ECN Capital Corp

TSX:ECN

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Second Quarter 2024 Results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]



I would now like to turn the meeting over to Katherine Moradiellos, VP of Finance and Investor Relations. Please go ahead, Katherine.

[Katherine Moradiellos, executive]

Thank you, Brenda. Good afternoon, everyone, and thank you all for joining this call. Joining us today on the call are Steven Hudson, Chief Executive Officer; Jackie Weber, Chief Financial Officer; Chris Johnson, Senior Vice President and Head of Capital Markets; Lance Hull, President of Triad Financial; Matt Heidelberg, Chief Operating Officer of Triad Financial; Mike Opdahl, President of Source One; and Hans Kraaz, Founder and CEO of IFG.



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, 2024, 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 in the webcast as well as in PDF format under the Presentation 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 statement 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 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 -- the IFRS measures can be found in our MD&A. All figures are presented in U.S. dollars unless explicitly noted.



With those introductory remarks complete, I will now turn the call over to Steve Hudson, CEO.

[Steven Hudson, executive]

Thank you, Kathy, and good evening, and welcome to our second quarter conference call.



Turning to Slide 5. I'd like to have -- just highlight 3 key takeaways, if I can. The second bullet, the scaled originator, it's now been 3 years since we've developed our first institutional flow program. And this last quarter, we got our first detailed look at both the credit and yield performance of the portfolios for our large institutional investors, and they came in both yield and credit came in much better than expected. As a result, demand exceeds supply, and we truly have a scarcity of our -- of MH assets.



Turning to the fourth bullet on diverse funding relationships, we have now completed our strategic flow shift to institutional versus bank credit unions, and that shift remains at 70% institutions and 30% banks and credit unions. We think that's a healthy balance from the perspective of our liquidity and profitability.



And finally, on the second last bullet with respect to our investment-grade rated loan servicing business, we've now created 3 pillars within Triad, a retail pillar, commercial finance pillar and our servicing pillar, leading to further diversification and I believe improvement in the quality of earnings for the Triad business.



Turning to Slide 6. A couple of items I'd like to focus on. We're happy to report $0.03 of earnings per share and confirming our guidance of $0.10 to $0.16. $20.2 million of operating income from Triad ahead of our plan and origination revenues came at 7.5%, evidence of our path to returning to our former profitability.



Our funding programs Carlyle -- our partnership with Carlyle was extended and expanded, which is great news. And I'm very pleased to announce that Monroe Capital has joined our partnership group with a $300 million forward rental funding program launched in late June. It came a little later, but better late than never.



And I want to thank the team at Monroe particularly our friend Kyle.



Turning to RV and marine. It's nice to see growth coming back up 14% year-over-year. Thank you, fellows. It was $311 million originations. I do want to point out the 2 significant developments. First of all, we acquired a servicing platform, Paramount Capital, a great addition to our family, which will service our RV and marine assets. And as well, we've now, with Chris Johnson's leadership, we've now launched our institutional funding with a $250 million forward funding program with a AAA-rated mutual insurance company, that signals the movement away from credit unions and to institutional funding.



With that, I'll pass to Lance.

[Lance Hull, executive]

Thank you, Steve. Let me take you forward to Slide 9, where I'll hit just a few of our highlights from Triad. Our adjusted operating income was up 108% year-over-year to $20.2 million, while our origination revenue margin climbed to 7.5% from 5.2% in Q1, leading to a $23.4 million origination revenue for the quarter.



Our managed assets continue to grow. We're now at $5.3 billion, which is a 13% increase year-over-year. And the ongoing initiatives that I've been discussing for the last couple of quarters regarding our improvements to operational efficiencies have resulted in a modest quarter-over-quarter and year-over-year reduction in operating expenses.



And as Steve mentioned, we have a new funding partner in Carlyle, which is very exciting for us. And the Monroe Capital rental program is going to allow us to expand our operations further.



Over to Slide 10. Steve also mentioned the 3 pillar business that Triad is now operating under, reporting under. And I think it's important for -- just to spend just a minute kind of talking about each of these and how it's flowing into our path forward.



When ECN acquired Triad in 2017, it was basically a retail-driven company, midsized lenders specializing in prime and super prime borrowers. But we've been able to expand the retail program, which is the first pillar to include, of course, everything that was done prior to ECN acquisition, but now with the addition of the Silver and Bronze program and a larger buy box, we're much more capable of serving a larger portion of the borrowers and buyers for manufactured housing.



