Great Elm Group, Inc. 7.25% Notes due 2027 (GEGGL) Q2 2024 Earnings Report, Transcript and Summary

Hello, and welcome to the Great Elm Group Fiscal Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now 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 second quarter 2024 earnings conference call. As a reminder, this conference call is being recorded on Wednesday, February 14, 2024. If you would like to be added to our distribution list, you can e-mail geginvestorrelations@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, CEO; Adam Kleinman, President, and General Counsel; Nichole Milz, COO; and Keri Davis, CFO. I will now turn the call over to Jason Reese, CEO.

Welcome, everyone, and thank you for joining us. Before diving into second quarter earnings, I want to highlight a pivotal transaction for our alternative credit platform that closed last week. On Thursday, GEG announced a $24 million equity capital raise at our BDC, Great Elm Capital Corporation. GEG provided significant support in this capital raise by investing $6 million alongside an institutional investor in a special purpose vehicle that acquired $24 million of common stock in GECC at net asset value. The institutional investor aims to establish a strategic relationship with Great Elm. This transaction is a step change for GEG. It increases GEG's basis for earning fees from GECC, giving the company the ability to add significant recurring asset management fee revenue and the potential to earn incentive fee revenue on this incremental capital. Most importantly, the investment structure embedded in this transaction provides a template for future capital raising and investment opportunities. Great Elm Group also launched the Great Elm Credit Income Fund during the fiscal second quarter with $13 million of total capital. GEG ceded this private fund with a $6 million investment alongside several additional investors. The credit income fund will focus on direct lending, syndicated credit and special situations and will leverage our existing operational and origination platforms to manage and source investments. Management is focused on raising third-party capital in the fund, providing another opportunity to grow our AUM and enhance recurring fee revenue. These investments made alongside other capital partners serve as a testament to GEG utilizing its strong liquid balance sheet to scale existing businesses, launch new fund products and deploy capital into new platform opportunities. Along with growing our recurring revenue, we believe that GEG's investments in these vehicles will deliver a strong return. In addition to these key strategic developments, GEG had a solid fiscal second quarter of 2024. We continue to grow our fee-paying assets under management on both a sequential quarter and year-over-year basis. We generated total revenue of $2.8 million, a 50% increase from the prior year period and adjusted EBITDA of $0.6 million, up from $0.1 million from the prior year period. We ended the quarter with approximately $69 million in cash and marketable securities to deploy across our growing alternative asset management platform. Reflecting on our two anchor fee-paying vehicles, Monomoy and GECC, we have increased both fee revenue and AUM across both platforms. We will seek to accelerate the momentum at these core businesses and are pleased with continued solid performance from both during the quarter. GECC once again had a solid quarter. GECC will pay incentive fees to GEG for the third consecutive quarter of approximately $750,000, bringing total fees earned by GEG from GECC to $1.7 million for the quarter. GECC remains well positioned to continue paying GEG incentive fees moving forward as we see the results of the successful portfolio repositioning efforts. Additionally, NII continues to exceed the regularly quarterly dividend and GECC declared a special dividend in December. Net asset value at GECC grew to $12.99 per share as of December 31, post-calendar 2023, with a 30% return on equity. Additionally, Monomoy made great strides during the quarter as the REIT acquired three properties with in-place leases deploying $4 million of capital, amended nine existing tenant leases for meaningful term extensions and executed five-year renewal options on two properties with a key tenant. In addition, our build-to-suit business continued to make meaningful progress on its two construction projects in Florida and Mississippi. The real estate team remains on track to complete these projects within our current fiscal year. With a robust pipeline of new properties and open requirements from significant tenants, we remain confident of continued growth at Monomoy REIT and BTS through fiscal 2024. During the fiscal second quarter, our book value remained steady at $2.25 per share, which is why we intend to repurchase shares in the open market as part of our $10 million common stock repurchase program approved in November 2023. I'd like to conclude by reflecting upon the three goals we have consistently outlined in recent quarters, enhance our financial performance, broaden our platform, and increase our AUM. I am extremely pleased with great strides we have made towards achieving these goals so far in fiscal 2024. Our results demonstrate our commitment to repositioning Great Elm in the alternative asset management space by growing our core businesses and launching new products. Additionally, we continue to evaluate multiple strategic M&A opportunities in our promising pipeline. We will remain steadfast in pursuing opportunities to expand our business and invest capital in new platform opportunities that offer attractive risk-adjusted returns. With that, I'll turn it over to Keri.

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. In review of continuing operations, quarter-to-date revenues grew 50% year-over-year to $2.8 million, driven by increased fee-paying assets under management related to GECC and Monomoy and the recognition of incentive fees from GECC for the third consecutive quarter, generating approximately $0.7 million during the fiscal second quarter. AUM of $655 million as of December 31, 2023, was up 2% from the prior quarter-end and up 6% from the prior year quarter-end, while fee-paying AUM grew to $461 million, up 2% quarter-to-date and up 5% from prior year quarter-end. For the quarter, Great Elm Group generated a net loss from continuing operations of $0.2 million compared to net income from continuing operations of $29.7 million in the prior year period. Net income from continuing operations in the prior year period was inclusive of $22.2 million in net realized and unrealized gain on investments and $10.5 million gain related to the Forest transaction. Adjusted EBITDA for the quarter was $0.6 million, up from $0.1 million generated in the prior year period. As of December 31, Great Elm Group had approximately $69 million of combined cash and marketable securities on our balance sheet to deploy across growing alternative asset management platform. Please refer to Slide 6 that provides an overview of our financial position and highlights our book value per share of approximately $2.25, which remains steady compared to September 30. This concludes my financial review of the quarter. With that, we will turn the call over to the operator to open for questions.

Thank you. [Operator Instructions] :

There are no questions at this time. I will turn the call to Jason Reese.

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

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.