Advanced Flower Capital, trading under the symbol AFCG on Nasdaq, is a microcap mortgage REIT with a unique focus on the cannabis industry. It’s notable for offering an eye-popping yield of 16%. But while there are ongoing debates about the safety of marijuana, my main concern is whether this REIT’s hefty dividend is secure or at risk.
When diving into the numbers, the key cash flow indicator for Advanced Flower is its distributable earnings. There was a decline from $49.9 million in 2023 to $41.4 million, which could raise eyebrows. However, projections for 2024 are more promising, with estimates soaring to $69.3 million. This improvement could ease concerns about the payout ratio, which has been a worry in the past.
In 2023, the company doled out $42.5 million in dividends, creating a payout ratio of 103%. Translation: they spent $1.03 in dividends for every dollar in distributable earnings. While that sounds alarming, REITs often have high payout ratios due to their legal obligation to return at least 90% of earnings to shareholders. I’m comfortable with them paying up to 100% of their earnings, provided it doesn’t exceed their income.
Thankfully, last year saw the payout ratio reduce to a more manageable 83%. Yet, I harbor some reservations about the outlook for 2025. Predictions indicate slight declines in revenue and net interest income, with a modest rise in earnings per share. This makes it tricky to pinpoint where distributable earnings will land by year-end, and my gut tells me they might not see much, if any, growth.
Advanced Flower began paying dividends in 2021, but when distributable earnings took a dip in 2023, it had to cut the dividend. On a brighter note, it also issued a special $0.10 per share dividend in 2024.
Looking ahead, if the company faces hurdles in growing its distributable earnings in 2025, the payout ratio could be impacted. Coupled with its recent history of dividend cuts, this casts doubt on the security of Advanced Flower Capital’s dividends.
Dividend Safety Rating: D
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