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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Crown Capital's Q4 and Year-End 2018 Results Conference Call.Please note that today's call contains forward-looking statements within the meaning of the applicable Canadian security legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that maybe 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 Q4 and year-end 2018 as well as its I -- AIF at sedar.com.Chris Johnson, Chief Executive Officer, you may begin your conference.
Thank you, operator, and good morning, and welcome to Crown Capital's Fourth Quarter 2018 Results Conference Call. I'm joined, as usual, by Mike Overvelde, our Chief Financial Officer. I'll start today's call with a few comments on key developments and highlights before Mike reviews the financials, then we'll open up the call for questions.It was a very productive year for Crown Capital in terms of capital deployment and capital development, as we increased fee-generating assets and our capital base to support future growth. We expanded our special situations portfolio and added 2 on-balance-sheet long-term investments, seeded and launched Crown Power Fund, which targets new high-growth market segment.In total, we announced 8 new transactions for $130 million. And today, we have roughly $260 million working in 17 different investments. As Mike will review in more detail, the continued growth in our investments translated into strong growth in revenue, particularly interest revenue for the Q4 and full year. In our traditional special situations lending strategy, we added 5 new companies to the Crown Partners Fund in 2018, including term loan, for up to $15 million with VIQ Solutions in the fourth quarter. The fund currently has 13 loans outstanding totaling approximately $200 million. VIQ is a global expert in video and voice-to-text capture, primarily targeting the law enforcement, immigration, courts, insurance, transcription service industries. Digital solutions are poised to transform how audio and visual recordings are processed and evidence documented. And VIQ is building off their strong existing transcription services platform to accelerate key markets through acquisitions.In the fourth quarter, we also had a successful repayment of the $30 million term loan to Marquee Energy following the sale of the company. This loan has generated IRR to date of 15%, which does not include potential gains from our equity position we received from -- we received for nominal consideration from the acquirer.We also continued to make good progress on the capital development side as we aimed to diversify our funding sources. In addition to the $75 million upsizing of Crown Partners Fund we announced midway 2018, we recently completed $25 million credit facility in the fund with Alberta Treasury Branches. This initial facility will give us additional capacity to support the growth and allow us to manage the fund flows more efficiently. We anticipate increasing this facility through 2019 to match the expansion of our portfolio. Concurrent with this announcement, we also extended the maturity of our existing $35 million corporate facility to May 31, 2021. The increased use of leverage both at the fund and corporate level, supports our objective to deliver strong and increasing ROEs for investors. The most important strategic development for 2018 was the launch of Crown Power Fund, which aligns well with our expertise in sourcing and structuring transactions that create risk-adjusted recurring -- strong risk-adjusted recurring cash flows. In the past several quarters, we have expanded our base of operating partners in the fund, financed multiple new projects and built a robust pipeline of new customers. We've been working hard on multiple growth initiatives, including raising third-party capital to begin to scale the fund.Response from investors has been very encouraging. Yesterday, we were pleased to announce an upsizing of $43 million, increasing the fund size to approximately $60 million. Crown increased its investment to $25 million from $15 million, underscoring our confidence in the growth and return potential for the fund. We attracted strong interest from our current base of institutional investors, including 2 investors who are anchors in both our Power Fund and our special situation fund.Another important development in 2018 was the expansion of our team with the addition of numerous experienced professionals in business development, investor management, finance and operations. Most recently, we were pleased to bring in on Paul Budovitch as Senior Vice President and Chief Operating Officer. As both a corporate lawyer and manager, Paul has a unique skill set, broad range of legal, financial and operational experience. We're pleased to have him on the team to manage operations and help guide our Power Fund partners through transformational periods.With that, I'll turn the call over to Michael, who will review the financial results.
