AFC Gamma(AFCG -6.36%) reported second quarter 2025 results on August 14, 2025, producing distributable earnings (non-GAAP) of $0.15 per share and declaring a quarterly dividend of $0.15 per share. Management announced a pivotal strategic shift with a proposed conversion from a real estate investment trust (REIT) to a business development company (BDC), and reported continued portfolio stress with growing provisions for credit losses (CECL reserve of $44 million, or approximately 14.6% of loans at carrying value) and ongoing resolution efforts for legacy loans. The following analysis draws out the fundamental business realignment, credit quality issues, and actionable milestones with unique implications for long-term investors.

BDC conversion expands AFC Gamma’s lending universe

The proposed transition to a BDC structure would mark a significant departure from the original real estate-backed lending model, reflecting both market constraints and the evolving landscape of cannabis industry financing. As of August 1, 2025, approximately two-thirds of potential cannabis lending opportunities reviewed by the company lacked qualifying real estate collateral and were thus out of reach under the REIT framework.

"This morning, we announced our intention to convert from a REIT, the current structure under which we operate, to a business development company or BDC. This conversion, which is subject to shareholder approval on certain related matters, will enable AFC Gamma, Inc. to originate and invest in a broader array of opportunities, which would include both real estate and non-real estate covered assets. We believe the conversion, if approved, would be an important turning point for AFC Gamma, Inc. Given the capital-intensive nature of the cannabis industry, combined with the high cost of capital, many operators do not own real estate, which significantly limits the universe of cannabis operators AFC Gamma, Inc. can lend to as a mortgage REIT. As a BDC, the investment universe for AFC Gamma, Inc. would expand, allowing the company to lend to operators without real estate coverage as well as to ancillary cannabis businesses with high growth potential. Moreover, should rescheduling occur at the federal level, we believe much of the inflow of new capital will go towards established operators. As most of these companies do not own real estate, the BDC conversion should position AFC Gamma, Inc. to capitalize on this sector tailwind. We also announced that our board has approved an expanded investment mandate effective immediately that includes direct lending opportunities outside the cannabis industry. We believe that there are interesting credit opportunities in other private and public middle-market companies that can generate attractive risk-adjusted returns. By broadening the opportunity set, AFC Gamma, Inc. will be better positioned to diversify its exposure across industries and credit risk profiles. The AFC Gamma, Inc. investment team has over thirty years of experience in direct lending outside of cannabis, with over $10 billion of direct lending transactions executed, as well as twenty years of experience managing and scaling BDCs."
-- Robyn Tannenbaum, President and Chief Investment Officer

The BDC conversion would allow the company to pursue a wider range of lending opportunities, including those without real estate collateral, and diversify its portfolio beyond the cannabis sector.

Credit quality erosion elevates risk profile for AFC Gamma

While the portfolio at quarter-end included $359.6 million of principal outstanding across 15 loans, asset quality deterioration was apparent, with the current expected credit loss (CECL) reserve rising to $44 million, or 14.6% of loans at carrying value, and net GAAP losses of $13.2 million. The company shifted an additional loan to nonaccrual status as of June 1, 2025, after the end of the quarter, and litigation continues regarding several legacy loans.

"As of June 30, 2025, the CECL reserve was $44 million or approximately 14.6% of our loans at carrying value, and we had a total unrealized loss included on the balance sheet of $21.5 million for our loans held at fair value. As of June 30, 2025, we had total assets of $290.6 million, total shareholder equity of $184.7 million, and our book value per share was $8.18. In 2025, AFC Gamma, Inc. expanded its senior secured revolving credit facility from $30 million to $50 million with an additional $20 million commitment from the facility's lead arranger, an FDIC-insured bank with over $75 billion of assets."
-- Brandon Hetzel, Chief Financial Officer

Persistently high credit reserves relative to portfolio size signal elevated risk of future capital impairment, with legal recoveries and workout outcomes as key determinants of near-term intrinsic value realization for shareholders.

Rescheduling prospects and balance sheet constraints shape outlook

Management addressed the interplay of sector regulation and internal capital deployment, noting that federal rescheduling of cannabis could drive new capital inflows and enhance asset recoveries on underperforming loans. However, existing leverage is capped at one to one-and-a-half times, with no planned equity issuance given trading discounts to book value.

"So I'd say we target between one and one and a half times leverage. And I think that we'll operate within that. And given where our stock is currently trading, I don't see us issuing equity."
-- Robyn Tannenbaum, President and Chief Investment Officer

Absent an uplift in share price or resolution of impaired loans, AFC Gamma’s near-term growth is constrained by balance sheet capacity, intensifying the importance of maximizing value on problem assets and successfully executing the BDC transition.

Looking Ahead

Management stated that additional information on the BDC conversion would be provided in a forthcoming proxy filing, with conversion anticipated in 2026 pending shareholder and board approvals. The company expects to continue operating as a REIT in the interim, maintaining current real estate coverage requirements for new loans. No explicit forward quantitative earnings or portfolio growth forecasts were provided in the transcript.