Timbercreek Financial Corp. (TF) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to Timbercreek Financial's Fourth 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 thank you for joining us today to discuss Timbercreek Financial's fourth quarter and year-end financial results. I'm joined today, as usual, by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications. As we anticipated with our Q3 results, the fourth quarter was a very active period for the company and closed out a solid 2021. While we continue to work through the pandemic environment last year, our team remained very focused on asset and risk management, and that posture served us well as you will see in the performance metrics. Most importantly, we achieved the overriding objective to optimize the risk return parameters of the portfolio and deliver a stable dividend. We generated distributable income per share of $0.20 in Q4 and we grew DI per share to $0.75 for the full year, up from $0.71 per share in 2020. 2021 results were well within our targeted payout ratio. 2021 was also an active period from a financing and capital markets perspective, and we move ahead on an even stronger financial foundation with greater funding capacity on more favorable terms. There's no question we've had to navigate a more challenging operating environment over the past 2 years. With restrictions easing, we see better days ahead in our core markets, improved operating conditions, combined with a strong balance sheet, should allow us to achieve steady growth of the total portfolio, which has been one of our core objectives. 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. The core mortgage portfolio continues to perform as we expected, allowing us to generate healthy distributable income per share for the fourth quarter and full year. The durability and resilience of the portfolio remained a highlight in the fourth quarter. In December, as an example, we collected 100% of interest payments and none of the 109 loans were in arrears at year-end. This is consistent with what we experienced throughout 2021. This result underscores the value of our conservative approach and emphasis on income-producing assets. To that end, 88.3% of our investments were secured by income-producing properties at quarter end, with this over 60% in multifamily residential assets, including retirement. Our focus on these assets was once again a positive factor in portfolio performance, and we remain almost entirely invested in urban markets, which provide superior liquidity. In terms of risk management, first mortgages represented 93.2% of the portfolio, up from 90% in Q3. Our average LTV was 70.1%, which is essentially unchanged from Q3. The portfolio's weighted average interest rate, or WAIR, was 6.9%, down slightly from 7.1% in Q3. The WAIR is well protected by the high percentage of floating rate loans with rate floors, which was almost 85% of the portfolio at year-end, the highest it's ever been. This strategy has muted the impact of interest rate cuts in prior periods and sets us up well in the period of rising interest rates. As we look at the rate outlook for 2022, numerous supply side factors will likely keep inflation high in the near to medium term. We expect this will result in rising interest rates sometime in Q1 '22 and throughout the year. This should have a positive effect on distributable income given the high percentage of floating rate loans. In terms of capital deployment, in Q4, we invested roughly $336 million in new mortgage investments and additional advances on existing mortgages. High watermark for the year. This was offset by a repayment of $264 million, resulting in a net increase in the portfolio of roughly $64 million from Q3. Fourth quarter turnover was 23.3%. Building on a robust fourth quarter, the pipeline remains strong, and we are anticipating the 2022 operating environment to be noticeably improved relative to 2020 and 2021. Commercial real estate transaction activity is increasing, and reduced COVID-19 restrictions should positively impact the market. The portfolio remains well diversified and concentrated in urban markets in the largest provinces, with approximately 97% of the portfolio in Ontario, BC, Quebec and Alberta. Strategically, we are very pleased with the initial results from the opening of our Montreal office, which has resulted in strong origination activity from Eastern Canada. This translated into a meaningful increase in the weighting in Quebec at 31% at year-end. This is an important portfolio diversification initiative and gives us additional exposure to the large and diversified Quebec economy. At the same time, we remained disciplined and prudent in key Alberta markets that had a significant prolonged cyclical challenge. While the core mortgage investors performed well in 2021, we have navigated challenges with the noncore and non-income-producing assets. In