Earnings call: Great Elm Group reports strong fiscal Q4 with AUM growth

Great Elm Group, Inc. (GEG) concluded fiscal year 2024 on a strong note with significant growth in both assets under management (AUM) and revenue. The company’s fiscal fourth quarter earnings call highlighted a year of strategic milestones, including substantial capital raises for its business development company (BDC), Great Elm Capital Corp (GECC), and the successful launch of new platform businesses. Despite reporting a net loss for the year due to accounting rules on investments, the company’s management team expressed confidence in the temporary nature of these unrealized losses and anticipates a reversal as distributions from the BDC increase.

Key Takeaways

• Great Elm Group’s fiscal fourth quarter 2024 revenue tripled year-over-year to $9 million.
• Fee-paying AUM grew by 22% year-over-year, while overall AUM increased by 17%.
• The company reported a net loss from continuing operations of $0.6 million for the quarter, attributed in part to unrealized losses on investments.
• Adjusted EBITDA for the quarter was $1.2 million, compared to $0.4 million in the prior year period.
• Great Elm Group ended the fiscal year with approximately $58 million in cash and marketable securities.

Company Outlook

• Great Elm Group expects continued profitability and growth in its real estate platform, particularly with the build-to-suit (BTS) business.
• The company is poised to accelerate growth in fiscal 2025, leveraging its core alternative credit and real estate businesses.
• Management remains focused on expanding the platform and growing AUM, with an emphasis on pursuing opportunities that offer attractive risk-adjusted returns.

Bearish Highlights

• The company recorded a net loss of $0.9 million for the year, influenced by unrealized losses of $3.8 million, primarily due to accounting treatments of investments in SPVs.

Bullish Highlights

• Great Elm Capital Corp raised over $90 million in fresh capital, growing fee-paying AUM by nearly 30% from the prior year.
• The Monomoy BTS platform realized a gain of over $1 million from its first property sale and has a robust pipeline of approximately 30 projects.
• The Great Elm Credit Income Fund (GECIF) had a solid start, and plans are in place to raise capital in fiscal 2025.

Misses

• The financial accounting rules led to marking the company’s $9 million investment in the SPVs to a lesser value, contributing to the net loss for the year.

Q&A Highlights

• The Q&A session provided further insights into the company’s strategic initiatives and financial performance.
• Management addressed questions regarding the company’s investment strategies and the impact of market conditions on its operations.

Great Elm Group’s fiscal 2024 achievements reflect a strategic focus on expanding its asset management business and driving shareholder value. With a strong balance sheet and a clear vision for growth, the company is well-positioned to capitalize on its alternative credit and real estate platforms in the coming fiscal year.

InvestingPro Insights

Great Elm Group, Inc. (GEG) has made notable strides in fiscal 2024, but it’s crucial for investors to consider a comprehensive view of the company’s financial health and market performance. According to InvestingPro data, GEG’s market capitalization stands at $54.3 million, reflecting the company’s current valuation in the market. Despite the positive revenue growth of 66.76% in the last twelve months as of Q3 2024, GEG’s gross profit margin remains low at 2.55%, signaling potential inefficiencies or competitive pressures affecting profitability.

Investors should also be aware of the company’s price performance, which has seen a decline of 14.15% over the past year, underscoring the market’s reaction to the company’s financial position and future prospects. This is in line with one of the InvestingPro Tips, which notes that GEG’s price has performed poorly over the last decade.

Another InvestingPro Tip highlights that GEG is not profitable over the last twelve months, which aligns with the net losses reported in the article. Additionally, the company’s valuation implies a poor free cash flow yield, which could be a concern for investors looking for healthy cash generation.

For those interested in a deeper analysis, there are additional InvestingPro Tips available that could provide further insights into GEG’s financials and market performance. Visit InvestingPro for a more detailed understanding of Great Elm Group’s strengths and weaknesses in the context of its recent fiscal achievements.

Full transcript – Great Elm Group Inc (NASDAQ:) Q4 2024:

Operator: Greetings. Welcome to the Great Elm Group’s Fiscal Fourth Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I’ll now turn the conference over to Adam Yates, Managing Director. Adam, you may now begin.

Adam Yates: Good morning, everyone. Thank you for joining us for Great Elm Group’s fiscal fourth quarter 2024 earnings conference call. As a reminder, this conference call is being recorded on Friday, August 30, 2024. If you would like to be added to our distribution list, you can e-mail geginvestorrelations@greatelmcap.com, or you can sign up for alerts directly on our website, www.greatelmgroup.com. The slide presentation accompanying today’s conference call and webcast can be found on our website under Events and Presentations. A link to the webcast is also available on our website as well as in the press release that was disseminated to announce the quarterly results. Today’s conference call includes forward-looking statements, and we ask that you refer to Great Elm Group’s filings with the SEC for important factors that could cause actual results to differ materially from these statements. Great Elm Group does not undertake to update its forward-looking statements unless required by law. In addition, during today’s call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in our earnings release. To obtain copies of our SEC filings, please visit Great Elm Group’s website under Financial Information and select SEC filings. On the call today, we have Jason Reese, CEO; Adam Kleinman, President and General Counsel; Nichole Milz, COO; and Keri Davis, CFO. I will now turn the call over to Jason Reese, CEO.

