Q1 2025 Great Elm Capital Corp Earnings Call
Speaker Change: Greetings and welcome to the Great Elm Cptl Corp First Quarter 2025 Financial Results call.
At this time, all participants are in a listen only mode.
Speaker Change: A brief question and answer session will follow the formal presentation session.
Speaker Change: Should anyone require operator assistance during the conference, please press star zero on your telephone keypad as a reminder that conference is being recorded. It is now my pleasure to introduce your host, Peter Scusa, a representative of the company. Thank you. You may begin.
Peter Skusa: Hello, and thank you everyone for joining us for Great Elm Cptl Corp's first quarter of 2025 Earnings Conference Call.
Peter Skusa: If you would like to be added to our distribution list, you can email investor relations at greatelmcapt.com where you can sign up for a worse directly on our website.
Peter Skusa: www.greatelmcc.com. I'd like to note the slide presentation post on our website, accompanying today's call. The slide presentation can be found on our website under events and presentations. On our website, you can also find our earnings relief and SBC filing.
Peter Skusa: I'd like to call your attention to the customer's safe harbor statement regarding forward-looking information.
Peter Skusa: Also, please note that nothing today is called constitutes an offer to sell, or solicitation of offers to purchase or security.
Peter Skusa: State's conference call includes forward working statements, and we ask you to refer the Great Elm Cptl course filing to the FCC for important factors that could cause actual results at different materially from these statements.
Peter Skusa: Great Elm Cptl Corp does not undertake the updates for looking statements unless required by law. Between copies of SEC filings, please visit Great Elm Cptl Corp's website under financials, SEC filings, or visit the SEC's website.
Peter Skusa: Hosting the call today is Matt Kaplan, Great Elm Kaplan, Corporate Chief Executive Officer who be joined by Chief Financial Officer, Keri Davis, Chief Compliance Officer and General Counsel Adam Kaplan, and Mike Keller, President of Great Elm Specialty Finance. We'll now turn the call over to GECC CEO , Matt Kaplan.
Thanks Peter, and thank you all for joining us today.
We are pleased to start 2025 with a record-setting quarter.
Peter Skusa: achieving the highest total investment income in the company's history at $12.5 million.
Peter Skusa: Notably, the first quarter was also our highest-ever cash income quarter, a testament to the strategic portfolio enhancements undertaken over the past few years.
Peter Skusa: This 37% increase in TII from last quarter and more than 40% year over year growth was driven by the success of our CLOJD as well as from income generated by new investments in the quarter.
Peter Skusa: NII per share doubled to 40 cents per share from 20 cents in the prior quarter, largely attributable to the increase in total investment income and the ramping contributions from investments.
Peter Skusa: Our NII more than covered the increased first quarter distribution of 37 cents per share, a 5.7% increase in the prior quarter's 35 cents per share distribution.
Peter Skusa: This marks our commitment to delivering growing income to shareholders, supported by solid, underlying portfolio performance.
Peter Skusa: As we move through the second quarter, we are well positioned to further execute on our long-term growth strategy and navigate the dynamic macro environment.
Peter Skusa: Based on current expectations, we anticipate that second quarter NII will exceed first quarter levels
Peter Skusa: As we discussed on our last call, we anticipated an increase in cash distributions from the CLO JD this quarter. That CLO distribution patterns are typically uneven in their early stages.
Peter Skusa: For example, we received $3.8 million of cash distributions from the CLOJB in the first quarter of 2025 as compared to half a million dollars in the fourth quarter of 2024 which was a step down from the $3.2 million in the third quarter of 2024.
Peter Skusa: Additionally, in the second quarter of the day, we have received $4.3 million of cash distributions from the J.B.
Peter Skusa: We do expect these fluctuations will dampen over time as we fund additional CLO investments and continue to leverage our increased scale.
Peter Skusa: For these reasons, and considering our ongoing capital raising and deployment initiatives, we like to reiterate that it is best to review GECC on a four-quarter basis opposed to benchmarking the company quarter to quarter.
Peter Skusa: Moving on to our portfolios performance, while our NII generation was strong, we did see a modest step down in NAB per share of outlined on slide 8, driven by unrealized lawsuits on portfolio investments.
Peter Skusa: We began to see volatility in the markets pickup in the middle of the quarter which led to markdowns on positions at quarter end.
Peter Skusa: Specifically, our CLO JV equity and our investments in CW Opportunity to LP, a vehicle which was created to hold convertible preferred equity in coalweed and AI hyper-scaler, which went public at the end of March.
