Advanced Flower Capital Inc.

Advanced Flower Capital Inc. (AFC) operates as an institutional lender specializing in senior secured loans and other types of mortgage loans and debt securities. Historically, through December 31, 2025, the company focused on loans to cannabis industry operators in states with legalized medical and/or adult-use cannabis, structured primarily as senior loans secured by real estate, equipment, cash flows, and license value ¹. Effective January 1, 2026, AFC transitioned from a REIT to a Business Development Company (BDC) under the Investment Company Act of 1940, expanding its investment strategy beyond cannabis to include ancillary cannabis companies and other public and privately held middle-market companies ². The company's primary objective is to provide attractive risk-adjusted returns through cash distributions and capital appreciation ³.

During 2025, AFC's competitive strengths included an experienced management team, a flexible funding structure allowing quicker capital redeployment compared to traditional REIT land ownership models, compelling risk-adjusted returns from various fee structures, and underlying collateral primarily consisting of real property and certain personal property ⁴. The company also highlighted its established loan origination platform in the cannabis market, addressing capital supply and demand imbalances, and significant management investment in the company's common stock ⁵. Post-conversion, these strengths are expected to continue, augmented by a willingness to evaluate complex transactions, the ability to finance entire capital structures, and flexible financing solutions tailored to borrower needs ⁶.

The core business model through 2025 involved originating, structuring, underwriting, investing in, and managing senior secured loans and other debt securities, with a specialization in the cannabis industry. Revenue was generated through a combination of coupons, original issue discount (OID), prepayment or exit fees, and other fees ⁷. Primary customer segments were state law-compliant cannabis operators and ancillary cannabis companies, with an expanded mandate post-conversion to include other public and privately held middle-market companies ⁸. The company's wholly-owned subsidiary, AFCG TRS1, LLC (TRS1), operated as a taxable REIT subsidiary, with its financial statements consolidated within AFC's ⁹.

As of December 31, 2025, AFC's portfolio of assets held outside of TRS1 had a weighted average real estate collateral coverage of approximately 1.0 times its aggregate committed principal amount of such loans ¹⁰. Loans were typically secured by real property, cash flows, license value, equipment, and other assets ¹¹. The company did not have liens on cannabis inventory and was generally restricted from taking ownership of state licenses due to statutory prohibitions and exchange listing standards ¹².

For the fiscal year ended December 31, 2025, AFC reported total management fees of $3,782,299 ¹³, which were reduced by outside fees earned of $(854,432) ¹⁴, resulting in base management fees of $2,927,867 ¹⁵. Incentive fees earned for 2025 were zero ¹⁶. General and administrative expenses reimbursable to the Manager were $2,384,000 ¹⁷, and professional fees reimbursable were $47,801 ¹⁸, leading to total compensation and expense reimbursement of $5,359,668 ¹⁹. The company repurchased $13.0 million ²⁰ in principal amount of its 2027 Senior Notes at 96.3% ²¹ of par value, resulting in a gain on extinguishment of debt of approximately $0.4 million ²². As of December 31, 2025, $77.0 million ²³ in principal amount of the 2027 Senior Notes remained outstanding. Total consolidated indebtedness was approximately $98.0 million ²⁴, excluding debt issuance costs and accrued interest, including $21.0 million ²⁵ drawn under its Revolving Credit Facility.

Comparing 2025 to 2024, base management fees decreased from $3,593,341 ²⁶ in 2024 to $2,927,867 ²⁷ in 2025. Incentive fees earned saw a significant reduction from $6,768,480 ²⁸ in 2024 to zero ²⁹ in 2025. Total compensation and expense reimbursement decreased from $13,276,077 ³⁰ in 2024 to $5,359,668 ³¹ in 2025. Dividends declared per share decreased from $1.77 ³² in 2024 to $0.53 ³³ in 2025, with total dividends decreasing from $37,531,416 ³⁴ in 2024 to $11,975,530 ³⁵ in 2025.

