管理層發言
Greetings and welcome to the Great Elm Capital Corp. First Quarter 2025 Financial Results Call. It is now my pleasure to introduce your host Peter Sousa, the Investor Relations representative of the company. Thank you. You may begin.
Hello, and thank you, everyone, for joining us for Great Elm Capital Corp.'s First Quarter 2025 Earnings Conference Call. If you'd like to be added to our distribution list, you can email 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 Events and Presentations. On our website, you could 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. does 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 Financials, SEC filings, or visit the SEC's website. Hosting the call today is Matt Kaplan, Great Elm Capital Corp.'s Chief Executive Officer, who will be joined by Chief Financial Officer, Keri Davis; Chief Compliance Officer and General Counsel, Adam Kleinman; and Mike Keller, President of Great Elm's Specialty Finance. We'll now turn the call over to GECC's CEO, Matt Kaplan.
Thanks, Peter, and thank you all for joining us today. We are pleased to start 2025 with a record-setting quarter, achieving the highest total investment income in the company's history at $12.5 million. 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. This 37% increase in TII from last quarter and more than 40% year-over-year growth was driven by the success of our CLO JV as well as from income generated by new investments in the quarter. NII per share doubled to $0.40 per share from $0.20 in the prior quarter, largely attributable to the increase in total investment income and the ramping contributions from investments. Our NII more than covered the increased first quarter distribution of $0.37 per share, a 5.7% increase from the prior quarter's $0.35 per share distribution.
This marks our commitment to delivering growing income to shareholders, supported by solid underlying portfolio performance. 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. Based on current expectations, we anticipate that second quarter NII will exceed first quarter levels. As we discussed on our last call, we anticipated an increase in cash distributions from the CLO JV this quarter at CLO distribution patterns that are typically uneven in their early stages. For example, we received $3.8 million of cash distributions from the CLO JV in the first quarter of 2025, as compared to $0.5 million in the fourth quarter of 2024, which was a step down from the $3.2 million in the third quarter of 2024. Additionally, in the second quarter to date, we have received $3 million of cash distributions from the JV.
We do expect these fluctuations will dampen over time as we fund additional CLO investments and continue to leverage our increased scale. For these reasons and considering our ongoing capital raising and deployment initiatives, we'd like to reiterate that it is best to review GECC on a 4-quarter basis opposed to benchmarking the company quarter-to-quarter. Moving on to our portfolio's performance. While our NII generation was strong, we did see a modest step down in NAV per share, as outlined on Slide 8, driven by unrealized losses on portfolio investments. We began to see volatility in the markets pick up in the middle of the quarter, which led to markdowns on positions at quarter end, specifically our CLO JV equity and our investments in CW Opportunity 2 LP, a vehicle created to hold convertible preferred equity in CoreWeave, an AI hyperscaler, which went public at the end of March. We remain confident in these investments in our portfolio and expect these unrealized losses to reverse over time as market conditions stabilize.
Additionally, we recently filed a prospectus supplement for a $100 million at-the-market equity program to issue shares at NAV or better. We believe this new tool will provide us with additional capital flexibility as we seek to continue scaling GECC. 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. With our strength and foundation, we remain confident in our ability to generate sustainable returns and deliver increasing value to our shareholders in the years ahead. With that, I'd like to hand the call over to Keri Davis to discuss our first quarter 2025 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 filings for greater detail. During the first quarter, GECC generated NII of $4.6 million, or $0.40 per share, as compared to $2.1 million, or $0.20 per share, in the fourth quarter of 2024. The increase in NII was primarily driven by the receipt of distributions from the CLO JV as well as income from other new investments. Our net assets as of March 31, 2025, were $132 million as compared to $136 million as of December 31. Our NAV per share was $11.46 as of March 31 versus $11.79 as of December 31. Details for the quarter-over-quarter change in NAV can be found on Slide 8 of the investor presentation. As of March 31, GECC's asset coverage ratio was 163.8% compared to 169.7% as of December 31. As of March 31, total debt outstanding was approximately $207 million, and we had $12 million outstanding on our $25 million revolver. Cash totaled approximately $1.3 million. Our Board of Directors authorized a $0.37 per share cash distribution for the second quarter, which will be payable on June 30 to stockholders of record as of June 16. The distribution equates to a 12.9% annualized dividend yield on our March 31 net asset value. I'll turn the call back over to Matt.
Thanks, Keri. In the quarter, we continued to enhance our portfolio strength by steadily increasing our secured debt positions. Our CLO joint venture remains a significant contributor to the strategy, and we expect it to remain an important source of income for GECC as we continue to expand the vertical, targeting high teens to 20% returns over time. We have grown our corporate portfolio to nearly $250 million of investments, and first-lien loans comprised 71% of the corporate portfolio as of March 31. This demonstrates our commitment to enhancing portfolio quality while maintaining a focus on secured income-generating assets. Alongside new investments, our CLO JV helped drive us to record total investment income this quarter. This joint venture expands our exposure to a diverse portfolio of broadly syndicated first lien loans and continues to be a key contributor to our early success, with approximately $48 million deployed through March 31.
