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Good day, ladies and gentlemen. 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, sir.
Thank you, operator. Good afternoon, everyone. And thanks for joining us today to discuss Timbercreek Financial's Second Quarter 2020 Financial Results. I'm joined by Gigi Wong, our CFO; Scott Rowland, Managing Director of Debt Investments; and Geoff McTait, Executive Director and Head of Origination. In addition to discussing the results of the quarter today, we will give you our most current view of the portfolio and market trends. Almost 5 months into the COVID-19 pandemic, our portfolio continues to demonstrate resilience, which reinforces the value of our focus on income-producing assets. When we spoke in May, we presented additional disclosure around the principal and interest payments. It was a positive story then, and it remains one today. In a portfolio of 135 loans, there will always be files requiring more attention. The extent and duration of the COVID-19 crisis and resulting economic impact remain unknown. So we continue to monitor the portfolio and follow our clients very closely. While COVID has not materially affected our collection rates to date, there's no question it had an impact on the second quarter, including the volume and mix of business in the portfolio. Across our industry, transaction activities slowed markedly from pre-COVID levels. Put simply, borrowers and lenders were taking more time to transact, which pushes out time lines. In our portfolio, this translated to fewer new investment dollars deployed and lower turnover, which was offset by higher renewal activities. These renewals help drive lender fee income to meet our distributable income targets and kept capital at work in quality loans at attractive rates. Let's get into the details of the portfolio. In terms of the key portfolio metrics, there will be no surprises here. Close to 86% of our investments were secured by income-producing assets at quarter end, leaving less than 15% in land and construction. Multiunit residential remains the largest segment in the portfolio at 52%, down modestly from the prior quarter. Apartments provide diverse durable cash flow streams, which are important characteristics in an economic downturn. And we remain almost entirely invested in urban markets, which provide superior liquidity. A few additional metrics to highlight relative to Q1 results. First mortgages, represented 92% of the portfolio, similar to Q1 levels. Our average LTV decreased to 68.7% and just below 70%, reflecting the quality of the recent transactions we have been able to secure. The WAIR, the weighted average interest rate on our portfolio was 7.1%, and the exit WAIR was 7.2%, similar to Q1 and within our historical range. Despite a reduction in the prime rate, the second quarter saw good pricing on new deals, increasing our spreads. Lastly, term to maturity was 1.3 years, unchanged from Q1. As I mentioned, transaction activity slowed in the quarter, as expected in this market environment. Turnover was 6.4% versus a more typical level of 14% to 16%. In aggregate, we invested roughly $100 million in new high-quality mortgage investments and additional advances on existing mortgages. Understandably, portfolio diversification is an important feature at times like this. At quarter end, we had 135 loans at an average size of just under $9 million. Let me provide an update on a few of our specific portfolio investments that have been discussed on prior calls. First is Northumberland, previous stage 3 loan that was sold at par at the end of 2019 to retail specialist, the Trinity Group. Timbercreek provided a 3-year loan, which is held at fair market value to allow sufficient time to execute on a multiyear stabilization plan. As a smaller market retail assets with existing vacancy, this property already faced some challenges prior to the onset of COVID. In a current environment where traditional retail centers are facing additional headwinds, Northumberland is not immune. Last quarter, if you recall, we took a $666,000 negative adjustment on this $36 million asset. This quarter, we are recording a further negative adjustment of $2.7 million to reflect incremental effects of COVID-19. This affects our reported net income, but does not impact our DI, which Gigi will discuss. We'll continue to work with our partners to maximize the value of this asset while remaining prudent on valuation. On the positive side for this asset, the grocery anchor is currently finishing a substantial store renovation, and work is beginning this fall on a new Starbucks-anchored exterior pad site as well as the build-out of a new Giant Tiger. Clearly, brick-and-mortar retail, especially of the enclosed mall variety is a more challenging space given the current COVID-affected environment. As you will recall, our focus has historically been on grocery-anchored as well as -- or well-located urban street front assets with strong long-term feasibility. Our retail exposure was just over 16% at quarter end, up a bit from last quarter. Outside of Northumberland, we have 18 retail loans in the mortgage portfolio, representing roughly $195 million. Of those assets, 90% approximately would be considered on well-located urban street front, with the remaining 10% or, call it, $20 million, spread across 3 loans with an average of a 67% LTV in high occupancy grocery-anchored assets. We believe we are in a strong position with our exposure to the segment. Northumberland is a specific situation and not representative of other assets in the broader retail book. That said, we continue to approach the retail segment cautiously, and we'll look to lend opportunistically. From a risk perspective, this quarter, we adjusted the allowance for credit loss model to reflect a more conservative stance on the retail segment. Second, as regards Crestford, a Canadian development company that has been in the news of late, this situation remains before the court so we cannot go into much detail at this point. However, I will note that one of our loans is expected to be repaid in the near term, and we have a high degree of confidence we will be repaid in full on the other loans given our position relative to the value of the underlying real estate. The third investment I will comment on is Sunrise. Since we acquired the portfolio of properties in August of 