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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q1 2021 Results Conference Call.Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian securities legislations. Forward-looking statements involve known and unknown risks and uncertainties as well as other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. For a description of the risks associated with Crown's business, please refer to the company's filings for Q1 2021 at sedar.com.[Operator Instructions] And I would like to turn the conference over to Mr. Chris Johnson. Please go ahead, sir.
Great. Thank you, operator, and good morning, and welcome to today's call. I'm joined as usual by Mike Overvelde, our Chief Financial Officer.A year ago, we announced that we'd address a persistent discount to our underlying net asset value by evolving our strategy and diversifying our business. This strategy has 2 main priorities: first, to develop new revenue streams that are both highly profitable and scalable where Crown to act both as a direct investor and asset manager capital pools, such as distribute power; and second, to improve the efficiency of our use of capital by shifting to a capital-light business model. I'm pleased with the progress we made on these strategic priorities in 2020, and I expect progress to accelerate in 2021. Tackling the easier of the 2 priorities first, we continue to see a reduction of our investment in credit assets, and we're using this capital to repay debt and repurchase shares. In Q1, we had some minor repayments in harvesting the equity kickers in our Crown Partners Fund portfolio, and we sold a small portion of our interest in this fund as well to a third-party investor. We expect to see additional repayments and potentially further sales of Crown's interest in upcoming quarters. This portfolio remains in good condition overall. All expected interest payments are received and our risk ratings improved on the whole from year-end. We will continue to actively manage each of the investments with the objectives of ensuring expected realizations and generation of our targeted investment returns.With Mill Street, we recently acquired Lumbermens Credit Group, one of Mill Street's operating subsidiaries. Lumbermens is an Ontario-based credit reporting company with a long successful history, and our acquisition of this business is a meaningful step towards recovery of value from Crown's loan to Mill Street. During the first quarter, we continued to work with PenEquity to advance their development assets and ultimately [ restore ] value. In terms of recent developments of this loan, in March, we acquired 100% of the interest of PRC Stoney Creek in exchange for noncash consideration of $11 million, representing a portion of the loan we have outstanding to PenEquity. The company's assets include expected entitlements from completion of an earlier phase of the development, plus proceeds from adjacent lands that have been developed by PenEquity. As we mentioned in the past, we view this as the most significant asset of the 3 principal properties.And in April, we acquired 100% of the shares of PRC Barrie Corporation, whose assets primarily consist of a high-density land development in Barrie in exchange for noncash consideration of $2.7 million, representing a portion of our loan outstanding PenEquity. PenEquity continues to make good progress advancing this project and the general market conditions of Barrie's have improved, aided in part by the current housing boom.The more difficult of our 2 strategic priorities is to transform the income statement, replacing much of the investment income with earnings from our developer partners and, over time, management fees from capital pools built around our distributed power and network services platforms. The first quarter was highlighted by continued growth of our network services platform, revenue stream and operating profit. Network services generated 11% increase to $6.4 million in Q1 2021, representing 45% of our total revenue in the quarter. This reflects additional Galaxy and its strong performance since the acquisition in fall of 2020.There are lots of exciting activity underway in this platform with new technology as well as expanding project pipeline. We continue to advance projects to provide network services to entire communities and now have a qualified pipeline approaching $80 million.COVID has highlighted the need for better network connectivity, and we have a strong platform to address this with private enterprise customers, government entities and communities, particularly those in remote and underserviced areas. We expect to augment organic growth with additional acquisitions to add scale, new customers and capabilities as well as geographic presence. Work continues on this front as well.In the distributed power business, an additional project was completed and became operational in Q1, representing the fourth project generating lease revenue for the Power Fund. The fund has 12 other projects under development and is poised to see meaningful near-term increase of operating projects with 6 projects expected to become operational in Q2. This increase should enable us to commence initial fund distribution in the third quarter. And we hope to continue to build on that momentum during the year and [ convert ] on a pipeline of approximately $150 million of projects.With that, I'll turn it over to Mike to review the financials.
