Great Elm Group Q4 2024 Earnings Report

Great Elm Group EPS Results

• Actual EPS: -$0.02
• Consensus EPS: $0.40
• Beat/Miss: Missed by -$0.42
• One Year Ago EPS: N/A

Great Elm Group Revenue Results

• Actual Revenue: $8.92 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Great Elm Group Announcement Details

• Quarter: Q4 2024
• Date: 8/29/2024
• Time: After Market Closes
• Conference Call Date: Friday, August 30, 2024
• Conference Call Time: 8:30AM ET

Great Elm Group (NASDAQ:GEG) (NASDAQ: GEG) is a closed-end investment company specializing in private credit and equity co-investments for U.S. middle-market companies. The firm’s portfolio is composed primarily of senior secured loans, unitranche financing structures and selective equity interests, with an emphasis on providing flexible capital solutions for growth initiatives, refinancings, acquisitions and recapitalizations.

Through a disciplined underwriting process, Great Elm Group evaluates opportunities across a diverse range of industry sectors, including healthcare, business services, manufacturing and consumer products. The company structures tailored financing packages that can include senior debt, subordinated debt and equity co-investments, allowing it to meet the unique capital needs of privately owned businesses while seeking attractive risk-adjusted returns for shareholders.

Headquartered in New York, Great Elm Group operates throughout North America and is managed by a team of credit and investment professionals with deep experience in investment banking, commercial lending and private equity. The firm’s active portfolio management approach combines rigorous credit analysis with ongoing engagement alongside portfolio companies, aiming to generate consistent cash distributions and long-term capital appreciation.

Great Elm Group Q4 2024 Earnings Call Transcript

Key Takeaways

• Great Elm Capital Corp (“BDC”) raised over $90 million in equity and note financings between February and July 2024, driving a nearly 30% increase in fee-paying AUM and securing improved financing spreads on five-year notes.
• In Q4, total revenue tripled year-over-year to $9 million, adjusted EBITDA reached $1.2 million, and the net loss narrowed to $0.6 million (including $1.1 million of unrealized SPV mark-to-market losses), while ending the quarter with ~$58 million in cash and marketable securities.
• The Monomoy build-to-suit platform achieved its first property sale with a >$1 million gain and significant IRR, has a pipeline of ~30 projects entering 2025, and launched a construction management consulting business that is already generating fees.
• Great Elm expanded its product suite by launching the Great Elm Credit Income Fund (GSIF), which has built a promising performance track record in its first eight months, and made a $5 million preferred equity investment in AI startup CoreReap.
• Monomoy REIT deployed $25 million to acquire 13 properties, executed 16 lease amendments and 12 renewals with rent increases, and refinanced its debt facility to unlock an additional $10 million of growth capital.

Presentation

[Operator]

Greetings! Welcome to the Great Elm Group Fiscal Fourth Quarter twenty twenty-four Earnings Conference Call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. I'll now turn the conference over to Adam Yates, Managing Director. Adam, you may now begin.

[Adam Yates, Managing Director at Great Elm Group]

Good morning, everyone. Thank you for joining us for Great Elm Group's Fiscal Fourth Quarter 2024 earnings conference call. As a reminder, this conference call is being recorded on Friday, 30th August, 2024. If you would like to be added to our distribution list, you can email GEGinvestorrelations@greatelmcap.com, or you can sign up for alerts directly on our website, www.greatelmgroup.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. A link to the webcast is also available on our website, as well as in the press release that was disseminated to announce the quarterly results. Today's conference call includes forward-looking statements, and we ask that you refer to Great Elm Group's filings with the SEC for important factors that could cause actual results to differ materially from these statements.

[Adam Yates, Managing Director at Great Elm Group]

Great Elm Group does not undertake to update its forward-looking statements unless required by law. In addition, during today's call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in our earnings release. To obtain copies of our SEC filings, please visit Great Elm Group's website under Financial Information and select SEC Filings. On the call today, we have Jason Reese, CEO, Adam Kleinman, President and General Counsel, Nicole Mills, COO, and Keri Davis, CFO. I will now turn the call over to Jason Reese, CEO.

[Jason Reese, CEO at Great Elm Group]

Welcome, everyone, and thank you for joining us today. Fiscal year 2024 was a defining year for Great Elm. Our management team was able to focus on growing a streamlined, pure-play asset management business and driving shareholder value. Looking back, we delivered an excellent fiscal 2024, as we were able to improve profitability, expand our platform businesses, and materially grow our assets under management. I would like to highlight several key milestone achievements this fiscal year. Most notably, our BDC, Great Elm Capital Corp, raised over $90 million in fresh capital from February through July 2024, significantly growing fee-paying assets under management by nearly 30% from prior year. This growth was accomplished through a series of capital raises made possible by an innovative structure that provided $36 million of equity capital to GECC.

