ECN Capital Corp
TSX:ECN

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TSX:ECN
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Earnings Call Transcript

Earnings Call Transcript
2020-Q3

from 0
Operator

Welcome to the ECN Capital Third Quarter 2020 Results 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.

J
John B. Wimsatt

Thank you, operator. Good afternoon, everyone. Thank you for participating in our conference call to discuss ECN Capital's third quarter 2020 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 September 30, 2020, 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'll 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 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 the MD&A. With these introductory remarks complete, I'll now turn the call over to Steven Hudson, Chief Executive Officer.

S
Steven K. Hudson
CEO & Director

Thanks, John, and good evening. Let me start up with Slide 7 and provide 4 highlights of the third quarter. First, we're pleased to report strong results in the third quarter, driven by our continued implementation of both our take and make share strategies. That has driven adjusted net income of approximately up $0.10 per share, and we've seen solid operating results across each of our businesses, confirming our 2020 EPS guidance of $0.31 to $0.33 as well as our 2021 EPS forecast of $0.44 to $0.53. We'll be providing more information on that at our Investor Day, which John will speak to shortly. Second highlight is that under the leadership of Mark Berch, the Service Finance team produced record originations, driven by continued above -- significantly above-average dealer growth. We've seen unprecedented growth in dealers. We'll speak to that in a moment. Solid third quarter results impacted, as we announced last quarter, by temporary fee concessions, which provided additional liquidity for the company. And we are fully funded through '21 in excess of $2.5 billion at full margins. Third highlight, under the leadership of the Triad team, we had third quarter, our origination results rebounded sharply with expanded land home launch, which is on track. Third quarter originations were up 18% and core approvals were up 51%, which drove our growth and is leading into what we believe to be will be a very strong '21. Expanded long (sic) [ land ] home launch is on track to provide $150 million to $200 million of incremental originations in '21. We're pleased to announce 12 new funding partnerships year-to-date, which will fully fund our 20 (sic) [ 2021 ] originations to in excess of $1 billion. And finally, under Scott Shaw's leadership, KG produced strong third quarter results, in addition, including closing a $500 million portfolio transactions. The Q3 results were better than expected and EBITDA margin of 64%. Strong pipeline across all of Scott's businesses. And the third and final point is the credit card investment management business, our asset management business, if you will, structured and syndicated to our investing partners, adding $500 million portfolio without capital investment by ECN, further validating our business model, and in this individual transaction, provided in excess of $10 million of asset management fees. Turning to Slide 8. I mentioned, we're confirming operating earnings of $75 million to $79 million for the year, and that's $0.31 to $0.33, which compares to $0.27 in 2019, 15% to 22% growth. ECN continues to expect '21 EPS in the range of $0.44 to $0.53 with an estimated ROE of 14.5% to 17.5%. ECN will update these '21 guidance at our Investor Day, which is scheduled for February 4 in Florida. John?

J
John B. Wimsatt

Thanks, Steve. ECN management and the Board of Directors have focused on sustainability and with the goal of improving ECN's impact, policy and disclosure related to ESG issues. To this end, ECN has established an ESG management committee in order to address disclosure policy and ways for ECN to improve. We intend to have an update at our 2021 Investor Day and improved disclosure for 2021 reporting. Included some statistics and information here on the right in order to jump-start the disclosure process. Importantly, our businesses have some very strong ESG characteristics. Service Finance primarily finances energy efficient improvements for existing homes. HVAC, windows and doors, roofing materials and other equipment are largely Energy Star rated systems, not only offering customers with increased efficiency and reducing impact, but also allowing for significant potential tax breaks. Triad finances green housing construction with minimal waste compared to site-built homes. In addition, many manufactured homebuilders offer Energy Star rated homes. We estimate that approximately 1/3 of industry customers choose homes that meet the standard. We would expect a higher percentage of Triad customers to choose the standard, given higher price points and credit scores on average compared to the industry. Finally, both Service Finance and Triad -- at both Service Finance and Triad, the majority of partner manufacturer facilities are Energy Star rated. This is an important initiative for ECN, and we look forward to updating investors throughout 2021. Back to you, Steve.

