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Good day, ladies and gentlemen, and welcome to the Timbercreek Financial's third 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.
Great. Thanks, everyone. My name is Cam Goodnough. Thanks for joining us today to discuss our third quarter 2018 financial results. I'm joined by Gigi Wong, our CFO; Ugo Bizzarri, VP, Investments; and Brad Trotter, VP, Origination and Asset Management. Today, we'll provide a brief overview of the third quarter financial results and the current position of the investment portfolio. We'll conclude with a market outlook and Q&A. I would note, before we begin our call, that we just press released a change to our statements. There were 2 errors with respect to the calculation of the average net mortgage yield and average net mortgage balance for the quarter. Revised statements will be booked with the SEDAR and should be available shortly after this call. Apologies for that in advance. In terms of our third quarter highlights, they reflect continued robust transaction activity with 15 new investments and advances in our mortgage portfolio, totaling roughly $183 million. Combined with higher-average interest rates across the portfolio, this activity drove strong increases in investment income and income from operations and enabled us to continue to deliver solid distributable income of $0.19 per share. As you have heard from us previously, stable dividends is our main portfolio management objective and thus DI remains the metric to which we manage the business. Overall, the portfolio performed well again this quarter, and we continue to meet our objective of delivering strong risk-adjusted returns from a high-quality portfolio. The average rate at quarter's end was 7.5% for all loans, which is up 50 basis points since the end of 2017. This increase reflects the short-term nature of our portfolio, combined with an increasing number of floating rate investments. Those floating rate investments, in fact, now constitute 43.4% of the total loan portfolio. We expect rates will continue to rise. And given we now have more floating rate assets than liabilities, the company will benefit.In addition to these portfolio highlights, last month, we completed a private placement of $14.4 million as we continue to build our capital base opportunistically and accretively. Looking more closely at the key metrics for our net $1.1 billion mortgage portfolio. Exposure to first mortgages exceeded 90% consistent with prior quarters. First mortgages on income-producing assets remain a core part of our strategy and defensive positioning. Our weighted average loan-to-value ratio, LTV, was 67% in Q3, in line with prior quarters, providing downside protection in the form of the borrower's equity. Our weighted average interest rate on the total loan portfolio was 7.5% for the quarter, whereas our net mortgage portfolio yielded 7.3% over the quarter. And this is the revised number that I mentioned at the start of the call. It is our net mortgage portfolio yielding 7.3% over the quarter.Our remaining term to maturity was 1.1 years, consistent with prior quarters. The short-term nature of the portfolio allows us to transition rapidly in and out of markets and asset classes as we seek to optimize risk-adjusted returns.At quarter-end, over 84% of the investments were secured by properties with existing rental income, again, consistent with the prior quarter. And 39% of the mortgage portfolio was secured by rental apartments and asset class with highly stable and predictable cash flow streams. For those monitoring us closely, they may notice that we have reduced exposure to multi-res in 2018 relative to our 2017 levels. And this reflects our increased portfolio management activities. We've been pruning the older and larger lower-yielding investments, allowing us to redeploy the capital, generating incremental fee income and higher yield in this higher-rate environment. In addition, our portfolio management activities have helped redeploy capital from fixed-rate loans into floating rate deals. Our exposure to any single asset core category will ebb and flow depending on the relative attractiveness of the deal -- of the deal flow we are seeing. Part of our conservative lending strategy is to focus on urban markets, which at quarter-end totaled -- again totaled more than 90% of the portfolio. Deals in these markets come with greater liquidity and more exit options, thus enhancing the defensive characteristics of the portfolio. Strong deal float -- flow has been a consistent theme this year and was a highlight of the third quarter, again. We made 15 new investments and had 7 mortgages fully repaid. In dollar terms, new and subsequent mortgages advances totaled almost $183 million; while repayments, $138 million. Portfolio turnover was 12% during the quarter; that's down from 18% in Q2, with 12% being closer to what we would expect as a normalized turnover number given the average duration of the portfolio being 1.1 years. These figures do not include the allocation made to our enhanced return portfolio. At the end of Q3, this portfolio grew to roughly $100 million, or 7.8%, of the total assets net of syndications. At quarter-end, the mortgage portfolio remained highly diversified. We had 121 mortgage loans with an average size of $9 million, which represents less than 1% of the portfolio's total assets. Multi-res remains the dominant asset class at 39% of the portfolio. Retail Properties are second highest exposure, with 19.6%. Our focus, as previously noted in this category, is on necessity-based retail and urban infill properties, 2 segments we view as more insulated from the larger changes happening in the Retail segment. Looking at the portfolio by province. It remains heavily weighted towards Canada's largest provinces, with approximately 90% invested in Ontario, Québec, Alberta and B.C. There were no major changes to note over the prior quarter in these markets. That said, in Alberta, we did not invest in opportunities at the height of the market, but now, as we are