Thanks, Chris. Good morning, everyone, on the line. Full filings were posted to SEDAR last night. So as usual, I'll just keep the comments here fairly brief and focused on Q1. I guess looking first at the P&L, total revenue in Q1 more than doubled year-over-year to $14 million compared with $6.4 million in Q1 of last year, and I'll just walk you through quickly the various revenue items to explain that variance. The biggest revenue item remains interest revenue at $6.6 million. That was down year-over-year. If you're looking at components of that, Crown Partners Fund had a higher contribution due to a higher average level of investments, as did Crown Power Fund, where we're also growing the asset base. However, we earned no income from on-balance sheet investments compared with $1.3 million last year. So -- and that relates, obviously, to the Mill Street and PenEquity investments. So overall interest income attributable to shareholders was $1.1 million lower year-over-year.Fees and other income remained pretty small in the mix, increased to $0.6 million from $0.3 million last year. Biggest component of that is that royalty revenue being earned by Crown Partners Fund. Where we saw a big swing were in 2 of the other revenue items, one being net investment gains, which went from a net loss of $3.2 million in Q1 of last year to a net investment gain of $0.5 million this year. This year's net gain included net realized gains of $1.1 million. That's pretty much entirely due to $1.2 million that we realized on exercising the VIQ Solutions warrants that are held by the partners fund. Those were exercised for shares that were sold in the period. On the flip side, we had a net unrealized loss of $0.6 million. That includes a $1.2 million reversal of the unrealized gain we previously booked on the VIQ Solutions warrants that became a realized gain in Q1. So pretty much, I guess, a wash in terms of Q1 reporting on the sale of those warrants. But outside of that, if we look across the rest of the portfolio, we did have net unrealized gains of $0.6 million. So a decent quarter there. The other big driver of year-over-year revenue growth, as Chris highlighted, came from the network services businesses, with network service revenue increasing to $6.4 million from $2 million last year. The primary driver of that is obviously the inclusion of revenue from Galaxy, which was acquired in Q3 of last year. But we would highlight that network services revenue did show nice sequential organic growth compared with Q4 when we reported $5.7 million in that item.On the operating expense side, excluding the impact of acquisitions, G&A expense is about $300,000 higher year-on-year. Most of that relates to legals and other costs related to our realizations on the PenEquity and Mill Street loans. So not something that we would expect to be recurring and recurring. And that was offset by a similar level of decrease in salary expense. Also if we're looking at this, excluding the impact of acquisitions, the salary, net of acquisitions, declined by about $300,000 year-over-year due to head count reductions made at Crown and also to the voluntary salary decreases of senior management that came into effect at the beginning of this year.Net result that we reported improved earnings in the quarter with net income of $1.4 million compared with a net loss of $1.2 million in Q1 of last year and a net loss of $2.4 million last quarter. So it's nice to have that back in positive territory for sure. A big contributor, of course, to that was the network services segment. That segment posted net income before income taxes of $1.3 million. If we look at it before depreciation, amortization and taxes, so effectively EBITDA, network services sector posted $2 million in Q1 compared with $0.6 million a year ago. So it's becoming obviously an important element of our earnings base as we move forward.First quarter AFFO increased to $4.5 million. It's $0.49 per basic share compared with $4.2 million or $0.44 per basic share in Q1 of last year. If you take a quick look at the balance sheet, total assets increased from about $322 million at the end of 2020 to $331 million. That's mostly due to the acquisition of PRC Stoney Creek that Chris outlined. To be clear, that acquisition effectively converted about $10.4 million previously classified as a loan investment into a number of asset liability items that had an aggregate net value of $10.4 million. The components of that are all detailed in Note 13 to our financial statements. And the net result is we ended up with 2 new balance sheet categories. One is an asset item called lease earnout note receivable that relates to amounts that we expect to receive in connection with that Stoney Creek lease-up. And we have a new mortgage payable liability item that relates to that property as well. We exited the quarter with cash and equivalents on a consolidated basis of over $21 million. Total equity increased to $82.2 million or $9.10 per basic share, up from $8.98 at the end of 2020.One item I would note that's important if you're looking through these statements is that effective March 31, so last day of the quarter, we did sell some of our stake in Crown Partners Fund to new limited partners investing in that fund that reduced our percentage ownership in Crown Partners Fund from 38.8% to 36.5%. That raised as $4.4 million of cash. In our Q1 results, that amount is included in the balance sheet as a receivable. I guess, at the Crown corporate level, it was received in early April and was applied as a reduction of our corporate debt. Importantly, this sale occurred at a price equal to net asset value, such that it didn't result in a gain or loss. And it was consistent with the general plan that Chris has outlined to reallocate capital from direct investment to loans