Q4 2024 Great Elm Capital Corp Earnings Call
Unknown Executive: Greetings and welcome to the Great Elm Capital Corporation 4th Quarter 2024 Financial Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Greetings and welcome to the Great Elm Capital Corp, fourth quarter 2024 financial results call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Unknown Executive: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Peter Sousa: It is now my pleasure to introduce your host, Peter Sousa with ICR. Thanks. You may begin.
Speaker Change: It is now my pleasure to introduce your host Peter Souza with ICR.
Speaker Change: You may begin.
Matthew Kaplan: Hello, and thank you everyone for joining us for Great Elm Cptl Corp's fourth quarter and full year 2024 earnings conference call. If you'd like to be added to our distribution list, you can email investorrelations at 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. The slide presentation can be found on our website under events and presentations. On our website, you could also find our earnings release and FCC file.
Speaker Change: Hello, and thank you everyone for joining us for great Elm capital Corp's fourth quarter and full year 2024 earnings conference call, if you'd like to be added to our distribution list you can email investor relations at great Uncapped Dotcom, we can sign up for alerts directly on our website www Dot grade M. C C dot com.
Speaker Change: Like to note the slide presentation posted on our website accompanying today's call and slide presentation can be found on our website under events and presentations on our website. You can also find our earnings release and 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 sold.
Matthew Kaplan: I'd like to call your attention to the customary safe harbor statement regarding forward-looking Also, please note that nothing in today's call constitutes an offer to sell or solicitation of offers to purchase our services. Today's conference call includes forward-looking statements, and we ask that you refer to Great Elm Cptl Corp's filings with the FCC for important factors that could cause actual results to differ materially from these statements.
Solicitation of offers to purchase our securities.
Speaker Change: Today's conference call includes forward looking statements and we ask that you were pretty 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 to obtain copies of our SEC filings. Please visit great Elm capital Corp's website under financials.
Matthew Kaplan: Great Elm Capital Corp. does not undertake to update forward-looking statements unless required by law. To obtain copies of SEC filings, please visit Great Elm Capital Corp.'s website. Under Financials, SEC Filings, or visit the SEC's website.
Speaker Change: SEC filings or visit the Sec's website.
Matthew Kaplan: Hosting the call today is Matt Kaplan, Great Elm Cptl Corp's Chief Executive Officer.
Matt Kaplan: The call today, it's not Catholic Great Elm capital Corp's, Chief Executive Officer will be joined by Chief Financial Officer, Terry Davis, Chief Compliance Officer, and General Counsel, Adam Kleinman, and Mitel or present, a great specialty finance I will now turn the call over to G. D C CEO, Matt Kaplan.
Matthew Kaplan: We'll be joined by Chief Financial Officer, Keri Davis, Chief Compliance Officer and General Counsel, Adam Kleinman, and Mike Keller, President of Great Elm Special Police.
Matthew Kaplan: I will now turn the call over to GECC CEO Matt Kapp. Thanks, Peter, and thank you all for joining us today. This call marks the three-year anniversary of my appointment as CEO of Great Elm Capital Corp. Today, I will highlight our fourth quarter earnings, but I would also like to take a step back and review what we have accomplished over the past few years and then provide an overview of how GECC is positioned for growth in 2025 and beyond. Starting with slide three, our fullest quarter earnings. Our investment portfolio was generally stable in the quarter with the step down in NAV per share driven substantially by our dividend exceeding NII in the period.
Matt Kaplan: Thanks, Peter and thank you all for joining US today. This call marks the three year anniversary of my appointment as CEO of Great Elm Capital Corp.
Matt Kaplan: Today, I will highlight our fourth quarter earnings call.
Matt Kaplan: I would also like to take a step back and review what we have accomplished over the past few years.
Matt Kaplan: Then provide an overview of how G. E. C. C is positioned for growth in 2025 and beyond.
Matt Kaplan: Starting with slide three our fourth quarter earnings our investment portfolio was generally stable in the quarter with the step down in NAV per share driven substantially by our dividend exceeding NII in the period.
Matthew Kaplan: Our total investment income and therefore NII was impacted by temporary items that we believe are going to reverse in 2025. While our fourth quarter reflects the general step down we communicated during our previous earnings call, the impact was somewhat more pronounced this quarter due to two main factors. First, the uneven distribution patterns typical of CLOs in their early stages, and second, the short-term impact we see to NII following our equity raises through SPVs, including the December equity issuance at NAB. In addition, charges related to the refinancing of our January 2025 debt maturity and the shelf led to a further three cent impact on NII per share.
Total investment income and therefore NII was impacted by temporary items that we believe are going to reverse in 2025, while our fourth quarter reflects the general stepped down we communicated during our previous earnings call. The impact was somewhat more pronounced this quarter due to two main factors first.
Matt Kaplan: Distribution patterns typical CLO in their early stages and second the short term impact we see to NII. Following our equity raises there S Tvs, including the December equity issuance at bass.
Matt Kaplan: In addition charges related to the refinancing of our January 2025 debt maturity in the shelf led to a further three cent impact on NII per share.
Matthew Kaplan: While the level of rapid growth we experienced resulted in some anticipated short-term noise in our numbers in 2024, it has set us up for a strong 2025. Given the confidence in our portfolio and overall outlook, in December, our board declared a 6% increase to our quarterly base dividend to $0.37 per share for the first quarter of 2025, up from $0.35 per share last quarter, showcasing our commitment to delivering meaningful value to our shareholders. I am confident that we are well positioned to cover the increased dividend in the first quarter and over 2025.
Matt Kaplan: While the level of a rapid growth we experienced resulted in some anticipated short term noise in our numbers in 2024. It has set us up for a strong 2025.
