goeasy Ltd. (GSY) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the goeasy First Quarter 2021 Financial Results. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Farhan Ali Khan. You may begin.

Thank you, operator, and Good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice-President of Corporate Development and Investor Relations, and thank you for joining us to discuss goeasy Ltd. results for the first quarter ended March 31, 2021. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website. Today, Jason Mullins, goeasy's President and Chief Executive Officer, will review the results for the first quarter and provide an outlook for the business. Hal Khouri, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position; Jason Appel, the company's Chief Risk Officer, is also on the call. After the prepared remarks, we will then open the line for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks. The operator will poll for questions and provide instructions at the appropriate time. Business media are welcome to listen on this call and to use management's comments and responses to questions and any coverage. However, we would ask that you do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A. I will now turn the call over to Jason Mullins.

Thanks, Farhan, and welcome to today's call, everyone. I want to first extend our sympathies to the families and communities, both here in Canada and around the world that continue to deal with the ongoing effects of COVID-19. As an incredibly diverse organization represented by over 70 nationalities, many of our team members have friends or family in other countries and call those places home. In addition to prioritizing the health and safety of our team, we will continue to assist others through various charitable causes, and we hope that the support helps make an impact. Turning to first quarter results. It was a strong start to the year in which our business continued to perform well, and we produced record reported and adjusted earnings. Furthermore, subsequent to the quarter, we are pleased to announce our successful acquisition of LendCare, one of Canada's leading point-of-sale financing platforms. In the first quarter, we experienced a gradually improving level of demand for consumer credit, though seasonal trends and provincial stay at home orders continue to keep borrowing at more modest levels. After our second strongest quarter for web traffic, loan originations during the quarter were $272 million, up nearly 13% compared to the first quarter of 2020 and our strongest ever first quarter origination volume. Loan growth was $30.5 million, bringing our portfolio at quarter end to $1.28 billion in consumer loans. With the second and third waves of COVID continuing to impact our communities and moderate demand for our traditional direct-to-consumer lending channels, our point-of-sale financing channel has continued to perform well. As we highlighted last quarter, we have experienced continued growth in the proportion of new customers being acquired through our frictionless, full credit spectrum offering with the firm or directly through our merchant platform. The portion of new customers we acquired in the first quarter from this channel lifted to 28%. We also continued to execute on our strategy of focusing on lifetime value by offering an expanded range of lower priced products, while graduating customers to progressively better rates, collectively bringing down their overall cost of borrowing. The weighted average interest rate on our portfolio declined by 35 basis points in the quarter to 37.5%, with the total portfolio yield, including all ancillary product revenue, finishing at 44.3%. Combined with another stable performance from our leasing portfolio, revenue for the first quarter was $170 million, an increase of 2% over 2020. As closures and restrictions continue to come and grow across various regions and industry sectors, we continue to dynamically adjust our credit tolerance and underwriting practices. The improving credit quality of our portfolio and the continued reduction in the overall discretionary expenses for the average Canadian contributed to another quarter of strong credit performance. The net charge-off rate for the first quarter was 9.1%, down from 13.2% in the first quarter of 2020. We are also proud that our loan protection product continues to provide a reliable source of insurance for those remaining customers who have been displaced from their employment due to the recent pandemic related business closures. During the first quarter, the product paid out approximately $7 million in claim payments on behalf of our customers. With over $50 million in payments made in 2020, the product continues to provide customers with meaningful value during a period of economic disruption. While we expect the credit performance of our existing easy financial portfolio to trend back toward our optimal range in the coming quarters, the underlying credit trends of the portfolio remain healthy, and we are confident in long-term performance and stability of our loan book. As the broader economic environment has begun to show signs of recovery and as the timing of a return to more normal conditions is gradually becoming more clear, we have updated the probability weighted economic scenarios used to determine the appropriate loan loss allowance that would barely account for the future expected credit losses. As a result, our allowance for future credit losses reduced slightly from 10.08% to 9.88%, a reduction of 20 basis points from the previous quarter, while still providing ample coverage to account for unforeseen changes in the current economic environment. Improved operating leverage and lower credit losses led to record operating income of $63.9 million, up 45% from $44.2 million in the first quarter of 2020, while the operating margin expanded to a record 37.6%, up from 26.4% in the prior year. During the quarter, our retail point-of-sale financing partner, Affirm, formerly PayBright, completed an initial public offering with shares beginning to trade on the NASDAQ Global Select Market. Through the sale of PayBright to Affirm, which closed in early January, we received consideration of $23 million in cash, 655,000 common shares in Affirm, subject to a customary lockup agreement and 468,000 common shares held in escrow, subject to revenue performance achieved to 2021 and 2022. Shortly after the public listing, we entered into a 6-month total return swap agreement to substantively hedge our market exposure related to the non-contingent 655,000 common shares. The total return swap effectively results in the economic value of our non-contingent shares in Affirm being settled in cash at maturity for a price of $108.87 per share, net of applicable fees. After considering the impact of the hedging arrangement and the likelihood of achieving the contingent equity, during the quarter, we recorded a pretax unrealized fair value gain of $87.3 million, bringing the total value derived from our original $34 million investment to an excess of $140 million. Through our ongoing partnership with Affirm, we continue to offer a market-leading full spectrum point-of-sale financing solutions to major retail brands such as Wayfair, Samsung and Casper and look forward to working together for many years to come. During the quarter, we also invested $6.5 million to acquire a strategic minority equity interest in Brim Financial, an early stage private Canadian fintech platform. Brim offers a turnkey suite of consumer and business card products, a white label digital banking platform, and a globally open rewards and loyalty ecosystem. With the future roadmap to launch new products, enhance our mobile and digital platform for consumers, and eventually increase the rewards for our customers, Brim can help augment and accelerate our product, digital, and loyalty and rewards roadmap. We also believe that Brim offers one of the best cards, mobile banking, and loyalty reward solution on the market, presenting a unique investment opportunity. In connection with our investment, we are also entitled to preferential commercial terms for use of the BRIM platform in the future. Including the gain associated with our investment in Affirm, net income in the first quarter was a record $112 million, up from $22 million in the same period of 2020, which resulted in diluted earnings per share of $7.14, up from $1.41 in the first quarter of 2020. After adjusting for the $78.5 million after-tax fair value gain related to the depreciation of our investment in Affirm, adjusted net income was a record $36.7 million, up 67% from the first quarter of 2020, and adjusted diluted earnings per share was $2.34, up 66%. Adjusted return on equity was 29.5% in the quarter, up from 25.8% in the first quarter of 2020. I'll now pass the call over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.

