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 2023 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.
Thanks, Gillian. Good afternoon, everyone. First, I want to thank everyone for joining the call. Joining us today from ECN are Steve Hudson, Chief Executive Officer; Michael Lepore, Chief Financial Officer; Lance Hull, President of Triad Financial; and Matt Heidelberg, Chief Operating Officer of Triad as well. The news release summarizing these results was issued this afternoon, and the financial statements and MD&A for the 3-month period ended June 30, 2023, have been filed with SEDAR.
These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible on the website as well in PDF format under the Presentations section of the website. Before I 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'll 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 expectations 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. All figures presented are in U.S. dollars unless explicitly noted.
And with these introductory remarks complete, I'll turn the call over to Steve Hudson, CEO.
Thanks, John, and good evening. Turning to Slide 6. As everyone knows, on March 7, we launched a strategic review and response to the interest received in the company. During that time, we've evaluated all alternatives, including the outright sale of the company. We've determined the best way to maximize shareholder value is through a strategic industry partnership, not a financial investors.
The 4 key deliverables of ECN's strategic review: first, a strategic investment from Skyline will create the greatest value for shareholders and customers relative to other options reviewed by ECN; second, we've adopted a simplified operating structure, where we will focus on manufacturing housing, ECN corporate to be renamed Triad, ECN's parent will be eliminated and integrated and RV, Marine alternatives will be under active consideration; third, we've expanded our important funding partnerships.
We've built upon the existing and improved and expanded them. You'll see that discussion on Slides 17 and 18. They now total $1.3 billion with insurance capital, which has accelerated the transition to institutional investors; and fourth, Triad operating enhancements. As John mentioned, Lance Hull, who will speak with us in a second, Lance joining us this evening, has assumed the role as President of Triad. We strengthened the operating culture and the drive to lead by service over price.
Turning to Slide 8. Very pleased to announce the strategic investment with Skyline. The financial component of that deal is an investment split 55% common and 45% mandatory convertible shares. The stock will be issued at $3.04, a premium to market, and that's been assessed by sophisticated industry investors, sorry.
Net cash proceeds will be used to both fund Triad's independent dealer channel as well as Skyline's affiliated dealer channel.
The convertible shares carry a 4% coupon, rank pari pasu with ECN's other prefs. Skyline can convert these shares to common at any time with a mandatory conversion on the fifth anniversary. Key terms of Skyline's strategic investment include a committed Corporate Simplification Plan, which I mentioned a minute ago, including the integration of ECN parent into Triad; board representation; a standstill for 24 months, including a right to match unsolicited offers; and joint decision-making on future acquisitions during the standstill. ECN's Corporate Simplification Plan provides an opportunity for Skyline to require -- to acquire the remaining 80% over the next 24 months. Turning to Page 9.
The partnership, the Triad -- sorry, back up -- a little bit of background on Triad and Skyline is we have an existing strong partnership with Skyline already in place. This strategic arrangement will deepen and strengthen that partnership, which will benefit not only Skyline, Triad but also, more importantly, the customers. If you look at this in the context of the industry, if you look at 21st and Vanderbilt, part of the Berkshire Hathaway family, they represent 42% of the market. Triad is 12%. We currently, up till this evening, only had an offering in the independent channel.
With the creation of this partnership and specifically, a joint venture finance program with Skyline, we believe we'll be able to address significant share, and I'll speak to that in a moment. Turning to Slide 10. As I mentioned a moment ago, we have a strong partnership with Skyline. As you know, Triad was formed in 1959. The Skyline partnership includes retail as well as floor plan funding.
The opportunity on the right-hand side, we're going to capture significant incremental share by offering comprehensive dealer and customer solutions. We're going to enhance the customer experience and generate strong dealer loyalty. As background, over my 30 years in creating captive finance companies, including Dell Financial Services, manufacturers with captive finance subsidiaries demonstrate higher profitability, greater market share and lower sales volatility. We're quite excited by this partnership. Turning to Page 11.
We have a 2-channel strategy in partnership with Skyline. The first is the existing dealer channel that you're aware of, which is Triad offering financing, both on the retail and floor plan side, to independent dealers. This evening, we're announced -- announcing a Skyline affiliated dealer channel, a working name is Skyline Financial. That will address 1,700 incremental dealers in this channel. This captive finance company will be owned 51-49 by the partners.