contrarian by nature, we are seeing a number of attractive opportunities in that province and are becoming more constructive there. Given their existing exposure in cost basis, other lenders are not allocating additional capital to Alberta, creating an opportunity to select from a number of high-quality assets at lower valuations. As a short-term lender with a national presence, we are uniquely positioned to be opportunistic and would expect additional capital being deployed in Alberta going forward. At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. Higher interest rates and fee income associated with strong deal activity drove a $1 million year-over-year increase in net interest income to $24.5 million. Rising rates also led to increased interest expense on the credit facility. As Cam mentioned, we've been successful at mitigating the portfolio to floating rate and increasing the average yield. Net income of $13.7 million was up just over 10% from Q2 of this year. I'll now take a closer look at the earnings and cash available for distributions. We recorded $0.17 in net income per share in Q3 and had $0.19 of distributable income per share. Based on our dividend paid in the quarter of $0.173 per share, our payout ratio on distributable income was 92.8%. Looking more closely at distributable income, which represents the company's ability to generate recurring cash flows from dividends by removing the effects of amortization, accretion and other noncash items from net income. We can see that since the merger of 2016, our quarterly distributable income has remained relatively stable at around $0.18 to $0.19 per quarter. The financials include a detailed distributable income reconciliation, but here is the short summary of the accounting treatments that we felt in a divergence of DIs and EPS, factors which don't impact the fundamental cash earnings power of the portfolio. The net differences between cash lender fees earned versus the amortization of those fees over future quarters caused the highest degree of variability. In terms of other items, they largely relate to the amortization of financing fees and an accretion expense associated with our outstanding convertible debentures. Turning now to the balance sheet highlights at September 30. The net mortgage portfolio at quarter end was $1.1 billion, an increase of about $44 million from Q2 2018. At the end of Q3, we had drawn about $413 million of our $440 million mortgage investment credit facilities. In addition, we had about $32 million outstanding on our credit facility associated with the investment properties. I will now turn the call back to Cam for more color.
Thanks, Gigi. Looking ahead, we are encouraged by the quality of the deal flow and the general strength in the market for our financing solutions. Year-to-date, our manager has originated $1.3 billion of new loans in Canada and continues to review a significant pipeline of quality investment opportunities for Timbercreek Financial. Increased competition from other institutional capital sources is expected to continue, particularly in lower risk categories as there is more capital seeking this type of investment opportunity. That said, we continue to compete for and win business based on customization, speed of execution and service. We are fortunate to have a strong presence and reputation in this market, and our pipeline of new opportunities remains healthy.Because no 2 markets or situations are alike, we invest in market -- I'm sorry, we invest and monitor at a market-by-market level as well as at the asset-by-asset level. We continue to take an active role in portfolio management, opportunistically evaluating our investment portfolio and repositioning when we see opportunities with an eye to the changing market and competitive landscape. We continue to believe that these commercial assets provide the most attractive risk-adjusted returns for our shareholders.In Alberta, for instance, our competitors who invested at previous valuation highs are reducing or eliminating new investments in the province, which presents an opportunity. Lending into this market today means lower and attractive entry valuations as well as more favorable terms and rates. Seeking market opportunity that can deliver stronger risk adjustment returns is at the core of what we do. We are pleased with the progress we have made on originations, average portfolio yield and the transition to a floating rate investment portfolio, maintaining or increasing our DI in whatever market we find ourselves is our main goal as is maintaining our lower relative risk position in the market. In closing, the company continues to be well positioned to provide investors with steady monthly income from a conservative, well-diversified portfolio of institutional quality investments, managed by one of Canada's largest and most experienced real estate-focused investment managers. Just before I turn it over to Q&A, I'd like to thank everyone for taking the time to participate in the call today, and I'd like to particularly recognize Andrew Jones, who recently left the Board. As many of know, Andrew played a key role in the development of the company and its predecessors and we all sincerely thank him for his significant contributions over the years. We're also excited to welcome Pamela Spackman to the Timbercreek Financial Board. Pam will be joining the Board at the start of 2019, has a deep real estate background generally and particularly in the Canadian commercial mortgage environment, including as a member of our credit community from 2008 to 2016. So she knows our business very well and will be a great asset to the company. We look forward to updating you as we move forward -- we move through the rest of the year. And I would now turn it over to Q&A. Operator?
[Operator Instructions] Your first question comes from the line of Dylan Steuart from Industrial Alliance.
Just to clear it up, just the restatement, it's only the 2 numbers listed in the press release? I haven't seen the actual SEDAR filings yet, but nothing in the financials, I guess?
