AFC Gamma Inc Stock

Thank you. Good day and thank you for standing by. Welcome to the ASC second quarter 2026 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 please Star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again. 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 30th, 2026. I'm joined this morning by Robin 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 17th, 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 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.

Today's call will begin with Robin providing an overview of the lending environment and our results. Dan will then provide and 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, Robin 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 wanna 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 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 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 test. 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-like 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 15 cents per weighted average share of common stock. Additionally, the Board of Directors declared a second quarter distribution of 5 cents per share, which was paid on July 15, 2026 to shareholders of record on June 30, 2020. last quarter we announced a share repurchase program. During the quarter we repurchased about $2.8 million, which was 17 cents accretive to net asset value. We have approximately $2.2 million remaining in our $5 million share buyback program. Year to date, we have deployed approximately $102 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 Robin 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 30th, 2026, the fair value across our investment portfolio was $290 million across 17 portfolio companies. compared to $279 million across 15 portfolio companies at March 31st. 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 million, including $5 million to two new portfolio companies and $12 million to two existing portfolio companies. Fundings were eight million against nine million dollars of amortization and repayments. Subsequent to quarter end, we committed $7 million to a $25 million senior secured credit facility for a leading outpatient behavioral health platform with $3 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 Debbie, the receiver has continued the liquidation process. During the quarter, Debbie entered into a binding term sheet to sell two additional assets of Debbie for $12.5 million in cash proceeds. Subsequent to quarter end, Debbie earned a $2 million non-refundable deposit on the purchase and we expect the transaction to close this year. Inception to date, we have received $58 million of principal repayment on the Debit Loan. Regarding DMA, the receivers 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 IX 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 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 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 to $50 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 30th, 2026, we generated total investment income of 8.7 million and net investment income of 3.5 million or 15 cents per weighted average share of common stock. This provided three times coverage of our five cent 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 episode 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 million in the first quarter and are presented net of a management fee rebate of approximately $176,000 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. 17 cents per share of accretion from repurchasing shares below net asset value, and an increase in unrealized appreciation on investments of approximately 8 cents per share. and offset by the second quarter distribution of 5 cents per share.

Regarding the share repurchase program, during the quarter, we've 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 million share repurchase program. Turning to the balance sheet, as of June 30, 2026, we had $207 million of debt outstanding consisting of $110 million drawn under our secured revolving credit facility. $20 million under our unsecured revolving credit facility, and $77 million of senior unsecured notes outstanding. Subsequent to quarter end, the company repaid $84 million and $20 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 1.1 times as of June 30th compared to 1.09 times at March 31st, and net debt to equity was 0.53 times compared to 0.48 times 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. Our first question is going to come from the line of Erin Gray with a line from the.

Alliance Global Partners. Your line is open. Please go ahead. Hi, thank you very much for the questions here. First one for me, 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, I don't know, know 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. Thank you.

Thanks for the question. Dan, do you want to take that one? Yes, sure. Thanks, Erin. 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 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 were 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 can we do that? 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? Thanks.

Dan, do you want to do that one, or Brandon?.

Yes, sure. Yes, no, we, as stated in my remarks, you know, at the end of the quarter in our investment presentation we have over $70 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 syndicate deals that are above kind of our target hold threshold as well.

Okay, great, thanks. Last question from me. I know you said prepare remarks, right? Nothing further, you know, from some of the SEC filings regarding justice, but just maybe... to clarify things now that you know you have the process in place, you talked about prepared remarks. There's nothing outstanding or or maybe that's a legacy operators are doing you know that could keep you from you know going through you know what the sale process and for you to build the you know retrieve as much as possible from those assets just any clarification on that you know 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 Zuynik with Zuynik and 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?.

Sure. Thanks for the question, Pablo. I think what we have said in prior quarters and in prior years is that access to equity capital in the cannabis industry was challenged, and I think unfortunately it still continues to be challenged. There have been some changes been a lot of milestones that people have been hoping for for a while that have been long overdue, like the rescheduling of medical cannabis, which happened, I think, quicker relative to where people thought it was going to be a few months ago. And the pending potential rescheduling of adult use cannabis. We've also had, I think, two companies now, Uplift and NYSE, and unfortunately you haven't seen a lot of activity on the equity capital side of things associated with it. I think it's still a difficult environment to raise equity capital. And as a result, I think we have concerns about the industry being continued to be funded kind of on the debt side of things without having access to equity capital.

