Great Elm Capital Corp. (GECC) Q2 2023 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Great Elm Corp. Second Quarter 2023 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, [Paul Scousa] (ph), a representative of the company. Please go ahead, sir.

Good morning, and thank you everyone for joining us for Great Elm Capital Corp.'s second quarter 2023 earnings conference call. If you'd 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 can 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 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 the 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, 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.

Thank you, [Peter] (ph). Good morning, and thank you for joining us today. I am proud of our second quarter 2023 performance as we executed in all facets of our operations and continued to make significant progress with respect to our overall portfolio strategy. Our entire team's relentless effort towards successfully transforming Great Elm over the past year is paying off, and we firmly believe the best is yet to come. Turning to Slide 6. In the quarter, our continued focus on cash generation and portfolio construction, namely deploying capital into senior secured floating rate investments, enabled us to generate second quarter NII of $3.4 million or $0.44 per share, a 19% gain from the $0.37 reported for the first quarter of 2023 and easily exceeding our quarterly distribution of $0.35 per share. Even more important than our NII growth, I want to highlight Slide 7, which shows our cash NII. For the first time in GECC's history, we generated enough cash income from our portfolio to cover our distribution. As we move to Slide 8, this is driven by the fact that for the third consecutive quarter, the cash income generated from our investment portfolio was the highest amount in GECC's history, representing approximately 87% of total investment income. Our focus on repositioning the portfolio to generate cash income is operationally paying off. In addition, you will see later in the presentation, we increased our mix of first lien secured debt and reduced our equity exposure in the period, while still improving overall portfolio yield. These results are a testament to our ability to revamp and build a new portfolio, filled with high quality, cash yielding, attractive investments. Buoyed by our excellent NII performance, our net asset value increased by 3% in the quarter to $12.21 per share, as you can see on Slide 9. NAV benefited from both realized and unrealized mark-to-market gains on investments in the quarter. We remain focused on further recovering and improving our NAV moving forward. I would also like to note that we are aware of our near-term maturities and are actively evaluating various options to refinance them. We are constantly monitoring the capital markets and have initiatives in place to take advantage of potential financing transactions to opportunistically refinance these maturities at an attractive cost of capital. As you may have noticed, we have an N-2 on file, which adds to our toolkit of potential financing pads, which we may execute on. A key focus of ours is to put in place a capital structure that sets up GECC for success, both the near and the long term. Before turning the call over to Keri to review our financials in detail, I would like to highlight that as a result of many strategic initiatives at GECC to lay the foundation for long-term success, including our capital structure efforts, you should expect our expenses to tick up in the third quarter. Thus, you should not expect to see our NII constantly grow by $0.07 per share each quarter as we have done in the past two quarters. That said, given our current portfolio composition, our overall strategy and the current rate environment, we believe we remain well positioned to cover our quarterly distribution for the remainder of the year. With that, I'd like to hand the call over to Keri Davis to discuss our second quarter 2023 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. During the second quarter, GECC generated NII of $3.4 million, growing 19% from $2.8 million in the first quarter of 2023, as well as nearly tripling our NII year-over-year from $1.2 million in the prior-year quarter. Our net assets as of June 30, 2023, were $92.9 million, compared to $90.3 million at March 31 and $97.6 million as of June 30, 2022. Our NAV per share was $12.21 as of June 30, 2023, versus $11.88 as of March 31 and $12.84 as of June 30, 2022. Details for the quarter-over-quarter change in NAV can be found on Slide 9 of the investor presentation. NII per share was up $0.44, exceeding our quarterly dividend and up from $0.37 in the prior quarter. As of June 30, 2023, GECC's asset coverage ratio was approximately 161.5% compared to 159.8% as of March 31, 2023. As of June 30, our total debt outstanding was approximately $151 million, including $5 million outstanding on our $25 million line of credit. As of June 30, our cash and money market securities totaled approximately $11.8 million. Our Board of Directors has authorized a $0.35 per share cash distribution for the quarter ending September 30, 2023. The third quarter cash distribution will be payable on September 29 to stockholders of record as of September 15, 2023. Annualized, the distribution equates to an 11.5% annualized dividend yield on our June 30, 2023 NAV of $12.21 per share. With that, I'll turn the call back over to Matt.

