Timbercreek Financial Corp.

Good day, ladies and gentlemen, and 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 hand to register for a question. As a reminder, today's call is being recorded. I would now like to turn the meeting over to Scott Rowland. Please go ahead.

Good afternoon, everyone. Thanks for joining us to discuss the fourth quarter and full year 2025 results. Unfortunately, Blair Tamlin is delayed on a plane and is not currently available for the call. So joining me today is Tracy Johnson, CFO, and Jeff McTate, Head of Canadian Originations and Global Syndications. I will begin today's call by reading Blair's prepared remarks. Q4 marked the strong finish to the year from an investment activity standpoint as we anticipated on our last earnings call. We closed the year with strong fourth quarter originations of more than 330 million, driving portfolio growth of 18% over Q3. Net investment income was solid at 25.7 million, supported by portfolio growth and offset by the lower interest rate environment. Importantly, lower policy rates are now working in our favor. reducing funding costs and supporting net interest margins as origination activity accelerates. Distributable income was 18 cents per share in the quarter with a payout ratio of 95%. And we continue to advance the remaining stage loans as we look to return this balance to historical levels in the near term. As we move toward resolution on these stage loans, we have seen valuation adjustments in several cases. leading to a reported loss and book value contraction this period. However, importantly, our distributable income has remained healthy as the underlying portfolio continues to generate strong recurring income to support our consistent monthly dividends. Our disciplined, cycle-tested approach remains firmly intact, and we are well-positioned to benefit from an improving market environment and the resulting uptick in transaction activity. Moreover, As these legacy assets are positioned for sale and capital is redeployed, this will further align the portfolio with our growth strategy and add to earnings. This concludes Blair's opening remarks. At this point, 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 the portfolio KPIs, most were consistent with recent periods and historical performance. At quarter end, 84% of our investments were in cash flowing properties. Multi-residential real estate assets continue to comprise the largest portion of the portfolio at roughly 62%. First mortgages represented 95% of the portfolio. The latest average loan to value for Q4 was 67.4%, which is slightly below Q3. We continue to be very comfortable in this range in this economic environment. The weighted average interest rate was 8.1% in Q4 versus 8.3% in Q3 and 8.9% in Q4 last year. The decrease reflects the Bank of Canada's policy rate cuts, bringing the wear closer to a long-term average of roughly 8%. Portfolio wear is also protected by the high percentage of floating rate loans with rate floors, 89% of portfolio at year end. Roughly 97% of the loans with floors are currently at their floor rates. I will highlight that we have begun to expand our margins as rates continue to trend downward. In this phase of our business cycle, borrower interest rates tend to decrease with reductions in prime. However, this is offset by opportunities to capture incremental credit spreads, a reduction in the cost of our bank financing facility, and higher fees driven by increased transaction volumes. This dynamic is familiar to our team. Over 18 years in this market, we have consistently managed through both rising and falling rate environments to ensure that the dividend remains well supported by distributable income. In terms of the asset allocation by region, 96% of the capital is concentrated in Ontario, British Columbia, Quebec, and Alberta, and focused on urban markets. We continue to be active from an asset management perspective. We resolved $6.5 million of Stage 3 loans in December 2025, Over the past year, most remaining files have made notable progress with zoning and other milestones close to completion. These achievements will position the assets for sale and substantial progress is anticipated throughout 2026. Overall, we are focused on reducing stage loan balances to traditional levels by year end and then redeploying the capital into new accretive loan investments. At this point, I'll ask Jeff to comment on the transaction activity in the portfolio.