And that also impacts the re-offability of these borrowers, these are not straightforward businesses, there can be some volatility in the industry in the regulatory environment. And a lack of re-upability on the equity side of things to deal with those problems is problematic to debt investors. And so we applaud the progress. I think there has been good progress. but the lack of equity capital is very problematic for us.

Thank you. That's a good caller. Maybe just going back to Debbie and DMA, in the case of Debbie, you said that you are expecting the assets to be sold for $12.5 million in the second half and that a deposit was already taken on the transaction for $2 million. So that pretty much confirms that the transaction is in place. I just want to make sure I hear that right. I know I can go back to the transcript, and whether you have access to the full amount, or are there other parties that have access to those proceeds also? Thanks.

Yes, so that you heard correct. So it was a binding term sheet that was signed up, subject to $2 million cash hard deposit. So our expectation is that that closes sometime this year. That would be for twelve point five million dollars of total cash proceeds. Um We are a participant in the Debi loan, but I believe we have 78% or somewhere around 80% of our participation in Debi. 80% of the proceeds would be distributed to us on a pro-rata basis.

thank you that's good color and the same question on DMA and I'm sorry if I misheard you said that two of the three dispensaries closed the transaction or they closed operations I'm just trying another mechanism to the number you have that luckily that transaction closed the dispensaries did not close so.

We had two of the three dispensaries under APA previously. That sale received regulatory, Both of those sales received regulatory approval in June and both of those transactions closed in July. And I think in terms of the rest of the transaction in the wind down of DMA, we have one more to go. And you can look at our new BDC filings to see where our mark is on that.

Right. And again, apologies if there's more people on the Q&A line here, Hugh. In terms of the new loan you made in the third quarter, can you give more color on the amount? I think you said 17 million or maybe I'm misheard. And more color on the company itself, you know, if you can, thank you.

In the second quarter, Pablo, you were asking? The loan in the second quarter? Unless I misheard, I thought that you said subsequent to the quarter, you also funded a new loan, or maybe I misheard that. Sure, yep, yes, that's correct. So it's a, we talked a little bit in the script, it's a, behavioral health roll up focused in the northeast. They have 10 locations throughout the northeast and do a mix of do a mix of talk therapy, medication management, as well as some additional add-ons, both in an outpatient setting as well as a partial hospitalization setting. So it's an industry, you know, we had talked about previously, focusing on industries that are more predictable, recession resistant, have good cash flow characteristics and highlighted healthcare is one of the areas we'd be focused on. And so we've done a couple transactions in and around that space, one in the insurance space in Q1 and this deal in Q3. And Pablo, the size of that deal was we committed $7 million and funded $3.1 million on closing.

Thank you. That's good color there. And then look, I haven't gone through a thank you in full, only partially. I think a while ago you said that sunburn was in NANACRUELS. Just a reminder of where you are with the sunburn loan, which I think was renamed under another borrower's name, but just some comments.

in the last quarter there. Oh sure, so we had some disclosure last quarter there was. We entered into a forbearance agreement with Sunburn that was conditioned on the company raising additional equity capital as well as some other conditions. The company fulfilled those obligations in Q2 and we received a pay down associated with with the loan and there was additional equity capital that went into the business for some expansion that they're looking to do. and the company fulfilled the forbearance obligations and the loan is in good standing.

Thank you. And the very last one, I mean, obviously, we know how much credit you have available, credit lines you have available, but right now you're at net debt to equity at 0.53. What are you comfortable with? I understand the average on BDCs is like 1.3 times, but what are you comfortable with?.

Sure. I think on our side of things, we've always said that somewhere around one times or potentially above that, but I think one times is a good intermediate target for us.

That's good. Thank you. That's all for me. Thank you.

Thank you, and I'm showing no further questions, and I'd like to hand the conference back over to Dan Neville for closing remarks.

Thanks everyone for joining us today and we look forward to keeping you updated on future progress.

