Q3 2021 Great Elm Capital Corp Earnings Call
Okay.
Yeah.
Good day and thank you for standing by welcome to the Great Elm Capital Corp, third quarter 2021 financial results conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one I guess all of them.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to a representative from the company Mr. Adam Prior.
You may begin.
Thank you and good morning, everyone and thank you for joining us for Great Elm Capital Corp, 's third quarter earnings conference call if.
If you'd like to be added to our distribution list you can email investor relations at great Elm capped dot com or you can sign up for alerts directly on our website at great Elm C C Dot com.
In addition to our comments for today's call, we will be utilizing an investor presentation as an accompaniment well.
While we will not be directly referring to the slides our comments today will generally follow the form and structure of the presentation.
Slide presentation accompanying this morning's call and webcast can be found on our website under financial information quarterly results.
On the website you can also find a copy of this presentation our earnings release Form 10-Q, and a link to the webcast as well.
I'd like to call your attention to the customary safe Harbor language regarding forward looking information also please note that nothing in today's call constitutes an offer to sell or solicitation of offers to purchase our securities. Today's conference call includes forward looking statements and projections and we ask that you refer to great Elm Capital Corp, 's filings with the SEC for important factors that could cause.
Cause actual results to differ materially from those projections, great Elm capital Corp, does not undertake to update its forward looking statements unless required by law.
Copies of <unk> SEC filings.
Please visit great Elm capital Corp's website under financial information SEC filings or visit the SEC's website.
As a reminder, this webcast is being recorded on Friday November 5th 2021.
Hosting the call. This morning is Peter Reed, Great Elm Capital Corp, 's, President and Chief Executive Officer. Please go ahead Pete.
Thank you Adam.
And thank you for joining us today.
On today's call, we have our COO, Adam Kleinman, our CFO, Karen Davis, and our portfolio manager Matt Kaplan.
I would like to start out by highlighting our acquisition of a majority interest in lenders funding or at the end of the quarter we.
We are excited to partner with its founder Bob data as well as Harvey Friedman and gene method will build the business with a long term track record of profitable growth and a strong underwriting culture.
Forward to supporting lenders fundings future growth, which I will touch on in more detail later.
Also as is our usual practice I will now provide an overview of G. E. C sees investment performance during the quarter and Matt will discuss our portfolio Cary will discuss our financial highlights in greater detail and I'll return for closing remarks.
Our third quarter showed progress in many regards as we deployed $71 1 million into over 26 investments with a weighted average yield of 10% and grew our investment portfolio was $246 7 million an increase of nearly 18% from the second quarter.
Our investments in the quarter spanned a variety of industries with a focus on specialty finance.
We improved the weighted average yield on our debt investments to 11, 3% from 11, 1% in the prior quarter and continued to deploy capital into a higher number of income generating equity investments.
Throughout the year.
Excessively increase liquidity, while lowering our overall cost of capital and strengthened our financial position through the extension of maturities.
Finally, our asset coverage ratio was 163, 8% at the end of the quarter.
Let me take a quick moment to provide an overview of our financial position.
At quarter end J E. T. C had total assets of $415 2 million with $99 4 million of net asset value or $3 70 per share.
Our regular quarterly cash dividend of <unk> 10 per share, which represents a yield of 10, 8% on September 30 NAV.
NII for the quarter was approximately $1.6 million or <unk> seven per share.
NII of $2 1 million.
Our nine cents per share for the quarter ended June 32021.
Our NII. This period was impacted due to certain one time items, primarily related to legal fees incurred in connection with the legacy full circle investment, which resulted in a reduction to NII of approximately <unk> <unk> per share.
As we have discussed in prior quarters, we are growing the portfolio and getting to an inflection point, where legacy investments are no longer as impactful as they may have done in the past.
The same context, our largest industry in terms of percentage of the overall book at fair value and specialty finance.
The first time in our tenure, we're the largest percentage of the portfolio is weighted to investments, which were not part of the portfolio at the time of the full circle merger.
We have now deployed over $179 million in new investments in the first nine months of 2021 with an increasingly diversified investment mix as we seek to rotate the portfolio into what we believe to be higher quality credits, primarily comprised of secured loans bonds preferred equity investment in specialty.
Finance businesses uncorrelated to the corporate credit portfolio.
This is partially driven by our ownership position in and relationship with prestige capital a spot factoring business that provides liquidity to its clients by purchasing their receivables from creditworthy counterparties at a discount to face value.
