ECN Capital Corp
TSX:ECN
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ECN Capital Corp
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Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Third Quarter 2021 Results Conference Call. [Operator Instructions] 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 conference over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.
Thank you, operator. Good afternoon, everyone. First, I'd like to thank everyone for joining our Q3 earnings review call. Joining us today 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, 2021, 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 statements section of the MD&A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct.You should note that the Company's earnings release, financial statements and MD&A and today's call include references to a number of non-IFRS measures, which we believe help to present the Company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. All figures, as always, are presented in U.S. dollars unless explicitly noted.With these introductory remarks complete, I'll now turn the call over to Steve Hudson, Chief Executive Officer.
Thanks, John. Turning to Slide 7. The Service Finance sale to Truist is scheduled to close in early December. A shareholder meeting has been called for December 2 to approve a reduction in capital. As we mentioned earlier, no approval is required for the Service Finance transaction just the form of dividend. The distribution will be paid to shareholders prior to the year-end.Turning to Page 8. We had an exceptional quarter. We're pleased to repeat -- report $0.06 of earnings per share, and Service Finance has now been reported as a discontinued business in the third quarter. We are reiterating our 2021 and 2022 guidance, which will be updated at Investor Day. ECN has obviously exceeded this quarter and will exceed the expectations in the fourth quarter.Originations for Triad were 48% quarter-over-quarter increase, strong. We remain on track for our $1 billion-plus a year in originations, operating income of $16 million in Q3. Backlog has continued. Builders are continuing to turn on additional or idle plants. I would reference for you the recent call from Skyline, which is a publicly traded U.S. manufactured home participant, where they announced the opening of several new idle -- sorry, not new, but several idle or mothballed manufacturing plants.Chattel and COP originations remained strong, and the pipeline continues to expand. Land-home pipeline is at a record of $185 million. New funding partners year-to-date are 12 new funding partners. KG reported solid adjusted operating income of $12.2 million. We launched a significant new multi-year co-branded partnership program.We're pleased to announce that KG has entered into a partnership, a strategic partnership with specialty lending company affiliated with Blackstone. And the first step in that relationship was a $450 million portfolio purchase with KG acting as the originator and manager.Consistent with this new partnership, ECN exited its credit card investments, which were also sold to specialty lending company. John will speak to this in a moment. We believe that this initiative validates ECN's investment in our Credit Card Investment Management business.Turning to Page 10. As I mentioned, $16.2 million of operating earnings this quarter. Originations up 48%. We've added one new funding partner in the quarter. Industry backlogs are now extended to 9 months plus. We're maintaining our guideline -- our guidance of $1 billion-plus in originations in 2021.Turning to Page 11. Strong growth in both approvals and origination during the quarter. We've also continued to expand our new and improved product launch in so-called make share that we use -- is a term we use throughout our business, and that will drive incremental growth in 2022 and beyond.Slide 12 shows you a slide of our menu of services and products that we offer. This was also in the Q2 deck. I think it's interesting to note that over half of these initiatives have been launched since ECN has made its investment in Triad.Turning to Chattel update. The Docs Out, which are deals that have been approved, signed and are awaiting delivery of a home remains at elevated levels, both this backlog and backlog and approved land home gives ad an increasing strength to our 2022 guidance.Page 13 -- sorry, 14, dealing with the Land Home update. We continue to see record approvals, both in volume and growing pipeline. And we officially launched the FHA product in 2021, which will also drive our higher originations. We will guide you at Investor Day to the high-end of our $1.5 billion for originations for this business.Turning to Page 15. Assets held-for-trading remained at a very modest level. You can anticipate that this level will remain in the $30 million to $50 million range.On 16, portfolio credit trends remain exceptionally strong, both in delinquencies and charge-offs. That bodes well for 2022.17 is a slide you've seen before. It shows the growth quarter-over-quarter over the last 5 years.On Page 18, the Triad outlook, where we're reiterating our guidance for 2021 at $43 million to $46 million. Obviously, we're going to be above the $46 million slightly. Continue to expect originations of in excess of $1 billion. Our core market is growing, and our new products are fully launched. We're reiterating our guidance for 2022 of $57 million to $65 million. We will be at the top end of that, and we'll revisit with you at Investor Day in early 2022.As I mentioned, our guidance for originations is $1.25 billion to $1.5 billion, I would guide you to the high-end of that range.And look forward to having Matt and Mike present to you at Investor Day. John?
