Timbercreek Financial Corp.

As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Chamberlain. Please go ahead.

Thank you, Operator. Good afternoon, everyone. Thanks for joining us to discuss the third quarter financial results today. I'm joined as usual by Scott Rowland, CIO, Tracy Johnson, CFO, and Jack McTate, Head of Canadian Originations and Global Syndications. With respect to portfolio growth, which we've been communicating on regularly, we're up by approximately 50 million years to date, with an expectation that will increase by year end. Looking at Q3 specifically, transaction activity, while solid, was mildly behind our expected pace, as the residual effects of the macro uncertainty we discussed in recent quarters continues to play out. As Jeff will elaborate on, we're pleased with the pipeline in general, although a few material commitments expected to fund in Q3 did push into Q4. Combined with a large unexpected repayment, this brought the overall portfolio down modestly from Q2. The Q3 spillover volume, in conjunction with strong Q4 commitments and additional pipeline volume, should still generate the portfolio growth we anticipated for the full year and result in higher revenue. To put a finer point on this, we've had more than $200 million of funded and committed deals so far in Q4. Our overall optimism continues to reflect improved market conditions as recalibrated commercial real estate valuations and a reduced interest rate environment have set the foundation for a new real estate cycle. In short, the conditions are favorable for a period of sustained strong transaction activity. We upsize the credit facility with this outlook in mind. Given these factors, the third quarter financial performance was mixed. Net investment income was steady at $25.4 million. DI was modestly below last quarter at 17 cents per share, partly reflecting the constraints on new investment activity in the quarter as mentioned. This drove a higher payout ratio in this quarter. As we've said before, the payout ratio will move around during the year and then settle in our targeted range for the full year. We expect to deliver full year results in this range based on a higher activity levels in Q4. Lastly, we continue to demonstrate progress with the remaining stage loans as we return this balance back to the historical levels. In the remaining stage loan, the revaluation of two investments drove a higher ECL in this quarter, which lowered our reporting earnings in the period. Scott will expand on this in his remarks. In summary, I would reiterate our confidence in the continued ability to deliver stable monthly income through a conservative strategy grounded in income producing assets. Our core objective is to deliver strong risk adjusted returns primarily comprised of distributions for our investors, a goal we've consistently met over the long term. One key indicator of this performance is our 10-year IRR, which today stands around 7.8%. This track record reflects our disciplined approach and ability to navigate evolving market dynamics. I will now ask Scott to cover the portfolio review. Scott?

Thanks, Blair, and good afternoon. I'll quickly cover the portfolio metrics and provide a brief update on key developments with the stage loans. And Jeff will comment on the originations activity and lending environment. Looking at portfolio KPIs, most were consistent with recent periods and historical performance. At quarter end, 82% of our investments were in cash flowing properties. Multi-residential real estate assets continue to comprise the largest portion of the portfolio at roughly 57%. First mortgages represented 94% of the portfolio. The weighted average LTV for Q3 was 67.9%, which is up a bit from recent quarters. We've previously communicated that we expect LTV to tick higher in 2025 as we lean into the market with reset asset valuations. And we are seeing that. We continue to be very comfortable in this range in this economic environment. The portfolio's weighted average interest rate was 8.3% in Q3 versus 8.6% in Q2 and 9.3% in Q3 last year. The decrease reflects the Bank of Canada's policy rate cuts, bringing the where closer to a long-term average of roughly 8%. The rates coming down, we're seeing a corresponding decrease in interest expense on the credit facility, supporting a healthy net interest margin. The portfolio where is also protected by the high percentage of floating rate loans with rate floors above 85% of the portfolio at quarter end. Roughly 93% of the loans with floors are currently at the rate floors. In terms of asset allocation by region, there were no major shifts to highlight with approximately 92% of the capital invested in Ontario, BC, Quebec and Alberta and focused on urban markets. From an asset management perspective, we resolved close to 19 million in stage two loans since our last earnings call. More recently, we provided an update on the Stephen Avenue Place office asset in Calgary. As we disclosed, we applied for the court appointment of a receiver on behalf of the syndicate of secured creditors, following the termination of a forbearance period with the borrower. This is the next step on the path to realization and to protect the interest of all stakeholders in the property. As a reminder, Timber Creek holds approximately 11% interest in this loan on a peri-pursue basis with other lenders. Revaluation of this asset was the largest contributor to an ECL increase of $5.9 million in the quarter. The $3 million related to this exposure and $2.1 million related to the Vancouver retail portfolio slated for redevelopment into multifamily. Both revaluations were driven by current market appraisals reflect the overall challenges in their respective markets. We are actively working toward the resolution and monetization of the outstanding stage loans and continue to advance the remaining files. While few challenges remain, we expect to see further progress over the coming quarters with the expectation of ultimately returning this portion of the portfolio to historical norms. Ultimately, the redeployment of this capital into more profitable loans will be a significant tailwind for revenue growth. I'll now ask Jeff to comment on the transaction activity in the portfolio.

