AFC Gamma, Inc. (NASDAQ:AFCG) Q3 2022 Earnings Call Transcript

AFC Gamma, Inc. (NASDAQ:AFCG) Q3 2022 Earnings Call Transcript November 8, 2022

AFC Gamma, Inc. misses on earnings expectations. Reported EPS is $0.59 EPS, expectations were $0.66.

Operator: Good day and thank you for standing by. Welcome to the AFC Gamma Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Gabriel Katz. Please go ahead.

Gabriel Katz: Good morning, and thank you all for joining AFC Gamma’s earnings call for the third quarter of 2022. I’m joined this morning by Leonard Tannenbaum, our Chief Executive Officer; Jonathan Kalikow, our Head of Real Estate; Robyn Tannenbaum, our Head of Originations and Investor Relations; and Brett Kaufman, our Chief Financial Officer. Before we begin, I would like to note that, this call is being recorded. Replay information is included in our October 20 press release and is posted on the Investor Relations section of AFC Gamma’s website at afcgamma.com, along with our third quarter earnings release and investor presentation. Today’s call includes forward-looking statements and projections that reflect the company’s current views with respect to, among other things, future market developments, anticipated portfolio yield and financial performance and projections for 2022 and beyond.

These statements are subject to the inherent uncertainties in predicting future results and conditions. Please refer to AFC Gamma’s most recent periodic filings with the SEC for certain significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During this call, we will refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations of net income, the most comparable GAAP measure to distributable earnings, can be found in AFC Gamma’s earnings release and investor presentation available on AFC Gamma’s website. The format for today’s call is as follows; Len will provide introductory remarks, an overview of our third quarter 2022 performance and strategic commentary; Jon, will discuss AFC Gamma’s portfolio; Robyn will discuss the origination pipeline, Brett will summarize our financial results.

And we will then open the line for Q&A. With that, I will now turn the call over to our Chief Executive Officer, Leonard Tannenbaum.

Leonard Tannenbaum: Thank you, Gabe and good morning, and welcome to AFC Gamma’s earnings call for the third quarter of 2022. I would like to thank our analysts and investors for joining us today to discuss our results. I’m pleased to have continued to execute on our business plan during the third quarter. AFC Gamma generated distributable earnings of $0.59 per weighted average share of common stock, which does not include the earnings from our taxable REIT subsidiary. We view the core earnings power of AFC Gamma to include the earnings of our taxable REIT subsidiary, although to-date none of the earnings have been recognized in our distributable earnings. The taxable REIT subsidiary earned $1 million in the September quarter and $1.6 million year-to-date, which are excluded from our distributable earnings until distributed up to AFC Gamma.

As a reminder, distributable earnings is the primary metric that the Board considers when declaring AFC Gamma’s quarterly dividend. The Board of Directors declared a $0.56 dividend per share in the September quarter, which was paid on October 14, 2022, to shareholders of record as of September 30, 2022. Since going public, we have generated distributable earnings in excess of our dividend in each quarter. And since the IPO, we have paid out $2.98 in dividends per share. We currently have rollover income of approximately $6 million or $0.29 per share outstanding. We did not increased the dividend this quarter as we believe the quarterly dividend level of $0.56 is appropriate, based on the core earnings of AFC Gamma’s current portfolio. Given we are halfway through the quarter, we are making the statement that we are confident that our distributable earnings will meet or exceed the current dividend level in the fourth quarter of 2022.

Next, I would like to turn to the broader cannabis market. From a macro perspective, as we discussed last quarter, the sector remains under pressure due to the uncertainty of regulatory change, pricing compression and longer lead times to raise equity. In certain states, the pricing environment for wholesale has declined below the marginal cost of production, which has caused undercapitalized operators to close or suspend their cultivation and production. We believe that as wholesalers exit the market, prices may rebound above the marginal cost of production in mid-2023 benefiting to better capitalized operators. In addition, as a result of the difficult capital markets environment, any cannabis operators, sir? Interesting. Alarm. Okay. We believe that wholesalers exit the market – In addition, as a result of a difficult capital market environment, many cannabis as operators are focused on existing operations and generating earnings versus deploying additional capital in new states.

