Great Elm Capital Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Great Elm Capital Corp. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Garrett Edison, ICR. Please go ahead.

Speaker 1

Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp's Q1 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. 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.

Speaker 1

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 solicitation of offers to purchase are 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.

Speaker 1

To obtain copies of 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 Kerry Davis, GECC's CFO, Adam Kleinman, Chief Compliance Officer of GECC and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC's CEO, Matt Kaplan.

Speaker 2

Thank you, Garrett. Good morning and thank you for joining us today. 2022 was a reboot year for Great Elm. Now, 2023 is shaping up to be the year that Great Elm goes back on offense, led by our revamped portfolio strategy. Our focus on cash generation and portfolio construction, namely deploying capital into senior secured floating rate investments enable us to generate 1st quarter NII of $2,800,000 or $0.37 per share, a 23% gain from the $0.30 reported for the Q4 of 2022.

Speaker 2

On our prior call, I had mentioned that we were positioned to cover our new quarterly distribution of $0.35 per share over the course of 2023, and we not only covered our distribution, we exceeded it in the Q1. Given our momentum in our growing portfolio, we believe we remain well positioned to grow NII again in the 2nd quarter we cover our quarterly distribution. In addition, our net asset value increased by 6% in the quarter to $11.88 per share from both realized and unrealized mark to market gains on certain investments in the quarter, recovering over half of the portfolio declines seen in the prior quarter. We are focused on further recovering net asset value in the months ahead. As we noted on our prior call, we are strategically focused on constructing a high quality diversified portfolio focused on performing and cash yielding investments.

Speaker 2

For the 2nd consecutive quarter, the cash income generated from our investment portfolio was the highest amount in GECC's history, representing over 85 percent of total investment income. In the Q1, we opportunistically deployed approximately $46,000,000 into new investments at average yields in excess of 12%. Meanwhile, about $53,000,000 of assets were modestized in the quarter at average yields just above 10%. Most importantly, 58% of our debt investment portfolio at quarter end consisted of floating rate debt, up from 50% at the end of 2022 and almost double the 33% from just 9 months ago. Average yield on our credit portfolio also increased to over 13% at quarter end from around 12% at the end of 2022.

Speaker 2

You should expect that we will continue to focus on investments that benefit from rising rates as opposed to fixed rate investments, we also continue to monitor the Fed's policy stance. Along with reconstructing our portfolio to focus on floating rate investments, we have previously noted that we are committed to scaling our specialty finance platform. Today, I'm happy to announce that our healthcare finance vehicle recently closed a credit line with Encina Lender Finance. As a result, Great Elm Healthcare Finance now has access to up to $100,000,000 of financing for healthcare related secured lending, and we expect the team to begin deploying that capital in Q2 in a disciplined manner toward its robust pipeline of investments. Our factoring business also continues to perform well and as a result, we believe the Specialty Finance platform is well positioned to provide material contributions to GECC as we move through the year.

Speaker 2

Moving forward, we are cognizant of the increasingly challenging macro environment and remain measured with respect to deploying capital we are excited for the future and our ability to generate attractive risk adjusted returns for our shareholders. I am proud of our team's ongoing efforts as we continue to grow Great Elm Capital Corp. With that, I'd like to hand the call over to Keri Davis to discuss our Q1 2023 performance.

Speaker 3

Thank you, 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 Q1, GECC generated NII of $2,800,000 growing 26 percent from $2,300,000 in the Q4 of 2022 as well as more than doubling year over year from $1,100,000 in the prior year quarter excluding the fee reversal. Our net assets as of March 31, of 2023 were $90,300,000 compared to $84,800,000 at December 31, $69,300,000 as of March 31, 2022. Our NAV per share was $11.88 as of March 31, 2023 versus 11.16 as of December 31 and 15.06 as of March 31, 2022.

