Great Elm Group Q4 2024 Earnings Call Transcript

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August 30, 2024

There are 4 speakers on the call.

Operator

Greetings. Welcome to the Great Elm Group's Fiscal 4th Quarter 20 24 Earnings Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being

Speaker 1

recorded. I'll now turn the conference over

Operator

to Adam Yates, Managing Director. Adam, you may now begin.

Speaker 2

Good morning, everyone. Thank you for joining us for Great Elm Group's fiscal Q4 2024 earnings conference call. As a reminder, this conference call is being recorded on Friday, August 30, 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 dotgreatelmgroup.com. The slide presentation accompanying today's conference call and webcast can be found on our website under Events and Presentations.

Speaker 2

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.

Speaker 2

To obtain copies of our SEC filings, please visit Great Elm Group's website under Financial Information and SEC Filings. On the call today, we have Jason Rees, CEO Adam Kleinman, President and General Counsel Nicole Mills, COO and Kerry Davis, CFO. I will now turn the call over to Jason Rees, CEO.

Speaker 1

Welcome everyone and thank you for joining us today. Fiscal year 2024 was a defining year for Great Elm. Our management team was able to focus on growing a streamlined pure play asset management business and driving shareholder value. Looking back, we delivered an excellent fiscal 2024 as we were able to improve profitability, expand our platform businesses and particularly grow our assets under management. I would like to highlight several key milestone achievements this fiscal year.

Speaker 1

Most notably, our BDC, Great Elm Capital Corp, raised over $90,000,000 in fresh capital from February July 2024, significantly growing fee paying assets under management by nearly 30% from prior year. This growth was accomplished through a series of capital raises made possible by an innovative structure that provided $36,000,000 of equity capital for GECC. First, in February, GECC raised $24,000,000 of equity capital through Great Elm Strategic Partnership 1 LLC. GEG supported this capital raise by investing $6,000,000 along with an institutional investor's $18,000,000 investment in the SPV, which in turn invested in $24,000,000 of new GECC common shares at net asset value. GECC continued to utilize the structure as a template for a second equity capital raise in June.

Speaker 1

In this transaction, GECC raised $12,000,000 of capital at NAV via Prosper Peak Holdings LLC. GEG made a $3,000,000 investment into the SPV alongside a $9,000,000 investment from other institutional investors. We were able to raise capital at these SPVs due to our strategic relationships with sophisticated institutional investors and GECC's continued improved performance. We continue to work with our strategic partners to further enhance their relationship with Grado, which we believe would provide additional benefits over time for both parties. Additionally, in April, GECC completed an underwritten public offering of $34,500,000 of 5 year notes at a more than 50 basis point spread improvement as compared to GECC's August 23 note issuance.

Speaker 1

GECC subsequently issued an additional $22,000,000 of notes through a registered direct offering to an institutional investor in July. Accomplishing these capital raises at NAV and improved financing rates were a huge success for Great Elm Group and clear evidence of our commitment to further scale GECC. These capital raises are integral to our business as they expand GEG's ability to earn fee revenue from GECC, providing both substantial recurring asset management fee revenue and potential incentive fee revenue from the incremental capital. In addition, GEG continues to maintain a material direct investment in GECC and received $2,300,000 of dividend income in fiscal year 2024, inclusive of a special dividend paid in December 2023. Looking ahead, we believe our BDC is well positioned to generate attractive risk adjusted returns for its shareholders and to raise further capital in fiscal 2025.

Speaker 1

It should be noted that the financial accounting rules guide us to mark our $9,000,000 investment in the SPVs to a material lesser value creating unrealized losses. These unrealized losses contributed $3,800,000 to our overall net loss of $900,000 for the year. We believe the unrealized losses are temporary and will reverse over time as the SPVs receive distributions from the BDC. Our real estate platform continued to expand over the past year. Monomoy BTS had a milestone Q4 of fiscal 2024 nearing completion on our 2 inaugural properties, including our first property sale in June, where we realized a gain on sale of over $1,000,000 and a significant IRR.

Speaker 1

We expect continued profitability in fiscal 2025 as the team focuses on selling its second property in the first half of the year and begins development on its 3rd contracted design build project. The build to suit pipeline remains robust with approximately 30 specifications entering 2025. We will continue to execute on these development opportunities to further enhance profits at GUG and create value for both our tenants and shareholders. During fiscal 'twenty four, Great Elm launched complementary products and businesses to expand its alternative credit and real estate platform offerings. Back in November 'twenty three, we launched the Great Elm Credit Income Fund or G SIF.

Speaker 1

I'm pleased to report that after the 1st 8 months of the fund, we have a solid start to building a strong marketable performance track record and we plan to raise capital for DUSIT in fiscal 2025. Additionally, last quarter in response to tenant demand, we launched Monomoy BTS Construction Management, a consulting business that enables clients to utilize our experienced team for overseeing in house construction projects through owner representative services. We began earning fees from this business in fiscal 2024 and are encouraged by the initial demand and growth prospects. Outside of our core business, in fiscal Q4, GEG invested $5,000,000 in a 10% preferred financing for CoreReap, a revolutionary cloud AI startup backed by other best in class institutional investors including Magnetar and Blackstone. This investment is a testament to the strength of our sourcing capabilities through our Board of Directors and our broader sophisticated network that give us a seat at the table in cutting edge investment opportunities.

