Adv Flower (AFCG) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Nov. 5, 2026

CALL PARTICIPANTS

• Chief Legal Officer - Gabriel Katz
• President and Chief Investment Officer - Robyn Tannenbaum
• Chief Executive Officer - Daniel Neville
• Chief Financial Officer - Brandon Hetzel

TAKEAWAYS

• GAAP Net Investment Income -- $3.5 million, representing $0.16 per weighted average share for the quarter.
• Net Asset Value Per Share -- $8.55, reflecting a $0.30 increase from $8.25 as of June 30, 2026.
• Total Investment Income -- $8.6 million, primarily driven by $7.6 million in interest income and $949,000 in payment-in-kind interest.
• Portfolio Fair Value -- $289.6 million, consisting of 18 senior secured first lien debt investments across five industries.
• Lower Middle Market Exposure -- $93 million, representing 32% of the total investment portfolio fair value.
• Weighted Average Yield -- 13.3% on income-producing debt investments as of Sept. 30, 2026.
• Share Repurchases -- $1 million, comprising 285,656 shares repurchased at a weighted average price of $3.46 per share.
• Debt Repurchase -- $19 million in senior unsecured notes, purchased subsequent to quarter-end at 96.5% of par plus accrued interest.
• Total Assets -- $395.1 million, including $102.1 million in cash and cash equivalents.
• Gross Debt-to-Equity -- 1.03x, decreasing from 1.1x at the end of the second quarter.
• Net Debt-to-Equity -- 0.49x, compared to 0.53x as of June 30, 2026.
• Asset Coverage Ratio -- 197%, exceeding the 150% regulatory minimum.
• Investment Pipeline -- $1.1 billion, involving multiple industries with two signed term sheets expected to close in the near term.
• Principal Repayments -- $8.1 million, including a realized gain of $2.2 million from the sale of Trulieve senior notes at 104.25% of par.
• Investment Funding -- $4.6 million, including a $3.1 million funding for a new outpatient behavioral health platform.
• Management Fee Rebate -- $176,420, reducing total operating expenses for the quarter.
• Senior Unsecured Notes -- $58 million, representing the remaining balance due in May 2027 following the opportunistic repurchase.
• Revolving Credit Facility -- $115 million outstanding at quarter-end, with $96.5 million subsequently repaid on Oct. 1, 2026.
• Devi Recoveries -- $1.7 million, received subsequent to quarter-end as part of a receiver-led asset disposition process.
• Justice Grown Fair Value -- $42 million, representing the carrying value of the nonaccrual loan as noted during the analyst Q&A session.
• Operating Expenses -- $5 million, a decrease from $5.2 million in the second quarter of 2026.
• Year-to-Date NAV Accretion -- $0.24 per share, resulting from share repurchases executed at a discount to net asset value.

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RISKS

• Tannenbaum stated, "Credit stress remains evident across parts of the private credit market," noting that the U.S. private credit default rate reached a record 6.3% for the trailing 12 months ended August 2026.
• Management noted that the Federal Reserve's target range of 3.75% to 4% is "keeping debt service costs elevated for many floating rate borrowers."
• Neville reported that the Justice Grown loan matured on May 1, 2026, and remains in maturity default, with the company pursuing rights and remedies through legal actions and scheduled collateral dispositions.

SUMMARY

Advanced Flower Capital Inc. (NASDAQ:AFCG) reported an increase in net asset value to $8.55 per share and noted that its non-cannabis lower middle market portfolio now accounts for 32% of total investments. The company stated that it repurchased approximately $1 million in common stock and $19 million in senior unsecured notes to enhance shareholder value and manage the balance sheet ahead of 2027 debt maturities. Management indicated it is focusing on lower middle market opportunities where capital imbalances between large and small lenders create favorable pricing and structural protections.

• Robyn Tannenbaum stated, "The combination of large fund concentration and lenders moving upmarket is creating attractive opportunities to negotiate pricing and lender protections in the lower middle market."
• Management is executing on its affiliate TCG platform, which has signed term sheets for two transactions including a $43 million facility for a healthcare services platform.
• Daniel Neville reported that the company sold its position in Trulieve senior notes at 104.25% of par, generating a $2.2 million realized gain during the quarter.
• The company is utilizing a $5 million share repurchase program, with approximately $1.2 million remaining available for future buybacks.
• Management noted that it expects investment deployment to be lumpy over the coming quarters as it remains disciplined regarding credit quality and lender protections.
• Article 9 public dispositions for collateral related to the Justice Grown loan are scheduled for Nov. 12 and Nov. 19, 2026, in New Jersey and Pennsylvania.

