Good day, and thank you for standing by. Welcome to the Advanced Flower Capital Second Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one 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. Please go ahead.
Good morning, and thank you all for joining Advanced Flower Capital's earnings call for the quarter ended June 30th, 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 June 24th, 2025 press release and is posted on the investor relations portion of AFC's website at advancedflowercapital.com, along with our second quarter 2025 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, a proposed corporate conversion, 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 second quarter earnings release uploaded to our website for reconciliations of the non-GAAP financial measures with the most directly comparable GAAP measures. Today's call will begin with Dan providing an overview of our portfolio pipeline and the cannabis industry. Robyn will then provide information about the proposed conversion to a business development company that we announced earlier this morning. 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 CEO, Dan Neville.
Thanks, Gabe, and good morning, everyone. I'll begin with an overview of our results followed by an update on our portfolio. For the second quarter of 2025, AFC generated distributable earnings of $0.15 per basic weighted average share of common stock. Additionally, the Board of Directors declared a second quarter dividend of $0.15 per common share outstanding, which was paid on July 15th, 2025, to shareholders of record as of June 30th, 2025. Over the last year, we have made significant progress reducing our exposure to underperforming credits. There is still work to be done, and our earnings may be impacted by the underperformance of some of our legacy loans and any realized losses we take on assets. During the quarter, we exited Public Company A's equipment loan, which impacted earnings.
As a reminder, we were a participant in an equipment loan to a Nevada cultivator, which has been in liquidation for about three years. In Q2, we received the last payment from the collateral agent as part of the liquidation, and we wrote off the remaining carrying value of the loan. This impacted distributable earnings, but did not impact book value as the loan was already fully reserved. Turning to our current portfolio management efforts, I would like to touch on a few of our underperforming loans. Regarding Private Company A, the receiver has executed LOIs for two of the three main assets and will be submitting for court approval in the near term. He is also in discussions for the timely sale of the third asset and has multiple parties interested and has been efficient in the management and liquidation of these assets.
Subsequent to quarter end, Private Company P's loan was moved to non-accrual status as of June 1st, 2025, as the company did not pay interest due July 1st. As a result, Advanced Flower Capital provided a default and acceleration notice. We will look to exercise all rights and remedies to recover our principal. There is approximately $16 million of principal outstanding, and the loan is secured by one cultivation facility and one non-operational dispensary in Michigan, both of which are owned real estate. Lastly, we wanted to take a minute to touch on subsidiary of Private Company G, which is Justice Grown. We are currently engaged in three separate legal proceedings with Justice Grown entities related to enforcing certain rights under the credit facility in connection with the alleged defaults.
We have appealed a pre-discovery preliminary injunction in one of the actions, barring us from exercising rights with respect to certain alleged defaults. We also have outstanding litigation surrounding the shareholder guarantee in New York. As a reminder, our loan to Justice Grown matures in May 2026 and is secured by the vertical assets in New Jersey, including an owned cultivation facility and three dispensaries, two of which are owned. In Pennsylvania, we are secured by three dispensaries and an owned cultivation facility, which is currently not operational. We remain extremely focused on realizing maximum value from these underperforming loans. On a positive note, there's recently been talk of rescheduling being considered by the Trump administration. We believe that rescheduling cannabis would increase the supply of capital for cannabis companies and lead to potentially better recoveries for our troubled loans.
At the moment, however, the sector remains in a challenging environment for many operators as there continues to be limited capital entering the market. In light of this environment, as disciplined capital allocators, we have only sought to invest in established operators. However, many of these operators do not have real estate coverage, which limits our pipeline and our ability to invest in size. It has become clear to the Board and leadership team that expanding our investment focus beyond real estate-backed companies is an important step to deliver value to our shareholders. As such, today we propose to convert the company from a REIT to a BDC, which Robyn will speak to now.
Thanks, Dan, and good morning, everyone. This morning, we announced our intention to convert from a REIT, the current structure under which we operate, to a business development company, or BDC. This conversion, which is subject to shareholder approval on certain related matters, 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. We believe the conversion, if approved, would be an important turning point for AFC. Given the capital-intensive nature of the cannabis industry, combined with the high cost of capital, many operators do not own real estate, which significantly limits the universe of cannabis operators AFC can lend to as a mortgage REIT.