Thanks, Jason. During the first quarter, we continued to invest in our business while also improving our liquidity position and deleveraging our balance sheet in preparation for our LendCare acquisition. To help simplify and highlight the free cash-generating capability of our portfolio, last quarter, we began to publish a new non-IFRS measure in our disclosures, which is the cash provided by operating activities before the net growth of the consumer loan portfolio. This figure represents the amount of free cash we produce each period if we were to hold loan portfolio flat. From this figure, we can then invest that free cash and incremental growth in consumer loans, invest in new business or initiatives, reduce our debt or return capital to shareholders through dividends or share repurchases. Cash provided by operating activities before net growth in gross consumer loans receivable in the quarter was $63.2 million, an increase of 17% over 2020. Based on the cash at hand at the end of the quarter and the borrowing capacity under the company's revolving credit facilities, goeasy had approximately $435 million in total funding capacity. At quarter end, the company's fully drawn weighted average cost of borrowing reduced to 4.8%, down from 5.5% in the prior year, with incremental draws on its senior secured revolving credit facility bearing a rate of approximately 3.5% and incremental draws on its revolving securitization warehouse facility bearing a rate of approximately 3.4%. As of March 31, 2021, the company also estimates that once its existing and available sources of capital are fully utilized, it could continue to grow the loan portfolio by approximately $150 million per year solely from internal cash flows. When factoring in the gains recorded in the quarter and the cash produced by the business, we have continued to reduce our leverage position. As at quarter end, our net debt to net capitalization declined to 58%, well below our target of 70%, and the equity on our balance sheet improved to over $550 million. Subsequent to quarter end, we also completed 2 successful capital raises to support the acquisition of LendCare, which closed on April 30, 2021. First, we completed an equity offering of 1.4 million subscription receipts at a price of $122.85 for gross aggregate proceeds of $172.5 million. As a result of the completion of the acquisition, each of the 1.4 million outstanding subscription receipts were automatically exchanged for one common share of the company. In addition, subsequent to quarter end, the company also closed its offering of $320 million, 4.375% senior unsecured notes maturing on May 1, 2026. Concurrently with the offering, the company entered into a cross-currency spot agreement, effectively hedging the obligation at CAD 400 million with a Canadian dollar interest rate of 4.818%. At the close of our second quarter financial results, which will now include a partial consolidation period with LendCare and the inheritance of new funding facilities, we estimate that our total funding capacity will be in excess of $600 million. Looking forward, we also believe there is an opportunity to syndicate and increase the size of our current $200 million revolving securitization warehouse facility, which we recently launched in January with National Bank Financial Markets. With the continued strength of our business model, the stability in credit performance, and the positive growth outlook of the company, we have received expressions of interest from several large and reputable financial institutions to participate in the syndication and related increase in the facility capacity. We look forward to updating everyone on our progress in the quarters ahead. During the first quarter, our common shares were also added by Dow Jones to the S&P/TSX Composite Index effective March 22, 2021. The index is considered the principal benchmark measure for the Canadian equity markets and consists of the 231 largest Canadian companies as measured by market capitalization and liquidity. goeasy is also included in the S&P/TSX Canadian Dividend Aristocrats Index as a result of consistently increasing dividends for more than 5 consecutive years. Lastly, we continue to use a portion of our free cash to return capital to shareholders through our regular dividend program. The Board has approved a quarterly dividend of $0.66 per share payable on July 9, 2021, to the holders of common shares of record as at the close of business on June 25, 2021. I'll now pass the call back over to Jason for some comments on our outlook.

