Advanced Flower Capital (NASDAQ:AFCG) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.
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Summary
Advanced Flower Capital reported net investment income of $0.15 per share and declared a $0.05 per share distribution for Q2 2026.
Total assets stood at $399.7 million, with total net assets of $187.3 million, and a net asset value per share increase to $8.25.
The company repurchased approximately $2.8 million worth of shares, contributing to a $0.17 accretion to net asset value.
A robust pipeline of $1.3 billion is noted, with focus on lower middle market opportunities offering compelling risk-adjusted returns.
The company remains cautious about new cannabis industry investments due to limited access to equity capital.
Debt to equity ratio was reported at 1.1 times, with $106.5 million in cash providing liquidity for future investments.
Non-accrual loans are being actively managed, with progress in asset sales and liquidation processes in the legacy cannabis book.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the Advanced Flower Capital 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 press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Gabriel Katz, Chief Legal Officer. Sir, please go ahead.
Gabriel Katz, Chief Legal Officer
Good morning and thank you all for joining Advanced Flower Capital's earnings call for the quarter ended June 30, 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 is included in our 7-17-2026 press release and is posted on the investor relations portion of Advanced Flower Capital'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 Advanced Flower Capital's most recent periodic filings with the SEC, including our Quarterly Report on Form 10-Q filed earlier this morning, for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections.
Today's call will begin with Robin providing an overview of the lending environment and our results. Dan will then provide an update on our portfolio and pipeline. Finally, Brandon will conclude with a summary of our financial results before we open the line for Q&A. With that, I will now turn the call over to our President and Chief Investment Officer, Robin Tannenbaum.
Robin Tannenbaum, President and Chief Investment Officer
Thanks, Gabe, and good morning everyone. We appreciate you joining us to discuss Advanced Flower Capital's second quarter 2026 earnings. Before turning to our results, I want to provide some context on the broader lending environment. As many of you know, the private credit ecosystem is experiencing stress. Default rates across private credit have risen, notably with Fitch reporting a 6% default rate as of July 2026 and Proskauer's private credit default index tracking a similar upward trend.
Banks, while not direct lenders to much of the middle market, hold indirect exposure through leverage facilities extended to private credit funds, and that exposure is now drawing increased scrutiny. In response to broader market stress, we are seeing a pullback in available capital, particularly in the lower middle market where many lenders have either exited or shifted up market to support their existing portfolios. As a result, we continue to believe the lower middle market offers one of the most compelling risk-adjusted return investment opportunities in private credit today.
Competition remains rational in our segment. Unlike the upper middle market where larger direct lending funds continue to compete aggressively on pricing, leverage, and documentation, the lower middle market continues to reward lenders with sponsor relationships, internal sourcing capabilities, and the ability to execute quickly. For Advanced Flower Capital, this environment is exciting and what we are prepared for. We believe this dislocation is creating a compelling vintage for new originations.
The loans we originate are generally supported by both enterprise value and asset coverage. We continue to negotiate comprehensive maintenance covenant packages including leverage and fixed charge coverage tests. Our pipeline continues to reflect that opportunity and we are being thoughtful in how we deploy capital. In contrast, much of the upper middle market remains characterized by covenant-lite structures with fewer lender protections and more aggressive EBITDA adjustments.
Now turning to our results for the second quarter of 2026, Advanced Flower Capital generated net investment income of $0.15 per weighted average share of common stock. Additionally, the Board of Directors declared a second quarter distribution of $0.05 per share which was paid on July 15, 2026 to shareholders of record on June 30, 2026. Last quarter we announced a share repurchase program. During the quarter we repurchased about $2.8 million which was $0.17 accretive to net asset value.
We have approximately $2.2 million remaining in our $5 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.
Daniel Neville, Chief Executive Officer
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 30, 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 31. One hundred percent 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 $8 million against $9 million 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 Debbie loan.
Regarding DMA, the receiver has continued the liquidation process and closed the sale of two of the three dispensaries subsequent to quarter end. Moving on to Justice Grown, the Justice Grown loan matured on May 1, 2026 and is in maturity default. We have commenced Article 9 foreclosures and are pursuing our rights and remedies under both the credit agreement, including the parent guarantee, and the shareholder guarantee. Our collateral includes vertically integrated assets in New Jersey and three operating dispensaries in Pennsylvania and a non-operating cultivation facility in Pennsylvania.
Advanced Flower Capital has engaged SSC 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 SSC 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.
Brandon Hetzel, Chief Financial Officer
Thank you, Dan. For the quarter ended June 30, 2026, we generated total investment income of $8.7 million and net investment income of $3.5 million, or $0.15 per weighted average share of common stock. This provided three times coverage of our $0.05 second quarter 2026 distribution. Total investment income was $8.7 million compared with $9.8 million in the first quarter. The decline primarily reflects $1.8 million of other income recognized in the first quarter that did not recur in the second quarter, mainly relating to a $1.5 million exit fee from the Bloom repayment.
Excluding these exit fees that are episodic, investment income increased modestly quarter over quarter driven by higher interest income. Total operating and income tax expenses were $5.2 million compared to $5.0 million in the first quarter and are presented net of a management fee rebate of approximately $176,000. 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, $0.17 per share of accretion from repurchasing shares below net asset value, and an increase in unrealized appreciation on investments of approximately $0.08 per share, and offset by the second quarter distribution of $0.05 per share. Regarding the share repurchase program, during the quarter we repurchased and extinguished approximately 839,000 shares at a weighted average price of $3.29 per share for approximately $2.8 million.
