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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Blair Tamblyn. Please go ahead.
Great. Thank you. Good afternoon, everyone, and thank you for joining us to discuss the first quarter financial results. I'm joined today, as usual, by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndication. Given the proximity of the Q4 results, our prepared remarks should be fairly brief today. Overall, it was a good start to 2022. Rig activity was robust, and we exited the quarter with a larger mortgage portfolio. We achieved distributable income per share of $0.18, which was within our historical range and our targeted payout ratio. And we completed transactions for 2 of the remaining non-core assets. We previewed these deals with our Q4 results, and I will leave it to Scott to cover the details. In short, these are important milestones as we look to redirect that capital.
While the results were solid overall, we did see some rate compression in the period. Scott will also talk about the dynamics here and why we see this reversing in the near term and how we are well positioned to benefit from rising rates during 2022 and deliver another strong year for our shareholders. It's also important to understand that given the short duration of our loans, we have considerable elective advertising rate environment versus, say, a REIT for a bank, given the longer duration of their loan portfolios typically.
With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions. Scott?
Thanks, Blair, and good afternoon. I will focus my comments on key changes and trends as well as our outlook for the coming quarters. As Blair highlighted, the portfolio continues to perform quite well with no new additions to either stage 2 or stage 3 loans. Otherwise, our entire portfolio is current, and we have seen our weighted average interest rate rise reflective of our almost entirely floating rate portfolio. Looking at the portfolio KPIs. At quarter end, 90.8% of our investments were in cash-flowing properties, similar to Q1 and 55% were in multi-family residential assets, including retirement, the same as in Q1. We also remain almost entirely invested in urban markets, which provides superior liquidity. In terms of risk management metrics, first mortgages represented 92.5% of the portfolio, the same as in Q1. Our weighted average LTV for Q2 was 69.9%, down from 71.3% in Q1. Portfolio's weighted average interest rate or WAIR was 7.2%, up considerably from an average of 6.6% in Q1, and we've seen the initial benefit of rising benchmark rates on our floating rate portfolio.
I would also note that our WAIR exiting the quarter was $7.6 million. Regarding rates, with future increases, we do anticipate there will be some compression in credit spreads on new loans. And of course, our credit facility costs will continue to increase. Overall, however, given our convertible ventures are fixed and our credit facility represents approximately 36% of our loan portfolio, rising rates should be a net positive for distributable income over the coming quarters. Coming off an exceptionally active Q1 in terms of capital deployment, we invested roughly $165 million in new mortgage investments and additional advances on existing mortgages. This was offset by net mortgage repayments of $98.2 million, syndications of $64.5 million, and the exchange of 2 fair value loans of $30 million for our real estate investment. This resulted in a net decrease in the portfolio of roughly $28 million from Q1.
Second quarter turnover was 8.1% versus 11.4% in Q1 and new exposure was comprised primarily of desirable multi-family residential. Looking ahead, we anticipate turnover may be reduced in the second half of the year as market activity adjust to the new reality of higher rates. This is tied to the price discovery process between buyers and sellers and tends to result in a reduction in sales activity in the near term. However, once the markets adjust this new reality, these transitional periods typically yield very strong opportunities for Timbercreek with favorable risk-return characteristics as traditional senior lenders reduce their risk appetite.
Portfolio remains well diversified and concentrated in urban markets in the largest provinces with approximately 96% of the portfolio in Ontario, E.C., Quebec, and Alberta. We continue to be pleased with the quality of the deal flow in our core markets across a diverse range of asset types, including in Quebec, where we are seeing strong returns from the investment we made to expand our team and presence in the region. We ended Q2 with a weighting of 37% in Quebec versus just over 40% at the end of Q1. As Blair highlighted, we have continued to make progress in monetizing the remaining non-core assets during the second quarter. We closed the sale of the Sunrise multi-family investment property portfolio in April, following which we closed on a transaction involving a fair value assets at Macy Bay in the Loudoun City, which were held in a 50-50 joint venture.
As part of the transaction, we have fully exited the Macy Bay mobile home park development project. We have consolidated our interest into primarily development lands in the Loudoun City area and accordingly have reclassified as inventory on our balance sheet. With full control over the investment, we will now seek an optimized exit with some zoning initiatives, and we engaged a commercial broker to help plan the disposition in an orderly manner.
