Montfort Capital Corp. (MONT) Earnings Call Transcript & Summary

Good morning, and welcome to the Annual General Meeting of the Shareholders of Montfort Capital Corporation. My name is Howard Atkinson, and I am the Chairman of Montfort. A couple of housekeeping items. This is our first AGM in Toronto since the inception of the company. Happy to be here kind of reflects the direction of the company and the way it's going in terms of different verticals, a little bit more to the East from where we started with Vancouver. And so I think this is a great step to have a meeting in Toronto not to say that we wouldn't be back to Vancouver sometime. And certainly, we've got a very valuable business there. Andrew will talk a little bit about the different verticals that we're involved with. One other item, well, this is being broadcast and will be on our website later today or tomorrow for viewing. We do have [indiscernible] interactive, but there is a chat function on Zoom. And if you have any questions for those of you online, please send them in at any time during our presentation today, we'll address them at the question-and-answer period. Andrew Abouchar, our Interim CEO, will take those questions and direct them appropriately. If we can't get through all of them, we'll get back to you with an answer by posting, okay? Get started. I will act as Chairman, and I will appoint Andrew Abouchar, Montfort's Interim Chief Executive Officer, to act as Recording Secretary of this meeting. And I will appoint Roxanne Parsaud of Computershare Investor Services, Inc. to act as scrutineer of the meeting. The scrutineer has provided me with a preliminary report regarding shareholder acceptance -- or the attendance, excuse me, at the meeting. The scrutineer reports that there are present at this meeting in person or by proxy 21 shareholders, holding 36,737,422 common shares, representing 40.06% of the outstanding common shares. The articles of the company provide that a quorum for the transaction of business at a meeting of shareholders is 2 persons who are -- or who represent by proxy shareholders who, in the aggregate, holds at least 5% of the issued shares entitled to vote at the meeting. Accordingly, I declare that the requisite quorum of shareholders is present, and I declare that the meeting is duly and properly constituted for the transaction of business. I direct that the confirmation of mailing of the notice of the meeting received by Computershare and the scrutineers' complete report on attendance be annexed to the minutes of the meeting. The Secretary has advised me that the notice calling this meeting, together with the form of proxy and management information circular, have been sent to each director of the company, its intermediary and registered holder of common shares of the company of record on April 6, 2023, over the record date for this meeting. Accordingly, unless there is an objection, I will dispense with the reading of the notice of meeting. I further declare that the meeting is regularly called and properly constituted for the transaction business. If any registered shareholder present has previously deposited a proxy with Computershare Trust Company of Canada for use of this meeting, and that shareholder wishes to personally vote the shares represented by the proxy, then that proxy must now be withdrawn. Any registered shareholder wishing to withdraw his or her proxy should now speak to the scrutineer.

Didn't see any.

Before commencing with the business of the meeting, I would like to explain the voting procedures to be followed at this meeting. There are several matters that must be dealt with during this formal part of the meeting. In order to expedite these matters, I as Chairman, will be making the motions and reading the resolutions to be put forth to the body of this meeting. In accordance with the articles of the company, motions need not be seconded. Motions once proposed will be followed by discussions in the floor. In accordance with the Business Corporations Act British Columbia, registered shareholders and proxy holders are deemed to be present at the meeting. Only registered shareholders and proxy appointees present at the meeting shall be entitled to vote on matters put forth before the meeting. In the event of poll is requested, votes will be counted by ballot, and each shareholder and proxy holder will be entitled to 1 vote for each share held by such shareholder or represented by proxy. The first order of business is the presentation of the company's audited financial statements and the auditor's report thereon for the year ended December 31, 2022. These statements have been reviewed and approved by the company's Board of Directors. Unless specifically requested, the auditor's report will not be read at this meeting. I now present and table these financial statements and the auditor's report thereon. If there's no discussion regarding the audited financial statements or auditor's report, I shall consider them received by the shareholders as submitted to the meeting. The Interim CEO will now give us an overview of the financial statements and entertain any questions thereon. Andrew?

