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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q3 2018 Results Conference Call.Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian securities legislation. Forward-looking statements involve known and unknown risks and uncertainties and 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 Q3 as well as its AIF at sedar.com.Chris Johnson, Chief Executive Officer, you may now begin the conference.
Thank you, operator, and good morning, and welcome to Crown Capital's Third Quarter 2018 Results Conference Call. I'm joined today by Michael Overvelde, Chief Financial Officer.I will start today's call with a few comments and highlights on the quarter before Mike reviews the financials, then we'll open the call to questions.Crown has had a highly active and productive year-to-date. With one new loan transaction closed in the quarter, we have now deployed $105 million in 6 loans through 2018, which has lifted our fee-generating assets to the highest level ever. We have roughly $284 million at work in 17 investments. As Mike will review in more detail, the continued growth in our investments translated into record quarterly interest revenue and strong cash flow increases.During the quarter, we completed a $15 million loan with Triple Five Intercontinental Group, a Calgary-based oil and gas company. Triple Five has an established track record of low-cost production, which has resulted in significant cash flow even during a challenging pricing environment. As additional wells come on stream, they are positioned for material increases in production and profitability. This transaction structure included a royalty stream and a [ pay-for-performance ] feature, similar to our loan to Touchstone.As we discussed in recent calls, we remain positive on the opportunity to deploy capital in this industry. There are many quality cash-positive companies producing [ wells in ] the top markets, but little to no capital to fund them.One of the most important milestones in the quarter was the upsizing in amendments to Crown Fund IV, which we now refer to as Crown Partners Fund. In addition to the upsizing of the fund by $75 million, we extended the investment period to the end of 2019 and provisions to extension -- to further extend this beyond that. We have approximately $222 million deployed in loans and see the $400 million to $500 million target as the medium-term deployment for this fund.Our track record and limited partner relationships serve us well as we further develop the opportunity for Crown Power Fund, which is a major focus of ours in the third quarter. This fund was launched at the end of June, and it generates significant net interest from prospective investors.The thesis is underpinned by a large and growing opportunity to provide utility solutions for commercial enterprises. It's becoming more apparent and accepted that on-site integrated electricity platforms are a great alternative for lower-cost, more reliable electricity. In our position as a financial provider, we can build our portfolio of long-term contracts with profitable well-established businesses that will deliver an attractive utility-like recurring cash flow.Crown has made initial capital commitments of [ $15 million ] to fund a near-term project pipeline of 8 projects with our first operator. To date, $9 million of this capital has been allocated to the first 2 projects, which we're expecting to be operating by the end of the first quarter 2019.Our first operator continues to develop and deepen its project pipeline. Recently, we've added [ Staple Energy ] as our second operating partner. [ Staple ] is focused on the Greater Toronto Area due to the density of prospective customers and favorable market conditions. Their pipeline is weighted towards condominiums that need reliable and controllable costs.We're hard at work on multiple growth initiatives for this fund, including developing the project pipeline with our operating partners, establishing new operating partner relationships and capital raising. And we expect to have updates in the near term on this.With that, I'll turn the call over to Mike, who will review the financial results.
Thanks, Chris. Good morning, everyone.I'll quickly cover the highlights for the quarter. As a reminder, we are now reporting, and have been all year, under IFRS 9. As a result, some of our debt investments are now carried at amortized costs, with other debt investments and all equity investments carried at fair value through profit and loss.Previously, you recall, all of our assets had been treated at fair value through profit and loss, and comparative periods prior to January 1 of this year were not restated for the impact of IFRS 9.In addition, just a reminder that financing fees earned in relation to debt investments carried at amortized costs are now deferred and amortized over the term of related loans as part of the effective interest rate and are no longer recognized immediately in revenues.In Q3, that applied to fees earned on the Triple Five loan, in particular. During the quarter, we also received fees that had been earned in Q2 with respect to the WireIE investment.Revenues for Q3 reached $7.9 million. It's an increase of 41% compared with $5.6 million in Q3 of last year, mainly reflecting higher interest revenue. The portfolio growth that Chris highlighted drove a strong increase in interest revenues to $7.2 million this quarter. That's up 49% from last year, and it's our highest level ever.On a quarter-over-quarter basis, interest income attributable to shareholders increased by 20%, and that's a direct result of the new investments that we made in both Q2 and Q3.The net gain on investments for Q3 totaled $0.5 million. That's similar to Q3 of last year. And fees and other income were $0.2 million in the quarter, up modestly from $0.1 million a year ago.Total expenses were $2.3 million in the quarter, compared with $1.5 million in Q3 of last year. While there are really no material changes to highlight, I would note that we have added to our team in recent months, filling 2 key roles of finance and sales and marketing, and we also continued to absorb additional startup costs in relation to the Power Fund this quarter.I will note that we