Q3 2020 ECN Capital Corp Earnings Call
Welcome to the E C N Capital's third quarter, 2020 result conference call I'm.
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I would now like to turn the meeting over to Mr., John When Scott. Please go ahead Mr. I'm sorry.
Thank you operator, good afternoon, everyone. Thank you for participating in our conference call to discuss CCN Capital's third quarter 2020 results announced earlier today.
Joining us for Steve Hudson, Chief Executive Officer, and Michael <unk>, Chief Financial Officer.
The news release summarizing. These results was issued this afternoon and the financial statements and.
Mdna for the three month period Anders ended September Thirtyth 2020 have been filed with SEDAR.
These documents are available on our website at Www Dot you seen capital Corp. Dot com.
The presentation slides to be reference during the call are accessible in the <unk> in the west and the webcast as well as in PDF format under the <unk>.
Patient 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 Mdna for a description of such risks uncertainties and assumptions.
Options, 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 Mdna and today's call include references to a number of non IRS measures.
Which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non on fire I F. R. S measures to I. FRS measures can be found in the mdna.
All with these introductory remarks complete ill now turn the call over to Steven Hudson Chief Executive Officer. Thanks, John.
Shawn and good evening.
Let me start with slide seven and provide for highlights of the third quarter first.
I'm pleased to report strong results in the third quarter driven by our continued implementation of both our take and make share strategies.
That has driven adjusted.
So net income of approximately up 10 cents per share we've seen solid operating results across each of our businesses confirming our 2020.
EPS guidance of 31 to 33 cents as well as our 2021 EPS forecast of 44 to 53 cents, well, providing more and more information.
Question on that at our Investor Day, which John will speak to shortly.
Second highlight is that under the leadership of Mark Birch. The service finance team produced record originations driven by continued above significantly above average dealer growth, we've seen unprecedented growth in dealers will speak to.
That in a moment solid third quarter.
Results impacted as we announced last quarter by temporary fee concessions, which driven which provided additional liquidity for the company.
And we are fully funded through 21 in excess of $2.5 billion at full margins.
Third highlight.
Under the leadership of.
Of the triad team, we had third quarter origination results rebounded sharply with expanded land home law.
Launch, which is on track.
Third quarter originations were up 18% and core approvals were up 51%, which drove our growth and as.
Again to what we believe to be a very strong 21.
Expanded long home home lunch is on track to provide 150 to 200 million of incremental originations and 21.
We're pleased to announce 12, new funding partnerships year to date.
Which will fully fund our 20 originations to.
Lead to an excess of $1 billion.
And finally under Scott Shaw's leadership kg produced a strong third quarter results. In addition, including closing a $500 billion 500 million to our portfolio transactions.
The Q3 results were better than expected EBITDA margin, 64% strong.
Pipeline across all of Scott's businesses in the third and final point is the credit card investment management business, our asset management business. If you will structured in syndicated to our investing partners a $500 million portfolio without capital investment by HCM.
Further validating our business model and in this individual Trent.
Transaction provided in excess of $10 million of asset management fees.
Turning to slide eight.
They mentioned, we're confirming operating earnings of 75% to $79 million for the year.
And Thats 31 to 33 cents, which compares to 27 cents in 2019, 15% to 22% growth.
You see and continues to expect 21 bps in the range of 44 to 53 cents.
With an estimated RSV, a 14.5% to 17.5%.
And we'll update these 21 guidance at our Investor Day, which is scheduled for February 4th in Florida.
John.
Thanks, Steve.
C N management the board of directors have focused on sustainability and with the goal of improving end impact policy and disclosure related DSG issues to this end East Canada established in ESG Management Committee in order to address disclosure policy in ways freehand to improve.
We intend to have an update.
Update and our 2021 Investor day improved disclosure for 2021 reporting included some statistics and information here on the right in order to jumpstart disclosure process improve.
Importantly, our businesses has some very strong yesterday characteristics.
Service Finance, primarily finance is energy efficient improvements for existing homes HVAC.
Back Windows doors roofing materials and other equipment are largely energy star rated systems, not only offering customers with increased efficiency and reducing impact, but all but also allow for significant potential tax breaks.
Triad finances green housing construction with minimal weights compared to site built homes. In addition, many many.
Any factor manufactured homebuilders offer energy Star rated home, we estimate that approximately a third of industry customers choose homes that meet the standard we would expect a higher percentage of tried customers.
Choose the standard given higher price points and credit scores on average compared to the industry Finally, both service and anthem Tri Ed.
At both serve sniff and try the majority of partner manufacturer facilities or energy Star rated this.
This is an important initiative for easy and we look forward to updating investors throughout 2021 back tested thanks, John turning to slide 11.
Specifically addressing service finance adjusted operating income in the third quarter of 18.6.
And.
A rich gross origination growth of 37% year over year.
As well as 38% year over year growth in origination revenue serve.
Servicing and other revenue was impacted by temporarily by fee concessions announced in Q2, we have proact proactively and strategically locked in 21 funding.
Fully support our significant incremental take share.
Service Finance is fully funded through 21 at full margins and although our estimate is for $2.5 billion of originations in 21, if the market brings us $3 billion originations or more you can assume that we are fully prepared to accepted.
Service tenants.
Thats continues to experience elevated dealer growth.
And its multi billion dollar take share opportunity.
Turning to page 12, I thought I'd take a moment and reflect on service finance growth.
It it goes without saying that co vid.
Pandemic, which is which is a terrific but it has.
Has produced an opportunity from the work from home but.
But in those service finance growth strategy is several years in the making and it's had multiple drivers and I want to share for those drivers behind this growth over the last three to four years first of all some market attributes, we're seeing an aging of housing stock which is dry.