Thanks, Steve. As we did with Service Finance last quarter, as part of our ongoing commitment to ESG, we engaged Sustainalytics to evaluate Triad's manufactured housing loan program. Sustainalytics specifically look to Triad's contribution to affordable housing goals. Specifically, they certified that Triad's originations finance the purchase of affordable homes and that the majority of Triad's loan satisfy bank's CRA requirements under the Community Reinvestment Act.Triad's program creates clear positive social impacts by serving low and moderate-income populations. And finally, these characteristics contribute to United Nations sustainable development goals. A copy of the report is available on Sustainalytics website at the link provided here on the page, and will be up on the ECN website under the Presentation section.With that, I'll turn to Page 20 and move on to KG. KG reported a solid Q3 with adjusted operating earnings before tax of $12.2 million, which is up around 6% year-over-year. Revenue was effectively flat with improvements in marketing services and transaction services and, to a lesser extent, interest and other, offsetting a year-to-year decline in the Partnership Services area.Partnership Services decline is largely due to lower CCIM balances year-to-year as our initial investments were largely in runoff portfolios. Marketing Services continue to ramp to around $3.5 million for the quarter, which is up about 30% compared to last quarter as the rebound in marketing spend continues.As you'll see, a lot of new activity has occurred since the end of the third quarter. In Q4, we added a significant new co-brand partnership with a major Canadian bank. We also launched a multi-year CCIM partnership with SLC and closed on a $450 million card portfolio as part of that. In addition, we sold our existing credit card investments to SLC, completing our transition to a fully asset-lite business and validating ECN's investment in building out the platform.Page 21. Q3 saw a bit of a decline in the Partnership Services income. As stated before, Partnership Services decline is largely due to lower revenues as a result of lower CCIM balances year-to-year as our initial investments were largely runoff portfolios.The actual traditional core partnership revenues are up year-to-year a bit. And the volatility that occurs in the Partnership Services space is largely from 2 things. One is renewal opportunities within the core partnership area, which can obviously be fees that are earned more on a onetime nature as well as some of the variability around CCIM assets, which specifically can move up and down depending on the nature of the underlying portfolio.Importantly, between the partnership with SLC and our current healthy pipeline, we continue to believe CCIM will be a nice contributor and grow well over the next several years. Finally, we look to -- we continue to view the BaaS or Banking-as-a-Service opportunity favorably, and we are well along with our initial launch partner and looking to add other partners in 2022.Moving on to Page 22. After spending the time and capital to build the business, CCIM is an important growth area for KG going forward. The SLC partnership should accelerate that growth. We think that there is an opportunity to add in the range of $1 billion to $3 billion of assets annually across the platform. Management fees are generally between 75 basis points and 100 basis points or 3x to 6x larger than traditional Partnership Services arrangements at 15 basis points to 25 basis points.In addition, KG earns performance fees, which are typically a percentage return over a hurdle rate, and that can materially enhance revenues over time. So adding $1 in CCIM assets is the equivalent of adding $10 or more on traditional partnership assets, which is obviously quite attractive for KG.On Page 23, we recall the time line of the CCIM buildout. KG recognized early that the market was changing and some typical bank-to-bank transactions were no longer tenable, largely due to regulatory change or changes in capital charges. KG then pioneered the bank's institutional investor structure, which was unique and allowed KG to continue to transact where competitors cannot. ECN works with KG to build the platform by investing in its first 4 transactions alongside institutional investors as well as in acquiring a platform and team.ECN put up capital to incubate a new business inside one of our portfolio companies. This is exactly what we've done across Service Finance and Triad. In the fourth quarter, ECN successfully exited our initial credit card investments in the transaction with SLC. While this validates our process and generated meaningful returns, the goal of creating a new business platform has been successful.Finally, on Page 24, we are reiterating our previous guidance from last quarter for 2021 and 2022, we'll revisit our 2022 guidance at our upcoming Investor Day.With that, I'll turn to Mike.
