Great Elm Group - Earnings Call - Q2 2025

Executive Summary

• Revenue grew 24% year over year to $3.50M, with net income from continuing operations of $1.40M and diluted EPS of $0.04; sequentially, revenue declined versus Q1 due to fewer monetizations at Monomoy BTS relative to the prior quarter’s property sale-driven contribution.
• Fee-paying AUM/AUM reached $538M/$751M (+17%/+14% YoY), supporting higher management and incentive fees; GECC base fees rose 33% YoY to $1.20M and incentive fees were $0.50M in the quarter.
• Strategic expansion: GEG acquired Greenfield CRE and launched Monomoy Construction Services to integrate construction management capabilities, expected to add accretive fee revenue and operating efficiencies.
• Capital allocation: GEG repurchased ~4.1M shares for $7.4M at $1.83 average; book value per share was $2.30; cash totaled ~$44M to fund growth initiatives.
• Potential stock reaction catalysts: Integrated real estate platform (MCS) formation, continued AUM growth and fee momentum, and GECC’s distribution increase to $0.37 plus a $0.05 special dividend that underscores credit platform strength.

What Went Well and What Went Wrong

What Went Well

• “We delivered a solid fiscal second quarter 2025, continuing our positive momentum by expanding our assets under management, growing revenue across our credit and real estate businesses and generating strong returns on our investments.” — CEO Jason Reese.
• Fee engine strengthening: GECC base management fee up 33% YoY to $1.20M, and ~$0.50M incentive fees accrued, reflecting higher FPAUM and portfolio performance.
• Platform expansion: Acquisition of Greenfield CRE and formation of Monomoy Construction Services to offer full-service construction and owner-rep consulting, expected to be accretive and improve operational efficiency.

What Went Wrong

• Sequential revenue decline: Q2 revenue of $3.50M vs. Q1 revenue of $3.99M as Q1 benefited from Monomoy BTS monetizations and incentive fee timing; Q2 lacked similar property sale scale.
• Core operating loss persisted: Q2 operating loss was $(1.98)M, with interest expense of $(1.03)M, highlighting ongoing pressure from operating costs and capital structure despite positive investment gains.
• Limited market interaction: No analyst Q&A on the call, and no formal guidance issued, limiting visibility into forward metrics and drivers.

Transcript

Operator (participant)

Greetings and welcome to the Great Elm Group Fiscal 2025 second quarter conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Yates, Managing Director. Thank you. You may begin.

Adam Yates (Managing Director)

Good morning, everyone. Thank you for joining us for Great Elm Group's Fiscal Second Quarter 2025 Earnings Conference Call. As a reminder, this conference call is being recorded on Thursday, February 6th, 2025. If you would like to be added to our distribution list, you can email GEG Investor Relations at 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. Today's comments do not constitute an offer to sell or a solicitation of an offer to buy interest in any investment vehicle managed by Great Elm or its affiliates. Any such offer or solicitation will only be made pursuant to the applicable offering documents for such investment vehicle. 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 (CEO)

Welcome, everyone, and thank you for joining us today. We delivered a solid fiscal second quarter 2025, marked by significant year-over-year growth in both assets under management and revenue across our businesses, building on last quarter's momentum. We continue to evolve as a streamlined alternative asset management business, and our solid foundation leaves us well positioned to expand our core credit and real estate platforms while executing on our long-term growth strategy. Among our recent highlights, earlier this week, we announced the launch of Monomoy Construction Services with the strategic acquisition of Greenfield CRE, a leading construction management company. Great Elm Capital Corp, our BDC, raised an additional $13.2 million of equity at net asset value in December, its third equity capital raise in calendar 2024. We continue to grow our assets under management, increasing our fee-paying AUM by 17% on a year-over-year basis.

We generated total revenue of $3.5 million, growing 24% year-over-year. We completed construction of and are working to sell our second Monomoy build-to-suit property for a potential gain. We surpassed double-digit net returns in Great Elm Credit Income Fund, or GSIF, since our inception through December 31st. We continue to repurchase shares at a meaningful discount to book value, executing on our expanded $20 million buyback authorization, and we ended the quarter in a strong financial position with over $44 million in cash available to facilitate continued growth across our asset management platforms. Diving into the quarter in more detail, fee-paying assets under management continued to grow and reached approximately $538 million, representing a 17% increase over the prior year period, primarily driven by our BDC. In December 2024, GECC raised $13.2 million of equity capital at net asset value through another SPV, Summit Growth Partners.

