Timbercreek Financial Corp
TSX:TF
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
6.45
8.25
|
Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Earnings Call Analysis
Summary
Q2-2024
Timbercreek Financial had a solid second quarter in 2024, reporting net investment income of $26.4 million and net income of $15.4 million. The firm generated distributable income of $0.20 per share with an 88% payout ratio. Despite market challenges, Timbercreek successfully redeployed capital into high-quality loans, growing the portfolio by $27 million over Q1 to above $1 billion. Bank of Canada's recent rate cuts improved market conditions, supporting Timbercreek's plan to shift back to growth mode. Looking forward, the company expects strong performance in the second half of 2024 and 2025, driven by a rebound in transaction activity and favorable market conditions.
Good day, ladies and gentlemen, and 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 Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone. Thanks for joining us to discuss the second quarter financial results. I'm joined as usual by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications.
The overall portfolio performed well in the second quarter. We reported improved sequential results and demonstrated our ability to generate consistent, healthy cash flows and dividends with a conservative payout ratio, but we navigate a transition period in the commercial real estate markets.
Building on strong Q1 origination activity, we continue to have success redeploying capital into high-quality loans as we expand the portfolio back to historical levels. We ended the quarter over $1 billion and as you will hear from the team today, recent Bank of Canada rate cuts create improved market conditions for Timbercreek.
As we look out to the second half of 2024, we are well positioned to shift back to growth mode and deploy capital to expand the portfolio. With this backdrop, we reported healthy financial results in Q2, including net investment income of $26.4 million, net income of $15.4 million, and we generated distributable income of $0.20 per share with a healthy payout ratio of 88%.
Our book value per share was modestly higher year-over-year even after we issued a special dividend in Q1. At $8.42 per share, our current book value is roughly 15% above the weighted average trading price in Q2. Lastly, our team continues to focus on resolving the remaining stage loans through highly active asset management efforts.
We're making good progress on these select situations and remain confident both in the underlying value of the assets and our ability to navigate these situations to ensure the best outcomes for our shareholders.
Scott will walk through these situations in his portfolio review. Scott?
Thanks, Blair, and good afternoon. I'll comment on the portfolio metrics and the progress with Stage 2 and Stage 3 loans, and then I'll ask Geoff to comment on the originations activity and overall lending environment. .
Looking at the portfolio of KPIs. Most were stable relative to recent periods and consistent with historical averages. At quarter end, 83.4% of our investments were in cash flowing properties. Multi-residential real estate assets of apartment buildings continue to comprise the largest portion of the portfolio at roughly 52%.
Portfolio remains conservatively invested. First mortgages represented 85.6% of the portfolio. This is typically above 90%, and we expect this percentage to trend upward in the coming quarters. Our weighted average LTV for Q2 is down to 62.3% as new loans were funded at lower LTVs, while loans with higher LTV were repaid. Portfolio's weighted average interest rate or WAIR was 9.8%, down slightly from 9.9% in Q1 and flat with Q2 last year. Our Q2 exit WAIR was 9.5%, down from 9.9% exiting Q1 and reflects the June interest rate cut. Lastly, floating rate loans represented 87% of the portfolio at quarter end.
In terms of the asset allocation, the mix between provinces was largely unchanged from Q1. Recall, we had a more significant shift from year-end due to the Quebec City repayment in Q1 and strong deployment in Ontario. We're comfortable with the current Ontario and Quebec diversification and continue to look for new opportunities to deploy capital in Quebec. As Blair mentioned, we continue to pursue resolution and recovery on the Stage 2 and Stage 3 loans through our asset management efforts.
Asset management is a bespoke process and then we spend considerable time developing plans and weighing our options to ensure the best result for Timbercreek shareholders.
There is fulsome disclosure in our MD&A, so I will comment on the main developments in the period. In Stage 2, the previously reported Calgary and Vancouver loans are stable, with no material updates at this time. In Calgary, we have seen some positive leasing activity on the assets. 3 new exposures have entered Stage 2 this quarter, and I will provide some color here.
