Timbercreek Financial Corp
TSX:TF
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Timbercreek Financial Corp
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Welcome to Timbercreek Financial's 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 Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone. Thanks for joining us to discuss the first quarter financial results. As usual, I'm joined today by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications.
During the first quarter, we were able to generate solid income levels and deliver on our monthly distribution while navigating a near-term reduction in the average mortgage portfolio.
As we discussed in our last earnings call, we were intentionally cautious through much of 2023, and the lower portfolio balance also reflects 2 quarters of significant repayments including the repayment of the large Quebec City portfolio in early January 2024.
As you're evaluating the year-over-year financial results, this lower average balance was the primary factor in the reduced top line income versus last year's first quarter, which represented a high watermark over the previous 2 years. Conversely, interest expense on our credit facility was much lower, allowing us to largely maintain net income margins.
In terms of the specific highlights, net investment income was $24 million versus $32.7 million last year. Q1 net income was $14.4 million versus $18.1 million last year. And we generated distributable income of $15.8 million or $0.19 per share within our typical range, a healthy payout ratio of basically 90%.
We also paid a special dividend to the first time in the quarter. And after paying this out, our book value per share was still modestly higher year-over-year to $8.39 versus $8.37 in Q1 '23. We'd also highlight that our current book value is roughly 15% above the weighted average trading price in Q1.
As Scott will outline, there was a strong first quarter for originations, which allowed us to grow the portfolio from a year -- from year-end levels. Importantly, we remain optimistic that a stable interest rate environment in 2024 will promote increased commercial real estate activity and present attractive risk-adjusted return opportunities for us to expand the portfolio back to historical levels over the course of the year.
Lastly, our team continues to make good headway on Stage 2 and Stage 3 loans in the portfolio. As we have shown, we're actively managing these situations to ensure the best outcomes for our shareholders. That remains a key focus in the coming quarters.
With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions.
Thanks, Blair, and good afternoon. I'll comment on the portfolio metrics, the progress with Stage 2 and Stage 3 loans and the improving lending environment in 2024.
Looking at the portfolio KPIs, at quarter end, 85.7% of our investments were in cash-flowing properties compared with 86% at the end of 2023. Multiple residential real estate assets, apartment buildings continue to comprise the largest portion of the portfolio at 54.6% compared to 56.5% at the end of 2023. The portfolio remains conservatively invested. First mortgages represented 85.7% of the portfolio compared to 88.9% in Q4. The lower percentage here is primarily due to the denominator effect of the recent first mortgage payoffs as well as a second mortgage advance.
Our weighted average loan-to-value for Q1 was 64.4%, down from 65.6% at year-end as new loans were funded with lower LTVs, while loans with higher LTV were discharged.
Portfolio's weighted average interest rate or WAIR was 9.9%, down slightly from 10% in Q4 and up from 9.7% in Q1 last year. Our Q1 exit WAIR was 9.9%, down slightly from 10% exiting Q4. Overall, we are pleased to see the average loan-to-value declining in the portfolio as we reinvest in more conservative loans while maintaining high margins in the current market environment.
It was a busy quarter for transaction activity. Total mortgage portfolio repayments were high at $167.1 million, 3/4 of which reflected the desired repayment of the Quebec City portfolio in early January 2024. This led to high turnover in the quarter of 19.4%, similar to Q4 levels. The portfolio typically turns over 50% per year, so these are higher-than-normal rates. For the most recent quarter, turnover was only 4.7% outside of the Quebec City portfolio.
At the same time, repayments create capacity for new investments. To that end, Q1 was a strong originations quarter with nearly $200 million in new mortgage investments and additional advances on existing mortgages. Q1 is typically a more competitive quarter as other institutional investors put that capital to work in real estate. So we're especially pleased with this level of activity early in the year.
As stability returns to the market, commercial real estate transaction volumes should broadly rise, and this is an attractive environment for Timbercreek to grow the portfolio back to normalized levels. Our pipeline has been growing with attractive risk return investment opportunities, and we believe 2024, 2025 will be excellent investing vintages as the market has reset from previous valuation highs.
In terms of the asset allocation, the mix between provinces changed significantly in Q1 due to the Quebec City repayment, which reduced the Quebec weighting to 16% from 29% at year-end. And we had strong deployment in Ontario during the quarter, bringing Ontario exposure to 45%, up from 32% at year-end. We're very comfortable with the higher Ontario weighting at present and pleased to have the capacity to redeploy into Quebec. Generally speaking, the portfolio is divided into thirds between Western, Central and Eastern Canada.
