Q3 2019 Earnings Call
Thank you for standing by this is the conference operator welcome to the E. C. N Capital's third quarter 2019 conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q you May Press Star one on your telephone keypad did you need assistance during the conference call you may signal operator by pressing star zero.
I would now like to turn the meeting over to Mr. John ones that please go ahead mr. ones that.
Thank you operator, good afternoon, everyone. Thank you for participating in our conference call to discuss E. C. N Capital's third quarter 2019 results announced earlier today, joining us or Steve Hudson, Chief Executive Officer, and Michael the poor a chief financial Officer, a news release summarizing. These results was issued this afternoon.
And the financial statements and Mdna for the three month period ended September Thirtyth 2019 had been filed with CR.
These documents are available on our website at Www Dot you see on capital Corp. Dot com.
Presentation slides to be referenced during the call are accessible on the website as well 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 refer you to the cautionary statements section of the M. DNA for a description of such risks uncertainties and assumptions although.
Sure believes that expectations are reflected in these statements are reasonable we can obviously give no assurance that the expectation of any forward looking statement proved to be correct.
You should note that the Companys earnings release financial statements Mdna and today's call include references to a number of non I FRS measures, which you believe helped to present the company and its operations in ways that are useful to investors. A reconciliation of these non I FRS measures. The IRS measures can be found in Europe .
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You should also note that as of January Onest 2018, the company changed his presentation and functional currency from Canadian dollars to U.S. dollars. In addition, readership note that legacy operations have been discontinued and classified as held for sale. That's the fourth quarter 2018.
All figures are presented in us dollars unless explicitly noted.
With these introductory remarks complete I'll now turn the call over to Steve Hudson.
Chief Executive Officer, Thank you John and good afternoon, starting with slide eight.
Our third quarter results are in line with management expectations, and we are reiterating reiterating our full year 2019 guidance. If you look to our origination growth.
Approximately 30% in Q3 or 35% excluding pace, both are very strong and demonstrate both our make and take share strategies are working.
As well as our strong EBITDA growth of approximately 33% in a quarter.
Turning to page nine.
Lennox volume continues to be strong Q3 volume accelerated after an unseasonably cool weather in May and Jim.
With respect to solar as we discussed in Q1 that service Finance management.
We're actively and prudently raise FICO scores in pricing on store loans, which was not made mandated by our bank partners, but of our protecting our but our yield for our bank partners. So represents 17% of a third quarter originations compared to 24% in the prior period prior years period.
Originations are were at excluding pace and that a one of our origination partners, who went bankrupt were approximately 38% and we continue to forecast 1.6 to 1.8 billion originations for 2000 I like to.
Turning to page 10, so with respect to our bags and light cocoa purchase our loans I think it's interesting to note that of our top 10 partners purchase commitments have increased by 70% since our January Investor day.
We've also added a large life insurance part or the first quarter lighting.
I know the new bank partner in Q3.
As we entered 2020, we will need to allocate loans amongst our partners. This is a case where demand for service finance loans actually Rex is greater than our ability to originate notwithstanding very strong origination numbers.
Page 11.
Assets held for trading for an update on that a decline from 273 million in Q4 to 75 million as forecasted in the earlier quarter.
Our complementary Froch program are complementary flow program is working as a reminder of these are similar credits average FICO 760, and perform and performance similar to our core program well follow outside of the core program due to one criteria. Another principally due to loan size, we executed a $44 million sale complimentary flow.
To partner Bank partners wishing to acquire these loans.
Originations on paid 12 reflect the strong growth, but I mentioned earlier.
Kessler group on page 13.
Third quarter results were in line with expectations. We are also rerate dating.
Our guidance for 2019 for this business EBITDA margins of approximately 57%.
Reflect both improved expense management and better revenue performance.
We can do to explore a long term strategy develop credit card syndicated investment loan platform.
Caster group partner with several institutional investors to originate syndicate and manage on for portfolios totaling a little under $1 billion.
[noise] or group has retained a modest investment of 90 million with an 18 month average.
