AFC Gamma Posts Q2 Loss and 73% EPS Drop

Key Points

• Distributable earnings per share (non-GAAP) fell short of expectations at $0.15

• Net income (GAAP) swung to a loss of $13.2 million, reflecting heightened credit loss provisions and issues among cannabis borrowers.

• The company announced plans to convert from a mortgage REIT to a BDC, signaling a major business model pivot.

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AFC Gamma (NASDAQ:AFCG), a specialty lender focused on the cannabis sector, reported its earnings for the second quarter of fiscal 2025 on August 14, 2025. The company recorded distributable earnings per share of $0.15 (non-GAAP), missing the analyst consensus estimate of $0.20 (non-GAAP) by 24.5%. Distributable earnings (non-GAAP) fell to $3.4 million, compared with $11.4 million in Q2 2024—Net income (GAAP) flipped from a profit of $16.4 million in Q2 2024 to a net loss of $13.2 million. These results fell short of external expectations, as the company faced intensified credit challenges and muted loan origination activity. In this context, AFC Gamma also announced its intent to convert from a mortgage real estate investment trust (REIT) to a business development company (BDC) as disclosed in its earnings release, signaling a significant strategic pivot following persistent headwinds in its core lending business.

Source: Analyst estimates for the quarter provided by FactSet.

Company Overview and Key Success Factors

AFC Gamma specializes in providing senior secured loans to cannabis operators—primarily in states with legalized cannabis. The company’s lending is typically backed by real estate, equipment, or certain business assets. This core focus arose because many cannabis businesses remain underserved by traditional banks; federal restrictions limit access to conventional financial services for companies in the industry.

In recent quarters, AFC Gamma has concentrated on managing credit risk and maintaining a selective approach to new lending. The business's success hinges on navigating evolving cannabis regulations, upholding strict underwriting standards, and leveraging management’s significant experience in direct lending. Adapting to changes in market dynamics, particularly dwindling investable opportunities within the cannabis space, has also been central to the company's recent strategy.

Quarter in Review: Financial Performance and Strategic Shift

The quarter was marked by sizeable declines in profitability and distributable earnings. Distributable earnings (non-GAAP) dropped to $3.4 million from $11.4 million in Q2 2024, and per-share earnings (non-GAAP) missed consensus forecasts by a significant margin. GAAP net results shifted sharply from a profit in Q1 2025 to a net loss, due largely to an increase in the provision for credit losses and headwinds among core cannabis borrowers.

Credit quality deterioration stood out as the defining issue. The company reserved $14.1 million for expected credit losses, more than four times its distributable earnings (non-GAAP) base. This compares with a $6.2 million GAAP reversal in Q2 2024. These provisions reflect non-accruing loans and ongoing legal actions with several borrowers, highlighting the capital risks associated with lending in the cannabis sector.

Muted loan origination persisted throughout the quarter. Although management noted an active origination pipeline, the actual volume of new loans under review as of May 1, 2025 ($287 million) has dropped sharply compared to the pipeline as of March 1, 2025 ($383 million), indicating fewer viable candidates. As of May 1, 2025, the active pipeline was $287 million—all from cannabis-related deals, with limited funding flowing into the sector.

The company announced a significant strategic pivot: the Board approved plans to broaden the investment focus beyond just real estate-backed lending to include ancillary cannabis businesses and other middle-market companies. If implemented, converting to a BDC would allow lending to a wider range of business types, including those not secured by property. This change aims to address the shrinking universe of cannabis borrowers with real estate collateral, a limiting factor under the current REIT structure.

The recent changes primarily reflect strategic repositioning rather than new product-line introductions.

The quarterly dividend was reduced to $0.15 per share, down from prior levels, signaling an adjustment to match lower distributable earnings. The dividend now closely tracks per-share distributable earnings (non-GAAP), which have declined markedly in the last two quarters.

Look Ahead: Guidance and Watchpoints

The company did not provide forward financial guidance for the upcoming quarter or fiscal year. Management comments focused instead on the pending BDC conversion proposal and the ongoing emphasis on credit recovery and legal resolution of non-performing loans. No quantification of pipeline growth, new loan origination targets, or future earnings power was offered.

In the months ahead, investors should monitor progress on the BDC transition and the outcomes of efforts to resolve troubled loans. Distributable earnings is one of many factors considered by the Board of Directors in authorizing dividends. Given the absence of formal guidance and ongoing business model changes, there is heightened uncertainty around future growth, asset mix, and income generation.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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