Great Elm Capital Corp. (GECC) Q2 2026 Earnings Report, Transcript and Summary

Thank you. Good day and welcome to Great Elm Capital Corp.'s second quarter 2026 financial results conference call. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to Adam Yates, Managing Director. Please go ahead.

Hello, and thank you for joining us for Great Elm Capital Corp.'s second quarter 2026 earnings conference call. If you would like to be added to our distribution list, you can email Investor Relations at investorrelations@greatelmcap.com, or you can sign up for alerts directly on our website, www.greatelmcc.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations. 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 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 our SEC filings, please visit Great Elm Capital Corp.'s website, Financials, SEC Filings, or visit the SEC's website. Hosting the call today is Jason Reese, Great Elm Capital Corp.'s Chairman of the Board and CEO. He will be joined by Matt Kaplan, Portfolio Manager, Chris Croteau, Head of Research, Chief Financial Officer, Keri Davis, Chief Compliance Officer and General Counsel, Adam Kleinman, and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's Chairman and CEO, Jason Reese.

Thanks, Adam, and thank you everyone for joining us today. Since stepping into the CEO role, our priorities have remained unchanged. Protecting and growing NAV, generating sustainable net investment income, and maintaining a disciplined approach to capital allocation and portfolio management. We believe this quarter's results demonstrate solid progress toward each of those objectives. NAV increased nearly 3% from the prior quarter. Net investment income or NII fully covered our quarterly distribution, and we generated meaningful realized and unrealized gains from investment monetizations and appreciation. At the same time, we continue to strengthen the quality of the portfolio and position GECC to generate durable earnings and create long-term shareholder value. These results were supported by continued strong portfolio performance, including our CoreWeave-related equity investment. During the quarter, we received $2.6 million in distributions from this investment, bringing cumulative distributions to approximately $9.5 million, well above our original $6 million investment. Although our CoreWeave-related equity investment remains subject to market volatility, it continues to provide meaningful upside potential. Importantly, this quarter's strong results were achieved while we enhanced the overall quality of the portfolio. We once again ended the quarter with less than 1% of the portfolio on non-accrual, reflecting our focus on proactive risk management and portfolio quality. The broader credit market remains highly competitive, but our disciplined approach to portfolio management has not changed. We continue to prioritize protecting capital, maintaining strict underwriting standards, and investing only where we believe risk-adjusted returns are justified. During the quarter, we deployed approximately $30 million of capital across 14 investments, including 3 private credit transactions sourced through our proprietary network of partners, representing approximately $12 million. We also selectively expanded our broadly syndicated loan portfolio, increasing our diversified pool of primarily senior secured investments. Our CLO investments also helped increase portfolio diversity, providing GECC with exposure to over 300 senior secured loans. CLO investments accounted for approximately 16% of our portfolio fair value at quarter end, generating meaningful cash flow to GECC, diversifying our income streams, and supporting the sustainability of our NII. At Great Elm Specialty Finance, or GESF, we continue to execute on our strategic transformation to streamline the platform and enhance growth and profitability. Great Elm Commercial Finance and Great Elm Healthcare Finance continue to build robust lending pipelines, while Prestige Capital, our invoice factoring business, continues to generate attractive returns, albeit with some quarter-to-quarter variability due to the high customer churn rate inherent in its business. All 3 GESF verticals were profitable during the quarter and generated cash distributions, reinforcing GESF's role as a growing source of diversified assets and income for GECC. Manager alignment with our shareholders remains a core principle at GECC. Consistent with that commitment, our investment manager, GECM, waived all accrued and unpaid incentive fees through the second quarter of 2026. This marks the third consecutive quarter of fee waivers, directly benefiting shareholders through approximately $3.7 million or $0.26 per share of cumulative waived incentive fees as of June 30, including approximately $0.9 million or $0.06 per share during the second quarter. These waivers are accretive to NAV and directly support shareholder returns. We also continue to opportunistically repurchase GECC shares at a discount to NAV through our Stock Repurchase Program. Beginning January 1, 2026 through August 4, 2026, we have repurchased approximately 1% of our outstanding shares at an average 37% discount to our June 30 NAV, leaving $9.5 million of remaining capacity under the $10 million authorization approved in October 2025. At current market prices, the remaining authorization represents approximately 14% of GECC's market capitalization. Our balance sheet continues to strengthen. During the quarter, we extended the maturity of our revolving credit facility from 2027 to 2029 and retired all outstanding GECCO notes, leaving no debt maturities until 2029. Subsequent to quarter end, we also called $6.5 million of GECCI notes, our highest cost debt, further reducing our capital cost. Furthermore, our liquidity position is a competitive advantage, allowing us to navigate a volatile market environment while selectively capitalizing on attractive investment opportunities. We ended the quarter with approximately $6 million of cash and equivalents, $39 million of available capacity under our revolving credit facility, and a meaningful portfolio of liquid investments. This liquidity and disciplined capital deployment provides us with the flexibility to act quickly when the right investment opportunities arise. Looking ahead, we remain focused on disciplined execution and prudent capital allocation. We believe the progress we've made this quarter, strengthening portfolio quality, maintaining dividend coverage, enhancing the balance sheet, and preserving liquidity positions GECC to continue creating long-term value for shareholders. I'd now like to turn the call over to Keri Davis to review our financial results in greater detail.