It will offer both tailored retail loan programs as well as branded floor plan offerings. The captive will run in the same model as Triad on a capital-light basis. Then, the captive will utilize leverage -- will leverage or utilize Triad's best-in-class originated servicing infrastructure as well as its proven and existing funding capabilities. Services provided by Triad, including a capital charge, will be recovered on a cost basis. Profits will be split on a 51-49 basis.
And for the Canadians in the call, Skyline has a significant business in Western Canada. We hope to replicate a program -- financing program for those customers. Turning to Slide 12. A lot of work done on what does the joint venture mean. Look -- and this is the forecast for 2024.
It's anywhere from $12 million to $24 million. That is Triad share of the joint venture. I'd like to put this in context for you. Our current sales finance penetration rate with Skyline is approximately 13%. Once we move that target up to a 20% penetration, we'll be at that $24 million number.
In '25 or sooner, we would want to move that penetration rate to 30%. That would represent $40 million of income for Triad. In terms of an industry standard, there is an industry leader where their penetration rate is 50%. I believe that the 20% and 30% penetration rates are achievable in the short term. Turning to the operating structure on Page 14.
We have agreed with Skyline to integrate ECN Corporate into Triad's operating structure. ECN Capital, as I mentioned earlier, will be renamed Triad Financial. That will be subject to a shareholder vote. It will focus primarily on manufactured housing, both in the independent channel as well as the Skyline affiliated dealer channel.
We will be reducing overhead. The first phase has been to reduce expenses by $6 million. In the second phase, we will see the elimination of ECN Capital, bringing in a further $6 million of cost savings. ECN corporate will be eliminated in H1 2024. On the RV and Marine business, we will continue to assess strategic alternatives for that business, at the same time, improving the operations, further reducing in cost.
And as well, we will begin to replicate the successful institutional flow program we put in place for our manufactured housing business that's expected to be launched in the third or fourth quarter of '23. Provide a little more color on corporate expense reductions on 15. I'll leave that with you to review. Turning to Page 16. During the strategic review process, we're happy to announce that we have added, say, approximately $1.3 billion of new and expanded flow programs with both Blackstone and Carlyle.
As you're aware, the Blackstone arrangements go back for 3 years. Now in excess of $3 billion, we started with our home improvement flow program at Service Finance, followed by Kessler Group's credit card portfolios and now an expanded program with manufactured housing. It's a relationship that is extremely strong, and we expect to grow it in the near term. It's split between retail and floor plan, and all the loans are serviced on Triad's platform. As I noted in an earlier slide, last quarter, Triad recently had its ratings -- its investment-grade ratings improved on its servicing business.
Turning to Carlyle. That is a new program entered into post the quarter. It starts with a $150 million program for retail loans, similar in structure to the Blackstone retail program. We are in discussions -- short-term discussions to expand that $150 million as well as adding flow to our -- with both those partners to our RV and Marine business. Turning to 18.
You see the significant transition in our funding model. The credit unions and banks are important partners of our business but the way that we have chosen the institutional flow model to support the significant growth at Triad, hence, the shift to 65-35 year-to-date in the split. There are at least 2 or 3 others, I believe, Matt, institutions who would like to enter into these arrangements as well. Turning to Page 20. Good picture of Lance Hull on the right-hand side.
Lance is iconic and a proven leader in the MH industry. And I think the best thing I can do now is have Lance speak a little bit about his background.
Thank you, Steve. In my 25 years with the industry, I've had the privilege and experience of leading growing companies in the MH space. While at Clayton, we took our market share from 10% to 50% through a series of acquisitions and brand strategy and integration as well as building strong retail alliances. As I joined 21st Mortgage, by focusing on innovation and process improvement and customer experience, we took our market share from 15% to 30% in the last 10 years. I have a history of creating programs that drive growth.
The communities effort that I developed at 21st Mortgage remains an industry-leading program today, and we plan to change that at Triad as we will improve on that and do everything we can to create the very best programs for our partners. I joined Triad to lead a good company to be a great one, and my primary focus will be to improve origination cycle lifetimes or life cycles, improve responsiveness in all areas of the company and create the industry's best customer experience.
For the years that I've been in the industry, Triad has always been a great competitor. In fact, they've been a real pain in my butt for the last few years. And I look forward to changing that to make sure that we're a pain in everybody else's butt. It's going to be a great run, and I look forward to leading this company for many years to come.
