AFC Gamma AFCG Q1 2026 Earnings Call Transcript

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DATE

Thursday, May 7, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President — Robyn Tannenbaum
• Chief Executive Officer — Leonard Mark Tannenbaum
• Chief Financial Officer — Brandon Hetzel
• Chief Legal Officer — Gabriel A. Katz
• Chief Investment Officer — Daniel Neville

TAKEAWAYS

• BDC conversion -- Advanced Flower Capital (NASDAQ:AFCG) completed its first fiscal quarter operating as a business development company, gaining broader investment flexibility to pursue opportunities beyond real estate-backed loans.
• New originations -- Closed two non-cannabis lower middle market deals totaling approximately $90 million in new commitments.
• Repayments -- Received $41.2 million in cannabis loan repayments during the quarter.
• Net fundings -- Reported net fundings of $39.1 million.
• Net investment income -- Generated $0.21 per basic weighted average share of common stock.
• Distribution -- Declared and paid a first quarter distribution of $0.05 per share to shareholders of record as of March 31, 2026.
• Share buyback -- Announced a $5 million share buyback program as a component of long-term capital allocation.
• Deals pipeline -- Maintained an active pipeline exceeding $1.5 billion across multiple industries, including healthcare, consumer, manufacturing, and services.
• Portfolio growth -- Increased principal outstanding to $370 million across 17 loans as of May 1, 2026, up from $356.6 million across 15 loans at fiscal quarter end.
• Total assets -- Reported total assets of $394.9 million and total shareholders' equity of $185.8 million.
• Net asset value (NAV) per share -- NAV per share rose to $7.90, increasing $0.44 from the prior quarter.
• Credit facility expansion -- Expanded the senior secured revolving credit facility to $80 million, with the option to raise it to $100 million, and averaged a $22 million balance drawn during the quarter.
• Yield guidance -- Daniel Neville said, "we would expect the yields to move down a touch into the low double-digit range on an overall basis," citing improved borrower quality in the lower middle market.
• Justice Grown status -- Identified the Justice Grown loan as in maturity default, with management stating intent to exercise all rights and remedies, and collateral includes New Jersey cultivation and dispensary assets plus Pennsylvania assets.
• Non-accrual loans -- Three loans remain on non-accrual; liquidations and paydowns continue, including a $6.2 million Q1 paydown from Debbie Holdings.

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RISKS

• Justice Grown loan is in maturity default, with management unable to predict outcomes due to pending litigation; Chief Legal Officer Gabriel A. Katz said, "it is too early to make any predictions on outcomes in this litigation."

SUMMARY

Advanced Flower Capital completed its first fiscal quarter as a business development company for the period ended March 31, 2026, marking a strategic shift to broader private credit activity. The company originated and funded new loans outside the cannabis sector, indicating early execution of diversification efforts. Management highlighted an expanded $80 million credit facility and disclosed a $5 million authorization for share repurchases. The active pipeline now exceeds $1.5 billion, reflecting management’s emphasis on lower middle market opportunities with stronger credit covenants than those common in larger deals.

• Daniel Neville described new sponsor-backed deals, including a $60 million senior secured facility for revenue recovery in retail supply chains and a $30 million commitment to a healthcare benefits platform for hourly employees.
• Paydowns on non-performing loans are being redeployed into performing credits, providing incremental support to current income as portfolio turnover increases.
• Management underscored a move to loans with cash flow and fixed charge coverage covenants, stating, "we are not allowing the aggressive EBITDA add-backs endemic to larger deals."
• Federal cannabis rescheduling may improve asset recoveries but is not expected to substantially shift pipeline focus, as management reiterated their view that "we are still focused on expanding into lower middle market lending generally."

INDUSTRY GLOSSARY

• BDC: Business Development Company; a closed-end investment company designed to provide capital to small and mid-sized businesses, subject to regulatory requirements under the Investment Company Act of 1940.
• Non-accrual loan: A loan on which interest income is no longer accrued due to credit deterioration or borrower default, typically as a result of missed payments or insolvency.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a common measure of operating performance and loan sizing for middle market borrowers.
• Fixed charge coverage ratio covenant: A loan agreement requirement mandating borrowers maintain a minimum ratio of earnings to fixed charges (such as interest and lease payments), intended to protect lenders.

