Prepared remarks
Good day, and thank you for standing by. Welcome to the AFC Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, please press 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Gabriel A. Katz, Chief Legal Officer. Sir, please go ahead.
Good morning, and thank you all for joining AFC's earnings call for the quarter ended 06/30/2026. I am joined this morning by Robyn Tannenbaum, our President and Chief Investment Officer; Daniel Neville, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our 07/17/2026 press release and is posted on the investor relations portion of AFC's website at afcbdc.com, along with our second quarter 2026 earnings release and investor presentation. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, market developments, anticipated portfolio yield, and financial performance, and projections in 2026 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to AFC's most recent periodic filings with the SEC, including our quarterly report on Form 10-Q filed earlier this morning, for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. Today's call will begin with Robyn providing an overview of the lending environment and our results. Daniel will then provide an update on our portfolio and pipeline. Finally, Brandon will conclude with a summary of our financial results before we open the line for Q&A. With that, I will now turn the call over to our President and Chief Investment Officer, Robyn.
Thanks, Gabe, and good morning, everyone. We appreciate you joining us to discuss AFC's second quarter 2026 earnings. Before turning to our results, I want to provide some context on the broader lending environment. As many of you know, the private credit ecosystem is experiencing stress. Default rates across private credit have risen notably, with Fitch reporting a 6% default rate as of July 2026 and Proskauer's private credit default index tracking a similar upward trend. Banks, while not direct lenders to much of the middle market, hold indirect exposure through leveraged facilities extended to private credit funds, and that exposure is now drawing increased scrutiny. In response to broader market stress, we are seeing a pullback in available capital, particularly in the lower middle market, where many lenders have either exited or shifted up market to support their existing portfolios. As a result, we continue to believe the lower middle market offers one of the most compelling risk-adjusted return investment opportunities in private credit today. Competition remains rational in our segment. Unlike the upper middle market where larger direct lending funds continue to compete aggressively on pricing, leverage, and documentation, the lower middle market continues to reward lenders with sponsor relationships, internal sourcing capabilities, and the ability to execute quickly. For AFC, this environment is exciting and what we are prepared for. We believe that this dislocation is creating a compelling vintage for new originations. The loans we originate are generally supported by both enterprise value and asset coverage. We continue to negotiate comprehensive maintenance covenants, including leverage and fixed charge coverage tests. Our pipeline continues to reflect that opportunity, and we are being thoughtful in how we deploy capital. In contrast, much of the upper middle market remains characterized by covenant-light structures with fewer lender protections and more aggressive EBITDA adjustments. Now turning to our results. For the second quarter of 2026, AFC generated net investment income of $0.15 per weighted average share of common stock. Additionally, the board of directors declared the second quarter distribution of $0.05 per share, which was paid on 07/15/2026 to shareholders of record on 06/30/2026. Last quarter, we announced a share repurchase program. During the quarter, we repurchased about $2.8 million which was $0.17 accretive to net asset value. We have approximately $2.2 million remaining in our $5 million share buyback program. Year to date, we have deployed approximately $102 million in new lower middle market commitments. Our pipeline remains well diversified across industries, and we tend to avoid sectors where we believe cyclicality or disruption creates an unfavorable risk profile. I will now turn it over to Daniel to discuss our portfolio.
