Advanced Flower Capital's Q2 2025: Contradictions Unveiled on BDC Conversion, Cannabis Rescheduling, and Pipeline Prospects

BDC conversion and pipeline expansion, impact of rescheduling on the cannabis industry, CECL reserves and credit quality, impact of rescheduling on existing portfolio, and pipeline broadening after BDC conversion are the key contradictions discussed in Advanced Flower Capital's latest 2025Q2 earnings call.



Convert to Business Development Company (BDC):
- Advanced Flower Capital announced its intention to convert from a REIT to a BDC.
- The conversion expands the investment universe, enabling AFC to originate and invest in a broader array of opportunities, including real estate and non-real estate covered assets.
- The decision is driven by the capital-intensive nature of the cannabis industry, limited real estate coverage by operators, and potential sector tailwinds from federal rescheduling.

Pipeline and Investment Focus:
- AFC's pipeline has been reduced in recent quarters, with about 2/3 of cannabis opportunities lacking real estate coverage.
- The proposed BDC conversion will allow AFC to invest in cannabis and ancillary businesses without real estate coverage, expanding the opportunity set.
- The narrowing pipeline is attributed to fewer real estate-covered opportunities and tightened underwriting standards due to industry volatility.

Distributable Earnings and Portfolio Management:
- AFC generated distributable earnings of $0.15 per share in Q2 2025.
- The company reported a GAAP net loss of $13.2 million, or a loss of $0.60 per basic weighted average common share.
- Earnings were impacted by underperforming legacy loans, such as Public Company A's equipment loan, which was written off in Q2.

Non-Performing Loans and Recovery Efforts:
- AFC is managing non-accrual status loans like Private Company P's, with approximately $16 million in principal outstanding.
- The company is engaged in legal proceedings with Justice Grown to enforce rights under the credit facility.
- Efforts to recover principal and maximize value from underperforming loans are ongoing, with a focus on realizing better realizations and improving industry conditions.