Advanced Flower Capital's Q3 2025: Shifts and Contradictions in Investment Mandate, Cannabis Strategy, and Federal Reform Outlook

Date of Call: October 28, 2025

Financials Results

• EPS: $0.16 distributable earnings per basic share (Q3 2025); GAAP net loss $12.5M, or $0.57 loss per basic share (Q3 2025)

Guidance:

• Conversion from a REIT to a BDC expected in Q1 2026 (subject to board approvals)
• AFC will operate as a REIT until conversion is complete
• No dividend expected in Q4 2025 due to an anticipated ~$4M taxable loss related to a loan settlement
• Board will reevaluate dividend/distribution policy in conjunction with the BDC transition
• Management plans to redeploy returned principal into a broader, ~ $350M pipeline across cannabis and non-cannabis opportunities

Business Commentary:

• Conversion to a BDC and Expanded Investment Mandate:
• Advanced Flower Capital is planning to convert from a mortgage REIT to a business development company (BDC) to expand its investment universe.

• This decision is driven by the aim to originate and invest in a broader array of opportunities, including real estate and non-real estate covered assets, and to access a wider range of industries to enhance risk-adjusted returns.

• Shareholder Approval and Support:

• Over 61% of outstanding shares were represented by proxy at the special meeting, with 94% of those votes cast in favor of both proposals related to the conversion from a REIT to a BDC.

• This strong engagement and approval from shareholders validates the rationale for AFC's evolution and long-term growth strategy.

• Disposed and Repaid Loans:

• In Q3, private company J paid off its term loan ahead of maturity at par plus accrued interest, with a principal amount of $23.2 million.
• Subsidiary of public company S also paid off their term loan, and the $10 million capital was redeployed into a new issue at a significantly higher yield.

• The company received a total of $43 million in principal repayments since the end of Q2.

• Financial Results and Taxable Loss:

• Advanced Flower Capital generated net interest income of $6.5 million and distributable earnings of $3.5 million, or $0.16 per basic weighted share of common stock, for the quarter ended September 30, 2025.
• The company anticipates a taxable loss of approximately $4 million on the loan to private company P, which will impact Q4 earnings and led to the board's decision not to make a distribution to shareholders in Q4.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Mixed results: distributable earnings of $3.5M ($0.16/share) but a GAAP net loss of $12.5M (-$0.57/share). Shareholders approved conversion to a BDC (Nov 6, 2025 vote; >94% of votes in favor). Management paused Q4 distributions due to an expected ~$4M taxable loss tied to a loan settlement.

Q&A:

• Question from Aaron Gray (Alliance Global Partners): First, you referenced a potential pipeline; is the $350M outside cannabis separate from the $416M pipeline referenced in the presentation? Second, can you give color on opportunities in the non-cannabis pipeline, expected yields vs. historical cannabis yields, and whether target yields differ?
  Response: The $350M non-cannabis figure is inclusive of the ~ $415M total pipeline (about $60M active cannabis); non-cannabis target yields are slightly below cannabis—likely low-double-digits on average—and the firm will be more selective as the broader mandate increases opportunity set.

• Question from Pablo Zunic (Zunic & Associates): Timing for redeploying cash (e.g., Jan 1 vs Apr 1)? Clarify whether you’d deploy up to $60M in non-cannabis in 2026. How transferable is your team’s cannabis underwriting skill set to other industries and will you target stable, recession-resistant businesses? Any changes to fee structure with the adviser in the move from REIT to BDC? If federal reform occurs, how would that affect opportunities? Should analysts model zero dividend in Q1 2026?
  Response: No specific deployment guidance for 2026; conversion to a BDC is expected in Q1 2026 and until then deals must meet REIT rules (real-estate covered); the team believes its direct-lending and underwriting experience is transferable to more stable, recurring-revenue industries; fee details are in the proxy; cannabis deployment hurdles remain high absent federal reform.

Contradiction Point 1

Investment Mandate and Industry Focus

It highlights a change in the company's investment strategy and industry focus, which can impact the types of investments made and the risk profiles of the company's portfolio.