Finally, we have made some progress on resolving our exposure on Northumberland Mall and a transaction that is now expected to close in late September. The structure will see a new first mortgage lender in the deal and will also provide the ongoing CapEx to finish the leasing plan at the mall. Timbercreek will retain a smaller second mortgage on a 2-year term. The mall is improving with the opening of the Starbucks-anchored pod and the new giant power location. In addition, there are positive negotiations with other significant tenants for the site. Overall, we believe this transaction limits our future exposure to the mall and will free the vast majority of our committed capital that can then be reinvested accretively into core investments.
At this point, I'll turn it back to Tracy to review the financials in more detail.
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so focus on the main highlights of the second quarter. The second quarter across key metrics, we've done exceptionally well. Net investment income on financial assets measured at amortized costs was $25.8 million [ inputed ] from $23.4 million in the prior year, reflecting higher weighted after investments and initial benefits of the interest rate increases in the variable loans. Lender fee income was $2.2 million compared with $2.3 million in Q2 2021. After adjusting for a non-recurring fee in 2021 of 140,000 non-refundable lender fees were consistent with the prior year. Net rental income decreased year-over-year to $36,000.
As Scott mentioned, we completed the sale of Sunrise in early Q2, so this revenue line was lower in Q2 and will be out of the quarterly financials going forward, along with the associated financing costs on the credit facility for investment properties. We expect this will be more than offset by additional interest and fee income. Q2 net income was also strong at $14.7 million compared to $13.5 million in Q2 of last year. After adjusting for fair value gains and losses on financial assets measured at fair value and the net unrealized loss on real estate properties, adjusted net income was $15.2 million versus $13.6 million in Q2 last year.
Q2 basic and diluted adjusted earnings per share were $0.18, respectively, compared to $0.17 in the prior year. We generated distributable income and adjusted distributable income of $15.9 million or $0.19 per share in the quarter. This compares with adjusted distributable income of $15.4 million or $0.19 per share from the same period last year. Q2 payout ratio was a very healthy 91.3% on an adjusted distributable income basis, comfortably below our desired range in the '90s. Turning now to the balance sheet.
The net value of the mortgage portfolio, excluding syndications, was $1.24 billion at the end of the quarter, a decrease of about $28 million from the first quarter. They're still well ahead of where we were at Q4. The enhanced return portfolio decreased by $68.2 million from $80.6 million at Q1 2022. This change mainly reflects the removal of net equity and investment properties following the disposition of those assets. Subsequent to Q2, we added to our available credit. The credit facility for mortgage investments was upsized by $25 million, taking us to a total availability of $600 million. The amount drawn on this facility was $492 million at the end of Q2 compared to $516 million at the end of Q1. With $83 million available on the credit facility and another $25 million exercised subsequently on the accordion, we continue to be in a healthy liquidity position entering Q3.
With that, I'll turn the call back to Scott for closing comments.
Thanks, Tracy. It was a good second quarter and first half of the year, and we are encouraged by the outlook for the coming quarters. We have seen the initial benefit of rising interest rates and would expect this to remain a positive factor for DI and the payout ratio in coming quarters. While the current market conditions may cause transaction activity to slow in the near term, we have historically been a beneficiary during transitional periods as traditional vendors retrench. Overall, we believe our portfolio is well constructed and we have the ability to perform well in a more challenging economic environment. That concludes our prepared remarks.
And with that, we will open the call to questions. Operator?
[Operator Instructions] Our first question is from Rasib Bhanji.
Can you hear me okay?
Yes.
Okay. So I was having some technical difficulties at the start. One of your prepared comments on a mall asset. Wondering if you could please repeat what you said over there. I just want to make sure I confine what trade.
So around the mall in Northumberland?
Yes.
Northumberland Mall, that's been on the books for a while. So our current loan, we are in the first mortgage position today. What's going to happen in a restructure is that there's going to be a new third-party first mortgage, taking the majority of the exposure. We're going to be in a second mortgage position subsequent to closing. And essentially, what this does for us is we have a small second with a 2-year term that we expect to realize fully on the maturity in 2 years. The first mortgage holder is going to be coming with a fair amount number of proceeds.
