AFC Capital Q1 2026 Earnings Call - BDC Conversion Drives $90M Non-Cannabis Expansion

Operator: Good morning, and welcome to AFC’s 1st quarter 2026 earnings call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Gabriel Katz, Chief Legal Officer, AFC: Good morning, and thank you all for joining AFC’s earnings call for the quarter ended March 31st, 2026. I’m joined this morning by Robyn Tannenbaum, our President and Chief Investment Officer, Leonard Tannenbaum, our Chairman, 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 April 15th, 2026 press release and is posted on the investor relations portion of AFC’s website at advancedflowercapital.com, along with our first 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, 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 our results. Leonard will then provide commentary on the lower middle market, and then Daniel will provide an overview of 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 now turn the call over to our President, Robyn Tannenbaum.

Robyn Tannenbaum, President and Chief Investment Officer, AFC: Thanks, Gabe. Good morning, everyone. We appreciate you joining us to discuss AFC’s first quarter earnings. Before turning to earnings, we are pleased to have completed our first quarter operating as a BDC. The conversion to a business development company has expanded AFC’s investment flexibility, which has allowed us to pursue opportunities beyond real estate-backed loans. We believe that this expanded opportunity better positions AFC to diversify its exposure across industries and credit risk profiles. During the quarter, we closed two non-cannabis deals in the lower middle market, totaling approximately $90 million in new commitments. We received $41.2 million in cannabis loan repayments during the quarter. For Q1 2026, AFC had net fundings of $39.1 million.

The two lower middle market deals are similar to other potential transactions in our pipeline and have many of the characteristics we look for: cash flow operating businesses backed by experienced sponsors. Turning to earnings, for the first quarter of 2026, AFC generated net investment income of $0.21 per basic weighted average share of common stock. Additionally, the board of directors declared a first-quarter distribution of $0.05 per share, which was paid on April 15, 2026 to shareholders of record on March 31, 2026. Before turning the call over to Len, I would like to note that the board of directors has put a $5 million share buyback program in place. We view the share buyback authorization as a flexible component of our capital allocation strategy designed to enhance long-term shareholder value.

Now, I’ll turn it over to Len to discuss the state of the middle market.

Leonard Tannenbaum, Chairman, AFC: Thank you, Robyn, and good morning, everyone. I want to explain why we are excited about private credit and why we believe the timing is particularly compelling. As private credit experienced meaningful reductions in net inflows, many lenders have exited the lower middle market in favor of moving upmarket to support their existing portfolios. This reduction in capital and resultant shift upmarket has created a sizable opportunity for a small, nimble lender like us to capture what we consider to be an exceptional vintage in the lower middle market. In this part of the market, we are seeing better risk-adjusted returns with absolute yields running at approximately 100-300 basis points higher than they were just 6 months ago. Our ideal sweet spot is in the $5 million-$50 million EBITDA range, largely below the threshold where the larger private credit platforms operate.

We believe that the lower middle market assets that we are currently underwriting carry a meaningful distinction from the covenant light structures common in the upper market. Lenders there often rely solely upon a liquidity covenant. Our deals typically include a cash flow measure and a fixed charge coverage ratio covenant. We are not allowing the aggressive EBITDA add backs endemic to larger deals, a further indicator of the strong underlying credit quality opportunity available in the lower middle market. Strategically, we are actively expanding our pipeline and continuing to diversify our portfolio. We believe this vintage offers an attractive opportunity, and we are positioning ourselves to capture it thoughtfully and at scale. I will now turn it over to Dan to discuss the state of our portfolio and our pipeline.

Daniel Neville, Chief Executive Officer, AFC: Thanks, Len. I’ll begin with an update on our expansion into private credit outside of the cannabis space, followed by an update on our portfolio. As Len described, we feel good about the supply and demand dynamics in lower middle market lending and are excited about the opportunities we are seeing. Since expanding our investable universe, our active pipeline remains strong with over $1.5 billion of deals as of today. We are focused on sourcing deals and backing companies in the lower middle market across a variety of industries, including healthcare, consumer, manufacturing, and services. We are focused on deals where we have expertise or can add value and have no interest in stretching beyond our core competencies. Our sweet spot is providing loans to cash flowing borrowers with $5 million-$50 million of EBITDA.

We are primarily participating in sponsored transactions, though we selectively engage in non-sponsored deals as well. The financings we are looking at are often used for expansion capital, acquisitions, refinancings, or recapitalizations. During Q1, AFC closed 2 loans totaling $90 million and subsequent to quarter end, AFC closed an additional $5 million of loans. In January, AFC closed on a $60 million senior secured credit facility to support the combination of STAT and The Moresby Group, which is backed by Cambridge Capital. In February, AFC committed $30 million to a $60 million senior secured term loan to support the acquisition and growth of a leading healthcare benefits platform tailored toward hourly and lower wage employees. At closing, AFC funded $20 million of this commitment, and the remaining $10 million was funded subsequent to quarter end.

