Q3 2020 GWG Holdings Inc Earnings Call
Continued success in raising capital through our $2 billion.
The bond offering this quarter, we raised right at 115 million and the L bond sales, including of $43 million per month in September.
Then the efficient closed 8.1 million of the originations in October 2020 interest after the quarter closed and have built a pipeline of approximately 300 million of.
Of for originations sourced from our A's family offices General partners foundations in the various other sources.
The third quarter was our first full quarter with grant Thornton as our new independent public auditing for them and we're very pleased to have grant Thornton here and they've done a very good job for the from GWP Holdings, and beneficent have taken steps to assist management and oversight of our combined companies controls.
This includes engaging internationally recognized accounting firm to prepare quarterly valuations and an opinion on the officials the loan portfolio.
We engaged internationally recognized accounting for the consult with GW GE and beneficial on internal audit Department developments.
We've hired another internationally recognised counting phone to review the cost basis of beneficial financings and related loan balances.
During the third quarter, we purchased a multiyear hedge to protect the inefficient loan portfolio against potential market corrections.
And we began automating our middle and back office functions, which will allow both been Angie WG to scale the business minimize cost and increase accuracy.
During the pandemic, we have experienced no material impact on the licensure portfolio from COVID-19 based maturities.
The performance of our portfolio is not affected by market movements and consequently, non correlated to the market.
We have spent a lot of energy on focusing on the health and safety bar employees and we are committed to our business partners investors to continue to raise capital.
Paying receive income of dividends received insurance policies benefits and otherwise meet all of our ongoing operating obligations.
The majority of our employees have worked from home since mid March.
And during this time period, we had relatively strong L bond sales in face of this paint the.
Next I'd like the handed over the Brad Hitler the chairman of the board of GW GE Holdings.
Brad.
Thank you Mary good afternoon, everyone.
The G and Ben for their advanced our strategic partnership in December 2019, nearly a year ago net created a joint workforce of over 150 employees. It also expanded our strategy of providing early liquidity on professionally managed alternative assets to a vast an underserved market of mid to high net worth and.
The visuals and the small to mid sized institutions dirt.
During 2020, we have focused our efforts to build the foundation of our companies by introducing unique products services and systems. Some of these systems, we intend to file patents to protect we believe all of these efforts poised for companies for 2021 to scale at the time when there is.
The great need for our products and services that we've created.
We believe the liquidity challenges faced by individuals and families by small institutions and their advisors provide an opportunity for our liquidity line of products.
This need for liquidity has grown substantially in the past few years, driven basically by US based investors, who now hold over three trillion dollars in institutionally managed net asset value of alternative assets now that three trillion dollars excludes hedge funds that have interval of liquidity bdcs and real estate.
Weve estimates that are exchange traded it's quite a large market for people needing liquidity today only 50% of these assets are held by large institutions, which have greater than a $1 billion balance sheet and that number of 50% continues to decrease the reason for this is that the other.
For half of the 1.5 trillion dollars of NAV held by U.S. investors are today held by small institutions with under a billion dollars in assets and by individuals and families. Having the net worth of over $5 million, that's half the marketplace and that segment of alternative asset holders is growing.
There are now 2700 small us institutions that fit our category, we all know them as small endowments foundations hospitals in unions, but in addition, there are $750 billion that are now held by individuals and families in our communities.
This growth in our alternative asset industry and how those that hold the assets evolved over the past 15 years has required us to take a much closer look at how the deliver liquidity to different types of investors, having these liquidity needs.
For example individuals families of small institutions. They do not have the ability to access the U.S intermediary markets for liquidity.
That market for secondary liquidity was built for the big institutions and in fact, the big institutions are the ones who built the market.
It is the mergers and acquisition transactional type of market built by bankers, where each party often has their own advisors they have their own accounting firms and their own law firms.
Typically there are several pricey intermediaries consultants and auctioneers in the middle of each transactions. So its a very expensive. It's a complicated process. They can often take anywhere from six to 18 months.
There's a reason that individuals and small as tuitions cannot yet liquidity out of alternatives from that market that simple. They just can't afford it it's too expensive they needed to be simpler they needed to be of much more rapid they need the liquidity now for their life changes individuals have helped needs they have family.
