Management Discussion and Analysis March 31, 2014

Transcription

1 Management Discussion and Analysis March 31, 2014

2 The following management discussion and analysis ( MD&A ) provides information management believes is relevant to an assessment and understanding of the consolidated financial condition and consolidated results of operations of Element Financial Corporation (the Company or Element ) as at and for the three months ended March 31, 2014 and should be read in conjunction with the Company s unaudited condensed consolidated financial statements as at and for the three months ended March 31, 2014, and the audited consolidated financial statements and MD&A as at and for the year ended December 31, Additional information relating to the Company is available on SEDAR at and on the Company s website at CAUTIONARY STATEMENT THIS ANALYSIS HAS BEEN PREPARED TAKING INTO CONSIDERATION INFORMATION AVAILABLE TO MAY 13, CERTAIN STATEMENTS CONTAINED IN THIS REPORT CONSTITUTE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORDS MAY, WOULD, COULD, WILL, INTEND, PLAN, ANTICIPATE, BELIEVE, ESTIMATE, EXPECT, AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY, OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO INHERENT RISKS, UNCERTAINTIES AND NUMEROUS ASSUMPTIONS, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC CONDITIONS, RELIANCE ON DEBT FINANCING, DEPENDENCE ON BORROWERS, INABILITY TO SUSTAIN RECEIVABLES, COMPETITION, INTEREST RATES, REGULATION, INSURANCE, FAILURE OF KEY SYSTEMS, DEBT SERVICE, FUTURE CAPITAL NEEDS AND SUCH OTHER RISKS OR FACTORS DESCRIBED FROM TIME TO TIME IN REPORTS OF ELEMENT. BY THEIR NATURE, FORWARD LOOKING STATEMENTS INVOLVE NUMEROUS ASSUMPTIONS, KNOWN AND UNKNOWN, RISKS AND UNCERTAINTIES, BOTH GENERAL AND SPECIFIC, WHICH CONTRIBUTE TO THE POSSIBILITY THAT PREDICTIONS, FORECASTS, PROJECTIONS AND OTHER FORMS OF FORWARD LOOKING INFORMATION MAY NOT BE ACHIEVED. MANY FACTORS COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT MAY BE EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS AND READERS ARE CAUTIONED THAT THE LIST OF FACTORS IN THE FOREGOING PARAGRAPH IS NOT EXHAUSTIVE. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ASSUMPTIONS UNDERLYING THE FORWARD LOOKING STATEMENTS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS INTENDED, PLANNED, ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED. ACCORDINGLY, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD LOOKING STATEMENTS OR INTERPRET OR REGARD FORWARD-LOOKING STATEMENTS AS GUARANTEES OF FUTURE OUTCOMES. EXCEPT AS MAY BE REQUIRED BY APPLICABLE CANADIAN SECURITIES LAWS, WE DO NOT INTEND, AND DISCLAIM ANY OBLIGATION TO UPDATE OR REWRITE ANY FORWARD LOOKING STATEMENTS WHETHER ORAL OR WRITTEN AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 1

3 Overview Element is an independent financial services company that originates, co-invests in and manages assetbased financings with operations in both Canada and the United States ( U.S. ). Element originates the financing of a broad range of equipment and capital assets by way of secured loans, financial leases, conditional sales contracts and operating leases. Element originates the vast majority of its equipment financings through its employee sales force, which focuses on both equipment vendors and direct equipment users. Element distinguishes itself from traditional lenders such as banks and finance companies in that it: offers select, asset-based financing services rather than providing full-service lending; originates primarily through its own vendor and direct end user relationships; and funds its activities through commitments from institutional investors rather than accepting deposits from the public. The Company has assembled a deep and experienced leadership team that has capitalized, and is poised to continue to capitalize, on the continuing recovery of the North American equipment finance industry. Through its legacy and recently acquired businesses, the Company has established strong platforms across multiple lines of business in the asset and equipment finance market place. The Company plans to continue to grow its business organically, but will also continue to capitalize on new opportunities for business acquisitions where the Company believes it is beneficial and accretive to earnings. Further, as the Company continues to grow organically and through acquisitions, it will continue to capitalize on increasing economies of scale allowing it to reduce overall operating costs while increasing and diversifying its funding sources throughout Canada and the U.S. The equipment financing industry is the second largest provider of debt financing to business customers and consumers after banks and credit unions. In general, the Canadian equipment finance industry is served by three main industry participants: independent lease finance companies like Element (including subsidiaries of U.S. based commercial leasing companies), captive finance companies owned by the manufacturers and distributers, and Canadian banks and credit unions. The Company s revenue consists primarily of finance income earned on originated asset-based financings ( finance receivables ) net of amortization of lease origination costs, and rental revenue earned on equipment under operating leases, net of depreciation and related fees. Direct costs consist mainly of interest on secured borrowings including amortization of deferred financing costs. Deferred financing costs are costs incurred by the Company to secure financing for the transactions. These costs are capitalized, deferred and expensed over the life of the underlying secured borrowing facility. Operating expenses consist of salaries, wages and benefits, general and administrative expenses, and share-based compensation. 2