Thanks, Scott. As Blair highlighted, new investments in the quarter were solid, although transaction delays pushed some meaningful Q3 committed volume into Q4. During the quarter, we advanced over $131 million in 11 new net mortgage investments and advances, all targeting low LTV multifamily assets. These were offset by total mortgage portfolio repayments of $191 million, including a large $83 million repayment in September, as also outlined in our press release. Resulting in a turnover ratio of 18.2% and a portfolio balance a bit over 1.05 billion, down 60 million from Q2 levels. These short-term variations aside, we are seeing continued opportunity in the conventional multifamily bridge and construction space, in addition to the multi-tenant industrial lending space. The market also continues to respond well to Timber Creek Capital's CMHC approved lender status, which is leading to more opportunities with existing clients and interest from new prospects. Looking forward, our Q4 transaction pipeline is strong, including approximately 200 million already funded or committed at this point in the quarter, with continued momentum anticipated through year end. Our position in the market and strong client relationships continue to support our ability to deploy capital to high-quality loans and return to growth mode. I will now pass the call over to Tracey to review the financial highlights.

Tracey? Thanks, Jeff, and good afternoon, everyone. As we look at the main drivers of income, the average portfolio size has grown year over year, offset by the wear returning to a more typical range following DOC rate cuts. Q3 net investment income on financial assets measured at amortized costs was $25.4 million, consistent with Q2 of this year and Q3 of last year. We reported distributable income of $14.1 million, or $0.17 per share, versus $15 million and $0.18 per share in Q3 last year. The payout ratio on VI was elevated this quarter as a result of market conditions that have been discussed. We recorded a reserve of $5.9 million this quarter, as Scott highlighted, driven primarily by the revaluation of two loans. Net income was $8.5 million this quarter, and net income before ECL was $14.3 million, the same level as Q3 2024. Looking at quarterly earnings per share over the past three years with and without ECLs, you will see it's been quite stable, as has DI per share. Over the medium term, quarterly GI per share has been between $0.17 and $0.21 per share, averaging just over $0.19 over this time period. Looking quickly at the balance sheet. The value of the net mortgage portfolio, including syndications, was just over $1.05 billion at the end of the quarter, an increase of about $37 million year over year. The balance on the credit facility was $283 million at the end of Q3, down from $345 million at the end of Q2. The credit utilization rate at the end of the quarter was 75%. We expect to utilize the facility more significantly in Q4, given the volume Jeff highlighted. As Blair highlighted, with the upsizing of the credit facility and repayments, we have ample capacity to deploy new capital against the pipeline Jeff and team are building. I'll now turn the call back to Scott for closing comments.

Thanks, Tracy. We're encouraged by the overall outlook. Despite some short-term transaction delays given current macro conditions, we believe that the combination of interest rate cuts and strengthening fundamentals will lead to the next upswing in the real estate cycle. This bodes well for future transaction activity at an attractive risk-return basis. Q4 investment activity is expected to be robust, allowing us to grow the portfolio in 2025. We are delivering a stable monthly dividend currently yielding over 9.5%. And we continue to make progress on resolving the majority of the stage loans, and we look forward to freeing up this capital for new investments. That completes our prepared remarks. With that, we will open the call to questions.

Now take any analyst questions. If you have a question, please click the raise hand button on the bottom right screen. The first question will come from Michael McHugh. Michael, please go ahead.