Average life that investment as other Perry passive basis, how do you not supportive.
Turning to page 14 business mix or revenue mix, Scott Shaw and his team.
Executed and read a great leadership from Scott, we seem to material shift in the nature of the revenue.
Moving from 66% of annuity based revenue at the date of our investment to 87% this quarter and decreasing our reliance on one term onetime M&A fees.
Hereby classified as portfolio advisory fees revenue from 34% to 13%.
We liked the annuity revenue because it provides a lot higher margin on longer term revenue.
Driving more predictable a better profitability.
We have a strong robust pipeline across all business lines for the remainder of 2019 and entering into 2020.
Turning to page 15, and Tri Ed results were ahead of management expectations, we are reiterating our 2019 forecast.
Approximately 16% year over year Q3 growth.
30, 332%, sorry, a growth in EBITDA.
Floor planning continues to do what it's supposed to do which is to drive more loans to our banks and credit unions.
We'd outstandings of approximately 100 million over 236 active dealers.
And as we mentioned earlier floor plan dealers dry three times, the revenue growth or loan origination growth of that of non floor plan dealers.
We had a modest assets held for sale of 16 million, which would be Cumulating Oh, we have to bank partners, who wish to purchase and certain bulk size. This will be sold by yearend.
[noise] 16 reflects the originations that I spoke to earlier with that I'll pass it to Michael.
Thank you Steve turning to the consolidated operating highlights on page 18.
Total originations were 639.1 million in the quarter up over 25% compared to Q3 2018 again reflective of the strong year over year growth, both service finance and Tri Ed.
Q3, adjusted EBITDA of 34 million was down slightly compared to the 38 million in the same prior year quarter, largely due to lower transactional revenue at the Kessler group.
Adjusted operating income before tax or 26.4 million was up compared to Q3 2018 due to the impact of the buyout of the 20% non controlling interest and the Kessler group in Q1 2019.
Adjusted earnings per share applicable to common shareholders was 0.8 0.8 cents per share.
Which was in line with our guidance of 78 cents per share.
That's equity ratio was 0.51 to one consistent with the prior quarter and down from 0.751 Q3 2018.
Turning to the balance sheet on page 19.
Total assets were up 19 million from the prior quarter, primarily due to a new investment in a syndicated credit card portfolio and an increase in risk based marketing receivables at the Kessler group, partially offset by the sale of legacy held for sale assets.
Mandersson advisory assets were up to 32.6 billion, reflecting $27.9 billion Kessler 2.3 billion at service Finance and 2.4 billion Triad financial services.
That was up slightly compared to the prior quarter, primarily due to the increase in assets referenced above.
Turning to the income statement on page 20.
Q3, adjusted EBITDA of 34 million was down slightly compared to the same prior year quarter. Prior primarily due to the lower transactional M&A revenue at the customer group as noted earlier, partially offset by the year over year growth in EBITDA, Both service finance and tried financial services.
Adjusted operating income of 26.4 million was up 15.6% compared to Q2 Q3 2018 as the impact of the buyout of the 20% non controlling interest in Q1.
2019 more than offset the decline in Kessler group operating income.
Operating expenses expenses decreased in the third third quarter compared to 2018 due to lower cost at the Kessler group.
Turning to page 21, which provides a breakdown of the operating expenses. This page illustrates the breakdown of operating expenses and highlights what the overall decrease is being driven by the lower Kessler operating costs. As a result of expense reductions initiated in Q1, 2019, and lower incentive compensation due to the impact of lower revenue.
So we're operating expenses at this at the Kessler group were partially offset by the increase in operating cost of service finance and try and financial services, which are driven by the year over year growth in revenues.
Corporate operating expenses were up slightly compared to our normalized run rate for 2019.
5 million to 5.5 million per quarter due to higher costs in the quarter related to the pursuit.
<expletive> Tuck in M&A and other growth opportunities.
Turning to the legacy business update on page 22.
I wanted to highlight that again with the white the legacy.