Speaker 3

Detail for the quarter over quarter change in NAV can be found on Slide 8 of the investor presentation. As of March 31, 2023, DECC's asset coverage ratio was approximately 159.8 percent compared to 154.4 percent as of December 31, 2022. The ECC had an increase in net assets of $1.07 per share in the Q1 compared to a net loss from operations of $0.96 per share in the prior quarter. NII per share was $0.37 exceeding our quarterly dividend and up from $0.30 in the prior quarter. As of March 31, our total debt outstanding was approximately $151,000,000 including $5,000,000 outstanding on our $25,000,000 line of credit.

Speaker 3

As of March 31, 2023, our cash and money market securities totaled approximately $12,500,000 our Board of Directors has authorized a $0.35 per share cash distribution for the quarter ending June 30, 2023. The 2nd quarter cash the distribution will be payable on June 30 to stockholders of record as of June 15, 2023. Annualized, equates to an 11.8 percent annualized dividend yield on our March 31, 2023 NAV of $11.88 per share. And with that, I'll turn the call back over to Matt to review the portfolio.

Speaker 2

Thanks, Carrie. Just a quick note on how our portfolio construction has continued to evolve. As noted on our prior call in early March, we selectively took advantage of the recovery in January February to monetize investments. Shortly after that call, Silicon Valley Bank and Signature Bank collapsed and Credit Suisse was hastily sold to UBS, which created significant volatility in the market. We remained focused on managing our relationship and counterparty risks and were not directly impacted by these events.

Speaker 2

We continue to expect these orderly markets will develop over the course of 2023, providing pockets of opportunity to invest. In addition, we continue to direct our time and capital to club and direct deals as well as specialty finance, while still maintaining an active pipeline of potential secondary market investments. Historically, GECC was more focused on stressed and distressed secondary trading. But through the strategy we have been executing on, the team has increased its focus to sourcing direct deals and performing cash paying credits. To that end, approximately 50% of our capital deployed so far in 2023 has been in proprietary transactions.

Speaker 2

Around the end of the quarter, we closed on 2 private club deals, both senior secured floating rate loans. Interestingly, both these investments contain 2% sulfur floors, which we believe provides added protection in a scenario where the Federal reserve begins to cut rates. Currently, we are working on a number of deals, almost all with a floating rate component with mid teens return profiles. On that note, I would like to turn the call over to Michael Keller to provide an update of our

Speaker 4

Specialty Finance Initiatives. Thanks, Matt. As Matt noted in his remarks, we are excited to have successfully closed on a facility that provides our new Great Elm Healthcare Finance with up to $100,000,000 of financing from which to deploy capital into healthcare related security investments. We have taken much care to build this new vehicle step by step. 1st, developing an operational platform and significant investment pipeline and now finding the right senior finance partner in Encino Lender Finance to fund our platform.

Speaker 4

We'll 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 in our last call, structural and macroeconomic factors have created an opportunity in healthcare that I have not seen since the early 2000s. We expect GEHF will become a major contributor to the specialty finance business we are building across the continuum of lending that GECC can offer As economic uncertainty, credit losses, shrinking deposit basis and the full effect of interest rate increases take hold. Our investment professionals have been receiving more inbound calls from borrowers shunned by banks as well as financial institutions looking for liquidity and specific pools of assets. In addition to asset sales and overall lender pullback, various private credit platforms may be sold or require we have been approached by lending platforms seeking additional capital and or looking to sell specific portfolios of loans.

Speaker 4

As noted previously, we have taken steps to bolster the operations and asset monitoring capabilities of our specialty finance businesses, which should allow us to take advantage of current market dynamics and opportunities. One of the direct beneficiaries of the pullback from banks is Prestige, our invoice funding business. Prestige had a tremendous first quarter, meeting our management's expectations on both volumes and net income. The team continues to execute on its pipeline, we have seen the momentum from the Q1 continue into the Q2. We remain confident that our specialty finance platforms are properly positioned to execute on our growth initiatives and generate increasing sustainable income.

Speaker 2

Thanks, Mike. We continue to head in the right direction as evidenced by our NII exceeding our quarterly dividend. We're only 1 third of the way through the Q2. I believe we are well positioned to grow NII and again cover the $0.35 dividend this quarter. With that, I'll turn the call over to the operator for questions.

