Q4 2022 Great Elm Capital Corp Earnings Call
Speaker 1: We ation pro that.
Speaker 2: Greetings and welcome to the great Am Capito Corp 4th quarter 2022 financial results. At this time all participants are in a listen only mode. I'd raise question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press 30 on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edison, a representative of the company. Thank you. You may begin. Good morning and thank you everyone for joining us for Great Elm Capital Corp's fourth quarter 2022 earnings conference call. If you'd like to be added to our distribution list, you can email investorrelationsatgreatemcap.com.
Speaker 3: I would like to call your attention to the customary safe harbor statement regarding board looking information. Also, please note that nothing in today's call has to do with an offer to sell or solicitation of offers to purchase our securities.
Speaker 3: Today's conference call includes forward-looking statements. We ask that you refer to great-elm capital corpse filings with the SEC for important factors that could cause actual results to differ materially from these statements. Great-elm capital corpse does not undertake to update its forward-looking statements unless required by law. To obtain copies of SEC filings, please visit Great-elm capital corpse website under financial information, SEC filings, or visit the SEC.
Speaker 3: website. Hosting the call this morning is Matt Kaplan, great-owned Catholic Corps 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. Thank you, Garrett. Good morning, and thank you for joining us today. Nearly one year ago, I hosted this call for the first time at the newly appointed CEO of GECC, an outlined our strategy to reboot the company.
Speaker 3: Today, I am pleased to discuss our fourth quarter results, which I believe marked a clear turning point in Great Elm Capital Corps' history and began to validate the rebamped portfolio strategy on which the team has been executing. One of the key pillars of our strategy was to construct a high quality, diversified portfolio. The goal of the year in the most advanced portfolio has been that there is quería, a Ngottick?, and the
Speaker 3: focused on performing and cash yielding investments. To that end, the cash income generated from our investment portfolio in the fourth quarter was the highest amount in GECC's history, and our portfolio is almost entirely comprised of cash generating investments today.
Speaker 3: Talking about cash generation is one thing, but the impact is reflected in our financials. For 2022, PIC and accretion income was approximately 11% of total investment income, significantly lower than the nearly 40% in 2021. Our focus on cash generation and portfolio construction set us up to report fourth quarter NII of $2.3 million or 30 cents per share, more than double the 14 cents reported for the third quarter of 2022. Quite simply, our shifts to focus on deploying capital.
Speaker 3: into senior secured floating rate investments is working and materially boosted MII from the prior quarter. Further, operating expenses declined from the third quarter as I indicated on the November call.
Speaker 3: Additionally, our board decided to realign our quarterly distribution to what we believe to be a sustainable level of 35 cents per share for the first quarter of 2023. Given our momentum and our growing portfolio, I think we are well positioned to cover the new distribution over the course of the year. Another key strategic objective I outlined last year was to increase our scale by raising capital.
Speaker 3: While 2022 was a challenging year to raise capital in the markets, we successfully closed on a $37.5 million rights offering in June , which positioned us to take advantage of the volatility in the second half of 2022. In the fourth quarter, we opportunistically deployed approximately $38 million dollars.
Speaker 3: into new investments at average yields of approximately 12%. Meanwhile, about $20 million of assets were monetized in the quarter at average yields below 10%. Half of our debt investment portfolio at year end consisted of floating rate debt, up from 48% at the prior quarter end and a marked difference from 33% on June 30th.
Speaker 3: Average yield on our credit portfolio also increased to 12.4% per year and from 11.6% cuts of 10.30%
Speaker 3: You should expect that we will continue to focus on investments that benefit from rising rates. The third strategic initiative I outlined a year ago was focusing on scaling our specialty finance platform. In that regard, I am pleased to report that we continue to make significant progress. Last quarter, when formed and funded are healthcare finance platform with Bercadia as a strategic minority part. Since that time, they close on three lines, have cultivated a robust pipeline of potential investments.
Speaker 3: and our active discussions to secure a senior financing partner. Our factory business also continues to perform well, and we believe the specialty finance platform is a well-positioned to provide material contributions to GECC in 2023. While we were pleased with the quarter from an income generation perspective, we saw a reduction in our net asset value to $11.16 per share as a result of unrealized market losses on certain investments in the quarter.