Peter Skusa: We remain confident in these investments and our portfolio, and expect these unrealized losses to reverse over time as market condition stabilizes.
Peter Skusa: Additionally, we recently filed a prospective supplement for a $100 million at the Market Equity Program to issue shares at NAV or better.
Peter Skusa: We believe this new tool will provide us with additional capital flexibility as we see
Peter Skusa: We remain well positioned to cover our dividend over the course of 2025, and our portfolio is set up to weather the uncertain macro environment.
Peter Skusa: With our Strength and Foundation, we remain confident in our ability to generate sustainable returns and deliver increasing value to our shareholders in years ahead. With that, I'd like to hand the call over to Keri Davis to discuss our first quarter 2025 performance.
Keri Davis: Thanks, Matt. I'll do over our financial highlights now, but we'll be in by all of you to review our press release accompanying presentation and SEC filings for greater detail.
Keri Davis: During the first quarter, GECC generated NII of $4.6 million or 40 cents per share as compared to $2.1 million or 20 cents per share in the fourth quarter of 2024.
Keri Davis: The increase in NII was primarily driven by the receipt of distributions from the CLOJB as well as income from other new investments.
Keri Davis: Our nap for share was $11.46 as of March 31st for the $11.79 as of December 31st.
Keri Davis: Detail for the quarter of a quarter change in NAF can be found on slide 8 of the investor presentation.
Keri Davis: As of March 31st, GEC's asset coverage ratio was 163.8%, compared to 169.7% as of December 31st.
Keri Davis: As of March 31, total debt outstanding was approximately $207 million and we had $12 million outstanding on our $25 million revolver.
Cash totals approximately $1.3 million $1.
Keri Davis: Our Board of Directors authorize a 37-cent per share cash distribution for the second quarter which will be disabled on June 30th to stockholders of record as of June 6th.
Alright.
Keri Davis: The distribution equates to a 12.9% annualized dividend yield on our March 31st net asset value.
I'll turn the call back over to Matt
Matt Kaplan: Thanks, Keri. In the quarter, we continue to enhance our portfolio strength by steadily increasing our secured debt positions.
Matt Kaplan: Our CLO joint venture remains a significant contributor to this strategy and we expect it to remain an important source of income for GECC as we continue to expand the vertical, targeting high teams to 20% returns over time.
Matt Kaplan: We have grown our corporate portfolio to nearly $250 million of investment and the first lean loans comprise that be one percent of the corporate portfolio as of March 31st.
Matt Kaplan: This demonstrates our commitment to enhancing portfolio quality while maintaining a focus on secured income generating assets.
Matt Kaplan: Alongside new investments, our CLOJV helped drive us to record total investment income this quarter.
Matt Kaplan: This joint venture expands our exposure to a diverse portfolio of broadly syndicated, first lean loans and continues to be a key contributor to our early success with approximately $48 million deployed through March 31st.
Matt Kaplan: As a reminder, we hold the majority of our CLO exposure a bit differently than other BDCs to close-down funds that many may be familiar with.
These other entities typically hold their investments directly.
Matt Kaplan: which allows the income to be recognized utilizing the effective yield methodology while GECC only recognises the income when the CLOJD makes distributions.
Matt Kaplan: This leads to a more uneven nature tour income reporting.
Matt Kaplan: While we may hold some minority CLO positions directly on our balance sheet, the JD affords us the ability to have exposure to majority interests and CLOs, which we believe can provide enhanced economics.
Matt Kaplan: We are comfortable with this quarter to quarter income oscillation which we expect will dampen over time.
Matt Kaplan: Further, outside of some markdowns we discussed, our investment portfolio is performing well.
Matt Kaplan: and as of March 31st, we have bureau positions on non-accool. Notably, the single issue that we had on non-accool at your end was restructured in February into three debt instruments which will begin generating income in 2026.
Demonstrating our hands-on approach to working with our portfolio companies.
Matt Kaplan: While it's still too early to assess the overall impact of tariffs on our portfolio, our initial analysis suggests limited direct exposure. Our portfolio maintains broad diversification with a predominantly domestic focus and minimal exposure to China.
Matt Kaplan: With our defensive portfolio structure, we believe we are well positioned to navigate the ongoing tariff uncertainty.
Matt Kaplan: In this volatile environment, 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.
Matt Kaplan: This balanced approach, combined with our strength and platform and diversified portfolio, positions us well to continue growing Great Elm Capital Corp and delivering attractive risk-adjusted returns for our shareholders.