Is the $350 million pipeline separate from the $416 million cannabis pipeline, and can you provide details on opportunities, yields, and target IRRs outside cannabis? - Aaron Gray(Alliance Global Partners)

2025Q3: The $350 million pipeline includes both cannabis ($60 million) and non-cannabis opportunities. Opportunities in cannabis remain limited due to the lack of federal progress and equity capital. Non-cannabis yields and target IRRs are in the low double-digit range, with variation between opportunities. - Dan Neville(CEO)

Are there any updates on the legal situation with Justice Grown? - Pablo Zuanic(Zuanic & Associates)

2025Q1: We are a commercial real estate company that originates loans to operators within the cannabis industry. Specifically, we originate first mortgage loans to cultivators, manufacturers and retailers. - Daniel Neville(CEO)

Contradiction Point 2

Market Volatility and Yield Expectations

It involves changes in the company's stance on market volatility and yield expectations, which are critical factors for investment decisions and financial forecasting.

How easily can the cannabis industry's knowledge and network be replicated in new industries, and how do you assess the capital requirements for stable, recession-resistant businesses? - Pablo Zunic(Zunic & Associates)

2025Q3: Yields have ticked up a bit relative to recent history, but we're focused on quality and protecting shareholder capital. - Robyn Tannenbaum(CIO)

Can you discuss the pipeline's growth expectations and yields? - Chris Muller(Citizens Capital Markets)

2025Q1: Yields are in the low double-digit range, with variation between opportunities. The focus is on stable, recession-resistant industries for capital preservation. - Robyn Tannenbaum(CIO)

Contradiction Point 3

Deal Selectivity and Investment Mandate

It reflects a shift in the company's strategy regarding deal selectivity and investment mandate, which directly impacts the types of investments the company pursues and its future financial performance.

How will the expanded investment mandate affect deal selectivity and flexibility in the near to medium term? - Aaron Gray(Alliance Global Partners)

2025Q3: Deal selectivity will increase with the broader investment mandate due to the expanded universe of opportunities. - Dan Neville(CEO)

What are the next steps for Justice Grown’s accrual restoration and forbearance agreements? Are you still pursuing a new agreement, and what is the timeline for potential next steps, given its significance as a major borrower in the portfolio? - Aaron Grey(Alliance Global Partners)

2024Q4: There's a really big opportunity set right now in the market. I think the only thing that is really holding us back from deploying more capital is finding the best of the best, right? The cream of the crop. - Daniel Neville(CEO)

Contradiction Point 4

Investment Mandate Expansion and Cannabis Opportunities

It reflects the company's shifting approach to investment opportunities within the cannabis sector, which may affect its risk profile and potential returns.

How will deal selectivity change with the expanded investment mandate, and will the broader opportunity universe allow greater flexibility in the near-term to medium-term? - Aaron Gray(Alliance Global Partners)

2025Q3: The company remains cautious with cannabis investments but is open to exploring new industries for opportunities that generate attractive risk-adjusted returns. - Dan Neville(CEO)

Would rescheduling open new opportunities or benefit the existing portfolio? - Aaron Thomas Grey(Alliance Global Partners)

2025Q2: Rescheduling would attract more capital, boost asset valuations, and potentially attract new investment players. - Daniel Neville(CEO)

Contradiction Point 5

Cannabis Federal Reform Expectations

It involves the company's stance on federal regulatory reform in the cannabis industry, which could significantly impact the company's future investments and market strategy.

How would federal cannabis regulation changes impact the industry positively, and what is your outlook on equity capital returning to the sector? - Pablo Zunic(Zunic & Associates)

2025Q3: The company remains cautious about federal reform expectations and the return of equity capital to cannabis. - Dan Neville(CEO)

What are the most attractive opportunities in your capital allocation strategy, including refinancing, CapEx, and M&A, and how much of the near-term pipeline could be realized this year? - Pablo Zuanic(Zuanic & Associates)

2024Q4: We continue to be very interested in deploying capital into new medical markets as well as in adult-use states. - Daniel Neville(CEO)