Great Elm Capital Group, Inc. (NASDAQ:GEC) (“Great Elm”)
announced today that it reported results on Friday, February 9,
2018 for its second fiscal quarter ended December 31,
2017.
Great Elm is also excited to announce that it
has closed the first transaction in its real estate platform by
partnering with a leading investor in the Credit Tenant Lease
(“CTL”) space to recapitalize the Gartner I and Gartner II office
buildings and associated property in Fort Myers, Florida.
Great Elm’s real estate strategy is to build a diversified
portfolio of high-quality, income-producing properties which are
leased to credit-worthy tenants such as Gartner, Inc.
(“Gartner”). Please refer to the “Real Estate” section
below for more detail. Great Elm estimates, based on the base case
assumptions set forth herein, that this investment will generate an
IRR in excess of 20%, a cash-on-cash return of 12x and NOL
utilization of approximately $50 million.1
In addition, Great Elm announced today that
Great Elm Capital Management, Inc. (“GECM”), a U.S. Securities and
Exchange Commission (“SEC”) registered investment advisor and
wholly owned subsidiary of Great Elm, has entered into new
investment management agreements with an institutional investor to
manage three separate accounts with assets totaling approximately
$33 million (par value). GECM’s investment approach focuses on
applying the principles of value investing to the capital
structures of leveraged middle-market issuers. Please refer
to the “Investment Management” section below for more detail.
Great Elm is a publicly-traded holding company
that is seeking to create long-term shareholder value by building a
business across three verticals: investment management, real
estate, and operating companies.
“We are pleased to announce the closing of the
first transaction in our real estate platform as well as the growth
in our investment management business. The team also continues to
devote substantial time and effort to the acquisition of operating
companies that generate significant earnings,” noted Peter A. Reed,
Great Elm’s Chief Executive Officer and GECM’s Chief Investment
Officer.
Real Estate
Great Elm announced today that it has partnered
with CRIC2 Funds, a leading investor in the CTL space, to
recapitalize the Gartner I and Gartner II Class A office buildings
and associated property (collectively, the “Property”) in Fort
Myers, Florida.
Under the terms of the transaction, Great Elm
will acquire an 80.1% equity interest in the Property for a capital
outlay of approximately $3.0 million. The total value of the
transaction is $61 million, with $57.5 million of non-recourse debt
remaining on the Property. Currently, the Property is leased, on a
triple net basis, to Gartner until March 31, 2030, which date may
be extended in accordance with the lease. Under the terms of
the lease, Gartner is required to make monthly payments,
substantially all of which will be used to service the outstanding
debt on the Property and which Great Elm estimates will generate
$6.1 million of revenue and $1.9 million of net income over the
next 12 months and $74.1 million of revenue and $20.6 of net income
over the remaining term of the lease.
With a credit-worthy tenant in place, the CTL
structure allows Great Elm to finance this transaction with a
significant amount of non-recourse leverage, resulting in the
potential for equity-like returns with limited credit risk and a
modest amount of capital deployed. Furthermore, Great Elm’s
significant tax attributes alleviate one of the most common
concerns for investors in the CTL space: the potential generation
of taxable income that results from the owner’s receipt of lease
payments from the tenant when substantially all of such payments
are used to service the debt on the property. Great Elm
believes that its ability to absorb this “phantom income” should
make it a preferred partner to leading investors and
developers.
“We are excited to announce our first real
estate investment with the closing of the Fort Myers transaction.
We hope this will be the first of many, as we seek to build a
portfolio of high-quality real estate assets,” said Mr. Reed. “Most
importantly, we believe this transaction and our real estate
strategy more broadly will deliver significant, long-term value to
our shareholders.”
For more information on the aforementioned
transaction, please refer to Great Elm’s Current Report on Form 8-K
filed with the SEC on March 6, 2018. Additionally, Great Elm will
be hosting a conference call to discuss the Fort Myers transaction
in greater detail; details below under “Conference Call and
Webcast.”
Earnings
As of December 31, 2017, Great Elm had two
operating segments: investment management and general corporate.