Speaker 3: We are focused on recovering now in the months ahead. Moving forward, we remain measured with respect to deploying capital in the current market environment and are focused on finding investments with limited risk of permanent capital impairment and durable returns. We are excited for our future prospects and the opportunities we are seeing in the market for floating rate security that can provide attractive risk adjusted returns. I'm proud of our teams ongoing efforts as we continue to transform and grow great Elm Capital Court. With that,
Speaker 2: I'd like to hand the call over to Carrie Davis to discuss our fourth quarter 2022 performance. Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation, and FBC filing for greater detail. As Matt noted, our efforts to generate cash as well as higher yield from our portfolio is bearing fruit. During the fourth quarter, GECC generated NII of 2.3 million, growing from 1.1 million...
Speaker 4: 31st 2021.
Speaker 4: Our NAF per share was 1116 as of December 31, 2022, versus 1256 as of September 30 and 1663 as of December 31, 2021. Detail for the Quaterer and Recorder changing NAF can be found in the investor presentation.
Speaker 4: As of December 31st, 2022, GECC's asset coverage ratio was approximately 154.5%, compared to 165.5% as of September 30th, 2022. GECC had net loss from operations of 96 cents per share in the fourth quarter, compared to a net increase of 18 cents per share in the prior quarter. NII per share was 30 cents more than doubling from 14 cents per share in the prior quarter.
Speaker 4: As of December 31st, our total debt outstanding was approximately $156 million, including $10 million outstanding on our $25 million line of credit. As of December 31st, 2022, our cash and money market security totaled approximately $7 million.
Speaker 4: Our Board of Directors has authorized a $0.35 per share cash distribution for the quarter ending March 31, 2023. The first quarter cash distribution will be payable on March 31 to stockholders' record as of March 15.
Speaker 4: Annualize the distribution equates to 12.5% annualized dividend yields on our December 31st nav of 1116 per share. I'll turn the call back over to Matt to review the portfolio. Thanks, Kerry. Let me provide a bit more color on how our portfolio construction has continued to evolve. In the secondary markets, similar to what we saw in the June July period,
Speaker 3: We saw market dislocation in October and December of 2022. We opportunistically downbade certain credits in the secondary market and were successfully able to deploy capital at attractive yields. This January February period is reminiscent of the rally in the middle of the third quarter last year and we have selectively taken advantage of the recovery to monetizing investments.
Speaker 3: When secondary markets are robust, we direct our time in capital to club and or direct deals as well as special refinance, while still maintaining an active pipeline of potential secondary market investments. We are working on a number of private deals, almost all with a floating rate component with mid-teens returns profile.
Speaker 3: On that note, I would like to turn the call over to Michael Keller to provide an update of our specialty finance initiatives. Thanks, Matt. We've consistently discussed our goal to develop a continual lending that GECC can operate small business clients. And an important part of that continuum is building our specialty finance platform. As noted before, we were excited in the fourth quarter to launch great Alam healthcare finance, and I am personally thrilled to be working alongside the Bukadea team. This vehicle is already making inroads and building its pipeline and we are in various stages of negotiations with bank and non-bank senior finance partners to provide capital to scale this platform. Structural and macroeconomic factors have created an opportunity in healthcare that I have not seen since the early 2000s.
Speaker 2: in the question queue. You may prior to start too if you would like to hear when all of your questions from the queue.
Speaker 2: For participants using sticker equipment, it may be necessary to pick up your handset before brushing the sarees.
Speaker 2: One moment please while we pull for questions. Again, if you have a question please press this part one on your telephone keypad.
Speaker 3: Please hold. There are no questions at this time. I would like to turn the floor back over to Matt Kecklin, CEO of the company for closing comments. Please go ahead. Thank you again for joining us today. We continue to make solid progress in our efforts to transform GECC and after nearly a year at the helm, I'm excited to start 2023 on offense.
Speaker 3: I'm pleased the board has realigned the dividend and will all the two-thirds of the first quarter. I'm optimistic we will cover the 35 cent dividend is coming quarter. We look forward to continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thank you.
Speaker 2: These countries based on a conference, you may disconnect your lines at this time. Thank you for your participation and have you all great day.
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Speaker 2: or P4 quarter 2022 financial results. At this time, all participants are in a listen only mode. I'll bring a question and answer session with all of the formal presentation. If anyone should require operator assistance during the conference, please press 30 on your telephone keypad.
