Crown Capital Partners Inc

TSX:CRWN

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q3 2020 Results Conference Call.Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian securities legislation. And 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 Q3 2020 as well as its AIF at sedar.com.[Operator Instructions]I would now like to turn the conference over to Chris Johnson. Please go ahead.

[Christopher Allen Johnson, CEO, President & Director]

All right. Well, thank you, operator. And good morning, everyone. Welcome to today's conference call.I'm joined, as usual, by Michael Overvelde, our Chief Financial Officer.Earlier this year, we outlined our strategic plan to expand each of our 3 investment platforms and reposition Crown's balance sheet, with a focus on transitioning to a more capital-light model where we leverage third-party capital to scale. Since then, like many companies, we've had to navigate the disruptions from COVID both with our own business as well as our borrowers' business. Despite these challenges, we've made good progress on these strategic priorities. In the past 2 quarters, we've seen a reduction in balance sheet investments, growth in new lines of business and a modest reduction of balance sheet intensity.Let me start with the activities and highlights from our alternative corporate finance platform. Our focus has been on close monitoring of our portfolio and pursuing realizations and restructuring of several loans. The proceeds from realizations have been used to pursue strategic opportunities and rationalize our capital structure. Given both our cautious view of the economic environment and our plan to reposition Crown's balance sheet, we are not actively deploying new capital to new lending opportunities other than supporting our current borrowers. Our medium- to long-term view of the lending industry continues to improve, and we are actively seeking new investors for our next private capital fund.Since our reposition was announced in May, we've received significant proceeds from 4 loans. We received $20 million from Touchstone, which generated a gross IRR of 16% for Crown Partners Fund investors. We received $7 million from Mill Street, a first payment up towards their $10 million long-term loan, and we expect to receive further proceeds in late 2020 and early 2021. We received approximately $5 million from Ferus towards their $25 million loan in Crown Partners Fund. And we received full payout, $5.5 million, from CCI Wireless, which generated a gross IRR of 17% for Crown Partners Fund investors.In prior quarters, we've talked about the resilience of our portfolio and our past experience working through economic cycles. We continue to be pleased with the progress of nearly all of our portfolio companies and their ability to manage through the current difficult economic environment. As said, certain businesses are experiencing more stress than others. And our client PenEquity has experienced significant disruption to their business.PenEquity, as you recall, develops real estate properties primarily in the retail sector, with a focus on grocery-anchored retail plazas. Their business has been severely impacted by COVID-19 and the associated fallow. This has caused an outright of some of their project and declines in value of others. This quarter, we've taken a large provision against our loan to reflect the continued deteriorating conditions with this loan. This is obviously a disappointing situation, but in our business we must deal with these from time to time. We will continue to actively work with PenEquity to manage through this environment, and if we're successful, we expect to reverse some or all of this provision. I want to remind our shareholders our team has significant experience in managing through these situations.In our distributed power business, we are making good progress with the power fund, having advanced projects with most of the operators; as well as establishing a new relationship with and partial ownership in an eighth operating partner, SWITCH Power. Our operator base continues to build a healthy pipeline. On a consolidated basis, the pipeline has grown to just over $250 million in 40 projects from about $200 million at the end of the previous quarter. We have 12 projects approved to date. And by year-end, we expect 3 of these in operation, with the remaining 9 to be commissioned in 2021. The Ontario government's decision to introduce a 2020 peak-shaving hiatus caused a delay in 4 of these projects, but we expect all of these to be commenced in 2021.One of the key highlights in the quarter was the acquisition of Galaxy Broadband Communications, an Ontario-based company that provides primarily satellite communication services to enterprise customers across Canada. The acquisition price was $7.5 million, including cash, assumed debt and performance-based earnouts. In the most recent fiscal year ended April 30, 2020, Galaxy had revenue of approximately $11.5 million. We're excited to add the Galaxy team to Crown's network services platform. Galaxy has an established and exceptional reputation in the marketplace; as well as a solid base of recurring revenue, primarily from large enterprise customers. And combined with our existing WireIE operations, we move forward with additional scale, deeper technology and go-to-market capabilities. COVID-19 has highlighted the need for better connectivity. And we have an even stronger platform to address the opportunity to better connect private enterprise customers, government entities and communities in underserviced [indiscernible]. We continue to evaluate similar acquisition opportunities where we can add new capabilities, recurring revenue and customers with minimal capital outlay. Over time, as our investments in this service grows, we expect to raise commitments from third-party investors to fund further asset growth.With that, I will turn it over to Mike to review the financials.