As a BDC, the investment universe for AFC would expand, allowing the company to lend to operators without real estate coverage, as well as to ancillary cannabis businesses with high growth potential. Moreover, should rescheduling occur at the federal level, we believe much of the inflow of new capital will go towards established operators. As most of these companies do not own real estate, the BDC conversion should better position AFC to capitalize on this sector tailwind. We also announced that our board has approved an expanded investment mandate effective immediately that includes direct lending opportunities outside the cannabis industry. We believe that there are interesting credit opportunities in other private and public middle-market companies that can generate attractive risk-adjusted returns. By broadening the opportunity set, AFC will be better positioned to diversify its exposure across industries and credit risk profiles.
The AFC investment team has over 30 years of experience in direct lending outside of cannabis, with over $10 billion of direct lending transactions executed, as well as 20 years of experience managing and scaling BDCs. In short, we believe this is a positive step for the company and for our shareholders going forward. The proposed conversion is subject to, among other things, approval by AFC shareholders of a new investment advisory agreement with AFCM. That complies with the requirements of the Investment Company Act of 1940. Additional information will be available when we file our proxy with the SEC. If approved by AFC shareholders and subject to additional required approvals by our board, we anticipate that our conversion would occur in the first quarter of 2026. Now, I'll turn it over to Brandon to discuss our financial results in more detail.
Thank you, Robyn. For the quarter ended June 30th, 2025, we generated net interest income of $6.2 million and distributable earnings of $3.4 million, or $0.15 per basic weighted average common share, and had a GAAP net loss of $13.2 million, or a loss of $0.60 per basic weighted average common share. We believe providing distributable earnings is helpful to shareholders in assessing the overall performance of AFC's business. Distributable earnings represent the net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, any unrealized gains or losses, provision for current expected credit losses, also known as CECL, taxable REIT subsidiary income or loss net of dividends, and other non-cash items recorded in net income or loss for the period. We ended the second quarter of 2025 with $359.6 million of principal outstanding spread across 15 loans.
As of August 1st, 2025, our portfolio consisted of $357.9 million of principal outstanding across 15 loans. The weighted average portfolio yield to maturity, which is measured for each loan over the life of such loans, was approximately 17% as of August 1st, 2025. As of June 30th, 2025, the CECL reserve was $44 million, or approximately 14.6% of our loans at carrying value, and we had a total unrealized loss included on the balance sheet of $21.5 million for our loans held at fair value. As of June 30th, 2025, we had total assets of $298.6 million, total shareholder equity of $184.7 million, and our book value per share was $8.18.
During the second quarter of 2025, AFC expanded a senior secured revolving credit facility from $30 million- $50 million, with an additional $20 million commitment from the facility's lead arranger and FDIC-insured bank with over $75 billion of assets. Lastly, on July 15, 2025, we paid a second quarter dividend of $0.15 per common share outstanding to shareholders of record as of June 30th, 2025. With that, I will now turn it back over to the operator to start the Q&A.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Aaron Grey with Alliance Global Partners. Your line is open.
Hi, thank you very much for the questions. First question for me, just overall in terms of the decision to convert over to a BDC versus mortgage REIT, can you talk about why you felt like this was the right vehicle and doing it as a conversion versus maybe setting up a different structure? We'd just like to know more in terms of what happened into the thought process of going about it this way. Thank you.
Hi, Aaron. It's Robyn. Thanks for the question. I'd say that, as we've seen the landscape of cannabis evolve over time, more and more operators that I'd say are growing and thriving don't own their real estate. As a REIT, we're limited in the investments that we can make in those operators. As we've continued evaluating options to ensure that we're best positioned for market growth, we believe that now is the right time where converting to a BDC is the best path to realizing long-term value and being able to invest in more of these opportunities that we're seeing. That's why we went at it this way.
Okay. Appreciate that. Turning to the pipeline, right? I saw it was reduced versus prior quarter. In converting to a BDC, any line of sight in terms of how much that would broaden the pipeline versus where it is today? Is a lot of the limitation of the pipeline due to the fact they don't have the real estate coverage, or is it some of the broader macro dynamics that you're talking about within the cannabis industry?
I'll let Dan take that question. Just as a reminder, as we are still operating as a REIT, the investments that we're going to do currently will be REIT compliant. I'll let Dan touch on the current pipeline and potential growth once we expand the aperture.
Yeah, sure. Aaron, with a proposed BDC conversion, we have the opportunity to invest in cannabis companies and, speaking to the cannabis pipeline, that don't have real estate coverage today. Given the high cost of capital in the industry and the high cost of keeping real estate on your balance sheet, many, many companies in the universe do not have sufficient real estate coverage to be REIT qualifying assets. As a rough figure, I'd say we see every opportunity that comes across in the cannabis space. About two-thirds of the opportunities that come across our desk are not real estate covered. That gives you kind of a metric to evaluate the expansion and the opportunity set associated with the conversion with respect to cannabis opportunities. I think you've seen over the last few quarters our pipeline continue to move down.
