Timbercreek Financial Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 5 speakers on the call.

Operator

Thank

Speaker 1

you, operator. Good afternoon, everyone. Thanks for joining us to discuss the Q1 financial results. I'm joined by Scott Rolland, CIO Tracy Johnson, CFO and Jeff McDate, Head of Canadian Originations and Global Syndications. In Q1 'twenty three, we reported another quarter of strong financial performance and year over year increases in earnings and distributable cash.

Speaker 1

Of note, We delivered record quarterly net investment income of $32,700,000 up 44% from last year. Record adjusted net income and comprehensive income of $18,000,000 up from $13,800,000 in the same period last year. And a significant increase in distributable income, which reached $18,300,000 or $0.22 per share at a very comfortable payout ratio of 71.1. While transaction activity was lighter in the Q1, We continue to see healthy borrower demand and anticipate higher new funding activity as we look ahead in coming quarters. We have the financial capacity and the team ready to execute.

Speaker 1

Generally, the portfolio performed well in the Q1, reflecting our ongoing focus on high quality income producing assets in urban markets. However, as we discussed with Q4 results in March, in select situations borrowers are experiencing challenges in this environment. Our investment team continues to actively manage these loans and advance our exit plans to achieve the best outcome for shareholders, something we're accustomed to doing over 14 years in this business. We remain confident in the quality and value of the underlying assets in each instance, which should more than support our loan exposures. With strong cash generation and a low payout ratio, we are fundamentally well positioned to manage through this period and deliver on our core financial objectives.

Speaker 1

With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions. Scott?

Speaker 2

Great. Thanks, Blair, and good afternoon, everyone. It was another strong quarter across key financial metrics as our largely floating rate portfolio continues to generate strong top line income and a low payout ratio. This provides a meaningful buffer to manage through a period when inevitably some borrowers encounter challenges specifically from higher interest expense burden than they originally anticipated. I'll quickly cover the portfolio metrics before commenting on the origination environment and several specific loans in Stage 2 and Stage 3 at quarter end.

Speaker 2

So looking at the portfolio KPIs, At Q1 end, 89% of our investments were in cash flowing properties, up from 87.4%. Multi residential real estate assets, apartment buildings continued to comprise the largest portion of the portfolio at 50.8% at quarter end compared to 52.5% in Q4 'twenty two. Including retirement loans, approximately 58% of the portfolio was in multifamily residential assets at year end. And we remain almost entirely invested in urban markets, which provide superior liquidity. We continue to carefully manage risk ensure the portfolio is conservatively positioned.

Speaker 2

1st mortgages represent 92% of the portfolio, consistent with 92.4% in Q4. Our weighted average LTV for Q1 was consistent with the prior quarter of 68.5% compared to 68.3% in Q4. And the portfolio's weighted average interest rate or wear was 9.7%, the same as in Q4. Our Q1 exit wear was 9.7% also, down from 10% exiting Q4. Decrease reflects our strategy to deploy loans with a reduced risk profile in this environment.

Speaker 2

As demonstrated this quarter with a low distributable income payout ratio, We have the flexibility to do this while still generating very healthy results at moderately lower the risk. For reference, the wear at this time last year was 6.6%. Year over year increase is due to the impact of rate hikes on our floating rate loans, which represented 88% of the portfolio at year end. Looking forward, we will continue this conservative stance on new investments and put new money to work on an attractive risk adjusted basis. After a reasonably active Q4, Portfolio activity was a bit lighter in Q1, both for repayments and originations.

Speaker 2

In Q1, we invested roughly $39,000,000 in new mortgage investments and additional advances on existing mortgages totaled $13,000,000 This was offset by net mortgage repayments and syndications of about $99,000,000 resulting in a decrease in the net value of the mortgage portfolio from year end. Portfolio turnover was also lower at 8.4% compared with 17.2% in Q4 'twenty two. As Blair mentioned, we expect activity to pick up in the coming quarters and the team has a solid pipeline of opportunities. In terms of asset allocation, were no material changes from Q4 with respect to geographic concentration, with the vast majority of the portfolio in urban markets in the largest provinces, Ontario, BC Quebec and Alberta. We continue to be pleased with the quality of the deal flow in these core markets.

