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Good day, ladies and gentlemen. Welcome to Timbercreek Financial First (sic) [ 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 Blair Tamblyn. Please go ahead.
Thank you, operator. Good afternoon, everyone, and thanks for joining us today to discuss Timbercreek Financial's third quarter financial results. I'm joined today by Scott Rowland, CIO; and Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications. The third quarter played out largely as expected, and we reported DI of $0.17 per share, within the quarterly range we have generated over the past several years. While the DI and adjusted DI payout ratio was above 100% in the quarter, the year-to-date ratio of 95% is a better barometer of 2021 performance, given the variations we will see quarter-to-quarter. Origination activity was solid in Q3, and we exited with significant dry powder to deploy against a healthy pipeline. More broadly, as we finish off the year, we moved forward with an expanded capital base and the financial flexibility to achieve steady growth of the total portfolio and a favorable operating environment. I will quickly note that we have continued to use the ATM program. In the third quarter, we issued just under 300,000 shares for proceeds of $2.9 million. Additionally, we closed a 5.25% $55 million convertible debenture financing, replacing our $46 million 5.45% coupon converts. So additional capital on more favorable terms. Before we dig into the portfolio, I will also highlight a few changes to the Board, which were included in today's announcement. We're very pleased to welcome Tracy to the Board as a Director as well as Deborah Robinson, who joins as an independent director. Deborah is the President and the founder of Bay Street HR and has over 25 years of diverse human resources and governance experience. We also announced that Steven Scott, a longtime Director, will resign from the TF Board. He remains an investor in and a Director of the broader asset management platform and a great asset to the firm. We thank Steve for his many contributions to TF, and welcome Tracy and Deborah. I will turn it over to Scott to discuss the portfolio and market trends. Scott?
Thanks, Blair, and good afternoon. I will quickly review the key portfolio metrics and transaction landscape. In short, the portfolio continues to perform well and consistent with our expectations, allowing us to generate distributable income per share in our historical range. As we get closer to turning the page on 2021, we can appreciate the durability and stability of our investments. Our portfolio has been mostly unaffected through the worst periods of the pandemic. In the most recently completed month, October, we collected approximately 99% of interest payments. This result all comes back to our conservative approach and emphasis on income-producing assets. 87% of our investments were secured by income-producing assets at quarter end, down slightly from Q2, with 49.4% comprising of multi-residential assets, which was also a modest decrease from Q2. Multifamily has performed very well through COVID, and our focus on this segment was a positive factor in our portfolio performance. And we remain almost entirely invested in urban markets, which do provide superior tenancy and asset liquidity.In terms of risk management, I would like to highlight a few things. First, mortgages represent 90% of the portfolio. Our average LTV was 69.6%, essentially unchanged from Q2. And the weighted average interest rate on our portfolio was 7.1%, down slightly from 7.2% in Q2. The WAIR is well protected by the high percentage of floating rate loans with rate floors, which at almost 83% is the highest it's ever been. This strategy has muted the impact of interest rate cuts in prior periods.Looking ahead, clearly, inflation is top of mind for many of us. As we emerge from COVID, both supply and demand side factors are affecting the price of major components, whether it be energy, food or wages, and while the ongoing loose monetary policy also contributes to the issue. All things being equal, this should result in rising rates in 2022, and that should have a positive effect on future distributable income.In terms of capital deployment, we invested roughly $177 million in new mortgage investments and additional advances on existing mortgages. In a typical slower Q3 with the summer months, our team drove high volumes of funding. However, this was offset by considerable repayments with $236 million coming back. This resulted in a net decrease in the aggregate portfolio. This equated also to a 17.1% turnover ratio compared to 7.2% in the second quarter. The higher level of repayments do position us well to capitalize on a strong fourth quarter pipeline as Blair had mentioned. We've been active in the quarter to date and see this continuing through year-end. The portfolio remains well