With public cannabis company stocks trading near lows, many are reluctant to raise equity capital, which may open additional opportunities for debt providers such as us, to fill the void and invest in deals with enhanced yields and strong risk adjusted returns. Given the market volatility, we are pleased with the quality of our portfolio. We believe that our focus on targeting operators in limited license states has set us up to mitigate risk and generate strong risk-adjusted returns. We actively manage our portfolio, having regular dialogue with many of our borrowers and we are comfortable with the coverage of our loans on an enterprise-value basis. Two loans are ranked as Category 4 under our CECL analysis with no new additions during the quarter, and no Category 5 loans in our portfolio.

In addition, all of our borrowers are current with their payment obligations and no loans are on nonaccrual. Subsequent to quarter end, AFC Gamma, its affiliates and Viridescent increased their commitment to Acreage Holdings by providing access to an additional $50 million of which $13 million has been drawn. The amended credit facility now includes a floating interest rate equal to U.S. prime plus 5.57% per annum with prime floor of 5.5%, an increase from the initial fixed coupon rate of 9.75%. We have further enhanced our collateral under the facility with a cash escrow of $28.5 million by a Canopy subsidiary. Additionally, subsequent to quarter end, AFC gamma was refinanced out of our $86.6 million position in Verano Holdings. In this volatile cannabis environment, we believe it is important to the agent in order to have substantial control over our deals.

As of November 1, 2022, we agent 95% of our deals based on outstanding commitments. AFC Gamma did not participate in Verano’s new financing, which was not fully real estate secured. Toronto was among our lowest yielding investments and we could potentially deploy the capital in higher yielding assets. As we have stated in the past, deals can take between three and nine months to close. Therefore, we may have a cash balance at the end of the year as we look to deploy capital into deals with strong risk adjusted returns. This cash balance may cause us to have an under leveraged balance sheet, the lower previously stated target of 0.5:1 debt-to-equity ratio, which may decrease return on equity in the medium-term. Turning to the macro lending environment.

There has been a substantial rise in benchmark interest rates in the broader market as well as in the cannabis market. As of November 1st, approximately 56% of our portfolio had a floating interest rate, increasing from 29% at the end of the second quarter of 2022. The weighted average yield of the portfolio was approximately 20% on November 1st, up nicely from the 18% at the end of the second quarter of 2022. We are also excited to discuss that, we are exploring some attractive opportunities for the company. As John will describe, we are analyzing expanding our investment strategy using our core competencies – utilizing our core competencies. Management and the Board are also exploring potential corporate opportunities for the company, including an internalization of our external manager.

As we consider what is best for the company and its shareholders, a special committee of independent and disinterested members of the Board has been formed to lead the company in thinking around a potential – lead the company’s thinking around a potential internalization. Looking ahead, I’m excited about our market positioning, portfolio composition, our opportunity set and our available liquidity. I will now turn the call over to John.

Jonathan Kalikow: Thank you, Len. As of November 1, 2022, AFC gamma has 13 loans outstanding with 426.2 million in commitments and 368.6 million funded. The portfolio has a weighted average time to maturity of just under three years. In building our portfolio, we targeted borrowers with operational knowledge, cultivation experience in cannabis and significant equity invested in their enterprise. We have remained steadfast in our underwriting criteria and will not lend money to companies that don’t meet our loan standards simply because we wish to deploy capital. Even, if this may result in a temporary cash trap. In the current cannabis market, operators have encountered new or worsening challenges that have made deploying capital into loans with a favorable risk profile more difficult, companies access to equity capital has virtually ceased cost increases for construction and personnel has not slowed, while pricing pressure on candidates itself continues.

These factors combined with the absence of regulatory reform has caused a slowdown in the industry, making it more difficult to source cannabis opportunities with significant real estate coverage in limited license states. Add to this, unknowns around the possible passage of the Safe Act and whether ballot legalization measures in states like Maryland and Missouri will succeed, and it is not surprising that we have increased our cash balances. We believe that having capital available to take advantage of the opportunities that may be coming in this volatile environment is prudent. We see the possibility of a scenario in the near future, where strong companies will once again seek our capital for distressed purchases, mergers, or expansion into newly approved adult use markets.

We are therefore building cash reserves from the recent repayments we have received to be best positioned to invest in deals with strong near-term risk adjusted returns, while preserving the ability to take advantage of the next wave of cannabis M&A activity and growth. I wanted to highlight another factor in our lending. As a REIT, we generally require real estate as part of the collateral pool we receive from a borrower. While this requirement has eliminated some loan candidates, it has proven a vital part to ensure our loans remain fully collateralized. We do recognize that the necessity for real estate shrinks our pool of potential cannabis borrowers, and as such, we are discussing solutions to increase our pool of potential borrowers. We can continue to make the best investment decisions for our shareholders through different economic and market cycles.