Thanks, Lance. Just before I pass to Michael, I just want to recap, last 5 years -- last 5 months, we covered a lot of turf, and the strategic investment with Skyline is the highlight of the last 5 months. I wouldn't diminish the simplified operating structure, which has been approved by our Board, is now being implemented. The expanding funding partnerships with both Blackstone and Carlyle are very significant and important. That proof of concept is now other institutions to approach as those discussions are ongoing.
And finally, with Lance Hull's leadership, Matt Heidelberg and others, we believe that Triad is in great hands. Michael?
Thank you, Steve. Now if you turn to Page 22, just for the preliminary 2024 guidance ranges. Just some key highlights. This preliminary guidance reflects Triad's share of the captive that we're about to form. And key assumptions in terms of the growth reflects 15% growth in originations from Triad's existing business, and it assumes that we'll realize average gain on sale margins of approximately 6.5% in 2024.
And it also includes, as noted, Triad's share of the expected captive finance income. Assumes RV and Marine income recovers with the new funding commitments and programs, as Steve noted, that are currently in process, which will drive increased originations. Operating expenses reflect the elimination of ECN corporate overhead, as noted earlier, and our expected annual tax rate in 2024 is expected to be 26%. All that drives a base range of -- a base EPS of $0.21 to $0.27 per share or a fully diluted -- on a fully diluted basis, $0.19 to $0.25 per share.
Now turning to Page 24 just for an overview of key developments in Q2, some of which we covered already or will cover in the following sections. The key highlights, obviously, you've just heard from Lance, the new President of Triad, which was a tremendous acquisition for Triad in Q2. Other items to note, new programs continue to drive growth with Land Home, Silver, Bronze and Rental, all up more than 80% year-over-year in the first half of 2023. We did take a onetime fair value adjustment at the end of Q2 of approximately $12.5 million, which reflects the impact of higher rates on our gain on sale margins that we're currently realizing.
And as Steve noted, we continue to review various strategic alternatives relative to the RV and Marine business. And finally, on the inventory finance side -- inventory finance, we entered into a flow program with Blackstone to flow up to $300 million of manufactured housing inventory finance assets and have sold $130 million in the quarter to date under the structure.
With that, I'll turn it over to Matt Heidelberg.
Thanks, Michael. Turning to Page 26. Triad reported adjusted operating income in the second quarter of $9.7 million. The quarter was impacted by lower pooled gain on sale margins of approximately $5.8 million. Following the fair value mark taken in the quarter and in line with our first quarter communication, we expect to return to normalized margins in the second half.
We're pleased to see the managed portfolio grew 29% year-over-year to $4.8 billion. That's continuing to add to Triad's recurring revenue stream. And as Steve mentioned, we're really excited to announce both our increased forward flow commitment from Blackstone and happy to welcome Carlyle as a new partner to the Triad family. These partnerships, combined with our existing partner base, positions us exceptionally well for the future growth. Moving to Page 27.
Second quarter originations were down 8.6% in the quarter, with first half originations flat year-over-year when excluded the portfolio purchase in the prior year. This compares to industry shipments that were down about 30% in the same period. And you'll see in the bottom pie charts that our product mix has shifted to include an additional contribution from our newer product offerings such as Rental, Silver and Land Home. We expect these product offerings to continue to grow at higher rates and become a source of additional growth for us in the -- looking forward. Moving to Page 28.
While the second quarter approval growth was down 25.6%, we're really pleased to see an improvement in the recent months. We've seen an increase in the approval growth for each of the last 4 months and much more so with our largest product offering being Core Chattel. Core Chattel was back to plus 18% and plus 15% in the prior 2 months and is also a very high revenue yield product for us, which will contribute to revenues and income in the 4 quarters. Moving to Page 29. As we mentioned previously, Triad's performance year-to-date has significantly outpaced that of the industry shipments, as you see here in the chart to the right.
On Page 30, Triad sold $149 million of pooled loan portfolios at a 1.8% gain on sale. This impact, as we communicated in the last quarterly call, which was pricing compression from rising rates, combined with slower loan sales of Land Home loans than we originally expected. Following these sales in the fair value mark, we're positioning Triad to return back to normalized pricing in the second half, again, as we communicated last quarter.
