Good day, and thank you for standing by. Welcome to the AFC Q3 2026 Earnings 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 the session, you will need to 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 first speaker today, Gabriel Katz, Chief Legal Officer. Please go ahead.
Good morning, and thank you all for joining AFC's earnings call for the quarter ending September 30, 2026. I am joined this morning by Robyn Tannenbaum, our President and Chief Investment Officer, Dan 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 20, 2026, press release and is posted on the investor relations portion of AFC's website at afcbdc.com, along with our third 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, signed term sheet transactions, 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 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 lines for Q & A. With that, I will turn the call over to Robyn Tannenbaum, our President and Chief Investment Officer.
Thanks, Gabriel, and good morning, everyone. We appreciate you joining us to discuss AFC's third quarter 2026 earnings. Before turning to our results, I want to provide some insight into the current lending environment. Credit stress remains evident across parts of the private credit market. Fitch's U.S. private credit default rate reached a record 6.3% for the trailing 12 months ended August 2026. The Federal Reserve raised rates by 25 basis points in September and held the target range steady at 3.75%-4% on October 28, keeping debt service costs elevated for many floating rate borrowers. At the same time, we see a growing capital imbalance in the lower middle market where AFC is focused. As private credit managers raise larger funds, they increasingly focus on larger transactions. The average direct lending deal was roughly $220 million in the second quarter, according to PitchBook LCD.
Meanwhile, smaller businesses continue to need capital for acquisitions, growth, and refinancing. In our view, the combination of large fund concentration and lenders moving upmarket is creating attractive opportunities to negotiate pricing and lender protections in the lower middle market. We believe the competitive dynamics also differ by market segment. Larger borrowers can often compare private credit financing with broadly syndicated loans, increasing pressure on pricing and structure. By contrast, many transactions we target involve a small group of lenders and are negotiated directly with borrowers and sponsors. We believe that favors lenders with established relationships, differentiated sourcing, and the ability to provide certainty of execution. This is the market environment AFC has been positioning itself to address. We see an opportunity to originate new loans in the lower middle market with disciplined underwriting, appropriate collateral or enterprise value support, and meaningful structural protections.
Where appropriate, we seek financial maintenance covenants, amortization, call protection, and prepayment fees. We remain selective on credit quality and structure rather than pursuing volume for its own sake. Now, turning to our results. For the third quarter of 2026, AFC generated net investment income of $0.16 per weighted average share of common stock. Net asset value per share increased for the third consecutive quarter to $8.55, up $1.09, or approximately 15%, since the beginning of the year. Additionally, the board of directors declared a third quarter distribution of $0.05 per share, which was paid on October 15th, 2026, to shareholders of record on September 30th, 2026. We continue to execute on our share repurchase program.
During the quarter, we repurchased approximately $1 million of common stock at a weighted average price of $3.46, approximately a 58% discount to net asset value. This contributed approximately $0.06 per share to NAV. Since the program began in May, we have repurchased approximately $3.8 million of common stock, contributing approximately $0.24 per share to NAV year to date. Approximately $1.2 million remains available under the $5 million authorization. On the liability side, subsequent to quarter end, we opportunistically purchased $19 million of our senior notes ahead of their May 2027 maturity. The transaction generated a gain, which will be reflected in the fourth quarter of 2026. This also reduces our upcoming debt obligations. This reflects our focus on active balance sheet management.
Year to date, we have committed approximately $102 million to new lower middle market investments, and our affiliate, TCG, or Tannenbaum Capital Group, has signed two financing term sheets, which we expect AFC to commit to a portion of in each deal. We continue to favor opportunities where we can underwrite sustainable cash flow and enterprise value while negotiating strong lender protections. I will now turn it over to Dan Neville, our Chief Executive Officer, to discuss our portfolio.
Thanks, Robyn, and good morning, everyone. I will start with the portfolio and our investment activity for the quarter, then provide an update on our legacy positions and our pipeline. As of September 30, 2026, the fair value of our investment portfolio was approximately $290 million across 18 investments. All of our investments were senior secured first lien debt, and the weighted average yield on income-producing investments was 13.3%. Our non-cannabis lower middle market investments, which we began originating this year, totaled approximately $93 million, or 32% of our investment portfolio at fair value. We currently have five investments in this category that are performing in line with our underwriting expectations. During the quarter, we closed our previously discussed $7 million commitment to an outpatient behavioral health platform, with approximately $3 million funded at close.
