Executive Summary

Q3 2025 printed GAAP net loss of $(12.5)M (−$0.57/sh), while Distributable Earnings (DE) were $3.5M ($0.16/sh). Credit costs (CECL) and unrealized losses drove GAAP results; core earnings power tracked DE and net interest income (NII) of $6.5M .
Board signaled no Q4 2025 distribution given an anticipated ~$4M taxable loss on the settlement of a non‑accrual loan; loss was fully reserved at 9/30 and will affect Q4 earnings when closed .
Shareholders approved conversion from REIT to BDC; conversion expected in Q1 2026, expanding investable scope beyond real‑estate‑backed cannabis loans to ancillary and non‑cannabis middle market credits .
Capital recycling accelerated: $43M of principal repayments since Q2-end; pipeline includes ~$60M in cannabis and a growing non‑cannabis slate, with management targeting low double‑digit IRRs as a BDC and tighter selectivity .

What Went Well and What Went Wrong

What Went Well

Shareholder approval to convert to BDC (94% of votes cast in favor), enabling broader mandate (including non‑cannabis) and diversification of risk/returns; conversion targeted for Q1 2026 .
Active portfolio management: $43M of principal repayment since Q2; redeployment of a $10M payoff at a “significantly higher yield,” plus a $23.2M par payoff enhanced liquidity/earnings trajectory post‑recycle .
Management pipeline and selectivity: “We’re throwing the gates wide open” to sector‑agnostic, stable, recession‑resistant credits with “low double‑digit” target IRRs, improving prospective risk‑adjusted returns .

What Went Wrong

Credit costs drove GAAP losses: CECL provision of $7.37M and other non‑cash losses pulled GAAP net to $(12.5)M despite $3.5M DE; YoY DE fell from $7.25M to $3.54M .
Dividend suspension in Q4: Board does not anticipate a Q4 distribution due to expected ~$4M loss on a non‑accrual settlement (fully reserved), a near‑term income headwind .
Elevated problem loan intensity: Multiple receiverships and litigation (e.g., Justice Grown) persisted; CECL reserve rose to $51.3M (18.7% of loans at carrying value) as of 9/30, compressing book value per share to $7.49 .

Financial Results

Core P&L and Earnings Power (oldest → newest)

Metric	Q3 2024	Q1 2025	Q2 2025	Q3 2025
GAAP Net Income ($M)	$1.38	$4.07	$(13.16)	$(12.49)
GAAP EPS ($)	—	$0.18	$(0.60)	$(0.57)
Distributable Earnings ($M)	$7.25	$4.54	$3.38	$3.54
Distributable EPS ($)	$0.35	$0.21	$0.15	$0.16
Net Interest Income ($M)	—	$6.6	$6.2	$6.5

Notes: DE/DEPS are non‑GAAP; see reconciliation in press releases . YoY: DEPS fell from $0.35 to $0.16 .

Actuals vs Wall Street Consensus (S&P Global)

Metric	Q1 2025	Q2 2025	Q3 2025
Consensus EPS ($)	0.1625*	0.18*	0.155*
Actual EPS ($)	0.18	(0.60)	(0.57)
EPS Beat/(Miss) ($)	+0.02*	−0.78*	−0.73*
Consensus Revenue ($M)	7.98*	8.01*	6.32*
Actual Revenue ($M)	7.34*	−9.65*	−0.84*
Rev Beat/(Miss) ($M)	−0.64*	−17.66*	−7.16*

Values retrieved from S&P Global.* Revenue is not a primary management focus for AFCG’s mortgage REIT model; NII and DE are better indicators of core earnings power .

KPIs (portfolio quality, capital, dividends)

KPI	Q1 2025	Q2 2025	Q3 2025
Principal Outstanding ($M)	$366.3 across 17 loans	$359.6 across 15 loans	$332.8 (start of Q3); $327.7 (11/3) across 14 loans
CECL Reserve ($M; % of loans CV)	$29.9; 9.75%	$44.0; 14.6%	$51.3; 18.7%
Loans at FV – Unrealized Loss ($M)	$20.4	$21.5	$31.2
Total Assets ($M)	$321.7	$290.6	$288.7
Total Equity ($M)	$200.8	$184.7	$169.3
Book Value/Share ($)	$8.89	$8.18	$7.49
Dividend/Share	$0.23 (Q1, paid 4/15)	$0.15 (Q2, paid 7/15)	$0.15 (Q3, paid 10/15)

Segment breakdown: Not applicable; AFCG operates a single lending strategy with loans primarily to cannabis operators (transitioning to a broader mandate) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Common Dividend	Q4 2025	None provided beyond quarterly decisions	“Do not anticipate making a distribution in Q4 2025” due to ~$(4)M loss on settlement (fully reserved)	Lowered/Suspended
Corporate Structure	Q1 2026	Announced intent to seek BDC conversion; pending shareholder vote	Shareholders approved proposals; conversion expected Q1 2026 (board approval pending)	De‑risked timing
Investment Mandate	Ongoing	Expanded (Aug 2025) to ancillary cannabis and non‑cannabis middle market loans (REIT‑compliant until conversion)	Continued execution; building non‑cannabis pipeline (~~$350M) and total pipeline (~~$415M)	Maintained/Operationalized
Leverage Target	Ongoing	—	Target 1.0–1.2x; no plans to issue equity at current valuation	New disclosure