Full Conference Call Transcript

Robyn providing an overview of our results. Len will then provide commentary on the lower middle market, and then Dan will provide an overview of 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 now turn the call over to our President, Robyn Tannenbaum.

Robyn Tannenbaum: Thanks, Gabe, and good morning, everyone. We appreciate you joining us to discuss Advanced Flower Capital Inc.'s first quarter earnings. Before turning to earnings, we are pleased to have completed our first quarter operating as a BDC. The conversion to a business development company has expanded Advanced Flower Capital Inc.'s investment flexibility, which has allowed us to pursue opportunities beyond real estate-backed loans. We believe that this expanded opportunity better positions Advanced Flower Capital Inc. to diversify its exposure across industries and credit risk profiles. During the quarter, we closed two non-cannabis deals in the lower middle market, totaling approximately $90 million in new commitments. Additionally, we received $41.2 million in cannabis loan repayments during the quarter.

For Q1 2026, Advanced Flower Capital Inc. had net fundings of $39.1 million. The two lower middle market deals are similar to other transactions in our pipeline and have many of the characteristics we look for: cash-flowing operating businesses backed by experienced sponsors. Turning to earnings, for the first quarter of 2026, Advanced Flower Capital Inc. generated net investment income of $0.21 per basic weighted average share of common stock. Additionally, the Board of Directors declared a first quarter distribution of $0.05 per share, which was paid on 04/15/2026 to shareholders of record on 03/31/2026.

Before turning the call over to Len, I would like to note that the Board of Directors has put a $5 million share buyback program in place. We view the share buyback authorization as a flexible component of our capital allocation strategy designed to enhance long-term shareholder value. Now I will turn it over to Len to discuss the state of the middle market.

Leonard Tannenbaum: Thank you, Robyn, and good morning, everyone. I want to explain why we are excited about private credit and why we believe the timing is particularly compelling. As private credit experienced meaningful reductions in net inflows, many lenders have exited the lower middle market in favor of moving upmarket to support their existing portfolios. This reduction in capital and resulting shift upmarket has created a sizable opportunity for a small, nimble lender like us to capture what we consider to be an exceptional vintage in the lower middle market. In this part of the market, we are seeing better risk-adjusted returns with absolute yields running approximately 100 to 300 basis points higher than they were just six months ago.

Our ideal sweet spot is in the $5 million to $50 million EBITDA range, largely below the threshold where the larger private credit platforms operate. We believe that the lower middle market assets that we are currently underwriting carry a meaningful distinction from the covenant-light structures common in the upper market, where lenders often rely solely upon a liquidity covenant. Our deals typically include a cash flow measure and a fixed charge coverage ratio covenant, so we are not allowing the aggressive EBITDA add-backs endemic to larger deals. This is a further indicator of the strong underlying credit quality opportunity available in the lower middle market. Strategically, we are actively expanding our pipeline and continuing to diversify our portfolio.

We believe this vintage offers an attractive opportunity, and we are positioning ourselves to capture it thoughtfully and at scale. I will now turn it over to Daniel Neville to discuss the state of our portfolio and our pipeline.

Daniel Neville: Thanks, Len. I will begin with an update on our expansion into private credit outside of the cannabis space, followed by an update on our portfolio. As Len described, we feel good about the supply and demand dynamics in lower middle market lending and are excited about the opportunities we are seeing. Since expanding our investable universe, our active pipeline remains strong, with over $1.5 billion of deals as of today. We are focused on sourcing deals and backing companies in the lower middle market across a variety of industries, including healthcare, consumer, manufacturing, and services. We are focused on deals where we have expertise or can add value and have no interest in stretching beyond our core competency.

Our sweet spot is providing loans to cash-flowing borrowers with $5 million to $50 million of EBITDA. We are primarily participating in sponsored transactions, though we selectively engage in non-sponsored deals as well. The financings we are looking at are often used for expansion capital, acquisitions, refinancings, or recapitalizations. During Q1, Advanced Flower Capital Inc. closed two loans totaling $90 million, and subsequent to quarter end, Advanced Flower Capital Inc. closed an additional $5 million of loans. In January, Advanced Flower Capital Inc. closed on a $60 million senior secured credit facility to support the combination of STAT and the Mooresby Group, which is backed by Cambridge Capital.