We have $40 million on 2 loans related to a GTA industrial construction project. The borrower and their general contractor are looking to end their relationship due to cost overruns on a development that is actually unrelated to the Timbercreek loans. However, these issues have overflowed to affect our loan as the borrower stopped making interest payments beginning June 1. We are actively engaged with the borrower and resolution here may come as their contractor issues are figured out or alternatively, we understand that potential sale may be a near-term outcome. The strategy on this exposure is evolving, so we will provide more details in our next update, but we are hopeful this will be resolved relatively quickly.
The other main addition to Stage 2 is a $12 million loan on a residential development site in downtown, Toronto. This is a very well-located site that the borrower has listed for sale and requested to accrue interest until the sale is finalized. The loan is in Stage 2, given we have accrued June and July payments, but we have signed a forbearance agreement with the borrower to allow an existing sales process to proceed as we believe it is the most efficient path to repayment. We are expecting firm bids in late Q3 and full repayment of this loan thereafter.
On the Stage 3 front, we are pleased to report that the Quebec multifamily development loan has been fully resolved and has returned to Stage 1. The asset is nearing completion and a CMHC takeout is expected before the end of the year. This brought total Stage 3 assets down to just over $24 million at quarter end.
In summary, while there is more work to be done, we are happy with the progress of the stage loans and remain confident these files will be resolved in due course. The team is focused on successful outcomes and is very experienced in handling these situations as they come along.
At this point, I will ask Geoff to comment on the transaction activity in the portfolio. Geoff?
Thanks, Scott. It was a solid quarter for new investments, and it's been a good first half of the year as we've been successful in redeploying capital and building back the portfolio following 2 quarters of higher repayments. .
In Q2, we advanced nearly $137 million in new mortgage investments and advances on existing mortgages, including 13 new loans in the period, which were largely centered around lower LTV multifamily investments.
Total mortgage portfolio repayments in the quarter were $111.5 million, resulting in a turnover ratio of 11.6%, a return to normal levels as you will see in this chart. The net result is we grew the portfolio by about $27 million over Q1. Importantly, the positive macro backdrop created by the recent Bank of Canada rate cuts is further enhancing the deal pipeline going forward. While valuations of assets purchased pre-COVID and certain segments such as office will continue to be challenged, we believe transaction activity will rebound in the second half of this year and provide improved optionality for borrowers to either sell or refinance their assets.
We are well positioned to continue to deploy capital in this environment, which will result in the portfolio continuing to grow through the balance of the year.
We continue to believe that 2024, 2025 will be excellent investing vintages as the market has reset from previous valuation highs.
To better illustrate the types of opportunities we're seeing and the segment of the market we serve exceptionally well, we've highlighted a recent transaction. This is a first mortgage commitment of $43 million, secured by 95 multifamily units, spending 5 buildings located in Midtown Toronto within an established and affluent neighborhood.
The Board has acquired the portfolio in 2020 [Audio Gap] considerably to update all the exteriors and landscaping.
Our loan refinanced the prior existing debt and will provide some additional capital to advance the remaining portions of the borrowers' repositioning program. This fits squarely in our core multifamily category and has attributes that align with our typical transaction. This is a 3-year loan with an attractive LTV. These are urban well-located multifamily assets that will command substantial demand and liquidity. And the loan is supported by a sponsor with a successful track record with previous projects, several of which were funded by Timbercreek.
Relative to other lenders, we win transactions like this because of our ability to execute on committed terms and time lines in addition to providing working capital to drive further value accretion.
Our going-in loan basis is comfortable relative to current value and is further supported by the strong underlying fundamentals of the collateral security and is poised to delever through the investment period based on successful execution by an experienced operator and existing borrower relationship.
I will now pass the call over to Tracy to review the financial highlights. Tracy?
Thanks, Geoff, and good afternoon, everyone. As Blair mentioned, it was a solid quarter across our key metrics. Similar to Q1, the year-over-year income comparisons were impacted by a lower average portfolio balance from the higher repayments we experienced at the end of 2023. For context, the average net mortgage investment portfolio balance for this quarter was $960 million, about 19% lower than $1.2 billion in Q2 of last year, which is a more typical or targeted level for us. Q2 net investment income on financial assets measured at amortized cost was $26.4 million, down from $31.5 million in the prior year. Q2 net income was $15.4 million compared to $16.9 million in Q2 last year. In Q2, basic and diluted earnings per share were $0.19 and $0.18, respectively versus $0.20 in the prior year.