Thanks, Keri. In the second quarter, we continued to rotate into higher-yielding investments, taking advantage of the rally in rates to deploy approximately $23 million into new investments at average yields of approximately 15%. Meanwhile, we opportunistically monetized $16 million of assets in the quarter at average yields of approximately 10%. We continue to increase our exposure to floating rate investments. 63% of our debt investment portfolio at quarter-end consisted of floating rate debt, up from 58% at the end of the prior quarter and almost double the 33% from a year ago. Most notably, along with our portfolio's enhanced yield profile, which stood at 13.5% at quarter-end, up 40 basis points from the prior quarter, we increased the proportion of our portfolio that consists of first lien loans, thus also improving the overall credit quality of our portfolio. The increase in both yield and portfolio quality is further validation of the work we have accomplished over the past year. Looking ahead, we will continue to focus on investments that benefit from the elevated rate environment while also closely monitoring the Fed to see when they determine to officially conclude the rate hike cycle. We also continued to scale our specialty finance platform during the quarter. We noted on our prior call that Great Elm Healthcare Finance was able to access up to $100 million of financing for healthcare-related secured lending, and in the quarter, it began deploying that capital into new loans while maintaining a robust pipeline of new potential investments. In addition, Sterling, the asset-based lending platform, also closed a couple of attractive deals; and Prestige, the invoice financing business, had another strong quarter. In early July, we exited our equity and sub debt investments in Lenders Funding. While we decided to part ways with the management team there, we believe Lenders Finance is an attractive piece of the specialty finance platform, which Mike Keller will discuss shortly. We continue to believe the specialty finance platform is well positioned to provide material contributions to GECC in future quarters. Given the ongoing macro environment, we will remain disciplined with respect to deploying capital towards opportunities that have limited risk of permanent capital impairment and durable returns. By staying measured, we are well positioned to continue growing Great Elm Capital Corp. and generate further attractive risk-adjusted returns for shareholders. As I noted before, we are pleased with our ability to navigate through the choppy environment in the first half of this year, improving both our overall yield and the quality of our portfolio composition. We continue to believe there will be opportunities in the back half of the year to selectively make thoughtful investments while keeping a watchful eye on the rate environment. With that, I would like to turn the call over to Mike Keller to provide an update of our specialty finance initiatives.

Thanks, Matt. We continued to see positive momentum with our specialty finance businesses. During the second quarter, Great Elm Healthcare Finance closed on a leverage facility that provides up to $100 million in financing from which to deploy capital into secured investments. We continue to see buoyant deal flow in our healthcare group and have expanded the platform from both a new business and operational standpoint. We will continue to keep you apprised of our progress, but we expect Great Elm Healthcare Finance to scale in the months and quarters ahead. As I noted on previous calls, structural and macroeconomic factors have created an opportunity in healthcare that I have not seen since the early 2000s. We continue to expect GEHF to become a major contributor to the specialty finance business we are building across the continuum of lending. In addition to the healthcare opportunities, we are beginning to see dislocation and lender pullback in the ABL market. This is being fueled by economic uncertainty, shrinking deposit bases, higher interest rates and credit losses. As a result, our investment professionals are receiving inbound calls on specific deals as well as potential portfolio purchase opportunities. As previously discussed, we have taken steps to bolster the operations and asset-monitoring capabilities of our specialty finance businesses. This should allow us to take advantage of both portfolio purchase opportunities and new platform investment. As Matt noted, shortly after the quarter closed, we exited our equity and sub debt investments in Lenders Funding at valuations consistent with the 6/30 fair values. While we ultimately decided to part ways with management, we continue to hold the commitment in the Lenders Funding senior credit facility, and we believe the lender finance market is attractive. Building on the servicing capabilities of Sterling, which have allowed Great Elm Healthcare Finance to scale rapidly, we are exploring the opportunity to launch our own lender finance platform under Great Elm Specialty Finance. I expect to have more to say on this initiative later this year. Finally, as noted last quarter, our invoice financing business, Prestige Capital, is directly benefiting from lender pullback and credit dislocation. Prestige followed up a strong first quarter with a tremendous second quarter, exceeding our management's expectations on both volumes and net income. The Prestige team continues to generate and execute on attractive risk-adjusted opportunities. We remain confident that our specialty finance platforms are properly positioned to execute on our growth initiatives and generate increasing sustainable income.

Thanks, Mike. To sum it up, it was another excellent quarter for Great Elm as evidenced by another quarter of NII exceeding our quarterly dividend and a record cash income generation. We remain well positioned to continue covering our dividend on an ongoing basis. 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 we look forward to continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thank you.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.