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 third 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.
Thank you and good morning, everyone. Thanks for joining us today to discuss our third quarter 2019 financial results. I'm joined by Gigi Wong, our CFO; Ugo Bizzarri, CIO as a Manager; Brad Trotter, VP Origination; and Scott Rowland, VP Portfolio Management. Today, we'll provide a brief overview of the third quarter financial results and the current position of the portfolio. We'll conclude with a market outlook and Q&A session. Our third quarter operating metrics, including distributable income, were solid and reflect our clear focus on building a quality loan portfolio of cash flowing properties and managing portfolio risk. All of our risk metrics have either improved or have been maintained, specifically our focus on first mortgages, our allocation to cash flowing properties and our weighted average loan-to-value. On the last earnings call, we indicated that we expected activity levels to pick up in the second half of the year, and we saw such improvements, particularly at the end of the third quarter, which has continued into Q4. Real estate transaction levels are robust, and we are seeing a good volume of deals. There is significant competition in the core plus and high-yield markets. Conventional lenders continue to take outsized risk or below-threshold returns and secondary lenders are holding smaller tickets to become more cost competitive on a whole loan basis. In this environment, our reputation, relationships and platform allows us to achieve our objectives for the company. I'm on Slide 7. There are no surprises on this page. We continue to construct the portfolio with an emphasis on stability and security. The net mortgage portfolio remained at approximately $1.2 billion at the end of the third quarter, down modestly from the second quarter. Over 90% of our exposure is to first mortgages with a short term, averaging just over a year. LTV, loan-to-value, is under 70%, giving us a significant equity buffer across the portfolio. The weighted average interest rate on our total loan portfolio increased to 7.5% at the end of the period, up slightly from Q2 and relatively unchanged since the merger in 2016. Turning to Slide 8., we highlight a few more metrics that illustrate our clear emphasis on income-producing property in urban markets with a strong weighting in multi-res. Just over 87% of our investments were secured by income-producing assets at quarter end, which is up slightly from Q2. Put another way, we have less than 15% in land and construction. Multiunit residential sits at about 46%. This is our core asset class, and it's a desirable place to be from a borrower's perspective, as macro factors are highly supportive of adding and retrofitting floor rent space in urban markets, speaking of which, urban markets represented about 93% of the portfolio this quarter. On the slide, you can see a few recent multi-res transactions, which are illustrative of the types of deals we are doing. The top one, the Edmonton deal is an acquisition of 96 units in 4 buildings, where the borrower will execute a repositioning strategy and has the potential to intensify entitled land. Second deal, the Victoria deal is also an acquisition and repositioning strategy of 4 rental apartments, in this case, totaling 110 units. Here, the borrower elected a 3-year term and a floating rate with a floor. Coming off of strong 2018 for deal flow, our activity level moderated in the first half of 2019. That said, deal velocity in the conventional plus and high-yield markets continues to improve as the prime and conventional lenders have achieved target allocations and scaled back demand and market-leading pricing. This has led to improvements in transaction activity levels at the end of the third quarter, which, as I stated earlier, has continued into the fourth quarter. Portfolio turnover in the quarter was about 14%, in line with Q2 and generally in the range we expect. Portfolio -- as we've discussed before, portfolio turnover can fluctuate based on timing and weighting of investment renewals and other factors. Good activity leads to portfolio turnover, allowing us to drive lender fees and ultimately distributable income for our shareholders. Looking at the composition of the mortgage portfolio by asset and region, it remains highly diversified with 129 loans at an average size of just over $9.5 million. As indicated, multiunit resi is our largest asset class. We have seen an increase in the number of these investments this year from 65 at year-end to 75 currently. Like I said, the drive to provide housing in urban markets is a significant long-term tailwind. Relative to the second quarter, there were no major variances to highlight. Over the long term, there will be variability in the concentration of our investment assets as we transact in situations where we can drive appropriate risk-adjusted returns for our shareholders. The portfolio concentration by province has shifted only modestly from Q2, the big 4 provinces representing just over 93% of the portfolio, and we continue to see strong activities in these core markets. Turning to a couple of our portfolio investments that we have discussed both in our