While the lower portfolio balance impacted top line income, interest expense on the credit facility also declined meaningfully due to the lower credit utilization, allowing us to maintain net income margins. Interest expense in the quarter was $5.4 million versus $7 million in the same period last year.
We reported quarterly distributable income of $16.3 million or $0.20 per share versus $0.21 in last year's Q2. The Q2 payout ratio on DI was very healthy at 88%, reinforcing our ability to generate healthy cash flows and dividends and we declared regular dividends of $14.3 million or $0.17 per share, representing a 93% EPS payout ratio.
Looking quickly at the balance sheet. The net value of the mortgage portfolio, excluding syndications, was $1,003.4 billion at the end of the quarter, an increase of about $57 million from the end of 2023.
At quarter end, we had $92.8 million of net real estate, including real estate held for sale, net of collateral of $62.2 million, which is the 3 senior living facilities acquired in August 2023. Note that these were previously classified as real estate properties inventory. This adjustment changed the presentation on the consolidated statements of financial position, but otherwise had no impact to the financial statements.
The balance on the credit facility for mortgage investments was $307 million at the end of Q2, up from $260 million at the end of 2023. Lastly, on the capital front, we repaid the June 2017 debentures in Q2 with the proceeds of a new issuance of debentures for total gross proceeds of $46 million and a coupon of 7.5%.
Additionally, we completed the renewal of our NCIB, where we can repurchase shares when accretive opportunities exist. In short, we have ample room to deploy capital accretively as activity in the commercial real estate market accelerates.
I will now turn the call back to Scott for closing comments.
Thanks, Tracy. As you're hearing from us today, we're feeling increasingly positive on the balance of the year. With 2 rate cuts and more expected, the stage is being set for a recovery in the real estate sector, increased transaction activity and more optionality for borrowers to repay loans. We were able to deploy a substantial amount of capital in new investments during the first half of 2024, growing the average net mortgage portfolio balance by close to $100 million from the low in early Q1.
And as Blair highlighted, the market conditions support meaningful growth in the second half of the year. At the same time, we will continue with our active management of the stage loans as we drive toward resolution of these files over the coming quarters. That completes our prepared remarks.
With that, we will open the call to questions.
[Operator Instructions] The first question will be from Jaeme.
Yes, guys, can you hear me, okay?
Hey Jaeme.
All right. So first question, just on the deal pipeline and the optimism that you're expressing in both the press release and then in your prepared remarks today. Can you describe some of the deals that are starting to flow through into that pipeline? Is it primarily multifamily? Are you getting diversified maybe some geographic commentary and then how is that building for the second half as compared to the first 2 quarters here?
Yes. Jaeme, it's Geoff. I'm happy to provide some commentary on that. I mean, I think, again, in general, it's pretty broad-based and diversified from a geographic standpoint. I think we're seeing good flow from our sort of 3 core originations locations in Montreal, Toronto and Vancouver. So we're seeing good balance of opportunity across West Central and East, which will keep kind of the existing diversification, I think, appropriately diversified and maintained. The activity, again, sort of early activity is, call it, $500 million of opportunities in the deal identified pipeline, which are sort of that earlier phase, and again, will translate into or advance into more tangible, real investment opportunities as we move further into the year as well as significant deals that are LOI signed or commitment signed, which would be near-term executions. Again, we're seeing good predominance in the inter multi-res exposure. But in addition to that, we are seeing good opportunities in the industrial space as well.
We're seeing some interesting and well-leased retail opportunities with some potential upside to grow or to expand footprints and grow that side of the book.
We're seeing a little bit of land, a little bit of construction. And again, it's pretty well diversified across asset class in addition to 2 geographies. So we're feeling really good about the sort of the deals that we've signed up and the potential deals that will be signed up in the near term.
Okay. And then...