diversified, which is fundamental to our risk management. We continue to be concentrated in the largest provinces with approximately 97% of the portfolio in Ontario, B.C., Quebec and Alberta. Geographically, we've seen a near-term decrease in the weighting in Quebec. That's simply a function of the timing of repayments in Q3 versus deployments. We continue to see enhanced new loan pipeline activity in this market and expect a higher weighting in future quarters. Otherwise, the mortgage portfolio remains concentrated in multifamily residential assets.For the net mortgage portfolio measured at fair value, which represented 3 investments and roughly 5% of total assets at quarter end, we recorded a fair value loss in the period. This is primarily associated with an agreement that has been reached on Northumberland Mall that will see the borrower repay the loan on a discounted basis. Post closing, TF will retain a small 2.5 million VTB with a 3-year term. The closing is expected before the end of the year. As we highlighted earlier, the portfolio proved very durable through COVID. Overall, we are pleased with the progress we have made over the past year and managing a small number of challenging investments. Going forward, we remain focused on optimizing the balance sheet and deploying capital into our core investment strategy of current pay income-producing mortgages.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 third quarter. First, I'll start with the income statement. Net investment income on financial assets measured at amortized cost was $22 million in Q3, which was down from $23.9 million in the prior year, mainly due to lower weighted average net investments over the period. We recorded a net loss of $3.6 million on financial assets measured at fair value through profit and loss versus $147,000 gain in the comparable period last year. As Scott mentioned, we continue to make progress on plans for the fair value through profit and loss assets. Net rental income was $386,000 in the period, up slightly from last year, reflecting stable occupancy levels. Lender fee income was $2.1 million, up from $1.5 million in Q3 2020 as a result of higher turnover volumes. Q3 net income was $10.4 million compared with $14.4 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 $13.7 million versus $14 million in the prior year. Basic and diluted adjusted earnings per share was $0.17 for the quarter, the same as in the prior year. We reported adjusted distributable income of $0.17 per share this quarter which is down from $0.18 per share in last year's Q3, but within the quarterly range we have generated over the past 8 quarters. Our payout ratio on adjusted distributable income was above our target range at 103.7% and compared to 98.3% last year, but within the desired year-to-date range, and we remain comfortable with this target. Turning now to the balance sheet highlights. The value of the net mortgage portfolio, excluding syndications, was $1.096 billion at the end of the quarter, a decrease of $63.2 million from the second quarter. The enhanced return portfolio increased to $97.6 million, which included $80.1 million of other investments and $17.5 million of net equity and investment properties. The portfolio increased from $94.7 million in Q2 reflecting additional collateralized loans. Our balance sheet continues to be a real strength. And as Blair mentioned, we capitalize on opportunities to increase the total capital base and reduce our cost of capital. Between syndications, repayments and line availability, we remain very well capitalized. Our credit utilization rate was down to 80% at quarter end, giving us roughly $130 million to take advantage of the opportunities Scott discussed. I will now turn the call back to Scott for closing comments.
Thanks, Tracy. Overall, Q3 was consistent with our expectations, and we remain on track with our full year plan. As we look ahead, the transaction outlook for Q4 is strong, and we have significant funding capacity to execute. We are well protected in the event we enter a rising rate environment. In fact that scenario should act as a tailwind for distributable income. The quality of the portfolio remains high, and we are pleased with our progress on challenging loans. And lastly, we remain focused on steadily growing the total portfolio as we continue to fortify our position as a lender of choice for sophisticated real estate investors.With that, that completes our prepared remarks, and we will now open the call to questions.
[Operator Instructions] Your first question comes from the line of Graham Ryding.
Can you hear me? Okay, Great. Just my first question, I guess, on your commentary on the rising rate environment. What do you think given the outlook for bond yields and short-term interest rates and whatnot, what would you think would be reasonable expectation in 2022 for that weighted average mortgage rate? I'll start there.
