Advanced Flower Capital's Q3 2025: Contradictions Emerge on Cannabis Pipeline, BDC Conversion, and Cash Deployment

Date of Call: November 12, 2025

Financials Results

• EPS: $0.16 per basic weighted average share distributable earnings ($3.5M); GAAP net loss $0.57 per basic weighted average share (net loss $12.5M).

Guidance:

• Conversion to a BDC anticipated in Q1 2026; AFC will operate as a REIT until conversion.
• Board does not anticipate making a distribution to shareholders in Q4 2025 (no dividend).
• Board will reevaluate dividend/distribution policy in conjunction with the BDC transition in Q1 2026.
• Company intends to redeploy recent principal repayments (~$43M since Q2) into attractive risk‑adjusted opportunities under an expanded investment mandate.
• Pipeline: ~ $350M non‑cannabis (≈$415M total including ~$60M cannabis); non‑cannabis target yields ~low‑teens on average.

Business Commentary:

• Conversion to Business Development Company (BDC):
• Advanced Flower Capital Inc. (AFCG) announced its plan to convert from a mortgage REIT to a BDC, expanding their investment universe to include both real estate and non-real estate covered assets.

• The conversion is expected to occur in Q1 2026, subject to board approval, and will allow AFCG to originate and invest in a broader array of opportunities, enhancing shareholder value.

• Portfolio Management and Loan Repayments:

• AFCG received $43 million in principal repayment since the end of Q2, with plans to redeploy these funds into attractive risk-adjusted opportunities under their expanded investment mandate.

• The company's portfolio management efforts, including underperforming loans, are progressing with private company A and private company K's dispensaries expected to be sold in 2026.

• Challenges in the Cannabis Industry and Diversification:

• AFCG's investment focus is evolving to accommodate the challenging cannabis industry environment, with limited equity capital and lack of federal progress impacting underwriting decisions.

• The company is diversifying its pipeline, with a sizable non-cannabis pipeline of approximately $350 million, representing opportunities in stable industries with recession-resistant business models.

• Taxable Loss and Dividend Policy:

• AFCG anticipates a taxable loss of approximately $4 million from a settlement with private company P, impacting Q4 earnings and dividend policy.

• The Board of Directors has decided not to pay a dividend in Q4 2025, with future decisions to be reevaluated in conjunction with the BDC conversion.

• Regulatory Progress and Future Opportunities:

• AFCG remains attentive to potential changes in cannabis regulations at the federal level, viewing this as crucial for equity capital to flow back into the industry.
• However, the company is cautious about relying on future regulatory changes, focusing on the current reality and broader investment opportunities in non-cannabis industries.

Sentiment Analysis:

Overall Tone: Neutral

• Management noted shareholder approval to convert to a BDC and a ~ $350M non‑cannabis pipeline, but also reported a GAAP net loss of $12.5M, CECL reserves of $51.3M (~18.7% of loans), an anticipated ~$4M taxable loss in Q4, and no Q4 dividend. These mixed operational positives and near‑term headwinds support a neutral tone.

Q&A:

• Question from Aaron Grey (Alliance Global Partners): Is the ~$350M non‑cannabis pipeline separate from the ~$416M referenced in the presentation, and what yields/opportunities are you seeing versus historical cannabis target yields?
  Response: The ~$415M total pipeline includes ~ $60M in cannabis and the balance non‑cannabis; non‑cannabis target IRRs are generally below cannabis and likely in the low‑teens on average.

• Question from Aaron Grey (Alliance Global Partners): With a broader scope, will deal selectivity change or expand given you’ll be looking beyond cannabis?
  Response: Selectivity will increase; a broader universe gives more options and lets AFC be more selective across both cannabis and non‑cannabis opportunities.

• Question from Pablo Zuanic (Zuanic & Associates): Timing for redeploying cash (e.g., Jan 1 or Apr 1) and clarification on whether you'll deploy $60M in non‑cannabis in 2026?
  Response: No specific deployment guidance provided; capital can be invested now within REIT constraints but conversion timing is only expected in Q1 2026 and no concrete 2026 deployment amounts were committed.

• Question from Pablo Zuanic (Zuanic & Associates): How transferable is your cannabis underwriting/relationship skill set to new industries, and are you targeting lower‑growth but stable/recession‑resistant businesses?
  Response: Underwriting and direct‑lending experience are transferable; AFC is casting a wide net and targeting stable, recurring‑revenue, recession‑resistant borrowers to preserve capital and earn attractive risk‑adjusted returns.

• Question from Pablo Zuanic (Zuanic & Associates): Any changes to the fee structure with the external adviser in converting from a REIT to a BDC?
  Response: Refer to the proxy for fee‑structure details; management declined to discuss specifics on the call.

• Question from Pablo Zuanic (Zuanic & Associates): If federal reforms occur or states expand rec legalization, could cannabis fundamentals meaningfully improve absent federal change?
  Response: Management remains skeptical reform is imminent; absent federal reform and renewed equity capital, the hurdle to deploy fresh capital into cannabis remains very high.