We'll also be providing the CapEx proceeds to do some incremental leasing, accretive leasing at the site. For us, it's going to free approximately $19 million to $20 million of capital that we can then go reinvest in our core mortgage portfolio. So it's accretive from a cash flow perspective in the near term and ultimately resolves a troubled asset that's been on the books for a while.
That makes sense. I appreciate the color there. If I could switch gears to your -- if you could you remind me what's in the remaining Stage 2 and Stage 3 bucket and the other investments line on your balance sheet. Could you remind us what that includes?
Sure. So it's Tracy here. So to start with the Stage 2, Stage 3 loans. So Stage 2 is a medical office building in Ottawa that is [ a lot ] is paying for it. They're currently just going through a re-leasing plan with the GPs and moving around some of the pharmacies. So they're looking at a re-leasing plan and potentially a sale exit plan. They're looking at that in tandem. So it's just really the length of time to exit on that loan that caused us to move it to Stage 2.
The Stage 3 assets consistent with prior quarter, one is what we had on the books for a while Garafraxa, we continue to write down as we wait for legal proceeds, which is effectively the exit on that one. And the more significant one is a portfolio of condos in Edmonton that we are now in receivership. So there's an executed sales plan for those condominiums, and we're hoping to exit the sales over the next 6 months or so. And you see the provisioning there on that one for the quarter of about $300,000 is largely applied to that loan out in Edmonton, just with some of the market conditions that are there. Sorry, your other question was what are the other investments on the balance sheet?
Yes. 60 million.
Yes. So that's really a handful of investments that don't qualify as mortgages. I'll just refer you to note on the -- I think it's on the financial statements. But largely, it's a portfolio of collateralized loan investments of about $55 million. So I have more of a corporate security on them as well as some finance lease receivables and investment we have in our portfolio in Ireland for $4.4 million and then joint venture condo investment for $2.2 million. The bulk are these collateralized loan investments.
Okay. That helps. Just on your portfolio and the weighted average mortgage rate, there are a few comments about potentially higher turnover in the second half of this year as the market is just too high rates. And then given the majority of your mortgages are also variable. Wondering if you can provide any color on where you think the portfolio can contour and how much of a benefit would it be towards your weighted average mortgage rate.
I didn't hear all of that question, but I think you were asking -- let me just clarify the impact on where on sort of future originations over the next -- for the rest of the year, is that kind of the -- is that where you're heading?
Yes. That was one part. And the second part was on the mortgage rate. Where do you see that trending given the rate hikes that have happened so far?
Yes. So I think -- so again, right, so we exited the quarter to 7.6% WAIR, and that was prior to the 100 basis point prime increase that occurred in July. I would say that the vast majority of that increase we've captured. Our loans are through their floors, and we're about 94% floating rate in our book. So anticipate a large percentage of that increase to flow through into WAIR. And then what happens is as we get into -- as we look into the future, right, and we're all thinking about this, and we're anticipating a future rate hike in September.
We can debate what that amount will be, and there's maybe another one after that, we'll see. What happens if the market is it entirely efficient? So mortgages tend to be a little bit of a laggard. So as the borrowers in the market, we're negotiating for deals, there's sometimes some rate compression. So I would anticipate -- I'll hand it over to Geoff for his thoughts as well. But I would anticipate the majority of future increases at this point, we are still anticipating to pick up and wear in our book.
I mean it was indicative just with the WAIR at the end of the portfolio -- or excuse me, quarter as well, right, rather than the average, which…
Yes. I don't really have a whole lot to add, Scott. I mean, I would echo your comments, really, obviously, it could be by the market in terms of where the third or the competitive environment sits and what others in the market are willing to do. At the end of the day, yes, we picked up the majority of these increases to this point. We expect to continue to pick up the majority of any further increases going forward and the interim nature of our loan profile, it's a short-term cost, but it doesn't really change the broader economics of any one trade from an ownership perspective. And so to this point, it's been pretty seamless in terms of our ability to pass through these costs to our benefit.