Thanks, Hal. While 2021 is presenting a new round of challenges as we navigate through the third wave of the pandemic, our business continues to perform well, and we see a renewed sense of optimism beginning to build as vaccination distribution accelerates and the economy builds momentum toward recovery. To help further accelerate our growth, we were pleased to announce the closing of the acquisition of LendCare within the last few weeks. LendCare is one of Canada's leading point-of-sale financing platforms and the power sports, retail, healthcare and home improvement verticals. Through approximately 3,000 merchants, LendCare offers a consumer-focused loan origination platform that enables their merchant partners to process installment loans quickly and easily for their customers with rates between 9.9% and 34.9%. The company has deep and longstanding relationships with retailers, dealers, and major name brand OEMS, such as Bombardier Recreational Products and CFMoto. LendCare consumers range across the entire credit spectrum with 2/3 in the nonprime segment where they have a specialty deep expertise in credit and underwriting in their respective verticals. The transaction is a highly complementary and meaningful end market acquisition, which increases our scale, extends the product line for customers, and diversifies our channels of distribution through expansion into new verticals. We have already begun to work with the LendCare team and collaborate on new opportunities together. We also remain on track to launch the pilot of our direct-to-consumer auto secured loan product in the next 60 days. We will first activate our new digital auto loan application so that we can toggle and moderate traffic. Our first phase will involve enabling customers to purchase from their dealer of choice or through a private sale, followed by the introduction of an approved dealer network and then an online car buying experience over the course of 2021. Further, we will also begin testing offering customers with existing vehicles that are declined for unsecured credit, the opportunity to provide their vehicle as security as a way to borrow and build credit. We also continue to work on our new cloud-based core lending platform called [ Fusion ]. This platform will not only enable us to scale the enterprise under a multiproduct, multichannel model, but will unlock features and functionality that can drive a greater experience and new sources of revenue. We expect to complete the configuration of the new platform over the coming quarters and carefully stage our migration amongst our other major initiatives. As we noted in our earnings release yesterday evening, we plan to provide a new 3-year forecast, including the impact of LendCare when we report our second quarter results. With the transaction closing on April 30, the second quarter will include a partial consolidation period, which will influence some of the typical portfolio metrics we report, such as yield and net charge-off rates, which are calculated on the average consumer loan book during the period. As such, we will temporarily move to providing an outlook on the upcoming quarter in the form of the total revenue and net charge-offs we expect provided in dollars. After accounting for the loan growth during the quarter and the adjustments associated to the merge of the LendCare business, we expect to finish the second quarter with a consumer loan portfolio of between $1.79 billion and $1.8 billion. While the calculation of the total yield generated on the loan portfolio will be skewed by the partial consolidation period, we expect total company revenue of between $195 million and $205 million during the quarter. Lastly, while the credit trends on our existing easy financial portfolio are expected to gradually return to more normal levels, the amalgamation of the higher credit quality LendCare business will serve to improve the overall credit performance. During the second quarter, we expect to record net charge-offs of between $36 million and $40 million, excluding the change in the allowance for credit losses associated with the growth in the consumer loan book. As we move into the third quarter and beyond, we will return to providing both the short and longer-term forecast using traditional portfolio metrics such as portfolio yield and net charge-off rate as we have done in the past. So with a highly strategic acquisition now complete, the pending launch of a new auto loan product and the economy set to experience meaningful recovery in the quarters ahead, there is much excitement in our business. We continue to be in the early stages of our journey to becoming the largest and best-performing lender in the large and underserved $200 billion nonprime consumer credit market. Even more important, with a wider range of rates and products now available, our mission to help the 9 million nonprime Canadians get access to credit while improving their financial health, lowering their cost of borrowing and graduating to prime, is stronger than ever. I want to once again welcome LendCare to the goeasy organization and thank our now over 2,200 team members for continuing to work diligently to take great care of our merchant partners and our customers. With those comments complete, we will now open the call for any questions.

