Great Elm Group, Inc. (GEG) Q3 2023 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Great Elm Group Fiscal 2023 Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Adam Yates, Managing Director. Please go ahead.

Good morning, everyone. Thank you for joining us for Great Elm Group's Fiscal Third Quarter 2023 Earnings Conference Call. As a reminder, this conference call is being recorded on Friday, May 5, 2023. If you would like to be added to our distribution list, you can e-mail GEG investorrelations@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. 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, our newly appointed CEO; Adam Kleinman, President; Nichole Milz, COO; and Brent Pearson, CFO. I will now turn the call over to Jason Reese, CEO.

Thank you, Adam. Welcome, everyone, and thank you for joining us. I am thrilled to report as of today, Great Elm Group has completed its transformation from a diversified holding company to a focused alternative asset manager. We spent the last year taking deliberate steps to reposition the company, to simplify the balance sheet and to position the organization for growth. Let me walk you through some key highlights. In March of '22, key management changes were made at Great Elm Capital Corp. our publicly traded BDC. Matt Kaplan was appointed as its CEO and 3 new directors were appointed to the Board. GEG waived all accrued incentive fees at the BDC, and we started with a clean slate under Matt's leadership. With these changes, the BDC has been successfully repositioned to become a consistent income-producing vehicle for GEG. GECC reported a strong first quarter yesterday. If you've not had the opportunity to review the materials or listen to the call, I strongly suggest you take the opportunity to do so. After the GECC leadership changes, we acquired the management agreement of Monomoy properties in May of '22. This transaction marked our entry into the private REIT industry, doubled our AUM and highlighted our ability to add long-duration capital vehicles to GEG. Later in May, Dave Matter joined our Board of Directors after retiring from BlackRock where he was the Co-Chief Investment Officer of BlackRock Alternative Advisors, their hedge fund solutions team. Dave brings incredible relationships and investment experience to Great Elm. In June, we successfully raised $27 million in 7.25% unsecured notes due in 2027. In August, GECC shareholders approved an amendment to reset GEG's incentive fees to start fresh on April 1, 2022. As a result, we believe that we are well positioned to start receiving cash incentive fees in the future. Around the end of the calendar year, we closed 2 large strategic business divestitures. First, we sold our entire majority interest in Forest Investments in a 2-part transaction taking place in December '22 and January '23. In January, we sold our majority interest in the non-core DME business. This leaves us with a streamlined corporate structure and a clean easy-to-understand balance sheet. Today, the company announced that Pete Reed resigned as CEO, effective with the filing of our Form 10-Q. I am fortunate that the Board asked me to assume the additional role of CEO, and I gratefully accept their appointment. As the largest shareholder of GEG, my interests are directly aligned with all of our shareholders. I would like to take the opportunity to thank Pete for his service and contributions to Great Elm. Pete steps down with our full support, and we look forward to working with Pete as a consultant to the company to ensure a smooth transition. We are grateful for his expertise, passion, dedication and leadership over the years. We are now a focused alternative asset manager with 2 anchor investment vehicles, GECC and Monomoy properties. We have a healthy pipeline of new business opportunities and a clean liquid balance sheet to execute upon them. Our institutional back office has the ability to effectively service our growing platform. We're well positioned to achieve our strategic goals. It's now my job as CEO to prove to our shareholders that we can achieve our goals, which are simple: grow our assets under management, improve our profitability and execute on opportunities to expand our platform. I look forward to leading Great Elm in its next phase of growth and reporting to you on our progress. With that, I'll turn it over to Brent to discuss our financial results for the quarter.

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. As Jason highlighted, Great Elm completed 2 significant transactions during the quarter. On January 3, we sold our majority interest in the durable medical equipment business to a subsidiary of QIP for a total purchase price of $80 million. After repayment of obligations, we received approximately $26 million in cash as well as just over 346,000 shares of QIP common stock. On January 17, we exercised the right to put our remaining 19% interest in Forest to an affiliate of JPMorgan for nearly $27 million. The transaction followed the sale of 61% of our majority ownership interest in Forest to JPMorgan for over $18 million on December 30, 2022. The January sale brought our aggregate cash proceeds from the Forest transactions to approximately $45 million. As a result of these transactions, we realized material gains on these investments, generated significant value for Great Elm's shareholders and added over $70 million of cash to GEG's balance sheet. Please note that as in the prior quarter, due to the Forest and DME transactions, we have recast our historically reported segment information to reflect our ongoing business as a single reportable segment and to remove the activity of discontinued operations. In review of continuing operations, during the quarter, revenues were up 92% year-over-year driven by higher assets under management and management fees related to GECC and Monomoy. AUM of $631 million as of March 31, 2023, increased 2% from the prior quarter end and was up 4% fiscal year-to-date, while fee-paying AUM grew to $439 million, up 1% quarter-to-date and over 8% fiscal year-to-date. For the quarter, Great Elm Group generated a net loss from continuing operations of $0.5 million compared to a net loss from continuing operations of $6.5 million in the prior year period. The change was primarily driven by $2 million in net realized and unrealized gains on investments in the current quarter compared to a net realized and unrealized loss on investments of $3.5 million in the prior year quarter. Adjusted EBITDA loss for the quarter was $1.2 million compared to $1.6 million in the prior year period. As of March 31, Great Elm Group had approximately $84 million of cash on our balance sheet to deploy across our growing alternative asset management platform. Please refer to Slide 8 that provides an overview of our financial position and highlights our book value per share of approximately $2.34. This concludes my financial review of the quarter. And with that, we will turn the call over to the operator to open for questions.

[Operator Instructions] Our first question will come from the line of Mark Kingdon with Kingdon Capital.

Wanted to ask first, what the impact is, if any, on your spreads at GECC and overall in the company, from the credit crunch we are seeing in the banking system currently and how it impacts your ability to fund some of these transactions?

Thank you, Mark. It's Jason. I don't know that there's specific impacts, we're seeing more opportunities. And if you look at GECC over the last year, we have moved significantly to owning floating rate debt at GECC. So the moves by the Fed have, if anything, probably helped us, our NII more than covered our dividend this quarter. And we had the ability -- we announced yesterday at GECC that they were just able to put a new $100 million credit facility in place for the health care business. So we have not seen credit crunch to be able to fund deals, but we're actually seeing more opportunity for transactions as because banks are kind of pulling out of the market.

Good. And then on Monomoy, I think at some point, there was a discussion about using the great NOL to help produce an even more competitive product. I wonder what's your growth strategy going forward now that Great Elm does not have that NOL?

Well, we still have an NOL, but not nearly as big as we had in the past. We really like the space that Monomoy is in, and we have not had any issues with convincing investors that, that space is still good space. We've been slow to grow the business this year because it's -- you talked about with rates moving significantly cap rates in the industrial space have not kind of moved this quickly. So there's been a little bit of a stalemate. If you look at industrial space, there's been less transactions because sellers have not reduced their expectations for prices even though the cost of debt to fund those acquisitions has gone up but we have a pretty strong pipeline. I think you will see significant growth in the calendar second and calendar third quarters for Monomoy.

So what you're saying is that your issue isn't finding new investors in Monomoy, it's more just fighting the opportunities at a price you like?

Yes. That's exactly what I was trying to say.

[Operator Instructions] We have no further questions at this time. I'll turn the call back to Jason Reese, CEO, for any closing remarks.

Thank you for joining us today. We look forward to speaking with you in the future.

That will conclude today's meeting. Thank you all for joining. You may now disconnect.