ECN Capital Corp

TSX:ECN

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Third Quarter 2023 Results Conference Call. [Operator Instructions] And 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.

[John Wimsatt, executive]

Thank you, Lyn. Good afternoon, everyone. First, I want to thank everyone for joining this call. Joining us from ECN today are Steven Hudson, Chief Executive Officer; Michael Lepore, Chief Financial Officer; Lance Hull, President of Triad Financial; Matt Heidelberg, Chief Operating Officer of Triad Financial.

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, 2023, have been filed with SEDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentations section of the company's website.

Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I'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 our MD&A. All figures are presented in U.S. dollars unless explicitly noted.

With these introductory remarks complete, I'll now turn the call over to Steven Hudson, Chief Executive Officer.

[Steven Hudson, executive]

Thanks, John, and good evening. Turning to Slide 6, a number of bullets here, and I'll speak briefly to most of them.

We had our first Board meeting today at ECN, with Skyline colleagues attending that meeting. It went extremely well. I continue to believe that this joint venture and strategic partnership is the extremely powerful engine that will drive our 2024 growth. The ECN corporate simplification plan is well underway, which is directly reducing our expenses and increasing our partnership between Triad and Skyline. Our new funding arrangements are in place and will continue to drive our 2024 growth and funding. We'll speak to that in a moment.

Third, Lance is into his 100-day plan, which he'll speak to in a second. Part of that was the decision to accelerate bulk sales in this quarter after portfolio review and a way to increase and return capital for the initiatives within the joint venture. Lance, as I mentioned, well through his 100-day plan, he'll speak to that in a moment.

Pleased to announce the new executive leadership at Source One, which John will speak to in a moment. Our strategic marine review will conclude with either sales spend in the first quarter of 2024. We're also announcing this evening the expected sale of Red Oak, which is our RV Marine inventory finance platform.

I'd like to comment over the last 9 months, management team has done an exceptional job. We've had extensive third-party validation for both equity investors, debt providers, rating agencies and senior management endorsement from industry leaders joining us. I'm also pleased to reiterate our '24 operating guidance, which will be back-ended, driven by the growth of the joint venture as well driven by the incremental flow partners we'll speak to in a second.

Turning to Slide 7. This afternoon, Tawn Kelley and Mark Yost from Skyline attended our Board Meeting chaired by Bill Lovatt. Tawn, as you can read from the website of Skyline, is a leader in the U.S. mortgage industry. Mark is the CEO of Skyline. Skyline, as you know, has been a partner of Triad for the past 2 decades. We have begun the implementation of the joint venture. We formally launched both the floorplan of rental, and the retail launch will be formally launched at the Louisville Manufactured Housing Show in mid-January. You're welcome to join us at that show if your schedule accommodates.

Turning to Page 8. I would highlight this is -- we repeated the slide from our last quarter with these 4 platforms of growth. We are adding to the floorplan opportunity, a rental opportunity, which is an expansion, I believe that Matt will speak to that in a moment. It's quite exciting.

Turning to Page 9. Our simplification process is underway. We announced this last quarter, we're on track. Two things I would highlight in the third box are that RV Marine will be spun or sold in the first quarter of '24, and off our very successful ABS East meetings, we are now in advanced discussions to add multiple new funding partners, both banks and insurance companies into both platforms.

Turning to Page 10. This again is a repeat from the last quarter. I'd look at that last bullet in reference to you that the institutional flow partners are the backbone of our business, but we're now seeing the reemergence from some of our historical partners, and credit unions and small banks are now back at the table.

Turning to Page 11. I mentioned the significant extensive validation of our core business, both the platforms and processes, validated through rigorous due diligence by 4 credible parties, namely that of Blackstone and Carlyle, for funding; Champion Skyline, on equity Investment; Fitch, our improved service rating; and finally, both Lance and Mike did extensive due diligence before they accepted the leadership positions at Triad and Source One, respectively. We're happy with that support and extremely proud of the validation.