Hi, guys. Just wanted to check that you can hear me first.

Yeah. Good morning, Michael.

Hey, guys. Good to talk to you again. Just wanted to start on the Calgary and Vancouver properties against which the ECLs were taken. Just wondering about sort of the outlook and exit strategy for the Calgary property and then maybe just a little bit of color on progress with Vancouver. It looked like that was the first specific update since it was initially placed into Q3. So maybe just update on, on, on strategy and potentially a timeline for both of those. If you have any visibility.

Yeah, that's a good question. So let's start with, let's start with the Calgary office. That is a specific asset, right? It was a loan that we originated in 2018 actually. So it was a pre COVID loan, which has been part of the challenge. At this point, the lending syndicate, we have decided to sort of take control of the asset, and we are looking to likely test the market for sale. That will take a bit of time, but I would say we will likely be launching a process in early Q1 to test the market. That's not to say we're necessarily going to sell. But I think we're at the point we'd like to have that visibility into the market. And as part of that process, we did an updated valuation, which is what drove the ECL. So we look at Calgary office. While there's a couple of green shoots, it remains challenging. And so that revaluation was just reflective of what we think is the current market conditions. When it comes to Vancouver, so the second part of your question, We do have, it's kind of a similar story, but I look at Vancouver and Toronto. Both of those markets on the development basis remains challenged. It's just part of the supply and demand in those markets right now. And so from time to time, we do continue to do asset valuations. And so this is basically reflecting an updated view of what we think of the current market for those assets. As far as timeline goes, These are going through approval processes with the city. We are definitely in the final innings of those, the borrowers, in the final innings of getting those approvals. And I would say somewhere between Q4, Q1, we expect that to be complete. And then going to market, the borrower, like us getting off those loans, like there's obviously a few different ways that can happen. But we sort of expect to sort of see resolution to those Sometime in the sort of middle quarters of 2026. That would be my sort of assessment today.

Okay, great. Thanks. That's very helpful. And then just as a follow-up, again, relating to both of those loans, potential for further ECLs in the coming quarters, obviously depending on these timelines, but just sort of an outlook on the provisioning front for both of those.

Yeah, look, the view of the current market value of these things, and I would sit there and say for development, these markets are pretty much near the bottom. Like if you want to look at historical timelines, it's been a pretty aggressive markdown of what you would say sort of land values are in sort of the Vancouver, Toronto markets, and certainly office values in Calgary. It is fairly low, pretty much of a trough. So I'd say where these valuations are fairly reflective. I can't predict what's going to happen to the market in the future, but certainly the current outlook of value is nowhere near a high point.

Okay, great. Thanks. That's helpful. I will re-cue and raise my hand again.

Thanks, Michael.

The next call comes from Stephen Boland. Stephen, please go ahead.

Hi, can you hear me okay? Great. Maybe a general question. I'm just wondering about, you talked about growth at the end of the presentation. I'm just, I'm trying to see if your outlook has changed for 2026 in terms of what you can grow, what rate, you know, is the balance sheet a little bit constrained at this point? You mentioned your, you know, additional debt capacity. How are you navigating that? And, you know, Is there any, what can you do here besides, you know, if you're getting robust kind of growth and commitments, you know, are you going to have to syndicate more? I'm just trying to get an idea for 2026, what your outlook is.

Yeah, that's a great question. I think I'm going back to, I'm thinking back to the comments we made the last call. I'd say it's just very consistent. A key driver for growth for us, right, is capacity, right? As we mentioned in the MD&A, we're able to upsize our primary credit facility up to $600 million. That gives us a fair amount of powder to continue to grow the book. So if we look at Q4, so the commitments that we have and with the line where it is, I think it is sort of consistent. I don't know exactly what we said from last quarter. I'm just writing it back.

Growth year over year.

Yeah.

Sorry for 2026. I mean, are you comfortable? Like, you know, in terms of, I know you've got the extension or the increase on the line. I'm just, you're, do you feel the balance sheet at all?