As I stated last quarter, we currently have three loans on non-approval and are focused on receiving paydowns on these loans to redeploy that capital into performing credits that should contribute to current income. The receiver has continued the liquidation process for our investment in Debbie Holt’s. During Q1, we received a $6.2 million paydown, which brings the total paydown since Debbie entered receivership to $20.8 million. Lastly, we wanted to take a minute to touch on Justice Grown. The loan matured on May first, 2026 and is in maturity default. Now that the loan has matured, we intend to exercise our rights and remedies under the credit agreement, including our rights under the shareholder guarantee and parent guarantee.

As a reminder, our loan to Justice Grown is secured by the vertical assets in New Jersey, including an own cultivation facility and 3 dispensaries, 2 of which are owned. In Pennsylvania, we are secured by 3 dispensaries and an own cultivation facility, which is currently not operational. We remain laser-focused on pursuing our rights and remedies under the credit agreement and realizing maximum value from this loan. I’ll turn it over to Brandon to discuss our financial results in more detail.

Brandon Hetzel, Chief Financial Officer, AFC: Thank you, Daniel. For the quarter ended March 31, 2026, we generated total investment income of $9.8 million and net investment income of $4.8 million or $0.21 per basic weighted average share of common stock. We ended the 1st quarter of 2026 with $356.6 million of principal outstanding spread across 15 loans. As of May 1, 2026, our portfolio consisted of $370 million of principal outstanding across 17 loans. As of March 31, 2026, we had total assets of $394.9 million, total shareholder equity of $185.8 million, and our net asset value per share was $7.90. This is an increase of $0.44 per share over the prior quarter.

The increase in net asset value per share was primarily driven by net investment income of $0.21 per share, an increase in unrealized appreciation on investments of approximately $0.28 per share, offset by the Q1 dividend of $0.05 per share. During the 1st quarter, AFC expanded its senior secured revolving credit facility to $80 million, with an additional $30 million commitment from the facility’s lead arranger an FDIC-insured bank with over $75 billion of assets. The facility remains expandable to $100 million, subject to lender participation in our available borrowing base. During the 3 months ended March 31, 2026, we had an average balance drawn on the credit facility of approximately $22 million. Lastly, on April 15, 2026, we paid the 1st quarter dividend of $0.05 per common share outstanding to shareholders of record as of March 31, 2026.

With that, I will now turn it back over to the operator to start the Q&A.

Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We’ll pause for a moment while we compile our Q&A roster. Our first question comes from Aaron Grey with AGP. Your line is open.

Aaron Grey, Analyst, AGP: Hi, thank you for the questions. I guess just first one for me. Thanks for some of the comments you provided on Justice Grown. I guess, how should we think about potential outcomes here, just given the other litigation that is pending? You know, the loan is now officially in default. How should we think about the different potential outcomes that could happen over the near term? Thanks.

Daniel Neville, Chief Executive Officer, AFC: Hi, Aaron Grey. I’m gonna pass that one over to our Chief Legal Officer, Gabriel Katz.

Gabriel Katz, Chief Legal Officer, AFC: Sure. Yeah, the loan has matured, as you noted. We are pursuing all rights and remedies to obtain maximum value from the credit facility, but it’s too early to make any predictions on outcomes in this litigation.

Aaron Grey, Analyst, AGP: Okay. Just to clarify, there’s still questions in terms of being able to fully take it over, you know, as the other litigation’s pending, even if it’s currently in default now.

Daniel Neville, Chief Executive Officer, AFC: No, we are pursuing our strategies to obtain maximum value from the collateral.

Aaron Grey, Analyst, AGP: Okay. All right, great. Next question for me, just in terms of some of the incremental, you know, loans in the pipeline. I know you’ve talked about before some of the expected yields. I understand the April ones were a little bit smaller here, but just wanna, you know, confirm that the ones in the pipeline are expecting similar yields that we have seen kind of that mid to high teens as we go forward for the year.

Robyn Tannenbaum, President and Chief Investment Officer, AFC: Hi, Aaron. I’ll pass that one to Dan.

Daniel Neville, Chief Executive Officer, AFC: Yeah, Aaron, I think, you know, we’ve got a few loans in our disclosures and you can look at those yield to maturities as a guidepost. I think our overall target and what we’ve said previously with the transition to lower middle market is that we’d expect the yields to move down a touch into kinda the low double-digit kinda range on an overall basis. Expect the quality of the borrowers, the counterparties on the sponsor side of things, to improve significantly in the lower middle market, generally relative to what’s available today across the cannabis landscape.

Aaron Grey, Analyst, AGP: Mm-hmm. Last question for me, just with the recent rescheduling, you know, currently it’s DEA approved in state medical legal operation, does that change your outlook for the cannabis market, or are you still kind of focused in terms of more broadly, maybe less focused on cannabis with pipeline? Thank you.