a few situations, our general approach has been to allow development or redevelopment plans to play out, then to evaluate our options to monetize these positions. In the fourth quarter, we decided to accelerate our realization strategy. We believe it's important for shareholders to exit these sooner and to reinvest the capital into our core investment strategy of [indiscernible] income-producing mortgages, mortgages that will be accretive to distributable income. With our Q3 results in November, we announced an agreement on Northumberland Mall which should close in the near term, albeit a bit later than our original expectations. More recently, in consultation with our investment partners, we have reached decisions to enter a disposition process for the multifamily investment property portfolio and a liquidation process for the remaining mortgage investments that we carry at fair value through profit or loss. On Sunrise, the multifamily investment property portfolio, we are currently in late-stage negotiations on a potential transaction. On the mortgage investments carried at fair value through profit and loss, we are in negotiations with our partner to realign interests in various properties so that we can initiate a disposition process. This would include our exit from the Macey Bay development property. We recorded a fair value loss in Q4 2021 to reflect the disposition strategies of these assets. Once we exit these remaining positions, we will move forward without the quarter-to-quarter fluctuations and distractions in net income caused by these fair value gains and losses. 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 for the fourth quarter. First, let's start with the income statement. Net investment income on financial assets measured at amortized cost was $22.4 million in Q4, which is down from $24 million in the prior year, mainly due to lower weighted average net investments and modest interest rate compression over the periods. We recorded a loss of $7.4 million on financial assets measured at fair value through profit and loss versus a $14.9 million loss in the comparable period last year. As Scott mentioned, we continue to make progress on exiting the fair value through profit and loss assets. Net rental income was $389,000 in the quarter, up slightly from last year, reflecting stable occupancy levels. For Scott's comments on the disposition plan for Sunrise, we recorded a fair value loss on investment properties of $4.4 million. Lender fee income was strong at $3.7 million, up from $1.8 million in Q4 2020 as a result of higher transaction volume year-over-year. Q4 net income was $2.4 million compared to a loss of $1.6 million last year. After adjusting for fair value gains and losses on financial assets and investment properties measured at fair value through profit and loss, adjusted net income was $14 million versus $13 million in the prior year. Basic and diluted adjusted earnings per share were $0.17 for the quarter compared to $0.16 in the prior year. We reported adjusted distributable income of $0.20 per share in Q4, which is up from $0.18 per share from last year and at the high end of our quarterly range we have generated over the past 8 quarters. Our payout ratio and adjusted distributable income was 87.6% in Q4 and 92.9% for the full year, which are both comfortably within or better than our targeted range. Now turning to the balance sheet highlights. The net value of the mortgage portfolio, excluding syndications, was $1.16 billion at the end of the quarter, an increase of about $64 million from the third quarter. Enhanced return portfolio decreased to $84.6 million from $97.6 million in Q3. This portfolio at year-end included $71.2 million of other investments and $13.4 million of net equity and investment properties. As Blair mentioned, we took advantage of opportunities during 2021 to increase the total capital base and reduce our cost of capital. During Q4, we closed a $46 million convertible debenture financing at 5%, representing a historically low rate for the company. In addition, we issued 537,000 shares under the ATM program at an average price of $9.67 per share for gross proceeds of $5.2 million. On top of the financing activity in 2021, earlier this month, we upsized our mortgage investment credit facility by $40 million to $575 million. From a profitability perspective, we were benefited from the December 2021 expiry of a fixed rate swap on $250 million of this facility balance. This was fixed at 4%, and the balance is now priced on a floating rate basis of 200 basis points over vigorous acceptances, which was approximately 2.4% at the end of 2021. Between syndications, repayments and line availability, we remained very well capitalized. Our credit utilization rate was down to 84% at year-end, giving us ample room to steadily grow the portfolio. I'll now turn the call back to Scott for closing comments.