Improvements, we're seeing energy efficient considerations, which John just mentioned and we're seeing lower interest rates, which makes it easier for the average consumer to finance home improvements.
Second we have a large customer base of high FICO home owners, who are attracted to our loan products.
Third we believe we have a superiors superior business model to that our competitors, which is driving our take share.
Strategy.
And fourth we are adding new manufacturers and dealers driving dealer bit deeper dealer base and further incenting or driving our may can take share programs.
Dealer base CAGR, our has been 23% since we've invested with mark in this business.
Turning to slide 13.
Both in originations and a rig approvals originations were strong through each of the three months that comprise the third quarter.
HVAC originations up 40%, 40% year over year in Q3.
Next volume, 41% mirroring that.
Windows and doors, which I'll come to in the second were up 93% in the third quarter approvals and originations have strong momentum, which means just makes us feel highly confident about the fourth quarter and 2021.
This growth is.
Let loose of Mark strategic decision in 2019 to limit solar growth solar originations.
45% year to date through September and they now represent only 6% of Q3 originations compared to 20% and the full year 19.
Turning to slide 14.
I've mentioned, a couple times sustained dealer groups I would I would ask you to reference the chart on the lower part of the chart on Slide 14, which shows total dealer growth of 23% CAGR over the last three years and that's been the that is the result of marks and his team's consistent strategy on very effectively.
Implementing both their take share and their make share programs. We've added 793 dealers in Q2, we've got to 582, new dealers in Q3, all of those dealers are significant and mature.
We've added new service, new new take share relations like service, Titan, which I'll speak to in a second.
Which is also drift driven increased dealer expansion.
Turning to page 15.
We made two announcements during the quarter one service tightening of those Panasonic we.
We typically don't release names of large dealers. This was a material a material take share transaction service.
Titan announced a transaction with service finance, it's a large transaction will drive our growth historically, we believe that originations were in excess of $200 million per annum for this platform.
Zonnic, which was a battery program for consumers is a significant matter and then make share side.
Turning to 16.
In a case study on on Windows and doors and yes people are sitting at home and looking through that picture window during cold and decided to replace it but this is more than just that story. If you turn to the right hand box on the upper right hand side, you will see that 54% of the growth in windows and doors has been new dealers.
Thats direct evidence of this take share program year to date originations are up 72% window.
Windows and doors now account for 16% of service finance originations in Q3.
From just 11% in Q3 2019 as.
Estimated backlog in Windows and doors is continues in Q.
Two in Q3, which gives us confidence in Q4 and 2021.
Turning to the credit quality of the portfolio that we manage on behalf of our bank credit Union life and pension plan investors, we peaked at 1.8% and cumulative deferments of May that is now.
Klein to effectively nothing up three tenths of 1% at the end of the third quarter.
Performance the servicing portfolio continues to reflect the prime and Super Prime customer base and an exceptional service team servicing group within service Finance third quarter delinquencies are down year to date and well within.
Now historical averages.
Turning to two held held for trading assets you will note that the in the second quarter. They were $231.5 million. There were some process delays during covert those have now been solved.
On the held for trading assets are now down to 128.4 and our.
Our forecasted to be sub 50 million by the end of the fourth quarter.
As we discussed in Q2 sales were delayed primarily to COVID-19 results in short term accumulation of balance sheet assets service finance execute on two portfolio sales totaling $205 million in Q3, and they are back on track to accumulate these portfolio.
Totals and sell them through to our institutional partners.
19 is a slide you've seen before which demonstrates on a month by month basis and over several years. The continued growth of the service product service finance platform and the high quality of this business model.
Turning to slide 20 on Tri Ed.
Adjusted operating income for the fourth for the third quarter was at 88 8.9 million up 15% year over year originations were up 18% an important announcement as we've talked about adding funding partners through the year. This is a point in time, where we're going to stop and look at that but theyre stop and look at the results.
Under Matt Heidelberg's leadership and his strategic initiative, we have been able to secure 12, new partners year to date and we continue to add more. We're also pleased that Fannie Mae has joined Freddie Mac and as that as we are now an approved servicer for originator and servicer both on land home financings. We also added.
And our first insurance company.
All of that is strategically important and underpins the $1 billion financing for Tri Ed in 2021.
Assets held for trading are within the parameters that we have continued to sell through those portfolios and we expect to be under $30 million by year end.
At at a floor plan is operating as promised with very low delinquencies and yield being maintained.
Turning to slide 21 program update similar to that of service finance significant growth and approvals originations I would draw your attention to September which are significant increases over years.
Three year high margin core business is up 51%, we had the expanded land home program, which we are launching have launch with both Freddie.
And with Fannie.
Originations benefited from these accrues increased approvals and expanded programming offerings will be we have delivered.
Year on our Investor day goal of expanded land home program will be providing further further detail.
In February turning to slide 22.
A term that we use internally, which as Doc so what is dock so mean.
These are fully completed and approved financings, whether it be a chattel or mortgage with.
With down payments made and simply awaiting delivery of the manufactured home. There was a 19, 99% close rate on backlog transactions. You'll note the significant increase in the backlog, which gives us confidence going into the fourth quarter and 21. This backlog is reduced produced by reduced staffing and manufacturers.
Early plant closures, which are now back up and running and extended supply chain as well as significantly increased demand or what I am referring to as a d. urbanization and the US all of this underpins our billion dollar origination target for 21.
Turning to 23 similar to service finance.
The credit trends have have have.
Our have improved and I think our.
Exceptional total deferments peaked at 1.2% and are now down to effectively zero on September 30 day delinquencies are those so the elevated are well within our historical operating range.
