CA - ECN Capital Corp. (ECNCF) Q3 2023 Earnings Call Transcript

2023-11-13 22:44:10 ET

ECN Capital Corp. (ECNCF)

Q3 2023 Earnings Conference Call

November 13, 2023, 05:30 PM ET

Company Participants

John Wimsatt - CIO

Steve Hudson - CEO

Michael Lepore - CFO

Lance Hull - President, Triad Financial

Matt Heidelberg - COO, Triad

Conference Call Participants

Geoff Kwan - RBC Capital Markets

Nik Priebe - CIBC Capital Markets

Mario Mendonca - TD Securities

Tom MacKinnon - BMO Capital

Jaeme Gloyn - National Bank Financial

Presentation

Operator

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

I would now like to turn the meeting over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.

John Wimsatt

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

A news release summarizing these results was issued this afternoon, and the financial statements, and MD&A for the three-month period ended September 30, 2023, have been filed with CEDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the presentation section of the Company's website.

Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I refer you to the cautionary statements section of the MD&A for a description of such risks, uncertainties, and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct. You should note that the Company's earnings release, financial statements, MD&A in today's call include references to a number of non-IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. All figures are presented in U.S. dollars unless explicitly noted.

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

Steve Hudson

Thanks, John, and good evening.

Turning to Slide 6, number of bullets here and I'll speak briefly to most of them. We had our first Board meeting today at ECN with Skyline colleagues attending that meeting. It went extremely well. I continue to believe that this joint venture and strategic partnership is the extremely powerful engine that will drive our 2024 growth. The ECN Corporate simplification plan is well underway, which is directly reducing our expenses and increasing our partnership between Triad and Skyline.

Our new funding arrangements are in place and will continue to drive our 2024 growth and funding. We'll speak to that in a moment. Third, Lance is into his 100-day plan, which he'll speak to in a second, part of that was a decision to accelerate bulk sales in this quarter after portfolio review and a way to increase and return capital for the initiatives within the joint venture. Lance has mentioned well through his 100-day plan and he'll speak to that in a moment. Pleased to announce the new Executive leadership at Source One which John will speak to in a moment.

Our strategic Marine review will conclude with either the sales spin in the first quarter of 2024, we're also announcing this evening the expected sale of Red Oak, which is our RV Marine inventory finance platform. I'd like to comment, over the last nine months, the management team has done an exceptional job. We've had extensive third-party validation from both equity investors, debt providers, rating agencies, and senior management endorsement from industry leaders joining us.

I'm also pleased to reiterate our '24 operating guidance which will be back-ended driven by the growth of the joint venture as well driven by the incremental flow partners we'll speak to in a second.

Turning to Slide 7. This afternoon, Tawn Kelley and Mark Yost from Skyline attended our Board meeting chaired by Bill Lovatt. Tawn, as you can read from the website of Skyline, is a leader in the U.S. mortgage industry. Mark is the CEO of Skyline. Skyline, as you know, has been a partner of Triad for the past two decades.

We have begun the implementation of the joint venture. We formally launched both the floor plan and rental and the retail launch will be formally launched at the Louisville manufactured host show in mid-January. You're welcome to join us at that show if your schedule accommodates.

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

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

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

Turning to Page 11, I mentioned the significant extensive validation of our core business, both in platforms and processes, validated through rigorous due diligence by four credible parties, namely that of Blackstone and Carlisle Funding, Champion Skyline, and Equity Investment Fitch, our improved service rating, and finally both Lance and Mike did extensive due diligence before they accepted their leadership positions at Triad and Source One respectfully. We're happy with that support and extremely proud of the validation.

Turning to 13, I would highlight for you on Marine RV, the leadership addition of Mike Opdahl. John will speak to that in a moment, that's great news. Inventory finance balances continue to perform as promised. We'll speak to rental as part of that.

With that, I'd like to pass this discussion to Lance Hull, who's Mr. 100-day plan. Over to you, Lance.

Lance Hull

Thank you, Steve, and good evening, everybody.

Turn to Page 15, please. I just want to highlight three key points on here. First, in our efforts to continue to focus on the customer experience and bettering both speed and efficiency, we've formed the Office of Change Management at our company. And it's highlighted, run by Ayesha Kahn, that's going to support our planning and delivery of key initiatives and drive improvements across both IT and enterprise change.

And we're looking for great things out of Ayesha. We also, as one of our first projects that she's working on, we've integrated our CRM and LLS, this is going to help us create much better workflow queues for our team members, which will improve their work environment and allow them to provide better and faster service.

It'll provide clarity and accountability in the things that they're doing so that both our customers, our borrowers, and our retailers have better insight into loan process and it's going to form a foundation for us to expand additional tech upgrades, including application upgrades and portal upgrades in the future.

