AFCG - NASDAQ

Good morning, and welcome to Advanced Flower Capital Inc.'s fourth quarter and fiscal year 2025 earnings call. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel A. Katz, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining Advanced Flower Capital Inc.'s earnings call for the quarter and fiscal year ended 12/31/2025. I am 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 02/10/2026 press release and is posted on the Investor Relations portion of Advanced Flower Capital Inc.'s website at advancedflowercapital.com, along with our fourth quarter and full year 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, anticipated market developments, portfolio yield, and financial performance in 2026 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to Advanced Flower Capital Inc.'s most recent periodic filings with the SEC, including our Annual Report on Form 10-K 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 this call, we will refer to distributable earnings, which is a non-GAAP financial measure. Reconciliations to net income, the most comparable GAAP measure, for distributable earnings can be found in Advanced Flower Capital Inc.'s earnings release and investor presentation available on our website. Today's call will begin with Robyn providing a high-level recap of our 2025 fiscal year, including the conversion to a BDC. Dan will then provide an overview of our portfolio. 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 and CIO, Robyn Tannenbaum.

Thanks, Gabe, and good morning to all our investors and analysts that have joined us today. Looking back on 2025, Advanced Flower Capital Inc. was focused on, one, reducing our exposure to underperforming credits through active portfolio management, and two, converting from a real estate trust to a business development company, or BDC, to expand the universe of transactions Advanced Flower Capital Inc. could invest in. We continue to focus our portfolio management efforts on underperforming credits in order to preserve capital. We believe that as we begin to get repaid on some of these underperforming assets and reinvest that capital into performing credits, we may unlock future earnings potential. I am pleased to announce that we received $117,000,000 of paydowns from performing and underperforming credits from the start of 2025 through today. During fiscal year 2025, Advanced Flower Capital Inc. originated $53,000,000 of new commitments, and subsequent to year end, we have closed on $89,700,000 of new commitments in the lower middle market, which Dan will describe in further detail. Turning to our conversion to a BDC, as of 01/01/2026, we completed our previously announced conversion from a REIT to a BDC. Our conversion expands Advanced Flower Capital Inc.'s investment flexibility to pursue opportunities beyond real estate-backed loans, including a broader universe of operating businesses aimed at enhancing long-term shareholder value. Before turning the call over to Dan, I want to touch upon our earnings for the quarter and fiscal year. For the quarter and full year ended 12/31/2025, Advanced Flower Capital Inc. generated distributable earnings per basic weighted average share of negative $0.12 and positive $0.39, respectively. Primarily due to realized losses from two underperforming credits recognized during the year, our 2025 dividends were characterized as a return of capital, making the 2025 distributions to our shareholders tax-free. Future dividends may receive similar treatment if Advanced Flower Capital Inc. recognizes additional losses in 2026. Looking ahead, the Board of Directors has declared a first quarter dividend of $0.05 per share, which will be paid on 04/15/2026 to shareholders of record on 03/31/2026. With that, I will turn it over to Dan, who will discuss our portfolio management efforts, strategy expansion, and new deals we have recently invested in.

Thanks, Robyn, and good morning, everyone. I will begin with an update on our portfolio, then turn to our expanded strategy and deals we recently completed. Looking at our existing portfolio, from 2025 through today, we received $117,000,000 in paydowns. This includes the repayment of two loans subsequent to year end at par plus accrued, with an additional $1,800,000 in prepayment and exit fees from those two loans. We currently have three loans on nonaccrual and are focused on receiving paydowns on those loans to redeploy that capital into performing credits that should contribute to current income. We have continued the liquidation process for Private Company A. From 2025 through today, we have received $6,300,000 of paydowns. The borrower is still in receivership, and the distribution of proceeds needs to be approved by the court. We currently have a pending motion for an additional distribution of $6,400,000 in proceeds. While we are frustrated by the pace of distribution to date, I am happy to report that all of the operating assets of the estate are under agreement, and we expect distributions will continue to flow in over the course of 2026 as regulatory approvals and other milestones are met. Regarding Private Company K, two of the three Massachusetts dispensaries have signed purchase agreements approved by the court and are awaiting regulatory approval to effectuate the sale. We expect the sale of all of the collateral of Private Company K to be completed sometime in 2026. Lastly, we wanted to take a minute to touch on Justice Grown. In February, one of Justice Grown's claims was dismissed in the New Jersey action, and we also had oral arguments on the appeal of the preliminary injunction. We expect a ruling on the appeal in the coming months, and the Justice Grown mature loan matures on 05/01/2026. We continue to actively manage these positions to preserve shareholder capital 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. However, as we begin to get repaid on some of these loans on nonaccrual and reinvest that capital into performing credits, we may unlock future earnings potential. Since expanding our investable universe, our active pipeline remains strong, with over $1,400,000,000 of deals as of today. We are focused on sourcing deals and backing companies in the lower middle market across a variety of industries. We are primarily focused on providing loans to cash-flowing borrowers with $5,000,000 to $50,000,000 of EBITDA. These financings are often used for expansion capital, acquisitions, refinancings, and recapitalizations. Turning to our activity after converting to a BDC, I would like to discuss two loans that we closed in Q1 2026. In January, Advanced Flower Capital Inc. closed a $60,000,000 senior secured credit facility to support the combination of Stat and the Morsby Group, which is backed by Cambridge Capital. Stat is a leading revenue recovery specialist servicing the Walmart, Target, and Amazon ecosystems. Morsby is a procurement specialist that focuses on long-tail supplier negotiations and savings for Fortune 1000 clients. Advanced Flower Capital Inc. provided the $60,000,000 to finance the acquisition of Morsby and refinance existing indebtedness. In February, Advanced Flower Capital Inc. committed $30,000,000 to a $60,000,000 senior secured term loan to support the acquisition and growth of a leading healthcare benefits platform tailored toward hourly and sub-$50,000 salaried employees, which is a large and underserved segment of the workforce. At closing, Advanced Flower Capital Inc. funded $20,000,000 of this commitment supporting a top-tier sponsor. In closing, we remain focused on unlocking value from underperforming loans and are excited about the new lending opportunities that we are seeing. Now I will turn it over to Brandon to discuss our financial results in more detail.

