Timbercreek Financial Corp
TSX:TF
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Timbercreek Financial Corp
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Good day, ladies and gentlemen. Welcome to Timbercreek Financial's second 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. Thanks and good afternoon, everyone. My name is Cam Goodnough. Thanks for joining us today to discuss our second quarter 2018 financial results. I'm joined in the room today by Gigi Wong, our CFO; and Ugo Bizzarri, our VP, Investments; and by phone, Brad Trotter, our VP of Origination and Asset Management. Today, we'll provide a brief overview of the second quarter financial results and the current position of the investment portfolio. And we'll then conclude with a market outlook and a Q&A.It was an active investment period for the company. 14 new investments and advances were made in our mortgage portfolio, which totaled $160 million. The second quarter, once again, showed high portfolio turnover and syndication levels, which reflected our active portfolio management during the period. In the second quarter, we continue to build and expand our sources of new capital with the introduction of an at-the-market equity program, which allows the company to issue up to $70 million of new equity efficiently and accretively to book value. Similar to Q1, this transaction activity and active portfolio management resulted in strong distributable income in the second quarter. Q2 DI at $0.20 per share was the highest since the merger 2 years ago. Cash yields that support stable dividend in our main -- is our main portfolio management objective, and thus DI remains a metric to which we manage the business. As everyone's aware, accounting treatments can cause timing differences in earnings leading to some variability. If you look at year-over-year, EPS was down, reflecting several factors. And similar to what we discussed last quarter, things like an increased share count, the migration of the portfolio to lower risk first mortgages against a backdrop of rising rates as well as non-yielding investments in the portfolio exhibiting J-curve type returns, which could drag earnings in the short term but expect to be contributors down the line. And as we've stated before, we prefer to look at these investments on a total return basis and monitor them over a longer period of time than on a quarterly one.Overall, the portfolio performed well again this quarter, and we continue to meet our objective of delivering strong risk-adjusted returns from a high-quality portfolio. Of note, the average rate at quarter end was 7.4% for all loans, and it's in line with our expectations. This is up meaningfully since the start of the year. Additionally, most new loans year-to-date include floating rate coupons which, as of June 30, accounted for approximately 38% of the portfolio.Looking more closely at the key metrics for our net $1.1 billion mortgage portfolio. Our exposure to first mortgages was 92%, which is down marginally from Q1 but has been trending upward in recent quarters. First mortgages remain a core part of our strategy and defensive positioning.Our weighted average loan-to-value ratio was 68% in Q2, consistent with Q1 and roughly in line with our 70% LTV long-term expectation. Our weighted average interest rate on the total loan portfolio was 7.3% for the quarter, up from 7% in Q1 and 7.2% at this time last year.Our remaining terms of maturity was 1.1 years, slightly higher than last quarter. The short-term nature of the portfolio, combined with our increasing allocation to floating rate loans, positions us well for potentially rising rates.At quarter end, 84% of the investments were secured by properties with existing rental income, down from 87% in Q1. And 41% of the mortgage portfolio was secured by rental apartments and asset class with highly stable and predictable cash flow streams. Part of our conservative lending strategy is a focus on urban markets which, at quarter end, totaled more than 90% of the portfolio. Deals in these markets come with greater liquidity and more exit options, thus enhancing the defensive characteristics of the portfolio.Building off an excellent first quarter, it was another solid quarter for originations. We made 14 new investments and had 19 mortgages fully repaid. In dollar terms, new and subsequent mortgage advances totaled $160 million while repayment totaled $206 million. Portfolio turnover for the quarter was 18.6%, up from 16.2% in Q1, really highlighting the volume of activity we've had on a year-to-date basis. These figures do not include the allocations made to our enhanced return portfolio. At the end of Q2, this portfolio grew to roughly $97 million or approximately 7.6% of the total asset net of syndications. This is an increase of $28 million due to the funding of existing commitments as well as new investment.Overall, deal flow remains strong and we continue to review a significant pipeline of quality investment opportunities. This has been the strongest year in the history of the company in terms of deal flow.At year-end, the mortgage portfolio remained highly diversified with 113 mortgage loans averaging $9.7 million in size, an investment of that size representing less than 1% of total assets. Multi-res remains the dominant asset class at 41% of the portfolio while retail