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Good day, ladies and gentlemen. Welcome to Timbercreek Financial First 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, sir.
Thank you, operator, and good morning, everyone. Thanks for joining us today to discuss Timbercreek Financial's First Quarter 2020 Financial Results. I'm joined on the call virtually today by Gigi Wong, our CFO; Scott Rowland, Managing Director, Debt Investments for us; as well as Geoff McTait, our Executive Director and Head of Canadian Originations. Understandably, we've had many questions about recent portfolio trends in light of the economic impact of COVID-19. Included in today's commentary is a discussion of the current position of the portfolio as well as some trends and data points from the early days of the second quarter. In most other nonessential businesses across Canada, we have just completed our seventh week, I guess, of working from home. While the transition has been smooth and the technology is working pretty well, you can all relate to the significant disruption this has caused. The big question for all of us right now is how long is this going to last? And how long will this impact the economy? One thing that has become abundantly clear is that COVID-19 is going to be a historically important event affecting the trajectory of politics, economics and society at large. In this new world, we continue to believe that the foundation of our business model, which is lending on a secured basis to quality real estate with quality equity sponsorship, is going to thrive. The severity and the length of the economic downturn will determine the degree to which commercial and multi-residential tenants are impacted, which in turn will determine the degree to which landlords are affected, which, of course, will vary by the type and location of that real estate as well as the diversification and financial strength of the sponsor themselves. This is why, as a lender, we describe our exposure as second derivative. The collection of interest and principal is through landlords, not tenants. And thus, the selection of quality sponsors is equally as important as the selection of quality real estate. None of us could have predicted COVID-19, but there were signs of real estate being in a late cycle. Quarter-after-quarter, you have heard us repeat our investment preferences, which have been heavily tilted towards risk mitigation strategies such as income-producing commercial assets, which are better positioned to weather economic shocks; first mortgages, in order to be in the driver seat, should actually be required; urban locations because liquidity matters when you need it most; and supporting well-capitalized, experienced and diversified sponsors with a track record of keeping their financial obligations. So where does this leave things? In short, even relative to historical first quarter levels, today's -- last night results, I guess, were pretty good. Of course, things didn't shut down until the final 2 weeks of March. And by then, most of our work for the quarter had been completed to get the deals closed by quarter end. So looking at the numbers through March 31, COVID-19 had kind of a superficial impact. And as far as the impact it's had on interest and principal payments for April and so far in May, as you'll see when we go further into the details, that also is negligible, which is an encouraging early sign for our second quarter. Slide 7, going through the portfolio strategy. Let me quickly review the key metrics for the first quarter, which reinforced that we entered this period with a conservatively positioned portfolio, a result of several years of derisking the investments. Just over 85% of our investments were secured by income-producing assets at quarter end, leaving less than 15% in land and construction. Multiunit residential remains our largest segment of the portfolio at just over 54%, consistent with our prior quarters. Apartments have always been a central focus for the company, and the diversification and durability of their cash flow is on display during the current period of economic weakness. A few additional trends to highlight relative to Q4 results. We saw a modest increase in the percentage of first mortgages, which climbed to just over 80 -- excuse me, just over 93%. Our average LTV was just below 70%, again, consistent with the range we've seen -- we've been in for a number of quarters now. The WAIR, we might agree what that is, that's the weighted average interest rate, the WAIR on our portfolio was 7.2%, the same as Q4 and within our historical range. We will touch on current pricing dynamics in a moment. Lastly, term to maturity decreased slightly to 1.3 years, in line with where we've been for a number of quarters now. It was a decent quarter for transaction activities, in line with what we'd expect in a first quarter, which, as you've seen in prior quarters, is generally lighter, as other institutional lenders aggressively put capital to work to meet allocation targets. Net investment -- net mortgage investments and advances on both -- on existing loans during the quarter totaled almost $127 million. Following a spike in the fourth quarter, turnover returned to a more typical level, just below 15%. This next slide speaks to the continued diversification of the portfolio, an important feature at times like this. As at quarter end, we had 131 loans at an average size of just over $9 million. Let's use this chart to address