Timbercreek Financial Corp.

Recorded.

Good day, ladies and gentlemen. Welcome to Timber Creek Financial's fourth quarter earnings call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts. Analysts are asked to raise their hands to register for a question. 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 Johnson, CFO, and Jeff McTate, 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 is using 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 Timber Creek. 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 Jeff will speak to in a moment, we're 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. With strong cost 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 in 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 three 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 WHERE, was 9.7%, up meaningfully from 8.5 in Q3, as we anticipated. And our WHERE 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 devalues 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 three loans move to stage three at year end, resulting in an increase in our loan loss provision. Specifically, we had two loans that moved from stage one to stage three, 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 three is a suburban medical office building in Ottawa, where the sponsors 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 play 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 costs 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 two 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 three 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 diluted adjusted earnings per share was 17 cents, the same as in the prior year. We generated record quarterly distributable income of 18.4 million in Q4 2022, up 14% from the same period last year. On a per share basis, we reported DI of 22 cents, up from 20 cents 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 79 cents up from 74 cents 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 activities Scott called out earlier. However, year over year, the portfolio grew by roughly $36 million. The enhanced return portfolio decreased to $72.9 million from $84.6 million at Q4 2021, as we continue to de-emphasize 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 non-core 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 wanted 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. Two to five 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 taken 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 Timber Creek portfolio, which is almost entirely floating rate, we will continue to see strong top line income. Borrowers with 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 in Timber Creek We'll continue to seek out the best of these investments for our portfolio. I complete our prepared remarks. And with that, we'll open the call to questions.

We will now take any analyst questions. If you have a question, please click the raise hand button on the bottom right screen below. Jamie, your line is open. Please go ahead.

Yeah, thanks. First question is related to the payout ratio this quarter and 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 return of capital shareholder plan in terms of the dividend or more share buybacks.

Yeah, thanks. Good question, obviously. So I mean, the shorter 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 two. It 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, then 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 three 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, you know, nine months and certainly well telegraphed. So I think, you know, 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 fairly evidently. Not saying 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 the CCAA situation, it's an unfortunate situation. You hope that it 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 you know, lender interests at court. And so far, you know, I can look to Jeff if he wants to add any comments, but 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 too much more I can add, Jamie, just because of where we are with the legal process. Yeah, that's good.

Thank you. Thank you, Jamie. Your line is now open. Please go ahead.

Thank you. Good afternoon. If I could continue on with the CCAA Stage 3 assets, have there been any developments since November, December-ish? And the reason I ask is 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.

Yeah, 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 accommodate, 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 interests and 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?

Yeah, I think it's obviously, it's a large portfolio. So to the extent that there is a, you know, numerous multiple bids for everything, I think that's yet to be determined. But I think, you know, in the case of our two 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 in demand. Okay.

Would it be fair to say that you do not expect to lose any money on these mortgages, maybe just like lost interest income, but nothing on the principal side?

We took a minor provision this quarter, specifically tied 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 three migration, the medical building in Ottawa. A few questions there, if I could. One, is it current on payments or is this more of a technical default? And two, I am not sure if you shared this, but would you be able to share an LTV figure for this loan?

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, you know, specific numbers out of the case. We have the provision that we've included, writes it down to sort of where we think sort of that fair value is. And then from our perspective, though, you know, the final outcome legally we have not determined. But I do think, you know, we do know the asset. We do think that, you know, 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, working through the process, but there's an opportunity here to sort of invest and recapture.

Okay, understood. Thank you.

Thank you, Rasib. I believe we have Sid next. Your line is open. Please go ahead.

Hi, I was wondering if you can share the LTVs on the two loans in Montreal, the ones that got moved to stage three.

I cannot give you specific LTVs at this time. Again, 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 does that exit and the time frame for that exit look like. We're making those decisions as we go. We're going to do what's, you know, best for the shareholders.

Got it. How has your rates been increasing, I mean, relative to prime rates? Obviously, most of your loans are floating rates, so you have been. Just to get an idea, have you been racing in line or slightly lower?

Pretty much in line, almost lockstep. So most of our loans are floating with pure flow through.

So our 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 where it 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, you know, 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, you know, for us, if you look at opportunities, there's certainly with some unknowns going into 2023, we are, if we have to give up 50 basis points, 75 basis points of rate for safety, you know, 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 optimal mix of business. So, you know, that may reduce wear a bit over time in 2023, but I think it's still with healthy margins.

All right. Thank you, Scott. Just one question. What's your outlook for originations this year? Let's, for example, if I'm trying to guesstimate the year-end portfolio size, How should we look at this?

Yeah, I would say, like, for us, we're still, you know, do I think in a normal course year, I would 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 looking to see how that repayment environment, essentially our business, right, like repayments creates, capital to create new loans. And 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, you know, we like to keep some headroom there in our capital and our ability to take advantage of opportunities. But compared to where we ended at December, you know, I would say stable to somewhat higher.

Yeah, I think there's still pressure on transaction activity, right? And I think that's really been the piece for us. Obviously, 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, you know, obviously the interest rate environment to some degree needs to stabilize a bit such that sort of that buy sell gap shrinks and that transactions start happening. I think there's an expectation for that to pick up as we move into, you know, further into 2023. Obviously somewhat dependent on what happens on the rate side of things, but obviously to the extent that you see, you know, a resumption of normal transaction activity, I think that will, you know, obviously to Scott's point, help drive potential for growing the book overall.

Yeah, 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 those unique sort of positive risk-adjusted returns for us. So we see opportunities in 2023 to lean into deals that, you know, in a normal environment we might not have win. Those are certainly good expansionary type of opportunities that we'll take advantage of.

Are there seeing more opportunities?

Blair, should I just overlay one thing on the top of what Scott and Jeff were saying there? I mean, we certainly would like to grow the business. You know, 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, you know, if the stock's trading in a range that allows us to go back and increase, you know, shareholder base will look to do that. You know, obviously, we have to talk to the board about that as well. But, you know, we would like to be in a position to grow the business. But, you know, the deal flow has to be there.

Which province do you see best opportunities? Do you think Quebec will dominate the portfolio this year or?

You know, I think we've made this comment last quarter, so I still kind of believe it. I still actually see balance in the country. We're still managing this, I would say, to a third, a third, a third, sort of west, central, and east. We've had some great opportunities in Quebec over the last, you know, we put in a, we opened a new office there last year. And, you know, that's been an attractive, we've sort of had the benefit there of that local boots on the ground and in with some of those forwards, I think, led to some incremental flow for us. But, you know, we're liking some of these, I think in this environment where we have some of the senior letters pull back, I think that's gonna 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 wanna be, where we wanna play. And I would see that in sort of thirds. Jeff, do you wanna add to that?

Yeah, no, I think those are all fair comments. Certainly, yeah, our Originations Initiative 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. We are expecting to see, and as Scott said, increased flow and exposure volume in this market. And Quebec should 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 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, you know, 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 to this point, and we see opportunities to drive that similar growth here in Ontario going forward.

Perfect. Thank you so much. Thank you.

Thanks, Sid. 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.