Great Elm Capital Corp.

Welcome to the Great Elm Capital Corporation's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Garrett Edson, a representative of the company. Mr. Edson, you may now begin.

Good morning, and thank you, everyone, for joining us for Great Elm Capital Corp's fourth quarter and full year 2023 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 Financial Information Quarterly Results. On our website, you can also find our earnings release and SEC filings. I would 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 Court's filings with the SEC for important factors that could cause actual results that differ materially from these statements. Great Elm Capital Court, not undertake to update its four living statements unless required by law. To obtain copies of SEC filings, please visit Great Elm Capital Corp's website under Financial Information, SEC Filings, or visit 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, Kerry 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.

Thanks, Garrett. Good morning, and thank you all for joining us today. We finished 2023 on a high note, generating an approximately 30% return on equity for the year, and we have continued our momentum into 2024 with the closing of a $24 million equity raise at net asset value earlier this month. Before diving into our strong performance, I want to further highlight our capital raise. On February 8th, GECC issued 1.85 million shares at a then current NAV of $12.97 per share, a 25% premium to the prior day's closing price. Great Elm Strategic Partnership I and SPV acquired the shares for gross proceeds to GECC of $24 million. Great Elm Group invested $6 million in and a strategic institutional investor invested the other $18 million in the SPV. This non-dilutive equity raise increases the scale of GECC, which will provide operating efficiencies as we leverage our fixed cost base. And over time, we believe will lead to an improved cost of capital. The transaction comes on the heels of success from our repositioning efforts over the past two years, further enabling us to build upon our growth strategy and execute on our strong investment pipeline at greater scale. Shifting back to earnings, we are proud to have closed out the year with NII exceeding our base dividend for the fourth consecutive quarter and another quarter of increasing NAV, positioning us for continued success in 2024. We continued to excel in the fourth quarter across all facets of our business. We generated an annualized ROE of approximately 18% bringing our calendar year 2023 ROE to approximately 30%. Additionally, we increased our net assets, generated another quarter of significant cash income, and further enhanced both our capital structure and overall operations. I remain proud of our team's unwavering execution and tremendous effort this past quarter and year, positioning us for long-term platform and portfolio growth. Turning to slide three, You can see we reported NII of 43 cents per share. Additionally, full-year NII was $12.5 million, or $1.65 per share, exceeding the $1.50 per share of total declared dividends in 2023, which is inclusive of a 10-cent special distribution declared in December. We are very pleased to have been able to deliver the special cash distribution to our stockholders, a testament to our portfolio's strong performance throughout the year. I would also like to highlight slide eight, which shows our total investment income for the fourth quarter was $9.2 million. Notably, for the full year, we generated cash income of over $30 million, easily the highest full year total in Great Elm's history. This is a true validation of our efforts over the past couple of years to enhance the portfolio's cash income generation. We also continued to proactively harvest lower yielding investments reinvesting the proceeds into higher-yielding, higher-quality credits, and improving our mix of first lien secured debt, with 98% of our deployments in the quarter going to first lien investments, all while further enhancing the overall corporate portfolio yield. These results underscore our ability to construct and maintain a high-quality portfolio for those attractive, cash-yielding investments. In addition to another quarter of solid NII performance, as displayed on slide 9, our net asset value per share grew to $12.99, up from $12.88 in the previous quarter. More noteworthy is our NAV growth over the past year, as seen on slide 10, which experienced a 16% increase from the beginning of 2023, driven primarily by gains on investments. We are committed to further growing our NII and NAV over the long term. Along with our strong results in the quarter, we were pleased to amend our $25 million revolving line of credit, extending the maturity by three years to May 2027 and reducing its cost by 50 basis points to SOFR plus 3%. This provides us with additional flexibility in our capital structure and demonstrates our lenders' sustained confidence in our business. We are continuously assessing the capital markets and potential financing opportunities strategically extend our maturities at favorable costs, priming us for both short and long-term success. With that, I'd like to hand the call over to Carrie Davis to discuss our fourth quarter 2023 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 our SEC filings for greater detail. During the fourth quarter, GECC generated NII of $3.3 million compared to $3.1 million in the third quarter. Additionally, full year NII was $12.5 million or $1.65 per share. Our net assets as of December 31st rose to $99 million compared to $98 million at September 30th. Our NAV per share also improved to $12.99 as of December 31st versus $12.88 as of September 30th in 11-16 as of the end of last year. Detail for the quarter-over-quarter and year-over-year change in NAV can be found on slides 9 and 10 of the investor presentation. NII per share was $0.43 for the quarter, exceeding our quarterly base dividend for the fourth consecutive quarter and compared to $0.40 per share in the prior quarter. As of December 31st, GECC's asset coverage ratio was approximately 169% compared to 168.4% as of December 30th. As of December 31st, our total debt outstanding was approximately $143 million, and cash and money market securities totaled approximately $12 million. Our $25 million revolving line of credit also remained undrawn. Our Board of Directors authorized a $0.35 per share cash distribution for the quarter ending March 31st, 2024. The first quarter cash distribution will be payable on March 29, 2024 to stockholders of record as of March 15. The distribution equates to an 11% annualized dividend yield on our December 31 NAV of $12.99 per share. In addition, the 2023 distribution, inclusive of the $0.10 per share special distribution, totaled $1.50 per share for the trailing 12-month period. equating to an 11.6% yield on December 2023 NAV. With that, I'll turn the call back over to Matt.