S
Steven K. Hudson
CEO & Director

Thanks, John. Turning to Slide 11. Specifically addressing Service Finance, adjusted operating income in the third quarter of $18.6 million, origination growth of 37% year-over-year as well as 38% year-over-year growth in origination revenue. Servicing and other revenue was impacted temporarily by fee concessions announced in Q2. We have proactively and strategically locked in '21 funding to fully support our significant incremental take-share. Service Finance is fully funded through '21 at full margins. And although our estimate is for $2.5 billion of originations in '21, if the market brings us $3 billion originations or more, you can assume that we are fully prepared to accept it. Service Finance continues to experience elevated dealer growth and its multibillion-dollar take-share opportunity. Turning to Page 12. I thought I'd take a moment and reflect on Service Finance growth. It goes without saying that COVID pandemic, which is horrific, but it has produced an opportunity from the work-from-home. But the Service Finance growth strategy is several years in the making, and it's had multiple drivers. And I want to share 4 of those drivers behind this growth over the last 3 to 4 years. First of all, it's the market attributes. We're seeing an aging of housing stock, which is driving improvements. We're seeing energy efficient considerations, which John just mentioned. And we're seeing lower interest rates, which makes it easier for the average consumer to finance home improvements. Second, we have a large customer base of high FICO homeowners who are attracted to our loan products. Third, we believe we have a superior business model to that of our competitors, which is driving our take-share strategy. And fourth, we're adding new manufacturers and dealers, driving deeper dealer base and further incenting or driving our make & take share programs. Dealer base CAGR has been 23% since we've invested with Mark in this business. Turning to Slide 13. Both in originations -- approvals and originations were strong through each of the 3 months that comprised the third quarter. HVAC originations, up 40% -- 48% year-over-year in Q3. Lennox volume, 41% mirroring that. Windows & Doors, which I'll come to in a second, were up 93% in the third quarter. Approvals and originations have strong momentum, which makes us feeling highly confident about the fourth quarter and 2021. This growth is inclusive of Mark's strategic decision in 2019 to limit solar growth. Solar originations, down 45% year-to-date in September, and they now represent only 6% of Q3 originations compared to 20% in the full-year '19. Turning to Slide 14. I've mentioned a couple of times, sustained dealer growth. I would ask you to reference the chart -- on the lower part of the chart on Slide 14, which shows total dealer growth of 23% CAGR over the last 3 years. And that's been -- that is the result of Mark's and his team's consistent strategy on very effectively implementing both their take-share and their make-share programs. We've added 793 dealers in Q2. We've added 582 new dealers in Q3. All of those deals are significant and mature. We've added new service -- new take-share relations, like ServiceTitan, which I'll speak to in a second, which has also driven increased dealer expansion. Turning to Page 15. We made 2 announcements during the quarter: one, ServiceTitan; the other is Panasonic. We typically don't release names of large dealers. This was a material take-share transaction. ServiceTitan announced a transaction with Service Finance. It's a large transaction, will drive our growth. Historically, we believe that originations were in excess of $200 million per annum for this platform. Panasonic, which was a battery program for consumers, is a significant adder in the make-share side. Turning to 16, a case study on Windows & Doors. And yes, people are sitting at home and looking through that picture window during COVID and decide to replace it. But this is more than just that story. If you turn to the right-hand box on the upper right-hand side, you'll see that 54% of the growth in Windows & Doors has been new dealers. That's direct evidence of this take-share program. Year-to-date originations are up 72%. Windows & Doors now account for 16% of Service Finance originations in Q3, up from just 11% in Q3 2019. Estimated backlog in Windows & Doors is -- continues in Q2 and Q3, which gives us confidence in Q4 and 2021. Turning to the credit quality of the portfolios that we manage on behalf of our bank, credit union, life and pension plan investors. We peaked at 1.8% in cumulative deferments in May. That has now declined to effectively nothing at 0.3% at the end of third quarter. Performance of the servicing portfolio continues to reflect the prime and super-prime customer base and an exceptional service -- servicing group within Service Finance. Third quarter delinquencies are down year-to-date and well within historical averages. Turning to held-for-trading assets. You'll note that the end of the second quarter, they were $231.5 million. There were some process delays during COVID. Those have now been solved. The held-for-trading assets are now down to $128.4 million, and our forecasted to be sub-$50 million by the end of the fourth quarter. As we discussed in Q2, sales were delayed primarily to COVID-19 results in a short-term accumulation of balance sheet assets. Service Finance executed on 2 portfolio sales, totaling $205 million in Q3, and they are back on track to accumulate these portfolios and sell them through to our institutional partners. 19 is a slide you've seen before, which demonstrates on a month-by-month basis and over several years, the continued growth of the Service Finance platform and the high-quality of this business model. Turning to Slide 20 on Triad. Adjusted operating income for the third quarter was at $8.9 million, up 15% year-over-year. Originations were up 18%. An important announcement is, we've talked about adding funding partners through the year. This is a point in time where we're going to stop and look at that, but there -- stop and look at the results. Under Matt Heidelberg's leadership and his strategic initiatives, we've been able to secure 12 new partners year-to-date, and we continue to add more. We're also pleased that Fannie Mae has joined Freddie Mac. And as we are now an approved servicer for originations and servicing both on land home financings. We also entered our first insurance company. All of that is strategically important and underpins the $1 billion financing for Triad in 2021. Assets held-for-trading are within the parameters that we continue to sell-through those portfolios, and we expect to be under $30 million by year-end. Floorplan is operating as promised with very low delinquencies and yield being maintained. Turning to Slide 21. Program update similar to that of Service Finance, significant growth in approvals and originations. I would draw your attention to September, which are significant increases over year-over-year. High margin core business is up 51%. We had the expanded land home program, which we're launching -- have launched with both Freddie and with Fannie. Originations benefited from these increased approvals and expanded program offerings. We have delivered on our Investor Day goal of expanded land home program. We'll be providing further detail in February. Turning to Slide 22. A term that we use internally, which is docs out. What is docs out? It means, these are fully completed and approved financings, whether it be a chattel or a mortgage, with down payments made and simply awaiting delivery of the manufactured home. There was a 99% close rate on backlog transactions. You'll note the significant increase in the backlog, which gives us confidence going into the fourth quarter and '21, this backlog is reduced -- has been produced by reduced staffing at manufacturers, early plant closures, which are now back up and running and extended supply chain, as well as significantly increased demand to what I'm referring to as a deurbanization in the U.S. All of this underpins our $1 billion origination target for '21. Turning to 23. Similar to Service Finance, the credit trends have improved. And I think our exceptional total deferments peaked at 1.2% and are now down to effectively 0 in September. 30-day delinquencies are though solely elevated, are well within our historical operating range. 24 and originations. Monthly and annual originations, they're strong. I won't spend time on that. Turning to Page 25. In KG, adjusted operating income for the third quarter of $11.6 million. Partnership revenue was up 29% year-over-year, primarily reflecting our increased asset management fees from the transaction I announced at the beginning of this call. Marketing Services are continuing to slowly improve as bank partners begin to reengage. The asset management portfolio -- our asset management business, known as CCIM, is performing as expected, and we're happy to announce this $500 million transaction without capital -- equity from capital -- an equity investment from ECN and it validates this business. EBITDA margin was 64% in the third quarter, reflect the ongoing proactive expense management under Scott's leadership and a deferred revenue environment. Turning to 26. This is a continued shift implemented in 2019 and '20 to deemphasize what I call the home run transactions and emphasize the singles and doubles, which is my -- which is our long-term recurring revenue, and I think we can now announce that's been successful as you look at the Partnership and Marketing Services in place. 27 is example -- further discussion of that point I just made. I would note for you, the portfolio pipeline is up 3x in 2020 with visibility on significant transaction fees, largely on increased annuity opportunities in that pipeline. We're currently piloting several new marketing programs, which will add to revenues in '21 as banks reengage. And then our card investment management business, the CCIM business, we have a pipeline of in excess of $10 billion of opportunities on behalf of our institutional investors. We won't win all of those, but we will win our share. Michael?