Jason Reese: Welcome, everyone, and thank you for joining us today. Fiscal year 2024 was a defining year for Great Elm. Our management team was able to focus on growing a streamlined, pure-play asset management business and driving shareholder value. Looking back, we delivered an excellent fiscal 2024 as we’re able to improve profitability, expand our platform businesses and materially grow our assets under management. I would like to highlight several key milestone achievements this fiscal year. Most notably, our BDC Great Elm Capital Corp raised over $90 million in fresh capital from February to July 2024, significantly growing fee-paying assets under management by nearly 30% from prior year. This growth was accomplished through a series of capital raises made possible by an innovative structure that provided $36 million of equity capital for GECC. First, in February, GECC raised $24 million of equity capital through Great Elm Strategic Partnership I, LLC. GEG supported this capital raise by investing $6 million along with an institutional investors $18 million investment in the SPV, which in turn invested in $24 million of new GECC common shares at net asset value. GECC continued to utilize the structure as a template for a second equity capital raise in June. In this transaction, GECC raised $12 million of capital at NAV via Prosper Peak Holdings, LLC. GEG made a $3 million investment into the SPV alongside a $9 million investment from other institutional investors. We were able to raise capital at these SPVs due to our strategic relationships with sophisticated institutional investors and GECC’s continued improved performance. We continue to work with our strategic partners to further enhance their relationship with Great Elm, which we believe will provide additional benefits over time for both parties. Additionally, in April, GECC completed an underwritten public offering of $34.5 million of 5-year notes at a more than 50 basis point spread improvement as compared to GECC’s August 23 note issuance. GECC subsequently issued an additional $22 million of notes through a registered direct offering to an institutional investor in July. Accomplishing these capital raises at NAV and improved financing rates were huge success for Great Elm Group and clear evidence of our commitment to further scale GECC. These capital raises are integral to our business as we expand GEG’s ability to earn fee revenue from GECC, providing both substantial recurring asset management fee revenue and potential incentive fee revenue from the incremental capital. In addition, GEG continues to maintain a material direct investment in GECC and received $2.3 million of dividend income in fiscal year 2024, inclusive of a special dividend paid in December 2023. Looking ahead, we believe our BDC is well positioned to generate attractive risk-adjusted returns for its shareholders and to reach further capital in fiscal 2025. It should be noted that the financial accounting rules guide us to mark our $9 million investment in the SPVs to a material lesser value, creating unrealized losses. These unrealized losses contributed $3.8 million to an overall net loss of $0.9 million for the year. We believe the unrealized losses are temporary and will reverse over time as the SPVs received distributions from the BDC. Our real estate platform continued to expand over the past year. Monomoy BTS had a milestone fourth quarter of fiscal 2024 nearing completion on our two inaugural properties, enclosing our first property sale in June where we realized a gain on sale of over $1 million in a significant IRR. We expect continued profitability in fiscal 2025 as the team focuses on selling its second property in the first half of the year, and begins development on its third contracted design-build project. The build-to-suit pipeline remains robust with approximately 30 specifications entering 2025. We will continue to execute on these development opportunities to further enhance profits at GEG and create value for both our tenants and shareholders. During fiscal 2024, Great Elm launched complementary products and businesses to expand its alternative credit and real estate platform offerings. Back in November 2023, we launched the Great Elm Credit Income Fund, or GECIF. I am pleased to report that after the first eight months of the fund, we have a solid start to build a strong, marketable performance track record and we plan to raise capital conducive in fiscal 2025. Additionally, last quarter, in response to tenant demand, we launched Monomoy BTS Construction Management, a consulting business that enables clients to utilize our experienced team for overseeing in-house construction projects through owner representative services. We began earning fees from this business in fiscal 2024 and are encouraged by the initial demand and growth prospects. Outside of our core business in fiscal fourth quarter, GEG invested $5 million and a 10% preferred financing for CoreWeave, a revolutionary cloud AI start-up backed by other best-in-class institutional investors, including Magnetar and Blackstone (NYSE:). This investment is a testament to the strength of our sourcing capabilities for our Board of Directors in our broader sophisticated network that give us a seat at the table and [prearranged] investment opportunities. Alongside these significant strategic developments, Great Elm Group experienced a strong fiscal fourth quarter in 2024. We continue to grow our fee-paying assets under management on both a sequential quarter and year-over-year basis. Including the net proceeds from GECC’s July capital raise, fee-paying AUM and AUM increased 22% and 17% year-over-year, respectively. We generated total revenue of $9 million tripling revenue from the prior year period and adjusted EBITDA of $1.2 million compared to $0.4 million for the prior year period. We ended the quarter and the year with nearly $60 million in cash and marketable securities to deploy across our growing alternative asset management platform. We improved our capital structure and opportunistically repurchasing over $4 million principal of our 5% convertible notes at 47% of face value and repurchasing 1.2 million shares of GEG common stock in the market for $2.1 million as part of our stock repurchase program. We are pleased with the continued performance of our credit and real estate verticals in the fiscal fourth quarter and seek to further accelerate the momentum at these key businesses. GECC had another successful quarter while raising ample capital and substantially increasing the scale of our platform. In April, GECC further expanded its reach into CLOs forming a strategic joint venture with an institutional partner to make investment in CLOs and related warehouse facilities. The JV is beginning to receive sizable distributions from CLO investments and we expect there will be a source of increasing income at GECC in the coming quarters. GECC’s performance in fiscal 2024 supported the payment of incentive fees to GEG totaling $2.7 million over the last 12 months. GECC remains well positioned to continue delivering fee revenues to GEG given the successful portfolio repositioning and recent expansion into CLO products. Combined, these initiatives should drive increased fee revenue as the BDC scales. Monomoy REIT put up solid performance over fiscal 2024. Over the last 12 months, the REIT deployed $25 million of capital to acquire 13 existing properties, amended 16 existing tenant leases for meaningful term extensions and expansion projects executed renewal options at 12 properties with key tenants and entered into four new leases. Also, approximately 70% of the REIT’s portfolio saw rental rate increases from value-added services, lease renewals and contractual step-ups, private property management fee growth. Lastly, Monomoy successfully refinanced a sizable debt facility without any material impact to annual debt service and freed up an additional $10 million of growth capital. As referenced earlier, our build-to-suit business achieved a meaningful milestone with our first property sale. With the anticipated sale of our second property in fiscal 2025. Our third attractive project under development and a meaningful pipeline of new projects, we’re extremely encouraged by GEG’s future growth potential with BTS and construction management, and our opportunity for creating shareholder value with this business in fiscal 2025 and beyond. I’d like to conclude by revisiting the three driving goals we’ve consistently outlined. Enhance our financial performance, expand our platform and grow our assets under management. I’m extremely pleased with our achievements toward our goals in fiscal 2024. After divesting our non-core businesses in fiscal 2023, our accomplishments underscore our commitment to reposition Great Elm in the alternative asset management space by growing our core alternative credit and real estate businesses and adding accretive differentiated products. Additionally, we continue to actively evaluate multiple strategic initiatives. Moving ahead, we remain steadfast in pursuing opportunities to expand our businesses and allocate capital to promising new platform opportunities offering attractive risk-adjusted returns. We are very excited about the future of Great Elm and we are well positioned to accelerate our growth in fiscal 2025. With that, I’ll turn it over to Keri.

