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 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 Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone. Thanks for joining us to discuss the fourth quarter financial results. As usual, I'm joined by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications.
We closed 2022 with a very strong fourth quarter across our key financial measures as we benefited from higher interest rates applied across a larger portfolio of variable loans. This translated into strong growth in our investment income and distributable income. For example, DI was up 14% to $18 million in Q4 from the prior year quarter, and it grew 10% for the full year to $66 million after provisions. In this period of unusually rapid prime rate increases -- excuse me, this period of unusually rapid prime rate increases caused some broader challenges in the real estate environment as well, including a general slowdown in commercial real estate transaction activity during Q2 and Q3. As expected, this eased in Q4, which you will see reflected in higher transaction levels and turnover in the portfolio.
While the general pace and magnitude of the increases in the prime rate and shorter-term rates generally has been an intentional shock to the economy, we think that it's important to note that the ultra low rate environment that existed for much of the last decade was challenging for active lenders like Timbercreek. As we return to a more normalized rate environment in the latter part of '23 and into '24, from a macro perspective, our business will be very well positioned to generate attractive cash flow. As Scott and Geoff will speak to in a moment, we are actively managing a few situations where our borrowers have faced challenges in this environment.
Active management is required from time to time in our business and I'm confident in our team's ability to navigate these unique situations to preserve capital. Strong cash generation and a low payout ratio, we are fundamentally well positioned and the overall health and durability of the portfolio continues to underscore the value of our conservative approach.
By underwriting high-quality income-producing assets from high-quality borrowers, we generally have more options and leeway in periods of market turbulence. With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions. Scott?
Thanks, Blair, and good afternoon. We are pleased with the financial performance in the quarter and for the full year, especially in light of the unique operating environment in 2022. I'll focus first on the portfolio metrics before commenting on the origination environment and a few specific loans that moved into Stage 3 at period end.
Looking at the portfolio KPIs, at year-end, 87.4% of our investments were in cash flowing properties, down modestly from 89.3% in Q3. Multi-residential real estate assets, apartment buildings, continue to comprise the largest portion of the portfolio at 52.5% at quarter end. And including retirement loans, approximately 60% of the portfolio was in multifamily residential assets at year-end, and we remain almost entirely invested in urban markets, which provide superior liquidity. Particularly in an uncertain environment, our risk management strategies are front and center. First mortgages represented 92.4% of the portfolio, up from 90.9% in Q3.
Our weighted average loan-to-value for Q4 decreased to 68.3% from 69.4% in Q3. And the portfolio's weighted average interest rate or WAIR was 9.7%, up meaningfully from 8.5% in Q3 as we anticipated, and our WAIR exiting this quarter was 10%. The increase is due primarily to the impact of additional rate hikes in Q4 on our floating rate loans, which represented 94% of the portfolio at year-end. This was partially offset by our decision to reduce loan to values on some of our new originations in Q4, which naturally resulted in lower rates on those loans.
Looking forward, we will likely continue this conservative stance on new investments and based on today's prime rate, we'll be putting new money to work in the 8.5% to 10% range. As expected, we saw higher turnover and repayments in Q4, reflecting a general uptick in market activity. The rising interest rate environment in Q2 and Q3 resulted in muted transaction volume as buyers and sellers went through a price discovery exercise. This chart shows the quarterly turnover over a longer time and clearly highlights that these were unusual periods.
For the quarter, we had net mortgage repayments and syndications of about $214 million, and portfolio turnover of 17.2% compared with just 3.3% in Q3. Our team has line of sight on higher repayments and was able to recycle a considerable amount of this capital into high-quality new deals.
Origination activity was solid as we invested roughly $139 million in new mortgage investments and additional advances on existing mortgages of $13 million. New funding was once again primarily directed towards our core residential assets. The portfolio remains well diversified and concentrated in urban markets in the largest provinces with approximately 96% of the portfolio in Ontario, BC, Quebec and Alberta. There were no material changes from Q3 with respect to geographic concentration and we continue to be pleased with the quality of the deal flow in our core markets and asset types.