Speaker Change: We remain excited for the future of GECC and with that I would like to turn the call over to Mike Keller to provide an update on specialty finance.
Mike Keller: Thanks, Matt. The start of 2025 has been transformative for Great Elm's specialty finance.
Mike Keller: In January , we combined the Corporate and Healthcare ABL portfolios and replaced our existing asset back lender with a new facility led by CIBC, which is now an active syndication to increase the facility commitment as our business ramps.
Mike Keller: In March, after repositioning the legacy Great Elm Healthcare Finance business, to focus solely on healthcare real estate financing opportunities, we closed an leverage facility to support the real estate assets held within that platform.
Mike Keller: In April , we completed the rebranding of Sterling as Great Elm Commercial Finance.
Mike Keller: which today offers traditional ABL products to a wide range of industries, including healthcare. Also, GESF exited its last equipment lease holding at a game, further simplifying the business.
Mike Keller: These actions have streamlined our operations and better aligned our platform with growth objectives. While income from GESF was similar to the prior quarter, we are confident that these changes will translate into increasing returns over the remainder of the year.
Mike Keller: Thanks, Mike. In closing, we are pleased with our first quarter result and remain well-positioned to grow MII in the second quarter and cover our dividend in 2025. With that, we'll turn the call over to the Operator for questions. Operator?
Thank you
Speaker Change: We will now be conducting 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.
Mike Keller: You may press star 2 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 they pull for questions
Mike Keller: The first question is from Mickey Schleien from Laddenburg, Feldman. Please go ahead.
Mikey Schlein: Yes, good morning, everyone. Matt, how do you see the portfolio and the funds NAV performing with both the party- syndicated loan market and private credit spreads widening in April ?
So,
Mikey Schlein: That's a great question, Mickey. Thanks. So I think overall, you can see in the first quarter we saw some modest markdowns.
Mikey Schlein: in our portfolio. We had 38 cents of net unrealized game loss of which about 30 cents of that is actually attributable to two positions that we noted, the CLOJV and also our
Mikey Schlein: investment in chloro weave away from that the rest of the portfolio was performed, you know, pretty and we actually started to see some mark, you know, the volatility pick up in
Mikey Schlein: caught late February , early March. In April , really, if you look at kind of the CLO market by the end of last week, we're kind of getting close to being back to where we ended March, interestingly enough, and spread.
Mikey Schlein: So, you know, kind of depends on where we remain to be seen. Try to disindecate the loan market. You can pull up this, you know, move down a little bit from 331 to 431. So obviously.
Mikey Schlein: on a whole under diversified portfolio. You know, it can read between the lines there, but, you know, I think overall the portfolio is pretty healthy and we had minimal NAV impact those, you know, all unrealized.
Mikey Schlein: Over time, as you know, market conditions stabilized, we would expect a lot of that to largely reverse.
Mikey Schlein: One of the positives of our CLO positions is the relatively young. So actually when you look at CLOs in choppy markets like this, kind of this best CLO vintages are the ones that were issued just prior to significant amounts of market volatility due to the long term financing structure of them, you look at the 2007 eight vintages of CLOs or you look to the 2019 vintages. [inaudible]
Mikey Schlein: COVID, all very, very strong performance over the life cycle. But I think we're well set up there. And then, you know, on core we've, you can just look at that it's a publicly traded stock now, and we are invested in a vehicle that has a convertible preferred.
So you can kind of...
Mikey Schlein: Think about it at 331, you know, if the stock had closed around $48 a share, we would have had a roughly flat mark quarter on quarter. Um, you can see that had 331 the stock to close at 37 to 38 level and around the end of marks there. So, you know, it took a hit on that, but you know, look at the. [inaudible]
Speaker Change: Now it's been a volatile name. We have a lot of faith in the company over time and stock I think was over 50 as of yesterday's close.
Hello.
Thanks for that Matt. You just mentioned that
Speaker Change: the sealant market is sort of stabilized. The JV holds warehouse facility.
Speaker Change: with Apex Credit. What is the JV earning on that warehouse? And now that the market is stabilized, when do you expect that? See a load of price.
Speaker Change: So, that feel actually closed at the end of last month already, and we were able to get the execution on that done with commitments that were made in kind of early March, so it was a very...
Successful outcome to be able to get that one.
taken care of.
I'm sorry, when did you say it priced?
It closed on paper.
Speaker Change: April , and so it usually takes a quarter or two for CLOs to provide their initial distribution. Would that be the case for this investment?