Speaker 2

Operator?

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question And our first question comes from Lee Crockett, Private Investor.

Speaker 5

Good morning, Matt. A couple of questions if I could. On Slide number Your NAV bridge, you've got the net realized gains of $0.24 and the unrealized gains of $0.46 could you give us a little detail as what's behind those numbers? Was it general, were there a couple of specific creds in there that improved? Or is it just I don't know what the market did over that time period and it was just overall spreads.

Speaker 5

That's question 1. Okay. Go ahead, I'll chance that when I get the other one. Thank you.

Speaker 2

Yes. So a third was from realized gains, which there are various credits in the rally that I was speaking about in January February that were monetized or even refinanced out. About 2 thirds was from recovery and marks. I think there were 2, when you dig in, 2 contributors. 1 was a investment in an insurance entity in Florida that we made kind of end of 2022 and beginning of 2023 and the other one that I'd like to highlight is Prestige.

Speaker 2

In the 4th quarter, Prestige actually impacted NAV by about $0.05 but this quarter was about a $0.10 benefit to NAV here. And as Mike mentioned, they had a very strong Q1 and they've carried that momentum well into the Q2. Even before the banking stress started, they're off to a good start to the year. And we believe the current contraction that we're seeing from credit from the regional banks will be a tailwind for them throughout the rest of the year. And when I'm talking about specialty finance overall, I'd just like to highlight On the Great Elm Healthcare Finance side, that has developed a very robust pipeline.

Speaker 2

And now that we have this credit facility in place, we believe they're well positioned to capitalize on this disruption in the asset based healthcare lending market as we've seen the banks pull back. So as they grow over 2023, we expect this business to be a contributor to Great Elm's specialty finance platform along with Prestige and our other asset based lending platforms. Great. And a

Speaker 5

question on the dividend. In the December quarter, NII was $0.30 and they paid $0.35 Here you did $0.37 this quarter and you exceeded the dividend. You did mention that you're comfortable with your confident These assets generating the income to get to that level and maybe a little bit of a bump. Is the Board committed to this $0.35 level? And any thoughts you have on the earnings capacity going forward and the dividend payout going forward to the extent you can you feel comfortable talking about it?

Speaker 2

Sure. So growth is rarely linear, but as we ramp our healthcare and other specialty finance initiatives and on the credit pipeline we're seeing, we're working to grow NII over 2023. I believe we're well positioned to grow RNII again in the Q2 here and cover the dividend over the year. One item that I think I'd like to point out With regard to this is our cash generation. Excuse me, as I mentioned on the call, this is our highest cash quarter income in the BDC's history.

Speaker 2

And originally when drafting the script, I wanted to say it was the highest cash Income quarter as well. But then I went back and saw that actually Q4 of 2017, when it was the highest Cash income quarter, but GECC reported something like $10,000,000 of total investment income. But you know what, about 90% of that was PIK And accretion income, so that Q4 2017 kind of highest income quarter in GECC's history only had a little north of $1,000,000 of cash based income. This quarter, we did $8,400,000 of total investment income, 2nd highest now in GEC's history, But over 85% of that is cash based. So that's over $7,000,000 cash based.

Speaker 2

This is a fundamental change from the past approach. We have a new Board that joined when or 3 new Board members that joined back in March of 2023 when I stepped in as CEO, we are focused now on this new approach focused on cash and cash generation. So when I talk about covering the dividend, I'd like to emphasize My approach to doing that is very different than the past and we think we're well positioned, as I said, to cover the dividend over the year.

Speaker 5

Great. Thank you. Appreciate the

Speaker 2

help. Thank you for the questions, Lee.

Operator

We are closing our question and answer session. Now I would like to turn the floor back over to Matt Kaplan for closing comments. Please go ahead.

Speaker 2

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. Let us know if we can help with any follow-up questions that you may have. Thank you.

Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

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Earnings Conference Call
Great Elm Capital Q1 2023
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