Speaker 2

Our originations focus remains on income producing multifamily properties and we are also seeing diversification opportunities with warehouse style industrial assets. There has also been a pullback by bank lenders in unimproved land. This is creating unique opportunities to invest in low LTV properties with stronger sponsors than typical. Our exposure to land and industrial were at 5.8% and 10.5% of the portfolio respectively, both up from Q4 'twenty two. On the other hand, we continue to be cautious on older format retail centers and the office sector in general.

Speaker 2

The office market is in a period of transition as owners and tenants adjust to post COVID realities. And as a lender, we are monitoring the situation closely. Fortunately, TF has limited exposure to this sector and we are comfortable with the loans that we do have. Overall, we utilize a disciplined risk management approach to all of our investment activities, and we have the flexibility to move quickly to take advantage of changing market environments. At this time, I'll provide a progress update on our Stage 3 assets.

Speaker 2

We discharged $1,900,000 of the Stage 3 condo inventory loan in the quarter, more units under contract to close in Q2 and increased sales activity expected in the second half of twenty twenty three. We also continue to work towards an exit plan on the Stage 3 medical office building in Ottawa. This strategy is advancing well with a meaningful progress expected in the coming months. You may also recall that the remaining two assets in Stage 3 are owned by a sponsor group that filed for CCAA in Q4 'twenty two. Both assets are attractively located in Montreal.

Speaker 2

1 is a high quality income producing senior living facility and the other is a multifamily building that is currently under construction. The legal process here has been advancing and we will likely exit the CCAA in the coming months. Resolution could take different forms from outright repayment to a period of lender control. But overall, we continue to believe there will be a limited principal exposure We are satisfied with the progress we've made. Additionally, during the quarter, we added a series of individual loans with 1 sponsorship group into stage 2.

Speaker 2

While these loans continue to be performing loans where interest payments are current, We believe there is increased risk in the liquidity of the sponsorship group. The loans are secured by high quality, income producing multifamily assets built less than 7 years ago in Quebec. In short, we concluded that while there is sponsorship level risk, the underlying assets are strong with valuations that should more than support our loan exposures. Stage 2 loans may well resolve themselves without any issue. This is an exposure we are monitoring closely and reviewing the plans of the borrower carefully.

Speaker 2

We continue to have high confidence in the overall durability and for the performance of the portfolio through market cycles. In the near term, higher rates can place some strain on certain borrowers as they manage the higher carrying cost. This is a normal and expected reality in our business. We are very prepared to work through these situations. And fortunately, with these types of assets, Our borrowers typically have several options as well.

Speaker 2

Lastly, as Blair highlighted, we are currently managing from a position of financial strength, with a high cash yield and strong interest income. I will now pass the call over to Tracy to review the financial results. Tracy?

Operator

Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I'll focus on the main highlights of the Q1. As Blair mentioned, we reported strong income growth for Q1. Net investment income on financial assets measured at amortized costs was $32,700,000 up 44% from $22,700,000 in the prior year, reflecting significantly higher interest rates positively impacting the variable rate loans. Fair value gain and other income on financial assets measured at fair value through profit and loss improved from a loss of $100,000 in Q1 2022 to a gain of $282,000 in Q1 2023.

Operator

We reported a modest net rental loss from real estate properties of 300 and of $89,000 This is related to land inventory from an equity interest conversion completed last year. We intend on selling the land and have accordingly recorded this with rental income of $83,000 offset by operating losses of $442,000 In terms of the provisions for mortgage investment losses, we reported $300,000 for Q1 2023 versus $649,000 in last year's Q1. Overall, this is due to some movement in the provision among Stage 3 loans. As Scott discussed earlier, we continue to believe there is limited principal on these loans given the quality of the assets. Lender fee income was $2,500,000 up from $2,300,000 in Q1 2022.