Speaker 1

Alongside these significant strategic developments, Great Elm Group experienced a strong fiscal Q4 in 2024. We continue to grow our fee paying assets under management on both a sequential quarter and year over year basis. Including the net proceeds from GEC's July capital raise, fee paying AUM and AUM increased 22% and 17 percent year over year respectively. We generated total revenue of $9,000,000 tripling revenue from the prior year period and adjusted EBITDA of $1,200,000 compared to $400,000 for the prior year period. We ended the quarter and the year with nearly $60,000,000 in cash and marketable securities to deploy across our growing alternative asset management platform.

Speaker 1

We improved our capital structure by opportunistically repurchasing over $4,000,000 principal of our 5% convertible notes at 47% of face value and repurchasing 1,200,000 shares of GEG common stock in the market for $2,100,000 as part of our stock repurchase program. We are pleased with the continued performance of our credit and real estate verticals in the fiscal Q4 and seek to further accelerate the momentum at these key businesses. GECC had another successful quarter while raising ample capital and substantially increasing the scale of their platform. In April, GECC further expanded its reach into CLOs, forming a strategic joint venture with an institutional partner to make investments in CLOs and related warehouse facilities. The JV is beginning to receive sizable distributions from CLO Investments and we expect it will be a source of increasing income at GECC in the coming quarters.

Speaker 1

GECC's performance in fiscal 2024 supported the payment of incentive fees to GEG totaling $2,700,000 over the last 12 months. GECC remains well positioned to continue delivering fee revenues to GEG given the successful portfolio repositioning and recent expansion into CLO products. Combined, these initiatives should drive increased fee revenue as the BDC scales. Monomor REIT put up solid performance over fiscal 2024. Over the last 12 months, the REIT deployed $25,000,000 of capital to acquire 13 existing properties, amended 16 existing tenant leases for meaningful term extensions and expansion projects, executed renewal options at 12 properties with key tenants and entered into 4 new leases.

Speaker 1

Also approximately 70% of the REIT's portfolio saw rental rate increases from value added services, lease renewals and contractual step ups driving property management fee growth. Lastly, Monomoy successfully refinanced a sizable debt facility without any material impact due to annual debt service and freed up an additional $10,000,000 of growth capital. As referenced earlier, our builder seat business achieved a meaningful milestone with our 1st property sale. With the anticipated sale of our 2nd property in fiscal 2025, our 3rd contracted project under development and a meaningful pipeline of new projects, we're extremely encouraged by GEG's future growth potential with BPS and Construction Management and our opportunity for creating shareholder value with this business in fiscal 2025 and beyond. I'd like to conclude by revisiting the 3 driving goals we've consistently outlined: enhance our financial performance, expand our platform and grow our assets under management.

Speaker 1

I'm extremely pleased with our achievements toward our goals in fiscal 2024. After divesting our non core businesses in fiscal 2023, our accomplishments underscore our commitment to reposition Great Elm in the alternative asset management space by growing our core alternative credit and real estate businesses and adding accretive differentiated products. Additionally, we continue to actively evaluate multiple strategic initiatives. Moving ahead, we remain steadfast in pursuing opportunities to expand our businesses and allocate capital to promising new platform opportunities offering attractive risk adjusted returns. We are very excited about the future of Great Elm and we are well positioned to accelerate our growth in fiscal 2025.

Speaker 1

With that, I'll turn it over to Keri.

Speaker 3

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. Fiscal 4th quarter revenues tripled year over year to $9,000,000 driven by the Monomoy BTS property sale. AUM of $727,000,000 as of June 30, 2024 was up 6% from the prior quarter end and up 14% from the prior year end, while fee paying AUM grew to $524,000,000 up 6% quarter to date and up 17% from the prior year end. Including the net proceeds from GECC's July capital raise, AUM was $749,000,000 up 9% from March 31 17% from the prior year quarter end and fee paying AUM was $546,000,000 up 11% from March 31 22% from the prior year quarter end.

Speaker 3

Great Elm Group generated a net loss from continuing operations of $600,000 for the quarter as compared to $5,300,000 loss for the prior year period. As previously mentioned, this quarter's loss includes $1,100,000 in unrealized loss on Great Elm's investment in Prosper Peak Holdings LLC. Adjusted EBITDA for the quarter was $1,200,000 compared to $400,000 in the prior year period. As of June 30, we had approximately $58,000,000 of combined cash and marketable securities on our balance sheet deployed across our growing alternative asset management platform. Please refer to Slide 7 that provides an overview of our financial and highlights our book value per share of approximately $2.06 This concludes my financial review of the quarter.

Speaker 3

With that, we will turn the call over to the operator to open for questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. At this time, I'll turn the floor back over to Jason Rees for closing remarks.

Speaker 1

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

Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Great Elm Group Q4 2024
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