In the aggregate, approximately $2.2 million remains available under the $5 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 revolving credit facility, $20 million drawn 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. Debt to equity was 1.1 times as of June 30, compared to 1.09 times at March 31. 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.
OPERATOR
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment as we compile our Q&A roster. Our first question is going to come from the line of Erin Gray with Alliance Global Partners. Your line is open. Please go ahead.
Erin Gray, Analyst at Alliance Global Partners
Hi. Thank you very much for the questions here. I guess 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 your ability to execute on opportunities in the near term? It does seem like there's been a little bit maybe of slowdown considering the fast start you got off to in January, February.
So just curious in terms of if that's partially the environment, maybe a bit longer of a process, some timing—any color there would be appreciated. Thank you.
Gabriel Katz, Chief Legal Officer
Dan, do you want to take that one?
Daniel Neville, Chief Executive Officer
Yeah, 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'll be lumpy and episodic just given the deals that we're hunting.
Erin Gray, Analyst at Alliance Global Partners
I appreciate that. That's helpful. And then just in that line, given the potential lumpiness of this and you could have some potential large opportunities, how comfortable do you feel regarding your liquidity position today to ensure that you're able to capitalize on potential larger opportunities that could come in the pipeline? Thanks.
Gabriel Katz, Chief Legal Officer
Dan, do you want to do that one, or Brandon?
Brandon Hetzel, Chief Financial Officer
Yeah, sure. As stated in my remarks, at the end of the quarter and in our investor presentation, we have over $70 million in liquidity available to deploy. So we're very comfortable with our liquidity position.
Daniel Neville, Chief Executive Officer
Yeah, and I'd say in terms of some of the larger opportunities too, as well, outside of Advanced Flower Capital, 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.
Erin Gray, Analyst at Alliance Global Partners
Okay, great, thanks. Last question from me. I know you said in prepared remarks, right, nothing further from some of the SEC filings regarding Justice, but just maybe to clarify things, now that you have the process in place that you talked about in prepared remarks, there's nothing outstanding, or maybe that the legacy operators are doing, that could keep you from going through with a sale process and for you to be able to retrieve as much as possible from those assets—just any clarification on that would be helpful.
Robin Tannenbaum, President and Chief Investment Officer
Gabe or Dan.
Gabriel Katz, Chief Legal Officer
Yeah, Erin, 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 stages of litigation there.
Erin Gray, Analyst at Alliance Global Partners
Fair enough. Thank you very much. I'll jump back in the queue.
OPERATOR
Thank you, and one moment for our next question. Our next question comes from the line of Pablo Zuanyik with Zuinek and Associates. Your line is open. Please go ahead.
Pablo Zuanyik, Analyst at Zuinek and Associates
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. So do you want to expand on that, please? Thanks.
Daniel Neville, Chief Executive Officer
Right. 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 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 uplist to NYSE, and unfortunately you haven't seen a lot of activity on the equity capital side of things associated with it. And 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-up ability 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-up ability 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.
Pablo Zuanyik, Analyst at Zuinek and Associates
Thank you. That's good color. 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?
Daniel Neville, Chief Executive Officer
Yeah, so you heard correct. So it was a binding term sheet that was signed up subject to a $2 million cash hard deposit. So our expectation is that that closes sometime this year, and that would be for $12.5 million of total cash proceeds. We are a participant in—we're the lead participants in—the Debbie loan, but I believe we have 78% or somewhere around 80% as our participation in Debbie. So 80% of the proceeds would be distributed to us on a pro rata basis.
Pablo Zuanyik, Analyst at Zuinek and Associates
Thank you. That's good color. And the same question, 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—and I don't know if you can say a number.
Daniel Neville, Chief Executive Officer
No, luckily the transaction closed—the dispensaries did not close. So we had two of the three dispensaries under APA previously. 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 and 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.
Pablo Zuanyik, Analyst at Zuinek and Associates
Right. And again, apologies if there's more people on the Q&A line here. You, 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 misheard—and more color on the company itself, if you can? Thank you.
Daniel Neville, Chief Executive Officer
In the second quarter.
Pablo Zuanyik, Analyst at Zuinek and Associates
Pablo, you were asking the loan—unless I misheard, I thought that you said subsequent to the quarter you also funded a new loan, or maybe I misheard that.
Daniel Neville, Chief Executive Officer
Sure, yep. Yeah, that's correct. So 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 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 as 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.
Brandon Hetzel, Chief Financial Officer
And Pablo, the size of that deal was we committed $7 million and funded $3.1 million on closing.
Pablo Zuanyik, Analyst at Zuinek and Associates
Thank you. That's good color there. And then, look, I haven't gone through the 10-Q in full—only partially—I think a while ago you said that Sunburn was in non-accruals. Just a reminder where you are with the Sunburn loan, which I think was renamed under another borrower's name, but just some color there.
Daniel Neville, Chief Executive Officer
Oh sure. So we had some disclosure last quarter. 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 paydown associated 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.
Pablo Zuanyik, Analyst at Zuinek and Associates
Thank you. And the very last one: 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?
Daniel Neville, Chief Executive Officer
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.
Pablo Zuanyik, Analyst at Zuinek and Associates
That's good. Thank you. That's all for me.
OPERATOR
Thank you, and I'm showing no further questions. I'd like to hand the conference back over to Dan Neville for closing remarks.
Daniel Neville, Chief Executive Officer
Thanks, everyone, for joining us today, and we look forward to keeping you updated on future progress.
OPERATOR
This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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