Matt Kaplan: Given the confidence in all portfolio and overall outlook in December our board declared a 6% increase to our quarterly base dividend to <unk> 37 per share for the first quarter of 2025 up from 35 cents per share last quarter, showcasing our commitment to delivering meaningful value to our shareholders.
Matt Kaplan: I am confident that we are well positioned to cover the increased dividend in the first quarter and over 2025.
Matthew Kaplan: However, before going into where we stand today, it is important to review what we have accomplished over the past few years at GECC. In March 2022, I took over as CEO and we can break down the last three years into three phases. Year one, clean up and reposition the business. Year two, upgrade the portfolio and execute on the revamped strategy. Year three, optimize our portfolio and growth. Quite frankly, I walk into a challenging situation in year one. In 2022, we had to take some pain to reduce our exposure to non-cash generating investments and reduce portfolio concentration.
Matt Kaplan: However, before going into where we stand today. It is important to review what we have accomplished over the past few years at G. C C.
Matt Kaplan: In March 2022, I took over as CEO and we can break down the last three years into three phases year, one cleanup and repositioned the business.
Matt Kaplan: To upgrade the portfolio and execute on the revamped strategy year three.
Matt Kaplan: Optimize our portfolio and growth.
Matt Kaplan: Quite frankly, I walked into a challenging situation in year, one and 2022, we had to take some pain to reduce our exposure to noncash generating investments and reduce portfolio concentration.
Matthew Kaplan: Great Elm Group provided significant support in 2022, waiving previously accrued incentive fees and providing equity capital to ensure GECC was properly capitalized. After we made significant strides on cleaning up the portfolio in 2022 and on the back of a rotation into higher quality credit, our performance over the last two years is quite impressive in my view. If you look at slide five, you can see how our focus on cash generation and the increase in scale has literally paid dividends to our shareholders. Over 2023 and 2024, GECC's market capitalization doubled from around $60 million to over $120 million.
Matt Kaplan: Great Elm group provided significant support in 2022 waiting previously accrued incentive fees and providing equity capital to ensure G. E. C. C was properly capitalized.
Matt Kaplan: After we made significant strides on cleaning up the portfolio in 2022 and on the back of a rotation into higher quality credit our performance over the last few years is quite impressive in my view.
Matt Kaplan: If you look at slide five you can see how our focus on cash generation and the increasing scale has literally paid dividends to our shareholders over 2023 and 'twenty 'twenty four G E C. CS market capitalization doubled from around $60 million to over $120 million.
Matthew Kaplan: We returned $2.95 per share to shareholders in cash distribution. NAV per share has increased by over $0.60 per share. We've generated over $2.90 of NII per share and reported net earnings in excess of $3.60 per share out earning our distributions. And total return on our stock was nearly 80% over the period, outperforming the Cliffwater and S&P BDC We believe this return is largely driven by our fundamentals with the two-year cumulative return on net asset value per share in excess of 30%, coupled with the narrowing of our discount to NAB from approximately 25% to less than 10% at the end of 2024.
Matt Kaplan: We returned $2 95 per share to shareholders in cash distributions.
Matt Kaplan: NAV per share has increased by over 60 cents per share we've generated over $2.90 of NII per share and reported net earnings in excess of $3 60 per share out, earning our distributions and total return on our stock was nearly 80% over the period outperformed.
Matt Kaplan: The cliff water and SMT BDC indices. We believe this return is largely driven by our fundamentals with the two year cumulative return on net asset value per share in excess of 30%.
Matt Kaplan: Coupled with the narrowing of our discount to NAV from approximately 25% to less than 10% at the end of 'twenty four.
Matthew Kaplan: Moving to slide six, you can see the progression of our asset base with large asset losses in the legacy and cleanup years compared to a strong up and to the right showing over 2023 and 2024 on our net asset. Turning to slide 7, this is where you can see our significant growth in investable assets focused in 2024. In 2024, we have executed on two incredible initiatives. One, raising equity at net asset value, and two, forming a distinctive joint venture with a high-quality partner to invest in CLO. However, on a short-term basis, each time we raise equity or expand the CLOJV, it is disrupted to our income generation temporarily, but we believe it improves GECC's ability to generate strong, long-term returns for its shareholders over time.
Matt Kaplan: Moving to slide six you can see the progression of our asset base with large asset losses, more legacy and cleanup years compared to a strong up until the right showing over 2023 and 'twenty 'twenty four on our net assets.
Matt Kaplan: Turning to slide seven this is where you can see our significant growth in investable assets focused in 'twenty 'twenty four and 'twenty 'twenty four we had executed on two incredible initiatives, one raising equity at net asset value and to forming a distinctive joint venture with a high quality partner to.
Matt Kaplan: And C L S.
Matt Kaplan: On a short term basis, each time, we raise equity or expand the CLO JV. It is disruptive to our income generation temporarily but we believe it improves G E. C C. The ability to generate strong long term returns for its shareholders over time.
Matthew Kaplan: This uneven cadence of our earnings from equity raises is driven by the cash deployment drag on an immediate step change in share count, as well as from a delay in leveraging the equity raises and the further cash drag from that. When coupling this with the fact that cash distributions from CLOs as they get formed are uneven at the beginning of their life, the magnitude of these actions can be amplified depending on the timing of each. Unfortunately, this lumpiness to our earnings was exacerbated in the fourth quarter of 2024 with the equity raise and timing of closing our second CLO in the JV.
Matt Kaplan: This uneven cadence of our earnings from equity raises it was driven by the cash deployment drag on an immediate step change in share count as well as from a delay in leveraging the equity raises and the further cash drag from that.
