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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 Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone, and thanks for joining us today to discuss Timbercreek Financial's second quarter financial results. I'm joined today by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications.It was a strong second quarter and consolidated first half of 2021 for the company. The portfolio continues to perform well, generating consistent distributable income, which of course is our primary objective.We reported adjusted distributable income of $15.4 million or $0.19 per share, representing a 90.8% dividend payout ratio. For the year-to-date, the payout ratio was 91% versus 97.7% in 2020. Over the past 18 quarters, we have maintained an average dividend payout ratio of 93.7% on dividend income, despite the historically low interest rate environment. This performance is set against a gradually improving industry backdrop as cities and markets reduce restrictions, creating better conditions for commercial real estate transaction activity. COVID is not out of our lives by any means, but with subsistence from the worst periods, we can appreciate the durability and stability of our investments.Our portfolio has been mostly unaffected by COVID, which we attribute to our focus on income-producing assets and significant multifamily residential exposure. While we will continue to apply a conservative investment strategy, we see opportunities to steadily expand the portfolio and along with that, the market cap of the company. As Tracy will touch on, with some recent capital structure initiatives, we have an expanded capital base and financial flexibility to achieve this over time.I'll pause here and turn it over to Scott to discuss the portfolio and market trends. Scott?
Thanks, Blair, and good afternoon. My view today will be fairly brief. In short, the portfolio continues to perform quite well and consistent with our expectations, allowing us to deliver on our financial objectives. Once again in this period, there were basically no issues with collections from our borrowers. We collected approximately 99% of July 2021 interest payments, which is consistent, if not better, than historical averages.This underscores the value and importance of our investment strategy. The key portfolio metrics clearly reflect our conservative approach and emphasis on income-producing assets. 89% of our investments were secured by income-producing assets at quarter end, up modestly from Q1, with 51.4% comprising of multi-residential assets, which was basically unchanged from Q1. Multifamily performed very well through COVID and our focus on this segment was a very positive factor in portfolio performance. And we remain almost entirely invested in urban markets, which provides superior tenancy and asset liquidity.Looking at some additional metrics. First, mortgages represented 92% of the portfolio, up from Q1. Our average LTV was 69.7% versus 68.8% in Q1 and this is simply the result of some low loan-to-value land mortgages that we paid this period. The weighted average interest rate on our portfolio was 7.2%, down modestly from 7.3% in Q1. The WAIR is well protected at the end of Q2 due to floating rate loans with rate floors representing almost 80% of the portfolio. This high percentage has muted the impact of interest rate cuts in prior periods and pricing on recent transactions has remained relatively unchanged.In terms of capital deployment, we invested roughly $96 million in new mortgage investments and additional advances on existing loans, offset by repayments of $84 million, resulting in a modest increase in the aggregate portfolio. Portfolio turnover decreased to 7.2% compared with 13.7% in the prior quarter.As Blair mentioned, there is growing optimism throughout the commercial real estate industry, as provincial governments steadily reduce COVID restrictions with the successful rollout of vaccines in Canada.In the lending business, the market for new loan investments remains competitive and COVID has caused many lenders to lean into resilient asset classes such as multifamily residential. This has been the case for some time and is typically more pronounced in the first half of the year, which we mentioned on the last earnings call as a near-term headwind. Nevertheless, we continue to receive our fair share of these opportunities based on strong relationships and our industry knowledge.In terms of portfolio diversification, there are no significant shifts to report. Approximately 97% of the portfolio is invested in Ontario, B.C., Quebec and Alberta. From a new mortgage originations perspective, we continue to see attractive letting opportunities across the country. To assist with our origination efforts in Eastern Canada, we've hired a senior originator and opened a new office in Montreal. This initiative is already leading to enhanced new loan pipeline activity that will be beneficial for the second half of 2021 and beyond.Looking at the asset types, the mortgage portfolio remains firmly weighted to multifamily residential assets, as I mentioned earlier. At quarter end, we had 0 hospitality exposure. Our land has decreased to approximately 6% and retail increased a bit to approximately 19%.We continue to underwrite cautiously in retail, concentrating on well-located downtown assets in Vancouver, Toronto and Montreal. As for hospitality and other segments that have been largely impacted by COVID, we remain cautious here as well, but we may look to add selectively to the portfolio in future quarters if we see strong opportunities presenting themselves.For the net mortgage portfolio measured at fair value, at Q2 quarter end we did not identify any significant changes from the prior quarter and we recorded a small fair value gain in the period. As stated on previous calls, however, we continue to evaluate our options for these assets. This includes the future strategy for Northumberland Mall and the Macey Bay development site where options include stabilizing with further investment or exiting via a sale.Finally, we've also made some very good progress this quarter on resolving the assets in stage 3. The first asset I'll mention is the Arsenal multi-residential loan, with a net exposure of $1.65 million. This asset has been recently sold with $1.9 million of net proceeds received this week actually. So this will be removed with a small gain showing up in the Q3 financials.In other mortgage investments, the final residential security on our [indiscernible] loan was also sold. This reduced net proceeds from -- net exposure from $2.165 million to $1.125 million. The final balance here is subject to a litigation claim that is in our favor, and we continue to monitor and assess the collectibility of this from quarter-to-quarter. While this investment will stay in stage 3 until resolution, there is no impact to distributable income.Lastly, in other loan investments, our Monmouth Mall loan was substantially and successfully restructured, in line with our existing provisioning and is now current. We've established a new 3-year loan with an LTV of 73%. The borrower plans to add significant multifamily residential to the site and take out the Timbercreek facility with construction financing before the end of the loan term.At this point, I'll turn it over to Tracy to review the financials in more detail.
