Crown Capital Partners Inc

TSX:CRWN

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to Crown Capital's Q3 2021 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 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 2021 at sedar.com. Following the call, we will be conducting a Q&A session.I would now like to turn the conference over to Mr. Chris Johnson. Please go ahead, sir.

[Christopher Allen Johnson, Co]

Great. Good morning, everyone, and welcome to today's conference call. I'm joined, as usual, by Mike Overvelde, our Chief Financial Officer. It was another active quarter for Crown as we continue to execute on the transformation of the company that began back in 2000. With the divestment of a majority stake in lending business during Q3, and substantially reduced exposure to the Crown Partners Fund over the last several quarters, the transformation of operations, and balance sheet, are now coming into greater focus.Recall, that our first strategic priority is to reposition the balance sheet, reducing our exposure to loan-based investments, and improving the efficiency of our capital. Freed up capital will be redirected to growth initiatives, paying down debt and returning to shareholders.Over the past year, our efforts on this front have resulted in a return of approximately $40 million of capital, which has allowed us to reduce debt while also returning $4.3 million of capital to shareholders through issuer bids.During the quarter, we announced the results of our first SIB, which resulted in the repurchase -- of cancellation of approximately 560,000 shares at a purchase price of $5.50 per share. Between this SIB and our normal course issuer bid, we've reduced outstanding shares by approximately 10%. Yesterday, we announced our intention to commence a second SIB to purchase up to 10 million in shares with a tentative price range from $6.50 to $7.50 per share. This offer represents approximately 16% to 18% of the total shares outstanding.The offers opened until December 22, and additional detail will published in a circular next week. As you look at the balance sheet at quarter end, we had roughly $53 million in investment associate, which is our retained interest in Crown Partners Fund, inclusive of accrued performance fees. There were 2 repayments in the third quarter, CareRX and Triple Five and we're working towards repayment of a material percentage of the portfolio over the next 12 months.Our second strategic priority is to expand and diversify our platform with a focus on recurring revenue assets, and businesses, where Crown's capital can be scaled and leveraged. Going forward, this is where we have focused our management resources and capital.In addition to the transformation of our balance sheet, we have changed the composition of our income statement. The key highlights for Q3 once again was the growth in network services platform. Network services revenue has increased to $7.4 million, up from $2.5 million in Q3 2020. The year-over-year revenue reflects the increase of Galaxy as well as organic growth.We have a healthy pipeline of opportunities, including numerous community network partnership opportunities. We're currently constructing our first builds with our recently formed Community Networks Partners development platform company, and expect to advance several more in 2022. From a funding perspective, as our investment grow, we'll continue to raise commitments from third-party investors, and fund asset growth to capitalize on this market opportunity. I'll distribute power side at quarter end, 4 distributed power projects are operational, and under lease agreements. In addition, the fund has 7 other projects under development at various stages of completion, including 3 expected to become operational by the end of the year and the others to become operational in Q1 2022.Overall, progress has been slower than anticipated, however, we've seen a significant increase in opportunity in the Alberta marketplace. We just completed our first full quarter of operation, and ownership of Lumbermens business, and are happy with the early results. We also continue to make good progress with PenEquity development properties, albeit these are longer-term projects.With that, I'll turn the call over to Mike.