Okay. That makes sense. And sorry, would you have any color into originations? Or how much the portfolio can grow by the end of the year?
And I can speak to the pipeline. Certainly, the pipeline continues to be robust. We are seeing, I'd say, in particular, really good inflow continuing on the multi-family and industrial asset classes in particular. I think what we've found, despite potentially some reduction on the transactional side of things as there's some price discovery and people are trying to figure out ultimately where value is going to land. And Scott mentioned this earlier, really, a pretty significant pullback in the conventional market, where conventional lenders we're getting, I'd say, overly aggressive encroaching into our more difficult market segment and they scale back a fair bit at this point, which is creating additional opportunity within a pretty strong risk-adjusted profile relative to prior to rates for sure. So good flow with an expectation remains fully deployed.
It's Blair. I'll just add just a clarifying point or maybe an additional point to Scott. So when you're looking at portfolio turnover, and that's maybe not expecting but not being surprised should that slowdown in Q3 and Q4. Given the rate hikes, the additional interest income will most likely almost certainly, more than offset the potential reduction in fee revenue that we generate from new originations.
I agree with that comment as well.
The next question is from Sidd Rajeev.
Congrats on the strong quarter. With how the markets are shaping these days, my question really, what is your biggest concern? Is it softening of originations, which we talked about or potential increase in defaults?
Well, in of different views here. So it's Scott, from my perspective, from a risk perspective, I think I'll frame that question is what keeps me up at night. And I sit there and say me, as a lender, I'm always concerned about [ deals ]. So I will sit there and say, on the deep side of things, we're putting as rates increase and a variable rate book, you are putting more pressure on your borrowers. When we think about that, when we go into a loan, we do, generally speaking, we're doing income-producing properties 2-year terms where our borrower has a value-add plan in mind. So our borrowers go in, and they're investing additional capital and they're doing that very much with the intent to drive and increase income at the properties. That's the business plan that we like to underwrite and get involved in.
So the nice thing for us is it's the sort of natural hedge. Yes, their borrowing costs may increase in these flooding rate environments, they are doing the work to increase the value of their assets and to increase the cash flow in their properties. So that's the good news. And the other thing that we do, obviously, in every deal that we do, we're underwriting those borrowers. We're doing borrowers with strong track record, strong performance, strong balance sheets in-house to handle these rising rates were historically quite low.
We're actually just sort of coming back to where they used to be at this point. So well within the ability of our borrowers to pay these rates. But we have to see, right? If rates continue to march up if we continue to see 2, 3, 4 points eventually hit a certain stress point. And that's where me as a portfolio manager, I'm thinking about the fault. And so how we handle that, especially when we look at new loans, we're spending a ton of time, our risk groups paying a ton of time on forward rates, debt service coverage, what are the various stress factors we look at.
And for us, that helps us assess new loans we do and what advance rates will provide or other structural [ megas ] to ensure that we don't get ourselves in a fault position and it's no different than the analysis that we would normally do. It's just in these environments where we're that much more thinking about it that much more broadly. And I think so far to date like I mentioned earlier in the call, we've had no unexpected defaults at all in our portfolio, and the whole book is current, which I think is a testament to the strong underwriting in place and the capability of our borrowers.
The second part on originations, which I'll mention to Geoff as well, but it is interesting in these times. These are actually good environments for private lenders. We sit there, one of the -- in a very stable environment, what we find is that the senior lenders tend to punch above their weight. They take more risk than they traditionally would take and squeeze the opportunity set for privates. When we get these sort of environments where things get a little different when people are thinking twice the traditional lenders tend to retrench and it really gives Geoff and his team that opportunity to get fairly paid and we serve really measure that risk-reward balance. But I'll let Geoff add some comments to that.
Yes. I think it's totally, what Scott just said. I mean I think we do find at this moment in time, particularly where the conventional lenders are, I'll call it, overcorrecting. It does create an opportunity for us for frankly, better risk-adjusted returns. Typically, again, we're always balancing yield versus risk. And ultimately, the ability to take advantage of higher rates or all thought in conjunction with risk and exposure, et cetera.