Turning to Slide 13. I would highlight for you on marine RV, the leadership addition of Mike Opdahl. John will speak to that in a moment. That's great news. Inventory finance balances continue to perform as promised. We'll speak to rental as part of that. And then I'd like to pass the -- this discussion to Lance Hull, who is Mr. 100-day plan. Over to you, Lance.

[Lance Hull, executive]

Well, thank you, Steve, and good evening, everybody. Turn to Page 15, please. I just want to highlight 3 key points on here.

First, in our efforts to continue to focus on the customer experience and bettering both speed and efficiency, we formed the Office of Change Management at our company, as highlighted by -- running by Ayesha Kahn. That's going to support our planning and delivery of key initiatives and drive improvements across both IT and enterprise change, and we're looking for great things out of Ayesha.

We also -- as our -- one of our first projects that she's working on, we've integrated our CRM and LOS. This is going to help us create much better workflow queues for our team members, which will improve their work environment and allow them to provide better and faster service. It will provide clarity and accountability in the things that they're doing so that both our customers, our borrowers and our retailers have better insight into the loan process. And it's going to form a foundation for us to expand additional tech upgrades, including application upgrades and portal upgrades in the future.

We're also, through [ Eric Lamon's ] leadership, our servicing team, and as Steve just alluded to a minute ago, we recently upgraded to Fitch RPS3+. But we are continuing to look for opportunities to strengthen some of our teams for some of our higher touch portfolios. We're already seeing immediate results in terms of lower delinquency, which is going to allow us to expand our origination efforts into some of those higher touch portfolios.

Over on Slide 16. Adjusted operating income for the quarter, $7.9 million. That's Q3 originations were up 5.4%. But very encouragingly, our approvals in Q3 were up 17.3%, and I'll touch on approvals more in just a minute. Steve alluded to, as part of my 100-day plan, we decided to accelerate our pool sales and recycle capital into our stronger growth initiatives, including rental and floorplan. Our managed portfolios grew this quarter by 18% year-over-year to $4.8 billion.

We also, as Steve alluded to, closed our strategic partnership with Skyline, and we've now set on our way to establish the joint venture. We're working very hard with our Skyline Champion team as well, to make sure that we put great programs in place and on schedule for our launch at the Louisville show in January, January 18. And lastly, on this slide, it's very encouraging to see us now. We're -- thanks in large part to Blackstone and Carlyle and the funding commitments they make to our business, we're in a very strong position in Q3 of this year as well as all of 2024.

Over to Slide 17, I mentioned approvals. Approvals are accelerating and core channel strength is leading the recovery. We're up 17% in approvals overall, but our core chattel is up 22% year-over-year. Encouragingly also, in the months of September and October, we saw an increase in chattel originations of more than 30%.

On to Page 18, just a little closer look at retail originations. You'll notice the 2 small pie charts, you see a shift first in core chattel. A year ago, it was just under 54% of our origination. This year, it's a little over 60%. And if you also noticed that very small sliver of pie, we are already beginning to see our rental opportunities grow, which we're very excited about. There's a lot of potential in the market for that, and we see it now at 2.6% of our originated volume.

On to Slide 19. This is the best look at how we're doing compared to the industry. Industry shipments are measured monthly, and you can see that year-over-year industry shipments are down 26%. Triad's originations are down 2%. So against that measure of industry activity, we are faring very, very well. Industry shipments are starting to -- that slowdown is starting to recover some just in Q3. The shipments were only down 19%. So you're seeing some return in shipment activity and backlogs are beginning to grow a little bit. But again, we continue to lead the way and outpace industry shipments, and those trends are continuing into 2024.

On Slide 20, we take a quick look at our portfolio credit trends. Good news here is delinquency and charge-offs remain well within our target ranges.

I'm going to turn it over now to Matt Heidelberg to talk a little more about our commercial products.

[Matthew Heidelberg, executive]

Thanks, Lance. So turning to Page 21. I thought I'd start by defining what is rental finance. Rental finance, to us, are they're loans to manufactured housing community owners that own and rent homes that are placed within their communities. So these are community owners that we're very familiar with. They're community owners that we've underwritten before for things like floorplan that we've underwritten before to do things like submit retail loan applications to us. We're targeting large, well-established, financially strong community owners. We have perfected lean on the home, and we're not going to be extending financing to anything greater than 80% of value, and we want long-term rental agreements in place and executed prior to us extending that financing.

