Despite the overall weakness in the cannabis industry, cannabis REIT AFC Gamma, Inc.’s (AFCG) net interest income and distributable earnings for the second quarter of 2022 increased 128% and 135% year-over-year, respectively.

AFCG originates, structures, underwrites, and invests in senior secured loans and other types of loans and debt securities for established companies operating in the cannabis industry in states that have legalized medicinal and adult-use cannabis.

It primarily originates loans structured as senior loans secured by real estate, equipment, licenses, and other assets of the loan parties to the extent permitted by applicable laws and the regulations governing such loan parties.

As of August 1, 2022, AFCG announced that it had closed $154.70 million in new commitments and had funded $135.50 million of new and existing commitments year-to-date. Across 12 portfolio companies, total loan commitments were $483.20 million.

The company is not only growing its business but is also rewarding its shareholders in the form of dividends. The company paid a quarterly dividend of $0.56 for the second quarter ended June 30, 2022. This represents a 47.4% year-over-year dividend increase.

AFCG’s four-year average dividend yield is 5.99%, and its forward dividend translates to a 12.2% yield. The REIT has gained 18.1% over the past month but declined 18.6% year-to-date to close the last trading session at $18.52.

Here’s what could influence AFCG’s performance in the upcoming months:

Robust Financials

AFCG’s net interest income increased 127.5% year-over-year to $19.90 million for the second quarter ended June 30, 2022. The company’s net income increased 145.3% year-over-year to $11.35 million. In addition, its distributable earnings increased 135.4% year-over-year to $13.58 million. Its adjusted distributable EPS came in at $0.69, representing an increase of 60.4% year-over-year.

Favorable Analyst Estimates

AFCG’s EPS for fiscal 2022 and 2023 is expected to increase 49.4% and 20.7% year-over-year to $2.27 and $2.74, respectively. Its revenues for fiscal 2022 and 2023 are expected to increase 111.3% and 25.2% year-over-year to $78.24 million and $97.99 million, respectively. It surpassed consensus EPS estimates in three of the trailing four quarters.

Mixed Valuation

In terms of forward non-GAAP P/E, AFCG's 8.15x is 22.1% lower than the 10.47x industry average. Its trailing-12-month P/B of 1.09x is 15.1% lower than the 1.28x industry average.

However, the stock's 21.30x trailing-12-month Price/Cash Flow is 159.1% higher than the 8.22x industry average. In addition, its 5.95x trailing-12-month P/S is 91.3% higher than the 3.11x industry average.

Mixed Profitability

AFCG’s trailing-12-month asset turnover ratio of 0.12% is lower than the 0.20% industry average. Likewise, its 11.52% trailing-12-month ROCE is 0.7% lower than the 11.60% industry average.

However, its trailing-12-month gross profit margin and net income margin of 100% and 65.17% are 60% and 131.4% higher than the industry averages of 62.47% and 28.17%, respectively.

POWR Ratings Reflect Uncertainty

AFCG has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. AFCG has an A grade for Sentiment, consistent with its favorable analyst estimates.

It has a C grade for Value and Quality, in sync with its mixed valuation and mixed profitability, respectively.

AFCG is ranked #3 out of 15 stocks in the Insurance – Brokers industry. Click here to access AFCG’s Growth, Momentum, and Stability ratings.

Bottom Line

It has been a rough year so far for the cannabis industry as the legalization of cannabis by the government took a backseat. Despite the challenging macroeconomic environment, AFCG has managed to grow by funding new and existing projects in the cannabis industry. With the cannabis industry expected to grow in the long run, AFCG is expected to benefit.

However, given its mixed valuation and profitability, it could be wise to wait for a better entry point in the REIT.

How Does AFC Gamma, Inc. (AFCG) Stack Up Against its Peers?

While AFCG has an overall POWR Rating of C, you might want to consider investing in the following Insurance - Brokers stocks with a B (Buy) rating: AXA SA (AXAHY) and Trean Insurance Group, Inc. (TIG).

AFCG shares were trading at $18.54 per share on Friday afternoon, up $0.02 (+0.11%). Year-to-date, AFCG has declined -13.40%, versus a -10.28% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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