Thanks, Scott. Clear that the real estate industry has navigated another year of transition, albeit marked by several encouraging developments. Broader environment of monetary easing supported a healthy volume of commercial real estate transactions, with approximately $47 billion changing hands across Canada last year. This momentum, coupled with growing optimism for ongoing sector improvement, sets the stage for a strong 2026, The transaction volume is projected to reach nearly 56 billion by year end. Against this backdrop, as was previously highlighted, new investments in the fourth quarter were strong. We advanced nearly 334 million in 23 new net mortgage investments and advances, predominantly targeting low LTB multifamily assets. These were offset by total mortgage portfolio repayments of 135 million. resulting in a turnover ratio of 12% and a portfolio balance of $1.24 billion of $185 million from Q3 levels. As another measure of the level of activity, gross originations in Q4 were $425 million. Looking ahead, the Q4 momentum has carried into 2026, resulting in a healthy new business pipeline. For Timber Creek, the current interest rate environment aligns well with our typical two-year bridge financing offerings and is helping drive forward demand while supporting requisite credit spreads. In terms of asset types, we are seeing particular strength in multi-residential assets, continued improvement in retail, and tightening conditions emerging in industrial markets. Although the office market still faces hurdles, return to office mandates are changing the outlook premium well-situated properties poised to outperform their peers. I will now pass the call over to Tracy to review the financial highlights. Tracy?

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 the Bank of Canada rate cuts. Q4 net investment income on financial assets measured at amortized costs was $25.7 million consistent with Q3 of 2025. We reported distributable income of 15 million or 18 cents per share, compared with 14.1 million or 17 cents per share in Q3. The payout ratio on DI, both for the fourth quarter and full year, fell within our targeted range. And as Scott noted, distributable income continues to provide solid coverage of our monthly dividend. We reported a net loss of 1.1 million in Q4. driven by three specific items, all related to the continued resolution of legacy loans and assets. We recorded ECLs of 8.3 million in the quarter, driven by updated market appraisals on a small number of remaining stage loans. As we have discussed previously, these provisions reflect valuation adjustments, and we continue to make progress on advancing these toward resolution. Second, we recorded a net fair value loss of 4.5 million on net mortgage investments measured at fair values through profit and loss. This reflects a lower than anticipated sales price on underlying collateral assets. Third, we completed the disposition of a land inventory asset, which included an operating marina. This resulted in a loss of 2.1 million relative to carrying value. Importantly, the associated operating losses incurred in this marina will not recur going forward. Looking at quarterly EPS 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 DI per share has been between 17 cents and 21 cents, averaging 19 cents per share over this time period. Looking quickly at the balance sheet, the value of the net mortgage portfolio excluding syndications was just under 1.24 billion at the end of the quarter. an increase of $150 million year-over-year. We continue to have capacity to deploy capital against the strong pipeline as we move into 2026. I will now turn the call back to Scott for closing comments.

Thanks, Tracy. As we look ahead to 2026, our outlook is increasingly constructive. The Canadian commercial real estate market has begun to regain momentum, supported by monetary easing and improving transaction volumes. While 2026 is not without its macro risks, our team believes the conditions for a continued recovery in the real estate industry are deeply rooted. We are seeing this translate directly into a stronger opportunity set for Timber Creek. Our origination volumes remain strong, and we expect this momentum to support continued portfolio growth as the year progresses. In addition, we expect to substantially reduce the stage loan balances to traditional levels by year end. and that in turn creates the opportunity to redeploy the capital into new accretive loan investments to drive distributable income. Taken together, we believe the company is well-positioned for the next phase of the real estate cycle while continuing to deliver stable monthly income and attractive risk-adjusted returns for shareholders. That completes our prepared remarks, and with that, we will open the call to questions.

We'll now be taking any analyst questions. If you have a question, please click the raise hand button on the bottom of the screen. Our first question comes from Zach. Zach, your line is open. Please go ahead.

Hey, good afternoon. Hey, Zach. Thanks for taking the question short-handed today. There's strong growth in the mortgage portfolio in Q4, and you highlighted that the momentum is continuing into 2026. When you look at funding these loans, is there a specific ceiling for leverage that you're targeting on the overall portfolio?

Do you have to answer? And when you say leverage, you mean like the loan-to-value of the loans?

Or in terms of debt as a percentage of the loan?