Matt Kaplan: When coupling this with the fact that cash distributions from cielo as they get formed are uneven at the beginning of their life. The magnitude of these actions can be amplified depending on the timing of each.
Matt Kaplan: Unfortunately, this lumpiness to our earnings was exacerbated in the fourth quarter of 'twenty 'twenty four with the equity raise and timing of closing our second CLO in the JV. This shows up in the T. I yield chart on the right of slide seven which shows a modest step down in overall portfolio yield in 2024.
Matthew Kaplan: This shows up in the TII yield chart on the right of slide 7, which shows a modest step down in overall portfolio yield in 2024. To further illustrate this point, GECC received cash distributions from the CLO JV of $3.2 million in 3Q24, half a million in 4Q24, and to date in the first quarter of 2025, we have received $3.8 million of distribution. And based on our current expectations, the JV is poised to see second quarter 2025 distributions in excess of the first quarter. We expect these fluctuations will begin to dampen as we add CLO investments and continue to leverage our scale.
Matt Kaplan: To further illustrate this point G E. C. C received cash distributions from our CLO JV of $3 $2 million in three <unk> 24.
Matt Kaplan: Half a million and <unk> 24 and to date in the first quarter of 2025, we have received $3 $8 million of distributions and based on our current expectations. The JV is poised to see second quarter 2025 distributions in excess of the first quarter.
Matt Kaplan: We expect these fluctuations will begin to dampen as we add CLO investments and continue to leverage our scale.
Matthew Kaplan: Going from the first to the second CLO, expectedly, we'll have more short-term oscillation in aggregate cash flows for the JV than when we go from the fifth to the sixth CLO investment.
Matt Kaplan: Going from the first to the second CLO Expectedly will have more short term oscillation in aggregate cash flows for the JV then when we go from the fifth to sixth CLO investment.
Matthew Kaplan: For these reasons, and considering our capital raising and deployment initiatives, we think it is better to review GECC on a four quarter basis, rather than benchmarking it quarter to quarter. As we look into the first quarter, I believe we are well positioned to cover our increased distribution level, and while still early, based on our expectations of timing for certain items, I expect our second quarter income will exceed that of our first quarter. Clearly, future equity raises and CLOs could change the cadence. But as we grow, the lumpiness from each new COO should have less of an impact on our financials.
Matt Kaplan: For these reasons and considering our capital raising and deployment initiatives. We think it is better to review G. E. C. C on a four quarter basis, rather than benchmarking it quarter to quarter.
Matt Kaplan: As we look into the first quarter I believe we are well positioned to cover our increased distribution level.
Matt Kaplan: And while still early based on our expectations of timing for certain items I expect our second quarter income will exceed that of our first quarter.
Matt Kaplan: Clearly future equity raises and Clo's could change the cadence.
Matt Kaplan: But as we grow the lumpiness from each new CLO should have less of an impact on our financials. Nonetheless over 2025, we are set up to cover the dividend and our portfolio is well positioned.
Matthew Kaplan: Nonetheless, over 2025, we are set up to cover the dividend and our portfolio is well positioned. We enter the next chapter of Great Elm with momentum, scale, and a roadmap for continued success, confident in our ability to generate sustainable returns and deliver increasing value to our shareholders in 2025 and beyond.
Matt Kaplan: We enter the next chapter of Great momentum scale and a roadmap for continued success confident in our ability to generate sustainable returns and deliver increasing value to our shareholders in 2025 and beyond with that I'd like to hand, the call over to Karen Davis to discuss our fourth quarter 2020.
Keri Davis: With that, I'd like to hand the call over to Keri Davis to discuss our fourth quarter 2024 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. During the fourth quarter, GECC generated NII of $2.1 million, or $0.20 per share, as compared to $4.1 million, or $0.39 per share, in the third quarter of 2020. The decline in NII was predominantly driven by the uneven cadence of our initial CLO cash In addition, we took a hit to NII in the fourth quarter as we wrote off the deferred expense of our prior shelf or after filing a new $500 million shelf.
Matt Kaplan: Performance.
Karen Davis: Thanks, Matt I'll go over our financial highlights, but we invite all of you to review our press release accompanying presentation and SEC filings for greater detail.
Matt Kaplan: During the fourth quarter.
Matt Kaplan: We generated NII of $2 1 million or 20 cents per share compared to $4 $1 million or 39 cents per share in the third quarter of 2020 before the.
Matt Kaplan: The decline in NII was predominantly driven by the uneven cadence of our initial CLO cash bonds.
Matt Kaplan: In addition, we took a hit to NII in the fourth quarter as we wrote off the deferred expense of our prior shelf registration after filing a new $500 million. So.
Keri Davis: Importantly, this new shelf allows us to bypass the stand-alone entry process going forward and should increase our flexibility and reduce our cost of raising debt. Our net assets as of December 31, 2024 were $136 million as compared to $126 million as of September. Our NAV per share was $11.79 as of December 31st versus $12.04 as of December 2nd. Detail for the quarter-over-quarter change in NAB can be found on slide 12 of the Investor As of December 31, GECC's asset coverage ratio was 169.7% compared to 100% 2% as of Sept. As of December 31st, total debt outstanding was approximately $195 million and our $25 million revolver remains undrawn, fully available.
Matt Kaplan: Importantly, this new shelf allows us to bypass the standalone entity profits going forward and should increase our flexibility and reduce our cost of raising debt.
Matt Kaplan: Our net assets at the December 31, 2024, or $136 million as compared to $126 million at September 30, our NAV per share was 11 79 as of December 31st.
Matt Kaplan: 12 O four as of December 30 <unk>.
Matt Kaplan: Sales for the quarter over quarter change in NAV can be filed.