Moving to Page 31. The timing of the Land Home launch has been the primary reason for
pricing compression year-to-date. At that time, we had backlogs to complete homes extending out beyond 12 months with market rates increasing at a frequency that we've not experienced previously and the combination led to delayed loan sales with pricing compression in the first half of this year. We price for that now and looking to go back to normalized pricing for the rest of the year.
In response to that, Triad has now had forward pricing commitment added for our Land Home products. As we close loans, we're going to lock down pricing looking forward. That will minimize the interest rate risk. We've also strengthened processes and put in place a new EVP of Land Home operations with deep experience in the mortgage operations industry. With these improvements complete, Land Home is prepared to scale, and we see the Land Home opportunity as being 2x that size of Chattel.
Matt, this is Lance Hull again. Matt, if I could just add to that. I've had the opportunity over my career to fund over $3 billion in Land Home loans, and I am completely confident that we now have the right team and the right processes in place at Triad to lead in the Land Home business.
Thanks.
I'll take everybody to Page 32. The yield impact in the first half will return to normalized yields in the second half, as we said a few times. Current Land Home loan approvals are at full fees with forward pricing commitments now. We don't see or we don't foresee the unique macro environment being repeated today. Increased and expanded funding commitments are going to support our future growth.
And the Land Home operational and personnel changes have now been completed. On Page 33, you've seen this slide before. Pleased to say there's really nothing changed. The performance we're delivering for our partners is as expected. Moving to Page 34 for our commercial department.
We've begun flowing floor plan loans through to our partners. This partnership provides Triad significantly more capital to grow its floor plan as well as grow our recurring like managed service income stream. The floor plan revenue yield, you see on the bottom left, continues to increase. As we pointed out before, that's floating monthly with market rates. The reduction in our balance, you see on the top right, is primarily driven by the $130 million of floor plan loans we sold to our partner in the quarter.
Lastly, on Page 35, another chart you've seen in the past, lays out our quarterly originations and percentage growth year-over-year.
Now with that, I'll turn it over to John.
Thanks, Matt. we're on Page...
Pardon me, this is the operator. We're not able to hear you any longer, presenters.
Sorry, is that better?
Yes, it is.
Thank you very much. Okay. I'll start over. We're on Page 36. Just want to remind everyone that our Marine and RV segment consists of both Source One and IFG.
Adjusted operating income in the quarter was $3.3 million on originations of $274 million combined. Q2 results continue to reflect a materially slower operating environment than we had anticipated earlier in the year.
While both originations and earnings have been below anticipation, both Source One and IFG continue to be the top source for Marine and RV loans for virtually all of their bank and credit union partners. We've continued to see -- so as a result, they've continued to maintain or in many cases, take share. It's just been a slower environment. We continue to see the industry weakness overall due to multiple reasons such as just overall economic, higher interest rates, inventory shortages, higher percentages of cash buyers and some normalization of seasonal buying patterns.
We have added another 200 dealers in our national rollout, so we now have actually north of 3,700 dealers. That's up about -- over 1,000 dealers since we bought the company. Expenses continue to reflect investments to build the premier platform in the space. And like Michael and Steve mentioned before, ECN continues to review various strategic alternatives related to the business. Page 37, we're just highlighting, again, all the groundwork that ECN has laid to date in these businesses.
We're still in sort of the early stages. In the first year, we were able to get licensed in 46 states, established servicing capability and build out our geographic expansion with over 700 dealers, actually closer to 1,000 dealers at this point and over 3,700 total. We were also able to launch the inventory finance business here and did a lot of work on systems.
Our plan in year 2 was to add some significant new funding partners. As you know, the year has been -- adding those partners has taken a bit longer than we expected. We initially expected to launch some in Q2. We'll now be launching them in Q3 and Q4. Once we get those launched, we'll be able to launch some of our alternative products like Silver and Bronze, and that should result in some significant growth in originations.
As we've told you before, we have over $1 billion of turned down applications with which to launch some of those products.
On the Q2 program update on Page 38, approvals were down almost 10% for the quarter and originations were down almost 34% year-over-year. It's been a very slow quarter, but it's actually in line with what we've seen sort of across the industry. Continue to see solid attendance at most of the shows, at the RV and boating shows that we've seen year-to-date, and we continue to expect to see that new flow partner really help launch the growth going into next year. Page 39 is just the originations chart that we typically include.
And with that, I'll turn it over to Michael to go through the consolidated financial summary.
