Advanced Flower Capital Q3 2025 Earnings Call - Shareholders Approve REIT to BDC Conversion to Broaden Investment Mandate

Conference Operator: Good day, and thank you for standing by. Welcome to the Advanced Flower Capital Q3 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message that advises your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Gabe Katz, Chief Legal Officer. Please go ahead, sir.

Gabe Katz, Chief Legal Officer, Advanced Flower Capital: Good morning, and thank you all for joining Advanced Flower Capital’s earnings call for the quarter ended September 30, 2025. I’m joined this morning by Robyn Tannenbaum, 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 October 28, 2025 press release and is posted on the investor relations portion of AFC’s website at advancedflowercapital.com, along with our third quarter 2025 earnings release and investor presentation. Today’s conference call includes forward-looking statements and projections that reflect the company’s current view with respect to, among other things, market development, the company’s anticipated conversion to a BDC, and financial performance and projections in 2025 and beyond. These statements are subject to inherent uncertainties in predicting future results.

Please refer to Advanced Flower Capital’s most recent periodic filings with the SEC, including our quarterly report on Form 10Q 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. During today’s conference call, management will refer to non-GAAP financial measures, including distributable earnings. Please see our third quarter earnings release uploaded to our website for reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures. Today’s call will begin with Robyn providing information about our recent shareholder vote to convert to a business development company. Dan will then 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, President and Chief Investment Officer, Advanced Flower Capital: Thanks, Gabe, and good morning, everyone. We appreciate you joining us this morning to discuss AFC’s third quarter earnings. Before turning to our earnings, I want to touch upon AFC’s planned conversion from a mortgage REIT, the current structure under which we operate, to a business development company, or BDC. As a reminder, in August, AFC announced its intention to convert to a BDC, as this structure will enable AFC to originate and invest in a broader array of opportunities, which would include both real estate and non-real estate covered assets. On November 6, 2025, shareholders approved the two proposals related to our plan to convert from a REIT to a BDC.

The first proposal was to approve a new investment advisory agreement with our external manager to allow us to operate as a BDC in accordance with the Investment Company Act of 1940, and the second was to approve reduced asset coverage requirements under the 1940 Act. We were pleased with the strong engagement from our shareholder base, with over 61% of outstanding shares represented by proxy at the special meeting, and over 94% of those votes cast in favor of both proposals. This broad shareholder support validates the rationale for AFC’s evolution and long-term growth strategy. We thank our investors for their support and for their continued investment. We anticipate that the conversion to a BDC will occur in the first quarter of 2026, and AFC will continue to operate as a REIT until that time.

The conversion remains subject to the approval of certain matters by AFC’s board of directors. Upon completion of the conversion, AFC will continue to trade on the NASDAQ under our existing ticker AFCG. As a BDC, the investment universe for AFC will expand, allowing the company to lend to operators with or without real estate collateral. Additionally, as of August 2025, our board has approved an expanded investment mandate that includes direct lending opportunities outside the cannabis industry. We see credit opportunities in other private and public middle-market companies beyond cannabis that have the potential to generate attractive risk-adjusted returns. By broadening our opportunity set, AFC will be better positioned to diversify its exposure across industries and credit risk profiles. In short, we view this as an important and value-enhancing step for the company and for our shareholders going forward.

Now, I’ll turn it over to Dan to discuss our portfolio and pipeline.

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Thanks, Robyn, and good morning, everyone. I’ll begin with an overview of our results, followed by an update on our portfolio. For the third quarter of 2025, AFC generated distributable earnings of $0.16 per basic weighted average share of common stock. Additionally, the board of directors declared a third-quarter dividend of $0.15 per common share outstanding, which was paid on October 15th, 2025, to shareholders of record as of September 30th, 2025. As we have discussed, while we have made progress reducing our exposure to underperforming credits, we continue to actively manage these positions to protect and maximize recovery value. Our earnings may continue to be affected by the underperformance of some of these legacy loans and any realized losses we take on assets. On a positive note, in the third quarter, private company J paid off its term loan ahead of maturity at par plus accrued interest.