Thanks, John. Turning to Page 26 and the Q3 consolidated operating highlights. As noted earlier, Service Finance operating results are now presented as discontinued operations, and its assets and liabilities are classified as held-for-sale on the ECN balance sheet effective Q3.Triad originations of $299 million were up over 48% compared to the same prior year quarter, reflecting continuing strong growth in our Manufactured Housing business segment. And Q3 adjusted EBITDA of $26.8 million was up almost 46% compared to the prior year quarter, again, primarily driven by the strong growth of Triad. Q3 adjusted net income applicable to common shareholders was $19.4 million or $0.06 per share compared to $12.5 million or $0.03 per share in the prior year quarter.Turning to Page 27 and the balance sheet. Key highlights for the quarter are the total assets and total debt were both down compared to the previous quarter. Total assets down about $59 million and total debt down by approximately $90 million, and the decrease in both assets and debt were primarily driven by the sale of held-for-trading assets at Service Finance.Both assets and debts decreased subsequent to quarter end, Q2, as noted in our Q2 call, as a result of the sale of $173 million and held-for-trading assets at Service Finance. Managed and advisory assets on a continuing basis were approximately $30.1 billion, comprised of $3 billion of managed loans at Triad and $27.1 billion in managed and advisory assets at KG.Now turning to Page 28 and the income statement. Key highlights are, again, as noted, Q3 2021 adjusted EPS was $0.06 per share, which was above analyst consensus for Q3 of $0.05 per share. And Q3 2021 adjusted EBITDA was $26.8 million compared to the $18.4 million in Q3 2020, again a 46% year-over-year increase, primarily driven by growth at Triad.Now turning to Page 29 and operating expenses. Key highlights are higher business segment operating expenses were primarily driven by the growth in originations, managed assets at new products at Triad. Corporate expenses of $4.6 million are down compared to the previous quarter, primarily due to the allocation of corporate G&A attributable to SFC to discontinued operations. Legacy business expenses of $1.3 million were offset by legacy business revenues of approximately $1.3 million.And then finally, turning to Page 27 and discontinued operations. As noted, SFC operating results are now reported as discontinued operations and adjusted EBITDA of $25.1 million attributable to SFC, includes approximately $4.5 million of corporate and transactional costs was still up compared to the $17.8 million in the previous year, reflecting the strong year-over-year growth of Service Finance. As the Service Finance business remains strong, and its overall performance remains in line with our original 2021 guidance range.With that, I'll pass it back to Steve.
Thank you, Michael. On Slide 32, I'd like to highlight 5 things. First, obviously, is that we are on track to close the Service Finance transaction and to pay a dividend before year-end. Second, the $0.06, as Michael noted, was a beat, and we have continued strength going into the fourth quarter. Third is the launch of our partnership with SLC affiliated with Blackstone. That's an important -- it's an important strategic development for Scott Shaw and want to reach out and thank Scott and his team for getting that done. And coterminous with that was the sale of our remaining credit card assets to SLC, a big step forward.#4 is that ECN was active in repurchasing common stock in Q3 in the NCIB. You can assume that we will continue to use the NCIB to create additional value for our shareholders. And Michael and his team successfully issued with Randy, $86.25 million of senior unsecured, which was going to be used to retire the preferred shares, portion of preferred shares coming due at year-end.And with that, operator, we're ready for questions.
[Operator Instructions] Our first question is from Stephen Boland with Raymond James.
Two quick questions. First on Triad. We've seen the progression in the revenue yield, I think it's up another 17 basis points this quarter on numbers. I'm just wondering what -- is that going to continue? What's driving that? Obviously, it's probably a mix of business. Maybe you could just explain that.