Matt Kaplan: On slide 12, the investor presentation.
Matt Kaplan: As of December 31, GEC theme at the coverage ratio was 169, 7% compared to 166, 2% as of September 30th.
Matt Kaplan: As of December 31, total debt outstanding was approximately $195 million and $25 million revolver remains undrawn and fully available to us.
Keri Davis: Cash and Money Market Security totals approximately $8 million. Our Board of Directors authorized the 37 cent per share cash. the first quarter, an increase of 5.7% from the prior quarter, which will be payable on March 31st to stockholders of record as of March. The distribution equates to a 12.6% annualized dividend yield on our December 31st net assets.
Matt Kaplan: Cash and money market securities totaled approximately $8 million.
Matt Kaplan: Our board of directors authorized a 37 cents per share cash distribution for the first quarter, an increase of five 7% from the prior quarter, which will be payable on March 31st stockholders of record as of March 17.
Matt Kaplan: The distribution equates to a 12, 6% annualized dividend yield on our December 31st net asset value.
Matthew Kaplan: With that, I'll turn the call back. Thanks, Keri. In the quarter, we enhanced our portfolio strength by steadily increasing our secure debt position. Moreover, we continue to believe that our CLO joint venture will become an increasingly significant source of income for GECC as we expand the vertical targeting high teens to 20% returns over time. The shift in our portfolio composition reflects this strategy. Last year, First Lean Loans made up 67% of our $178 million corporates portfolio. In 2024, we grew our corporate portfolio by 34%, holding $240 million of investments and also increasing our exposure to First Lean Loans, which comprised 71% of the corporate's portfolio at year end, demonstrating our commitment to enhancing portfolio quality while maintaining a focus on secured income generating assets.
Matt Kaplan: With that I'll turn the call back over to Matt.
Matt Kaplan: Thanks Cary in.
Matt Kaplan: In the quarter, we enhanced our portfolio strength by steadily increasing our secured debt positions.
Matt Kaplan: Moreover, we continue to believe that our CLO joint venture will become an increasingly significant source of income for GE you see seat as we expanded the vertical targeting high teens to 20% returns overtime.
Matt Kaplan: The shift in our portfolio composition reflects this strategy.
Matt Kaplan: Last year first lien loans made up 67% of our $178 million corporates portfolio in 'twenty 'twenty four we grew our corporate portfolio by 34% holding $240 million of investments and also increasing our exposure to first lien loans, which comprised 71% of the corporates.
Matt Kaplan: Folio at yearend, demonstrating our commitment to enhancing portfolio quality, while maintaining focus on secured income generating assets.
Matthew Kaplan: Notably, this past year marked a major step as we formed a distinctive JV with a high-quality partner to invest in CLO equity and related warehouse facilities. Our JV, which holds majority CLO positions, increases GECC's exposure to a diverse portfolio of broadly syndicated first-lane loans. We are encouraged by the early success of our CLO joint venture strategy, where we have deployed approximately $40 million through December 31. By way of reminder, we hold our CLO exposure a bit differently than other BDCs or closed-end funds that many may be familiar with. These other entities typically hold their investments directly, which allows the income to be recognized utilizing the effective yield methodology, while GECC only recognizes income from the CLO-JV when it makes distribution.
Matt Kaplan: Notably this past year marked a major step as we formed a distinctive JV with a high quality partner to invest in CLO equity and related warehouse facilities, our JV, which holds the majority CLO positions increases GEC sees exposure to a diverse portfolio of.
Matt Kaplan: We syndicated first lien loans, we are encouraged by the early success of our CLO joint venture strategy, where we have deployed approximately $40 million through December 31st.
Matt Kaplan: By way of reminder, we hold our CLO exposure a bit differently than other bdcs or closed end funds that many may be familiar with these other entities typically hold their investments directly which allows the income to be recognized utilizing the effective yield methodology, while GEC only recognizes income from the <unk>.
Speaker Change: L O J b when it makes distributions this leads to a more uneven nature to our income reporting.
Matthew Kaplan: This leads to a more uneven nature to our income reporting. While we may hold minority positions in CLOs directly, the JV affords us the ability to have exposure to majority interests in CLOs, which we believe can provide enhanced economic We are comfortable with this quarter to quarter income oscillation, which we expect will dampen over time, as I previously highlighted. Further, our investment portfolio was generally stable in the quarter. We continued to actively monitor our investments and had no change in non-accruals, which totaled $1.3 million or less than 1% of portfolio fair value as of December 31st.
Speaker Change: Well, we may hold minority positions in CLO directly the JV affords us the ability to have exposure to majority interest in <unk>, which we believe can provide enhanced economics.
Speaker Change: We are comfortable with this quarter to quarter income oscillation, which we expect will dampen overtime as I previously highlighted.
Speaker Change: Our investment portfolio was generally stable in the quarter. We continue to actively monitor our investments and had no change in non accruals, which totaled $1.3 million or less than 1%.
Speaker Change: No fair value as of December 31st.
Matthew Kaplan: Given the volatile macro environment, including uncertainties around further rate cuts and implications of tariff policy, we continue to take a measured approach to capital deployment. As always, we prioritize credit quality and seek investments with minimal risk of permanent capital loss, directing capital toward opportunities that are primed to perform across various economic cycles. This balanced approach, combined with our strengthened platform and diversified portfolio, positions us well to continue growing Great Elm Cptl Corp and delivering attractive risk-adjusted returns for our shareholders. We remain excited for the future of GECC.
Speaker Change: Given the volatile macro environment, including uncertainties around further rate cuts and implications of tariff policy. We continue to take a measured approach to capital deployment.