As Blair mentioned, we continue to make meaningful progress on the Stage 2 and Stage 3 loans in the portfolio. We have expanded disclosure on these loans in our MD&A, so I will focus my comments on the key developments and larger loans.
On the Stage 3 loans, we completed the sale of the largest of the stage loans, and we were fully repaid all principal and all accrued interest in January. This materially reduced the Stage 3 balance.
We've also made progress on the multifamily asset under construction that was part of an earlier CCAA process. The property is nearing completion, with expected occupancy this summer. The owners have injected fresh cash equity into the project to restart construction and leans are close to being fully cleared. We anticipate the loan returning to Stage 1 this quarter, at which point we will begin funding the balance of the construction advances.
In terms of the Stage 2 assets, these include 3 office properties and 1 retail property with the same sponsor in Calgary, representing $54.7 million. During the quarter, we moved 2 of these loans from Stage 3 to Stage 2, so all 3 are now in stage 2. And all these 3 loans now have collateral enhancement via equity pledges on proceeds from the sales of other assets owned by the borrower. We have forbearance agreements in place with the borrower, while the borrower focuses on leasing and optimizing the asset to realize full repayment. Maturity dates have been extended to the fall of 2025.
In terms of other Stage 2 assets, the largest entry here relates to 3 loans comprised of 8 primarily retail properties in downtown Vancouver, totaling $110.3 million in exposure. These loans are all current, however, they were moved to Stage 2 while the borrower works on plans to sell assets to increase their liquidity position, which has been hampered by higher rates in the current environment.
The assets are well located in Vancouver retail buildings and also hold residential redevelopment potential. Forbearance agreements have been signed to provide enhanced security via across collateralization. Current business plan should result in individual asset sales over the next year and a resulting reduction in our exposure.
In summary, while there is more work to be done, our team is making great progress and remains confident both in the quality of the underlying assets and our ability to recover our investments through active management. As we resolve more of these and see the total stage loan balance decline, we look forward to focusing more of our discussion on new investments and the portfolio expansion.
I will now pass the call over to Tracy to review the financial results. Tracy?
Thanks, Scott, and good afternoon, everyone. As Blair mentioned, while it was a decent quarter, the year-over-year comparisons were impacted by a lower average portfolio balance from the large repayment in January. We were able to redeploy this capital and more by quarter end. For context, the average net mortgage investment portfolio balance for Q1 was $863 million versus almost $1.2 billion last year and $1.1 billion at year-end, which is a more typical level for us.
As a result, Q1 net investment income on financial assets measured at amortized cost was $24.6 million, down from $32.7 million in the prior year. While we have slightly higher WAIR year-over-year positively impacting the variable rate loans, this was offset by the lower average portfolio balance.
Fair value gain and other income on financial assets measured at fair value through profit and loss improved from a gain of $282,000 in Q1 2023 to a gain of $337,000 in Q1 2024. And we reported higher net rental income from real estate properties of $474,000 versus a loss last year, reflecting the higher real estate properties inventory from acquisitions mid-2023.
Net rental income was partially offset by a net rental loss on land inventory. Loan loss provisions for the quarter were $0.9 million versus $0.3 million in the prior year. The loan loss provisions primarily related to provisions for future interest due to increased time to access the Stage 2 and 3 loan positions.
Lender fee income was $1.4 million, down from $2.5 million in Q1 2023. Q1 net income was $14.4 million compared to $18.1 million in Q1 last year. And Q1 basic and diluted EPS were $0.17 versus $0.22 and $0.21, respectively, in the prior year. While the smaller portfolio balance impacted top line income, interest expense on the credit facility also declined significantly due to lower credit utilization, allowing us to maintain net income margin. Interest expense in the quarter was $3.9 million versus $7.6 million in the same period last year, basically half the amount.
We reported quarterly distributable income of $15.8 million or $0.19 on a per share basis versus $0.22 from last year's Q1. You can see from this chart that the per share DI is well within our historical range. And the Q1 payout ratio on DI was very healthy at 90.6%, reinforcing our ability to generate healthy cash flows and dividends.
During Q1 2024, we declared regular dividends of $14.3 million or $0.17 per share and a onetime special dividend of $5.75 per share paid in March for a total of $4.8 million.