4 The Company funds the acquisition of finance receivables using its senior revolving credit facility, secured borrowing facilities and cash flow from operating activities. Element currently operates in two distinct verticals of the North American asset-based finance market: (i) commercial finance and (ii) corporate finance. To serve these market verticals, Element has organized its activities and operations around four core business verticals: (i) Commercial and Vendor Finance (formerly Element Finance); (ii) Aviation Finance (formerly Element Capital); (iii) Fleet Management (formerly Element Fleet); and (iv) Rail Finance. Commercial and Vendor Finance The Company s Commercial and Vendor Finance vertical services the mid-ticket finance segment of the equipment finance industry. The mid-ticket finance segment involves financing for the acquisition of equipment ranging in value from approximately $10,000 to approximately $5,000,000. Commercial and Vendor Finance originates its equipment finance assets in specific segments of the equipment finance market, with a current focus on the transportation and construction, commercial and industrial, healthcare equipment, golf equipment, technology equipment and office products sectors. To assure the quality of its equipment finance assets, Commercial and Vendor Finance emphasizes the creditworthiness of the end-user or borrower, the value of the financed assets and the creditworthiness of the vendor. On November 30, 2012, the Company acquired all the outstanding shares of CoActiv Capital Partners, Inc. ( CoActiv ), a U.S. vendor finance company, with Canadian operations. The CoActiv transaction was an important step in Element s growth strategy and provided a platform which allowed Element to serve the sales financing needs of equipment manufacturers that are active on both sides of the Canada- U.S. border. As in Canada, Element s principal competitors in the commercial finance segment of the U.S. market include banks, captive finance companies and independent finance companies. On January 18, 2013, the Company acquired all of the outstanding shares of Nexcap Finance Corporation, a Canadian vendor finance company based in Burlington, Ontario. The Nexcap acquisition was a tuckin acquisition that provided Element with supplemental origination volumes derived from various vendor finance relationships with leading Canadian technology and transportation equipment manufacturers in Canada. The Nexcap acquisition strengthened Element s direct financing and vendor financing support to equipment dealers, distributors and manufacturers in the Canadian market and provided a portfolio with a particular focus on technology and transportation equipment. 3

5 Aviation Finance Aviation Finance originates large equipment financing and leasing transactions that range in size from $5 million to $150 million or more with a duration ranging from 36 to 120 months. These transactions typically apply to the financing of a single high-value asset, such as corporate jets and/or helicopters. Aviation Finance originates these larger, longer-duration aviation financing transactions through its teams of knowledgeable aviation industry finance specialists who have established networks of contacts with both manufacturers and end users. On December 19, 2013, the Company acquired a portfolio of helicopter leases for $242.7 million as well as the related customer lists from General Electric Capital Corporation. The portfolio acquisition and associated customer list acquisition add further scale and scope to Aviation Finance s position in civil aviation equipment financing and leasing. Fleet Management Fleet Management s core business is providing vehicle fleet leasing and management solutions and related service programs to Canadian companies, including service cards, remarketing, maintenance management and accident services. Fleet Management was established as a new vertical following the completion of the acquisition of TLS Holdings Inc. ( TLSI ), the holding company of Transportaction Lease Systems Inc. ( TLS ) on June 29, At the time of the TLS acquisition, the acquired company was Canada s fourth largest fleet leasing company and provided Element with a portfolio of more than $430 million of lease assets. The acquisition accelerated Element s growth through the addition of its established origination platform and through the creation of extensive cross-selling opportunities for Element s existing clients. Fleet Management enhances the diversification of Element's operations by providing a low risk earnings stream that is complemented by significant fee based revenue. On June 28, 2013, the Company acquired the assets of GE Capital s Canadian fleet portfolio ( GE Portfolio ) and its related operational resources. At the time of acquisition the GE Portfolio provided Element with a portfolio of more than $480 million of lease and loan assets. In addition, the Company entered into Strategic Alliance Agreement (the Strategic Alliance ) with GE Capital Fleet Services. Under the Strategic Alliance, the two companies will collaborate primarily on the pursuit of Canada/U.S. cross-border fleet management opportunities. As a result of this acquisition, Fleet Management now manages close to $1 billion in finance assets and is now the largest vehicle fleet leasing business in Canada. 4

6 Rail Finance Rail Finance provides railcar leasing through vendor financing programs. Rail Finance was launched in December 2013 when the Company entered into a strategic alliance agreement with Trinity Industries, Inc. ( Trinity ) to provide lease financing for up to $2 billion worth of railcars over two years. Railcar leasing is characterized by leases and assets that have longer term and lessees with strong credit quality. In addition, the strategic alliance with Trinity enables the Company to enter the railcar financing segment with limited investment in overhead and a low operating expense base required to grow and manage the portfolio. Since the inception of the strategic alliance agreement, Element has acquired $684.6 million in rail car leases from Trinity, including $111.7 million on December 19, 2013, $441.7 million on January 28, 2014, and a further $131.2 million on March 27, Market Trends According to the Canadian Finance & Leasing Association (the CFLA ), approximately 20% of all equipment sold in Canada is financed by leasing, with approximately 60% of the industry s customers being small and medium-sized businesses. Historically, capital expenditures in Canada have grown at a cumulative average growth rate of 3.6% over the last 20 years. The 2008 global credit crisis severely impacted the Canadian equipment finance industry. From 1999 to 2006, capital expenditures on Canadian machinery and equipment grew steadily with volumes reaching $109.6 billion. Leasing market penetration rates also peaked in 2006 at 22%, representing new lease 5