As always we prioritize credit quality and seek investments with minimal risk of permanent capital loss directing capital towards opportunities that are primed to perform across various economic cycles.
Speaker Change: This balanced approach combined with our strengthened platform and diversified portfolio positions us well to continue growing great Elm capital Corp, and deliver attractive risk adjusted returns for our shareholders. We remain excited for the future of GCC and with that I'd like to turn the call over to Mike Keller to provide an update on specialty finance.
Michael Keller: And with that, I'd like to turn the call over to Mike Keller to provide an update on specialty finance. Thanks, Matt. Revenue and net income at GESF increased from the third quarter. This growth was primarily driven by Prestige, our invoice financing business.
Speaker Change: Yes.
Mike Keller: Thanks, Matt.
Mike Keller: Revenue and net income at GE assets increased from the third quarter.
Mike Keller: This growth was primarily driven by prestige our invoice financing business, we saw a rebound from the normal third quarter seasonal lull and prestige ended the year on a strong note vol.
Michael Keller: We saw a rebound from the normal third quarter seasonal low and prestige ended the year on a strong note. Volumes have continued to trend well into 2025 and we are confident in management's ability to continue to execute this year.
Mike Keller: Volumes have continued to trend well into 2025, and we are confident in management's ability to continue to execute this year.
Michael Keller: Moving on to our ABL business.
Mike Keller: Moving onto our E B L businesses I stepped into the CEO role at Great Elm healthcare finance at the end of 2024.
Michael Keller: I stepped into the CEO role at Great Elm Healthcare Finance at the end of 2024. After spending time strategically reviewing our two ABL platforms, Sterling and Great Elm Healthcare Finance, we made the decision to consolidate all ABL operations under one roof, rebranding as Great Elm Commercial Finance. Great Elm Commercial Finance offers traditional ABL products to a wide range of industries, including health.
Mike Keller: After spending time strategically reviewing our two ABL platforms Sterling and great home Health care Finance, we made the decision to consolidate all ABL operations under one roof rebranding as great Elm commercial finance.
Mike Keller: Great Elm commercial finance offers traditional ABL products to a wide range of industries, including health care.
Michael Keller: With this, we will be retiring the sterling commercial credit name. Additionally, we also decided to reposition our legacy Great Elm healthcare finance business to focus solely on healthcare real estate financing opportunities. Planning for this started in the fourth quarter, and in early 2025, we are beginning to execute on our strategic initiative. In summary, we ended 2024 with renewed energy and momentum that is beginning to take hold this quarter as we execute on growing and streamlining Great Elm's specialty finance. And I'm optimistic that the steps that we have taken will drive increased profitability over 2025 and beyond.
Mike Keller: With this we will be retiring the sterling commercial credit.
Mike Keller: Additionally, we also decided to reposition our legacy great Elm health care finance business to focus solely on health care real estate financing opportunities.
Mike Keller: Planning for this started in the fourth quarter and in early 2025, we are beginning to execute on our strategic initiatives.
Mike Keller: In summary, we ended 2024 with renewed energy and momentum that is beginning to take hold this quarter as we execute on growing and streamlining great Elm specialty finance and I'm optimistic that the steps that we've taken will drive increased profitability over 2025 and beyond.
Michael Keller: I look forward to sharing more when we speak again, as I am confident in our ability to execute on the next steps of our plan at GESF.
Mike Keller: I look forward to sharing more when we speak again as I am confident in our ability to execute on the next steps of our plan at Ges.
Matthew Kaplan: Thanks, Mike. In closing, while the fourth quarter was impacted by some isolated items, we ended the year on strong footing. Recapping our highlights for the year, we successfully expanded into CLO products through the formation of our distinctive CLO-JV structure, which strengthens our cash generation ability. Through our equity and note issuances, we raised nearly $150 million of total capital, substantially increasing our operating scale. One of our note issuances refinanced our GECCM notes, extending our debt maturity profile into 2026 and beyond, providing us with enhanced financial flexibility. And we filed a $500 million shelf. In summary, we grew our portfolio substantially, raised ample capital, and implemented our CLO strategy.
Mike Keller: Thanks, Mike in closing, while the fourth quarter was impacted by some isolated items. We ended the year on strong footing recapping our highlights for the year, we successfully expanded into CLO products through the formation of our distinctive CLO JV structure, which strengthens our cash gen.
Mike Keller: <unk> ability.
Mike Keller: Through our equity issuance as he raised nearly $150 million of total capital substantially increasing our operating scale.
Mike Keller: One of our note issuances refinanced our GE E. C. C M notes, extending our debt maturity profile into 2026, and beyond providing us with enhanced financial flexibility and.
Mike Keller: And we filed a $500 million shelf.
Mike Keller: In summary, we grew our portfolio substantially.
Mike Keller: Ample capital and implemented our CLO strategy.
Matthew Kaplan: I am optimistic for 2025 with our strong pipeline, growing CLO-JV distributions, and enhanced scale, positioning us for continued success. Looking ahead, we believe we remain well-positioned to cover our dividend in 2025 and to continue delivering attractive risk-adjusted returns for our shareholders.
Mike Keller: Im optimistic for 2025 with a strong pipeline growing CLO JV distributions and enhanced scale positioning us for continued success looking ahead.
Mike Keller: Believe we remain well positioned to cover our dividend in 2025 and to continue delivering attractive risk adjusted returns for our shareholders with that I'll turn the call over to the operator for questions operator.
Unknown Executive: With that, I'll turn the call over to the operator for questions. Operator? Thank you.
Unknown Executive: We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we post our first question.
Speaker Change: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two excuse me like to remove yourself from the queue for participants using speaker equipment, it may be necessary to pick up here.