So just to make sure, hopefully I don't answer your question correctly. Please feel free to ask again if I don't. Typically, right, we are leveraged at around 50%, or 45%. That's equity, right? So we're going to use sort of 45 cents-ish of leverage across the book. So that would sort of continue in that manner, Zach. So for us, right, as we look at the 2026, we basically use a combination of our debt facility, right, or repayments to generate capacity for new loans. And then the other thing we do as our sort of credit line gets near to its optimal capacity Because then what we also do is we increase the level of syndications of loans. So we will go out and use more of an A-B structure. So we will lay off sort of an A note and hold a B note that tends to be accretive to the overall book. The analogy I would use is kind of like a hotel, right? Like you want to increase the occupancy of your hotel as much as you can, and then you want to drive rates. So for us, it's a question of making sure we have the book nice and full, which we were able to accomplish at year-end. Jeff has seen a lot of that coming as well, but we're seeing a lot of transaction activity, which is great. We should help keep the book full. And then we use syndications and our leverage strategy to help increase that equity return within the book to drive our margins. Does that answer your question, Zach, or are you trying to get at something else?

No, that answers it. I appreciate that. And my last question here is regarding the impaired loans. They're assets listed for sale or slated to be marketed in the near term. Can you comment on the bidding activity and specifically your willingness to accept the current market pricing versus potentially holding the assets for longer?

Yeah, specific bidding activity is... There are assets that are in the market with bids to come, so I wouldn't necessarily comment on activity yet. I think it's a little premature. When it comes to the price, we're hopeful, obviously, that we could trade at the current price. I think it makes sense to do that. Obviously, we will evaluate any bid that we get. We felt it was, you know, if it doesn't make sense, we're not forced to make some of these decisions. That said, we feel pretty good about where we think market pricing is going to be. And what we are really kind of attracted to is that ability to see those resolutions of these files and then redeploy that capital into a more accretive situation, right? So basically, one of the issues with the stage loans is that they tend to be at a lower wear today. They don't churn books. We don't get those new loans. So we're not generating fees. from those assets and these are the things that kind of hamper us in our distributable income model so for us right when we look at it when we look at an asset although the price may not be you know fantastic today's market that ability to take that asset take that capital and then redeploy it into a new loan and likely a higher wear earning a new fee those are those those are the reasons why we're excited about you know resolving these issues and taking that transfer price while, you know, a negative potentially up front, it's accretive to the portfolio down the road. And that's one of these we're focused on, and certainly a key part of that calculus that we evaluate when we're looking at bids.

Yeah, I mean, I think it is very much asset-specific decisioning. And as we look at, you know, again, dependent on the specific asset, in some cases you have a – a current market value, and again, whether it's perfectly optimal or not, part of the analysis we consider is circumstances where In addition to the fact that it's not generating a yield for our investors, it may also be an asset that obligates additional capital investment beyond the existing exposure to carry further, to maintain, to potentially drive incremental future value. And there's no definitive confirmation that that exists. incremental exposure will drive a future positive or accretive outcome such that decisions get made on that basis as well, right? Again, it depends on the asset specifically how the decision is made, but there's a fundamental detailed analysis we consider for the specific asset in question.

Yeah. Understood. Thanks. I'll turn it back. Thanks, Zach.

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

Can you hear me?

Yeah, good afternoon, Graham.

Great. First question just on loan growth, just to sort of understand, it was a good quarter for activity, strong loan growth. Is your messaging that that could persist into Q1? Should we see... further loan growth or just further turnover of the portfolio?

It's a bit of both. So, we are – the pipeline is strong, which we're very happy about. We also have some decent repayment activity, which, you know, it's important for us to, you know, fuel to be able to do those loans and generate those fees. We expect to be at sort of a near optimal level – in Q1 and going into Q2.

Okay, great. I appreciate the disclosure you provided on page 21 of the MD&A just around the individual or the key loans within stage two and stage three. The retail Vancouver property, it seems to be the most sizable at $158 million, and it's been in stage two for almost two years now. Two questions, just why would the asset not be sitting in stage three because it's been

in stage two for so long and then how much of your current acl is provisioned against that asset or how are you feeling about your loss exposure there yeah i can i can jump in um you know this this loan is obviously on our our watch list it's not technically sorry it's a parcel of a couple of loans but it's not technically in in default so we are monitoring it it is currently continuing to to perform but obviously a significant watch list item for us, so that's why it's not in Stage 3 versus the other Stage 3 loans, which are technically in default. In terms of overall provisioning on the asset, I mean, this year we took about $5 million on that position, which is really bringing us to I'm just adding things up here slightly. So we're at about 6.4 million there as a provision on the overall portfolio.

