Timbercreek Financial Corp
TSX:TF
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
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.
Timbercreek Financial Corp
You don't have any saved screeners yet
Good day, ladies and gentlemen. Welcome to Timbercreek Financial Fourth 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, Amy. Good afternoon, everyone, my name is Cam Goodnough. Thanks for joining us today to discuss our fourth quarter and full year 2018 financial results. I'm joined by Gigi Wong, our CFO; Ugo Bizzarri, VP Investments; and Brad Trotter, VP Origination and Asset Management. Today, we'll provide a brief overview of the fourth quarter financial results and the current position of the portfolio. We'll conclude with a market outlook and Q&A.On Slide 5, we're going to go through the fourth quarter highlights. It was a strong fourth quarter for the company, wrapping up a very successful year against the backdrop of equity market volatility. We achieved our main objectives, which are protecting investor capital and generating attractive returns through regular monthly income. The fourth quarter results reflect a continuation of several key themes. It was a great quarter and year for deal flow. In the fourth quarter alone, new investments and advances in our mortgage portfolio totaled roughly $240 million. For the full year, we deployed close to $800 million in total. Given the short duration of our portfolio and our success at converting the floating rate instruments, which now represent almost 58% of the total loan portfolio from the 12% at the end of 2017, we were able to increase the weighted average interest on all loans to 7.6% in the fourth quarter. That's a 50 -- approximately 50 basis points increase from where we ended the year last year. Combined with the uptick in average interest rates, this transaction activity resulted in strong gains in our investment income and income from operations in the period, and enabled us to deliver on our objective of stable, distributable income, which reached $0.20 a share in the fourth quarter, which -- that included some onetime items which we'll get into.In terms of portfolio strategy, the mortgage portfolio rose to $1.2 billion at year-end and continues to perform very well. Our conservative positioning is evidenced in our key metrics at year-end. Our exposure to first rate mortgages exceeded 93%, which is slightly higher than in recent quarters, and first mortgages remain a core part of our strategy and defensive positioning. The weighted-average LTV, loan-to-value ratio, was 67% in the fourth quarter, which is in line with prior quarters. The average -- the weighted average, rather, interest rate on the total loan portfolio was 7.5% at the period end, up from 7.1% as at December 31. Our remaining term to maturity was 1.2 years, consistent with prior quarters. The short-term nature of the portfolio allows us to transition rapidly in and out of markets and asset classes as we seek to optimize risk-adjusted returns.At year-end, 87.5% of the investments were secured by properties with existing rental income, that's up from about 84% in the third quarter. Almost half of that amount, or 40% of the mortgage portfolio, was secured by rental apartments, an asset class with highly stable and predictable cash flow. As one of the country's largest multi-res operators, Timbercreek understands this asset class exceptionally well. Our exposure to any single asset category will obviously ebb and flow depending on the relative attractiveness of the deals -- deal flow we are seeing. In 2018, our exposure to multi-res decreased relative to 2017 levels, but is up modestly from Q3 levels, largely due to faster-than-anticipated repayments, increased competition and more attractive deal flow coming from other categories. That said, we continue to see multi-res investment opportunities and expect it to remain our largest lending category going forward. We remain focused on urban markets, which provide greater liquidity and more exit options, thus enhancing the defensive characteristics of the portfolio. At year-end, more than 92% of the portfolio was in urban markets.The strong deal flow we experienced in 2018 continued into the fourth quarter. We made 17 new investments and had 14 mortgages fully repaid. In dollar terms, new and subsequent mortgage advances totaled almost $240 million, and repayments totaled $165.5 million. That means a portfolio turnover rate of 13.8%, which is up from our 12% in Q3, but still consistent with what our normal expectations are. Separately, our enhanced return portfolio grew to roughly $105 million, representing about 7.6% of total assets, net of syndications. And that's up from just over $70 million at the end of 2017.The mortgage portfolio remains highly diversified with 124 loans at an average size of $9.8 million. As discussed already, multi-res is the largest asset class at just over 40% of that, while retail properties coming in second at 