Thanks, Robyn, and good morning, everyone. I will start with the portfolio and our investment activity for the quarter, then provide an update on our legacy positions and our pipeline. As of 06/30/2026, the fair value across our investment portfolio was $290 million across 17 portfolio companies, compared to $279 million across 15 portfolio companies at 03/31/2026. One hundred percent of the portfolio is in senior secured, first lien debt investments and the weighted average yield, excluding nonaccrual loans, was 13.2%. During the quarter, we funded $17 million, including $5 million to two new portfolio companies, and $12 million to two existing portfolio companies. Fundings were $8 million against $9 million of amortization and repayments. Subsequent to quarter end, we committed $7 million to a $25 million senior secured credit facility for a leading outpatient behavioral health platform with $3 million funded at close. The use of proceeds was to refinance existing debt and support future growth through acquisitions, and is consistent with our expanded lower middle market mandate. Turning to non-accrual loans, which remain concentrated in the legacy cannabis book. Regarding Devi, the receiver has continued the liquidation process. During the quarter, Devi entered into a binding term sheet to sell two additional assets of Devi for $12.5 million in cash proceeds. Subsequent to quarter end, Devi earned a $2 million nonrefundable deposit on the purchase; we expect the transaction to close this year. Inception to date, we have received $58 million of principal repayment on the Devi loan. Regarding DMA, the receiver has continued the liquidation process and closed the sale of two of the three dispensaries subsequent to quarter end. Moving on to Justice Grown. The Justice Grown loan matured on 05/01/2026 and is in maturity default. We have commenced Article 9 foreclosures and are pursuing our rights and remedies under both the credit agreement, including the parent guarantee, and the shareholder guarantee. Our collateral includes vertically integrated assets in New Jersey, three operating dispensaries in Pennsylvania, and a nonoperating cultivation facility in Pennsylvania. AFC has engaged SSG Advisors to conduct a robust marketing process for these assets and we encourage any interested buyers to see the notices available on our website and reach out to SSG for additional information. Given the active legal proceedings, we will not comment further on the specifics outside of what is disclosed in our SEC filings. Taking a step back, the portfolio continues to evolve as we make progress towards resolving the legacy cannabis loans on non-accrual, and the performing cannabis book amortizes and repays over time. Multiple trends signal that capital demand in the lower middle market is only accelerating as legacy lenders push off market. We will look to redeploy that capital into strong risk-adjusted opportunities in the lower middle market. Our pipeline remains active, with $1.3 billion across a diverse range of industries. We remain focused on cash-flowing borrowers with $5 million to $50 million of EBITDA, primarily in sponsored transactions, where we believe we can achieve risk-adjusted returns with strong structural protections. We are maintaining a disciplined approach to underwriting while actively advancing several opportunities through our pipeline. I will now turn it over to Brandon to discuss our financial results in more detail.
Thank you, Daniel. For the quarter ended 06/30/2026, we generated total investment income of $8.7 million and net investment income of $3.5 million, or $0.15 per weighted average share of common stock. This provided 3x coverage of our $0.05 second quarter 2026 distribution. Total investment income was $8.7 million compared with $9.8 million in the prior quarter. The decline primarily reflects $1.8 million of other income recognized in the first quarter that did not recur in the second quarter, mainly relating to a $1.5 million exit fee from the Bloom repayment. Excluding these exit fees, which are episodic, investment income increased modestly quarter over quarter driven by higher interest income. Total operating and income tax expenses were $5.2 million, compared to $5 million in the first quarter, and represented net of a management fee rebate of approximately $176 thousand for the quarter. We ended the second quarter with $364.5 million of principal outstanding spread across 17 loans. As of 06/30/2026, we had total assets of $399.7 million, total net assets of $187.3 million, and our net asset value per share was $8.25. This is an increase of $0.35 per share over the prior quarter. The increase in net asset value per share was driven by net investment income of $0.15 per share, $0.17 per share of accretion from repurchasing shares below net asset value, and an increase in unrealized appreciation on investments of approximately $0.08 per share, offset by the second quarter distribution of $0.05 per share. Regarding the share repurchase program, during the quarter we repurchased and extinguished approximately 839 thousand shares at a weighted average price of $3.29 per share for approximately $2.8 million in the aggregate. Approximately $2.2 million remains available under the $5 million share repurchase program. Turning to the balance sheet, as of 06/30/2026, we had $207 million of debt outstanding consisting of $110 million drawn under our secured revolving credit facility, $20 million drawn under our unsecured revolving credit facility, and $77 million of senior unsecured notes outstanding. Subsequent to quarter end, the company repaid $84 million and $20 million, respectively, on the company's outstanding debt obligations under the secured revolving credit facility and the unsecured revolving credit facility. The weighted average interest rate on our debt outstanding was 6.3% for the quarter. Debt to equity was 1.1x as of June 30 compared to 1.09x at March 31, and net debt to equity was 0.53x compared to 0.48x, respectively. Our asset coverage ratio was 190%, which provides meaningful cushion against the 150% requirement applicable to us. We ended the quarter with $106.5 million of cash and cash equivalents. This provides substantial liquidity for new investments and other capital allocation opportunities. On distributions, we paid the second quarter distribution of $0.05 per common share on 07/15/2026 to shareholders of record as of 06/30/2026. With that, I will now turn it back over to the operator to start the Q&A.