I will now turn the call over to Robyn.

Robyn Tannenbaum: Thank you, John. Our origination platform is focused on both expanding loans with a variety of our existing borrowers and continually sourcing new borrowers. From January 2020 through November 1, 2022, we have sourced over $17 billion of transactions, which represents over 660 potential deals. As of November 1st for the same time period, our selectivity ratio was approximately 4.4%. We have an active pipeline of $368 million down from higher levels in the previous few quarters due to market factors that both John and Len described. Additionally, it remains difficult to predict both the timing of converting and closing those deals. At AFC Gamma, we are being prudent with our capital commitments and exhibiting a higher degree of selectivity as the market environment has been challenged.

During the third quarter, we closed on new commitments of 19 million and had growth funding of 24.8 million. We continue to remain disciplined in our approach to lending and implement stringent underwriting criteria to make prudent investment decisions. AFC Gamma has substantial liquidity and capacity to complete additional transactions that meet our lending criteria and have strong risk adjusted returns. Before turning the call over to Brett, as President of AFC Foundation, I’m excited to highlight another deserving organization that AFC Foundation donated to Corners Outreach based in Atlanta, Georgia. Corners Outreach is a non-profit organization that strives to equip Metro Atlanta’s underserved students of color and their families with the tools needed to lead full lives through educational development and economic opportunities.

AFC Foundation was pleased to make this donation, as Corners Outreach continues to improve its nearby communities and invest in students to enact social change. I will now turn it over to Brett to review our financials.

Brett Kaufman: Thank you, Robin. We are pleased to report another quarter of solid financial performance driven by strong growth in income during the quarter due to the growth in the loan portfolio versus the prior year comparable quarter. For the quarter ended September 30, 2022. We recorded GAAP net income of $11.5 million or earnings of $0.57 per basic weighted average common share an increase to net income of 45% as compared to the third quarter of 2021, where we had GAAP net income of $7.9 million or earnings of $0.48 per basic weighted average common share. For the third quarter of 2022, we generated net interest income of $18.1 million, an increase of 71% as compared to the third quarter of 2021, where we had interest income of $10.6 million.

For the same time period, we generated distributable earnings of $11.8 million or $0.59 per basic weighted average common share, and increased to distributable earnings of 64% as compared to distributable earnings of $7.2 million or $0.44 per basic weighted average common share for the third quarter of 2021. As of September 30, 2022, our total assets were $471.3 million as compared to $303.9 million on September 30, 2021. As of November 1st, 2022, AFC Gamma’s portfolio consisted of $426.2 million of current commitments with $368.6 million funded across 13 loans. As of November 1st, 2022, year-to-date we have closed on new commitments of $203.8 million where we paid on $152.4 million from five investments, and we sold $25 million from two investments.

The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loan was approximately 20% as of November 1, 2022, as compared to 18% as of June 30th, 2022. As previously mentioned, we believe providing distributable earnings, is helpful to stockholders in assessing the overall performance of AFC Gamma’s business. Distributable earnings represents the net income computed in accordance with GAAP, excluding non-cash items such as equity compensation expense, any unrealized gains or losses, provision for current expected credit losses, also known as CECL, taxable REIT subsidiary income or loss, or other non-cash items recorded in net income loss for the period. As of September 30, 2022, the CECL reserve of our loans at caring value represents approximately 1.8% compared to approximately 1.76% at June 30, 2022.

On October 14, 2022, AFC Gamma paid a dividend of $0.56 per common share for the third quarter to shareholders of record as of September 30, 222. Year-to-date, we have paid out dividends of approximately 90% of our distributable earnings. As a reminder, on an annual basis, our dividend policy is to pay between 85% and 100% of distributable earnings over the year. Next, let’s take a look at our balance sheet, which remains strong. I’m pleased to report that Egan Jones during the quarter affirmed our BBB+ investment grade corporate and senior notes rating. Our $100 million senior notes, which have a 5.75% fixed rate remain outstanding and are due in May 2027. Our leverage as measured by debt to equity was 0.29x to 1 as of September 30, 2022 and currently there is no net leverage.

