Great Elm Capital Corp. (GECC) Q4 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Great Elm Capital Corp. Fourth Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson, a representative of the company. Thank you. You may begin.

Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp's Fourth Quarter 2022 Earnings Conference Call. If you like to be added to our distribution list, you can e-mail 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 Financial Information, Quarterly Results. On our website, you could also find our earnings release and SEC filings. 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.'s 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. He will be joined by Keri Davis, GECC's CFO; Adam Kleinman, Chief Compliance Officer of GECC; and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO, Matt Kaplan.

Thank you, Garrett. Good morning, and thank you for joining us today. Nearly, one year ago, I hosted this call for the first time as the newly appointed CEO of GECC and outlined our strategy to reboot the company. Today, I am pleased to discuss our fourth quarter results, which I believe marks a clear turning point in Great Elm Capital Corp.'s history and begin to validate the revamped portfolio strategy on which the team has been executing. One of the key pillars of our strategy was to construct a high-quality diversified portfolio focused on performing cash yielding investments. To that end, the cash income generated from our investment portfolio in the fourth quarter was the highest amount in GECC's history, and our portfolio is almost entirely comprised of cash-generating investments today. Talking about cash generation is one thing, but the impact is reflected in our financials. For 2022, PIK and accretion income was approximately 11% of total investment income, significantly lower than the nearly 40% in 2021. Our focus on cash generation and portfolio construction set us up to report fourth quarter NII of $2.3 million or $0.30 per share more than double the $0.14 reported for the third quarter of 2022. Quite simply, our shift to focus on deploying capital into senior secured floating rate investments is working and materially boosted NII from the prior-quarter. Further, operating expenses declined from the third quarter, as I indicated on the November call. Additionally, our Board decided to realign our quarterly distribution to what we believe to be a sustainable level of $0.35 per share for the first quarter of 2023. Given our momentum and our growing portfolio, I think we are well positioned to cover the new distribution over the course of the year. Another key strategic objective I outlined last year was to increase our scale by raising capital. While 2022 was a challenging year to raise capital in the markets we successfully closed on a $37.5 million rights offering in June, which positions us to take advantage of the volatility in the second half of 2022. In the fourth quarter, we opportunistically deployed approximately $38 million into new investments at average yields of approximately 12%. Meanwhile, about $20 million of assets were monetized in the quarter at average yields below 10%. Half of our debt investment portfolio at year-end consisted of floating rate debt up from 48% at the prior quarter-end and a market difference from 33% on June 30. Average yield on our credit portfolio also increased to 12.4% at year-end from 11.6% at September 30. You should expect that we will continue to focus on investments that benefit from rising rates. The third strategic initiative I outlined a year-ago was focusing on scaling our specialty finance platform. In that regard, I am pleased to report that we continue to make significant progress. Last quarter, we formed and funded our health care finance platform with Berkadia as a strategic minority partner. Since that time, they closed on three loans, have cultivated a robust pipeline of potential investments and are in active discussions to secure a senior financing partner. Our factoring business also continues to perform well and we believe the specialty finance platform is well positioned to provide material contributions to GECC in 2023. While we were pleased with the quarter from an income generation perspective, we saw a reduction in our net asset value to $11.16 per share as a result of unrealized mark-to-market losses on certain investments in the quarter. We are focused on recovering that in the months ahead. Moving forward, we remain measured with respect to deploying capital in the current market environment and are focused on finding investments with limited risk of permanent capital impairment and durable returns. We are excited for our future prospects and the opportunities we are seeing in the market for floating rate securities that can provide attractive risk-adjusted returns. I'm proud of our team's ongoing efforts as we continue to transform and grow Great Elm Capital Corp. With that, I'd like to hand the call over to Keri Davis to discuss our fourth quarter 2022 performance.

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. As Matt noted, our efforts to generate cash as well as higher yields from our portfolio is bearing fruit. During the fourth quarter, GECC generated NII of $2.3 million, growing from $1.1 million in the third quarter of 2022 as well as year-over-year from $1.9 million in the prior-year quarter, excluding an expense reversal. Our net assets as of December 31, 2022 were $84.8 million compared to $95.5 million at September 30 and $74.6 million as of December 31, 2021. Our NAV per share was $11.16 as of December 31, 2022, versus $12.56 as of September 30 and $16.63 as of December 31, 2021. Details for the quarter-over-quarter change in NAV can be found in the investor presentation. As of December 31, 2022, GECC's asset coverage ratio was approximately 154.5% compared to 165.5% as of September 30, 2022. GECC had net loss from operations of $0.96 per share in the fourth quarter compared to a net increase of $0.18 per share in the prior-quarter. NII per share was $0.30, more than doubling from $0.14 per share in the prior-quarter. As of December 31, our total debt outstanding was approximately $156 million, including $10 million outstanding on our $25 million line of credit. As of December 31, 2022, our cash and money market securities totaled approximately $7 million. Our Board of Directors has authorized a $0.35 per share cash distribution for the quarter ending March 31, 2023. The first quarter cash distribution will be payable on March 31 to stockholders of record as of March 15. Annualized, the distribution equates to a 12.5% annualized dividend yield on our December 31 NAV of $11.16 per share. I'll turn the call back over to Matt to review the portfolio.

Thanks, Keri. Let me provide a bit more color on how our portfolio construction has continued to evolve. In the secondary markets, similar to what we saw in the June, July period, we saw market dislocation in October and December of 2022. We opportunistically down bid certain credits in the secondary market, and we're successfully able to deploy capital at attractive yields. This January, February period is reminiscent of the rally in the middle of the third quarter last year, and we have selectively taken advantage of the recovery to monetize investments. When secondary markets are robust, we direct our time and capital to club and/or direct deals as well as specialty finance, while still maintaining an active pipeline of potential secondary market investments. We are working on a number of private deals, almost all with a floating rate component with mid-teens returns profiles. On that note, I would like to turn the call over to Michael Keller to provide an update of our specialty finance initiatives.

Thanks, Matt. We've consistently discussed our goal to develop a continuum of lending that GECC can operate small business clients and an important part of that continuum is building our specialty finance platform. As noted before, we were excited in the fourth quarter to launch Great Elm Healthcare Finance, and I am personally thrilled to be working alongside the Berkadia team. This vehicle is already making inroads and building its pipeline, and we are in various stages of negotiations with bank and nonbank senior finance partners to provide capital to scale this platform. Structural and macroeconomic factors have created an opportunity in health care that I have not seen since the early 2000s when I led the restructuring efforts of Finova Capital's health care loan portfolio. Along with our recent key hires at our specialty finance vehicles, we are growing more confident that our platforms are properly positioned to execute on our growth initiatives and generate increasing sustainable income.

Thanks, Mike. We are headed in the right direction as evidenced by our doubling of NII from the prior-quarter and are confident in our ability to execute on our strategy. With that, I'll turn the call over to the operator for questions. Operator?

Thank you again for joining us today. We continue to make solid progress in our efforts to transform GECC and after nearly a year at the helm, I'm excited to start 2023 on offense. I'm pleased the Board has realigned the dividend and while only two-thirds of the first quarter, I'm optimistic we will cover the $0.35 dividend this coming quarter. We look forward to continued investor dialog. Please let us know if we can help with any follow-up questions that you may have. Thank you.

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