Our commercial lending program started with floorplan. Floorplan is an outstanding business for us to be in because it increases our engagement with our retailers, and it drives retail originations, which I'll speak to a little more in just a minute.



And then lastly, our servicing business, which was very small back in 2017, but now serving nearly 50,000 borrowers and over $5.3 billion in managed assets. These last 2 pillars in particular, are so important because while today, about 2/3 of our revenue is driven off of our retail business, the commercial and servicing platforms are delivering recurring and stable revenues that will increase in the years to come.



And with that, I'm going to turn it over to Matt Heidelberg, our COO, to talk about some of the details in our results.

[Matthew Heidelberg, executive]

Thank you, Lance. Over to Page 11. I was going to walk you through a few more details on our results in the first half, beginning on Page 11, I was going to walk you through these 3 graphs you see, beginning with the one on the top right. I'd like to highlight our origination revenues of $23.4 million, which was up 19% year-over-year and a margin of 7.5%. These results were above our internal budget and set us up very well for the remainder of the year.



Next, on the bottom left, you'll see a decision to delay our Land Home relaunch and a later signing of a rental flow agreement than expected, did impact originations in the first half. However, as these products are lower margin products, it had minimal impact on our financial results.



To the right, for the second half, we see Chattel continuing to accelerate and the longer time to fund and Land Home, leading to still a small contribution for the second half.



Turning to Page 12. Tying these 2 halves together, we have a lower -- we've lowered our origination guidance from $1.7 billion to $1.5 billion, primarily due to the Land Home and Community products, as I've just discussed. However, due to the increased Chattel mix and margins, we're able to maintain both reaffirming our originations revenue guidance of $95 million to $105 million and reaffirming adjusted operating income guidance of $68 million to $80 million.



Moving to Page 13, giving us confidence in this guidance and forward originations. I'd like to highlight total approval growth of 25% year-over-year in the quarter. Breaking this down closer, Chattel is up 28% and Land Homes up 30% following the relaunch, while Community is down 12% in the quarter. We believe approval growth of 25% relative to second half guidance of just 15% growth positions us very well for the remainder of the year.



Moving to Page 14 to give you an industry update. On the left is the shipment update that you've seen previously. Second quarter shipments were up 18%. And this, in particular, has been benefiting our floorplan portfolio, which Lance is going to get into more detail later.



On the right, we have an analysis of annual shipments for the industry compared to both consumer sentiment and 10-year treasury. What the analysis shows us is that historically, there's been no correlation which leads us to believe that affordable housing, the need and demand is there despite market conditions.



Moving you on to Page 15. You'll see that we've maintained loan rates at healthy premiums to market rates as we have the last several quarters.



In our performance on Page 16. We've also maintained consistent delinquency and net charge-offs while still building and growing our managed asset portfolio.



With that, I'll turn it back over to you, Lance.

[Lance Hull, executive]

Thank you, Matt. I want to highlight again that second pillar that we mentioned earlier, which is our commercial business. We've increased our outstanding balances to $452 million, which is up 18% versus the same time a year ago. These are higher-yielding assets with an average yield of 11%, and they are floating and indexed to SOFR. So we'll continue to see positive returns there.



I mentioned before that these programs are so important because they drive engagement and increase retail flow. And today, about 3/4 of this $452 million or floorplan, and then we know that as our floorplan business grows, so will our retail business grow because the average floorplan and retailer that does business with Triad does about 2.5x the amount of retail volume with us as well. So the synergies that we gain by engaging them in multiple products will deliver better and better returns going forward.



And then lastly, we did, as we've mentioned a couple of times, recently signed the Monroe Capital rental agreement, and we're beginning to add assets to the portfolio and that will also, of course, increase our ongoing servicing portfolio.



Flipping over to Slide 18. I want to spend just a minute to talk about Land Home. It's been such a big part of our communication over the last couple of quarters. And Matt commented on our delayed relaunch of Land Home. But this period has allowed us to put the things in place and to implement the operational changes needed to ensure that we have a great go-forward business. During this time, we have been able to consolidate our underwriting and processing teams and better align them with our retailers to ensure a very enhanced and positive construction process. We've also improved systems for faster decisioning and more efficient processing that have elevated our customers' experience and the buying experience overall for both the borrower and our retailer. And these have paid dividends.