M
Michael Lepore
Chief Financial Officer

Thanks, Steve. Turning to Page 29 and the Q3 consolidated operating highlights. Total originations for Service Finance and Triad of $841.6 million in Q3 2020, were up 32% compared to Q3 2019, reflecting the continuing strong growth of both businesses. Q3 adjusted EBITDA was up almost $4 million or 11% year-over-year and Q3 adjusted net income applicable to common shareholders was $23.3 million or $0.10 per share, up 28% compared to Q3 2019. And we did record a modest incremental COVID provision of approximately $1.3 million, $1 million after-tax, related to our dealer advanced solar exposure, and this cleans up our California exposure, which California remains shut down, and there's opportunities to recover elsewhere in the country. Turning to Page 30 and the balance sheet highlights. Key highlights are that, as indicated last quarter, total assets and total debt were both down, with total assets down about $73 million and total debt down approximately $113 million, driven by the -- primarily by the sale of the held-for-trading assets at Service Finance that Steve referenced earlier. And we expect further asset sales in Q4 and therefore, expect lower asset and lower debt levels again by the end of the year. Managed and advisory assets are now approximately $32 billion, comprised of $3.2 billion in servicing assets at Service Finance, $2.6 billion in managed loans at Triad and managed and advisory assets of $26.4 billion at KG. Of note, we completed CAD 75 million in senior unsecured 5-year term debt offering in the quarter. This debt allows us to diversify our capital structure and provides incremental financial flexibility. Turning to Page 31 and the income statement highlights. Q3 2020 adjusted EBITDA and adjusted net income applicable to common shareholders were both up, as noted earlier, compared to Q3 2019, primarily due to higher revenues across each of our business segments, partially offset by lower margins at Service Finance. Q3 2020 adjusted EPS was $0.10 per share, up from $0.08 in the prior year quarter. In the quarter, we executed certain tax planning initiatives, including tax structuring that allows us to more efficiently utilize losses generated by our legacy businesses. As a result, we now expect our effective tax rate on adjusted operating income to be approximately 18% to 20% compared to 20% to 22% previously. Turning to Page 32 and operating expenses. Key highlights are higher business segment operating expenses, primarily driven by the growth in originations and managed assets at both Service Finance and Triad. Corporate operating expenses were down compared to Q3 2019 and slightly above our revised target of $4 million per quarter for 2020. The higher expenses were driven by higher professional services fees, primarily tax fees related to the tax planning initiatives that we completed in the quarter. Finally, turning to Page 33 and discontinued operations. No significant change in rail assets compared to Q2. The pace of aviation dispositions continue to be impacted by COVID with $2 million in minor asset dispositions completed in the quarter. However, strong efforts are underway to further reduce these asset balances in the fourth quarter. C&V assets were down to approximately $9 million, and are expected to decline further to approximately $5 million by year-end. And finally, the operating loss from discontinued operations was reduced to approximately $3 million for the quarter, reflecting the declining holding costs as asset balances continue to decline. And with that, I'll turn it back to Steve.

S
Steven K. Hudson
CEO & Director

Thank you, Michael. In closing, on Page 35, I'd like to make 5 highlights or suggest 5 highlights for the takeaway. First is the third quarter EPS of $0.10, which is a great number and gives us confidence in our $0.31 to $0.33 for the full year. Second, the Service Finance, Mark and Ian and Eric and Steve Miner, their 3-year strategy of take-share and make-share is now bearing significant fruit with a 37% increase in Q3 originations. And from my perspective, they're just getting going. SFC is fully funded for forecast originations of $2.5 billion. If the team can take $3 billion to $3.5 billion, we've got the funding. But right now, we're leaving the forecast at $2.5 billion. Triad's results of core originations was up 51%, speaks volumes for the strength of that business and the fact that we've been able to attract 11 new funding partners, speaks to the quality of these credit assets. And finally, KG's, with the closure of their $500 million asset management transaction, which had no ECN investment, coupled with a $10 billion pipeline, I think it's time to say that the asset management business has proven itself, and we look forward to sitting up the increases in asset management fees. I would quickly note that the quarter dividend remains at $0.025. We closed a $7 million unsecured debenture. And Michael mentioned, we've used some of those proceeds under NCIB to start to purchase preferred shares. I think you'll see us act on that when we find attractively priced opportunities to invest your and our capital. With that, operator, we'll open the call to questions.

Operator

[Operator Instructions] The first question comes from Geoff Kwan with RBC Capital Markets.

G
Geoffrey Kwan
Analyst

At Service Finance, the 2021 or guidance or how you're looking at it, would that include like the ServiceTitan relationship? I'm guessing the Panasonic's may be small, but just trying to understand what's incorporated into the 2021 outlook?

S
Steven K. Hudson
CEO & Director

It doesn't include ServiceTitan, Geoff.

G
Geoffrey Kwan
Analyst

Okay. Sorry, it does not?

S
Steven K. Hudson
CEO & Director

Yes. I don't want to be accused of being promotional, but we are in the midst of a multibillion-dollar take-share opportunity. ServiceTitan was held by a competitor, and we are now a recipient of that program. So I think it's the reason why we put all that incremental funding in place, so we could take this opportunity.

G
Geoffrey Kwan
Analyst

Okay. And then, I think about a month ago, I guess, there was the Capital One-GM-Goldman Sachs deal. Just wondering, are you able to say, whether or not Kessler was involved? And if so, how to kind of think about the timing and maybe the magnitude to Kessler's earnings?