[Operator Instructions]. We have our first question coming from the line of Etienne Ricard with BMO Capital Markets.

So with the closing of LendCare now behind us, could you share how the integration is progressing, your near-term priorities as well as growth achieved by the business in 2021 year-to-date.

Yes. So I guess, on your first question, integration goes well. We've obviously spent the last couple of weeks now working together with the LendCare team, getting to know everybody, figuring out what each business' individual priorities and focus areas are. We continue to have a heavy list of key strategic priorities that we're focused on, the launch of the auto product, the new core platform. LendCare continues to be focused on adding new merchants to their existing verticals, making improvements to their customer experience through their technology. And we've already started to now collaborate on ways that we can work together in the future, of which we highlighted some of them during our announcement of the transaction, which primarily revolve around being able to offer more of their customers loan products through our easy financial scoring models and then also being able to cross-sell customers across the 2 businesses. We'll obviously start to explore when and how we implement those particular new initiatives over the next couple of months. But both businesses, of course, have quite a robust organic growth by now as it is now under one umbrella. We don't -- we haven't broken out in our Q2 projections, the exact split of the growth coming from the contribution of each of those 2 portfolios as our plan and our intent, as we highlighted when we made the announcement, is that these are really going to become one consumer loan portfolio, and we'll just be providing the growth on a consolidated basis. As you can imagine, part of the strategy, which is to be able to move customers back and forth across products means that crosspollination is going to murky the waters as to what exactly belongs to each individual channel of distribution. So it's really only going to make sense for that to be part of one consolidated loan portfolio.