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good morning, and welcome to AFC's First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining AFC's earnings call for the quarter ended March 31, 2026. I'm joined this morning by Robyn Tannenbaum, our President and Chief Investment Officer; Leonard Tannenbaum, our Chairman; 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 April 15, 2026 press release and is posted on the Investor Relations portion of AFC's website at advancedflowercapital.com along with our first 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 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 our results. Len will then provide commentary on the lower middle market, and then Dan will 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 to discuss AFC's first quarter earnings. Before turning to earnings, we are pleased to have completed our first quarter operating as a BDC. This conversion to a business development company has expanded AFC's investment flexibility, which has allowed us to pursue opportunities beyond real estate-backed loans.

We believe that this expanded opportunity better positions AFC to diversify its exposure across industries and credit risk profiles. During the quarter, we closed 2 noncannabis deals in the lower middle market, totaling approximately 90 million new commitments. Additionally, we received $41.2 million in cannabis loan repayments during the quarter.

For Q1 2026, AFC had net fundings of $39.1 million. The 2 lower middle market deals are similar to other potential transactions in our pipeline and has many of the characteristics we look for, cash flow operating businesses backed by experienced sponsors. Turning to earnings. For the first quarter of 2026, AFC generated net investment income of $0.21 per basic weighted average share of common stock. Additionally, the Board of Directors declared a first quarter distribution of $0.05 per share, which was paid on April 15, 2026, to shareholders of record on March 31, 2026.

Before turning the call over to Len, I would like to note that the Board of Directors has put a $5 million share buyback program in place. We view the share buyback authorization as a flexible component of our capital allocation strategy, designed to enhance long-term shareholder value. Now I'll turn it over to Len to discuss the state of the middle market.

Thank you, Robyn, and good morning, everyone. I want to explain why we are excited about private credit and why we believe the timing is particularly compelling. As private credit experienced meaningful reductions in net inflows, many lenders have exited the lower middle market in favor of moving upmarket to support this in portfolios. This reduction in capital and resulting shift upmarket has created a sizable opportunity for a small, nimble lender like us to capture what we consider to be an exceptional vintage in the lower middle market.

In this part of the market, we are seeing better risk-adjusted returns with absolute yields running at approximately 100 to 300 basis points higher than they were just 6 months ago. Our ideal sweet spot is in the $5 million to $50 million EBITDA range, largely below the threshold where the larger private credit platforms operate. We believe that the lower middle market assets that we're currently underwriting carry a meaningful distinction from the covenant-like structures common in the upper market.

Lenders there often rely solely upon a liquidity covenant. Our deals typically include a cash flow measure and a fixed charge coverage ratio covenant, and we are not allowing the aggressive EBITDA add-backs [indiscernible] to larger deals. A further indicator of the strong underlying credit quality opportunity available in the lower middle market.

Strategically, we are actively expanding our pipeline and continuing to diversify our portfolio. We believe this vintage offers an attractive opportunity, and we are positioning ourselves to capture it thoughtfully and at scale. I will now turn it over to Dan to discuss the state of our portfolio and our pipeline.

Thanks, Len. I'll begin with an update on our expansion into private credit outside of the cannabis space, followed by an update on our portfolio. As Len described, we feel good about the supply and demand dynamics in lower middle market lending and are excited about the opportunities we are seeing.

Since expanding our investable universe, our active pipeline remains strong with over $1.5 billion of deals as of today. We are focused on sourcing deals and backing companies in the lower middle market across a variety of industries, including health care, consumer, manufacturing and services. We are focused on deals where we have expertise or can add value and have no interest in stretching beyond our core competencies.

Our sweet spot is providing loans to cash flowing borrowers with $5 million to $50 million of EBITDA. We are primarily participating in sponsored transactions though we selectively engage in nonsponsor deals as well. The financings we are looking at are often used for expansion capital, acquisitions, refinancings or recapitalizations.

During Q1, AFC closed 2 loans totaling $90 million and subsequent to quarter end, AFC closed an additional $5 million of loans. In January, as we closed on a $60 million senior secured credit facility to support the combination of STAT and the Moresby Group which is backed by Cambridge Capital. In February, AFC committed $30 million to a $60 million senior secured term loan to support the acquisition and growth of a leading health care benefits platform tailored toward hourly and lower-wage employees. At closing, AFC funded $20 million of this commitment and the remaining $10 million was funded subsequent to quarter end.