Thanks, Chris. Good morning, everyone. I'll quickly cover the highlights for the fourth quarter here. As a reminder, under IFRS 9, some of our debt investments are now carried at amortized cost, with other debt investments and all equity investments carried at fair value through profit and loss. Prior to 2018, you recall all of our assets had been treated at fair value through profit and loss. And as you review our 2018 results, please keep in mind that those comparative periods prior to January 1, 2018 were not restated for the impact of IFRS 9. This should be the last quarter I'll have to give all of that qualification.As a result of all that, recall, the 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, they're no longer recognized immediately in revenues.While we recorded double-digit revenue growth in 2018, these changes that I'm referring to do distort and in this case, mute the growth, so please keep that in mind as you do the year-over-year analysis. Revenues for Q4 reached $10.4 million. It's an increase of 16% from Q4 of last year, mainly reflecting higher interest revenue. The portfolio growth that Chris highlighted drove a strong increase in interest revenues to $7.6 million this year. That's up 38% from last year, and it's our highest quarterly level.We recorded net gain on investments in Q4 of $1.3 million compared with $1.6 million in the same period last year. Fees and other income were $1.5 million for the quarter, down from $1.9 million for the same period last year, reflecting the differences in accounting treatment I referred to earlier.For the fourth quarter alone, we received transaction fees totaling $0.8 million that were not recognized as fee income in the period. For the full year, we received $3 million in transaction fees that weren't recognized.Total expenses were $2.8 million in the fourth quarter, that compares to $1.9 million in Q4 of 2017. This year-over-year change in Q4 is due almost entirely to increased finance costs from higher average level of outstanding debt. It also includes a slightly higher level of G&A expense that includes some additional start-up costs in relation to Crown Power Fund, which will be recovered in Q1 from the initial unit subscription to that fund, which is just closed.Looking forward, I'd remind everyone that we have added to our team in recent quarters to support future growth, as Chris mentioned earlier, which raises our run-rate salary expense somewhat.Adjusted funds from operations, which is a metric we introduced last quarter, were $3.9 million in Q4 compared with $3.3 million in Q4 of last year, an increase of 17%. As a reminder, we believe this is a 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 cost. Total comprehensive income net of noncontrolling interest was $2.4 million or $0.25 per basic share in the quarter compares with $2.1 million or $0.22 per basic share in the fourth quarter of last year. Total assets at year-end increased to $276 million, it's up from $229 million at year-end 2017, including an increase in the carrying value of investments from $181 million to $247 million at year-end.Total equity was $104.9 million or $10.91 per basic share compared with $104.4 million or $10.98 per basic share at the end of last year.As Chris mentioned, the growth in our fee-generating assets continues to produce healthy cash flow to support our current quarterly dividend of $0.15 per share, which was declared and paid in November. For the full year, we paid quarterly dividends of $0.60 per share. That's up 20% from 2017 and our first quarter dividend for this year was declared in February and paid last week.Looking at our funds available for additional investments, at year-end, we had access to approximately $92 million for additional portfolio investments. That includes our working capital, $63 million of committed capital available to Crown Partners Fund from third parties and amounts available under our credit facility. And effective February 28, we now have additional committed capital from third-party investors to help fund the next phase of growth of Crown Power Fund. I'll turn the call back to Chris for some closing comments.
Thanks, Michael. So in 2019, our primary focus will be to continue to increase the assets in both the Crown Partners Fund and the Crown Power Fund. With the new capital and broader group of operators in the Power Fund, we can now execute on near-term projects and continue to build the pipeline for 2019 and beyond. As we get deeper into the distributed power market, it's clear there is a multibillion-dollar opportunity, it has a long runway, and our aim is to be the leading financial provider to this market. For our investors, we will build a portfolio of long-term contracts with profitable well-established businesses that will deliver utility-like recurring cash flow.While we've seen some pressure from traditional financing sources in the special situations market more recently, we're a recognized leader in this segment and are confident in our ability to expand and grow this loan portfolio to $500 million over time. In addition to portfolio expansion, we'll continue to pursue increased third-party funding to grow both these segments. Our near-term priorities are to add a new credit facility to the Crown Power Fund.Thank you for your time today, and we look forward to updating you with the release of our Q1 results in May. We will now turn the call over to questions. Operator?
