Timbercreek Financial Corp.

Good day, ladies and gentlemen, and welcome to Timber Creek Financial's third quarter earnings call. At this time, all participants are in a 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 third quarter financial results. As usual, I'm joined by Scott Rowland, CIO, Tracy Johnston, CFO, and Jeff McCate, Head of Canadian Originations and Global Syndications. It was another solid period financially as our portfolio continued to generate strong interest income, allowing us to report solid top-line and bottom-line results in the quarter. Financial highlights included net investment income of $30.3 million, similar to last year's Q3, net income of $16.5 million, up from $13.5 million last year, and distributable income of $16.8 million, or 20 cents per share, at a modest payout ratio of 85.6%. These results speak to strong underlying fundamentals and the capability of our portfolio to generate substantial income, EPS, and sustainable dividends. At the same time, this has been a uniquely challenging period for certain borrowers, caused mainly by the rapid rise in interest rates and the general economic weakness. We are now emerging from a period where central banks around the world increased interest rates with unprecedented speed to combat the inflationary environment. With that, during Q3, the team made excellent progress towards the repayment of several Stage 2 and Stage 3 loans. Scott will provide additional colour in his remarks, and we have extra disclosure in the MD&A again this quarter. Higher rates and rate instability create issues across many industries, and of course, in commercial real estate, we have seen a general slowdown in transaction activity. That said, as the interest rate outlook stabilizes, which seems to be the most likely outcome in the near term, we expect to see increased activity and a higher transaction volume within our portfolio. As the market rebounds and we resolve our Stage 3 loans, We look forward to putting capital work to grow the portfolio and productive investments tied to high-quality assets valued at today's pricing reality. Before I turn the call over to Scott, I do want to briefly comment on the recent share price. We rarely use these calls for this topic. However, it's been an especially volatile equity market environment. And for Timber Creek shareholders, which includes our entire senior management team, we've seen the company's shares trade in a historically low valuation range. Our book value at quarter end was $703 million, which equates to $8.43 per share. And book value for us is a simple calculation. It's the sum of all the principal amounts of the loans outstanding. So while we appreciate the perspective that there is elevated risk today in the portfolio, given the Stage 2 and Stage 3 assets, what you will hear from the team today is that we expect to recover our invested capital, and that a large portion of this should be resolved in the near term. Put another way, we're confident in the book value of the business. As we've highlighted in the past, active management is an occasional reality of our business and a requisite skill set. Over the past 15 plus years, through periods of economic and financial market turbulence, our team has demonstrated the ability to effectively navigate these situations and recover capital and ensure the best outcomes for our shareholders. With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions. Scott?

Thanks, Blair, and good afternoon. I'll quickly comment on the portfolio trends and origination environment before going deeper on the progress with Stage 2 and Stage 3 loans. Looking at the portfolio KPIs, at quarter end, 86.5% of our investments were in cash-flowing properties, compared with 87.7% at the end of Q2. Multi-residential real estate assets, apartment buildings, continue to comprise the largest portion of the portfolio at 58.2% at quarter end, up from 50.1% at the end of Q2, due to all Q3 fundings being multifamily loans. Portfolio remains conservatively positioned. First mortgages represented 92.2% of the portfolio, up slightly from 91.4% in Q2. And our weighted average LTV for Q3 was 67%, slightly lower than the prior quarter, which was 68.3%. The portfolio's weighted average interest rate for wear was 9.9%, up slightly from 9.8% in Q2. For context, the wear in Q3 last year was 8.5%. The year-over-year increase is due to the impact of central bank rate hikes on our floating rate loans, which represented 88% of the portfolio at quarter end. Our Q3 exit wear was 10.1%, up slightly from 9.9% exiting Q2. The higher wear has benefits and drawbacks, of course. It's driving strong interest income from the portfolio. However, the higher debt costs also place strain on certain borrowers, especially those whose debt costs have increased much faster than rents, or those with demand issues, such as office borrowers, where occupancy is down considerably due to work-from-home policies. As a result, our portfolio has seen an increase in Stage 2 and Stage 3 loans over the past year, as these issues work their way broadly through the commercial real estate industry. While Q3 typically sees reduced volume, transaction levels this quarter were also indicative of the general slowness in the commercial real estate market, as buyers and sellers await more stability in the interest rate outlook. We invested $76 million in new mortgage investments and additional advances on existing mortgages. Originations in the quarter were largely centered around low LTV multifamily assets. Mortgage repayment activity was also lower in the quarter. We had net mortgage repayments and syndications of about $67 million. The portfolio turnover ratio decreased to 6% compared with 11.6% in Q2 