That is a combination of, one, just not seeing as many good real estate covered opportunities, and two, given the ongoing uncertainty and volatility in the industry, the last couple of weeks aside, with each quarter that goes on without any equity capital coming into this space, I think our underwriting standards and how we evaluate credits and the risk-adjusted opportunities that we're looking to pursue, those kind of benchmarks and metrics get tighter and tighter, which has resulted in the apples-to-apples pipeline moving down over the course of the last few quarters.
I appreciate that. That's helpful color. Last one for me, kind of touching on what you said a little bit in that commentary. If rescheduling were to occur as some of these articles have been coming out lately, is it more so just helping out your existing portfolio operators? Obviously, it improves cash flow in terms of the 280(e) tax, but do you feel like that's really a big step change in terms of incremental opportunities for you? I know you said you're mainly looking at any existing operators today. Do you feel like that opens up a whole new set of operators coming in, or do you feel like that's more so a factor of states legalizing and licenses being distributed? I just want to get some context of how you view rescheduling in terms of opportunities versus the existing portfolio or really opening up more opportunities for you.
Thank you.
Sure. I think, thanks, Robyn. If rescheduling were to occur and you get certainty on the tax positions of these companies, both with historical tax liabilities as well as taxation on a go-forward basis, that's significant for the industry. That should allow more capital to be attracted to and flow into the space. As more capital comes in, that should be supportive of asset valuations in this space as well and potentially attract new either investment players or new potential platforms coming into this space. I think looking at AFC as we stand today, we trade at a significant discount to book value, which is at least in part a function of the number of troubled legacy loans that we have on the books today.
If rescheduling were to occur and new capital were to come in and asset values were to appreciate, that would help us to achieve better realizations as we work out some of the troubled loans within the portfolio, which, given the size of that, is significant to AFC. Secondarily, capital coming in hopefully allows equity capital to come into the space. For anyone who's tracking it, basically all of the capital coming in over the last couple of years has been debt capital. That's not a healthy way to finance businesses. That's not a healthy way to grow the industry. This is a capital-intensive industry, and you need both equity capital and debt capital coming in.
If that were to occur, and again, there's been some fits and starts, that would be positive for the industry and I think positive for the lending environment and deploying more capital into the industry.
Okay, great. That's really helpful color. I'll go and jump back into the queue.
Thank you. Our next question comes from Pablo Zuanic from Zuanic & Associates. Your line is open.
Good morning, everyone. This is Rahul on for Pablo. We just have a few questions. For our first one, on the problem loans with Private Company K, can you give an update on where the receivers are regarding asset sales? Related to this, if both Private Company A & K loan are with receivers, why is only the loan with Private Company A booked at fair value while the loan with Private Company K is booked at carrying value?
Sure. I'll take the first part and then Brandon will jump in on the second. We gave a brief update in the script on progress on Public Company K. Two assets are under LOI. These assets are in receivership today, so any sale has to be approved by the court that is overseeing the receivership. We expect those APAs for the two assets to be submitted in the near term. The third asset is being actively marketed. In Massachusetts, which has been a difficult state for a while, there is a bit more activity recently because the legislature has proposed increasing the cap from three stores today, which is very low and difficult to build a scaled business, to six stores and an additional four partnership stores. Talking to contacts in that market, there's optimism around that happening sometime in the balance of the year.
I think that is driving some of the activity around companies looking to get ahead of that and potentially increase their holdings within the state from three to six or ten, depending on the model.
This is Brandon. The loans being held at fair value or carrying value is just a function of GAAP and the elections we've made in the past. When we first started the company back in 2020, we kept all loans on our books at fair value. Once you elect fair value, you have to keep it on your books at fair value. Once we IPOed, we transitioned to putting new loans on the books at carrying value. Private Company A is the only legacy loan from when we originally elected fair value status. That's why that one's listed at fair value versus carrying value. It is unrelated to anything for the receivership.
Got it. Thank you. Regarding debt leverage, please remind us how high you're willing to go in terms of the debt ratio and at what point would you need new equity to fund future loan growth?
It's Robyn. I'd say we target between 1x and 1.5x l everage. I think that we'll operate within that, and given where our stock is currently trading, I don't see us issuing equity.
Sure, if you could quantify for us the maturities for the second half, please.
Sure. We have one maturity in the second half that is coming up next month. That is a loan that we, just given where the cannabis industry is and where our stock is trading, I think we are focused on getting capital back both from the underperforming credits we have within the portfolio and as maturities are realized across the performing portfolio. We expect that loan to be refinanced in the coming weeks, and just for clarity, we will not be participating in the refinancing.
