AFC Gamma, a Florida-based real estate investment trust (or “REIT”) that provides debt financing to cannabis cultivators, processors, dispensaries, and related operations, filed an S-11 with the SEC on December 29, 2020, to allow the company’s stock to be listed on the Nasdaq. REITs own, operate, or finance income-producing real estate and typically specialize in a specific market sector. Although the S-11 form is unique to REITs, AFC Gamma’s filing includes risk disclosures that are similar to those often included in the periodic reports of cannabis companies listed on US securities exchanges.
Disclosing Legal and Regulatory Shifts
Consistent with disclosure statements filed by several cannabis producers and processing companies, AFC Gamma’s S-11 identified potential changes in the cannabis sector’s legal and regulatory environment as a major risk factor that investors should consider. AFC Gamma identified operations in Arizona, Arkansas, California, Connecticut, Florida, Maryland, Massachusetts, Michigan, Nevada, New Jersey, Ohio, and Pennsylvania, as being especially susceptible to “social, political, and economic risks” related to local laws and regulations. In contrast, major cannabis producer Aphria, Inc. in its July 2020 annual SEC filing, more broadly disclosed legal and regulatory shifts as a risk of operating in its home country, Canada, and abroad.
A Highly Leveraged Industry
AFC Gamma’s S-11 also includes a risk disclosure that “[s]ome of our borrowers may be highly leveraged” and identified potential restrictive covenants as impairing their ability to finance future operations. A December 14, 2020, Seeking Alpha article notes that over a third of publically-traded U.S. cannabis companies have negative tangible equity, including MedMen whose negative tangible equity is estimated to exceed $364 Million. When commercial leases such as those provided through AFC Gamma are added to the debts of listed cannabis companies, their leverage rises drastically. Aphria Inc.’s most recent annual SEC filing also mentions potential undercapitalization as a material risk.