The business the to state planning requirements all of the big institutions. They don't have of those needs.
So we went to work a few years ago to create a line of business products and services that simplifies the entire transaction for gaining liquidity simplifies the process into a rapid and cost effective manner to provide individuals and small institutions with access to liquidity when they need it much easier than the biggest.
Tuitions, the built their market for providing them liquidity.
Our strategy is very simple, we're a financial services company, we provide private trust solutions, including a unique suite of trust the liquidity solutions.
I always like to highlight the beneficent is not an investment fund and were not an investment advisor our business model is to operate as a permanent financial institution and the deploy our balance sheets with capital that's off our balance sheet to fund the liquidity needs of.
The alternative asset investors.
We operate with the lower cost of capital than our competition.
They provide liquidity large institutions and typically have to cover their own extensive promoted profits interest in advisory fees that they pay to their asset managers, along with seven figure transaction cost paid the wall Street attorneys consultants intermediaries on every liquidity transaction that they did.
They typically raise money from private equity institutional investors, who have a very high rate of return expectation.
Our companies on the other hand do not have all of these costs for managers lawyers outside investors reason is we do all of these functions our sales inside our company. This means that our costs are substantially lower than our competition often more than 50 per cent lower than the secondary.
Liquidity providers cost of capital.
Our asset based lending arm operate similar to how the bank operates and we found other ways to cut costs associated with delivering liquidity to our underserved market of individuals and then tuitions all of these cost cuts allow us to operate at a spread and to be transparent to our investors on what that spread.
It is and what we intend to earn by providing the liquidity to the investors the.
The benefit of our lower cost of capital of our lower execution costs and of our lower holding costs. The opens us up to a market that needs our products and services and it allows us to be among the first to this market with a compelling and valuable liquidity solutions and services built specifically for them.
To engage with our targeted clients beneficent built during 2020, the all access proprietary online secure platform portal, we developed it to do business directly with our clients all online our clients consistently and rapidly complete all of their transactions.
Online over our all to access platform.
It's our very own main street for connecting beneficial to our target market worldwide without a brick and mortar presence without the expensive legacy information technology needs or without having the burden of branch bank technology operations.
Through all the access clients can learn about our liquidity products and solutions those solutions that provide cash securities or a mix of cash and securities and then they can transact on those solutions from beginning the in all online everything can be done simply from their own system on line.
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In the summer of 2020, Beneficent officially launched its suite of liquidity solutions for our target markets and we launched it under GW of Gi Central to our launch was the introduction of the liquidity bond. It's a five of those six C offering which allows our companies to advertise and promote our products to a credit investors who knows.
Liquidity from the professionally managed alternative investments very few liquidity providers.
Can directly advertise and promote in the manner that we can to our target market.
Since June.
2020, we have over $100 million of private assets that are currently pricing are being actively under consideration with an additional $200 million of potential transactions that are waiting on actions from our potential clients. That's the large pipeline this pipeline of potential new true.
Transactions has all been sourced from registered investment advisors family offices alternative asset sponsors foundations and other types of investors very happy to see the development of the inflow for a demand from beneficent to provide liquidity, we should see more closings begin to evolve.
Of over the next few months.
With that I'm going to hand, it back to Murray the CEO of GW of Gi He's going to talk about some of our key proprietary tools that we developed the operate and further enhance our business and then he's going to introduce Tim Evans, our CFO to discuss our financial results for the third quarter.
I appreciate your time today, Thank you Larry.
Right. Thank you very much.
I'd now like to share with you bins risk management and underwriting tools that have been implemented here in the third quarter of 2020 for.
First is total loans total was developed by bins risk management team, it's a comprehensive portfolio management system.
He was designed and built to maintain a wrist optimize collateral portfolio by employing in synchronizing except.
Except the principles of diversified portfolio construction using alternative asset valuation methodologies of hedging strategies to.
The managed the quality and make up as well as the risk profile of bins collateral portfolio.
Underwriting has developed the operating system. It's in the original grading system built by beneficent underwriting and risk management teams to analyze and review new and existing loans.
It's tailored specifically to evaluate loans that are collateralized with alternative assets.