7 volumes of $24.1 billion. Between 2007 and 2009, the market experienced a reduction in both capital expenditures and leasing market penetration. Specifically, capital expenditures dropped from $114.4 billion to $101.2 billion, with leasing market penetration rates also falling from 20.8% to 13.0%, representing new lease volumes of $23.8 billion and $13.2 billion, respectively. However, in 2010 both capital expenditures and leasing market penetration began to recover with capital expenditures increasing to $103.0 billion and leasing market penetration rates increasing to 15.13%, representing new lease volumes of $16.0 billion. Statistics Canada reported machinery and equipment capital expenditures to be $105.1 billion in 2011 and $107.7 billion in 2012, demonstrating continued recovery from the lows experienced during the global credit crisis. Data published by Statistics Canada (Catalogue no X 2014) estimates that capital spending on machinery and equipment in Canada grew by 0.1% in 2013 to $107.8 billion from $107.7 billion in the previous year. Approximately 75% of this spending was concentrated in Ontario, Alberta and Quebec with one third of it attributable to three sectors Mining and oil and gas extraction; Manufacturing; and Transportation and warehousing. For 2014, Statistics Canada forecasts intentions for capital spending on machinery and equipment in Canada to rise by 3.9% to $112.0 billion with spending in Ontario, Alberta and Quebec increasing at a faster rate of 5.4% and spending in the top three sectors of Mining, Manufacturing and Transportation increasing at 6.4% over the previous year. In terms of the competitive landscape, the Company believes that the 2008 global credit crisis resulted in a number of U.S.-based participants exiting or curtailing activities in the Canadian market. Since 2008, there has been a reduction in the number of participants overall within the Canadian market. This includes both subsidiaries of large-cap U.S.-based equipment finance companies that scaled back operations in order to refocus on core operations and independent domestic participants that were unable to access new capital given tightened funding terms and conditions. During the 2008 global credit crisis, certain Canadian financial institutions seized upon the industry disruption to expand their equipment finance capabilities by acquiring independent Canadian equipment finance companies which further consolidated the industry. Examples of this trend include: the acquisition by Royal Bank of Canada ( RBC ) of the leasing business of MCAP Commercial LP, Leasing Business, a Canadian equipment financing provider; Canadian Western Bank s acquisition of National Leasing Group Inc., which specialized in equipment leasing for small to mid-sized transactions and had a Canadawide platform; RBC s acquisition of ABN AMRO Bank N.V. s Canadian equipment finance business; and the acquisition by RoyNat Inc. a subsidiary of the Bank of Nova Scotia, of Irwin Commercial Finance Canada, Irwin Financial Corporation s small-ticket equipment leasing business in Canada, to create RoyNat Lease Finance. These market conditions have narrowed the range of alternatives available to equipment manufacturers, dealers and distributors seeking to secure independent vendor financing sources to facilitate the sale of capital equipment to their customers. 6

8 The 2008 global credit crisis also seriously impacted the US$827 billion equipment finance industry in the United States resulting in the withdrawal of many competitors, particularly in the small and mid-ticket leasing segments which have seen significant decreases in market participants. Since the credit crisis, many banks and other traditional commercial financing sources have focused on re-capitalizing their balance sheets and been unable or unwilling to create the systems and business processes that are essential to effectively serve the needs of equipment manufacturers, dealers and distributors with comprehensive vendor financing solutions that can be delivered seamlessly across North America. Small and mediumsized businesses, which are the principal users of vendor financing programs offered by equipment manufacturers, continue to be constrained in terms of their ability to access traditional supplies of capital required to replace aging and underperforming equipment. As a result, small and medium-sized businesses continue to rely on lease financing to acquire needed equipment and there is significant unfulfilled demand for equipment financing within these segments. The US Bureau of Economic Analysis ( BEA ) data for 2012 show nominal equipment and software investment of US$1,374 billion for the private and public sectors. The Equipment Finance and Leasing Association s U.S. Equipment Finance Market Study reports that the economy-wide propensity to finance equipment and software was estimated to be approximately 56 percent ($0.56 of every dollar of equipment and software in use in the United States is leased or financed). The size of equipment finance industry in the US is estimated by multiplying the propensity to finance by the total equipment and software investment. Accordingly, the equipment finance industry is estimated to have increased to US$776 billion in 2012 from US$709 billion in 2011 and is forecast to have grown by 6.6 percent to US$827 billion in 2013 and is expected to grow a further 4.0 percent in 2014 to US$860 billion. 7