INDUSTRY GLOSSARY

• Article 9: A section of the Uniform Commercial Code that governs secured transactions, including the rights of lenders to dispose of collateral after a default.
• BDC: Business Development Company, a type of closed-end fund that invests in small and mid-sized companies and is required to distribute at least 90% of its taxable income.
• NAV: Net Asset Value, representing the total value of the company's assets minus its liabilities, often expressed on a per-share basis.
• NII: Net Investment Income, the income remaining after operating expenses are deducted from total investment income but before realized or unrealized gains and losses.
• Nonaccrual: A status for loans where the lender no longer expects to collect all principal and interest, typically leading to the suspension of interest income recognition.
• PIK: Payment-in-kind interest, a form of interest that is added to the principal balance of a loan rather than being paid in cash.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the AFC Q3 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Gabriel Katz, Chief Legal Officer. Please go ahead.

Gabe Katz: Good morning, and thank you all for joining AFC's earnings call for the quarter ended September 30, 2026. I'm joined this morning by Robyn Tannenbaum, our President and Chief Investment Officer; Dan Neville, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our October 20, 2026 press release and is posted on the Investor Relations portion of AFC's website at afcbdc.com, along with our third quarter 2026 earnings release and investor presentation.

Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, market developments, signed term sheet transactions, anticipated portfolio yield and financial performance and projections in 2026 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to AFC's most recent periodic filings with the SEC, including our quarterly report on Form 10-Q filed earlier this morning for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. Today's call will begin with Robyn providing an overview of the lending environment and our results. Dan will then provide an update on our portfolio and pipeline.

Finally, Brandon will conclude with a summary of our financial results before we open the lines for Q&A. With that, I will turn the call over to Robyn Tannenbaum, our President and Chief Investment Officer.

Robyn Tannenbaum: Thanks, Gabriel, and good morning, everyone. We appreciate you joining us to discuss AFC's third quarter 2026 earnings. Before turning to our results, I want to provide some insight into the current lending environment. Credit stress remains evident across parts of the private credit market, such as U.S. private credit default rate reached a record 6.3% for the trailing 12 months ended August 2026. The Federal Reserve raised rates by 25 basis points in September and held the target range steady at 3.75% to 4% on October 28, keeping debt service costs elevated for many floating rate borrowers. At the same time, we see a growing capital imbalance in the lower middle market where AFC is focused.

As private credit managers raise larger funds, they increasingly focus on larger transactions. The average direct lending deal was roughly $220 million in the second quarter according to PitchBook LCD. Meanwhile, smaller businesses continue to need capital for acquisitions, growth and refinancing. In our view, the combination of large fund concentration and lenders moving upmarket is creating attractive opportunities to negotiate pricing and lender protections in the lower middle market. We believe the competitive dynamics also differ by market segment. Larger borrowers can often compare private credit financing with broadly syndicated loans, increasing pressure on pricing and structure. By contrast, many transactions we target involve a small group of lenders and are negotiated directly with borrowers and sponsors.

We believe that favors lenders with established relationships, differentiated sourcing and the ability to provide certainty of execution. This is the market environment AFC has been positioning itself to address. We see an opportunity to originate new loans in the lower middle market with disciplined underwriting, appropriate collateral or enterprise value support and meaningful structural protections. Where appropriate, we seek financial maintenance covenants, amortization, call protection and prepayment fees. We remain selective on credit quality and structure rather than pursuing volume for its own sake. Now turning to our results. For the third quarter of 2026, AFC generated net investment income of $0.16 per weighted average share of common stock.

Net asset value per share increased for the third consecutive quarter to $8.55, up $1.09 or approximately 15% since the beginning of the year. Additionally, the Board of Directors declared a third quarter distribution of $0.05 per share, which was paid on October 15, 2026, to shareholders of record on September 30, 2026. We continue to execute on our share repurchase program. During the quarter, we repurchased approximately $1 million of common stock at a weighted average price of $3.46, approximately a 58% discount to net asset value. This contributed approximately $0.06 per share to NAV. Since the program began in May, we have repurchased approximately $3.8 million of common stock, contributing approximately $0.24 per share to NAV year-to-date.

Approximately $1.2 million remains available under the $5 million authorization. On the liability side, subsequent to quarter end, we opportunistically purchased $19 million of our senior notes ahead of their May 2027 maturity. The transaction generated a gain, which will be reflected in the fourth quarter of 2026 and also reduces our upcoming debt obligations. This reflects our focus on active balance sheet management. Year-to-date, we have committed approximately $102 million to new lower middle market investments and our affiliate, TCG or Tannenbaum Capital Group has signed 2 financing term sheets, which we expect AFC to commit to a portion of in each deal.