Thanks very much, Tracy. Q4 was a strong quarter to end the year, and we are encouraged by the outlook for 2022 after 2 years of challenging operating conditions. Commercial real estate transaction activity should continue to improve, and we have even greater funding capacity to execute on deals. Rising interest rates, the most likely outcome in the near term should act as a tailwind for distributable income given our high exposure to floating rate loans. We continue to make progress exiting the small number of challenging investments in the portfolio. We expect to deploy this capital into loans that will be accretive to distributable income. Finally, we are well positioned to deliver steady growth in the total portfolio. And that completes our prepared remarks. And with that, we will open the call to questions. Operator?

[Operator Instructions] Your first question comes from the line of Jaeme Gloyn from National Bank Financial.

Yes. Thanks. Good afternoon. First, I just want to clarify, I've got the properties correct here. So the Saskatchewan rental portfolio of Sunrise apartments. That property is in the late-stage negotiations on a potential sale at this point, and the fair value losses of $4.4 million on that property. Do those reflect the expected sale price and losses attached to that? Or just lack of -- or I guess, a slower-to-stabilized rental profits on that property?

Yes. So it is, you're right with the correct property. That evaluation is sort of done as an estimate at current -- at the end of the Q4, Jaeme. So it's very much reflective of the environment. And with the change into a disposition strategy which we knew we were embarking, it's the last time to stabilize. So by looking at sort of today income -- heavier weighting today's income, that sort of results in a lower fair value, which is sort of -- which should be reflective of a potential transaction. Having said that, those are 2 separate events, and we are in negotiations. And pricing is one of the components that has not been stabilized -- finalized.

Okay. Okay. So we could be seeing further fair value losses or if things go really well, maybe even a gain on that portfolio?

In theory, that's right. We would imagine -- we do think that this current valuation is reflective of what our expectations would be.

Okay. Great. And same question, as it relates to the properties that are now set for disposition, I believe, at the Macey Bay and Lagoon City development site, both in Ontario, that you're seeking to exit. The value or the $8.3 million loss on that one, that value reflects comparable land and property values that you saw in Q4 or today? And I guess what gives you comfort that you've sufficiently reserved with that loss for the ultimate sale?

That's a good point. And just to talk about that, right, so we are in a -- it's a JV partnership, right, on both those assets that you mentioned, the Macey Bay and the Lagoon assets. And what -- as we decide to try to get off this position and working with our partner, basically what we're doing is we're going to reallocate the interests in the portfolios. And part of that is us saying, yes, we will -- we are going to be out of essentially Macey Bay project and consolidating into a subset of the Lagoon assets. And then when we have full control over that subset of assets, we are then solely -- we separate ourselves so that we can basically start a sales process to get out of them. As part of coming to that determination and as part of these negotiations over the last few months, we absolutely went sort of deep into market comps to sort of see what that -- what the current market would be. And so that market that we took is reflective of that. So we believe we are well lined up to take our assets and essentially list them for sale. We will be engaging in a process to do that, assuming we finalize this transaction. We haven't finalized it, to be clear, but we are in late-stage negotiations here as well. And then what we intend to do is essentially list. But we will be going through what's the best way to optimize those exits. It could be a bulk sale. It could be property-by-property. We'll be working with an institutional broker to help us determine that sort of final strategy in '22.

Jaeme, it's Blair. The only thing I'd add to that is, I mean, 100% agree with what Scott said. But the disposition process for the remaining assets that we have will -- I mean, if -- we will maximize value there. So if that means it may take a year, it may take less than a year, it may take more than a year, but we are in control of the process. So we're certainly not going to blow them out. We just -- we feel more comfortable with the stability of that portfolio, Macey as a development side, as you probably recall, and not ready, and it's just -- it's a more -- in our view, for TF, that's a more challenging project to have line of sight into. So this -- in our view, this is a great outcome.

Okay. Great. And the -- this last set of assets, Macey Bay, Lagoon City is the -- is that the $25 million that's listed as other mortgage investments in stage 3 default on -- within the MD&A and financial statements at the end of the quarter?

No. That's another loan that's in Stage 3. It's a condo inventory.

Okay. Sorry can you...

Go ahead. Sorry.

Sorry. I think I was talking over you. I was just going to say, I believe I heard a condo in Victoria, and then I guess the natural follow-up has been some sort of color around what's going on with that portfolio. And I suppose it looks like good recovery.

Yes. It's Geoff McTait here. Just quickly on that. So this is -- it's a -- it's actually a first mortgage loan on a condo inventory project, a newer project well located in downtown Edmonton. Loan is current in terms of interest, but past maturity and currently negotiating extension terms here to facilitate the sale of the remaining inventory and recovery of the loan. That market has been a bit slow and sluggish over the last couple of years, resi condo and Edmonton admittedly, but we've seen some recent upticks, some obviously improvement in oil and gas in that market of late. But even ahead of that, some activity, recent sales in this project at pricing that well supports our loan position very comfortably.