24.
Four and originations monthly in the annual originations strong I wont spend time on that.
Turning to page 25 and kg.
Adjusted operating income for the third quarter of $11.6 million partnership revenue was up 29% year over year, primarily primarily reflecting our increased average asset management.
Fees from the transaction I announced at the beginning of this call Mark.
Marketing services are continuing to slowly improve as bank partners begin to Reengage. The asset management. Please portfolio, our asset management business known as Sam is performing as expected and were happy to announce this $500 million transaction without.
Capital.
Equity from capital an equity investment from PC and in the validates this business as.
EBITDA margin, 64% in the third quarter reflect the ongoing proactive expense management under Scott's leadership, and a deferred revenue environment.
Turning to 26.
This is a continued shift implemented in 2019 and 20 to deemphasize, what I call that the home run transactions and emphasize the singles and doubles, which is my neck, which is our long term recurring revenue and I think we can now announced that's been successful.
As you look at the partnership and marketing services in place.
27 is example, further discussion at that point I just made I would note for you that portfolio pipeline is up three acts in 2020.
With visibility on significant transaction fees.
Laurie.
<unk> on increased annuity opportunities in that pipeline. We're currently piloting several new marketing marketing programs, which will add to revenues of 21 as banks Reengage.
And in our card investment management business, a Sim business, we have a pipeline of in excess of $10 billion of opportunities on behalf of our.
Large institutional investors, we won't win all of those but we will win our share.
Michael.
Thanks, Steve.
Turning to page 29, and Q3 consolidated operating highlights.
Total originations were service finance and trend of 841.6 million in Q3 2020 were up 30.
<unk> percent compared to Q3 2019.
During the continuing strong growth of both businesses.
Q3, adjusted EBITDA was almost 4 million it was up almost $4 million or 11% year over year and Q3, adjusted net income applicable to common shareholders was $23.3 million or 10 cents per share up 28% compared.
Q3 2019.
And we did record a modest incremental covered provision of approximately 1.3 million 1 million after tax related to our dealer advance similar exposure now this cleans up our California exposure, which California remains shut down and there are opportunities to recover and elsewhere.
The country.
Turning to page 30 in the balance sheet highlights key highlights there are that as indicated last quarter total assets and total debt were both down the total assets down about 73 million and total debt down approximately 113.1 million driven by the.
During the primarily by the sale of the held for trading assets into service finance that Steve referenced earlier and.
We expect further asset sales in Q4, and therefore expect lower asset and lower debt levels again by the end of the year.
Management Advisory assets are now approximately 32 million comprised of $3.2 billion in servicing asset that service.
Service Finance 2.6 billion in managed loans, the Tri Ed and manage an advisory assets of $26.4 million and kg.
Of note, we completed Canadian $75 million in senior unsecured five year term debt offering in the quarter. This data allows us to diversify our capital structure and provides incremental financial flexibility.
Turning to page 31, and the income statement highlights Q3, 2020, adjusted EBITDA and adjusted net income applicable to common shareholders were both up as noted earlier compared to Q3 2019, primarily due to higher revenues.
Across each of our business segments, partially offset by lower margins at service finance.
Q3, 2020, adjusted EPS was 10 cents per share up from eight cents in the prior year quarter in the quarter, we executed certain tax planning initiatives, including tax structuring that allows us to more efficiently utilize losses generated by our legacy businesses. As a result, we now expect our effective tax rate on adjusted operating income to be approximately.
10%, 20% compared to 20% to 22% previously.
Turning to page 32, and operating expenses key like key highlights are higher business segment operating expenses, primarily driven by the growth in originations in managed assets at both service finance and Tri Ed.
Corporate operating cost.
Our operating expenses were down compared to Q3, 2019, and slightly above our revised target of 4 million per quarter for 2020, the higher expenses were driven by higher professional services fees, primarily tax fees related to the tax planning initiatives that we completed in the quarter.
Finally, turning to page 33 in discontinued operations.
Corpus.
No significant change in real assets compared to Q2.
The pace of aviation dispositions continue to be impacted by coated with $2 million in minor asset dispositions completed in the quarter. However, strong efforts are underway to further reduce these asset balances in the fourth quarter.
Seat and the assets were down to approximately nine.
And then and are expected to decline further to approximately 5 million by year end.
And finally, the operating loss from discontinued operations, we reduced to approximately $3 million for the quarter, reflecting declining holding costs is holding costs. This asset balances continue to decline.
With that I'll turn it back to Steve Thank you Michael.
In closing on page 35, I'd like to make five highlights serves justify pilots takeaway first is the third quarter EPS of 10 cents, which is a great number and gives us confidence in our 31 to 33 cents for the full year.
Second this service finance.
Mark and Ian and Eric and Steve minor their three year strategy uptake share make share is now bearing significant fruit with a 37% increase in through in Q3 originations and from my perspective, they are just getting going.
SFC is fully funded.
For forecasted originations of 2.5 billion if the if the team can take three to 3.5, we got the funding, but right now we're leaving the forecast at 2.5.
Try its results core earnings up 51%, 51%, 51% speak volumes for the strength.
Business and the fact that we have been able to attract 11, new funding partners speaks to the quality of these credit assets.
And finally kgs with the closure of their $500 million asset management transaction, which had no.
You see on investment.
Toppled with a $10 billion pipeline I think.
They have to say that big asset management business has proven itself and we look forward to sitting up to increases in asset management fees.
Quickly note that the quarter dividend dividend remains at two and a half cents.
We closed a $7 million unsecured debenture that Michael mentioned, we view some of those proceeds on the rents the IB to start to preferred stock.
