Advanced Flower Capital Inc. (AFCG) Earnings

Management highlights

- Market Environment & Strategic Positioning: * The broader private credit ecosystem is experiencing notable stress, with default rates rising to 6% as of July 2026. * Many lenders have pulled back from or exited the lower middle market to support their existing upper-middle-market portfolios, creating attractive dislocated opportunity for AFC. * Competition remains rational in the lower middle market, compared to aggressive pricing and leverage competition in the upper middle market. * AFC targets borrowers with $5 to $50 million of EBITDA, primarily in sponsored transactions, prioritizing loans with strong enterprise value coverage, asset coverage, and comprehensive maintenance covenants. - Portfolio & Origination Activity: * As of June 30, 2026, the portfolio held fair value of $290 million across 17 portfolio companies, up from $279 million across 15 companies at the end of Q1 2026. * In Q2 2026, AFC funded $17 million total: $5 million to two new portfolio companies and $12 million to two existing portfolio companies, with net fundings of $8 million after $9 million in amortization and repayments. * Year-to-date through Q2 2026, AFC has deployed $102 million in new lower middle market commitments, with an active total pipeline of $1.3 billion diversified across industries, avoiding cyclical or high-disruption sectors. * Subsequent to quarter end, AFC committed $7 million to a $25 million senior secured credit facility for an outpatient behavioral health platform, with $3 million funded at close, aligned with its lower middle market mandate. - Legacy Non-Accrual Portfolio Update: * All non-accrual loans are concentrated in the legacy cannabis book, and AFC is progressing through resolution and liquidation. * For the Debbie legacy loan: a binding term sheet for $12.5 million in asset sales has been signed, with a $2 million non-refundable deposit received, and the transaction is expected to close in 2026. Inception-to-date, AFC has received $58 million in principal repayment on this loan. * For DMA: two of three dispensaries have completed sale subsequent to quarter end, with one remaining asset to resolve. * For Justice Grown: the loan matured in May 2026 and is in maturity default; AFC has commenced foreclosure proceedings and launched a formal marketing process to sell the collateral assets. - Capital Allocation & Balance Sheet: * The Board declared a Q2 2026 distribution of 5 cents per share, paid July 15 2026, covered 3x by net investment income. * Under the authorized $5 million share repurchase program, AFC repurchased $2.8 million (839,000 shares) in Q2 2026, which was 17 cents accretive to net asset value per share; $2.2 million remains available under the program. * As of quarter end, AFC had $207 million total debt outstanding, a 190% asset coverage ratio (well above the 150% regulatory requirement), 0.53x net debt to equity, and $106.5 million in cash and cash equivalents for substantial liquidity.

Guidance

- Management maintained its long-term strategic target of a net debt to equity ratio of approximately 1x, with room to go modestly above that level, up from the current 0.53x at the end of Q2 2026. - Management expects continued origination activity through the remainder of 2026, noting that originations will be lumpy and episodic given the size and nature of the lower middle market deals AFC pursues. - Management expects the pending Debbie legacy asset sale to close in 2026, as planned, with proceeds distributed pro-rata to AFC, which holds ~80% of the Debbie loan. - No explicit upward or downward revisions to full-year financial projections were provided; management reaffirmed its view that the current market dislocation creates a compelling vintage for new AFC originations with attractive risk-adjusted returns.

Segment performance

AFC is a business development company focused exclusively on lower middle market private credit lending; it does not report separate product segments. As of June 30, 2026, the firm's entire investment portfolio of $290 million fair value consists entirely of senior secured first lien debt investments, with a weighted average yield (excluding non-accrual loans) of 13.2%. Total investment income for the second quarter 2026 was $8.7 million, with net investment income of $3.5 million (15 cents per weighted average common share). Total assets were $399.7 million, total net assets were $187.3 million, and net asset value per share was $8.25. Non-accruing loans are concentrated entirely in the firm's legacy cannabis portfolio, which makes up a minority share of the overall portfolio.

Risks & headwinds

- Broad market risk: Rising default rates across the private credit sector, increased scrutiny of bank indirect exposure to private credit, and broader capital market stress have caused a pullback in available capital across the industry. - Legacy portfolio risk: Non-accrual legacy cannabis loans remain in active legal proceedings, with uncertainty around the total recoverable value from collateral asset sales. - Cannabis industry risk: Even with recent favorable regulatory changes, the cannabis industry still lacks consistent access to equity capital, creating fundamental risk for debt lenders that has led AFC to avoid new cannabis lending. - Origination timing risk: Lower middle market originations are inherently lumpy, which can lead to uneven deployment of capital quarter over quarter.

Analyst Q&A

• Q: The pipeline appears slower than the fast start to 2026 in Q1, can you explain the slowdown and what to expect for near-term execution? /

  A: Management confirms the $1.3 billion pipeline has high quality opportunities with attractive pricing, but originations for lower middle market deals are inherently lumpy. Q1 had ~$80 million in originations, while Q2 had lower volumes, and this uneven cadence is expected to continue through the rest of the year as opportunities progress through underwriting.\n\nQ: How comfortable is AFC with its current liquidity to pursue larger pipeline opportunities? / A: AFC has over $70 million in available liquid capital to deploy, which management finds fully sufficient. For opportunities larger than AFC's target hold size, the firm can use co-investment with TCG platform affiliates under an SEC co-investment order, or syndicate portions of larger deals to third parties.\n\nQ: With recent favorable cannabis regulatory changes, has AFC softened its cautious stance on new cannabis lending? / A: Management notes that while regulatory progress has occurred, the cannabis industry still lacks consistent, widespread access to equity capital. Without reliable equity capital to absorb volatility and address unexpected business challenges, debt lending to cannabis borrowers remains too high risk for AFC, so the firm will continue avoiding new cannabis originations.\n\nQ: What is the maximum net debt to equity leverage ratio AFC is comfortable targeting? / A: Management has maintained a long-term target of ~1x net debt to equity, which remains the intermediate target, and the firm is comfortable going modestly above that level if attractive opportunities justify additional leverage.