financials and on previous calls. With respect to the Saskatchewan Sunrise portfolio, these assets continue to perform and improve, generating higher rental income for the company. Together with our 80% co-owner, we have recently reduced our cost of leverage and have pulled back for the time being on an active sale process. As performance continues to improve, we are comfortable being patient and will review with our co-owner an exit strategy when appropriate. As for the approximately $7 million of other loan investments previously found in stage 3, we're pleased to report that, that loan has been restructured during the quarter and is now current with all interest and arrears being fully repaid. At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Net investment income increased 1% over Q3 of 2018 due to a higher weighted average interest rate and increased income from other investments. Net income of $13.9 million for the third quarter of 2019 is up slightly from Q3 of last year. Earnings per share of $0.17 was consistently -- consistent with the comparable period of last year due to the increase in share count from the ATM entry programs we have in place. I will now take a closer look at the earnings and cash available for distribution. Distributable income was $0.19 per share, the same as in Q3 2018 and up from $0.17 in Q2 of last -- this year. During the quarter, we acquired marketable securities that our profit securities team identify as attractive investment opportunities. While this is not a big component of our strategy, we have utilized this tool in the past opportunistically. As a result of the increased DI this quarter, our payout ratio on distributable income was 90.2%, bringing the year-to-date payout to 97.6%. To reiterate, we stated that last quarter, we expect the payout ratio for 2019 to be below 100%. Since the merger in 2016, our quarterly distributable income has been relatively stable between $0.17 to $0.20 per quarter. Please refer to the MD&A for a detailed reconciliations between DI and earning per shares. Turning now to the balance sheet highlights at September 30. Since year-end 2018, our net mortgage assets have been essentially unchanged. The balance on our credit facilities has declined to $451 million from $487 million at the end of Q2 and $509 million at year-end. And our syndicated loan balance is down to $395 million from $437 million at the end of Q2. Our leverage ratio was 43.8% on September 30, down modestly from the prior quarter. The enhanced return portfolio increased by about $6.6 million net of margin facilities, representing approximately 7.7% of assets net of syndications and debt from 7.1% at the end of Q2. I will now turn the call back to Cam for closing remarks.
Thanks, Gigi. Economic conditions in Canada remained stable in the third quarter of 2019. Benchmark interest rates are flat or have declined. Moreover, job creation remains relatively healthy, and the real estate market is sound. These are good operating conditions for our borrowers and bode well for our ability to put the capital to work in quality transactions. The competitive environment remains robust. Commercial mortgage spreads remain tight, although minimal further compression was experienced beyond the prior quarter, if at all. Our strong presence and reputation continues to allow us to win business and find attractive investment opportunities including in our core multi-res segment. As always, we have found a way to adapt to market conditions, we remain optimistic in Timbercreek's ability to provide attractive risk-adjusted returns to investors through exposure to high-quality, cash flowing commercial assets in Canada. Timbercreek has the financial capacity, the agility and know-how to deliver on our investment objectives. Our deal flow remains healthy, and we are very pleased with the composition of the portfolio. We often see a seasonal uptick as we approach year-end, and that appears to be repeating this year. That completes our prepared remarks. With that, I would ask the operator to open the line for questions.
[Operator Instructions] Your first question today comes from the line of Stephan Boire of Echelon Wealth Partners.
In the -- I'll start off with the rather general question. But in the MD&A, you mentioned that to quote, you saw improvements in the deal pipeline and activity levels at the end of Q3, which have continued into the start of Q4. And I know that you quickly touched on the subject at the beginning of your opening remark. But could you elaborate a little bit on that. And I mean, how does it affect your strategy? And what are your views for next year?
Sure. Perhaps, I'll ask Brad Trotter, to answer that and perhaps have others weigh in as well.
Sure. Thanks, Cam. Yes, the front half of the year, the industry was down about 25%. We saw as we got through the summer the pipeline build, and that started to convert in the back half of the quarter. And we've entered the fourth quarter with close to $1 billion worth of opportunities that we're looking at. So I guess, in terms of how does that bode? It just allows us to be more selective about the opportunities that we pursue and close on, and make sure we're driving that right balance between return and risk for Timbercreek Financials.
