Great Elm Capital Corp. (GECC) Q3 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen good morning and welcome to the Great Elm Capital Corp. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Peter [indiscernible] with Investor Relations. Please go ahead sir.

Hello and thank you everyone for joining us for Great Elm Capital Corp.'s third quarter 2024 earnings conference call. If you'd like to be added to our distribution list, you can e-mail investorrelations@greatelmcap.com or you could 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. 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 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 today 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.

Thanks Peter and thank you all for joining us today. I am pleased to report we had a busy and record-setting quarter for GECC. We completed a $22 million tack on to the GECCI bonds in July with an institutional investor utilizing our stop for the first time. In August, we closed the second CLO in our recently formed CLO JV. In September, we priced our GECCH bonds at a lower rate than our previous other debt financings this year and utilized the proceeds to take out our notes maturing in January 2025 leaving us with no maturities for the next 20 months. And finally, I am pleased to report that our investment income was the highest ever in GECC's history and not only the highest, but also the highest cash income quarter as well. Overall, it was a very strong third quarter for GECC with NII of $0.39 per share, rebounding from $0.32 in 2Q and exceeding our quarterly distribution of $0.35. Our NII growth was primarily driven by the increase in cash flows attributed to our CLO JV. In addition, we ended the quarter with NAV of $12.04 per share on September 30th, essentially flat from $12.06 as of June 30th. Further, we believe our portfolio remains solid and we continue to actively monitor our investments. Non-accruals declined in the quarter and totaled $1.3 million or less than 1% of portfolio fair value as of September 30th. This compares to $9.4 million or approximately 3% of portfolio fair value as of June 30th. We believe the bulk of the impact to NAV from these nonaccrual positions has been realized. Looking forward we do expect NII to step down in the fourth quarter due to the uneven nature of CLO distributions at the start of their life. As we scale and expand our asset base, we would expect these quarterly income fluctuations to normalize over time. This year we have completed numerous equity and debt issuances in excess of $130 million, adding a lot of noise into our 2024 numbers, while at the same time increasing our scale. These actions have laid a strong foundation for GECC as we look forward. Additionally, as distributions from our CLO-focused JV continue to ramp, combined with other income from our strategic capital deployments, backed by our recent capital raises, we believe we remain well positioned to continue to increase our scale and to cover our dividend. A key highlight this quarter is the early success of our CLO joint venture strategy where we've deployed approximately $33 million through September 30th. We are encouraged by the first distributions from our CLO investments including a large initial distribution on our first CLO investment in July and a strong return on our warehouse investment related to the second CLO settling in August. Through the third quarter, we generated a strong cash return on our JV investment, receiving approximately $3 million in distributions on our $33 million invested. Our JV, which holds majority CLO positions increases GECC's exposure to a diverse portfolio of broadly syndicated first lien loans. These largely floating rate investments held by the CLOs are financed primarily by long-term floating rate debt, mitigating interest rate risk. We believe our innovative structure provides superior financing as compared to typical BDC JV loan structures and also enhances our ability to minimize the book tax differences that holding CLO equity directly can create. We continue to believe that our CLO joint venture will become an increasingly significant source of income for GECC as we continue to expand the vertical, targeting high teens to 20% returns over time. With this foundation in place, we are well situated to capitalize on the CLO asset class, which has historically demonstrated resilience across various market cycles. CLOs represent one of the most established forms of non-recourse financed bank loans, making them an attractive addition to our investment strategy. Moving on to our capital structure. During the quarter, we also successfully issued $36 million of 8.125% GECCH notes due 2029 and the underwriters exercised their full shoe for an additional $5.4 million in October. We subsequently used the net proceeds along with available cash to redeem all outstanding 6.75%, GECCM notes due January 2025. The refinancing extends our debt maturity profile into 2026 and beyond, providing us with enhanced financial flexibility. Overall, we delivered a solid quarter of results, supported by our enhanced investment platform strengthened balance sheet and diversified portfolio. These core strengths create a strong framework to execute on as we seek to further advance our long-term growth strategy. With that, I'd like to hand the call over to Keri Davis to discuss our third quarter 2024 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 third quarter, GECC generated NII of $4.1 million or $0.39 per share as compared to $3.1 million or $0.32 per share in the second quarter of 2024. Our net assets as of September 30th were $126 million stable as compared to the previous quarter. Our NAV per share was $12.04 as of September 30th versus $12.06 as of June 30th. Details for the quarter-over-quarter change in NAV can be found on slide 9 of the investor presentation. As of September 30th, GECC's asset coverage ratio was 166.2% compared to 171% as of June 30th. As of September 30th, total debt outstanding was approximately $235 million and our $25 million revolver remains undrawn and fully available. Cash and money market securities, totaled approximately $26 million. Pro forma for the GECCH notes issuance and subsequent refinancing of the GECCM notes total debt outstanding was approximately $195 million. Our Board of Directors authorized a $0.35 per share cash distribution for the fourth quarter, which will be payable on December 31st to stockholders of record as of December 16. The distribution equates to an 11.6% annualized dividend yield on our September 30th net asset value. With that, I'll turn the call back over to Matt.

