Great Elm Capital Corp (GECC) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Elm Capital Corp.'s First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Adam Yates, Portfolio Manager. Sir, you may begin.

Thank you, Crystal, and good morning, everyone. Thank you, all, for joining us for Great Elm Capital Corp.'s First Quarter 2019 Earnings Conference Call. As a reminder, this webcast is being recorded on Tuesday, May 14, 2019. If you'd like to be added to our distribution list, you can email Investor Relations at greatelmcap.com or you can sign up for alerts directly on our website, www.greatelmcc.com.

The slide presentation accompanying this morning's conference call and webcast can be found on our website under Financial Information, Quarterly Results. On the website, you can also find a copy of our earnings release, Form 10-Q and a link to the webcast. 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 projections, 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 projections. Great Elm Capital Corp. does not undertake to update its forward-looking statements unless required by law. To obtain copies of the 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 Peter Reed, Great Elm Capital Corp.'s President and Chief Executive officer.

I will now turn the call over to Peter.

Thank you, Adam. Good morning and thank you for joining us today. I'm joined this morning by our COO, Adam Kleinman; Portfolio Manager, Adam Yates; and CFO, Keri Davis. Where relevant in our prepared remarks, we'll point you to the corresponding slide number in the deck that Adam references, which is available on our website as well as through the webcast.

Please turn to Slide 3 for an overview of GECC. GECC is an externally managed, special situations-focused BDC. GECC seek to generate both current income and capital appreciation from its portfolio of investments comprised of secured loans and bonds sourced in the secondary market as well as in originated transactions.

As of March 31, 2019, GECC had total assets of approximately $290.2 million, a portfolio fair value of $185.7 million and a net asset value of $114 million equating to $10.89 per share. The weighted average current yield on our debt holdings was approximately 11.3%. GECC pays an $0.083 per share base monthly distribution that equates to approximately $1 per share on an annual basis. Importantly, greater than 20% of GECC shares are held between Great Elm Capital Group, Inc., Great Elm Capital Management Inc.'s employees and GECC's Board of Directors, creating very clear alignment of interest between management and our shareholders.

Let's turn to Slide 4 to go over a few highlights and recent achievements. I'm pleased to report that GECC's net investment income has covered its declared distributions every quarter since its inception in 2016. In 2018, GECC paid $1.24 in total distributions consisting of an $0.083 monthly base distribution and a $0.24 special distribution. Based on March 31 NAV and closing market price, that total distribution equates to an annual distribution yield of 11.3% and almost 15%, respectively. During the quarter, we deployed capital at a weighted average price of 97% of par, and we monetized investments at a weighted average price of 99% of par.

On Slide 6, we highlight a few high level characteristics of the portfolio. The weighted average current yield on our secured debt holdings, which comprise almost 82% of the fair value of the portfolio, is approximately 11.3%. The weighted average price of the debt investments in our portfolio is approximately 89% of par providing for significant potential capital appreciation. Moreover, as we have monetized legacy Full Circle positions and redeployed the proceeds into new and existing Great Elm investments, the portfolio continues to better reflect our investing style and approach. As of March 31, roughly 82% of the portfolio was comprised of investments that are representative of the manner in which we intend to invest going forward.

Slide 7 describes additional portfolio characteristics. The portfolio contains 33 investments, 26 of which are secured debt and 7 are equity. The 26 debt investments account for $151.5 million of fair value, and the 7 equity investments account for approximately $34.2 million of fair value. Of our total debt holdings, roughly 70% are floating rate instruments and 30% accrue at fixed rates.

Please turn to Slide 8 to review our capital activity during the fourth quarter. We deployed almost $55 million into 14 investments at a weighted average price of 97% of par and a weighted average current yield of greater than 10.5%. We monetized in part or in full 17 investments at a weighted average dollar price of 99% of par and a weighted average current yield of 10.4%.

Slide 9 and 10 review our capital deployment in greater detail. We purchased investments in 6 new and 3 existing portfolio companies during the quarter deploying approximately $35.1 million. The new investments were Dynata secured revolver; 80% of the equity interest in Prestige Capital Corporation; approximately $2 million of Viasat receivables; $2.5 million of APTIM Corp. secured notes; $2 million of Boardriders secured loan; and $3 million of California Pizza Kitchen's secured loan. Additions to our existing investments included $3 million SESAC second-lien term loan; $10 million of TRU Taj equity purchased at a significant discount to plan value via a rights offering; and $3 million of Finastra's second-lien term loan.

Please turn to Slide 11 to breakdown the quarter-end portfolio by asset and interest rate type. Approximately 82% of the fair value of the portfolio is invested in secured debt with the balance in equity investments. That's roughly $151.5 million of debt and $34.2 million of equity. Of the $151.5 million of debt holdings, roughly $105.9 million is invested in floating rate debt with a weighted average current yield of 11.7%. Roughly $45.6 million is invested in fixed rate debt with a weighted average current yield of 10.4%.

On Slide 12, we highlight how the composition of the portfolio has changed over time. Today, the portfolio has no unsecured debts as we continue to source and purchase attractive secured opportunities.

Turning to Slide 13, I'd like to note that floating rate debt has encompassed a growing percentage of the portfolio quarter-after-quarter. Specifically, our team has been focusing on leverage loan opportunities they're uncovering in the secondary market, and those tend to offer LIBOR-based interest rates. Recently, we have found greater opportunity in the leveraged loan market than in the more transparent high-yield bond market, and we anticipate that this trend may continue.