Each has over 30 years of experience in the factoring business with approximately $6 billion in aggregate transactions factored during that time.
Since our acquisition of a majority interest in prestige. Its performance has been excellent as prestige is in many cases, taking comparatively little credit risk for returns that are frequently more attractive than those that can be found in the syndicated credit market.
As we have discussed previously our goal is managers, who spend to support the team at prestige and to continue to allow them to pursue larger transactions given the strength of our balance sheet.
We are constantly analyzing the most effective methods to grow our specialty finance platform further given the results produced to date.
Our overall goal is to create an ecosystem, where we can provide solutions to small businesses at varying stages in their development.
Team continues to explore a number of acquisition opportunities in the specialty finance space.
Many of which we were introduced to by the management teams at prestige and lenders funding.
To that end, we were very pleased to acquire a majority interest in lenders funding during the quarter.
The direction of the Companys principles lenders funding provides participant financing and risk sharing specifically for factors in asset based lenders.
The acquisition of lenders funding increases our visibility into the broader specialty finance market due to with having over 20 years of experience providing capital to lenders in the specialty finance space as.
As well as.
It provides proprietary overflow opportunities for GE E C C.
Perfect complement to prestige and another important step in our specialty finance strategy at J E. T. T. In connection with this acquisition <unk> also issued approximately three 4 million shares to lenders funding at net asset value at this point I'd like to turn the call to Matt to discuss our portfolio performance for the quarter.
Yeah.
Thanks Pete.
I'll take a moment to describe the composition of our portfolio at quarter end.
The overall theme is a growing and diversified book with a stable yield profile over the course of the year.
Our September 30th portfolio contains 46 debt investments and 13 equity investments excluding specs.
If you compare this with the prior quarter. Our June 30th portfolio contains 42 debt investments in 11 equity investments.
The debt investments account for $186 million or approximately 75% of the portfolio's fair value at quarter end compared to $156 million or approximately 74% of the portfolio fair value at June 30.
We are pleased with this growth and even more so that we give decreased issuer concentration or increasing the weighted average current yield on our debt investments to 11, 3% at quarter end as compared to 11, 1% at June 30, and 10, 9% at the end of March.
Of the approximately $186 million of debt investments roughly 72 million is invested in floating rate instruments.
The weighted average current yield of nine 1%.
114 million is invested in fixed rate instruments with a weighted average current yield of 12, 7%.
We added to income generating equity investments in the quarter lenders funding and echo Trans preferred and not hold five income generating equity investments totaling approximately $35 million or 14% of our overall invested capital at fair value.
The weighted average yield for five income generating equity investments prestige vendors ballooned night Echo trends and Crestwood is approximately 13%.
We also held other equity investments, excluding specs totaling approximately $17 million or 7% of fair value as well as spec instruments totaling approximately 9 million accounting for approximately 4% of fair value.
If you examine our portfolio by sector G. E. C. C is invested across 25 separate industries as Pete noted earlier specialty finance is now our largest sector, representing nearly 20% of investments at fair value.
As our portfolio has grown this year, the wireless telecommunications services business and our largest holding a bumpy has declined as an overall percentage of portfolio of fair value.
We seek to grow our investments in the specialty finance space.
Diversify our holdings, we expect the portfolio to continue to be less concentrated.
We have been able to successfully find compelling investment opportunities.
Rice's or.
Or below par in each of the last eight quarters. This past quarter, we were able to deploy capital at a weighted average price of 99% of par.
In the third quarter, approximately $30 million of investments were monetized approximately $71 million of capital was deployed into investments with higher weighted average yields.
With that I'll turn the call to Carrie to go through our financial highlights.
Gary.
Thank you Matt I'll go through the financial highlights quickly, but invite all of you to review our press release accompanying presentation and of course, our SEC filings.
Total shares outstanding as of September 30th were $26 9 million up from $23 5 million at the prior quarter end with the increase attributable to the equity issued in connection with our acquisition of lenders funding.
<unk> reported a net loss of 13 per share during the third quarter compared to net income of 11 cents per share in the prior quarter.
Of course share with certain sense compared to nine cents in the prior quarter as Pete noted earlier onetime items, primarily related to legal fees incurred in connection with the legacy full circle investment, which resulted in a reduction to NII of approximately <unk> <unk> per share.
Corner ended September 30th 2021.
Moving on to the balance sheet net asset value or NAV was $3 70 per share at September 30, compared to $3 90 per share at June 30, and $3 46 per share at December 31, 2020, which was largely driven by unrealized losses and certain legacy investments.