[Jason Reese, CEO at Great Elm Group]

First, in February, GECC raised $24 million of equity capital through Great Elm Strategic Partnership I, LLC. GEG supported this capital raise by investing $6 million, along with an institutional investor's $18 million dollar investment in the SPV, which in turn invested in $24 million of new GECC common shares at net asset value. GECC continued to utilize the structure as a template for a second equity capital raise in June. In this transaction, GECC raised $12 million of capital at NAV via Prosper Peak Holdings, LLC. GEG made a $3 million dollar investment into the SPV, alongside a $9 million dollar investment from other institutional investors. We were able to raise capital at these SPVs due to our strategic relationships with sophisticated institutional investors and GECC's continued improved performance.

[Jason Reese, CEO at Great Elm Group]

We continue to work with our strategic partners to further enhance their relationship with Great Elm, which we believe will provide additional benefits over time for both parties. Additionally, in April, GECC completed an underwritten public offering of $34.5 million of five-year notes at a more than 50 basis points spread improvement as compared to GECC's August 2023 note issuance. GECC subsequently issued an additional $22 million of notes through a registered direct offering to an institutional investor in July. Accomplishing these capital raises at NAV and improved financing rates were a huge success for Great Elm Group and clear evidence of our commitment to further scale GECC. These capital raises are integral to our business as they expand GEG's ability to earn fee revenue from GECC, providing both substantial recurring asset management fee revenue and potential incentive fee revenue from the incremental capital.

[Jason Reese, CEO at Great Elm Group]

In addition, GEG continues to maintain a material direct investment in GECC and received $2.3 million of dividend income in fiscal year 2024, inclusive of a special dividend paid in December 2023. Looking ahead, we believe our BDC is well positioned to generate attractive, risk-adjusted returns for its shareholders and to raise further capital in fiscal year 2025. It should be noted that the financial accounting rules guide us to mark our $9 million dollar investment in the SPVs to a material lesser value, creating unrealized losses. These unrealized losses contributed $3.8 million to our overall net loss of $0.9 million for the year. We believe the unrealized losses are temporary and will reverse over time as the SPVs receive distributions from the BDC. Our real estate platform continued to expand over the past year.

[Jason Reese, CEO at Great Elm Group]

Monomoy BTS had a milestone fourth quarter of fiscal 2024, nearing completion on our two inaugural properties, including our first property sale in June, where we realized a gain on sale of over $1 million and a significant IRR. We expect continued profitability in fiscal 2025 as the team focuses on selling its second property in the first half of the year and begins development on its third contracted design-build project. The build-to-suit pipeline remains robust, with approximately 30 specifications entering 2025. We will continue to execute on these development opportunities to further enhance profits at GEG and create value for both our tenants and shareholders. During fiscal 2024, Great Elm launched complementary products and businesses to expand its alternative credit and real estate platform offerings. Back in November 2023, we launched the Great Elm Credit Income Fund, or GCIF.

[Jason Reese, CEO at Great Elm Group]

I am pleased to report that after the first eight months of the fund, we have a solid start to building a strong, marketable performance track record, and we plan to raise capital for GCIF in fiscal 2025. Additionally, last quarter, in response to tenant demand, we launched Monomoy BTS Construction Management, a consulting business that enables clients to utilize our experienced team for overseeing in-house construction projects through owner representative services. We began earning fees from this business in fiscal 2024 and are encouraged by the initial demand and growth prospects. Outside of our core business, in fiscal fourth quarter, GEG invested $5 million in a 10% preferred financing for CoreWeave, a revolutionary cloud AI startup backed by other best-in-class institutional investors, including Magnetar and Blackstone.

[Jason Reese, CEO at Great Elm Group]

This investment is a testament to the strength of our sourcing capabilities for our board of directors and our broader, sophisticated network that give us a seat at the table in cutting-edge investment opportunities. Alongside these significant strategic developments, Great Elm Group experienced a strong fiscal fourth quarter in twenty twenty-four. We continue to grow our fee-paying assets under management on both a sequential quarter and year-over-year basis. Including the net proceeds from GECC's July capital raise, fee-paying AUM and AUM increased 22% and 17% year-over-year, respectively. We generated total revenue of $9 million, tripling revenue from the prior year period, and adjusted EBITDA of $1.2 million, compared to $0.4 million for the prior year period. We ended the quarter and the year with nearly $60 million in cash and marketable securities to deploy across our growing alternative asset management platform.