Its purchase preferred shares I think you'll see US act on that when we find attractively priced opportunities to invest youre on our capital.
With that operator, we'll open the call to questions.
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Yes.
The first question comes from Jeff Kwan with RBC capital markets. Please go ahead.
Hi, there good evening.
At service finance it.
21.
Our guidance or how you.
With that.
Includes I'd like to surface Titan relationship I'm guessing the panasonics may be small, but just.
Trying to understand what's incorporated into 2021 outlook.
It doesn't include service pricing.
Okay.
Okay, sorry, it does not.
Yeah.
And I don't want to.
Be accused of being promotional but we are in the midst of a of a multibillion dollar take share opportunity.
Service Titan was held by a competitor.
We are now a recipient that program. So I think it's.
It's the reason why we put all that incremental funding in place. So we can now.
Ill take this opportunity.
Okay, and then I think about a month ago I guess, there was the capital one GM Goldman Sachs deal. Just wondering are you able to to say whether or not cancer was involved and if so how to kind of think about the timing timing in maybe the magnitude of cancers earnings.
We can say.
Kessel was evolve I can't tell you the role, but Kessler kg was involved.
And I think you gives us confidence, Jeff and that we are a strategic advisor to cap one on both the.
The acquisitions of co op and affinity credit cards as well as the divestitures.
That are not allowed to speak to that.
Individual transactions.
Okay and just my last question was just looking at the end of the 90 day delinquency bucket that went up a lot in Q3, but it looks like it was essentially the solar but moving through the.
Where's buckets from Q2, and then you also had a loss provision.
In.
Q3.
Headwind in Q2, I'm, just trying to understand.
What would need to happen for further provisions against that book and also explain why the provisions are being recorded below the operating income line.
Sure, Yes for the aging that's just that exposure cycling through the.
Inc. So it's moved from 60 to 90 days.
In terms of the terms of the provision how we put it below the line because it's really not a normal operating division as we discussed last quarter, it's really.
Really related to two coded that being said we've called it out for you. So you know the amount [noise].
Yeah.
In terms of the remaining exposure is right now.
Good about our position.
I would say, Jeff you saw earlier in the deck.
How small solar has become that our business, it's safe to assume that we we have everything in California has been locked down and provided for we have been able to.
[laughter] collect on dealer advances elsewhere in the nation, we're just not able to do it in solar so we made the decision to to write off the remaining balance in California, we have been able to collect elsewhere in the country.
To answer your question on dish provision from other <unk>.
Okay, great. Thank you.
[noise].
The next question comes from Nick Creed.
CNBC capital markets. Please go ahead.
Okay. Thanks, good evening.
Start with a question on Chrysler group.
Partnership services revenue is up took a big step up 17% I think on a sequential basis.
Just.
Releasing commensurate with the underlying rate of growth.
Actually with the credit asset Tonight, I think you alluded to there were some incremental fees that were recognized associated with a bit of a tricky transaction in the third quarter. So maybe can you just expand like with those of being one time fees or Q3 at pretty good baseline here going forward.
Yep, Thanks, Nick So in Q3 the.
The as you would recall, we earn management and performance fees. So we there's there's a mixture of those coming through the quarter, but as as that platform continues to grow you're going to see that level that should be a good baseline going forward in terms of the performance of that business.
Okay, Okay got it.
And then just with respect to the D. Confessions at service Finance.
How should we think about the timing in terms of those running off you know is it is it essentially at December 31st and and they flipped back to full Ti Vittorio should we expect to see a bit of a gradual migration.
Steve back to you.
More fulsome levels throughout 2021.
Both those fees have been provided for the reductions off will will end in December 30, Onest of this year and provided for in the forecast.
Okay, Okay that helps clarified.
And as I as I mentioned earlier neckwear back too.
I believe funded.
Funding going forward and.
The incremental funding that we put in place with these fee concessions has allowed us to take this market share that we've just begun to see.
There are other competitors are our other competitors are structured this way so they are not able to pick up this flow.
Got it okay, no that helps from a modeling perspective, and then one last one a share based comp picked up a little bit in the quarter, just a few million, but eight I was wondering if could give us a little bit of color around that whether that was a a bit of a one time anomaly or whether you'd expect that to normalize around historical levels relative to Q2 going forward.
Really as a one time thing in the quarter. If you look at the year to date, it's actually we're actually consistent year to year and what's driving that is HM primarily we normally do our annual grants in Q1, but.
[noise], obviously right in the middle of coated the board didn't feel it appropriate to the Grantor awards at the bottom of the market. So we actually waited for the.
The price to recover in the business to stabilize and Weve done or normal annual grants. This this year in Q3.
Okay. No. That's good that a that helps that's it for me I'll pass the line. Thank you.
The next question comes from Vincent Caintic with Stephens. Please.
Please go ahead.
Hey, Thanks, good evening and thanks for taking my questions guys.
So very impressive originations growth and it's a quite a huge backlog for service financial Tri, Ed or having doubled year over year for both.
I Wonder if you can unpack that a little bit so.
When you look at that backlog doubling how much of that is a makes share versus take share and how sustainable is that take care market and then when you think about executing on that backlog I'm turning into originations how quickly can that get done and has there been any near term say impacts.
Like I don't know supply chain issues or something where there's been more delay on executing on the backlog and maybe we can expect something next year like it.
Hey, Vincent.
First of all I'd, just say I, just say were all impacted by the same issues. When it comes to the these macro things like supply chain issues et cetera, I mean, clearly a number.
Factories got hit in Texas, and along the Gulf Coast.
You've had some materials issues youve had employment issues in a sense that employees aren't showing up on the line and certain factories et cetera. So we've we've all had similar sort of macro environment. They have to deal with the differences I I think that that service.