Turning now to the balance sheet highlights. The net value of the mortgage portfolio, excluding syndications, was $977.5 million at the end of the quarter. This was an increase of about $31 million from the end of 2023. Despite of the healthy repayments, as noted earlier, reflecting strong origination activity as the team successfully redeployed capital from pre-rate type loans in those of current metrics. At year-end, we had $92.8 million of net real estate inventory, including land inventory of $30.6 million and net real estate properties inventory of $62.2 million, which is the 3 senior living facilities acquired in 2023.
We exchanged a mortgage investment of $54.4 million for ownership of the underlying collateral, which we intend to sell. Gross asset of $131 million is recognized in the real estate properties inventory on the balance sheet with a corresponding liability for the syndicate 50% share of the asset. You will find a detailed breakdown of this in note 5 of the financial statements.
The enhanced return portfolio increased by $3.9 million to $53.4 million from $59.4 million in Q1 2023, mainly reflecting new investments in Q4 2023. The balance of the credit facility from mortgage investments was $293 million at the end of Q1, up from $260 million at the end of 2023, meaningfully lower than Q1 last year, reflecting the higher repayments over the past 2 quarters and a more cautious underwriting position during those periods.
We expect the balance to revert to a more normalized range in the mid $400 million as the year progresses.
In February, we are pleased to review our credit facility for another 24 months. The facility includes a revolver of $510 million and an accordion auction of about $200 million. Shareholders' equity decreased modestly to $696 million at quarter end from $701 million at year-end 2023, reflecting the payments of the special dividend. The company's book value per share was $8.39 at quarter end versus a book value per share of $8.45 at the end of 2023. However, book value per share is up from $8.37 at this point last year, demonstrating our ability to pay a special dividend and for book value.
I will now turn the call back to Scott for closing comments.
Thanks, Tracy. Coming off of a challenging year where we maintained a cautious stance, we are feeling increasingly positive that 2024 will mark an inflection point for commercial real estate. As interest rates stabilize and likely decline in the quarters ahead, we are seeing buyers and sellers regain confidence in the market. We were able to deploy a substantial amount of capital in new investments during Q1, and we continue to see favorable conditions for us to expand the portfolio of historical levels this year. At this stage in the cycle, we can invest with attractive risk return profiles as valuations and borrower expectations have been broadly reset.
With respect to the stage loans, we made substantial progress in the past several quarters and expect realization and/or resolution on others during 2024. Our team continues to demonstrate the ability to effectively navigate these situations that unfortunately can occur with situations such as the rapid rise in rates.
With that, that completes our prepared remarks, and we'll now open the call to questions.
[Operator Instructions] The first question comes from Graham Ryding. Graham, your line is open.
Can you hear me okay?
Yes.
Great. Maybe just start with the portfolio, like how are you feeling about the potential growth here in terms of when you're thinking about this year, how much capacity do you have like $1.1 billion, $1.2 billion? Can you get the portfolio back up to that size this year, or what's your feeling?
I'm looking at Tracy, but I can answer too. Graham, I do think -- so we did have a lot of repayments. If I think about where our situation was, we had a lot of repayments in Q4. And then we had the repayment of the Quebec portfolio in Q1. That essentially all gets covered with reducing debt under the line. And so we do have ample capacity under the line to continue to grow. Talking to the originations team, we're quite pleased with the pipeline. And our repayment situation has gone back to, say, normal levels is what we're seeing right now, which is to be expected after a higher percentage.
So yes, I do think we'll be expanding the portfolio in the coming quarters. I think that $1.1 billion, $1.2 billion, that's exactly right in that range.
My next question would just be, I guess, there was a couple of developments here on sort of assets moving from Stage 2 to Stage 3. First of all, just the downtown Vancouver retail portfolio, what determines here that you're comfortable sort of putting these assets in Stage 2 versus Stage 3?
So the Vancouver portfolio, and again, [indiscernible] Tracy, the Vancouver portfolio was in Stage 1, just to clear where we're starting from. So we've just advanced it to Stage 2. So this is not in default. So it is not -- the 90 days plus default is sort of your definition of Stage 3. This isn't a default.
But Stage 2 is also -- the definition of Stage 2 involves loans that may have had a material segregation. And so from our perspective, we know the borrower just have a bit of a stressed balance sheet, right, because their interest rates have doubled over the past couple of years, and they have a fair number of -- they have a mix of income-producing assets and redevelopment assets.