Speaker Change: Handset before pressing the star Keith once again Thats Star one at this time, one moment, while we poll for our first quarter.
Mickey Schlein: The first question comes from Mickey Schlein with Gladdenburg-Dowman. Please proceed. Yes, good morning everyone.
Speaker Change: The first question comes from Mickey <unk> with Ladenburg Thalmann. Please proceed.
Mickey: Yes, good morning, everyone.
Mickey Schlein: Matt, a couple questions on the CLO JV. First, have you and your partners fully funded the JV?
Speaker Change: Matt a couple of questions on the CLO JV.
Mickey: First have you and your partners fully funded the JV.
Matthew Kaplan: Good morning, Mickey. Thanks for the question. First, the JV commitment is outlined in our 10-K and we have some uncommitted capital still to be drawn in there as well as a 1231. The answer, not fully funded. We expect and expect to continue growing it over time.
Speaker Change: Good morning, Mickey Thanks for the question.
Mickey: The JV.
Mickey: As outlined in our 10-K, and we have some uncommitted capital still to be drawn in there.
Mickey: As well as of 12 31.
Mickey: Or not not fully funded we expect to continue growing it over time.
Matthew Kaplan: How do you intend to raise the capital to finish funding your commitment then? As you recall, we ended the quarter with $8 million of cash and equivalents on our balance sheet as well as we have a $25 million unfunded revolver. One great thing that we did in the quarter was we closed on a new SPV to raise equity at net asset value into GECC. That happened in mid-December just before we went X on our dividend. That added some funding which we have not, you know, drawn down any leverage on. So our target debt-to-equity ratio is kind of around the 1.5 times.
Speaker Change: How do you intend to raise the capital to finish funding your commitment then.
Speaker Change: As you recall, we ended the quarter with $8 million of cash and equivalents on our balance sheet as well as we have a $25 million unfunded revolver.
Speaker Change: One great thing that we did in the quarter, we closed on a new SPV to raise equity at net asset value into <unk> that happened all in.
Speaker Change: In mid December just before.
Speaker Change: We went on our dividend that added some funding, which we have not you know.
Speaker Change: Drawn down any any leverage answer.
Speaker Change: Target debt to equity ratio, it's kind of around the one five times as you can see we ended the quarter a little under Levered. So we have extra capacity on our revolver as well fully available to us to meet the remaining commitment.
Matthew Kaplan: As you can see, we ended the quarter a little under-leveraged. So we have extra capacity on our revolver as well fully available to us to meet the remaining commitments.
Mickey Schlein: Okay, I understand. Fair enough.
Speaker Change: Okay, I understand fair enough.
Mickey Schlein: The JV is only investing in apex credits CLOs. I'm curious why you're only investing in apex instead of diversifying the portfolio a little bit more. That is the current investment mix as of today. You know, one of the things that JV affords us to do is to take majority positions. We have a couple of strategic institutional partners that we are working with. That is the current opportunity set as of today.
Speaker Change: The JV is only investing in apex credits solos.
Speaker Change: Curious why you're only investing in apex, instead of diversifying the portfolio a little bit more.
Speaker Change: That is the current.
Speaker Change: The investment mix as of today.
Speaker Change: The thing is the JV affords us to do is to take majority positions we have.
Speaker Change: A couple of strategic institutional partners, but we are working with.
Speaker Change: That is the correct the current opportunity set as of today.
Mickey Schlein: We may diversify over time, our CLO exposure. All right.
Speaker Change: We made diversify overtime, our CLO exposure.
Mickey Schlein: As you know, there's been a sharp amount of spread compression in the loan market over the last year, and that's impacted the CLO arbitrage. Since your CLOs in the JV are new, I'm assuming they're still in their non-call period, so you can't reset or refinance their liabilities yet. So how do you see that spread compression impacting the CLO's cash flows this year?
Speaker Change: Alright.
Speaker Change: As you know there has been a.
Speaker Change: <unk>.
Speaker Change: The amount of spread compression in the loan market over the last year and that's that's impacted the CLO arbitrage is since the <unk> and the JV or new I'm, assuming they're still in their non call periods. So you can't reset were refinanced their liabilities yet.
Speaker Change: So how do you see spread that spread compression impacting the CLO cash flows this year and what's sort of your target ROE on your CLO JV investment.
Matthew Kaplan: And what's sort of your target ROE on your CLO JV investments? So I think we're very fortunate with the execution on the, you know, as you said, the loan side liability or assets have compressed on spread. At the same time, the liability side that the CLOs are pricing it have come in as well. And, you know, we are not fully at the bottom of that tier, but we are confident in our CLO cash flow generation. And based on what we're seeing and modeling, we are expecting, as I mentioned earlier, high teens to 20% IRRs. One thing to think about is Growth is rarely linear here.
Speaker Change: Sure So I think.
Speaker Change: We're very fortunate with the execution on the as you said the loan side liabilities or assets have compressed on spread at the same time the.
Speaker Change: Liability side that they feel is on pricing.
Speaker Change: Come in as well and we are.
Speaker Change: Not fully at the bottom of that tier, but we are confident in our CLO cash flow generation and based on what we're seeing in modeling we are expecting as I mentioned on our earlier.
Speaker Change: Earlier.
Speaker Change: High teens to 20% IRR.
Speaker Change: One thing to that.
Speaker Change: About as you know.
Speaker Change: Growth is rarely linear in here. So you saw we had a step down on the nature of the.
Matthew Kaplan: So you saw we had a step down and the nature of the distributions from the JV can be a little lumpy at the outset. But you know, as we look, we're doing two really great things here, raising equity at NAV and investing in these DLOs, taking majority positions through the joint venture that provide what we believe are, you know, enhanced economics and our really look through vehicles to senior secured, first lien Investments that are generating cash yields.