[Michael John Overvelde, Senior VP of Finance & CFO]

All right, thanks, Chris. And good morning to everyone on the line.Full filings are on SEDAR and on the website, so I'll keep the comments here fairly brief, as usual.For Q3, of course, we reported a net loss of $8.1 million, and that was primarily the result of an $11.2 million provision for credit losses taken in the quarter. That provision relates almost entirely to an increase in the allowance that we've taken in respect to the PenEquity Realty loan, which Chris referred to earlier in the call. Aggregate provisions on the other loans carried at amortized costs were quite small, as the rest of the lending portfolio is performing quite well for us at this point.Other notable aspects of our Q3 results, which are all discussed in the MD&A, include the following. First, I'll point out that our results include a $0.4 million loss attributable to WireIE. It's an accounting loss and includes depreciation expense of $1 million. Looking through that, EBITDA contribution from WireIE was $0.6 million in the quarter. We recorded net unrealized gains of $2.9 million. That includes a net gain of $3.6 million in Crown Partners Fund, with gains on the fund's investments in Rokstad being the biggest contributor to that; and partially offsetting, an unrealized loss of $0.7 million in Crown Private Credit Fund, which relates to our Mill Street investment. As a reminder, the Mill Street loan is carried at fair value; had a par value of $10 million, of which $7 million was repaid in Q3; and was current on its monthly interest right through till the end of July until its primary income-earning asset was liquidated. Our carrying value for the Mill Street loan does anticipate full repayment of the remaining par value.Third point, finance costs increased year-over-year by $0.5 million due to a higher average level of outstanding debt. Fourth point, we recorded a $0.4 million impairment charge in relation to certain distributed power equipment under development. And fifth point, our interest revenue was $0.9 million lower year-on-year. And that's due primarily to the fact that we're no longer recognizing interest from PenEquity or, since July at least, from Mill Street. And the impact of those reductions has been partially offset by a higher amount of interest earned by the partners fund.In total, revenues increased to $12.6 million from $8 million last year in the quarter due mainly to higher net gains on investments in the current period and higher network services revenue related to the acquisitions. Our reported fees and other income in Q3 remained fairly low, $0.3 million. That's down from $0.5 million last year and comprised mainly of royalty revenue, which was consistent year-over-year, and a small amount of transaction fees related to a loan amendment and a partial loan repayment in the quarter.Turning to the expense categories that haven't already touched on. Please keep in mind that we acquired Galaxy late in Q3 of this year and that WireIE was acquired midway through Q3 of last year, and both of those impact the year-over-year comparisons of certain expense categories.So running through those. G&A is $1.2 million compared with $0.9 million last year. Net of the 2 acquisitions, it was $0.9 million. That's an increase of $2.2 million year-over-year. It was really attributable to higher legal costs that we incurred through the restructuring of certain of our investments in Q3 of this year. Salaries, management fees and benefits expense was consistent year-over-year at $1.3 million. Net of the 2 acquisitions, it was also flat year-over-year. Share-based comp increased year-over-year and quarter-over-quarter, with the increase really due primarily to an increase in our share price in Q3. That results in upwards revaluation of certain deferred compensation liabilities that are tied to share price performance, so you can expect the share-based comp line to move around a bit quarter-to-quarter as our share price fluctuates.Depreciation expense is the other one I'll touch on. Again this is almost entirely attributable to network services. It was $1 million this quarter, down from $1.2 million last year.Adjusted funds from operations increased year-over-year to $2.1 million, $0.22 per basic share. That compares with a loss of $0.3 million or $0.03 per share in Q3 of last year. I'll just highlight, as we did in the MD&A, our AFFO calculation. You'll see a full breakdown of how we calculate that at the back of the MD&A. It does exclude unrealized gains and losses and credit loss provisions, and it includes those gains and losses when they're realized.Total assets increased from about $300 million at year-end, up to $326 million in Q3. It's due largely to additional investment we've made in distributed power equipment under development, also to a higher cash balance. We exited Q3 with cash and equivalents close to $18 million on a consolidated basis, which of course includes cash held by each of our subsidiary investment funds. It compares with $8.4 million at the end of 2019. The increase in that period in our corporate-level cash balance mainly reflects $7 million of proceeds we received from the Mill Street loan, which were received in the last day of the quarter, September 30.Total equity decreased to $84.5 million, $9.14 per basic share. Decrease was mostly a result of the loss we incurred in Q3, but I'll flag it is also impacted by the ongoing share buyback activity. As Chris touched on, I think, we were more active with the NCIB in Q3 as we acquired and canceled 154,000 shares, brings us up to 193,000 in the first 9 months of the year. And we have remained active with that NCIB to date in Q4 and intend to remain active to the extent we can under the existing program.With that, I'm going to turn it back to Chris for some closing comments.

[Christopher Allen Johnson, CEO, President & Director]

Well, thanks, Mike.And as we look forward, I just want to remind everybody we're highly focused on the 2 priorities we set out before: first, to expand and diversify the business to unlock the new revenue streams, with emphasis on recurring-revenue assets; and second, to reposition our balance sheet, moving towards a capital-light model. Our team strongly believes that, by executing the strategy, we'll emerge a much more diversified finance platform with a larger market opportunity; and that our efforts are really geared towards increasing earnings per share over the next 12 to 24 months. On the balance sheet repositioning, we're making progress. And combined with the unwinding of investment in these investments will allow us to repatriate a significant amount of capital.We look forward to updating you in the coming months on the execution of these priorities outlined today.With that, I'll open up the call for questions. Operator?