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I'll just cover the main highlights of the quarter. Building on a strong Q1, it was another great quarter across key measures.First, let's start with the income statement highlights. Net investment income on financial assets measured at amortized costs was $23.4 million in Q2, which was down from $24 million in the prior year, mainly due to lower weighted average net investments over the period. We recorded a modest gain of $211,000 on financial assets measured at fair value through profit and loss, resulting primarily from interest income on financial assets at fair value through profit and loss. We recorded a $2 million fair value loss in the comparable period last year, which is the primary variable in the year-over-year changes to net income.Net rental income was $376,000 in the period, the same as last year, reflecting stable occupancy levels offset by moderate operating cost increase. Lender fee income was $2.3 million, similar to $2.2 million in Q2, 2020. Expenses increased year-over-year because of an increased allowance for credit loss. This is mainly as a result of a provision taken on the restructured bond with loan due to it being noninterest-bearing. The provision will reverse over time into interest income throughout the term of the loan.Q2 net income rose $13.5 million from $11.7 million last year. After adjusting for fair value gains and losses on financial assets measured at fair value through profit and loss, adjusted net income was $13.6 million versus $14.2 million in the prior year. Basic and diluted adjusted EPS was $0.17 for the quarter, the same as in the prior period.We reported adjusted distributable income of $0.19 per share, which is up from $0.18 per share in last year's Q2. Our payout ratio and adjusted distributable income was also well within our desired range of 90.8% compared to 95.7% last year.Turning now to the balance sheet highlights. The net value of the mortgage portfolio, excluding syndications, was $1.159 billion at the end of the quarter, an increase of $11.6 million from the first quarter. The enhanced return portfolio increased to $94.7 million, which included $77.3 million of other investments and $17.2 million of net equity and investment properties. The portfolio increased from $87.4 million in Q1, reflecting additional collateralized loans.Our balance sheet continues to be a real strength for the company. And as Blair mentioned, we implemented and announced a few capital structure initiatives this quarter, capitalizing on the low interest rate environment that continues to prevail as well as opportunities to issue equity accretively at a rate which allows for steady growth of the portfolio.In May, we renewed our existing credit facility for another 2 years, securing the same rate as well as increasing the Accordion back to $100 million. In June, we launched an ATM share issuance program, allowing us to issue common shares in the market opportunistically. Also in June, we announced a bought deal offering of a 7-year 5.25% convertible debentures for $50 million with an over-allotment option of $5 million, which is exercised and closed in July. The proceeds were used initially to pay down the credit facility, which was subsequently drawn up to redeem the existing 5.45% series unsecured debentures on July 23.Between syndications, repayments and line availability, we remain very well capitalized with ample liquidity. Our credit utilization rate was 90% at quarter end. With about $66 million available on the credit facilities, we are in a strong liquidity position for the remainder of 2021 to take advantage of the opportunities that Scott discussed.I will now turn the call back to Scott for closing comments.
Thanks, Tracy. Overall, we believe Q2 performance was strong, with results that represent the consistent income profile we strive to achieve. While there is still economic uncertainty to manage going forward, the past year has given us recent evidence of the durability of our investment portfolio.In addition to the quality of the new loans and the deal pipeline, I'm very pleased with the recent work on our stage 3 assets that will be fully reflected in the Q3 financials. And while we haven't resolved the feature of Northumberland and the fair market value assets, with continued focus I believe we will reach desired conclusions here as well.We continue to believe that private real estate debt presents an attractive risk return profile and that Timbercreek Financial is a fantastic platform to provide investors with access to this asset class.And with that, that completes our prepared remarks. And we'll hand it over to the operator to take questions. Thank you.
[Operator Instructions] And we have a question from [ Lee Chen ] from iA Capital Markets.
A couple of quick ones from me. So regarding your earlier remarks on the overall market trend, I was just wondering if you can comment particularly what you're seeing in terms of the dynamic between levels of repayment and origination, and what you're expecting for the rest of the year and into 2022.