Thank you, Dan. For the quarter ended 12/31/2025, we generated net interest income of $5,200,000 and distributable earnings of negative $2,800,000, or negative $0.12 per basic weighted average common share, and had GAAP net income of $900,000, or $0.04 per basic weighted average common share. For the full year ended 12/31/2025, we generated net interest income of $24,600,000, distributable earnings of $8,700,000, or $0.39 per basic weighted average common share, and had a GAAP net loss of $20,700,000, or $0.95 per basic weighted average common share. As previously mentioned, we believe providing distributable earnings is helpful to shareholders in assessing the overall performance of the business. Distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items such as stock compensation expense, any unrealized gains or losses, provision for current expected credit losses, also known as CECL, taxable REIT subsidiary income or loss net of dividends, and other noncash items recorded in net income or loss for the period. We ended 2025 with $317,400,000 of principal outstanding spread across 15 loans. As of 02/25/2026, our portfolio consisted of $366,400,000 of principal outstanding across 15 loans. During the quarter, we repurchased $13,000,000 of our unsecured bonds. Currently, $77,000,000 of our unsecured bonds remain with a maturity in May 2027. We continue to evaluate and explore options to refinance that bond prior to maturity. As of 12/31/2025, the CECL reserve was $46,100,000, or approximately 18.2% of our loans at carrying value, and we had a total unrealized loss included on the balance sheet of $27,700,000 for our loans held at fair value. As of 12/31/2025, we had total assets of $275,600,000, total shareholder equity of $175,600,000, and our book value per share was $7.46. Lastly, on 03/02/2026, the Board of Directors declared a first quarter dividend of $0.05 per share, which will be paid on 04/15/2026 to shareholders of record on 03/31/2026. With that, I will now turn it back over to the operator to start the Q&A.

We will now open for questions. To ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from Aaron Thomas Grey with Alliance Global Partners. Your line is open.

Good morning. Thank you for the question. This is John on for Aaron. So the active pipeline increased meaningfully with $1,400,000,000, up from last quarter's $400,000,000. Could you provide some color on the key factors that led to this increase, and how quickly you believe this could potentially translate to closed originations?

Sure. Thanks for the questions.

So, the pipeline increased meaningfully. That is primarily a function of our conversion from a REIT to a BDC. As you know, and as we have discussed, the investable universe within a REIT-only framework and the associated restrictions on real estate coverage was limiting to the loans that we could do within our portfolio. Upon converting to a BDC, that investment universe has been expanded beyond cannabis, which happened in August, but also allows us to invest in cash flow loans that are not fully covered by real estate as they were under the REIT framework.

Great. Thanks. And then is there a split you could provide between the cannabis and non-cannabis pipeline, and what the expected yields for the non-cannabis, how those would compare to the legacy portfolio?

Sure. So this is Robyn. We view the active pipeline as an active pipeline for lower middle market companies regardless of industry and spreads across a few. We are not going to break out what industries those are associated with, including cannabis. And as for yields, I would point you to page 14 in our deck. Yields that we have invested in are obviously not indicative of future yields, but Private Company X and Private Company Y were the last two loans that we did, which were in the lower middle market. One loan's yield to maturity per the deck is 14%, and one is 19%.

Great. Thanks. I will jump back in the queue.