18.8% of the portfolio. Now this is a segment that continued to attract a lot of attention, particularly as it relates to malls. But not all retail is bad or has the same risk profile; it does, however, require a cautious approach, and in our opinion, a focus on necessity-based retail and urban infill properties.Looking at the portfolio by province. It remains heavily weighted towards Canada's largest provinces, with approximately 93% of the portfolio invested in Ontario, Québec, Alberta and B.C. Over the course of 2018, the most significant change was the increase in our exposure both in B.C. and Alberta, which represented 23.5% and 20.9%, respectively, of the assets at year-end 2018. Our geographic concentration is something we monitor at a macro level. It's really at the deal level that we're looking for the best risk-return profile that meets our target hurdle. And this can lead to some variability in geographic or asset class exposure. In B.C, we've had very strong deal flow from current and past customers and have been able to execute on many of these opportunities. Sometimes it's easier to hear about an example to better understand what we do and how we're positioned, and in that light, I thought we'd provide an example. We recently funded a loan facilitating one of our largest borrowers' acquisition of a mixed-use retail office property located in Kitsilano, one of the strongest Vancouver submarkets. Existing tenants had below-market rents and short-term leases. Transitioning these to longer-term at-market rates, adds tremendous value and positions the asset well for a traditional financing take-out. This loan highlights many of the key elements of our strategy, such as making shorter-term loans to proven sponsors on transitional income-producing assets in urban markets, with a value creation plan and multiple exit strategies. Let's have a look at Alberta, where we continue to see attractive opportunities in Calgary and, particularly, Edmonton. We generally have a positive and constructive long-term view on the province. And we are also benefiting from limited competition as other lenders have pulled out of the market or restricted their capital, creating an opportunity to transact on high-quality assets at lower valuations with better pricing. These are predominantly income-producing assets that expand across our focus segments.At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Higher rates and fee income associated with the strong deal activity and a larger balance sheet, drove a $2 million year-over-year increase in net investment income to $25.2 million. Net rental income increased over last year and from Q3, as our Saskatchewan investment properties continue to lease up. The team has made great progress completing and stabilizing these properties, which is evident in the reduced vacancies and the corresponding increase in net rental income. We will continue to move this project forward and execute on the stabilization plan. I should note that in the fourth quarter, we recorded a onetime $1.2 million item, contributing to other income, primarily from an HST input tax credit refund from prior period. Net income of $15.3 million for this quarter was up over 11% from Q3 of this year. While our Q4 income benefited from higher portfolio interest rates, rising rates also led to increased interest expense on the credit facility.I would now take a closer look at the earnings and cash available for distribution. We recorded $0.19 in earnings per share, and $0.18 on diluted basis in Q4. We had $0.20 of distributable income per share. Our payout ratio for the quarter on distributable income was 86.3% or 93.3% excluding the HST refund.Looking more closely at distributable income, which represents the company's ability to generate recurring cash flows from dividends by removing the effects of amortization, accretion and other noncash items from net income. Since the merger in 2016, our quarterly distributable income has remained relatively stable at around $0.18 to $0.20 per quarter. The MD&A includes a detailed distributable income reconciliation, but here is a short summary of this accounting treatment that results in a divergence of DI and EPS. There are timing differences between cash lender fees earned versus the amortization of those fees over future quarters, as well as amortization of financing fees and accretion expenses associated with the outstanding convertible debentures.Turning now to the balance sheet highlights at December 31. Looking at year-over-year comparison, our assets increased $146 million, which was funded by $60.6 million of new equity and $83 million of incremental debt. At the end of 2018, we have a balance of $478 million on our mortgage investment credit facility, which is basically a full draw on the $500 million facility. In addition, we had about $33 million outstanding on our credit facility associated with investment properties.I will now turn the call back to Cam for closing remarks.