9 The Equipment Leasing and Finance Association reported new business volumes in the U.S. increased 16.5% in 2011 and 16.4% in 2012 after experiencing significant declines in 2009 (-30.3%) and a weak recovery in 2010 (+3.9%). Year-to-date, for the first quarter of 2014, the Monthly Leasing and Finance Index published by the Equipment Leasing and Finance Association, reports that new business volume increased by six percent versus the same period last year. The Company believes that it is well positioned to realize opportunities for increased profitability and to capture market share due to these improving market trends. 8

10 Key Performance Indicators Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include new origination volume, net investment in finance receivables, financial revenues, average yields, interest expense, interest cost of debt, net finance income, adjusted operating expenses and net income. We evaluate our performance on these metrics by comparing our actual results and normalized results to management budgets, forecasts and prior period performance. Key Initiatives The last three years were transformational years for Element. The Company secured an industry leading and experienced management team, built a capital structure and secured an infrastructure capable of executing on its growth plan. The Company has grown organically, through acquisitions, and has expanded into new business verticals, including fleet management, railcar financing and aviation financing. During the three months ended March 31, 2014, the Company continued to execute on its growth plan through the following initiatives: On January 28, 2014, the Company completed its second portfolio acquisition of railcar leases for $441.7 million. On March 7, 2014, the Company issued 5,126, % cumulative 5-Year Rate Reset Preferred Shares, Series C [ Series C shares ], at a price of $25.00 per Series C share for gross proceeds of $128.1 million. On March 27, 2014, the Company completed its third portfolio acquisition of railcar leases for $131.2 million. On March 31, 2014, the Company entered into a multi-year program with Celadon Group, Inc. ( Celadon ), one of the largest transportation and logistics companies in North America, whereby the Company will provide financing for the renewal and expansion of the transportation assets operated by lessees under contract to Celadon. As part of this transaction, the Company acquired an initial portfolio of equipment leases for $58.6 million. 9

11 Description of Non-IFRS Measures Our unaudited condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and the accounting policies we adopted in accordance with IFRS. These unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at March 31, 2014 and December 31, 2013, the results of operations, comprehensive income and cash flows for the three months ended March 31, 2014 and March 31, Management uses both IFRS and Non-IFRS Measures to monitor and assess the operating performance of the Company s operations. Throughout this MD&A, management uses the following terms and ratios which do not have a standardized meaning under IFRS and are unlikely to be comparable to similar measures presented by other organizations: Adjusted operating expenses Adjusted operating expenses are equal to Salaries, wages and benefits and, General and administration expenses. Adjusted operating expenses provide an indication of the cash settled expenses of the Company during the period. Adjusted operating income Adjusted operating income reflects Income before income taxes, Business acquisition costs and Sharebased compensation. Management believes that this measure is the most appropriate operating measure of the Company s performance as it excludes business acquisition costs and share-based compensation which do not relate to maintaining operating activities and which would have been previously capitalized under Canadian GAAP. Adjusted operating expense ratio Adjusted operating expense ratio is calculated as the adjusted operating expenses divided by average earning assets outstanding throughout the period. The adjusted operating expense ratio is used by the Company to assess the efficiency of the management of the Company s earning assets. Adjusted operating income on average earning assets Adjusted operating income on average earning assets is the adjusted operating income for the period divided by the average earning assets outstanding throughout the period, presented on an annualized basis. 10

12 Adjusted operating income on average common shareholders equity Adjusted operating income on average common shareholders equity is the adjusted operating income for the period divided by the average common shareholders equity outstanding throughout the period, presented on an annualized basis. After-tax adjusted operating income After-tax adjusted operating income reflects the adjusted operating income after the application of the Company s statutory tax rates. After-tax adjusted operating income per share After-tax adjusted operating income per share reflects the after tax adjusted operating income divided by the basic weighted average number of common shares outstanding during the period. After-tax adjusted operating income on average earning assets After-tax adjusted operating income on average earning assets is the after-tax adjusted operating income for the period divided by average earning assets outstanding throughout the period, presented on an annualized basis. After-tax adjusted operating income on average common shareholders equity After-tax adjusted operating income on average common shareholders equity is the after-tax adjusted operating income for the period divided by average common shareholders equity outstanding throughout the period, presented on an annualized basis. Allowance for credit losses as a percentage of finance receivables Allowance for credit losses as a percentage of finance receivables is the allowance for credit losses at the end of the period divided by the finance receivables (gross of the allowance for credit losses) at the end of the period. Annualized loss rate or Annual loss rate The annualized loss rate or annual loss rate is equal to the Charge-offs, net of recoveries recorded through the allowance for credit losses during the period divided by the average finance receivables outstanding throughout the period, presented on an annualized basis. The annualized loss rate is used by the Company to assess the percentage of the finance receivables portfolio that incurred losses during the period. In addition, the Company utilizes the annualized loss rate as an alternative measure to the provision for credit losses as it excludes the effect of provisions for (reductions in) the allowance for credit losses during the period which may not coincide with the actual timing of write-offs and recoveries. 11