Questions and answers
Thank you. First question is going to come from the line of Aaron Thomas Grey with Alliance Global Partners. Your line is open. Please go ahead.
Hi. Thank you very much for the questions here. I guess, first one for me, just in terms of activity. I could certainly appreciate incremental funding for existing borrowers, but as we think about new borrowers, today you had this participation in July. How is it best to think about the pipeline relative to your ability to execute on opportunities in the near term? It does seem like there has been a little bit of a slowdown considering the fast start you got off to in January and February. So just curious in terms of if that is partially the environment, maybe a bit longer of a process, some timing—any color there would be appreciated. Thank you.
Thanks. Do you want to take that one?
Yeah. Sure. Thanks, Aaron. So we have a very active pipeline, $1.3 billion in the pipeline. And I think we are happy with the quality of the opportunities that we are seeing in the pipeline, the pricing that we are seeing, etc. But originations are going to be lumpy. You saw it in Q1, we did about $80 million. We did less in Q2. And so I think that we are advancing a bunch of opportunities through the pipeline and are seeing good looks, and we will look to continue the momentum over the course of the year. But it will be lumpy and episodic just given the deals that we are hunting.
I appreciate that. That is helpful. And then just in that line, given the potential lumpiness of this, and you could have some potential larger opportunities, how comfortable do you feel regarding your liquidity position today to ensure that you are able to capitalize on potential large opportunities that could come in the pipeline? Thanks.
Daniel, do you want to do that one? Or Brandon?
Yeah. Sure. Yes. As stated in my remarks, at the end of the quarter, in our investment presentation, we have over $70 million in liquidity available to deploy. So we are very comfortable with our liquidity position.
Yeah. And I would say in terms of some of the larger opportunities too, as well, outside of AFC, we do operate under a co-investment relief order with the SEC, which allows us to potentially participate with other affiliates under the TCG platform. And so one of the opportunities that you saw in July, we participated alongside an affiliate. If there are larger opportunities out there that we are chasing, that is also an option to deploy into larger opportunities. And there is also the opportunity to syndicate deals that are above our target hold threshold as well.
Okay. Great. Thanks. Last question from me. I know you said in prepared remarks nothing further from some of the SEC filings regarding Justice. But just maybe to clarify things, now that you have the process in place, you talked about prepared remarks. Is there nothing outstanding, or maybe the legacy operators are doing something that could keep you from going through with the sale process and for you to be able to retrieve as much as possible from those assets? Any clarification there would be helpful. Thanks.
Gabe or Daniel?
Yeah. Aaron, we have pretty extensive disclosures in the SEC filings. I would encourage you and the investors to read through that. We, outside of that, are just not going to be able to comment given the active stages of litigation there.
Fair enough. Thank you very much. I will jump back in the queue. Thank you.
One moment for our next question. Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Your line is open. Please go ahead.
Thank you, and good morning, everyone. Robyn, can you maybe go back to your comments in prior quarters about your views about lending in the cannabis industry? You have pretty much implied that you remain very cautious there and that pretty much all new activity will be outside of cannabis, but we do have a more favorable regulatory backdrop, right? Do you want to expand on that, please? Thanks.
