ECN Capital Corp
TSX:ECN
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ECN Capital Corp
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Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Second Quarter 2019 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the meeting over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.
Thank you, Operator. Good afternoon, everyone. Thank you for participating in our conference call to discuss ECN Capital's Second Quarter 2019 Results announced earlier today. Joining us are Steve Hudson, Chief Executive Officer; and Michael Lepore, Chief Financial Officer.A news release summarizing these results was issued this afternoon, and the financial statements and MD&A for the 3-month period ended June 30, 2019, have been filed with SEDAR. These documents are available on our website, at www.ecncapitalcorp.com. Presentation slides to be referenced during this call are accessible in the webcast as well as in the PDF format under the Presentations section of the company's website.Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I will refer you to the Cautionary Statements section of the MD&A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectation of any forward-looking statements will prove to be correct.You should note that the company's earnings release, financial statements, MD&A and today's call include references to a number of non-IFRS measures which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A.You should also note that as of January 1, 2018, the company changed its presentation in functional currency from Canadian dollars to U.S. dollars. In addition, readers should note that legacy operations have been discontinued and are classified as held-for-sale as of fourth quarter of 2018. All figures are presented in U.S. dollars unless explicitly noted.With these introductory remarks complete, I'll now turn the call over to Steven Hudson, Chief Executive Officer.
Thanks, John. We are pleased to share with you our second quarter results. I would sum these up as strong, clean and robust.Turning to Page 8, with respect to Service Finance. Second quarter results were in line with our expectations. We are reiterating our full year guidance. We've seen strong dealer growth.Adjusted operating income before tax of $15.9 million, which includes $400,000 of onetime expenses related to the discontinuance of PACE, which we spoke about in earlier quarters. Origination growth was at 20.5%; if you exclude PACE, 26.7%. Then again strong growth in EBITDA of 23%.A key measure that I look at in assessing the strength of the company are approved home improvement loans waiting project completion. We've approved the customer, we've approved the loan, but the project is not yet complete. That year-to-date number year-over-year is up 30%. That gives me strong confidence in the second half of 2019.Turning to Page 9, looking a little bit at Lennox, if you will. Lennox volumes were unseasonably cool in May and June, as was reported by Lennox. The good news is it's hot across the entire nation, and we've seen a very strong recovery in July. Year-over-year, the numbers are up significantly, and we're very happy with the progress on this important client for Service Finance.As we discussed in previous calls, with respect to solar loans and in light of some undisciplined small competitors' products, we took the proactive measure to increase the price and to increase the FICO score to protect the quality of our prime and super-prime portfolios. As a result, solar represents 23% of Q2 originations, versus 33% in Q2 2018. We think it's a prudent measure to take on behalf of our bank and lifeco partner.Originations excluding PACE were up 31%, adjusted for PACE and for Sears that filed bankruptcy last year. We continue to forecast originations in the $1.6 billion to $1.8 billion for this current fiscal year.Turning to Slide 10, assets -- held-for-trading asset update. Happy to announce that the assets held-for-trading are at $62 million as of today. This has been an important measure for us as we've underwritten prime and super-prime new categories which have turned into flow programs.We recently launched a new program called Complimentary Flow, and those are high-FICO, similar credit, similar arrears, similar loss experience, but would have 1 item where they don't qualify for the Flow program. 2 examples that we give you is that if a loan is for $40,001, it will not qualify to go through our current round-robin. We have 2 bank partners who elected to pick up those loans. Again, same FICO, same credit, same super prime and prime.We sold $51 million of those Complimentary loan products. We look forward to continuing those programs with our flow partners as we progress through the rest of the year.Page 11, with respect to current programs and gain on sale. Just to note that of the 90% flow business, we've seen a very steady margin in the 3% to 3.5%, as shown in the lower-right chart. It's been a very predictable business, and we're quite happy with the predictability in the flow of this margin.As you note, solar and Complimentary Flow programs have a lower cost of sale -- gain on sale, which reduces, overall. But more importantly, it's incremental to our funding partners. These programs create additional revenue from existing capacity we have within the Service Finance system and our funders.12 is a placeholder. It shows the strong growth on a quarterly and monthly basis.Turning to Slide 13, Kessler Group had second quarter results ahead of expectations. We as well are reiterating our full year guidance. EBITDA margins of [ almost ] 56% reflect strong ongoing performance and better revenue performance -- sorry, operating efficiencies.We mentioned an expanded strategic partnership with a large U.S. bank in the fourth quarter. That has begun to bear fruit. We've begun to earn additional fee income from exclusive mandates awarded