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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. Thank you for joining us to discuss the third quarter financial results. As usual, I'm joined by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications. In the face of continued equity market volatility and rising interest rates, we produced another solid quarter for shareholders.
As you will hear today -- as you hear from the team today, our mortgage portfolio remains in very good shape, demonstrating the durability through market cycles that has become a hallmark of our income-focused investment philosophy. As we anticipated, we benefited from the rapid rise in interest rates. This translated into a much higher average interest rate for the portfolio, and most important, strong growth in our investment income and distributable income.
We also expect that this rate environment to cause a temporary slowdown in transaction activity as buyers and sellers adjust to this reality. Looking beyond the near term, we expect activity to pick up again and experience is that these transitional periods also serve as a sell-in for lenders like Timbercreek. With that, I'll turn it over to Scott to discuss the portfolio trends and the market conditions. Scott?
Thanks, Blair, and good afternoon. As Blair mentioned, the portfolio has performed well. No new additions, either Stage 2 or Stage 3 loans. Otherwise, our entire mortgage portfolio is current, and we have seen a material increase in our weighted average interest rate given the majority of our loans are floating rate. Looking at the portfolio. At quarter end, 89.3% of our investments were in cash flow and properties, down from 90.8% in Q2 and 64.9% in multi-family residential assets, including retirement. And we remain almost entirely invested in urban markets, which provide superior liquidity.
In terms of risk management metrics, first mortgages represented 90.9% of the portfolio, down a bit from 92.5% in Q2. Our weighted average LTV for Q3 was 69.4, basically in line with 69.9 in Q2. And the portfolio's weighted average interest rate we are aware was 8.5%, up considerably from an average of 7.2% in Q2, as we are exiting this quarter, importantly, was 9.2%.
Origination activity and turnover were lower in Q3 as we signaled as a probable outcome on our Q2 earnings call. We invested roughly CAD 88.8 million in new mortgage investments and additional advances on existing mortgages. New funding was once again primarily directed towards our core multi-family residential assets. This was offset by repayments of CAD 41.2 million syndications of CAD 26.9 million. The net result was an increase of roughly CAD 20 million from Q2 to CAD 1.26 billion.
Third quarter turnover was lower than normal at 3.3% versus 8.1% in Q2. While Q3 typically sees reduced volume, quarter was more unique as borrowers weighed the changing interest rate environment against their business plans for refinancing acquisitions or sales. As we enter the final quarter of the year, we are seeing an increase in market activity and have line of sight on repayments that will increase turnover and in turn, our capacity to fund new opportunities.
The portfolio remains well diversified and concentrated in urban markets in the largest provinces. Approximately 96% of the portfolio in Ontario, B.C., Quebec and Alberta. There were no material changes from Q2 with respect to geographic concentration, and we continue to be pleased with the quality of the deal flow in our core markets and asset types.
Regarding our noncore portfolio, I'm pleased to announce the restructuring of our CAD 24 million fair value position on Northumberland Mall is finally closing. This is actually happening today. A new third-party first mortgage for CAD 19 million is in place with a significant future CapEx facility to complete additional leasing of the mall. This brings CAD 19 million of accretive reinvestment by Timbercreek and ends our future capital investment at the property, typically retain CAD 5 million of exposure secured by a CAD 6.5 million second mortgage on a 2-year term at a current pay at market rate.
This creates a CAD 1.5 million gain opportunity if the mortgage is repaid in full. We are satisfied with the conclusion here, and believe the current owner has the leasing expertise to create additional value that will see our second mortgage repaid in full. 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 focus on the main highlights of the third quarter. As Scott mentioned, we reported strong growth in income for Q3. Net investment income on financial assets measured at amortized costs was CAD 30 million, up significantly from CAD 22 million in the prior year, reflecting higher weighted average net investments and the benefit of interest rate increases in our variable rate loans.
Lender fee income was CAD 1.1 million compared with CAD 2.1 million in Q3 2021. Lower lender fees was primarily driven by the lower turnover in origination volumes as Scott mentioned. Though there are no new Stage 3 loans, we did increase the provision for loan losses on 1 of 2 in the Stage 3 category. The loans on a portfolio of condominium assets in Edmonton that are currently for sale and the provision reflects the softening housing market conditions in Edmonton, primarily as a result of rising interest rates.
Q3 net income was strong at CAD 13.5 million compared to CAD 10.4 million in Q3 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 CAD 13.9 million versus CAD 13.7 million in Q3 2021. Q3 basic and diluted adjusted earnings per share were CAD 0.17, consistent with the prior year. We generated robust distributable income and adjusted distributable income of CAD 16.8 million or CAD 0.20 per share in Q3.