While the portfolio continues to perform well overall, we did have 3 loans move to Stage 3 at year-end resulting in an increase in our loan loss provision. Specifically, we had 2 loans that moved from Stage 1 to Stage 3, which represents $71.8 million in aggregate. These are part of a portfolio of assets owned by a sponsorship group that filed for CCAA in the fourth quarter.
We issued a press release commenting on this at the time. Both assets are attractively located in Montreal, one is a high-quality income-producing senior living facility and the other is a multifamily building that is currently under construction. We are actively engaged in the legal process here and are working to ensure the best outcome for our secured investments.
The other mortgage that moved into Stage 3 is a suburban medical office building in Ottawa with the sponsor's releasing and development plans are behind schedule. We are pursuing an active asset management strategy in this instance as well. We continue to have high confidence in the overall durability and performance of the portfolio through market cycles and varying macro conditions. We underwrite high-quality income-producing assets, and we stress test loans for different rate scenarios. In the near term, there's no question that these rates can place some strain on certain borrowers as they manage the high carrying cost. Fortunately, with these types of assets, there are usually options for the borrowers.
Importantly, we are managing from a position of financial strength with a high cash yield and a strong interest income. That's a good segue to Tracy, who will review the financial results. Tracy?
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I'll focus on the main highlights of the fourth quarter. As Blair mentioned, we reported strong income growth for Q4. Net investment income on financial assets measured at amortized cost was $31.3 million, up 40% from $22.4 million in the prior year, reflecting the benefit of interest rate increases on our variable rate loans and higher weighted average net mortgage investments. Fair value gains and other income on financial assets measured at fair value through profit and loss increased from a loss of $7.4 million in Q4 2021 to a gain of $736,000 in Q4 2022, resulting primarily from the exchange of 2 fair value through profit and loss loans for equity interest and land inventory currently carried at $30 million.
Additionally, in November 2022, we discharged the remaining fair value through profit and loss investment for cash of $19 million and a vendor take-back mortgage with an estimated fair value of $5.5 million. The increased year-over-year expenses mainly reflect provisions for mortgage investment losses of $2.8 million for Q4 2022 versus $103,000 in last year's Q4. This increase relates to the 3 loans that were moved to Stage 3 in the fourth quarter, which Scott discussed earlier.
Lender fee income was $2.1 million, down from $3.7 million in Q4 2021 as a result of lower turnover and origination volumes. Q4 net income was $14.8 million compared to $2.4 million in Q4 last year. After adjusting for fair value gains and losses on financial assets measured at fair value through profit and loss, adjusted net income was strong at $14.7 million versus $14 million in Q4 2021, an increase of 5%.
Q4 basic and diluted adjusted earnings per share was $0.17, the same as in the prior year. We generated record quarterly distributable income of $18.4 million in Q4 2022, up 14% in the same period last year. On a per share basis, we reported DI of $0.22, up from $0.20 in last year's Q4, and as you can see in this chart, above our quarterly average. The Q4 payout ratio was very healthy at 78.7% on a distributable income basis.
For the full year 2022, we generated DI per share of $0.79, up from $0.74 last year, for a payout ratio of 87.1%. Blair noted earlier, as we transition from the low-rate environment we found ourselves in for much of the last decade, we will be well positioned to generate attractive returns for our shareholders.
Turning now to the balance sheet highlights. The net value of the mortgage portfolio, excluding syndications, was $1.2 billion at the end of the quarter, a decrease of approximately $60 million from the third quarter due to the higher repayment activity, Scott called out earlier. However, year-over-year, the portfolio grew by roughly $36 million. The enhanced return portfolio decreased by $72.9 million -- sorry, the enhanced return portfolio decreased to $72.9 million from $84.6 million at Q4 2021 as we continue to deemphasize this segment of the portfolio.
The credit facility for mortgage investments was $450 million at the end of Q4 2022 compared to $515 million at the end of Q3 2022. With $103.5 million available on the credit facility, the company continues to be in a strong liquidity position entering 2023. I will also highlight that shareholders' equity stood at $699 million at year-end, up from $685 million last year. This reflects our intent to focus on increasing book value after disposing and restructuring of some noncore assets and investments during 2022.