We're also, through Eric [indiscernible] leadership of our servicing team, and as Steve just alluded to a minute ago, we recently upgraded to Fitch RPS 3+. But we are continuing to look for opportunities to strengthen some of our teams for some of our hard-touch portfolios. We're already seeing immediate results in terms of lower delinquency, which is going to allow us to expand our origination efforts into some of those hard-touch portfolios.

Over on Slide 16, adjusted operating income for the quarter $7.9 million. That's Q3 originations were up 5.4%, but very encouragingly, our approvals in Q3 were up 17.3% and I'll touch on approvals more in just a minute. Steve alluded to as part of my 100-day plan, we decided to accelerate our pool sales and recycle capital into our stronger growth initiatives, including rental and floor plan.

Our managed portfolios grew this quarter by 18% year over year to $4.8 billion. We also, as Steve alluded to, closed our strategic partnership with Skyline and we've now set on our way to establish the joint venture. We're working very hard with our Skyline Champion team as well to make sure that we put great programs in place and on schedule for our launch at the Louisville show in January 18th.

And lastly, on this slide, it's very encouraging to see us now, we're thanks in large part to Blackstone and Carlyle and the funding commitments they've made to our business. We're in very strong position in Q3 of this year as well as all of 2024.

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

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

Onto Slide 19, this is the best look at how we're doing compared to the industry. Industry shipments are measured monthly and you can see that year-over-year industry shipments are down 26%. Triad's originations are down 2%. So, against that measure of industry activity, we are faring very, very well. Industry shipments are starting to slowdown and starting to recover some just in Q3, shipments were only down 19%.

So, you're seeing some return in shipment activity and backlogs are beginning to grow a little bit. But again, we continue to lead the way and outpace industry shipments. And those trends are continuing into 2024.

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

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

Matt Heidelberg

Thanks, Lance.

So, turning to Page 21, I thought I'd start by defining what is rental finance. Rental finance to us they're loans to manufactured housing community owners that own and rent homes that are placed within their communities. So, these are community owners that we're very familiar with. They're community owners that we've underwritten before for things like floor plan that we've underwritten before to do things like submit retail loan applications to us.

We're targeting large, well-established, financially strong community owners. We have a perfected Lien on the home and we're not - we're not going to be extending financing to anything greater than 80% of value. And we want long-term rental agreements in place and executed prior to us extending that financing. We're not looking for Airbnbs or weekend rentals, we're looking for long-term, established cash flows. Yields on this program are similar to floor plan. We're earning 11% plus today and durations are half that of our consumer loans, sitting at around four years.

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

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

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

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

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

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

With that, I will turn it over to John.

John Wimsatt

Thanks, Matt.

We are on Page 26. I am very pleased to announce that Mike Opdahl has joined Source One as President, to really oversee the next phase of growth for the company. Mike was previously the COO of Automotive Credit Corp's in 2015, where he oversaw profitable turnaround of the Midwest auto lender and returned the company to profitability in 2016 and each year since. Mike's also been the COO of Westlake Financial and a Regional Sales Manager at GE Capital.

We've known Mike for many years and are very excited that he agreed to join Source One. He will improve operations, sales, and customer service, driving growth with key objectives including reducing cycle times, improving responsiveness, dealer communication, and customer experience in order to grow both originations and manage assets over time.

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

Page 28, we just want to reiterate that we really believe the groundwork has been laid for significant growth. 2023 has been a difficult year for a number of reasons, both from a macro perspective and a timing perspective, in terms of where we were in rolling out various processes and programs.

We've gotten through a lot of the things we had talked about earlier, like licensing and establishing servicing capability and really creating the ability for geographic expansion. This year, we had hoped to add some more funding partners and some other things like that's taken clearly longer than we initially expected.

But, you know - so you've seen most of what we've talked about here in the left column, but I do want to comment on the funding side. While we've seen somewhat of a slowdown from existing funding partners while we wait on some new funding deals to close, you know, some of these - some of those deals we've been working on for quite a while. The good news is we're well along in the process. In addition to some of the partners that we've previously discussed, we're also now in talks with several new large banks, which we expect will likely close late in Q4 or in early Q1 of 2024.

We've also begun some discussions with some new institutional investors that have interest in flow across several products. New funding is what's going to drive origination and earnings growth in 2024. On the right side of the column, I just want to give people some context into, you know, how we see some of this growth evolving over time.

Some of the other metrics that we've not spoken about explicitly before, but Source One really has material upside from improving customer and dealer experience, which is really what Mike is focused on today, or Mike and his whole team. Today, only about 20% of our dealers, or less than 750, actually do at least one deal per month.