Refinance in particular has been.
Able to take a lot of share and you can see that through the year over year growth the quarterly growth of 93% year over year growth of 72% the windows and doors areas, continuing very very strong growth across h. back and some of the other areas that we have so it's a combination like we said its exists.
Shifting dealers that we have today, we're servicing the answer is getting a bigger share of their financing volume and new dealers that are coming from.
Places, there, where they were giving funny getting financing elsewhere and moving over to service finance and frankly.
Over the years it had taken.
Six months 12 months to get a deal or sort.
Of up and running because there was a lot of training et cetera, a lot of the dealers were seeing today are coming over with a lot of experience doing financing there just leaving a former partner and moving over to service for that so the ramp is much much faster. So we're starting to see some of that origination volume very very quickly.
I don't know if that answers your question if there's if there's anything else you.
[music].
Okay, Yes, that's helpful and I guess when when you think about executing on the backlog is that something where I don't know it takes eight weeks until you deliver the manufactured house or until.
It will deliver in that window and door. So maybe like a first quarter thing where they get part.
[music].
Right.
Look the part of the backlog is.
Just what you're talking about it's taken a little bit longer to deliver but.
But the overall scale of the backlog is growing just because we have many more transactions going through the pipe. So this is representative of real real growth.
I would say that in service and Ansys case.
The.
Backlogs can move in and out of different jobs kind of move in relative relative to what their normal is in certain try. Its case you have seen backlogs backup maybe from sort of three months normally to closer to five or six months today, but we are seeing many many more applications and origination so we can.
We need to drive drive through that and drive that origination growth.
Okay, great that makes sense, yeah, I mean look going from 50% backlog, we're at the 100% backlog growth it seems pretty strong for us relative to the guidance, you're giving career originations next year. So that's very helpful.
I guess second question are we.
Targets 14, and a half to 17 and at present, but some nice expansion there.
Could you talk about what your expectations are for 2021 share buybacks that you've built into that are we guidance. Thank you.
Yeah, we haven't built in any.
Share buybacks or other sort of capital plan as it relates to that or are.
We so at this point, we're just assuming we're adding any access capital to the capital base and generating are are we off that higher capital. This.
The only color I would give you of incentives that we will wait we're not going to chase preferred shares but a lot of blocks of preferred shares are after offered on the tractor basis, we're going to take.
Take them.
So.
It's incrementally positive to our common shareholders.
Okay, great I'll get back in the queue. Thanks very much.
Thanks Vincent.
The next question comes from Steven Boland with Raymond James. Please go ahead.
Good evening, guys first question would be on service Titan.
Mean, they don't disclose how much.
Financing they do but they also have on their site listed or other lenders. So is this.
That they just haven't dropped those other lenders.
Or officially you're getting all the business I'm just trying to understand the transition of you being added to that platform.
Yeah as it's a good to hear your Steve the.
We service segment for all of our dealers, we serve that prime and Super Prime segment.
We are the preferred the exclusive in that segment. There are other people list, there who deal in near prime or subprime or second look credit.
Yeah, and the previous lender, it's still listed on on the page that I don't think you would have put out a press release like this unless there was an intentional message.
There.
But.
We'll see how it shakes out over the next couple of quarters, the big add for us.
Okay, and if I could just go back to guidance or maybe the way I should look at guidance is what what's not included in service in terms of the the two and a half billion.
You didn't mean you.
But includes service Titan you didn't include Panasonic when a when this guidance was first given and partially it did the addition of the dealers, which I think is even maybe surpass your thoughts or guidance or hopes.
Probably wasn't.
You did eight into the the guidance when it was was given so is that the right way to look at it that this these are the things that have not been included in that two and a half billion.
Yeah, I think Steve it's fair to say that we're going to let mark speak.
222 as business at Investor day, but I think you're observing things that we see an opera.
Vishal perspective, and the reason why.
We put all this capital in place to fund it as we think there could be upside, but I don't think tonight's anite to two to revise the 2.5 billion, let us get through the fourth quarter, let us get ready for Investor Day, and you know it it's.
It's looking very positive.
[laughter].
Yeah, when we when we set guidance.
Stephen it's a budgeting process et cetera.
Bottoms up process, but you know you. This business is actually relatively predictable you can look at that dealer growth than and ticket size growth and what what the.
The amount of dealers that are that are using service.
Brent in any given month et cetera, and you can you can get to numbers that that.
Our pretty accurate, what you can't predict necessarily as adding a new deal or adding a new manufacturer and that's I think where we feel we feel like that theres a long long road here. So one of one of our major competitors is now forecasting a 20% decline.
Listen every year you can you can assume we're on the other side of that trade.
Okay. Thanks, very much guys.
Thanks, Steve.
The next question comes from Tom Mackinnon with BMO capital. Please go ahead.
Yeah. Thanks, Thanks very much.
Good evening want to start with just a again the growth and the dealers at surface finance I get to take share a you know with some competitors but.
The make share maybe you can elaborate a little bit on that talk about say getting a bigger and bigger share of the dealers financing volume financing volume maybe you can what what is driving.
Sure, Matt, maybe just give us a little bit more color. There. Thanks, I have a follow up.
That's okay. So Thomas we're going to go back, but if you go back when Mark announced as exclusive with Beacon Beacon roofing, which is the largest root for in the U.S. So that program is still being rolled it rolled out but.
He can didnt have another provider.
Adding dancing brand new programs, so you're seeing dealers being added under Beacon as an example, Panasonic as a brand New program. That's an example of a make share those.
Those are examples of where you know that takes your significant but that makes your still you know beacons like an annuity will continue to build barks.
