Lending and banking are always timely topics in the cannabis business world, especially with federal reform and possible banking reform looming once again.
Advanced Flower Capital Gamma (AFC Gamma) is one of the largest providers of institutional loans to cannabis companies nationwide in all aspects of production: cultivation, processing, and distribution. AFC Gamma is a commercial mortgage REIT that provides loans to companies secured by three pillars: cash flows, licenses, and real estate. The company seeks to work with operators, ideally in limited license states.
The company is co-founded by Robyn and Len Tannenbaum along with Jonathan Kalikow. Len, who serves as CEO of the AFC Gamma.and previously founded Fifth Street Asset Management, which he eventually sold to Oaktree, also founded LMT Investments, a single family office that is focused on allocating capital across various strategies, including credit via Tannenbaum Strategic Credit Fund, which is a $100M+ fund, equities and real estate. Robyn, who is co-partner and Head of Origination and Investor Relations formerly served as bead of investor relations at Fifth Street Asset Management and as a vice president in Healthcare mergers and acquisitions at CIT Group Inc. Kalikow spent 18 years on Wall Street investing across industries and asset classes as a proprietary trader at Morgan Stanley and then as a hedge fund trader and portfolio manager.
I sat down with Robyn and Len to talk about their cannabis lending upstart and its seemingly bright future ahead.
Jackie Bryant: Len, Robyn, what’s your background, and what were you doing before jumping into the world of cannabis?
Len Tannenbaum: When I was 27, I founded Fifth Street, a finance company specializing in raising funds from private investors and investing in middle-market companies. The company managed $5 billion of assets across multiple private investment vehicles and two publicly-traded business development companies. After an excellent twenty-year run, I decided to sell the company to Oaktree Capital Management in 2017 for $320 million. After the sale, I took some time off and started a family office, and saw an arbitrage opportunity in the cannabis industry while researching investments. After some further analysis, I realized there was a void in the cannabis market as there was no institutional lender, and capital was only being provided by sale-leasebacks or family offices.
Robyn Tannenbaum: Before cannabis, I was a healthcare investment banker for eight years focused on M&A and leveraged finance. I was also in charge of investor relations at Fifth Street and was doing healthcare consulting while we both recognized the lending opportunities in cannabis. The concept of AFC Gamma all started on the back of a napkin, and we quickly realized that to be successful, we needed another partner. We needed someone with significant real estate expertise and brought on Jonathan Kalikow as our third partner. Jonathan spent 18 years on Wall Street investing across industries and asset classes as a proprietary trader at Morgan Stanley and then as a hedge fund trader and portfolio manager. Once Jonathan was on board, Len and I built AFC Gamma from the ground up at home during the height of the pandemic lockdown.
JB: Cannabis companies of all sizes have been traditionally starved of access to capital — most “mom-and-pop” and larger established businesses like MSOs cannot walk into a bank or financial institution and receive a loan. So how is AFC Gamma helping cannabis companies gain access to capital and what do you offer them?
LT: Exactly right, cannabis companies, no matter the size, traditionally lack the lending opportunities that other enterprises have available, and that’s where AFC Gamma comes in. As an institutional lender, we provide financial solutions to the cannabis industry. We offer a flexible solution to meet the needs of our borrowers. We provide term loans, draw facilities, and construction loans. Each loan is unique and tailored specifically to meet the needs of our borrowers. This unique partnership approach with each of our clients allows us to find solutions to help them expand and grow alongside them.
RT: Since starting AFC Gamma, we have completed almost $500 million of transactions – we provide capital to an industry that others do not and, in turn, allow these operators to build cultivation facilities, production facilities, and dispensaries. Our platform includes a publicly-traded company, a private BDC and a network of Family Offices that allows us capacity to support portfolio companies over long periods of time. We offer our clients our expertise in understanding unique industry issues, the flexibility to customize financing solutions to each transaction and deep relationships with cannabis-focused investors and industry experts.
Additionally, I believe on a macro-level, that by providing capital to an industry that many other companies can’t or won’t lend to, we are bolstering credibility and legitimacy to the industry, setting it up for success well before legalization.
JB: Can you provide an overview of your investment portfolio and explain what types of companies AFC Gamma tends to work with? And tell me more about your approach to lending, what do you look out for and why?