Total fair value of investments as of September 30th was $146 7 million compared to $209 4 million at June 30, and $151 7 million at December 31, 2020, net assets were $99 4 million and eight 4% increase from 91.
One 7 million in the prior quarter.
We have three publicly traded issues of unsecured notes the six 5% notes due in 2024 trading under the ticker G E C C N b six.
675% notes due in 2025 trading under the ticker G E M and the new 5.8, 75% notes due in 2026 trading under the ticker G E T C L.
Our total debt outstanding was approximately $151 7 million, including these unsecured baby bonds and $10 million drawn on our revolving credit facility, we have the ability to draw up to an additional $15 million on the revolving credit facility. We're pleased to have ample capital and runway to grow our business with the nearest maturity.
Being over two years away.
Moreover, we continue to evaluate ways to lower our cost of capital.
Finally at September 30th our cash balance was approximately $20 6 million exclusive of holdings in U S. Treasury note.
And with that I'll turn it back to Pete for closing remarks.
Thanks, Carrie and Matt we will open it up for questions shortly but I'd like to close with our dividend and capital deployment and then we would be happy to take your questions.
We will again be paying a 10 cent cash distributions to shareholders for the quarter ended March 31 2022.
As I mentioned earlier this represents an indicated yield of 10, 8% on a b at quarter end and 11, 4% yield on our common stock price as of the close on November one.
The record and payable date for this distribution will be set by the company pursuant to authority granted by the board and announced in the ordinary course.
In summary, we can.
Continued to strengthen our portfolio by deploying higher amounts of capital at higher yields, but what is most exciting is the foundation of what we're building is a specialty finance focused lender as evidenced by our acquisition of a majority interest in lenders funding along with the continued success of prestige.
With that we will turn the call over to the operator to open for questions.
As a reminder to ask a question you will need to press star one telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
As a reminder to ask a question you will need to press Star then the number one when you go to all of that one.
At this time there are no questions.
I would like to turn the call back over to management.
Thank you again for joining us. This morning, we look forward to continued dialogue and please let us know if we can be helpful with anything in follow up.
Ladies and gentlemen. This concludes today's teleconference. We thank you you may now disconnect at this time.
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Good day, and thank you for standing by walking to the Great Elm Capital Corp, third quarter 2021 financial results conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there won't be a question and answer session to ask a question. During the session you will need to press star one I guess all of them. If you require any further assistance. Please press star zero I would now like to hand, the conference over to a representative from the company Mr. Adam Prior.
You may begin.
Thank you and good morning, everyone and thank you for joining us for Great Elm Capital Corp, 's third quarter earnings conference call if.
If you'd like to be added to our distribution list you can email investor relations at great Elm capped dot com or you can sign up for alerts directly on our website at great Elm <unk> Dot com.
In addition to our comments for today's call, we will be utilizing an investor presentation as an accompaniment.
While we will not be directly referring to the slides our comments today will generally follow the form and structure of the presentation.
Slide presentation accompanying this morning's call and webcast can be found on our website under financial information quarterly results.
On the website you can also find a copy of this presentation our earnings release Form 10-Q, and a link to the webcast as well.
I like to call your attention to the customary safe Harbor language regarding forward looking information also please note that nothing in today's call constitutes an offer seller solicitation of offers to purchase our securities. Today's conference call includes forward looking statements and projections and we ask that you refer to great Elm Capital Corp, 's filings with the SEC for important factors that could cause.
Cause actual results to differ materially from those projections with great Elm Capital Corp, does not undertake to update its forward looking statements unless required by law to obtain.
Copies of <unk> SEC filings.
Please visit great Elm capital Corp's website under financial information SEC filings or visit the SEC's website.
As a reminder, this webcast is being recorded on Friday November 5th 2021.
Hosting the call. This morning is Peter Reed, Great Elm Capital Corp, 's, President and Chief Executive Officer. Please go ahead Pete.
Thank you Adam.
And thank you for joining us today.
On today's call, we have our CLO, Adam Kleinman, our CFO, Karen Davis, and our portfolio manager Matt Kaplan.
I'd like to start out by highlighting our acquisition of a majority interest in lenders funding or at the end of the quarter. We are excited to partner with its founder Bob data as well as Harvey Friedman and gene Madden, but build the business with a long term track record profitable growth and our strong underwriting culture.
Look forward to supporting lenders funding future growth, which I will touch on in more detail later.
Also as is our usual.