Just a second, Jaeme. I'll just add from a overall market sentiment perspective. As we talk to some of the larger equity holders, some of the owners of real estate, what we start hearing -- and we're starting to hear some early signaling about as the rate cut cycle starts, is some of those larger portfolio players coming back to the market and looking to tie up properties before rate cuts continue to go in earnest and the values start to creep up.
So we're sort of anticipating based on just some signals in the market a more transaction-heavy fall, a more of a return to normal after kind of a, 1.5 years of sort of buyers and sellers not quite agreeing on price. I think that will help drive our pipeline as well.
Okay. And just looking to put some context around that pipeline, then Geoff, you mentioned the $500 million in initial phase like what would that number have been in, let's say, like 2019, 2020 maybe not 2020 as a good example, but just more normal years, let's say.
Yes, I'd say it's -- I mean it's close. It's not quite the transaction velocity that we saw back in '19 for sure. Again, I think the profile here is preferable in terms of the -- it's lower leverage than it would have been at that point in time and lower leverage on more of a reset valuation at this point.
So I think there's still room to grow that opportunity set as we get back to normal. Again, further to Scott's point, it's still is predominantly refinancings as opposed to a preponderance of transactional financings, acquisition financings, and that's where we expect to see some additional growth.
Okay. Great. And following on this question, in terms of the pricing and I guess the impact on the yield earned in interest income. Obviously, a couple of Bank of Canada rate cuts is going to weigh on that weighted average interest rate that's earned.
So first, I guess that kind of correct to think about that flowing through in Q3 before. And then second, when you're looking at this pipeline, like what are you seeing from a pricing environment, is it staying elevated? Or are you starting to see that pricing environment lower with the rates and perhaps with competition?
I can take a start at that. When we come to pricing, I mean it's funny like -- so we have our -- the margin and there is obviously the underlying prime rate and we get to our mortgage coupon. One of the dynamics that we saw as interest rates were increasing and properties, there's really still only so much they can bear, right? So you actually see pressure on margin, net margin as the market kept going up.
So actually, as coupon comes down, or WAIR will fall, but our debt are levered also falls. What happens is you get -- as coupon start to shrink, there's actually get a little bit of an expansion of margin, which is helpful, hopefully to DI. So it's a little bit of both. So those relief goes to the borrower, but there's also a little bit of margin expansion that continues to go down.
So I think what we have is a market where as pricing falls a little bit more margin to the lender that comes back. But in general, and that's on the coupon front. I do think what you're seeing is there's still some tighter margins in the multifamily space. As is such a sort of off-trade office classes like office, you're seeing some flight to safety from lenders into sort of multifamily and industrial. So that tighten margin is really about 2 to 3 years ago and that we're still seeing that in the market. which is well reflected in our portfolio.
But I think as we move forward into this new cycle, I think you see coupons coming down a bit. I think you see some room for some margin expansion. And I think there's still continued to be competitive for multifamily loans. But for us, it's well within the barbell of what we're looking for in our portfolio. So stable from that perspective, but there's definitely a dynamic market -- pricing market.
Okay. That's interesting on the margin expansion or it was modest expansion early on. Who would have thought that might come more towards the back end of a rate decreasing cycle as like loans with floors or hit, but your credit facility continues to drop through. I guess, we're probably still a little ways away from that...
That's right, Jaeme, by the way. And your observation is correct, right? It's not day 1 for sure. It's just as we continue to go. If we're down middle of next year, we're down another 50, 75 basis points. That's when you'll start seeing that expansion, it's not with the first cut as to your point.
The next question will go to Rasib.
Okay. Can you guys hear me, okay?
Yes.
Awesome. I wanted to focus on the credit side of the business for -- my questions. I guess first, at a high level, could you remind us what would cause a loan to go from Stage 2 to Stage 3? Is it simply being in reais for over 90 days? Or are there some other factors over here?
Rasib,, it's Tracy. Generally, that's a factor. Reais over 90 days typically comes to Stage 3.
Okay. Fair. And then more specifically on the individual loans and the Edmonton condo portfolio, it was good to see it being sold down. I think your commentary mentioned you have around 4 million of PCLs associated with the remaining balance.