RT: AFC Gamma is a commercial mortgage REIT. We make loans to companies secured by three pillars: cash flows, licenses, and real estate. AFC Gamma seeks to work with operators, preferably in limited license states. We tend to lend to operators in regulatory-friendly states, such as: Ohio, Pennsylvania, New York, New Jersey, Maryland, Massachusetts, Arizona, New Mexico, Missouri, Illinois, Michigan, and Nevada. We have 16 borrowers in 17 states, and what we look for are companies that we can grow with over the long term.
We don’t just want to be there for the company’s first financing. We want to be there for the company’s second and third financing. So we tend to work with three different buckets of operators. You have the large publicly traded MSOs we have lent to, such as Verano. Then you have the tier right below the top tier MSOs, where you have some public like Acreage, who is one of our borrowers, and then some private like Nature’s Medicine and Justice Grown. The third tier is smaller operators. They’re single or two-state operators, and we’re typically coming in to help them build out licenses that they want or help them expand within that state. And that’s why state-by-state dynamics are so important to us and why we typically only lend to limited license states.
JB: Although AFC Gamma is open to lending to all aspects of cannabis production, I’m sure not all operators qualify for financing. Are there specific deals the team tends to focus on more? What is the team’s strategy for building a diverse portfolio?
RT: Our strategy for building a diverse portfolio is to lend to multiple operators of all sizes, the large MSOs, the mid-tier MSOs, and single state operators. When you’re lending to a Verano or an Acreage, you’re not just lending to one state; you’re lending to multiple states. So we look at diversity on a step-by-step basis rather than a borrower-by-borrower basis. We tend to focus on deals in limited license states and also deals that have real estate as collateral. So, as a REIT, we need to have real estate as collateral. On the other hand, we also have other vehicles that don’t necessarily need real estate as collateral. We have found though, that REIT loans give our clients the most flexibility, and we are able to finance more companies this way. 5. Out of curiosity, how many potential deals has AFC Gamma vetted since its inception, and how many made it to funding or commitment? Are there any notable success stories that resulted from your funding?
LT: From January 1, 2020, through December 24, 2021, we have reviewed 443 deals and have funded 21 loans. Since we aim to find and fund strong deals in everyone’s best interest—those of our investors, our borrowers, and our own — our stringent loan-selection process means that most potential borrowers don’t make it past our review process.
RT: Many success stories have resulted from our funding and operators that we provided capital to build and expand their businesses. One early loan that we funded was with a company called OnePlant, run by Brady Cobb. They were a Florida operator that we backed in November 2020 and provided capital to build out their Indiantown cultivation facility. The company was purchased by Cresco for $213 million a year later after we financed them.
JB: What does the competitive landscape look like for AFC Gamma?
RT: Two types of financing are available to cannabis operators. The first type is known as a sale-leaseback, which was around before loans were available. Sale-leasebacks are where the REIT owns the real estate, and a cannabis operator is the tenant and leases it back. Companies like IPR engage in sale-leasebacks. Companies like ourselves are known as commercial mortgage REITs – which means we simply take a lien on the real estate as a lender.
We are different from other lenders in two significant ways. First of all, we take a unique partnership approach. We find solutions to help them expand and meet their needs versus roadblocks. The second way we are different is we, as the first NASDAQ-listed lender and the leading lender in the cannabis industry, have a considerable hold size where we will hold the majority of the loan versus syndicating them. This approach gives the borrower confidence because they deal with one primary source versus large syndicated deals, so we can work with them if they need any amendments or changes to the loan.
LT: Right now, we are one of the biggest lenders in cannabis. Looking to the future, though, if the SAFE Banking Act passes, we could see an influx of institutional capital that would increase competition amongst cannabis-specific and mainstream lenders. I think, from the outset, most of the competition will come from hedge funds, not big banks. This competition will drive down interest rates and attract borrowers like MSOs.
Suppose the Senate passes the SAFE Banking Act this go-around, which I believe they will, lenders, including AFC Gamma, will be able to borrow cheaper, which will, in turn, allow lenders to lend cheaper. It will be a net positive for all operators. It could also be positive for lenders assuming they have the infrastructure and capabilities to scale and decrease the cost of capital once the money starts flowing and more deals are being made.
JB: AFC Gamma is notably among a handful of cannabis-related companies listed on the Nasdaq. Why did your team decide to go public in March 2021, and have you noticed a shift in how cannabis stocks are viewed among institutional investors in the past year?