Wind down of the legacy business assets remains on track and in the quarter were able to sell eight aircraft for proceeds of approximately 40 million, which was in line with their book value.
And with that I will turn it back to Steve for the closing summary, Thank you Michael on Slide 24 were closing.
We're quite pleased the third quarter EPS of eight cents, which is the high end of our guidance of seven or eight cents.
We are confirming our 2019 EPS guidance of 25 at 28 cents as well as maintaining our 35 to 40 cents for 2020 will provide additional detail what color.
EPS at our January Investor Day.
This represents I believe another solid and clean quarter I want to thank all by partners MDC and.
Employees as well, so surface finance Kessler group and and Tri Ed.
We have no onetime charges. So I would like to think that we've delivered on online in line.
Results for this quarter service finance at a solid third quarter Lennox volumes accelerating balance sheet use declined to 75 million Kassere group was on plan revenue mix continues to strategically shift to more predictable recurring revenue.
And Tri Ed was on plan with the floor plan initiatives driving the results that were seeking and we continue to take market share in that particular sectors. We expect to capital management. We're pleased to announce the quarterly dividend increased by 25 cents to two and half sense.
Quarter or 10 cents annually.
Add 2019, 2020, and see I'd be has been reauthorized.
But those comments operator, we would open the call for questions.
Certainly Sir we will now take questions from the telephone line.
If you have a question. Please press star one on your telephone keypad, you will hear atone acknowledging your request. If you are using a speaker phone. Please lift your handset before pricing any Keith.
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Our first question comes from Jamie going with National Bank Financial. Please go ahead.
We appear to have lost him. Our next question is Vincent Camtek with Stephens. Please go ahead.
Good afternoon guys.
And thanks.
This quarter.
Just wanted to talk about.
Pipelines at each of the different businesses.
And if you could use an update there so I appreciate that 2019 call.
Confirmation of guidance, but kind of one thing to look a little further.
And then specifically with two of the businesses. So when I think about service finance and weakness at a competitor.
It's been around for about it.
Quarter, everybody has that.
Benefited you in terms of signing more partners and then on Kessler nice to see that there's more recurring revenues is that still sort of the where we would need to look at more credit card portfolio.
Partnerships there for that to see.
Another way, we should be thinking about growth there. Thanks.
Hi.
We are oh.
I'll speak to that so I'll speak to service Finance and then I'll, let John speak to to try to come back to cancer, but I'm service.
Mark Birch and his team.
And then Eric and Steve minor and the rest of.
That is employees have done an exceptional job of 35% organic growth in the quarter is very strong we look at the approvals approvals. We get funded originations. Most continued strong in October and November and I can't say, it's a function of.
Just take or just make share take share as competitive shift that's just not from a competitor. It's also from.
Our revolving credit cards that offer buybacks, we think card solvent based programs our superior.
Talk about competitors a lot, we do originate prime and.
Super Prime home improvement loans, however, our business models materially different than that we originate a manage without providing recourse and I think that's a model, though it will take it is a model of service finances at a place and we continue.
In terms of what 2020 looks like will speak to a detail a January at the Investor day, but we're continuing to see strong growth in our business. We have a bigger number to lifted each year, but I think the growth is extremely strong and we're not seeing a.
Consume a consumer that's fatigue in the us many consumers are electing to stay on their home and improve it.
And so I think its a.
This is not an oral easterly whether thats a nice wins out of the south that I think we'll continue very strong growth from service both from take share and make sure. We are looking at some tuck in deals and set a service don't think of US change in the model, we're not going to change the model, but there are some opportunities that will speak to what our investor day I'll, let John .
But to try I mean as you as you as you can see try it continues to grow mid high teens, which we've seen throughout most of the year.
Shipments shipments in the industry have actually I've actually been down a little bit another some reasons for that but all things equal. We're very excited we've very clearly been taking market share within the manufactured housing space and I think a lot of that has to do with our proprietary for print products that we've introduced really effectively over the last.
You know the last year so so.