This compares with adjusted distributable income of CAD 13.5 million or CAD 0.17 per share for the same period last year. Q3 payout ratio was a very healthy 86.2% on adjusted distributable income, comfortably below our desired range in the 90s.
Turning now to the balance sheet highlights. Net value of the mortgage portfolio, excluding syndications, was CAD 1.26 billion at the end of the quarter, an increase of about CAD 20 million from the second quarter. The enhanced return portfolio increased to [indiscernible] million from CAD 68.2 million at Q2 2022. Credit facility for mortgage investments was CAD 515 million at the end of Q3 compared with CAD 492 million at the end of Q2. With approximately CAD 80 million available on credit facility and expense repayments. Timbercreek Financial continues to be a strong liquidity position entering Q4.
Two other items to highlight on the Capital Markets today. First, we suspended the aftermarket equity program in the quarter due to a depressed stock price as the broader equity market declined. We made recent changes in the ATM program during the remaining allotted 24-month period. During Q3 2022, we have only issued nominal shares under the ATM. Secondly, in September, we resumed the normal course [indiscernible] program.
In Q3, we repurchased for cancellation 10,000 common shares at an average price of 7 59 per share. We will continue to evaluate opportunities to use this to acquire shares accretively that traditionally trade below book value. I'll now turn the call back to Scott for closing comments.
Thanks, Tracy. I thought I'd spend some time here with closing remarks. I had some thoughts on the outlook of the business given how rapidly the environment has been changing. We are all aware of the inflationary environment we are currently living in and that central bankers are tackling this issue through rising rates. While I won't provide yet another prediction on when this cycle will end, we'll say then it's tricky, with numerous factors from the high price of oil, supply chain issues, COVID, onshoring, low unemployment and other geopolitical issues, all playing a role.
This likely results in a longer period of higher rates and a probable recession in 2023. After that, the yield curve suggests a softening of rates. But again, I won't predict exactly when. From Timbercreek's perspective, our [indiscernible] portfolio has done well. And led by our increased where we have generated an 86% DI payout ratio this quarter. Specifically, I'd like to highlight that over 70% of our investments are in multi-family and industrial segments that are well positioned to generate higher property income in an inflationary impairment.
From a risk perspective, we also understand that increased borrowing costs can cause stress for certain borrowers. While always vigilant we are using extra caution through our operating and asset management processes to ensure the ongoing quality of the portfolio. In addition, we are carefully considering risk return criteria that may give us interest rate to add safety to the book.
Our current payout ratio provides some flexibility in making these sort of decisions. Well, so while we may not be immune to the -- can-- that can emerge, we believe our underlying philosophy of investing in value-add income-producing properties will serve us well. And that completes our prepared remarks. With that, we will open up the call to questions. Operator?
[Operator Instructions] First question comes from Rasib Bhanji.
I wanted to ask about the comment on the higher turnover ratio expected in Q4. Are you expecting it to be more in line with historical averages around like the 10%, 15% range or more like a modest improvement versus this quarter, which was more quiet?
Yes. Historical range. Yes, sir.
Historical range. Okay. Sounds good. And then a couple of follow-up questions on that. Would you be able to flesh out which sectors or geographies you're seeing demand for mortgage funding? And then on the other side, on the competitive side, can you give us a sense of how the competitive landscape is shaping out right now? Are the banks and other lenders still active here in this market? Or if they pulled back somewhat because of the higher rate environment?
I think, this is Scott, I'll take a first stab of this question, and I think Geoff -- I'm looking at Geoff, if you can do it after this. So I'll say this. I think the business is still, frankly, reflective of a normal activity. For that, I mean, for us, that is a range of geographies across the range of [indiscernible]. We're primarily focused on multi-family and industrial lending like right now, and we're seeing that activity in those segments. We're also seeing some office and some retail. But I think this is just sort of a return to activity. The multi-family ratio, I sort of made this comment a bit in my prepared remarks. But we did see in the past, in the summer, basically with the rapid change in interest rates, you're certainly seeing sort of buyers and sellers -- sort the owners of real estate sort of sitting on their hands and then evaluating sort of what are the next steps.
I think as we've come back into the fall and there's a little more certainty that, hey, listen, rates weren't going to drop overnight and in fact there was still upward pressure. What that means is that the owners of real estate had to just make some decisions and some conclusions of what they want to do. As that happens, we've started to see a return to volume or return to that sort of normal pace that you would see.