Yes. There is a -- nothing in the financial statements themselves. In the notes to financials, there is a reference to those numbers and in the MD&A there are references to those numbers. It is -- to reiterate, it is the quarterly and year-to-date average -- weighted average yields on the net mortgage portfolio, and also, the average outstanding balance -- daily average outstanding balance for that same component, the net mortgage portfolio. Gigi, do I have all that right?
Yes. For Q3, yes.
But the yields on the gross portfolio haven't changed?
Correct.
And, I guess, just a bit more color on the outlook, just particularly covering in on the Alberta market, but just how's your outlook on the B.C. market right now just given the -- a little bit of upheaval in the residential market?
Maybe I'll ask Ugo to talk a little bit about B.C.
Look, I think the B.C. market is doing well. We've done a lot of business in B.C. this year. We saw some opportunity in the beginning of the year. We are cautious, though, now, and residential market is a little bit different than what we do and what -- and sort of the loans that we do. We don't really focus on single-family residential, but we do see a lot more activity in commercial. And a lot of the money that was for money capital that was being placed in single family is now going into commercial. So we're cautious, and we're still looking for opportunities, but we still like the B.C. market. Brad, if you wanted to...
I'd say like it's a lot of our expectation and the type of assets that we're quite familiar with and know how to manage and operate. And we will look at the risk-return balance and pursue those opportunities that fit the book. And those that don't, we are happy to pass on.
Okay, perfect. And just 1 more, if I can. Just on the stage 3 assets. Doesn't look like much change from last quarter, but just wondering if sort of the sizable ones on track for a resolution by year-end, I think, was sort of the goal last quarter anyway?
Yes, we are on track.
Sorry, everything's on track, pretty much same deal as you had last quarter?
Yes.
Your next question comes from the line of Marko Kais with TD Securities.
Just a follow-up on the stage 3 mortgage. Just wondering if you can give us more color on your interest to resolve this.
Sorry, could you repeat the question? You were cutting in and out. Didn't really hear you.
Just wondering what is your game plan to resolve this [indiscernible] as you mentioned previously?
I guess -- yes or no. Are you asking about the same mortgage that Dylan just referenced, the stage 3 asset that, yes?
Yes. That's correct.
And you're asking us...
Just wondering how you plan to resolve this and just more color on the small [indiscernible] EBITDAs.
Yes. The stage 3 mortgages, we're working with an operator to go through the asset and we hope to have this sold by the end of the year and by the end of the quarter -- sorry, end of the year.
Okay. Are other entities from the Timbercreek organization involved in this deal? Or is it just the profit mix at this point?
There is no other entities. No.
Okay. Then how should we think about your evolving risk profile given that the multi-res has been going down while unimproved land in retail increasing? And maybe if you can give us a sense of kind of what kind of extra yield are you able to capture thereby repositioning the portfolio relative to the multi-res?
I'll ask Brad to take that one.
Sure. So on the multi-res perspective, think of it as an in and an out, right. So the flow coming into the business is robust. It's really -- we continue to execute in a multi-family space successfully. As Cam alluded to earlier in the prepared remarks, we have been proving the portfolio by exiting some lower-yielding fixed-rate loans to accelerate our transition to a more floating rate portfolio. And so that's been really the driving force around the change in multi-family. And then as far as increase in Alberta, that was the second part of the question?
No, I think, it was more about the yields.
Oh, yields. Well, so, I mean, with 4 main deals, there's 2 benefits. It's -- we're getting attractive spreads on those deals that we are repositioning that capital into. And then, on the book as a whole, as rates increase, benefits as well and our floating rate assets are in excess of our floating rate debt, so that's the net-net benefit to the overall profitability of the mix.
Okay. And just lastly from me, if I could. Just wondering, in terms of Alberta, which asset classes do you see the most opportunity at this time?
So first [indiscernible] thoughts, we've seen some very strong deals in the retail space where our retail sales are in all-time high right now in Alberta, and multi-family as well, particularly up in the Edmonton area. And there are some very attractive office deals as well around Calgary right now where rents and absorption have turned to the positive in the downtown. And so we think that market has bottomed and with -- there aren't as many lenders attractive in that space, and so we have been able to capture incremental yield there of 50-plus basis points over a traditional yield of same kind in the eastern part of the country.
Your next question comes from the line of Jaeme Gloyn of National Bank Financial.
Sorry, Jaeme, we can't hear you. You may be on mute.
There are no further questions at this time.
Okay. Let's give him a couple of seconds to re-queue in case he had a bad connection there. Operator, has Jaeme been able to re-queue or is he no longer available?
No one has re-queued up.
Okay. Well, with that, I'm going to thank everyone for their time today. I appreciate that and we look forward to our next call, which should be in March, which will be our full year 2018 financial results. Thanks, again, everyone.
This concludes today's call. You may now disconnect.