S
Steven K. Hudson
CEO & Director

We can say that Kessler was involved. I can't tell you the role, but Kessler -- KG was involved. And I think you -- gives us confidence, Geoff, and that we are a strategic adviser to Cap One on both the acquisitions of co-op and affinity credit cards as well as the divestitures. We're not allowed to speak to individual transactions.

G
Geoffrey Kwan
Analyst

Okay. And just my last question was just looking at the 90-day delinquency bucket that went up a lot in Q3, which it looks like it's essentially the solar book moving through the rears buckets from Q2. And then you also had a loss provision in Q3, which you also have one in Q2. I'm just trying to understand, what would need to happen for further provisions against that book. And also explain, why the provisions are being recorded below the operating income line.

M
Michael Lepore
Chief Financial Officer

Sure. Yes, for the aging, that's just that exposure cycling through the aging. So let's move to 60 to 90 days. In terms of the provision, we put it below the line because it's really not a normal operating provision. As we discussed last quarter, it's really related to COVID. That being said, we've called it out for you, so you know the amount. In terms of the remaining exposures, right now, we feel good about our position.

S
Steven K. Hudson
CEO & Director

Yes, I would say, Geoff, you saw earlier in the deck, how small solar has become in our business. It's safe to assume that we've -- everything in California has been locked down and provided for. We have been able to collect on dealer advances elsewhere in the nation. We're just not able to do it in solar, so we made a decision to write-off that remaining balance in California. We have been able to collect elsewhere in the country. To answer your question on the provisions, no, there won't be.

Operator

The next question comes from Nick Priebe with CIBC Capital Markets.

N
Nikolaus Priebe
Research Analyst

Okay. Start with a question on Kessler Group. Partnership Services revenue was up, took a big step-up, 17%, I think, on a sequential basis. Just didn't really seem commensurate with the underlying rate of growth naturally with the credit assets. And I think you alluded to -- there were some incremental fees that were recognized, associated with a bit of a chunky transaction in the third quarter. I was wondering if you could just expand. Like, were those being onetime fees or is Q3 a pretty good baseline here going forward?

M
Michael Lepore
Chief Financial Officer

Yes. Thanks Nick. So in Q3, the -- as you would recall, we earned management and performance fees. So there's a mixture of those coming through the quarter. But as that platform continues to grow, you're going to see that level -- that should be a good baseline going forward in terms of the performance of that business.

N
Nikolaus Priebe
Research Analyst

Okay, okay. Got it. And then just with respect to the fee concessions at Service Finance, how should we think about the timing in terms of those running off? Is it essentially a December 31 and flip back to full fee rates or should we expect to see a bit of a gradual migration of fees back to more fulsome levels throughout 2021?

S
Steven K. Hudson
CEO & Director

Those fees have been provided for the reductions will end in December 31 of this year and provided for in the forecast.

N
Nikolaus Priebe
Research Analyst

Okay. Okay, that helps clarify.

S
Steven K. Hudson
CEO & Director

And as I mentioned earlier, Nick, we're back to fully funded funding going forward. And the incremental funding that we put in place with these fee concessions has allowed us to take this market share that we've just begun to see. Our other competitors aren't structured this way, so they're not able to pick up this flow.

N
Nikolaus Priebe
Research Analyst

Got it. Okay. No, that helps from a modeling perspective. And then one last one. Share-based comp picked up a little bit in the quarter, just a few million. But I was wondering if you could give us a little bit of color around that, whether that was a bit of a onetime anomaly or whether you'd expect that to normalize around historical levels relative to Q3 going forward.

M
Michael Lepore
Chief Financial Officer

Really, it's a onetime thing in the quarter. If you look at the year-to-date, it's actually -- we're actually consistent year-to-year. And what's driving that is it's primarily -- we normally do our annual grants in Q1. But obviously, right in the middle of COVID, the Board didn't feel it appropriate to grant our awards at the bottom of the market. So we actually waited for the price to recover and the business to stabilize, and we've done our normal annual grants this year in Q3.

Operator

The next question comes from Vincent Caintic with Stephens.

V
Vincent Albert Caintic
MD & Senior Specialty Finance Analyst

So very impressive originations growth, and it's quite a huge backlog for Service Finance and Triad, having doubled year-over-year for both. I'm just wondering if you can unpack that a little bit. So when you look at that backlog doubling, how much of that is a make-share versus take-share? And how sustainable is that take-share market? And then when you think about executing on that backlog and turning into originations, how quickly can that get done? And has there been any near-term, say, impacts like, I don't know, supply chain issues or something where there's been more delay on executing on the backlog, and maybe we can expect something next year?

J
John B. Wimsatt

Vincent, first of all, I'd just say, we're all impacted by the same issues when it comes to these macro things like supply chain issues, et cetera. I mean, clearly, a number of factories got hit in Texas and along the Gulf Coast. You've had some materials issues. You've had employment issues in the sense that employees aren't showing up on the line in certain factories, et cetera. So we've all had similar sort of macro environment to have to deal with. The difference is, I think that Service Finance, in particular, has been able to take a lot of share. And you can see that through the year-over-year growth, the quarterly growth of 93%, the year-over-year growth of 72% in the Windows & Doors areas, continuing very, very strong growth across HVAC and some of the other areas that we have. So it's a combination, like we said, its existing dealers that we have today where Service Finance is getting a bigger share of their financing volume and new dealers that are coming from places there where they were getting financing elsewhere and moving over to Service Finance. And frankly, over the years, it had taken 6 months, 12 months to get a dealer sort of up and running because there was a lot of training, et cetera. A lot of the dealers we're seeing today are coming over with a lot of experience doing financing. They're just leaving a former partner and moving over to Service Finance. So the ramp is much, much faster. So we're starting to see some of that origination volume very, very quickly. I don't know if that answers your question. If there's anything else you...

V
Vincent Albert Caintic
MD & Senior Specialty Finance Analyst

Yes, that's helpful. And I guess when you think about executing on the backlog, is that something where, I don't know, it takes 8 weeks until you deliver the manufactured house or until delivering that window and door, so maybe like a first quarter thing, where that gets [indiscernible].