As I stated last quarter, we currently have 3 loans on nonaccrual and are focused on receiving paydowns on these loans to redeploy that capital into performing credits that should contribute to current income. The receiver has continued the liquidation process for investment in Devi Holdings. During Q1, we received a $6.2 million paydown which brings the total paydowns in Devi and in receivership to $20.8 million.

Lastly, we wanted to take a minute to touch on Justice Grown. The loan matured on May 1, 2026, and is in maturity default. Now that the loan has matured, we intend to exercise our rights and remedies under the credit agreement, including our rights under the shareholder guarantee and parent guarantee.

As a reminder, our loan to Justice Grown is secured by the vertical assets in New Jersey including an own cultivation facility and 3 dispensaries, 2 of which are owned. In Pennsylvania, we are secured by 3 dispensaries and an own cultivation facility, which is currently not operational.

We remain laser focused on pursuing our rights and remedies under the credit agreement and realizing maximum value from this loan. Now I'll turn it over to Brandon to discuss our financial results in more detail.

Thank you, Dan. For the quarter ended March 31, 2026, we generated total investment income of $9.8 million and net investment income of $4.8 million or $0.21 per basic weighted average share of common stock. We ended the first quarter of 2026 with $356.6 million of principal outstanding spread across 15 loans. As of May 1, 2026, our portfolio consisted of $370 million of principal outstanding across 17 loans.

As of March 31, 2026, we had total assets of $394.9 million, total shareholder equity of $185.8 million our net asset value per share was $7.90. This is an increase of $0.44 per share over the prior quarter. The increase in net asset value per share was primarily driven by net investment income of $0.21 per share, an increase in unrealized appreciation on investments of approximately $0.28 per share offset by the Q1 dividend of $0.05 per share. During the first quarter, AFC expanded its senior secured revolving credit facility to $80 million with an additional $30 million commitment from the facility's lead arranger and FDIC-insured bank with over $75 billion of assets. The facility remains available to $100 million subject to lender participation in our available borrowing base.

During the 3 months ended March 31, 2026, we had an average balance drawn on the credit facility of approximately $22 million. Lastly, on April 15, 2026, we paid the first quarter dividend of $0.05 per common share outstanding to shareholders of record as of March 31, 2026. With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions]

Our first question comes from Aaron Grey with AGP.

I guess just first 1 for me. Thanks for some of the comments you provided on Justice Grown. I guess how should we think about potential outcomes here just given the other litigation that is pending, the loan is now officially in default? How should we think about the different potential outcomes and that could happen in the near term?

Hi Aaron, I'm going to pass that 1 over to our Chief Legal Officer, Gabe.

Sure. Yes. The loan has matured, as you noted. We are pursuing all rights and remedies to obtain maximum value for the -- from the credit facility, but it's too early to make any predictions on outcomes in this litigation.

Okay. So just to clarify, there's still questions around being able to fully take it over as the other litigations pending given if it's currently in default now?

No, we are pursuing our strategies to obtain maximum value from the collateral.

Next question for me just in terms of some of the incremental loans and the pipeline, I know you've talked about before, some of the expected yields. I understand that April 1 were a little bit smaller here, but just want to confirm that the ones in the pipeline are expecting similar yields that we have seen kind of that mid- to high teens as we go forward for the year.

Hi Aaron, I'll pass that 1 to Dan.

Yes, Aaron, I think we've got a few loans in our disclosures, and you can look at those yield to maturities as a guidepost. I think our overall target and what we said previously with the transition to lower middle market is that we'd expect the yields to move down a touch into kind of the low double-digit kind of range on an overall basis, but expect the quality of the borrowers, the counterparties on the sponsor side of things to improve significantly in the lower middle market generally relative to what's available today across the cannabis landscape.

And just last question for me. Just with the recent rescheduling, currently it's FDA-approved, medical, legal operation. Does that change your outlook for the cannabis market? Or are you still kind of focused in terms of more broadly, maybe less focus on cannabis for the pipeline?