The principal amount of the payoff was $23.2 million. Over the third quarter, subsidiary of public company S also paid off their term loan during the quarter, and we redeployed that $10 million of capital into the new issue at a significantly higher yield than the existing paper. In total, we’ve received $43 million of principal repayment since the end of Q2, and we’ll seek to redeploy that capital into attractive risk-adjusted opportunities under our expanded investment mandate. Turning to portfolio management, I would like to touch on a few of our underperforming loans. We have continued the liquidation process for private company A, and the receivership recently directed the distribution of $5.4 million to AFC Agent, of which $4.2 million went to AFC, with the balance going to Syndicate Partners.

Regarding private company K, two of the three Massachusetts dispensaries have signed purchase agreements approved by the court and have submitted for regulatory approval to effectuate the sale. The third dispensary is expected to be under LOI in the coming weeks. We expect these sales to be completed sometime in 2026. As we discussed last quarter, private company P’s loan was moved to non-accrual status as of June 1, 2025, as the company did not pay interest due on July 1. As a result, we called an event of default and accelerated the loan. In November 2025, we reached a mutual release and settlement agreement with private company P and certain other parties. In connection with the settlement, we will be paid a settlement in the amount of $13.3 million less certain fees and expenses.

AFC will finance $6 million of the settlement via a new term loan to private company T at a 10% interest rate. Closing of the settlement and the related loan is expected to occur in the fourth quarter. At the time of the settlement, the non-performing loan with private company P had a carrying value of approximately $15.3 million. As a result of the settlement, we anticipate that AFC will realize a taxable loss of approximately $4 million on the loan once the transaction is complete, which will impact earnings in the fourth quarter. This loss was fully reserved as of September 30, 2025, and is already reflected in our book value. Given the uncertainty regarding the timing of repayments and recovery of loans currently on non-accrual, the board continues to evaluate the company’s distributable earnings on a quarterly basis to determine the appropriate quarterly dividend.

Given the anticipated approximately $4 million taxable loss associated with the loan to company P, we do not anticipate making a distribution to shareholders in Q4 2025. Year to date, the company has distributed $0.53 per common share. The board remains committed to returning capital to shareholders in a manner that aligns with long-term value creation, and we expect the board to reevaluate and set the company’s go-forward dividend and distribution policy in conjunction with the company’s transition to a BDC in Q1 2026. Lastly, we wanted to take a minute to touch on subsidiary of private company G, which is Justice Ground. In the New Jersey action, we have filed a motion to dismiss on multiple grounds, which is pending in the district court in New Jersey. We have also appealed the court’s initial pre-discovery preliminary injunction ruling.

The appeal is fully briefed and awaiting oral arguments or a ruling by the Third Circuit Court of Appeals. We are also pursuing our rights under the shareholder guarantee and the parent guarantee through separate actions in federal and state courts in New York, respectively. As a reminder, our loan to Justice Ground matures in May 2026 and is secured by the vertical assets 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 extremely focused on realizing maximum value from these underperforming loans. Looking ahead to 2026, we have three sizable loans maturing, which would provide an influx of capital to AFC that we can use to redeploy as a BDC across both cannabis and non-cannabis assets.

We believe that the expanded investment focus beyond real estate companies is an important step to deliver value for our shareholders. Our team is working hard to source lending opportunities to middle-market companies outside of the cannabis industry and has already built a pipeline of approximately $350 million. We are actively evaluating these opportunities, which we believe can generate attractive risk-adjusted returns for our shareholders. Now, I’ll turn it over to Brandon to discuss our financial results.