If and when you're able to discharge of the entire portfolio is -- could we expect to see some of those provisions flow back into the income statement? Or do you expect the majority of this to be eaten up by write-offs or credit losses?
I don't think it's unreasonable to see some release of the provision. I think it's a little too early to say just as we get down to the final years whether or not all of it would come back in, but we'll likely see some Recovery of that.
Yes. We're pretty much from our perspective, from my perspective, holding it to what a net is today. So I think if we get a recovery out of it, that would be a really good news story. I think we feel comfortable with what our current exposure is.
Okay. That makes sense. And then the medical office building in Ottawa. So correct me if my time line is off here, but this asset went to Stage 2 around the summer of 2022 and then went to Stage 3 shortly thereafter. I guess a question is, what's the time line here for resolution? Or why has it taken so long to resolve till now?
Yes. So this particular asset, we've been undergoing a re-leasing plan. So this is a medical office property. I was just -- that's exactly one of the files that we're actively working on at the moment and how exactly we want to resolve it to continue to release the asset, that takes time and money and get to an outcome.
We're also exploring just a potential sale, an outright sale with some entitlement work. It's a good site actually, and there is some excess density on the site. So we're actively engaged with the city there to sort of [ conserve ] some early entitlement work. likely, we think that, that is a good exit for this asset and potentially, we'll be coming to market with it towards the end of the year. It's been dragging a bit, but it's -- again, I'm just trying to find what is that best outcome for us. So we think this position might make more sense.
Okay. So would it be fair to expect an exit or some resolution by 2025, if we're targeting to bring it to market by the end of this year?
For sure. To me, it's sort of a Q1 -- Q1 '25, maybe.
Okay. That's good to hear. And just my last question. So the overall portfolio mix between cash flowing properties. So it used to be in the high 80s even like low 90s in a few quarters. And that's -- I think it's 83% or so. Just wanted to confirm, is this intentional? Or is this just a blip during this period? .
Yes. No, that's a really good question. And we addressed this, I want to say a couple of quarters ago now. One of the things we did -- and one of the things that we saw through this cycle through the later part of the cycle is the traditional -- I mean, the [indiscernible] portfolio is the multifamily income-producing properties. Multifamily in producing properties, though trade at a pretty low cap rate. So as interest rates, we're hitting 9%, 10%, that puts pressure, right, on those borrowers. Do they want to pay that rate considering the income at the properties are actually generating. So an alternative approach for refinancing, if you're the owner, as you could sit there and say, hey, I'll inject more equity into this property. I'll take a more traditional bank loan, cheaper rate. They have to inject the equity to do that. As that happened, right, so you're seeing sort of fewer opportunities than, say, going back to sort of that pre rate hike cycle in the multifamily space.
What we also were seeing is there was a pretty big reset in the land market. Land and construction loans became more difficult to obtain sort of post-COVID in a rising rate environment. And so for us, what we've always done some land but maybe that was 5% of our portfolio, 7% of our portfolio.
We made a conscious decision that, hey, listen, these were sort of on sale from both a risk and a pricing perspective. So we were getting more yield a much lower LTV. And we've made some conscious decisions to invest in some of those land assets, a little more construction a little land, which are both nonincome-producing. There's also a condo inventory loan or 2 we did in the past 6 months, as an example, which is again very, very low LTVs, much lower than we would have seen sort of pre the rate hike cycle and just such an opportunistic opportunity plus the pressure on the multifamily. We sit here and say it was just -- it was the right opportunity for us to move that mix a bit, which is where you're down in that kind of 80-20 type of mix.
I think as we get into the rate hike cycle goes the other way, so the reduction cycle I do see us floating back towards more multi -- a little less nonincome-producing and probably get more into the 80%, 85% split. So it's something we're keeping an eye on it. We won't go much lower than we are today. I see it going back to more traditional norm, but it was intentional the split you're seeing today.
[Operator Instructions] At this time, there are no other questions. So I'll now turn the call back over to Blair Tamblyn for closing remarks.
Great. Thanks very much for joining us today. We look forward to speaking again when we release our Q3 '24 results. As always, please reach out to the team with any questions, and I hope you enjoy the rest of your summer.
Thank you. You will now be disconnected.