our exposure to regions, asset classes that a number of investors are focused on and have asked us questions about. First, retail, which at 13.7% of the portfolio at quarter end is down from 15.5% last quarter. Retail is clearly being affected by COVID-related shutdowns, so we are happy that our exposure is limited. We are monitoring the portfolio closely and remain cautious towards the category going forward. We should note that our exposure is focused on either grocery-anchored assets or well-located urban street front assets with strong long-term visibility.Second area of focus is Alberta. Our exposure at quarter end was 17%, down from 20% at year-end. 95% of these assets are located in either Calgary or Edmonton, and 60% are multifamily. Reality is that Alberta was already dealing with depressed oil prices for several years. So our loan structures reflected this reality, including interest reserves and a focus on sponsorship strength. As I have said, we are in regular contact with our borrowers to understand the lease-up progress, and we monitor each loan closely. Thirdly, land and construction. At less than 15%, it's a similar number to the last quarter. Major markets in the multifamily sector continue to be our main focus. While we can -- while we believe certain loans in these segments have strong investments, our direct strategy has been to be very selective, and we apply stringent risk criteria when considering opportunities. I would also highlight that we have no exposure to hotels, an asset class that has been particularly hard hit by COVID-19. Given the market backdrop that's changed so quickly and dramatically since March, we want to provide additional color on 2 important topics: One, how has the portfolio performed more recently? And two, how has this affected our transaction pipeline? I will caveat that what we say today is based on what we know today, and that there remains a lot of uncertainty as regards to the depth and duration of the economic impact caused by the global shutdown. From a portfolio perspective, I'm pleased to say that there was nothing significant to report for April. We collected approximately 98.4% of April 2020 interest payments, which is materially in line with historical collection rates, with only a single small loan being in arrears as a direct result of COVID-19. Furthermore, for May, we have provided only 2 short-term deferral arrangements affecting approximately 3% of the portfolio. In summary, from an income collection perspective, the second quarter remains on track. Overall, we believe the recent performance speaks to the creditworthiness and financial capacity of our borrower base and highlights the value of income-producing assets. Looking to the market conditions, our pipeline remains solid with strong incoming inquiries from both existing customers and new prospects. While overall market activity levels have undoubtedly slowed, we are seeing more than our usual share of transactions given our financial strength and capabilities to execute. The pricing environment remains stable despite March decreases in prime rates. Compared with several months ago, in fact, we are seeing better pricing today for the same kinds of deals or similar pricing but at lower LTVs. In addition, we have increased access to transactions, which in pre-COVID times utilize larger traditional lenders. At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Net investment for the first quarter was $24.1 million, which was consistent with Q1 2019 and in the range of what we generated quarterly through most of 2019. Total interest income was down very modestly from prior year, reflecting the decrease in collateralized loans and the enhanced return portfolio. This was offset by slightly higher lender fee income in the current quarter relative to Q1 2019. Cash lender fees were $2.2 million in this quarter compared with $1.8 million in 2019 Q1. You will note that we have presented an adjusted net income figure this quarter to provide an apples-to-apples comparison with prior periods. This adjustment is for a $5.8 million unrealized fair value loss on derivative contracts as a result of the 150 basis point decrease in the prime rate. This is a mark-to-market accounting adjustment that is a noncash item and will reverse over time. First quarter adjusted net income was $13.2 million compared with $13.1 million in the same period last year, and adjusted EPS was $0.16 in both periods. DI was $0.17 per share, consistent with Q1 2019 and in the range of what we have historically delivered. Our payout ratio based on DI was 99.9% compared with 99.4% last year. When you look at the quarterly trend in DI since the merger in 2016, it has been relatively stable between $0.17 to $0.20 per quarter. Please refer to the MD&A for a detailed reconciliation between DI and EPS. Turning now to the balance sheet highlights at March 31. Our financial position remains strong and solid. Since the end of 2019, our net mortgage assets were down slightly to $1.2 billion. At quarter end, the enhanced return portfolio was at $17.1 million, similar to year-end. The balance on our credit facilities declined to $433 million from $490 million at 2019 year-end, providing us with approximately $100 million of deployable funds as at March 31, 2020, an enviable position to be in. Between syndications, repayments and line availability, the business is well capitalized with sufficient liquidity. I will now turn the call back to Cam for closing comments.