As Matt alluded to earlier, we're now seeing our Land Home approvals up 30% in the second quarter year-over-year. We have also significantly derisked the platform by reducing the balance in our construction book and have also, of course, seen much more attractive rates. So we're in a tremendous position now to spring forward. And we anticipate that while we are seeing growth in Land Home approvals, we will see the originations from those late in 2024. And many of them, again, due to the nature of Land Home and as Matt alluded to, the longer tail on the business. We'll see even more business throughout 2025 as this business continues to expand.



On to Slide 19, just to very quickly talk about the Champion Financing update. We're so fortunate to have this relationship with Skyline Champion. Just to recap, we had the original launch on the program was in January of this year in Louisville with our floorplan and commercial business, and then we followed that up a few months later with the retail launch at the Biloxi Show in March of 2024. Both of these are really picking up speed and beginning to show significant dividends. If you look down in the lower left-hand corner of this slide, you'll see that our current active balance in our floorplan pipeline is at $57.8 million, which is more than double what it was just a quarter ago.



Again, to highlight the benefit of this as we grow these outstanding floorplan balances and engage more retailers with us in floorplan, we know that's also going to drive retail business to both us and, of course, Champion Finance Product as those retailers will typically do about 2.5x the retail volume with us. And then I would like to comment that while our total approvals are up 28%, as you heard Matt alluded to earlier, our approvals through the Champion Financing Group are up more than double that. So we're having a tremendous opportunity with some of the programs that we put in place with them and some of the new products that have been launched to see the interest rise in both their products as well as our financing. So we're excited to see where this is going to take us going forward.



And on Slide 20, it's a slide that we've included many times before. It's got some of the details, and I'll leave that with you.



And with that, I will turn it over to Steve Hudson.

[Steven Hudson, executive]

Thanks, Lance. Slide 22. I think I've spoken to most of the go through it again on the fact that growth returning to the RV and marine [indiscernible]. -- Funding update is great to start the transition away from credit units. -- credit units entirely, but we're looking ultimately to get to that 70-30 mix on path forward to that, and Chris Johnson, will speak to in a second.



And the second component. We've run a 4 component playbook at ECM for all of our businesses. The 4 components are making sure that we're licensed for all of our activities. The second is the systems in place to create a ultra-compliance. The third is making sure we have internalized servicing, and the fourth is introduced [indiscernible] arrangement. We now have those 4 components complete.



But we now have the 4 components complete for RV and Marine. I'm not going to -- I won't speak to '23. You've seen it before.



And with that, Mike.

[Michael Opdahl, executive]

Thank you, Steve. Good afternoon. Please turn to Slide 24.



As Steve mentioned, we are executing the ECN playbook, and I'm very pleased to report that the initiatives launched last year are starting to pay off.



Looking at the marine and RV market in totality, momentum is definitely shifting. Both the RV Association and Towable manufacturers are reporting that shipments of new RVs are up. In Marine, our recently released industry survey reported that almost 70% of marine lenders originated higher Q2 loan volume year-over-year. In fact, it was the highest quarterly increase since pre-COVID.



IFG and Source One are seeing the same -- significant increases in applications, approvals and fundings in the second quarter. As evidenced by our Q2 results, ECN's marine and RV businesses are on plan with quarterly approvals up over 21% and originations up almost 14%. We saw this positive momentum continuing through July.



Turning to Slide 25. A couple of highlights here. As the top right graph shows, even in the face of elevated rates, RV and marine assets continue to deliver substantial yield premiums versus automotive. As the bottom right chart illustrates Source One's held-for-sale portfolio continues to experience extremely low losses and our lending partners are reporting similar results. As a result of the superior performance, both IFG and Source One enjoy strong lender support and are fully funded through 2024. With Source One's entry into the capital markets, we have the capacity to accelerate our growth plans, and we are very well positioned to take advantage of the coming lower rate environment.



Please turn to Slide 26, and let's focus on some of the accomplishments for Source One this past quarter. We've added 4 new sales reps to our team, and we are now originating in 44 states. Our take share strategy is working very well as we focus on capturing significant volume once we've entered a new market. Examples of our success include tripling our market share in the U.S.'s 3 largest RV markets, and we are now the #1 lender for one of the nation's largest RV groups. Our momentum is definitely building.



Second quarter originations were up 42% year-over-year, and that positive trend continued in July as we were up 48% versus 2023. Our investments in technology continue to bear fruit. Our industry-leading e-contracting platform has improved capture rates and dealer fee efficiencies. We anticipate launching our proprietary scorecard and pricing model in Q3. This will improve -- improved dealer experience and a stronger portfolio performance.