I think I'll give a little color on the rescheduling side of things. I think it's great to see progress at the federal level finally after 5 years. I think the positives are it eliminates 280 liabilities for medical operators today. It certainly eliminates future uncertainty or decreases future uncertainty related go-forward liabilities given the path that we seem to be on at the federal level with hearings related to adult use later this year as well.

And you have potential relief of historical tax liabilities, at least for medical operators as was highlighted in the actions over the last few weeks. And so that -- the combination of those factors could potentially attract additional capital over time. I think the negatives are that no -- none of the operators were really paying taxes today outside of GTI, and so if you look at the cash flow statements for the last couple of years, that reflects a post-280E world on a cash basis today.

And certainly, I think the industry is more competitive than it was 5 years ago, and so the relief came but it took a long time to get here. I think the consequences of that are that on -- to the extent that additional capital is attracted to the industry, that would be positive for asset values that would be positive for medical asset value, certainly, given that 280E is eliminated, and it could lead to better realizations for us on loans that we have on non-accrual.

We are seeing better opportunities in the lower middle market today given the economics that we're seeing, the less competitive nature of the lending environment in the lower middle market today generally, and the quality of the borrowers and counterparties. And so I think on a go-forward basis, while rescheduling is great and it could be good for asset values and our loans on nonaccrual, we are still focused on expanding into the lower middle market lending generally.

Our next question comes from Pablo Zuanic with Zuanic & Associates.

Look, you gave some color on the 2 large loans that you made in the first quarter to the noncannabis companies, but can you expand a little bit more? I mean these are private companies, we don't have access to their financials whatever additional color you can provide to understand better what those companies are doing, what their plans are for those proceeds from the loans, that would be helpful.

Sure, Pablo. Yes, as you mentioned, they are private companies. That's the vast majority of loans that are done in the BDC space are private companies. We can give a little bit of color here on 2 of those businesses. So STAT, we put out a press release on that, described what the business does. They operate in the revenue recovery space related to suppliers and to big retailers like Walmart, Target, the Amazon ecosystem, et cetera, and they recovered deductions related to invoices, for goods that are shipped into Walmart and those other retailers.

And so if you think about the opportunity set there, Walmart has $700 billion of sales, their cost of goods sold is probably somewhere around $400 billion, and every invoice that goes into Walmart, you typically see a 2% deduction related to various issues with quantity mismatches on time and full, et cetera. And these folks will work to recover that, which is an $8 billion opportunity on that 10% for Walmart alone, and you expand that opportunity as you get to other retailers on the platform.

The use of proceeds there was for a refinancing of an existing credit facility on the buyer as well as to partially finance the acquisition of the Moresby Group. On BCIS borrower that's, as we've discussed, a health care benefits platform that serves low-wage employees. When I -- in my previous life, I had 1,700 hourly employees and dealt with benefits there, and 1 of the constant complaints is that regular way health care insurance was way too expensive, nonaffordable and honestly, overkill for folks in the 18 to 35 age subset.

And so this product provides a low-cost offering for virtual urgent care, primary care, generic prescriptions and is good for the employee as the low-cost option and good for the employer as an avenue for some tax savings on FICA payroll taxes. And so the platform is seeing tremendous growth and is really attacking an interesting niche and unfilled need in the health care insurance market.

That's great color. My last question, obviously, I can do the math, but you have the cash on the balance sheet that you reported for end of March, plus the expanded credit facility, if I put all that together, do you think you can deploy all of that this year? I mean you've talked about the pipeline, but just trying to think how we should model book loan growth from here to end of the year.

Pablo, it's Robyn. I think that as we're entering the lower middle market, it's hard to predict and give any guidance as to the rest of the year as to what we're going to fund, but we do have dry powder that we look to deploy over the course of the year. And as we get repayments, as we discuss this quarter, we'll look to deploy that capital as well.

And I'm not showing any further questions at this time. I'd like to turn the call back over to our CEO, Daniel Neville for any further remarks.

Thank you for joining us this morning, and we look forward to updating you on our continued transition to lower middle market lending on future calls.