[Operator Instructions] Your first question comes from Jaeme Gloyn from National Bank Financial.
First question is just around that outlook for the Crown Partners Fund. I was wondering if you can just give us a little bit of hint as to the contraction in the pipeline. Can you put a little maybe some quantitative numbers around that? And where you see potential growth of Crown Partners going in 2019 given the pace to grow that to sort of in the $500 million range eventually?
Sure. So we started seeing additional pressure from the chartered banks in late summer, maybe early summer. You feel it in different ways, like you see transactions that are occurring that you're working on that should be in a secondary debt market that ended up being done with primary debt alone, through to borrowers that you're working on that get refinanced and just other deals that people paid out a while ago who've increased facilities, who then run into overleveraged situation. So that very aggressive lending has been going on now for almost 9 months. It's reflected in the fact we only closed 1 deal in Q4 and we didn't close any deals in Q1. So it's not just our pipeline, it's actually running through right to closings. We've seen some change in the last 2 to 3 weeks, so it is picking up a little bit. And so we -- these cycles come and go. I can't explain -- I have my views in terms of what's maybe causing this because they're fairly across-the-board, increase of the banks being somewhat aggressive, but -- so it's just tough to say exactly when it's going to break. My feeling is these cycles don't last more than 12 months typically. If a few losses kick in, some softness in economic conditions, then the banks go really cold and then you're just overwhelmed with transaction activity. So I really can't -- I can't give you a specific prediction as to when it's going to happen other than the fact that I -- it's warming up a bit. We have some interesting things we're working on right now. And I'm hopeful for a strong second half.
Okay. So fair to say the pipeline right now is fairly dry for lack of a better word. Can you talk about potential repayments from investors at this point -- or your portfolio companies, I should say?
Yes, I wouldn't say it's dry. As I said, in the last 2 to 3 weeks, we've had a number of things come in that are quite interesting. So it's actually quite active and so to the point where we couldn't get it all done if we wanted to. So it's -- I'm hoping it's going to be a decent second quarter still, but these things come, these things go. So it's tough to say. In terms of prepayments, I can't give you any specifics. It's just we have a number of loans that are, say, out of the non-call period. And I think they're great borrowers. So they're performing really well. So that's just a combination of with aggressive bank debt, it just -- we're going to have some prepayment pressure.
Okay. Fair enough. Shifting to the Power Fund announcement recently, obviously that the -- that's increased the capacity there. When should we expect to see the Power Fund start to drive meaningful or maybe incremental revenue? And I think when we talked about this in the past, it's something that could drive sort of like in the 12% to 13% yield. I was wondering -- I was hoping if you could just give us a little bit of an update on where you are on that front and if anything has changed in the economics of these investments.
Yes. So maybe just bringing back to the Investor Day where we kind of released to the world what we're doing there. Like this is a building of a product line from scratch and it's a bit of unique offering where we're working with partners and then they work with end customers, and we're scaling it that away. So there is a lot of effort going in, just they get the mechanics working of just getting operators signed up, getting the operating protocols, approving projects, getting projects built and operating and then there's a ton of stuff that needs to be done. So it makes it really -- and given it's all new for everybody, it's difficult to say exactly when and what's going to happen. I feel really comfortable in the 2 to 3-year horizon saying with the operators we have signed up right now, as their pipelines move to fruition, it will be hundreds of millions of dollars with just the guys we've got right now. In 2019, it's tough to say exactly what's going to hit revenue producing. We -- for instance, the first plant just turned on a month ago and second plant is nearing completion right now. And plants 3 through 5 or 6 are just being in the building stage as well. So it's going to start hitting our revenue and we'll start getting a return on our capital. It will initially be more around the 8% level rather than the 12% level. That's what it gets to as we grow the fund and add leverage to it. Right now, it's an unleveraged return. So it's not going to be meaningful or material to Crown's results during the first half, we'll start seeing some material results in the second half. And then it becomes a bigger part of our business in years 2 and 3.