We're not looking for your Airbnbs or weekend rentals. We're looking for long-term established cash flows. Yields on this program are similar to floorplan. We're earning 11% plus today, and durations are half that of our consumer loans sitting at around 4 years.

So what does this mean for our market size or opportunity for us, as I take you over to Page 22. With the increased inflation, values of homes are higher. Interest rates are elevated as well. Demand for rental being more affordable has been increasing. The manufactured housing community owners we do business with today, there's been a strong amount of demand in the ask of us to come up with this program and expand it for them.

So according to MHI, there are 43,000 manufactured housing communities across the country with 4.3 million home sites. According to them, 20% of those are rented, which gives you an estimated total market size of about $40 billion. From another survey performed through MHI that said that 69% of renters with an annual salary above $75,000 are extremely likely to purchase, that means it's going to be converting to a significant amount of retail flow for us looking forward, just like our other programs like floorplan. This is going to be another product that helps to feed other product lines for us as we look forward.

Going to take you to Page 23, talk about what our commercial finance balances look like today. Balances are down $142 million, following the sale of several of these floorplan loans with our established flow-through program that we've previously discussed, and by the removal of the Red Oak assets to held for sale, which we'll discuss a little bit more in a minute. Yields on the portfolio remains strong, upwards of 11% more. Performance has been pristine and appetite for our partners for this product continues to be there and grow. With the JV, we're expecting to grow that managed portfolio of these floorplan balances quite a bit into next year.

Taking you to Page 24. Red Oak has been another successful launch for ECN. The team that we have in there, led by Jeff Collins, has surpassed expectations with balances over $140 million and a growing pipeline for more. Performance has been exceptional, yields north of 10%. We felt to best position Red Oak for its continued growth, it was in the best interest to consider a sale of the platform.

With that, ECN is in advanced discussions to sell to a partner that's seeking to maintain a continued partnership with our RV and marine retail side. It's important to us that we find somebody that wants to maintain that retail wholesale relationship, which we believe we found. The sale of the platform will release capital that will be redeployed to other origination platforms within ECN.

Page 25 is the origination growth tracker that we've shown you before.

With that, I will turn it over to John.

[John Wimsatt, executive]

Thanks, Matt. We are on Page 26. I am very pleased to announce that Mike Opdahl has joined Source One as President to really oversee the next phase of growth for the company.

Mike was previously the COO of Automotive Credit Corp in 2015 where you saw profitable turnaround of the Midwest auto lender and returned the company to profitability in 2016 and each year since.

Mike has also been the COO of Westlake Financial and Regional Sales Manager at GE Capital. We've known Mike for many years and are very excited that he agreed to join Source One. He will improve operations, sales and customer service, driving growth with key objectives, including reducing cycle times, improving responsiveness, dealer communications and customer experience in order to grow both originations and managed assets over time.

Move to Page 27. Operating income was $2.3 million in the quarter, originations of $211 million. Originations remained slow for largely the same reasons we've noted for most of the year. Even so, we've added another 300 dealers in Q3 and now almost 3,800 total at Source One. And just on the final bullet, Steve already mentioned this, while the strategic review is ongoing, we look to see it ending in Q1 2024 with the announced spin or sales.

Page 28. We just want to reiterate that we really believe the groundwork has been laid for significant growth. 2023 has been a difficult year for a number of reasons, both from a macro perspective and a timing perspective in terms of where we were in rolling out various processes and programs, we've gotten through a lot of the things we had talked about earlier, like licensing and establishing servicing capability and really creating the ability for geographic expansion.

This year, we had hoped to add some more funding partners and some other things, like that's taking clearly longer than we initially expected. But you've seen most of what we talked about here in the left column, but I do want to comment on the funding side. While we've seen somewhat of a slowdown from existing funding partners, we wait on some new funding deals to close, some of those deals that we've been working on for quite a while. The good news is we're well along in the process.