I think maybe I'll answer the first half and then turn it to Geoff McTait, our Head of Originations, for the second. I think repayment is interesting, right? And it's actually something we talk a lot about, especially coming out of COVID because there was definitely some changes in the market and repayments can be a little unpredictable. Generally speaking in our business, as loans get -- as the assets get more stabilized, a borrower tends to take us out with cheaper financing. That's kind of the business model at TF. And so from that perspective, I think that continues to be the same. It's just kind of the changes of that and ability of our clients to be repaid is affecting some of those numbers. And if you look at that repayment trend chart, it's a little choppy.So this past quarter was a little less than usual. I would say Q3 has that ability to potentially catch that up, right? And I would say, overall we're probably averaging that 40%-ish a year. And they just find a way -- I find in the quarter where they're low, they tend to pick up the next quarter. And then for that, right, that's sort of our runway to lean into new origination business or not. But we have sufficient capital. We have some room in our credit line. We have a cycle. We can see upcoming repayments, which is allowing us to continue to build a healthy pipeline.And with that, I will let Geoff sort of say so what he's seeing for towards the end of the year for originations.
Yes. For sure. And I'll answer that. I think pipeline activity has been very strong and continues to project to be very, very strong going forward. I mean the summer, August, in particular, all this tends to slow down a little bit, but sort of the final 1/3 of the year for us is always usually where activity tends to pick up. In general, the conventional lenders tend to be fully allocated at some point through -- into the third quarter, which creates an opportunity -- an outsized opportunity for us, which is historically the case for us in a strong Q4 and that's expected to continue.And then furthermore, I'd say just transactionally speaking, as we're seeing things open up, as we're seeing people starting to get their heads around not just the multi-residential and the industrial asset classes, but starting to have some ideas and frankly, get some more information around how often is it going to open back up and ultimately, as you're seeing people getting back into retail space as well, I think there's comfort around there. The bid-ask on the transactional side of things is getting closer and we're seeing that transaction activity pick up, just generally speaking, which will again for us, result in more opportunities to see.So we feel great about the pipeline and the expectation for activities. Again for us, we have great existing relationships that continue to generate opportunities and good outsized relative opportunities for our platform based on those relationships.
Okay. That's great. And last one from me. I might have missed it, but this one's I think for Tracy. So just regarding the increase in the allowance for credit loss, you said it was -- I might have missed it, but you said it was for a loan restructuring, right?
Yes. Yes. So I -- put simply, it's 3 things. So within that balance, you have $300,000 of the normal provisioning that's a fee quarter-over-quarter. We have another approximately $300,000, which is really the realization of the Monmouth restructuring. So essentially, we had initially provisioned for 20% of the principal balance as we successfully restructured at -- with a reserve of 22.5% of the principal balance.And then the last piece is part of the restructuring, the original Monmouth loan is going to be noninterest-bearing. So effectively, what we had to do for IFRS is to discount it back, in a press value. And it will essentially reverse via an accretion to interest income at 7% over the term of the loan. That was about $1 million of the provision that will reverse over 3 years.
Our next question is from Graham Ryding from TD Securities.
The distributable income, $0.7 million onetime adjustment in there, what was that in relation to?
Yes. So we have an investment in an Irish fund that there was a cash release effectively on a distribution. So that was really a onetime catch up over the term of the investment, which was 2018, I believe, was the start of it. So going forward, we won't see that recurring. We'll see more or less about $40,000 a quarter on a recurring basis and cash distributions from that investment.
Okay. So that's in the other bucket, Graham, of course.
Okay.
Yes.
It's a Timbercreek institutional fund.
Okay. Okay. Understood. So it sounds pretty constructive regarding the Monmouth loan. I guess just to be clear, does that come out of your stage 3 next quarter?
Yes, yes. So the piece that still is in stage 3 should be moving out, yes, by the end of Q3.
Okay. And then do you see potential for a similar approach or transaction for Northumberland Mall? Is this the type of scenario that can potentially play out for that situation, I guess?
Yes. Northumberland is a little different because we already have possession of -- like we -- that's kind of a loan with Trinity as the borrower. And it's kind of more status quo. So it's more of a question there, Graham. We kind of -- we're working with Trinity to say, hey, listen, are we going to continue down the path, their path to sort of do the redevelopment. That's the strategic option #1. And that requires X million dollars more to stabilize that offset to invest in new tenancy and that carries with it future cap rate, future capital expenditures, certain risks with that. And so the other alternative for us is to facilitate a sale and exit the facility altogether.So the current fair market value is reflective of the redevelopment plan. An alternative is a -- to me, the alternative program is not so much what we did in Monmouth loan, is if we continue to invest to turn the asset around or do we exit it fully.
