Advanced Flower Capital (NASDAQ:AFCG) Q2 2026 Earnings Call

0:00 Good day, and thank you for standing by. Welcome to the AFC Second Quarter twenty twenty six Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

0:24 Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker today, Gabriel Katz, Chief Legal Officer. Sir, please go ahead. Good morning, and thank you all for joining AFC's earnings call for the quarter ended 06/30/2026. I'm joined this morning by Robin Tanenbaum, our president and chief investment officer Daniel 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 07/17/2026 press release and is posted on the Investor Relations portion of AFC's website at afcbdc.com, along with our second quarter twenty twenty six 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, anticipated portfolio yield and financial performance and projections in 2026 and beyond. These statements are subject to inherent uncertainties in predicting future results.

1:27 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 Robin 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 line for Q and A. With that, I will now turn the call over to our President and Chief Investment Officer, Robin Tanenbaum. Thanks, Gabe, and good morning, everyone. We appreciate you joining us to discuss AFC's second quarter twenty twenty six earnings. Before turning to our results, I want to provide some context on the broader lending environment.

2:16 As many of you know, the private credit ecosystem is experiencing stress. Default rates across private credit have risen notably, with Fitch reporting a 6% default rate as of July 2026 and Proskauer's

2:29 Private Credit Default Index tracking a similar upward trend. Banks, while not direct lenders to much of the middle market, hold indirect exposure through leveraged facilities extended to private credit funds, and that exposure is now drawing increased scrutiny. In response to broader market stress, we are seeing a pullback in available capital, particularly in the lower middle market where many lenders have either exited or shifted up market to support their existing portfolios. As a result, we continue to believe the lower middle market offers one of the most compelling risk adjusted return investment opportunities in private credit today. Competition remains rational in our segment. Unlike the upper middle market where larger direct lending funds continue to compete aggressively on pricing, leverage, and documentation, the lower middle market continues to reward lenders with sponsor relationships, internal sourcing capabilities, and the ability to execute quickly.

3:28 For AFC, this environment is exciting and what we are prepared for. We believe this dislocation is creating a compelling vintage for new originations. The loans we originate are generally supported by both enterprise value and asset coverage. We continue to negotiate comprehensive maintenance covenant packages including leverage and fixed charge coverage tests. Our pipeline continues to reflect that opportunity and we are being thoughtful in how we deploy capital. In contrast, much of the upper middle market remains characterized by covenant light structures with fewer lender protections and more aggressive EBITDA adjustments. Now turning to our results. For the second quarter of twenty twenty six, AFC generated net investment income of $0.15 per weighted average share of common stock.

4:16 Additionally, the Board of Directors declared a second quarter distribution of $05 per share, which was paid on 07/15/2026, to shareholders of record on 06/30/2026. Last quarter, we announced a share repurchase program. During the quarter, we repurchased about $2,800,000 which was $0.17 accretive to net asset value. We have approximately $2,200,000 remaining in our $5,000,000 share buyback program. Year to date, we have deployed approximately $102,000,000 in new lower middle market commitments. Our pipeline remains well diversified across industries, and we tend to avoid sectors where we believe cyclicality or disruption creates an unfavorable risk profile.

5:06 I will now turn it over to Dan to discuss our portfolio. Thanks, Robin, 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 06/30/2026, the fair value across our investment portfolio was $290,000,000 across 17 portfolio companies compared to $279,000,000 across 15 portfolio companies at March 31. 100% of the portfolio is in senior secured first lien debt investments and the weighted average yield excluding nonaccrual loans was 13.2.

5:55 During the quarter, we funded $17,000,000 including $5,000,000 to two new portfolio companies and $12,000,000 to two existing portfolio companies. Fundings were $8,000,000 against $9,000,000 of amortization and repayments. Subsequent to quarter end, we committed $7,000,000 to a $25,000,000 senior secured credit facility for a leading outpatient behavioral health platform with $3,000,000 funded at close. The use of proceeds was to refinance existing debt and support future growth through acquisitions and is consistent with our expanded lower middle market mandate. Turning to nonaccrual loans, which remain concentrated in the legacy cannabis book.