With that, I'll turn it over to Hans to bring everyone up to speed on IFG's accomplishments and talk about our cross-company initiatives.

[Hans Kraaz, executive]

Thanks, Mike. Well done on a great quarter at Source One. Turning to Slide 27. We also had several very positive developments across IFG, all of which I'm very, very proud of. Beginning with the second quarter results. Originations for the quarter were up 4% year-over-year, largely driven by strong May and June months and a continuation of an upward trend in a number of transactions with a 7% increase versus the same period last year. This is a great sign for our business. We're seeing strong demand from the consumer as well as appetite from our loans from our bank partners.



In terms of dealers, we have signed up more new dealers this year than any time in the company's history. And more dealers will ultimately lead to more volume. This is clearly evidenced by a 30% increase in volume for the month of June versus 2023.



On that note, we have executed on our take share plan and have expanded into new markets with the addition of 7 new sales agents. We'll begin to see this impact almost immediately and are anticipating an incremental $75 million in originations on an annualized basis from this group. The new hires bring 150 years of combined experience and will significantly expand key markets from the East to the West Coast. It's important to note that July's positive performance was not impacted by the addition of our new sales team.



Next slide. Last quarter, we reported the purchase of First Approval Source. This acquisition fits squarely in the ECN playbook. Although this was a smaller purchase, I'm confident this will bring significant value to IFG and across the RV and marine platform. For a purchase price of $800,000, we have picked up over 30 dealers and $40 million worth of annualized origination volume. But that's not all. We have also added an industry-leading front-end and underwriting technology platform.



The First Approval Source system, where FAS in short, will unlock value by enhancing the customer experience. This will be achieved by providing our team with enhanced underwriting tools and decision engines. The result will be a reduction in time from application to funding and maximum profit per transaction. The platform is built for scale, which ties into our sales expansion strategy and will allow us to benefit from enhanced data collection. From a funding perspective, demand for IFG paper continues to outpace supply. That said, we see incremental benefits in accessing Source One's unique funding arrangements, which will further our competitive advantage versus our peers. Source One strive for efficiency, speed and execution will bring new options for our customers, dealers and brokers nationwide.



I continue to work closely with Mike Opdahl to capitalize on cross synergies across the RV and marine platform. This will help us benefit from our joint internal capabilities whether it's the lowest cost given scale, IFG's in-house title department, cross-sales or Source One's funding, all of which will ultimately lead to margin improvement across the platform and greater number of originations.



In summary, with the platform and technology improvements in place, we're winning customers and increasing our market share. We are attracting new and experienced people to our team and expanding funding.



And with that, I will pass it back to Jackie.

[Jacqueline Weber, executive]

Thank you, Hans. Turning to Page 30 for our consolidated operating highlights. Overall, our Q2 operating results are on plan as we continue to improve from 2023 with adjusted EBITDA of $31.5 million and adjusted operating income of $14.5 million. Overall, revenues were up across each of our businesses, while consolidated operating expenses stayed flat, which drove the improvement in EBITDA. I would also add that there were no fair value provisions in the current quarter. Adjusted net income was $8.2 million or $0.03 per share, consistent with our guidance of $0.02 to $0.04 per share.



Turning to Page 31. Looking at the balance sheet. Our total balance sheet remains down over $200 million from the prior year quarter. Comparing to the first quarter of 2024, finance assets and debt were up due to the timing of pooled loan sales that were subsequently completed in July.



Turning to Page 32. We continue to stay on track to deliver our 2024 business plan. Loan origination revenues were $30.7 million in the quarter, up from $25.9 million in 2023, which reflects margin improvement at Triad and growth in origination volumes at RV and Marine. The improvement in adjusted operating income reflects higher overall revenue and flat overall operating expenses. Interest expense and interest income each decreased as a result of lower on-balance sheet finance assets in 2024.



On Page 33, manufactured housing operating expenses decreased modestly from the prior year, reflecting operational efficiencies. RV and Marine operating expenses were up as a result of continued investments in growth and operational improvements. Corporate operating expenses decreased to $2.5 million.



And lastly, on Page 34, our held-for trading portfolio remains down from $440 million at the end of 2023 to $375 million at the end of Q2. Subsequent to the end of the quarter, we completed additional sales that further reduced the held-for trading balance down to approximately $325 million.



