Great Elm Capital Corp. (NASDAQ:GECC) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Greetings. Welcome to the Great Elm Capital Corp. Third Quarter 2023 Financial Results. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Garrett Edson, a representative of the company. You may begin.
Garrett Edson: Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp.’s Third Quarter 2023 Earnings Conference Call. If you like to be added to our distribution list, you can e-mail investorrelations@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 Financial Information, Quarterly Results. 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 a solicitation of offers to purchase our securities.
Today’s conference call includes forward-looking statements, and we ask that you refer to 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 not undertake to update its forward-looking statements unless required by law. To obtain copies of SEC filings, please visit Great Elm Capital Corp’s website under Financial Information SEC filings which is at the SEC’s website. Hosting the call this morning is Matt Kaplan, Great Elm Capital Corp’s Chief Executive Officer, who will be joined by Chief Financial Officer, Keri Davis, Chief Compliance Officer, Adam Kleinman; and Mike Keller, President of Great Elm Specialty Finance. I will now turn the call over to GECC’s CEO, Matt Kaplan.
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Matt Kaplan: Thank you, Garrett. Good morning, and thank you for joining us today. Our momentum throughout the year continued, and I’m pleased to report yet another strong quarter for Great Elm, generating an ROE of nearly 8.5% in the quarter, bringing our year-to-date ROE to approximately 25%. We continue to successfully deliver across all facets of our business. We saw portfolio growth, continued cash income generation, capital structure improvements and implemented operational enhancements. I remain proud of our team’s consistent execution and incredible effort to position us to further grow our platform and portfolio in the quarters and years to come. Turning to Slide 6. You can see we would have reported NII of $0.45 per share if we excluded the net impact of certain refinancing items in the quarter, showing continued sequential growth from our second quarter 2023 NII.
However, the impact of the refinancing transaction in the quarter led us to report third quarter NII of $3.1 million or $0.40 per share, again, exceeding our quarterly distribution of $0.35 per share. I especially want to highlight Slide 7, which shows our cash NII. Even with the double interest expense associated with the refinancing, we continue to generate enough cash NII from our portfolio to cover our distribution driven by another consecutive quarter of record cash income generated from our investment portfolio. The cash income we generated in the third quarter represented approximately 88% of total investment income. We continue to make great strides in enhancing our portfolio to generate increased cash income. We also successfully harvested lower-yielding investments and used the proceeds to continue enhancing our mix of first lien secured debt, with 90% of our deployments in the quarter going into first lien investments, all while further improving overall corporate portfolio yield.
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Q&A Session
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These results are a further testament to our ability to build a new and high-quality portfolio built with attractive cash yielding investments. In addition to another quarter of excellent NII performance, our net asset value increased by 5.5% in the quarter to $12.88 per share, driven by gains on investments, as you can see on Slide 9. Our investment portfolio gains were broad-based with over 75% of the portfolio pricing stable or up quarter-over-quarter with most of our investments that saw fair value declines being limited to mix and neck that we expect will largely recover over the coming quarters. We remain focused on further recovering and improving our NAV moving forward. Along with our strong results, we successfully completed the refinancing of our 2024 debt maturity with the issuance of new notes due in 2028.
While accomplished at a higher cost of capital given the current rate environment, we were pleased to extend our maturity wall and do not expect a material drag on NII from the higher interest expense in the fourth quarter. We continue to evaluate the capital markets and potential financing transactions to opportunistically extend our maturities at an attractive cost of capital and further position us for both near- and long-term success. In addition, as Mike will discuss in his remarks, we also capitalized Great Elm specialty finance with our core specialty finance assets in the quarter and welcomed in a strategic investor to assist GESF in growing and scaling the platform. With outside capital and increased operational flexibility, I believe GESF can become a significant engine of growth for GECC over the next 3 to 5 years as it further scales.
With that, I’d like to hand the call over to Keri Davis to discuss our third quarter 2023 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 filings for greater detail. During the third quarter, GECC generated NII of $3.1 million as compared to $3.4 million in the second quarter of 2023 as well as nearly tripling our NII year-over-year from $1.1 million in the prior year quarter. Third quarter NII includes $0.3 million of net expenses related to the redemption of the 6.5% GECCN notes due 2024 in connection with our issuance of the 8.75% GECCZ notes due 2028. Our net assets as of September 30, 2023, rose to $98 million as compared to $93 million at June 30. Our NAV per share improved to $12.88 as of September 30, 2023, versus $12.21 as of June 30.
Details for the quarter-over-quarter change in NAV can be found on Slide 9 of the investor presentation. NII per share was $0.40, once again exceeding our quarterly dividend and compared to $0.44 in the prior quarter. Excluding the net expenses related to debt refinancing would result in NII per share for the third quarter of $0.45. As of September 30, 2023, GECC’s net asset coverage ratio was approximately 168.4% compared to 161.5% as of June 30. As of September 30, our total debt outstanding was approximately $143 million. During the quarter, we issued $40 million of GECCZ notes and redeemed $43 million of the 6.5% notes due 2024, successfully extending our maturity wall. As of September 30, 2023, our cash and money market securities totaled approximately $3 million, and we had $25 million available on our undrawn line of credit.
Our Board of Directors has authorized a $0.35 per share cash distribution for the quarter ending December 31, 2023. The fourth quarter cash distribution will be payable on December 29, 2023, to stockholders of record as of December 15, 2023. We annualized, the distribution equates to an 11% dividend yield on our September 30, 2023 NAV of $12.88 per share. I’ll turn the call back over to Matt.
Matt Kaplan: Thanks, Keri. In the third quarter, we continued to rotate into higher-yielding investments, taking advantage of the continued elevated rate environment to deploy approximately $33 million into new investments at average yields of approximately 11.4%. Meanwhile, we opportunistically monetized $37 million of assets in the quarter at average yields of approximately 11%. We continue to maintain significant exposure to floating rate investments with 63% of our debt investment portfolio at quarter end comprised of floating rate debt, well above 48% from a year ago. Most notably, along with our portfolio’s high yield profile, which stood at 13.4% at quarter end, as noted before, 90% of our capital deployed in the quarter was into first lien investments, thus further improving the overall credit quality of our portfolio.
