Advanced Flower Capital Q3 NAV Rises as Credit Risks Persist

Advanced Flower Capital Inc. reported a higher net asset value and a larger quarterly increase in net assets for the third quarter of 2026, supported by net investment income and unrealized investment gains. However, credit quality remained a central risk, with investments on non-accrual representing 23.5% of the portfolio’s fair value at quarter-end.

For the three months ended September 30, the business development company recorded total investment income of $8.6 million, compared with $8.7 million in the second quarter. Net investment income increased to $3.5 million, or $0.16 per weighted-average share, from $3.5 million, or $0.15 per share, in the preceding quarter.

A $2.9 million net unrealized gain on investments lifted the net increase in assets resulting from operations to $6.4 million, or $0.28 per share. That compared with $5.4 million, or $0.23 per share, in the second quarter.

Net asset value rose to $8.55 per share as of September 30 from $8.25 at the end of June. Total net assets increased to $191.6 million from $187.3 million. The board declared a third-quarter distribution of $0.05 per share, which was paid on October 15 to shareholders of record as of September 30.

Limited net portfolio deployment

AFC originated $7 million of loan commitments during the quarter and provided $4.6 million of new gross funding, including payment-in-kind interest. Repayments totaled $8.1 million.

Portfolio commitments stood at $383.3 million across 18 investments at quarter-end, up from $378.7 million across 17 investments at the end of June. The average investment size declined to $21.3 million from $22.3 million. All investments were first-lien debt, while floating-rate loans represented 59% of debt investments at fair value.

By October 30, portfolio commitments had declined to $376.6 million across 17 investments, with $350.4 million of principal outstanding. The portfolio carried a weighted-average cash interest rate of 13.3%, a 1.3% PIK rate and a 4.4% original issue discount. Floating-rate investments accounted for approximately 61% of portfolio fair value at that date.

The portfolio continued to include a substantial group of cannabis-related loans, alongside investments in commercial and professional services, insurance, leisure products and healthcare services. The broader sector mix reflects AFC’s strategy following its January 1 conversion from a real estate investment trust to a BDC.

Under the BDC structure, AFC is pursuing debt investments in U.S. lower middle-market companies across multiple industries, generally targeting businesses with EBITDA of $5 million to $50 million. The company primarily seeks first-lien and unitranche loans, typically with commitments of at least $10 million, and considers both private equity-backed and non-sponsored borrowers.

Liquidity and debt reduction

AFC ended the quarter with $102.1 million of cash and cash equivalents and $197 million of debt principal outstanding. Its net debt-to-equity ratio was 0.49 times.

Debt was subsequently reduced to $94 million by October 30. The change reflected a $96.5 million repayment on the revolving credit facility on October 1, a $5 million paydown of the affiliated TCGSL credit facility and $19 million of senior-note repurchases during October. At October 30, outstanding debt consisted of $58 million of 2027 senior notes and $36 million drawn under the revolving credit facility.

Management is seeking to use the BDC structure to broaden originations beyond cannabis, increase flexibility in loan structures and diversify portfolio exposures. AFC reported a $1.1 billion active pipeline as of October 30, but said those potential transactions were in various stages of negotiation and due diligence, with no assurance that investments would be completed.

Non-accrual exposure remains significant

Credit performance remains the most prominent disclosed risk. At September 30, three investments carrying AFC’s lowest internal rating accounted for $68 million, or 23.5%, of total portfolio fair value. That rating indicates the investments were underperforming, with an expected loss of interest and uncertainty over full principal recovery. On an amortized-cost basis, non-accrual investments represented 36% of the portfolio.

The company also remains exposed to risks related to loan and borrower concentration, defaults and recovery rates, interest-rate changes, the availability of suitable investments and its ability to maintain BDC and regulated investment company status. AFC intends to elect RIC tax treatment for 2026 after having elected REIT treatment for 2025.