And I mean, part of the strategic rationale for the deal is that it expands your point-of-sale presence. Could you share how you think about customer acquisition economics for the -- for this channel and how that would compare to your branch and online channels?

Yes, sure. So generally speaking, in our direct-to-consumer, we think of the branch and the online as direct-to-consumer and point-of-sale as indirect in that we're in point-of-sale using more of a B2B2C model where you're working through an emergent relationship and partnership. In the direct-to-consumer business, our marketing and advertising dollars, which, as you know, goeasy historically has invested approximately 4% to 5% of our annual revenues into is where we acquire our customers. And through that channel, we would, generally speaking, obviously, ebbs and flows with the impacts of COVID as of late, but we would generally acquire a customer for around $300 when you take our marketing and advertising investment over the number of new customers we acquire. In the point-of-sale channel because you're leveraging the traffic of that existing merchant base, you really have a cost of acquisition that's only a couple of dollars. It's really just the operational transaction costs, if you will, of actually processing it as that merchant partner really does the heavy lifting in promoting and advertising their products that drive the customer traffic. That difference in the cost structure, which includes both the cost of acquisition and the operating cost of the business because you don't have a big platform of retail branches, for example, is what enables that channel to be able to still generate comparable returns, comparable return on assets, even though it has a lower overall yield from the portfolio coming through point of sales. Once a customer comes in through a point-of-sale acquisition, whether that be our existing business or LendCare, we will then, over time, be able to, of course, continue off of those customers other products. We've seen from our prior point-of-sale experience that over 1/4 of our customers we acquire through point-of-sale eventually migrate within that first year into one of our other traditional lending products. We don't know, of course, what that exact experience will look like as we start to work with LendCare, but we do think there will be an interest on those consumers' parts to want to consider other products.

And last one for me. On the investment at Brim Financial, could you provide a bit more details as to the background of this investment? And how should we think about the potential for goeasy to introduce maybe at some point, revolving loan products?

Yes, sure. So the background thesis is, we've known about Brim for a little while, started to connect and talk to them about some of the things that they had on the go and some of their new business initiatives and really get to look at their platform and their technology carefully over the last 6 months. What really became clear to us is that their platform, their technology business enables 3 key features that are of interest to us. The first one is, they have a card platform that enables you to issue a variety of different types of card products; cards connected to bank accounts, revolving credit cards, and prepaid cards. So they offer these variety of card products. We think from a product expansion perspective, in the future, some of those card products might make sense in our suite. For example, for the consumer that's declined for unsecured credit, there might be an opportunity to offer a secured credit card, similar to the one that Capital One would offer to its nonprime customers, where the customer puts forth some full or partial amount of security in order to get access to a card product that can build credit. On the upper end of our credit spectrum, and particularly now that we're moving more toward near prime through our business and the acquisition of LendCare, we think there might be an opportunity down the road for a traditional nonprime credit card product. In fact, if you look at kind of the largest North American peer group member, OneMain in the U.S., that's a product they've actually been working on and announced over the last year, and I believe they're bringing to market later this year as well. So it had this card platform that we think can be useful to us in the future. Secondly, they also offer a kind of white label digital mobile customer platform. And we've done a phenomenal job at building a mobile-first web experience for both the main core websites and our application. We have not yet invested in the creation of a mobile app that creates another point of engagement with our customers. As we think about expanding that product strategy and customers over time, having multiple products, giving them an access to a low lap that allows them to interact and engage with us more frequently, we think is going to deepen the relationship with the customer. So they have that, and we think that's interesting. And then lastly, they also have a loyalty platform that uses the credit card rails to allow the participation in both issuing and revealing points across different retailers that are part of the network. And of course, again, our view is, over time, we want to be able to strengthen the reward system for our customers. So because they have these capabilities in this platform, that really has a number of pieces that we need and want and are interesting to us, similar to what we've done in the past with those types of relationships, became this really great unique opportunity to take a small minority equity interest as we work together with the business, and that also helped enable us to get some preferential commercial terms for the use of that platform in the future.