In February, Advanced Flower Capital Inc. committed $30 million to a $60 million senior secured term loan to support the acquisition and growth of a leading healthcare benefits platform tailored toward hourly and lower-wage employees. At closing, Advanced Flower Capital Inc. funded $20 million of this commitment, and the remaining $10 million was funded subsequent to quarter end. As I stated last quarter, we currently have three loans on non-accrual and are focused on receiving paydowns on these loans to redeploy that capital into performing credits that should contribute to current income. The receiver has continued the liquidation for our investment in Debbie Holdings.

During Q1, we received a $6.2 million paydown, which brings the total paydown since Debbie entered receivership to $20.8 million. Lastly, I wanted to take a minute to touch on Justice Grown. The loan matured on 05/01/2026 and is in maturity default. Now that the loan has matured, we intend to exercise our rights and remedies under the credit agreement, including our rights under the shareholder guarantee and parent guarantee. As a reminder, our loan to Justice Grown is secured by the vertical asset in New Jersey, including an owned cultivation facility and three dispensaries, two of which are owned. In Pennsylvania, we are secured by three dispensaries and an owned cultivation facility, which is currently not operational.

We remain laser focused on pursuing our rights and remedies under the credit agreement and realizing maximum value from this loan. Now I will turn it over to Brandon to discuss our financial results in more detail.

Brandon Hetzel: Thank you, Dan. For the quarter ended 03/31/2026, we generated total investment income of $9.8 million and net investment income of $4.8 million, or $0.21 per basic weighted average share of common stock. We ended the first quarter of 2026 with $356.6 million of principal outstanding spread across 15 loans. As of 05/01/2026, our portfolio consisted of $370 million of principal outstanding across 17 loans. As of 03/31/2026, we had total assets of $394.9 million, total shareholders' equity of $185.8 million, and our net asset value per share was $7.90. This is an increase of $0.44 per share over the prior quarter.

The increase in net asset value per share was primarily driven by net investment income of $0.21 per share and an increase in unrealized appreciation on investments of approximately $0.28 per share, offset by the Q1 dividend of $0.05 per share. During the first quarter, Advanced Flower Capital Inc. expanded its senior secured revolving credit facility to $80 million with an additional $30 million commitment from the facility's lead arranger, an FDIC-insured bank with over $75 billion of assets. The facility remains expandable to $100 million, subject to lender participation and our available borrowing base. During the three months ended 03/31/2026, we had an average balance drawn on the credit facility of approximately $22 million.

Lastly, on 04/15/2026, we paid the first quarter dividend of $0.05 per common share outstanding to shareholders of record as of 03/31/2026. I will now turn it back over to the operator to start the Q&A.

Operator: We will now open the call for questions. If you would like to ask a question, please press star one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, please press star two. Our first question comes from Aaron Thomas Grey with AGP. Your line is open.

Aaron Thomas Grey: Hi. Thank you for the question. First one from me. Thanks for some of the comments you provided on Justice Grown. How should we think about potential outcomes here given the other litigation that is pending? The loan is now officially in default, so I am trying to think about the different potential outcomes that could happen over the near term. Thanks.

Robyn Tannenbaum: Hi, Aaron. I am going to pass that one over to our Chief Legal Officer, Gabe.

Gabriel A. Katz: Sure. Yes, the loan has matured as you noted. We are pursuing all rights and remedies to obtain maximum value from the credit facility, but it is too early to make any predictions on outcomes in this litigation.

Aaron Thomas Grey: Okay. So just to clarify, there are still questions in terms of being able to fully take it over as the other litigation is pending, even if it is currently in default now?

Gabriel A. Katz: No. We are pursuing our strategies to obtain maximum value from the collateral.

Aaron Thomas Grey: Okay. Alright. Great. Next question for me is on incremental loans in the pipeline. I know you have talked before about expected yields. I understand the April ones were a little bit smaller, but I just want to confirm that the ones in the pipeline are expecting similar yields that we have seen, kind of that mid- to high-teens, as we go forward for the year?

Robyn Tannenbaum: Hi, Aaron. I will pass that one to Daniel Neville.

Daniel Neville: Aaron, we have a few loans in our disclosures, and you can look at those yield-to-maturities as a guidepost. Our overall target, and what we have said previously with the transition to the lower middle market, is that we would expect the yields to move down a touch into the low double-digit range on an overall basis, but we expect the quality of the borrowers and the counterparties on the sponsor side to improve significantly in the lower middle market relative to what is available today across the cannabis landscape.