13 Average cost of borrowing Average cost of borrowing is equal to interest expense divided by the average debt outstanding during the period and is presented on an annualized basis. The average cost of borrowing provides an indication of the average interest rate that the Company pays on debt financing. Average debt outstanding Average debt outstanding is calculated as the daily weighted average borrowings outstanding under all of the Company s secured borrowings facilities throughout the period. Average common shareholders equity Average common shareholders equity is calculated as the daily average common shareholders during the period. Average net financial margin yield Average net financial margin yield is the net financial income divided by average earning assets outstanding during the period provided on an annualized basis. Average net financial margin yield provides an indication of the effective net yield generated on the earning assets before deductions for all other operating expenses and of the net margin generated on the portfolio of earning assets. Average portfolio yield Average portfolio yield is financial revenue divided by average earning assets in the period. Average portfolio yield provides an indication of the effective yield generated on the earning assets before deductions for financial, operating, transaction costs and income tax expenses. Average outstanding earning assets or average earning assets Average outstanding earning assets or average earning assets is the average earning assets balance outstanding during the period and is calculated at the lowest denominator available for each type of assets. Average outstanding finance receivables or average finance receivables Average outstanding finance receivables or average finance receivables is the average finance receivables net investment balance outstanding during the period and is calculated at the lowest denominator available for each type of assets. 12

14 Average equipment under operating leases Average equipment under operating leases is the daily weighted average equipment under operating leases outstanding during the period and is calculated net of accumulated depreciation. Common shareholders equity Common shareholders equity is total shareholders equity less principal face value of the preferred shares outstanding. Earning assets or total earning assets Earning assets is the sum of the total net investment in finance receivables and total carrying value of the equipment under operating leases. Financial leverage or financial leverage ratio Financial leverage or financial leverage ratio is calculated as total debt excluding trade payables and accrued liabilities outstanding at the end of the period, divided by shareholders equity outstanding at the end of the period. Financial leverage refers to the use of debt to acquire/finance additional finance receivables and provides an indication of future potential ability to increase the level of debt when compared to specific industry-standard and or existing debt covenants. Financial revenue Financial revenue is the sum of Interest income, Rental revenue, net, Other revenue items, net of the provision for credit losses. Financial revenue provides an indication of the total revenues before consideration of interest expenses. Free operating cash flow Free operating cash flow is after-tax adjusted operating income, adjusted for components of After-tax adjusted operating income not affecting cash including net change in deferred tax liabilities, and provisions for credit losses, less actual charge-offs, net of recoveries during the period. Free operating cash flow per share Free operating cash flow per share is calculated as Free operating cashflow divided by the basic weighted average number of common shares outstanding during the period. 13

15 Gross average yield Gross average yield is equal to financial revenues before provision for credit losses divided by average earning assets outstanding throughout the period, and is presented on an annualized basis. Gross average yield provides an indication of the yield earned on earning assets before consideration of credit losses. Gross interest expense Gross interest expense is equal to interest expense before amortization of deferred financing costs as reported for the period. Gross interest income Gross interest income is equal to interest income before amortization of lease origination costs as reported for the period. Net interest income and rental revenue, net before provisions for credit losses Net interest income and rental revenue, net before provisions for credit losses is equal to total interest income and total rental revenue, net less total interest expense and excludes provisions for credit losses as reported for the period. Net interest income and rental income before provisions for credit losses provides an indication of the gross interest and rental revenues from earning assets, before consideration of credit losses. Operating expense ratio The operating expense ratio is calculated as total operating expenses divided by average earning assets outstanding throughout the period. The operating expense ratio is used by the Company to assess the efficiency of the management of the Company s finance receivables portfolio and equipment under operating leases. Other revenue items Other revenue items consist of syndication fees, fees and other income and gains/losses on foreign exchange. Portfolio average remaining life (in months) Portfolio average remaining life (in months), is the average remaining life in months of the outstanding finance receivables at the end of the period. 14

16 Provision for credit loss as a percentage of average finance receivables The provision for credit loss as a percentage of average finance receivables is the provision for credit losses during the period as recorded on the statements of operations divided by the average finance receivables outstanding throughout the period, presented on an annualized basis. Rental revenue, net Rental revenue, net is equal to rental income earned on equipment under operating leases, less depreciation. Total revenue or Financial revenue Total revenue or financial revenue is equal to the sum of total interest income and rental revenue, net, and net of amortization of origination costs, deferred subsidies and deferred upfront fees, and other revenue items less provision for credit losses. Total revenue provides an indication of revenue generated by the Company before consideration of all expenses. 15