Select financial highlights for investment management are as
follows:
- For the three months ended December 31, 2017, Great Elm
recognized investment management and administration fee revenue of
$2.5 million, up 88% year-over-year as compared to $1.3 million of
revenue generated in the same period in the prior year.2
- For the three months ended December 31, 2017, Great Elm
reported Adjusted EBITDA for its investment management division of
$1.0 million, up 83% year-over-year as compared to $0.6 million of
Adjusted EBITDA generated in the same period in the prior year.2
- For the six months ended December 31, 2017, Great Elm
reported Adjusted EBITDA of $1.5 million, as compared to $0.6
million of Adjusted EBITDA generated in the same period in the
prior year. 2
- For the three months ended December 31, 2017, Great Elm
reported Net Income for its investment management division of $0.15
million, as compared to ($0.8 million) of Net Loss generated in the
same period in the prior year.2
- For the six months ended December 31, 2017, Great Elm reported
a Net Loss for its investment management division of ($1.5)
million, as compared to ($0.8 million) of Net Loss generated in the
same period in the prior year. 2
Great Elm believes that a rising rate
environment should be positive for GECC’s fee generation, which in
turn should increase GECM’s earnings. Based on GECC’s portfolio as
of September 30, 2017, assuming no other changes to the portfolio,
an increase in LIBOR of 100 basis points would result in an
increase of $0.8 million of Net Investment Income (“NII”). An
increase in LIBOR of 200 basis points would result in an increase
of $1.6 million of NII and an increase of 300 basis points would
result in an increase of $2.4 million of NII.3
“These operating results highlight the
attractiveness of investment management for Great Elm: the
opportunity to grow revenues with strong profit margins and limited
capital requirements by leveraging the skills and experience of our
seasoned investment team,” noted Mr. Reed.
Investment Management
GECM also announced today that it has entered
into investment management agreements (the “IMAs”) to manage three
separate accounts with assets totaling approximately $33 million
(par value) for an institutional investor.
Formed in 2016, GECM is also the external
manager of Great Elm Capital Corp. (NASDAQ:GECC), a publicly traded
business development company with approximately $218.3 million in
gross assets under management as of September 30, 2017. With the
closing of the aforementioned IMAs and the previously announced
baby bond issuance by GECC in January 2018 (NASDAQ:GECCM), GECM’s
gross assets under management have grown by over 10% in the past
year.
“We are excited to announce this new investment
management relationship and believe that the opportunity to partner
with such a prestigious institutional investor is a testament to
our team and our expertise in navigating complex, leveraged,
special situations investment opportunities,” said Mr. Reed. “We
view this as the first of many growth opportunities for the Great
Elm investment management platform.”
Conference Call &
Webcast
Great Elm will host a conference call and
webcast on Wednesday, March 7, 2018 at 4:00 p.m., New York City
time, to discuss the Fort Myers transaction in greater detail. All
interested parties are invited to participate in the conference
call by dialing +1 (844) 820-8297; international callers should
dial +1 (661) 378-9758. Participants should enter the Conference ID
8987517 when asked. For a copy of the slide presentation that will
be referenced during the course of our conference call, please
visit: www.greatelmcap.com under Downloads: Investor Relations or
email investorrelations@greatelmcap.com. Additionally, the
conference call will be webcast simultaneously at:
https://edge.media-server.com/m6/p/pswt4ifn.
About Great Elm Capital Group,
Inc.
Great Elm Capital Group, Inc. (NASDAQ:GEC) is a
publicly-traded holding company that, through its wholly owned
subsidiary, Great Elm Capital Management, Inc., conducts an
investment management business focused on leveraged finance. Great
Elm is also seeking to build a business across both real estate
assets and operating companies. Great Elm Capital Group’s
website can be found at www.greatelmcap.com.
