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Edited Transcript of TF.TO earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Timbercreek Financial Corp Earnings Call

TORONTO Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Timbercreek Financial Corp earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Goodnough

Timbercreek Financial Corporation - CEO, President & Director

* Gigi Wong

Timbercreek Financial Corporation - CFO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Timbercreek Financial second quarter earnings call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the meeting over to Cam Goodnough. Please go ahead.

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Cameron Goodnough, Timbercreek Financial Corporation - CEO, President & Director [2]

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Great. Thank you, operator, and good morning, everyone. As the operator indicated, my name is Cam Goodnough. And I wanted to extend thanks for joining Timbercreek Financial's second quarter 2019 financial results. I'm joined by Gigi Wong, our CFO; Ugo Bizzarri, CIO, the manager; Brad Trotter, VP, Origination; and Scott Rowland, VP, Portfolio Management. Today, we'll provide a brief overview of the second quarter financial results and the current position of the portfolio. We'll conclude with the market outlook and Q&A.

Our operating results for the second quarter were sound and clearly demonstrate our focus on quality and managing portfolio risk rather than simply asset deployment. All the metrics we use to measure risk have either improved or have been maintained. Specifically, our focus on first mortgages, our allocation to cash flowing properties and our weighted average loan-to-value.

As we've discussed on recent calls, competition for high-quality Canadian commercial assets remains elevated from institutional investors and Schedule 1 banks competing aggressively. Overall, many projects are arranging debt financing at rates below expected levels given their degree of risk. And as a result, we remain disciplined in the deployment of capital at this time.

We have significant financial capacity, and we continue to focus on delivering the financial objectives for the company. We see signs that activity will pick up in the second half of 2019, and we expect that our payout ratio on a distributable income, or DI, basis will end up above the target 95% but below 100% on a full year basis. That said, as the capital influx has focused on higher-quality deals, the market remains highly competitive for our targeted asset categories, namely first mortgages on cash flowing commercial real estate.

So following along on screen, which is on Slide 7. The net mortgage portfolio remained at approximately $1.2 billion at the end of the second quarter, consistent with the first quarter and year-end 2018. Risk management remained at the forefront of our strategy, and our risk metrics remain sound. Exposure to first mortgages was 93.8%, consistent with prior periods. We continue to have a significant equity buffer across the portfolio with a weighted average loan-to-value of 67.4% in Q2, again, consistent with prior periods. Our weighted average interest rate at the end of the period was 7.4% in Q2, the same as Q1. And our remaining term to maturity was 1.1 years, essentially unchanged.

Turning to Slide 8. You can see that our concentration of first mortgages and our LTVs have remained relatively stable over the last 2 years and that our weighted average interest rate, or WAIR, has been in the mid-7s for the last 4 quarters or so. This is fairly consistent with the prime rate experience over that similar period, which has been also relatively flat with only a 25 basis point increase since last July.

Turning to Slide 9, we highlight a few more metrics that illustrate our portfolio strategy. We ended the quarter with just over 86% of our investments secured by income-producing assets, which is essentially unchanged from Q1. Assets in urban markets represented almost 95% of the portfolio. If you recall from prior calls, probably, we -- excuse me, as you recall from prior calls, properties in urban centers tend to be more liquid through economic cycles and thus remain a critical investment attribute and risk mitigation tactic for Timbercreek. Multiunit residential properties are a primary asset class that we target, and our concentration there sits at about 46%.

In terms of portfolio activity, deal flow has moderated somewhat over 2018 levels, as you can note on the diagram, where we benefited -- in 2018, we had benefited from some large onetime opportunities. As previously mentioned, competition from institutional investors can have some seasonality as assets tend to be deployed more aggressively in the first half of the calendar year. In addition, our business can be lumpy and should be viewed over a longer-term horizon.

Turning to Slide 11. Portfolio turnover in the quarter was about 14%, a bit higher than Q1 but down from the 18% this time last year. Portfolio turnover can fluctuate based on the timing and weighting of investment renewals and other factors, thus quarterly numbers can vary and should be measured over a longer time period to establish a normalized level.

Looking at a couple of our portfolio investments that we've discussed on previous calls and in our financial statements. We have, as previously discussed, announced our intention to sell our $46.9 million interest in the Saskatchewan portfolio, also referred to as the Sunrise portfolio. In order to maximize the marketability of the portfolio, we are finalizing preparation of the properties and are considering dividing the portfolio into smaller tranches to maximize the potential buyer universe. The portfolio has almost fully stabilized and is a positive contributor to the company's income, supporting a patient and methodical approach to the marketing process.

With regards to the largest segment of our stage 3 asset category, the property we control as mortgagee in possession, with the help of a new property management firm, we have completed some renovations and are seeing positive leasing activity at the property. We continue to review options, and we'll work to find a solution that protects our investment.