17 Operating Lease Accounting As disclosed in the Unaudited Condensed Consolidated Interim Financial Statements as at and for the three months ended March 31, 2014, the rail cars acquired under the Trinity vendor program and certain aircrafts acquired as part of the GE Helicopter portfolio purchase of December 2013, are now being accounted as operating leases. Management believes it is crucial for the reader of the Company s financial statements to have a greater understanding of the accounting implications for the Company of reporting lease assets under two distinct accounting methods as dictated under existing accounting standards. As a result, we are providing additional and comparative analysis of the accounting resulting from both a finance lease, which until December 31, 2013 represented the totality of the finance assets owned by the Company, and an operating lease. The accounting specifics of an operating lease are as follows: An operating lease is one that does not transfer substantially all of the risks and rewards of ownership to the lessee. Operating leases entered into by the Company are reported as Equipment under operating leases and the underlying asset are carried at cost less accumulated depreciation and are being depreciated to their estimated residual values using the straight-line method over the estimated useful life of the assets. Rental revenue on operating leases is recognized on a straight line basis over the lease term and is being reported net of depreciation as Rental Revenue, net. Equipment under operating leases is reviewed for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds the higher of the asset s fair value less costs to sell and its value in use. During the quarter ended March 31, 2014, the Company completed the review of the lease classification of two separate portfolios acquired in December 31, As a result, an amount of $239,005 initially reported as Finance Receivables as at December 31, 2013, has been reclassified as Equipment under operating lease during the current quarter. Accounting differences between an Operating lease and Finance lease: There are several key differences between accounting for operating leases and finance leases that are relevant to the Company, the most significant of which relates to the timing of income recognition. As the lessor of an operating lease, the Company records revenue on a straight-line basis over the life of the contract, with the revenue typically equal to payment received from the lessee during any given period. Operating lease accounting also requires the Company to record the underlying asset on its balance sheet and amortize the asset in accordance with the related deprecation policy. Operating lease revenue is presented on the Company s statement of operations net of the related amortization amounts. For the Company, operating lease accounting will result in essentially straight-line revenue recognition over the life of the operating lease contracts. As the lessor of a finance lease, the Company s investment represents a finance receivable and income on that investment is accounted for as interest income, 16

18 producing a constant rate of return on the finance receivable balance over the life of the contract. For the Company, operating lease accounting results in the deferral of income to future years. While the economics of a transaction accounted for as a finance lease do not differ from the economics of the same transaction accounted as an operating lease, the accounting results are quite different. We are providing the following high level income recognition comparative of a finance lease versus an operating lease asset: Assumptions Equipment cost: $100,000 Annual lease rate (as % of equipment cost) 9.51% Annual rental payment $9,760 Useful life of the Asset (in years) 35 Scrap value (as % of original equipment cost) 30% Year 1-5 Finance Lease Operating Lease Rental revenue $48,800 Depreciation $10,000 Rental revenue, net $38,800 Interest income $47,201 Total income reported $47,201 $38,800 Year 5-10 Finance Lease Operating Lease Rental revenue $48,800 Depreciation $10,000 Rental revenue, net $38,800 Interest income $46,233 Total income reported $46,233 $38,800 Year 1 to 35 Finance Lease Operating Lease Rental revenue $341,600 Depreciation $70,000 Rental revenue, net $271,600 Interest income $271,600 Total income reported $271,600 $271,600 17

19 As per the above exhibits, the economic benefits over the life of the asset are the same (same cash flows at the same periods of time) but the accounting and the resulting revenue recognition is quite different. Under a finance lease, only the interest income related to the lease is recognized into income on an actuarial basis which as a result, reports higher income in the beginning years of the lease as the principal amount of the lease is higher. Under the operating lease accounting model, the revenue being reported is the fixed monthly rental net of the depreciation expense which results in a fixed amount over the term of the lease. The accounting differences are only that and have no impact on the economics of the transaction or the cash flows which in both cases are the same. In the above example of an asset with a useful life of 35 years, it is only in the later years (namely and beginning in year 23) that the income curve becomes inverted and where the rental income exceeds the interest income amounts. As a result of the operating lease accounting, the Company is technically deferring for accounting purposes, a large portion of its income to the later years especially in situations where the useful life of the asset is very long as is the case for both rail cars and aircrafts; the economics are the same and so are the cash flows from the transaction. 18

20 The financial impact of the application of operating lease accounting for the quarter ended March 31, 2014 is an approximate $3.3 million in reduced accounting income reflecting after-tax earnings per share impact of $ As stated above and as seen from the above chart, this reduced income is essentially only deferred to future years when it will reverse back into income. The introduction of operating lease accounting also has the effect of inserting variation in some of the performance statistics and ratios as the lease assets and average lease assets are now being reported and computed on a different basis and this variation will be seen throughout this document. Variations will also continue as the mix of assets under each of these accounting policies change from period to period. 19