Barks view as a beacon could be as big as.
Fight as Lennox down the road, but it's going to take time to build it. So those but those are examples of of make sure you remember back on the Investor Day slides, Tom We always described the two major accounts is Lennox was take share account, we took that from another financing provider way back in the day and then and then I moved on whereas Owens Corning had.
No.
Financing provider.
Provider at all it was a new program that servicing at Bill Owens Corning. So that's more of a make share type program.
Okay. Thanks for that for that yet another one just with respect to that she's got I think in the second quarter, you brought on Freddie Mac and.
Made them I think they promise to <unk> billion in terms of originations and but.
But they were lower origination yields and now that you've got the.
Fannie Mae joining that program is do they do you have any kind of size or a impact on origination yields associated with them on your land home.
<unk> platform.
Yes, Tom our view was that we launched a new land home program, we're going to have multiple sources to finance that the one that launched a program with us with Freddie Mac, we always expected that Fannie Mae would be joining the funding mix as well we hope over time, we can add even some other.
Our partners that could have interest in that kind of paper as well. We were right now were looking for $150 million to $200 million for the land home originations next year. This year, we launched it I think August nine.
We've been averaging about $22 million a month of approvals.
Obviously won't impact us this year from an origination perspective, it will really.
Other than January February started to close, but we feel really good about that 150 to 200 million. A we do think there's probably upside to that number potentially but right. Now we're just sticking with that 150 to 200.
I'm going to have.
Nation yields associated with bringing in Ah. Thank you Yeah, you do.
In the forecast is when you're doing a mortgage product, which is the land holding stuff you don't have the same 7% origination gave you have 3% to 4% you have a longer duration asset you have significant servicing income, but there is less but thats. It thats you know two different products. They don't compete as people like a chat alone as people like.
Land home product. So we're not cannibalizing the 7% chattel loan business to offer the land home stuff, it's incremental volume okay.
Okay.
Okay. I was just you know this is the work that Matt Heidelberg has been doing tightest tirelessly for the last two to three years, which is to move forward to add incremental funders too.
It was a credit union only model, whether it be uninsured or whether it be freddie or Fannie and others like that is that's allowed us to to.
To put this billion dollar number out there for originations.
Great and then fire and finally to hire a uptick in corporate expenses just in the quarter I think you mentioned that was.
What we do in part to some tax planning, yeah should we think of that or fees associated with a professional fees associated with tax planning is this essentially a one off and should we think that that the expenses will come back down a little bit in the fourth quarter or maybe some guidance.
Yeah. Thanks, Yeah. We think it's good question, we we've as you know we created in the.
With a with al just his leadership, we sold off 6 billion of assets to end up with just under 100 million, though of legacy assets. There were some losses recorded over the three year divestiture Michael.
Before he and his team have been working at how to access those losses and provide shelter.
As you know, but the complexity of tax it takes time and effort. So you have some expenses this quarter some expenses in fourth quarter and I think you'll see a return thereafter.
It's a big win for us to be able to take the tax rate down into the 89.
<unk> percent.
Well worth the 300000 dollar investment.
So do you expect that you'd be back on the 4 million per quarter for a.
For 2021.
Correct.
Okay. Thanks.
Your next question comes from Jeff Kwan with RBC capital markets. Please go ahead.
Hi, just one follow up question would just going back to that the tax planning and the impact on the tax rate and is that impacts maybe not permanent I mean is that a tax rate that you could see all else equal.
For a number of years and can you kind of articulate that always or is it.
They were temporary.
Oh, well very very at least through the 2021, probably 20 to 22.
Then obviously things just things after that you know things change pretty quickly so were as of right now that's that's what our forecasted.
Go forward rate is looking to be in the range of okay.
Okay. So maybe I mean, how many years that that.
And then yeah, well at least Jeff <unk> most of our competitors operate in this 18% to 22% range.
Yeah, we have significant at all wells. If you will talk later through so I think I'd be a little more optimistic than Michael probably three years, but.
Taxes can change, but given what we have at hand right. Now I think you have at least three years at this rate and more importantly, we will be paying cash taxes for those next couple of years.
Right.
Maybe maybe a few years at that rate and then kind of getting back to you.
Recent years is that.
That right way to think about it I would just I would just drive you Jeff towards our competitors have an 18% to 22% tax rate.
Okay.
Thank you.
The next question comes from Jamie Good wine with National Bank Financial. Please go ahead.
Yeah, Hi, good evening.
First question is just to get into the triad origination fee income rate this quarter. It looks like it comes in at about six and a quarter versus that sort of 7% run rate or was there was there an explanation as to why it was a little bit lower in this quarter and is that a is that a one time.
Impacts.
Yeah, Hey, Jim good good to hear you. We are it came down a bit in the quarter, mostly because we had a little bit elevated.
On balance sheet, so somebody originations that we normally would have sold through soccer on balance sheet, a little bit. So we didnt earn that origination fee.
Quarter, we are portfolioing those loans for bulk sales, where we were we will earn that origination fee it'll just should come back in the fourth quarter of thing. So yeah, I mean, we would characterize it as.
One time that we should see the margin sort of come back to normal in the fourth quarter.
The the explanation is basically we portfolio in more assets this quarter than than we had traditional got.
Got it higher held for trading assets drives a little bit lower origination fee income in the order trends a little bit lower in the quarter, yes.
Okay shifting to service finance.
Any or any color on.
Can you actually provide any stats on what the percentage of dealers are submitted in in Q3 like its elevated but is it.
Is that twice the normal rate and what would be a normal rate for for dealers submission no I mean, if you.