The evaluates various low metrics using internally generated simulation models to create a rating score, reflecting the probabilistic risk of default for each loan.
Next I would like to introduce Tim Evans, our Chief Financial Officer cash.
Tim.
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Thanks, very happy to be here to go through our Q3 results for 2020, we'll start out with our 2020 financial metrics Review, then we'll move over and talk about our balance sheet and liquidity I will end with the discussion of both the Ben collateral portfolio and the life insurance portfolio.
I can start with our 2020 financial metrics for you you for Q3.
So then we think we have total assets in excess of $3.6 billion and stockholders equity in excess of $400 million. So from a balance sheet perspective still in line of where we were last quarter and as we switch over here to our income statement metrics I will be able to discuss some of those differences that we see from Q3.
2020 versus Q3 2019.
So for Q3 2020, we had our gross revenue to meet the half million up six and a half million from Q3 2019 total expenses were up by about $38.4 million and income and other expenses really other expenses here up 22 point.
For million for a total net loss for the quarter of 43.5 million more than we had in Q3 of 2019.
And earnings per share similarly, with the 2.23 earnings per share loss for the quarter, let's break down what cash.
Just to some of these differences for the quarter. So if we look at the six and a half increase from gross revenue. What we see is that this is really being driven by higher interest income and higher trust services revenues totaling about 13.6 million for Q3 now remember that this is comparing Q3 of 2020, where we are now concern.
The validating these revenue items from the operations of then after Q3 of 2019, where we were not consolidating so we have this new revenue stream that we're showing here in Q3 2020, we didnt have last year. Another difference is that we are not currently purchasing life insurance policies. So we.
I do not have the net gain on life insurance policy purchases that we would have had back in Q3 of 2019, and Thats, where we see the $3.7 million difference at the top of our section down here in the bottom and then finally, we see a $3.6 million negative difference for the quarter, what's really driving that number is the.
The portfolio hedge that Mary mentioned earlier that hedge of again is intended to protect us in case of the market downturn over from the three broadly speaking the quality of the market had increased instead of the value of that hedge had decreased slightly but again. The idea is that overtime, if the market were to decay.
The line the value of that hedge with increased and in a way that would be sure that the collateral portfolio of then was protected from any of those equity market.
On the expense side, we did have significantly more expenses for the period large part of that coming from higher interest.
$12.5 million period over period and.
That also makes sense, because we have more outstanding L. Bonds. In Q3 2020, then we hadn't for 19. So we would expect to see a higher interest expense. We also have a large amount that's directly attributable to higher employee compensation really want to stress, though this is more of the non cash equity compensation.
Patient that was issued by then kind of given its startup nature and the fact that it has a number of long term employees that are getting significant investing into their equity grants that we do not expect to see in the future. This is the last quarter, where we would expect to see any of these long term grant.
Coming into place and setting a large non cash expense. The just like the ones. We saw earlier. This year. These are non cash in this period and would not turn into any cash anytime in 2020, and just would start to in small amounts from 2021. So we don't expect to have any more of these large non cash.
The equity compensation expenses hitting for the remainder of 2020 or going into the future. All we would expect to see is that with any new hires and that would have any equity grants that they will start adding to the overall schedule and then the expected period over period vesting of previously.
As youd equity compensation.
We also had higher legal expenses for the period of $5.2 million as we continue this transitionary period that GBG and dinner end and the.
We also had a recapture of provision for loan losses of negative five.
So what that reflects the is the fact of than our prior period, we had taken an expense for a potential loan losses related to want to then financing, but based on changes in the underlying collateral the value of that loan has actually increased by five loans as we recapture that loss from the prior period, because we now think it.
We'll be repaid so thats a review of our metric summary, now move over to the balance sheet from.
The balance sheet side, not a lot of changes here, we still have assets in excess of three and a half million again for the period 3.63 billion and all the liquidity standpoint, we continue to have strong liquidity compared to some of the prior quarters back in 2019, we are down a little bit for Q3, 2020, but really that's for.
Flattening of the fact that we paid down about $50 million of.
Debt at bins senior credit facility. So while we did have a slight decrease in liquidity there that's offset by a smaller loan balance on the face financials as well.