And Geoff, we -- yes, Jaeme, so that loan will likely unwind itself gradually, obviously, as the condos are sold.

Yes, sort of either side of Q3, I think, as we kind of go forward here, it will be looking at options there in terms of continuing [indiscernible] or selling in bulk. But again, our basis is comfortable relative to a current view of value.

Right, right. Okay. So a technical default rather than financial stress or concerns on that one.

Very different than the other 2.

Your next question comes from the line of Graham Ryding from TD Securities.

Maybe I could just -- a little bit of comfort on just what else is in the -- what you call your margin investments measured at fair value to profit loss, I guess, beyond Sunrise, Macey Bay and Lagoon, like is that all -- is that all that's in there or is there anything else in there?

It's a little different. So Sunrise is an investment portfolio, sort of a stand-alone equity investment portfolio, Graham. And then the fair value profit and loss properties, it's really [indiscernible]. So Northumberland is categorized in that category, as well as Macey and Lagoon so the intention here -- there's nothing else in that category, Graham, and like this should be -- we're coming to the conclusion here on these assets.

Okay. Understood. So it sounds like you're looking to dispose of these assets. Can you remind us of what the strategy is with Northumberland there? Were you looking to dispose that as well or is that a redevelopment?

Yes. No, we have a firm I have a firm deal on that. It was actually supposed to close to by year-end. And the purchaser is just -- they're having -- they've explained as a delay on their financing. And so we're hoping to get that wrapped up by the end of the quarter. So that deal is in place.

Okay. That deal's in place. Okay. And do you have an ongoing mortgage on that one after or will that completely leave your portfolio?

Couple of million dollars of the VTB, but that's it. And then, listen. We talked about -- Go ahead, Graham.

No, no, no, you go ahead.

I was just going to say, listen, obviously, we've had to work through these assets, and I look at -- these are not easy decisions for us to take. Some of these write-downs day 1 to take -- to move off of these positions. If I look at assets like Macey Bay and Lagoon that are sitting there, earning 0 distributable income. And Macey Bay is a great example where -- as we just decide our decision, do we want to continue to invest in that asset? Do we want to pay for the infrastructure and the development costs associated with that for an eventual and potentially uncertain exit? We look at assets like this and just say, although we're taking a bit of a mark today, if I take that equity and redeploy it 10% equity returning yielding distributable income mortgages, a, it's -- there's obviously a lot of distractions, and potential additional capital, management time and the questions that we have, and by just taking these decisions today, redistributing in what we do well and what is accretive to the book, we think it will help our DI ratio from the very beginning, right? Because these assets are generally speaking, not earning assets today. And then over time, right, it's a payback. And we think that's a reasonable payback period and a very low-risk strategy versus continuing down a development path. So I think it's similar. Northumberland is a little bit different, but sort of similar. Again, it's not an optimized or accretive asset. And sometimes we have to make these decisions that are best for the company for the long term.

Okay. That makes sense. Now you did mention in your MD&A that you're looking to exit some of these noncore, non-income-producing loans. How should we just think about your strategy going forward? Does this change your strategy at all in terms of the types of asset classes that you're looking at or other areas of your portfolio that you would consider noncore?