And the redevelopment assets require equity injection to pay interest. And so the borrower is just -- their business plan is they need to sell some assets to create liquidity, and that is how they're serving to get themselves out of their current sort of situation. They're very strong assets, very well located downtown Vancouver. But we felt it was prudent to put this portfolio into Stage 2 because we know that the borrower needs to generate some liquidity through asset sales.
Graham, it's Blair. I'll just add to that. This is also a borrower we have a very long-term and positive relationship with. So we're confident he is acting in everybody's best interest.
Okay. Okay. And then -- that's helpful. Similar on the office properties in Calgary, like what was it that sort of triggered the move from Stage 3 back to Stage 2? Was it these equity pledges on the proceeds from sales that you expect to get? And then if that's it, what is your visibility on the potential sale there?
It's part of a that, Graham, and then we also -- it's sort of a wholesome forbearance agreements that were signed. So it's a combination of factors of a new agreed to interest rate, the borrower continued to inject capital into the assets that Blair just mentioned. And then we extended the term to 2025. So sort of reaching an agreement with the borrower on that strategy.
And then the borrower will now continue to lease the assets and to stabilize the underlying property NOI. And we are seeing green shoots in the Calgary market. But we're not anticipating sales in the next 12 months, likely more in the 18 to 24. But there needs to be a stabilization of the underlying property income first before we take those assets to market, the borrower, I should say.
Okay. So is it fair to say that the retail portfolio in Vancouver, you expect an earlier resolution to those assets versus the office properties in Calgary?
Yes, that's absolutely true. And with the Vancouver properties, it's multiple loans, multiple assets. So were as opposed to the Quebec City portfolio, which was a singular process that resolved at 1 time, this should be more of a step function depending on as assets come up for sale and close. We wouldn't anticipate getting parcel repayments sort of over the next 12 months, which is easier to manage from our perspective as well.
Our next question comes from Stephen Boland.
Can you hear me okay?
Yes.
Okay. Great. Just a couple of questions, maybe following on Graham's stuff. I mean 2023 obviously was a challenging year, but you seem to have come through it. Notwithstanding REITs moving up as high as it did in these durations of these mortgages that went Stage 2 and 3 were a little bit older, what has changed, if anything, on your underwriting process? Like is there anything that you've gained from this process? I mean are you going to lower LTVs? Are you avoiding certain segments, geographies? I'm just wondering, not so much about growth, just what about how you protect the downside, I think?
Yes, I know, it's funny. I would say, and I'm looking across at Geoff McTait here, our originations leader. We always underwrite every -- we do a full in-house underwriting of every asset we've ever been involved in. And so we obviously use third-party appraisal, but we have a very, very deep team involved soup to nuts from the beginning of how we source our loans through the underwriting process.
So while we get recourse and we -- sponsorship is a big focus of our initiatives of our focus when we underwrite assets, really that under -- the underwriting asset collateral and quality is a key part of how we like to lend. So when we go into sort of that pre-COVID condition or pre the interest rates going up in 2022, we're underwriting a 5%, 5.5% interest rates and cap rates are 4%, and that's the environment that you're in. We're doing our best to ensure that these are assets, hey, we think that there's NOI and NOI growth potential in the assets, Steve, and assets that we like.
We go through -- and sort of protect us essentially from what happened. So in 2023, when all of a sudden, there was a rapid rise in floating rates and rates went from 5% to 10% -- there's no question. Not a lot of underwriters are planning for that rapid of an increase. But what we feel good about is that we know at the end of the day, as there's problems, we hope our borrowers can work that out. But if not, we think that the assets are there to have that value. And as we work through our remedies and get to conclusion, that's why we feel good about our process and the track record we've been able to demonstrate as we sort of take loans through the stages through to payoffs.
And I think when we look at our process today, so I don't think that we're necessarily doing things differently because we are still a complete -- we do a complete level of macro and micro analysis that you would expect us to do. I think the difference is, though, for us and why we're sort of -- we really think how 2024 and 2025 is attractive is that the markets reset a bit.