Thank you. As a reminder, to ask a question, please press 1-1. Our next question comes from Pablo

John, can I just follow up on—you gave good color there? About the loans on nonaccrual. In the case of Private Company A, what is left then is $4,400,000. There is nothing else to recover, right, if you can confirm that? In the case of Private Company K, you said two dispensaries are in the process of being sold. The third one, I guess, is still pending. The principal is over $12,000,000. Can we assume that when you are talking about process that you will recover and redeploy, that for Private Company K you will be getting the $12,000,000? And then any further color you can give on Justice Grown? From our start, it seems unlikely that you will be paid $78,000,000 or $79,000,000 principal in May. But if you can just give me—give color—correct me if I am wrong in my assumptions. Thank you.

So this is Robyn. I will let Dan answer a few. On Private Company A, I believe what Dan was referring to is the amount that is currently pending in front of the receiver, not the total amount that we expect to get over time. Okay, and then I will let Dan take Private Company K. And then in terms of Justice Grown, we commented all that we are going to comment, and that is we really do not have anything to expand upon there aside from the loan is due in May.

Yeah. So just to elaborate on Company A, we commented on the amount that was distributed in 2025, which was, I believe, $6,800,000. We have a pending motion for $6,400,000 that we expect to be distributed in the coming months. And then there were various other assets within the estate, both operating assets and financial assets, that will be monetized over time, and as those proceeds come in, we would expect additional distributions. We did not make a commentary on what the expected amount of the proceeds from the balance of the assets would be relative to what you see in our disclosures. Regarding Private Company K, which is the Massachusetts operator, as I discussed, two of the dispensaries are under APA and have court approval to effectuate those sales. Both are pending regulatory approval in front of the CCC, which typically is a three- to four-month process, although it can be longer, can be shorter. And then the third dispensary, we are receiving final LOIs in the coming weeks and expect that sale to also be effectuated in the 2026 timeframe. We do not break out reserves with respect to individual loans, but I would say that we believe that we are appropriately reserved on our portfolio as everything stands today.

Thank you. That is good color, Dan. And then just, I know you are not going to guide for future loans, but is the first quarter pace based on the two facilities you extended to low middle market companies—is that cadence, call it $100,000,000 per quarter, is that something that you think can be sustained for the rest of the year? And just remind us how that would be funded in terms of your credit facilities and, of course, the proceeds you may receive.

Yeah. So, Pablo, I think you can look at cash on the balance sheet and the capacity of our credit facilities. As it stands today, the $100,000,000 per quarter pace is not something that we currently have capacity to sustain outside of—obviously there are some loans that are on nonaccrual today, and we could receive proceeds from those loans over time, but it is very difficult to predict. But I would say that we are pleased to come out of the gate and start the year on a strong footing with two solid loans in the lower middle market to sponsors that we like and companies that we like at attractive yields. And I think, again, as Robyn said, I would point folks to page 14 of the deck and some of the terms associated with those loans, and that is the kind of deal that we would like to do going forward as we deploy capital over the course of 2026.

Thank you. And then just two more if I may. One, again, I know you are not going to give guidance in terms of pipeline between cannabis and non-cannabis, but given everything that is happening on the regulatory landscape, do you foresee making any new loans in cannabis this year? I mean, I think the fourth quarter activity in terms of new loans was minimal in cannabis, right? So just your macro outlook in cannabis and whether that indicates that there would be opportunities to make loans in cannabis or not. And then the second question, which is unrelated, but does the whole Blue Owl Capital situation—how does that—obviously it does not affect your performance directly, but it does affect sentiment. Do you want to make any comments on that in terms of how investors should think about that situation relative to Advanced Flower Capital Inc.? Thank you.

So in terms of the cannabis loans and the question regarding that, I think it is something that is in our pipeline that we continue to evaluate. But as we have said previously, the bar is very, very high for making any new loans into cannabis. Unfortunately, the regulatory approval that everyone is talking about first happened in August 2023, and there really has not been a ton of incremental progress since then. And so while we are hopeful and optimistic that there is regulatory approval, I think the lack of equity capital in the industry over the last three years, combined with the burgeoning tax liabilities that some of these companies are carrying, make it a very difficult sector for us to deploy fresh capital into.

And then in terms of the BDC question, I think that each BDC speaks on its own credit performance and credit portfolio, just as we have. The middle market loans that we have made are new, and we feel good about those loans and where we invested. I am not going to speak on the industry or any other companies. They know their book a lot better than we do, so I will leave it to them to discuss on their earnings call.

Alright. Thank you. This concludes the question-and-answer session. I would now like to turn it back to Daniel Neville, CEO, for closing remarks.

Thank you for joining us today, and we look forward to talking to you on future earnings calls.