That's a good question, Graham. I think a couple different things will happen. It kind of depends on the timing of it and it depends on how much will translate through. So there's normally a bit of a lag effect. But we -- if we see, I would say, about 0.25 point of a lag, so we -- let's say we were to see 3 rate increases next year -- 2 to 3 rate increases next year, I would expect to see about 50% of that translate into WAIR. Certainly, most of our portfolio is floating, and we continue to write almost exclusively floating rate loans. So as prime increases, we should start to see a translation into the top line.
Got it. And there'll be some offset on your cost of your credit facility. Is that right to think about...
Yes, exactly. Yes. Now our credit facility on that note, we've had a large fixed rate instrument there, like a hedged instrument, that's expiring in December. So that's been at 4%. And we -- that will go back to a floating rate at 2.5%. So we're actually going to get a nice little tailwind there for the beginning of 2020. But that will go up, to your point, with interest rate increases. But given we typically carry net investments of around $1.2 billion versus our debt facility in the $450 million, $500 million, you get that sort of accretion, right, because there's more top line than debt costs. So net-net, if I look in 2022 within the rising rates, I would expect us to have more distributable income than less. Does that make sense?
It does make sense Yes. Okay. That's helpful. The -- I guess the discharge -- or not the discharge -- the $4.4 million fair market value sort to a write-down related to Northumberland Mall, so it sounds like you've got some resolution there, which is, I would say, a positive. What was the size of repayment that you're expecting in Q4 related to that?
Yes. So we're going to get back 21% with a -- 21.5%, Tracy, with a $2.5 million VTB that's going to stay outstanding.
Yes.
But it is a -- we basically -- we were just -- we continue to look down that asset and looking down the additional capital investment, that was going to be required. And it's just -- it's a very large asset in a small market and you start looking at that additional capital, and we just felt at the end of the day, Graham, the right decision was for TF to exit and put it behind us.
Okay. Understood. And then my only other question would just be on your stage 3 loans, they declined in the quarter. Maybe just walk through sort of the impact there or -- sorry, what those were? And then what was the impact there on your ACLs? Because I know you did release some PCLs, but I think you may have also realized a loss there and maybe 1 of those stage 3 loans discharging or something. Maybe just give us some color there, please.
Yes. Sure, Graham. I'll give you some color on that. So 2 things happened. So we had previously a stage 3 loan, which is a multi-residential in Quebec. We announced last quarter that we had successfully discharged that at an amount above what our net carrying was. We finally received the proceeds on that in Q3. So effectively, what that was is in the multi-res line there on stage 3, we reduced, I think, it was about $1.4 million, and we recognized about I think it's like $280,000 recovery there on that ACL piece. So relatively good news there. The other piece that is more significant is the provision that we have recorded for a mall in New Jersey. I think we spent a little bit of time on this at Q2. We've now successfully renegotiated that position with a first mortgage and we secured [indiscernible] our mezzanine financing. There's also been some significant kind of restructuring on the side of the borrower. So with that in mind, we've now moved that loan to stage 1.
Your next question comes from Jaeme Gloyn.
Yes. Just wanted to get an update on the other 2 fair value loans, the Macey Bay development site and then remind me what the third one is? And just an update on the performance of those and what's going on there.
Sure. The other -- it's Macey Bay and Lagoon City. Those 2 assets together -- so we have a partner with those assets. Macey Bay is the -- it's a mobile home park development site. They are continuing to sort of go through and working to finalize site and development plans. Construction hasn't begun. So essentially, its status quo at this time.
Hello?
Yes. Sorry. I might have cut off there for a second. I'm not quite sure what the last thing I said was just sort of we're status quo on Macey Bay and Lagoon City as a similar investment. I mean these 2 are both -- I think we've talked about this in the last couple of calls as well, but they're both essentially equity positions that aren't yielding assets. And so it's a different sort of development land place. So when you look at these investments, these are just good examples of -- for the future. We're talking to our partner and trying to see if there's ways as we continue to try to maximize the portfolio here. Do we continue to go down the path of sort of that future development? Or do we look for potentially a path to exit? I'd say all options are on the table as we look to see what we're going to do with these assets. But at this point, I think the answer is just sort of status quo for now.