In addition to some of the partners that we've previously discussed, we're also now in talks with several new large banks, which we expect will likely close late in Q4 or in early Q1 of 2024. We've also been -- we got into some discussions with some new institutional investors that are interested in flow across several products. New funding is what's going to drive origination and earnings growth in 2024.

On the right side of the collage, I just want to give people some context into how we see some of this growth evolving over time. Some of the other metrics that we've not spoken about explicitly before, but Source One, really, have material upside from improving customer and dealer experience, which is really what Mike is focused on today, or Mike and his whole team.

Today, only about 20% of our dealers or less than 750, actually do at least one deal per month. We've added more than 1,000 dealers since we acquired the company. Just a 5% increase in those active dealers would add almost 25% new originations. In addition, if we change that from 1 deal a month to 1.25 deals a month, that would be another 25% combined, almost 56% growth. We think both of those are doable next year just from process improvements and customer service initiatives that we think will get complete here in 2024.

On -- sorry, on Page 29. Origination is down 31%, like I said, due to similar factors discussed previously. But as discussed, we believe new funding and Mike's leadership around process improvement, we believe 2024 will be a much stronger year. Separately, current application flow more than supports our 2024 guidance. We'll just need more funding in place to close those deals, and we feel great about where we stand on the funding side. Again, we anticipate getting that done very shortly here over the next several months.

Page 30 is our typical origination charts. And with that, I will pass it to Michael.

[Michael Lepore, executive]

Turning to Page 32 and the consolidated highlights. The total originations of $571.5 million in the quarter were down 16% year-over-year, driven by the decrease in MH originations of approximately 5% and RV Marine was down a little over 30% year-over-year, as noted earlier. The decrease in lower originations as well as the lower MH origination revenue margins resulted in lower adjusted EBITDA, adjusted operating income and net income applicable to common shareholders compared to the prior year quarter. Of note, the Q3 results include a $4 million provision as a result of the classification of Red Oak RV and marine inventory finance business as held for sale, and this represents the best estimates of the cost to sell the business.

Turning to Page 33. Q3 results continue to be impacted by lower margins related to the launch of Land Home, and as noted earlier, at the end of Q3, under Lance's leadership, we accelerated the sale of some of these portfolios. And the impact of that was an impact on revenue margins of approximately $10.3 million in the quarter. We have reduced the manufactured housing guidance in Q4 as well as to reflect potential additional bulk sales and expect to return to normal margin levels in 2024. Pricing on core chattel remains robust and our leading indicators point to strong loan production going forward, as noted by Lance, which will lead to further improve margins in Q4 and in 2024.

Turning to Page 34 and the balance sheet highlights. The key highlights on the balance sheet reflects the net equity raise from our strategic partnership with Skyline, as well as a slight decrease in finance assets. So the net equity raise and the decrease in finance assets resulted in total debt decreasing to just over $800 million compared to over $950 million of Q2. And more importantly, net debt is now down to approximately $29 million compared to $160 million at the end of Q2.

Turning to Page 35 and the income statement. Just the key item to note is the loan origination revenues. You can see the decrease year-over-year as a result of the factors that we've discussed earlier. The other items to note are interest income and interest expense, obviously, significantly higher year-over-year given the higher rate environment.

Finally, turning to Page 36, operating expenses. Business segment operating expenses remained largely in line year-over-year, reflect the continued investment in growth and operational improvement initiatives across our businesses. Corporate operating expenses of $3.1 million reflect the overhead reductions in H1 2023 as a result of our previously announced corporate simplification plan, as well as the impact of the strategic review that the company has undertaken since Q1 of this year.

And with that, I'll turn it over to Steve for the summary.

[Steven Hudson, executive]

Thanks, Michael. Slide 38, 4 quick things to highlight, the 100-day plan is well underway. We're impressed by what Lance and the team have achieved in such a short period of time. I got a little note from a dealer saying, a bit of market turnaround and that will include some of those experts coming in, but it's been amazing.