Speaker Change: Distributions from the JV can be a little lumpy at the outset, but as we look we're doing two really great things here at raising equity at NAV and investing in these fellows.
Speaker Change: Taking minority positions through the joint venture that provide what we believe are enhanced.
Speaker Change: Enhanced economics, and I really look through vehicles, just senior secured first lien.
Speaker Change: Investments that are generating cash yield so we look at our business over at <unk>.
Matthew Kaplan: So, you know, we look at our business over a 12 month period rather than quarter to quarter. And I expect our trailing 12 month NII will steadily improve over the year. We believe based on our current expectations, that we're set up to cover the distribution in the first quarter. And as I mentioned earlier on the call, set up to Incrementally improve NII in the second quarter and be off to the races for 2025 and cover the distribution for the full year.
Speaker Change: Month period, rather than quarter to quarter, and I expect our trailing 12 month NII will steadily improve over the year.
Speaker Change: I believe based on our current expectations.
Speaker Change: Set up to cover the distribution in the first quarter and as I mentioned earlier on the call setup too.
Speaker Change: Incrementally improve NII in the second quarter.
Speaker Change: Be off to the races for 2025.
Speaker Change: Cover the distribution for the full year.
Mickey Schlein: I understand, Matt.
Mickey Schlein: One last question. I appreciate your patience. It's nice to see that your non-accruals were stable because across the space, we've seen generally, you know, some credit deterioration as the credit cycle sort of matures.
Speaker Change: Understand one last question and I appreciate your patience.
Speaker Change: It's nice to see that your non accruals were stable because it.
Across the space, we've seen generally.
Speaker Change: Some credit deterioration as the credit cycle sort of matures.
Mickey Schlein: You do have one position in Maverick Gaming, and that first lien is, one of those first liens is marked at a pretty distressed level.
Speaker Change: Have one position in Maverick gaming and that first lien is one of those first liens as mark did a pretty distressed level.
Matthew Kaplan: Understanding that you can't say a lot about a private company, can you give us a sense of what the outlook is for that company? The company has operations in multiple geographies. I can say that there's pluses and minuses here and there. We evaluate the position quarterly and have it fair value quarterly by our third-party evaluation specialists and provide them all the information and continue to monitor the situation. All I can say. I mean, the company is in the casino and gaming industry.
Understanding that you can't say a lot of other private company can can you give us a sense of what the outlook is for that company.
Speaker Change: Hum.
Speaker Change: The company has operations in multiple geographies.
Speaker Change: I can say that.
Speaker Change: There is pluses and minuses here and there we are.
Speaker Change: Evaluate the position quarterly and Havent fair value quarterly bar.
Speaker Change: Third party valuation specialist and provide them all the information and continue to monitor the situation.
Speaker Change: All I can say.
Speaker Change: Hum.
Speaker Change: The company is in the casino and gaming industry is at.
Mickey Schlein: Is it related to the demand side of the picture, given what's going on with the consumer, or anything you can tell us about that? I think you can go onto the company's website. They operate in Washington, Nevada, and Colorado are the three core markets. So it's pretty regional specific there. Private Company.
Speaker Change: Is it related to.
Speaker Change: The demand side of the picture given what's going on with the consumer or anything you can tell us about that.
Speaker Change: I think you can go onto the.
Speaker Change: Company's website they operate.
Speaker Change: In Washington, Nevada, and Colorado are about the three core markets. So it's pretty regional specific there.
Matthew Kaplan: So there's not much more I can share.
Speaker Change: Yeah, It's a private company so there's not much more I can share.
Mickey Schlein: Okay, those are all my questions this morning. Thanks for your time. Thank you very much, Mickey.
Speaker Change: Okay. Those are all my questions are this morning, thanks for your time.
Speaker Change: Thank you very much Mickey.
Eric Zwick: The next question comes from Eric Zwick with Lucid Capital Markets. Please proceed. Thank you. Good morning. Morning, Eric.
Speaker Change: The next question comes from Erik Zwick with Lucid capital markets. Please proceed.
Erik Zwick: Thank you and good morning.
Speaker Change: Good morning, Eric.
Eric Zwick: I wanted to start with another question or so on the CLO, JV, and just curious from a, you know, kind of bigger picture, longer term perspective, how do you think about the appropriate size or contribution of the JV to Great Elm's total results? Are you targeting a kind of a certain percentage of assets or a certain percentage of total income? How should we think about that? I think we are, you know, over time, we could see the CLOJV grow to, you know, around our CLO kind of exploded to around 20% of our asset base, as we kind of begin to scale.
Speaker Change: I wanted to start with another question or so on the CLO JV and just curious from a.
Speaker Change: Kind of bigger picture longer term perspective, how do you think about the appropriate size or contribution of the JV. It's it's a great ounce.
Speaker Change: Total results as are you targeting a kind of a certain percentage of assets or a certain percentage of total income how should we think about that.
Speaker Change: I think we are you know overtime, we could see the CLO JV grow to around our <unk>.
Speaker Change: What kind of exposure to around 20% of our asset base.
Speaker Change: It began to scale as.
Matthew Kaplan: As you saw in 2020, For we raised $50 million of our nearly $50 million of equity and also raised some debt new debt against that as well. I think we increased our corporates and CLL portfolio from $178 million. They're called $180 million at the end of 23 to $280 million by the end of 2024. You know, we are planning to continue to grow the platform. So the income mix will continue to increase as we grow the asset base and continue to look to add to this vertical in a measured way.
Speaker Change: You saw in 2020.
