Great Elm Capital Group Q2 2024 Earnings Report

Great Elm Capital Group EPS Results

• Actual EPS: $0.32
• Consensus EPS: $0.33
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: $0.44

Great Elm Capital Group Revenue Results

• Actual Revenue: $9.55 million
• Expected Revenue: $9.77 million
• Beat/Miss: Missed by -$220.00 thousand
• YoY Revenue Growth: N/A

Great Elm Capital Group Announcement Details

• Quarter: Q2 2024
• Date: 8/1/2024
• Time: After Market Closes
• Conference Call Date: Thursday, August 1, 2024
• Conference Call Time: 5:00PM ET

Great Elm Capital Group (NASDAQ:GECC) (NASDAQ: GECC) is a closed-end, externally managed business development company (BDC) that seeks to generate current income and capital appreciation by investing in private, middle-market companies. The firm targets senior secured loans, subordinated debt and equity securities of U.S. companies, with a focus on businesses offering stable cash flows and potential for growth. Industry sectors of interest include business services, consumer products, industrials and healthcare, among others.

GECC’s investment strategy emphasizes portfolio diversification and active management. Through its external adviser, Great Elm Capital Advisors, LLC, the company typically makes equity and debt commitments ranging from $10 million to $40 million. Its disciplined due diligence process evaluates company fundamentals, sponsor alignment and market positioning, while ongoing oversight and strategic support aim to drive operational improvements and value creation within portfolio companies.

Headquartered in Greenwich, Connecticut, Great Elm Capital Group completed its initial public offering in April 2018. The company is led by President and Chief Investment Officer Stephen Booras, whose experience spans credit analysis, private lending and capital markets. Supported by a team of seasoned professionals, GECC leverages its flexible investment mandate to navigate market opportunities and pursue attractive risk-adjusted returns for its shareholders.

Great Elm Capital Group Q2 2024 Earnings Call Transcript

Key Takeaways

• Great Elm raised over $90 million of fresh capital year-to-date via non-dilutive equity at NAV and debt issuances, benefiting from an Egan-Jones upgrade to BBB Flat and tighter spreads versus prior offerings.
• The newly formed CLO joint venture has begun receiving distributions, with the firm targeting mid-teens to low-20% returns from its structured finance investments as it scales the portfolio.
• Second-quarter NAV per share declined to $12.06 from $12.57 due to write-downs on two Level 3 holdings, but most non-accrual impacts have been realized and recoveries are largely complete.
• Net investment income of $0.32 per share (versus $0.37 in Q1) was weighed by cash drag from recent offerings and timing delays, yet management expects H2 income to exceed H1 as CLO distributions and new investments ramp up.
• The portfolio mix has shifted to 60% secured debt via first-lien loans and CLO stakes (up from 44%), maintaining a yield profile above 13% while prioritizing credit quality and risk-adjusted returns.

Presentation

[Operator]

Greetings and welcome to Great Elm Capital Corp. Second Quarter 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Garrett Edson, a representative of the company. Thank you. You may begin.

[Garrett Edson, Managing Director at Great Elm Capital Corp]

Good afternoon. Thank you, everyone, for joining us for Great Elm Capital Corp's Second Quarter 2024 Earnings Conference Call. If you would like to be added to our distribution list, you can email investorrelations@greatelmcap.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 Events and Presentations. On our website, you can also find our earnings release and SEC filings. I'd 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.

[Garrett Edson, Managing Director at Great Elm Capital Corp]

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's website under Financials, SEC filings, or visit the SEC's website. Hosting the call this afternoon is Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer, who will be joined by Chief Financial Officer Keri 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.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Thanks, Garrett. Good afternoon, and thank you all for joining us today. We had a solid second quarter as we continued to advance our long-term growth strategy, as demonstrated by our portfolio enhancement initiatives and notable financing activities completed to date. In June, we successfully raised $12 million in equity at net asset value from Prosper Peak Holdings, an SPV, supported by a $3 million investment from Great Elm Group in the SPV. This capital raise followed the structure established by the $24 million equity raise at net asset value in February, which was also supported by a $6 million investment from Great Elm Group. In July, we issued an additional $22 million of GECCI notes through a registered direct offering to an institutional investor.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