2017, we've been working to restabilize it and complete outstanding construction and renovation work. We continue to drive a steady increase in net rental income, and the assets are performing well despite a challenging economic backdrop in the province. Pre-COVID, we had been achieving above-market rental increases and declining vacancy as a result of the ongoing repositioning program, with occupancy now north of 88% versus the 40% occupancy when we took over the asset. While COVID initially impacted progress, leasing momentum has picked up in the last 60 days and collection rates remain strong at around 93%. There remains some repositioning work ahead, but we are comfortable with our ability to execute on this investment. There is strong demand and liquidity for the multi-asset -- multifamily asset class and the low interest rate environment has made performance even more attractive from a yield perspective. Recall that we have roughly a 20% equity ownership, but are entitled to incremental profits from the excess returns generated over certain thresholds. From a regional perspective, our Alberta exposure at quarter end was 17%, similar to Q1. And also similar to Q1, 95% of these are located in Calgary and Edmonton and 60% are in multifamily. 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. With that said, we are in regular contact with our borrowers to understand their lease-up progress and we monitor each loan very closely. In this rapidly changing and uncertain environment, it is helpful to dive a little deeper on the [ pulse ] into the performance of the portfolio and the outlook for new transactions. From a portfolio perspective, I'm pleased to say the positive trends we reported on for April and May continued for June and July, and we see no evidence of deterioration so far in August. In July, for example, we collected 98.4% of interest payments, which is in line with historical collection rates. The small single loan that we had previously mentioned back in May, that was in arrears as a direct result of COVID-19, has been fully repaid in the second quarter. This performance speaks to the creditworthiness and financial capacity of our borrowing base and highlights the value of investing in income-producing assets. From a pricing and coverage perspective, Q2 activity was accretive to the overall book with moderately better pricing for the same kinds of deals or similar pricing at lower LTVs. From a market perspective, although overall activity slowed in the second quarter, we have seen an increased transactional activity to start Q3, albeit accompanied by an increasingly competitive lending environment, with many of the lenders previously sidelined by COVID returning with significant unfunded mandates. While our pipeline is strengthening, and we expect to see a continued increase in the number of potential transactions in the second half of 2020, we remain cautious in our approach with headwinds high due to this increasingly competitive environment and the uncertainty of COVID-19. At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Net investment income for the second quarter was $22 million, down from the prior year, mainly due to the negative $2.7 million fair value adjustment that Cam had mentioned. Excluding this, net investment income would have been consistent with Q1 and up from last year. Net rental income was $376,000 in the period and $736,000 for the year-to-date period, reflecting an increase in occupancy rate, offset by a moderate increase in operating costs. While total transactions almost down this quarter, higher renewal activity drove solid lender fee income of $2.2 million compared that with $1.5 million in Q2 2019. Second quarter net income was $11.7 million compared to that with $13.6 million in the same year -- same period last year. And EPS was $0.14, down from $0.16 last year. While reported net income was impacted by the fair value adjustment, we are in our targeted range for DI, which was $0.18 per share this quarter. Our payout ratio on DI was in our desire range at 95.7%, as an improvement from last year's 104.2%. When you look at the quarterly trend in DI, since the merger in 2016, it has been relatively stable between $0.17 and $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 June 30. Our financial position remains sound. The net value of the mortgage portfolio, excluding syndications, was $1.2 billion at the end of Q2, an increase of $19.2 million from Q1 2020. The enhanced return portfolio was $82.6 million, which included $65.6 million of other investments and $70 million of net equity in investment properties, representing 6.2% of total assets, net of syndications. The balance of our credit facilities declined to $475 million from $490 million at 2019 year-end. This provides us with approximately $55 million of deployable funds as at June 30. Between syndications, repayments and line availability, we remain well capitalized with sufficient liquidity. Lastly, we were quite active with the NCIB program in Q3, acquiring and retiring more than 1.9 million shares.I will now turn the call back to Cam for closing comments.
Thanks, Gigi. Given the continued uncertainties tied to COVID-19, we remain cautious in our outlook and approach going forward. That said, the fundamental strengths underlying many of the asset classes and markets we are active in remain a source of optimism in respect of the continued stability of the market overall. Our focus will remain on monitoring the existing book and preserving capital first and foremost. And our proven disciplined investment approach will continue to identify risk-adjusted returns reflective of the current environment. As discussed in Q1, the high percentage of floating rate loans with floors in our portfolio, 75% of the portfolio at quarter end, has muted the impact of recent interest rate cuts. The WAIR exit rate this quarter, as previously mentioned, was 7.2%, consistent with Pre-COVID levels. In summary, the portfolio performed well in Q2. That said, COVID-19 looks like it will be with us for a while longer yet. And even when it finally abates, we expect its economic impact to linger. All the more reason to focus on quality real estate, backed by well capitalized and experienced sponsors with well-structured loan protections. That completes our prepared remarks. And with that, we will open the call to questions. Operator?