Yes. Steve, I think your -- if I understood the question, you've got increased revenue or increased margin on the sale of our loans. Is that what the question?
Yes.
Yes. So we've had -- we've been able to, with the institutions buying the loans, the demand is unprecedented for our loan product. We're able to get better deals. So I think you can assume that will continue into 2022. If we add $2.5 billion, $3 billion of loans from Triad in 2022, which we don't, unfortunately, they all be sold this evening. So we've been able to use that competitive [ tension ] to get a modest improvement in terms and higher margin.
Okay. So Steve, when I look at like total revenue versus your average managed portfolio, that's really the driver of that increased ratio is just the gain on -- the gain on sale with the margin on sale.
Correct.
Steve, I just was going to say, I mean, if you look at revenues that are made up of 3 components, right. So our origination revenue in the quarter represented about 7.3%, which is up a decent chunk year-over-year. It's sort of flattish, maybe down even a little bit from last quarter, but it's still elevated overall. That's what Steve is talking to. There's just a lot of demand for these assets.The servicing income running annualized around 53 basis points is about flat with last quarter. And yes, floor planning income is higher than it has been previously. So as balances are up and it's something we've turned it over a little bit faster. So that's what accounts for the revenues in the quarter. It actually looks kind of in line to me to where it was last quarter. Though revenues still are accelerating faster than expenses. So you saw EBITDA margins jumped [ 6% ] for the quarter.
Okay. And then just a question on your guidance for Triad on 2021. Like Q4 would then have to be, I guess, not say well below, but certainly below Q3 to get to the -- even to the top end of the range. You mentioned it, sorry, in the comments. But so is Q4 expected to be down sequentially in terms of a...
We expect to have a strong fourth quarter for Triad. Hence my comments, Steve, that we will beat expectations in the fourth quarter.
Okay.
Obviously, you look at the guidance and what we've reported year-to-date, it would imply something like $6.6 million to $9 million for the third quarter just to get to the guidance range. We clearly expect to be above that at this point. But we updated guidance last quarter, and we got the Investor Day on January 25, so we'll readdress all our guidance then.
Our next question is from Vincent Caintic with Stephens.
I guess first on Triad. It's nice to see the origination growth ended moreover, the really high backlog growth. Just wondering when you think about maybe some of these delays, good to hear that the Finance is going back online. But how much have the delays maybe impacted business? And if you would maybe have normalized some of those, what would have originations been? And is there basically pent-up demand here that we could see [ factories ] come back online.
Most of the delays are caused by the lack of labor as opposed to supplies. It's been a challenge to get carpenters and electricians and plumbers back into the plant, depending upon the particular state and that states unemployment assistance. As you know, it's been a state-by-state issue. Some of the states have turned it off sooner than others. And that's what's driving the idle or the mothballed plants to come back online.Hard to say what -- how to normalize it. I think these additional plants coming back online, I referenced Skyline's conference call for you will material impact. And I think that's the driver to our 1.5 on the high end of our guidance next year. I'm not being as crisp as I should be, but that's the information we have in front of us right now.
Yes. I would say that we've started to see potentially some ease on the labor side as you've seen a number of the stimulus programs start to end around the country in certain areas of the country, you've started to see some labor statistics that are looking a little bit better. Obviously, the plants that are coming online, these are plants that weren't online previously. It's not like they were made previously on and went idle. These are older plants or, in some cases, new plants, but this is to expand capacity because demand is still running very, very high. So I don't know exactly what it would have been, had all this stuff been running full out, but we feel pretty good about where we are and where we're going into next year.
Okay. That's helpful. And yes, it's sort of like with different types of products, it seems like sometimes demand gets washed alongside with the supply. So that's helpful.I guess switching to KG Now. So a very interesting CCIM partnership. I'm just wondering if you could maybe talk about the economics in more detail. Not sure if ECN has equity into SLC partnerships. So I guess that's one. And then the loan sales or the $450 million do get gains as you contribute those loans, sell those loans into the partnership. And then the appetite for -- you talked about $1 billion to $3 billion. I'm not sure if that's just with this one partnership or if there's more opportunities, more demand from other funds to grow that?