Ugo, do you have any comments for what you're looking about 2020, possibly looking like?
Thanks, Cam. I would say that -- I feel, as also Brad said, I think the 2020 year is always -- it's in the future. We don't know what it'll hold, but we always seem to, the deal pipeline seems to be strong and -- along the origination team, and we continue to see the deals that we like to do. And there's lots of deals and lots of velocity as we pass on deals, so but I don't see that changing in the future. We've been doing this for 10 years now. And the deal pipeline has always been strong.
Yes, perhaps, a couple of comments on what you're seeing in multi-res, given our focus there. And do you still see that the macro trends continuing?
Yes, I think the multi-res sector is a very strong sector. And it's continuing to improve. There's way more demand than buying sector right now. We're going to see probably a lot more construction in multi-res in the near future, in 2020-'21. But it is a very strong asset class right now. And there's been a few deals announced in the public markets, where Starlight recently bought a large perspective, or IPO in the market of $1.9 billion. And that continues to be strong, there's a lot of capital in the sector, and there's a lot of lending opportunities. So yes.
Stephan, do you have any further questions?
Yes. Well, first, thanks for the color. I really appreciate it. And so based on what was mentioned, what do you see in terms of portfolio growth because it was mentioned that it allows you to be more selective. And in the meantime, there's a strong demand. So what do you see in terms of portfolio growth and the exposure of -- to -- the exposure of your portfolio to specific markets for next year? Will it remain very much market driven? Or will you adjust, given your expectations? How will that go?
Yes, I'll start with portfolio growth and then go into allocation by asset class. But in terms of portfolio growth, it's always difficult to project. There is -- we are managing our loan portfolios, while large at $1.2 billion is spread over just shy of 130 loans. And so we do have fluctuations at any given time in the utilization of the line. So I think we'd be cautious to project any significant increase in the overall portfolio size at this point and would rather pick and choose the highest-quality, risk-adjusted returns we can achieve. You'll note that our line [ utilage ] and our syndication balance is down from where we were at year-end. So we could -- we can handle growth from these levels without any change in our capital base. And we'll obviously be trying to manage our leverage ratios were mid- to low 40s at this point. And generally, we'd like to be at the mid- to high 40s leverage ratio. So in terms of growth, I'd expect it to come by higher utilization of the line. In terms of -- and I think your question was more on a province by province basis. Look, we continue to focus on the 4 largest provinces with the largest urban concentrations. We -- and we haven't seen much changed quarter-over-quarter in our allocations to those provinces. That will change, but it's going to be on a very deal-specific basis, not a macro call, one way or the other.
Okay. So the way I interpret this is that you're -- the strategy won't necessarily be impacted, but your -- I'm just stuck on the word selective. So you're going to be able to cherrypick the better deals, I guess, or the best deals?
Well, yes, that's one way to say it, for sure. I mean, it is competitive. So we do have to -- we aren't alone in bidding for these transactions. And so it's not like we get to cherrypick which ones we want. We will utilize all the tools in our belt, relationships, speed of execution, customization and try to maintain the best pricing we can through that.
If I can just add, right?
Yes.
We, in essence, have more flow than capital. And as that flow ebbs and surges, right, with market activity, right, our propensity there is to use our syndication capabilities, right, to balance out that risk and return. We've got ample demand for what we do by other partners. And so the bias is -- I think, opportunistically, we could maybe at some point, but the bias is to get the best return for the capital we have employed today.
Okay. And just a last one for me. Are there scenarios in which you would consider increasing your exposure to development or construction?
I would -- this is Ugo. I would say that we're always within a certain -- land and construction is always within the 15% allocation of the portfolio, and I don't think we're going to go above that. We will look at more construction deals in multifamily construction. We feel like that asset class, as a business, we fairly -- we're very comfortable with that asset class for a variety of reasons. But it will remain within that 15%. And I don't feel it will go above that.
Your next question comes from the line of Jaeme Gloyn of National Bank Financial.
First, just with some follow-ups on the last discussion there around the pipeline. You mentioned the industry was down 25% in the first half of the year. What was down 25% precisely? And then if you could just size that $1 billion of opportunities relative to maybe this time last year, how big was that? Was it like $500 million or something? Just a little color around those two?