Okay. Got it. As it relates to the overall portfolio mix, I guess, a little bit of movement this quarter primarily because of some of the repayments. But are there -- is there anything within the movements today that you would point to as being maybe a more permanent shift or you're more excited about certain asset classes this quarter going forward than you were, say, the start of the year?
Yes. Now what I think it's actually -- it's a fairly consistent portfolio with big similar consistent expectations. What I will say is if I look at the earlier part of the year and into Q2, in Q2, we had lower repayments as an example. So we were sort of high in our capital wheel, and so we had a really strong payout ratio in those first couple quarters of the year. And then sort of like all good things that will last forever, so then in Q3 was just a bit of a catch-up.I'll also say, I just think we've had lower rates. And so as we go through the summer months, I think some borrowers were lining up some takeout financing that they were able to execute in September. So if I look at repayments, repayments also in Q3, they were high, but they were especially high in the month of September, right? So when that happens, it just sort of over -- that's why we tried to look at this business as multi-quarters in a row, not really get too excited quarter-to-quarter because things just seem to ebb and flow. So you have a period of low repayments is often offset by a period of high repayments. And you kind of see that in our chart that I put out in the presentation, so that up and down of repayments. And then for us, when it comes to deployment, we do get a read on that, we get heads up from the borrowers when loans will come back, and then that allows us to help queue up future business. And so in this particular case, I would say, in the fast high repayment period, it did come a lot out of Quebec, and our Quebec logs went down. That was 1 specific borrower actually repaid over $100 million in the month of September. We've been sort of had some information about that going back to April, but they were able to finally execute on that plan. And that's okay. And what we've been doing in the meantime is we have a new office in Montreal. We have our originator there. We've just actually hired an underwriter to add to that office. And we've been building a pipeline of diversified deals in Quebec that we're pretty excited about. So I would just say, overall, and just coming back to your question, is we continue to like to have a diversified book, we continue to like to and are specializing in multifamily. We think it's just a strong and stable asset class, and we react to repayments. So when they come, it allows us to deploy more capital. And in general, we just try to keep our book as high as we can. But when you get a very large repayments like we did at the end of -- in the month of September, it does sort of play with those quarter-end results a little bit. But from my perspective, we expect that to normalize as we get into the fourth quarter and certainly normalize over the course of the year.
Got it. And last one, just on the competitive environment, particularly in multifamily, driving some rate compression here. Is that persisting into Q4? Or do you see some sort of relief on that as rates start to back up? Or a little bit more context on what we're seeing there.
Yes. I'll...
Sure. Maybe I'll hand that over to Geoff. Yes.
Yes. Yes.
Hand that over to you, Geoff.
Yes. Sounds good. So yes, listen, I mean, I think the competitive market persists without question. I mean I think multiresidential remains a favorite asset class and will continue to remain as such. I think we're seeing transaction activity just generally speaking in this asset class leave -- lead the broader market as it has done for quite some time now. From a pricing standpoint, though, I mean, I think we have seen it moderate a little bit to your point about expectations on -- and longer-term rates turning a bit higher. I think quarter-over-quarter, generally speaking, I think we've seen that compression soften. Again, you still see it a little bit more so in the more commoditized kind of cheapest very, very conventional bank lifeco type segments of the market. And our pricing as we've said many times before, it tends to be a bit stickier. We -- obviously, we have to compete on pricing to some degree, but we compete on a variety of other -- in a variety of other areas as well.But generally speaking, more broadly, it definitely has, I'd say, quarter-over-quarter, it's softened. It's approximately flat, I think. So expectation is that we'll see where interest rates go. But that -- again, obviously, for us, we look forward to potentially rising rates here to help drive some yield and opportunity for that matter.
[Operator Instructions] We have no further questions at this time.
Okay. Great. Thank you, operator. Again, I'd like to thank -- or we'd like to thank everyone for taking the time to participate on the call today. If there are any additional questions, please feel to reach out to us directly, of course. And thanks again. Have a great afternoon.
This concludes today's conference. You may now disconnect.