to us for the sale of portfolios pursuant to that expanded program.An update on our credit card investment platform. We discussed that at our Investor meeting in Boca back in January. Kessler Group has partnered with several institutional investors to originate, syndicate and advise on 3 portfolios totaling $0.6 billion. Kessler Group retained a very modest $600 million coinvestment, which has an 18-month average life. Initial performance has exceeded expectations.Our objective, as I discussed in Boca, is to develop a business model similar to that of Service Finance and Triad where we will originate and manage, as opposed to producing just onetime advisory fees. It looks very promising in the initial development phase.Turning to Page 14, a little on business mix, and this is all due to Scott Shaw and his 45 industrial professionals. We've been able to see a significant improvement in the revenue mix. The strategic partnership revenue and the risk-based multichannel marketing revenue has a 5-year-plus term. So shifting from 66% to 80% makes us feel much better about the revenue flow.We like the advisory revenue. It's onetime-ish. So getting that in the 20% range has been an important accomplishment, and we want to thank our partners in Boston.The pipeline remains robust across the business line for '19 and '20. We're feeling very good about this business for H2 and going into 2020.Page 15, just quickly commenting on Triad. We've seen 13% year-over-year growth in originations; 23% growth in EBITDA. What's driving the incremental has been the continued improvement on operating leverage (i.e., lower expense) as we grow the book.Happy to announce we've been approved as a servicer for Fannie Mae. That's an important development and a strategic initiative for Fannie to enter the manufactured home sector.Floorplanning, an update. We're at $90 million, with 225 active dealers. I think it's an important note to note that dealers who use Floorplanning are growing 3x faster than dealers not using Floorplan, which was always our intention to launch this foundation product. It's not a business; it's a product, which is intended to drive higher loan originations. We're happy to report that is, in fact, happening.Turning to 16, a similar slide to that of Service Finance, a placeholder. We expect quarterly and monthly originations.With that, Michael, I'm going to pass to you.
Thank you, Steve.So turning to Page 18 for the Q2 consolidated operating highlights. Pleased to report that total originations were $598 million in Q2. That's up 18.4% over Q2 2018, reflecting the strong year-over-year growth at both Service Finance and Triad.Adjusted EBITDA of $32.4 million and adjusted operating income before tax of $24.4 million was up 71% and 122% compared to the same prior year quarter, reflecting the strong operating leverage inherent in our platform.Adjusted EPS available to common shareholders was $0.07, compared to just $0.02 in Q2 2018. On an IFRS basis, EPS was $0.04.It was a very clean quarter with no on-time charges.Moving down, our debt-to-equity ratio was down to 0.49:1, compared to 0.67:1 at Q1 2019, reflecting a reduction in total debt outstanding of approximately $150 million.And book value per share was up to $3.10 per share in U.S. dollars, reflecting the positive earnings for Q2.Turning to Page 19, on the update on the balance sheet. Key items to note are that total assets and total debt are both down by approximately $150 million, reflecting the deleveraging impact associated with the wind-down of our legacy assets and the reduction in on-balance-sheet finance assets at Service Finance. As noted earlier, post quarter end, we have reduced on-balance-sheet loans at Service Finance by an additional $50 million.Turning to Slide 3 (sic) [ Slide 20 ], to give you an update on the consolidated statement of income. Adjusted EBITDA and adjusted operating income before tax, as noted, were up significantly compared to Q2 2018, reflecting the strong year-over-year origination growth at Service Finance and Triad and the strong performance by Kessler for a full quarter in Q2 2019.Operating expenses were higher in the quarter, primarily due to higher expenses at Service Finance and Triad, driven by the revenue growth and the inclusion of a full quarter of Kessler expenses. As you recall, Q2 2018 only reflected 1 month of operating results for Kessler.Turning to Slide 21, on operating expenses. This slide provides a good breakdown of the operating expenses by business segment and corporate. And again here you can see the trends at Service Finance and Triad, up year-over-year reflecting their strong revenue growth; and at Kessler, reflecting the inclusion of a full quarter of operating expenses in Q2 2019.Other item to note is that our corporate operating expenses are below $5 million for the first time, and we believe we will maintain this level on a go-forward basis.Finally, turning to Slide 22. Just to highlight, as we noted, all our legacy businesses are now classified as discontinued operations. So just a quick update on that.Our rail assets remain at approximately $34 million at Q2 and will be sold following the completion of scheduled retrofits that are at the lessees' cost.We were very successful in reducing the total aviation assets, which are down to $182 million at Q2 2019, reflecting approximately a little over $40 million in sales in the quarter that were in line with the valuation levels that we established when we classified these assets as held-for-sale at Q4 2018.In addition, C&V asset balances were down to $11 million at the end of Q2, a reduction of approximately $10 million from the prior quarter. C&V assets are held-for-sale and will also be disposed of in due course.Just to note that the orderly disposition of all of our legacy held-for-sale assets remain on track and in line with our business plan.And with that, I'll turn it back to Steve for a wrap-up.