In September, we resumed the normal course issuer bid program. And during Q4, we repurchased for cancellation 107,500 common shares at an average price of $7.20 per share. We will continue to evaluate opportunities to use this to acquire shares accretively, especially when we trade below book value. I will now turn the call back to Scott for closing comments.
Thanks, Tracy. For closing comments, I want to take a minute to reflect on the current environment from an industry perspective. 2023 is certainly an interesting time for borrowers and lenders, as both sides adjust to a rapid rise in interest rates that we haven't seen in 15 years. While we are likely near the end of the interest rate increase cycle, the Bank of Canada may have a few more moves to make as job and inflation numbers remain high. 2- to 5-year bond yields are a good guide to watch here, and we've seen 50 basis points of expansion over the last month, reflecting some of this renewed risk to the upside.
While new investments are being fully underwritten to account for this environment, older loans and business plans almost certainly have a higher expense burden than originally anticipated. Mitigants for owners include the fact that real estate values increased significantly during the last several years, and we are now seeing higher property incomes across many asset classes and markets. This is tied to inflationary rent growth. While lenders may have more issues to deal with, their interest income is robust and provides a meaningful cushion to absorb such events.
Given this backdrop, we expect an increase in activity in 2023, as borrowers pivot to execute on plans, having been taking more of a wait-and-see approach in 2022. This will include standard acquisitions and refinancings, recapitalizations with equity as well as asset sales to solve specific liquidity gaps.
Within the Timbercreek portfolio, which is almost entirely floating rate, we will continue to see strong top line income. Borrowers of projects that are near stabilization will look to refinance at lower rates, and that should keep our turnover ratio in line with historical averages. As for new business, there continues to be strong demand for shorter-term loans that support assets during their value-add phase, and Timbercreek will continue to seek out the best of these investments for our portfolio. That completes our prepared remarks. And with that, we will open the call to questions.
[Operator Instructions]
Jaeme, your line is open.
First question is related to the payout ratio this quarter in what looks like a pretty healthy run rate in the 80% range as we move into '23. Just wanted to get your thoughts on what that could mean from a shareholder or return of capital to shareholder plan in terms of the dividend or more share buybacks?
Yes. Thanks. Good question, obviously. So I mean, the short answer there is we're very happy to be in this position. Obviously, it's nice to have a well-supported dividend, but we're going to be cautious for the next quarter or maybe 2, doesn't have to be a full quarter. I mean just generally, as Scott said, we want to wait and just see how the remainder of this rate hike environment unfolds and maybe it's over, maybe it's not, assuming things go as planned, and we'd love to be in a position to talk about what to do with that cash.
Okay. Great. And then the second question is, I guess, related to the loans in Stage 3 at this point. What gives you confidence around the provisions taken to date thus far and your ability to realize positive outcomes on those loans?
I mean we've been in this higher rate environment now for 9 months and certainly well telegraphed. So I think for us, take those existing loans that we have, and we monitor our book on an almost daily basis. And I think as we sit there and we take a look at stress in the portfolio, I mean, I think those issues come to light, right, fairly evidently. Not saying we don't -- we can't predict the future, obviously, but we feel pretty confident that we sort of know where that weakness was.
So I think that's kind of a general comment on provisions. When it comes to like the CCAA situation, that's -- it's an unfortunate situation. You hope that doesn't occur. But when that happened in Q4, we did make the announcement on it. We're really happy with the assets themselves and the status of the assets. And PwC is sort of running the process there, and it's been quite transparent. So from our perspective, we're following the legal process. We're there to represent the first mortgage holder -- lender interests at court. And so far, I can look to Geoff, if he wants to add any comments. I think we just feel it's sort of normal course with proper transparency, and from my perspective, we're sort of getting through the CCAA stay period. And I think by the time we have our next conference call, I am quite optimistic that we're going to have some meaningful progress on next steps for those assets.
There's not much more I can add, Jaeme, just because of where we are with the legal process.
Rasib, your line is now open. Please go ahead.
If I could continue on the CCAA Stage 3 assets. Have there been any development since November, December-ish? And the reason I ask is I just saw a headline saying some of those assets are being put up for auction. I'm not sure if that's speculation or if that's something that you could comment on.