Thanks, Howard. Thank you to all you for joining. Thank you to PwC for allowing us to [indiscernible] their boardrooms, fabulous and also be great work getting us through the audit and thank you, especially to our -- the audit team that truly work tirelessly. We delivered separate audit opinions across 4 entities with a bunch of other nonaudited statements and other reports. So it was truly a remarkable -- all of which, by the way, this is the first time it's ever been consolidated, and we were doing a system change at the same time. So needless to say, organization worked tirelessly to get it done. And, well, we're just grateful that we see the end line, I think they did a great job. This company is not the same as a company we talked about last year. During the year, we closed 2 acquisitions, Langhaus Financial was closed at the start of Q4, Brightpath halfway through Q3. Our loan portfolio, our book, if you will, increased 250%. Our total revenue increased 200%. And the change to the way we account for some limited partnerships meant that they would no longer be consolidated as of December 31. I'm going to share with you some balance sheet overview. There's lots of detail in the financial report, which is available on SEDAR, if you're interested, if you want to dig into it. Certainly, I'm happy to entertain specific questions. Of note here, the goodwill number has increased dramatically, primarily as a result of the acquisitions here. Goodwill is the difference between the book value of a company and the purchase price, and the book value of lending operation is -- typically is confined to a few debts and shares. So there tends to be a fairly high level of goodwill and intangibles. You can see the increase in our book there on Line 2 of the loan book. That was the 200% increase that I was talking about. A few lines downward says debentures and co-investment obligations, you'll note that those were extinguished during the period. And in fact, that 2 will and the next 4, that 2 will disappear as well. The line below that noncontrolling interest is also interesting. This is the term that we use for the assets that are owned by other people. In last year, the $30 billion were owned by the limited partners of TIMIA LPs I, II and III. Due to the accounting change that I mentioned earlier is now 0. We're no longer consolidating those entities. And the reason for that is that when we consolidate that we increase assets, we increase income. But the company -- the shareholders of the company doesn't actually have ownership of that -- those assets or income. So it doesn't make too much sense for us to do that. So on to the income statement. Our revenue grew 3x, 3.2x over last year, and our operating income grew 1.5x. Remember, this is not a full year consolidate -- or a full year consolidation of those new entities because we only known for a quarter. It's interesting to note that our operating income this year is 14% of revenue versus 31% last year in fiscal '21, probably worth unpacking that a little bit. Noncash charges were up as a percent of revenue. I'm going to describe all of these things as a percent of revenue to try and normalize because of our dramatic growth. Our ECL, or expected credit loss, is up as a percent of revenue a little bit, too. The primary driver of the relative reduction in income was interest costs as a percent of revenue. The obvious answer to this is that the interest rates have gone up, but there's a more subtle reason as well. In both fiscal '21 and '22, we -- as I mentioned earlier, we had fully consolidated our revenue partnerships. That meant that not all of the -- not all of our cost of capital was interest. Some of our cost of capital was in the form of distributions to limited partners. You can see that in the second from bottom line, it says noncontrolling interest. About $3 million in both years -- $3.3 million in both years was distributions that were paid to limited partners. So as you can see, the $3 million that was capital cost, so to speak, but not included in interest would be much higher as a percentage of revenue in year fiscal '21, that would be in '22, simply because our mix has changed. So a long way of saying, the change in the revenue -- or the operating income as a percent of revenue is primarily driven by the mix of the assets that we hold. Interestingly, our -- all other costs, our SG&A as a percent of revenue were actually down 9%, which I think points to the opportunity for some scale. Net income, the exciting part is that net income for common shareholders increased $1.3 million from a loss of $760,000 to a profit of almost $600,000 in the year. And remember, we only had these new investments for a quarter. I think that's all I got for the statement for now I'll pass it back to the Chair.

Great. Thank you, Andrew. And again, a reminder, if you do have a question, please submit it to the chat function, I assume if you're joining us remotely. The next item of business is the fixing of the number of directors of the company at 9. In order to complete the formal business of the meeting as quickly as possible, I, as Chair of the meeting, will make each motion relating to the matters set forth in the notice of this meeting. Accordingly, I move that the number of directors of the company be fixed at 9. Is there any discussion on this motion? I then pass for a vote. I showed hands on the motion on the favor. [Voting]

Contrary, if any? [Voting]

I declare the motion carried. The next item of business is the election of a Board of Directors. Currently, the Board of Directors consists of 9 directors, as previously stated. There are 9 nominees for election as director. They are Howard Atkinson, David Demers, Andrew Abouchar, Paul Geyer, Jan Lederman, Thealzel Lee, Robert Napoli, Ken Thomson and Blake Albright. All are continuing nominees and I'm consented to act as directors of the company. The articles of the company contained advanced notice requirements regarding the nomination of persons for election as directors. Management advises that no further individuals were nominated for election as directors in accordance with the articles of company. As a result, I consider that nominations closed. Accordingly, I move that Howard Atkinson, David Demers, Andrew Abouchar, Paul Geyer, Jan Lederman, Thealzel Lee, Robert Napoli, Ken Thomson, and Blake Albright be elected as Directors of the Corporation for the ensuing year. Is there any discussion on this motion? Then I ask for a vote by show of hands. on favor. [Voting]