Thanks, Carrie. In the fourth quarter, we continued to rotate into higher-yielding investments, taking advantage of the ongoing elevated rate environment and deploying approximately $30 million into new investments at average yields of approximately 14%, up from 11.4% in the previous quarter. Meanwhile, we opportunistically monetized $36 million of assets in the quarter at average yields of approximately 11%. Our rotation into floating rate investments continued, with 67% of our debt investment portfolio at quarter end comprised of floating rate debt, compared to 63% last quarter and well above 50% in the prior year period. Notably, along with our portfolio's yield profile, which stood at 13.8% at quarter end, Most of the capital deployed in the quarter was into first lien investments, strengthening the overall credit quality of our portfolio. We are pleased with the composition and return profile of our current portfolio and the strides we have made over the past two years. Looking ahead for 2024, we continue to prioritize investments that are benefiting from the elevated rate environment while focused on credit quality as we actively monitor the ever-changing macro landscape. In sum, We are proud of our performance and transformation over the past couple of years, resulting in a higher quality portfolio with a strong yield profile, sustainably improving NAV and enabling NII to consistently exceed the regular quarterly distribution. We will remain disciplined in deploying capital towards opportunities with durable returns and limited risk of permanent capital loss. By maintaining this approach, we are well-situated to further grow Great Elm Capital Corp. and deliver compelling 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.

Thanks, Matt. First, I'd like to note a key hire we made earlier this month. Jason Schwartz, an industry veteran, has joined GESF as its chief credit officer. Jason has significant experience in all levels of lending, healthcare, ABL, real estate, and lender finance. He will help drive growth in each of our businesses, as well as assist with our multiple lending arrangements. Moving to our businesses, I'll start with Prestige, which saw some weakness in invoice financing volume in the back half of the year, but ended 2023 on a strong note, outperforming budget. Going into the first quarter, we are seeing volumes pick up again and expect another strong year from the team. At Great Elm Healthcare Finance, we continue to see robust deal flow and our team has been successful in expanding its financing relationships. We expect Great Elm Healthcare Finance to continue to take advantage of the healthcare market dislocation in 2024. As mentioned last quarter, we continue to build out Sterling Commercial Credit and its asset-based servicing capabilities. Today, we have a platform in place to support growth. The Sterling team grew the pipeline in the fourth quarter and has a strong foundation to convert that pipeline into earning assets over the coming months. Turning to our latest business initiative, we are working with various bank and non-bank capital providers to further grow a new asset-based and asset-backed financing vertical. We believe that this will provide Graydelm Specialty Finance with the ability to take advantage of opportunistic secured lending transactions. In summary, now under GESF, I am confident that our specialty finance companies are properly positioned to execute on our growth initiatives as we seek to generate increasing and sustainable income over the coming years.

Thanks, Mike. To sum up, it was an excellent quarter and a fantastic year for GECC. Given our current portfolio composition, overall strategy, and the recent equity capital raise at NAV, We believe we remain well-positioned to continue to cover our quarterly-based distribution throughout 2024. In addition, we remain focused on continuing our capital-raising initiatives and growing the business. With that, I'll turn the call over to the operator for questions. Operator?

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, you may press star 1 from 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 your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to ask a question, and we'll pause a moment to assemble the queue.

Thank you. Thank you. Once again, as a reminder, you may press star 1 at this time to ask a question. Thank you. Thank you.

It appears at this time there are no questions. I would turn it over to Madge for any further remarks.

Thank you all for joining us again today. We're pleased with our strong momentum and the incredible progress we've made. We look forward to a continued investor dialogue. Please let us know if we can help with any follow-up questions that you may have. Thanks again. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.