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

Right. Thanks, Chris, and good morning, everyone. Press release, full financials for the quarter were filed yesterday evening, and they do feature a bit of a different look this quarter, as Chris touched on. I'll focus my comments on some of the changes we've made to the accounting, and the disclosures in Q3, and I'll touch on a few of the major items from Q3 results.It can address any questions you have on other aspects of the results in the Q&A session at the end of the call. As mentioned, the biggest change is that we're no longer consolidating Crown Partners Fund. This change became effective on July 13, when we sold Crown Private Credit Partners, our alternative lending fund management business and transferred to it, the management contract from Crown Partners Fund. At that point, we were no longer deemed to have control of the fund, and instead are now deemed to have significant influence over it such that we're now accounting for it on the equity method.The main impact to this change, just to walk you through those are as follows. 1, on the balance sheet, we're now including our investment in Crown Partners Fund on a single-asset line called investment in Credit Partners Fund. This number includes the carrying value of our limited partnership interest in addition to that of our general partnership interest, and a full breakdown of continuity of the carrying value can be found in Note 5 of the Q3 financial statements. As a result of that, other balance sheet items no longer include any amounts related to Crown Partners Fund, the biggest impact being on the investments line as well as in the cash, the receivables, the [ NCI ] and the distributions payable to [ NCI ] lines, which are now all either smaller or nil in the consolidated balance sheet.Second point is that we had a similar impact in our income statement where we're now including the net earnings contribution as a single revenue item, called share of earnings of Crown Partners Fund, which includes our share of the earnings attributable to each of our limited partnership and our general partnership interests. The deconsolidation of course, resulted in a sizable reduction in interest revenue and in earnings attributable to [ NCI ], among other items. Third thing I'll mention on -- in terms of changes of the impact of this on our financials, is that you'll see in our Q3 results, we've recorded a $1.6 million gain on derecognition of subsidiary that's comprised of 2 things. First is that the LP units that we sold as part of the carve-out transaction were sold at fair value, which was higher than our carrying value, and resulted in a realized gain of about $0.4 million in the quarter. The second part of that is that when we change the basis of accounting for our retained interest in the fund, we had to establish an open and carrying value at a level equal to fair value, which resulted in a $1.2 million gain in the quarter.So as you read through our Q3 financial disclosures, just please keep in mind that the Q3 figures in many cases are not directly comparable to the results of the prior periods. Now to be clear, the amount of earnings that we recognized in Q3 under the new accounting methodology for Crown Partners Fund, is no different than we would have recognized if it was still consolidated, other than the gains related to the transaction. And although we had to mark-up the carrying value of the retained interest of the fund at fair value, it will not be marked to market on a regular basis going forward. We're going to continue to recognize our share of the fund's income is determined by the fund under IFRS.Also to be clear, we continue to own a 100% of the general partner, Crown Partners Fund, and the performance fee from that fund continues to accrue to us. It is essentially with the general partnership interest component represents in the interest in Crown Partners Fund balance sheet item, and 50% of that fee that will be payable to plan participants, mostly employed that continues to be represented on our balance sheet as a provision for performance bonus liability.So no changes there. I'll also point out a couple of other considerations related to the carve-out transaction, 1, is that after selling a portion of our LP interest in the fund for $16.3 million, our interest in the funds fell from 36.5% to 28%, meaning that all else equal, our share of earnings from Crown Partners that have been reduced, such that it now represents a smaller overall contribution to the consolidated results.The second thing to point out is that we are able, as Chris mentioned, get our balance on our revolving credit facility down the mill in Q3. We used proceeds from the LP unit sales as well as our share of the 2 subsequent loan repayments, that Chris mentioned, to repay our own loan. And as an aside, the fund is also sits fully repaid its own revolving facility, and is also now debt-free, although that's no longer consolidated.The other notable change in our Q3 disclosures is that we've enhanced our segmented recording, specifically, in addition to our existing network services and specialty finance segments, we've added reportable segments for real estate, distributed power, and corporate and Other. Specialty Finance at this point includes our investment in Crown Partners Fund plus residual loan balances held by Crown that have an aggregate carrying value, just $2.5 million. The real estate segment simply includes the properties we acquired for PenEquity through the related holding companies, and corporate and other includes our investment in Lumbermens but is mostly comprised of corporate level expenses and debt, including our converts.I guess turning back to Q3 results. The only other items I'd note would include the following: 1, as Chris mentioned, revenues from our network services business continued to grow, $7.4 million versus $6.8 million in Q2, $2.5 million a year ago, which was before we had the benefit of the Galaxy acquisition, and earnings before income tax, financing charges and depreciation, from this segment in Q3 is $2 million, and is tracking ahead of expectations that we had at the beginning of the year.Second notable thing, you'll just -- because it stands out when you scan the income statement, I'll mention it, you'll see that our share-based comp expense line is a net recovery of $46,000 this quarter. That's really the result of the cancellation of our MTPU, medium-term comp program in Q3 that involved the partial settlement of outstanding units, and the cancellation of all other invested units. The value of the settled units was simply less than we previously accrued for, resulted in a net recovery in Q3 that more than offset the impact that a higher share price had on the outstanding [ DVSU ] liability.And the other item that stands out in the Q3 results is a negative $2 million item from the remeasurement of financial instruments at the line item is called. Just to make that clear, up $1.8 million of that relates to a reduction in the value on the lease earn-out note receivable associated with the PRC Stoney Creek property, where leasing activity lagged earlier expectations, and will result in a lower-than-expected payout in respect to that earn-out note. We do expect that at least some of that shortfall can still be earned by PenEquity itself in the form of leasing fees in subsequent quarters, which would provide additional support for the value of our residual loan to the company.Interest revenue at this point, as Chris mentioned, that is a lot smaller. It now totally includes revenue for Crown Power Fund, which was $0.3 million, essentially unchanged.In summary, our AFFO, our adjusted funds from operations of $2.4 million in the quarter was the same as a year ago, but on a per share basis, that $0.28 versus $0.25 a year ago. We had net income of $0.8 million this quarter, $1.8 million year-to-date, and that compares with losses in the prior periods.As we've articulated in the past, we're aiming for a cleaner P&L as we go through this process. And the simple objective that we have going forward is growth in earnings per share. We believe that over time, EPS growth from a diversified set of operating businesses such that when we're assembling, will be the best path to long-term value creation.Finally, I'll just point out the total equity per share at quarter end $79 million, that's $9.37 per basic share compared with $8.98 at year-end of 2020.With share buybacks completed this year, contributing to a higher book value per share. With all of that, I'll turn it back to Chris for some closing comments.

[Christopher Allen Johnson, Co]

Great. Well, thanks, Mike. So just to wrap up our remarks this morning. It's been a very productive 2021 that has seen us accelerate the transition to the balance sheet and our operations. Quite simply, our business is very different today than it was this time last year, and we expect this product to continue through 2022.The SIB we announced yesterday represents another material step, and we look forward to update you on the milestones in the coming months. So with that, we'll turn over the call to -- for questions. Operator?

[Operator]

[Operator Instructions] All right, it appears there are no questions at this time. I would like to turn the conference back to the speakers for any additional or closing remarks.

[Christopher Allen Johnson, Co]

That's great. Well, thank you, everyone, for joining us this morning. As always, we're available, to talk to us, of the quarters as well. Have a great day.

[Operator]

This concludes today's call. Thank you all for your participation. You may now disconnect.