Thank you. Ladies and gentlemen, this concludes today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good morning, and welcome to Advanced Flower Capital's Fourth Quarter and Fiscal Year 2025 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining AFC's earnings call for the quarter and fiscal year ended December 31, 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 February 10, 2026 press release and is posted on the Investor Relations portion of AFC'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 AFC'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 to distributable earnings can be found in AFC's earnings release and investor presentation available on AFC's 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, AFC was focused on: One, reducing our exposure to underperforming credits through active portfolio management; and two, converting from a real estate investment trust to a business development company, or BDC, to expand the universe of transactions AFC 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 million of paydowns from performing and underperforming credits from the start of 2025 through today. During fiscal year 2025, AFC originated $53 million of new commitments. And subsequent to year-end, we have closed on $89.7 million of new commitments in the lower middle market, which Dan will describe in further detail.

Turning to our conversion to a BDC as of January 1, 2026, we completed our previously announced conversion from a REIT to a BDC. Our conversion expands AFC'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 December 31, 2025, AFC 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 AFC 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 April 15, 2026, to shareholders of record on March 31, 2026.

With that, I'll 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'll begin with an update on our portfolio then turn to our expanded strategy and deals we recently completed. Looking at our existing portfolio from the beginning of 2025 through today, we received $117 million back in paydowns. This includes the repayment of two loans subsequent to year-end at par plus accrued with an additional $1.8 million 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 the beginning of 2025 through today, we have received $6.3 million of paydowns. 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 $6.4 million 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, 2 of the 3 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 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 maturity loan matures on May 1, 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 $1.4 billion 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 million to $50 million of EBITDA. These financings are often used for expansion capital, acquisitions, refinancings and recapitalization.

Since converting to a BDC, I would like to discuss two loans that we closed in Q1 2026. In January, AFC closed a $60 million senior secured credit facility to support the combination of STAT and the Moresby Group, which is backed by Cambridge Capital. STAT is the leading revenue recovery specialist servicing the Walmart, Target and Amazon ecosystems. Moresby is a procurement specialist that focuses on long-tail supplier negotiations and savings for Fortune-1000 clients. AFC provided the $60 million to finance the acquisition of Moresby and refinance existing indebtedness. In February, AFC committed $30 million to a $60 million senior secured term loan to support the acquisition and growth of a leading health care benefits platform tailored toward hourly and sub-$50,000 salaried employees, which is a large and underserved segment to the workforce. At closing, AFC funded $20 million 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'll turn it over to Brandon to discuss our financial results in more detail.

Thank you, Dan. For the quarter ended December 31, 2025, we generated net interest income of $5.2 million and distributable earnings of negative $2.8 million 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 December 31, 2025, we generated net interest income of $24.6 million and distributable earnings of $8.7 million or $0.39 per basic weighted average common share and had a GAAP net loss of $20.7 million 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 AFC's business. Distributable earnings represents the net income computed in accordance with GAAP, excluding noncash items such as stock compensation expense and the 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 the fourth quarter of 2025 with $317.4 million of principal outstanding spread across 15 loans. As of February 25, 2026, our portfolio consisted of $366.4 million of principal outstanding across 15 loans. During the quarter, we repurchased $13 million of our unsecured bonds. Currently, $77 million of our unsecured bonds remain outstanding with the maturity in May of 2027. We continue to evaluate and explore options to refinance that bond prior to maturity. As of December 31, 2025, the CECL reserve was $46.1 million or approximately 18.2% of our loans at carrying value, and we had a total unrealized loss included on the balance sheet of $27.7 million for our loans held at fair value.

As of December 31, 2025, we had total assets of $275.6 million, total shareholder equity of $175.6 million, and our book value per share was $7.46. Lastly, on March 2, 2026, the Board of Directors declared a first quarter dividend of $0.05 per share, which will be paid on April 15, 2026, to shareholders of record on March 31, 2026.

With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions] Our first question comes from Aaron Grey with Alliance Global Partners.