We've added more than 1,000 dealers since we acquired the company. Just a 5% increase in those active dealers would add almost 25% new originations. In addition, if we changed that from one deal a month to 1.25 deals a month, that would be another 25% combined, almost 56% growth. We think both of those are doable next year just from process improvements, customer and customer service initiatives that we think will get completed here in 2024.

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

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

Michael Lepore

Turning to Page 32 and the consolidated highlights, total originations of $571.5 million in the quarter were down 16% year over year, driven by the decrease in MH originations of approximately 5% and RV Marine was down a little over 30% year over year as noted earlier. The decrease in originations, lower originations as well as the lower MH origination revenue margins resulted in lower adjusted EBITDA, adjusted operating income, and net income applicable to common shareholders compared to the prior-year quarter.

Of note, the Q3 results include a $4 million provision, a result of the classification of the Red Oak RV and Marine inventory finance business as held for sale, and this represents the best estimates of the cost to sell the business.

Turning to Page 33, Q3 results continued to be impacted by lower margins related to the launch of land home and as noted earlier, at the end of Q3, under Lance's leadership, we accelerated the sale of some of these portfolios and the impact of that was an impact on revenue margins of approximately $10.3 million in the quarter.

We have reduced the manufactured housing guidance in Q4 as well to reflect the - to reflect potential additional bulk sales and expect to return to normal margin levels in 2024. Pricing on core travel remains robust and where leading indicators point to strong loan production going forward, as noted by Lance, which will lead to further improved margins in Q4 and in 2024.

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

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

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

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

Steve Hudson

Thanks, Michael.

Slide 38 four quick things to highlight. The 100- day plan is well underway. We're impressed by what Lance have achieved [technical difficulty] short period of time I got a little note from a dealer saying it's been a market turnaround. Next time we'll include some of those excerpts coming in, but it's been amazing. The new executive Mike is now on board at Source One. And that's Mike and I are back from the North American RV convention and we've begun discussions with large manufacturers about two joint ventures captives. And while he's been adding funding, Mike has both experiences deep in the dealer sales side as well as in the securitization side. So it's nice to have an executive that can see both origination and funding.

Third, our RV Marine Strategic review is now concluding with either a spin or sale in the first quarter and fourth. Hans doesn't get enough recognition in our shop is the leader and founder of IFG, Hans Pross, who one month doesn't make a year but in October had year over year income increase, which is amazing given it's not the strongest market for big boats. But well done Hans, to you and your team.

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

Question-and-Answer Session

Operator

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

Geoff Kwan

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

Michael Lepore

Hi, Geoff. Yes, it's Michael. So if you look at Page 33, it's a similar issue. As you know, we've - we had, you know, we got the land home portfolio that's coming through. What we've done at the end of - we took the mark on the interest rates in Q2. What we've done in this quarter under - once Lance completed his review, we start to accelerate the sale of these assets.

And when you sell outside of normal flow arrangements, there's an additional mark take to get the sale done. So we've made the decision to accelerate those sales as quickly as possible and redeploy capital into more productive uses for ECN. So, that's - it's an opportunity cost on that $10.3 million margin compared to what a normal sales margin would be. So that's what that is.

Geoff Kwan

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

Steve Hudson

Yes, thanks. It's Steve. Since we announced, since we did the deal, Tawn Kelley has joined the board of Skyline. You can go on to Skyline's corporate governance website or section. Tawn is a leading U.S. Mortgage broker, the largest in the U.S., in fact, she's done a series of captive sales finance companies on behalf of site build manufacturers, one of which is in Canada, which is Metamy Homes. We thought that expertise was particularly important for Lance, so we asked her to on the board. We didn't want to disenfranchise Mark, so we invited him on as an observer. We got Tawn's skill and expertise and Mark in the partnership.

Geoff Kwan

Thank you.

Steve Hudson

Doesn't change the voting percentages at all.

Operator

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

Nik Priebe

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

Michael Lepore

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

Nik Priebe

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

Michael Lepore

That's correct, yes.

Nik Priebe

Okay, that's good. I'll just ask one more. Just wondering if you could help us understand what a spinoff of the RV and Marine financing business might look like. Would this be a distribution of a new public vehicle to existing ECN shareholders, and, you know, do you think the scale of that entity could accommodate, you know, the cost of being a standalone public company? I'm just trying to think through that scenario a little bit more.

Michael Lepore

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

Steve Hudson

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

Nik Priebe

Understood. Okay, thanks very much.

Operator

The next question is from Mario Mendonca with TD Securities. Please go ahead.

Mario Mendonca

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

Michael Lepore

Correct. Yes.

Mario Mendonca

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

Michael Lepore

Like I said, we're trying to accelerate and sell as much of the portfolios. So there's interest rate risk. There's also, if you want to sell, you know, a large amount in a short amount of time, there is - you know, there is - you're going to take an incremental mark to do that.