We continue to favor opportunities where we can underwrite sustainable cash flow and enterprise value while negotiating strong lender protection. I will now turn it over to Dan Neville, our Chief Executive Officer, to discuss our portfolio.

Daniel Neville: Thanks, Robyn, and good morning, everyone. I'll start with the portfolio and our investment activity for the quarter, then provide an update on our legacy positions and our pipeline. As of September 30, 2026, the fair value of our investment portfolio was approximately $290 million across 18 investments. All of our investments were senior secured first lien debt and the weighted average yield on income-producing investments was 13.3%. Our non-cannabis lower middle market investments, which we began originating this year totaled approximately $93 million or 32% of our investment portfolio at fair value. We currently have 5 investments in this category that are performing in line with our underwriting expectations.

During the quarter, we closed our previously discussed $7 million commitment to an outpatient behavioral health platform with approximately $3 million funded at close. Subsequent to quarter end, we sold our position in Trulieve senior notes at 104.25% of par, resulting in a realized gain of approximately $2.2 million. Overall, we funded $4.6 million during the quarter, including $1.5 million to our existing portfolio companies and received $8 million in principal repayment and amortization. Turning to our nonaccrual loans. Regarding Devi, the court appointed receiver has continued its asset disposition process.

As previously disclosed, in July, the receiver entered into a binding term sheet for the proposed sale of collateral in Massachusetts and New Mexico for an aggregate consideration of $12.5 million, including a $2 million nonrefundable deposit. Subsequent to quarter end, we received approximately $1.7 million of repayments, representing a portion of the expected sale proceeds. We will provide updates as additional recoveries are realized. Inception to date, repayments have totaled approximately $60 million on Devi. The Justice Grown loan matured on May 1, 2026, and remains a maturity. We are pursuing our rights and remedies under the credit agreement and the related guarantees.

In August, our agent commenced a separate action seeking summary judgment against the parent under its payment guarantee. The Article 9 public dispositions for certain collateral are currently scheduled for November 12 and November 19, 2026. The collateral includes assets in New Jersey and Pennsylvania and SSC Advisors is assisting with marketing to potential buyers. Interested parties can consult the current sale notices on our website and contact SSC Advisers for additional information. Given the active legal processes, we will not be commenting further on specifics outside of what is disclosed in our SEC filings.

Stepping back, our priorities remain to maximize recoveries on the legacy nonaccrual positions, actively manage our performing cannabis exposures and selectively redeploy capital into other industries in the lower middle market as repayments and recoveries are realized. Our prospective pipeline remains active at approximately $1.1 billion across multiple industries. Our affiliated TCG platform has signed term sheets as agent and lender on 2 transactions, and we expect AFC to commit a portion of each deal. One deal that is expected to close in the near term is a $43 million senior secured facility to a sponsor-backed health care services platform, which AFC will commit to.

While we remain focused on cash flowing borrowers with approximately $5 million to $50 million of EBITDA, we are opportunistically including an asset-backed lending opportunities where we believe we can obtain attractive risk-adjusted returns with appropriate downside protections. We remain disciplined as we advance opportunities through underwriting and negotiations. Now I'll turn it over to Brandon Hetzel, our Chief Financial Officer, to discuss our financial results in more detail.

Brandon Hetzel: Thank you, Dan. For the quarter ended September 30, 2026, we generated total investment income of $8.6 million and net investment income of $3.5 million or $0.16 per weighted average share of common stock. Total expenses were $5 million compared to $5.2 million in the second quarter, and net expenses were $4.8 million compared to $5 million in the second quarter, which represented net of a management fee rebate of approximately $176,000 for both the second and third quarters. We ended the third quarter with $361.1 million of principal outstanding spread across 18 investments. As of September 30, 2026, we had total assets of $395.1 million and total net assets of $191.6 million.

NAV per share increased by $0.30 from June 30 to $8.55. The increase reflects approximately $0.16 per share of net investment income approximately $0.13 per share of net unrealized appreciation on investments and approximately $0.06 per share of accretion from repurchases below NAV, offset by the $0.05 quarterly distribution. Regarding the share repurchase program. Turning to the quarter, we repurchased and extinguished approximately 286,000 shares at a weighted average price of $3.46 per share for approximately $1 million in the aggregate. Approximately $1.2 million remains available under the $5 million share repurchase program.