Thanks, Gigi. And perhaps I'll take a second, and I wouldn't mind reiterating something, we've had a few calls or e-mails already asking around the net income versus the adjusted net income. And I just want to be -- make sure people caught Gigi's comments about the presentation of the adjusted net income figure this quarter. That's reflecting a mark-to-market accounting adjustment, and that is a noncash item and will reverse over time. Obviously, you can refer to the financial statements for some additional details in that regard. So it's -- you were -- the market view is an outlook segment of the presentation, and it's difficult to provide much in the way of an outlook because, unfortunately, what we lack is certainty. And it's that uncertainty that is causing significant gyrations in share prices, including our own. We try not to get too distracted by these short-term trends. Rather, we're staying focused on protecting our balance sheet as that is what's going to determine long-term success, especially if the economic impacts of COVID-19 are protracted. We believe our capital position and our investment portfolio have positioned us well to get through this current crisis, perhaps with a few bumps and bruises but through it, nonetheless. In terms of the commercial real estate environment, transaction volumes are, not surprisingly, down as people push out time lines rather than transact under these conditions. And we continue to see strength in the multifamily residential sector. However, spaces like hospitality and retail are really bearing the brunt of the current storm. On the last call, we cautioned that sustained downward pressure on rates could impact our weighted average interest rate this year. That said, the high percentage of floating rate loans with floors in our portfolio, 79% at quarter end, has really muted the impact of recent rate cuts. Despite the 150 basis point cumulative reduction in prime rate in March, the weighted average interest rate exit for this quarter was down only 10 basis points to 7.1%. In short, the portfolio is performing well so far in Q2, and the near-term outlook for capital deployment is positive. It's at times like these that we are reminded of the great number of investors, clients and supporters, who have entrusted their capital and their business to us. We thank you for the confidence you've shown in us and we -- as we navigate waters that none of us have swum in before. While we can't know for certain which twists and turns are going to occur over the next 1, 6 or 12 months, what is certain is our team will continue to manage with the same investment discipline that has served us so well in the past. Protecting capital continues to be our primary focus. That completes our primary remarks. And with that, I'd ask the operator to open the call. Operator?
[Operator Instructions] Your first question comes from the line of Stephan Boire.
So I have a few questions. First, I may have missed it, but have you quantified the number of loans or maybe the dollar amount that you think will need to be extended? And how does it compare to the pre-COVID environment?
So you didn't miss it. I don't think we spoke specifically to that item, but I'm going to ask Scott to give some kind of highlight comments around what we're seeing in terms of maturity profiles and whether we are -- how we're doing on the extensions and/or repayments. Certainly, prepayments are down, I would say. Scott?
Yes. I think the answer to that question is, sort of looking pre- and post-COVID, right? So our portfolio was in very good shape going into the portfolio. We had sort of 1 loan that I would have called -- 1 or 2 loans that would have had a couple of these pre-existing conditions, pre-existing issues that we were managing. As we get to the end of the quarter and into April, we actually only had 1 loan that ended up adding to that balance. And that sort of results in that cumulative sort of 1.6% of the portfolio that we were dealing with, which is about $20 million, of which only the 1 loan, $7 million of that balance, we would sort of relate directly to COVID. As we look a little bit forward now, and so we're right in the middle of our May collection cycle. We actually collect loan payments on the first of the month and the fifth of the month. So we're -- we did get through the first of the month well. We're just waiting now to see sort of the balance of our portfolio. But through this process and with negotiations with the borrowers, we actually only added 2 loans to that list that have requested some relief, sort of a rent deferral. Certainly nothing beyond that. So we negotiate sort of some short-term rent deferrals to make that money back. And anything that's deferred is added to the balance and that sort of...