Two, new executives. Mike is now on board at Source One. And Lance, Mike and I are back from the North American RV Convention, and we've begun discussions with large manufacturers about 2 joint ventures, captives, and well, he's been adding funding. Mike has both experiences deep in the dealer sales side as well as the securitization side, so it's nice to have an executive that can see both origination and funding.

Third, our RV Marine strategic review is now concluding with either spin or sale in the first quarter.

And fourth, a fellow who doesn't get enough recognition in our shop is the leader and founder of IFG, Hans Kraaz, who one month doesn't make a year, but in October had year-over-year income increase, which is amazing given not the strongest market for big boats. But well done, Hans to you and your team.

And with that, operator, we're happy to take questions.

[Operator]

[Operator Instructions] Our first question is from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, analyst]

I just had a question -- or my first question was on the gain on sale on the Triad side. I guess what it sounds like is this the same issue that came up from last quarter? And just was curious why it's kind of coming up again, and it sounds like you're also suggesting that we may see that impact into Q4. Just wanted to get some color around that.

[Michael Lepore, executive]

Geoff, yes, it's Michael. So if you look at Page 33, so it's a similar issue. As you know, we had -- we've got the Land Home portfolio that's coming through. What we've done at the end of -- we took the mark on the interest rates in Q2. What we've done in this quarter under -- once Lance completed his review is start to accelerate the sale of these assets. And when you sell outside of normal flow arrangements, there's an additional market take to get the sale done. So we made the decision to accelerate those sales as quickly as possible and redeploy capital into more productive uses for ECN. So that's -- it's an opportunity cost on that $10.3 million margin compared to what a normal sales margin would be. So that's what that is.

[Geoffrey Kwan, analyst]

Okay. And then just the second question I had was, so if I saw the slide right, in the original agreement with Skyline, they were going to get one Board seat. Now it's saying it's one Board seat and one Board observer. I can probably guess what that is, but can you just explain why did things change? And what exactly did the Board observer, their role, pertain to?

[Steven Hudson, executive]

Yes. Thanks. The -- since we announced -- since we did the deal, Tawn Kelley has joined the Board of Skyline. You can go on to Skyline's corporate governance website or section. Tawn is the leading U.S. mortgage broker, the largest in the U.S., in fact. She's done a series of captive sales finance companies on behalf of site build manufacturers, one of which is in Canada, which is Mattamy Homes. We thought that expertise was particularly important for Lance. So we asked her to come on the Board. We didn't want to disenfranchise Mark. So we have let him on as an observer. We got Tawn's skill and expertise and Mark in the partnership. It doesn't change the voting percentages at all.

[Operator]

The next question is from Nik Priebe with CIBC Capital Markets.

[Nikolaus Priebe, analyst]

Circle back on Geoff's first question regarding gain on sale margins. Am I correct in my interpretation that you had warehoused some loans on balance sheet that were subsequently marked down on sale in Q3? Like I thought those loans that remained on balance sheet were marked down last quarter as well? Or was that related to the incremental upward move that we've seen in market yields since last quarter?

[Michael Lepore, executive]

Yes. The balance sheet, Mark (sic) [ Nik ], is just an incremental $4.7 million that was -- it's just -- that's a reflection of the incremental move in interest rates from last quarter. So the impact, the $10.3 million was the impact on realized sales and the $4.7 million is just the impact from the bulk portfolio sales and the $4.7 million is the incremental interest rate impact from the movement from Q2.

[Nikolaus Priebe, analyst]

Understood. Okay. And just to drill into that a little bit further. So your exposure to interest rate risk. My understanding is that you'll issue a commitment for a fixed rate loan, but that loan won't fund for some number of months after the date of the initial commitment. So the risk is that market yields would move higher in the interim period. And so if you see markets roll over, you would kind of see an opposite effect on the gain on sale margin. Do I have that right?

[Michael Lepore, executive]

That's correct. Yes.