Practice I will now provide an overview of GEC sees investment performance during the quarter and then Matt will discuss our portfolio Cary will discuss our financial highlights in greater detail and I'll return for closing remarks.
Our third quarter showed progress in many regards as we deployed $71 1 million into over 2006 investments with a weighted average yield of 10% and grew our investment portfolio was $246 7 million an increase of nearly 18% from the second quarter.
Our investments in the quarter spanned a variety of industries with a focus on specialty finance.
We improved the weighted average yield on our debt investments to 11, 3% from 11, 1% in the prior quarter and continued to deploy capital into a higher number of income generating equity investments.
Throughout the year.
Definitely increase liquidity, while lowering our overall cost of capital and strengthened our financial position through the extension of maturities.
Finally, our asset coverage ratio was 163, 8% at the end of the quarter.
Let me take a quick moment to provide an overview of our financial position.
At quarter end <unk> had total assets of $415 2 million with $99 4 million of net asset value or $3 70 per share.
Our regular quarterly cash dividend of <unk> 10 per share, which represents a yield of 10, 8% on September 30 NAV.
NII for the quarter was approximately $1.6 million or seven cents per share as compared to NII of $2 1 million or nine cents per share for the quarter ended June 32021.
Our NII. This period was impacted due to certain one time items, primarily related to the legal fees incurred in connection with the legacy full circle investments, which resulted in a reduction to NII of approximately <unk> <unk> per share.
As we have discussed in prior quarters, we are growing the portfolio and getting to an inflection point, where legacy investments are no longer as impactful as they may have done in the past.
But at the same context, our largest industry in terms of percentage of the overall book at fair value and specialty finance this.
This is the first time in our tenure, we're the largest percentage of the portfolio is weighted to investments, which were not part of the portfolio at the time that the full circle merger.
We have now deployed over $179 million in new investments in the first nine months of 2021 with an increasingly diversified investment.
As we seek to rotate the portfolio into what we believe to be higher quality credits, primarily comprised of secured loans bonds preferred equity investments in specialty finance businesses uncorrelated to the corporate credit portfolio.
This is partially driven by our ownership position in and relationship with prestige capital.
Factoring business that provides liquidity to its clients by purchasing their receivables from creditworthy counterparties at a discount to face value.
With each has over 30 years of experience in the factoring business with approximately $6 billion in aggregate transactions factored during that time.
Since our acquisition of a majority interest in prestige its performance.
Then excellence is prestige is in many cases, taking comparatively little credit risks sort of returns that are frequently more attractive than those that can be found in the syndicated credit bucket.
As we have discussed previously our goal is managers who's been to support the team at prestige and to continue to allow them to pursue larger transactions given the strength of our balance sheet.
We are constantly analyzing the most effective method to grow our specialty finance platform further given the results produced to date. Our overall goal is to create an ecosystem, where we can provide solutions to small businesses at varying stages in their development.
Our team continues to explore a number of acquisition opportunities in the specialty finance space many of which we were introduced to by the management teams at prestige and lenders funding.
To that end, we were very pleased to acquire a majority interest in lenders funding during the quarter.
The direction of the Companys principles lenders funding provides participant financing and risk sharing specifically for factors in asset based lenders.
The acquisition of lenders funding increases our visibility into the broader specialty finance market due to it having over 20 years of experience providing capital to lenders in the specialty finance space as.
As well as.
It provides proprietary overflow opportunities for GE E C C.
Perfect complement to prestige and another important step in our specialty finance strategy at J E. T. C. In connection with this acquisition <unk> also issued approximately three 4 million shares to lenders funding at net asset value at this point I'd like to turn the call to Matt to discuss our portfolio performance for the quarter.
Yeah.
Thanks Pete.
I'll take a moment to describe the composition of our portfolio at quarter end.
The overall theme is a growing and diversified book with a stable yield profile over the course of the year.
Our September 30th portfolio contains 46 debt investments and 13 equity investments excluding specs.
To compare this with the prior quarter. Our June 30th portfolio contains 42 debt investments 11 equity investments.
The debt investments account for $186 million or approximately 75% of the portfolio fair value at quarter end compared to $156 million or approximately 74% of the portfolio is fair value at June 30.
We are pleased with this growth and even more so that we have decreased issuer concentration while increasing the weighted average current yield on our debt investments to 11, 3% at quarter end as compared to 11, 1% at June 30, and 10, 9% at the end of March.
Of the approximately $186 million of got investments roughly 72 million is invested in floating rate instruments.
The weighted average current yield of nine 1%.