J
John B. Wimsatt

Well, I mean, look, the part of the backlog is -- just what you're talking about is it's taken a little bit longer to deliver. But the overall scale of the backlog is growing just because we have many more transactions going through the pipe. So this is representative of real growth. I would say that in Service Finances' case, the backlogs can move in and out, but different jobs kind of move relative to what their normal is. In Triad's case, you have seen backlogs back up maybe from sort of 3 months normally to closer to 5 or 6 months today. But we are seeing many, many more applications and originations, so we continue to drive through that and drive that origination growth.

V
Vincent Albert Caintic
MD & Senior Specialty Finance Analyst

Okay. Great. That makes sense. Yes. I mean, going from 50% backlog growth, then 100% backlog growth, that seems pretty strong for -- relative to the guidance you're giving for originations next year, so that's very helpful. I guess, second question, the ROE targets, 14.5% to 17.5%, that's some nice expansion there. Could you talk about what your expectations are for 2021 share buybacks that you've built into that ROE guidance?

J
John B. Wimsatt

We haven't built in any share buybacks or other sort of capital plan as it relates to that ROE. So at this point, we're just assuming we're adding any excess capital to the capital base and generating ROE off that higher capital base.

S
Steven K. Hudson
CEO & Director

The only color I would give you, Vincent, is that we will wait. We're not going to chase preferred shares. But if blocks preferred shares are offered on an attractive basis, we're going to take them. It's incrementally positive to our common shareholders.

Operator

The next question comes from Stephen Boland with Raymond James.

S
Stephen Boland
MD & Equity Research Analyst

First question would be on ServiceTitan. I mean, they don't disclose how much financing they do. But they also have on their site listed other lenders. So is this that they just haven't dropped those other lenders or officially, you're getting all the business? I'm just trying to understand the transition of you being added to that platform.

S
Steven K. Hudson
CEO & Director

Yes. It's good to hear you, Steve. The -- we serve segment for all of our dealers. We serve that prime and super-prime segment. So we are the preferred, the exclusive in that segment. There are other people listed there who deal in near prime or subprime or second look credit.

J
John B. Wimsatt

Yes. And the previous lender is still listed on the page. I don't think you would have put out a press release like this unless there was an intentional message there. But we'll see how it shakes out over the next couple of quarters. It's a big add for us.

S
Stephen Boland
MD & Equity Research Analyst

Okay. And if I can just go back to guidance, maybe the way I should look at guidance is, what's not included in Service in terms of the $2.5 billion, didn't -- I mean, you didn't include ServiceTitan, you didn't include Panasonic when this guidance was first given. And partially, the addition of the dealers, which I think has even maybe surpassed your thoughts or guidance or hopes, that probably wasn't baked into the guidance when it was given. So is that the right way to look at it that these are the things that have not been included in that $2.5 billion?

S
Steven K. Hudson
CEO & Director

Yes. I think, Steve, it's fair to say that we're going to let Mark speak to his business at Investor Day. But I think you're observing things that we see on operational perspective. And the reason why we put all this capital in place to fund it is we think there could be upside. But I don't think tonight is the night to revise the $2.5 billion. Let us get through the fourth quarter, let us get ready for Investor Day. And it's looking very positive.

M
Michael Lepore
Chief Financial Officer

Yes. When we set guidance, Steve. I mean, it's a budgeting process, et cetera. It's a bottoms-up process. But this business is actually relatively predictable. You can look at that dealer growth and ticket size growth and what the amount of dealers that are using Service Finance in any given month, et cetera. And you can get to numbers that are pretty accurate. What you can't predict necessarily is adding a new dealer, adding a new manufacturer. And that's, I think, where we feel like that there's a long road here.

S
Steven K. Hudson
CEO & Director

One of our major competitors is now forecasting a 20% decline year-over-year. You can assume, we're on the other side of that trade.

Operator

The next question comes from Tom MacKinnon with BMO Capital.

T
Tom MacKinnon
MD & Analyst

I want to start with just, again, the growth in the dealers at Service Finance. I get the take-share weakened competitors. But the make-share, maybe you can elaborate a little bit on that. You talk about getting a bigger share of a dealer's financing volume. Maybe you can -- what is driving that? Maybe just give us a little bit more color there. And I have a follow-up.

S
Steven K. Hudson
CEO & Director

That's okay. So Tom, it's -- where we're going to go back. But if you go back when Mark announced as exclusive with Beacon Roofing, which is the largest roofer in the U.S., that program is still being rolled out. Beacon didn't have another provider of financing, brand-new programs. So you're seeing dealers being added under Beacon as an example. Panasonic is a brand-new program. That's an example of a make-share. Those are examples of where the take-share is significant, but the make-share is still -- Beacon is like an annuity we'll continue to build. Mark's view is that Beacon could be as big as Lennox down the road, but it's going to take time to build it. So those are examples of make-share.

M
Michael Lepore
Chief Financial Officer

If you remember, back on the Investor Day slides, Tom, we always described the 2 major accounts as Lennox was a take-share account. We took that from another financing provider way back in the day and then it moved on. Whereas Owens Corning had no financing provider at all. It was a new program that Service Finance built with Owens Corning. So that's more of a make-share type program.

T
Tom MacKinnon
MD & Analyst

Okay. Another one, just with respect to that, you've got -- I think in the second quarter, you brought on Freddie Mac and you gave them -- I think they promised $1 billion in terms of originations. And -- but there were lower origination yields. Now that you got Fannie Mae joining that program, do they -- do you have any kind of size or impact on origination yields associated with them on your land home platform?

J
John B. Wimsatt

Yes. Tom, our view was that we launched the new land home program. We're going to have multiple sources to finance that. The one that launched the program with us was Freddie Mac. We always expected that Fannie Mae would be joining the funding mix as well. We hope, over time, we can add even some other partners that could have interest in that kind of paper as well. We're -- right now, we're looking for $150 million to $200 million worth of land home originations next year. This year, we launched it, I think, August 9. We've been averaging about $22 million a month of approvals. That obviously won't impact us this year from an origination perspective. It'll really be in January, February, start to close. But we feel really good about that $150 million to $200 million. We do think there's probably upside to that number potentially. But right now, we're just sticking with that $150 million to $200 million.