[Nikolaus Priebe, analyst]

Okay. Okay. That's good. I'll just ask one more. I was wondering if you could help us understand what a spin-off of the RV and Marine financing business might look like. Like would this be a distribution of a new public vehicle to existing ECN shareholders? And do you think the scale of that entity could accommodate the cost of being a stand-alone public company? I'm just trying to think through that scenario a little bit more.

[Michael Lepore, executive]

Sure. Yes. So a spin would be similar to the Element ECN spin, the shareholders would receive shares in Triad effectively and shares in the new RV Marine business. So we're going to -- as Steve mentioned, we're going through that analysis now. There's some -- as part of the strategic review, there's other things we're looking at to bulk up the RV Marine business to give it the scale to -- that it can stand up as its own stand-alone business.

[Steven Hudson, executive]

Yes, Nik, we're confident in either because we're pursuing both, that on a spin that we will shortly internalize the servicing function within RV Marine and add incremental origination channels with banks and institutional investors. Those conversations are well advanced. That's all I can tell you now. But to your point, it will have additional bulk and scale on a spin or a sale.

[Operator]

The next question is from Mario Mendonca with TD Securities.

[Mario Mendonca, analyst]

Maybe we could just go back, I just want to clarify a couple of things. The $4.7 billion, that's the amount you add back to your revenue to get to your adjusted revenue. That's the right way to look at it, right?

[Michael Lepore, executive]

Correct. Yes.

[Mario Mendonca, analyst]

And those marks you took, again, I'm similar to probably other people on the line. I thought that, that issue was resolved that the company had appropriately hedged out the interest rate risk is -- so that's not the case. So these gains and losses could play out over subsequent quarters. Is that right?

[Michael Lepore, executive]

Like I said, we're trying to accelerate and sell as much of the portfolios -- so there's interest rate risk. There's also if you want to sell a large amount of share of your time, there's -- you're going to take an incremental mark to do that. So we're continuing to analyze that. And if the opportunity comes up, we may -- we plan on exiting these on balance sheet positions as quickly as possible. We reflected -- the Q4 guidance reflects our best estimate that there likely will be another bulk portfolio sale, had lower-than-expected margins and we've adjusted the guidance accordingly.

[Mario Mendonca, analyst]

Maybe just tell me how much is left over then of these assets to unload?

[Michael Lepore, executive]

I'd say about $100 million to $150 million.

[Mario Mendonca, analyst]

And how much have you done so far?

[Michael Lepore, executive]

From the chart, yes, if you go look at -- we sold -- we're down to $300 million in held for trading, and just over $100 million in AR. We expect to reduce that by -- we've cut into it by about $100 million, and they got another $150 million to go in terms of the Land Home.

[Mario Mendonca, analyst]

Okay. And the marks that we've seen so far, like the $4.7 million or so, I mean, if we compare that to the amount that's already been sold. Could we use that as a good proxy for the level of losses we can see going forward? Or will it get worse going forward because there's more to do?

[Michael Lepore, executive]

It's hard to forecast exactly. It depends on how you're selling or who you're selling to and what -- so it's -- definitely, it's like the Q3, like it's better than Q2, and we expect Q4 to be better than Q3, and have the issue behind us in 2024 is the way we look at it.

[Mario Mendonca, analyst]

And just refresh memory, this all happened why because of the -- that really long lag between the commitment and the actual funding?

[Michael Lepore, executive]

Yes. It was the long lag between the commitment and the funding and the switch in the funding from credit unions and banks to institutional buyers.

[Mario Mendonca, analyst]

Okay. And then maybe the $10.3 million, just to make sure I understand this, the $10.3 million reduced, I don't think you adjusted for that. That's...

[Michael Lepore, executive]

We didn't adjust. No, I just start calling it out because it looks like people -- so you understand why origination revenues are down year-over-year. So we didn't -- I didn't adjust for it. It's just for comparative purposes, so you just understand what the platform origination capabilities should be in terms of origination revenue.

[Mario Mendonca, analyst]

Those $12 million, the tax, that was like a $12 million tax gain or a recovery of. That's a big number of the $12 million -- it doesn't -- it couldn't relate just to what happened in the quarter. Was there something else that happened that resulted of this big tax gain?