You know, I'm just trying to get, I think that, listen, I think, I think that existing capacity gets us to, I'm sort of looking at Tracy here too, but I think it gets us to sort of the 1.2, 1.3 level. Um, we feel very confident we can hit those numbers. Um, And then growth beyond that, right, then we're looking at, you know, are you raising equity and debt together to continue to grow? And I think as we resolve the staging loans, the book has that much more flexibility, right, to continue to grow. With interest rate cuts, resolving the stage loans, I think that sets the stage well. for positive action on the stock, which I think then, you know, obviously that would allow you to go in and raise equity and then match that with debt to continue to grow. So if I look at this in stages, we are where we are today. I think the existing debt capacity gets us to that $1.2 billion, $1.3 billion. And then future growth from that, right, that's debt and equity matching with, I think, with an improved stock price, right? But that's a story we'll tell through 2026. In my head, I'm blaring.

Yeah, I agree. The only thing I'd add, you know, sort of as a parallel swim lane to, you know, growth of the balance sheet is obviously the growth of revenue. So as we've talked about a few times, I mean, as the portfolio turns over and the pace of transaction picks up, which is a result of commercial real estate fundamental stabilizing, we'll generate more revenue, right? And that ties in with you know, a loan that's, you pick Calgary office, I mean, a loan that is in forbearance, you know, obviously is generating less interest income than a loan that is freshly originated generating, call it, you know, like roughly an 11. So drive revenue as, you know, sort of both are important, of course, but we expect revenue to grow, you know, as rapidly in addition to what you would correlate with the balance sheet, if that makes sense.

Yeah. Okay. That's great. And then the second question is, you know, the stage two and three, I believe increased quarter over quarter. I mean, should we start, you're talking about resolving those loans. Should we start to see that number sequentially come down like quarter after quarter? I know it can be lumpy, but you know, is there going to be improvement in those, you know, starting even in Q4?

It's hard to pick the exact quarter, Steve, to spell it out. But we've had ongoing improvement and reductions over time. But yeah, it is lumpy. And the loans we've been talking about on this call today is the majority of what's left. Dollar-wise? Dollar-wise. And so it is unusual. These aren't like popping up. new stage two, stage three loans. These are pretty much the ones that have been around for a while that have longer timelines to resolve. But we do plan to get rid of them and sort of go back to historic norms.

If you think about it going back, you know, there's, and I, you know, I don't have the number at hand, but, you know, we've worked through quite a few of them, and I think arguably one you know, every quarter. I mean, we announced the one that was resolved in this quarter earlier. And so to answer your question directly, like, we, you know, do expect there to be resolutions in Q4. It's just, like, it's super active, right, as we talked about. Like, it's, you know, they're negotiated. And to the extent you try to force things, it generally reduces the validity or, you know, isn't helpful to the outcome.

Okay, and I'll sneak one more in, just in terms of the credit facility. I know you got the increase in size. Was there any other changes, rate, covenants, anything like that you can mention, or you just got more money?

Yeah, well, we got more money, increased two new banks into the syndicate, which was great. But more importantly, improved economics. So our spread has come in back to kind of where we were historically, which is great. And then no changes on covenants.

Okay. And can you mention the spread? Maybe it's in the disclosure. I apologize if it is.

I don't think it is. Why don't we say that it's come in by 25 basis points. Okay.

I appreciate that. Thank you.

Thanks. Thanks.

The next call comes from James. James, your line is open. Please go ahead.

First, on the $200 million funded or committed, how does that look from a geographic and asset class perspective?

Hey, James, I think we missed the first part of your question, but I think you were asking just what is the sort of the makeup of the Q4 outlook? You got it. Yeah, thank you.

Yeah, I mean, I would say it's Jeff here. Pretty consistent with the portfolio overall. It's a combination of, I'd say, primarily Ontario and Quebec. And it is the vast majority is is residential income with the balance being industrial.

Okay. And would these be some like new customers, new borrowers or existing former clients? You know, just a little bit more, just curious on how that portfolio is shaping up for Q4 and then- Yeah, so I-

Yeah, so listen, I mean, I think there's some very strong repeat business within that new volume in addition to some new prospects, but it's predominantly repeat business with existing clients that we've seen good churn with, right? So we're focused on and managing total exposure with individual groups, but are seeing good churn. They're executing on their plan. They're refinancing, you know, our existing exposures and then taking on new opportunities. And that existing relationship is enabling us to facilitate execution on good timelines and win good deals, you know, even with some incremental spread.

