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Advanced Flower Capital Inc. (AFCG)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 results were weak: GAAP net loss of $13.2M (-$0.60 EPS) and Distributable Earnings (DE) of $3.4M ($0.15/share), driven by higher CECL provisioning and the exit/write‑off of a long‑running equipment loan; the Board paid a $0.15 dividend for Q2 .
  • Management announced a strategic pivot: expansion of the investment mandate to include ancillary and non‑cannabis middle‑market loans and an intention to seek conversion from a mortgage REIT to a BDC to broaden the investable universe (subject to shareholder approval) .
  • Core credit metrics deteriorated sequentially: CECL reserve rose to $44.0M (14.6% of loans), book value per share fell to $8.18, and net interest income declined to $6.2M; weighted average portfolio yield to maturity was ~17% as of 8/1/25 .
  • Street EPS consensus for Q2 was +$0.18 versus actual -$0.60; consensus revenue $8.0M versus reported net interest income $6.2M — a significant miss that will likely force estimate cuts (values retrieved from S&P Global)* [GetEstimates].
  • Stock reaction catalysts: the proposed BDC conversion and an expanded mandate could support medium‑term growth and diversification; near‑term sentiment hinges on progress resolving underperforming loans and potential federal rescheduling impacts on capital flows and borrower health .

What Went Well and What Went Wrong

What Went Well

  • “We focused on working through our non‑accrual credits with the goal to achieve resolution, paydowns and paybacks of our loans,” with progress exiting a Nevada equipment loan already fully reserved (no book value impact) .
  • Expanded investment mandate approved to include ancillary cannabis and non‑cannabis middle‑market lending, positioning for broader opportunities and risk diversification .
  • BDC conversion plan (subject to shareholder approval) to expand investable universe beyond real‑estate‑covered loans where many operators lack property coverage; team highlights 30 years of direct lending experience and $10B in transactions .

What Went Wrong

  • GAAP net loss of $13.2M and DE fell to $3.4M ($0.15/share), reflecting higher CECL provisions ($14.1M in Q2) and earnings impact from legacy asset exits .
  • Portfolio credit metrics deteriorated: CECL reserve increased to $44.0M (14.6% of carrying value), book value per share declined to $8.18 .
  • Incremental non‑accrual and litigation headwinds: a Michigan borrower moved to non‑accrual (~$16M principal), and ongoing Justice Grown disputes constrain near‑term resolution and redeployment timing .

Financial Results

Core P&L and Capital Metrics (quarterly)

MetricQ4 2024Q1 2025Q2 2025
Net Interest Income ($USD Millions)$7.64 $6.60 $6.20
GAAP Net Income (Loss) ($USD Millions)$(0.99) $4.07 $(13.16)
Basic EPS ($USD)$(0.05) $0.18 $(0.60)
Distributable Earnings ($USD Millions)$6.29 $4.54 $3.38
DE per Share ($USD)$0.29 $0.21 $0.15
CECL Provision ($USD Millions)$5.31 $(0.70) (reversal) $14.07
CECL Reserve ($USD Millions)$30.6 $29.9 $44.0
Book Value per Share ($USD)$9.02 $8.89 $8.18

Vs. Estimates (Q2 2025)

MetricActualConsensusBeat/Miss
Primary EPS ($USD)$(0.60) $0.18* [GetEstimates]Bold miss: $(0.78) [GetEstimates]
Revenue ($USD Millions)Net interest income $6.20 $8.01* [GetEstimates]Bold miss: $(1.81) [GetEstimates]

Note: S&P Global consensus values marked with *; Values retrieved from S&P Global.

KPIs

KPIQ4 2024Q1 2025Q2 2025
Principal Outstanding ($USD Millions)$356.8 $366.3 $359.6
Loans (#)16 17 15
Weighted Avg Portfolio YTM (%)~18% (12/31/24 & 3/1/25) ~18% (3/31/25 & 5/1/25) ~17% (as of 8/1/25)
Dividend per Share ($USD)$0.33 paid for Q3 2024 $0.23 paid for Q1 2025 $0.15 paid for Q2 2025

Guidance Changes

MetricPeriodPrevious Guidance/ActionCurrent Guidance/ActionChange
Dividend per ShareQ2 2025$0.23 paid in Q1 2025 $0.15 paid on 7/15/25 Lowered
Investment MandateEffective Aug 14, 2025REIT focusing on real‑estate‑covered cannabis loans Expanded to include ancillary cannabis and non‑cannabis middle‑market secured loans Expanded
Corporate StructureTarget 2026 (subject to shareholder approval)Mortgage REIT Intention to convert to BDC (proxy to be filed; timing 2026 if approved) Strategic pivot
Revolving Credit FacilityQ2 2025$30M facility [prior context]Expanded to $50M; lead arranger FDIC bank >$75B assets Increased capacity
Leverage TargetOngoingN/A1.0–1.2x leverage target; no equity issuance at current stock levels Operating target disclosed

