Q3 2022 Great Elm Group Inc Earnings Call

Yeah.

Welcome everyone and thank you for joining us today.

I'm joined this afternoon. This morning by our President and COO, Adam Kleinman, and our CFO Brent Pearson.

As you May have seen we announced an important transaction in conjunction with earnings.

Yesterday, we entered the private REIT business through our acquisition of the investment management agreement for <unk> properties reached a private real estate investment Trust with a 108 property portfolio of diversified net leased industrial assets, representing $348 million of real estate.

This transaction is exactly what we should be doing to further our strategic objectives and is supported by every board member.

For reference we added a number of slides to our earnings presentation that are dedicated to the transaction.

At a high level. We believe this acquisition represents a transformative transaction for our investment management business and demonstrates significant progress towards our strategy of managing a diversified set of recurring fee generating long duration capital vehicles.

Our AUM more than doubled from $224 million to approximately $572 million.

From a financial perspective GE.

ECM will earn an asset management fee equal to 1% of the REIT.

In addition to property management fees equal to 4% of gross rents.

In the first quarter 2022 asset management fees for the <unk>, REIT or zero point $4 million and pro forma for the transaction property management fees would have been zero point $3 million in the quarter.

Annualized. This quarterly result, this represents approximately $2 $8 million in fees on an annualized basis.

We believe the $10 million upfront purchase price is an attractive entry point at approximately three six times pro forma first quarter 'twenty two annualized revenues on a growing durable capital vehicles.

Taking a step back.

I'd like to outline our thesis by speaking to the transactions two key pieces.

Acquiring the manager and investing into the REIT.

Firstly, the manager acquisition adds another leg to our investment management stool and furthers our strategy of acquiring management rights to long duration capital vehicles that utilize the expertise of our board management, and GE Ge's financial resources, including its Nols.

Specifically the acquisition is compelling given the platform is backed by a skilled and seasoned management team.

Underlying capital is sticky and therefore, the management fees are durable.

We believe there is a path to converting the REIT into a permanent capital vehicle and that <unk> unique tax structure provides us with a competitive advantage and raising additional capital for the modern way right.

Moreover, the growth in fee revenue will allow <unk> to leverage fixed overhead and as outlined earlier, we believe at three six times pro forma annualized revenue. This is an attractive purchase price.

Secondly, we are making a strategic growth investment into <unk>, which provides the GE <unk> access to a diversified portfolio of industrial properties poised for sustainable growth.

This investment follows our June 2021 investment of $4 6 million into the REIT, which has grown to $5 6 million as of March 31 2022.

The additional investment into the <unk> as part of this transaction is based on the strong track record of the management team a large build to suit pipeline and <unk> tax attributes, which offer an advantage to shield, both current income and long term gains.

<unk> properties is a private real estate investment trust with a 108 property portfolio across 27 states and 41 unique tenants.

The recall to a diversified portfolio of net leased industrial assets, representing $348 million of gross real estate at fair value as of March 31, 2022, and focuses on single tenant light industrial properties with small building footprints on significant acreage.

The trust targeted investments in critical markets with favorable underlying economic trends and demographics, while building mutually beneficial relationships and streamlining the management of tenants real estate.

The terms of the acquisition include multiple components.

<unk> has agreed to an upfront purchase price of $10 million at closing finance with a combination of.

$2 $5 million in newly issued shares of <unk> stock.

$125 million in shares of common stock of Great Elm Capital Corp, where GE ECC that are owned by <unk>.

And three a promissory note issued by GE ECM in an aggregate principal amount of approximately $6 $3 million.

In addition, there are two earn out payments subject to meeting revenue growth targets of up to $1 million. Each following the fiscal years ending June 32023 and June 32024.

Also the transaction includes a targeted equity investment into the <unk> rate of up to $30 million to fund growth <unk> has committed to investing $15 million and intends to invest an additional $15 million over the next 12 months, although it is not contractually obligated to do so.

In summary, the <unk> reached growth potential represents a substantial value creation opportunity for GE. We are excited to partner with Chris <unk> and his team to accelerate our investment management segment growth.

From a capital perspective yesterday, we filed a registration statement for a $30 million offering of senior unsecured notes.

We expect to use the net proceeds of this offering to make investments in the <unk> rate and or for general corporate purposes, including making opportunistic investments a refinancing subsidiary preferred stock or other indebtedness.

Looking ahead offering likely serves as a template for future capital raises.

Turning to our results for the quarter ended March 31, 2022, we delivered another quarter of solid performance highlighted by 20% growth in consolidated revenue on a year over year basis.