Daniel Neville, Chief Executive Officer, AFC: I think I’ll give a little color on the rescheduling side of things. I think it’s great to see progress at the federal level finally after five years. I think the positives are it eliminates 280E liabilities for medical operators today. It certainly eliminates future uncertainty or decreases future uncertainty related to go-forward liabilities, given the path that we seem to be on at the federal level, with hearings related to adult use later this year as well. You have potential relief of historical tax liabilities, at least for medical operators as was highlighted in the actions over the last few weeks. That, the combination of those factors could potentially attract additional capital over time.

I think the negatives are that none of the operators were really paying taxes today outside of, outside of GTI. If you look at the cash flow statements for the last couple of years, that reflects a post 280E world on a cash basis today. Certainly I think the industry is more competitive than it was five years ago. The relief came, but it took a long time to get here. I think the consequences of that are that to the extent that additional capital is attracted to the industry, that would be positive for asset values, that would be positive for medical asset values, certainly given that 280E is eliminated, and it could lead to better realizations for us on loans that we have on non-accrual.

We are seeing better opportunities in the lower middle market today, given the economics that we’re seeing, the less competitive nature of the lending environment in the lower middle market today generally, and the quality of the borrowers and counterparties. I think on a go-forward basis, while rescheduling is great and it could be good for asset values and our loans on non-accrual, we are still focused on expanding into the lower middle market lending generally.

Aaron Grey, Analyst, AGP: Okay, great. Really helpful color there. I’ll jump back in the queue.

Operator: Thank you. One moment for our next question. Our next question comes from Pablo Zuanic with Zuanic & Associates. Your line is open.

Pablo Zuanic, Analyst, Zuanic & Associates: Yes, good morning, everyone. Look, you gave some color on the 2 large loans that you made in the first quarter to the non-cannabis companies. Can you expand a little bit more? I mean, these are private companies. We don’t have access to their financials. Whatever additional color you can provide to understand better what those companies are doing, what their plans are for those proceeds from the loans, that would be helpful. Thank you.

Daniel Neville, Chief Executive Officer, AFC: Sure, Pablo. Yes, as you mentioned, they are private companies. That’s, you know, the vast majority of loans that are done in the BDC space are to private companies. We can give a little bit of color here on two of those businesses. STAT, we put out a press release on that described what the business does. They operate in the revenue recovery space, related to suppliers into big retailers like Walmart, Target, the Amazon ecosystem, et cetera. They recover deductions related to invoices for goods that are shipped into Walmart and those other retailers. If you think about the opportunity set there, you know, Walmart has $700 billion of sales. Their cost of goods sold is probably somewhere around $400 billion.

Every invoice that goes into Walmart, you typically see a 2% deduction related to various issues with quantity mismatches on time in full, et cetera. These folks will work to recover that, which is, you know, an $8 billion opportunity on that 10% for Walmart alone. You expand that opportunity as you get to other retailers on the platform. The use of proceeds there was for a refinancing of an existing credit facility on the buyer as well as to partially finance the acquisition of The Moresby Group. On BCI borrower, that’s as we’ve discussed, a healthcare benefits platform that serves low-wage employees. You know, when I in my previous life, you know, I had 1,700 hourly employees who dealt with benefits there.

One of the constant complaints was that regular way healthcare insurance was way too expensive, non-affordable, and honestly overkill for, you know, folks in the 18 to 35 age subset. This product provides a low-cost offering for virtual urgent care, primary care, generic prescriptions, and is good for the employee. It’s a low-cost option and good for the employer as an avenue for some tax savings on FICA payroll taxes. The platform is seeing tremendous growth and is really attacking an interesting niche and unfilled need in the healthcare insurance market.

Pablo Zuanic, Analyst, Zuanic & Associates: Thank you. That’s a great color. My last question, obviously I can do the math, but you have the cash on the balance sheet that you reported for end of March plus the expanded credit facility. If I put all that together, do you think you can deploy all of that this year? I mean, you’ve talked about the pipeline, but just trying to think how we should model book loan growth from here to end of the year. Thanks.

Robyn Tannenbaum, President and Chief Investment Officer, AFC: Pablo, it’s Robyn. I think that as we’re entering the lower middle market, it’s hard to predict and give any guidance as to the rest of the year as to what we’re going to fund. We do have dry powder that we look to deploy over the course of the year. As we get repayments, as we discussed this quarter, we’ll look to deploy that capital as well.

Pablo Zuanic, Analyst, Zuanic & Associates: Yeah, that’s good. Thank you.

Robyn Tannenbaum, President and Chief Investment Officer, AFC: Thank you.

Operator: I’m not showing any further questions at this time. I’d like to turn the call back over to CEO Daniel Neville for any further remarks.

Daniel Neville, Chief Executive Officer, AFC: Thank you for joining us this morning, and we look forward to updating you on our continued transition to lower middle market lending on future calls.

Operator: Thank you, ladies and gentlemen. This does conclude today’s presentation. We thank you for your participation. You may now disconnect and have a wonderful day.