Keri Davis: Thank you, Jason. I’ll provide a brief overview of the quarter and of course, welcome all of you to review our filings in greater detail or reach out to our team with any questions. Fiscal fourth quarter revenues tripled year-over-year to $9 million, driven by the Monomoy BTS property sale. AUM of $727 million as of June 30, 2024, was up 6% from the prior quarter end, and up 14% from the prior year-end while fee-paying AUM grew to $524 million, up 6% quarter-to-date and up 17% from the prior year-end. Including the net proceeds for GECC’s July capital raise, AUM was $749 million, up 9% from March 31 and 17% from the prior year quarter end, and fee-paying AUM was $546 million, up 11% from March 31 and 22% from the prior year quarter end. Great Elm Group generated a net loss from continuing operations of $0.6 million for the quarter as compared to $5.3 million loss for the prior year period. As previously mentioned, this quarter’s loss includes $1.1 million in unrealized loss on Great Elm’s investment in Prosper Peak Holdings, LLC. Adjusted EBITDA for the quarter was $1.2 million compared to $0.4 million in the prior year period. As of June 30, we had approximately $58 million of combined cash and marketable securities on our balance sheet to deploy across our growing alternative asset management platform. Please refer to Slide 7 that provides an overview of our financial position and highlights our book value per share of approximately $2.06. This concludes my financial review of the quarter. With that, we will turn the call over to the operator to open for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. At this time, I’ll turn the floor back over to Jason Reese for closing remarks.

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Jason Reese: Thank you again for joining us today, and we look forward to speaking with you in the future.

Operator: This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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