6:45 Regarding Debbie, the receiver has continued the liquidation process. During the quarter, Debbie entered into a binding term sheet to sell two additional assets of Debbie for $12,500,000 in cash proceeds.

7:01 Subsequent to quarter end, Debbie earned a $2,000,000 nonrefundable deposit on the purchase and we expect the transaction to close this year. Inception to date, we have received $58,000,000 of principal repayment on the Debbie loan. Regarding DMA, the receivers continued the liquidation process and closed the sale of two of the three dispensaries subsequent to quarter end. Moving on to Justice Grown. The Justice Grown loan matured on 05/01/2026 and is in maturity default. We have commenced Article nine foreclosures and are pursuing our rights and remedies under both the credit agreement, including the parent guarantee and the shareholder guarantee.

7:51 Our collateral includes vertically integrated assets in New Jersey and three operating dispensaries in Pennsylvania and a non operating cultivation facility in Pennsylvania. AFC has engaged SSC advisors to conduct a robust marketing process for these assets and we encourage any interested buyers to see the notices available on our website and reach out to SSC for additional information. Given the active legal proceedings, we will not comment further on the specifics outside of what is disclosed in our SEC filings. Taking a step back, the portfolio continues to evolve as we make progress towards resolving the legacy cannabis loans on non accrual, and the performing cannabis book amortizes and repays over time.

8:48 Multiple trends signal that capital demand in the lower middle market is only accelerating as legacy lenders push up market. We will look to redeploy that capital into strong risk adjusted opportunities in the lower middle market. Our pipeline remains active with $1,300,000,000 across a diverse range of industries. We remain focused on cash flowing borrowers with 5,000,000 to $50,000,000 of EBITDA, primarily in sponsored transactions, where we believe we can achieve risk adjusted returns with strong structural protections. We are maintaining a disciplined approach to underwriting, while actively advancing several opportunities through our pipeline.

9:35 Now, I'll turn it over to Brendan to discuss our financial results in more detail. Thank you, Dan. For the quarter ended 06/30/2026, we generated total investment income of $8,700,000 and net investment income of $3,500,000 or $0.15 per weighted average share of common stock. This provided three times coverage of our $05 second quarter twenty twenty six distribution. Total investment income was $8,700,000 compared with $9,800,000 in the first quarter. The decline primarily reflects $1,800,000 of other income recognized in the first quarter that did not recur in the second quarter, mainly relating to a $1,500,000 exit fee from the Bloom repayment.

10:20 Excluding these exit fees that are episodic, investment income increased modestly quarter over quarter, driven by higher interest income. Total operating and income tax expenses were $5,200,000 compared to $5,000,000 in the first quarter and represented net of a management fee rebate of approximately $176,000 for the quarter. We ended the second quarter with $364,500,000 of principal outstanding spread across 17 loans. As of 06/30/2026, we had total assets of 399,700,000 total net assets of $187,300,000 and our net asset value per share was $8.25 This is an increase of $0.35 per share over the prior quarter.

11:07 The increase in net asset value per share was driven by net investment income of $0.15 per share, $1.07 per share of accretion from repurchasing shares below net asset value and an increase in unrealized appreciation on investments of approximately $08 per share and offset by the second quarter distribution of $05 per share. Regarding the share repurchase program, during the quarter, we repurchased and extinguished approximately 839,000 shares at a weighted average price of $3.29 per share for approximately $2,800,000 in the aggregate. Approximately $2,200,000 remains available under the $5,000,000 share repurchase program. Turning to the balance sheet. As of 06/30/2026, we had $2.00 $7,000,000 of debt outstanding consisting of $110,000,000 drawn under our secured revolving credit facility, dollars 20,000,000 drawn under our unsecured revolving credit facility and $77,000,000 of senior unsecured notes outstanding.

12:11 Subsequent to quarter end, the company repaid $84,000,000 and $20,000,000 respectively, on the company's outstanding debt obligations under the secured revolving credit facility and the unsecured revolving credit facility. The weighted average interest rate on our debt outstanding was 6.3% for the quarter. Debt to equity was 1.1x as of June 30 compared to 1.09x at March 31, and net debt to equity was 0.53x compared to 0.48x, respectively. Our asset coverage ratio was 190%, which provides meaningful cushion against the 150% requirement applicable to us. We ended the quarter with $106,500,000 of cash and cash equivalents.