[Operator]

[Operator Instructions] Okay. So we have a question here from Trevor Reynolds from Acumen.

[Trevor Reynolds, VP of Research & Equity Research Analyst]

I was wondering if you can walk me through a little bit more in detail what the process is with PenEquity here and what your expectations are kind of moving forward.

[Christopher Allen Johnson, CEO, President & Director]

Sure. Why don't I just back up then and give you some context? And then we'll get into the specifics. [ It's best, I think ].

[Trevor Reynolds, VP of Research & Equity Research Analyst]

Yes. That would be helpful.

[Christopher Allen Johnson, CEO, President & Director]

So we made the investment nearly 5 years ago. They had a number of properties, a significant amount of equity. And really over the course of 2020 -- or sorry, 2019, we really started experiencing decline of equity in those properties. And our loan-to-value was increasing such that, by earlier this year, we knew we had a higher loan-to-value but felt that we were fully covered and just had to see the disposition of the properties and we'll be fully repaid. Then comes the end of March, and there have been major disruptions in the business. 3 of their properties were tied up in a receivership, just that essentially went no bid. We were expecting some value for the primary property. Therefore, we'd be -- think 2 properties were provided as collateral. We would get that value back, but just given it went no bid, the other party took all of the collateral. So that had a significant impact on us. Second, the -- I would say their primary jewel and property, the jewel in the crown, so to speak, was [ a retail ] development in London where they had a large international retailer, that would have been key to the success of the site, withdrew given the landscape. Another one would be -- public knowledge, would be -- actually I won't get into specifics, but another large retailer has filed a CCAA. It's still unclear if that's -- that lease will be proceeding. The benefit is it has one of the best-performing retailers as an anchor tenant and customer in the place -- or shadowing or -- I guess, will be the correct term, but that property has significantly stabilized. And that's the one that's generated most of our write-downs this quarter. We have an appraisal that would indicate that, if everything normalizes, then our existing carrying values were good. It's just it's a very volatile situation both operationally to get that project moved ahead and as well as financially with the capital structure that existed there in trying to put that together -- back together again. So I do think -- personally I believe that this site will get developed. I think there's a lot of motivated parties at the table to get it developed. And if it gets developed, we'll start bringing some value back into the equation.The other 2 are just some -- one we actually did a minor write-up on, one we did a minor write-down on. And so it's probably a wash. One is a -- another kind of finalizing touches of a retail development in the Hamilton area; and just, again, some destabilization and pushed back some leases. Carrying costs went a little higher, but they're at the finishing touches on that one, so we're not concerned about that one coming through. There's going to be some work, but from a value sense, we think that's -- the team we have at PenEquity is on top of that one. And then the third one is a residential land development in Barrie that was adjacent to the commercial site that went under last year. And that one looks like it's going to be a good one as well, although it's just getting to the starting lines. There's been a considerable amount of work, some unattended issues we've had to work through to get there, but -- so that's the nature of the problem is it's a very fluid situation as we're working through these 3 projects. And if the team does a good job, both our team and their team does a good job, we'll see actually significant profit in these developments, but we're dealing with a lot of volatility, and for our valuation standards, we decided to take the provisions now.

[Trevor Reynolds, VP of Research & Equity Research Analyst]

Perfect. That's helpful. So -- and then if you had to kind of gauge what the potential upside is and downside from here, like what could still go wrong from what you've written-down? And maybe what -- I think you touched a little bit on what needs to go right, but just maybe where things sit in terms of the write-downs.

[Christopher Allen Johnson, CEO, President & Director]

So we don't disclose carrying values of individual properties, but you can see that some of it is a significant discount to the face value of $25 million. So I would say most of that value is on the properties we well know, as I said, the Hamilton site and the Barrie site. And we put very little value on the London site. And it's disappointing. Like -- as -- that goes back to that was probably one of the sites we felt strongest about 6 months ago prior to -- I'm losing track of time but prior to COVID when we believed we had an international customer as a -- for a certain land and a shadow anchor and now we don't. So it doesn't have anywhere really to go down further than where it is right now and has a long way to go up. In terms of how much money we can make, I think, as we get clarity in terms of how the project comes together, we can give a bit of guidance on that, but the view is not only would we recover the value we would have on the land. There would be development profits to be had as well that we'll build -- [ not recognize but ] we will realize over time through successful completion of these projects.

[Operator]

[Operator Instructions] Okay, it appears there are no further questions. Please proceed.

[Christopher Allen Johnson, CEO, President & Director]

All right. Obviously not the greatest of quarters. And do appreciate everybody participating today. Just to remind everybody that we're available to talk in terms of the quarter.And a lot of work needs to be done. We continue to believe that our plan to have this repositioning complete in a year's time -- so that really means, by next May, it will be substantially complete and we'll be in -- positioned in the right direction. But again, I do appreciate everybody participating and [ appreciate you having the time ].Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.