Sorry, Scott. Interest deferrals rather than rent deferrals.
Interest deferral, correct, sorry about that. And it's an interest deferral and again -- but it's not forgiven at all by any means. And that's about 3% of the book. So outside of that, I'd say the numbers are looking strong and looking consistent. To the second part of your question on repayments, repayment activity, I think, is starting to slow down a bit. We just coincidentally had sort of a lighter number in our maturity ladder in the months of April, May. But I think -- I anticipate we are going to see some requests for extensions. I think just in general, you're seeing the transaction market sort of freeze a little bit, right, as people sort of have taken a bit of a pause. And then having said that, though, again, with a weighted average of 68% loan-to-value, a strong portfolio, these are tenants -- or loans that we would have no issue giving short-term extensions to accommodate sort of business plans. And that would just be -- those loans would stay current and stay under the existing sort of legal contract obligations.
Okay. And I guess I just want to circle back to the risk. Obviously, you've talked about it in the opening remarks. But in the MD&A, you mentioned having enhanced the credit risk assessment process to include an assessment of possible loan deterioration factors, including a few things such as the sponsorship's ability to make interest payment, the condition of the assets, et cetera, so -- a couple of more things. So in that context, can you give us some information on the -- maybe more specifically on the retail and office properties, securing a portion of your portfolio, but what kind of tenants are located in these properties? I'm just trying to see if the risk disproportionately increased for any of the properties in your portfolio. That's a long question, but I'm just trying to get to the crux of it.
No, no. I think it's a great question. So I think I'll answer that sort of in 2 parts as well. The first is -- and the risk rating and that loan deterioration factor, and just for people on the call, the risk rating factors and the risk rating process is something that is -- we work with KPMG. It is part of our IFRS accounting requirements. And we launched a system, I want to say, back last spring. And we evaluate the loans for several different criteria, whether it's liquidity of the market, the loan-to-value, the type of asset class, these sort of factors. One of the things as a management team we worked through -- and this is -- I'm going back to the fall now, so well before COVID-19 was a thought, one of the things we wanted to do just to sort of enhance the robustness of that process was how do we capture a little more detail about what happens to the loan over time. And so we -- out of this sort of this new fifth factor for us, which is called the loan deterioration factor, where we assess a loan under 4 key criteria: The sponsor, so is there any ability or sort of changes in the sponsor to be able to pay their loans; the asset itself, so call that the cash flow within the asset, quality of the asset; market conditions, which, again, would be things like COVID or Alberta with the oil issues; and we want to look at execution. So execution is sort of, is there a material change in the business plan? Is loan-to-value materially changing any sort of loan structural criteria? So call this a wholesome look at a loan. And every quarter, we're going to assess our entire loan book through our standard risk rating process with this now inclusive of it. So this will give us a little more of a dynamic risk rating process. It's something we worked with KPMG on, and we had always intended to launch that for the beginning of 2020. And frankly, we're developing -- I'll say, I started developing that back in October. So this was launched, okay? And so that was sort of the rationale behind it, just to be a more robust process. Now what does this mean? And when we look at this, and I think exactly to your point, and those are criteria I worked out, where will you see impact? If you look at our multifamily book, I can tell you, we are exposed to some of the larger landlords in Canada. And we've seen a very strong collection activity, well over sort of 97%. Our multifamily book is very strong. As you would expect, those loans shook through the sieve of the risk rating process kind of exactly as is. You turn your attention over to the retail book or the office book, that's where you start potentially having more risks, right? And this comes down to market. So I would say, our portfolio -- our office exposure portfolio, generally speaking, actually is full collections, remains strong. We're a little more cautious in Alberta. So like, for example, Calgary office, we will increase that risk factor slightly, not enough. And by the way, then you assess these risks, does it increase your probability of default or does it increase in expected credit loss? So it's a waterfall model. So it heightens the risk for us to look at. But I would say, no, it did not result in an increased sort of probability of default on those loans. Similarly, when you go into the retail book, Cam mentioned this in his comments, but our retail book -- listen, we are light retail. So our retail is around 14% of the book. And really for us, historically and going forward, we focused on 2 segments in retail. The one is, if you have sort of a larger sort of traditional retail center, we focus on grocery-anchored properties, grocery-anchored, drug-anchored, maybe have an LCBO. And the nice part is, as we had moved into COVID, what we found is strong performance for those assets because, in general, those are still open for business. The other type of retail that we focus on is very prime urban street front. So picture downtown Toronto, a downtown Vancouver, centralized locations that even if a tenant was forced to be closed, we know the landlords are going to protect those assets, are going to work with those tenants. And down the road when we do get cleared of COVID, these will remain very, very strong properties. So again, those do go through the risk rating process. It would result likely in an elevated risk rating, but nothing overly material at this point that would lead us to, say, be concerned about an expected credit loss.