Now we turn to look at the end collateral assets as this was the slide we started including our recently we have some updated amount here on the total number of funds and investments and on the total amount of bins loan receivables, which is 227 million. We also see on the left the stated interest rate for those loans receivable.
Goal of 14% and 2.8% of annual administrative fees that Ben collapses, well for its role it related to the various trusts that have these financing. So again, we see then income which is it's in.
Interest income and its trust services income. These are really the amounts that we are seeing captured on the income state and then we have the breakdown of that collateral portfolio. The alternative assets. The cash flows from which are collateralizing, the repayment of debt financing broken down by geography.
Industry and investments.
Now we look at the secondary life insurance portfolio again. This portfolio continues the season and the cash flow is off the portfolio continue to perform as we expect which has been quite strong total portfolio of face value is $1.92 billion at 930 with over 330 million of policy benefits within.
Sure. It's that are over the age of nine day on the benefit side in Q3, we had just over $39 million of.
Liquidity for the period of maturities for the period, which was another strong quarter for the portfolio and again on a trailing 12 month basis. These.
These maturities are more than covering the premiums that are required to maintain the portfolio. So over the trailing 12 months as of 930, it's 220% so more than two times the amount of needed in the.
Under the cover the premiums off of the portfolio.
We look at it on a break down of different policy benefits by the age of insured for we see the amounts here and really if we look at that amount beginning at 85, we see that over 80, 546% of the total payout policy benefits for the portfolio for just over $880 million of benefits.
Over 85, and then on our counterparty risk we continue to be very comfortable with the quality of the credit rating on all of our counter parties for the vast majority of the portfolio.
So again, the another strong quarter of performance by the portfolio.
The Dan I will turn it back now to you for questions.
Thanks, Tim we allow people to submit questions during registration for received a number of good questions. Our first question is from an advisor who ask could you comment regarding coverage of L bonds in the event of the liquidation.
Sure. So I can take that one Dan if we look at our L. Bond indenture. There is a debt coverage ratio that set out there, which effectively says that the value of the total indebtedness and not the exceed 90% of the assets of the company and so we performed that calculation.
And each quarter and disclose the calculation quarterly and all of our cues. It's right there towards the end of the Q and this quarter as well.
And for this quarter I think we reported a 69% debt coverage ratio, which means that the total indebtedness of the company does not exceed 69% of the value of the assets of the company as set out in the debt coverage ratio. So I would encourage everyone to review that debt coverage ratio disclosure in the Q, which breaks down the the.
Are you of the different assets and the methodology that we used for determining our debt coverage range.
Thanks, Tim one more question for you is the viability of life settlements progressing as expected.
Yes, I would say that it is and as you may recall back in 2018, DDG changed its portfolio valuation methodology and began using a longest life expectancy methodology as opposed to an average L.E. methodology and what we found as a result of that is that our.
Tool to expected the methodology, which we discussed at length in our K. So if you want to look for actual to expected methodology and our 2019 10-K, you will see an extended discussion there that talks about how much of the actual performance of the portfolio is performing as expected underneath that methodology and that's true through Q.
The three as well so again, our disclosures there I think would give folks for information on that methodology and yes, its still performing as expected.
Thanks, Tim Murray one.
It will be the future of the GW GE business model.
We have been reporting since 2018 that GW GE is going to be moving their investment strategy of ways from life settlements in the street to other alternative assets through its investment has been over the last five or seven years of the life settlements business has become highly competitive.
The number of very large well financed entities have entered the space and yields times currently on policies have been declining substantially and in that yield has not is not producing a big enough spread for GW G to continue in the business. Consequently.
The our investment strategy has moved to investments and other alternative assets through the subsidiary of been efficient and the there we are experiencing as you heard earlier from Brad Heffern Weve reported in the queue of rich.
Spring sing considerably higher yields and we expect to continue that strategy in the future.
Thanks, Marie Thank you, Tim and everyone, who dialed in organic you Didnt get your question answered we're happy to get it to you off line you could call or email us one of the thank everybody for taking time to hear about our third quarter and our prospects going forward. We hope you have a great rest of the day. Thank you again.
Yes.