Thanks, Jason. I'll go over our financial highlights now, but we invite all of you to review our earnings release, accompanying presentation, and SEC filings for additional detail. Total investment income for the second quarter increased to $10.9 million from $9.5 million in the first quarter, primarily driven by a $2 million dividend from our investment in insurance-related preference shares. NII for the second quarter was $4.5 million, or $0.32 per share, compared to $5 million, or $0.36 per share, in the prior quarter. While reported NII declined sequentially, the first quarter benefited from a larger incentive fee waiver. Excluding that difference, underlying earnings improved meaningfully. Pre-incentive fee NII increased approximately 66% to $4.5 million from $2.7 million, reflecting higher total investment income and lower interest expense. The incentive fee waiver contributed approximately $0.9 million or $0.06 per share during the quarter compared to $2.8 million or $0.20 per share in the first quarter. Net assets increased to $110.4 million, or $7.95 per share, as of June 30, 2026, from $107.5 million, or $7.74 per share, as of March 31, 2026. The increase was driven primarily by realized and unrealized investment gains, including gains on our CoreWeave-related equity investment. Additional detail is provided in the NAV bridge on slide 11 of the investor presentation. Our balance sheet remains strong and liquid. Asset coverage improved to 166.4% from 161.8%, while debt to equity improved to 1.51x from 1.62x in the prior quarter, reflecting our continued focus on deleveraging and balance sheet optimization. As of June 30, total debt outstanding was $166.4 million. We also held cash and money market investments of approximately $6 million, along with $39 million of availability under our revolving credit facility. Finally, our Board of Directors declared a quarterly distribution of $0.25 per share payable on September 30, 2026, to stockholders of record as of September 15. The distribution was fully covered by our second quarter NII. I will now hand it over to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Erik Zwick with Lucid Capital Markets. Please go ahead.

Thank you. Good morning, all. I wanted to start with a question on the pipeline for new originations, kind of looking forward into 3Q and beyond, just curious what that looks like from a mix perspective in terms of private credit and BSL and any other kind of commentary you might have there.

Yes, it's Jason. Erik, thanks for the question and following us. Our mix is definitely moving more towards private credit from BSL at this point in time. We'll always have a portion of BSL, but obviously that's a much more difficult market to find the yields we need at this point in time. So we have a pretty strong backlog of private credit deals. I think you see we closed 3 in the last quarter. Those definitely take longer to close, but we're seeing a number of very interesting things and we're seeing much better risk-return profiles on private credit. That being said, we're being pretty conservative. We're not going out on the risk curve anywhere right now. We don't love the overall risk-reward characteristics of the market. So the things that we're doing, we're doing very, very thorough underwriting on and trying to get very comfortable. Does that make sense?

Yes, that's helpful. Thank you. Shifting gears a little bit, the next question, just curious, and I may have overlooked it in the release, maybe Keri can help me out. What was the CLO distributions, and what was the contribution to the CLO distribution in the quarter? And then I know those can potentially, there can be some variability quarter to quarter based on when you've made recent changes or investments that they haven't made their first distribution yet. So just, kind of, curious about the kind of cadence of the contributions going forward as well, if you've got any detail to share there.

Sorry, can you hear me?

Yes. Yes.

Yes. Okay. I'm pulling the information up as we are speaking. So I think we did have that in our investor deck for this quarter. I think you're right that the cadence can change. I think we try to include as much of that information as we have available in those materials.

Okay, I'll take a look there and follow up with that. Yes, exactly.

Yes, but Erik, we haven't made a new CLO investment in a while, so some of that cadence should become less variable. But some of it also will depend. We're getting to the point where we've held some of these for 2 years, and so there's some opportunities to refinance the CLOs, which should help our cash flow. So there is still some variance, but it should be less than it has been historically.

Got you. So it should be more consistent. And if you're able to opportunistically refinance some of the liability side there, then you could see a little bit of maybe an improved return, which would be nice. Okay. That makes sense.

Correct.

And then curious, I can't remember. Do you guys have any undistributed taxable income or spillover at this point?

Yes, we do.

We do. And we monitor that regularly to make sure we are staying current on that with distributions.