As far as far as the future, obviously, we'll get into that at Investor day, but what we've seen this year is a really nice pickup in market share across a across triad and with respect to the capsular Kessler group that's a deal we're.
The growth is being driven by the mandate of being able to assist our bank partners with.
What programs, they really want to be into with respect to credit card world and we've been able to successfully moved those portfolios driven by factors, such as see soul and and other risk factors.
That accounting practice, and we were able to place those and the good news is will be replaced them with our partners, we're picking up long term annuity fees.
That's been a big driver of growth here, we're happy to take the onetime M&A fees.
What we really want to improve the quality of the revenue and earnings and caster and we think the longer term fees will hold us a good stead and then it is a one particular source account say its credit card investment or others, it's across the board and Kessler and its strong going into 2020.
Okay, Great very helpful. Just maybe one.
Follow up.
Looking into the fourth quarter.
Guidance, but.
Just what are you seeing in terms of.
Your retail partners.
Your bank partners are they is there any difference in appetite for the retail partners are they doing.
More different types of programs just kind of wondering if there's any change to this holiday.
Thanks.
Yeah, I know, we speak to the service, but we service we've tended to see.
Historically things slow up as you get into the into the holiday period with Thanksgiving starting the holiday period at home improvement tends to decline because people don't want to open up their homes will approve it but it's remained strong stronger than you otherwise think given that seasonality and the Paul in terms of bank partners, It's very significant because a lot of our bank partners are.
Hi, great results on risk adjusted basis with yields coming down significantly for them. This is an asset category that really works, so I think coming into 2020.
One of the nice issues to have is that mark will have to focus on how to allocate amongst partners, we need to satisfy all the demands, but I don't think away, but we are able to satisfy 100% of loan demand in 2020 give them.
The growing as I mentioned that slide Weve had 70% growth in commitments from existing bags.
So it's I think it speaks volumes to the quality.
The risk adjusted quality of the service finance product.
Great.
Thank you.
Our next question is from Jamie going with National Bank Financial. Please go ahead.
Yeah. Thanks.
So first question is just on the Kessler group I'm looking at the a recurring revenues just backing into it based on your disclosure percentage that was recurring in Q3 in Q2 looks like 17% quarter over quarter growth in those recurring revenues can you speak to the sustainability of that growth rate.
Or religious level off.
Yeah, I think what you're seeing Jimmy as we.
We renewed a large bank partner relationship we spoke about on Investor day as part of that renewal, we were able to increase the scope of our relationship.
To cover portfolios that bank partner may be a divesting of and that has begun.
And as they divest those portfolios, we sell them to other banks.
Our institutions, who are paying us at M&A feel but more importantly, our are allowing us to grow on the management advisory a new but it would be fees I think that will pick up pace as we move into 2020, so strong growth in whether it's a large bank partner, making room for very large business they acquired or.
Whether it's a bag partner, having to deal with see soul and looking to get some reserves released.
So the the pipeline of credit card trades is up significantly.
As a result of those trade you will see the the growth than the.
Management Advisory Slash, what you're referring to as the annuity fees grow on a corresponding corresponding rate.
Okay. So if I can just summarize on the the 15.6 million recurring revenues earned in Q3, we'll see that I continue to grow at close to double digit.
Growth rates.
Into 2020.
Hi, Jamie, Yes, Michael Corey Oh, Yeah, we think those recurring revenues as we said, it's a focus for us to to grow those segments. So we look to grow the grow the recurring revenue stream in double digits through 2000, Tony.
Okay.
So.
We will give a lot of detail around that and guidance when we get some investor day as like last year. So.
You'll get a lot though.
Okay and are still on that Kessler I, just want to square the performance in the quarter. So on an EBITDA margin basis.
It looks like the margin went down by a percentage point the disclosure in the Mdna suggests that recurring revenue has higher margins I'm. Just wondering what went on there to have the margin decline.
Yeah, David cycle overall income went down right. So whenever you have.
Income going do we have less transactional revenue so even though it's lower margin still good margin. So the.
The margins came came down slightly but not not materially.