introduced a new measure through our disclosures this period that we've called adjusted funds from operations, which we believe is the more useful supplemental measure than the metric we've previously used, adjusted EBIT, given the implications of IFRS 9 on the measurement and recognition of interest income and financing fees on those loans measured at amortized costs. Adjusted funds from operations were $3.1 million in the quarter, that compared with $1.6 million last year. That's an increase of 99%.I will point you towards the definition and reconciliation of adjusted funds from operations to both our reported earnings and to that adjusted EBIT number in case you'd like to make the comparison of what we've reported in the past. That's in both the press release and the MD&A.Total comprehensive income, net of noncontrolling interest, was $1.8 million or $0.19 per basic share in the quarter. That compared to $1.1 million or $0.12 per basic share in the third quarter of last year. Total assets at quarter-end increased to $288 million. That's up from $229 million at year-end, including an increase in the carrying value of investments to $264.9 million, up from $181.3 million. Total equity was $103.9 million, that's $10.79 per basic share, compared with $11.03 that we reported as at the end of Q2, with the Q-over-Q decline mainly due to divesting of all the outstanding transition RSUs that had been issued in 2015 in connection with the company's IPO.I would note that with these transition RSUs now fully vested, the impact of related amortization on share-based compensation expense has also ended, resulting in a step down in that share-based compensation expense line from about $0.5 million in Q2 down to $0.3 million, and that's a decrease that should be sustained into future quarters.And as Chris mentioned, the growth in our fee-generating assets continues to produce healthy cash flows to support our current quarterly dividend of $0.15 per share, which was declared yesterday.Looking at our funds available for additional investments. At quarter-end, we had access to approximately $78 million for additional portfolio investments, which includes our working capital of $49 million of committed capital available to Crown Partners Fund from parties other than Crown and amounts available under our credit facility.With that, I'll turn the call back to Chris for some closing comments.
Thanks, Mike.So looking ahead, we have multiple important milestones and catalysts in these coming quarters. These will include just additional deals for our special situations portfolio, but also the development and establishment of our Power Fund, which will be expressed in new projects, new operating partners and new fundraising.In addition to expanding these 2 primary funds, we're also at various stages developing new investment vehicles with the objective to build long-term recurring revenue for Crown Capital.We look forward to updating you with our release in Q4, next year. So with that, we'll turn it over to questions.
[Operator Instructions] And your first question will be from Stephen MacLeod at BMO.
I just wanted to get a sense of -- you already mentioned a little bit on your prepared remarks, Chris, but I just wanted to get a sense to what you're seeing on the Crown Power Fund side and maybe if you can give some parameters around what you're expecting in terms of average returns and sizes of projects and, potentially, how big can this new initiative potentially be.
Sure. So maybe just an overarching statement like this. We feel it's in rapid building mode, so some of this is somewhat directional and aspirational. Our goals are to, over the course of next month or 2, to pull it together and then offer some much stronger guidance to the market. But just I can answer some of that generally. In terms of returns, the overall returns to the investors, to Crown, is going to be in the low to mid-teens, consistent with our special situations fund. That is a leveraged return, and it's after all the operating costs and management fees of Crown. So we think those returns, in the way they come through as steady, reliable monthly with some bonus income down the road, is highly compelling to both Crown -- our own money working as well as our third-party money working. The size of the projects we're seeing, we're actually seeing a fairly wide range, but I would say where we think the sweet spot is going to be in that sort of $0.5 million project, maybe up to $10 million or $15 million project at the higher end. We'd rather see multiple, diversified projects than some big, chunky ones in there. And in terms of total scale, this is a fairly clear path to well over $1 billion of assets here. So it's costing a lot more, so that's what we're trying to establish in terms of what we think our share of the market will be. We think the market is very large. It's just that because we're early stages, not sure how much of that we're going to capture.
Did you have any further questions, Mr. Macleod?
Yes. Just one more question, if I may. Could you just give a little bit of color around what you're expecting in term -- or what you see right now in terms of available capital?
Well...
Available capital?
Available -- is the question how -- I want to say [ what I see ], so what was your question? Can you repeat that?
Yes. No problem. Sorry, just in terms of what you have in terms of available capital for deployment into loans and --well, deployment into loans.
Yes. That's an easy one. So right now, we're $222 million advanced in the fund of a $300 million target, so that gives us about $80 million of liquidity in there. And then on balance sheet, it's fairly full with the activity we did in the second quarter on balance sheet. But with some of the changes we're working on, on just our leverage loan lending front, we're expecting to create a little bit of room there, but I can't give you a number at this time.
Our credit -- let me give you a specific metric in our credit facility. It's $20 million drawn at the end of the quarter at the $35 million facility. And then within the fund, of course, a lot of -- the majority of the headroom to -- that we could call would come from external limited partners.
Next question will be from Stephen Boland at INFOR Financial.