Sure. Thanks for the question, Pablo. I think what we have said in prior quarters and in prior years is that access to equity capital in the cannabis industry was challenged, and I think, unfortunately, it still continues to be challenged. There have been a lot of milestones that people have been hoping for a while that have been long overdue, like the rescheduling of medical cannabis, which happened quicker relative to where people thought it was going to be a few months ago, and the pending potential rescheduling of adult-use cannabis. We have also had, I think, two companies now uplist to the NYSE. Unfortunately, you have not seen a lot of activity on the equity capital side of things associated with that, and I think it is still a difficult environment to raise equity capital. As a result, I think we have concerns about the industry continuing to be funded on the debt side of things without having access to equity capital. That also impacts the refi-ability of these borrowers. These are not straightforward businesses. There can be volatility in the industry and in the regulatory environment, and a lack of refi-ability on the equity side to deal with those problems is problematic to debt investors. So we applaud the progress; I think there has been good progress, but the lack of equity is very problematic for us.
Thank you. That is good color. Maybe just going back to Devi and DMA. In the case of Devi, you said that you are expecting the assets to be sold for $12.5 million in the second half, and that a deposit was already taken on the transaction for $2 million, so that pretty much confirms that the transaction is in place. I just want to make sure I heard that right. I know I can go back to the transcript. And whether you have access to the full amount, or are there other parties that have access to those proceeds also? Thanks.
Yeah. So that you heard correct. It was a binding term sheet that was signed, subject to a $2 million cash hard deposit. Our expectation is that it closes sometime this year, and that would be for $12.5 million of total cash proceeds. We are a lead participant in the Devi loan, and I believe we have roughly 70% to 80% participation in Devi, so about 80% of the proceeds would be distributed to us on a pro rata basis.
Thank you. That is good color. And the same question on DMA, and I am sorry if I misheard: you said that two of the three dispensaries closed the transaction, or they closed operations? I am just trying to clarify whether you can give a number as to what you are expecting.
No, the transaction closed; the dispensaries did not close. We had two of the three dispensaries under an asset purchase agreement previously. Those sales received regulatory approval in June, and both of those transactions closed in July. In terms of the rest of the transaction and the wind down of DMA, we have one more to go. You can look at our BDC filings to see where our mark is on that.
Right. And again, apologies if there are more people on the Q&A line here. In terms of the new loan you made in the third quarter, can you give more color on the amount? I think you said $17 million or maybe I misheard. And more color on the company itself, if you can. Thank you.
In the second quarter—you were asking? The one in the second quarter? Subsequent to the report, we committed $7 million to a $25 million senior secured credit facility for a leading outpatient behavioral health platform. It is a behavioral health roll-up focused in the Northeast. They have ten locations throughout the Northeast and do a mix of talk therapy, medication management, as well as some additional add-ons both in an outpatient setting and a partial hospitalization setting. It is an industry we have talked about previously—predictable, recession-resistant, good cash-flow characteristics—and health is one of the areas we would be focused on. We have done a couple transactions around that space, one in the insurance space in Q1 and this deal in Q3.
And, Pablo, the size of that deal was we committed $7 million and funded $3.1 million on closing.
Thank you. That is good color there. I have not gone through the 10-Q in full, only partially. I think a while ago you said that Sunburn was non-accrual. Can you give a reminder where you are with the Sunburn loan, which I think was renamed under another borrower's name? Just some color there.
Oh, sure. So we had disclosure last quarter. We entered into a forbearance agreement with Sunburn that was conditioned on the company raising additional equity capital as well as some other conditions. The company fulfilled those obligations in Q2, and we received a paydown associated with the loan. There was additional equity capital that went into the business for some expansion that they are looking to do. The company fulfilled the forbearance obligations, and the loan is in good standing.
Thank you. And the very last one: I mean, obviously, we know how much available credit you have. But right now you are at net debt-to-equity at 0.53. What are you comfortable with? I understand the average on BDCs is like 1.3x, but what are you comfortable with?
Sure. I think on our side, we have always said that somewhere around 1.0x, or potentially above that, is where we would consider being; but I think 1.0x is a good intermediate target for us.
That is good. Thank you. That is all for me.
Thank you. I am showing no further questions, and I would like to hand the conference back over to Daniel Neville for closing remarks.
Thanks, everyone, for joining us today, and we look forward to keeping you updated on future progress.
This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.