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Good day, ladies and gentlemen, and welcome to the Timbercreek Financial Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Cam Goodnough. Please go ahead.
Thank you, and good morning. Hopefully, everybody has access to the presentation, which is on our website, and are able to follow along with the materials. As most of you know by now, we have released our fourth quarter and year-end numbers that we'll be discussing on this call today. My name is Cam Goodnough, I'm the CEO of Timbercreek Financial. I am joined by Gigi Wong, our CFO. Today, we'll provide a brief overview of the fourth quarter financial results and the current state of the investment portfolio. We'll conclude with a market outlook and a question-and-answer session. Joining us on the Q&A portion today is Ugo Bizzarri. He's the Co-Founder and CIO of Timbercreek Asset Management and one of Timbercreek Financial's directors. As well, we have Brad Trotter, who's Timbercreek's Global Head of Debt, who will also join us on the Q&A session. Prior to starting the call, however, I wanted to take a moment to thank Andrew Jones who stepped down as CEO on December 31. His involvement with the company and its predecessors over the past decade was instrumental in building Timbercreek Financial into what it is today. We look forward to continuing to work with Andrew as a member of our board. For those following along at home, we're on Slide #5, the highlights. The fourth quarter closed off an eventful and successful 2017. We delivered on our objective to generate attractive returns from a high-quality, conservatively positioned mortgage portfolio focused on first mortgages and income-producing properties. 2017 was certainly an interesting year for the Canadian real estate lending industry. We saw continued strength in the Canadian economy, which led to 2 rate increases by the Bank of Canada for 50 basis points in aggregate. We also saw a shock to some of the single-family lenders last spring in terms of short-term funding availability. The year also included provincial and federal government announcements that affected rents, foreign ownership, single-family mortgages, amongst other things. It has been an interesting year at Timbercreek Financial as well. With our first full year of financial results post amalgamation. We completed several capital-raising initiatives, we largely completed the repositioning of the portfolio into lower-risk mortgages, and we finished the year with a modest increase to our monthly dividend. Set against a backdrop of continued strong and stable fundamentals in the commercial mortgage market, it's been a solid year for the company. Slide 7. Portfolio strategy, stable and secure returns. Our portfolio continued to perform well in Q4, and we continue to focus on managing and minimizing risk. Looking at the metrics for the net $1.1 billion mortgage portfolio, our exposure to first mortgages was 93% at the end of Q4. This number is down marginally from Q3 but has been trending upward in recent quarters, consistent with our strategy. Our weighted average loan-to-value ratio was 66% in the quarter, again, consistent with Q3. In terms of weighted average interest rate for the quarter, it was 6.9%, which is down slightly from the 7% in the third quarter as a few of the remaining higher-yielding mortgages rolled off and were reinvested into a lower-risk portfolio. Given recent rate increases in Canada, we have seen a modest positive trend on rates for new loans, but expect it will take some time for those increases to be reflected in our average interest rate. I would note, however, that we have seen competition increase for low-risk asset categories, such as multi-family, our most important asset class, as well as industrial. We have not seen the same competitive dynamics in higher-risk areas like land and construction, which have resulted in higher rates and spreads there. However, we remain cautious on these categories and have held our exposure to this category roughly constant. Our remaining term to maturity for the portfolio was 1.1 years, slightly less than last quarter. At quarter end, 87% of the investments were secured by properties with existing rental income, up slightly from the 86% in third quarter last year. Importantly, 47% of the mortgage portfolio -- rather, 50% of the mortgage portfolio was secured by rental apartment, an asset class of highly stable and predictable cash flow streams. Part of our conservative lending strategy is a focus on urban markets, which at year-end, totaled roughly 90% of the portfolio. These larger centers come with greater liquidity and more exit strategy, thus enhancing the defensive characteristics of the portfolio. In terms of portfolio activity, relative to the third quarter, the fourth quarter saw increased new mortgage activity, reflecting a combination of higher repayment and active demand for new mortgages. We made 11 new investments in the quarter and had 13 mortgages fully repaid. In dollar terms, new and subsequent mortgage advantages -- advances totaled $140.5 million, of which, 47% were secured by rental apartments. And repayments totaled $119.1 million. Portfolio turnover was 10.8% during the quarter, largely in line with the rest of 2017. This brings our net mortgage investments to $1.1 billion at the end of the quarter, a