At the end of the day, most of the loans that we do are sort of 2-year, 3-year transactional loans. So there's sort of a natural end to borrowers business plans that sort of require and necessitate refinancings. With regards to competition in the market, quickly, and maybe I'll let Geoff sort of tag in here. But really, we are seeing competitors back in the market. But you're right, conventional, some more senior lenders definitely in this environment is a bit of a risk-off approach. I mean ours as well. But we are seeing some pullback in things where, when things are very hot, you see the senior lenders step up out of their normal space. And so they sort of retrenched, that created some opportunities in the market for us. Geoff, do you want to add some more color?
Yes. I mean I think, Scott, you summed it up pretty well. What I would say, very much coming out of the summer and into the first couple of weeks of September, we did start seeing an increase of competitive activity. Again, the market is such with high interest rates being where they are, the conventional debt that you can actually get on asset is just less, right? Interest rates are higher, you need incremental income to support the similar that you could get in a lower interest rate environment.
And as such, we are seeing borrowers putting in more equity into deals. We are seeing loan to values falling within that competitive environment. The reality is we are starting to see the price compression. And at the same time, it still is a little bit choppy, right? So we're staying vigilant and evaluating each deal as we always do on the merits of that individual opportunity.
And we're going to win some deals, we'll lose some deals, in particular, as we go through this period of volatility. But it's definitely picked up activity-wise. Asset classes, as Scott said, in terms of what we're seeing repaid, that is broad-based. We had a second mortgage repaid on a retail asset quite recently. As an example of, again liquidity, be it third-party debt, getting and putting in additional equity to delever their positions, be it buyers and sellers, rationalizing pricing after a period of being unable to do so, any combination of things, which is just creating some additional liquidity in the marketing activity as a whole.
Okay. Understood. Yes, that's helpful. And just my last question on the Stage 3 portfolio of condominium assets in Edmonton. Could you give us any update on the timing of an exit over there? And just as a follow-up to that, I think your Stage 3 sales are roughly 25% of the Stage 3 loans now. Is that how much you would expect to lose with an exit? Or is there a level of excess allowance or prudence built in over there?
It's Tracy. I'll just comment on your last part of that question there. So the way that the valuation works is that -- sorry, not the valuation. The IFRS 9 model takes an appraised value and applies various stress scenarios. So the appraised value, we only adjust -- we adjust it down by 10%, and the corresponding provisioning there, it kind of what pops out in the model. So really, just on the valuation side, we only took it down 10%, and then that's the corresponding provision that as a matter of fact comes out there.
Okay. And could you give any color on an exit over there? Or would you wait till the market sort of settles a bit more?
Just on the timing for the condo piece, I think at the end of the day, I think we're probably -- it's going to be closer to 12 months than 6 months. If we continue to exit on an individual asset sale basis, certainly, the local market there has been impacted by rising rates as was noted previously. The winter months in Edmonton are even slower just more typically.
So that's likely pushing into the spring of next year, where we'll start seeing some activity. We're additionally exploring potential opportunities to sell the entire remaining inventory in bulk. So these are other opportunities that could expedite that time line, but I'd say 12 months is a reasonable expectation.
Sorry, just to jump in then on that provision side, too. So what the model does is with that 12 months is that it effectively takes your appraisal value, then it adds 12 months of interest. So that's kind of in line with the exit period and how the provision effectively proves out.
The next question comes from Chris K.
Just on the interest rate, 9.2% exiting the quarter. Would you expect that to end up closer to 10% by the end of Q4, just given the increase in prime rates expected by year-end, including the October rate hike?
Yes, I'll answer that. Depending on the increase in prime rates, we are -- the book is approximately 9 3 percent floating. So yes, that's probably a pretty good math, right. If rates were to go up in the 100, eventually. I mean, new business is coming in a little bit later than that, but you should have high correlation on prime increase to where, for sure.
Okay. Great. And then just my second question. Recognizing that each deal is going to vary in general, are you able to comment on how your assumptions have changed in regards to exit cap rates and the availability of takeout financing when you're underwriting deals now perhaps versus the beginning of the year?
That's a good question. For sure, I mean, every underwriting that we do is a bespoke process, but following the same process, right? So we spent a great deal of time thinking about the exit on any deal we get ourselves that we're signing up for. And so when we go through that exit analysis, we're using, whether it's on the valuation side, we're looking at cash flows as well as cap rates. We're forecasting value that way.
And then on the takeout, we are very much looking at forward curves and projected interest rates, and what we think that sort of longer-term conventional takeout financing will be for us, so that's what facilitates the refinancings, right? So whether that's a CMHC program or conventional bank program, we have the ability, obviously, to make estimates of sort of what would be the debt coverage that's required for those programs and what that level of refinancing of debt that the borrower will be able to achieve.