Yes. No. So obviously, I'd say the process has continued to move forward. I think in terms of a definitive sales process around any subset of the overall portfolio, I don't have definitive confirmation of that, but certainly that is the expectation. And obviously, there's a -- I mean it's a big portfolio, some assets are wholly owned, some assets are partially owned. So there are some complications in terms of how that ultimately unfolds. At the end of the day, for us, we are very much continuing to preserve our rights depending on which path makes the most sense for us to sort of expedite the process on our side and again, preserving our security interest and proceeding in a way that will ensure that our investments are maintained and preserved.
Would it be fair to say that we're comfortable with liquidity for the assets?
Yes. I think it's -- obviously, it's a large portfolio. So to the extent that there is a -- numerous multiple bids for everything, I think that's yet to be determined. But I think -- in the case of our 2 specific assets, certainly, the one that's built and existing, is an income-producing asset today. It is a -- it has been described within the market more broadly and certainly our view similarly as a trophy asset within the broader portfolio and the other asset being an apartment under construction, again, good quality. It's substantially complete. And again, well located and more of a conventional multi-res deal for which there will always be lots of liquidity and demand.
Would it be fair to say that you do not expect to lose any money on these mortgages and maybe just like lost interest income, but nothing on the principal side?
We took a minor provision this quarter, specifically to tie this asset, and I think that does cover what our expectation is. We'll have to see where it is with the environment, but our objective here is to recover our full position.
Okay. That's fair. And just my last question on the other Stage 3 migration, the medical building in Ottawa. A few questions there, if I could. One, is it current on payments? Or is this one of a technical default? And two, I'm not sure if you shared this, but would you be able to share an LTV figure for this one?
This is currently -- we're currently in negotiations and again, working through the legal process. So in light of that, I'm going to keep specific numbers out of the case. We have the provision that we've included, write it down to sort of where we think sort of that fair value is. And then from our perspective, though, the final outcome legally, we have not determined, but I do think we do know the asset. We do think that with a repositioning plan that there's an ability here to recapture our full investment. So this is one we're just -- we're in the process now of -- working through the process. But there's an opportunity here to sort of invest and recapture.
We have Sid next.
I was wondering if you can share the LTVs on the 2 loans in Montreal, the ones that got moved to Stage 3?
I cannot give you specific LTVs at this time. Again, we're -- these are negotiations that could involve future purchase prices as well. But what I will say is that there's no question that the LTV is relatively high, especially given the environment and the specific situation if you were to try to liquidate in a day. But for us, we do believe they're high-quality assets. We're comfortable with the price per pound. We believe we will sort of recover our full positions here. It's just a question of exactly what is that exit and the time frame for that exit looks like? We're making those decisions as we go. We're going to do what's best for the shareholders.
Got it. How has your rates been increasing, I mean, the prime rates? Obviously, most of your loans are floating rates. So you have -- just to get an idea, have you been placing in line or slightly lower?
It's pretty much in line, almost lockstep. So most of our loans are floating that -- with pure flow through.
Prime is up 4.5% last 12 months. Fair to say that your rates are also up by the same amount.
Pretty much our exit WAIR was 10%. That's a good specific question. I probably should know the answer to, but the math is pretty clear. Certainly, we had some loans that had a bit of a lag to it. But on most of our floating rate book, which is 94%, it was almost a pure flow-through.
I will say just as a comment for future loans, like we are -- we're looking at the book, right? We're looking at the environment. And so this is obviously creating a very healthy dividend payout ratio, which we're happy about it, right, and we want that support, and we want to deliver that income through into the balance sheet. But I do think for us, if you look at opportunities, there's certainly -- with some unknowns going into 2023, we are -- if we used to give up 50 basis points, 75 basis points of rate for safety, some lower LTV loans, I think we're happy to do that. So that's just something we're monitoring between sort of the portfolio management group and the originations group, looking at the pipeline and just trying to make that an optimal mix of business. So that may reduce WAIR a bit over time in 2023, but I think it's still with healthy, healthy margins.
All right. Just one question. How -- what's your outlook for originations this year? Let's -- for example, if I am trying to guesstimate the year-end portfolio size, how should we look at this?