Operator

Q1 net income was a record $18,100,000 compared to $12,900,000 in Q1 last year. Q1 basic and diluted earnings per share were $0.22 $0.21 respectively, up from $0.15 in the prior year. After adjusting for net unrealized fair value gains and losses on financial assets measured at fair value through profit and loss, Q1 adjusted net income was $18,000,000 compared to $13,800,000 in Q1 last year. Q1 basic and diluted adjusted earnings per share were $0.21 respectively, up from $0.17 in the prior year. We also reported strong growth in quarterly distributable income and adjusted distributable income of $18,300,000 in Q1 2023, up from 20% for the same period last year.

Operator

On a per share basis, we reported distributable income of $0.22 up from $0.18 in last year's Q1, and as you can see in this chart, above our longer term quarterly average. The Q1 payout ratio on VI was very healthy at 79.1 percent similar to Q4, but considerably lower than last year's Q1. Turning now to the balance sheet highlights. The net value of the mortgage portfolio excluding syndications was $1,150,000,000 at the end of the quarter, a decrease of about $47,000,000 from the 4th quarter due to repayments exceeding new investments in the period. The enhanced return portfolio decreased to $59,400,000 from $80,600,000 in Q1 2022, primarily as a result of repayments in the period.

Operator

The credit facility for mortgage investments was $387,000,000 at the end of Q1 of 2023 compared to $450,000,000 at the end of Q4 2022. With $133,700,000 available on the credit We continue to be in a strong liquidity position for 2023. Shareholders' equity increased to $701,000,000 at Quarter end up from $696,000,000 last year and $699,000,000 at year end 2022. This reflects our focus on increasing book value after disposing and restructuring some of our non core assets and investments during 2022. Under the normal course issuer bid program, we repurchased for cancellation 112,500 common shares this Last quarter at an average price of $7.52 per share.

Operator

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.

Speaker 2

Thanks, Tracy. We provided a longer outlook with our Q4 financial results and in short, we remain generally positive on the market environment for 2023. After a rapid rise in rates, both buyers and sellers are adjusting to the current environment and the reassuring outlook that rates remain steady for a while. Given this backdrop, we continue to expect an increase in activity in 2023 as borrowers move to execute on plans after, in many cases, staying on the sidelines through 2022. This bodes well for increased originations, repayments and portfolio turnover after a comparatively quiet Q1.

Speaker 2

Within our portfolio, we will continue to see strong top line income supporting healthy distributable income, earnings and payout ratios. While certain borrowers will feel the strain from higher expenses, our team is experienced and adept at managing these situations and we are confident in the quality of the assets supporting our loans. With that, that completes our prepared remarks. And I will now open the call to questions.

Operator

We will now take any analyst questions. Our first question is from Rapseed. Please go ahead.

Speaker 3

Thank you. If I could start on the credit side, the condo Two part question here. One, did you take any losses on the initial $1,900,000 divestment? And second, Judging by your commentary, it looks as if you're planning to exit by the end of this year. Would that be a fair takeaway?

Operator

It's Tracy. I'll answer the first question on the release. So in terms of what we value the inventory at, The sale of the condos were within range of that. They're at about 95% of the list price, which is consistent with how we had who values the inventory relative to what it was listed for on MLS. So we actually had a bit of a recovery in the provision ultimately

Speaker 4

Yes. I mean, I think the yes, like in general, the market appetite has continued to be within range of where we've listed and valued assets and certainly in excess of our exposure. There continues to be activity. We are expecting to pick up in the second half and we do have perspective interest from some for the larger bulk bidders that could clean up the residual before the end of the year, but that still could be determined at this point.

Speaker 3

And I had a couple of more questions on the credit side. One on the medical office building in Ottawa. I don't recall, but did you ever share an LTV on that project? And second, The exit plan, could you provide more color on that? Is this a restructuring that you're working on or complete exit of the loan?