So when we're upfront in our underwriting and trying to figure out what are the loan proceeds that we're going to provide, we go through that analysis of sort of what's our level of comfort between is there an obvious conventional takeout or is it a stretch takeout where you know there if things were to go poorly, it might be a [indiscernible] We do that level of analysis and that's the risk, one of the key risks that we evaluate in determining a new loan. So taking on a different process, Chris, but it is just, again, more focus, more emphasis and taking a lot of stress scenarios.
And maybe to add to that, I'd say, the only other comment I'd add, Chris, is just current cap rate environment, call it, depending on the asset class, of course, and the specific market location, I mean, you're plus or minus 50 bps higher than you were sort of 9 months ago. Obviously, there is an expectation in correlation with it going forward. So we look at valuations today and expectations on value, where we've taken into consideration the current environments and forward those that relates to cap rates and to Scott's point on the takeout interest rates.
The next question comes from Jaeme Gloyn.
Yes. Just first question is on the Edmonton condo units. Are you able to give us a little bit more color as to like what kind of building this is, age of the building, number of units in the building, how many units you're exposed to, things along those lines to give us a little bit more comfort around the process?
Yes. So it's a 2016 vintage. So it's a newer built. It's Downtown location, well located Downtown. In terms of the total number of units, I think it's like 23 units that are remaining. They're sort of, I'd say, missed opportunity in quality, in terms of the quality of the product. Units are, I'd say, maybe a little bit larger than a lot of the smaller product that's coming to the market. And so it's good quality product. They are a little bit larger units. We have seen some traction over the last period of time, last number of months.
But certainly, I'd say as the Edmonton market recovered from -- with price of oil, et cetera, it sort of coincided with the rising of rates, which has resulted in some continued softness there. Not a ton of product in that market. Nothing new really being built there. And so we think, obviously, there's some time play through here, but again, expect there's demand for these units.
Jaeme, it's Blair. And the other thing that we're looking at is potentially renting it in the short term. I mean there's some complication to that. But obviously, we're not just going to blow them out into the market. That wouldn't make any sense. So that's why Scott and Geoff are both talking to kind of a 12-month guidance and hopefully faster, but we'll be patient.
Right. And I'd maybe step back to, I guess, 2016 or like, what was the origin of the loan and the exit strategy?
This was at the time a newly built project or relatively new built project. I guess it was commenced in '16 and was effectively complete '18, '19 when we did the loan. And so it was, call it, 65% sold at that time. A significantly different market than it is today certainly. But residual inventory to pay out the balance of a construction loan at that point in time, there has been substantial recent sales that were a little bit comp in some pricing for the balance of the inventory.
The sponsor, this higher net worth guy who was intending to occupy 1 of the units themselves, in addition to selling the balance of the units. And obviously, the market hasn't cooperated.
Okay. Understood. Two more on this one actually, sorry to dig in on it. Are there any other lender partners on the loan alongside Timbercreek? Or is this entirely your file?
This is entirely Timbercreek.
Okay. And then the last one, just Tracy, in terms of the provision, did I understand correctly that the provision is entirely covering the interest accrual over the next 12 months? Or was there some component of principal write-down, let's say?
Yes. So the first part is the principal write-down of 10%, and that's what runs through the model as kind of an appraised value and then you stress it under certain scenarios on the assumption of how long it takes you to get out. So in this case, we've said, okay, we'll be out in 12 months, do you apply interest to that, and then it looks -- it kind of comes up with what would be our exposure on exit 12 months from now. And that that's certainly how it is. So both principal and future returns.
Okay. Got it. Understood. On the ATM, clearly, it looks like you shut that down, I guess, right at the beginning of the quarter. And pardon me if I missed this because I was jumping on just a bit late. But what was the decision to pause the ATM primarily because of the share price movements? Or the outlook for mortgage fundings? Or I guess maybe a combination, but maybe a little bit more color about how you're thinking the decision to pause and then what's your thought process on restarting?
Yes. I mean it was entirely really what the share price was and whether or not it was accretive to book. And going forward, we'll still look to that. I mean, as we move towards the end of [indiscernible] we're currently evaluating what makes most sense from use of our cash resources. And we are light on the NCIB, just looking at the pipeline that one just had and where we want to put cash in light of a low turnover environment. It makes sense to deploy the yields we're getting to buying back at this point.
[Operator Instructions] At this time, there's no questions, so I'll turn the call back to Blair for closing remarks.
Great. Thank you very much, operator. As usual, I appreciate your time. Obviously, we're quite pleased with the quarter on absolute basis and in light of the current market conditions. So we'll leave it there and look forward to talking again in 90 days or so. Have a good afternoon.
You all would be disconnected.