Speaker 3: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host during Addison, a representative of the company. Thank you, you may begin. Good morning and thank you everyone for joining us for Great Elm Capital Corp. Fourth quarter 2022 earnings conference call. If you'd like to be added to our distribution list, you can email investorrelations at gradeelmcap.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, a company today's call. The slide presentation can be found on our website under financial information quarterly results.
Speaker 3: on our website that also find our learnings released in SEC filings. 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 our securities. Today's conference call includes forward-looking statements. We ask that you refer to great Elm capital court's filings with the SEC for important factors that could cause actual results to differ materially from these statements. Freedom capital court does not undertake to update its forward-looking statements unless required by law. To obtain copies of SEC filings, please visit Great Elm Capital Court's website under financial information, SEC filings, or visit the SEC's website. Both seem to call this morning as Matt Kaplan.
Speaker 3: Great-Uncatholic Corpse Chief Executive Officer who will be joined by Carrie 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 Catham. Thank you, Garrett. Good morning and thank you for joining us today. Nearly one year ago, I hosted this call for the first time at the newly appointed CEO of GECC and outlined our strategy to reboot the company. Today, I am pleased to discuss our fourth quarter results, which I believe marked a clear turning point in Great Elm Capital Corpse history and begin to validate the rebamped portfolio strategy on which the team has been executing.
Speaker 3: One of the key pillars of our strategy was to construct a high quality, diversified portfolio, focused on performing and cash-yielding investments. To that end, the cash income generated from our investment portfolio in the fourth quarter was the highest amount in GECC's history, and our portfolio is almost entirely comprised of cash generating investments today. Talking about cash generation is one thing, but the impact is reflected in our financials. For 2022, picked immigration income was approximately 11% of total investment income significantly lower than the nearly 40% in 2021. Our focus on cash generation and portfolio construction set us up to report fourth quarter MII of $2.3 million or $0.30 per share.
Speaker 3: more than double the 14 cents reported for the third quarter of 2022. Quite simply, our shift to focus on the polling capital into senior secured floating rate investments is working and materially boosted NII from the prior quarter. Further, operating expenses declined from the third quarter as I indicated on the November call. Additionally, our board decided to realign our quarterly distribution to what we believe to be a sustainable level of 35 cents per share for the first quarter of 2023. Given our momentum and our growing portfolio, I think we are well positioned to cover the new distribution over the course of the year. Another key strategic objective I outlined last year was to increase our scale by raising capital. While 2022 was a challenging year to raise capital in the market, we successfully closed on a $37.5 million right-offering in June , which positioned us to take advantage of the volatility in the second half of 2022. In the fourth quarter, we opportunistically deployed approximately $38 million.
Speaker 3: into new investments at average yields of approximately 12%. Meanwhile, about $20 million of assets were monetized in the quarter at average yields below 10%. Half of our debt investment portfolio at year end consisted of floating rate debt, up from 48% at the prior quarter end in a market difference from 33% on June 30. Average yield on our credit portfolio also increased to 12.4% at year end from 11.6% at September 30. You should expect that we will continue to focus on investments that benefit from rising rates. The third strategic initiative I outlined a year ago was focusing on scaling our specialty finance platform. In that regard, I am pleased to report that we continue to make significant progress.
Speaker 3: Last quarter, when formed and funded are healthcare finance platform with Bercadia as a strategic minority partner. Since that time, they closed on three loans, have cultivated a robust pipeline of potential investments and are an active discussion to secure a senior financing partner. Our factory business also continues to perform well and we believe the specialty finance platform is a well-positioned to provide material contributions to GECC in 2023. While we were pleased with the quarter from an income generation perspective, we saw a reduction in our net asset value to $11.16 per share as the result of unrealized market to market losses on certain investments in the quarter.
Speaker 3: Last quarter, when formed and funded are healthcare finance platform with Bercadia as a strategic minority part. Since that time, they closed on three loans, have cultivated a robust pipeline of potential investments and are an active discussion to secure a senior financing partner. Our factory business also continues to perform well and we believe the specialty finance platform is a well-positioned to provide material contributions to GECC in 2023. While we were pleased with the quarter from an income generation perspective, we saw a reduction in our net asset value to $11.16 per share as the result of unrealized market to market losses on certain investments in the quarter. We are focused on recovering now in the months ahead.