We don't we haven't we haven't disclosed that on a monthly basis or quarterly basis, but it's definitely not double like what happens here as you are talking about differences in percentage points right. So every year. If you think about just the model on how we make money here. It every year, our dealer count goes up a little bit or whatever.
That number is our ticket size is going up over time, and then then those numbers of dealers submitting go up but theyre going to go up by a percentage point or two and there is some seasonality to it what we've seen over the last several quarters is.
Submission rates that are above the normal range in a relatively meaningful way and it's sort of been stable.
Revenue above that range. So it's.
It's not like you're getting all of a sudden you're going from you know 30.
30% to 60% or something like that but you are going from 25% to 32% or something like that like its that's any given deal or any given month right like so it's.
It's a that's not.
No changes, but the combination of all the above enhance dealer growth.
Growth plus submission rates is a is a big deal.
Okay.
Still on service.
The origination growth is outpacing the approvals growth is that a reflection of.
The higher ticket size of.
What the dealers are submitting what's what's driving that.
Yes, I know you are seeing.
With the dealers that are being added.
You're you're seeing very mature is coming in with significant.
Pipelines with have higher tickets so.
In the past your approval to approval to funding your pull through.
And lower your approval to funding now is higher so your approval and you're getting higher originations out of the same approval period. It's also hard Jimmy to read into.
A month or two.
Approvals and origination that you got to look at on a quarterly or annual basis, we'll be happy to follow up with you.
Okay fair enough.
Last one for me just looking at the Kessler's managed assets declined quarter over quarter.
Any additional color to add to that to what happened there.
Yeah, just just like you've seen in the general credit card industry quicker.
Card balances of coming down due to covance. So he had a slight decrease in credit card.
Portfolios that we advise on it Kessler.
Not the ones that we own but the the advisory portfolios.
Perfect.
Makes sense. Thanks.
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Evening several of my questions may have been addressed but still perhaps I'll just try to be quick with this did you offer any commentary on the tax gain.
In this quarter was there any reason anything unusual that would have driven taxes lower in the quarter.
Yes, we found merial way to use the.
The operating losses, we have in Canada, which were the with the sale of the legacy businesses, we've been able to.
Having come in Canada, which has allowed us to.
Bruce a lower effective tax rate is just not a one time is something that's going to occur for the next three years right. Okay. So this is.
This is sustainable and there wasn't a special audit that was completed in the quarter resulted in a gain.
So we still have losses.
In Canada, we havent recognized the benefit of yes.
Yes, it was.
17.4 for the quarter and I think we're guiding to 18 to 20 for the full year.
Or basis, just about in line I get it.
On solar did you talk about how much is left in solar or net of the provisions.
Yes, we have in California, we have about $2 million left variable.
$1.8 million, where we were going to collect that piece. So we're down to if you're not going to see another solar write off in the fourth quarter or the first or second quarter.
So, California is 1.8, but isn't the total something closer to 11 million.
Yes, but you're those are in areas, where it's still being installed the work is.
Being done there.
There's there's no delinquencies there's no aging.
It's working just fine.
Yeah, but I would I be right in saying the total is about 11 million.
That's correct.
Okay.
And then on.
On the service or rather on Kessler that $500 million.
Portfolio trends.
Production.
Can you talk about the economics behind that like what sort of service fees or management fees.
Learns or is that too private a discussion that happens.
Yeah, I don't we don't get into the specific fee arrangements, but it would be typical management performance fees for these types of private.
Transactions.
We do have and what hurdles or have US right. We typically we typically have 75 to 100 basis points of management fees.
And then we have a.
Maybe 125 on certain transactions and we have a carry after that.
I guess the reason I asked that is what services discussed.
They are providing that would support.
Support that type of fee structure.
So your first of all you're doing on behalf of our institutional investors.
We're originating transactions have you otherwise wouldn't say so we will lineup of portfolio on an exclusive basis.
We will have given.
Even our views and I think clearly do due diligence on the quality of that portfolio credit exposure yield opportunities and we will bring you not just the portfolio on an exclusive basis, but also a plan on how to improve the economics of that business.
Yeah, we sourced we structure, we manage that entire.
Platform and that entire investment for our investors. So think about it this way Mario in historically you'd seen these portfolios move bank to bank. Okay now you're in a situation where some of these portfolios may not be as attractive for banks, given new capital rules, given new credit rules et cetera, and so what we've basically done is created.
The market for institutional investors to invest in these kinds of assets. So we are bringing them unique assets were sourcing structure and helping manage that portfolio and for that we are getting paid management fees and performance seems like you would in this type of idiosyncratic investment.
Yeah, It sounded to me like something in investment banking fee would be.
The attach too, but somehow you've converted this into more of an annuity I guess that was the strategy ultimately.
Correct, Yeah, where we believe we are providing value added by improving your yields and mitigating your credit losses.
And then finally, a more much more broad sort of general question I've been.
Watching the progress of your book value per share over over many years and.
For the last couple of quarters or been no buybacks, but yet booked value per share continues to shrink and when I drill down on.
Why is this the case I can certainly look at a bunch of one offs that wont repeat themselves. So I can see that normalizing over time.
But there are two that that our niggling and that will continue and continue can constrain the growth in book value and I'm talking aside from anything to do buybacks. There's of course, the amortization of intangibles, which I think most people would agree.
It's appropriate to remove for the purposes of discussing your your core adjusted earnings I think.
Virtually every company would do that but the share based compensation.
And that caught my attention this quarter because it was almost double what it has been in previous quarters.
What is the sort of what's the logic there in excluding share based compensation from from your adjusted earnings is it because it's not really a cash item at some.
Thing that settled in stock, but what's the logic behind doing that.