And for what it's worth or materially higher than they were previously I mean, we've really worked too.
Rationalize that that platform and take out take out expenses. So all things equal the margin for the business as a whole is up materially year over year, but there's still a fixed base of expenses. So as income comes down you'll see a little bit of margin decrease.
And it.
Second question is a is just related to the discontinued operations seeing a bigger loss there and it looks like gets comp and benefits driven I'm wondering can you just speak to what's driving that increase in the a in the discontinued operations.
Yes, sorry.
So as you know or as we were almost a year into the wind down. So we we sold over 100 million and assets. This year. So we've got to keep that team in place and keep them going and keep the motivated so.
To the extent.
As we get to the end were.
How to.
Hey performance bonuses to those people, so thats driving comp up little bit and any other factor on the loss on disc ops was revenue was down.
Slightly quarter over quarter, just to again, some real leases roll off.
And the assets move into inventory. So so that was the two factors impacting the higher loss in disc ops.
Okay. So really just performance based comp driven on the asset sales okay.
Adam.
And to add decline in revenue every week.
We took back a bunch of equipment, we want to sell so we took it off lease when you take it off lease.
Loose leaf stream. So we took it off lease in order to sell it we're pretty focused as you know on returning that capital as quickly as possible because we'd like to we'd like to redeploy that capital in accretive tuck in M&A deals and.
For longer term, but that that legacy portfolio is kind of our piggy bank to fund to fund those tuck in deals so.
Aggressively going after it.
That all Ricky.
Our next question is from Paul Holden, What's the IB fee. Please go ahead.
Good afternoon.
When I think about the increased demand on the part of your lender, Steve you highlighted a 70% increase in demand for product.
And then kind of comment you just made on wanting to pursue M&A deals and the extra corporate expense you saw in Q3 related to the pursuit of M&A.
To all those three kind of tied together. This is you know you feel more encouraged to pursue emanate today because of that demand on part of the lenders.
Yeah, I think that's that's a good question while weve been.
Been brought a couple opportunities by our Firebag partners, who are originating.
Loans, rather platforms, they buy them from the other platform and the benefits of the business model without recourse. So those relationships are entirely consistent with our business model.
And we were looking at those opportunities with our bank partners, we're not going to originate credit assets to put in our balance sheet, that's the old old model.
We're not going back there so but I think you could actually you can read into that that we'd have a heightened level of FFO.
Tuck in discussions with our bank partners, who are already buying these assets.
And given the results they've had a favorable results they've had on the service finance and Tri Ed risk adjusted returns there they are bringing us opportunities.
And the risk adjusted yields yield works for them Paul.
So yes, I think you can read into that a heightened level of.
Tuck in deals don't read into that that we're going to go and do.
Four or 500 million dollar deal because we're not.
But we are going to pursue these deals that are within our capital structure.
And our ability to fund them with on balance sheet assets on balance sheet capital.
And then I guess, the second part of that.
Wood.
They can be contingent on your ability to execute on noncore asset sales or would you consider a different sequence I.E., if you're thinking and close the tuck in M&A before completing the asset sales you would you do so maybe just bridge the financing.
Yeah, we have a lot of.
Have a.
Billion dollars of credit line turn to your facility were only using less and less than half of that also we have.
Lots of lots of free free capital.
I just look at the cash in the legacy assets being permanent funding.
So we've got two sources for it. So we are engaged in these tuck in conversations.
And the opportunities and funding is not the didnt about without slowing down we have the capital to execute.
Okay.
And maybe one more from me.
You know you increased your dividend.
This quarter.
On the midpoint of your 2020 guidance I get to expect apparent ratio roughly 20%.
Do you view that as a good level.
In the medium term.
He will you continue to increase your dividend with with earnings growth or do you see capacity to grow that payout ratio overtime.
Got it.
We increased the dividend this quarter, because we're very confident in our business model and the cash flows that are being we've completed the transition our business partners at the three business at more than more than provided or more than delivered. So we are we're confident that cash flow. We don't don't read into that that we haven't got the opportunity.