Thank you, John. Turning to Page 41, Q2 consolidated operating highlights. Total originations in the quarter were $622 million compared to $613 million in the prior year quarter. That includes $348.1 million of originations from our MH Finance Unit and $274 million from RV, Marine and Finance. Those originations drove adjusted -- Q2 adjusted EBITDA to $24.5 million compared to $25.7 million in Q2 2022, and Q2 adjusted operating income before tax of $2.6 million compared to $15.6 million in the prior year quarter.
The decrease in adjusted operating income is primarily driven by lower originations revenue, driven by the lower gain on sale margins as noted earlier. Q2 adjusted net income applicable to common shares was $0.7 million or $0 per share compared to $11.3 million or $0.05 per share in Q2 2023. Turning to Page 42 on the balance sheet highlights. Not much change compared to Q1. Total assets, down slightly to $1.3 billion.
That reflects the sale of the $130 million in inventory finance assets to Blackstone in the quarter; Triad managed assets up to $4.8 billion at the end of Q2, as noted earlier; and total debt consistent with Q1. Key to note, the pro forma balance sheet with the over $130 million in equity capital that we raised as part of the strategic investment will significantly strengthen the balance sheet and lower debt in -- at the end of Q3. Turning to Page 43.
The income statement highlights key items to note: decrease in loan origination revenues, as noted earlier, again, driven by the lower gain on sale margins at Triad. Interest income and interest expense are both up significantly, reflecting the higher on-balance sheet finance assets and higher interest rates compared to the prior year.
Finally, turning to Page 44, operating expenses. Total operating expenses were down slightly compared to Q2 2022 primarily driven by lower variable expenses at Triad as a result of lower originations. We took a $7.3 million charge in the quarter. That was primarily related to severance of about $4 million and $3 million related to the disposal of our remaining corporate legacy aircraft.
And with that, I'll turn it over to Steve for a summary.
Thanks, Michael. On Page 46 for my closing comments, I'd like to add 2 points that are not there. First and foremost, we've had a very successful partnership with Skyline, which this evening has been expanded into a comprehensive strategic relationship. If I had to put a few words around that, it would be the right home with optimal financing for customers of both independent and Skyline dealers. We think it's very powerful.
We look forward to executing on that strategy.
And second, with Lance's proven leadership, our good to great plan -- lance's good to great plan, his 100-day plan, I think will yield great results for us. And we look forward to -- a lot accomplished in the last 5 months. And operator, we're happy to open the call to questions.
[Operator Instructions] The first question is from Geoff Kwan with RBC Capital Markets.
My first question was just if you considered a range of alternatives for the strategic review, would it be fair to assume you've considered options where ECN would not be still having the boat and RV business. And so 5 months later, if a sale of the boat and RV business was considered and so far, nothing has come to fruition, does that put that as a less likelihood that there might be some sort of sale or divestiture of that? Or like are there other options that you're considering for that business? Or what would be some of the other considerations?
Thanks, Geoff. I assume you can hear me okay. We had interest in both businesses. We didn't have investors who are interested in the 2. We had investors that were specific on manufactured housing and specific on RV, Marine.
We focused on manufactured housing first because of its size and because of the flow arrangements. We think we still have work to do on RV, Marine. We are now into the flow arrangements. We think that John made a reference, a couple of billion dollars of originations that we're unable to do in RV, Marine.
We want to prove that up in the third and fourth quarter to maximize value. So we focused on MH first in our review and are now -- and we've concluded that. And now we're going to turn our attention to RV, Marine, but two separate groups of investors, Geoff.
Okay. On the kind of merging of the corporate into Triad and we'll see what happens with the boat and RV business. Just trying to understand, I guess, of the extra $6 million of OpEx reduction, how much of that is coming from, say, like personnel redundancies, if there was any change to compensation plans as well as the -- for seller non-comp expense?
So we've been -- maybe second part first, which is we've been building out a very senior team at Triad with Lance and with Matt, new Head of Land Home. We intend to build a stand-alone management team at Triad. You don't need a lot of people at ECN. In my case, my compensation is capped at $500,000. I'm here for the upside on the shares.
So a lot of work done with the Board on how to dramatically reduce. So I think if you go back, Geoff, to the business back when ECN had Service Finance and Kessler, they're upwards of 35 employees inside of ECN. By the end of this year, you'll have 5 or 6 and a very strong stand-alone team at Triad. Anyone left at ECN, will have modest compensation.