T
Tom MacKinnon
MD & Analyst

And the impact of origination yields associated with bringing in Fannie?

S
Steven K. Hudson
CEO & Director

Yes, you -- in the forecast is when you're doing a mortgage product, which is the land home stuff, you don't have the same 7% origination game. You have 3% to 4%. You have a longer duration asset. You have significant servicing income, but there's less. But that's 2 different products, they don't compete. There's people who like chattel loan. There's people who like the land home product. So we're not cannibalizing the 7% chattel loan business to offer the land home stuff. It's incremental volume. But I would just -- this is the work that Matt Heidelberg has been doing tirelessly for the last 2 to 3 years, which is to move or to add incremental funders to what was a credit union-only model, whether it be an insurer, whether it be Freddie or Fannie and others like that, that's allowed us to put this $1 billion number out there for originations.

T
Tom MacKinnon
MD & Analyst

Great. And then finally, the higher uptick in corporate expenses just in the quarter. I think you mentioned it was due in part to some tax planning. Should we think of that of fees associated with -- professional fees associated with tax planning? Is this essentially a one-off? And should we think that the expenses will come back down a little bit in the fourth quarter? Or maybe some guidance there.

S
Steven K. Hudson
CEO & Director

Yes. Tom, thanks. Good question. We've -- as you know, we created in the -- with Algis's leadership, we sold off $6 billion of assets to end up with just under $100 million now of legacy assets. There were some losses recorded over this 3-year divestiture. Michael Lepore and his team have been working at how to access those losses and provide shelter. As you know, about the complexity of tax, it takes time and effort. So you had some expenses this quarter, some expenses in fourth quarter, and I think you see it return thereafter. It's a big win for us to be able to take the tax rate down into the 18%, 19% in an all worth of $300,000 investment.

T
Tom MacKinnon
MD & Analyst

So do you expect that you'll be back on the $4 million per quarter for 2021?

S
Steven K. Hudson
CEO & Director

Correct.

Operator

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

G
Geoffrey Kwan
Analyst

Just one follow-up question. Was just going back to that -- the tax planning and the impact on the tax rate. Is that impact, maybe not permanent, but I mean, is that a tax rate that you would see all else equal for a number of years? And can you kind of articulate that or is it something more temporary?

M
Michael Lepore
Chief Financial Officer

Well, very least through 2021, probably 2022. And then obviously, things -- after that, things change pretty quickly. So we're -- as of right now, that's what our forecast and go forward rate is looking to be in the range of...

G
Geoffrey Kwan
Analyst

Okay. So maybe a couple of years at that? And then assume...

S
Steven K. Hudson
CEO & Director

Yes. Well, at least, Geoff, most of our competitors operate in this 18% to 22% range. We have significant NOLS, if you will, to weight us through. So I think I'd be a little more optimistic in, Michael, probably 3 years, but taxes can change. But given what we have at hand right now, I think you have at least 3 years at this rate.

M
Michael Lepore
Chief Financial Officer

Yes. And more importantly, we will be paying cash taxes for those next couple of years [indiscernible]

G
Geoffrey Kwan
Analyst

Right. Maybe a few years at that rate and then kind of going back to what you've been [indiscernible] recent years, is that the way to think about it?

S
Steven K. Hudson
CEO & Director

Yes. I would just drive you, Geoff, towards our competitors, have an 18% to 22% tax rate.

Operator

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

J
Jaeme Gloyn
Analyst

First question is just digging into the Triad origination income rate this quarter, it looks like it comes in at about 6.25% versus that sort of 7% run rate. Was there an explanation as to why it was a little bit lower this quarter? And is that a one-time impact?

J
John B. Wimsatt

Yes. Jaeme, good to hear you. We are -- it came down a bit in the quarter mostly because we had a little bit of elevated on balance sheet. So some of the originations that we normally would have sold through stuck on our balance sheet a little bit, so we didn't earn that origination fee in the quarter. We are portfolioing those loans for bulk sales where we will earn that origination fee. It will just -- should come back in the fourth quarter, I think. So yes, I mean, we would characterize it as one-time that we should see the margins sort of come back to normal in the fourth quarter. The explanation is basically we portfolioed more assets this quarter than we had traditionally.

J
Jaeme Gloyn
Analyst

Got it. Higher held-for-trading assets drives a little bit lower origination fee income.

J
John B. Wimsatt

In the quarter. Yes, it trends a little bit lower in the quarter. Yes.

J
Jaeme Gloyn
Analyst

Yes. Okay. Shifting to Service Finance. Any color on -- can you actually provide any stats on what the percentage of dealers are submitting in Q3? Like it's elevated, but is it is it twice the normal rate? And what would be a normal rate for dealer submission?

J
John B. Wimsatt

No. I mean, if you -- we don't -- we haven't disclosed that on a monthly basis or a quarterly basis, but it's definitely not doubled. Like what happens here is, you're talking about differences in percentage points, right? So every year, if you think about just the model and how we make money here, it's -- every year, our dealer count goes up a little bit or whatever that number is, our ticket size has gone up over time. And then those numbers of dealers submitting go up. But they only go up by a percentage point or two, and there's some seasonality to it. What we've seen over the last several quarters is submission rates that are above the normal range in a relatively meaningful way, and it's sort of been stable above that range. So it's not like you're getting -- all of a sudden, you're going from 30% to 50% or something like that, but you're going from 25% to 32% or something like that. Like it's -- and that's any given dealer or any given month, right? Like so it's -- that's not how it changes. But the combination of all the above, enhanced dealers, growth plus submission rates is a big deal.