slight increase from the end of Q3 and an increase of over $100 million from the end of 2016, reflecting the capital markets activities we undertook in -- during the year. These figures do not include allocations made to our enhanced return portfolio. For those who have followed us in prior quarters, these were previously referred to as other investments. As you will recall, over the past several quarters, we have broadened the types of investments in our portfolio to include certain higher yielding investments, such as collateralized loans and debentures. At the end of Q4, the enhanced returned portfolio was $70.5 million, which is up $8.3 million over Q3, bringing it to approximately 5.8% of the total assets, net of syndication. Overall, deal flow remained strong, and we continue to review a significant pipeline of quality investment opportunities. At year-end, the mortgage portfolio remained highly diversified. We had 114 mortgage loans with an average size of $9.7 million. An investment of that size represents less than 1% of the portfolio's total assets. After multi-residential, retail properties represent our second highest exposure at 14% of the year-end portfolio. Like with other asset categories, we invest in retail -- like other asset categories we invest in, retail properties offer predictable cash flows. Our focus is on necessity-based retail and urban infill properties, 2 segments we view as more insulated from the larger changes occurring across the retail landscape. Looking at the portfolio by province, exposure is similar to the last quarter as we continue to favor our top 3 markets, Ontario, Québec and B.C., Which now represents 81%. In summary, we are pleased with the results for the quarter. At this point, I'll turn it over to Gigi to review the financials in more detail.
Thanks, Cam. The results for Q4 again reflects solid earnings and cash flow performance. Interest income remain strong resulting from portfolio performance just aligned by Cam. The larger portfolio drove an increase in income from operations from $17.9 million in Q4 2016 to $19.6 million this quarter. This increase was largely offset by higher expenses, in particular, interest cost. As a result, income was basically flat quarter-over-quarter. Over time, we do get the positive -- we will get the positive benefit of high interest rate on new loans. I would now take a closer look at the earnings and cash available for distribution. We earned $0.17 in net income per share in Q4 and had $0.18 of distributable income per share. For the full year 2017, earnings were $0.70 per share and distributable income was $0.75 per share. Based on our dividends pay in the quarter of $0.172 per share, our fourth quarter payout ratio on an EPS basis was 99.2%, while our payout ratio on distributable income was 93.3%. This is in line with our current target payout. Turning now to the balance sheet highlights as of December 31. The combined net mortgage portfolio was $1.1 billion, as Cam mentioned, up $21.4 million from Q3 and up $103 million from Q4 2016. At the end of Q4, we had drawn about $365 million of our $400 million mortgage investment credit facility. That number is, of course, fluid as we balance out loans and repayments. In addition, we had about $30 million outstanding on a credit facility associated with investment property. In aggregate, there are about $25 million -- these are about $25 million higher than Q3. I will now turn the call back to Cam for closing comments.
Great. Thanks, Gigi. Looking ahead, our outlook remains positive. With respect to the commercial environment, despite marginal rate pressures, we have not seen a material change in commercial valuations. What we are seeing is that some provinces are experiencing strong economic growth, translating to healthy market conditions for rental apartments. In terms of macro conditions, as we have said on past calls, an environment of gradual rate increases would generally be good for our borrowers. We are seeing modestly higher rates on some new loans, although there is a lag as it takes time for the portfolio to turn over and for borrowers to digest the higher rates. I would reiterate that competition has intensified from lower-risk categories such as multi-res and industrial, which when combined with 2017's rate increases, have led to some spread compression. We are not seeing this to the same effect in higher-risk categories, such as land and development. Despite a significant pipeline of these types of deals, we continue to favor lower-risk segments at this stage of the cycle. Our differentiator as a company remain our flexibility, service and customization. We will continue to adjust to the changing market and competitive landscape, and we continue to believe lower-risk commercial assets provide the most attractive risk-adjusted returns for our shareholders. In summary, we're very pleased with how the company performed in 2017. We are growing and diversifying the portfolio while meeting our investment objectives, deal flow remains very strong, and the quality of our portfolio remains high. We have built a conservative portfolio that provides investors with the unique opportunity to access institutional quality mortgages, secured by a diversified portfolio of investment real estate. That completes our update for today. I'd now like to open the line for questions. Operator?