For the capital in other business growth whether it's.
Whether it's a tuck in M&A or program, which will will do but I think that the board was very comfortable with that in terms of payout ratio, while I think thats something the board will visit sort of midpoint of 2020 I.
I think there's there's room to grow it but I think we've got so there is room to grow up but we got some work to do on some tuck in M&A deals in the interim.
Got it.
Thank you that's all that's all for me.
Our next question is from Jeff Kwan with RBC capital markets. Please go ahead.
Hi, Good evening, just the first question I had I apologize if I missed it early or the.
Increasing on the FICO score on the solar stuff and was it something you were seeing a within the but that you'd already originated or was there other reasons for that.
Good evening the.
Markets some of the competitors offering so we're financing were dropping rates and we didnt. We didn't see that that was a great trade on the risk adjusted basis. So we weren't going to follow it down. We're also cognizant that the solar loans have a very long of a longer duration of some seven to eight years versus our average two and a half.
Three and a half years and our other product.
So you just have to be cognizant of that as you know where you want to sit on the credit.
So it wasn't anything we're seeing the book it was proactive we we treat these credit assets as if there are ours are not because or non recourse, but we underwrite them as if they are.
And that our view on on that downward drift a pricing it wasn't warranted.
It wasn't acceptable to us.
So we focused on encore core solar origination.
That we thought was was priced appropriately.
Okay, and just a second caused.
Cleared wave was not initiated by any bank partners. It was our recommendation to the bank group and they accepted it.
Okay.
Second question I had was just clarifying on slide 10, where you kinda talk about that increase from the top 10 Bank partners. It sounds to me you've been describing is it's the top 10 at each point in time another white, that's not the same 10 banks.
At the start of the air that have increased the commitments by 70%, but it's just the top 10 as it stands today in aggregate would be 70% higher than the top 10, you would've had at the top at the beginning of the year.
Hey, Jeff It's John Yeah that I mean that that that's right right. It's the top 10 lenders at this point time at that point time, obviously, we've added a large partner with an insurance company number of our banks have upsize their commitments. We've added some new banks. So at any given time the top 10 might not be exactly the same I think the point, we are trying to make was.
We're certainly not we're certainly adding capacity and we've been consistently adding capacity over the entire year and we're we're just trying to make sure that it's clear to people that that that is in fact, the case and we've got more than enough capacity to fund our origination profile through 2020.
Okay perfect. Thanks.
Our next question is from Brenna, feeling with Raymond James. Please go ahead.
Hi, good evening.
Could you talk a little bit about the economics that you're going to see come from the the credit card portfolio structuring the management season potential incentive fees and.
The potential for capital appreciation.
Hey, Brian .
Again, the a credit card portfolio or credit card investment portfolio business is something that we're in processing in progress right. It's.
We're still exploring the long term strategy as a result, we're not we're not at this point prepared to discuss sort of economics and and fees then and other things other than to say, we'd expect on our capital invested to turn adequate returns, but in addition to that and the reason the strategic reason behind this is.
Related to create management fees.
Which we also anticipate happening over time, I would anticipate that we're going to get more into.
This business and what we're doing with it at Investor Day.
But right now because we are actively looking at you know various types of transactions at et cetera.
Status, where we want to talk about pricing et cetera. The only thing I would add readiness of the advice, where we're doing advisory business on behalf of these syndicated books that advisory business has similar margins to that of our regular advisory business.
And we'll work this has been up an initiative by US bye bye not to take undue risk, which we havent.
And to get this business ready for its formal rollout in the January Investor day.
Okay and are these institution investors new relationships for Kessler.
That can be leveraged to purchase and other.
Types of assets that you originate up.
Yes. These are large institutional investors who could.
I can't give the names, but think of a pension industry in particular.
We've noticed that pension discussion, we're having a service finance and.
You know you I've had the strategic initiative to see if we can cross sell services from.
Service to try to Kessler, and I think thats beginning.
Okay, I guess the risk there is commonality.
And.