Aaron Thomas Grey: Mhmm. And just last question for me. With the recent rescheduling—currently FDA approved and if they are medical, legal, operations—does that change your outlook for the cannabis market, or are you still more broadly focused, maybe less focused on cannabis for the pipeline? Thank you.

Daniel Neville: I will give a little color on the rescheduling side. It is great to see progress at the federal level finally after five years. The positives are it eliminates 280E liabilities for medical operators today and certainly decreases future uncertainty related to go-forward liabilities, given the path that we seem to be on at the federal level, with hearings related to adult use later this year as well. There is also potential relief of historical tax liabilities, at least for medical operators, as was highlighted in the actions over the last few weeks. The combination of those factors could potentially attract additional capital over time.

The negatives are that none of the operators were really paying those taxes on a cash basis outside of GTI, and if you look at the cash flow statements for the last couple of years, that reflects a post-280E world on a cash basis today. Certainly, the industry is more competitive than it was five years ago, and it took a long time to get here. To the extent that additional capital is attracted to the industry, that would be positive for asset values—particularly medical asset values given that 280E is eliminated—and it could lead to better realizations for us on loans that we have on non-accrual.

We are seeing better opportunities in the lower middle market today given the economics, the less competitive nature of the lending environment, and the quality of the borrowers and counterparties. So on a go-forward basis, while rescheduling is great and could be good for asset values and our loans on non-accrual, we are still focused on expanding into lower middle market lending generally.

Operator: Thank you. One moment for our next question. Our next question comes from Pablo Zuanic with Zuanic and Associates. Your line is open.

Pablo Zuanic: Yes. Good morning, everyone. You gave some color on the two large loans that you made in the first quarter to non-cannabis companies. Can you expand a little bit more? These are private companies, and we do not have access to their financials. Whatever additional color you can provide to understand better what those companies are doing and what their plans are for the proceeds from the loans would be helpful. Thank you.

Daniel Neville: Sure, Pablo. As you mentioned, they are private companies; the majority of loans done in the BDC space are to private companies. We can give a bit of color on two of those businesses. For STAT, we put out a press release that described what the business does. They operate in the revenue recovery space related to suppliers into big retailers like Walmart, Target, and the Amazon ecosystem, and they recover deductions related to invoices for goods that are shipped into those retailers. If you think about the opportunity set there, Walmart has about $700 billion of sales, with cost of goods sold probably somewhere around $400 billion.

On every invoice that goes into Walmart, you typically see deductions related to quantity mismatches, on-time in-full, and similar items. These folks work to recover those amounts, which represents a very large opportunity at scale for Walmart alone, and you expand that opportunity as you get to other retailers on the platform. The use of proceeds there was for a refinancing of an existing credit facility for the buyer as well as to partially finance the acquisition of the Mooresby Group. On the benefits platform borrower, that is a healthcare benefits platform that serves low-wage employees.

In my previous life, I had 1,700 hourly employees and dealt with benefits, and one of the constant complaints is that regular-way healthcare insurance was too expensive, unaffordable, and honestly overkill for folks in the 18–35 age subset. This product provides a low-cost offering for virtual urgent care, primary care, and generic prescriptions, and it is good for the employee as a low-cost option and good for the employer as an avenue for some tax savings on FICA payroll taxes. The platform is seeing tremendous growth and is really attacking an interesting niche and unfilled need in the healthcare insurance market.

Pablo Zuanic: Thank you. That is great color. My last question: you have the cash on the balance sheet that you reported for March plus the expanded credit facility. If I put all that together, do you see that you can deploy all of that this year? You have talked about the pipeline, but I am trying to think how we should model book loan growth from here to the end of the year.

Robyn Tannenbaum: Pablo, it is Robyn. As we are entering the lower middle market, it is hard to provide guidance for the rest of the year as to what we are going to fund. We do have dry powder that we look to deploy over the course of the year, and as we get repayments, as we discussed this quarter, we will look to deploy that capital as well.

Operator: I am not showing any further questions at this time. I would like to turn the call back over to our CEO, Daniel Neville, for any further remarks.

Daniel Neville: Thank you for joining us this morning, and we look forward to updating you on our continued transition to lower middle market lending on future calls.

Operator: Thank you, ladies and gentlemen. This does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

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