LT: Throughout my career, I’ve been fortunate to have significant experience with taking companies public — to date, I’ve taken four companies public, including AFC Gamma. Both Robyn and I knew that being listed on NASDAQ would be crucial to our success. We knew it would provide us with a great head start and the ability to have the best cost of capital in the industry, which allows us to be competitive on pricing with our borrowers. Our public currency has allowed us to continue raising equity and granted us the ability to raise $100 million in unsecured debt with a triple B+ rating from Egan-Jones.
RT: We are fortunate to have support from a robust institutional investor base that understands the cannabis market. There is still a limited subset of institutional investors who are comfortable with cannabis, despite us being listed on NASDAQ. We believe even more institutions will enter the industry over time, given the growth the industry is experiencing.
8. AFC Gamma works with cannabis companies nationwide. Are there any particular markets or segments that you two are excited about and why?
RT: We’re excited about New York, although there is some work to do. Understanding the new regulations regarding hemp licenses converting to cannabis licenses is essential, but we believe the state’s licenses are extremely valuable. Acreage has one of those prized licenses, and we’re looking forward to helping them continue building it out.
We really like the state of Ohio as the market continues to be ripe for cannabis operators since it’s a limited license state. With the expansion of dispensaries, we believe those cultivation licenses will only become more valuable as well as the dispensary locations.
We like the state of Arizona. We’re very bullish on New Jersey as well. Aside from Arizona, New Mexico, and Nevada, most of our deals are made in Mississippi. Still, I would say that we continue to focus on limited license states and the buildout of new states such as Georgia, which has six licenses awarded that will be a home run state for those six operators. But it will take time to build that out, get the market set up and have some of the regulations probably become more favorable.
9. Does AFC see lending opportunities in the California market, or do you typically shy away from the Golden State and facilitate deals in limited licensed states?
LT: We have not currently made any loans to operators in California, Washington, Oregon or Oklahoma. Of course, as in any market, some operators will be successful, but we do not have plans to enter the California market. Since we underwrite loans based on three pillars: cash flows, licenses and real estate, it doesn’t make sense for us to focus our efforts in those states. With license value being a component of our underwriting, we tend to focus on limited license states such as New Jersey, Florida, Pennsylvania, Ohio, to name a few.
JB: AFC Gamma is currently located in Florida, the largest medical market in the U.S. – are there any other medical markets or opportunities that seem like attractive targets?
RT: Given our focus on limited license states, our two favorite medical markets, aside from Florida, currently are Ohio and Pennsylvania. Both markets have strong medical programs with a robust addressable market and population of patients. The Ohio medical program patient community has grown 87% from 2020 to 2021, and the Pennsylvania medical program patient community has grown 313% from 2020 to 2021. We believe Ohio may go recreational soon, but we have enjoyed supporting that medical market. Pennsylvania Senators also discussed the potential for recreational for the first time at a GOP-led committee hearing in February. We also remain very optimistic about the prospects in New Jersey and New York.
JB: Looking ahead this year, what will be AFC Gamma’s biggest hurdles to overcome, and are there any opportunities to look forward to?
RT: I believe our challenge hurdle is always being stewards of capital. We see a lot of deals, and the biggest hurdle is continuing to find good operators to back, focusing on our due diligence and making sure that the investments that we’re making are suitable solid investments. The hurdles that you overcome as any growing company is the need for additional talent as you scale.
But I think that really, the future is wide open. There are so many great opportunities to put capital to work with good borrowers. The only other challenge is going to be that as capital comes back, we’re going to have to either refinance those existing borrowers or deploy capital. In cannabis, it’s sometimes difficult to predict the timing of closings, but we’re excited about our pipeline. We feel good about its strength, although the number may fluctuate from time to time, and we look forward to continuing to advance the cannabis industry.
JB: Tell me more about the AFC Foundation. Has the Foundation made any headway this year to support local communities? What long-term goals do you have planned for the Foundation?
LT: Giving back to others is extremely important to us. Cannabis is a local business, where the operators become entrenched in the local communities providing jobs and revenue to the states. We decided to partner with our borrowers to find charities that support people in the given state that they operate in to support the local communities. The charities we evaluate are focused on causes that are important to our borrowers.
We have asked all our borrowers to provide us with two to three charities they are passionate about, and we are currently evaluating our first few charities and going through the vetting process. We look forward to making our first of many donations shortly and positively impacting these communities. Long-term, we would like to benefit the states that our borrowers operate in. The only way to advance the communities that our borrowers serve is by ensuring all residents have the opportunity to succeed.