Just on the potential for tuck in M&A is dot and.
Core asset classes that you already have a presence in or is there potential too and the type.
Oh, the things that your financing.
Yeah, they are where we're not going to leave that private super Prime consumer financing market, where we have expertise. So we're not going into sub prime or near prime. So we're sticking with our knitting.
And we're letting our banks initiate the conversation where they're seeing opportunities.
Where they have an origination and management relationship with a partner that might be better.
Managed within these CN world, that's what that's for those flow is coming from.
Okay, but we're not adding we're not adding a fourth leg, we're sticking with our duty.
Okay and within Kessler Huh.
I understand that you're focusing on the more recurring type nature of the revenues but.
Within the portfolio Advisory Universe is there anything big out there that and progress or are you are actively pursuing that you see presenting material opportunity.
Well as we described Investor day last year, Brenda there's always a significant opportunity, meaning that theres always credit card portfolios that are moving around one way or the other and Kessler is a lot of the time involved in that so as you can imagine there's a pretty robust pipeline of things that we're working on.
And then and looking to participate and.
As an advisor structure manager of that have that process that said you know, we're obviously not going to talk about potential future.
Transactions until we have till we actually have something to announce.
But we'll give you an updated investor day of how we feel about those businesses going into 2020, but what I can say as we we still feel really good about about the pipeline I think I think the point is what we're trying to do it's not that were de emphasizing.
Transaction fees and other things that are core businesses for cats would have been or for a long time, but we're really trying to do with emphasize those really long term recurring revenues because ultimately those are easier to understand so.
That's a.
That's that's where I believe it.
Okay. Thank you.
Thanks Brent.
Our next question is from Tom Mackinnon with BMO capital markets. Please go ahead.
Yeah. Thanks, very much Oh couple questions of course with respect to the corporate segment I'm thinking in Investor Day, you said, you're looking to get your corporate expense is expected to be under 20 million in 2020, or how should we be thinking about that now that you're talking about all this tuck ins stuff.
And I've got a few follow ups.
Yes, I think I think.
Tom the.
The range, we gave the guidance. We gave was like 20 were not far from that range and if we happen to be at 21 million and we do a tuck in deal and that's a good trade for us.
So it is not going to materially off that and we'll wait to see what we can produce tuck in deal for you.
So hiking biking, right, if I can deliver or the team can deliver accretion of acts.
Billion dollars of expense I think that's going to be a good trade for us.
Okay.
With respect to get that increased like overall in the company. It went up 13 million, but in the corporate segment. It seemed to go up more hawk corporate gets allocated with debt and why is the cost seemed to be in the 70 ish percent range if I'm.
Figuring it correctly here.
[noise] no time, it's Michael.
The.
The way, we the way we allocate the dad is based on the usage so to the extent the we're making.
Investments.
Typically we keep it at corporate to the extent the at these subsidiaries are using our balance sheet to generate on balance sheet assets. Then that's what goes gets allocated to that those segments.
In terms of the costs.
I don't have the math right and frankly, but.
So the cost the cost inner liner generally the variable costs are generally around 4% that then there is.
You know.
We have the amortization of costs and then a standby charges, but I don't think.
I think it's quite as high a 70% couldn't get back to you on that.
I think it offline with you we can run through you're going through it.
Okay, and then finally.
Depreciation and amortization was kind of run in the 607 Hundredish range.
Now I'd like double that this quarter is there anything funny happening in this quarter or.
Yeah, and if you're the accounting rules of change.
In 2019 and.
Required to.
Capitalized so your leases all leases so for us it's mostly the office space that we have obviously it for the corporate office and other operating subsidiaries. So those those lease costs now get capitalized and expense true interest and depreciation expense.
That's what you're seeing that John .
That that jumps just in the third quarter because.
Yeah. So we yeah, we pushed it we pushed it you know it's not it wasn't usually materials, we had to do the work in the first three quarters and we are.
And the change in Q3.
Okay. Thanks.
That's it.
Thanks, Tom.