J
Jaeme Gloyn
Analyst

Okay. And still on Service, the origination growth is outpacing the approvals growth. Is that a reflection of the higher ticket size of what the dealers are submitting? What's driving that?

S
Steven K. Hudson
CEO & Director

Yes. I -- you're seeing -- with the dealers that are being added, you're seeing very mature dealers coming in with significant pipelines with higher tickets. So in the past, your approval to funding, your pull-through, may have been lower. Your approval of the funding now is higher. So your approval and you're getting higher originations out of the same approval period. It's also hard, Jaeme, to read into a month or 2 approvals and the origination that you got to look at on a quarterly or annual basis. We'll be happy to follow up with you.

J
Jaeme Gloyn
Analyst

Okay. Fair enough. Last one for me, just looking at the Kessler's managed assets declined quarter-over-quarter. Any additional color to add to what happened there?

M
Michael Lepore
Chief Financial Officer

Yes. Just like you've seen in the general credit card industry, credit card balances are coming down due to COVID. So you had a slight decrease in credit card portfolios that we advise on at Kessler. Not the ones that we own, but the advisory portfolios.

Operator

Next question comes from Mario Mendonca with TD Securities.

M
Mario Mendonca
MD & Research Analyst

Several of my questions may have been addressed, but perhaps I'll just try to be quick with this. Did you offer any commentary on the tax gain this quarter? Was there any reason anything unusual that would have driven taxes lower in the quarter?

S
Steven K. Hudson
CEO & Director

Yes. We found, Mario, way to use the operating losses we have in Canada, which were the sale of the legacy businesses we've been able to have income in Canada, which has allowed us to produce a lower effective tax rate, and it's just not a one-time. It's something that's going to occur for the next 3 years.

M
Mario Mendonca
MD & Research Analyst

Right. Okay. So this is this is sustainable then? It wasn't a special audit that was completed in the quarter and resulted in a gain?

M
Michael Lepore
Chief Financial Officer

No. We still have losses in Canada that we haven't recognized the benefit of.

J
John B. Wimsatt

Yes, it was 17.4% for the quarter, and I think we're guiding to 18% to 20% on a quarter-over-quarter basis.

M
Mario Mendonca
MD & Research Analyst

Just about in line, I get it. On solar, did you talk about how much is left in solar net of the provisions?

S
Steven K. Hudson
CEO & Director

Yes. We have. In California, we have about $2 million left, Mario, about $1.8 million. We're going to collect that piece. So we are down to -- you're not going to see another solar write-off in the fourth quarter or the first or second quarter.

M
Mario Mendonca
MD & Research Analyst

So California has $1.8 million. But isn't the total something closer to $11 million?

S
Steven K. Hudson
CEO & Director

Yes. But you -- those are in areas where it's still being installed. It's -- the work is being done. There's no delinquencies. There's no aging. It's working just fine.

M
Mario Mendonca
MD & Research Analyst

But would I be right in saying the total is about $11 million?

M
Michael Lepore
Chief Financial Officer

That's correct.

M
Mario Mendonca
MD & Research Analyst

Okay. And then on the Service or rather, on Kessler, that $500 million portfolio transaction, can you talk about the economics behind that? Like what sort of service fees or management fees Kessler earns or is that too private a discussion to have on this call?

M
Michael Lepore
Chief Financial Officer

Yes. We don't get into the specific fee arrangements, but it would be typical management performance fees for these types of private transactions.

M
Mario Mendonca
MD & Research Analyst

And what's...

S
Steven K. Hudson
CEO & Director

We typically have 75 to 100 basis points of management fees. And then we have maybe 125 on certain transactions. And we have a carry after that.

M
Mario Mendonca
MD & Research Analyst

I guess, the reason I asked that is, what services is Kessler providing that would support that type of fee structure?

S
Steven K. Hudson
CEO & Director

So you're -- first of all, you're doing on behalf of our institutional investors. And we're originating transactions that you otherwise wouldn't say. So we will line up a portfolio on an exclusive basis. We will have given our views and, I think, fairly deep due diligence on the quality of that portfolio, credit exposure, yield opportunities, and we will bring you not just the portfolio on an exclusive basis, but also a plan how to improve the economics in that business.

J
John B. Wimsatt

Yes. We source, we structure, we manage that entire platform and that entire investment for our investors. So think about it this way, Mario. In -- historically, you've seen these portfolios move bank to bank, okay? Now you're in a situation where some of these portfolios may not be as attractive for banks, given new capital rules, given new credit rules, et cetera. And so what we've basically done is created a market for institutional investors to invest in these kinds of assets. So we are bringing them unique assets. We're sourcing structure and helping manage that portfolio. And for that, we're getting paid management fees and performance fees like you would in this type of idiosyncratic investment.

M
Mario Mendonca
MD & Research Analyst

Yes. It sounded to me like something an investment banking fee would be attached to. But somehow you've converted this into more of an annuity. I guess, that was the strategy ultimately.

S
Steven K. Hudson
CEO & Director

Correct. Yes, we believe we're providing value added by improving your yields and mitigating your credit losses.

M
Mario Mendonca
MD & Research Analyst

And then finally, a more -- a much more broad sort of general question. I've been watching the progress of your book value per share over many years. And over the last couple of quarters, there have been no buybacks, but yet the book value per share continues to shrink. And when I drill down on why is this the case, I can certainly look at a bunch of one-offs that won't repeat themselves. So I can see that normalizing over time. But there are 2 that are niggling and that will continue and continue to constrain the growth in book value. And I'm talking aside from anything to do with buybacks. There's, of course, the amortization of intangibles, which I think most people would agree, is appropriate to remove for the purposes of discussing your core adjusted earnings, I. Think virtually every company would do that. But the share-based compensation, and it caught my attention this quarter because it was almost double what it has been in previous quarters. What is the sort of -- what's the logic there in excluding share-based compensation from your adjusted earnings? Is it because it's not really a cash item, it's something that's settled in stock? What's the logic behind doing that?