[Operator Instructions] Your first question comes from the line of Sid Rajeev of Fundamental Research.
My first question is really regarding the deferral. About 3% of borrowers have requested deferred payment plans. What percent of the borrowers did actually request for one? And what are the typical terms of these deferral plans?
Well perhaps I'll ask Scott to speak a little bit on the deferrals and whether there were others that requested and weren't granted a deferral, but more importantly, what kind of typical terms are we looking at -- and Geoff as well but perhaps I'll start with Scott.
Yes, sure. No problem. It's actually 3%. It's actually a single loan. It is Northumberland Mall. Northumberland Mall was under some pressure as similar asset types with tenants that were deferring rent. And so what we've done is we've agreed to a deferral program with Northumberland until the end of August with the cash payment scheduled to restart for September. So it's really to provide them that opportunity to preserve cash flow while COVID was sort of hitting them hard. That asset already has existing vacancy. So with some tenants also holding off, it increased that additional pressure. But it's a $36 million loan. So that -- when you sort of run the math, that is essentially the -- that deferral percentage you're referring to. The rest of the book is current and paying outside of 1 asset in stage 3, which is -- which is not COVID-related, it's just delinquent, which is...
So when you say about 96.7% of the rent was collected, is that including this 1 loan? Or is it calculated from the remaining portfolio?
That would include it. So like Northumberland is about 2 -- 2.8, I want to say. And Arsenal is less than 0.5 a point.
Have you received requests from other borrowers for similar deferral plans?
We had 1 back in May. It was 1 month. And it was a partial deferral they asked for. It's almost like a reaction to the event -- to COVID and -- but that -- they settled that right back in the following month as things sort of stabilized. It's just not sort of uncertain period out of the gate. But the rest of the portfolio has been clean, and we don't have other deferral arrangements.
That's good to know. Just 2 mortgages of the 130-plus where you only have 2 requests. Just 1 more question there. The 9 new mortgages last quarter, can you provide some color on what were the types geography and province and things like that?
I can start or Geoff, you can lead into that?
[indiscernible] you start.
Yes, sure. It was a standard mix of the business. We -- it was primarily multifamily. We did a nice deal in Montreal as well. That was actually retail, street front downtown that we thought we got really good pricing and a good LTV. And really, in general, we found in the quarter we were able to lend better LTVs and at better pricing than what we had seen. But we lent into it cautiously. The other thing, too, is I think just there were fewer transactions and we had fewer repayments that also kind of curbed our lending as well. But we were busy with renewals that were attractive -- attractive opportunities for us.
Just a final macro question. Are you seeing more competition from the banks, especially on the high-quality multifamily properties?
Geoff, why don't you take that one?
Yes. No, listen, I mean, I think that's really who's kind of come back into the market sort of starting in Q2. I think Q1 and the tail end of Q1, we saw many of the conventional lenders exit. And they've come back quite substantially in the sort of the second half of Q2 and into Q3.As a result, you're seeing pricing compression in that conventional lending space, in the top-tier lending space, which again is inside where we typically participate. But on occasion, we will bump into them as they stretch up the loan-to-value curve to compete and try and win loans. But in general, for us, the increased competition in that space, albeit peripherally can and impact our business and cause pricing to soften a little bit. Our pricing still remains fairly sticky and won't move with the more significant movement of, call it, 25 to 50 basis points that we've seen in the conventional and the top-tier market.
[Operator Instructions] Your next question comes from Graham Ryding of TD Securities.
Maybe I'll just start with the $75 million of margins that you classify as a [indiscernible] loss. Why do you classify them in that respect and not as advertised, consistent with the rest of your $1.6 billion gross portfolio?
Maybe I'll ask Gigi just to go through the accounting definition differentiation.
So when we have these loans where is not just earning pure interest, we have a -- either a profit participation feature within it, it doesn't -- it's not within the IFRS 9 bucket where it is a fair value loans. And so it's not going through the normal allowance for credit loss process, it is being valued on a fair value basis. So it's coming at it a different way, but from a fair value perspective, obviously, you would look at pricing, you'll look at whether the credit risk has changed or not to come up with the fair value. So short answer is because it has some kind of profit participation type of feature, that is not just pure holding for interest and principle.