[Michael Lepore, executive]

Tax, you mean talking about the tax provision? I mean we have -- it's just a recovery based on operating losses, right?

[Mario Mendonca, analyst]

Right. But the loss was $16 million, and you recovered $12 million. Doesn't that seem a little high?

[Michael Lepore, executive]

If you look at the year-to-date, it's like -- so Q3 is when we file a lot of the returns. So there's a lot of deferred tax true-ups and things like that, that happened in Q3. But the year-to-date numbers are probably a better reflection of the provision, which is also -- again, it's -- there's a lot of moving parts, a lot of the -- so we don't recognize deferred -- Canadian deferred tax assets. So it's the actual GAAP provision is -- there's just a lot of moving parts.

[Mario Mendonca, analyst]

That makes a lot of sense. I understand that. And then the $4 million provision on the RV, the size of that asset base before the write-down, was it something like $58 million or so? And the...

[Michael Lepore, executive]

Sorry, it's about $140 million portfolio.

[Mario Mendonca, analyst]

And that's the portfolio that took the $4 million mark against it?

[Michael Lepore, executive]

It's not a mark on the portfolio. We expect to sell the portfolio at book as well as the business. The $4 million is just the exit cost. So banker fees, lawyer fees, et cetera. True cost itself.

[Mario Mendonca, analyst]

You're comfortable that despite what's going on in the marketplace that, that can be sold at book, there's no need to...

[Michael Lepore, executive]

If you remember, the inventory finance, which are all floating REIT assets.

[Mario Mendonca, analyst]

Okay. So again, your content that, that value is appropriate. You don't expect any kind of loss on sale of that business then.

[Michael Lepore, executive]

No. Otherwise, we would just run the business down. We can just accelerate the recovery of those loans. They're short duration inventory finance loans. But our preference is it's a great business and it's great growth prospects, and it's a great team. So we just need to redeploy the capital into other areas, and we found a partner that will be able to take that platform and grow it very profitably and still partner, as Matt mentioned, with our RV Marine retail business so that we can still have the benefits of a combined retail inventory finance floorplan or product offering to dealers.

[Mario Mendonca, analyst]

Great. Last question. And I understand, Steve, did you say Bill Lovatt's on the line as well?

[Steven Hudson, executive]

No. Bill chaired the meeting today. He's not on...

[Mario Mendonca, analyst]

Oh, I'm sorry, he's not online. Maybe let me just ask you then. There's been a fairly -- there's a meaningful increase in stock-based comp. Now I hope it's not impolite to say, but it's not because of the stock's performance or earnings. There's got to be something else that's driving that meaningful stock-based comp...

[Michael Lepore, executive]

Yes. So that share-based comp in this quarter. So it's actually the opposite, Mario. So we obviously mark our share-based comp to market in terms of what we expect to vest each year given the performance to date. Effectively, we're forecasting almost a 0 vesting for management employees this year. But as part of that, we had hedges on our share-based comp, so we had to derecognize, so it's an accounting charge effectively, but not an increase in actual cash out the door comp to employees and management. It's actually the opposite.

[Operator]

The next question is from Tom MacKinnon with BMO Capital.

[Tom MacKinnon, analyst]

Just continuing on the origination margins with respect to the manufactured homes. I thought that the 2024 guide was down from 7% to 8% range to maybe 6.5% to reflect the cost of locking in rates on new products kind of given the rate volatility we had. Are you still standing by that, just given the fact that it didn't seem to cooperate the way you would have wanted to now? Do you have all these hedges in place? Or is that still part of this plan?

[Michael Lepore, executive]

So the 6.5% is not technically the hedging cost, it's the change in mix between who our funding partners are. So that's what's driving the lower margins. Like we said, we've -- going through all the loans we're originating for the last 4 or 5 months, we're at full margin and we'll fund it full margin next year. It's really the land home portfolio that was launched in 2022 that is there, causing the issues on the marks.