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995
Statements in this press release that are
“forward-looking” statements, including statements regarding
expected revenue, taxable income and net income, involve risks and
uncertainties that may individually or collectively impact the
matters described herein. Investors are cautioned not to place
undue reliance on any such forward-looking statements, which speak
only as of the date they are made and represent Great Elm’s
assumptions and expectations in light of currently available
information. These statements involve risks, variables and
uncertainties, and Great Elm’s actual performance results may
differ from those projected, and any such differences may be
material. For information on certain factors that could cause
actual events or results to differ materially from Great Elm’s
expectations, please see Great Elm’s filings with the SEC,
including its most recent annual report on Form 10-K and subsequent
reports on Forms 10-Q and 8-K. Additional information relating to
Great Elm’s financial position and results of operations is also
contained in Great Elm’s annual and quarterly reports filed with
the SEC and available for download at its website
www.greatelmcap.com or at the SEC website www.sec.gov.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in
filings with the SEC, and in public disclosures, of financial
measures that are not in accordance with US GAAP, such as adjusted
earnings before interest, taxes, depreciation and amortization
(“Adjusted EBITDA”). Adjusted EBITDA is derived from methodologies
other than in accordance with US GAAP. Great Elm believes that
Adjusted EBITDA is an important measure for investors to use in
evaluating Great Elm’s businesses. In addition, Great Elm’s
management reviews Adjusted EBITDA as they evaluate acquisition
opportunities.
Adjusted EBITDA has limitations as an analytical
tool, and you should not consider it either in isolation from, or
as a substitute for, analyzing Great Elm’s results as reported
under US GAAP. Non-GAAP financial measures reported by Great Elm
may not be comparable to similarly titled amounts reported by other
companies.
Set forth below is a reconciliation of Adjusted
EBITDA to the most directly comparable GAAP financial measure, net
income. The information in the table below includes forecasts,
projections and other predictive statements that represent Great
Elm’s assumptions and expectations in light of currently available
information. These forecasts, projections and other predictive
statements involve risks, variables and uncertainties. Great Elm’s
actual performance results may differ from those projected in in
the table below, and any such differences may be material.
|
|
For the Three Months
EndedDecember 31, 2017 |
|
|
For the Three Months
EndedDecember 31, 2016 |
|
Dollar amounts
in thousands |
|
InvestmentManagement |
|
|
GeneralCorporate |
|
|
Total |
|
|
InvestmentManagement |
|
|
GeneralCorporate |
|
|
Total |
|
Net income
(loss) - US GAAP |
|
$ |
150 |
|
|
$ |
(1,352 |
) |
|
$ |
(1,202 |
) |
|
$ |
(832 |
) |
|
$ |
(7,302 |
) |
|
$ |
(8,134 |
) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) - US
GAAP |
|
$ |
150 |
|
|
$ |
(1,352 |
) |
|
$ |
(1,202 |
) |
|
$ |
(832 |
) |
|
$ |
(7,302 |
) |
|
$ |
(8,134 |
) |
Interest |
|
|
37 |
|
|
|
— |
|
|
|
37 |
|
|
|
67 |
|
|
|
2,583 |
|
|
|
2,650 |
|
Taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Depreciation and
amortization |
|
|
133 |
|
|
|
— |
|
|
|
133 |
|
|
|
1,018 |
|
|
|
— |
|
|
|
1,018 |
|
EBITDA: |
|
$ |
320 |
|
|
$ |
(1,352 |
) |
|
$ |
(1,032 |
) |
|
$ |
253 |
|
|
$ |
(4,719 |