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
Origination Pipeline & SelectivityStrong pipeline; $135M 2024 originations; cautious, focus on proven operators Active pipeline $287M; originations likely muted amid volatility Pipeline moving down; tighter underwriting; ~2/3 of opportunities lack real‑estate coverage Tightening
Underperforming Loans & Recoveries$119M returns from 5 underperformers in 2024; aggressive rights enforcement Receiverships for Private Co A and K progressing; Justice Grown litigation ongoing Michigan borrower moved to non‑accrual (~$16M); continued Justice Grown legal actions Ongoing stress
CECL & ReservesCECL reserve $30.6M (10.4% of loans) CECL reserve $29.9M (9.75%) CECL reserve $44.0M (14.6%); provision +$14.1M Higher reserves
Capital Markets & Supply/DemandScarcity of capital; attractive risk‑adjusted returns amid limited providers Scarcity persists; refinancing/M&A driving demand Rescheduling could attract capital; current environment still tight Potential tailwind contingent
Tariffs/Macro InputsNot highlightedMinimal impact; hardware/packaging partly sourced China; fertilizers mostly stateside No new update; consistent view Neutral
Corporate Structure StrategyN/AN/AProposed BDC conversion to expand investable universe Strategic change

Management Commentary

  • CEO (Dan Neville): “During the quarter, we focused on working through our non‑accrual credits… there continues to be a lack of capital entering the cannabis market and we are selectively evaluating opportunities with established operators of scale” .
  • CEO (Dan Neville): On BDC conversion rationale: “Many operators do not own real estate… Converting to a BDC would significantly expand our investable universe” .
  • CFO (Brandon Hetzel): “For the quarter ended 06/30/2025, we generated net interest income of $6.2M and distributable earnings of $3.4M… GAAP net loss of $13.2M” .
  • CIO/President (Robyn Tannenbaum): “Conversion… will enable AFC to originate and invest in a broader array of opportunities… broaden opportunity set and diversify exposure” .
  • CEO (Dan Neville): On rescheduling: certainty on taxation “should allow more capital to be attracted… support asset valuations… help us achieve better realizations as we work out troubled loans” .

Q&A Highlights

  • Structure choice (BDC vs. REIT): Management prefers conversion over parallel vehicles to unlock non‑real‑estate lending and ancillary opportunities; current investments remain REIT‑compliant until conversion .
  • Pipeline breadth and quality: Roughly two‑thirds of cannabis opportunities lack real‑estate coverage today, constraining origination as a REIT; underwriting standards tightening amid industry volatility .
  • Credit quality and CECL: Reserve increase primarily loan‑specific; macro inputs secondary. Rescheduling (280E relief) could improve cash flows and valuations, potentially lowering reserves over time .
  • Leverage & equity: Target leverage 1.0–1.2x; management does not anticipate issuing equity at current valuation .
  • Non‑accrual updates: Michigan borrower moved to non‑accrual (~$16M principal), Justice Grown litigation ongoing across jurisdictions; management focused on exercising rights and recovering principal .

Estimates Context

  • Q2 2025 EPS: Actual $(0.60) vs consensus $0.18 — large miss tied to CECL provisioning and legacy loan dynamics (values retrieved from S&P Global)* [GetEstimates].
  • Q2 2025 revenue: Street consensus $8.01M vs reported net interest income $6.20M — miss likely reflecting lower accruals and impact from underperformers (values retrieved from S&P Global)* [GetEstimates].
  • Implications: Expect EPS and revenue estimate cuts for 2H 2025 as DE run‑rate and dividend reset lower; any favorable developments (rescheduling, paydowns and redeployment into performing loans, expanded mandate execution) could later stabilize estimates .

Key Takeaways for Investors

  • Near‑term headwinds: Elevated CECL provisioning and non‑accruals drove Q2 losses; watch for receivership outcomes and litigation resolutions to unlock capital redeployment .
  • Dividend reset: Q2 dividend cut to $0.15 aligns with lower DE; future dividends will reflect quarter‑by‑quarter DE until underperformers are resolved .
  • Strategic pivot: Expanded mandate and planned BDC conversion broaden opportunity set beyond real‑estate‑covered loans, potentially improving originations and diversification over time .
  • Balance sheet and funding: Facility expanded to $50M; leverage targeted at 1.0–1.2x; no equity issuance contemplated at current stock levels .
  • Estimate reset risk: Large Q2 miss vs. Street suggests downward revisions; monitor sequential DE trajectory, CECL reserve trends, and book value recovery [GetEstimates] .
  • Regulatory optionality: Federal rescheduling could attract equity capital, support asset valuations, and aid recoveries on troubled loans — a medium‑term tailwind if realized .
  • Trading lens: Near term, stock likely trades on credit outcomes (non‑accruals, receiverships) and clarity on BDC conversion timing; medium term, diversification and originations under expanded mandate are the narrative drivers .