Yes. Okay. Okay. Understood. The strategy in Montreal in terms of the types of mortgages that you'd be focusing on, like would your strategy there be a little bit different than perhaps other markets where you're more experienced or you've got a longer track record, do you focus on multi and perhaps lower risk assets? Or do you just treat the opportunities in the same way that you would treat the rest of your portfolio?
Geoff, do you want to grab that?
Yes. No, I can speak to that for sure. Listen, I think in general from our perspective, it's -- I would say we are aiming to treat it similar to the broader geographies. I do think we are seeing relative outsized opportunities in the multi-residential space, which again I think will be the primary focus as it is for us across the country.It is a very unique market and having boots on the ground there I think for us is just -- what we've seen in a very short period of time is a great demonstration of the broad-based opportunities that we weren't seeing without having a French speaker on the ground there and access to the broad network that is very uniquely and local in that market.Today, this, yes, primarily been residential, but I think we're open to other opportunities there as we see them. And again it's really just a matter of what we think is a relatively underserved market from a capital perspective and very much a local market and we think there's great opportunities, again broad-based, but certainly primarily on the multi-residential side of things.
Yes. Graham, I'll just add, so it's not really a new market for us. I mean Julie has been covering it from Toronto for years and doing that well. She's being bilingual and well, French being her first language. She retired and it was that kind of shift that gave us an opportunity to bring Simon on board and really beef up our presence. But I wouldn't think of it as a new market per se, just more of a focus on it.
Yes. No. I misspoke. It's a new office, but it's not a new market.
Yes. No, I just want to make it clear.
Yes. No, I misspoke it. For sure. And then my last question would just be like when you think about the potential for portfolio growth, your current leverage looks like you're kind of close to your capacity. So should I think about you utilizing that ATM program if you see opportunities to materially grow the portfolio from here? Is that how you would do it?
Yes. I mean it's [indiscernible] for business like -- yes. If we have capital coming in on an incremental basis, but -- well, it doesn't work so well to go raise $100 million because obviously we delever it. It's hard to deploy that immediately. But if we were, for instance, to be able to bring in $5 million or $10 million a month through an ATM combined with -- I mean, you're probably aware you can complete sort of block trade private placements through the ATM as well.So if you think about it kind of as one new loan a month, for argument sake, at say $6 million or $8 million or maybe $10 million, that works really well for our model. So if we can structure it to work that way, that would be great from our perspective. Obviously, if we can get the market cap up a little further, we'll ultimately -- or should ultimately be able to be included in an index or a few indices. And I think that would be pretty constructive for the business as well. So that's sort of a more medium term target.
Our next question is from Jaeme Gloyn from National Bank.
One theme for questions on -- and I apologize if you addressed this in the prepared remarks -- regarding the lender fees received in this quarter, pretty elevated. Are there some strategies that you're employing there, maybe with a tranching or otherwise that is helping to drive higher lender fees receives in the quarter? And how should we think about that going forward in terms of like sustainability of that rate level, maybe not at these heights, but something above normal trend, let's say?
Yes. And listen, I think it's -- we've had some sort of consistent higher -- I'd say one of the things that we've leaned in a little bit to is some construction lending. And by lean into, it remains less than 5% of our assets. So will you still look at land and construction together sort of that non-income producing bucket that we're going to keep the lender at that sort of 15%, 20% level. But we like the construction lending space. New multifamily, we like well-located with strong borrowers who do it. You end up with a new asset that tends to have a takeout strategy.So it's kind of efficient from a fee model, right? So we get that fee upfront and we deploy the capital over time. So you might see some higher fees even though if you're looking at that in relation to the new volume, right, that would look at maybe mismatches higher for you as sort of more stable volume. So that might explain part of it.And then other than that, I actually just kind of think it's fairly consistent. So we still typically receive a 1% new loan commitment fee on a typical 2-year loan term. That's sort of staying fairly consistent now for many years. We're seeing healthy fee levels on loan renewals and just part of the model.I don't know, Geoff, do you have any additional color to add to that?
Yes. I don't think there's anything structurally different other than what you've addressed there. Like for sure, it's going to be a function of construction to some degree. And then I think periodically, there may be a more sizable one-off transaction here or there that results in a more meaningful fee.I think as we think about optimizing returns and managing the risk profile for the investors underline the TF strategy, it's also finding different ways to hold smaller positions in whole loans. And again, so it's a relative outsized fee ultimately. But where and when we're syndicating A notes, we have been syndicating maybe a little bit more on the A notes in certain instances, but results in an outsized relative fee for the smaller also on the B note, which again I think is part of the reality there too.
And there were no further questions at this time. I will now turn the call back over to Blair.
Great. Thank you. And thanks for the questions, guys. We're always happy to chat, of course. And thank you all for joining. I hope everyone enjoys the rest of their day and have a great weekend. Take care.
Thank you. Cheers.
This concludes today's conference call. You may now disconnect.