On Slide 14, we break down the portfolio by industry. Wireless telecommunications services and building cleaning and maintenance services comprised of Avanti and PE Facility Solutions, respectively are still the largest industry weightings. We continue to maintain a diversified portfolio of investment as indicated by the 21 different industries represented.

Please turn to Slide 15 to take a historic look at GECC's portfolio rotation. During each of the past 10 quarters since inception, we've monetized higher dollar-priced investments and deployed capital into lower dollar-priced investments contributing to GECC's total return. Most recently, in the first quarter of 2019, we deployed capital at a weighted average price of approximately 97% of par, and we realized investments at a weighted average price of approximately 99% of par. Again substantially all of the debt capital deployed was invested in first-lien and/or secured debt.

Turning to Slide 16, we get a more granular picture of what GECC's investment activity looks like quarter-over-quarter. We've been able to find interesting debt investment opportunities at prices below par in each of the last 5 quarters. This past quarter, we were able to invest capital at a 10.5% average current yield, largely in line with our recent trend.

Please turn to Slide 17 for an update on Avanti. When we formed GECC, Avanti was struggling to monetize the capacity of its satellite network. As Avanti encountered financial difficulty, we worked with other key creditors to improve the company through deleveraging its balance sheet, launching its biggest satellite yet and identifying and recruiting new Board members, who brings stability and strategic insight to the company.

These improvements paved the way to hire Kyle Whitehill as the new CEO in April of 2018. Since Kyle's start, he has dramatically overhauled sales and marketing resulting in large contract wins and rapidly growing, recurring core bandwidth revenue. Based upon the trajectory that we observe in Avanti's business, we expect the following throughout 2019: continued revenue growth, coupled with a significant reduction in operating expenses, culminating in a rate of EBITDA growth exceeding the rate of revenue growth. On this trajectory, we expect that Avanti will have visibility into generating positive unlevered free cash flow.

On Slide 19, we detail our activities since quarter end. In particular, I would note our share repurchase activity as well as the entry by PE Facility Solutions into an agreement to sell substantially all of its assets for $23.75 million. We expect this transaction to close late in the second quarter or early in the third quarter of 2019.

Let's turn to Slide 21 to review financial highlights from the quarter. Earnings per share were $0.76 in the first quarter. NII per share came in at $0.26 once again covering our $0.25 quarterly base distribution. We experienced realized and unrealized gains of approximately $0.06 and $0.44, respectively. Net asset value or NAV was $10.89 per share at period end, up from last quarter's $10.34 per share.

Please turn to Slide 22 for a financial overview of the portfolio. At period end, total assets were $290.2 million, total fair value of investments was $185.7 million and our $10.89 per share NAV equated to an aggregate NAV of $114 million, all meaningfully greater than the same metrics in the prior quarter. Total debt outstanding was unchanged at $79 million comprised of our 2 baby bonds, tickers GECCL and GECCM. Cash and money market investments were $24 million at period end.

Slide 23 details select financial performance during the quarter. Total investment income was approximately $6.3 million or $0.59 per share. Net expenses were approximately $3.5 million or $0.33 per share. NII was approximately $2.8 million or $0.26 per share. Net realized gains were approximately $608,000 or $0.06 per share. Net unrealized appreciation from investments was $4.7 million or $0.44 per share.

Turning to Slide 24, let's discuss the quarterly operating results. Total investment income of $6.3 million or $0.59 per share compares to the fourth quarter's $6.9 million or $0.65 per share. Net operating expenses of $3.5 million or $0.33 per share was lower than the fourth quarter's $4.2 million or $0.40 per share. NII of $2.8 million or $0.26 per share was marginally higher than the fourth quarter's $2.7 million or $0.25 per share.

Turning to Slide 26, let's discuss GECC's distribution policy and declared distributions to-date. GECC continues to pay an $0.083 per share monthly base distribution that sums to $1 per share per year. In December, we announced a special distribution of $0.24 per share bringing 2018's total distributions to $1.24 per share. The past 12 month's total distributions represent an 11.3% dividend yield on the March 31, 2019, NAV and an approximate 15% dividend yield on the quarter-end market value.

Slide 27 shows GECC's full distribution history and overlays what the annual distribution yield was as a percentage of the market price. GECC's substantial special distributions in each of the past 2 years, when combined with the monthly base distributions, have driven annual distribution yields well north of 10% in each full year since inception.

Slide 28 illustrates our historic distribution coverage. Again, it's important to emphasize that NII has covered the base distribution every quarter since inception in 2016.

Finally, please turn to Slide 30 for a GECC summary. Our Board has set the third quarter 2019 distributions at $0.083 per share per month. Also importantly, GECC insiders own greater than 20% of GECC's outstanding shares, fostering an alignment of interest between insiders and other shareholders. Furthering that alignment of interest to-date, GECC has repurchased approximately 20% of its initial share count. The weighted average current yield on our portfolio of secured loans and bonds is greater than 11%, and the IRR on our growing pool of realized investments is a substantial 22%.

A summary of the investments monetized in the first and partial second quarter of 2019 is set forth in the appendix. Thank you, all, for joining us this morning. We continue to be excited about the upside potential in the portfolio as well as with the progress we have made monetizing legacy positions. We believe that we have created a significant alignment of interest with you, our shareholders. Thank you, again, for the support and confidence that you have placed in us.

With that, we'll turn the call over to the operator to open for questions.

(Operator Instructions) And I am showing no questions from our phone lines today. I now like to turn the conference back over to Adam Yates for any closing remarks.

Thank you, again, for joining us this morning. We look forward to continued dialogue, and please let us know if we can be helpful with anything in follow up.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.