In addition to the substantial cash and liquidity, partially provided by the Verano loan repayment, we have an undrawn $60 million revolving credit facility. As of September 30, 2022, our total stockholders’ equity was $347.4 million and our book value per share was $17.06 as compared to $16.61 as of December 31, 2021, an increase of 3%. With that, I will now turn it back over to the operator to start the Q&A. Operator?

Q&A Session

Operator: Thank you. And our first question will come from Gaurav Mehta from EF Hutton. Your line is open.

Gaurav Mehta: Thanks, good morning. First question on your comments on internalization. I was hoping if you could provide some more color on what factors you are going to consider? And then I know I think in the past you had talked about considering internalization when equity equals $1 billion or more. Is that still a target or is there any change in that order?

Leonard Tannenbaum: So we are still relatively early and I think in the discovery that the Board is doing and the committee was just formed as I said. I think we are not going to – so there is not much to talk about, of course, you can go back and see in the proxy, it was very detailed out. As you point out that $1 billion, there is a certain formula and thought process around it. It will differ from that, but I think that is at least a good starting point to understand what we are talking about. And yes, the Board is considering doing it earlier than asking us to do it earlier than the $1 billion where they had the right to internalize the manager. They are asking the manager in this case, will we consider doing it earlier? But yes, the discussions are very preliminary.

Gaurav Mehta: Okay. Second question on your repayments, your comments on substantial repayments in 4Q. I’m sorry if you maybe talked about this. But was it sort of expected or was that a surprise, the increase in repayments that you guys saw in 4Q?

Leonard Tannenbaum: No. it was expected. In fact, I think I talked about it, on previous calls that, a large borrower could repay and that drown happened to be our lowest yielding loan, et cetera. So we did expect it. It was actually due the following May. So they have to refinance certainly by then. And we received some additional income because they are early repayment.

Gaurav Mehta: Okay. Thank you.

Operator: Thank you. And our next question will come from Harrison Vivas from Cowen and Company.

Harrison Vivas: Great, thanks so much for taking my question. Len just wanted to start maybe taking a step back and looking at the broader economic environment. Understanding you have talked about and you sort of studied rate cycles in the past, would appreciate your perspective on where you think we are in the current rate cycle. And do you think your borrowers in your pipeline have the flexibility to wait for rates to soften before executing on new loans?

Leonard Tannenbaum: So I think that we are going to find out in the CPI print this week, but I think most estimates are that inflation will stay persistent. The interest rates will stay high for a period of time. And we found it really important to switch to migrate a lot of our portfolio to floating rate from fix, which we were very successful moving it to 56%. We hope to move it higher obviously, but 56% up from 20 some percent robin, 29%. So we are going to benefit as rates continue to rise. Obviously, the feds indicated a slower rate of rise. The borrowers are already paying quite a bit, in terms of interest, I’m not sure one or 200 basis points is going to tilt the apple cart one way or another. Much more important are – is the supply demand equation in the macro environment in cannabis, which could get better by mid next year because of people coming out of the market.

The weaker players at least we hope that, at least we hope for some price stabilization, but it certainly has compressed margins, across the board. As for the country’s macro environment, I think everyone realizes it is slowing across the board it is a question of, what the pace of how fast it will slow and where it bottoms out.

Harrison Vivas: Okay it makes sense, thank you. Shifting to guidance you previously offered, obviously the expectation has been for 300 million to 500 million in gross originations, you are at around 200 million, as of November 1st. So, do you kind of expect to still land somewhere within that gross origination target obviously on the repayment front you are sort of at the midpoint of your guide, so curious to hear what you are thinking about, uh, gross originations.

Leonard Tannenbaum: Yes. The problem is it is very difficult the time originations, but my guess is if we do hit the 300 to 500, it will be the low end at best. So it is going to be challenging to hit that, to hit that range and same thing for next year. I think I made some forward looking comments regarding leverage. I think it will be difficult to get to our previously stated 0.5 times lever target. Next year we are going to be under levered for the medium-term. And I’m not sure what the medium term means in terms of, but a lot of people aren’t anticipating us taking leverage. And by the way, I’m not quite sure it is prudent to take leverage in this volatile environment either. We do want to see things bottom in cannabis before, we are more aggressive in terms of loans. So we are pretty happy about having such a nice liquidity position

Harrison Vivas: Makes sense. Last one for me would love some more color on the public company deal. I guess how long did that deal take to complete and obviously giving you acquired that loan. Do you think acquiring loans become a bigger part capital deployment strategy?