Thanks, Michael. Slide 24. Pleased to report $0.07 of earnings per share and reconfirming '19 and '20 earnings per share range.It's a solid, clean quarter, as Michael mentioned.Corporate expenses are in line with our undertaking to our shareholders.Service Finance, a solid Q2. Lennox recovery continues. The Complimentary Flow program of high-FICO super-prime credits is a way to utilize existing funding relationships and gain incremental income. And we're very happy with the reduced use of balance sheet in this quarter.Kessler Group is ahead of plan. The expanded strategic bank relationship is bearing significant fruit. And the credit card investment platform is advancing.Triad remains on plan. The Floorplan initiative, our foundation product, is driving exceptional growth, as mentioned earlier.And we're fully funded capacity through 2020 with our funding partners. That means our loan production has been sold through then. That's been delivered across 90-plus financial institutions and supported by our investment-grade rating and $1 billion of backup financing in our senior line.With respect to capital management, we're proud of our record of our quarterly dividend. Our past NCIB, as Michael mentioned earlier, we're renewing that today. We're also in the same normal course issuer. We are renewing our shelf securities. That does not mean that we'll be issuing common equity because we will not be issuing common equity.And before I open the line for questions, let me just draw upon some quick comments on our strong business model, if I could quickly turn you to Page 31 of the deck. There's a lot on this slide, but let me just speak to 4 pillars that I think frame our compliance and our regulatory strength in our business and our underwriting.The first is dealer onboarding. We have a very stringent dealer [ romo ] program that touches among many factors but includes satisfactory trade references, complaint examination, experience, licensing verification, credit checks and satisfactory financial information. We also monitor our dealers continuously. If you have complaints and they're unsatisfied or unresolved, out you go. And everyone goes through an annual certification.Second of all, we are licensed at the kitchen table in all the states for both Service Finance and Triad. We don't rely upon a third-party bank charter for federal preemption.Third, we require all borrowers to sign a truth-in-lending disclosure before the loan is documented and executed.And fourth, and probably the most important part of our regulatory strength, is all borrowers, all borrowers, receive a borrower certification call prior to funding the loan to confirm 2 things: one, the consumer is satisfied with the project or with the manufactured home, and they understand the terms and conditions of the loan.All 4 of those are critically important to our business model.With that, Operator, we'll open the call for questions.
[Operator Instructions] The first question comes from Geoff Kwan of RBC Capital Markets.
My first question was on Service Finance. And just from a funding perspective do you feel that you have the right balance in terms of the aggregate commitments to fund the growth at SFC and at the same time kind of keep those buyers happy with the funding levels that you are giving them? Or do you think that there's still, that you want to kind of expand that network to kind of deepen the buyer pool?
That's a good question, Geoff. We are confident that we are fully funded, and then some, through the end of 2020. As you know, we've introduced some nonbank funders, namely a large life insurer, and we're working on another type of similar funder. We think that's important. We can keep our banks happy as long as we manage expectations.So we're very happy with diversification of our bank partners. We've mentioned for a number of quarters now that strategically it's important to us that we bring the life and pension industry in. We consider one of those boxes ticked and the second box almost ticked.And I think we're in good shape going into 2020, allowing for significant continued growth. When we talk about being fully funded, I am putting a 25% growth factor on the originations for '20.
Okay. And in terms of on M&A appetite, just wanted to get a sense as to how you feel about that, whether or not it's bolt-on deals or if something fit more in the transformational bucket, how you're thinking about that.
Geoff, we're not going to buy GreenSky, Geoff. They originate prime and super-prime loans. But we're very successful. We just need to continue to block and tackle on our current organic growth. We have both a take-share and make-share strategy. Mark has been very effective at it.If a modest size bolt-on came along, and modest size being $100 million to $200 million of annual originations, we would look at it. But we're not going to stretch, we're not going to take integration risk. And we're very comfortable with our strategy. I want to produce several more quarters that are clean like this.
Okay. And if I can sneak in one last question, just if there's any additional color you have on the resignation at the board level.