Subsequent to quarter end, we sold our position in Trulieve senior notes at 104.25% of par, resulting in a realized gain of approximately $2.2 million. Overall, we funded $4.6 million during the quarter, including $1.5 million to our existing portfolio companies, and received $8 million in principal repayment and amortization. Turning to our non-accrual loans. Regarding Devi, the court-appointed receiver has continued its asset disposition process. As previously disclosed, in July, the receiver entered into a binding term sheet for the proposed sale of collateral in Massachusetts and New Mexico for an aggregate consideration of $12.5 million, including a $2 million non-refundable deposit. Subsequent to quarter end, we received approximately $1.7 million of repayments, representing a portion of the expected sale proceeds. We will provide updates as additional recoveries are realized. Inception to date, repayments have totaled approximately $60 million on Devi.
The Justice Grown loan matured on May 1, 2026, and remains in maturity default. We are pursuing our rights and remedies under the credit agreement and the related guarantees. In August, our agent commenced a separate action seeking summary judgment against a parent under its payment guarantee. The Article 9 public dispositions for certain collateral are currently scheduled for November 12 and November 19, 2026. The collateral includes assets in New Jersey and Pennsylvania, and SSG Advisors is assisting with marketing to potential buyers. Interested parties can consult the current sale notices on our website and contact SSG Advisors for additional information. Given the active legal processes, we will not be commenting further on specifics outside of what is disclosed in our SEC filings.
Stepping back, our priorities remain to maximize recoveries on the legacy non-accrual positions, actively manage our performing cannabis exposures, and selectively redeploy capital into other industries in the lower middle market as repayments and recoveries are realized. Our prospective pipeline remains active at approximately $1.1 billion across multiple industries. Our affiliated TCG platform has signed term sheets as agent and lender on two transactions, and we expect AFC to commit a portion of each deal. One deal that is expected to close in the near term is a $43 million senior secured facility to a sponsor-backed healthcare services platform, which AFC will commit to. While we remain focused on cash flowing borrowers with approximately $5 million-$50 million of EBITDA, we are opportunistically including an asset-backed lending opportunities where we believe we can obtain attractive risk-adjusted returns with appropriate downside protections.
We remain disciplined as we advance opportunities through underwriting and negotiations. I will turn it over to Brandon Hetzel, our Chief Financial Officer, to discuss our financial results in more detail.
Thank you, Dan. For the quarter ended September 30th, 2026, we generated total investment income of $8.6 million and net investment income of $3.5 million, or $0.16 per weighted average share of common stock. Total expenses were $5 million compared to $5.2 million in the second quarter, and net expenses were $4.8 million compared to $5 million in the second quarter, which are presented net of a management fee rebate of approximately $176,000 for both the second and third quarters. We ended the third quarter with $361.1 million of principal outstanding spread across 18 investments. As of September 30th, 2026, we had total assets of $395.1 million and total net assets of $191.6 million. NAV per share increased by $0.30 from June 30th to $8.55.
The increase reflects approximately $0.16 per share of net investment income, approximately $0.13 per share of net unrealized appreciation on investments, and approximately $0.06 per share of accretion from repurchases below NAV, offset by the $0.05 quarterly distribution. Regarding the share repurchase program, turning to the quarter, we repurchased and extinguished approximately 286,000 shares at a weighted average price of $3.46 per share for approximately $1 million in the aggregate. Approximately $1.2 million remains available under the $5 million share repurchase program. At September 30th, 2026, we had approximately $197 million of principal debt outstanding, $115 million under our secured revolving credit facility, $5 million under our affiliated credit facility, and $77 million of senior unsecured notes. on October 1st, 2026, we repaid $96.5 million under the secured revolving credit facility and $5 million under the affiliated credit facility.