Do you happen to have what the amount is either in dollar terms or on a per share basis?

We're currently working through our most recent tax year with some of our underlying investment information coming through. So we should have that update in the next quarter.

Yes, we'll get that to you, Erik, as soon as we have it.

Excellent. Thanks. Appreciate that. And then just with regard to the CoreWeave distribution in the quarter, I know, you were receiving those more regularly prior when it was the preferred investment, but once it converted to the equity, so, what drove that distribution? Did the vehicle sell shares, or is there some other kind of something that drove that? Just, kind of, curious there.

The sponsor there is selectively selling shares based on market prices. So all of that distribution came from underlying shares being sold. We have no control over how that investment liquidates, but as it liquidates over time, we will continue to get distributions. But I think if you look at the numbers, we've kind of, got over 150% of our investment back and we still have a pretty significant chunk there that's been a very good one for us.

Yes, okay. That's what I suspected. Thank you for the confirmation. And just trying to think about the run rate of kind of, you know, core earnings going forward, the insurance investment dividend that you received was $2 million this quarter, and I think typically that's, you know, annual, so you won't be getting that for another 3 quarters or 4 quarters or so. CoreWeave distribution, hard to predict timing there for when those are sold. So if I back those two out, it seems like the core run rate of earnings is below the dividend level now. So just curious about your thoughts for that, you know, kind of levers. And I know you've talked a little bit about, you know, improving the portfolio, improving the structure and liabilities. But what does it take to ge,t kind of, that core run rate of earnings closer to the dividend level at this point?

So, Erik, we try, the Board tries to look at what our annual earnings are going to be and make sure we're covering the dividend. Okay, because there is that variability. So we, you know, the insurance distribution comes in the second quarter every year. We get that. You're right, we will not have that next quarter. So that will change the core piece. It's hard to really sketch out, but we look pretty hard on an annual 4-quarter basis. And we're trying to set the dividend so it could be covered over that period of time. So we're doing our best to try to figure out not just what the base is, but with those other things from the CLOs, from insurance, there's some variability when we look at like Prestige, our factoring business is great every year, the earnings, but quarter by quarter, it can vary significantly. So we're trying to set the dividend based on what we think we can cover and pay on a 4-quarter basis, as opposed to every individual quarter. We don't think it makes sense for our shareholders to vary our dividends significantly quarter to quarter.

Understood, yep, thanks for the explanation there. And last one for me, you know, you started to use the share repurchase authorization and just given the discount that shares, you know, trade relative to NAV today, it seems like it's still a really attractive proposition for you. You've also got a strong pipeline and you're seeing good opportunities there. So just how do you think about the balance of using capital between those two and what could we potentially see in terms of rate of repurchases going forward over the next quarter or so?

Look, the obvious answer is that completely depends on the stock price, right, and how the stock trades. But we're constantly looking, and the Board's involved in the balance of, you know, putting capital to work. And there's multiple ways that that could be done versus buying back the shares. So we clearly have levels at which we think it's better for our shareholders to repurchase shares and increase their NAV and increase their percentage ownership of the company by repurchasing those shares. I think you'll see us from time to time doing that in the market. And then we're also balancing looking at working our liabilities versus making new investments too. I think you saw that we called $6.5 million of our GECCI notes in July. Those are the most costly piece of debt that we have outstanding. It's an 8.5% coupon. But when you look at the total GAAP cost of that debt with, you know, amortized expenses and so on, it's above a 9% cost. And so we're balancing, do you repurchase shares? Do you repurchase debt? Do you make new investments? And we're constantly looking at that to figure out. Obviously, repurchasing 9% cost of funds is a riskless transaction. So there's a lot of positives, I think, in retiring the high-cost debt when the time is right.

Thank you, both of you, Jason and Keri, for all of the answers today. I appreciate it. That's all for me.

Erik, happy to do a follow-up one-on-one anytime you want.

I appreciate that.

[Operator Instructions] That will conclude our question-and-answer session. I would like to turn the conference back over to Jason Reese for any closing remarks.

Thank you again for joining us today. This quarter reflects continued progress on the priorities we outlined earlier this year. We increased NAV, strengthened portfolio quality, generated net investment income that fully covered our dividend, and further improved our balance sheet while reducing cost of capital. I am pleased with both the trajectory of the portfolio and the strength of the team executing our strategy. As we look ahead, our priorities remain unchanged. Protect and grow NAV, generate sustainable NII, and allocate capital with discipline. We will continue to actively manage portfolio risk, pursue differentiated investment opportunities, and maintain the liquidity and financial flexibility to act on attractive opportunities as they arise. We believe GECC is well-positioned to continue delivering durable, long-term value for shareholders. We appreciate your continued support and look forward to updating you on our progress. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.