At September 30, 2026, we had approximately $197 million of principal debt outstanding, $115 million under our secured revolving credit facility, $5 million under our affiliated credit facility and $77 million of senior unsecured notes. On October 1, 2026, we repaid $96.5 million under the secured revolving credit facility and $5 million under the affiliated credit facility. The weighted average interest rate on our debt outstanding was 6.2% for the quarter. Subsequent to the quarter end, we repurchased $19 million in principal amount of our 2027 senior unsecured notes at 96.5% of par, plus accrued interest, resulting in an approximately $600,000 gain on extinguishment of debt.

Approximately $58 million of the notes remain outstanding following this transaction with a May 2027 maturity. Our gross debt-to-equity ratio as of September 30 was approximately 1.03x versus 1.1x at June 30. Net debt to equity was 0.49x versus 0.53x at June 30, and our asset coverage ratio was 197%, above the 150 regulatory minimum applicable to us. Turning to distributions. We paid the third quarter distribution of $0.05 per common share on October 15, 2026, to shareholders of record as of September 30, 2026. With that, I will now turn it back over to the operator to start the Q&A.

Operator: [Operator Instructions] Our first question comes from the line of Aaron Grey with Alliance Global Partners.

Aaron Grey: So first question for me, I know you're somewhat limited in what you can talk about, just regarding Justice Grown and the potential sale for some of those assets. How best to think about potential proceeds looking at the fair value, at least in the 10-Q, it looks like it held at about $42 million for the quarter. So is that any type of read-through? And do you expect there to be any type of impact on what you get for those assets, just given some of the counterclaims that you're receiving right now and the pending litigation there? So any color there would be helpful.

Gabe Katz: As we noted, we will not be commenting on the active legal process there. In terms of the auctions, those are upcoming very soon here, and we'll be certain to share material updates at the appropriate time.

Aaron Grey: Okay. The second question, just bigger picture. I know you talked about there's a pending $43 million that you guys will commit to. But just bigger picture, as we think about the cadence of new fundings, is that an indicator of getting an uptick and getting more comfortability? Should we expect that pace to come with more deals going forward? And how should we think about how much you will be involved in that -- you'd just be a portion of it? Just trying to size out in terms of the pipeline translating to deals in the near term.

Robyn Tannenbaum: Sure. So I think, Dan, do you want to start and I'll finish or...

Daniel Neville: Yes, sure. The -- so Aaron, I think deals are going to be -- it's going to be choppy. We were very active in the first quarter. We obviously have a solid pipeline that we're working against and a few opportunities that are advanced in that pipeline, one of which we expect to close in the near term. But we're also going to be disciplined about the opportunities that we deploy into focused on good protections on the lender side of things and capital preservation and making sure that we earn an appropriate risk-adjusted return.

So as we find those opportunities and we have a few that are coming down the pipe, we will actively deploy into them, but it's going to be a little bit lumpy on the deployment side of things, I think, over the next few quarters.

Aaron Grey: Okay. Great. Last one for me. Is there any common theme that you're seeing in terms of maybe why opportunities aren't making it through the pipeline to deal terms? Any type of commonality you could call out?

Robyn Tannenbaum: I think -- it's Robyn. So I think there's a few things. One, when you're in sponsor-driven processes, right, you select -- you are typically backing one sponsor, sometimes they win the deals and the ability to purchase it, sometimes they don't. We've seen things break in diligence. We've seen things break due to an independent sponsor not being able to raise equity. I don't think there's one common theme. I think that -- we currently have a wide funnel as we've expanded into lower middle market credit.

And as Dan said, right, and I think as we said in our prepared remarks, we're being selective on what we choose to execute upon and back borrowers and sponsors with strong cash flow, enterprise value or asset coverage in some situations. So I wouldn't say there's a common theme why things get kicked out. I think it's a mix of what I just went through.

Operator: Our next question comes from the line of Pablo Zuanic with Zuanic & Associates.

Pablo Zuanic: Just to follow up on that last question there, maybe asking it a different way. After the debt repayment you made in October, can you just remind us of what you have available to deploy ex any recoveries from other asset sales in terms of your credit lines and cash on hand? Just to quantify that. And maybe a reminder of what's your tolerance for the debt-to-equity ratio? How high can you go?

Brandon Hetzel: Pablo, this is Brandon. As we noted in the presentation, as of October 30, we had about $36 million drawn on our revolver. That revolver has a commitment up to $80 million. So that gives you an idea on that line of credit, what our capacity is. And then we also have our unsecured affiliate line of credit of $20 million as well. And that's putting aside any type of repayments that we will receive from our current investments.