And let's be really clear. Every one of those assets we've discussed on this call today, right? There is not more that we're not discussing. It is the sort of -- it's Northumberland, Macey Bay and Lagoon, and Sunrise as well, which is a little -- I would classify Sunrise differently, but it's not a high accretive asset today, and it's something that, again, we feel it's a better use going into more of a core mortgage strategy. So coming back to the core book, which is well over 95% of what we do, Graham, we said that we're trying to build a diversified book. I looked at it as I want all these loans current and paying interest. I look at the country right now that I kind of divide it into thirds. Kind of like 1/3 of my exposure in Western Canada, 1/3 in Ontario and 1/3 in Eastern Canada. I'd like to be diversified by asset type. Of course, being a MIC and where multifamily is in the cycle, we continue to be very much thinking multifamily is the safest asset class in the country with the best in-place income. So we will continue to lean into multifamily, and that will diversify the book by other asset classes. We'll stick to urban markets, we'll stick to markets with high liquidity. I don't think it's a coincidence that some of the assets where we've had trouble, like Northumberland Mall is in Cobourg, Macey Bay and Lagoon are also in smaller markets. And I think as we -- again, as we look to redeploy that capital, we redeploy it into the strong liquid markets where the vast majority of our book is. So I think our strategy has been pretty good. It's been strong. Like I'm very pleased with the distributable income results. We've had a couple of quarters now in those low 90s. I think we'll be able to continue to do that. And I think we -- I hate to use the expression, stick to our knitting, but if we stay very focused on the core mortgage book, which is most of what we do, our pipeline is strong. And I think that is -- that will be the ongoing success and stability for the dividend and for the company that everyone is expecting.

Graham, it's Blair. I'll just add a couple of things there quickly. So to directly answer your question about a change in strategy. The change in strategy is with respect to how much time and effort we are willing to invest in loans that have had challenges rather than, as Scott says, take a modest mark potentially and get that capital redeployed. So that's the change, if that makes sense to you.

That's -- I appreciate the going through and flag in all the key items that you're considering noncore and what has some hair on it and what and how you're moving forward.

If you think about it over the past 1.5 years, maybe even 2 years, the majority of our discussions have been around these 3 or 4 assets rather than, to Scott's point, the other 95% of the portfolio, which is performing absolutely as we expect. So it's a good analogy, right? I mean, we would rather focus more of our time on maximizing the types of investments that are performing. So I'll leave it there.

Okay. Understood. Can you talk a little bit about your balance sheet? You sort of flagged that you've got some appetite to grow the portfolio from here. But I'm looking at your debt to assets ratio of 46%. So could you sort of talk about what your comfort level is with sort of that ratio and how much we really have to grow the portfolio?

Graham, it's Tracy. And certainly, yes, we are looking to grow. Obviously, a couple of the strategies we've implemented just from our capital base with new debentures -- 3 series of debentures outstanding right now and then the upside on the credit facility. Obviously, our other lever there is the ATM just to really keep the debt-to-asset ratio in check as we grow and look to strategically and accretively issue the equity to keep in the same ratio. So I'd say from a comfort level, we're -- and also even just with our covenant compliance, we look to sit generally where we are right now and keep all ratios in check as we grow strategically across the company.

The only other lever, Graham, the equity side is the trip. So we've been spending a little more time trying to increase the take-up rate in that regard, which is working. It just takes time, but it's another great way to raise capital of course.

Okay. Great. And then just the last question. Just on the mortgage rate, it did come down a bit quarter-over-quarter, but maybe you could just talk about the competitive landscape and your outlook for the mortgage rate in the context of the rising rate environment?

Sure. Yes, it's Geoff. Listen, I mean, I think quarter-over-quarter, I mean, market wide, I would say, was relatively flat to down a bit, like as competitive as the environment has been from Q3 to Q4, like we didn't see any material decline in pricing broadly speaking. I mean, again, for us, as we've mentioned, certainly numerous times in the past, the subsegment of the market that we participate in primarily tends to be fairly sticky pricing-wise. We're meeting certainly partly on price within our segment, but certainly on our ability to execute on a timeline. Obviously, existing relationships and reputation, and a combination of things that help us to win our fair share, and we continue to do that. Certainly, as Scott noted, again, to be as competitive and successful in deploying capital over what's been a very low interest rate environment over the last number of years, we're, I think, eagerly anticipating a bit of an uptick in rates. Certainly, we think it plays into the space that we operate and helps create a little uncertainty in the market for borrowers who would otherwise be locking in long term, maybe ahead of when an asset is really optimized for that. So we think there is the potential for some increased flow as a result of that. And I think, again, for us, in general, where we see a little bit of our WAIR fall, it is somewhat a function of some of the older vintage, higher yield loans rolling off the book. We see floors largely in place here. We're going to see effect on the portfolio on the uptick for those that are out their floors. We obviously have a subset of the portfolio that are below the floors that were maybe predated, the 150 bps of prime compression that occurred through the pandemic. So there'll be a bit of room to move there, but we've obviously been benefiting from those floors over the past period of time. So again, it's a very -- it's a competitive market for sure. Our pipeline is really strong. It has been strong right through the fourth quarter. We continue to see good deal flow, diversified deal flow. Quebec has been a great addition. That strategy is working out as we would have hoped, and our originator has been active in that market, in particular, in the multi-res space, which has been great. And there's always been a little more yield in that market than some of the other markets as you move west across the country. So we're feeling optimistic.