We have our next question coming from the line of Gary Ho with Desjardins Securities.

I just wanted to dig into one element of your Q2 guidance, which is the net charge-off of $36 million to $40 million. Can you help me segment kind of what would be on a percentage basis roughly on the easy financial versus the LendCare side? Just want to gauge kind of your expectations on a sequential basis relative to the 9.1% in Q1 and whether you're looking for, I guess, it sounds like some gradual increase as the portfolio normalizes, as you've mentioned in the past.

Yes. I can start, Gary, and then Jason can add if there's any additional comment. So again, similar to my comment earlier, we are reporting the portfolio as one consolidated portfolio for the reasons highlighted earlier, and that's just inevitably how the portfolio mix is going to change and evolve through the cross-sell of products that I highlighted. What I can tell you just for some extra color there is, as you know, we had anticipated that our core easy financial portfolio would gradually migrate back to the range we originally provided for this year, which is between 10.5% and 12.5%. That was what we believe is the steady state and optimal range for our book, of course, down from where it used to be pre-pandemic as a result of the credit enhancements we've made and the evolution of the mix of our business. We expected that it would be around the second quarter, we would start to see the return to those more normal levels begin to occur. And so we are beginning to see a little bit of that trend back towards those more normal levels. So we're not all the way back there yet, but some of that correction is occurring, and I would expect that provided that over the next several months, they begin to reverse some of the lockdowns and some of the things that are going to drive growth occur, we will -- we are right on track to drift to that exact range that we targeted. What you also know, of course, is that the LendCare portfolio that we are inheriting has a -- as we quoted before, the mid-single-digit loss rate performance. So the amalgam of those, of course, produces a charge-off rate that as we quoted before, it would be around 10%. And we will, of course, provide more clarity on what that consolidated portfolio looks like now and in the future, when we put out the new forecast projections in the next quarter.

And then my next question, maybe just on the liquidity. How you mentioned almost greater than the $600 million financial flexibility currently. Wondering relative to the Q3 2023 run rate for growth that you published last quarter, where do you stand today, factoring in the potential growth of the LendCare book over the coming years?

Gary, so I think we'll be producing as part of our Q2 financial outlook, we'll be providing that guidance in terms of the liquidity runway as we integrate the LendCare portfolio. What I would say though is that the balance sheet has been in the best position that it's been in quite a long time. As we look at securitization, in particular, we've received quite a bit of expression of interest from our syndicated banks that we deal with, and we would be looking to upsize our securitization facility over the coming quarters. And that will unlock additional liquidity. And of course, we have a multiyear runway that would be available to us. And so we would expect, notwithstanding the accelerated growth from both the goeasy business and the new LendCare business being integrated, that we'd have ample runway over the next 12 to 24 months.

And then my last question, maybe just a numbers questions just related to LendCare. On the corporate segment, will any of LendCare's corporate costs fall under there? Or will it all flow through in the easy financial side? And then any early read as to kind of what that day one credit provision might look like. I think you'll back that out on the adjusted EPS, but any color would be helpful.

Yes. Gary, so just in terms of the bifurcation of overall cost, we would expect that a portion of the LendCare costs would actually be attributed to the corporate segment. Typical things like back office, technology, admin, typical to what we currently do with our existing EFS and EH business on that front. In terms of the day one provision, we are still examining that, and we'll be looking to provide an update as part of our Q2 earnings.