Speaker Change: For that specific one, yes, I think we would expect our first distribution from the underlying investment in the underlying field of JV to come in October of 2025.
Speaker Change: Okay, so as I kind of laid out, you know, on the CLO's and, like,
To our old business, you know, we have [inaudible]
I have a little bit of... [inaudible]
Speaker Change: The fluctuation in the way our earnings are done because the COJB will be distributing dividends, right? That's how we record our income from that. So, you know,
Speaker Change: In the first quarter, we got about 3.8 million from the CLOJV, this far quarter to 8.4.3 million, so I think we're well positioned to grow NII, and cover the 37th day dividend.
Speaker Change: You know, next quarter, and you know, as I mentioned, we kind of have to look in and evaluate our business over a 12-month period rather than quarter to quarter. And I expect, you know, our full year and I will, you know, improving cover. It looks to be higher and will cover the dividend.
Speaker Change: I understand. And one more question, if I might. You borrowed on your credit facility. And I'm curious whether that facility requires market to market accounting, you know, just thinking in terms of all the volatility we're seeing in the markets.
Sure, so the facility has a borrowing base, which is
Speaker Change: feeds into fair volume investments that are comprised of the borrowing base, but we have significant
Speaker Change: or Q, it's minimum asset value of 65 million, we have 135 million in NAV, and then 150% ACR, so you know, kind of the standard BDC ACR covenant there.
You know, I think [inaudible]
Speaker Change: Would you, on the revolver, if you look, we raised equity at the very end of the fourth quarter?
Speaker Change: which led to an increase in share account, and we rolled over the quarter with, you know,
Speaker Change: You know, optimize our portfolio and yield, you know, helped also, as I said, our income this quarter was driven by new deployments, as well as the COJD. So we are looking to continue to grow diversified scale GECC.
Speaker Change: I appreciate that that's it for me this morning. Thank you for taking my questions
Thank you, Mickey.
Speaker Change: The next question is from Erik Zwick from Lucid Capital Markets. Please go ahead.
Eric Zwick: Thanks. Good morning. I wanted to start first with a question. I'm curious if you could provide a little maybe color into that the timing of the new deployments and the monetization you had in the quarters, you know, based on the incoming yields being significantly higher than the outgoing yield seems like there should be some benefit to the overall portfolio. So curious how much of that was actually reflected in the first quarter, and if there may be some benefit in the 2Q as well.
I think it was...
We have this.
Eric Zwick: It's a good question. I think it was a little barbed out. We had access cash and some commitments that we had to close on in the January time frame, but then kind of...
Eric Zwick: February was more of a woe, and then in March, I would say, we...
Eric Zwick: We're able to take advantage of a little bit of the market of all of the things that started to pick up with some deployments.
Eric Zwick: And we hope to see some additional flow through a fact in the QQ. As I said, I think we're looking to see QQ and I increase sequentially from one Q.
Speaker Change: kind of thanks for the commentary that I met and maybe just kind of continuing along that thought process in terms of, you know, forward yield. Could you maybe just quantify what the, you know, pipeline looks like today in terms of magnitude of the size as well as, you know, what you're seeing for for yields and the pork pipeline today. [inaudible]
and Keri's situation of, you know, tariffs are kind of—
Speaker Change: leading to some uncertainty out there. However, there is other activity going on in the space in lending. We have seen some M&A or financing opportunities.
Keri Davis: company's looking for capital. So the pipeline actually remains a little stronger I'd say than it was probably three to four months ago on the on the direct lending side and then we are the broadly syndicated tradeable loan space is providing certain pockets.
of opportunity here and there. There are some.
Speaker Change: Babies that get thrown out with the bathwater due to industry sometimes and our team continues to look underwriting those, you know we maintain relationships with many management teams and sponsors that allow us to, you know, work to create a pipeline of names. [inaudible]
in the syndicating market that maybe aren't... [inaudible]
Speaker Change: It's interesting when they come as a new issue but we follow them and track them and that pipeline is looking interesting. We need to maintain a cautious approach to that and we have certain assets in our portfolio that are in the broadly syndicated loan space that are. [inaudible]
Speaker Change: You know, very, very high quality, kind of, I would quasi call it a cash surrogate bucket that when we want to take advantage of certain opportunistic trading levels in names that we know and companies that we know how we can go harvest some of our very, you know,
Speaker Change: I have cash to get low yielding investments to rotate into that, but it's opportunistic and not a large percentage of what we do, but helps generate some coming alpha over time.