And at this moment in time, in particular with the uncertainty, higher cost of capital, we're always thinking about our exit, how do we get repaid, and obviously, in a term refinance context, there are a fewer proceeds available on a higher interest rate environment. But again, for us, we're finding opportunities to come in 10% less leverage, 15% less leverage, sometimes even in excess of that in order to come up with a structure that we feel really comfortable with gets paid very well for it and still have good certainty in terms of our future exit...
I'm just going to make one quick Sorry, I'm just going to make one quick comment as an overlay. So -- just to clarify, our view is that we're coming out of an unusually low rate environment. So just -- I think Scott said historically low rates, we're actually thinking we're getting back to where in our world where rates historically have been coming out of where rates have been unexpectedly low. So this is -- we're not uncomfortable at all in this rate environment.
I totally get that because I think alternative lenders, especially focused on multi-family seems to be in one of the best solutions these days. In terms of rate increases, do you -- are you able to increase rates strictly in line with benchmark rates? For example, if it goes up by 1%, our rates was to grow by 1%.
So we were talking about that. It's a good question because there's a couple of factors into that. There is the market, and obviously, our competition is a bit of a lag to that. And then there's also one of the things we also are measuring is risk-return. Sometimes, I've looked at some opportunities recently where maybe I'm taking -- maybe I'm capturing 75% of that as an example, but I'm doing it at 5% or 10% LTV less. So sometimes, we look at and evaluate that trade-off. But in general, maybe a generalization comment at this point, we're capturing 80% to 100% of the increases, I would say.
Got it. You talked about originations. How about repayments, especially conventional lenders slowing down? Do you see a lot of new renewals increasing in the coming quarters?
Yes. So I'll make a comment about that. So our turnover ratio was a little lower in the last quarter. And I think that's one of the things that we're evaluating. So one of the things that I'm anticipating and this is a forward-looking comment, I'm anticipating lower than normal repayments. And I say that because in this environment if you have borrowers that let's say they were planning not [ certified exit ] sale. In this quick rate increase, you tend to have some people sort of try on lower prices.
So certain borrowers as opposed to doing a normal repayment in September or October, certain borrowers are anticipating were coming to us and say, “Hey, listen, I'm looking for a 6-month extension.” They'll pay an extension fee for that, but they just sell their assets, what they think is a true value in a better day, and not be taking advantage of maybe a short-term swing in the market. So I think there'll be -- I could be wrong. When you get the -- so the other scenario is in the fourth quarter is that there's just a lot of activity after a slower summer and which is traditionally the case for our book, where we see a lot of activity.
We get a lot of repayments and do a lot of lending. So I would sit there and say, it's a bit of a crystal ball, I'm not entirely sure. I would lean towards a reduction of repayments, but it could go back to the normal depending on how the market shakes itself out in October and November. And then I will echo Blair's comment in the event we have fewer repayments, we will be that much higher in our book capacity and where the interest rates have gone to that top line interest income and a full book is absolutely more than offsetting sort of a reduction in fee income and we get from that churn in the portfolio. It's a good question and a trend we'll look for. And my vote is that it will be slightly less turnover than historical.
Okay. Just one more question. Historically, during slowdown, lenders across the board, they increased their provisions, loan loss provisions, even though they don't have anything specific, they have general provisions. Is that something Timber might adopt in the coming Q3, Q4?
It's Tracy. So I mean we follow the IFRS 9 methodology. We have, I think, a strong model that follows the methodology and looks at our internal risk ratings and any loan deterioration factor ratings, which we do quarterly, just to assess how have loans performed, what's the underlying story relative to the loan at origination.
And as I said, we do that quarterly, and the math proves it out there. In addition to that, with any of our troubled loans, we do look to some specific provisions, which we did record this quarter on one of our Stage 3 loans. But outside of that, we don't typically do a general provision on top of that, but it's not -- they were not applying the same model and consistent methodology and looking closely at our risk ratings and loan deterioration factors, particularly in this type of environment.
Congrats.
[Operator Instructions] There are no other questions at this time. I'll now turn the call over to Blair Tamblyn for his closing remarks.
Thank you, operator. I appreciate everyone's time today. We will look forward to speaking with you again next quarter. Enjoy the rest of your summer. Peace.