Our next question is from Jeff Fenwick with Cormark Securities. Please go ahead.
Hi, there, maybe just to circle back onto the Kessler good questions. There just with the the building your capital behind those opportunities.
How are you feeling in terms of how large you'd like the debt funding.
Being behind.
Do you start to think about finding some other vehicle you could structure along side.
Mm.
I'm sorry.
Are you asking how large we think the credit card investment platform opportunity is for on he sends balance sheet well more how much debt are you willing to put behind thoughts step up from just a little little over 60 up to 94 like <unk> the sky the limited the opportunities right.
No no no yeah look like if you think back to think back to what we did with a think back to what we did with solar right. I mean, we had to add assets to the balance sheet for a period of time to develop a solar business. So that we could ultimately turn it into a flow program. So it kind of came off balance sheet and became more of that fee core.
The business It service finance I would think of it similarly here in the sense that we're using some capital on some balance sheet to invest alongside some of these partners to create a platform where in the future. We can just syndicate these out to partners and earn management fees.
Where we're not actually putting up more capital I think we said previously that the.
The limit that we would do on balance sheet for for that business is around $100 million and I don't think that's changed at this point now remember these are very short duration assets, meaning less than 18 months. So they roll over relatively quickly. So if we wanted to we could obviously reinvest some of that capital that's coming back to us, but we don't think it's going to get much.
Larger from here.
Okay.
Hello.
Yeah, we're not we're not going to go and buy a credit card portfolio put in our balance sheet, we're happy to put up up up to 10% of Pari passu basis prefer to be five but up to 10.
And we're going to 100 million dollar market might be one of fiber 95, where a number is that's a real marks in our mind.
Ill limit or so we understand.
We were going to allocate our capital very very carefully.
That's a that's an important distinction so thanks for clarifying.
Our next question is from Jamie going with National Bank Financial. Please go ahead.
Yeah.
Thanks, I just want to come back to the other tuck in M&A and ER and the the expenses related to that is this.
It sounds like its bank driven or partner driven.
In terms of what you're looking at so maybe just a comment on how active you are and these expenses that popped up in a in Q3 would you expect them to continue is this something that you're actively searching for tuck in M&A in a in the portfolio.
Maybe a little more color on that.
Have you did that it's.
We're actively pursuing them because our bank partners are presented them to us.
Adding over the past we've seen several from them that we just didnt think met the.
Matt Didnt meet our credit required we saw one for financing.
Collector car as an antique automobiles, which was easy no go.
Were now see ones that have got real teeth that clearly within our silos and we're spending money and time on it.
With the real opportunities, but I can't guarantee of that.
Any result will happen, we think we're confident but you know.
It's all a function of due diligence and as a function on making sure. The banks are there for.
Committed period to fund the to fund the loans so.
It's it's temporary in nature, it's relatively modest this increase in expense and I think it's important part of doing effective in the due diligence.
Yeah. <unk> is is the right way to think about it then just side the the level of expenses in Q3 will sort of continue until you announced deal or you announce that you're done looking at a tuck ins yeah, I don't I can't I can't tell you. They we stop today that you'll see them come down.
But you know these underwritings Jimmy they take some time right you've gotta go.
Deep on the credit performance the loan performance tapes, the management team all that stuff and we underwrite. These you know as you know we looked at $80 billion and opportunities to settle on three businesses that we bought.
So were pretty good at this but we get extremely deep so we don't get a land line.
Okay, Thanks, and no one more than just on the divestitures of the aircraft a in the quarter can you talk about the.
The the fair value that you're getting on those sales and if I recall correctly, there's a provision related to the sale of those assets. How much is left in our provision as your as you're winding down.
Yeah, I think its adequate to deal with the portfolio and we don't give individual valuations because we have people in this phone who are looking to buy those aircrafts. So.
We have a value, which will sell them off of valley will value their advertising the value that will sell of that.
Which is within our provision.
I'd say that in the sales that took place where within we're very close to our provisional values.
Okay. Thank you.
There are no more questions registered at this time. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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