Okay. Understood. That helps. And the $3.6 million loss that you took, I guess, 2 questions. What's the potential that there's further adjustments here on that Northumberland property? And then -- well we'll leave it here. What's the potential room for further adjustments?
Yes.
So maybe I'll start.
Go ahead, Scott.
No, go ahead, Cam. Go ahead.
I was just going to say that the way that we approach it and that we're required to approach it is, it's every quarter we review the loans in the fair market value bucket to determine our view on the current fair value. So it's -- it reflects our current and best view of value throughout that bucket, making it speculation of what's going to happen in the quarter or next or the quarter after that, I think it's going to depend on what happens in overall markets between now and the end of the next quarter when we do that reevaluation exercise once again. So stepping back, is it possible that there is continued deterioration? Yes. Is it possible that we'll have to review again? Sure. We'll go back to -- we made the first assessment in Q1 as related to Northumberland. There was an adjustment made in Q1 to -- but that was very early in the days of COVID, obviously, at the end of March. So it's relatively modest and revisited again at this quarter. So we will continue, as we're required to revisit and apply current best guess and best estimates and analysis on a quarterly basis.
Okay. And then -- but at the end of the day, this is a mortgage. So we should interpret this as a similar to a provision for credit loss that you would potentially look if this mortgage was just treated as a typically amortized mortgage. Is that fair?
Yes. I don't know whether -- accountants would probably disagree with that characterization, but I understand what you're saying. And I view it similarly, too. I don't know [indiscernible] Scott, whether you have to add anything?
And it's Scott, hey, I totally view it that way. So we have 30 -- the current loan balance is $36.1 million. We now have a fair value of $32.7 million, right? So to your point, Graham, if we exit this asset and we collect par value, we would have a fair market value increase. Or if our valuation were to change, if this new leasing results in incremental leasing and the value is -- obviously, we use a discounted cash flow methodology. If for whatever reason, the assumptions were better, you could potentially see an uplift, right? So very similar to that reserve methodology that you're describing. But today, right, we do -- we don't take an optimistic or pessimistic view, it's really the camps where we're trying to establish the best and truest estimate of value on a quarterly basis.
Okay. And then relative to the rest of your book, in particular, I guess, you've had some commentary around pressure on the retail side. So you do have, I think, $195 million in retail mortgages. And you've set aside $2.9 million in allowances or about 25 basis points of your overall portfolio. So can you just talk to your comfort that there isn't further Northumberland-type situation sitting there in your book and you've that you've provisioned sufficient at this point?
Yes, I'm happy to take that, too.
Yes, go ahead, Scott.
Yes. No, listen, I think that is what we obviously do look at and through Cam's sort of opening remarks and try to provide some additional color. Northumberland really is, it is that a large fashion mall in a small market that lost its major anchor. And so it's struggling with that re-leasing of that asset, right? In an environment like COVID, it makes it difficult and hence, the challenges. The vast majority of our retail book is not of that type. 90% of it is located in Vancouver, Toronto and Montreal, primarily, and in downtown sort of urban core locations. So really good streets, street front retail, that is high occupancy or that high sort of future leasability. So it's just not that kind of situation that you're seeing in some of these smaller towns that had larger enclosed malls that are really facing the pressure of COVID and as well pre-COVID, just this just the emergence of e-commerce, right? So I can safely say that the rest of our retail book really is not representative of sort of Northumberland-type of situation. It's a fair question, though.
I will -- yes, I wouldn't mind adding a little bit there, Graham. I mean, just speaking of broader -- beyond retail for a moment, our -- we obviously work closely with KPMG and all this analysis, not just this question but prior questions as well. The types of assets that we're focusing on being income-producing and having a fairly modest exposure to land and construction. And of those assets, the majority being multi-res with collection rates in the high 90s. We're -- our portfolio is, we think, is not necessarily completely comparable to others. And our loan loss reserves reflect that -- and aren't necessarily -- shouldn't necessarily be held as apples-to-apples and should have some adjustments made for the kind of underlying assets inside there.
Okay. Fair enough. And if I could just 1 more, if I could be greedy, the stage 3 loan, I think, $6 million of mortgages. Can you just give us some color on what that is?
Yes. No, sure, I'm going to do that. Yes. It's really a multifamily asset, 2 multifamily deals. One is the Ontario, one's in Québec. And it's a delinquent asset. Frankly, we're just trying to increase the occupancy and then we'll list the assets for sale.
Got you. It’s one mortgage?
It's 2 assets, I believe, Gigi, right? It's a --
Yes, there's 2.
Yes, there's the 1 in Ontario.
1 in Quebec. 1 in Ontario.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you, operator. Again, I'd like to thank everyone for taking the time to participate on the call today. And feel free to reach out to us with additional questions. And I hope everyone stays healthy and safe and enjoy the rest of the summer. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.