And a little more colour I can provide to Graham is, this is multiple projects, actually, and they are, they're very well located Vancouver redevelopment sites. So a major component of it. So we've been basically, so we started explaining the two years, which is obviously a long time to be in staged. Part of that has been ongoing efforts by the borrower with rezoning applications, which is to get the projects ready for sale. If I think about that $150 million, the largest component of it is the primary site downtown that represents about 45% of that exposure. That asset is actually going to go up for sale in Q1 this year. So that's about half of that exposure. So we would expect and are very hopeful for resolution of that, you know, in later Q2, Q3. There's a couple other projects that are also, you know, working through similar timelines. A little bit later, longer than that, I'd say about two other projects about 15% each of that exposure, you know, we're ideally getting resolution at before the end of Q4 of 2026. So it's sort of going to be a multi-stage approach. It's been sort of the length of time. It's been sort of the length of steady rezoning processes, which do take a great deal of time. But it's a key component to unlocking the value and then putting it for sale in an optimal position. So that's what we've been working through, and that's why that's been there as long as it has been. But we're feeling very optimistic that half of it is coming to market, and we're working with the borrower – get other assets ready for sale this year as well.

Okay, great. Appreciate the thorough response to that. My last one, if I could, just the weighted average interest rate. Looking at 2025 overall, it's down 100 basis points year over year. I guess given the spreads that you're sort of seeing with your recent activity and either your outlook or the consensus outlook for For rates in 2026, what would you expect for further weighted average interest rate compression?

Yeah. Good question. I'll answer it a couple different ways. So the wear rate as it is right now, let's just assume a stable rate environment for a moment. That's obviously part of that math, is a floating rate portfolio, right? So if there was future rate cuts, you would expect to see that where start to fall a bit. That said, the other component for us is we have current floating rate loans that are on floors. So as those roll over and they get replaced with new loans, you start to see a little pressure on where as well. So, you know, you might see a 10, 20, 30 basis point compression in where. One of the big things that happens, though, and this is a key component of this, is in our business, in the bridge business, there's a certain coupon, right, that the borrower pays, that the borrower can afford. And the coupon is that combination of the prime interest rate and then the credit spread that we put on the loan, right, which is ultimately actually what drives our distributable income. So one of the things that we see as interest rates have been coming down, we're starting to expand our margins. our credit spread of those loans so if you know as prime comes down 25 50 basis points we're able to recapture 25 basis points plus an incremental margin when interest rates are really high it's hard to do that and actually credit spreads get tighter because the assets can only support you know so much of a coupon but as interest rates have fallen we're sort of in that we'll call it goldilocks but it is it is a nice rate of interest where borrowers are happy to pay the coupon. It makes sense for their business models when we're more in that 7%, 8%, 9% range. And as interest rates, if they were to continue to fall, we're able to capture expanding margins. And I can tell you sort of over the last six months, over those last couple of rate cuts, we have been expanding our margin across all of our property and asset classes. Jeff, if you want to add anything to that.

Yeah, for sure. I think over the last, we've definitely seen in the 50 to 75-bit range of credit spread expansion, which is, you know, again, to Scott's point, I mean, our leverage underlying is also coming down in cost as Prime has fallen, but we are able to capture incremental margin through this period of time while still maintaining sort of that coupon's little sticky. And it still allows us to compete very favorably in the market and win transactions. And, again, we'll see where interest rates go through the balance of this year. But certainly there is an ability to recapture, you know, at least a portion of any future cuts through credit expansion.

