Timbercreek Financial Corp
TSX:TF
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Timbercreek Financial Corp
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Good day, ladies and gentlemen. Welcome to the Timbercreek Financial first quarter earnings call. [Operator Instructions] As a reminder, today's call is being recorded.I would now like to turn the meeting over to Cam Goodnough. Please go ahead.
Great. Thank you. Good afternoon, everyone, and thanks for joining us today to discuss our first quarter 2019 financial results. I'm joined by Gigi Wong, our CFO; Ugo Bizzarri, VP, Investments; Brad Trotter, VP, Origination and Asset Management; and Scott Rowland, Portfolio Management. Today, we'll provide a brief overview of the first quarter financial results and the current position of the portfolio. We'll conclude with a market outlook and a question-and-answer session.Well, it's certainly been an interesting start to 2019. We've seen the stock markets testing new highs with relatively large swings. You've seen capital continuing to see less correlated returns by investing in alternative investments with real estate capturing a significant component of those flows both equity and debt strategies.The Canadian commercial real estate market continues to be strong, almost uniformly. Rates, which most had predicted as recently as last year at least, only heading in one direction, seem to have taken a pause at a minimum. Bonds have stabilized. The yield curve has flattened. And the bank and pension fund commercial spreads have come down in the last 6 months or so.For us, Q1 was a reasonably active period during what is typically a slower quarter for the company from an originations perspective. The first quarter tends to see insurance companies and large funds deploying significant capital at the beginning of the year in order to ensure annual funding targets. As discussed on these calls for the prior few quarters, competition has had a pricing impact on the lower-risk segments of the commercial market.That said, we are seeing signs of rates normalizing in the multi-residential apartment market. This compares to pricing for higher-risk segments, such as land, which have risen. First mortgages on these types of loans can start with an [ 8 handle ] and even higher, but they come with more risk, and we largely shy away. Our team continues to evaluate attractive opportunities in all of our key markets, and we are adjusting to the competitive marketplace, ensuring we find the right transactions for the portfolio.On Slide 7, the mortgage portfolio was approximately $1.2 billion at the end of the first quarter, a 1.5% increase compared to year-end 2018 and an increase of about 8% year-over-year. We remain confident in the quality of our portfolio and our risk mitigation strategies. Our conservative positioning is evident in the following metrics. Our exposure to first mortgages was just shy of 93%. First mortgages on income-producing assets remain a core part of our strategy and defensive positioning. Our portfolio continues to have a material equity buffer with a weighted average loan-to-value or LTV ratio of 68.1% in the first quarter.Our weighted average interest rate on the total loan portfolio was 7.4% in the first quarter, up from 7% year-over-year 2018 numbers, which reflects the reinvestment and floating rate component in what has been a rising rate environment over that period of time at least. Our remaining term to maturity was 1.2 years, which is consistent with prior quarters. The short-term nature of the portfolio allows us flexibility in the dynamic localized Canadian real estate market.But rather than focus on a single point in time, let's take a look at macro trends in the portfolio since the merger of the junior and the senior mix at the end of 2Q 2016. If you recall at that time, our focus was on derisking the portfolio post merger. The gray line at the top shows the percentage of first mortgages within the company. At the end of Q3, the first quarter of the merged entity, there was a noticeable increase in first mortgages over the first 12 months or so, stabilizing in the low 90% range ever since.Over that same period of time, the yellow line at the bottom, the average LTV, increased modestly. And the weighted average interest rate or WAIR for short on the total portfolio point-to-point is the blue line. Point-to-point, it's been roughly flat. That said, the path has been anything but. Initially, we saw the WAIR fall post merger as we turned over second mortgages in the portfolio when we replaced them with first mortgages as we just discussed as part of the derisking strategy.Then it grows from a low of about 7% in Q1 2018 as we benefited from the rising rate environment through turnover and reinvestment in our loan book. The declining commercial real estate spreads Canada has experienced over the past 6 months or so have had a recent negative impact on the portfolio's WAIR. There's uncertainty how long this may last, but as always, we will continue to adjust and modify the portfolio to address market realities.Turning to Slide 9. We highlight a few more metrics supporting our portfolio strategy. We ended the first quarter with 86.2% of our investments, secured by income-producing assets. We continue to focus on urban markets, which represent 93.5% of the portfolio. This is a critical metric for us as it provides us and our borrowers the most liquidity and exit options despite where we may be in the real estate cycle. Multiunit residential is our strong suit, and our mortgages against this asset class comprise just over 46.5% of our investments.We continue to see strong deal flow. However, as I previously mentioned, competition from lending opportunities is seasonally strong in the first calendar quarter of the year, and Timbercreek will not compromise on underlying -- underwriting criteria in order to put money to work. We funded 14 new mortgages in the first quarter compared to 10 in the first quarter of 2018. And our net cash advances were $145 million compared to $174 million this time last year. While total loan advances, $155 million, and total loan repayments, $148 million, are off activity levels we saw in 2018, they continue to reflect a high level of activity.In fact, adjusting for approximately $280 million of total incremental capital added to the balance sheet in 2018, which averages to be about $70 million per quarter, activity levels are more or less consistent. The portfolio turnover in the quarter of 11.2% is in line within normalized quarterly turnover rates. Variability and turnover is largely a function of timing and