Great. Thanks, Gigi. Looking ahead, we remain optimistic on the environment and outlook for 2019. Deal flow continues to be strong and we continue to evaluate and convert a robust pipeline of approximately $0.5 billion at this point. Our pipeline remains weighted towards major cities: Vancouver, Calgary, the GTA, Ottawa, Montréal, and apartments in industrial are the asset classes we are focused on, followed by office. There is a lot of demand for land loans, but we continue to shy away from most. We anticipate healthy competition from multi-res again in 2019, and there is more institutional capital -- as there is more institutional capital seeking this type of investment. However, we do not see this affecting our ability to find sufficient investment opportunities. In fact, there is currently more construction ongoing in the apartment sector than we have ever seen. Our strong presence and reputation in the market allows us to win this business. Early sentiment for 2019 is that rate increases will happen at a slower pace, if at all. And the portfolio is well positioned, if rate increases do occur, as we continue to focus on investing in floating rate loans, but with rate floors. First mortgages on income-producing assets with strong sponsors in urban centers continue to be our core focus.In closing, the company continues to be well positioned to provide investors with steady monthly income from a conservative portfolio of institutional-quality investments, managed by one of Canada's largest and most experienced real estate investment managers.That completes our review of the fourth quarter. With that, we will open up the call to questions. Operator?
[Operator Instructions] Your first question comes from the line of Johann Rodrigues.
Cam, maybe just kicking off, it looks like you've been -- you've also increased the allocation to unimproved land, and I was wondering if you could maybe just provide an example or 2 of the type of loans that you've done?
Sure. Maybe I'll ask Ugo or Brad to speak to you. You want just kind of a flavor for the kinds of land deals that are being done?
Yes. And then I guess maybe kind of some of the reasoning as to why you've kind of -- why you feel kind of comfortable increasing that exposure?
This is Ugo. Just on the exposure. Some of the deals that we have committed to just were deals that we had committed to unimproved land, that we're not really [ out ] seeking for new exposure on land right now. We really wanted to just get us to sort of close to the 10% mark, and really stop our waiting that way. But some of the deals, did improve, it did go up a little bit. These were just commitments we had made over time and just reflected in the numbers over time. And it's all moving quickly, still focused on multi-res land improvement deals.
Yes. It's just -- yes, and through the entitlement process, which adds a lot of value at this time, right.
Okay. Okay. And then the Alberta stuff, what asset class would you say that's mostly?
Brad, perhaps, you can speak to Alberta.
Yes, it's multi-family and office. Downtown office, multi-family a lot up in Edmonton, some industrial. But it's in those core segments.
Okay. And then maybe, Cam, given where the stock price is today. Are you kind of more -- in terms of raising permanent capital, are you more likely to issue equity than maybe convert at this point?
There are always -- that's always a bit of a loaded question, obviously. But I would say is that we are comfortable with where our leverage ratio sits as a percentage of our capital structure at this time, being in the 47%, 48% range. I would suspect that any incremental leverage that we add going forward would be accompanied by a roughly equal amount of equity to maintain that ratio. So I think we're comfortable with where we're sitting on -- just to repeat that, we're comfortable with kind of where we're sitting on a ratio basis. So any capital we're raising from this point forward has to -- somewhat maintain that within some bands.
Your next question comes from the line of Graham Ryding.
So the -- maybe we could dig into the stage 3. There is a retail property outside of Toronto just -- I think you were targeting to resolve that by year-end, but it's still on your books. So maybe just some color on the status of that situation.
Sure. Ugo?
Yes, we were hoping, Graham that -- we were hoping that might get resolved by year-end. Unfortunately, it's been kind of pushed back a little bit. We're in the final stages of an agreement with a party, and, right, we're just in the final stages of getting that done and resolved. It will get resolved in the second quarter. Exactly the time of it, I don't know, but we're in the sort of the LOI stage of that part.