This is John on for Aaron. So the active pipeline increased meaningfully with $1.4 billion, up from last quarter's $400 million. 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 question. So the pipeline increased meaningfully, that's primarily a function of our conversion from a REIT to a BDC. As you know -- and as we 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. And upon converting to a BDC that investment universe has been expanded beyond cannabis, which happened in August of last year, 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. And then is there a split you could provide between the cannabis and non-cannabis pipeline? And what's 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 industries. We're 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've 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 yield to maturity per the deck is 14% and one is 19%.

[Operator Instructions] Our next question comes from Pablo Zuanic with Zuanic & Associates.

Jon, can I just follow up on, you gave good color there about the loans on nonaccrual. In the case of private company A, what's less than is $4.4 million, there's 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, it's over $12 million. Can we assume that when you're talking about proceeds that you will recover and redeploy that for private company K, you will be getting the $12 million. And then any further color you're going to give on Justice Grown. From our start, it seems unlikely that you will be paid $78 million or $79 million principal in May, but if you can just give color there. Correct me, if I wrong in my assumptions.

So this is Robyn, I'll let Dan answer a few. On private company A, I believe what Dan was referring to is the amount that's currently pending in front of the receiver, not the total amount that we expect to get over time. And then I'll let Dan take private company K. And then in terms of Justice Grown, we've commented all that we're going to comment. And that's -- we really don't have anything to expand upon there aside from the loan is due in May.

Yes. So just to elaborate on company A, we commented on the amount that was distributed in 2025, which is, I believe, $6.8 million. We have a pending motion for $6.4 million 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'd expect additional distributions. We didn't make a commentary on what the expected amount of the proceeds from the balance of the assets would be relative to 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 3- to 4-month process, although can be longer, can be shorter. And then the third dispensary is we're receiving final LOIs in the coming weeks and expect that sales to also be effectuated in the 2026 time frame. We don't break out reserves with respect to individual loans, but I would say that the -- but I would say that we believe that we're appropriately reserved on our portfolio as everything stands today.

That's good color. And then just -- I know you're 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 million 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.

Yes. So Pablo, I think you can look at cash on the balance sheet, the capacity of our credit facilities as it stands today, the $100 million 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's very difficult to predict. But I would say that we're 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 I would, again, as Robyn said, point folks to Page 14 of the deck and some of the terms associated with those loans, and that's the kind of deal that we'd like to do going forward as we deploy capital over the course of 2026.

And then just two more, if I may. One, again, I know you're not going to give guidance in terms of the pipeline between cannabis and non-cannabis, but given everything that's happening on the regulatory landscape, do you foresee making any new loans in cannabis this year? I mean I think the 4Q 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 that's the whole Blue Owl Capital situation, how does that -- obviously, it doesn't 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?

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've 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 of 2023. And there really hasn't 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've made are new vintage, and we feel good about those loans and where we invested. I'm not going to speak on the industry or any other companies. They know their book a lot better than we do. So I'll leave it to them discuss on their earnings call.

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

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

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Advanced Flower Capital Q3 2025 Earnings Conference Call. [Operator Instructions] 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.

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 the 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 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 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 a 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 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 under 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 risks 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.

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 15, 2025, to shareholders of record as of September 30, 2025. As we have discussed, while we have made progress reducing our exposure to underperforming credit, 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 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, 2 of the 3 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 P's loan was moved to nonaccrual status as of June 1, 2025, as the company did not pay interest due on July 1st. 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 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 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 nonaccrual, 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 Grown. 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 prediscovery, preliminary injunction ruling. The appeal is fully briefed and awaiting oral arguments, oral 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 grown matures in May 2026 and is secured by the vertical assets in New Jersey, including an own cultivation facility in 3 dispensaries, 2 of which are owned. In Pennsylvania, we are secured by three dispensaries and an own 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 were provided 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 our 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.

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 distributor earnings is helpful to shareholders in assessing the overall performance of AFC'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 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 the third quarter of 2025 with $332.8 million of principal outstanding spread across 14 loans. As of November 3, 2025, our portfolio consisted of $327.7 million of principal outstanding across 14 loans. As of September 30, 2025, the CECL 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 30, 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 15, 2025, we paid the third quarter dividend of $0.15 per common share outstanding to shareholders of record as of September 30, 2025.

With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions] Our first question will come from the line of Aaron Grey with Alliance Global Partners.