I'll turn to Chris Johnson, our Head of Capital Markets for comments on funding.

[Christopher A. Johnson, executive]

Thank you, Jackie. Turning to Slide 35. ECN continues to diversify its financing sources with well-respected, sophisticated institutional investors that appreciate the quality of our assets. Our Triad business continues the path that has been on for the past 3 years. We secured a $300 million funding program for our rental assets with Monroe Capital, a premier credit manager with $20 billion of managed capital. We extended and increased the commitment size of our Carlyle funding program on May 30. And we also extended our Blackstone funding agreement for Chattel and other products this past March.



As mentioned before, as we continue to increase originations in RV and marine, we are diversifying funding. In that regard, we executed last month, a $250 million flow agreement with a AAA rated mutual insurance company for Source One's originated assets. This agreement, which is a monthly flow agreement also included a sale of Source One seasoned assets totaling $36 million late last month.



For RV and marine, we are working on other programs for further funding diversification, which will be executed in the remainder of 2024.



I will now turn this back to Steve.

[Steven Hudson, executive]

Thanks, Chris. I think I've spoken to every bullets on the slide, but let me just close by thanking ECN's partners and employees for your exceptional commitment, focus and execution on producing a solid Q1 and Q2. And many of you -- some of you know, I'm an old football player and terrible football player. Hans was a good one. I was bad. But I'd like -- ECN to a football game, we've had 2 strong quarters, Q1 and Q2. And we are at half time, but we're not ready to announce victory. We have to punch out the last 2 quarters and restore our credibility and continue our path of profitability. Thank you.



Operator, with that, we'd like to take questions.

[Operator]

We will now take analyst questions from the telephone line. [Operator Instructions] The first question comes from Nick Priebe with CIBC Capital Markets.

[Nikolaus Priebe, analyst]

I just want to start the question on the acquisition of Paramount Capital. I don't know if I've overlooked it, but can you say what the transaction value was there? And just based on the unchanged full year earnings guidance, is it reasonable to assume any incremental earnings contribution associated with that business will be relatively modest overall?

[Steven Hudson, executive]

The acquisition will close. If we committed and closed but we're waiting for final regulatory approval. So its first month of operation will be September. There'll be modest -- very modest income in '24. We expect profitability in '25 when we provide updated guidance, we'll provide it. But the acquisition price was $10 million, $6 million of cash from us and the management team founders took $4 million in stock. So modest, but it has a very strong proven technology platform. It's a rated servicer by KBRA, and we think it will do amazing things for us.

[Nikolaus Priebe, analyst]

And then a few quarters ago, I think you made the comment that if you add $0.5 billion of incremental funding, it would add a couple of cents of earnings per share that's currently not in the forecast. And there were some comments in the prepared remarks just around how the demand for paper from the RV and marine financing business outstrips the supply. So what is the limiter on growth in the business today? Like is it funding availability? Or is it your ability to source loans? Like which is the limiter to the growth of the business?

[Steven Hudson, executive]

The limiter is if we had $3 billion of paper, we could sell $3 billion of paper. But Lance's leadership is to run a platform with reduced risk in a very prudent fashion, as evidenced Nick by slowing down Land Home and waiting an extra quarter to turn it back on. So it's -- the limiting factor is the origination of assets. We think Land Home is a great growth asset for '25 and rental was even larger, just 2 quarters. We had planned on closing a rental flow arrangement in early '24, it got closed in late June.

[Operator]

The next question comes from Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, analyst]

First question, just on the Champion Financing, some positive developments there and growth from what you've disclosed in the past. I'm just -- I just want to clarify, are these pipeline numbers actually hitting anything on the balance sheet for ECN or the financial statements? Or is this just sort of building the outlook for 2025? I guess the question is, are we generating income from Champion Financing at this stage?

[Lance Hull, executive]

And the answer to that question is yes. There is -- the arrangement with Skyline Champion is that we're generating loans that flow through the JV for which we share in the economic benefit of those loans. So yes, it's generating income.

[Steven Hudson, executive]

I think it's fair to say that it was launched in 2 components. The first was floorplan, and the second one retail program. The floorplan is now -- as Matt has gone through the numbers with you very active and on track. Retail was probably a quarter late, Jimmy. But it's now launched with a national buy down. There was a commentary in the Skyline Champion conference call early this morning saying that activity is exceeding expectations. You can pull up the comment or we can send you the link. So we think it's a significant driver of profitability in latter part of this year and particularly into '25.