The weighted average interest rate on our debt outstanding was 6.2% for the quarter. Subsequent to the quarter end, we repurchased $19 million in principal amount of our 2027 senior unsecured notes at 96.5% of par, plus accrued interest, resulting in an approximately $600,000 gain on extinguishment of debt. Approximately $58 million of the notes remain outstanding following this transaction, with a May 2027 maturity. Our gross debt-to-equity ratio at September 30th was approximately 1.03x versus 1.1x at June 30th. Net debt-to-equity was 0.49x versus 0.53x at June 30th. Our asset coverage ratio was 197% above the 150% regulatory minimum applicable to us. Turning to distributions, we paid the third quarter distribution of $0.05 per common share on October 15th, 2026, to shareholders of record as of September 30th, 2026.
With that, I will now turn it back over to the operator to start the Q & A.
Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to 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 the line of Aaron Grey with Alliance Global Partners. Your line is now open.
Hi. Thank you very much for the questions. The first question from me, I know you're somewhat limited in what you can talk about, just regarding Justice Grown and the potential sale for some of those assets. How best to think about potential proceeds, looking at the fair value at least in the 10-Q? Looks like it held at about $42 million for the quarter. So is that any type of read-through? Do you expect there to be any type of impact on what you could get for those assets, just given some of the counterclaims that you're receiving right now and the pending litigation there? Any color there would be helpful. Thanks.
As we noted, we will not be commenting on the active legal process there. In terms of the auctions, those are upcoming very soon here, and we'll be certain to share material updates at the appropriate time.
Okay, thanks. The second question is just bigger picture. I know you talked about there's a pending $43 million that you guys will commit to. Just bigger picture, as we think about the cadence of new fundings, is that an indicator of getting an uptick and getting more comfortability? Should we expect that pace to come with more deals going forward? How should we think about how much you will be involved in that commitment? Will it just be a portion of it? Just trying to size out in terms of the pipeline translating to deals in the near term. Thanks.
Sure. I think, Dan, you want to start and I'll finish, or?
Yeah, sure. Aaron, I think deals are going to be it's going to be choppy. We were very active in the first quarter. We obviously have a solid pipeline that we're working against and a few opportunities that are advanced in that pipeline, one of which we expect to close in the near term. We're also going to be disciplined about the opportunities that we deploy into, focused on good protections on the lender side of things and capital preservation, and making sure that we earn an appropriate risk-adjusted return. As we find those opportunities and we have a few that are coming down the pike, we will actively deploy into them, but it's going to be a little bit lumpy on the deployment side of things, I think, over the next few quarters.
Okay, great. Last one for me. Is there any common theme that you're seeing in terms of maybe why opportunities aren't making it through the pipeline to deal terms? Any type of commonality you could call out?
Hi, it's Robyn. I think there's a few things. One, when you're in sponsor-driven processes, you are typically backing one sponsor. Sometimes they win the deals and the ability to purchase it, sometimes they don't. We've seen things break in diligence. We've seen things break due to an independent sponsor not being able to raise equity. I don't think there's one common theme. I think that we currently have a wide funnel as we've expanded into lower middle market credit. As Dan said, and I think as we said in our prepared remarks, we're being selective on what we choose to execute upon and back borrowers and sponsors with strong cash flow, enterprise value, or asset coverage in some situations. I wouldn't say there's a common theme why things get kicked out. I think it's a mix of what I just went through.
Okay, great. Thanks. I'll go and jump back in the queue.
Thank you.
Thank you. Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Your line is now open.
Thank you, and good morning, everyone. Just to follow up on that last question there, maybe asking it a different way. After the debt repayments you made in October, can you just remind us of what you have available to deploy ex any recoveries from other asset sales in terms of your credit lines and cash on hand? Just to quantify that. Thank you. Maybe a reminder of what your tolerance for the debt-to-equity ratio. How high can you go? Thank you.
Hey, Pablo. This is Brandon. As we noted in the presentation, as of October 30, we had about $36 million drawn on our revolver. That revolver has a commitment up to $80 million, so that gives you an idea on that line of credit what our capacity is. We also have our unsecured affiliate line of credit of $20 million as well, and that is putting aside any type of repayments that we will receive from our current investments.