Brandon Hetzel, Chief Financial Officer, Advanced Flower Capital: Thank you, Dan. For the quarter ended September 30, 2025, we generated net interest income of $6.5 million and distributable earnings of $3.5 million, or $0.16 per basic weighted share of common stock, and had a GAAP net loss of $12.5 million, or a loss of $0.57 per basic weighted average share of common stock. We believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFCG’s business. Distributable earnings represents the net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, any unrealized gains or losses, provisions for current expected credit losses, also known as CECL, taxable REIT subsidiary income or loss net of dividends, and other non-cash items recorded in net income or loss for the period. We entered the third quarter of 2025 with $332.8 million of principal outstanding spread across 14 loans.

As of November 3rd, 2025, our portfolio consisted of $327.7 million of principal outstanding across 14 loans. As of September 30th, 2025, the CECL reserve was $51.3 million, or approximately 18.7% of our loans at carrying value, which was inclusive of the approximate $4 million reserve on our loan to private company P that Dan mentioned previously. Additionally, we had a total unrealized loss included on the balance sheet of $31.2 million for our loans held at fair value. As of September 30th, 2025, we had total assets of $288.7 million, total shareholder equity of $169.3 million, and our book value per share was $7.49. Lastly, on October 15th, 2025, we paid the third-quarter dividend of $0.15 per common share outstanding to shareholders of record as of September 30th, 2025. With that, I will now turn it back over to the operator to start the Q&A.

Conference Operator: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question will come from the line of Aaron Gray with Alliance Global Partners. Your line is open. Please go ahead.

Aaron Gray, Analyst, Alliance Global Partners: Hi. Thank you very much for the questions. First question for me, you referenced a potential pipeline. I think you said $350 million outside cannabis. Just clarification quickly, that’s separate than the $416 million pipeline I imagine that you referenced within the presentation. Secondly, can you maybe just give some color in terms of some of the opportunities that you’re seeing there, and then also the yields you might expect and whether or not it’d be different than the target yields you’ve had historically within cannabis? Thank you.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: Sure. Dan, do you want to take that one?

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Sure. On the first, thanks for the question, Aaron. On the first question, that is inclusive of approximately $415 million. That includes $60 million on the cannabis pipeline and the balance on the non-cannabis pipeline. I’d say on the cannabis side of things, we still are looking and evaluating opportunities, but there’s fewer and fewer that we think are interesting on a risk-adjusted basis given the lack of progress on the federal side of things. I think until we see progress on the federal side of things and equity capital coming back into the industry, there will probably be a limited opportunity set for us on the cannabis side, and we’ll see kind of continued growth on the non-cannabis side of the pipeline and portfolio.

Secondly, regarding the opportunity set, I would say that the yields or target IRRs that we’re seeing are a bit below what we’re seeing in cannabis. I think it’s still something that likely is in the low double-digit range, although we’re still evaluating, and that’ll be an average. There will be some that are below, some that are potentially above. In terms of kind of the industries or targets that we’re looking at, we went from a very limited investment mandate in cannabis, only cannabis, and only real estate covered in cannabis. We are looking at this from an industry-agnostic perspective and opening the pipeline wide open to see what the opportunities out there. We’re really focused on just finding opportunities, again, industry-agnostic that generate strong risk-adjusted returns.

We have a big focus on capital preservation and are looking for stable industries that have some element of consistency or recession resistance in the overall business models. I think that’s where we’re at today. Over time, I think we will develop a little bit more of a niche and a focus in certain areas, but we’re throwing the gates wide open to explore all the opportunities out there.

Aaron Gray, Analyst, Alliance Global Partners: Appreciate that color, Dan. Second question for me. As we think about the deal selectivity and how that could potentially change, given your broader scope here, we’re seeing it get tighter and tighter selectivity within the cannabis space over the near to medium term. Do you feel now broadening that it might be able to expand back? How should we think about that? Or is it still maybe too early to tell as you’re in the early days of evaluating these new opportunities outside of cannabis?