Contrary, if any. [Voting]

I declared the motion carried. As registered shareholders or proxy holders you're entitled during -- Next order of business is to appoint auditors to hold office until the next Annual General Meeting and to authorize the directors to fix their remuneration. I move that PricewaterhouseCoopers LLP, chartered professional accountants, be appointed auditors of the company to hold office until the next Annual General Meeting or until their successors are duly appointed and that the directors be authorized to fix their remuneration. Is there any discussion on this motion? I then ask for a vote by show of hands on favor. [Voting]

Contrary, if any? [Voting]

I declare the motion carried. The final order of business is to pass an ordinary resolution ratifying and improving the company's existing equity incentive plan, as described in Page 27 of the information circular. I move that the ordinary resolution ratifying and improving the company's equity incentive plan in the form of resolution set forth on Page 27 of the information circular for this meeting be passed. Any discussion? I then ask for a show of hands on favor? [Voting]

Contrary, if any. [Voting]

I declare the motion carried. Lastly, is there any other business which shareholders would like to bring before the meeting at this time? Seeing any -- if there's no further business to be brought before the meeting, I move to terminate this meeting. All in favor? [Voting]

Contrary, if any? [Voting]

I declare the motion carried and the meeting terminated. Now I'll turn it over to Andrew Abouchar, our Interim CEO, to talk about the business strategy.