2023. You may recall that turnover was also lower in Q3 of last year, at 3.3%, as rates were quickly changing at the time, causing a similar pause in activity. Looking ahead, recent inflation numbers indicate that the Bank of Canada may hold on further interest rate hikes, which is expected to create more confidence in the market and most likely a resumption in transactional activity. Our team continues to evaluate a decent volume of opportunities in our core multi-residential categories and industrial. Given the short-term nature of our agreements, we have the flexibility to quickly take advantage of opportunities or respond to new headwinds in a given region or asset type. In terms of the asset allocation, there were no material changes from Q2 with respect to geographic concentration. The majority of the portfolio is tied to assets in urban markets in Ontario, British Columbia, Quebec, and Alberta. As Blair mentioned, over the past several months, we've made significant progress on the Stage 2 and Stage 3 loans in the portfolio, so let me spend a few minutes now on their status. As you may have read in our Q3 disclosures, in August, Timber Creek and its syndicate partners successfully credit bid three collateral assets for which the associated mortgage investment was previously a Stage 3 loan. And now we own 100% of the real estate. These are three high-quality senior living properties. We've installed an experienced third-party operator and are currently in negotiation for a third-party sale that will return this investment to a performing loan with material pay down from the purchaser. We hope to have material progress on this transaction by the end of this year, and ultimately, we expect a full recovery. Moving on to the portfolio of seven high-quality, income-producing, multifamily assets held in receivership, totaling $146 million in exposure. During Q3, there was an offer to purchase these assets, and the process has maturely progressed to the point that a sale is expected to close in Q4. The structure will see all principal and accrued interest fully repaid in late Q4 or early Q1 2024. Whether through this transaction or another counterparty, we remain confident that active management of the file should result in a near-term resolution of this investment. We've also seen good progress on the multifamily asset under construction that was part of the same CCAA process. The asset remained in stage three at quarter end. However, a purchaser was recently selected through a bid process run by the receiver. A new purchaser will join the existing joint venture owner to complete the construction of the asset. We expect the loan to be performing in Q4 2023, including the company being made current on its interest arrears. We ultimately expect full repayment of this loan. The Stage 3 assets accord around also include $15.6 million in condo inventory against an original inventory balance of $23.7 million. During Q3, we discharged $2.3 million of this inventory with more units expected to close in Q4. We are satisfied with the proceeds to date and expect to be repaid by the end of 2024. During Q3, we continue to advance the Stage 3 medical office building in Ottawa. We engaged a new property manager in Q2 with deep expertise in the market to manage the leasing strategy. Our team is confident that the intended repositioning plan will generate the best outcome for the property and the ultimate repayment of principal. At the same time, we're currently selecting a broker to potentially list the asset for sale as early as Q1 2024. Moving on to stage two assets, there are two loans to highlight. First relates to an income-producing multifamily asset in Edmonton. This loan matured in Q2 but will be extended for an additional 12 months to enable the borrower to either sell the property or seek CMHC financing. The loan is current and we expect full repayment. The second Stage 2 entry is $53.6 million net mortgage investment on three income-producing office assets and one retail asset across three loans with the same sponsor in Calgary. The borrower failed to pay interest as of September and we are currently working through our legal remedies to protect our interests. We are also in active discussions with the borrower about a potential forbearance agreement and we will likely determine next steps in the coming weeks. While the Calgary office market has been challenging for many years, some positive absorption Planned office conversions to multifamily and the high price of oil are all contributing to some optimism for the market. In addition, the loans are structured with material pay down guarantees from non-related future asset sales that will reduce our loan exposure by approximately 20% or $10 million. In short, there's more news to come with these assets, but with the structured pay downs and active management, we expect to work through the situation to realize our full repayment. To summarize on the Stage 2 and 3 loans, we are making material progress toward realization of the larger positions. By early 2024, this should reduce the percent of Stage 2, Stage 3, and real estate inventory to approximately 10%. We're confident both in the quality of the underlying income-producing assets and our ability to recover our investment through active management and the range of remedies available under our agreements. The Timber Creek team is experienced, aligned, and highly focused on ensuring the best outcome for our shareholders. While we work through the monetization of these assets, we're pleased that the portfolio continues to generate strong income and earnings, allowing us to continue delivering attractive monthly dividends. I will now pass the call over to Tracy to review the financial results.