Okay. Great. That's good color. Just last one for me. In terms of the -- actually back to the Partners Fund in terms of the portfolio companies, is there any incremental color? I think in past MD&As, you've been able to provide a little bit of color around these sort of puts and takes of each portfolio company around the loan risk ratings, seeing big jumps in Solo and, let's say, Persta. Is there anything specific you'd like to draw out related to those investments?
Yes. So, look, I'll just maybe comment on the risk rating process. So it is a fairly comprehensive process. We've given you all the inputs, the weightings we're not going to share that, necessarily. And so there are things happening in these companies that are moving risk ratings around. And some for the better, some for the worse. I can't talk specifically what's happening in the private companies other than to say these things happen. And sometimes, they self-correct. Sometimes, we have to work with them to correct them. And sometimes, we end up moving towards how to get our money out of the situation. So we're -- these are things we actively manage. And it's -- and the -- I would say these risk ratings are a good measure as to what's happening. So if they're moving up, then we feel our risk is moving up, but it doesn't mean that we're necessarily saying we have an impairment there or anything like that.
Okay. Just a quick follow-up on that one and just specifically with like Solo and Persta. Like are you approaching a point, or have you reached a point where you are actively pursuing a repayment of those loans at this point, an exit strategy? Or is this more still in the range of, I want to say like, sort of normal-course risk that you would have potentially anticipated with any of these -- with either of these loans?
Yes. I just can't talk about what we're doing with the specific of a private company.
Your next question comes from Nik Priebe.
Okay. I just want to start with a question on the fundraising process for the Power Fund. Could you just share some of the feedback that you received through conversations with investors, perhaps what resonated with them as well as what sort of pushback you encountered there?
Sure. I would start by saying we did not do a full fundraising process. It really was more of a reaching out to our existing clients. And we added a few high net worth folks in, people we thought would be influencers in the marketplace. So -- and it was really well received. I think there is a real lack of product in that steady return of 8% and above. So -- and another thing we saw is we're seeing some rotation out of real estate into other asset classes. So I think we're going to be a beneficiary of that with this Power Fund. In terms of specific pushback, not a ton. I know like there's definitely uncertainty around what they see as a new industry and what regulatory risks that might come out of that. Our view is this is an essential solution to the great problem in Ontario and many other jurisdictions. And it's actually highly supported in certain U.S -- U.S. is a little head of us in certain areas in terms of the utilities actually promoting distributed generation. So there's always anxiety with new things. And my view is the first capital raise is the hardest. And we have a fairly decent roster of people we're talking to that are there -- that we're working on that will be for the second round of closings.
So I guess, when you think for -- and I'm guessing, I'm putting the cart before the horse here, but when you think forward to the second round of fundraising, would you look to kind of broaden the scope of fundraising efforts to capture new investors as well in that round?
For sure. That's exactly our intention. As I see, the whole fund development plan we have is to seed it with our own money, get it going, invite in your existing clientele to come in for the first closing. There's a little bit of fee concessions we give. In this case, we give a fee concession on the carried interest component. And then, as you scale it, you're raising more money from other people, and very likely, there's going to be some kind of NAV growth in there. So the people who get in early are getting doubly rewarded with that. So it's -- we're well on that. I was actually quite happy that 2 of our anchors in the Partners Fund came on as anchors of our Power Fund. And so combined with Crown, a 3-anchored fund is quite attractive. So it's a stabilized fund. The interest we have from -- we've started high-level pitching to the broader market base we have. And we have numerous, like more than we've ever seen in terms of like a Partners Fund type of pipeline being established with Power Fund.
Okay. That's helpful. And then just one last one just on the same sort of topic, but looking at the deal pipeline in the Power Fund, it sounds like you're pretty optimistic there. Do you have some visibility or expectation around the time line for deployment of that newly committed capital in the fund?