Significant operational developments during 2025 included placing Private Company K in consensual receivership in January 2025 ³⁶ and initiating a mortgage foreclosure proceeding against Subsidiary of Private Company G in February 2025 ³⁷. In April 2025, AFC commenced separate legal actions against two shareholders of Subsidiary of Private Company G's parent company and the parent company itself ³⁸. In May 2025, a preliminary injunction was granted against AFC, enjoining it from seizing certain assets or enforcing remedies against Subsidiary of Private Company G ³⁹. AFC appealed this injunction to the Third Circuit Court of Appeals ⁴⁰. In June 2025, AFC wrote off an equipment loan receivable with Public Company A of approximately $1.8 million ⁴¹. In November 2025, AFC entered into a mutual release and settlement agreement with Private Company P, receiving a settlement of approximately $10.0 million ⁴², with $6.0 million ⁴³ financed by a new loan to Private Company W ⁴⁴. The company also entered into new senior secured credit facilities with Private Company U for $15.0 million ⁴⁵ in February 2025, and with Subsidiaries of Private Company V for $14.0 million ⁴⁶ in April 2025. In August 2025, AFC purchased $10.0 million ⁴⁷ in outstanding principal of a senior secured term loan to Subsidiary of Public Company S at a 4.0% ⁴⁸ discount, while an existing $10.0 million ⁴⁹ investment with the same entity was repaid ⁵⁰. In December 2025, AFC purchased $5.0 million ⁵¹ in outstanding principal of a senior secured term loan to Subsidiary of Public Company T at par ⁵². The Revolving Credit Facility was amended multiple times in 2025, extending its maturity to April 29, 2028 ⁵³, increasing the interest rate floor from 4.00% to 7.00% ⁵⁴, and increasing the total aggregate commitment from $30.0 million to $50.0 million ⁵⁵. The AFCF Credit Facility was terminated in April 2025 ⁵⁶.

Effective January 1, 2026, AFC completed its strategic transition from operating as a REIT to operating as a BDC, and beginning with its taxable year ending December 31, 2026, the company intends to elect to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes ⁵⁷. As a BDC, AFC is now subject to a new regulatory framework, including requirements for portfolio composition, asset coverage, affiliate transactions, governance, and compliance ⁵⁸. The company's primary objective continues to be providing attractive risk-adjusted returns through cash distributions and capital appreciation ⁵⁹.

A major growth area for AFC is the expansion of its investment universe. While the company will continue to pursue lending opportunities to cannabis operators and ancillary cannabis companies, these investments are no longer its primary focus ⁶⁰. Opportunities in other industries, including private and public middle-market companies, will be evaluated alongside cannabis-related investments, subject to the requirements of the 1940 Act applicable to BDCs ⁶¹. This expanded mandate is expected to enhance portfolio diversification, increase investment flexibility, and support the pursuit of attractive risk-adjusted returns ⁶². The conversion to a BDC also removes constraints regarding real property collateral coverage, allowing investments in a broader range of real estate and non-real estate related assets ⁶³. The company targets loans with principal balances greater than $10.0 million ⁶⁴, often used for expansion capital, acquisitions, refinancings, and recapitalizations, and secured loans to cash-flowing borrowers with at least one times enterprise value coverage ⁶⁵. Borrowers typically generate EBITDA of $5 million to $50 million ⁶⁶ and operate across diverse U.S. industry sectors ⁶⁷.

Another growth vector is the robust loan origination pipeline. As of February 25, 2026, AFC's loan origination pipeline had approximately $1.4 billion ⁶⁸ of potential commitments under review for new loans to public and privately held lower-middle-market companies, including state law-compliant cannabis operators and ancillary cannabis companies ⁶⁹. The management team and Investment Committee have sourced over $29 billion ⁷⁰ of prospective loans to lower-middle-market companies across various industries ⁷¹. These potential loans are in various stages of evaluation, subject to underwriting, due diligence, and final Investment Committee approval ⁷². AFC intends to fund these potential loans using unused borrowing capacity under its Revolving Credit Facility and the new TCGSL Credit Facility, net proceeds of future debt or equity offerings, existing cash, and/or loan repayments ⁷³.