Okay. That's extremely helpful. And I just had 2 more questions, if I may, also on the risk subject. First, well, on Page 18 of the MD&A, there seems to be a new $10.1 million in stage 2 high risk. Again, can you just comment on that, please?
Yes. That was an addition of one specific asset, an asset called The Windsor in Calgary. Geoff, can you provide us sort of a quick update on that?
Yes, for sure. I mean, this is a high-quality recently completed multifamily asset with ground floor retail. The reality is, this asset was in lease-up pre-COVID. And obviously, the COVID circumstances disrupted some of the in-place tenancy and halted the leasing momentum that was being experienced in the asset pre-COVID. In addition, the loan matured at the end of March, and the borrower advised of an inability to pay April rent. We're -- this is a second mortgage position. We're working with the first mortgage lenders to bridge this interim disruption period. This is a well-located, high-quality asset. We're looking to bridge this sort of interim disruption period and stabilize the assets. I think from our standpoint, our exposure is reasonable, and we expect to be repaid in full, either through refinancing of the asset once it's stabilized or sale of the asset at that point in time.
Sorry. Did you say you had a second mortgage on that?
Yes.
Okay. And what's the total loan-to-value ratio on that property, including the first mortgage?
Loan-to-value ratio, including the first mortgage, is -- I think it's around 85%.
That's correct.
Yes. Okay. And just finally, pushing my luck, but can you give some color on the onetime adjustment in professional fees in the G&A?
We'll ask Gigi to speak to that one. Gigi, are you on the line?
Sorry, the onetime -- I'm on. Can you hear me? Are you referring to onetime adjustment that we made last year?
No. It seems to be in the MD&A, but I can take this off-line, if that's okay.
Yes. If you were referring to the adjusted net income that we made this time, I could just speak a little bit about it. It's an interest rate swap that we put on in the end of December. And we hedge about 200 -- we hedged $250 million notional value of our -- we fixed our rate essentially through the interest rate swap for our financing costs. And so with the change in the interest rate at the end of March or during March, that $5.8 million adjustment represent an unrealized mark-to-market had we choose to unwind the swap at that time. We have no intention of unwinding the swap, and this will reverse over time as the term of the swap shortens over time.
[Operator Instructions] The next question comes from the line of Graham Ryding.
All right. I'm just wondering given the economic uncertainty, is there not any thought to sort of increasing provisions even though the loans are performing, just given the material drop in the economic outlook? Is there not any thought to increasing provisions this quarter?
