Element Financial Corporation reported financial results for the three-month period ending March 31, 2014 with record originations of $1.1 billion contributing to a 27 percent increase in the Company’s total earning assets to $3.8 billion as at March 31, 2014 versus $3.0 billion as at December 31, 2013. After tax adjusted operating income increased by 37 percent to $20.7 million in the three-month period ending March 31, 2014 versus $15.0 million in the preceding period producing $0.10 of after tax adjusted operating earnings per share for the period in line with the consensus of analysts’ estimates.
“Element produced strong organic growth in the first quarter to set us on course to exceed our 2014 origination target of $3.86 billion,” said Steven Hudson, Element’s Chairman and CEO. “I am particularly pleased with the strong demand for new equipment that we are seeing coming out of the US market as businesses replace aging equipment stocks and acquire increased capacity across a wide variety of transportation assets from railcars, to highway trucks, to helicopters,” added Mr. Hudson.
The Company’s U.S. Commercial & Vendor Finance unit reported new originations of $160.5 million for the three month period ending March 31, 2014 versus $113.4 million originated in the preceding quarter. Originations from Element’s Canadian Commercial & Vendor platform were $141.0 million versus $195.9 million in the seasonally strong fourth quarter. Aviation Finance accounted for $96.2 million of Q1 originations, versus $462.4 million in the preceding quarter which had included a US$243 million contribution from the acquisition of GE Capital Corporation’s US-based helicopter portfolio. As previously noted, new business volumes in the Aviation Finance unit are expected to be uneven over quarterly reporting periods because of the high value nature of these assets. The Aviation Finance unit’s pipeline has expanded to $2.4 billion from $1.5 billion at the end of the preceding quarter. Element’s Fleet Management unit reported originations of $113.4 million in Q1 versus $113.8 million in the preceding quarter. The Railcar Finance vertical, which was established in December of 2013 following the launch of Element’s strategic alliance with Dallas-based Trinity Industries, contributed $573 million to Q1 originations versus $112 million in the preceding quarter.
“We are seeing significant incremental opportunities within our Railcar Finance unit as the industry accelerates the pace at which it expands and retrofits the North American railcar fleet,” said Mr. Hudson. “Our initial estimate is that the incremental capital investment for retrofitting alone amounts to more than US$3 billion, and we are positioning Element to capture share in this market,” added Mr. Hudson.
As a result of the growing volume of business generated by the Company’s Railcar Finance unit, equipment under operating leases now accounts for more than 21 percent of Element’s $3.8 billion portfolio of earning assets. While the payments are the same, the different accounting treatment attributable to operating leases versus financial leases results in the deferral of accounting income into future years. For the quarter ended March 31, 2014, the financial impact of the application of operating lease accounting is a deferral of approximately $3.3 million in accounting income or $0.014 in after-tax earnings per share.
Based on the continued growth of the Company’s book of leased assets and the change in the current mix of assets resulting from the addition of longer life assets, primarily railcars, the Company will not be required to pay cash taxes for more than ten years. As a result, the Company is now reporting free operating cash flow and free operating cash flow per share as additional metrics to more appropriately reflect the actual financial return of the overall. For the three-month period ending March 31, 2014, the Company reported free operating cash flow of $26.1 million or $0.14 per share versus $19.9 million or $0.12 per share for the preceding three-month period.
Financial revenue for the three-month period ending March 31, 2014 increased 31 percent to $66.5 million versus $50.9 million in the previous quarter generating net financial income of $45.0 million for the quarter versus $34.2 million in the preceding quarter. Adjusted operating expenses were $18.7 million for the quarter versus $13.8 million in the previous quarter resulting in adjusted operating income before income taxes of $26.3 million for the current quarter versus $20.4 million for the previous quarter. After tax adjusted operating income was $20.7 million versus $15.0 million in the preceding quarter.
Gross average yield on finance receivables was 8.26 percent for the period ended March 31, 2014 versus 8.47 percent for the immediately preceding quarter reflecting a slight shift in the mix of business. Financial revenue, net of depreciation expense from equipment under operating leases was 7.34 percent versus the 7.53 percent reported for the quarter ended December 31, 2013 again, a slight reduction resulting from the addition of a sizeable rail portfolio during the first quarter.
The Company’s adjusted operating expense ratio continued to decline during Q1 to 2.22 percent of average earning assets versus 2.26 percent in the preceding quarter. While the improvement was positive, the introduction of operating leases negatively affected this ratio due to the inherent deferral of income for this category of assets which reduces the value of the asset and thereby increases the expense ratios.
The Company’s average financial leverage ratio decreased to 1.61:1 for the quarter ended March 31, 2014 compared to 1.79:1 for the immediate quarter ended December 31, 2013 primarily as a result of the recent issuance of preferred shares in early March 2014. The effect of this de-leveraging resulted in a slight increase in the cost of borrowing to 3.95 percent during the quarter compared to 3.82 percent for the immediately preceding quarter from additional stand-by fees resulting from under-utilization of some of the Company’s credit facilities. At the end of the period, the Company had total available sources of capital of $1.37 billion versus $1.83 billion at the end of the preceding period.
“We have an under-leveraged balance sheet and more than $1.3 billion worth of available capital giving us more than enough capacity to fund the new origination growth that we foresee in our current business plan,” noted Mr. Hudson. “This capacity also has room to make us actionable on sizeable accretive acquisition opportunities that we continue to explore,” added Mr. Hudson.
Total assets increased to $4.2 billion at the end of the quarter versus $3.5 billion at the end of the preceding quarter and book value per share increased to $7.22 versus $7.05 reported at the end of the preceding period.
Delinquencies represented 0.39 percent of total finance receivables as at March 31, 2014 compared to 0.32 percent as at December 31, 2013. At the end of the period, the Company had 189.5 million common shares outstanding as well as 4.6 million preferred Series A and 5.1 million preferred Series C shares outstanding.
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