Yes. Like we're -- so that's capital, that's equity capital more or less and then we can leverage that up, and we're working on that, as I mentioned in my notes. So I think you have to look at the gross, not just the net of an equity capital. So that near give or take $60 million ends up being somewhere between $125 million and $150 million with sort of basic leverage with it. And that's just -- we would have projects in a qualified state, one that we've done advanced work on that there are some process along the way of close to, say, $80 million right now. So there's still a lot of time left in the year. So I have every expectation at this moment in time that we're going to be upsizing this fund again before the end of the year to make room for all the projects we're seeing.
Your next question comes from Chris Murray from AltaCorp Capital.
Chris, just going back to the Investor Day presentation, we spent a lot of time talking about Power and the special sits fund, but you'd also talked about other income streaming funds in 2019, including a telecom fund. Any additional thoughts on what you're thinking about development in terms of growing the portfolio as we go into 2019?
Yes. Thanks, Chris. That is -- that's like sort of an active dialogue, like we do have one company on our direct balance sheet called WireIE, which is a streaming deal, and it's a growth situation. So it's -- it is -- we do have the seeds of the telecom fund already in the ground. It's -- we are significantly busy right now with what we're doing on the Power Fund. We're really wanting to make sure we maintain a first-mover advantage in certain markets. So it's just -- there's a prioritization that's occurring. And right now, Power is winning the battle. So we're probably not, at least in the near term, going to put a lot of time into sourcing additional telecom fund operators. And there is one other one where we're playing with more in the energy infrastructure space that we're continuing to move ahead. But again, it's just resources, like there's -- going back to starting this business from scratch, it's just there's a lot involved there. So it's just we have to make sure we don't screw that up and they're just taking -- we can only do so many things at once. So while we continue to advance some, we're not really driving them like we are the other 2 businesses.
All right. Fair enough. Then thinking about -- you talked a little bit about leverage, can you sort of dive into it? So the thought is that now you're starting to put credit facilities and leverage in underneath, thoughts around how much leverage are you comfortable with at the fund level. And then even at the head level, at the corporate level, what should we be thinking about in terms of how much leverage you can get? And I guess, the other part of that is how effectively, as you bring that leverage on, can you deploy that additional capital is what I'm trying to understand.
Yes. So there is -- yes, you correctly pointed out there's fund leverage and there's corporate leverage and not all fund leverage is the same. So let's start with the Partners Fund. We don't see putting a lot of leverage on that asset -- those assets, they gets -- it's really never going to exceed 20%. It's more likely going to operate in that 10% of assets category. It's primarily there to help manage just the nature of the cash flows that we have loans paid back and loans going out and this will reduce the amount of capital flowing back and forth between the limited partners. So that's the primary reason there, it has a benefit with smaller ROE bump. And it does impact like some of our thinking of how we leverage the corporate facility because we wouldn't put a lot of leverage on those assets. The Power Fund, I feel differently about. I think the Power Fund, when you get a diversified portfolio of these utility-type cash flows, they can support significant leverage. And in the early days, you probably are throttling yourself to the 1:1, so 50%. And as you get more diversified, larger portfolios and seasoned assets, you're probably in the 3:1 asset range -- leverage range. And then at the corporate level, we're really seeing it more as a not necessarily choosing our returns anymore, like we were sort of doing that in parts that we didn't have any fund leverage and that's where we're getting leverage. So now we have -- we have some makings of fund leverage, we can afford some level of corporate debt, but it's really more to help transition us to do new things and to bridge us between capital raises. So like if this conversation a second ago in terms of if we move forward any deeper with the telecom or the energy infrastructure one, that can be done on balance sheet, can be done in the context of our credit facilities because we wouldn't want to go sit there and raise a bunch of capital to maybe do that. But as we make more progress to it, like right now, we're getting some relief as we close the fund our -- we're going to see some money back from the LP, just as we go from 100% to 40-something percent just in the Power Fund. We would do the same with the other ones. And then over time, we see some migration of asset dollars between our different funds to make room for these things as well. I fully expect over the next year or 2 to reduce our capital deployed in special situation and increase our capital deployed in the Power Fund. So -- but -- so you have to look at more of our corporate facility as a -- and I don't see it really going much beyond $35 million in the near term. So that's -- it's really there for working capital and growth new initiatives.