Thanks, Vincent. So yes, we're really excited about this partnership with and we did do a -- we closed on a portfolio of about $450 million of assets as part of the launch of this as well as sold our previous assets. We -- the terms aren't disclosed. We can't talk about exactly what our economics look like in this business. But as you can imagine, and as some of the slides say, if you think about it from a generic perspective, we think management fees look something like 75 basis points to 100 basis points.And on top of that, there's a performance fee, which is kind of structured like a typical fixed income fund type performance fee, where there's a hurdle rate of return and above that, you are sort of percentage on that rate of return. So we hope to have more information and be able to talk some more at Investor Day. And yes, yes, it's -- you think about it like a traditional sort of asset management type relationship. We're just getting paid fees to be the manager of that process. We're not making any investment here. There's no capital. So pretty straightforward, very exciting partnership.
[Operator Instructions] Our next question is from Tom MacKinnon with BMO Capital.
A question with respect to the corporate expenses, $4,604 million in the quarter. Just wondering how you're thinking about things now that Service Finance would be gone. What should we be looking at sort of looking into next year with respect to the corporate expenses? And then while you're at it, maybe you can talk, is there any preliminary thoughts you can tell us about where you think you might be positioning the dividend, the common dividend going forward as well?
Tom, it's Steve. We were on the record last quarter saying the guidance for corporate expenses going forward next year was $12 million, and that remains unchanged. And then we've also, on the record saying that we will have a dividend. Going forward, we will review that dividend policy and payout ratio at Investor Day, but there will be a dividend.Yes. Tom, my whole life has been 3 things in the last 60 days, close, close, close. So we're on track to get this transaction closed. And I think -- and we'll be able to give you clarity on your further depth on your questions when we see you in January.
Is there any reason, Steve, why the corporate expenses were so much higher? I assume that corporate line excludes the Service Finance business. Why was that sort of higher than the run rate of $3 million you're looking at for next year?
Tom, it's Michael. Well, it's -- the overall run rate has been consistent since all year. We obviously still -- we're still managing Service Finance right now. And as I said, we're focused on closing the business. So the run rate has generally been consistent and is not reflective of our planning for 2022.
Okay. So when you retalked about any legacy there, that's not associated with any of the Service Finance. So really, the $4.6 billion goes down to a run rate of $3 million just strictly as we lose the Service Finance business. Is that the way to think that?
Well, as we go through the planning exercise to reduce our overhead, yes, that's the number that will go down to $3 million.
Okay. All right. So even though we ex discontinued operations, the corporate expenses are not really ex the discontinued operations. Is that correct?
Well, those are the ones that are in -- they are, by definition, going to go away when Service closes.
Okay. All right. So you still stand by $3 million a quarter looking forward on that.
Our next question is from Jaeme Gloyn with National Bank Financial.
I just wanted to confirm I heard this correctly, the SLC partnership with Blackstone and yourselves, is there any other partners involved at this time? Do you expect to get more demand from other partnerships into that SLC partnership? Or is that just going to stay the 2 of you at this time?
Yes. SLC is affiliated with Blackstone. You heard that right. The only 2 partners at the table are us and SLC. We see it as a very deep partnership. As you know, our relationship with Blackstone started at Service Finance with a $1 billion-plus program to purchase loans through service. I think it's safe to -- you can assume this partnership is expanding.
Okay. Great. And today, it's $450 million of credit card loans in the presentation, you kind of stated that there could be other unsecured loans as well. Can you give us a little bit of color as to maybe what you're thinking about on that front and the potential timing for other loans getting into that relationship?
Yes. As you'd appreciate, Jaeme, we do have an active pipeline. I'm not going to get into the size this evening because it is a competitive process in some of these transactions. We think we've got a great partner in SLC. And so we'll give a little more color on pipeline when we see you at Investor Day. Right now, this is what's been approved by our partner to say.
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.