• Question from Pablo Zuanic (Zuanic & Associates): Given the Board decision to withhold the Q4 dividend, should analysts model zero dividend for Q1 2026?
  Response: No forward dividend guidance was provided beyond the Q4 decision; the Board will reassess distributions alongside the BDC conversion in Q1 2026.

Contradiction Point 1

Cannabis Pipeline and Investment Focus

It highlights a shift in the company's focus and strategy, which impacts potential future investments and revenue streams.

Is the $350 million pipeline outside cannabis separate from the $416 million pipeline referenced in the presentation? - Aaron Grey (Alliance Global Partners)

2025Q3: The cannabis pipeline is shrinking due to limited progress on the federal side. Opportunities are industry-agnostic, focusing on stable industries with recession resistance. - Daniel Neville(CEO & Partner)

How will the conversion to a BDC affect the pipeline, and is the current pipeline constraint due to real estate coverage or broader macro dynamics? - Rahul Ilangovan (Zuanic & Associates)

2025Q2: The proposed BDC conversion will enable us to invest in cannabis companies without real estate coverage, which accounts for about two-thirds of the cannabis opportunities we see. - Daniel Neville(CEO & Partner)

Contradiction Point 2

BDC Conversion and Investment Opportunities

It involves the rationale and expected benefits of the BDC conversion, which affects the company's investment scope and potential for growth.

Deal selectivity—how could it change with your broader scope, given tightening in the cannabis space over the near to medium term? Are you now broadening it to expand back? How should we think about this, or is it too early to tell as you evaluate new opportunities outside cannabis? - Aaron Grey (Alliance Global Partners)

2025Q3: Deal selectivity will increase with the broader investment mandate, allowing for more opportunities to be considered. - Daniel Neville(CEO & Partner)

What was the rationale for choosing a BDC over a mortgage REIT for conversion, and why this specific method? - Aaron Thomas Grey (Alliance Global Partners)

2025Q2: The conversion to a BDC allows us to invest in more opportunities, including those without real estate coverage, which is a significant limitation as a REIT. - Robyn Tannenbaum(Co-Founder, Partner, Chief Investment Officer & President)

Contradiction Point 3

Cannabis Pipeline and Strategy

It involves changes in strategic focus and expectations regarding the cannabis pipeline, which are crucial for understanding the company's investment strategy in the cannabis sector.

Is the $350 million potential pipeline outside cannabis separate from the $416 million pipeline mentioned in the presentation? - Aaron Grey(Alliance Global Partners)

2025Q3: The $350 million is inclusive of the $416 million pipeline, which includes $60 million on the cannabis pipeline and the balance on the non-cannabis pipeline. The cannabis pipeline is shrinking due to limited progress on the federal side. - Daniel Neville(CEO & Partner)

Can you provide more detail on the timeline for the pipeline's conversion to new originations? - Unidentified Analyst(Alliance Global Partners)

2025Q1: Our pipeline, we've talked about it before, of about $400 million to $450 million in near-term origination opportunities. - Robyn Tannenbaum(Co-Founder, Partner, Chief Investment Officer & President)

Contradiction Point 4

Deal Selectivity and Industry Expansion

It involves the company's strategy regarding deal selectivity and expansion into new industries, which are crucial for business growth and investment decisions.

How is deal selectivity changing as your scope expands beyond cannabis, given the tightening selectivity in the cannabis sector? Is it still too early to assess this shift as you evaluate new opportunities outside cannabis? - Aaron Grey (Alliance Global Partners)

2025Q3: Deal selectivity will increase with the broader investment mandate, allowing for more opportunities to be considered. While the cannabis pipeline is drying up, the investment committee's experience outside of cannabis is valuable, and the focus is on preserving capital and finding strong risk-adjusted returns. - Daniel Neville(CEO)

What opportunities are most appealing in your capital deployment strategy? Which near-term opportunities are most promising and how much of the pipeline could materialize this year? - Aaron Grey (Alliance Global Partners)

2024Q4: We're seeing a lot of interesting opportunities across new medical markets like Kentucky, recently adult-use flip states, refinancing opportunities, and significant M&A. We're seeing a robust pipeline of good operators with strong credits that fit our profile, and we'll be able to deploy any capital received back plus current liquidity into good credits in the space this year. - Daniel Neville(CEO)

Contradiction Point 5

Cash Deployment and Investment Strategy

It involves the company's approach to deploying cash and its investment strategy, which are critical for financial planning and investor expectations.

When can cash be redeployed, and will $60 million be deployed in non-cannabis loans in 2026? - Pablo Zuanic (Zuanic & Associates)

2025Q3: We are not providing guidance on the amount to be deployed in 2026. Capital can be deployed if attractive opportunities arise, regardless of industry. Conversion to a BDC will occur in Q1 2026. - Robyn Tannenbaum(CFO)

Can you clarify your current liquidity position, including available cash flow and remaining credit lines? - Pablo Zuanic (Zuanic & Associates)

2024Q4: We have two revolving lines of credit that allow us to borrow up to $100 million. As of March 1, we had approximately $89 million available under those facilities. - Brandon Hetzel(CFO)