Yes. Yes, sure. So that's we very periodically list out a view on the mortgage -- commercial mortgage market. So that's what that's referring to. So we get that periodically. Vis-à-vis the pipeline. I said we're about $1 billion today. We entered 2019 last year with about $450 million. So our pipeline right now vis-à-vis how we entered the year is about double.
Okay. That's great. With respect to the marketable securities investments this quarter, what are those specifically? Why marketable securities at this point? And then why is there margin account attached to it?
What was the last question?
Why is there a margin account attached to it?
Yes. Great. So we've always had -- not always, I guess, post the merger, we've added the ability to do a variety of things within the enhanced return portfolio. We had, as you probably know and others may be less familiar, Timbercreek Asset Management, the external manager of Timbercreek Financial is a broadly diversified real estate investment manager with capabilities in the public realm. There were some opportunities that are public security counterparts that are identified as attractive opportunities that aligned with available capital that we had and ultimately, the utilization of margin for those securities was around achieving our required rate of return on those investments. Without getting, obviously, into the specific names of the types of securities, these were publicly traded, and companies that participate in the mortgage market more generally outside of Canada.
Just to be specific, the mortgage REITs.
Okay, mortgage REITs outside of Canada?
Correct.
Okay. Okay, great. Notice the -- just a $5 million piece of the multi-res book moving into Stage 2. Can you provide a little bit of color around that? I realize it's only like 50 basis points of the overall portfolio, just a little bit more color, please.
It was -- reason it's moving is that an asset that is a construction building in multi-res, it's 98% complete, the construction, but they will lien put against it as a contract or put his lien against it, and that's why we put it into Stage 2. The lien will be kicking off shortly, and it will be put into core. And it would be cleaned up, but as a technicality because there is -- it was a lien, and there was a little bit of a nonimprovement that's why we put it in the Stage 2. But we feel very comfortable with the asset. It's 98% complete, and it should be finished in December, and the leasing should start in January.
Okay, great. And last one for me, just around the reduction in the credit facility for investment properties. Should we just expect that to wind down as the investment properties are wound down and either leased or sold.
Yes.
Is that just going to be tied directly to that portfolio not related to any other new investments or anything like that?
Maybe I'll make a quick correction. It wasn't a reduction in the facility, I thought it was reduction in the rate.
And part of the reduction in the facility was we reduced the facility, but we also got about 1.5 point reduction in rate. We spent, I think, the reduction of $7 million or approximately, the total facility, but we were able to save a fair bit on the rate reduction. And that's why we did it.
And what does that signal exactly like why reduce the size of the facility?
It was basically the same 1.5 or $150 million. So that was -- that was the reason.
Our next question comes from the line of Johann Rodrigues of Raymond James.
Given your comments about having more opportunities in capital as well as the stock being close to an all time high? Or just certain -- just off a 52-week high. How do you guys feel about raising permanent capital? Yes.
Kind of repeating what we talked about before, Johann, and thanks for that question. We'd like to -- we're always balancing some ebbs and flows in the portfolio as mortgages mature or get repaid early. Obviously, issuing capital at levels that we're currently trading at are better than issuing at lower prices. But for now, our focus is on utilizing more leverage, perhaps, syndications, to generate those attractive returns. We continue to issue in invisibly in dribs and drabs through our ATM program on our DRIP program, albeit our ATM was basically put on pause for the third quarter. And so we feel that we have, for the near term, at least adequate capital.
Okay. And then maybe you gave some commentary about how you feel going into next year, but would your expectation -- would your expectation be that your weighted average interest rate would stay the same or trend higher or even trend lower, given that there seems to be rising odds that maybe there isn't a rate cut in Canada?
Yes. Interestingly, when you plot our weighted average interest rate against prime, prime's come up over the last couple of years. And you -- and that's our borrowing cost. That's where we're getting -- that's our margin compression and as our rates -- but our rates have been relatively flat. You compare that against our competition, which are more traditional lenders who are pricing off of the 5-year Government of Canada's, those have actually have been falling over the last 12-plus months. And yet -- and we've been able to maintain -- maintain our weighted average interest rate. I think if we were to think about -- I think there's a very modest differences that you're going to see over the next 6, 12 months in what that total loan wear is going to be -- could it be 10 basis points higher or lower? Sure, but I don't think we're anticipating a significant change. It's been relatively inelastic. And I'm not sure there's going to be dramatic changes or we don't anticipate at least dramatic changes in the interest rate environment in the near-term either.