Yeah, so just in terms of the yield, new loans came in at the average interest rate, loans going out the door was 8.3. That was much lower than I think it was in the mid-nines in Q2 going out the door. I'm just curious, I guess, what is the range of rates right now in the portfolio? Are there still loans that are well above 9% that are still there that are expected to roll off at some point soon? Just trying to really kind of understand, I guess, the stability

Yeah, I mean, it's always a bit of a mix, right? So we do have some of those loans that exist that have some pretty high floors that over time, to your point, will roll off. Generally speaking, like, I think of new originations, if I look at it over prime, this is maybe a helpful context, like a credit spread over prime, you know, we typically are in that kind of 275 to three and a quarter range. And then what happens with credit spreads, right? It's an interesting thing as interest rates go up, credit spreads compress. So there's only sort of so much whole loan coupon that necessarily a book can absorb, like a board can absorb. So when we saw like rates go high, it is good for income, but your credit spread is compressing. As rates come down though, so the inverse is true. So as, you know, if prime was to continue to fall, we start to be able to expand credit spreads. And the credit spread is ultimately what we are interested in because our, you know, our cost of funds is also floating. So as long as you maintain sort of that difference, it allows us to achieve the equity we're looking to achieve. So it's kind of an interesting model. So as rates go down, our credit spread expands. You also tend to get more velocity of churn in the book, which generates more fees. So the headline where may fall, but more fees do more velocity, the higher credit spread to expansion in a lower rate environment. We've seen this happen through, we now operate through a few interest rate cycles, and it seems to be a consistent case. So in a higher interest rate environment, you have less velocity, less fees, the higher where, And in a lower interest rate environment, you have more fees and reduced wear. What helps us right now in the sort of short to medium term is the floors, to your point, like that does provide some positive impact into the book. And as those roll off, it's true, but then we continue to grow the book in that lower rate environment where you're getting more fees and we have a bigger book, right? So it is sort of an ever-changing model that we do manage quite closely, you know, ensuring that we sort of end up in that kind of mid-90s payout ratio that we're targeting.

Yeah, okay.

The only thing to add there perhaps, and, you know, we all hear a lot about, you know, the cost of debt generally. And generally speaking, when we're reading that in the media, it's by and large, you're talking about term debt, right? So five and 10 year money, which can get super cheap. But as you of course know, like our business is to provide flexible, you know, sort of debt with features that, you know, that are valuable. So That kind of is another way of explaining what Scott was saying. Like a borrower is willing to, you know, there's sort of a floor that is willing to be paid to be able to be, you know, flexible and creative as they go and execute on their value-add opportunities where they're generating equity returns that are obviously well in excess of what they're paying us, if that's helpful at all.

Yeah, yeah. And the follow-up on that is, like, obviously we're going into an environment set up. But still in the near term, those higher floor loans rolling off will have a bit of a negative impact. And so I guess I'm just trying to like, if you had any visibility on potentially when that inflection point happens, is it still several quarters away or is it something that's much more visible as those higher rate floor loans are no longer in the portfolio?

No, listen, it is You know, we can't predict necessarily when those loans will roll off. They can roll off at different times, right? We have a fairly consistent rollover of the portfolio, right? Somewhere in that 40%, 50% per year. And it tends to be pretty evenly distributed through the book. It could be some higher yielding loans. It could be some lower yield. Again, to Blair's point before, these shorter-term bridge loans are not necessarily driven by just the high rate. It's more around the strategy of the assets. So if the borrower is looking to reposition and sell, regardless of their underlying rate, they probably stay until they've executed their plan. So that does change the impact of when loans will roll off. But when we look at the book, again, as it rolls off, we're originating at a yield based on the current market environment and the current interest rate to make sure that we're in a decent position.

Don't underestimate the income, right? Like it's meaningful when the portfolio is turning over regularly.

Yeah. No, I understand.

Our next call comes from Zach. Zach, your line is open. Please go ahead.