[Jaeme Gloyn, analyst]

And just from an accounting perspective, is this showing up across the 3 revenue lines within manufacture -- within Triad?

[Jacqueline Weber, executive]

It's primarily in the other revenue line at Triad.

[Jaeme Gloyn, analyst]

Other revenue. Okay. Just in terms maybe a bit more of a macro refresh here as maybe we're getting into a lower interest rate environment from a Fed perspective. Can you just refresh us on, let's say, sensitivity of the 2 business lines to lower overnight interest rates?

[Matthew Heidelberg, executive]

For Triad, if you recall, we just ended that additional slide with some information about MH shipments relative to the 10-year treasury. So from what that data showed us was that there really is no correlation. What we're looking to serve and provide people is an affordable housing need and the financing for that. So we haven't seen a correlation ourselves as the Triad business.

[Steven Hudson, executive]

In the RV marine business, interest rates matter and in particular, payments, driven by interest rates, I think -- I don't think in July, IFG and Source One had their best July ever. Again, that's not -- we're hedged, but that's because the overall payments to the consumer coming down, which is driving significant business activity for both of our RV marine finance businesses.

[Jaeme Gloyn, analyst]

Okay. So that was a comment on activity impacts. And I guess maybe do you have a comment on the impact of the existing book? So kind of like in reverse the last few quarters, last year, we had some hiccups, let's say, with rise in interest rates quickly. So what are we -- what's the impact to existing book, existing originations on the balance sheet in your held-for-trading assets, things of that nature, that would give us a bit more perspective on the financial impacts of lower interest rates rather than just impacts on consumer demand?

[Steven Hudson, executive]

I think you're being kind when you use the word hiccup. So I have another word for it, but I won't repeat it. The book is hedged. So you're not going to see a mark on the book due to lower interest rates. The lower interest rates impact particularly RV and marine because of the lower payment factors. People are now buying more boats and more RVs. And as Matt mentioned, there doesn't -- we've ran a correlation also interest rates and consumer sentiment, and there is no correlation. I think the R-factor is 0.02 for both of those.

[Jaeme Gloyn, analyst]

So no financial impact is the takeaway.

[Steven Hudson, executive]

Well, no, I think no -- at the end there's no mark coming on the book with respect to balance sheet. And I think you're going to see a significant impact -- lift in RV marine business activity and originations. In July, Honda's business went from $44 million last year to $68 million in July. And that's the impact of lower interest rates and lower payments.

[Operator]

The next question comes from Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Just on the Triad servicing margin, just kind of eyeballing it, did it jump up this quarter compared to past quarters? And if -- or if it didn't, maybe is the margin where you want it to be, I guess?

[Steven Hudson, executive]

We -- there are a few things that go into the servicing margin there and the servicing income yield. It depends on mix, right? Silver and Bronze products, as you've heard us say before, come at a much higher servicing fee. There's some fee income that's in there, too, that we're able to pick up. The second quarter was a particularly higher servicing yield for us. If you were to think about modeling it, I'd think about more about the average of the first half into the second half.

[Stephen Boland, analyst]

And just going back to Skyline, when I look back, it's a year since pretty much announced the deal. I know it was talking about 30% penetration and maybe $40 million of income that, that happened. I mean, obviously, there's been good progress. But is it going as expected as you thought when you contemplated the deal a year ago, Steve?

[Steven Hudson, executive]

I'd say, Steve, it's going as expected. It was just late. It was maybe -- I was too ambitious thinking about the launch of floorplan and plans as usual was more measured, but it got launched, and it's got -- it's now up to where it should be retail launch. The buydown was probably 3 to 4 months late. It's now launched and its performing as it's planned. If you look to our heritage as a company, we created Dell Financial Services and a bunch of other captive finance companies. I think this one is going to be as good as -- at other competitor, Clayton may have both 21st and Vanderbilt, and we think this business will be as strong as those 2 combined groups.

[Stephen Boland, analyst]

And when I look at the change in guidance on originations for Triad, basically, what are your comments, I think, on the call have been that you're just pushing it out a little bit later into 2024. It's almost like a catch-up in 2025. Is that a fair comment?