Leonard Tannenbaum: That is the $10 million?

Leonard Tannenbaum: Yes, that is the $10 million acquired 10. Yes. You are whispering it to me, but now you are saying it on a call. That is not very smart, but it is okay. Look, I think that was a deal with a company that actually we are working on another deal with that is in the pipeline. It is one of the better operators in the space. We don’t name it. But it was – this one is not an agent to deal. So I said, 90. What percent? 95% of our deals are agented, public company aim is not an agent to deal, it is deal did by a different agent. We are part of a much larger loan. And we did it. Not only do we think the company’s good, but we did it to build a relationship with the company, which we hope to do some more business with.

Harrison Vivas: Good, very helpful. I will jump back into the queue.

Operator: Thank you. And our next question will come from John Hecht from Jefferies. Your line is open.

John Hecht: Hey. Sorry guys. Something went wrong, but good morning and thanks for taking my questions though. You talked about the Verano payoff and then you talked about gross commitments this quarter. I’m just trying to as best possible think about the near-term row book for modeling perspective and understanding. You are not giving any guidance there. But any other big – any other kind of meaningful pipeline – excuse me, payoffs we should think about that you are aware of over the next couple months? And then maybe can he just characterize the kind of – I know things take longer and there is no certainty about closing deals, but maybe can you just characterize the opportunities you have that may kind of come to fruition by the end of the year?

Leonard Tannenbaum: Well, that is a great question. We are working on some deals that could happen by the end of the year or they could slip into early next year. It is very hard to tell. But we have signed term sheets we are working on. Doesn’t mean they always complete. I do think we are going to have cash drag for a bit. I do think that this is not necessarily a bad environment to have it. We are as we have said on the prepared remarks considering expanding our universe of things that we are looking at that are real estate secured. And I think that is preliminary too. So I don’t intend to have cash drag over the long-term. I think having it now is not necessarily a bad thing given the uncertainty in the environment and the need for capital.

As these cannabis providers start running out of capital and having to make seller notes and having to make payments on things, they certainly need debt capital. The challenge that we are facing is real estate security. A lot of these, including the Verano loan the restated one after we got out, wasn’t real estate secured. And that really – was very real estate secured. And that really messes up your retest when you have that much money in a loan, which isn’t primarily real estate secured. There is two retest that are really important as you know, which the ICA test, Investment Company Act test, and of course your normal income from retest. And so you have two different considerations, and one very important, one is 55% or more of our loans, and we have to be fully real estate secured, like 100%.

And of course, we aim for much higher than that, but that is at a minimum to maintain a very important thing or reach status. So we are finding cannabis challenging in terms, I think John said this in terms of finding the appropriate real estate security, which we do view as a very important component in our overall security.

John Hecht: Yes. I think everybody concur that being selective and holding extra liquidity, a smart call in its environment. But maybe that does dovetail to the next question. You commented on this, Len, the TRS had a bigger impact this quarter. What assets go under the TRS and I guess just how do we think about that in the P&L?

Leonard Tannenbaum: That is a good question. And I’m glad you mentioned it because really what I realized as I look through our numbers and I look through the analyst estimates for this past quarter and we are like, okay, where is some of the discrepancy and one of the things as we had to drop one of our assets. I think we said that last quarter, right, Brett?

Brett Kaufman: Yes. We put it in – no, we dropped it this quarter.

Leonard Tannenbaum: We dropped it in this quarter. Okay. So we dropped a substantial asset into the TRS. And the way REITs work is for about a year after you do capital raising, you can match your assets against it and have it count for your retest. But after a year, it is not real estate secured and this asset isn’t. In fact, there is no real – this is very little real estate coverage. Yes, it has some real estate coverage, but not enough. It has to be dropped into the taxable REIT subsidiary, so that the income test is preserved. So therefore, all of the earnings of that asset, all of the interest that pays goes into the taxable REIT subsidiary, which is why you saw a big jump in that income. Now it is at our discretion to dividend that up to parent.

So when that dividend is up, then we have more distributable earnings, if we leave it there and we have less distributable earnings. But I just wanted to point out that, we are still earning it and it is real cash. It is showing up in a wholly-owned subsidiary. And so I’m not sure when we decide to dividend it up, but I did want to point out that, we did earn the money.

John Hecht: Okay. That is helpful. And is there any other assets in the near-term that will either come in or go out of that or should we think that, at least for the invisible future that, that should be consistent in terms of the level of impact on the P&L?