Operationally, the company's Adviser will manage investment activities and day-to-day operations, determining portfolio composition, identifying and structuring investments, performing due diligence, and executing, servicing, and monitoring investments ⁷⁴. The Investment Committee, whose members are expected to remain largely the same post-conversion (with Mr. Tannenbaum resigning and Johanna White appointed effective February 27, 2026) ⁷⁵, will continue to review and approve investments ⁷⁶. The company will no longer be subject to geographic concentration parameters for underlying collateral and may originate or acquire investments in any jurisdiction consistent with its investment mandate ⁷⁷.

Planned capital allocation includes funding new loans through increased access to equity and debt capital, which may provide a lower overall cost of funding and the ability to hold larger loan sizes ⁷⁸. In January 2026, AFC entered into a new TCGSL Credit Facility with an affiliate, providing a $20.0 million ⁷⁹ commitment at an 8.5% ⁸⁰ annual interest rate, maturing on August 1, 2028 ⁸¹. The company may also enter into new at-the-market (ATM) programs for equity sales ⁸².

A significant structural headwind is the ongoing federal illegality of cannabis, despite state-level legalization. While the U.S. government has generally adopted a "hands-off" approach, strict enforcement of federal laws could still occur, potentially disrupting borrowers' businesses and AFC's investments ⁸³. The potential reclassification of cannabis to Schedule III under the CSA, while a momentous change, would not legalize cannabis federally and could lead to new regulatory requirements or enforcement targets by the DEA or FDA ⁸⁴. The "Joyce Amendment," which prohibits the DOJ from using funds to prevent states from implementing medical-use cannabis laws, has been continuously renewed but does not expressly protect adult-use cannabis operators ⁸⁵. Furthermore, cannabis businesses face unfavorable U.S. tax treatment under Section 280E of the Code, which disallows deductions for business expenses beyond costs of goods sold, impacting borrower profitability and potentially demand for AFC's financing ⁸⁶.

AFC faces material risks including intense competition for lending opportunities from a growing number of institutional investors, which could reduce loan returns and profitability ⁸⁷. The company's historical and future portfolio concentration in a limited number of loans and sectors, particularly cannabis, exposes it to significant loss if any asset declines in value or a borrower defaults, as exemplified by the ongoing legal actions and foreclosure proceedings with Subsidiary of Private Company G ⁸⁸. The illiquidity of loans to private companies, especially in the cannabis industry due to regulatory restrictions on ownership and transferability, may make it difficult to sell such loans in a timely manner or at all, potentially leading to realized values significantly less than recorded fair values ⁸⁹. The federal illegality of cannabis poses a fundamental risk, as strict enforcement of federal laws could prevent AFC from executing its business plan and result in substantial losses on its cannabis-related loans, despite recent positive statements and an Executive Order directing rescheduling to Schedule III ⁹⁰. Changes in state cannabis laws or regulations, or their interpretations, could also adversely affect borrowers' ability to operate profitably, impacting AFC's loan performance ⁹¹. As a BDC, AFC is subject to a complex regulatory regime, including a 150% ⁹² asset coverage ratio requirement, restrictions on affiliate transactions, and qualifying asset requirements, which could limit operating flexibility, increase compliance costs, and constrain investment opportunities ⁹³. Interest rate fluctuations, particularly rising rates, could increase financing costs on floating-rate debt without a commensurate increase in fixed-rate loan income, negatively impacting results ⁹⁴. The company's ability to grow depends on external capital, which may not be available on favorable terms or at all, especially given banks' reluctance to lend to cannabis-related businesses ⁹⁵.

Management's message emphasizes the strategic transition from a REIT to a BDC, effective January 1, 2026, and the intention to elect RIC status for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2026 ⁹⁶. This conversion is highlighted as a move to enhance portfolio diversification, increase investment flexibility, and support the pursuit of attractive risk-adjusted returns by expanding the investment universe beyond real estate-backed cannabis loans to include ancillary cannabis businesses and other middle-market companies ⁹⁷. Management also underscores the continuity of its experienced team and rigorous underwriting process as key competitive advantages in executing this expanded mandate. The company intends to distribute substantially all available earnings on a quarterly basis, consistent with its RIC status ⁹⁸.