Great Elm Capital Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 29, 2024

There are 5 speakers on the call.

Operator

Greetings. Welcome to the Great Elm Capital Corporation's 4th Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded.

Operator

At this time, I'll now turn the conference over to Garrett Edson, a representative of the company. Mr. Edson, you may now begin.

Speaker 1

Good morning, and thank you everyone for joining us for Great Elm Capital Corp's 4th quarter and full year 2023 earnings conference call. If you'd like to be added to our distribution list, you can e mail investorrelationsgreatelmcap.com or you can sign up for alerts directly on our website, www.greatelmcc.com. I'd like to note the slide presentation posted on our website accompanying today's call. The slide presentation can be found on our website under Financial Information Quarterly Results. On our website, you can also find our earnings release and SEC filings.

Speaker 1

I would like to call your attention to the customary Safe Harbor statement regarding forward looking information. Also, please note that nothing in today's call constitutes an offer to sell or a solicitation of offers to purchase our securities. Today's conference call includes forward looking statements and we ask that you refer to Great Elm Capital Corp's filings with the SEC for important factors that could cause actual results to differ materially from these statements. Great Elm Capital Corp does not undertake to update its forward looking statements unless required by law. To obtain copies of SEC filings, please visit Great Elm Capital Corp.

Speaker 1

Website under Financial Information, SEC Filings or visit the SEC's website. Hosting the call this morning is Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer will be joined by Chief Financial Officer, Kerry Davis Chief Compliance Officer, Adam Kleinman and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO, Matt Kaplan.

Speaker 2

Thanks, Garrett. Good morning and thank you all for joining us today. We finished 2023 on a high note, generating an approximately 30% return on equity for the year, and we have continued our momentum into 2024 with the closing of a $24,000,000 equity raise at net asset value earlier this month. Before diving into our strong performance, I want to further highlight our capital raise. On February 8, GECC issued 1,850,000 shares at a then current NAV of $12.97 per share, a 25% premium to the prior day's closing price.

Speaker 2

Great Elm Strategic Partnership 1 and SPV acquired the shares for gross proceeds to GECC of $24,000,000 Great Elm Group invested $6,000,000 and a strategic institutional investor invested the other $18,000,000 in the SPV. This non dilutive equity raise increases the scale of GECC, which will provide operating efficiencies as we leverage our fixed cost base. And over time, we believe will lead to an improved cost of capital. The transaction comes on the heels of success from our repositioning efforts over the past 2 years, further enabling us to build upon our growth strategy and execute on our strong investment pipeline at greater scale. Shifting back to earnings, we are proud to have closed out the year with NII exceeding our base dividend for the 4th consecutive quarter and another quarter of increasing NAV positioning us for continued success in 2024.

Speaker 2

We continue to excel in the 4th quarter across all facets of our business. We generated an annualized ROE of approximately 18%, bringing our calendar year 2023 ROE to approximately 30%. Additionally, we increased our net assets, generated another quarter of significant cash income and further enhanced both our capital structure and overall operations. I remain proud of our team's unwavering portfolio growth. Turning to Slide 3, you can see we reported NII of $0.43 per share.

Speaker 2

Additionally, full year NII was $12,500,000 or $1.65 per share, exceeding the $1.50 per share of total declared dividends in 2023, which is inclusive of a $0.10 special distribution declared in December. We are very pleased to have been able to deliver the special cash distribution to our stockholders, a testament to our portfolio's strong performance throughout the year. I would also like to highlight Slide 8, which shows our total investment income for the Q4 was $9,200,000 Notably, for the full year, we generated cash income of over $30,000,000 easily the highest full year total in Great Elm's history. This is a true validation of our efforts over the past couple of years to enhance the portfolio's cash income generation. We also continued to proactively harvest lower yielding investments, reinvesting the proceeds into higher yielding, higher quality credits and improving our mix of 1st lien secured debt with 98% of our deployments in the quarter going to 1st lien investments, all while further enhancing the overall corporate portfolio yield.

Speaker 2

These results underscore our ability to construct and maintain a high quality portfolio that was attractive cash yielding investments. In addition to another quarter of solid NII performance as displayed on Slide 9, our net asset value per share grew to 12.99 dollars up from $12.88 in the previous quarter. More noteworthy is our NAV growth over the past year as seen on Slide 10, which experienced a 16% increase from the beginning of 2023, driven primarily by gains on investments. We are committed to further growing our NII and NAV over the long term. Along with our strong results in the quarter, we were pleased to amend our $25,000,000 revolving line of credit, extending the maturity by 3 years to May 2027 and reducing its cost by 50 basis points to SOFR plus 3%.

Speaker 2

This provides us with additional flexibility in our capital structure and demonstrates our lenders sustained confidence in our business. We are continuously assessing the capital markets and potential financing opportunities, strategically extend our maturities at favorable costs, priming us for both short and long term success. With that, I'd like to hand the call over to Keri Davis to discuss our Q4 2023 performance.

Speaker 3

Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying the presentation and our SEC filings for greater detail. During the Q4, GECC generated NII of $3,300,000 compared to $3,100,000 in the 3rd quarter. Additionally, full year NII was $12,500,000 or 1 point as of December 31 rose to $99,000,000 compared to $98,000,000 at September 30. Our NAV per share also improved to $12.99 as of December 31 versus $12.88 as of September 30 in $11.16 as of the end of last year.