size of repayments and capital deployment in a particular quarter. However, since the merger, turnover rates have increased as we've increased the active aspects of our portfolio management, calling lower-yielding loans by foreign institutional investors and from replacing with higher-rate loans.Turning to a couple of our portfolio investments that we have discussed in our financials and on previous calls. I'd now like to talk about the Saskatchewan Portfolio. We announced this quarter the sale of our $46.6 million portfolio, sometimes referred to as the Sunrise Portfolio, is currently underway. Since we took our equity position in the fall of 2017, we have made significant progress on this portfolio, both in terms of completing the build-out as well as vacancies.Second asset that we previously discussed was the largest contributor to our stage 3 asset category, the property we control as the mortgagee in possession. We recently put in place a new property management firm, started some property improvements and are seeing -- positively seeing activity at the property. We continue to review options and work to find a solution that stabilizes our investment and moves it out of the stage 3 category.Slide 12. The mortgage portfolio remains highly diversified with 128 loans and an average size of about $9.5 million. Multiunit residential remains our largest asset class at 46.5% of the portfolio, up from last quarter's 40.1%, although I would not infer from this any particular trend other than it remains our most important asset class. Office properties experienced the other major change in the quarter, down from 13.5% at year-end to currently 6.6%, which similarly should not be interpreted as a negative sentiment towards the office segment, but rather a natural ebb and flow in the portfolio.Looking at the portfolio by products. Our focus remains on the big 4. And changes in the mix between them was fairly flat with the exception of Alberta where our exposure fell from 20.9% at year-end to 16.8% due to portfolio turnover. We continue to see attractive opportunity in the province and benefit from limited competition as other lenders have pulled out or restricted their capital. As with elsewhere, we are focused on the major urban cities with the greatest liquidity.At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Net investment income increased 12% over the prior year as higher-average interest rate and an increase in lender fees recognized into income drove a $2.7 million increase in net investment income to $24.5 million. This compares to growth in the net mortgages investment portfolio of approximately 8% over the first quarter of 2018. Net income of $13.1 million for the first quarter of 2019 was up over 12% from Q1 of last year, consistent with the increase to net investment income.I will now take a closer look at the earnings and cash available for distribution. We recorded $0.16 in earnings per share on a basic and diluted basis in the first quarter of 2019, and distributable income was $0.17 per share. Our payout ratio on distributable income was 99.4% this quarter. In the first quarter of 2019, we realized relatively lower lender fees given the lower portfolio turnover. As Cam previously mentioned, turnover can be impacted by timing of capital deployments, repayments and renewals.Turning to Slide 16. We provide a high-level reconciliation between distributable income per share and earnings per share. The timing and quantum of lender fees have a significant impact. Please refer to our MD&A for a detailed reconciliation between the two metrics. Since the merger in 2016, our quarterly distributable income has remained relatively stable between $0.17 to $0.20 per quarter.Turning now to the balance sheet highlights at March 31. Since year-end 2018, our net mortgage assets increased by approximately $18 million. The balance of our credit facilities increased by $10 million to $519 million since the fourth quarter of 2018. Like other aspects of our business, there is some lumpiness in the balance of our credit lines tied to the timing to repayments and capital deployment. The enhanced return portfolio has decreased by about $11 million in the quarter due to repayments ending the quarter at 6.8% of the total loan portfolio.I will now turn the call back to Cam for closing comments.
Thanks, Gigi. We remain constructive on the commercial real estate market in Canada in 2019. Canada is a very localized market, and Timbercreek is agile enough to respond to changing market conditions. Our deal flow continues to be strong, and our repeat clients depend on us to provide flexibility and time and capital that meets their business needs. We will continue to focus on income-producing properties in urban markets, and we are resolute in our belief that we have a resilient underwriting model that can provide attractive risk-adjusted returns to investors over the long term. That completes the review of the first quarter.With that, we'll open the call to questions. Operator?
[Operator Instructions] Your first question comes from the line of Jeremy (sic) [ Jaeme ] Gloyn, National Bank Finance (sic) [ Financial ].
So just one question. And I apologize if I missed this in the opening remarks. I'm just wondering if there's been any strategies or thought around strategies in place to mitigate some of the pressure on the WAIR at this point? And how you expect that to support the weighted average interest rate as we sort of move through 2019 and beyond?
Yes. I think we obviously touched a little bit on that in our comments -- in our prepared comments, but I think it's a good question. I think it's obviously tough to judge at this point how long the pressure is going to be sustained. So you don't want to make any knee-jerk reactions that will affect you for the coming quarters. So with that said, I think we do want to balance -- you do need to balance where you're getting your -- the types of exposures you have in the portfolio.On the multires side, it is one of the lower-yielding asset classes. And so you have seen us -- you have seen a percentage number come down a bit absent, I think, this quarter. But you have seen it generally over the last few quarters come down a little bit as we're replacing it with other. But we do need to maintain some component of resi in that mix. The other thing you want to weigh that against is risk. I think the -- one of the tools in your tool belt would be to take on more risk and generate incremental yield that way. I think that's -- we've made a conscious effort not to do this at this point. Perhaps, Brad, you want to speak a little bit to that?
