Q3 2025 Advanced Flower Capital Inc Earnings Call
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Hi, I would now like to hand the conference over to our speaker. Today, we have Gabe Katz, Chief Legal Officer. Please go ahead, sir.
Good morning and thank you all for joining Advanced flower capitals earnings call for the quarter ended, September 30th 2025. I'm joined this morning by Robin tanabell. Our president and chief investment officer Daniel Neville, our chief executive officer and Brandon hel 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. 28th 2025 press release and is posted on the investor relations portion of the AFC of the
Afc's website at Advanced flower capital.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 and are not guarantees of 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.
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 the 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.
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 plan to convert from a mortgage REIT to the current structure under which we operate, to a Business Development Company (BDC).
As a reminder, in August, AFC announced its intention to convert to a BDC. 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 6th 2025 shareholders approved the 2. 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 REAP 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.
Thanks, Robin 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 16 cents per basic weighted average share of common stock.
Additionally, the board of directors declared a third quarter dividend of 15 cents per common share outstanding.
It was paid on October 15, 2025 to shareholders of record as of September 32025.
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 paid off its term loan had a maturity at par plus accrued interest and the principal amount of the payoff was $23 2 million.
Over the third quarter subsidiary of a public company has also paid off their term loan during the quarter and we redeployed that $10 million of capital into the new issue.
The higher yield than the existing paper.
In total we received $43 million of principal repayments since the end of Q2.
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.
And the receivership recently directed the distribution of $5 4 million to AFC aging of which $4 2 million.
ASC 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 dispense rate 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 piece alone.
<unk> moved to non accrual status as of June <unk> 2025, as the company did not pay interest due on July one.
As a result, we called an event of default and accelerated the alone.
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 last certain fees and expenses AFC.
AFC will finance $6 million of this 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 nonperforming loan with private company.
Carrying value of approximately $15 3 million.
As a result of the settlement, we anticipate the 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 32025, 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 land company, we do not anticipate making a distribution to shareholders in Q4 2025.
Year to date the company has distributed <unk> 53 per common share.
<unk> remains committed to returning capital to shareholders in a manner that aligns with long term value creation and.
And we expect the board to reevaluate and set the company's gulfport or dividend 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 courts initial pre discovery preliminary injunction enrolling.
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 lung to justice grown matures in May 2026, and is secured by the vertical assets in new Jersey, including an all in cultivation discount.
<unk> three dispensaries two of which are owned in Pennsylvania. We are secured by three dispensaries in AUM cultivation facility, which is currently not operation.
We remain extremely focused on realizing maximum value from these underperforming loans.
Looking ahead to 2026, we have three sizable loans maturity, which will provide an influx of capital to ASC that we can use to redeploy as a BDC across both cannabis and non cannabis assets.
We believe that the expanded <unk>.
<unk> 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 Brendan to discuss our financial results.
Thank you Dan for the quarter ended September 32025, we generated net interest income of $6 5 million and distributable earnings of $3 5 million or <unk> 16 per basic weighted share of common stock and had a GAAP net loss of $12 5 million or a loss of 57.
<unk> per basic weighted average share of common stock.
We believe providing distributable earnings is helpful to shareholders in assessing the overall performance of Amc's 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 provisions for current expected credit losses also known as <unk>.
Russell taxable REIT subsidiary income or loss net of dividends and other noncash items recorded in net income or loss for the period.
We ended 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 32025, the <unk> reserve was $51 3 million or approximately 18, 7% of our loans at carrying value, which was inclusive of <unk>.
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 <unk> 15 per common share outstanding.
Outstanding to shareholders of record as of September 32025.
With that I will now turn it back over to the operator to start the Q&A.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.
Our first question will come from the line of Aaron Grey with Alliance Global Partners. Your line is open. Please go ahead.
Hi, Thank you very much for the questions.
First question for me you referenced potential pipeline I think you said 350 million outside cannabis.
Clarification quickly that's separate than the 416 pipeline I imagine that you referenced.