Speaker Change: Four we raised $50 million of our nearly $50 million of equity and also.
Speaker Change: Raised some debt new debt against that as well I think we increased our corporate <unk> CLO portfolio from $178 million or call. It 180 million at the end of 2000 $3 million to $280 million by the end of 2024.
Speaker Change: We are.
Speaker Change: Or are planning to continue to grow the platform. So.
Speaker Change: The income mix will continue to increase as we grow the asset base and continue to look to add to this vertical.
Speaker Change: In a measured way.
Eric Zwick: Thanks, Matt.
Speaker Change: Thanks, Matt and just in terms of selecting the C.
Matthew Kaplan: And just in terms of selecting the, you know, the CLOs that you choose to invest in, can you just maybe kind of briefly kind of run through your investment selection process and how you share those responsibilities with your partner? Sure. So our partner is, we have a couple of partners in the joint venture, you know, sophisticated institutional investors have relationships and have deep understanding of the CLO market. And as opportunities come up, we make investment decisions.
Speaker Change: CLO that you choose to invest in can you just maybe kind of briefly kind of run through Gary our investment selection process and how you share those responsibilities with your partner.
Speaker Change: Sure. So our partner is that we.
Speaker Change: We are.
Speaker Change: A couple of partners in the joint venture.
Speaker Change: Sophisticated institutional investors have relationships.
Speaker Change: We have deep understanding of the CLO market.
Speaker Change: And as opportunities come up we make investment decisions.
Matthew Kaplan: One benefit of being in warehouses and ability to take majority equity positions allows for potential to have enhanced economics relative to just buying CLO equity in the secondary market, being part of the primary process. So we evaluate every opportunity as they come.
Speaker Change: The benefit of being in.
Speaker Change: Warehouses and the ability to take majority equity position allows for.
Speaker Change: To have enhanced economics.
Speaker Change: Relative to just.
Speaker Change: Buying CLO equity in the secondary market and being part of the primary process. So we evaluate every opportunity as they may come.
Eric Zwick: And switching gears to the corporate portfolio, could you provide an outlook just on, you know, the pipeline today, how it stands relative to maybe, you know, beginning of the last quarter, and what is your outlook for, you know, kind of deployments here in the near term and anything you'd have, I know, it's tough to have visibility into repayment outlook, but anything near term that, you know, is looking to be repaid? Um Good question, Eric. Thanks. Let's see.
Speaker Change: And switching gears to the.
Speaker Change: Our corporate portfolio could you provide it in that look just on.
Speaker Change: The pipeline today, how it stands relative to maybe.
Speaker Change: Beginning of last quarter, and what is your outlook for them.
Speaker Change: You know kind of appointments here in the near term and anything.
Speaker Change: Yeah, you'd have I know, it's tough to have visibility into repayment outlook, but anything near term that you know.
Speaker Change: It's looking to be repaid.
Speaker Change:
Speaker Change: Good question Nick.
Matthew Kaplan: So it's a little bit of a mixed world as we both operate in the quasi, in the direct lending space and the broadly syndicated market. As the recent market volatility has evolved here, we are starting to see some opportunities in the secondary space and starting to deploy capital measurably and some items, some secondary loans that we have been tracking, that we believe have gotten a little bit tight and some spreads are widening out in that kind of secondary market. On the direct lending side, continue to maintain an active dialogue and have a pretty stable pipeline quarter over quarter.
Speaker Change: Eric Thanks, let's see so it's a little bit of a mixed world as we both operate in the quality and the direct lending space and the broadly syndicated market.
Speaker Change: The recent market until it market volatility has.
Speaker Change: Evolved here.
Speaker Change: We are starting to see some opportunities in the secondary space and starting to deploy capital.
Speaker Change: And some items some secondary loans, but we have been tracking that we believe have.
Speaker Change: <unk> gotten a little bit tight.
Speaker Change: There's some some spreads are widening out in that kind of a secondary.
Speaker Change: Secondary markets on the direct lending side.
Speaker Change: We continue to maintain an active dialogue.
Speaker Change: And I'll hop off.
Speaker Change: Pretty stable pipeline quarter over quarter.
Matthew Kaplan: Don't really see any repayments in the immediate term, but there's a couple of portfolio companies that are in active discussions for potential refinancing or M&A. The current environment has led to some pause to some extent on M&A as people try to understand exactly, you know, what the Care for the new administration taxes are going to look at, but I think people are generally planning for M&A. Just the timing of that in this year seems to be a little more uncertain.
Speaker Change: Don't really see a.
Speaker Change: Repayments in that.
Speaker Change: The immediate term, but theres a couple of portfolio companies that are in active discussions for potential refinancings or M&A.
Speaker Change: If the current environment has led to.
Speaker Change: Some pause to some extent M&A as people try to understand exactly what the.
Speaker Change: Tariff regime, New administration taxes are going to look at but I think people are generally planning for M&A, just the timing of that in this year seems to be a little more uncertain.
Eric Zwick: Thanks, Matt. I appreciate all the color. Thanks, Eric. Thanks.
Speaker Change: Thanks, Matt I appreciate all the color.
Matt Kaplan: Thanks, Eric.
Matthew Kaplan: At this time, I would like to turn the call back to Matt Kaplan for closing remarks. Thank you again for joining us today. We are very excited to enter 2025 on strong footing as we continue to execute on our growth strategy. 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 Change: Thanks at this time I would like to turn the call back to Matt Kaplan for closing remarks.
Speaker Change: Thank you again for joining US today, we are very excited to enter 2025 on strong footing as we continued to execute on our growth strategy.
Speaker Change: 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.
Unknown Executive: This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day. https://www.youtube.com
Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Speaker Change:
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Okay.