Got it. Thank you. Finally, beyond cannabis, can you give us a brief overview on market sentiment about the mortgage REIT sector in general? How are macro themes, interest rates, alternative lending solutions, including crypto, impacting the mortgage REIT sector in general and stock sentiment in the group?
Sure. It's Robyn. I think if you look across the mortgage REIT landscape, mortgage REITs have traded better since last year. I think people are overall starting to realize some of their underperforming loans and take losses as they relate. I think overall, the mortgage REITs that we track are trading at about $0.80 on the dollar. I think that interest rates, people have believed interest rates were going down earlier, which is why you saw a bump early in the year. I think that lowering of interest rates will help mortgage REITs trade better. I also think that it may unlock opportunities for mortgage REITs to make new investments and complete some refinancing. In terms of alternative investments in crypto, you know, I'm going to pass on commenting on things that I'm not that smart on, and there's a lot of people smarter than me on that.
Got it. Thank you. That's all for us.
Thank you. As a reminder, to ask a question, please press star one one on your telephone. Again, that is star one one to ask a question. Our next question comes from Chris Muller with Citizens Capital Markets. Your line is open.
Hey, guys. Thanks for taking the questions. I guess given some of the recent comments from the administration on rescheduling, have you guys seen an uptick in interest from borrowers? Are they more waiting for something concrete to actually get done? Similarly, are you guys looking at non-real estate loans already, and have you seen any impact there from the recent rescheduling comments?
Dan, do you want to take that one?
Sure, Chris. Thanks for the question. I think it's still pretty new and people were digesting. The language in the press reports was that it's under consideration, and I think it's under active consideration, but there wasn't much of a tipping of the hand in terms of which way this decision is going to fall. I think a lot of folks are really in a holding pattern at this point to see what the result is. There's been a lot of fits and starts related to the rescheduling conversation. It's the middle of August, so it's not typically a time of year where there's a ton of activity. There hasn't been much movement on that side of things.
Got it. I guess following up on a prior line of questions, if CECL reserves were up a good bit this quarter, first, is that due to the existing portfolio fundamentals, or is there some macro aspects into that? Part two of that question, if we do get Schedule III and 280(e) goes away, how much of an impact would that be to the credit quality of your existing borrowers, and would we see those CECL reserves start coming down?
Sure. This is Brandon. I'll take the first part of that with regard to CECL. Macro does have some effect on CECL overall, just in general, but we do evaluate our loans on a loan-by-loan basis, and the inputs for the various loans themselves are the main driver of the increase in our CECL res
Could you repeat the second part of the question?
Yeah. If Schedule III happens and 280(e) goes away and cash flows start improving for some of your borrowers, I guess would the impact of that be CECL reserves going down as those valuations kind of come up for the borrowers?
Yeah, I think, look, CECL is a function of the cash flow performance of the assets, the value of said assets, and we use a third-party valuation firm to look at all of those metrics in coming to the determination of the reserves. To the extent that cash flow improves and asset valuations within the space improve, that could potentially lead to upward pressure on those valuations.
Got it. If I could just squeeze one last one in here. On the BDC conversion, would that open up new opportunities to add some credit facilities? Longer term, I guess what does that portfolio composition look like in a year or two of real estate versus non-real estate type assets? Is it too early to tell on that?
Thanks for the question. I think in terms of credit lines, what's interesting is the credit line that we currently have is similar to how BDCs finance. BDCs, a little more than mortgage REITs, sometimes have better pricing in terms of baby bonds or unsecured. That may be a bump. I think that from a credit line standpoint, we're limited by the banks that will participate in cannabis at this time. It's hard to tell if the structure would drive more banks in versus the REIT structure. In terms of our portfolio, it's hard to tell the composition. I only say that because we have non-real estate covered assets in our TRS as we're allowed to have under the REIT guidelines. Until we convert, we're operating as a REIT. We're going to make sure that transactions have that required real estate coverage and we maintain our REIT status.
Until such time where we've gotten a little further along and have converted, it's hard to predict what that composition will look like.
Got it. Very helpful. Thanks for taking the questions.
Thanks, Chris.
Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Daniel Neville, Chief Executive Officer, for closing remarks.
Thank you all for joining the call today. We anticipate filing a proxy statement to our shareholders in the coming days related to the proposed conversion to a BDC, and we look forward to keeping our shareholders updated as we progress on that front.
This concludes today's conference call. Thank you for participating. You may now disconnect.