Dan Neville, Chief Executive Officer, Advanced Flower Capital: No, I think our selectivity will certainly go up in terms of the deals we’re looking at. You already see that in kind of the deals that we’ve looked at and what’s been kicked out of the pipeline already. I think that given the broader investment mandate, given the broader universe, there’s just more opportunities to look at and more opportunities to be selective. I think as you’ve seen over the last really year and a half, two years too as well, we’ve been more selective on the cannabis side relative to what we’ll actually do and what we’ll actually underwrite. I think you’ll see that on both sides of the portfolio, really.

Aaron Gray, Analyst, Alliance Global Partners: Okay. Great. Thank you for the color. I’ll go ahead and jump back into the queue.

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Thanks, Aaron.

Conference Operator: Thank you. One moment for our next question. Our next question comes from the line of Pablo Zunic with Zunic & Associates. Your line is open. Please go ahead.

Pablo Zunic, Analyst, Zunic & Associates: Thank you. Good morning, everyone. Also, questions regarding the diversification. First of all, in terms of timing, when you can start redeploying the cash, are we talking about timing like January 1 or April 1? If you can just clarify that. I do not know how much visibility you have on that. In terms of the numbers that you provided, just to clarify, maximum you would deploy $60 million in 2026 in non-cannabis loans? If you can just clarify that. Thank you.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: Thanks, Pablo. I do not think that we have given a guidance to answer your second question first. I do not think we have given a guidance. I think what Dan was saying is that the non-cannabis pipeline plus the cannabis pipeline got to the $400 million number Aaron was referencing, and that the active cannabis pipeline is $60 million. We have not given any guidance as to what we would deploy in 2026. I think we are actively evaluating opportunities. We have capital currently if we see an opportunity that we like, whether it is in cannabis or non-cannabis to invest. Remember, we are operating as a REIT currently. Deals would need to have real estate coverage or fit within our guidelines. In terms of conversion to a BDC, that would be in the first quarter, and we have not given a specific date when that will occur.

Pablo Zunic, Analyst, Zunic & Associates: Right. Okay. Thank you. In terms of skill set, I understand it’s on the credit side, and obviously you have that skill set, but in cannabis, you know all the players, you know the industry well, you have a wide network. I just wonder how easy or difficult it is to replicate that in new industries. I guess related to that, although it’s a totally separate question, when we are talking about stable industry, recession-resistant business models, I guess those are not growth industries, and I wonder how much capital they need. If you can just clarify those two things, I realize there are two separate questions there. Thank you.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: I think from a relationship standpoint, what we—well, I think if you look at what we’ve done in cannabis from an underwriting standpoint, what we’re underwriting is real estate, but we’re also underwriting the underlying operating businesses in cannabis. I think we have that underwriting expertise from a deal flow perspective, right? We built this from scratch in cannabis, and I think that what we’re targeting is both direct deals and sponsored deals, and it’s incumbent on us to build that pipeline. I think that’s your first question. In terms of industries, I think, as Dan said earlier, and he can expand on this, we’re casting a wide net, right? There’s not a deal that I’m going to talk about at this moment, but we’re casting a wide net. We’re looking at industries.

We’re looking at how various macro factors would impact those industries, and that would be part of our diligence. I would just say at this point, we’re casting a wide net in terms of industries. I don’t know if you have anything you want to add to that, Dan.

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Yeah. I’d just say, look, the cannabis industry did not really exist on the legal side of things till five years ago, right? You look at the team that exists, three of the four members of the investment committee scaled Fifth Street Asset Management to a $5 billion asset manager and did $10 billion of transactions on the direct lending side of things outside of BDCs. I myself had a career as a generalist on the buy side for 10 years prior to stepping into the cannabis industry and investing cross-capital stack. Our Head of Underwriting, which we hired last year, had zero experience in cannabis and had done 15 years in direct lending and other regular way industries. I think the cannabis side of things provides a greater degree of difficulty in terms of the business model, right?