As a reminder, we hold the majority of 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 the income when the CLO JV makes distributions. This leads to a more uneven nature to our income reporting. While we may hold some minority CLO positions directly on our balance sheet, the JV affords us the ability to have exposure to majority interest 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. Further, outside of some markdowns we discussed, our investment portfolio is performing well. And as of March 31, we had zero positions on nonaccrual. Notably, the single issuer that we had on nonaccrual at year-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.
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. With our defensive portfolio structure, we believe we are well-positioned to navigate the ongoing tariff uncertainty. 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 towards 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 would like to turn the call over to Mike Keller to provide an update on specialty finance.
Thanks, Matt. The start of 2025 has been transformative for Great Elm Specialty Finance. In January, we combined the corporate and health care ABL portfolios and replaced our existing asset-backed lender with a new facility led by CIBC, which is now an active syndication to increase the facility commitment as our business ramps. In March, after repositioning the legacy Great Elm Healthcare Finance business to focus solely on health care real estate financing opportunities, we closed on a leverage facility to support the real estate assets held within that platform. In April, we completed the rebranding of Sterling as Great Elm Commercial Finance, which today offers traditional ABL products to a wide range of industries, including health care. Also, GESF exited its last equipment lease holding, further simplifying the business. 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.
Thanks, Mike. In closing, we are pleased with our first quarter results and remain well positioned to grow NII in the second quarter and cover our dividend in 2025. With that, I'll turn the call over to the operator for questions.
分析師問答
The first question is from Mickey Schleien from Ladenburg Thalmann.
Matt, how do you see the portfolio and the fund's NAV performing with both the broadly syndicated loan market and private credit spreads widening in April?
That's a great question, Mickey. In the first quarter, we experienced some modest markdowns in our portfolio. We had a net unrealized gain of $0.38, with about $0.30 of that related to two positions: the CLO joint venture and our investment in CoreWeave. Aside from that, the rest of the portfolio performed well, although we did notice increased volatility in late February and early March. By April, the CLO market had nearly returned to where it was at the end of March in terms of spread. The future remains uncertain. For the syndicated loan market, there was a slight decline from 331 to 431. Overall, the diversified portfolio remains healthy, and the NAV impact was minimal; these are all unrealized gains. We expect much of this to reverse as market conditions stabilize over time. One advantage of our CLO position is their relative youth. In volatile markets, the best vintages of CLOs, like those from 2007-2008 or 2019 during COVID, have shown strong performance throughout their lifecycle.
So we feel confident there. Regarding CoreWeave, if you look at the publicly traded stock, we invested in a vehicle with a convertible preferred. At 331, if the stock had closed around $48, we would have seen a flat mark quarter-on-quarter; instead, it closed at about 37 or 38 at the end of March, which resulted in a decline. However, we believe in the company's long-term potential, and the stock was over 50 as of yesterday's close.
You just mentioned that the CLO market has sort of stabilized. The JV holds a warehouse facility with Apex credit, what is the JV earning on that warehouse? And now that the market is stabilized, when do you expect that CLO to price?
So that CLO 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, April.
And does it typically take a quarter or two for CLOs to provide their initial distribution? Would that apply to this investment?
For that specific one, yes, I think we would expect our first distribution from that underlying investment in the underlying CLO JV to come in October of 2025.
Okay. So relative to...
As I mentioned regarding the CLOs and our business, we will experience some fluctuations in our earnings because the CLO joint venture will be distributing dividends, which is how we record our income. In the first quarter, we received approximately $3.8 million from the CLO joint venture. So far this quarter, we've received $4.3 million. I believe we are in a strong position to increase our net investment income and cover the $0.37 dividend for next quarter. It’s important for us to assess our business over a 12-month period rather than on a quarter-to-quarter basis. I anticipate that our full-year net investment income will improve and will be sufficient to cover the dividend as we look towards 2024, which appears to be more favorable.
I understand. And then one more question, if I might. You borrowed on your credit facility, and I'm curious whether that facility requires mark-to-market accounting just thinking in terms of all the volatility we're seeing in the markets.
Sure. So the facility has a borrowing base, which feeds in the fair value of investments that are comprised of the borrowing base, but that we have significant borrowing capacity, multiples of what the actual commitment is; more than three times the commitment level using recent marks. So I have no concerns there. And then the covenants are laid out in the Q; I think the minimum net asset value is $65 million. We have about $135 million of NAV and then 150% ACR. So kind of just the standard BDC ACR covenant there. I think we drew on the revolver. If you look, we raised equity at the very end of the fourth quarter, which led to an increase in share count, and we rolled over the quarter with year-end with about $8.5 million of cash. So that was just as we deployed and we raised approximately $13.3 million in the fourth quarter, modestly drawing on our revolver to optimize our portfolio and yield helped also, as I said, our income this quarter was driven by new deployments as well as the CLO JV. So we are looking to continue to grow, diversify and scale GECC.