So the -- do you have enough visibility then on the process, that you're comfortable with the loan-to-value exposure or the overall exposure on the mortgage?
Yes, like, we're comfortable. It was a loan that was a stage 3 that we are working through. We're comfortable that we've come to an agreement with a company that will take over the property, and we lease it and move forward on that development.
Okay. And then on the other investment side, I think there was a new $7 million sort of loan that was moved into stage 3. Just some color on what that revolves around.
Yes. I mean, as you noted, it's a pretty small immaterial position. And you can tell by the provisioning we took against it that we believe that we're well covered. We are -- we proactively -- as you can see, it moved quickly from 1 to 3, and normally that's a 90-day process. In this case, it moved less than that because we're pretty proactive in moving it there, and we're making progress to move it back out of stage 3. Our best estimate at this point, Graham, is probably end of second quarter.
Okay. Is there a loan-to-value on that? Is it one loan? Is there a loan-to-value? Or what gives you comfort from the exposure?
The loan to value is 65%, 70% loan-to-value right now, Graham. We're working through the borrower. The borrower -- it was part of a loan that was in the development stages and we're revisiting their development plan, and that's why we moved it to stage 3. But I think we've come to an agreement shortly with the new borrower. So that's why we feel comfortable that, that deal will go -- get back on track.
Okay. That's helpful. The Saskatchewan Portfolio, just maybe an update on where the sort of occupancy rates are with those apartments and sort of what is the longer-term plan for that investment? Is it still a couple years out? Or what's the progress?
Why don't I start and then turn it over to Ugo for additional color. I think you'll notice in the financials a much more significant contribution coming out of the Sunrise portfolio than you've seen in the past. And I think that's reflective of the implementation of the plan, which is the stabilization of the asset, as you noted. And yes, I'll let Ugo talk about more specifics, but the vacancy rates have come down materially. In terms of timing, this isn't a forever hold for the company. And it's certainly something we're starting to talk about internally around where do we go and when do we do that. Do you have anything else, Ugo, to add?
Yes. Graham, just -- I'd add when we took it over, the vacancy was fairly high, it was in the 40%. And now it's -- we're down to 7% availability of units. A lot of the work, the value-add has been completed, and it's made a tremendous amount of progress in the last year.
Your next question comes from the line of Jaeme Gloyn.
First question is just related to the equity raising right now that's ongoing. Are you still comfortable with that process at these levels? Or is it something that's -- yes, I guess, kind of similar to the first questions out there around looking to do something a little bit larger today? What are you thinking about in terms of that?
Yes, thanks, and I'll try to answer the similar question differently. One of the things that we need to be cognizant of is the raising capital that's accretive to our shareholders. And so you'll note some of our activity of late has been more in the private placement and/or at the market issuance, where the cost, the total cost of fundraising, which includes the discount as well as the commissions, is substantially lower, allowing us to do accretive deals. I think we'd like to see -- we can all do the math and we can calculate our current premium to our book value. And I think it's pretty evident from that whether there's enough room to fully cover all the costs associated with the bought deal financing at this point.
Okay, great. And with respect to the dividend and what you're foreseeing for 2019, would you expect to see modest increases again in 2019 and potentially beyond? Or with where the capital is and where we are sitting, whether that's a possibility?
Yes. I think, that's, obviously, difficult to answer question. As we look out through the rest of '19, it's going to be somewhat dependent on what rates are going to do this year and what the competitive environment and deal flow we're able to achieve in the vehicle. I would say, at this point, that we're comfortable with the level we're sitting at. I wouldn't bank on increases at this point, particularly given less-than-robust economic news -- recent economic news and where we think rates are going to be heading here in the near term.
Okay, great. And last one just on the rate outlook. You obviously shifted the portfolio mix to floating rate quite significantly. Where would you expect to see that mix, let's say, at the end of 2019? In particular, given that we seem to be sort of at a -- maybe a bit of a capping here in underlying rates. And then the second question related to that is, has there been any impact or any changes in the fee or loan origination as well?