13:01 This provides substantial liquidity for new investments and other capital allocation opportunities. On distributions, we paid the second quarter distribution of $05 per common share on 07/15/2026, to shareholders of record as of 06/30/2026. With that, I will now turn it back over to the operator to start the Q and A. Thank Our Our first question is going to come from the line of Aaron Grey with Alliance Global Partners. Your line is open. Please go ahead.

13:52 Hi, thank you very much for the questions here. I guess, first one for me, just in terms of activity, I can certainly appreciate, right, incremental funding for existing borrowers. But as we think about new borrowers, today you had this participation in July, But how best to think about the pipeline relative to your ability to execute on opportunities in the near term? Does seem like there's been a little bit maybe of a slowdown considering the fast start you got off to in January, February. So just curious in terms of that's partially the environment, maybe a bit longer of a process, some timing, any color there would be appreciated. You. Yes, Dan, do you want to take that sure. Thanks, Aaron.

14:41 So we have a very active pipeline, dollars 1,300,000,000 in the pipeline. And I think we're happy with the quality of the opportunities that we're seeing in the pipeline, the pricing that we're seeing, etcetera. But originations are going to be lumpy. You saw in Q1, did about $80,000,000 We did less in Q2. And so I think that we are advancing a bunch of opportunities through the pipeline and are seeing good looks and we'll look to continue the momentum over the course of the year, but it will be lumpy and episodic just given the deals that we're hunting.

15:28 I appreciate that. That's helpful. And then just in that line, given the potential lumpiness of this, and you could have some potential larger opportunities, how comfortable do you feel regarding your liquidity position today to ensure that you're able to capitalize on potential large opportunities that could come in the pipeline? Thanks.

15:50 Dan, do you want to do that one or Brandon? Yes, sure. Yes. No, we as stated in my remarks, at the end of the quarter in our investment presentation, we have over $70,000,000 in liquidity available to deploy. So we're very comfortable with our liquidity position. Yes. And I'd say in terms of some of the larger opportunities too as well outside of AFC, we do operate under a co investment relief order with the SEC, which allows us to potentially participate with,

16:28 other affiliates under the TCG platform. And so one of the opportunities that you saw in July, we participated alongside an affiliate. And if there are larger opportunities out there that we're chasing, that's also an option to deploy into larger opportunities. And there's also the opportunity to syndicate deals that are above kind of our target, hold threshold as well.

17:03 Okay, great. Thanks. Last question from me. I know you said in prepared remarks, right, nothing further from some of the SEC filings regarding Justice. But just maybe to clarify things, now that you have the process in place, you talked about in prepared remarks, there's nothing outstanding or maybe that the legacy operators are doing that could keep you from going through with a sale process and for you to be able to retrieve as much as possible from those assets? Just any clarification on that would be helpful. Thanks. Gabe or Dan?

17:45 Yes. Aaron, we have pretty extensive disclosures in the SEC filings. I'd encourage you and the investors to read through that. We outside of that, we just are not going to be able to comment given the active stages of litigation there.

18:09 Fair enough. Thanks very much. I'll jump back in the queue. Thank you. And one moment for our next question. Our next question comes from the line of Pablo Zuanic with Zuanic and Associates. Your line is open. Please go ahead. Thank you and good morning everyone. Dan, can you maybe go back to your comments in prior quarters about your views about lending in the cannabis industry? I mean, pretty much you have implied that you remain very cautious there and that pretty much all the new activity will be outside of cannabis. But we do have a more favorable regulatory backdrop, right? So do you want to expand on that, please? Thanks.

18:49 Sure. Thanks for the question, Pablo. I think what we have said in prior quarters and in prior years is that

18:59 access to equity capital in the cannabis industry was challenged. And I think unfortunately, it still continues to be challenged. There have been a lot of milestones that people have been hoping for, for a while that have been long overdue, like the rescheduling of medical cannabis, which happened, I think, quicker relative to where people thought it was going to be a few months ago. And, the pending potential rescheduling of adult use cannabis. We've also had, I think, two companies now, Uplift to MYSE.