Yes. I mean we also extensively look at what's the best return on the equity we put in any loan. So in some cases, we'll put that on our line, and we've been working on optimizing the utilization of that line as well as potentially selling B-note and as you've seen the syndicated balance we have on the book. So the weighted average is also a mix as we have put more whole loan into the book as opposed to a B or a second. But you end up with the same or close to the same sort of net return on equity from that loan.
Okay. And just with respect to further downside. I mean there are floors in place on the sizable floating rate portfolio right now. Have you done the homework or the math to determine at what level of interest rates would further declines be beneficial no matter what? As in you'll earn a certain level of asset yield and the lower rates is going to help on the interest side. Is there a certain point where that downside risk is completely eliminated?
I'm not -- there's so many moving parts in a portfolio like this, as you can imagine. It's hard to isolate one factor to pinpoint an exact number. That's kind of the crossover point. What I would say is that they are all important, and the mix of the use of leverage and the type of leverages Brad is indicating between the use of syndications versus the use of the credit facility versus the use of a convert all factor into that, as does the asset mix, as does fixed versus floating. We are seeing some opportunities in some fixed rate debt. I would speculate at this point that the rate of acceleration in the floating rate component of our book is probably going to start to slow. It will still be positive on the upside, but through 2018 and early in 2019, you saw most of the turnover be placed from -- into floating rate. I think that, that pace will slow a little bit, as we're going to hit kind of a spacious level per floating. I don't whether, Brad, you had anything else you want to add there?
Yes. There's still a lot of demand for floating rate debt. We're seeing renewed interest in fixed rate in certain spots, to the extent that we can get the right premium for locking that in. I would say the duration of the book is fairly short. On average, I think we have a little over...
1.2 years.
1.2 years left in the book. Our average loans on the books for a little over 20 months. So a lot of what we pay attention to is how our spreads are performing, which are pretty strong in the mix. But if you -- without a dramatic spike one way or the other, the book will turn over, right? And so what we really are tracking is spread.
Right. Fair enough. And then, just last one for me and maybe just speak to how the competitive dynamics have shifted here, either with lower rates coming in and -- and some of the big banks doing a little bit more of this -- more activity in the space. It may be offset with some higher risks in the commercial market. Can you just speak to some of the competitive dynamics around those factors?
Sure. Maybe I'll ask Brad to do it.
Yes. The first quarter was pretty competitive. I think overall market activity is a little lower than it was in the fourth quarter. That was pretty frothy in terms of the transaction volume we saw. As Cam mentioned, a lot of institutional players kind of [ re-up ] at the beginning of the year, and that lower cost of capital comes in and starts to put a lot of pressure. Our largest competitor really at the end of the day is that lower leverage, lower margin debt with equity. That sponsor may stay with or look to lever up later in the asset's life. But I would say though we're a fair share. I mean the number of loans that we did in the first quarter was up year-over-year and -- was up year-over-year from the year before. So I think we'll continue to win if we use capital markets again to get to that right return on equity for the portfolio. And the ebb and flow from asset class to asset class is kind of more of a function of what's going on in the market than it is a particular strategy. So I wouldn't read too much into mix either. But it's always competitive, and we have a pretty competitive team, and we'll go win our fair share.
[Operator Instructions] Your next question comes from the line of Johann Rodrigues, Raymond James.
I just really had one question. I'm just wondering maybe a little bit more color, Cam, on this Sunrise stuff. Can you just kind of expand a little bit on where it is, what kind of stage it's at, and how stuff has kind of progressed versus what you guys -- or what Ugo underwrote back in the fall of '17?
For sure, Johann. Ugo, I know you're on mute, and you're traveling. Hopefully, you can come off mute and address it. Otherwise, I'll handle it.
Yes. It's Ugo here. Sunrise has performed well from an operation point of view. We started the year roughly -- when we first bought it, it was around 50% vacancy. Now we're down to 7%. And as currently as 2019, we're beating budget on the portfolio from what we had for this year. As the size of the portfolio, we ended up listing in beginning of April. It's listed in the market right now. There's about 26 BAs of its size, and it's getting listed in the market right now, and we're expecting offers to be coming in the next 2 or 3 weeks.
Okay. Perfect.
You should -- there will be additional time, correct, Ugo, between -- what people should anticipate between hopefully when we get those offers and when a closing might occur.
Yes. Under our normal sale process, there's usually 45 days of due diligence and then another 30 to 60 days of closing. So this is not necessarily going to get closed in the second quarter, but we anticipate that this will be closed in 2019.
There are no further questions. I will turn the call back to Cam Goodnough for closing remarks.
Thanks, operator. Again, I'd like to thank everyone for taking the time to participate on the call today. We look forward to updating you with our Q2 results in August. If there are any additional questions, please feel free to reach out to us directly. Thank you, again.
This concludes today's conference call. You may now disconnect. Thank you.