So we're continuing to analyze that, and if the opportunity comes out, we will plan on exiting these on balance sheet positions as quickly as possible. We reflected the Q4 guidance reflects our best estimate that, you know, there likely will be another bulk portfolio sale at lower-than-expected margins, and we've adjusted the guidance accordingly.

Mario Mendonca

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

Michael Lepore

Let's say about $100 million to $150 million.

Mario Mendonca

And how much have you done so far?

Michael Lepore

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

Mario Mendonca

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

John Wimsatt

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

Mario Mendonca

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

John Wimsatt

Yes, it was the long lag between the commitment and the funding and the switch in the funding from credit unions and banks to institutional buyers. And then maybe the $10.3 million just to make sure I understand this. The $10.3 million reduced. I don't think you adjusted for that…

Michael Lepore

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

Mario Mendonca

$12 million, the tax, that was like a $12 million tax gain or recovery of, that's a big number, the $12 million. It couldn't relate just to what happened on the quarter. Was there something else that happened that resulted in such a big tax gain?

Michael Lepore

You mean talking to the tax provision? It's just a recovery based on operating losses, right?

Mario Mendonca

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

John Wimsatt

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

Mario Mendonca

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

John Wimsatt

I'm sorry, it's about $140 million portfolio.

Mario Mendonca

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

John Wimsatt

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

Mario Mendonca

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

John Wimsatt

If you remember that it's all inventory finance, which are all floating rate assets.

Mario Mendonca

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

John Wimsatt

No, otherwise we would just wind the business down. We can just accelerate the recovery of those loans. They're short-duration inventory finance loans. Our preference is it's a great business and it's a great growth prospect and it's a great team.

So, we just need to redeploy the capital into other areas and we found a partner that will be able to take that platform and grow it very profitably and still partner, as Matt mentioned, with our RV Marine retail business, so that we can still have the benefits of a combined inventory finance floor plan product offering to dealers.

Mario Mendonca

Alright, last question, and I understand, Steve, did you say Bill Lovatt's on the line as well?

Steve Hudson

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

Mario Mendonca

I'm sorry, I thought you said he was on the line. Let me just ask you then. There has been a fairly - there's a meaningful increase in stock-based comp now, I hope it's not impolite to say, but it's not because of the stock's performance or earnings, there's got to be something else that's driving that meaningful share-based comp.

Steve Hudson

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

Mario Mendonca

That's helpful. Thanks again.

Operator

The next question is from Tom MacKinnon with BMO Capital. Please go ahead.

Tom MacKinnon

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

Steve Hudson

So, 6.5% it's not technically the hedging cost, it's the change in mix between who our funding partners are. So that's what's driving the lower margins. You know, like I said, all the loans were originating for the last four or five months. We're at full margin and we'll fund at full margin next year. It's really the land home portfolio that was launched in 2022 that is causing the issues on the marks.

Tom MacKinnon

Okay, thanks for that. And I think Lance talked about that, that's running down and how much left - is left of that. If you could just - was that already answered?

John Wimsatt

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

Tom MacKinnon

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

Steve Hudson

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

And as we get through these corporate developments in the next 90 days, we'll return to that topic with you. But as John said correctly, his vision was when we bought this business, there was an unprecedented opportunity in RV Marine. It's the same credit profile as that of our manufactured housing customers.

So you could assume that the funders buying the paper MH want this paper as well. And the blip in the market, in the RV-MR market has presented some interesting origination platforms and servicing platforms, and we intended to take advantage of that.

Tom MacKinnon

Okay, we'll wait and see. Thanks.

Operator

[Operator Instructions] The next question is from Jaeme Gloyn with National Bank Financial. Please go ahead.

Jaeme Gloyn

Yes, thanks. Just wanted to go back to the origination margin again and just trying to understand what the yield would have been. So, the adjusted operating result for loan originations revenue was $18 million. Should I be adding $10 million to that number or should I be adding the $10 million to the $13.4 million loan originations revenue that is reported, how did you have that sort of pass-through?

Michael Lepore

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

Jaeme Gloyn

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

Michael Lepore

Yes, that's in the ballpark.

Jaeme Gloyn

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

Steve Hudson

You'll have operating income, Jaeme. Just that as we roll the joint venture out, the retail will lag on the joint venture, but your earnings will be up over '23.

Michael Lepore

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

Steve Hudson

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

Jaeme Gloyn

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

Michael Lepore

Somewhere in the two to three range. Three at the top end, two depending on the movement, but 2x to 3x.

Jaeme Gloyn

Okay. Thank you.

Michael Lepore

So, the sale of Red Oak will obviously significantly improve that as well, so...

Operator

As there are no further questions registered, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

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ECN Capital Corp. (ECNCF) Q3 2023 Earnings Call Transcript