Leonard Tannenbaum: I think there is another asset in the medium-term that may drop in, which means in the six month timeframe that I can think of. Yes. But I don’t see anything in the next – right now, I don’t see anything next quarter. It doesn’t mean we are not going to put something in there, but I don’t see anything next quarter.

John Hecht: Okay. That is very helpful. Thanks. And then last question is, I think there are five state double ballot initiatives today that I even think you commented maybe on one of the opportunities. I mean, are you eying these? Is there any update on how the outcome of these and how it may allow you to expand geographically or increase your appetite to expand or any comment about national legislation as well?

Leonard Tannenbaum: Look, I mean, I have been saying Safe Act passes and Lane Duck, I’m less excited about it today because I think depending on what happens today on the elections of the Republican states are approving legal cannabis, which is kind of interesting. And I think we are very optimistic that Maryland approves and we are looking at a deal in Maryland. We are very optimistic that Missouri approves it. And we have a lot of exposure in Missouri, and we consciously took the disproportionate amounts of exposure in Missouri given that dynamic. There is some other states that we are not really into, which is Arkansas, North Dakota, South Dakota. But when I’m continue to be excited about from a build-out standpoint. And you are hearing some of the big MSOs slowing their buildings, slowing their CapEx and that is true.

I think everybody is being more cash conserving and they also have a bunch of seller notes that they have to pay-off at the larger MSOs. But if you think about states with the most potential that still are getting reconciled as Georgia. I mean, Georgia is going to be amazing, not in the next year. It is going to be another – I think it is another Florida type state, about two-thirds the size of the state of Florida, there is only going to be six or so operators. The top two licenses got cleared, the bottom four haven’t. But we are very excited too. We are actively looking at partnering with those builders in, in Georgia.

John Hecht: Great. Thank you very much for the update.

Operator: Thank you. And our next question will come from Aaron Hecht from JMP Securities. Your line is open.

Aaron Hecht: Hey guys, thanks for taking my question. Len you talked about investment requirements maintained reach status, the broad loan, obviously the largest in your portfolio, I think you said it had limited real estate coverage. This was one of those major requirements I would think that would give you significant runway to invest in non-real estate secured loans given that was your biggest loan. But then you also made the comment about expanding the investment strategy to other core competencies. So does that imply that you have – you are looking to invest to a level where you’d change the structure of the organization or just kind of walk me through those dynamics?

Leonard Tannenbaum: So I think we got it backwards. The Verano loan when we did the loan was real estate secured. The Verano loan refinanced was not real estate secured. In fact, it had a little bit of real estate coverage, but less than 30% of the loan was real estate secured, if that. And so it became not re eligible. So in order to maintain even our B bucket, that was an A, what they call an A bucket loan, as that would have become B bucket loan. But we need a bucket loans to meet our ICA test and have our B bucket. So, that is the problem is even if we wanted to go back in the loan and, and we also chose not to because we weren’t agent in a very large loan, that we believe that you should have agent in control over your, over your investments.

We wasn’t real estate, really real estate eligible. And ultimately, those types of things, even if we did a small piece, would have to be dropped into the taxable REIT subsidiary. So that is the problem. So we do need to think about how do we do more real estate loans then that is what we are thinking about. It is really making sure that we have the real estate coverage for REIT.

Aaron Hecht: Okay, and then when you define core competencies, does that mean that you stay in the cannabis realm and for non real estate loans, if you are doing some more of those, what does the return profile look like versus a secured loan? And then just the opportunity say, how much bigger does your world get with this, you know, non real estate secured type of loans?

Leonard Tannenbaum: So I think again, we are off. We are backwards. We are looking for real estate secured loans not real estate secured loans. So, we are going to we want to stay with real estate secured loans. We have built in-house expertise in construction, we have built in-house expertise in industrial managing, industrial underwriting, industrial property underwriting. And so that is we have become very good at it. And Martin does a good job leading those teams, but also helping in the building, but also understanding all the hurdles when you want to build out a cultivation, when you want to build out dispensaries. I will point out even a big peer internally managed peer is going to lease their property to a non-cannabis provider.

And so there are a lot of tangential expertises and in our core competencies that we could explore, while still really maintaining what we are really good at. And so we are – by the way, we have a 100% of our deals in cannabis today. And right now we have nothing to talk about besides that. But we have – we do need to continue to find real estate secured funds and I think that is our primary focus.