Yes. I would say that for us, we're still -- I think in a normal course here, I'm going to say to you at this point, we should probably look to be growing the portfolio, right? And I think we probably still will by the end of 2023, but given the environment, I also could see a world where we're kind of stable, like we're kind of -- we're looking to see how that repayment environment -- essentially in our business, the repayments create capital to create new loans. If you look at our turnover portfolio page, the slide that we have in the deck, you'll see that kind of constant kind of following, one follows the other, right? So we do manage the pipeline to our repayments, but in general, we do have some ample room on our credit line, and that gives us the ability to continue to sort of creep up in the overall portfolio size.
So we like to keep some headroom there in our capital and our ability to take advantage of opportunities. But where we -- compared to where we ended December, I would say, stable to somewhat higher.
Yes. I think there's still pressure on transaction activity, right? And I think that's really been the piece for us. Obviously, we -- as a lender, we benefit from the opportunities that exist through the refinancing side of the market. And that obviously is a good piece and it doesn't keep us entirely reliant on transaction activity occurring. But depending on, obviously, the interest rate environment that some degree needs to stabilize a bit such that sort of the buy-sell gap shrinks and that transactions start happening. And I think there's an expectation for that to pick up as we move into -- further into 2023, obviously, somewhat dependent on what happens on the rate side of things.
But obviously, to the extent that you see a resumption of normal transaction activity, I think that will, obviously, to Scott's point, help drive potential for growing the book overall.
Yes. And I'll add. I'm not chasing growth in this environment where it's a little uncertain, right? But we have certainly seen some of those conventional senior lenders pull back their risk appetite, and that creates some of the unique sort of positive risk-adjusted returns for us. So whether -- we see opportunities in 2023 to lean into deals that in a normal environment, we might not have win, those are certainly good expansionary type of opportunities that we'll take advantage of.
It's Blair. I just overlay one thing on the top of what Scott and Geoff were saying there. I mean, we certainly would like to grow the business. As we mentioned earlier in the call, we do feel that the environment over the next number of years will support the growth of the business. So the stock is trading in a range that allows us to go back and increase the shareholder base, we'll look to do that. Obviously, we have to talk to the Board about that as well. But we would like to be in a position to grow the business. But the deal flow has to be there. .
Which province do you see best opportunities? Do you think Quebec will dominate the portfolio this year?
I think we've made this comment in the last third quarter. So I still kind of believe it. I still actually see balance in the country. We're still managing, as I would say, to 1/3, 1/3, 1/3, sort of West, Central and East. We've had some great opportunities in Quebec over the last -- we put in a -- we opened a new office there last year, and that's been an attractive -- we've sort of had the benefit there about local boots on the ground and with some of those borrowers, I think has led to some incremental flow for us. But we're liking some of these. I think in this environment where we have some of the senior lenders pull back, I think that's going to bode well for our Toronto and Ontario-based business.
And we've always sort of had a steady, strong flow in BC and to somewhat Alberta where we wanted to be, we wanted to play. And I wanted to see that in sort of 1/3. Geoff, do you want to add to that.
Yes. No, I think those are all fair comments. Certainly, yes, our originations initiatives in Ontario, I mean, we've been planting seeds over the last year or so in terms of, obviously, continuing to foster broker relationships and increase direct oral relationships to drive some increased volume in this market given obviously the growth elsewhere. And so we are expecting to see to its end, as Scott said, increased flow and exposure volume in this market and Quebec will continue to be stable.
Again, it's been great having boots on the ground there. That's really diversified our borrower base and our access to good opportunities. And the reality is the focus collateral-wise or asset-wise, is still very specifically oriented around the residential side and the industrial side of the commercial real estate space, both asset classes being diversified and broadly available in the province of Quebec and certainly, Ontario as well, but it's been a good driver for us in that market at this point, and we see opportunities to drive that similar growth here in Ontario going forward.
Are there any other questions at this time?
If there are no other questions at this time, I'll turn it over to Blair for closing remarks.
Great. Thanks. Thanks, everyone, for joining us today. We will look forward to speaking again when we release our Q1 results. And as always, please reach out to the team if you have any further questions. Have a good afternoon.