Just on the Power Fund. I mean, you mentioned there's a number of initiatives to grow that, Chris. Is the goal to get more IEPs onboard or to help the existing IEP? And I guess, I mean, I think there's only -- is there 1 or 2 now? I think you mentioned a second one that was -- I'm sorry. I'm still going through the MD&A, but I know there was one [ spined ] in. Is there a second IEP there as well?
Yes, yes. So we didn't -- it actually closed on Friday, the deal with [ Staple Energy ] that we -- because we have an advanced [ ending ] in itself that's not material to make it to our statements, but it is an important step in terms of our strategy to approach this marketplace. We've taken the view that this is going to be a very large industry. It's going to take many operating companies to address it, and all these companies are going to have similar challenges in terms of raising the capital they need, it's a very capital-intensive business they're running, and that we would have multiple operating partners in that. So we intend to scale both on the individual operator side, so our first operating partner whom we're building our first project with them. Right now, their pipeline grows by the week. And we're -- as we -- as they get more and more projects working, the pipeline is growing at somewhat of an exponential rate. But to add to that, we're going to add multiple operating partners. So we have the second one closed now, and there's 2 others we're in due diligence on. So it's -- we're seeing, as those things all multiply together, a very, very rapid growth rate in that business.
Is there no -- if I'm an IEP and you're funding me and then I find out you're funding a potential competitor, or is the market just one that they need the capital and they're happy to -- it doesn't matter if you're funding a potential competitor or it might not like looking at -- or is the competitive nature of this just not like what I'm framing, I guess?
I don't want to say it's not an issue. It's certainly something that gets discussed every time we talk about it. But it's -- I think, in the end, the cooperative model where -- it's not quite a buying group because we're operating a little more like a private equity fund than we are just a buying cooperative. But if the #1 cost everybody building these things is capital, why not try and get together and figure out how to lower that cost of capital? So we bring an immediacy to capital, but also by pooling the projects, it's a much clearer pathway to reduce that cost of capital over time. So I think if you're -- if it's just you are one of my operating partners, Steve, you'd be kind of, I think, well served to get inside the boat and ride down that cost-of-capital curve than try and do it on your own.
Okay. Now there's something -- again, I don't know if this is for you or Mike. But the Power Fund, there's something in the -- and, I guess, near the end of the MD&A, and again, I'm still going through that, MCS Energy. Was that a by-product or is that something temporary that you've assumed some sort of control over that? Is that a project that was an investment? Or how many -- what is that [ disclosure ] regarding?
Yes. This is -- I know -- and I appreciate this is quite confusing, so we do appreciate your patience and any readers who look at that, Steve. So what MCS Energy 21 is, that's the, I guess, the corporate name of the first operator that we signed on, I guess, as it sits in our org structure. So when we structured our partnership with the initial operator, the Power Fund itself took a 50% interest in that operator. And so it gets to be a little bit confusing. That deal, of course, it was a phenomenal consideration so all of this is completely immaterial to the financial results. But the confusion here for anyone reading it, because it's now you see it, now you don't, last quarter, we consolidated it as at the end of Q2. The transaction, of course, occurred right at the end of June. And on closer investigation, we determined there wasn't technically control, it's joint control. So, no, there's no change on the equity or the earnings or anything like that, but it's still the same 50% interest. And that's not -- we're not aiming to change that. It's just now equity accounted for.
Okay. And just one last one, Chris, maybe. Rising rates. I don't -- looking over your -- I mean, it's been many years since you've operated in this environment. Is that something you can pass through, whether it's 50 basis points or 100 basis points, to potential new loans coming in? Is that possible?
Yes and no. Like, there's a very loose correlation between the sort of secondary market rates and what's happening on the benchmark rates in the marketplace. We're seeing the banks in one sense. Obviously, the prime-based loans automatically reset, so there's that cost coming up. So -- and to the extent we're not as wide of a spread from the seniors, it makes transacting a little easier. It doesn't mean we can actually pass it through. It might mean that, but we're getting a lot of economics through the noninterest coupon side of revenue. I'd also highlight, we're -- despite the rising benchmark-constrained environment, I -- we're back in an extremely competitive senior debt world. And these things go in cycles. And sometimes they last a quarter or 2. Sometimes they last several years. This one seems to be going again, and as the [ senior sched As ] fight for market share. So actually, on the term stuff, I find the rates not going down much, but the -- how they're competing is just increasing their leverage. So In a way, they're lowering the overall cost of capital through different means. So it's something we're paying attention to. It's one that we're not highly impacted by, like it's -- like our cost of funds moves up a bit, it makes it a little easier for us to compete, but then we got to overlay the broader picture, what the senior banks are doing, that's making it a little more difficult to compete.
[Operator Instructions] And at this time, Mr. Johnson, it appears we have no other questions. I would like to turn the call back over to you.
Okay. Well, thanks, everybody, for your time. We look forward to giving you updates through the quarter. We think it's going to be a busy one. And of course, anytime, if you want to reach out, just give us a call. Talk to you soon.
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. Enjoy the rest of your day.