114 million is invested in fixed rate instruments with a weighted average current yield of 12, 7%.
We added to income generating equity investments in the quarter lenders funding and echo trends preferred and not hold five income generating equity investments totaling approximately $35 million or 14% of our overall invested capital at fair value.
The weighted average yield for five income generating equity investments prestige vendors Loopnet echo trends and Crestwood is approximately 13%.
We also held other equity investments, excluding specs totaling approximately $17 million or 7% of fair value as well as spec instruments totaling approximately 9 million accounting for approximately 4% of fair value.
If you examine our portfolio by sector G. E. C. C is invested across 25 separate industries as Pete noted earlier specialty finance is now our largest sector, representing nearly 20% of investments at fair value.
As our portfolio has grown this year the wireless telecommunications services business at all.
Just holding a bumpy has declined as an overall percentage of portfolio fair value.
We seek to grow our investments in specialty finance space and further diversify our holdings, we expect the portfolio to continue to be less concentrated.
We have been able to successfully find compelling investment opportunities.
Rice's or.
Or below par each of the last eight quarters. This past quarter, we were able to deploy capital at a weighted average price of 99% of par.
In the third quarter, approximately $30 million of investments were monetize approximately $71 million of capital was deployed into investments with higher weighted average yields.
With that I'll turn the call to Carrie to go through our financial highlights.
Gary.
Thank you Matt I'll go through the financial highlights quickly, but invite all of you to review our press release accompanying presentation and of course, our SEC filings.
Total shares outstanding as of September 30th were $26 9 million up from $23 5 million at the prior quarter end with the increase attributable to the equity issued in connection with our acquisition of lenders funding.
<unk> reported a net loss of 13 cents per share during the third quarter compared to net income of 11 cents per share in the prior quarter.
<unk> per share was seven cents compared to nine cents in the prior quarter as Pete noted earlier, one time items, primarily related to legal fees incurred in connection with the legacy full circle of investment, which resulted in a reduction to NII of approximately <unk> <unk> per share in the quarter ended September 30th 2021.
Moving on to the balance sheet net asset value or NAV was $3 70 per share at September 30, compared to $3 90 per share at June 30, and $3 46 per share at December 31, 2020, which was largely driven by unrealized losses and certain legacy investments.
Yeah.
Total fair value of investments as of September 30th was $246 7 million compared to $209 4 million at June 30, and $151 7 million at December 31, 2020, net assets were $99 4 million and eight 4% increase from $91 7 million.
In the prior quarter.
We have three publicly traded issues of unsecured notes the six 5% notes due in 2024 trading under the ticker G. ECC N B six.
675% notes due in 2025 trading under the ticker <unk> M and the new 5.8, 75% notes due in 2026 trading under the ticker G E T C L.
Our total debt outstanding was approximately $151 7 million, including these unsecured baby bonds and $10 million drawn on our revolving credit facility, we have the ability to draw up to an additional $15 million on the revolving credit facility. We are pleased to have ample capital and runway to grow our business with the nearest maturity.
Being over two years away.
Moreover, we continue to evaluate ways to lower our cost of capital.
Finally at September 30th our cash balance was approximately $20 6 million exclusive of holdings in U S treasuries and with that I'll turn it back to Pete for closing remarks.
Thanks, Carrie and Matt we will open it up for questions shortly but I'd like to close with our dividend and capital deployment and then we would be happy to take your questions.
We will again be paying a 10 cent cash distributions to shareholders for the quarter ending March 31 2022.
As I mentioned earlier this represents an indicated yield of 10, 8% on a b at quarter end.
And 11, 4% yield on our common stock price as of the close on November one.
Record and payable date for this distribution will be set by the company pursuant to authority granted by the board and announced in the ordinary course.
In summary, we continued to strengthen our portfolio by deploying higher amounts of capital at higher yields, but what is most exciting is the foundation of what we're building is a specialty finance focused lender as evidenced by our acquisition of a majority interest in lenders funding along with the continued success of prestige.
With that we will turn the call over to the operator to open for questions.
As a reminder to ask a question you will need to press star one telephone.
So let's draw your question press the pound key.
He said by while we compile the Q&A roster.
As a reminder to ask a question you will need to press Star then the number one it's all around.
At this time there are no questions.
I would like to turn the call back over to management.
Thank you again for joining us. This morning, we look forward to continued dialogue and please let us know if we can be helpful with anything in follow up.
Ladies and gentlemen. This concludes today's teleconference. We thank you you may now disconnect at this time.