Aaron Hecht: Okay. Thanks for that clarification. And then on potential internalization, what changed from your perspective for the board to consider an early internalization? And you do have some extra liquidity right now. Will you be holding on to liquidity until that process is figured out to give yourselves options for anything that may come up?

Leonard Tannenbaum: I think, we have lots of liquidity. We have an undrawn credit line and I think we are setting in a net debt equal position today. And so, I mean, that is far more liquidity than any internal – in my mind, that is much more liquidity than any internalization would require. As for why the Board’s considering early, I mean we are just in the preliminary discussions of it. I think part of it is cost of capital. I think there is as we have spoken to even our bankers in your firm and others, there are a number of investors that don’t invest in external managed companies. The external manager has different cost structures than the internal manager. And we want our stock to trade, continue to trade well, we are trading around book, but we want it to trade very well.

And we look at IFRS as an internally managed entity, and see how well it trades. So or at least the Board does. So this is still very preliminary. If soon as we have more, we are definitely going to talk about it. But I think there is a lot of considerations around it, and it is ultimately, it is up to our shareholders because we any internalization to me would require a shareholder value.

Operator: Thank you. One moment for our next question please. And our next question will come from Mark Smith from Lake Street. Your line is open.

Mark Smith: Hi guys. First one for me, just broadly as we look at the industry and weakness out there, you seen any changes in the states where you are operating in some of these limited license states? Any of this weakness kind of expanding into some of those states?

Leonard Tannenbaum: I mean the weakness that is in the unlimited license states expanding into limited license states. I think a good example of that is Arizona. Arizona is a great limited license state, but you will want to be on the dispensary side. It is unlimited license from a cultivation standpoint and Arizona cultivation prices have crashed and at wholesale prices down to the $350ish. It is one of the states that you can easily say is below marginal cost of production for greenhouse product especially. And so that is really unfortunate. The worst I have seen in Arizona. I mean, Colorado is an – I view it as an unlimited licenses. We don’t do business there, but that price is crashed there for sure. And so look, it is spilling, you are seeing a price compression in Pennsylvania.

You are seeing price compression in Massachusetts, pretty much across the board because as much as they don’t want cannabis to spill across borders magically it does. And so, it is a little bit of a flow especially with greenhouse products spilling cross borders and outdoor gross spilling cross borders. The one bright light I would say in general, is high end. So the high end premium product and brands have held up and held up well. We do have one company in Michigan, which is an extremely tough state and prices greenhouse crash, but the indoor product that they are selling really has held up to nice prices. And so that is a good example of a premium.

Mark Smith: – is that the big kind of leading indicator and then a few months to kind of get these deals over the finish line, once they come into the pipeline? Any insight into kind of what you are seeing as you are out there in the early stages looking for deals? Have we seen any compensation yet and people that look like they are getting ready to start dumping capital and invest in more?

Robyn Tannenbaum: So how we view the active pipeline and it is just as it sounds opportunities that are actionable either term sheets issued, heading towards the term sheet issued or farther down the diligence process to get – to make a decision on whether or not we want to issue a term sheet. So I think from that standpoint, it is definitely come down. As Len and John talked about, the environment for cannabis in general is making us more selective in terms of the deals that we are looking at, in terms of opportunities that we are willing to invest in. There is still definitely a need for capital from operators and providers. Some of the larger MSOs aside from the Verano refinancing as we discussed, they really focused on their existing operations and generating cash flow versus the expansion that we saw last year.

The expansion of those large MSOs and those bigger tickets are really what drove the pipeline up. And focusing more on the mid tier and mid size operators is part of what is driven it down along with a lack of real estate collateral that is been tough to find.

Mark Smith: Okay. In the same vein, as you are looking at and need that real estate collateral. As you look to move more towards floating, do you feel like there is pushback on kind of the switch over the floating rate loans or is that not as big of an issue?

Leonard Tannenbaum: I mean all the new things we are looking at are floating, just by standard. And when we have the opportunity in a renegotiation to modify a loan from fixed to floating, we are taking advantage of that because we clearly believe that floating with a good floor is the way to go in this increasing interest rate environment.

Mark Smith: That is fair. Thank you, guys.

Operator: Thank you. And I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Len Tannenbaum for any closing remarks.

Leonard Tannenbaum: Thank you all for listening and we look forward to reporting another quarter next year. So if we don’t talk to you, have a great rest of the year. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.