properties, our second highest exposure, represented 19%. Our focus, as previously noted, is on necessity-based retail and urban infill properties, 2 segments we view as more insulated from the larger changes happening in the retail area.Looking at the portfolio by province. It remains heavily weighted towards Canada's largest provinces with approximately 89% in Ontario, Quebec, Alberta and B.C. The percentage of office invested in B.C. increased 5% over the prior quarter to 20.6% as our team capitalized on several attractive financing opportunities in Vancouver with a long-standing client. We would note that the conditions for Vancouver commercial real estate continue to be very positive.At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. The larger portfolio drove higher income from operations, which rose to $19.9 million from $18.4 million in the same period last year. This increase was offset by higher interest cost reflecting our increased use of leverage and rising rates. Over time, we will see the positive impact of high rates on new loans, which would take time to work through the portfolio. Net income was up from Q1 of this year, although this was down modestly over the prior year.I will now take a closer look at the earnings and cash available for distribution. We recorded $0.16 in net income per share in Q2 and had $0.20 of distributable income per share. Based on our dividends paid in the quarter of about $0.173 per share, our payout ratio on distributable income was 88.4%. Turning now to the balance sheet highlights at June 30. The new mortgage -- the net mortgage portfolio at quarter end was $1.1 billion, as Cam mentioned, down about $45 million from Q1 2018, which was mainly a timing issue as we had to deposit cash in advance of the July 3 repayment day on a 6.35% convertible debentures. You will see the corresponding increase in our other assets, which were up by almost $36 million over Q1. At the end of Q2, we had drawn about $367 million off of our $440 million mortgage investment credit facility. That number is, of course, fluid as we balance new loans and repayments. In addition, we had about $31.6 million outstanding on our credit facility associated with investment property.I will now turn the call back to Cam for additional color.
Thanks, Gigi. As we highlighted last quarter, the metric we managed the business to is distributable income, which drives recurring cash flows for the monthly dividend and removes some of the effect that accounting treatment has on items, most notably lender fees. Looking back since the merger in 2016, you can see our quarterly DI has remained relatively stable at around $0.18 to $0.19 per quarter, rising to $0.20 this quarter. The financials include a detailed DI reconciliation, but here's a short summary of the accounting treatments that resulted in the diversions a bit from EPS, factors which don't impact the fundamental cash earnings power of the portfolio.The net differences between cash lender fees earned versus the accrual of those fees over future quarters causes the highest degree of variability quarter-to-quarter. In terms of other items, it largely relates to the amortization of capital markets fees and an accretion expense associated with the convertible debentures outstanding.Looking ahead, we are encouraged by the quality of the deal flow we are seeing and the general strength in the market for our financing solutions. We continue to see competition in lower-risk categories such as multi-residential from credit unions and other institutional capital. In general, there is more debt capital available for income-producing commercial assets versus nonincome-producing land and construction assets due to their lower risk profile. That said, we continue to compete for and win business based on customization, ease of execution and service. We are fortunate to have a strong presence and reputation in this market, and our pipeline of new opportunities remains healthy.Because no 2 markets nor situations are alike, we invest and monitor at a market-by-market level as well as an asset-by-asset level. In the face of this competition, we are pleased with the progress we have made on originations, average portfolio yield and a transition to a floating rate investment portfolio. Maintaining our -- or increasing our DI in whatever market we find ourselves remains our core focus, all the while remaining consistent with our lower risk position in the market.Finally, we continue to take an active role in portfolio management, opportunistically pruning some investments and freeing up investable capital to redeploy at higher rates, which is evidenced by the turnover ratio this quarter. We will continue to evaluate all of our investments and reposition when we see opportunities with an eye to the changing market and a competitive landscape. Fundamentally, we continue to believe that lower-risk commercial assets provide the most attractive risk-adjusted returns for our shareholders. In closing, the company continues to be well positioned to provide investors with steady monthly income from a conservative, well-diversified portfolio of institutional-quality investments, managed by one of Canada's largest and most experienced real estate-focused investment managers. That completes our update for today. I'd now like to open the line for questions. Operator?