Thanks Keri. In the quarter, we enhanced our portfolio strength by steadily increasing our secured debt positions. Notably, our CLO investments provide valuable access to the broadly syndicated first lien loan market supported by favorable financing terms and established institutional partnerships. The shift in our portfolio composition reflects this strategy. Last year, first lien loans made up 44% of our holdings with no CLO exposure. As of Q3 2024, our combined first lien loans and CLO positions have increased to 60% of the portfolio, demonstrating our commitment to enhancing portfolio quality, while maintaining a focus on secured income-generating assets. Given the ongoing volatility in the macro environment, including uncertainties around further rate cuts and electoral outcomes, we continue to take a measured approach to capital deployment. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss, directing capital toward opportunities that are primed to perform across various economic cycles. This balanced approach combined with our strengthened platform and diversified portfolio, positions us well to continue growing Great Elm Capital Corp. and delivering attractive risk-adjusted returns for our shareholders. 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.

Thanks Matt. After a rebound in the second quarter, GESF's momentum stalled in the third quarter. While our platform companies maintained robust pipelines, all of our companies struggled to convert and close new business in the quarter. Touching on our platform companies. While Prestige saw a notable pickup in the second quarter, income in the third quarter declined sequentially due to slower volumes, partially attributable to summer seasonality. On a positive note, volumes began to tick up near the end of September and October has been tracking well. As you may recall, Prestige provides spot invoice financing services, which can lead to lumpy income generation quarter-to-quarter. Management has a strong track record of delivering durable ROEs year-in and year-out, and we have confidence earnings will revert. At Sterling, operations were stable quarter-over-quarter but new business originations have been challenging. We are well positioned to capitalize on our pipeline and remain focused on driving deal closings into the year-end. Lastly, Great Elm Healthcare Finance has continued to lag projections. The business has struggled to originate and close deals and has had to manage a high cost of leverage. Steps were taken in the quarter to cut costs, including headcount reductions and separating with the CEO. I have stepped in as CEO of Great Elm Healthcare Finance, and I am focused on implementing strategic initiatives to reposition the platform for future success. Overall, in spite of a challenging quarter, I am optimistic that our efforts to drive further growth and profitability at Great Elm Specialty Finance will pay off.

Thanks Mike. In closing, we delivered a strong third quarter generating NII above our quarterly distribution while maintaining stable NAV. Looking ahead, we believe we remain well positioned to maintain our dividend coverage and continue delivering attractive risk-adjusted returns to our shareholders. With that, I'll turn the call over to the operator for questions. Operator?

Thank you. Ladies and gentlemen, we’ll now be conducting a question-and-answer session. [Operator Instructions] As there are no questions in the queue, I now hand the conference over to Matt Kaplan for his closing comments. Matt?

Thank you 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 continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thank you.

Thank you. The conference of Great Elm Capital Corp. has now concluded. Thank you for your participation. You may now disconnect your lines.