This supplemental debt financing was a tack-on to our GECCI offering in April, during which we issued $34.5 million of five-year notes, which were syndicated favorably at a more than 50 basis point spread to treasury improvement as compared to our August 2023 note offering. We believe this financing rate improvement was driven by our strong earnings, fresh equity capital, and the Egan-Jones rating upgrade to BBB flat from BBB minus since our August offering. Overall, we are pleased to have secured over $90 million of fresh capital this year, bolstering our liquidity and further strengthening our financial position, enabling us to execute on our investment pipeline at greater scale. The successful execution of these non-dilutive equity raises and debt issuances underscores the enduring strength of our platform as a result of the strategic repositioning efforts implemented over the past two years.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

We continue to actively pursue investment opportunities that offer attractive risk-adjusted returns for our shareholders. We are particularly excited about our expansion into CLO products, as previously outlined in our last earnings call. In April, we created a JV to hold investments in CLOs and related warehouse entities. Notably, the JV is beginning to receive distributions from its CLO investments, with its first sizable distribution in July. We expect the CLO JV will be a source of increasing income as we further invest in that portfolio moving forward. Over time, we anticipate potential returns ranging from the mid-teens to low 20% from our CLO investment portfolio. By incorporating structured financial vehicles into our portfolio, we gain exposure to instruments that have historically demonstrated strong ROEs across various economic cycles, exemplifying our commitment to building a resilient and diverse investment portfolio.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Turning to our second quarter performance, we ended the quarter with NAV of $12.06 per share on June 30, compared to $12.57 as of March 31. The reduction was primarily due to illiquid Level 3 investments on non-accrual in two portfolio companies, which adversely affected NAV by approximately $0.40 per share in the quarter. We believe the bulk of the impact to NAV from these portfolio companies has been realized, positioning us to recapture NAV moving ahead. Non-accruals as of quarter-end totaled $9.4 million, or approximately 3% of portfolio fair value. Of this $9.4 million, $8.1 million is attributable to a portfolio company which emerged from bankruptcy in July, and we received a significant majority of our recovery in now current pay secured take-back debt, leaving our pro forma non-accruals at $1.3 million of fair value.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Otherwise, we believe our portfolio remains solid, and we continue to actively monitor our investments for any incremental stress. In the second quarter, we generated $0.32 of NII per share. Sequentially, our NII per share declined due to cash drag related to the GECCI offering in April and our June equity offering, as well as the residual impact from the non-accrual positions and from the timing of cash flows from certain investments such as the CLO JV. As distributions from our CLO-focused JV begin to materialize, combined with income from our strategic capital deployments, we expect NII in the second half of the year to surpass that of the first half. As such, we believe we remain well-positioned to more than cover our dividend and continue growing the portfolio.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Overall, we delivered another solid quarter of results while advancing our strategic initiatives, enhancing both our capital structure and operational efficiency, and positioning ourselves well for sustainable long-term growth. Before turning the call over to Kerry to review our financials in greater detail, I would like to address our upcoming baby bond maturity in 2025, as we are actively assessing various options to refinance these bonds. Further, we are constantly evaluating the capital markets and have initiatives in place to take advantage of potential transactions to refinance this maturity. We expect to refinance these bonds by the end of 2024 and remain focused on optimizing our cost of capital. With that, I'd like to hand the call over to Kerry Davis to discuss our second quarter 2024 performance.

[Keri Davis, CFO at Great Elm Capital Corp]

Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation, and SEC filings for greater detail. During the second quarter, GECC generated NAI of $3.1 million, or $0.32 per share, as compared to $3.2 million, or $0.37 per share, in the first quarter of 2024. The sequential decline is largely attributed to cash drag and the increased share count from our June equity issuance at NAV, in addition to the timing of distributions from certain positions, particularly our CLO investments. Our net assets as of June 30, 2024, rose to $126 million compared to $119 million at March 31, 2024. Our NAV per share was $12.06 as of June 30 versus $12.57 as of March 31, with the decline once again primarily attributable to the write-down of certain investments highlighted by Matt.

