Advanced Flower Capital Inc. (AFCG) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the AFC Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Be advised that today's conference is being recorded. I 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 June 30, 2026. 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 in our July 17, 2026, press release and is posted on the Investor Relations portion of AFC's website at afcbdc.com, along with our second 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 developments, 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 AFC's most recent period 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 line for Q&A. With that, I will now turn the call over to our President and Chief Investment Officer, Robyn Tannenbaum.

Thanks, Gabe, and good morning, everyone. We appreciate you joining us to discuss AFC's second quarter 2026 earnings. Before turning to our results, I want to provide some context on the broader lending environment. 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 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. 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-lite structures with fewer lender protections and more aggressive EBITDA adjustments. Now, turning to our results. For the second quarter of 2026, AFC generated net investment income of $0.15 per weighted average share of common stock. Additionally, the Board of Directors declared a second quarter distribution of $0.05 per share, which was paid on July 15, 2026, to shareholders of record on June 30, 2026. Last quarter, we announced a share repurchase program. During the quarter, we repurchased about $2.8 million, which was $0.17 accretive to net asset value. We have approximately $2.2 million remaining in our $5.0 million share buyback program. Year-to-date, we have deployed approximately $102.0 million 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. I will now turn it over to Dan to discuss our portfolio.

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 June 30, 2026, the fair value across our investment portfolio was $289.8 million across 17 portfolio companies, compared to $279.2 million 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 non-accrual loans was 13.2%. During the quarter, we funded $17.2 million, including $5.1 million to two new portfolio companies and $12.1 million to two existing portfolio companies. Net fundings were $8.0 million after $9.2 million of amortization and repayments. Subsequent to quarter end, we committed $7.0 million to a $25.0 million senior secured credit facility for a leading outpatient behavioral health platform, with $3.1 million 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 non-accrual loans, which remain concentrated in the legacy cannabis book. Regarding [ Debi ], the receiver has continued the liquidation process. During the quarter, [ Debi ] entered into a binding term sheet to sell two additional assets of [ Debi ] for $12.5 million in cash proceeds. Subsequent to quarter end, [ Debi ] earned a $2.0 million non-refundable deposit on the purchase, and we expect the transaction to close this year. Inception to date, we have received $58.0 million of principal repayment on the [ Debi ] loan. Regarding DMA, the receiver has 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 May 1, 2026, and is in maturity default. We have commenced Article 9 foreclosures and are pursuing our rights and remedies under both the credit agreement, including the parent guarantee and the shareholder guarantee. 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 [ SFC 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 [ SFC Advisors ] 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. 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 $1.3 billion across a diverse range of industries. We remain focused on cash-flowing borrowers with $5.0 million to $50.0 million 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. Now, I'll turn it over to Brandon to discuss our financial results in more detail.

Thank you, Dan. For the quarter ended June 30, 2026, we generated total investment income of $8.7 million and net investment income of $3.5 million or $0.15 per weighted average share of common stock. This provided 3x coverage of our $0.05 second quarter 2026 distribution. Total investment income was $8.7 million compared with $9.8 million in the first quarter. The decline primarily reflects $1.8 million of other income recognized in the first quarter that did not recur in the second quarter, mainly relating to a $1.5 million exit fee from the Bloom repayment. 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 $5.2 million compared to $5.0 million in the first quarter and are presented net of a management fee rebate of approximately $176,420 for the quarter. We ended the second quarter with $364.5 million of principal outstanding spread across 17 loans. As of June 30, 2026, we had total assets of $399.7 million, total net assets of $187.3 million, and our net asset value per share was $8.25. This is an increase of $0.35 per share over the prior quarter. The increase in net asset value per share was driven by net investment income of $0.15 per share, $0.17 per share of accretion from repurchasing shares below net asset value, and an increase in unrealized appreciation on investments of approximately $0.08 per share, and offset by the second quarter distribution of $0.05 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 $2.8 million in the aggregate. Approximately $2.2 million remains available under the $5.0 million share repurchase program. Turning to the balance sheet, as of June 30, 2026, we had $207.0 million of debt outstanding consisting of $110.0 million drawn under our secured revolving credit facility, $20.0 million under our unsecured revolving credit facility, and $77.0 million of senior unsecured notes outstanding. Subsequent to quarter end, the company repaid $84.0 million and $20.0 million, 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. Net debt-to-equity was 1.0x 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 $106.5 million of cash and cash equivalents. This provides substantial liquidity for new investments and other capital allocation opportunities. On distributions, we paid the second quarter distribution of $0.05 per common share on July 15, 2026, to shareholders of record as of June 30, 2026. With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions] Our first question is going to come from the line of Aaron Grey with Alliance Global Partners. Your line is open. Please go ahead.

Just in terms of activity, can certainly appreciate 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. It 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 in terms of that's partially the environment, maybe a bit longer of a process, some timing, any color there would be appreciated.

Thanks, Aaron. So we have a very active pipeline, $1.3 billion 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, et cetera. But originations are going to be lumpy. You saw in Q1 we did about $80.0 million. 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.

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 larger opportunities that could come in the pipeline?

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 $70.0 million 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 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 our target hold threshold as well.

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

Thanks. Gabe or Dan?

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

Fair enough. Thank you 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 & 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?