It’s agriculture, it’s manufacturing, it’s distribution, it’s retail, and there are very other sub-elements within there. Certainly, getting security and structuring the loans and doing it on a direct basis is more difficult than other way industries. I think taking our skill sets from our past life, taking some of the learnings from the cannabis side of things on the structuring, the underwrite, and the portfolio management side of things will certainly be useful skill sets outside of the cannabis industry. I think in terms of the commentary about target industries, I’d say, look, we’re looking for stable businesses. I mentioned some element of recurring revenue, some element of recession resistance. We’re not looking for industries that are hyper-cyclical, like I think you’ve seen in the cannabis side of things. We’re a lender. We only get paid as lenders. We don’t get paid for the upside.

We’re looking for stable businesses that provide good credit quality, that protect our capital, and provide attractive risk-adjusted returns. We’re casting a wide net, and there’s a lot wider universe to look at out there outside of just cannabis and real estate covered, which has been our historical focus.

Pablo Zunic, Analyst, Zunic & Associates: That’s good. Thank you. Look, just one more on the BDC, and maybe it’s too detailed for the call, but is there any changes you want to highlight in terms of the fee structure with the external investment advisor for moving from a REIT to a BDC or not such a big deal?

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: I think that was pretty well laid out in our proxy, and I don’t want to speak out of turn since I don’t have it in front of me. So I direct you or any investors that have questions on that to look in our proxy.

Pablo Zunic, Analyst, Zunic & Associates: Okay. Thank you.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: As 61% of our investors voted, I’m sure they’ve seen that, and 94% voted for it. So that’s where to find that information.

Pablo Zunic, Analyst, Zunic & Associates: Thank you. And look, totally understood. Your very cautious stance on cannabis. But at the federal level, let’s say that these changes with Jim Derivatives happen, right? Some people have sized that market at $20 billion. Let’s say that number is true, right? And whether that flows to the cannabis industry at the federal level. And then you have potentially Virginia, Pennsylvania on the right side, and Texas on the right side. I realize we do not have visibility on date, but things could get pretty good even without changes at the federal level in a year’s time. Or am I putting too rosy a picture here, Dan, or Robyn?

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: I’ll let Dan take this one.

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Yeah. Look, it seems like we’ve been hearing reform is a few weeks away for the last three or four years. I think on our side of things, we’ve seen the reality of that. The reality is that there’s been no equity capital raised or very little equity capital raised into the cannabis space over the last two to three years. Very capital-intensive industry. For the last two or three years, it’s been financed by debt, whether that’s straight debt or that’s the accrual of unpaid tax liabilities. As a lender, when there’s no equity capital coming in and no equity cushion in a capital-intensive business, you have to be very selective and careful in your underwrites and very much pick your spots. I think that we’re still in the cannabis business, right? It’s part of our investment mandate.

We’re still actively looking at opportunities, and we still have a pipeline. We still have a sizable loan book in the cannabis side of things, both the performing and underperforming portions of the books. We are still active. We are still involved. I think our hurdle to deploy fresh capital into the cannabis space on a go-forward basis is going to be very, very high absent some progress on the federal side of things and seeing equity capital flow back into the space.

Pablo Zunic, Analyst, Zunic & Associates: Thank you. And one last one. I realize you’re not going to guide into 2026, but you made it very clear no dividend in the fourth quarter based on the board decision. BDC structure, the benefits, we probably start seeing them by the second quarter. I guess for an analyst, we should probably model zero dividend for the first quarter of 2026. I don’t know if you want to make any comments on that. Maybe you can’t.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: I don’t think we’ve given that guidance. I think we gave a fact, which is what the board has decided on the fourth quarter.

Pablo Zunic, Analyst, Zunic & Associates: Right. Okay. No, that’s good. Thank you. Thank you. That’s all.

Robyn Tannenbaum, President and Chief Investment Officer, Advanced Flower Capital: Thanks, Pablo.

Conference Operator: Thank you. I would now like to hand the conference back over to Dan Neville for closing remarks.

Dan Neville, Chief Executive Officer, Advanced Flower Capital: Thank you all for joining us today, and have a nice afternoon.

Conference Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect.