Participants

Peter Souza; Investor Relations; Great Elm Capital Corp

Matt Kaplan; Chief Executive Officer; Great Elm Capital Corp

Keri Davis; Chief Financial Officer, Chief Accounting Officer; Great Elm Group Inc

Mike Keller; President, Great Elm Specialty Finance; Great Elm Capital Corp

Mickey Sleyn; Analyst; Ladenburg Thalmann

Eric Zvi; Analyst; Lucid Capital Markets

Presentation

Operator

Greetings, and welcome to the Great Elm Capital Corporation fourth quarter 2024 financial results call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this concert is being recorded. It is now my pleasure to introduce your host, Peter Souza with ICR. Thanks. You may begin.

Peter Souza

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 greatoncap.com or you can sign up for alerts directly on our website www.remcc.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 can also find our earnings release and FCC 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, and we ask that you refer to gray down Capital Corp's filings with the FCC 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 gain copies of SEC filings, please visit Great Elm Capital Corp's website under financials, SEC filings, or visit the SEC's website.
Hosting the call today is Matt Kaplan, Great Elm Capital Corp's Chief Executive Officer. 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 Specialty Finance. I'll now turn the call over to GECC CEO, Matt Kaplan.

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.
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 3, 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. 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 NAV.
In addition, charters related to the refinancing of our January 2025 debt maturity and the shelf led to a further $0.03 impact on NII per share.
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. 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 grow.
Quite frankly, I walked 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. 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 5, 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. We returned $2.95 per share to shareholders in cash distributions.
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 Cliff Water and S&P 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%, coupled with the narrowing of our discount to NAB from approximately 25% to less than 10% at the end of 2024.
Moving to slide 6, you can see the progression of our asset base with large asset losses in the legacy and clean up years compared to a strong up and to the right showing over 2023 and 2024 on our net assets.
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 CLOs.
However, 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 GECC's ability to generate strong, long-term returns for its shareholders over time.
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. 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 $324.5 million in 3Q '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.
We expect these fluctuations will begin to dampen as we add CLO investments and continue to leverage our scale.
Going from the first to the second CLO expectedly we'll have more short-term oscillation and aggregate cash flows for the JV than when we go from the fifth to the sixth CLO investment.
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 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. We enter the next chapter of gray M 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. With that, I'd like to hand the call over to Keri Davis to discuss our fourth quarter, 2024 performance.

Keri Davis

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 2024.
The decline in NII was predominantly driven by the uneven cadence of our initial CLO cash flows.
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 shelf. 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 30, 2024 were $136 million as compared to $126 million as of September 30th. Our Nav per share was $1179 as of December 31, '24 as of December 30. Details for the quarter of a quarter change in NAB can be found on slide 12 of the investor presentation.
As of December 31, GECC's asset coverage ratio was 169.7% compared to 166.2% as of September 30.
As of December 30, total debt outstanding was approximately $195 million and our $25 million revolver remains undrawn, fully available to us.
Cash and money market securities totaled approximately $8 million.
Our board of directors authorized a $0.37 per share cash distribution for the first quarter, an increase of 5.7% from the prior quarter, which will be payable on March 31. Stockholders of record as of March 17. The distribution equates to a 12.6% annualized dividend yield on our December 31 net asset value.
With that, I'll turn the call back over to Matt.

Matt Kaplan

Thanks, Kerry. In the quarter, we enhanced our portfolio's strength by steadily increasing our secured debt positions. 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 10%s to 20% returns over time.
The shift in our portfolio composition reflects this strategy. Last year, first lien loans made up 67% of our $178 million corporate portfolio. In 2024, 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 portfolio at year end. Demonstrating our commitment to enhancing portfolio quality while maintaining a focus on secured income generating assets.
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. RJV, which holds majority CLO positions, increases GECC's exposure to a diverse portfolio of broadly syndicated firstly notes. We are encouraged by the early success of our COO joint venture strategy where we have deployed approximately $40 million through December 31.
By way of reminder, we hold our CLL exposure a bit differently than other BBCs 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 distributions. 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 economics. 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 continue 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 31.
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 Capital Corp and delivering attractive risk adjusted returns for our shareholders. We remain excited for the future of GECC, and with that, I'd like to turn the call over to Mike Keller to provide an update on specialty finance.

Mike Keller

Thanks, Matt. Revenue and net income at GESF increased from the third quarter.
This growth was primarily driven by Prestige, our invoice financing business. 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.
Moving on to our ABL businesses, 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 e-commercial finance offers traditional ABL products to a wide range of industries, including healthcare. 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. The planning for this started in the fourth quarter and in early 2025 we are beginning to execute on our strategic initiatives.
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 have taken will drive increased profitability over 2025 and beyond.
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.

Matt 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 CLOJD structure, which strengthens our cash generation ability.
Through our equity and not 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 dollar shelf.
In summary, we grew our portfolio substantially, raised ample capital, and implemented our CLO strategy. 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 dividends 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?