Graham, I'll just give you a couple of sound bites on the floors because, obviously, as Geoff and Scott have both mentioned, it's -- directionally the environment should get a little bit easier. So in terms of our book, about 2/3 of it are above their floors in terms of the floating rate. And of the remaining 1/3, about half of those loans will roll in the next year. So obviously, those will be reset with the current floor. So that's very positive.

Your next question comes from the line of Sid Rajeev of Fundamental Research Corp.

Congrats on the strong quarter. Just trying to get an idea or feel for 2022, I see a strong increase, so a significant increase in export to Quebec is -- and the retirement homes. So is there a correlation there, more retirement homes in Quebec? What are your plans for the province this year?

That's a good question. Maybe Geoff and I will both answer this a little bit, it's Scott. No, I don't think they are directly correlated. I think that's -- we've had some -- we've always had exposure to retirement homes. We tend to not do as much on the nursing side, just more pure play retirement, which we review as multifamily as well. The Quebec story is a little bit different. We definitely wanted to increase our exposure to Quebec. It's a nice diversifier. We've always had some exposure, but not as much as we would have liked. And so I think when we've opened this office in Montreal and our person there sort of doing all of Eastern Canada, so through Quebec City, there will be some exposure to Halifax. We just think there's some underserved markets there. We think there is a lot of -- ownership is a little less consolidated than it is in Ontario. And so you tend to get more diversity in your borrowers, on some nice sort of midsized assets. And Quebec has always been a very strong multifamily rental market. So it's just sort of an area we're leaning into a bit. But I would see our exposure sort of entering out around 1/3. It really is...

It seems like...

I'm sorry, I was just -- go ahead.

I was just saying that your exposure to Quebec is more than any other province. I think it's the first time in history that you've had. So Quebec is relatively less competitive in terms of the MIC market. I don't know if that's correct. But I see that fewer loans, higher dollar size. So it seems you're exposed to larger loans in Quebec and being less competitive? Are you seeing better deals there?

Yes. So I'm not sure, I mean, there's been a mixture of opportunities in that market. I mean, I don't think they would all be characterized as large loans per se. And I think in general, found it to be fairly granular. I think there's certainly a number of loans with certainty. I mean, that market, the reality is, -- there are -- certainly, the language is a barrier there, right? So historically, for us without someone in that market, someone who can speak the language and who can issue paper in French versus English. It really does change the dynamic. Obviously, those that can't speak English tend not to go into that market. We absolutely have seen it, and it is a competitive environment with a number of our competitors actively bidding on deals where we won and certainly deals where we lost in some of these competitive circumstances. But it is -- we found very much a function of having an office and an individual in that market, obviously, with deep relationships from his prior employment experience and awareness of the markets and the unique attributes. And again, for us, it's largely Greater Montreal focused, and Quebec City oriented, but that was also historically a focus for us. But we found a great opportunity for us in that market is really the opportunity to diversify our client base.

And the other thing I'll add is a little more technical. At the end of Q4, there was -- I want to say there was 2 loans in Quebec that in the $30 million-ish range that were that closed that hadn't -- that we were syndicating. So we were creating an A note. And the A-note partners didn't come into the book until January. So I think if you're looking -- if you're doing the math on sort of average size and number of loans, I'm just thinking through that question a little bit, there might be actually just a little -- it's not obviously -- it's not all of the noise, but there might be a little noise there that would clean up and get more to that more average hold size that you'd probably be more expecting to see from a provincial versus number of loans. That could be part of your query, which would make sense to me.