[Jason Reese, CEO at Great Elm Group]

We improved our capital structure by opportunistically repurchasing over $4 million principal of our 5% convertible notes at 47% of face value and repurchasing 1.2 million shares of GEG common stock in the market for $2.1 million as part of our stock repurchase program. We are pleased with the continued performance of our credit and real estate verticals in the fiscal fourth quarter and seek to further accelerate the momentum at these key businesses. GECC had another successful quarter while raising ample capital and substantially increasing the scale of their platform. In April, GECC further expanded its reach into CLOs, forming a strategic joint venture with an institutional partner to make investments in CLOs and related warehouse facilities.

[Jason Reese, CEO at Great Elm Group]

The JV is beginning to receive sizable distributions from its CLO investments, and we expect it will be a source of increasing income at GECC in the coming quarters. GECC's performance in fiscal 2024 supported the payment of incentive fees to GEG, totaling $2.7 million over the last 12 months. GECC remains well positioned to continue delivering fee revenues to GEG, given its successful portfolio repositioning and recent expansion into CLO products. Combined, these initiatives should drive increased fee revenue at the BDC as the BDC scales. Monomoy REIT put up solid performance over fiscal 2024. Over the last 12 months, the REIT deployed $25 million of capital to acquire 13 existing properties, amended 16 existing tenant leases for meaningful term extensions and expansion projects, executed renewal options at 12 properties with key tenants, and entered into 4 new leases.

[Jason Reese, CEO at Great Elm Group]

Also, approximately 70% of the REIT's portfolio saw rental rate increases from value-added services, lease renewals, and contractual step-ups, driving property management fee growth. Lastly, Monomoy successfully refinanced a sizable debt facility without any material impact to its annual debt service and freed up an additional $10 million of growth capital. As referenced earlier, our build-to-suit business achieved a meaningful milestone with our first property sale. The anticipated sale of our second property in fiscal 2025, our third contracted project under development, and a meaningful pipeline of new projects were extremely encouraged by GEG's future growth potential with BTS and construction management, and our opportunity for creating shareholder value with this business in fiscal 2025 and beyond. I'd like to conclude by revisiting the three driving goals we've consistently outlined, enhance our financial performance, expand our platform, and grow our assets under management.

[Jason Reese, CEO at Great Elm Group]

I'm extremely pleased with our achievements toward our goals in fiscal 2024. After divesting our non-core businesses in fiscal 2023, our accomplishments underscore our commitment to reposition Great Elm in the alternative asset management space by growing our core alternative credit and real estate businesses and adding accretive, differentiated products. Additionally, we continue to actively evaluate multiple strategic initiatives. Moving ahead, we remain steadfast in pursuing opportunities to expand our businesses and allocate capital to promising new platform opportunities offering attractive risk-adjusted returns. We are very excited about the future of Great Elm, and we are well-positioned to accelerate our growth in fiscal 2025. With that, I'll turn it over to Keri.

[Keri Davis, CFO at Great Elm Group]

Thank you, Jason. I'll provide a brief overview of the quarter and, of course, welcome all of you to review our filings in greater detail or reach out to our team with any questions. Fiscal fourth quarter revenues tripled year over year to $9 million, driven by the Monomoy BTS property sale. AUM of $727 million as of 30th June, 2024, was up 6% from the prior quarter end and up 14% from the prior year end, while fee-paying AUM grew to $524 million, up 6% quarter to date and up 17% from the prior year end.

[Keri Davis, CFO at Great Elm Group]

Including the net proceeds from GECC's July capital raise, AUM was $749 million, up 9% from March 31 and 17% from the prior year quarter end, and fee-paying AUM was $546 million, up 11% from March 31 and 22% from the prior year quarter end. Great Elm Group generated a net loss from continuing operations of $0.6 million for the quarter, as compared to $5.3 million dollars loss for the prior year period. As previously mentioned, this quarter's loss includes $1.1 million in unrealized loss on Great Elm's investment in Prosper Peak Holdings, LLC. Adjusted EBITDA for the quarter was $1.2 million, compared to $0.4 million in the prior year period.

[Keri Davis, CFO at Great Elm Group]

As of 30th June, we had approximately $58 million of combined cash and marketable securities on our balance sheet deployed across our growing alternative asset management platform. Please refer to slide seven that provides an overview of our financial position and highlights our book value per share of approximately $2.06. This concludes my financial review of the quarter. With that, we will turn the call over to the operator to open for questions.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw 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. Thank you. Once again, you may press star one at this time. Thank you. At this time, I'll turn the floor back over to Jason Reese for closing remarks.

[Jason Reese, CEO at Great Elm Group]

Thank you again for joining us today, and we look forward to speaking with you in the future.

[Operator]

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

Participants

Executives

• Adam Yates, Managing Director
• Keri Davis, CFO

Analysts

• Jason Reese, CEO at Great Elm Group