Speaker 4: Moving forward, we remain measured with respect to deploying capital in the current market environment and our focus on finding investments with limited risk of permanent capital impairment and durable returns. We are excited for our future prospects and the opportunities we are seeing in the market for floating-rate security that can provide attractive risk-adjusted returns. I'm proud of our teams on doing efforts as we continue to transform and grow great LN Capital Court. With that, I'd like to hand the call over to Carrie Davis to discuss our fourth quarter 2022 performance. Thanks, Matt. I'll go over our financial highlights now, but we invite all of you to review our press release, accompanying presentation and SEC filing for greater detail. As Matt noted, our efforts to generate cash as well as higher yield from our portfolio is bearing fruit. During the fourth quarter, GECC generated NII of 2.3 million, growing from 1.1 million in the third quarter of 2022, as well as year-over-year from 1.9 million in the prior year quarter, excluding an expense reversal. Our net assets as of December 31, 2022 were $84.8 million, compared to $95.25 million at September 30 and $74.6 million as of December 31, 2021.
Speaker 4: Our NAF per share was 1116 as of December 31, 2022, versus 1256 as of September 30 and 1663 as of December 31, 2021. Detail for the Quaterer and Recorder changing NAF can be found in the investor presentation. As of December 31, 2022, GECC's AFSEC coverage ratio was approximately 154.5%, compared to 165.5% as of September 30, 2022. DECC had netlocked from operations of 96 cents per share in the fourth quarter, compared to a net increase of 18 cents per share in the prior quarter.
Speaker 4: NII per share was 30 cents more than doubling from 14 cents per share in the prior quarter. As of December 31st, our total debt outstanding was approximately $156 million, including $10 million outstanding on our $25 million line of credit. As of December 31st, 2022, our cash and money market security totaled approximately $7 million. Our Board of Directors has authorized a 35 cents per share cash distribution for the quarter ending March 31st, 2023. The first quarter cash distribution will be payable on March 31st to stockholders record as of March 15th.
Speaker 3: Annualize the distribution equates to 12.5% annualized dividend yields on our December 31st nav of 1116 per share. I'll turn the call back over to Matt to review the portfolio. Thanks, Kerry. Let me provide a bit more color on how our portfolio construction has continued to evolve. In the secondary markets, similar to what we saw in the June July period, we saw market dislocation in October and December of 2022. We opportunistically downbade certain credits in the secondary market and were successfully able to deploy capital at attractive yields.
Speaker 3: This January , February period is reminiscent of the rally in the middle of the third quarter last year and we have selectively taken advantage of the recovery to monetize investments. When secondary markets are robust, we direct our time in capital to club and or direct deals as well as specialty finance, while still maintaining an active pipeline of potential secondary market investments. We are working on a number of private deals, almost all with a floating rate component with mid-teens or trans profiles. On that note...
Speaker 3: I would like to turn the call over to Michael Keller to provide an update of our specialty finance initiatives. Thanks, Matt. We've consistently discussed our goal to develop a continual lending that GECC can operate small business clients. And an important part of that continuum is building our specialty finance platform. As noted before, we were excited in the fourth quarter to launch great Alamed Healthcare Finance, and I am personally thrilled to be working alongside the Bukadea team. This vehicle is already making inroads and building its pipeline and we are in various stages of negotiations with Bank and non-bank senior finance partners to provide capital to scale this platform. Structural and macroeconomic factors
Speaker 3: have created an opportunity in healthcare that I have not seen since the early 2000s when I led the restructuring efforts of the Nova Capital's healthcare loan portfolio. Along with our recent key hires at our specialty finance vehicles, we are going more confidence that our platforms are properly positioned to execute on a growth initiatives and generate increasing sustainable income. Thanks Mike. We are headed in the right direction as evidence by our doubling of NII from a prior quarter and are confident in our ability to execute on our strategy. With that, we turn the call over to the Operator for questions. Operator?
Speaker 2: If you would like to ask a question, please press the star one on your telephone keypad. A confirmation down. We will indicate your lines in the question queue. You may press the star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Again, if you have a question, please press the star one on your telephone keypad. Please hold. There are no questions at this time. I would like to turn the floor back over.
Speaker 5: may disconnect your line's address. Thank you for your participation and have your all.