Yes. Perhaps, I'll start by asking Brad to just comment a little bit about the floors that we incorporate. Because I think one of the thoughts is what happens if rates hold steady or start to depress from these levels. So perhaps I'll stop there for a second and come back and address part Bs and Cs. Brad?
Yes. So when we originate a loan, we'll typically set the floor at -- whether it be over prime or BAs, we'll establish a spread in that loan and we'll set a floor at that current market rate. So if rates were to go down, our yield won't trend down with that. And if they go up as a floating rate loan, we capture the upside of that. And depending upon specifics of any one transaction, we may require rate caps on that borrower purchase to cover the upside interest rate risk to them. So from that perspective, we're pretty predictable. We don't price in rate increases when we do a deal, that's only upside. And we protect ourselves from rate declines with the floor that we mentioned at the top.
And if you think about where do you go from here, we -- there's approximately 10% to 12% or 13% portfolio turnover in every -- in any given quarter. Now some of that will be turned over in existing floating rate deals, so that's not going to be all deals transitioning from a fixed to a floating. But certainly, a component of that is going to be historically a fixed rate that we are redeploying capital on a floating rate basis. So I would expect that the floating rate component continues to rise. There is a point in which there are certain clients and certain deal structures that are not floating rate, that are preferred to be fixed, and so there will always be a component of our book that is fixed. But I would suspect that you'll continue to see some increase in the component of that floating rate through 2019.
And has there been any impacts on the fees earned as a result of this shifting? Is there some -- is there a little bit of give-back on your part to get that sort of upside protection on higher rates?
No, we...
Or any dynamics at play in the fee earned?
Why don't you go ahead, Brad?
I was just going to say, I mean, the high percentage of first mortgages tends to have one point fee versus being able to get more than a point. And then, we do, do some, with our stronger borrowers, deals that are inside of a year. And in those cases, we typically don't get a full point. So it's a little bit of a mix on term that's driving that movement.
In other words, it's more a reflection of the term of the loan-to-fee amount rather than the nature of the interest payments.
[Operator Instructions] Your next question comes from the line of Johann Rodrigues.
Just wanted to circle back on one thing. You'd mentioned in regards to the Alberta portfolio that some of it was office related. I was just wondering, maybe an example of what you're seeing there? Because it -- on the surface that maybe seems like one of the least-desirable asset classes that you've wanted to [indiscernible].
Yes, I can answer that. So when you take a look at office, I mean, one of the vacancy that you're seeing in Calgary, particularly the suburbs, has been supply driven as much as the economic cycle, and that supply has all come to market. I think there's less than -- and we talked about this at the last quarter. There's less than 500,000 square feet coming to market in the next couple of years. So from that perspective, the amount of space to be leased is fairly fixed for the foreseeable future. So you're not dealing with supply issue and the economic activity in the province is very strong. And the deals that we are looking at are core CBD-type transactions as opposed to out on the fringe of the suburbs, where the market has actually already shown some signs of rebounding in terms of positive absorption of space. So I think we've seen the bottom there and are picking our spots correctly by focusing on the CBD in a market which really has no new -- no near-term new supply.
And I would add, too -- I would add that our entry points into Alberta office, for years, we were -- we shied away from that market because of valuations. And now the valuations have come down and we're coming into a very good matrix from a valuation point perspective. And that's why we felt more comfortable entering this market on the office side because the numbers are a lot different than what they were 3 or 4 years ago. And we feel comfortable at the numbers that we're looking at today.
And there are no further questions. I would now like to turn the call back over to Cam Goodnough for closing remarks.
Great. Again, I'd like to thank everyone for taking the time to participate on the call today. We look forward to updating you on our Q1 results in May. If there are any questions, feel free to reach out to us directly. Thanks again, everyone.
This concludes today's conference call. Thank you for your participation. You may now disconnect.