21 The following table provide a reconciliation of non-ifrs to IFRS measures related to the Company: $ thousands (except % and per share amounts) As at and for the three months ended March 31, 2014 December 31, 2013 March 31, 2013 Reported and adjusted income measures Net income (loss) Adjustments: Share-based compensation Amortization of intangible assets from acquisitions Integration costs Transaction costs Provision (recovery) of income taxes Adjusted operating income Provision for taxes applicable to adjusted operating income After-tax adjusted operating income A 15,836 (278) 4,685 4,194 4,212 1,452 1,026 1, ,000 14,560 5, ,567 B 26,302 20,359 12,043 (5,647) (5,322) (3,399) C 20,655 15,037 8,644 Selected cash flow amounts Free operating cash flow D 26,139 19,857 12,315 Selected statement of financial position amounts Finance receivables, before allowance for credit losses (1) E 2,996,601 2,774,299 1,497,598 Allowance for credit losses F 11,086 11,071 10,010 Finance receivables, net (1) G=E-F 2,985,515 2,763,228 1,487,588 Equipment under operating leases (1) H 813, ,055 Total earning assets I=G+H 3,798,995 3,002,283 1,487,588 Average earning assets, net J 3,365,598 2,454,446 1,396,197 Secured borrowings K 2,467,016 1,893,910 1,033,181 Average secured borrowings L 2,182,433 1,752,400 1,085,630 Total shareholders' equity M 1,610,781 1,446, ,913 Preferred shares N 243, ,000 Common shareholders' equity O=M-N 1,367,621 1,331, ,913 Average common shareholders' equity P 1,356, , ,946 (1) Prior periods have been reclassified to conform to the current period presentation for equipment under operating leases. 20

22 Free Operating Cash Flows The following table provides a reconciliation of Free Operating Cash Flows. Free Operating Cash Flows and Free Operating Cash Flow per share are important statistics to more fully understand the profitability of the Company. As an equipment lessor, the Company benefits from differences in the accounting and the tax basis of assets resulting, in most situations, from accelerated permitted tax depreciation over the depreciation recorded for accounting purposes. In other words, the Company is benefiting for its ability to defer cash income taxes over long periods of time. Based on the continued growth of the Company s book of lease assets and the current mix of these lease assets, it is expected that no cash taxes would be payable over the next five or so years. In addition, the Trinity rail vendor program is expected to substantially increase the deferral of any cash income taxes due to the rapid tax acceleration of depreciation versus accounting and the size of the program itself. As a result, using pure accounting EPS to assess the Company s performance does not at this time reflect the value creation provided by the tax benefits resulting from the growth in the Company s deferred tax liabilities especially once this cash saving/origination is being leveraged. The Company has therefore elected to provide this additional disclosure going forward as it essentially represents a closer estimation of operating results. $ thousands Free operating cash flows After-tax adjusted operating income As at and for the three months ended March 31, 2014 December 31, 2013 March 31, 2013 C 20,655 15,037 8,644 Items not affecting cash Increase in net deferred tax liabilities 5,647 5,322 3,399 Provision for credit losses, net of charge-offs and recoveries (163) (502) 272 Free operating cashflows D 26,139 19,857 12,315 Free operating cashflow per share [basic] D/R

23 Non-IFRS and IFRS Key Annualized Operating Ratios and per Share Information: $ thousands (except % and per share amounts) As at and for the three months ended March 31, 2014 December 31, 2013 March 31, 2013 Free operating cashflow per share [basic] After-tax adjusted operating income per share [basic] D/R (C-T)/R Key annualized operating ratios Financial leverage ratio K/M Average financial leverage ratio L/P Allowance for credit losses as a percentage of finance receivables Adjusted operating income on average common shareholders equity Adjusted operating income on average earning assets After-tax adjusted operating income on average common shareholders equity After-tax adjusted operating income on average earning assets F/E 0.37% 0.40% 0.68% B/P 7.76% 8.33% 10.45% B/J 3.13% 3.32% 3.45% C/P 6.09% 6.15% 7.50% C/J 2.45% 2.45% 2.48% Per share information Number of shares outstanding (including special warrants) Weighted average number of shares outstanding [basic] Weighted average number of shares outstanding [diluted] Q 189, , ,414 R 189, , ,711 S 194, , ,924 Cumulative preferred share dividends during the period T 2, Net income (loss) per share [basic] (A-T)/R 0.07 (0.00) 0.04 Net income (loss) per share [diluted] (A-T)/S 0.07 (0.00) 0.04 Book value per share O/Q (1) Prior periods have been reclassified to conform to the current period presentation for equipment under operating leases. 22

24 Selected Financial Information and Financial Ratios The following table summarizes key financial data to be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company as at and for three months ended March 31, 2014, December 31, 2013 and March 31, Such financial statements are prepared in accordance with IFRS and are reported in Canadian dollars. As at and for the three months ended (in $000 s for stated values, except ratios and per share amounts) After tax adjusted operating income (loss) per share (basic) (1) March 31, December 31, March $ $ $ Free operating cash flows per share (basic) (1) Financial revenue (1) 66,500 50,945 31,838 Adjusted operating income (1) 26,302 20,359 12,043 After tax adjusted operating income (1) 20,655 15,037 8,644 Income/(loss) before taxes 21, ,252 Net income/(loss) 15,836 (278) 4,685 Total assets 4,234,963 3,454,653 1,766,353 Finance receivables, net 2,985,515 2,763,228 1,487,588 Equipment under operating leases 813, ,055 Total earning assets 3,798,995 3,002,283 1,487,588 New originations 1,084, , ,251 Loan acquisitions 84,043 Secured borrowings 2,467,016 1,893,910 1,033,181 Average finance receivables (1) 2,811,352 2,398,255 1,396,197 Average equipment under operating leases (1) 554,246 56,191 Average earning assets (1) 3,365,598 2,454,446 1,396,197 Average debt outstanding (1) 2,182,433 1,752,400 1,085,630 Number of shares outstanding (including special warrants) 189, , ,414 Weighted average number of shares outstanding (including special warrants) 189, , ,711 Total shareholders equity 1,610,781 1,446, ,913 Average common shareholders equity (1) 1,356, , ,946 Net income (loss) per share [basic and diluted] (1) For additional information, see Description of Non-IFRS Measures section. 23