Karen Martin after 3 years is available to serve as a director. We think Karen has a very unique skill set in the specialty finance sector, I think unparalleled when it comes to U.S. and Canadian markets. We're committed to keeping a small -- a reasonable size board. So Karen became available, and we wanted to be able to use her skillset, Geoff.
And so was it asking Ms. Toth to step down then?
No. No. No. She was looking for other boards, as well. So you can only serve on so many boards. There was nothing adversarial about it.
The next question comes from Vincent Caintic of Stephens Investment Banking.
Two sets of questions. On the first, kind of on what you touched on already. So the industry developments and with GreenSky out there and having kind of a tough quarter and seeing what's happened with their stock yesterday, but I'm actually wanting to focus on maybe some of the advantages to you. So you touched on maybe no M&A, but you've got somebody who kind of deals with these retailers, has bank partnerships. I'm kind of wondering what you can see as maybe some of the developments that can happen that benefits you, and then maybe putting a finer point on some of the differences between the business models.
Thanks, Vincent. So Vincent, I think with respect to the M&A, as I indicated earlier, we have a 30% pipeline increase year-over-year, and some of that is coming, a big chunk of that is coming in the window market, which was a big account somewhere else.So I think we can safely say that we can take share successfully, that we have sufficient funding to take the share because you don't want to take share without the funding. So we have that. And we have the systems to both underwrite and to manage those volumes. I don't think we have to rush at it; we just let it happen.At the same time, as you know, Vincent, we've been successful at making share, which is tougher. That's the likes of Abby and Beacon, where you're creating a program that didn't exist previously.I think it's time to reinforce the strengths of the businesses, to your last comment, which is we pride ourselves and Mark and Ian and Eric and Steve Miner pride themselves in regulatory compliance. And I can't think of another company when we were doing our due diligence almost 3 years ago, 2.5 years ago, where every single customer gets a verification call. And with that verification call, stops any issue about whether people are happy. Is the project on-time, on-budget? Does it work?It also allows us to confirm, even though they signed the TILA form earlier, the truth-in-lending form, it allows us to have that direct conversation. Do you understand how much you borrowed, what the interest rate is and what the repayment terms are?And I think that's a hallmark of compliance in this business. And I'm setting aside the conversation about how we onboard dealers and how we police them. That's all important.But we believe without that confirmatory call, which occurs both at Service and Triad, and I won't comment on our competition, we just think that you need that to be able conduct business.
Okay. Got it. That's very helpful. And the second set of questions, so just on the second quarter, and it maybe 2 parts. But on the -- so you had some nice management and service fee pick up this quarter. I'm just wondering if that is the right run rate to go forward. And then also on the restructuring side. So nice to see that there weren't any adjustments to net income this quarter on the restructuring side. I'm just wondering if you can elaborate on whether there's any more we should be expecting, going forward, or if this was kind of the organic run rate we should be expecting.
It's Michael. I'll take that question. On your first question, on the management and servicing revenue, as you know, it's a priority for us to build our recurring revenue streams, which again is another differentiating factor in our business model. We just don't put gains up at the front of the transaction.So yes, the growth in that reflects the growth in the managed assets, which you can see, as well, that we report on, and we expect to continue to grow those categories, for sure.And on your second question, as I mentioned when I went through it, yes, we believe $5 million is the right quarterly run rate for corporate operating expenses and don't anticipate any other significant onetime restructuring or other charges.
Vincent, if I could just add, could I just add one additional comment to your earlier comment, is that I think one of the other differentiators is our investment-grade rating, which we cherish. And to keep that, which just went through an annual review and just got reconfirmed, it's important. That goes through a review of regulatory compliance, the strength of your underwriting, liquidity, a number of factors. And we think that's a hallmark of our business. When we're pitching very large accounts that potentially are up for, are available now for take-share we think -- I don't think -- we lead with that card every time.
The next question comes from the Tom MacKinnon of BMO Capital Markets.
Just continuing on this change in strategy of one of your competitors, it sounds like they're going to try to move to more of a flow type business. I guess that's sort of similar to what you guys are doing. Is -- what sort of -- do you see that as a disruption in the market? Do you see them as they move more into that model being able to take some business from you? Or do you see this as more of a disruption in the marketplace that is going to cause a shakeout and present an advantage to you? So maybe if you could just talk through those points. Are they going to be starting to be able to take business from you as a result of changing their business to a flow program?