and in Crown Partners Fund towards other growth initiatives and towards share buybacks.In terms of subsequent events, it's been a pretty busy period for our team. We have disclosed several notable events that took place subsequent to Q1. First is that we renewed our NCIB for another year, commencing on April 13. We were quite active in 2020. We purchased just under 400,000 shares in the previous plan. We have authorization to buy up to 600,000 shares over the next year. With our stock continuing to trade at a discount to reported book value and to what we believe its intrinsic value is, we believe buybacks continue to be a good use of capital.As Chris also mentioned, on April 15, we acquired 100% of the equity of PRC Barrie Corp. and on May 6, we acquired 100% of the equity of Lumbermens Credit Group. Both transactions were primarily in exchange for portions of the remaining balances outstanding on our loans to PenEquity and Mill Street, respectively. And three, a major development that we announced on Monday is that we entered into a new senior secured corporate credit facility that provides a total commitment of up to $41.5 million that we can use to fund our capital commitments to the investment funds. It funds obviously existing investments, potential acquisitions, share repurchases and general corporate purposes. It's a far more flexible loan than the loan that we've just refinanced and that will absolutely provide us with the flexibility we need to see us through this next phase of our growth and transformation. Details of the components of that are, I guess, provided in the various disclosures we've made, and I'm happy to explain that to anyone that's interested in the Q&A session. With that, I'll turn it over to Chris for closing comments.
Great. Thanks, Mike. So the transition we're working through has encountered challenges along the way, not the least managing through an unprecedented operating environment due to COVID, and we appreciate your support during this period.As we look ahead to the rest of 2021, we have clear line of sight to important catalysts and developments and are confident these will bring us much further along our path to becoming a capital-efficient, diversified finance platform. Both network services and distributed power offers significant long-term opportunity for us as a direct investor, asset manager and a meaningful owner of development partners. We look forward to updating you in the coming months.With that, I'll open it up for the call -- the call for questions.
[Operator Instructions] And your first question will be from Chris Murray at ATB Markets.
Just -- I guess the first question I've got for you and maybe, Chris, if you can talk a little bit about the strategy, at least over the next year, in terms of capital light? And maybe if there's any targets you have in terms of reduction in the Partners Fund. I think previously, you talked about maybe something around 20%. But can you just talk a little bit about how you think that the transition unfolds over the year?
Well, there are a lot of moving pieces there. The -- probably the biggest one is we're seeing an acceleration of just certain deals coming back to us on their own. So that either you get money, sell the portfolio your interest or you get money from the portfolio, you end up in the same spot. So we have to -- we're watching that. The second thing we're doing is, like when we had stated that a year ago, we were contemplating taking potentially some discounts to that position in selling it. And then we came and saw the progress of our portfolio and matched against some of the prices we were seeing, decided that it was a far better strategy just to work through the assets. So -- and particularly, there's a couple of deals in our portfolio we see significantly greater upside than what the carrying value even is at right now. So those are all sort of moving pieces right now.I think the combination of the facility we've just picked up with ATB as well has changed that. So we look at liquidity needs on one end and sources of liquidity on the other. And while we continue to see a reduction there, we don't have necessarily a specific target other than to feel that we'll have plenty of liquidity for this year.
Okay. Sounds good. And then just turning to that credit facility. So one of the questions I have, and I'm not sure Mike or Chris, who wants to take this one. So part of the facility, it's sort of a step-down function over the year. There's a term loan that matures at the end of the year, and I guess the revolver steps down over the year. So I guess just part of that is thinking about, one, generating the -- I guess, the cash flow to pay down that debt. But can you just sort of explain the structure and why you structured it in such a way to start ratcheting down?
Well, it goes back to the same comment that we have a number of deals in the process of monetization. And that's twofold, Chris. That's -- you have deals that we started the process of bringing the money back many months ago and just take -- times evolved and time's passed. So we expect that money back. And then we also have a number of our borrowers doing really well, like really, really well. And when that happens, that tends to drive to prepayments. So if we're looking at the $70-odd million we've got invested in that fund today and you add those 2 things together, there's a lot of money we're expecting back this year. So -- and there's things we want to do this year that don't necessarily mean we want to wait for that money to actually be in the bank and then have a big -- sitting on cash and wait for that to happen. So it really is a portion of that loan, say, half of that loan is a bridge loan capacity to help transition us into the new things we want to do before the other money comes back.