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 2025)	Previous Mentions (Q2 2025)	Current Period (Q3 2025)	Trend
BDC Conversion	Discussed as strategic path to broaden investable universe	Formal intent announced; rationale tied to limited REIT‑qualifying pipeline	Shareholder approval secured; Q1’26 timing expected	Advancing
Pipeline & Selectivity	Active pipeline $287M; originations muted amid volatility	Pipeline reduced; tighter underwriting; REIT limits on non‑RE loans	~$415M total; ~$60M cannabis; selectivity rising; low‑double‑digit IRR targets	Improving breadth, tighter bar
Credit Quality/CECL	CECL $29.9M (9.75%); several receiverships/litigation	CECL rose to $44.0M (14.6%)	CECL $51.3M (18.7%); settlement on non‑accrual to drive ~$4M Q4 loss (reserved)	Deteriorated but addressed
Capital Returns	Q1 dividend $0.23	Q2 dividend $0.15	Q3 dividend $0.15; no Q4 distribution expected	Lowered near‑term
Legal/Receiverships	Justice Grown litigation; multiple receiverships	Updates on receiverships; state dynamics (MA, PA)	Justice Grown appeals pending; receivership distributions progressing	Ongoing
Macro/Regulatory	Capital scarcity; rescheduling watch	Rescheduling could improve recoveries; still debt‑heavy funding	Cautious; deployment in cannabis requires federal progress/equity inflows	Cautious

Management Commentary

“We continue to make progress resolving our nonaccrual positions and driving loan repayments… We see meaningful lending opportunities… and are actively evaluating opportunities in the lower‑middle market” (CEO) .
“As a BDC, the investment universe for AFC will expand… including direct lending opportunities outside the cannabis industry… better positioned to diversify exposure across industries and credit risk profiles.” (President/CIO) .
“Given the anticipated approximately $4 million taxable loss… we do not anticipate making a distribution to shareholders in Q4 2025.” (CEO) .
“Our selectivity will certainly go up… there’s just more opportunities to look at and more opportunities to be selective.” (CEO) .
“We’re looking for stable businesses… some element of recurring revenue… we’re a lender… we’re looking for… good credit quality… attractive risk‑adjusted returns.” (CEO) .

Q&A Highlights

Pipeline composition and yields: Total pipeline around ~$415M (≈$60M cannabis; remainder non‑cannabis); outside‑cannabis target IRRs “low double‑digit,” with deal selectivity increasing .
BDC conversion timing and deployment: Conversion anticipated Q1 2026; until then, new deals must be REIT‑compliant; no deployment guidance issued for 2026 .
Dividend outlook: Board decided no Q4 distribution given expected ~$4M loss; no forward dividend guidance beyond Q4 .
Legal updates: Justice Grown matters proceeding in NJ and NY; appeals pending; loans secured by NJ and PA assets maturing May 2026 .
Leverage/financing: Target 1.0–1.2x leverage; revolver increased to $50M in Q2; potential for BDC‑like financing options over time .

Estimates Context

EPS: Q3 actual −$0.57 vs consensus $0.155 (miss), after Q2 miss (−$0.60 vs $0.18) and Q1 beat ($0.18 vs $0.1625). CECL provisions and unrealized losses were key drivers of misses in Q2–Q3 .
Revenue: Consensus exists but is less relevant to AFCG’s model; NII and DE are the core performance indicators used by management .
Estimate implications: Street models likely need to incorporate higher run‑rate CECL and the Q4 loss impact, lower dividends near‑term, and slower near‑term deployment until BDC conversion unlocks broader origination channels .

Values retrieved from S&P Global for all consensus figures and “actual revenue” shown in the estimates table.*

Key Takeaways for Investors

Near‑term earnings quality: Core NII/DE remain positive, but elevated CECL/unrealized losses drive GAAP losses; expect a Q4 hit from the non‑accrual settlement (already reserved) and no Q4 dividend .
Transition unlocks growth: BDC conversion in Q1 2026 should broaden the investable universe to non‑cannabis/sponsor‑backed credits and non‑real‑estate structures, supporting more diversified, lower‑risk deployment .
Credit clean‑up ongoing: Receiverships and litigation are being actively worked; repayments ($43M since Q2) and par payoffs demonstrate progress, but CECL at 18.7% signals continued workout intensity .
Deployment pacing: Management will remain highly selective; pipeline breadth improving with a bias to stable, recurring‑revenue sectors at low‑double‑digit IRRs post‑conversion .
Book value trajectory: BVPS declined to $7.49 on higher reserves and unrealized losses; successful workouts, rescheduling/equity inflows could aid recoveries over time .
Liquidity/funding: Revolver expanded/renewed; leverage targeted at 1.0–1.2x, with no equity issuance contemplated at current valuation .
Trading angle: The Q4 dividend suspension and anticipated loss are near‑term overhangs; BDC approval and pipeline development are medium‑term catalysts as investors re‑underwrite earnings power in a diversified credit strategy .

Additional Source Documents Read:

Q3 2025 earnings call transcript (full)
Q3 2025 8‑K and press release (full)
Q3‑period other press releases (schedule, dividend)
Prior quarters: Q2 2025 8‑K and call – –; Q1 2025 8‑K and call – –

Advanced Flower Capital Inc. (AFCG)·Q3 2025 Earnings Summary