And BDCs are different than REITs when we are statutorily limited to two to one leverage, and you never want to get too close to that two to one leverage. So, I would say between 1x and 1.5x feels comfortable.
Right. Okay. No, that is good. Just in terms of the mechanics of the fourth quarter dividend, obviously, you will have room to, based on the payout ratio target, at some point you have to pay an extra, a one-time supplemental dividend. Just remind us when that announcement will be made. Is that a January issue for 4Q, or when do we hear about that? Thank you.
The board of directors typically declares a dividend on a cadence that would be announced on or around December 15th, and the board will evaluate all factors when declaring that dividend as they do every quarter.
Right. Just by definition, you still have to get your payout ratio, right? Right now with the $0.05, you are way below that.
Yeah. The board has to consider everything, not just what is shown on the NII. NII is not necessarily the taxable income that drives the required distribution amount. The board has to take into consideration that as well. There are also mechanics within BDCs where dividends in future years can be pulled back to this year as well. So it is not just a simple look at the NII and that is the amount that has to be paid out. There are a lot of factors that the board has to think about when declaring the dividend.
Including, I would say, Pablo, our overall capital allocation framework, which the board looks at every quarter. As you know, we paid out a dividend this year too as well, but we have also been repurchasing a significant amount of our equity at a pretty significant discount to our NAV. The board, on a quarterly basis, evaluates how we are returning capital to our shareholders between the dividend and between share repurchases as well.
Right. Thank you. That's good color. Then, Dan, in your prepared remarks, you talked about actively managing your cannabis loan portfolio. I did go through it in Q. I'm guessing Story, it says that it's current, but it was extended the loan. TheraTrue, $8 million current. Not sure if it's First of all, the $8 million, is TheraTrue current? That's a question. Then Sunburn, I think one or two Form 10-Qs ago, there was some issues there, but is that back to normal? Whatever comments you can make about the cannabis book, because there is some noise there, in my opinion, given the commentary around Story, TheraTrue, and Sunburn. Thank you.
Story is current, TheraTrue is current, Sunburn is current on all payments. The Story Arizona extension is a business that is performing well. There was a specific need for a short term extension, and we were able to be paid for that extension well, and it was something that we were very happy to do and work with the borrower and accommodate. Then Sunburn, they met the terms of the forbearance agreement that we had in place back in June of this past year. They raised some additional equity capital. The new management team has been doing a great job over the last year and a half in terms of working on and turning around that business. That's probably all we'll say and won't get into more specifics on that front.
I think, Pablo, just in normal course of business, there are waivers, there are amendments, there is working with borrowers to accommodate changes to a projected business plan that may or may not have happened years past. So, I think that while we do a very good job of disclosing everything, a lot of this really is just normal course business and lending to borrowers and working with them.
Yep.
Okay. Thank you. Last question regarding the loans that you made in 1Q to, I think it's called STAT Buyer and BCIS. I know some of those loans were for the companies to make M&A transactions. Can you give an update where those transactions have closed and any update you can give on those two borrowers? Thank you.
The deals, they were closed upon closing of the deal. The STAT deal was acquisition financing, and I believe the other one was acquisition financing as well, and those were closed at closing, current.
That's correct. Yep. Yeah. STAT was
All right.
to finance an acquisition and partially finance a debt paydown, so partially finance the acquisition, and Activate was an M&A financing transaction as well.
All right. That's all for me. I mean, obviously, we will all keeping a close eye on November 12th and November 19th. I know you're not going to make any comments, but at least you did say that you will inform the market about what happens on those days. I mean, I just want to make sure I understood that. I'm not asking questions about something that-
I think-
Hi, Pablo. I think what Gab said is, at the appropriate time, we will make sure that we inform the market. That does not mean that we're going to make an announcement the day of, for instance.
Right. Thank you.
I think that we have a history of making sure that we inform the market of events that are important. We will continue to endeavor to do that.
Yeah. All right. That is very good. Thank you very much.
Thank you.
Thank you. One moment for our next question. I am showing no further questions at this time. I would now like to turn it back to Dan Neville, Chief Executive Officer, for closing remarks.
Thank you all for joining us today, and we look forward to keeping you updated on our continued progress.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.