No, we -- certainly, a big part of our conversation amongst the team, the auditors and the Board and others, we've run through, and I'll ask -- you heard a bit of Scott's preamble around the risk modeling that we do on the portfolio. And that really drives, we've talked about this in prior quarters, drives the provisioning exercise. It's not something that you can arbitrarily pick a number that would be income smoothing, not allowed under IFRS. So this is something that you need to support through actual experience, historical or current or expected experience. So we've done that analysis. We've adjusted a number of the factors given some did -- where the market is today, given COVID-19, and the result was there was an increase in provisioning. It may not have been to the size that others, I'm thinking of some of the large banks, which have a much different exposure, some of which is unsecured, to which -- if that's what you're thinking in terms of our provisioning size. I don't know, Scott, whether you would add anything else to that.
Yes. No, we did go through -- obviously, we just spent a fair amount of time on it. We did -- it did result in an increase in our probability of default as we sort of worked through our IFRS 9 model. It did result in an increase in the provision, although not overly material. And again, you go through a probability of default and an expected credit loss model and where our average LTV is in the portfolio, it tends to have a -- provide a fair amount of cushioning from what you would actually expect to -- where you would actually need the market to get to where you would see a loss. So you can go -- and I think this is exactly as Cam described, you -- there's only so much you would do in a model to have a realistic expectation for a loss. So from that perspective, the provisions go up, but maybe not as specific or -- it's not really a qualitative exercise, I think, to Cam's point.
Got it. Okay. And the Cresford property, I think that was in the discussion in the last quarter. Is there any update there? Is that in your -- one of yours, considering all that has happened to that property?
Yes. No, sure. A quick update on Cresford. The Cresford loans are all current, remain current, and the borrower is working through a sales process for the assets. So we are sort of in a holding pattern while they work through that, but we are very, very comfortable with our loan-to-value position, first mortgage positions. And we expect to be repaid in due course. Definitely, I think COVID has affected the time line around those negotiations. But we're -- I would expect us to be likely free and clear towards the end of probably 3Q at the latest, 2Q, 3Q.
Okay. Got it. And just, Cam, the outlook for the portfolio, like given the pullback here in this general economic activity, is it reasonable to think that the portfolio will contract in size in the near term?
I think the early experience that we're having here in Q2, Graham, is given our unique position going into the quarter, that is the amount of dry powder we have, the quality of our portfolio, the disappearance of a number of competitors either voluntarily sitting on the sideline or involuntarily sitting on the sideline, has led to some pretty high-quality deal flow, as we said in this prepared remarks, either lower LTV stuff at similar rates or similar LTV at higher rates. So we've been in a unique position of being able to cherry-pick some great assets here through the start of Q2. So we'll actually deploy some of that capital that we've been sitting on. At this point, I would say our assets have actually -- are up over quarter end. And let's see where the rest of the quarter takes us. But at this point, it does feel a little bit like it's slowing down. But we don't expect a significant amount of prepayment stuff. I think all of our initial reaction is we probably end this quarter at -- on an asset level slightly up from where we ended the first quarter.
Okay. Understood. And then just my last question would be the lender fees. If you do go into a process of higher amount of loans sort of renewing as opposed to the natural turnover that you have in your business, what's the impact on the lender fees there? Is there a lower lender fee for renewals?
Generally, yes. Scott, what's the kind of the averages that you've seen in those 2 categories?
Yes. No. Typically, it's less, but it's typically time weighted, right? So when we do a new deal, which is typically 2 years, I'll say the typical fee is 1%. When we do a renewal, it's often 1 year with like 0.5 point of fee. So it's kind of -- just think of it as a time-weighted renewal. And I think that, that goes into the book this year that if we have more people asking for extensions, asking for renewals, we would have more renewal fees. But depending on the outlook, as opposed to a 1-year renewal, maybe we do execute a 2-year renewal, in which case, we would get a 1% fee. So I think when we're doing -- when we're negotiating these deals, we're very much just sort of focused on how much time for how much fee and try to keep it fairly consistent, frankly.
There are no further questions at this time. I'll turn the call back over to the presenters.
Thank you very much. And again, I thank everyone for taking the time to participate on the call today. If there are any additional questions, please feel free to reach us -- excuse me, reach out to us directly. Thank you again, and have -- stay safe and healthy.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.