VIRIDIAN INSIGHTS

• AFC Gamma (AFCG: Nasdaq) reported fourth-quarter results, which generally beat expectations, but the company also highlighted an increase in its reserves for credit losses. AFCG’s reserves now stand at approximately 5% of loans outstanding compared to 1.2% at the end of 2021. AFC’s portfolio contains 14 active loans with an average IRR of roughly 21%. On the conference call, the company stated that it only had one loan in non-accrual status. Interestingly, AFCG anticipates significantly increasing its non-cannabis loan portfolio in 2023 due to reduced opportunities to deploy capital in cannabis.
• The 3-month vs. 10-year treasury spread inversion widened about eleven basis points to negative 107bp and remains close to the most pronounced inversion since 1981. We like to watch this spread as opposed to the more commonly monitored 2yr-10yr spread for two reasons: 1) it is the measure that the Fed focuses more attention on, and 2) this measure does a better job of mirroring bank lending economics. This inversion has successfully predicted the previous five recessions, and we don’t think it will miss this time either. Today’s announcements by the Fed Chairman that rate increases will be sped up and go higher than previously expected reinforce our opinion that a near-term pivot is highly unlikely.

• Our Chart of the Week highlighted an interesting yet somewhat controversial fact: the percent decline in MSO enterprise values over the last year corresponds closely to the percentage reduction in consensus 2023 EBITDA estimates. The industry’s mantra over the previous year seemed to become “earnings don’t matter; it’s all about SAFE and legalization.” Our findings indicate that valuations are down because expected earnings are down. Go figure.