19:41 And unfortunately, you haven't seen a lot of, activity on the equity capital side of things associated with it. And I think it's still a difficult environment to raise equity capital. And

19:57 as a result, I think we have concerns about the industry being continued to be funded kind of on the debt side of things without having access to equity capital. And that also impacts, the re op ability of these borrowers. These are not straightforward businesses. There can be some volatility in the industry in the regulatory environment and a lack of re up ability on the equity side of things to deal with those problems is problematic to debt investors. And so we applaud the progress. I think there has been good progress, but the lack of equity capital is very problematic for us.

20:46 Thank you. That's good color. Maybe just going back to Debbie and DMA. In the case of Debbie, you said that you are expecting the assets to be sold for $12,500,000 in the second half and that a deposit was already taken on the transaction for $2,000,000 So that pretty much confirms that the transaction is in place. I just want to make sure I hear that right. I know I can go back to the transcript and whether you have access to the full amount or are there other parties that have access to those proceeds also? Thanks.

21:18 Yes. So that you heard correct. So it was a binding term sheet that was signed up subject to $2,000,000 cash hard deposit.

21:32 So our expectation is that that closes sometime this year and that would be for $12,500,000 of total cash proceeds. On we are a participant in we're the lead participant in the Debbie loan, but I believe we have 78% or somewhere around 80%

22:02 is our participation in DEPI. So 80% of the proceeds would be distributed to us on a pro rata basis. Thank you. That's good color. And the same question on DMA, and I'm sorry if I misheard, you said that two of the three dispensaries closed the transaction or they closed operations. I'm just trying and I don't know if you can see the numbers, that's what you're expecting there.

22:29 Luckily, the transaction closed, the dispensaries did not close. So we had two of the three dispensaries under APA previously. That sale received regulatory both of those sales received regulatory approval in June and both of those transactions closed in July. And I think in terms of

22:54 the rest of the transaction and the wind down of DMA, we have one more to go. And you can look at our new BDC filings to see where our mark is on that.

23:10 Right. Again, apologies if there's more people on the Q and A line here, Hugh. In terms of the

23:20 new loan you made in the third quarter, can you give more color on the amount? Think you said $17,000,000 or maybe I misheard. And more color on the company itself, if you can. Thank you. In the second quarter, Pablo, you were asking? Loan in the Unless

23:37 I misheard, I thought that you said subsequent to the quarter, you also funded a new loan or maybe I misheard that. Sure. Yes, that's correct. So it's a we talked a little bit in the script. It's a behavioral health roll up focused in the Northeast. They have 10 locations throughout the Northeast and do a mix

24:05 of talk therapy, medication management as well as some additional add ons both in an outpatient setting as well as a partial hospitalization setting. So it's an industry we had talked about previously focusing on industries that are more predictable recession resistant,

24:32 have good cash flow characteristics and highlighted health care is one of the areas we'd be focused on. And so we've done a couple of transactions in and around that space, one in the insurance space in Q1 and this deal in Q3. And Pablo, the size of that deal was we committed $7,000,000 and funded $3,100,000 on closing. Thank you. That's good color there. And then look, I haven't gone through a 10 Q in full, only partially. I think a while ago, said that Sunburn was in non accruals. Just a reminder of where you are with the Sunburn loan, which I think was renamed under another borrower's name, but just some color there.

25:19 Sure. So we had some disclosure last quarter. There was we entered into a forbearance agreement with Sunburn that was conditioned on the company raising additional equity capital as well as some other conditions. The company fulfilled those obligations in Q2 and we received a pay down associated with the loan and there was additional equity capital that went into the business for some expansion that they're looking to do. And the company fulfilled the forbearance obligations and the loan is in good standing. Thank you. And the very last one, I mean, we know how much credit you have available, credit lines you have available, but right now you're at net debt to equity at 0.53.

26:14 What are you comfortable with? I understand the average on BDCs is like 1.3 times, but what are you comfortable with? Sure. I think on our side of things, we've always said that somewhere around one times or potentially above that, but I think one times is a good intermediate target for us. Yes, that's good. Thank you. That's all for me. You. And showing no further questions. And I'd like to hand the conference back over to Dan Neville for closing remarks. Thanks everyone for joining us today and we look forward to keeping you updated on future progress. This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.