Robyn Tannenbaum: And then BDC is different than REITs and where are statutorily limited to 2:1 leverage, and you never want to get too close to that 2:1 leverage. So I'd say between 1 and 1.5x feels comfortable.

Pablo Zuanic: Right. Okay. No, that's good. And then just in terms of the mechanics of the fourth quarter dividend, obviously, you will have room to -- based on the target payout ratio target, at some point, you have to pay a onetime supplemental dividend. Just remind us when that announcement be made? Is that a January issue for 4Q? Or when do we hear about that?

Robyn Tannenbaum: We -- the Board of Directors typically declares a dividend on a cadence that would be announced on or around December 15. And the Board will evaluate all factors when declaring the dividend as they do every quarter.

Pablo Zuanic: Right. But just by definition, you still have to get to your payout ratio, right? Right now with the $0.05, you're way below that.

Brandon Hetzel: Yes. The Board has to consider a lot everything, not just what is shown on the NII. NII isn't necessarily the taxable income that drives the required distribution amount. And so the Board has to take into consideration that as well as -- and there's also mechanics within BDCs where dividends in future years can be pulled back to this year as well. So it's not just a simple look at the NII and that is the amount that has to be paid out. There's a lot of factors that the Board has to think about when declaring the dividend.

Daniel Neville: Including, I would say, Pablo, our overall capital allocation framework, which the Board looks at every quarter. But as you know, we paid out a dividend this year too as well, but we've also been repurchasing a significant amount of our equity at a pretty significant discount to our NAV. And so the Board on a quarterly basis, evaluates kind of how we are returning capital to our shareholders between the dividend and between share repurchases as well.

Pablo Zuanic: Right. That's good color. And then, Dan, in your prepared remarks, you talked about actively managing your cannabis loan portfolio. I did go through the 10-Q. I'm guessing Story, it that it is current, but it was extended the loan. Theratrue, $8 million current. Not sure if it's -- first of all, the $8 million, is Theratrue current? That's the question. And then Sunburn, I think 1 or 2 10-Qs ago, there was some issues there, but is that back to normal? Whatever comments you can make about the cannabis book? Because there is some noise there, in my opinion, given the commentary around Story, Theratrue and Sunburn.

Daniel Neville: So Story is a -- Story is current, Theratrue is current, Sunburn is current on all payments. The Story Arizona extension is a business that is performing well. There was a specific need for a short-term extension, and we were able to be paid for that extension well, and it was something that we were very happy to do and work with the borrower and accommodate. And then Sunburn, we -- they've met the terms of the forbearance agreement that we had in place back in June of this past year. They raised some additional equity capital.

The new management team has been doing a great job over the last 1.5 years in terms of working on and turning around that business. And that's probably all we'll say and won't get into more specifics on that front.

Robyn Tannenbaum: And I think, Pablo, just in normal course of business, there are waivers, there are amendments. There is working with borrowers to accommodate changes to a projected business plan that may or may not have happened years past. So I think that while we do a very good job of disclosing everything, a lot of this really is just normal course business and lending to borrowers and working with them.

Pablo Zuanic: Last question regarding the loans that you made in 1Q to -- I think it's called STAT Buyer and BCIS. I know some of those loans were for the companies to make M&A transactions. can you give an update where those transactions have closed? And any update you can give on those 2 borrowers?

Robyn Tannenbaum: So the deals, they were closed upon closing of the deal. So the STAT deal was acquisition financing, and I believe the other one was acquisition financing as well, and those were closed at closing current.

Daniel Neville: To finance an acquisition and partially finance the debt paydown, so partially finance the acquisition and activate was an M&A financing transaction as well.

Pablo Zuanic: All right. That's all for me. I mean, obviously, we will all keeping a close eye on November 12 and November 19. I know you're not going to make any comments, but at least you did say that you will inform the market about what happens on those days. I mean I just want to make sure I understood that. I'm not asking questions about something that...

Robyn Tannenbaum: Pablo, I think what Dan said is at the appropriate time, we will make sure that we inform the market. That does not mean that we're going to make an announcement the day out, for instance. But I think that we have a history of making sure that we inform the market of events that are important. So we will continue to endeavor to do that.

Operator: I'm showing no further questions at this time. I would now like to turn it back to Dan Neville, Chief Executive Officer, for closing remarks.

Daniel Neville: Thank you all for joining us today, and we look forward to keeping you updated on our continued progress.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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