Okay. Last question. Maybe you just add some colors as to why you backed off the sale of Sunrise?
Yes. Frankly, we wanted to concentrate on the portfolio. We saw there's a lot of uplift in the programs that we were doing on the suites and the uplift that we were getting in rents, and we also refinanced the portfolio at a lower rate. And we wanted to continue with the program for the near future. The economy is improving for Saskatchewan and we wanted to maximize value so we felt that it was better that we pull off a little bit on it. And focus on the properties versus selling it right now.
Okay. And I'll just remind you, Johann, we do have an 80% co-owner there, that is part of those decisions as well.
Right. No. Sure. You guys were marking it last quarter, if I remember. So wondering, could it also be you guys weren't thrilled with the offers you were getting? Or did you even get to that stage?
There were some offers in the portfolio. And frankly, we saw a lot of upside in the portfolio. We were -- yes, we weren't necessarily thrilled with the offers that we were getting. And we only took it out to market to see if we could get the prices that we wanted to. We weren't pressured to sell the asset, but it was more of testing it to see if -- since the market was soft in multifamily, to see if we could get above a price that would make sense for us to sell earlier than later. We did get some good offers, and we thought about moving forward on it, but we decided not to and focus on the portfolio, and we just saw more upside in waiting and holding it for a little longer.
I think if you recall, Johann, our original time line for these assets were closer to kind of a 3- to 5-year horizon. We've had it now for about 2 years. So it was just testing to see whether that we could hit the numbers that we were expecting and we wanted to.
And, Ugo, maybe you could just refresh our memory as to what, I guess, IRR threshold you guys have for that?
Well, what we were targeting was a 14% to 15% IRR for a 5-year period, right?
Your next question comes from the line of Graham Ryding of TD Securities.
The -- you made a comment that there was an improvement in the situation with the default on your books for, I'm assuming that's the mall in [indiscernible]. So maybe just some color there. I think you said it's been restructured. So what does that actually mean? Is it still on your books? Or -- and what was involved in the restructuring?
Yes, the mortgage that we restructured was not that particular mortgage. It was another Stage 3 asset that was about -- that was around $7 million. That was -- the mall that you're referring to, still is on the books as Stage 3 as of the end of Q3. That process is moving along. The asset is continuing to improve. We'd expect for our Q4 to have some resolution on that asset.
Yes, we are very close. It's under contract right now, Graham, and it should close. It's under contract, and it should close.
Okay, great. And then the other 1 is just sort of a bigger picture question. Just I'm looking at your portfolio mix, obviously, multiunit apartments have always been a primary focus in terms of asset class, but you've also consistently had a bigger weighting towards retail versus perhaps industrial or office. Can you just speak to what the -- whether that's deliberate, and what's the strategy? Or why do you prefer that asset class over industrial or office?
Well, the type of retail we typically do is more in that neighborhood service strip center, grocery anchored. That's a little bit more consistent, say, than what people might be experiencing in some of the enclosed malls. With respect to industrial, again, our type of lending tends to be short term. It's on income-producing assets that are in some kind of transition, or it's an acquisition, and you just don't see that kind of activity as much in industrial. And when you do, it's just that returns that don't make a lot of sense for the net.
Our deal sizes are a lot smaller. And so in aggregate, they don't sum up to a whole lot.
It's just not an area where we're being competitive.
Okay. That makes sense. Office should be the same then with a similar dynamic?
Well, kind of office has some flows. I don't really have a bias one way or the another towards office. So I think that's one where the opportunities make sense, there we lean in.
Yes. And just recently, on retail ground we had 1 large mall got repaid, and we're happy to get our money back from that, and it'll be deployed somewhere else. But there is no -- the -- on the office market, there's no particular, it's more investment-driven and deal-driven than having a macro call.