[Operator Instructions] And your first question comes from the line of Graham Ryding.
So I'll just start with maybe just the portfolio composition. There was a slight uptick in undeveloped land loans and the portion of your portfolio, I guess, that's not backed by cash flow, and producing properties increased a little bit. I just -- is that intentional? Or is this just how the portfolio evolves from quarter-to-quarter and just the opportunities that are in front of you?
It's the latter, Graham. There's timing. If you look at the same -- kind of a little bit of an ebb and flow because it is a point in time on June 30 for what the portfolio looks like. We had some multi-res investments repaid that we're reinvesting in now. So some of those changes, including the land that you've identified, are just the ebbs and flows of some of the transactions. Not an intentional acquisition on our part or increase. Perhaps, Ugo, you wanted to expand on that?
Yes. I was just going to say that, Graham, it was more of a function of the opportunities that we saw versus strategic viewpoint of increasing allocation of land. Our allocation of land has been stable and we haven't changed that allocation. It was more of an opportunity driven transaction or loan.
Okay, got it. So the philosophy hasn't changed at all. It's just a quarterly change. Okay. The 38% of your portfolio that I think is pricing variable loans now, is that sort of a good run rate to assume going forward? Or are you still going to look to increase that further?
Yes, Brad, why don't you handle this one?
Yes, I would just say the preponderance of what we're doing right now is floating rate loans. In the quarter, we were over 90% of our new business originations within floating rate, and you can expect that trend to continue. So I think, over time, you'll see the portfolio turning to more floating rate.
Like, can you get the portfolio almost up to 90% variable? Or is that too much?
I think it depends on how things roll on and off. But right now, which is in the current rate environment, we're focused on floating rate loans.
Okay. And then just the outlook on the actual weighted average interest rate. It certainly moved up by a healthy margin this quarter. Do we expect it to continue to trend up or not to the same degree?
I think, on the portfolio, as we have more and more floating rate, more and more of the portfolio's floating rate, you're going to see that will leverage our rate increases on that as well. Between the opportunities we're seeing and where we are able to sell A notes, we've been able to get to a higher effective yield. So we're going to continue to push that, but it's always subject to the competitive environment and the quality of the deals we're seeing. So far, that's maintained pretty well. We've had great flow, as Cam said. This year has been our best year ever. So this continues to tick up. How far and how much, I think, depends on how conditions change over the coming months and year.
Yes. And the governor there, Graham, being we don't want to change the risk profile of the portfolio. So always in line of maintaining the types of assets we like. So that's versus generating, seeking yields by taking on risk.
Okay. And then just my last question. Just the color on Stage 3 impairments. So I think it was $2.7 million that's in your multi sort of bucket, and then there is $40 million in your other mortgage investments. Can you just sort of breakout what those actual loans are? Maybe some color?
Well, perhaps I'll start. And then if I miss anything, I'll ask Gigi to highlight them. These Stage 3 assets were in Stage 2 prior quarter. So these are assets that have, I don't want to say graduated, whatever the inverse of graduated from Stage 2 to Stage 3 is. 2 out of the 3 and the preponderance of the assets relate to income-producing assets, and we're in rolling up our sleeves as an active investor in dealing with them. We are fully covered, and we expect them to be dealt with by the end of the year. I think this is going to happen from time to time. I think the advantage of having a manager like [ Tammy ] who's very active and a strategy like we have, which is focused on income-producing assets, is one which really helps not only speed up the exit, but also deals with recovery and keeping -- and the cash flow in the intervening period. So we recognize -- that's about all I can say, I think, at this point in terms of asset level specifics. I don't know. Gigi's shaking her head. She doesn't have anything else.