The next question is from Erik Zwick from Lucid Capital Markets.
I wanted to start first with the question. I'm curious if you could provide a little, maybe, color into the timing of the new deployments and the monetizations you had in the quarters based on the incoming yields being significantly higher than the outgoing yield; it 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 Q2 as well?
I think it was a good question. It was somewhat uneven. We had extra cash and commitments we needed to finalize in January, but February was relatively slow. In March, however, we managed to take advantage of some market opportunities and began to increase our deployments. We expect to see some additional benefits in Q2. As I mentioned, we are anticipating a sequential increase in Q2 NII compared to Q1.
Got it. And maybe just kind of continuing along that thought process in terms of forward yield, could you maybe just quantify what the pipeline looks like today in terms of magnitude of size as well as what you're seeing for yields in the pipeline today?
Sure. We are exploring several private credit direct lending opportunities. We've had a couple on hold while we assess the tariff situation, which is creating some uncertainty. However, there is other lending activity occurring, including mergers and acquisitions or refinancing needs from companies seeking capital. Overall, our pipeline appears to be slightly stronger now compared to three to four months ago in the direct lending area. Additionally, the broadly syndicated loan market is presenting various opportunities. Occasionally, some good prospects are overlooked due to broader market conditions. Our team is actively underwriting these opportunities, maintaining relationships with numerous management teams and sponsors. This approach allows us to build a pipeline of potential investments in the syndicated market that might not seem appealing at first glance, but we keep track of them, and that pipeline looks promising. We must remain cautious, but we have some high-quality assets in our portfolio within the broadly syndicated loan space. These assets serve as a sort of cash alternative, providing us the flexibility to capitalize on selective trading opportunities when we identify them. While this strategy is only a small part of our overall activities, it can contribute to generating additional returns over time.
And then I appreciate the comments you gave in the prepared remarks regarding kind of limited exposure, direct exposure to tariffs. So I'm curious if you've looked at your portfolio in terms of exposure to government contracts just given some of the cuts and cutbacks in federal spending and things of that nature?
We have. We were looking at an investment that we had historically been involved in the situation. It was refinanced, and then this is not in our portfolio anymore, but due to the government contract nature of it, it traded off. We've decided not to reinvest. But I think on the tariff side, the question is that a lot of people are asking is what's the direct exposure? And I think we're working to think through the second and third-order effects, the dynamic of tariffs and also the other government initiatives. I think the bigger question that everyone is trying to understand is what's the duration of this uncertainty and how will that lead to economic changes. And to that end, we've been reunderwriting our existing investments and focusing on thinking through that lens on new investments on if there is a recession, how severe could it be? What's the company's defensive position? So we are considering that in all of our current portfolio investments as we do our routine portfolio reviews as well as new underwriting.
Great. And one last one for me, and I'll step aside. So just looking at the kind of industry breakdown of the corporate portfolio, about 10% is categorized as consumer; maybe say another 2% if you include casinos and gaming. There are concerns in the market regarding the lower-end consumer, and especially if we get another inflation from the tariffs. So just curious if you could kind of characterize your portfolio in terms of what segment of consumers are there, and what potential kind of impacts or mitigations might need to be made there?
Yes. Our largest exposure in the consumer space would be in companies that have exposure to private label products and manufacturing. So to the extent there is weakness in the consumer, they should benefit from any trade-down effect from the premium brands into private label. So I think our consumer, and another one of our consumer services businesses, or larger exposure is you can look on the scheduled investments is CSC ServiceWorks, which provides laundry services. So generally, they are very recession-resilient businesses. So I think our consumer is actually more defensive than if you think about the kind of regular white label brand, like what is the consumer product. It’s more tied to benefit from any trade-down effects.
Next question is from Mitchel Penn from Oppenheimer & Company.
A quick question on the CLO. What's your expected ROE on that investment?
We are targeting, call it, high teens to 20% returns over IRRs on our dollars in. And is that before fees? Do you take any fees out at the joint venture level? There are no fees; the JV does not charge a management fee or anything like that specifically.
And if we just look at Q1, you had $3.8 million in dividends. And then what was the loss relative to the CLO?
Yes, I think it was approximately $2 million. It was, I want to say, less than a 5% hit to NAV. So if you kind of look at the other publicly traded CLO closed-end funds, I think they kind of some of them have provided ranges, I guess, for the first quarter, but you can look at their NAVs. They're down anywhere from, call it, a big range from like 6% to 14%. I think our CLOs are younger and longer reinvestment periods, less relatively cleaner portfolios, et cetera.
Yes, we did. We actually track 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 they charge.
They have a fee structure on their side. I think when we look at the JV, right, the JV is just if you look at it actually on the quarter, even with the markdown with the income we generated, it was positive to GECC.
There are no further questions at this time. I would like to turn the floor back over to Matt Kaplan for closing comments.
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 if we can help with any follow-up questions that you may have.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.