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 in the presentation? And then 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 be different than the target yields you've had historically within cannabis.

Sure. Dan, do you want to take that one?

Sure. So on the first -- thanks for the question, Aaron. On the first question, that is inclusive of 400 -- approximately $415 million. The -- 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 in 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. And 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 will be an average. There will be some that are below, some that are potentially above. And 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. And so we are looking at this from an industry-agnostic perspective, and opening the pipeline wide open to see what the opportunity is 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 are looking for stable industries that have some element of consistency or 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 a focus in certain areas. But we're throwing the gates wide open to explore all the opportunities out there.

I appreciate that color, Dan. Second question from me. So, yes, as we think about the deal selectivity, how that could potentially change given your broader scope here, we seem to get tighter and tighter selectivity within the cannabis space over the near to medium term. So 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?

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. And so 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. And I think as you've seen over the last, really, 1.5 years, 2 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. And so I think you'll see that on both sides of the portfolio really.

Next question comes from the line of Pablo Zuanic with Zuanic & Associates.

Also questions regarding the diversification. So just -- first of all, in terms of timing, when you start -- when you can start redeploying the cash, are we talking about timing like 1st of January or April 1st, if you can just clarify that. I don't know how much visibility you have on that. And then in terms of the numbers that you provided, just to clarify, so the maximum you would deploy $60 million in '26 in non-cannabis loans? If you can just clarify that.

So thanks, Pablo. So I don't think that we've given a guidance to answer your second question, first, I don't think we've 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 the active cannabis pipeline is $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 operating as a REIT, right, currently. So feels we 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. And then just in terms of skill set, I understand it's on the credit side, and obviously, you have 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. And I guess related to that, although it's a totally separate question. When we are talking about stable industry recession-resistant business model, I guess those are not growth industries, and I wonder how much capital they need. But if you can just clarify those two things. I realize there's two separate questions there.

So I think 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 -- we're also underwriting the underlying operating businesses in cannabis. So I think we have that underwriting expertise from a deal flow perspective, right? We built this from scratch and 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. So I think that's your first question. Then in terms of industries, I think, as Dan said earlier, and he can expand on this, we're casting a wide net, right? And there's not a deal that I'm going to talk about at this moment, but we're casting a wide network looking at industries. We're looking at how various macro factors would impact those industries and 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. I don't know if there's anything you want to add to that, Dan?

Yes, I'd just say, look, the cannabis industry didn't really exist on the legal side of things until 5 years ago, right? So you look at the team that exists. 3 of the 4 members of the investment committee scaled Fifth Street Asset Management to a $5 billion asset manager and $10 billion of transactions on the direct lending side of things outside of BDCs. I, myself, had career as a generalist on the buy side for 10 years prior to stepping into the cannabis industry and invested across capital stack. And 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. And so 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. And certainly, getting security and 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 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 just -- 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. And so we're looking for stable businesses that provide good credit quality, that protect our capital and provide attractive risk-adjusted returns. And 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 cover, which has been our historical focus.

That's good. Look -- and 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 adviser for moving to a REIT to a BDC or not such a big deal?

I think that, 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. 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.

And look, totally understood, you're very cautious answering cannabis, but at the federal level, let's say that these changes within derivatives happen, right? Some people have sized that market at $20 billion, not -- let's say that number is true, right? And where that flows to the cannabis industry at the federal level. And then you have potentially Virginia, Pennsylvania on the rec side and Texas on the rec side. I realize we don't 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 picture here then, Robyn?

I'll let Dan take this one.

Yes. Look, we've -- it seems like we've been hearing reform is a few weeks away for the last 3 or 4 years. And so I think on our side of things, we've seen the reality of that. And the reality is that there's been no equity capital raised or very little equity capital raised into the cannabis space over the last 2 to 3 years, very capital-intensive industry. And for the last 2 or 3 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'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. And I think that we're still in the cannabis business, right? We -- 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 book. And so we're still active. We're 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, absent some progress on the federal side of things and seeing equity capital flow back into the space.

And one last one. And 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. So 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.

I don't think we've given that guidance. So I think we gave a fact, which is what the Board has decided in the fourth quarter.

And I would now like to hand the conference back over to Dan Neville 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.