Yeah, I think that the pressure pumping every company does in one if you could be settled in stock too can be volatile based on the movement in the share price that people tend to normalize.
For that.
So those.
Those two combinations.
Yeah and also Mario just just so you know I mean, if you look at the year over year number for the nine months, it's really about the same remember in this quarter I don't know if you heard what Michael said had said previously we typically award our share based grants in the first quarter of the year, but since.
It could happen in the stock dramatically fell the boar.
Board and management decided not to make those grants into the third quarter until the stock had recovered somewhat.
We just thought of fairness to shareholders et cetera that was the right thing to do.
If you look at the way the grant and the accounting works on the grant you have to take 60% of the Grand upfront. So if you have a five year pro.
Program for example, your take.
Taking three years of the grant immediately.
Into your accounting number four for this particular quarter, even though it is noncash and won't actually get paid out a realized and less performance targets are hit over the next five years.
So it's the accounting for these things generates a much bigger number than the actual cash it would in any given year.
I think ultimately.
Really what's driving this line of questioning from me and the reason why investors talk about it more than they do for other companies is that.
The share based comp in any given quarter.
You know Paul at an average of $4 million born out million.
Bounce to 15% plus of your pre tax adjusted income.
And that's just the big number compared to what we see at any other company color.
And that's ultimately why it's having this negative effect on book value per share growth. So its cap. It caught my attention. It gets catching the attention of investors because it's a large number relative to your adjusted earnings and as there.
Result is having a meaningful effect on the company's capacity to grow your book value.
That's what's driving this.
That's the narrative I hear among investors and myself.
So yeah, that's mark.
I think what you're saying most of its fair however share based comp.
Can go up and down.
You know we we we waited this time to issue. This fall the stocking recovered back to where it is today I'd also draw your attention to its five year.
Staying with performance. So we'll see what it is when it's actually realized.
And my final view is it's a long term retention tool.
Two we have some pretty powerful business unit partners and this is one way of getting retention in alignment with the operating results that said, there's no doubt that this will.
Begin to mitigate and 21 I think I think I see you all have done all the share based allocation most of Anita Dunn has been done.
Okay, Yeah, the positive take away from my perspective is it's a closer alignment.
Oh senior executives to the to the value of the stock.
The negative is that ends up being a large number relative to the pre tax earnings, but yeah, I think I've taken that but as far as I can go.
Yeah, and I think you'll see it mitigate 21, but we also.
To wait for the proof in the putting Mary.
Thank you for sure.
Once again, if you have a question. Please press Star then one.
The next question comes from Vincent Caintic with Stephens.
Please go ahead.
Hey, Thanks for the follow up I have two follow ups kind of falling to light a question about capital that I had earlier.
First one just thinking about uses of capital so.
We talked about share buybacks, that's not baked into your 2021 or are we guidance and you're growing.
So quickly.
You know you don't need capital for that so you've got bank funding partners to take all of that just wondering with all the free cash you're generating is there anything else you might be interested in using.
That pre cash for maybe if there's additional capabilities that can help you growth more grow more or are there other verticals just thinking about.
M&A or anything else you might use the capital you're generating four.
Yes.
Thanks, Vincent it's.
Our principal focus is on our organic opportunities given the the did take share that we spend a fair amount of time on the ceiling is make sure that said we are seeing enough.
A number of bank partner to build our business model is getting bigger exposure, we're seeing banks and other institutional investors approach us looking for asset flow.
Often made the case that our principal customer are the banks credit unions Lycos pension plans to.
That we have that we originally.
Great assets, where they pay our origination fees. They appear management fees, we've actually got a little bench strength. There we brought a strategic advisor on the bells name is aeroskirt catching you know him because he was the CFO.
Jeeze Bank group and activities. He is assisting us not as a member of management, but as an advisor on.
Identifying opportunities for banks, who were looking for additional flow John continues to look at tuck in M&A deals, but don't read into that that we are doing a large transaction.
Any time soon we're very happy with the growth we are happy that the banks are now coming to us looking for asset flow.
We're happy by guys like Aaron can give us some advice on how to deal with those banks and what kind of flow they're looking for so I think it looks good.
Okay, Great that's helpful and into the second question.
Is on your funding so.
Certainly you differentiate yourself.
With funding and it seems to be a what I think about you know yourselves and competitors and you know some of the guys who are shrinking it seems like funding is the biggest.
Driver of that and those you know youve secured your funding through 2021, yet to give us maybe a little bit of margin for that but how you're thinking.
Funding ability and it maybe if you could differentiate why.
You're able to get that flooding and therefore able to secure all these take share opportunities versus some of these other guys like us like the one for example, with the 20% down your here as well as others. Thanks.
I I think the ultimate.
The answer to that Vincent is that we treat the banks like Kohl's credit unions insurers as our customer.
And we spent a lot of time talking about the assets that they want and need and the servicing they need.
That allows us to be laser focused on where we can act on their behalf but.
Well in a market where competitors are going through significant strain.
We're able to walk in and make.
The $200 million your flow arrangement move across like that without any interruption, because our bank partners want that and the big learning I've had coming out of the cobot crisis is that we need to extend these.
Okay funding relationships that weve extend them into 22.
On a committed basis. So we have those long term customer relationships and Matt has been doing the same thing at Tri Ed with with Mike Tolbert, David extending those relationships, bringing Gs owes its funding partners you can ask for a better.
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Customers and one of the U.S.G. episodes.
To be a partner side I think its a laser focus on our customer which is the institution purchasing the paper and we're servicing and advising it on.
And that's the part that's going to hold us in good stead as we can do to go through this market disruption.
Great.
Got it thanks very much.
There are no questions registered at this time. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a great day.
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