Okay. That's fair. And then just a quick clarification. I think in your script on the call today, you mentioned that there were 12 other projects under development. But I think in the press release, it was 7. So just if you can clarify that for me. But I guess the other question I've got is, when you look about the interest income that came out, the Power Fund with 4 operating units in the quarter, should we be thinking that, that would be the kind of run rate we should be expecting as we go into Q2 when the next 6 projects start operating?
I think interest revenue in aggregate from Power Fund includes I guess, 2 components, Chris. It does include some capitalized interest on projects that are under development, where the arrangements will see us recoup that capitalized interest as it will be capitalized as part of the lease. And then we've also got, of course, the lease interest at revenue. So as we go here, we're expecting -- I think I can't remember the number, it's in the documents, it's like 5 or 6, I think, [ approaching ] isn't it, Chris, in Q2 are expected to turn on?So over the -- so that may or may not have a big impact in the quarter, but the run rate on certainly the lease interest component coming from that Power Fund should begin to escalate the next couple of quarters. That won't be a trend because, of course, we've had a backlog of projects that have been ready to be turned on. And so once we have that surge, again, the trajectory will stabilize a fair amount. But we will see that pick up. I wouldn't say that this is a run rate.
Yes. And Chris, I think the press release was probably a combination of -- 12 is the right number. I actually went through this morning and counted the ones that we have under [ perk ] development. And I think part of it is we signed up a number of projects in April. So there must be a bit of a timing difference there.
Next question will be from Trevor Reynolds at Acumen Capital.
Can you maybe just talk a little bit more about the pipeline that you mentioned on the network services side and kind of what the time line would be on that pipeline?
Yes. It's -- so that includes a number of -- that's really just our community projects, I highlighted there in the $80 million. And some of that includes ones that are coming through the acquisition front. And so I'm hoping -- and some on the organic front. So we have signed LOIs right now with a number of projects that are going through technical due diligence right now. Some are actually in legal closing. So with the view that some might even be live by July. So there's -- that's probably on the earlier front. And some are in the process that they'll be moved through technical diligence, then legals and then construction will begin later this year and live next year.But I -- we're going to start press releasing communities as we -- as they move to binding contracts. So I expect you'll see some in Q2 get announced with expected delivery dates and capital investment required for those projects.
That's helpful. And then just on the distributed power side of things, just maybe your funding relative to the number of projects that you have signed up today and what that looks like moving forward here?
So we have enough equity capital to take down about half of our pipeline we have right now. So in terms of what's already in progress, we -- like that's already accounted for. Like bear in mind, we haven't drawn down any leverage yet in that fund, and that will provide significantly greater than the approximately $60 million of capital that we already have committed. And the goal is to upsize that fund like possibly in Q3, but most certainly by Q4 as we need to replenish that capital base.
Got it. And then just maybe quickly on the -- we have seen an improvement in the housing and realty market and just -- you kind of touched on it. But does that change your time line at all on some of these projects that you've taken on the balance sheet now?
It doesn't change time line. We were in high press mode to bring that project to market. We're in a part of Barrie that's by a hospital and by a college. There's a significant housing need that predated the COVID situation. What's happened with COVID is, call it, the B markets or the bedroom communities of the major markets are -- have seen a pretty significant lift as people realize they can work a little more remotely and affordability is just pushing everybody out of the core Toronto area.So we've probably seen just values increase by $20,000 or $30,000 per door. I would say that's a conservative measure. And we have a plan to build 450 units on that site is what we're working through. So there's considerable leverage there and one that it's hard to pick up in a valuation sense right now. But as you move the project through to full entitlements, like it takes land through the process of intensifying it, like that's -- and then getting the buildings approved and going through all the community consultations is what our team is doing now.But as I said, they're making good progress. The project seems reasonably well received by the municipality. The market certainly is demanding that product to be there. So the whole goal is to get it to market as soon as possible.
At this time, I would like to turn the call back over to Mr. Johnson.
Okay. Well, thank you, everybody, for joining us this morning, and look forward to talking to you next quarter.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.