Tom, I think that the flow arrangements, the whole loan sale programs we have which do not have recourse, are not new to us. They've been in place for 50 years at Triad, and they've been in place for 16 years at Service Finance. And the institutions who have been in those programs for the most part have been there forever. So I think they're happy.We think that our programs provide an attractive risk-adjusted return. We think we're proactive by helping our bank and lifeco partners look where we need to adjust pricing, like solar. So I don't see us at risk for any one of those flow partners moving. In fact, we've just been able to add additional banks this past quarter, without going into names, who like our model.And when you come into to join as a new bank partner it's going to take 6 to 9 months to underwrite because you are not going to get recourse with respect to credit or prepayment or anything. So it takes time and effort. So we actually are in the very fortunate position because of the work our partners do, that we have more bank demand than we have supply.So I don't see a disruption on the funding side, at all. I don't comment on their change in model, just not a comment from us.And on the origination side, I think that uncertainty with competitors creates opportunity, and I think we have a strategy for dealing with that.
Okay. That's great. And as a follow-up, the corporate interest charge kind of jumped up quarter-over-quarter, and I think that probably has to do with buying out Kessler's interest. How should we be looking at that in terms of a run rate?
So it jumped up -- even though our debt was down from Q1, the average debt over the quarter was actually slightly higher in Q2. Because if you recall, we did our SID early in January. So that debt was outstanding for all of Q1. And then we did the Kessler buyout in Q1, and then we reduced debt throughout Q2. But it worked out the averages were actually slightly higher. That was why there is a slight uptick.But if you model the closing balance of our debt in Q2, so just over $450 million, I think that's the good, that's a run rate, that's a good run rate to go forward.
Okay. And then, finally, the NCIB. I think you've used about 75% of the last one. You've just launched another one. Are there any constraints to suggest you wouldn't be working into that range for this NCIB?
I think, Tom, we think the stock represents very good value at these levels. And as we're all aware, we are going to have significant excess capital coming into the fourth quarter, for sure. And if we see there's an opportunity to buy our stock because we believe it's below a certain value point, we'll do it. We've been very disciplined on doing it. Again, we won't ever impact our investment-grade rating, but if there's an opportunity we will buy back stock.
Why is there more excess capital coming in the fourth quarter?
We're selling off the legacy assets.
The next question comes from Jaeme Gloyn of National Bank Financial.
First question is on the balance sheet and growth of some of these new initiatives. I'm just wondering if you can give us a little bit more color around where you're expecting to take dealer advances, credit card loans in the Kessler Group. And then the Triad is fairly on point with your previously stated targets. So we can leave that one aside.
That would be good, Jaeme, if we'd just leave Floorplanning apart. Let's just go back to Service Finance and the progress payments or staged payments you're referencing. We have been able to take significant share in the last month, 2 months. Some of these are exclusive programs. We've picked up large national vendors, and we've had to take over their staged-funding programs. So I consider that kind of a one-term increase. It also underpins my 30% increase in the pipeline. So I think the level you're seeing now is kind of where we'll settle out on the advances.With respect to the credit card investment, we've put $60 million to work. It's paying back quickly. It's an area that we're going to approach with caution as we develop the opportunity. We have a working cap internally of not more than $100 million, less than that in the short term. So we're going to be very modest in the use of our capital.Again, we are not making a market in this. We're making a market on behalf of institutional investors where we can get significant income on not just originations but on the management of the book.So very modest capital use here as we further develop the opportunity. And even when it's fully deployed it's still going to be modest. We're not becoming an on-balance-sheet business.
Okay. So to summarize quickly, Service Finance, more or less in the right range. Kessler Group, opportunistic, more or less in the right range still.
Correct. You'll see, just to be clear, you'll see Floorplanning grow in relation to the originations. So if originations were to be, I'm not saying this, but if originations were to be up 40% in the second half, then you'll see a modest increase in Floorplan issue bump that up.
And Floorplan, when you say that you mean the Triad.
Right. I'm sorry. I misspoke. It's the progress pay at Service. I'm kind of indicating to you that I think we'll see the second half of this year with a 30% growth in originations at Service. If for some reason it was higher, then you'll see a modest increase in the progress pay at Service Finance.
Right. Fair enough. In terms of those credit card portfolios, just maybe a couple of comments on the characteristics of the underlying assets: FICO scores, borrower characteristics, geography, things like that.
We don't get into a lot of details, but I would say that they're underwritten -- the portfolios are stressed to the level of the credit crisis and the seller provides credit-supported discount equal to -- you'd have to have a credit experience worse than the credit crisis for us to lose money. Again, they're underwritten on behalf of our institutional investors, not for us. So their underwriting guidelines are very, very strong, very tough. We're not in the subprime business.