MONT on TSXV -- going fast, if I got some, our disclaimer. Before we get started, I'd like to thank the members of the Board who agreed to serve for another term. Thank you. Thank you for coming, and thank you for those. We had some members who unfortunately couldn't come today, make the trip from Vancouver, but thank you all. I'd also like to take the time to thank Mike Walkinshaw for his service. Mike and Greg Smith and Paul Walker started TIMIA Capital in 2015. I joined them in 2016. We had an office in Gastown that was on the third floor, it's a creaky old thing. We shared with the [ no end ] apartments, a whole variety apartments, and we had $10 million under management. From there, we started to build. We built credit adjudication systems, we built digital content systems. Mark Bakker joined us to build digital content systems. We built more management systems. We built everything focused on the idea that we could lend to recurring revenues software companies. Well, as most of you know, Greg Smith passed away a while ago of ALS. And the company has evolved. I'd like to take a minute to thank Mike for his early leadership because our tech lending practice still there, his fingerprints and I suspect always will. The company has evolved, though, from a single line, private credit provider to a few shareholders, few investors to what if I like to say is a provider of private credit strategies for institutional investors, mainly offices, and wealth managers. We have 4 different lines of business, 4 different strategies that we're offering to the market, bound together by the idea that investors are looking for attractive returns. They're looking for monthly pay, looking for liquidity and looking for transparency. We think it's a super attractive place to be. The private credit space is growing quickly. People are starting to understand that it's not just for institutions, it's profitable. We get -- we earn a lot of money for our investors and we get well paid for doing that. And that, of course, goes to the common shareholder. And our returns, the returns in our investment vehicles are uncorrelated to the stock market. So you can rest easy knowing that the stock market will do it's thing and your monthly check -- Brightpath will send you your monthly check every month. And unlike every other real estate strategy in the country, Brightpath never miss to pay. We think there are 2 vectors of growth for the common shareholder for the value of the common share. Clearly, the growth in assets under management is important. Our AUMA, as we call it, assets under management and administration. We believe there's growth in existing strategies. It's my personal belief that each one of our strategies could be $0.5 billion before we're done with them. And there's enough growth. We're going to add new strategies. Historically, we've added them through acquisition. We acquired Pivot, we acquired Brightpath and we acquired Langhaus. But we can also think about incubating them. We have a project underway right now where we think there's an interesting space in the market that's untapped and we're looking about looking at and we build a fund around that and we put the capital together around that. It sounds common intuitive at least probably well known to us that if you're asking for $1 million, you pay 1 price. If you're asking for $10 million, you pay a little less. If you're asking for $100 million, you actually pay way less than you did for $1 million. We're now at the point where we need to consume capital in the $100 million and $200 million chunks. We believe that it's available at lower cost. So that's another opportunity for the value to accrue to the common shareholders. I love this chart, I love this chart. This chart is what we did last year. You can see in Q3, you can see the step is obviously due to the acquisition of -- the closing of the acquisition of Brightpath. In Q4, closing of the acquisition of Langhaus in terms of our assets under administration. And the revenue growth is a beautiful curve. I think the Q4 probably represents -- is probably closer to our run rate than the average. And of course, we need to make money for shareholders. We like adjusted net income because through the course -- as I mentioned earlier, through the course of acquisitions, we actually have a bunch of intangible assets on our balance sheet and they get amortized. So it's an intangible asset that gets amortized over the space of 3 to 5 years, a noncash charge that ends up on the balance sheet that doesn't really reflect the earning power of our organization. So we prefer to think about our adjusted net income for shareholders. And Q3 and Q4 had a bunch of acquisition costs associated with them. We know how lawyers like to charge. So that's all embedded in those numbers. And so we think that we're on the right trajectory. Consolidated net income as per the financial statements, I'll leave you to [ produce ] that. I love our space. I love the private credit space, I think it's a great place to be. It's not without risk. Our current economic environment is something that weighs on everyone's mind. I pulled this chart from the [indiscernible] Federal Reserve. It shows the year-over-year change in credit available across lines of business in the United States. If you pull the chart in Canada, it will be the same. Bumping along until Q3 of last year, and then, it fell off the cliff. So you might think, hey, that sounds pretty bad, right? But in reality, for us, it makes an attractive business proposition. As liquidity in the bank and the banking system contracts, the appetite for capital from alternate lenders grows. We're seeing across our lines of business, we're seeing stronger deal flow, stronger companies, stronger credits and better pricing. I think it's true -- it's safe to say that in spite of our cost of capital rising due to variable interest rates, our spread, the difference between our cost of capital we lend has also -- should be careful what I say because one of our noteholders are sitting out there wondering why he's not getting more interest. Now without risk, obviously, the key risk here is about matching variable interest rate again of our receivables versus variable interest rate against our loans payable. If they were too far out of whack, you would -- if our receivable balance was fixed rate and our loan balance was a variable rate, you could quickly get into a loss position. We're very well matched here, not seeing that as a problem. Term risk is a little more subtle. Term risk doesn't matter till it matters just as Silicon Valley Bank. So when you have a mismatch in term, you can find yourself without cash in the worst possible time. You can see that our loans less than -- our loan receivables less than 1 year are larger than our loans payable less than. You can see that our long-term debt is largely that our loans receivable. But given that a lot of our receivables are maturing within 1 year, that is a manageable mismatch. And of course, everyone is always concerned about whether you're using too much debt, especially in our business. Our total debt to equity is 6.25x. So we have 6.25x more debt than we have equity. As most of you know, we invest off of our balance sheet. We do not use -- we invest through separate vehicles, special purpose vehicles that we call them. And a lot of the credit resides in those special purpose vehicles. So the interesting -- and while the accounting rules might say that we have to consolidate them onto our balance sheet, the interesting question is how much of that debt is actually the responsibility of the common shareholders or can become the responsibility of the common shareholders of Montfort Capital. 1.5x -- 1.44x to be [ that ], so not large. Now I just want to say we wouldn't end up a whole bunch of reputational risk, should we have issues downstream are not suggesting that, but it's important to recognize that from a leverage perspective, we're well in here. So up until the point I'm talking about the common shareholder and Montfort as a public entity. I thought it would be worth spending just a little bit of time talking about our product. We believe investors are looking for attractive returns. We believe they're looking for monthly aid. They're looking for liquidity. And with us, their returns are uncorrelated [indiscernible]. We think that's a pretty attractive proposition. We also can offer them 4 different lending products across the risk spectrum. Technology lending, we believe we get -- relative to our volatility, we do really, really well at 12 to 14 points. We think that's a really attractive return because our sharp ratio, if you will, our return relative to the risk associated is extraordinarily high. It is a traditional limited partnership. The rest of the instruments are promissory notes -- fixed rate promissory notes. Again, they pay monthly. And that's attractive return. If you go all the way to the -- to your right to Langhaus, you'll note that, that interest rate is a little lower than the rest. Why is that? That's because the risk that is involved in Langhaus is basically the risk that one of the big insurance companies in this country, Great-West Life, Manulife, Sun Life goes bankrupt because our counterparty in those transactions, those insurance loans are the big insurance companies. So when you think about us, when you position us on our risk and return relative to what else is out in the market, particularly in the alternative space, we think we stack up pretty well. In fact, relative to T-bills, you can pick up a few extra points of return without an appreciable increase of risk. I think that's all I have. Okay, that's all I have. Back to Howard. But I'm happy to take questions.