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Advanced Flower Capital Inc. (AFCG-21.55%) has submitted its Annual Report on Form 10-K filing for the fiscal year ended December 31, 2024. The company, founded in July 2020, is an institutional lender specializing in senior secured loans to cannabis industry operators in states that have legalized medical and/or adult-use cannabis.
The filing details the company's financial performance, including a decrease in interest income by approximately $18.3 million, or 26.0%, for the year ended December 31, 2024, compared to the previous year. This decline was attributed to a reduction in capital deployed due to loan exits and prepayments, partially offset by higher fee income from loan exits and prepayments.
During the year, Advanced Flower Capital Inc. completed a spin-off of its commercial real estate portfolio into an independent, publicly traded company, Sunrise Realty Trust, Inc. (SUNS), on July 9, 2024. The separation was executed through a pro-rata distribution of all outstanding shares of SUNS common stock to shareholders of record as of July 8, 2024. The company retained no ownership interest in SUNS following the Spin-Off.
The company's portfolio as of December 31, 2024, comprised 16 loans with an aggregate originated commitment of approximately $361.3 million and an outstanding principal of approximately $356.8 million. The loans are primarily secured by real estate, equipment, cash flows, and license value associated with cannabis industry operators.
During the year ended December 31, 2024, Advanced Flower Capital Inc. received approximately $21.8 million in aggregate principal prepayments from Private Company L’s sale of certain collateral assets. The company also entered into new senior secured credit facilities with Private Company N and Private Company O, totaling $41.5 million.
The filing highlights several risks related to the cannabis industry, such as the potential for strict enforcement of federal laws against cannabis businesses, which could create legal uncertainties. The company's operations are subject to various federal, state, and local regulations, and any changes in these regulations could adversely impact the company's business and financial condition.
The company acknowledges its dependence on external sources of capital for growth, which may not always be available on favorable terms. The company also faces competition from other institutional investors in the cannabis industry, which could affect the returns on its loans.
Advanced Flower Capital Inc. is managed externally by AFC Management, LLC, and the company pays management fees and incentive compensation to its Manager. The management agreement automatically renews annually unless terminated by either party. The company has highlighted potential conflicts of interest in its relationship with the Manager, as some of the officers and employees of the Manager may also serve as officers, directors, or partners of other affiliates or investment vehicles managed by the Manager.
The company has elected to be taxed as a Real Estate Investment Trust (REIT) under U.S. federal income tax law, which requires it to distribute at least 90% of its REIT taxable income annually. Failure to comply with REIT requirements could result in the company being subject to regular corporate tax rates, reducing funds available for distributions to shareholders.
Advanced Flower Capital Inc. currently maintains its executive office in West Palm Beach, Florida, which is leased by its Manager or one of its affiliates. The company reimburses the Manager for certain expenses related to these offices.
The company has not experienced any cybersecurity threats that have materially affected its business, but it remains vigilant in monitoring and addressing potential cybersecurity risks. The company relies on its Manager's information technology and cybersecurity processes to protect its operations and data.
The company's common stock is listed on the Nasdaq Stock Market under the symbol 'AFCG'. As of March 1, 2025, the closing price of the common stock was $8.53 per share, with 69 holders of record. The company declared cash dividends totaling $37.5 million for the year ended December 31, 2024.
The company has a revolving credit facility with a $60.0 million commitment and an unsecured revolving credit facility with a $40.0 million commitment, both of which were fully drawn as of December 31, 2024, but subsequently repaid in full on January 2, 2025. The company also has $90.0 million in outstanding 2027 Senior Notes, which accrue interest at a rate of 5.75% per annum and mature on May 1, 2027.
Advanced Flower Capital Inc. continues to focus on expanding its portfolio of loans to state law-compliant cannabis companies. As of March 1, 2025, the company's loan origination pipeline consisted of potential new loans to cannabis operators representing prospective total loan commitments of approximately $383 million.
The company's growth strategy includes targeting loans for origination and/or investment that typically have a principal balance greater than $10.0 million and are secured by commercial real estate properties. The company also aims to diversify its financing sources with increased access to equity and debt capital.
The company has identified several risk factors that could affect its business, including competition for capital, limited operating history, regulatory risks related to the cannabis industry, and reliance on external sources of capital. The company acknowledges that its borrowers in the cannabis industry face significant challenges, including regulatory compliance, access to banking services, and competition from other industries.
The company has undergone several changes to its management agreement with AFC Management, LLC, which manages its day-to-day operations. The Management Agreement includes provisions for Base Management Fees and Incentive Compensation, and the company is required to reimburse the Manager for certain expenses incurred on its behalf. The company may terminate the Management Agreement for unsatisfactory performance by the Manager, but such termination may be difficult and costly.
The company also faces risks related to its taxation as a REIT. Failure to qualify as a REIT for U.S. federal income tax purposes would result in the company being taxed as a regular corporation, which would substantially reduce funds available for distributions to shareholders. The company may also be subject to other taxes that could reduce its cash flows, and changes in tax laws or regulations could adversely affect its business.
The company acknowledges that the market price for its common stock may be volatile and subject to various factors, including changes in governmental policies, equity issuances, and general market conditions. The value of the company's equity securities could be adversely affected by its level of cash distributions, and future offerings of debt or equity securities could result in dilution of existing shareholders' interests.
This content was summarized by generative artificial intelligence using public filings retrieved from SEC.gov. The original data was derived from the Advanced Flower Capital Inc. annual 10-K report dated March 13, 2025. To report an error, please email earnings@qz.com.