The mortgage portfolio remains highly diversified with 130 loans at an average size of just under $9.5 million. Multiunit residential or apartments remain our largest asset class at 46.3% of the portfolio, which is consistent with Q1 numbers. Office properties are at a lower level than prior periods, currently sitting at 7.1% of our portfolio. We reiterate that we have had no change in sentiment as regards to office, and there have been no changes in our strategy either. But similar to multi-res and other categories, over the long term, there is variability in the concentration of our investment assets, and we are most focused -- as we are most focused on providing acceptable risk-adjusted returns for our shareholders.

The portfolio concentration by province has shifted only modestly from Q1, with our highest exposure remaining Ontario at 45%. As discussed previously, we continue to see attractive investment opportunities in Alberta. And consequently, concentration in that market sits at 21%, consistent with year-end levels but up from 17% in the first quarter of 2019. It should go without saying that our investments in Alberta continue to be in the major urban centers.

At this point, I'll turn the call over to Gigi to review the financials in more detail.

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Gigi Wong, Timbercreek Financial Corporation - CFO [3]

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Thanks, Cam. Net investment income increased 6% over Q2 2018 due to a higher average net portfolio balance of 2% and an increase in our weighted average interest rate. Net income of $13.6 million for the second quarter of 2019 was up over 9% from Q2 of last year. EPS of $0.16 was consistent with the comparable period last year due to an increase in share count from the ATM and DRIP programs we have in place.

I will now take a closer look at the earnings and cash available for distribution. Distributable income was $0.17 per share compared to $0.20 in Q2 2018. Recall that distributable income in Q2 2018 was enhanced by higher-than-usual cash lender fees. Our payout ratio on distributable income was 104.2% this quarter. In the second quarter of 2019, we realized relatively lower lender fees given the reduced portfolio turnover and lower syndication activity. As Cam previously mentioned, turnover can be impacted by the timing of capital deployment, repayment and renewal. To reiterate, we expect that the payout ratio for fiscal 2019 will be between 95% and 100%.

Turning to Slide 16, we provide a high level reconciliation between distributable income per share and earnings per share. As we -- please refer to our MD&A for a detailed reconciliation between the 2 metrics. Since the merger in 2016, our quarterly distributable income has remained relatively stable between $0.17 to $0.20 per quarter, with much of the variability linked to the timing of upfront lender fees.

Turning now to the balance sheet highlights at June 30. Since year-end 2018, our net mortgage assets have been essentially unchanged, reflecting the competition from institutional investors and traditional lenders, which we've described in our opening remarks. The balance on our credit facilities has declined to $487 million from $509 million at year-end. And as disclosed in our financial statements, our syndicated loan balance is down to $437 million from $575 million at year-end. Our leverage ratio was 45.8% on June 30, down modestly from the prior quarter. The enhanced return portfolio has increased by about $3 million in the quarter, representing approximately 7% of assets net of syndications.

I will now turn the call back to Cam for closing moments -- comments.

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Cameron Goodnough, Timbercreek Financial Corporation - CEO, President & Director [4]

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Thanks, Gigi. Economic conditions in Canada remained stable in the second quarter of 2019. Benchmark interest rates have declined, job creation remains relatively healthy, and the real estate market is sound. Institutional capital continues to seek alternative investment opportunities, which has kept a firm bid on quality commercial mortgage investments in Canada and elsewhere. Like Timbercreek, these larger institutional investors tend to gravitate to the lower risk end of the investment spectrum, focusing on liquid markets and properties that produce cash flow.

As always, we have found a way to adapt to market conditions, and I am especially proud that we have not compromised our risk profile or the returns that we seek. We remain optimistic in Timbercreek's ability to provide attractive risk-adjusted returns to investors through exposure to the cash flows generated by high-quality commercial assets in Canada.

We continue to have many repeat clients that depend on Timbercreek for timely and flexible capital, a product that will always be in demand. Our DFO remains healthy, and we are pleased with the composition of the portfolio. As market conditions change, Timbercreek has the financial capacity, the agility and the know-how to deliver on our investment objectives. That completes our review of the second quarter. And with that, we will open the call to questions. Operator?

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Operator [5]

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(Operator Instructions) There are no questions at this time. I turn the call back over to the presenters.

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Cameron Goodnough, Timbercreek Financial Corporation - CEO, President & Director [6]

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I appreciate everybody's time this morning. And I wanted to thank you for all of your questions, jokingly, but I'm sure I'll talk to a number of you going forward. And we look forward to updating you with our Q3 results in November. Anyway, thank you once again, and have a good day.

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Operator [7]

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This concludes today's conference call. You may now disconnect.