Topline growth was broad based across our <unk> and investment management segments with both business is poised for growth, reflecting durable demand trends sustainable competitive advantages and a transformational transaction.

Focusing on our investment management segment.

Revenue for the quarter grew by 36% versus the prior year quarter, driven by rising AUM for <unk> and our other investment vehicles.

We remain focused on expanding and diversifying the platform by growing <unk> through additional equity raises debt issuances and opportunistic M&A as well as by adding additional clients and relationships through new fund launches and co investment opportunities.

On the durable medical equipment side, we again reported strong revenue growth, despite ongoing macro headwinds, including persistent supply chain issues and limited medical device inventories.

Looking ahead demand trends remained strong as evidenced by current backlog, which bodes well for the pace and sustainability of our growth.

As is our standard practice I wanted to reiterate the strong alignment between the great Elm team and <unk> shareholders.

Employees and directors, including funds under their management collectively own or manage.

Proximately, 30% of Great Elm outstanding shares and we continue to believe a meaningful disconnect exists between the underlying value of the great home platform, particularly following the powerful acquisition of <unk> properties.

And the current price of the stock.

With that I'll turn it over to Brent to discuss our financial results for the quarter in more detail Brent.

Thanks, Pete <unk>.

I'll provide a brief overview and of course, we welcome all of you to review our filings in greater detail or to reach out to our team with questions you may have.

During the quarter ended March 31, 2022, we reported consolidated revenue of $16 6 million, a net loss of $6 1 million and adjusted EBITDA, a non-GAAP measure of 1.0 million.

For the same period last year, we reported consolidated revenue of $13 8 million a net loss from continuing operations of $2 8 million and adjusted EBITDA of $2 2 million.

Great. One reports the results of each of our two operating segments, including investment management and durable medical equipment as well as unallocated general corporate activity.

We'll begin the review with investment management.

The fiscal third quarter investment management reported total revenue of 1.0 million compared to 0.7 million during the same period in the prior year.

Revenue for the quarter was higher due primarily to increases in assets under management at GCC.

Adjusted EBITDA was negative 400000 in fiscal 2022 third quarter compared to essentially breakeven during the same period in the prior year.

We incurred higher payroll and shared service costs in the current period as we focus on growing and optimizing gcc's portfolio of specialty finance companies, including the recently acquired Sterling commercial credit.

These increased costs outpaced the increases in revenue during the quarter.

Next turning to durable medical equipment.

For the fiscal third quarter, <unk> generated $15 6 million in revenue compared to $13 1 million for the same period last year.

The increase in revenue was primarily attributable to contributions from previous acquisitions and the M. P. M. On March 2021, and a bad one in August 21.

In addition, our previous investments into the business have significantly improved the intake and collections process, resulting in lower revenue reserve rates compared to prior year.

We improved our gross margin.

Increasing to 61, 2% as compared to 58, 4% in the prior year period.

The higher margins were driven by improved vendor pricing when compared to the prior period.

Grid on the EMEA operations reported net loss was $6 6 million in comparison to a net loss of $5 1 million in the prior year period.

Much of the net income volatility can be tied to the recurring valuation adjustment of an embedded derivative on an intercompany instruments, which are eliminated in consolidation and added back for EBITDA purposes.

Adjusted EBITDA was $2 5 million for the fiscal third quarter compared to $3 4 million in the prior year period.

The prior year period included a $2 $3 million benefit related to employee retention payroll tax credits claimed under the cares Act.

Excluding such benefits segment profitability significantly improved versus the prior year quarter.

Okay.

Moving onto our general corporate segment.

For the fiscal third quarter <unk> General corporate segment recognized $230000 in revenue compared to $160000. During the same period in the prior year.

Revenue increased as a result of increased management fees earned on DMD.

General corporate adjusted EBITDA for the current quarter was negative $1 2 million, which is consistent with the prior year period.

Finally in terms of our balance sheet.

We ended the quarter with a healthy liquidity position of $22 $7 million in cash exclusive of liquid investments.

We also Deleveraged, our managed fund G soft during the quarter subsequently liquidating and distributing approximately 80% of the portfolio in April .

This distribution provided an additional $8 $2 million in cash subsequent to quarter end, which strengthened our position to execute on fiscal Q4 strategic transactions.

This concludes my financial review of the quarter.

With that we'll turn the call over to the operator to open for questions.

At this time I would like to remind everyone in order to ask a question press Star one we'll pause for just a moment to compile the Q&A roster.

Again, if you would like to ask a question press star one.

There are no questions at this time I will turn the call back over to Peter for closing remarks.

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

This concludes today's conference call you may now disconnect.

Okay.

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