And you would have seen that in that sort of, you know, that COVID period when interest rates were so low. Our wear obviously went down quite a bit, but we were still able to hit that sort of mid-90s payout target ratio. And that's a combination that Jeff mentioned of the lower credit line costs for us, but also an expanded margin so that we were able to maintain that equity yield that's necessary to protect the dividend. So it's a big part of the calculus and the model that we run as we look forward and look at the rates, the rate environment that we're in.

Perfect. Thank you.

Thanks. As a reminder, if you have any questions, please use the raise hand button at the bottom of the screen. The next question comes from Steven. Steven, your line is open. Please go ahead. Stephen, your line should be open. Please go ahead.

Sorry, can you hear me now? Yeah, I hear Stephen. Good afternoon. Sorry, what's up? So just on the unimproved land and the improved land, we're hearing through the banks and things about projects being delayed. So I can imagine that these are not income-generating properties, so you're relying on the developer to continue to pay the mortgage. So I'm just wondering, has there been more, I guess the easy question, what's the protection that you get comfort that the developer has the cash to keep paying the mortgage if there is delays in the projects? And that's assuming there is delays.

I mean, in general, where and when we contemplate Land loans, which is, you know, again, it's a very small component of our overall portfolio. I mean, they are fundamentally, you know, much lower leveraged positions to start, right? So, you're – given the non-income producing reality of those assets, you're prepared to advance, you know, less dollars relative to the value of the collateral securities. facilities, and again, in general, a typical analysis for us in any loan we're looking at. And certainly, you know, with increased focus over the last few years relative to, you know, underlying sponsor strength, access to liquidity, and cash flow, et cetera, from other assets they own towards ensuring that, you know, they can support the interest positions on our loans. We also include structures, interest reserves, set capital aside, and you identify an exposure amount you're comfortable with, and then you reduce that amount by whatever you set aside for specific interest obligations. So those are general structural elements that we would look at and consider when it comes to land positions, right? I'm sure that answers your question.

Yeah, I think so. I just, I mean, obviously, you know, when you're not income, you know, generating, I mean, is it, has there been, obviously you're doing your diligence all the time, but is that portfolio getting extra diligence that, you know, these developers are solvent or continue to be solvent?

Well, I think, listen, and again, I mean, to Jeff's point, it is a smaller component of our portfolio, but 100%, I think when we have land projects, you're looking at what is the strategy? Are they being delayed? Is that construction takeout? Is that happening or not? So in our business, in the bridge business, right, we have sort of a constant relationship with our borrowers. You know what I mean? Like a sort of ongoing communication. And to Jeff's point, we typically structure a land loan with interest reserves. So as you get towards what would be the normal maturity event, and let's say the borrower needs a renewal, like an extension, you're negotiating a replenishment of that interest reserve, right, to take that period going forward. And to your point, though, like, and listen, this is happening in land projects. You know, if a borrower doesn't have that liquidity, right, because they don't have the income, they didn't have the balance sheet to support it. I mean, that's when you – that's when you – Unfortunately, that's when you can get yourself into a workout loan and you have to enforce or come up with a plan with that borrower. Fortunately for us, again, it's not a huge part of our reality. And, you know, we've been dealing with, you know, as everyone knows, we have a fair amount of staged loans in our portfolio, but it hasn't really been growing, right? For us, most of it has been we're focused on resolutions, right? I think that just speaks to the quality of things, but we, you know, before that interest rate environment, you know, went up in 2023, when these loans, these stage loans are from that period before that, right, when interest rates, when everyone's on the forward balance sheets were super strong, interest rates were very low, those are some of the borrowers that got caught in the shock of the higher interest rate environment. Those are, unfortunately for us, are the stage loans we have. We're working through diligently with our borrowers or through enforcement to get rid of those positions. We've made a lot of progress on that, and that's what we're focused on. We feel good about our ability to resolve those in 26. But I do think, you know, I think about land, right? some there's no question there's there's land loans out there today especially in the toronto and vancouver market that i think are under pressure for sure and those headlines you've seen in other firms and just in the real estate and news which i think is very factual um and that's a challenge in those markets um but for us you know we we haven't done a lot of historically and if you're doing land today it's not bad because it's not a reset valuation um and you can evaluate again you can ongoing evaluate those borrowers balance sheets