Speaker 2

Yes, it's right now we're sort of working with the borrower and working through what our options are, which could include full enforcement on the property We're continuing to work with the borrower. So it's a bit sensitive to discuss given sort of the status of the deal. Depending on how that resolves though, This is one where I think we may change the situation, but we do think there's value in this asset, additional value as well. There's some lease up opportunities here. So this is why we may work with the borrower or if we're taking control ourselves, we may invest a bit more here to create additional value in the property.

Speaker 2

So I'd say that at the actual plan, it will come together in the next few months.

Speaker 3

Okay. That's fair. And my last question, the Stage 2 or the new Stage 2 loans this quarter. I wanted to confirm if I heard right, these are all cash flowing properties First, and we are you able to share any more color around the loans, maybe LTVs or Hello, tenants here, is there anything to discomfort here?

Speaker 2

Yes. So these are current loans. They are all income producing multifamily properties. I will say at this point, given how the rapid rise of rates, the properties themselves at the Board is having to inject some equity along with the cash flow from the properties to make the full interest payment. From an LTV perspective, I mean the LTVs are elevated, but I would say it's the 80s.

Speaker 2

So there's still quite an equity cushion to our debt exposure. And so the borrower is working through Plans for that could be refinancing, it could be sales, it could be various different solutions and situations. So from us, from our perspective, we just are we moved them into stage 2 because it just gives us we know it's an elevated risk there. And we're not entirely sure, of course, what the outcome will be. It depends a lot on the borrower's plans.

Speaker 2

But as of now, the loans are current. And I would say, but overall, these are newly built assets. They're very high quality. We're quite comfortable with the security itself.

Operator

And if there are no further back to receive. One moment, please.

Speaker 3

Sorry, I didn't want to be greedy and take up all of your time.

Speaker 2

No problem.

Speaker 3

I had a couple of more questions. On the exit with your average mortgage rate 9.7%, it's down from the 10% level. Is it fair to say that your mortgage might have peaked now given where rates are or absent any unexpected rate hikes by the Bank of Canada?

Speaker 2

Yes, I think I caught that question correctly. This has the where peaked, right?

Speaker 1

That was essentially the question.

Speaker 2

Yes. I think that's I would say that that's true, absent any more rate increases. I would say that's true. I would expect our rates to stabilize to come down maybe a quarter point ish as we start progressing the road. And that's a little bit of us, I'm sort of looking at my origination head here, Jeff.

Speaker 2

As we look at loans and She's coming to the shop. Just listen, the environment remains a little unstable. And so for us, knowing where we are with our distributable income, which is in quite a positive and healthy range. We've got that latitude right to maybe take do some loans that Whatever the risk profile is that makes it a little safer like a lower LTV or stronger location, I'm happy to trade a little rate for that safety, especially in this environment, right? And so I think we'll be able to maintain rates, but I would if we who's at 25 basis points and the 50 basis points, a bit of a shaving down of that top line wear, well within a healthy range of our distribution.

Speaker 3

And as an extension of that, your distributable EPS and the dividend payout ratio, it's There's quite a bit of margin over there. I'm just wondering how you're thinking about are you considering increasing the dividend or would you rather deploy excess capital towards Either share buybacks or save it for a rainy day, any thoughts on that?

Operator

Yes. We certainly talked about this a lot. And just looking at the a bit of the uncertainty in the market right now, we're comfortable kind of proceeding as is, but will certainly take a closer look at it as we get through the balance of the year. And if the opportunity presents itself, yes, sure. But right now, just with Some of the things we're working through, we're okay with keeping the cash as is.

Speaker 3

Okay, sounds good. Thank you.

Speaker 1

Thanks.

Operator

Since there are no further questions at this time, I'll turn the call over to Blair for final remarks.

Speaker 1

Great. Thanks, everyone, for joining us today. We look forward to speaking again when we release our Q2 results. And as always, please reach out to the team if you have any questions in the interim. Have a great afternoon.

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Earnings Conference Call
Timbercreek Financial Q1 2023
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