Okay. And the $40 million in the other margin investments. It sounds like those are 2 mortgages. And what geographies are those in?
Go ahead.
Well, the one in the other asset is -- there's one. It's in Ontario.
Toronto.
Yes, near Toronto as well.
I should say this on that asset, too. It's current. We're sweeping cash, and we have a cooperative borrower in terms of resolving it and getting them paid off in full. So it's going to take a little time.
Okay, got it. That's the $40 million in other mortgage investments that you're talking about?
Yes.
Your next question comes from the line of Victor Dri.
Just filling in for Jaeme. The first question here on the enhanced portfolio. So obviously, an uptick in the quarter. Can you just talk about that new loan and the JV that you guys reported?
Sure. I think what I can say is that the preponderance of the increase related to -- in terms of new investment related to loan that we opportunistically, as a firm, had sourced that. That exceeds our target yield requirements for this bucket. If you recall, when we were looking for 11% to 12% to be included in the enhanced return portfolio, the equity investment is a much smaller component of that increase, is a much smaller number. And it is related to interesting opportunity in the GTA.
Okay. That's good. And then just on the impact of B-20 and kind of more competition in the multifamily space. Can you give a little bit more color on how that's developing? Are there any specifics that you're doing about it? Just kind of a little more color there.
Actually, I'll ask Brad to answer that.
Yes. I was going to say we're seeing more than our fair share of deal flow in the multifamily space. I think just with our reputation in that space, we are a -- we likely are one of the first phone calls for people. But we've got more than -- again, we're having a banner year in terms of total flow. Multifamily is a big component of that. So although it's competitive, we're winning our fair share more. And then from a pricing perspective, the market is providing a lot of cheap capital where we're able to structure the hurdle of those deals. So it's -- I know it's competitive. We are competing.
Right, right. Okay. That's helpful. Last one for me is under the ATM program. Was there any progress on that in the quarter? And kind of how are you guys feeling about it going forward?
Yes, there was no shares issued in the second quarter. The program officially launched in the middle of July, meaning the first sale of shares occurred in mid-July, I think it was July 19, if I recall. So we are starting that program and like we're starting at a rather modest pace. We're just evaluating as we go. So I'll have hopefully a lot more to say in terms of reporting on activity levels at the conclusion of the third quarter once we get a few more data points on how it's been done. But so far, I don't think you've probably -- if you've been watching this, haven't seen any material impact on either price or volumes.
[Operator Instructions] Your next question comes from the line of Johann Rodrigues.
Cam, you guys have had a chance to make a whole different type -- bunch of the other investments right now. I think it's like 7% of the portfolio. You guys are hoping to get to 10%. I'm just wondering if at this point, you've kind of developed the preference for one type of enhanced investment, or if you guys are seeing a lot of a certain kind of investment come across your desk.
Yes. I would -- a couple of things there. We're just over 7.5%. I wouldn't say we're hoping to get to 10%. I think we're saying that, that we could get to 10%. We haven't really set an aspirational target or a maximum, but we're looking at managing it to -- in and around that area. I think, in terms of -- I wouldn't characterize any specific type that we're seeing more than others. But in terms of where we're favorite-ing -- favoring, rather, it's been on a yield basis. So we'll go up the LTV curve higher than we would in our mortgage investment portfolio but structure it as debt and try to generate higher yields with the right sponsors. It all comes down to partnering with the right sponsors. Ugo, do you want to elaborate a little bit on...
Yes. I was just going to add, Cam, that most of the high -- this portfolio is more concentrated on the sector that we like the most, which is multifamily. So it's something that, as Cam says, that we're in the higher, higher LTV structure but -- of the capital stack. But it's on asset classes that we feel very comfortable with. And I would say 90% of the value-enhancing portfolio is in multifamily.
And I'm showing no further questions in the telephone queue at this time. I would now like to turn the call back to the presenters for closing remarks.
Great. I want to thank everybody for joining us today, and I appreciate your time and look forward to continued success as we are almost halfway through the third quarter already. So look forward to speaking again in the very near future.
Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.