Your next question comes from the line of Sidd Rajeev of Fundamental Research.
Congratulations on a healthy quarter. I have a question regarding syndication -- syndications as a percent of total mortgage is on a declining trend. For example, this figure was 32% at the end of 2018, declined in Q1, Q2 and was 25% at the end of Q3. How closely do you track this? And ideally, where would you like to see this number at?
Yes, I'm not sure we have a target number, Sidd, and thank you for the question. We obviously structure each -- well, not obviously, but if you think of it when we're originating a mortgage, we'll evaluate on an individual basis, whether it makes the most sense to utilize our bank facility in order to generate the target returns or whether there are syndication partners that make sense at a pricing structure in order to syndicate. I think, overall, we are light on our syndication number from where we would expect to be longer, mid -- no, longer term, medium term. But it wouldn't be -- it's not a number that you -- that we have a specific target in mind for.
I was just going to say, I can come back to the fact that we have a bit flow than capital. And that's just kind of where that in the aggregate balance, it will move around. As I said, beginning year front half, we were down as an industry, about 25%. So as our shorter-term loans rolled, you're going to see it roll through that number.
Got it. Thanks. I know that you don't take a macro approach. But since B.C. is showing signs of positive developments, would you be looking to expand further into the province?
Look, I think B.C. has strong signs of improvement. I think Toronto is very strong. But again, it's very much driven by where we see investments in deal flow. Sometimes in B.C., we would like to do a deal, but rates are lower. We get a bid or something. So it's also a function of competition and different lenders bidding on that product. So it's not necessarily that we don't like what we see or we want to do more B.C., but it's a function of where we're refining the investments [indiscernible]
Okay, got it. As -- the next one is multi-res is highly competitive. Are you seeing rates or the lending rates in that sector declining versus the other sectors?
No, I think they're pretty stable. Right now, the bond has gone down on the lending. We're seeing opportunity in the multi-res sector because, first of all, there's a lot more value-add to be done there than many other sectors. The other thing is there seems to be process, the multifamily is very much a government-insured financing. And that process of getting loans done with CMHC has slowed down. It's probably a 6- to 9-months process. And this is competitive, very, very competitive. We were able to do a lot of bridge financing in the multifamily sector for large clients and institutions that are waiting to get that CMHC financing done.
And just to expand upon the bridge borrower for what we do. Again, it's pretty short-term in nature. So the flexibility in restructuring, we're able to provide as a balance sheet lender, adds value to that borrower, which allows margin to be a little stickier. Still competitive...
And then just final question, I realize you don't want to put a number on the portfolio growth, but would you say that portfolio will be higher or flat by the year-end?
Growth in terms of what?
The portfolio size?
I'm not sure we could speculate today where we see that portfolio size. On a gross basis, it's probably up. On a net basis, it's going to be pretty consistent, but it will be up -- I'd like to see a little more utilization of the credit facility.
You have another question from the line of Jaeme Gloyn of National Bank Financial.
I just wanted to go back on that bridge financing comment as it relates to the 6- to 9-month delay for CMHC financing to get approved. How much of the residential multi-res portfolio would that type of bridge financing be at this stage?
Right now, it's probably 10% to 15%, not very much.
10% to 15%. So like 4% or 5% of the overall portfolio right now? And that -- is that, like I said, has that picked up since the beginning of the year? Or has that been fairly stable?
It fluctuates a lot. It depends on some big deals that happen in the market. It really goes up and down. There is no -- there's no number that we look at to keep. Some years, it's more. Some years, it's less. But sometimes, the pipe rents too like the 2 deals that Cam highlighted back in the slides. In both of those instances, there is a value strategy to the assets, one that they need the capital for acquisitions; and two, they're using some of the proceeds to as the units turnover to improve the units and roll rents to market. And when they restabilize, the typical takeout then again, is [ limited ]. So it's not always just a bridge to the process, but it's a bridge to stabilization or again CMHC is the typical takeout financier.
And there are no further questions in queue at this time. I'd like to turn the call back to the presenters for any closing remarks.
Great. Thank you. 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 year-end results in 2020. If there are any additional questions, please feel free to reach out to us directly. Thank you once again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.