Speaker 3

Detail for the quarter over quarter and year over year change in NAV can be found on Slides 9 and 10 of the investor presentation. NII per share was $0.43 for the quarter, exceeding our quarterly base dividend for the 4th consecutive quarter and compared to $0.40 per share in the prior quarter. As of December 31, GECC's asset coverage ratio was approximately 169 percent compared to 168.4 percent as of December 30. As of December 31, our total debt outstanding was approximately 140 $3,000,000 and cash and money market securities totaled approximately $12,000,000 Our $25,000,000 revolving line of of for the quarter ending March 31, 2024. The 1st quarter cash distribution will be payable on March 29, 2024 to stockholders of record as of March 15.

Speaker 3

The distribution equates to an 11% annualized dividend yield on our December 31 NAV of $12.99 per share. In addition, the 2023 distributions inclusive of the $0.10 per share special distribution totaled $1.50 per share for the trailing 12 month period equating to an 11.6% yield on December 2023 NAV. With that, I'll turn the call back over to Matt.

Speaker 2

Thanks, Carrie. In the Q4, we continued to rotate into higher yielding investments, taking advantage of the ongoing elevated rate environment and deploying approximately $30,000,000 into new investments at average yields of approximately 14%, up from 11.4% in the previous quarter. Meanwhile, we opportunistically monetized $36,000,000 of assets in the quarter at average yields of approximately 11%. Our rotation into floating rate investments continued with 67% of our debt investment portfolio at quarter end comprised of floating rate debt compared to 63% last quarter and well above 50% in the prior year period. Notably, along with our portfolio's yield profile, which stood at 13.8% at quarter end, most of the capital deployed in the quarter was into 1st lien investments, strengthening the overall credit quality of our portfolio.

Speaker 2

We are pleased with the composition and return profile of our current portfolio and the strides we have made over the past 2 years. Looking ahead for 2024, we continue to prioritize investments that are benefiting from the elevated rate environment while focused on credit quality as we actively monitor the ever changing macro landscape. In sum, we are proud of our performance and transformation over the past couple of years, resulting in a higher quality portfolio with a strong yield profile, sustainably improving NAV and enabling NII to consistently exceed the regular quarterly distribution. We will remain disciplined in deploying capital towards opportunities with durable returns and limited risk of permanent capital loss. By maintaining this approach, we are well situated to further grow Great Elm Capital Corp.

Speaker 2

And deliver compelling risk adjusted returns for our shareholders. We remain excited for the future of GECC. And with that, I'd like to turn the call over to Mike Keller to provide an update on Specialty Finance.

Speaker 4

Thanks, Matt. First, I'd like to note a key hire we made earlier this month. Jason Schwartz, an industry veteran has joined GESF as its Chief Credit Officer. Jason has significant experience in all levels of lending, healthcare, ABL, real estate and lender finance. He will help drive growth in each of our businesses as well as assist with our multiple lending arrangements.

Speaker 4

Moving to our businesses, I'll start with Prestige, which saw some weakness in invoice financing volume in the back half of the year that ended 2023 on a strong note, outperforming budget. Going into the Q1, we are seeing volumes pick up again and expect another strong year from the team. At Great Elm Healthcare Finance, we continue to see robust deal flow and our team has been successful in expanding its financing relationships. We expect Great Elm Healthcare Finance to continue to take advantage of the healthcare market dislocation in 2024. As mentioned last quarter, we continue to build out Sterling Credit and its asset based servicing capabilities.

Speaker 4

Today, we have a platform in place to support growth. The Sterling team grew the pipeline in the 4th quarter has a strong foundation to convert that pipeline into earning assets over the coming months. Turning to our latest business initiative, we are working with various bank and non bank capital providers to further grow a new asset based and asset backed financing vertical. We believe that this will provide Greydome Specialty Finance with the ability to take advantage of opportunistic secured lending transactions. In summary, now under GESF, I am confident that our specialty finance companies are properly positioned to execute on our growth initiatives as we seek to generate increasing and sustainable income over the coming years.

Speaker 2

Thanks, Mike. To sum up, it was an excellent quarter and a fantastic year for GECC. Given our current portfolio composition, overall strategy and the recent equity capital raise at NAV, we believe we remain well positioned to continue to cover our quarterly base distribution throughout 2024. In addition, we remain focused on continuing our capital raising initiatives and growing the business. With that, I'll turn the call over to the operator for questions.

Speaker 2

Operator?

Operator

Thank you. We'll now be conducting a question and answer Thank you. Thank you. It appears at this time there are no questions. I would turn it over to management for any further remarks.

Speaker 2

Thank you all for joining us again today. We are pleased with our strong momentum and the incredible progress we've made. We look forward to a continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thanks again.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Key Takeaways

  • Achieved approximately 30% return on equity for 2023 and an 18% annualized ROE in Q4, with net investment income of $0.43 per share exceeding the quarterly base dividend for the fourth consecutive quarter.
  • Generated over $30 million in cash investment income for the full year—easily the highest annual total in company history—and declared a special $0.10 per share distribution in December.
  • Completed a $24 million non-dilutive equity raise at NAV (25% premium) through a strategic partnership vehicle, scaling the business to drive operating efficiencies and lower cost of capital.
  • Rotated the portfolio into higher-yielding, first-lien secured debt—deploying $30 million at ~14% yields—and increased floating rate exposure to 67%, resulting in a 13.8% overall portfolio yield.
  • Enhanced liquidity and flexibility by extending a $25 million revolving credit facility to May 2027 and reducing its cost by 50bps to SOFR+3%, reflecting sustained lender confidence.
AI Generated. May Contain Errors.
Earnings Conference Call
Great Elm Capital Q4 2023
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