Yeah, I mean, it's a great – it really is a good question. It does sort of get to the fundamental tenet of Timber Creek Financial and, you know, the largely income-producing-oriented focus of our platform, right? I mean, certainly as I think of it relative to some of our peers in the market, it would be less income-producing and much more land and construction focused. I think for all – you know, the very questions you've raised, I mean, I think it's why we've always historically been, you know, opportunistic and limited in scope in terms of where we step into that – part of the market, and it can provide, you know, good augmentation and enhancement to the portfolio and diversity, et cetera, and to Scott's point, you know, at this point in the current land reality, it's not a bad point in time to be looking at and seeing, you know, good opportunities with strong sponsors on a, on a very attractive risk-adjusted return basis. But for us, we're very happy that we aren't largely exposed to this on a legacy historical basis, and it remains, again, a smaller part of the overall strategy in general.

Okay. Sorry to beat that to death. Maybe I want to follow on Graham's question in terms of growth, but not from a loan perspective but an income perspective. So, you've got $600 million of loans maturing this year and you've got these properties that are non-income generating right now that are for sale and hopefully you come out with the cash and you can turn those into loans that are income generating. You know, that's one portion of the growth. But I guess with the loans rolling off, is the goal to, if a $10 million loan gets paid off, that you... redeploy it maybe into a bigger loan using the credit line. Like, is that how we should think about your generating income growth and not just, you know, loan growth, I guess, but there is a portion of to, to maintain that growth right now. Um, you're going to have to continue to use, you know, the credit line and, and, and bring that number up, I guess.

Yeah. Like our use of the credit line, I'm going to say it's consistent and, and, and, You know, repayments create capacity, okay? So it is kind of a closed-loop system that, you know, we want repayments, right? Repayments for us generates an ability to then go out and do a new loan. And one of the key components of that is a new fee for us as well, right? So you want, for us, historically, I'm going to say an easy number for us is about 50% of our loan books should churn every year. We use the word churn often. to sort of describe that repayment and then redeployment. Churn is a key part of our business. It allows that redeployment at a current risk level, at a current market rate, and we earn a new fee. So it's an attractive thing to do. How we structurally leverage that, like using our bank line or using a syndication, those are both tools and they're both effective tools. We're very focused on what is our equity returning, right? Because that is ultimately what pays the pays the dividend. So I think sort of getting to your question, I think, so if I get $10 million back, I'm looking at my margin on that loan. So if I had a margin that was a little less, absolutely, you know, Jeff McTate and his team and myself, we evaluate what's out there in the market and where do we think we can get our best risk-adjusted returns. And we might sit there and say, you know, something that I got a 250 credit spread, if I see an opportunistic part of the market in today's market, where I can capture 300 over, that's the way I can have an accretion, right, to what you're talking about, to the DI. The other thing for us is these stage loans, which are absolutely sort of in a sort of a substandard current income position, as that money comes back, we can absolutely deploy that at a higher yield than we're making today, right? So it was a big part of It's opportunistic for us to get repayments. It allows us to redeploy what we typically think is the best risk return at the time and try to drive incremental margin with those decisions. It is a key part of what we do. That's why we really want to get these staged loans back because those don't churn, right? It's sort of like managing the portfolio with an arm tied behind your back. So for us, we are excited to turn the page on the staged loans and then be able to pivot these discussions towards growth. um calls like today when we have to take uh you know impairments to sort of write off positions which hurt support value these aren't fun calls for us and we know it's not fun for our investors either um it's unfortunately you know it was a part of that environment that coven environment and the rapid rate increase but we very much look forward to we've been working very hard to resolve these issues and then and then move to more of a growth narrative

That's really helpful. I appreciate that. Thanks. No worries. Thank you.

There are no other questions at this time. I'll now turn the call back over to Scott for closing remarks.

Okay. Well, thank you, everyone, for joining us today. We look forward to speaking again when we release our Q1 2026 results. As always, please reach out to the team with any questions.