Okay. And maybe if I can sneak in one last question. Just on the -- what the pro forma debt looks like after the private placement, in other words, is the plan to take the proceeds and use it to pay down debt initially? And obviously, you can pull it later -- draw on it later for whatever you need it for.
Geoff, it's Michael. Yes, so that's exactly right. The initial use will be to pay down debt. And then, as Steve noted, we believe there's going to be a lot of opportunities to invest in Triad going forward and the growth in both captive and the independent channels. But pro forma, we would expect that to be a little over 800 after the equity raise compared to 950 at the end of Q2.
And Geoff, I'd just add one more item to that. We now have a $300 million flow program for floor plan with Blackstone. So that will become more active here in the third, fourth quarter. So that will be used for debt reduction as well. I'm targeting to have $400 million of capacity in the senior line by the fourth quarter.
The next question is from Stephen Boland with Raymond James.
Steve, maybe just the first question about Skyline. When you put them in there and now they're a strategic investor, what's the reaction from other builders coming to Triad for finance? Does it cannibalize that channel at all? I mean maybe you could educate me a little bit more on the manufactured home finance industry. Maybe it's normal, but they need as much finances as they can get, so this wouldn't impact them.
Thanks for the question. This is Lance Hull. When you look at the opportunity that we have now with Skyline, it is going to lift the whole industry. What everybody realizes in order for us to return to the percentage of single-family housing that we all want to see, where we become a much more significant portion of single-family housing, all of the larger players need to get larger. They need more capacity.
And this helps open that up. We will continue to support the independent retailer network as we always have. This will do nothing but make us stronger, both for the captive that we'll have with Skyline Financial but also for the independent retailers that rely on our financing today.
Steve, if I could just add one more comment on Slide 9. We look at Berkshire Hathaway, which is Clayton, Vanderbilt and 21st. Notwithstanding the common ownership by Berkshire, 21st has not suffered any competitive loss. They've been able to maintain and grow their independent dealers, even though their sister company is aligned with Clayton. And we believe that will continue here. We don't see a material loss of share. In fact, we see the opposite.
We think that we had an opportunity to prove this up through Regional Homes. That's a customer of ours. And we created a dedicated sales finance program for them, and we went from doing 13% sales finance penetration to over 20%, and that was our case study over the last 12 months. So we're confident that 20% will go to 30%. And Triad share in 2025, I believe, will be at least $40 million of earnings out of the JV without loss on share.
Okay. And then my second question is still related to Skyline. I mean Triad has been doing prime, super prime. Is the goal to take more of Skyline's, I want to say, subprime, but not prime or super prime. Is that going to shift over time as well? And you -- does Triad have the ability to still say yes or no, depending on the loan?
Yes. So it's a good question, Steve. If you look at our programs today with Blackstone and Carlyle, they are 80% prime and 20% near prime, what we refer to as Silver and Bronze. We are in the midst of arranging with other flow partners. The mix would be 60-40 with other flow [prems], i.e., not institutions -- insurance institutions.
So I think we'll have that mix done in the fourth quarter, Steve. So between those institutional programs -- and as you know, the genesis, the history of Triad was prime -- super prime chattel loans, and we've now been successful in adding near prime at 20% of the mix, and we're comfortable we can get that to 30% of the mix. But we never want to lose that core subprime, prime, which is really important to our credit -- our debt investors buying the loans.
Right. Okay. I get that. And then -- so Geoff asked three. I'll ask a third. The move -- I know it's a presentation, but adjusted revenue and revenue, removing the fair value adjustment, can you just explain that a little more simply to me in terms of what's the mechanical -- when does that fair value adjustment -- is it a sale that you're ignoring it, not ignoring it? Maybe you could just spend 30 seconds on that, Steve, if you don't mind -- or Michael.
Thanks, Stephen. It's Michael. So the adjusted revenue, we took a provision on their balance at the end of the -- on the balance sheet at the end of the quarter. That was the $12.5 million. So that didn't -- we didn't adjust the -- what we actually sold through in the quarter.
We've noted that, it was about -- would have been about a $5.8 million impact, but we did take a fair value mark on the remaining book at the end of the quarter, and that's what it was adjusted for.
And going forward, that will continue to happen. Is that what the...
No, this is a onetime cleanup of the balance sheet. So we don't intend to take any more marks on the on-balance sheet portfolio.