[Operator Instructions] Your next question comes from Stephen Boland from INFOR Financial.
Mike, could you just go over the available capital again? I know you went through quickly. Can you just break that down again, if you wouldn't mind?
Yes. Sure. I'm going to shuffle for some numbers here. So the first aspect of that, it's a tricky -- I'll start by saying we kind of define it as having 3 components. One is the unused part of our current credit facility. Of course, at this point, the corporate credit facility is at year-end anyway $35 million, of which we -- against which we had drawn $18 million, right, so $17 million there. We've got the third-party committed capital that had not been called as at that point. So again, so I'm leafing through to find the number, I think that was $62.8 million. And the residual of that is, I guess, notionally, what we would refer to as working capital. And this is where it gets little trickier to try and work the number through. And I say tricky only because we, at the consolidated level, no longer have a classified balance sheet with current and long-term assets and liabilities. Given the nature of the company and the funds we manage, it's just not classified. So we sort of define that in the liquidity section of the MD&A to say what's in there. One of the complexities we had in and around year-end, as you'll notice from the financials in the MD&A and all that, is that on the day before year-end, our debt outstanding sort of kicked into the current box. It doesn't get disclosed as that on these consolidated financial statements because we don't have current section, but in our separate statement that we file with the regulator, it does. So technically, that $18 million net of deferred financing costs kicked over, it became current for a very short period of time as that loan was in the process of being extended. And so that's also included in that working capital number. So those are the 3 components. What that doesn't include is the debt that we've now subsequently added to the Partners Fund and it doesn't include the commitments from third parties to the Power Fund, both of which happened after year-end.
Okay. That's good. And then I guess, backing into that, Chris, you're comfortable, like this gives you the runway for at least the end of 2019, especially with the possible growth in the Power Fund?
I wouldn't say it takes us all the way to the end of 2019, like we have -- like the fund right now and fund for Partners Fund is $300 million, there's $200 million deployed, so we've got $100 million left. That's enough to go for the next little bit. And then the -- leveraged up, as I said we've got about $125 million to $150 million of just the Power Fund. And again, that's enough for where we are at, deployed today. And then, as Mike mentioned, we have some balance sheet capacity through the lines if we wanted to keep going on the initiatives I described to Chris Murray. It's -- that's enough as well. So we have enough. So it's just if things start happening really quickly, we'll need to bring those plans forward.
Your next question from Trevor Reynolds from Acumen Capital.
Maybe just some commentary on where you guys sit in terms of the addition of operators and getting to new jurisdictions away from Ontario?
Right. So we have 3 operators in Ontario. We're working on a fourth. And it's actually late stages. So we're hoping to have an announcement on that soon. We feel that probably has us fairly well covered in this market and even there's some peripheral markets that these operators will service already, but they're just happen to be based in Ontario. Alberta is an important market to us. And it's different. It doesn't have the same sort of power markets. It's deregulated in a different way there. But we -- there are some real neat opportunities that come out of the distributed generation side there. So we feel that we need 1 or 2 operators in that market, and we've been working on that now for about 6 months. So we're getting close to finalizing our first arrangements there. And we started now even looking south of the border in terms of key markets we want to be in and then figuring out who we want to work with in those markets. So we've made a few introductions so far and they seemed to be pretty positive.
There are no further questions at this time. Please proceed.
All right. Well, appreciate everybody's time this morning. Some great questions. And if anybody wants to follow up, you know where to find us. So thank you, and talk to you soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.