[Steven Hudson, executive]

Yes, I think that's fair statement, Steve. Lance came to me and said he wanted an extra quarter 3 or 4 months to relaunch Land Home. It's now launched as you'll see the approvals going up in the approval sheet that Matt referenced. So we gave Lance the time we needed to launch it. We are not going to repeat '23 again. And rental was simply that the flow program came, took longer to get structured and closed, but you're going to see a strong second half of originations. And more importantly, because of our focus on profitability on origination revenue, I think you're going to have Triad perform.

[Operator]

The next question comes from Tom MacKinnon with BMO Capital Markets.

[Tom MacKinnon, analyst]

Just sticking on the new guide for originations at Triad. Why was Land Home temporarily paused? And what would make it not pause again? Or what would make it not pause any of these programs again or reconsider any of these programs again?

[Steven Hudson, executive]

As you remember in '23, there wasn't a hiccup that it takes 4 to 6 months to build a Land Home mortgage to put the home as ordered. We enter into a commitment for the mortgage, but then the house has to be built. The site has to be serviced. The services come in. It takes a period of 4 to 6 months to do that. In '23, under prior management, they did not effectively hedge that 4- to 6-month build. 600 basis points increase gave us that horrendous mark-to-market.



This time, under Lance leadership, we have a system where the moment we signed that commitment, we are -- we are heading in -- we are hedging that mortgage, whether rates go up or go down.

[Tom MacKinnon, analyst]

Second is, just with respect to the guide, does it include any revenue in corporate because we seem to always beginning gains and losses from corporate investments? So how should we be thinking about that going forward?

[Jacqueline Weber, executive]

So other revenue did benefit again this quarter from investment income and also unrealized gains on an interest rate hedge. I would just guide you that these items vary from quarter-to-quarter, and those gains right now are unrealized. So we don't model in additional income for the second half.

[Tom MacKinnon, analyst]

And then the final is with respect to just interest rate expenses, if we get a knockdown and rates at the shorter end, are we going to get any lower interest expenses? Or how should we be thinking about modeling in that, particularly in corporate?

[Jacqueline Weber, executive]

So overall, Tom, we do have floating rate debt, but we also have floating rate assets. So if interest rates do stay down as they have been just very recently, we do expect some decrease in overall interest expense, but that would be also offset by lower interest income. So on a net basis, we don't think it would be material to our overall guidance. But again, that's based on where rates are today.

[Tom MacKinnon, analyst]

And then, I guess, maybe one final is. I think there was a time when there was a discussion of any kind of strategic review here, maybe as it related to RV and marine. It seems like you're pretty excited about this business and making additional spend here to continue to build it? Suffice to say, is this going to be both a manufactured home and as well as an RV and marine finance company going forward?

[Steven Hudson, executive]

I think, Tom, your memory is better than mine, but you're 100% right. So at one point, we did take a look at RV and marine. Over the last 6 months we've been able with both Hans and with Mike to really replicate albeit on a smaller scale, replicate the 4 components that Triad has been successful with. So I'm sitting here and myself and the Board had a conversation about this. We're feeling much better about the RV and marine business. We also think there's opportunities for vendor finance relationships in RV and marine. Those discussions are ongoing. Nothing to report yet, but that would be the next leg to the growth of this business.



So we like the business. We think it's coming into its own. We -- $10 million to $12 million of profitability this year we think it could be double of that in the next 12 to 18 months.

[Operator]

The next question comes from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, analyst]

Just I wanted to follow up on Tom's last question on the strategic review. Because my impression at the time was there were things in that business you wanted to kind of fix up. I mean, it sounds like you want to keep it here, the numbers seem to be improving. Are you at a point where this is where you wanted it to be when you kind of concluded the initial part of the strategic review? Or kind of what else do you want to accomplish to kind of feel like you've got everything kind of set up the way you want to try and execute on growth?

[Steven Hudson, executive]

I think, Geoff, the -- what we've accomplished since the strategic review is that we -- in Source One, we put -- we changed leadership and Mike came in, which has been significant improvement in the business. Hans has been able to reference the 8 new originators he brought on. And I think equally as important as adding the servicer, which we've announced this evening was the third step and fourth. Chris' leadership on adding institutional flow investors. So it feels like it came together in the second and third quarter. And I think you're going to see the impact of that in the latter part of '24 and certainly '25. I think from perspective of creating wealth for our shareholders, we need to continue to grow this business for the next 12 to 18 months. I think we will be rewarded for having done it.

[Operator]

[Operator Instructions] As there are no further questions registered. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.