Gary, just to add to that. I think in terms of trying to model, what does the provision rate look like for the business. You obviously have a good grounding as to where the provision rate of our existing business lies today. I think you can safely say that the provision rate on the portfolio we're acquiring from LendCare, similar to our business, is going to be approximately the annualized charge-off rate. So if you're using, again, a mid-single-digit provision rate on the growth associated with the portfolio we're acquiring. That will give you, on a weighted average basis, some sense and direction as to what that combined provision rate is likely to be. But as Hal said, we do have some work ahead to still complete our analysis and merge all the financials and then be in a position to provide a new consolidated provision rate at the end of next quarter.

Yes. And Gary, maybe just to bolt-on to that, as you might know already that LendCare was on ASPE reporting and will be required to convert them over to IFRS. So there's some additional work to be done on that front as well.

We have our next question coming from the line of Stephen Boland with Raymond James.

Just a follow-up to that last question because, I guess, when I go back to your previous 3-year guidance in that 10.5% to 12.5%, to average even to 10.5%, you have to assume a pretty, I won't say steep, but you're getting into the 10%, 11% to 12% to get to that 10.5% average for the year. What's the real driver of that? Is that -- is it government subsidies kind of falling off? Is it growth in the portfolio, as you mentioned? Or what would be the real cause if you think of that rate coming up pretty quickly over the next several quarters?

Yes. So really, the same factors that we've seen cause the lower level of losses over the last period of pandemic that are having the inverse correlation on growth. So as consumers get more comfortable living in a state of the pandemic or as they come out of lockdowns and return to more normal spending behavior, cars go back on the road, and they begin to break down again. Summer camps look like they're now opening back up and families have to put kids in camp. All of those normal spending matters are what drive both the demand for credit and contribute to a more normal spending pattern that results in a standard probability of default for any given segment of customers. We've modeled our credit tolerance to be such that the velocity of customers we approve and the credit profile of those customers we approve would have a normal run rate of losses in that 10.5% to 12.5% range. So therefore, if the environment is more normal, regular, normal behaviors in terms of spending and financial household liability, that should be the range that our portfolio operates at. And we intentionally try to manage the credit risk and optimize for that range because we think that's the way in which we maximize the combination of velocity and ultimately, returns for the business. We could, of course, tighten credit criteria further and slow the rate of the change in the rate or even bring down further the standards go forward right on that portion of the portfolio, but that wouldn't be in the best long-term interest of the business. So it's ultimately the reality of that over the next several quarters, we should see, in fact, we hope of correction because that would be the correction that also is going to lift and drive overall loan growth.

And maybe just a second, another piece of your guidance was the opening of locations. It was 20 to 25 for 2021. I think you did 3 in this quarter. Obviously, COVID may be still impacting that. Is that prior guidance still achievable, that 20 to 25? Like should we expect an acceleration for the remainder of the year?

Yes. I think we'll still be in good shape to get to that range. As you noted, COVID, particularly in the first little bit of the year here have slowed down some of that expansion effort. We will be heavily back-end weighted in the year in terms of new locations. The vast majority of the locations that we have planned for this year, we've already got leases signed up. We've got contractors assigned. So our real estate expansion plan is only being held up in the short-term just as it relates to the complexities of dealing with health and safe protocols and lockdowns related to COVID. So as soon as those lockdowns start to subside in the next, which should be hopefully a few months, depending on of course the province, that will allow us to get in and quickly complete the real estate build-out. So there might be a small bit of delay. But I would say, generally speaking, we're still on track in the back half of the year to get to or very, very close to our real estate expansion plans.

Our next question is coming from the line of Patrick Lauziere with Fiera Capital.

I think that was a mistake. I don't have a question.

There are no further questions on the queue. I will now turn the call over to Jason Mullins for additional comments.

Well, thanks, everyone, for joining our Q1 earnings release call. We appreciate your ongoing supports, and we look forward to updating everyone when we release our second quarter results in August, where we'll have the opportunity to showcase the combined consolidation of the business. And as noted, provide new long-term forecast for the organization. I hope everyone has a fantastic day. Thank you very much. Bye now.

This concludes today's conference call. Thank you for participating. You may now disconnect.