25 The following table summarizes key operating ratios to be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company as at and for the three months ended: As at and for the three-month periods ended March 31, December 31, March Ratios Financial leverage ratio (2) 1.53:1 1.31:1 1.73:1 Average financial leverage ratio (2) 1.61:1 1.79:1 2.36:1 Allowance for credit losses as a percentage of finance receivables (2) 0.37% 0.40% 0.68% Annualized credit loss provision as a percentage of average finance receivables (2) 0.43% 0.18% 0.46% Portfolio average remaining life (in months, excluding equipment under operating leases) (2) Adjusted operating income on average common shareholders equity (2) 7.76% 8.33% 10.45% Adjusted operating income on average earning assets (2) 3.13% 3.32% 3.45% After-tax adjusted operating income on average common shareholders equity (2) 6.09% 6.15% 7.50% After-tax adjusted operating income on average earning assets (2) 2.45% 2.45% 2.48% Book value per share (2) $7.22 $7.05 $4.75 (1) All are ratios presented on an annualized basis. (2) For additional information, see Description of Non-IFRS Measures section. 24

26 The following table summarizes the total finance receivable and equipment under operating leases originations by vertical for the three months ended: For the three months ended March 31, December 31, March 31 (in $000 s) $ $ $ Commercial and Vendor Finance Commercial and Vendor Finance Canada 141, , ,807 Commercial and Vendor Finance USA 160, ,378 34, , , ,008 Aviation Finance 96, ,366 51,131 Fleet Management 113, ,840 59,112 Rail Finance 572, ,717 1,084, , ,251 Three months ended March 31, 2014 Three Months Ended March 31, % 27.8% 8.9% Commercial and Vendor Finance Aircraft Finance 20.0% Fleet Management 17.3% Rail Finance 62.8% Commercial and Vendor Finance Aircraft Finance Fleet Management 10.5% Three months ended December 31, % 11.4% 31.0% Commercial and Vendor Finance Aircraft Finance Fleet Management Rail Finance 46.4% 25

27 Overall Performance Highlights Total originations were $1,084.0 million during the three months ended March 31, 2014, an increase of $787.7 million or 265.9% over the comparative three months ended March 31, 2013, and an increase of $86.8 million or 8.7% over the immediately preceding quarter. Total originations from the Company s Commercial and Vendor Finance vertical were $301.5 million, an increase of $115.5 million or 62.1% over the $186.0 million generated during the comparative three months ended March 31, 2013, and a decrease of $7.7 million or 2.5% compared to the $309.2 million generated in the immediately preceding quarter. Total originations for the Fleet Management vertical were $113.4 million during the three months ended March 31, 2014, an increase of $54.3 million or 91.8% over the comparable three months ended March 31, 2013, and was consistent with the immediately preceding quarter. Volumes in the Fleet Management vertical have increased year over year due to the customer relationships acquired as part of the GE Portfolio acquisition on June 28, Total originations for the Company s Aviation Finance vertical were $96.2 million during the three months ended March 31, 2014, an increase of $45.1 million or 88.2% over the comparable three months ended March 31, 2013, and decreased $366.2 million from the immediately preceding quarter which had benefited from the acquisition of the General Electric Capital Corporation s helicopter portfolio which contributed $242.7 million to the previous quarter s origination volumes. Excluding the acquired portfolio, originations were down $123.5 million over the prior quarter. As management has reported in the past, this business unit will not report even volumes over accounting periods due to the nature of the business. Aviation Finance continues to have a strong pipeline which is in excess of $2.4 billion at March 31, Total originations for the Company s Rail Finance vertical were $572.9 million for the three months ended March 31, 2014, an increase of $461.2 million or 412.8% over the immediately preceding quarter due to the acquisition of two additional tranches of railcar leases acquired under the Trinity vendor program during the quarter. Rail Finance was launched in December 2013, when the Company entered into a strategic alliance agreement with Trinity Industries, Inc. to provide lease financing for up to $2 billion worth of railcars. The Company s earning assets, consisting of the Company s Finance receivables and Equipment under operating leases, have grown substantially during the year ended March 31, 2014 to $3,799.0 million from $3,002.3 million reported at December 31, The growth over December 31, 2013 is primarily due to the combined effect of the total new originations for the year in the amount of $1,084.0 million, helped by the large contribution of the recently introduced Trinity vendor program, net of repayments, syndication activities and amortization of equipment under operating leases for $312.6 million, and others increases of $25.3 million. 26