Advanced Flower Capital Q3 2026 Earnings Call Transcript

Advanced Flower Capital (NASDAQ:AFCG) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Advanced Flower Capital reported a net investment income of $0.16 per share and an increased net asset value (NAV) per share to $8.55 for Q3 2026, marking a 15% rise since the start of the year.

The company repurchased approximately $1 million of common stock at a 58% discount to NAV, contributing $0.06 per share to NAV, with $1.2 million remaining under the $5 million repurchase authorization.

Advanced Flower Capital’s portfolio of $290 million is focused on senior secured first lien debt, with an average yield of 13.3%. The company is expanding into non-cannabis lower middle market investments, currently holding $93 million in this segment.

The company executed $19 million of opportunistic senior note repurchases post-quarter end, generating a gain and reducing upcoming debt obligations.

Future outlook includes continued focus on disciplined underwriting and strong lender protections in the lower middle market, with a $1.1 billion active pipeline across multiple industries.

Management emphasized maintaining selective credit quality and structure while actively managing non-accrual loans such as Devvy, with ongoing asset disposition processes.

Full Transcript

OPERATOR

There will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising 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 first speaker today, Gabriel Katz, Chief Legal Officer. Please go ahead.

Gabriel Katz (Chief Legal Officer)

Good morning and thank you all for joining Advanced Flower Capital’s earnings call for the quarter ended September 30, 2026. I’m joined this morning by Robyn Tannenbaum, our President, 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 Advanced Flower Capital’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 development, 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 Advanced Flower Capital’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.

Robyn Tannenbaum (President)

Thanks, Gabriel, and good morning, everyone. We appreciate you joining us to discuss Advanced Flower Capital’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. Fitch’s U.S. private credit default rate reached a record 6.3% for the trailing twelve 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 Advanced Flower Capital 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 Advanced Flower Capital 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, Advanced Flower Capital 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 two financing term sheets which we expect Advanced Flower Capital 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 (Chief Executive Officer)

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. 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 five 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’s senior notes at 104.25 of par, resulting in a realized gain of approximately $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 non-accrual loans: regarding Devvy, 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 non-refundable 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 Devvy. The Justice Grown loan matured on May 1, 2026 and remains in maturity default. 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 a 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 Advisors 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 non-accrual 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 two transactions, and we expect Advanced Flower Capital 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 healthcare services platform which Advanced Flower Capital will commit to. While we remain focused on cash-flowing borrowers with approximately $5 to $50 million of EBITDA, we are opportunistically including in 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 (Chief Financial Officer)

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 are presented 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 five-cent quarterly distribution.

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 at September 30 was approximately 1.03 times versus 1.1 times at June 30. Net debt-to-equity was 0.49 times versus 0.53 times 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

Thank you. At this time we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Aaron Gray with Alliance Global Partners. Your line is now open.

Aaron Gray (Analyst)

Hi, thank you very much for the questions. The 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, 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 can 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. Thanks.

Gabriel Katz (Chief Legal Officer)

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 Gray (Analyst)

Okay, thanks. 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 commitment? Just be a portion of it?

So just trying to size out in terms of the pipeline translating to deals in the near term. Thanks.

Robyn Tannenbaum (President)

Sure. So I think—Dan, do you want to start and I’ll finish?

Daniel Neville (Chief Executive Officer)

Yeah, sure. 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, you know, 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 Gray (Analyst)

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 (President)

I think—hi, it’s Robyn. So I think there’s a few things. One, when you’re in sponsor-driven processes, right, you are typically backing one sponsor. Sometimes they win the deal 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.

Aaron Gray (Analyst)

Okay, great, thanks. I’ll go ahead and jump back in the queue.

OPERATOR

Thank you. Our next question comes from the line of Pablo Zuanek with Zuanek and Associates. Your line is now open.

Pablo Zuanek (Analyst)

Thank you and good morning, everyone. Just to follow up on the last question there, maybe asking it a different way. After the debt repayments 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? Thank you. And maybe a reminder of what’s your tolerance for the debt-to-equity ratio—how high can you go? Thank you.

Brandon Hetzel (Chief Financial Officer)

Hey 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 where 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.

Daniel Neville (Chief Executive Officer)

And then BDCs are different than REITs. REITs are statutorily limited to 2 to 1 leverage, and you never want to get too close to that two-to-one leverage. So I’d say between one and one and a half times feels comfortable.

Pablo Zuanek (Analyst)

Right? Okay, that’s good. And then just in terms of 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 one-time supplemental dividend. Just remind us when that announcement be made. Is that a January issue for fourth quarter? When do we hear about that? Thank you.

Brandon Hetzel (Chief Financial Officer)

The Board of Directors typically declares a dividend on a cadence that would be announced on or around December 15th. And the Board will evaluate all factors when declaring that dividend, as they do every quarter.

Pablo Zuanek (Analyst)

Right. But just, you know, by definition you still have to get your payout ratio right. Right now with a $0.05, you’re way below that. And—

Brandon Hetzel (Chief Financial Officer)

Yeah, the Board has to consider everything, not just what is shown on the NII. You know, NII isn’t necessarily the taxable income that drives the required distribution amount. And so, you know, the Board has to take into consideration that as well. 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, 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 Zuanek (Analyst)

Right. Thank you. That’s good color. And then, Dan, in your prepared remarks you talked about actively managing your cannabis loan portfolio. I did go through it in the 10-Q—I’m guessing Storee, it says that it’s current but it was extended a loan. There are two $8 million—current? Not sure if it’s—first of all, the $8 million, is that too current? That’s the question. And then Sunburn, I think one or two 10-Qs ago there were 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 Storee, Saratru, and Sunburn. Thank you.

Daniel Neville (Chief Executive Officer)

So Storee is current. Saratru is current. Sunburn is current on all payments. The Storee 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—they 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 year and a half 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 (President)

But 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 Zuanek (Analyst)

Yep. Thank you. Last question regarding the loans that you made in 1Q to—I think it’s called Stacked Buyer and DCIS. I know some of those loans were for the companies to make M&A transactions. Can you give an update whether those transactions have closed and any update you can give on those two borrowers? Thank you.

Daniel Neville (Chief Executive Officer)

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, closing current?

Brandon Hetzel (Chief Financial Officer)

That’s correct. Yep. Yeah. Stat was to finance an acquisition and partially finance a debt paydown—so partially finance the acquisition—and Acctivate was an M&A financing transaction as well.

Pablo Zuanek (Analyst)

All right, that’s all for me. I mean, obviously we will all be keeping a close eye on November 12th and November 19th. 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’s—

Robyn Tannenbaum (President)

Hi Pablo. I think what Gabe 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 of, 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.

Pablo Zuanek (Analyst)

Yeah. All right, that’s very good. Thank you very much.

OPERATOR

Thank you. One moment for our next question. I’m showing no further questions at this time. I would now like to turn it back to Daniel Neville, Chief Executive Officer, for closing remarks.

Daniel Neville (Chief Executive Officer)

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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.