Advanced Flower Capital Inc. Q2 FY2025 earnings call

• Dan Neville provided an overview of results, noting distributable earnings of $0.15 per share, dividend declaration, and impact of legacy loans. - Discussed underperforming loans: Private Company A receiver has LOIs for 2 assets, Private Company P's loan moved to nonaccrual, and ongoing legal proceedings with Justice Grown. - Positive note on potential rescheduling by Trump administration. - Robyn Tannenbaum discussed proposal to convert from REIT to BDC to expand investment focus beyond real estate-backed companies. - Brandon Hetzel summarized financial results, including net interest income, distributable earnings, portfolio details, CECL reserve, and dividend payment.

For the second quarter of 2025, AFC generated distributable earnings of $0.15 per basic weighted average share of common stock. Net interest income was $6.2 million, distributable earnings were $3.4 million or $0.15 per basic weighted average common share, and there was a GAAP net loss of $13.2 million or a loss of $0.60 per basic weighted average common share. As of June 30, 2025, total assets were $290.6 million, total shareholder equity was $184.7 million, and book value per share was $8.18. Principal outstanding was $359.6 million across 15 loans as of June 30, 2025, and $357.9 million across 15 loans as of August 1, 2025. The weighted average portfolio yield to maturity was approximately 17% as of August 1, 2025. The CECL reserve was $44 million or approximately 14.6% of loans at carrying value, and there was a total unrealized loss of $21.5 million for loans held at fair value. A second quarter dividend of $0.15 per common share was paid on July 15, 2025.

• Proposed conversion from REIT to BDC to expand investment universe to include non-real estate covered assets. - Board approved expanded investment mandate including direct lending outside cannabis industry. - Anticipate conversion to occur in first quarter of 2026 subject to shareholder approval and other requirements. - Believes BDC conversion will position AFC better to capitalize on sector tailwind if rescheduling occurs.

• Earnings impacted by underperformance of legacy loans and realized losses on assets. - Limited pipeline due to challenging cannabis industry environment with limited capital entering and many operators lacking real estate coverage. - Uncertainties in predicting future results due to inherent uncertainties in market developments and cannabis sector challenges.

Q: Overall decision to convert to BDC versus mortgage REIT.

A: Robyn Tannenbaum stated that as cannabis operators grow and many don't own real estate, REIT limits investments, so converting to BDC is best for long-term value and investing in more opportunities.

Q: Pipeline reduction and BDC impact on pipeline.

A: Robyn Tannenbaum mentioned REIT limits investments in operators without real estate, and converting to BDC broadens investment universe. Dan Neville noted 2/3 of cannabis opportunities lack real estate coverage, affecting pipeline.

Q: Rescheduling impact.

A: Daniel Neville said rescheduling could increase capital supply, support asset valuations, and attract equity capital, helping troubled loans and industry growth.

Q: Update on problem loans with Private Company K.

A: Daniel Neville said 2 assets under LOI, 3rd asset actively marketed; Brandon Hetzel explained loans at fair value vs carrying value are due to GAAP election history.

Q: Debt leverage and equity funding.

A: Robyn Tannenbaum said target 1-1.5x leverage, no immediate plan to issue equity.

Q: Maturities in second half.

A: Daniel Neville said 1 maturity next month, expect loan refinanced in coming weeks, not participating in refinancing.

Q: Mortgage REIT sector sentiment beyond cannabis.

A: Robyn Tannenbaum said mortgage REITs traded better since last year, people realizing underperforming loans, but unclear impact of macro themes, interest REITs, alternative lending, crypto.

Q: CECL reserves and impact of Schedule III.

A: Brandon Hetzel said CECL reserves increase due to loan-by-loan evaluation; Daniel Neville said if Schedule III happens and cash flows improve, CECL reserves could come down as asset valuations improve.

Q: BDC conversion and new opportunities.

A: Robyn Tannenbaum said BDC conversion may open new credit facilities, but composition of portfolio post-conversion too early to tell as still operating as REIT until conversion.