This brings total capital raised at GECC through equity and debt issuances to over $147 million in the last year. GEG supported the December raise with a $3.3 million investment into the SPV, alongside an approximately $10 million investment from other institutional investors. GEG has now participated in a total of three equity raises at GECC, with a combined investment of approximately $12 million, facilitating an increase in fee-paying assets under management at GECC of greater than 40%. GECC also continued to perform well, as evidenced by its ability to raise capital in the recently announced 5.7% increase to the quarterly base distribution to $0.37 per share for the first calendar quarter of 2025. Since the refresh of the management and the board in March 2022, GECC has nearly doubled its net asset value, delivering meaningful value to shareholders as it continues to expand its portfolio and leverage its infrastructure.

In addition to its base distribution, GECC declared a special cash distribution of $0.05 per share in December 2024, driven by the portfolio's strong income generation throughout 2024. Overall, GECC's recent successes are fundamental to our growth strategy. The increased capital base expands our fee-paying AUM, driving both higher recurring management fees and incentive fee potential. Notably, our base management fee from GECC grew 33% year-over-year to $1.2 million, and we earned approximately $0.5 million in incentive fees this quarter. GSIF, our private credit fund, has delivered a strong return on invested capital of approximately 13.9% net of fees since inception in November 2023. With these strong returns and a now-established track record, we are well positioned to attract new capital and further scale the fund. Meanwhile, our real estate business, Monomoy, also continued to deliver strong results.

With the completion of our second design-build project, we anticipate continued profitability across Monomoy's platform as we focus on selling our second build-to-suit project and work towards the development of our third contracted design-build project. With a strong pipeline of build-to-suit opportunities, we remain committed to executing on these development projects to drive profitability and deliver value for both our tenants and shareholders. Further building on strategic growth initiatives, on February 4, we significantly expanded our real estate capabilities through the acquisition of Greenfield CRE, a leading construction management company and a long-standing partner of Monomoy. Greenfield has a deep knowledge of our development projects, a strong understanding of our tenant needs and expectations, and a proven track record of delivering on Monomoy's high standards.

In connection with this transaction, we launched Monomoy Construction Services, or MCS, and combined the assets of Greenfield CRE with the assets of our Monomoy BTS Construction Management business. MCS meaningfully bolsters our real estate platform by creating a fully integrated, full-service construction vertical to serve our existing asset management entities, and we expect our close relationship with the Greenfield team to make for a seamless integration. Additionally, MCS expands our third-party owner-represented consulting services, adding accretive fee revenue opportunities while improving our operational efficiency through economies of scale. We expect this transaction to enhance our construction management expertise by adding to Monomoy's existing civil engineering and land planning talent, expanding our scope of services, and fortifying our overall real estate value proposition to our investors and clients. Additionally, Monomoy REIT continues to execute.

We closed on three property purchases for approximately $3.8 million and maintain a strong pipeline of transaction opportunities and open requirements from our tenants. We have several value-added acquisitions under contract that we expect to close over the next six months. Outside of our core businesses, we have made significant progress in repurchasing shares under our expanded $20 million buyback. Through February 4th, we have repurchased approximately 4.1 million shares for $7.4 million at an average price of $1.83 per share, representing an approximately 20% discount to our book value of $2.30 per share. Additionally, GEG has continued to experience outsized returns on its unique investments, such as the convertible preferred financing for CoreWeave and a private fund managed by Stone Ridge Asset Management, a best-in-class reinsurance manager.

These investments further enhance our shareholder value and are a testament to the strength of our sourcing capabilities for our board of directors and broader sophisticated network, which gives us a seat at the table in unique investment opportunities. We continue to maintain a strong balance sheet and capital position with over $44 million of cash. Our ample liquidity enables us to support future growth initiatives across our alternative asset management platform. In closing, we are pleased with the performance of our credit and real estate businesses this quarter. The acquisition of Greenfield CRE strengthens our real estate capabilities, while GECC's continued growth demonstrates our momentum in credit. We remain focused on our core objectives: enhancing financial performance, expanding our platform, and growing AUM. Looking ahead, we will continue to evaluate strategic opportunities to expand our businesses and accretive differentiated product offerings with attractive risk-adjusted return profiles.

With that, I'll turn it over to Keri.

Keri Davis (CFO)

Thank you, Jason. I will 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 second quarter revenues grew 24% to $3.5 million from the prior year period, primarily driven by increased revenue from Monomoy BTS alongside a pickup in management fees from GECC. AUM and fee-paying AUM totaled approximately $751 million and $538 million, up 14% and 17% respectively from the prior year quarter end. Great Elm Group generated net income from continuing operations of $1.4 million for the quarter, as compared to a net loss from continuing operations of $0.2 million for the prior year period. Adjusted EBITDA for the quarter was $1 million compared to $0.6 million in the prior year period.

As of December 31, we had approximately $44 million of cash 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 $2.30. This concludes my financial review of the quarter. With that, we will turn the call over to the operator to open for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. There are no questions at this time. I would like to turn the floor back over to Jason Reese, CEO, for closing comments.

Jason Reese (CEO)

Thank you again for joining us today. We look forward to speaking with you soon.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.