Yes, and confident that these loans are money-good and the likelihood of any provisions against them is very limited.
Yes, we don't -- again, the seller is required to have a portfolio that's stressed to the levels of the credit crisis.
Okay. One more in Service Finance, on the origination side. Just trying to ex out PACE and solar impacts. It looks like, I guess, the core part of the business, originations in that core would have grown about 50% year-over-year versus Q2 '18. Obviously, Lennox is having a little bit to do with that. But maybe can you just sort of talk about what's going on in the core business, ex-PACE, ex-solar?
We were having very strong growth. Lennox is back. The unfortunate accident at their plant has now been rectified. We've launched a program with Lennox to incent dealers to come back, a very, very aggressive buy-down program. So you're seeing growth in that.You're also seeing, just more generally, you hate to talk about weather as a company or a CEO, but it's extremely hot. We've gone from a cool, wet spring to a very hot summer. That's helping.And then we're also seeing in the windows sector I mentioned earlier, replacement window, we've seen some opportunities there, and that portion of the business is up $50 million year-over-year. The lead time is a bit longer because when you order replacement windows you have to spec them and go through the permitting process. It's a bit like solar for lead time.
Okay. And Complimentary Flow is a big chunk of that year-over-year gain? And is that broad-based or specific to one industry?
It's about 7% to 8% of our total originations. High FICO, super FICO. I gave an example of -- I'm not sure why we didn't do it in the past, Jaeme, but when you have someone who's ordered replacement windows and it's $40,000 plus $1, it got rejected at Service Finance in the past. 2 of our banks said, hey, we'll take that flow.
Yes. Sorry, that Complimentary Flow is primarily windows? Or is it broad-based on various industries?
It's higher ticket because it would be replacement windows, it would be solar, the larger tickets.
The next question comes from Paul Holden of CIBC.
So first question is related to Kessler. So you said in your prepared remarks that the expanded strategic partnership agreement is performing ahead of expectations. Can you expand on that a little bit? Has the view on what I might refer to as recurring revenue versus transaction revenue changed? Or is it more just that there was more transaction revenue in Q2 than expected?
I think, Tom, we don't talk about clients. But Cap One was named as a client of ours. You probably saw in the Cap One release that they've been able to -- they sold $1 billion of noncore business. You can probably assume that was us. And why is Cap One selling portfolios? It's to make room for the Walmart onboarding. We're able to sell those portfolios. We get a onetime modest fee and we get a recurring fee from the buyers of those portfolios.I think you can't overstate enough the impact of the Walmart transaction. That was a little under $10 billion of credit assets, credit card portfolio that left one bank and went to another. The other bank makes room for it. It passes down portfolios. Other banks want those portfolios being passed down. So it becomes a bit of a virtual cycle or a waterfall, if you will. And we are under contract for those trades. Those trades are modest fees and long-term annuities.
Okay. Good. And then a quick update if you can regarding client retention since the change in ownership with Howard exiting. Any developments there?
No. As predicted, it's very, very long-term relationships these are under. I mentioned Cap One because it's public. We don't talk about others. But there's been no changes.
Okay. That's good. In terms of asset sales, I guess starting with aviation, those ones that transacted in Q2, are those coming in, in line with carrying value?
Yes, we're confident, Tom, that we will be able to liquidate this book consistent within the parameters of the reserve charge, the charge we took. I can't remember if [ it came in this quarter ] when we took the charge?
Q4. And yes, the sales we took place this quarter were in line with our marks that we took at year-end.
Okay. Good. And then similar question in terms of the transactions you did post-quarter. I guess it was more on the Service Finance side, but just wondering if you were able to dispose of those loans at book value.
I knew you were going to ask that question, Paul. And we did. And we are beginning to, on the Complimentary Flow first transaction, we disposed of that book and got a 2% management fee. It would appear the second one is going to be a 1.5% premium. So we're beginning to get better economics, with a 2% management fee, as well.
Good. And then last question. I guess it was really earlier this year one of your competitors that you've already named on this call lost a funding partner, and there was a hypothesis that that was related to upcoming regulatory changes that made it more capital-punitive to hold things like retail installment credit. Are you hearing any more noise on that front? Have your lending partners said anything? Are you getting any indications that they're changing their appetite?
You're referring to [ CICL ], and we provide all of our bank partners with our estimate plus an additional multiplier of what the credit experience will look like. They've consistently booked that. So they're over-reserved on the books. We haven't had a single bank come to us and say they have a [ CICL ] issue.
The next question comes from Brenna Phelan of Raymond James.