Hey, good afternoon. Can you guys hear me? Yeah. Yeah. Hey, it appears you guys have high confidence that the payer ratio will stabilize in the mid-90s. What are some of the factors driving that?

Just overall, if I look at year-to-date, that's where we're at. Again, Q3 is just was a little high given again, that Jeff was describing just the timing of some transactions, but it's just really just managing the pipeline and where we're seeing investment activity is when you just running through the yield math, it sort of generates that sort of mid, mid nineties type math. It's just running the business normally, Zach. Okay.

The pipeline was, was not, where it is, we wouldn't have the confidence that we do. I think it really comes down to, I guess, at the end of the day.

Yeah, and I mean, the pipeline, just for the Blair's point, I mean, you know, we look at the pipeline, it obviously was looked at in stages, right? So there's early stage, deal identified, We're working through it. We don't really have, you know, a good view as to do we want to bid, where it's going to land, are we going to win it? And then obviously as you go down the path, deals that we've been working through, deals we've issued term sheets, deals we've issued commitment letters, you know, acquisitions with firm timelines, any combination of these things is a sort of increased probability of execution within that pipeline view. you know, aligned with the timeline that, you know, an RDU, again, goes back into our forecasts and expectations, you know, along with year-to-date gets us to a point where we're comfortable in that range.

Okay, understood. Appreciate that. And with softer fundamentals for most property types right now, we're seeing higher vacancy, lower rental rates. Are you seeing that translate into slower origination activity at all? I know that you mentioned in your prepared remarks that there were some transaction delays.

Yeah, so, I mean, the transaction delays we're talking about, like, these are sort of more normal course, like, there's a real deal, there's a sign, you know, it's signed up and it's targeted to fund on a certain date, you know, and as they're going through their due diligence process and or negotiating, you know, final conditions to waive, you know, they need an extra week, they need an extra couple weeks, any combination of things that, you know, this is more specific to real transactions than necessarily, you an indication of the broader environment, right? I think, you know, to your point, you know, certainly the fundamentals have softened across, and again, you know, varies depending on asset class. Again, for us in general, we are still seeing strong fundamentals underlying the multifamily business and the industrial business, which has been the core of what we're doing, and we are still seeing transaction activity continue. Again, we benefit from refinancing opportunities as well, as mortgages continue to mature and need to be refinanced, even if there is no actual trade occurring. As you get into other asset classes, again, office is one that's been, you know, really inactive for the last number of years, given the unknowns in that space. You're starting to see, you know, tenancy demand increase. You're starting to see the fundamentals underlying that reality improve. Again, that's something that we're not looking at. ton of we've seen opportunities we haven't found a ton that are overly compelling and at the same time the fundamentals in that space which has been you know very uncertain for a period are starting to increase or improve and that should drive increased activity oh look and I'll just add to that is I think it is true though right like I think we said that the softening fundamentals if I go back to you go back to 23 as you got sort of you

heavily into that rate uptick cycle, like we started in 2022. For sure, those weakening fundamentals and the higher cost of debt, that caused price mismatches in the market, right, between buyer and seller. And so that is what, this is what's really been driving sort of this more challenging transaction activity, right, because the sellers are trying to hang on and they're trying to believe their 2021 pricing, right, their 2021 valuations. As vendors, sellers get more realistic in their price targets, what happens is all of a sudden, okay, so prices come down a bit and then you have that market transaction can occur, right? The buyer and seller have a meeting of the mind and the transaction occurs. So that's what we're talking about. When we talk about like on the face of these weakening sort of fundamentals that you mentioned, now you put in the rate cut environment, and you have a little more realistic view from the sellers, that's what drives those transaction activities. And then for us, on the lending side, what we like about it is you have a little bit more realistic view of value. Values are kind of lower than we would have been lending into 2020, 2021. If you look at today's environment, you feel pretty good that this is a reset value. More transactions are happening, and we feel pretty good of where we're lending and what our advance rates are.

Okay, thanks. Appreciate the caller. I'll turn it back.

There are no other calls at this time, so I'll turn the meeting back to Blair for closing remarks.

Thanks. Thanks, everyone, for your time. Obviously, if you have any further questions, feel free to reach out. We're happy to chat. Have a good afternoon.