Speaker Change: And then I appreciate that the comments you gave in the prepared remarks regarding the limited exposure direct exposure to Keras. So I'm curious if you.
Speaker Change: Look at your portfolio in terms of exposure to government contracts, just given some of the those cuts and cutbacks and federal spending and the things of that nature.
Speaker Change: We have, we were looking at an investment that we thought that we had historically been involved in this situation, it was refinanced, and then, um...
Speaker Change: You know, those are not in our portfolio anymore, but, you know, due to the government contract nature of it, we've, you know, traded off, we've decided not to take, you know, to
getting re-involved.
Speaker Change: That a lot of people are asking what's the direct exposure and I think we're working to think through the second and third order effects and
that dynamic of tariffs and also government initiatives.
Speaker Change: I think the bigger question that everyone's trying to understand is...
Speaker Change: What's the duration of this uncertainty and how will that lead to economic changes?
And to that end, we have been reumberating our existing investments.
Speaker Change: and focusing on thinking through, you know, that lens on new investments on.
Speaker Change: Company's defensive position so we are considering that in all of our
Current, portfolio investments as we do our, you know,
Routine Portfolio Reviews as well as it's a new one to any.
[inaudible]
Speaker Change: Great, and one last one for me, and I'll step aside. They're just looking at the
Speaker Change: There are concerns in the market regarding that the lower end consumer and, you know, especially that they get another half of inflation.
Speaker Change: from the terror, so just curious if you could kind of characterise
Speaker Change: You're portfolio in terms of what segment of consumers they are, they're targeting and you know what potential kind of you know impacts or mitigations you know might need to be made there [inaudible]
Get our largest exposure in the consumer space.
Speaker Change: would be in companies that have exposure to private label products and manufacturing.
Speaker Change: So, you know, to the extent there's weakness in the consumer, that's kind of, they should benefit from any trade-down effect from the premium brand into the private label. So I think our consumer and another one of our consumer services businesses, our larger exposure is you can look on that. [inaudible]
up.
Speaker Change: Special Investments is CSE Service Works, which is laundry mats. So, you know, generally very recession resilient businesses. So, I think our consumers are actually more defensive than just if you think about the
Speaker Change: that regular white label brand and what is a consumer product? It's more tied to the benefit from many trade-down effects.
That's helpful. Thanks for taking all my questions today.
Yeah, you got it, Eric.
Speaker Change: As a reminder to ask a question, please press star 1.
Speaker Change: Next question is from Mitchell Ten from Oppenheimer & Company. Let's go ahead
Mitchell Penn: Thanks. Hey, Matt. Quick question on the CLO. What's your expected ROE on that investment?
http://TheBusinessProfessor.com
Mitchell Penn: We are targeting, call it, high teams to 20% returns over.
I.R.s on our callers in.
And is that before C's?
Mitchell Penn: Do you take any fees out at the joint venture level?
There's no like GECC, I think that that's just a
Mitchell Penn: Income that GECC, the TII, you know, return that we expect to receive from the JV. There's no, the JV does not charge a management fear anything like that specifically.
Speaker Change: and if we just look at Q1, you had $3.8 million in dividends. And then what was the loss?
. . . . .
Relative to the CLO.
Speaker Change: Yeah, I think it was approximately two million dollars. It was millions. I want to say less than a five percent hit to NAV. So if you kind of look at the other publicly traded CEO closed in funds, I think they
Speaker Change: Kind of some of them have provided ranges, I guess, with their first quarter, but you can look at their nabs or down anywhere from call it. I want to say, you know, it's a big range from like 6 to 14% I think our RCOs are. [inaudible]
Younger, longer, lean back in periods, you know, less, less well to be cleaner, portfolios, etc.
Yeah, we did, we actually tracked those in.
The first quarter ROEs were negative for everyone.
So,
when you took the cash flow minus the marks.
They were all down, so well.
Speaker Change: We turned, you know, they have a few structure on their side. I think when we look at the JV, or at the JV is just, if we look at it actually on the quarter, even with the mark down, with the income we generated, it was positive to GCC.
Yeah.
Speaker Change: Got it. Got it. Okay. Thanks. That's all for me. Yes, you got it.
Thanks, Mitchell.
Speaker Change: There are no further questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments.
Speaker Change: Thank you again for joining us today. We're pleased with another quarter of solid performance as we continue to execute on our long-term growth strategy. We look forward to continued investor dialogue. Please let us know so we can help with any follow-up questions that you may have.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.