The presentation and then secondly can you maybe just give some color in terms of some of the opportunities that youre seeing there and then also the yields you might expect and whether or not be different than the target yields you've had historically within canvas. Thank you.
Sure Dan do you want to take that one.
Sure.
So on the first thanks for the question Erinn on the first question that that is inclusive of a 400 approximately $415 million.
The.
Does that that includes $60 million on the candidates pipeline in the balance.
On the non cannabis pipeline.
I'd say on the cannabis side of things.
We still are looking in evaluating opportunities.
But.
There is fewer and fewer that we think are interesting on a risk adjusted basis given the.
The lack of progress on the federal side of things and I think until we see progress on the federal side of things and equity capital coming back into the industry there'll probably be eliminated 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 opportunities that I would say that.
The yields are target IRR is that we're seeing are a bit below what we're seeing in the 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'll be some some that are below some that are potentially above.
And in terms of.
The industries are targets that we're looking at we went from a very limited investment mandate and cannabis only cannabis and only real estate covered in Canada.
And so we are looking at this from an industry agnostic perspective, and opening the pipeline wide open to see what the opportunities out there.
And 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 Theyre looking for stable industries that have some element.
Consistency of recession resistance in the overall business models and so I think that's where we're at today over time I think we will develop a little bit more of a niche and our focus in certain areas.
But we're throwing the gates wide open.
Ted to explore all the opportunities out there.
I appreciate that color Dan second question for me.
As we think about the deal selectivity and how that could potentially change you know given your broader scope here it would seem to get tighter and tighter selectivity.
The cannabis space over the near to medium term. So do you feel now broadening that it might be able chino 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.
No.
Think our selectivity will certainly go up in terms of that in terms of the deals. We're looking at your you already see that.
And kind of the deals that we've looked at and what's been kicked out in the pipeline already.
And so.
I think that given the broader investment mandate given the broader universe.
Just more opportunities to look at and more opportunities to be selective and 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.
Well relative to what we'll actually do and what will actually underwrite and so I think youll see that on both sides of the portfolio really.
Okay, great. Thanks for the color I'll going to jump back into the queue.
Thanks Darren.
One moment for our next question.
Our next question comes from the line of Pablo <unk> with <unk> Associates. Your line is open. Please go ahead.
Thank you and good morning, everyone also questions regarding the diversification. So just first of all in terms of timing when you start when you're going to start redeploying the cash.
Are we talking about tiny like first of January or April 1st. If you can just clarify that I don't know how much visibility you have on that.
And then our industrial numbers that you provided.
Just to clarify so maximo and you would deploy 60 million in 2006 in non kind of these loans. If you can just clarify that thank you.
So thanks Pablo.
I don't think that we've given a guidance to answer your second question first I don't think we've given our guidance I think what Dan was saying is that the non cannabis pipeline plus the candidates pipeline got to the 400 million dollar number Erin was referencing and that the active candidates pipeline of $60 million, but we haven't given any guidance as to.
What we would deploy in 2026 I think we're actively evaluating opportunities we have capital currently if we see an opportunity that we like whether it's in cannabis or non cannabis to invest but remember we are we are operating as a REIT.
Right currently so sales would need to have real estate coverage or fit within our guidelines and in terms of conversion to a BDC that would be in the first quarter and we haven't given a specific date when that will occur.
Right. Okay. Thank you.
And then just in terms of as Gil said I understand things when they get these guys and obviously you have the steel said, but you didn't kind of as you know all the players the industry will do you have a wide network.
Just wonder how easy or difficult it is to replicate that in new industries, and I guess related to that although it is a totally separate question. When we're talking about stable industry recession resistant business model. I guess, you know those are not growth industries and I wonder how much capital they need but if you can just clarify those two things I realized that to say.
My questions there. Thank you.
So I think from from a relationship standpoint, what we 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 operating as well.
So underwriting that 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 as you know.
Both direct deals and sponsored deals then it's incumbent on us to to build that pipeline.
That's your first question and then in terms of industries I think.