So starting with Service Finance, just going through the kind of moving parts, you gave the gain on sale chart in the deck. So PACE and solar would have historically had higher gain on sale components. So the overall revenue yield, is there something moving in the servicing income component that you're earning? And where does that management fee from the Complimentary Flow show up? How are you thinking of that?
Brenna, it's John. Well, I want to make sure that you're looking at or thinking about margins correctly. Obviously, if you're trying to look at a revenue yield type margin, we drive revenues off various different things, like gain on sale, which would be driven by originations, or servicing assets, which would be driven by sort of the managed book. So in order to think through what sort of revenue yields, et cetera, would be, you have to sort of break it down into multiple components.If you look at the gain on sale chart that we showed earlier in the slide, that really is reflective of the original core program that we bought when we bought Service Finance, right? So what we're trying to show there is that the margin has been sort of extraordinarily stable across those core programs.As we've added incremental programs into Service Finance, some of those programs have lower gain on sale margins. We've always said that. But those gain on sale margins are all incremental for us; meaning, we have the excess capacity to handle those and we're creating more servicing assets for the business over time. So we're just leveraging existing capacity.Again, what we were trying to show you in the slide was it really is a stable margin business across that core original business that we bought at Service Finance.
Right. Understood. But if I look at the revenue as a percentage of your managed portfolio in the first half of 2019 versus 2018, it's down. And I'm asking is that as a result of the incremental volume that you're adding? Or is that partially driven by a decline in the servicing yields?[Audio Gap]
Pardon me, ladies and gentlemen. Please stand by.Ladies and gentlemen, please stand by.[Technical Difficulty]
Hello?
Brenna, sorry about that. We got cut off. I'm not sure what happened.
So if we could back to my question, I think it would be helpful as we're trying to model this out as trying to work through the moving pieces of incremental programs you're adding. And I understand those have different gains on sale. But just looking to the servicing component, has that remained constant? Or are there moving parts to that, as well? And it would be helpful if you could provide us with that disclosure breakdown.
Brenna, it's Michael. I'd just, I guess, step back to your earlier question in terms of the different gain on sale margins. I think the way we look at is we look at our overall profit margins for the business and which we gave the guidance for at Investor Day. We're targeting a 69% EBITDA margin. If you look at our results for this quarter, we're actually right in line with that.So in terms of how we manage and view the business, we look at -- the mix of products can change, but we're targeting an overall profit margin and growth in overall profits. And that's what we are delivering year-over-year.In terms of the servicing, I think the revenue streams on servicing are pretty consistent. Our contracts really haven't changed that much. And the new products coming in are small percentage of the overall managed assets. So the overall revenue yields on servicing have been pretty consistent.
I think the one thing we can do for Brenna is go through and break out the solar versus nonsolar. Because the solar has origination gains at 2% to 2.5% and it gets management fees, as we've mentioned in earlier calls, management fees of 40 to 50 basis points. I think that will help reconcile this. So we can pull those 2 apart for you, Brenna.
Okay. That's helpful. And then just on the Complimentary Flow programs having lower gain on sale, what's the rationale behind that?
It's too early. We did 2 on behalf of 2 banks. And we're just firming the market up. So we need some time to test it more broadly than 2 banks. And I think when we get a chance, I think when we get a chance to test it more broadly we'll find larger gains on sale. The servicing income is 2%, like their other business. We obviously want to find the highest gain on sale possible, but we're early days.
Okay. That's helpful. And just going back to some things from your prepared remarks, you quoted a statistic 30% of year-to-date approved loans. So they're approved, they're just waiting to be matched with a bank partner? What did you say there?
It's a good question, Brenna. If you come in today and you're looking for replacement windows and it's a $30,000 replacement, we are going to approve you, the consumer, for a $30,000 loan. It will be sold to a bank, but it won't fund until you're happy with the project and you confirm to us you're happy and we can reconfirm the terms and conditions. So it sits in a holding pattern. So it's approved, waiting completion of the home improvement project. It's a very strong indicator of how originations will flow.
Okay. That's helpful. And just sticking to the revenue yield theme then, turning to Triad, is there anything in Q2 that is seasonally stronger that causes that to tick up?
Well, just Q2 is seasonally stronger than Q1. If you look at the normal seasonality within Triad, right, Triad is a little like Service Finance. Q2, Q3 tend to be the strongest quarters. [ Q4 ] is a little bit weaker, and first quarter is always the weakest quarter. So it's just seasonal.
Okay. So just higher gains on sale in there. And then the Fannie Mae opportunity of servicing components of their portfolio, could you size that for us, what you see as maybe contributing?