The next question is from Jaeme Gloyn with National Bank Financial.
Yes. Just to understand that last point about the mark. So is it that the loans originated -- previously, they've all been sold off now and then anything that's held for sale today or available for sale is done at more adequate rates and therefore, you don't expect any marks on that. Is that what I mean to understand?
Yes, Jaeme, it's Steve. Yes, in the introduction of -- as you know, Land Home is twice the size of Chattel. $1 billion of Chattel, you should be doing $2 billion of Land Home as a proxy. When we've introduced the product, it was obviously priced, I would say, below market. Today, that's no longer the case.
The pricing now reflects market. It reflects our funding relationships. So there was some price introduction in there for sure. And we've also moved to a rate lock program with our institutional investors buying the flow. So when we sign up for Land Home today, which takes 3 to 4 months to build because you're actually building a home, we can lock that rate upfront.
So we're not exposed to interest rate changes. So I would say the combination of those 2 are the learnings in launching the product. No one likes to lose money, especially me. But we've now got a successful product. We got leaders in Lance, the new Head of Land Home, who are extremely experienced, and I'm confident that this is behind us.
Okay. Going to the captive finance guidance, the $12 million to $14 million pretax. Is that -- like any -- that's net of any operating costs or interest costs that go into building that platform? That is a clean $12 million to $14 million that drop straight to the bottom line? And is that the same -- do I understand, it's the same for Skyline? Or does Skyline have other expenses that you need to compensate Triad for?
No, that's a clean number. The -- it's fully loaded with the cost to acquire, originate the loan to cost to service the loan, any associated interest costs and you have split the income 51-49, the operating income. So it's fully loaded. And then I think you're referring to the $12 million to $24 million. The big variable there is the sales finance penetration I mentioned earlier.
At 20% sales finance penetration, you'll be at $24 million, not $12 million I'm highly confident we'll be at 20%. And in '25, I think we can hit 30%, maybe 40%. It's a big delta because at 30% sales finance penetration in '25, our share is in '24, it's $40 million. So it's very sensitive to increased sales finance penetration. But I know the team is capable of it because we have a large competitor that's at 50%.
So I'm not suggesting we're going to 50% this evening. But I'm confident that we can step into 20%, which is $24 million in '24 and 30% in '25, which is the $40 million, our share. There will be an equal share with Skyline.
Got it. Okay. So just bear with me here and correct me if any of this is wrong. So if I look at the guidance on Page 22, adjusted net income after prefers, $59 million to $76 million, let's focus on the $76 million. So Skyline owning 20% of the company would earn 20% of that $76 million plus $24 million from the captive as well and then we'll tax affect that.
So effectively, they're going to generate -- Skyline gets a claim to almost $33 million of adjusted net income in this scenario, and they're only paying $138 million for that. So it's like 4x earnings. Is there anything off in what I'm saying here? Or I mean it seems like they're getting a pretty good deal here with you guys.
Yes. While we're getting to rent the Skyline rent, we get to use $1,700 -- 1,700 dealers for free. It's perpetual access to those 1,700 other dealers. They have all the cost of supporting those 1,700 dealers. So I think you'd have to put some cost against the cost of running that 1,700 dealer network.
[Operator Instructions] Our next question is from Mario Mendonca with TD Securities.
Maybe if we could take a step back, the $12.5 million, I think I know where you're coming from this. You're saying that the $5.8 million is what could have been earned but wasn't because of this dynamic. I guess what I'm trying to understand is it was apparent, I'm sure, to everyone that rates were going to move materially higher. Was this a case where the company just didn't position, didn't hedge the business for higher rates? Or is there something really unforeseen that played out and caused margins to compress the way they did?
So I would say a couple of things. If you look back at that time, while a lot of people thought rates were going to go higher, if you had hedged -- your typical hedging would have been towards like the forward curve, at any period of time, back then, the forward curve was off massively, right? Like it was -- it turned out to be much higher, much faster than anybody expected.
And in addition to that, you'd have to have the length of the hedge done properly, which got difficult because the backlog is extended. At the time, we're looking at backlogs that we thought were 4 to 6 months, and they turned out to be a year or more.