So when you have a very, very strong middle innings of the real estate market, the borrowers demand a lot. There's a lot of lenders stepping up. Valuations are high, and it's just a more aggressive environment. I think, today, you're seeing a lot more hesitation. Buyers and sellers, prices are down a bit and lenders can just -- are a little bit more in the driver seat to demand a lower loan-to-value or increased structure more stronger sponsorship. So it's a variety of elements at this time of the cycle, which is sort of the lenders a little bit more in the driver seat, and that allows us to underwrite attractive loans.
Geoff, anything you want to add, or Blair?
Yes. I mean I think, obviously, don't disagree with anything you said there. I mean, obviously, the reality in the last couple of years on the rapid rise is something that, again, where and when we look at and think through and run our math again, we're focused on the exit. And the exit today within a higher interest rate environment is going to deliver less loan proceeds than it historically would have. So the potential there for us, certainly, I think we had a little incremental buffer on the back end to ensure that there's a baseline of comfort and room in the exit.
And obviously, yes, we -- as Scott said, we've always been very, very focused on sponsorship, network and liquidity, et cetera. Again, that's something that we're going to maybe look at an extra time or 2 as we go through. We see what's happened here where we understand the borrowers have. Maybe it too much construction, too much land, too much floating rate within the broader and higher analysis that we do to determine liquidity and stresses that could happen. Because again, the fundamental real estate underwriting that we've historically done hasn't changed. But again, obviously, the reality in the last couple of years is going to play into how we think about the world going forward and how we think about exposures that anyone grow to any combination of things. So we're definitely taking it as a learning opportunity for sure.
Again, we do a fulsome approach, and this is just new data that we incorporate into our analysis and how we underwrite and think about deals.
Steve, it's Blair. I'll just add a couple of quick things. And you and I have talked about this a bit, but so if we go back up to 30,000 feet, I mean, our style of lending is to support growth, right, as we talked about. So we're looking to help people acquire assets, invest in them and drive up rents, drive up NOI.
So to Scott's point, at the tail end of the cycle, the purchase prices were highly tuned, right? So rents -- you're still seeing growth, but it through a very tight margins. So harder to lend. Fast forward till now, and to your point about what's changed, what's changed is values have come off. So the pricing isn't quite as finally tuned as it was. So we're still looking to support growth, support people that are buying office to improve them, but there's just a little bit more room there.
And importantly, the V and the LTV is reflecting this reduction in values. It's different in different asset classes, but I don't think any would argue that the values are down over the past couple of years. So that makes it -- those are fundamental differences.
Okay. Well, that's good color. And Blair, again -- apologize if I've asked you this, but we're talking about growth again in 2024, 2025. You've locked in a lower overall credit facility for that time period. So are you comfortable that you're going to have the capacity if things go better than expected, just say, in 2025, that you're going to have room, even though I know you have an accordion. I'm just curious about the decision about reducing the credit line when we're talking about regrowing the business.
Yes. Look, I mean, our syndicate is really supportive. We, as a company, felt it made the most sense to modestly reduced the facility based upon the utilization. And obviously, there's standby fees for that sort of thing. We have capacity. Scott answered Graham's question a minute ago. We have capacity to get back to $1.1 billion, $1.2 billion, which is generally speaking, where we've operated.
As the fundamentals improve, Geoff and his team are happy there's going to be flow there. And if there's flow there, that generally means that the opportunity to continue growing will be there. I mean it's -- but it all has to balance, right? So we target a balance between a leverage ratio. So we're not going to continue to add debt without adding equity. So we'll see how the equity markets react to the business improving. And if we can grow the business, we love to, of course.
Yes. And I would just add to that, I mean, from my standpoint on the syndication front, which is kind of our other lever to drive incremental growth when we're fully utilized on the line. I think maybe last quarter, I referenced some constraints underlying some changes in [indiscernible] capital ratios, which could restrict our institutional syndicate partners from participating in more opportunities.
Those restrictions have been removed or clarified such that within the core space in which we operate, and again, primarily focusing on income-producing multifamily residential that the required capital ratios have returned to their historic levels, which creates a cost-effective and certainly an increased appetite and higher potential for us to go and syndicate more deals, which is again what we do to create incremental capacity beyond the availability of the bank line.
[Operator Instructions] There are no other questions at this time. So I'll turn the meeting back to Blair Tamblyn, for closing remarks.
Great. Thanks, everyone, for joining us today. We certainly appreciate your time. We look forward to speaking again when we release our Q2 results in about 90 days. In the interim, as always, please feel free to reach out to the team if you have any questions. Have a good afternoon.