I think it's a little early to size the Fannie Mae program exactly. We're just happy to be an approved partner of theirs as they move forward with their initiative in the manufactured housing space.
And how many partners did they approve?
We're an approved servicing partner of theirs. I'm not sure how many other people they approved.
Okay. And then, the last one from me. Just going back to the Kessler manager of the credit card portfolios. Was that baked into your guidance? And was there any of that revenue in the current quarter? And what's the management fee like on those portfolios?
Brenna, it's Michael. We're not going to get -- as Steve said, we're still in, effectively, the R&D phase of this project. So we're not going to get into the specifics on pricing or management fees at this stage.And in terms of the guidance, it wasn't in there. We expect the contribution this year to be pretty modest. So I wouldn't count on a huge uptick for this year.
The next question comes from Vincent Caintic of Stephens Investment Banking.
Just one more follow-up, and this is on your, the capital levels you have. So I think it's pretty rare for a company to be growing 30% year-over-year and yet generating so much excess capital and able to buy back a lot of stock. So appreciate the repurchase resumption.And also your tangible leverage of being 1.99x according to your MD&A. I'm just wondering, so first, in order to keep the investment-grade rating what sort of tangible leverage are your targeting?And then, secondly, when you think about your capital generation it seems like you'll have enough capital to grow the business and with still a lot of excess capital. So when you think about what you'd want to do with that capital, so you've got the issuer bid resumption. How do you think about dividends? And then remind us about kind of your free cash flow generation.
Maybe I'll take the capital allocation but, Michael, if you want to talk about the leverage ratios?
Sure. Our leverage ratio, down to 2:1 on a tangible basis; 0.5:1 if you look at total equity. So obviously they're relatively low leverage ratios. So we have a bit of room there to increase debt without jeopardizing our rating. But I don't want to get into any specifics or target anything at this juncture. But it's obviously something we manage and monitor very carefully. And anything we do will be with keeping that investment-grade investment rating. So I don't want to get into specifics, but there is a bit of room, for sure, based on where we are now.In terms of the dividend, I think you mentioned the dividend policy. That's something we'll evaluate as part of our annual business planning process in Q4, together with our board. That's just part of our regular process, and we'll review dividend and capital allocation decisions at that time.
I think in the interim, Vincent -- I 100% agree with our CFO. That dividend is the subject to a Q4 discussion on payout ratio and all those good things. So expect some news on that in the fourth quarter.I think in the interim here as we start to increase our excess capital position because of operations and because of legacy sales, we'll look for opportunities to purchase stock if it makes sense. Michael has got some expensive securities on the balance sheet, noncommon equity securities that we constantly look at. We look at small tuck-in deals.So I think as evidenced by what we've done in the past we have a very defined capital allocation plan. And hard sitting here tonight to say I can see CAD 0.55 a share next year times 12. It's hard to see a stock that's not CAD 6.50 to CAD 7. That's my personal view. You're the experts, but I'm personal. So I just think that there's an opportunity here to further participate in the stock repurchase.
The next question comes from Jaeme Gloyn of National Bank Financial.
Two quick follow-ups, one on that last question there. Is there a tangible net worth covenant that needs to be maintained as you think about repurchasing common shares or preferred equity?
Yes. We have -- as part of our senior facility there is an overall coverage ratio covenant which incorporates a tangible net worth metric.
Jaeme, there's an absolute number with respect to shareholders' equity, and we're well within that absolute number. The absolute number is not tangible net worth; it's just net worth.
Okay. And there's no restriction to completely utilize the NCIB as it relates to that net worth coverage.
To Michael's point, we're going to manage within our investment-grade rating. We know what those ratios are and we have some room here, particularly with 2 more quarters that we want to be straight down the fairway producing strong cash flow, increasing shareholders' equity and return of capital from the runoff of the legacy business that Algis is doing such a great job on.
Okay. Great. And last one is just on the preferred dividend and the tax impact. Is there any way to know this in advance of earnings? Or is it just sort of, like, on a quarter-by-quarter basis? And what are the considerations and factors that's going to drive that for you to receive the tax benefit or not receive it?
I think based on where we are now in the year and the tax planning we've done in the first half of the year, we're comfortable that we'll be able to utilize the tax deduction on the preferred dividends for the rest of this year.
Right. And then in next year, it's still up in the air? Or what has to -- what do you need to achieve to be able to get that, going forward?
I'd say where we are now and based on our current business plans I think we'll be able to -- we would be able to utilize it next year, as well.
There are no questions registered at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.