So a lot of the hedges that we had put in place became ineffective, and then ultimately trying to hedge became extraordinarily expensive. So in an environment like we saw in 2022, especially the back half of '22 with the ultimate movement rates, we had some unfortunate timing. We ended up launching a business with, just to call it out, probably the wrong people in place, and it led to some mistakes in terms of operating the business and some of the process and product development.
We've obviously since corrected that. We think we have some very, very strong people in place to date but between the fact that we launched the business and the losses that we've taken to date that you've seen in the last 2 quarters have been entirely in Land Home. They haven't been in our Chattel or in our core businesses. Really, really were, for lack of a better way to describe it, some mistakes that were made when we first launched the business, and we got caught in an extraordinary macro environment.
John, can I just add? It's clear that our hedging strategy was ineffective, full stop. We've done 2 things to address that. We have new leadership of the company in addition to the team we have. And second of all, our flow partnership with Blackstone provides an interest plate block at the time that mortgage is entered into, not when it's funded but the time of inception, they then manage the interest rate risk. And I wish we had got there in an easier way, Mario, but that's where we're at tonight.
So when the company -- when this was all sort of unfolding early on in this more of like the genesis of ECN, this was supposed to be a very asset-light business. There wasn't supposed to be much on the balance sheet, which is one of the reasons why there wouldn't be a lot of interest rate risk. So how did the balance sheet -- why did the balance sheet grow the way it did, which ultimately drove these losses?
Yes. No, Mario, I don't -- I'm not in the habit of correcting you. But if you go back to look at Service Finance before we entered the solar flow program, which became successful, we had a $500 million on-balance sheet portfolio. In order for us to launch a product, we have to build a portfolio. Land Home is now part of the flow arrangements for institutional investors.
So we created the product like we have in our other businesses. We had to prove it to our investors. We've done that. It's now on flow.
Yes. And Mario, remember, this wasn't really a problem of something sitting on the balance sheet. It was a problem that when we originally launched the product, we effectively took the risk from the time the loan was approved till the time the house was delivered, right? So it wasn't sitting on our balance yet because the loan hadn't been originated, but we took that interest rate risk. So we set an interest rate when the loan was approved.
And by the time it hit us, we thought it would be 3 or 4 months later. It turns out to be 12 months later because the backlog, when it hits, rates have moved up quite a bit, and we've locked in a rate. The difference today is the new program locks in the rate upfront. So now the rate is locked, and we don't have that period of time where we're exposed. So it was never a situation so much that the assets were sitting on our balance sheet.
It was that we took the exposure from the period of time when the loan was approved to when the loan was actually closed.
All right. And the hedging effect, Steve, you're referring to is that extended period of closure that you just weren't hedged at that point.
Correct, correct.
Okay. So the reason I asked those questions is I kind of need to understand what went wrong, so we can kind of think about going forward. What you're telling us now then is that the gain on sale margins that the company enjoyed prior to the last 2 quarters, and I think everybody has their own way of calculating it, but we're looking at gain on sale margins of high 7%, 8% plus. Are you suggesting that those margins are doable as early as next quarter?
I think, Mario, our gain on sale guidance is at 6.5%. That 7% or 8% had significant credit union composition. It's credit union and small banks. We made the strategic call to shift our institutional, our funding mix institutions. So we gave up a little bit of gain on sale in exchange for long-term commitments from much higher credit -- much higher-rated counterparties.
The credit unions can play a role in this, so maybe 6.5% goes to 7%, but I would guide you to 6.5% this evening.
The other component to that, Mario, there's really 2 components, is what Steve talked about, which is our new funding partner mix more on the institutional side. We earn a little bit less, but we have longer-term commitments with larger commitments. The other side of it is mix overall. If you look at it, in the past year, even though the last couple of quarters have been slower, we've still seen extraordinary growth from Land Home, from Silver, from Bronze, from Rental, from a number of new products, those are lower-margin products than our Core Chattel products.
Like we said all along, as we introduce these new products, it's going to matter, right? Mix is going to matter for what the overall margin is. So when you're used to looking back at 7.5% sort of gain on sale margin in the company, that was almost when we were almost entirely Core Chattel, which is also our highest margin product.
Yes. And just maybe one -- I don't want to belabor the point, but that 6.5% includes the interest rate protection given by the buyer of the loans. So there obviously would be a number inside that 6.5% where Blackstone is doing the hedging for us or for themselves.
And you're content then that this mismatch can't happen again?
Yes. I'm content it will not happen again.
As there are no further questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.