) |
|
$ |
(4,466 |
) |
Adjusted
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
320 |
|
|
$ |
(1,352 |
) |
|
$ |
(1,032 |
) |
|
$ |
253 |
|
|
$ |
(4,719 |
) |
|
$ |
(4,466 |
) |
Stock based
compensation |
|
|
719 |
|
|
|
208 |
|
|
|
927 |
|
|
|
317 |
|
|
|
151 |
|
|
|
468 |
|
Unrealized loss on
investment in GECC |
|
|
— |
|
|
|
1,180 |
|
|
|
1,180 |
|
|
|
— |
|
|
|
7,049 |
|
|
|
7,049 |
|
Non-reimbursable MAST
Capital expenses |
|
|
4 |
|
|
|
39 |
|
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Re-measurement of
warrant liability |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
|
|
(11 |
) |
Adjusted
EBITDA |
|
$ |
1,043 |
|
|
$ |
75 |
|
|
$ |
1,118 |
|
|
$ |
570 |
|
|
$ |
2,470 |
|
|
$ |
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
EndedDecember 31, 2017 |
|
|
For the Six Months
EndedDecember 31, 2016 |
|
Dollar amounts
in thousands |
|
InvestmentManagement |
|
|
GeneralCorporate |
|
|
Total |
|
|
InvestmentManagement |
|
|
GeneralCorporate |
|
|
Total |
|
Net loss - US
GAAP |
|
$ |
(1,477 |
) |
|
$ |
(3,109 |
) |
|
$ |
(4,586 |
) |
|
$ |
(832 |
) |
|
$ |
(10,717 |
) |
|
$ |
(11,549 |
) |
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss - US GAAP |
|
$ |
(1,477 |
) |
|
$ |
(3,109 |
) |
|
$ |
(4,586 |
) |
|
$ |
(832 |
) |
|
$ |
(10,717 |
) |
|
$ |
(11,549 |
) |
Interest |
|
|
135 |
|
|
|
— |
|
|
|
135 |
|
|
|
67 |
|
|
|
6,036 |
|
|
|
6,103 |
|
Taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Depreciation and
amortization |
|
|
313 |
|
|
|
— |
|
|
|
313 |
|
|
|
1,018 |
|
|
|
— |
|
|
|
1,018 |
|
EBITDA: |
|
$ |
(1,029 |
) |
|
$ |
(3,109 |
) |
|
$ |
(4,138 |
) |
|
$ |
253 |
|
|
$ |
(4,681 |
) |
|
$ |
(4,428 |
) |
Adjusted
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(1,029 |
) |
|
$ |
(3,109 |
) |
|
$ |
(4,138 |
) |
|
$ |
253 |
|
|
$ |
(4,681 |
) |
|
$ |
(4,428 |
) |
Stock based
compensation |
|
|
2,271 |
|
|
|
413 |
|
|
|
2,684 |
|
|
|
317 |
|
|
|
333 |
|
|
|
650 |
|
Unrealized loss on
investment in GECC |
|
|
— |
|
|
|
1,534 |
|
|
|
1,534 |
|
|
|
— |
|
|
|
7,049 |
|
|
|
7,049 |
|
Non-reimbursable MAST
Capital expenses |
|
|
281 |
|
|
|
128 |
|
|
|
409 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Re-measurement of
warrant liability |
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
(11 |
) |
|
|
(11 |
) |
Adjusted
EBITDA |
|
$ |
1,531 |
|
|
$ |
(1,034 |
) |
|
$ |
497 |
|
|
$ |
570 |
|
|
$ |
2,690 |
|
|
$ |
3,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Case Assumptions:
1.
Purchase price of the Property: $61.2
million2.
Sale price of the Property upon lease expiration in 2030: $83.6
million3.
Capitalization rate of approximately 6.4% is held constant from
purchase to
sale4.
2% gross brokerage fee in the event of a sale of the
Property5.
Priority of payments to the equity in the event of a sale of the
Property:a. GEC priority
return of invested
capitalb.
Minority equity 7% Management Feec.
Remaining balance to be split 80.1% to GEC and 19.9%
to minority holders
Media & Investor
Contact:
Great Elm Capital
Group
Meaghan K. Mahoney Senior Vice President
+1 617
375-3006
mmahoney@greatelmcap.com or investorrelations@greatelmcap.com
1 There are no assurances that such estimates will be achieved.
See “Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995” on page 4 and “Base Case Assumptions” on Page
6.
2 The quarter ended December 31, 2016 was a partial period for
investment management fees with the closing of the merger with Full
Circle Capital Corporation on November 3, 2016.
3 Please refer to Great Elm Capital Corp.’s Form 10-Q Filed on
November 6, 2017.
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