[Tom MacKinnon, analyst]

Okay. And I think now let's talk about that, that's running down and how much is left of that. If you could just -- or was that answered?

[Michael Lepore, executive]

I believe I answered that. The remaining portfolio to work out through is around the $150 million mark.

[Tom MacKinnon, analyst]

Okay. And just with respect to a strategic review for RV and Marine, at the same time, you have new management at Source One and a whole outline of how you're going to drive growth with respect to that. So you seem to be reviewing it, whether you want to keep it or not. And at the same time, you seem to be stepping on the gas here and bringing in new management and driving growth for it. So just confused as to which one of these avenues do you really want to pursue? You want to keep it and grow it? Or do you want to sell it?

[Steven Hudson, executive]

It's 2 parts, as you know, that we announced a strategic partnership with Skyline for us, 20% deal, hopefully going to 100%. So that would take care of the Triad business, if you will. That leaves RV Marine and wanting to maximize return for our shareholders. We have identified immediate opportunities to grow RV Marine. That will come out in the next quarter. And having moving to someone owning 100% of Triad, we are going to be left with RV Marine and the best way to maximize value, and that is either selling it or spending it. And as we get through these corporate developments in the next 90 days, we'll return to that topic with you.

But there -- as John correctly -- his vision was when we bought this business, there was an unprecedented opportunity in RV Marine. It's the same credit profile as that of our manufactured housing customers so you could assume that the funders buying the paper MH want this paper as well. And the blip in the market, in the RV market has presented some interesting origination platforms and servicing platforms, and we intend to take advantage of that.

[Operator]

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

[Jaeme Gloyn, analyst]

Just wanted to go back to the origination margin again. And just trying to understand what the yield would have been. So the adjusted operating results for loan originations revenue was $18 million. Should I be adding $10 million to that number? Or should I be adding the $10 million to the $13.4 million loan originations revenue that's reported? How did you have that sort of thought through?

[Michael Lepore, executive]

Through the $18 million because the $4.7 million is really just from the balance sheet mark. So if you add the $10 million to the adjusted, that's what revenue would be on a normalized basis.

[Jaeme Gloyn, analyst]

Okay. And then in terms of the guidance then, the revenue for loan origination revenue is down $18 million. So as -- and sorry, it's the adjusted loan origination down $18 million at the midpoint. So I would suggest there's an $8 million lost revenue impact in Q4 that you're assuming? Is that -- do I understand that correctly?

[Michael Lepore, executive]

Yes, that's in the ballpark.

[Jaeme Gloyn, analyst]

Okay. Okay. Just making sure I have that clear. You also mentioned the cadence of your earnings profile being backloaded. So you must have some visibility here in the next 6 to 9 months or so, the first half, should we expect quarters that look similar to what we've seen in 2023 with very minimal operating income?

[Steven Hudson, executive]

So you'll have operating income, Jaeme, just that as we roll the joint venture out, the retail will lag on the joint venture. But earnings will be up over '23.

[Michael Lepore, executive]

Q1 is a slow -- we're going to go to the slower season anyway. So our plan would normally be back-end loaded. But Q1, season -- like 2022, 2024 will be better than 2023, but again, we have seasonality and that lag of implementing the JV.

[Steven Hudson, executive]

I think we forecast 20% increase in '24. And I think that Lance has commented about what occurred in September and October is a good harbinger of significant increases in volume in '24. So I think we're in good shape for '24, and the seasonality will -- you will be profitable in '24 starting the first quarter.

[Jaeme Gloyn, analyst]

Okay. And then my last question, just in terms of leverage. So obviously, the equity investment from Skyline has helped quite significantly to bring leverage down to about 3x debt to equity. Do you have a target leverage in mind? Is there a rating agency target leverage? Is there a Skyline target leverage that they want to see? Like how should we think and how are you thinking through your leverage ratios going forward?

[Michael Lepore, executive]

Somewhere in the 2 to 3 range, 3 at the top end depending on the movement, but 2 to 3x. So the sale of Red Oak will obviously significantly improve that as well. So...

[Operator]

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.