Dan said earlier and he can expand on this we're casting a wide net right and theres not a deal that I'm going to talk about at this moment, but we're casting a wide net worth looking at industry as well.
We're looking at how various macro factors would impact those industries and that that would be part of our diligence, but I would just say at this point, we're casting a wide net in terms of industries.
Anything you want to add to that Dan.
Yes.
Look the cannabis industry didn't really exist on the legal side of things until five years ago right. So.
You look at the team that exists.
<unk>.
Three of the four members of the investment Committee.
Scale fifth Street asset management to a $5 billion asset manager in that $10 billion of transactions on the direct lending side of things outside of Bdcs.
I myself had a career as a general last on the <unk> side for 10 years prior to stepping into the cannabis industry.
And invest in cross capital stack.
And our head of underwriting, which we hired last year had zero experience in cannabis and have done 15 years in direct lending and other regular way industries and so I think.
On the cannabis side of things provides a greater degree of difficulty in terms of the business model right.
Agriculture, its manufacturing and distribution that's retail.
And there are very other sop elements within there.
And certainly getting security in structuring the loans and doing it on a direct basis is more difficult than other way industries, but I think.
Taking our skill sets from our past life, taking some learnings from the Canada side of things.
On the structuring the underwrite.
And the portfolio management side of things well.
We will certainly be useful skill sets outside of the cannabis industry.
Think in terms of the commentary about target industries I'd say look we're just we're looking for stable businesses I mentioned some element of recurring revenue.
Some element of recession resistance.
Not looking for industries that are hyper cyclical like I think you've seen in the cannabis side of things, where a lender we only get paid as lenders, we don't get paid for the upside and so we're looking for stable.
Stable businesses that provide good credit quality that protect our capital.
And provide attractive risk adjusted returns and we're casting a wide net.
There is a lot wider universe to look at.
Out there outside of just Canada, some real estate covered which has been our historical focus.
Okay. No. That's good thank you and just one more on the BDC and maybe it's too detailed for the call but.
Is there any and any changes you want to highlight in terms of the fee structure with the external investment advisor for moving to a read through a BDC or not such a big deal.
I think that that was pretty well laid out in our proxy and 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.
Okay thing as 61% of them at.
At 61% of our investors that would add I'm sure they've seen that and 94% voted for it so.
That's right.
Thank you.
Totally understood you're very cautious done some kind of abuse, but.
<unk>.
At the federal level, let's say that these changes with him to rebuild these happen right. Some people have sized that market up 20 billion nothing none, let's say that nobody's too right and whether that flows through it kind of as industry at the federal level.
And then you know you have potentially Virginia, Pennsylvania on the rig side in Texas on the rig side.
I realize we don't have visibility.
But if things get pretty good even without changes at the federal level in a year's time or am I am I am I.
Putting too rosy picture here then for Robyn.
I'll, let Dan take this one.
Yes look.
It seems like we've been hearing.
Form has a few weeks away for the last three or four years.
And so I think on our side of things.
We've seen the reality of that and the reality is that there has 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.
And 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 and.
So as a lender when there is no equity capital coming in and no equity cushion in a capital intensive business you have to be very selective and careful and you're underwrites and very much pick your spots.
And 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.
The performing and underperforming portions of the box and so were still active were still involved but I think our hurdle to deploy fresh capital into the cannabis space on a go forward basis is going to be very very high.
And some progress on the federal side of things and seeing equity capital flow back into the space.
Thank you and one last one.
I realize you're not going to guide into 2026, but you know maybe.
Made it very clear no division in the fourth quarter based on the award decision.
BDC structure, the benefits will be probably start seeing them by the second quarter. So I guess, what anomalies, we should probably model.
For the first quarter 2026, I don't know if you want to make any comments on that maybe you can I.
I don't think we've given that guidance.
So.
We gave a fact, which is what the board has decided on the fourth quarter.
Right. Okay. No. That's good. Thank you. Thank you that's all.
Thanks Pablo.
Thank you and I would now like to hand, the conference back over to Dan novel for closing remarks.
Thank you all for joining us today and have a nice afternoon.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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Okay.
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