M
Michael Lepore
Chief Financial Officer

Yes, I think that's the part -- I mean, every company does it. One, it's -- you could be settled in stock. Two, it can be is volatile based on the movement in the share price of people tending to normalize for that, so those 2 combinations.

J
John B. Wimsatt

Yes. And also, Mario, just you know, I mean, if you look at the year-over-year number for the 9 months, it's really about the same. Remember, in this quarter, I don't know if you heard what Michael said -- had said previously, we typically award our share-based grants in the first quarter of the year. But since COVID happened and the stock dramatically fell, the Board and management decided not to make those grants into the third quarter until the stock had recovered somewhat. We just thought out of fairness to shareholders, et cetera, that was the right thing to do. If you look at the way the grant and the accounting works on the grant, you have to take 60% of the grand upfront. So if you have a 5-year program, for example, you're taking 3 years of the grant immediately into your accounting number for this particular quarter, even though it is noncash and it won't actually get paid out or realized unless performance targets are hit over the next 5 years. So it's -- the accounting for these things generates a much bigger number than the actual cash it would in any given year.

M
Mario Mendonca
MD & Research Analyst

I think ultimately, what's driving this line of questioning for me and the reason why investors talk about it more than they do for other companies is the share-based comp in any given quarter, call it, an average of $4 million, $4.5 million, amounts to 15% plus of your pretax adjusted income. And that's just a big number compared to what we'd see at any other company we cover. And that's ultimately why it's having this negative effect on book value per share growth. So it's -- it caught my attention, it's catching the attention of investors because it's a large number relative to your adjusted earnings. And as a result, it's having a meaningful effect on the company's capacity to grow your book value. And that's what's driving this narrative I hear among investors and myself. So that's more of a...

S
Steven K. Hudson
CEO & Director

Yes. I think what you're saying, most of it is fair. However, share-based comp can go up and down. We waited this time to issue this till the stock had recovered back to where it is today. I'd also draw your attention that it's 5-year testing with performance. So we'll see what it is when it's actually realized. And my final view is, it's a long-term retention tool too. We have some pretty powerful business unit partners, and this is one way of getting retention and alignment with the operating results. That said, there's no doubt that this will begin to mitigate in '21. I think I, as CEO, have done all the share-based allocation. Most of what I needed done has been done.

M
Mario Mendonca
MD & Research Analyst

Okay. Yes. The positive takeaway from my perspective is it's a closer alignment of senior executives to the value of the stock. The negative is that it ends up being a large number relative to the pretax earnings. But I think I've taken this as far as I can go.

S
Steven K. Hudson
CEO & Director

Yes. And I think you'll see it mitigate '21, but we have to wait for the proof in the pudding, Mario.

Operator

[Operator Instructions] The next question comes from Vincent Caintic with Stephens.

V
Vincent Albert Caintic
MD & Senior Specialty Finance Analyst

I have 2 follow-ups, kind of following the line of question about capital that I had earlier. First one, just thinking about uses of capital. So -- and we talked about share buybacks, that's not baked into your 2021 ROE guidance. And you're growing so quickly, but you don't need capital for that since you've got bank funding partners to take all of that. Just wondering with all the free cash you're generating, is there anything else you might be interested in using that free cash for maybe if there's additional capabilities that could help you grow more or if there are other verticals, just thinking about M&A or anything else you might use the capital you're generating for?

S
Steven K. Hudson
CEO & Director

Yes. It's -- thanks, Vincent. It's -- our principal focus is on our organic opportunities, given the take-share that we spend a fair amount of time on this evening. This make-share -- that said, we are seeing a number of bank partners. Now that our business model is getting bigger exposure, we're seeing banks and other institutional investors approach us looking for asset flow. And I've often made the case that our principal customer are the banks, credit unions, lifecos, pension plans that we originate assets for. They pay our origination fees, they pay our management fees. We've actually added a little bench strength there. We brought a strategic adviser on. The fellow's name is Aris Kekedjian. You know him because he was the CFO of GE's bank group and activities. He is assisting us not as a member of management, but as an adviser on identifying opportunities for banks who we're looking for additional flow. John continues to look at tuck-in M&A deals, but don't read into that, that we're doing a large transaction anytime soon. We're very happy with our growth. We're happy that the banks are now coming to us, looking for asset flow. We're happy like guys like Aris can give us some advice on how to deal with those banks and what kind of flow they're looking for. So I think it looks good.

V
Vincent Albert Caintic
MD & Senior Specialty Finance Analyst

Okay. Great. That's helpful. And then the second question is on your funding. So certainly, you differentiated yourself with funding, and it seems to be -- when I think about yourselves and competitors and some of the guys who are shrinking, it seems like funding is the biggest driver of that. And I know, you've secured your funding through 2021, you had to give up maybe a little bit of margin for that. But how you're thinking about funding ability? And maybe if you could differentiate why you're able to get that funding and therefore, able to secure all these take-share opportunities versus some of these other guys, like the one, for example, with the 20% down year-over-year as well as others?

S
Steven K. Hudson
CEO & Director

Yes. I think the ultimate -- the answer to that, Vincent, is that we treat the banks, lifecos, credit unions and insurers as our customer. And we spent a lot of time talking about the assets that they want and need and the servicing they need. That allows us to be laser-focused on where we can act on their behalf. Particularly in a market where competitors are going through significant strain, we're able to walk in and make a $200 million year flow arrangement move across like that without any interruption because our bank partners want that. And the big learning I've had coming out of the COVID crisis is that we need to extend these funding relationships, so we've extended into 2022 on a committed basis. So we have those long-term customer relationships. And Matt has been doing the same thing at Triad with Mike Tolbert. They've been extending those relationships, bringing GSOs in as funding partners. You can't ask for a better customer than one of the U.S. GSOs to be a partner. So I think it's a laser-focus on our customer, which is the institution purchasing the paper, and we're servicing and advising it on. And that's the part that's going to hold us in good stead as we continue to go through this market disruption.

Operator

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 great day.