Question and Answer Session

Operator

(Operator Instructions)
Mickey Sleyn, Ladenburg Thalmann.

Mickey Sleyn

Yes, good morning everyone. Matt, a couple of questions on the CLO JV, first, have you and your partners fully funded the JV?

Matt Kaplan

Good morning, Mickey. Thanks for the question. First, the JV commitment is outlined in our 10-Ks and we have some uncommitted capital still to be drawn in there, as well as a 12/31.
So they are not fully funded. We expect and expect to continue growing it over time.

Mickey Sleyn

How do you intend to raise the capital to finish funding your commitment then?

Matt Kaplan

As you recall, we ended the quarter with $8 million of cash and equivalents on our balance sheet as well as a $25 million dollar 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 1 on our dividend. That added some funding which we have not, drawn down any any leverage on so our target debt to equity ratio is kind of around the 1.5 times as you can see, we ended the quarter a little under leverage, so we have extra capacity on our revolver as well, fully available to us to meet the remaining commitment.

Mickey Sleyn

Okay, I understand, fair enough. The JV is only investing in Apex credit CLOs. I'm curious why you're only investing in Apex instead of diversifying the portfolio a little bit more.

Matt Kaplan

That is the current, investment mix as of today. One of the things that JV affords us to do is to take majority positions. We have a couple strategic institutional partners that we are working with, and that is the the the current opportunities that as of today.
We may diversify over time our CLO exposure.

Mickey Sleyn

All right, 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 spread that spread compression impacting the CLO's cash flows this year and what's sort of your target ROE on your CLO JV investment?

Matt Kaplan

Sure, so I think we're very fortunate with the execution on the, 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 1% to 20% IRRs, one thing to to think about is.
Growth is rarely linear here, so you saw we had a step down in the nature of the distributions from the JV can be a little lumpy at the outset. But as we look, we're doing two really great things here raising equity at Nav and investing in these CLOs and taking majority positions through the joint venture that provide what we believe are, enhanced economics and are really look through vehicles to senior secured first lien.
Investments that are generating cash yields. So you know we look at our business over a 12 month period rather than quarter to quarter, and I expect our trailing 12 months 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 MII in the second quarter and, be off to the races for 2025 and cover the distribution for the full year.

Mickey Sleyn

I understand, Matt. 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, some credit deterioration as the credit cycle sort of matures. You do have one position in Maverick gaming, and that first lien is one of those first lien is marked at a pretty distressed level. 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?

Matt Kaplan

The outlook, 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. It's all I can say.

Mickey Sleyn

I mean, the company, is in the casino and gaming industry. 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?

Matt Kaplan

I think you can go on to the, company's website. They operate, in Washington, Nevada, and Colorado, are the three core markets, so it's pretty regional specific there, it's a private company, so there's not much more I can share.

Mickey Sleyn

Okay, those are all my questions, this morning. Thanks for your time.

Matt Kaplan

Thank you very much, Mickey.

Operator

Eric Zvi, Lucid Capital Markets.

Eric Zvi

Thank you, good morning.

Matt Kaplan

Morning, Eric.

Eric Zvi

Wanted to start with another question or so on the, CLO JV and just curious from a, 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?

Matt Kaplan

I think we are, over time we could see the CLO JV grow to, around, our CLO kind of exposure to around 20% of our asset base, as we kind of begin to scale, as you saw in 2020.
Or we raised $50 million or nearly $50 million of equity and also raised some debt debt against that as well. I think we increased our corporates and CLO portfolio from $178 million. They call it $180 million at the end of '23 to $280 million by the end of 2024, we are planning to continue to grow the platform, so. The income mix will continue to increase as we grow the asset base and you know continue to look to add to this vertical, in a measured way.

Eric Zvi

Thanks Matt 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 and how you share those responsibilities with your partner?

Matt Kaplan

Sure, so our partner is, we have a couple partners in the joint venture, sophisticated institutional investors, have relationships, and have deep understanding of the CLO market and as opportunities come up, we make investment decisions. 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 and being part of the primary process. So we evaluate every op every opportunity as they come.

Eric Zvi

And switching gears to the the the corporate portfolio, could you provide it and that was just on, the pipeline today how it stands relative to maybe beginning of last quarter and what is your outlook for, kind of deployments here in the near term and and anything, it'd have, I know it's tough to have visibility into, repayment outlook, but anything near term that, is looking to be repaid.

Matt Kaplan

Good question. Eric, thanks. Let's see. 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 in some item, some secondary loans that we have been tracking that we believe have gotten a little bit tight.
And those some some spreads are widening out and that kind of secondary markets on the direct lending side, continue to maintain an active dialogue, and have a pretty stable pipeline quarter over quarter don't really see any repayments in the immediate term. But there's a couple portfolio companies that you know 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, what the.
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.

Eric Zvi

Thanks, Matt. I appreciate all the color.

Matt Kaplan

Thanks sir.

Operator

Thanks. At this time, I would like to turn the call back to Matt Kaplan for closing remarks.

Matt Kaplan

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.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.