[Keri Davis, CFO at Great Elm Capital Corp]

Detail for the quarter-over-quarter change in NAV can be found on slide 9 of the investor presentation. As of June 30, GECC's asset coverage ratio was 171% compared to 180% as of March 31. Pro forma for the July bond issuance, the asset coverage ratio would be approximately 163%. As of June 30, total debt outstanding was approximately $178 million, and our $25 million revolver remains undrawn. Cash and money market securities totaled approximately $3 million. Pro forma for the July bond issuance, total debt outstanding was approximately $200 million. Our Board of Directors authorized a $0.35 per share cash distribution for the quarter ending September 30, 2024. The third quarter cash distribution will be payable on September 30, 2024, to stockholders of record as of September 16. The distribution equates to an 11.6% annualized dividend yield on our June 30 NAV of $12.06 per share.

[Keri Davis, CFO at Great Elm Capital Corp]

With that, I'll turn the call back over to Matt.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Thanks, Kerry. Our investment portfolio continues to get stronger as we focus harder on increasing its exposure to secured debt. To that end, and notably, our CLO investments provide us a solid look-through to the broadly syndicated first lien loan market, with attractive financing sources and strong institutional counterparties. This gives us additional confidence in sourcing and deploying capital into these investments. Consider last year. Our portfolio consisted of 44% first lien loans and no CLO exposure. Fast forward to the second quarter of 2024, first lien loans and CLOs make up 60% of our portfolio. As our joint venture continues growing, we expect to provide additional insight into our underlying portfolio in the quarters ahead. Notably, our portfolio's yield profile stood steady at over 13% at quarter-end.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Despite the lingering effects from the non-accrual investments, we are pleased with the portfolio's composition and return profile, which will further be strengthened as we receive distributions from our CLO JV investments, amongst other newly initiated positions. Given the ongoing volatility in the macro environment, with uncertainty surrounding the timing of rate cuts and a turbulent election year, we are maintaining a disciplined approach to capital deployment. We are directing our investments towards opportunities that are primed to perform across various economic cycles. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss. By adhering to this strategy, we are well-equipped to continue growing Great Elm Capital Corp and delivering attractive risk-adjusted returns for our shareholders.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

We remain excited for the future of GECC, and with that, I would like to turn the call over to Mike Keller to provide an update on specialty finance.

[Michael Keller, President at Great Elm Specialty Finance]

Thanks, Matt. Despite a sluggish start to 2024 for new deal originations across all our specialty finance platforms, GESF saw improved performance in two of its three platform companies in the second quarter. Moreover, the pipelines remain robust thus far in the third quarter, and we continue to be laser-focused on closing new deals and streamlining operations. Touching on our platform companies, while Prestige started the first quarter with lower invoice financing volumes, a notable pickup in the second quarter led to increased net income sequentially. At Sterling, deals closed in the first half of the year generated positive momentum for the company, improving earnings both sequentially and year-over-year. We are excited for Sterling's prospects as the progress made over the last six months has positioned the business to further convert its pipeline into earning assets over the coming months.

[Michael Keller, President at Great Elm Specialty Finance]

Lastly, although deal volume at Great Elm Healthcare Finance has continued to lag projections, we remain focused on implementing strategic refinements to reposition the platform for future success. Overall, although the year began slowly, we experienced some sequential improvement in the second quarter and are optimistic that our efforts to drive further growth and profitability will pay off.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Thanks, Mike. In closing, GECC had a solid second quarter and strong first half of the year. The strategic and capital-raising initiatives implemented so far this year reflect our commitment to enhancing and expanding our platforms and portfolio. Looking ahead, we believe we are well-positioned to grow NAI and more than cover the dividend for the remainder of the year. With that, I'd like to turn the call over to the operator for questions. Operator?

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. A reminder to all the participants that you may press Star 1 to ask a question. There are no questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments.

[Matthew Kaplan, CEO at Great Elm Capital Corp]

Thank you all again for joining us today. We are pleased with another quarter of solid performance as we continue to execute on our growth strategy. We look forward to continuing the investor dialogue. Please let us know if we can help with any follow-up questions that you may have.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Analysts

• Garrett Edson, Managing Director at Great Elm Capital Corp
• Keri Davis, CFO at Great Elm Capital Corp
• Matthew Kaplan, CEO at Great Elm Capital Corp
• Michael Keller, President at Great Elm Specialty Finance