[Operator Instructions] Your first question comes from the line of Graham Ryding.
Maybe just start with the other investments, that bucket. I think you have a target of 10% of your assets would be in those sorts of investments. Is that something that you expect that you'll reach in 2018?
It's definitely fluid. It's -- you're right in terms of where we're targeting that number to get to. We have seen -- and what I mean by fluid is we've seen this year a couple of repayments out of that portfolio in full, so we're down below 5.8% today. So we'll continue to find -- as we continue to find the appropriate investments for that, we will continue that. I'm not sure whether we'll ever -- it won't be a situation where you're going to hit 10% and just be at stasis at that level. It will ebb and flow a little bit. But it's probably not a bad idea to model something closer to 10 versus today's 5.8 as we move through '18.
Okay, great. Appreciate the color on competition in the mortgage rate. Can you give us some idea of -- I think you had an effective rate of 6.9% in the quarter. What sort of -- what's the effective rate of margins that you're putting on to your portfolio today?
It varies by asset class. And I think the point, and hopefully, picked it up in the prepared remarks, that there's a bifurcation going on between low-risk and high-risk assets right now. As some of the more traditional entrants are expanding their portfolios into the commercial realm, they are favoring lower-risk assets. And those right now are -- generally include multi-res, but they include industrial at this point as well. And you're seeing at the other end of the spectrum is land and construction, which is not seeing the same kind of competition. So you're seeing that the rates are relatively stable when you're talking about the multi-res side of things. Or up very modestly. They're not necessarily -- not able to transfer the full Bank of Canada's rate hikes through to your borrowers at this point. Whereas on the high-risk assets, you're seeing it -- you're able to transfer it fully through and potentially a little bit more.
Okay, got it. I guess when the merger of your 2 funds happened in 2016, you had an EPS target of $0.72. You're slightly below that now. Is it still a reasonable target that you think, as your portfolio evolves, that you can achieve?
Yes. And I think what I would start with is that we look closer at it on a DI basis. I know that the market likes to follow EPS, but there are some differences between those that you can appreciate. And so there are some timing differences as you roll things out over the years and over the quarters. But yes, we do believe that, that target is the right -- is in -- what we should expect for '18. Short answer.
[Operator Instructions] Your next question comes from the line of Johann Rodrigues.
I just had a real quick question. Where do you think kind of the weighted interest rate of the portfolio is this time kind of next year?
About -- I suspect it's going to -- it's going to be up. And I would suspect it's going on a total portfolio basis, probably 10 to 20 basis points higher than what we're ending the year on at -- which was 6.9.
Okay. And that's a function of just increasing the other investment side of things? Or is that rates coming up on kind of the more traditional mortgage investments as well?
So I would make sure I'd clarify that, that 6.9 is not inclusive of the returns we generate on the enhanced return portfolio. So that 6.9 is the 94.2% of the asset. And so that part of the portfolio, we do expect to add some yield through the year. We're pretty much complete, our de-risking at this point, so we shouldn't see -- there's been some blending of the numbers that's hard to read through and there's a bit -- it's a bit opaque. As we derisk, the end rates are going up, so there's some offset, but we're pretty much done that. So we should continue to see, call it another our average rate, because it does take time to turn through the portfolio. The new stuff, we are going to capture it more, but it's going to take time to turn to the portfolio. On the enhanced return portfolio numbers, we continue to target an 11-plus percent IRR. That -- some of those, a small component of that could be -- there is some J curve element to it, but that portfolio is performing in line with those -- that kind of return profile.
There are no further questions at this time. I turn the call back over to the presenters.
Okay, great. I want to thank everybody for joining us this morning. And look forward to continuing the dialogue with all of our shareholders. Thanks again.
This concludes today's call. You may now disconnect.