Yes. No, it makes sense. The second question is, with rates expected to rise and deal flow might slow down, I mean, I guess that's the general consensus. Do you mind talking a bit about your pipeline? Where do you see more opportunity? And I know you don't give guidance, but trying to get a feel of what the year-end portfolio size will be. Any guidance will be appreciated.

The end of the year?

Yes.

That's a good question.

Yes, let's talk about pipeline first.

Talk about pipeline?

Yeah.

I'll break that question down a couple of ways. First of all, the pipeline is very strong right now. We're quite pleased. I think there's a lot of activity in the market, and we're taking advantage of it. I think we've -- our originations team is as strong as it's been. Again, we have the focus -- it's more difficult for us to serve Eastern Canada before, now we have that more of a focus on Ontario, focus on East. So I think that's good and an expansive pipeline. I think the rising rate environment comes, again, for us, very much we're a transitional loan lender. So almost all of our loans are sort of 2-year floating rate structures. So generally speaking, right, when someone comes to us, if the rate goes up or down, it's part of the price of sort of acquiring and repositioning an asset and they pay that sort of a market price. We were a little less sticky -- I'm sorry, overall, we are sort of sticky in pricing. And as interest rates go up, pricing will increase with it, albeit somewhat muted, right? So it's a bit of that sort of middle zone as far as demand for the type of product that we have in a rising rate environment. The demand, we don't anticipate would fall, right? The transactional landscape and the transactions that happen in real estate continues to happen, right? We just will benefit from a little bit more of top-line growth. And our numerator is bigger than our denominator. So we -- our cost of funds will go up, but our book will grow, right? So that's how you get that accretive DI moment.

Yes. I'd say it's the permanent term lenders, right, who are going to probably see a little downtick in their activity as rising rates make any borrowers sit there and say, do I want to lock in today at a higher rate than I thought was available to me? Maybe I'll wait it out and see what happens over the next 12 months. As Scott noted, for us, on an interim basis, the interest rate itself doesn't play a huge role in the ultimate outcome of the long-term investment here because they're not locking in our rate for 5 years, 7 years, 10 years. So we potentially expect to see some increased activity. It's certainly steady, no question.

And then the final part of your question, which is book size. Really, listen, our book size, again, is always sort of -- we have that rotation, right, where repayments create new loans. So really for us, it is -- we are sort of in control of that, right? So we do manage that equity ratio. And so as we do things like add a convertible debenture as we continue to drip in and use the ATM for equity, as we increase our line, I think it's sort of a steady growth. I would expect it will be a larger portfolio balance at the end of 2022 than we are like -- than we were at the end of 2021 given some of these tools that we put in place. But it's something that we can sort of continue to evaluate. And as the market -- we'll keep an eye on it. And as we think there's continued to be opportunistic loans, we will grow our sort of debt and equity base to take advantage of those. And I think like -- and the opposite was true, right, in COVID, right? When we were sort of nervous going into COVID, we took some steps to be a little more conservative. So we keep an eye on that payout ratio. And we just sort of -- we moved that balance of the portfolio to sort of what is that optimized level for the investors. So I don't think we grow. We just don't grow for the sake of growing. But I think we continue to evaluate the opportunity set and would anticipate sort of a steady sort of growth curve in 2022?

It's Blair. And I just add 1 comment on -- sorry, it's Blair. I just got one more comment on rates, right? So I think most of it, there's always outliers, but most of us are of the view that rates are going to go up, but take us back to a more normalized rate environment, right? So we've had super low rates for a while now. And I think if you were to go back and look at -- we've been running this lending strategy for 15 years. And over those years, the average risk-free rate over that period of time is certainly substantially higher than it is today. So we're not at all fast about moving into a more normalized rate environment. And to Geoff's point, we actually are looking forward to it.

That was very useful. I appreciate the insight. That's it from me. And congrats again on the strong quarter.

Thanks, Sid.

Thank you.

[Operator Instructions] You have a follow-up from Jaeme Gloyn from National Bank Financial.

A couple of follow-ups. First one on the -- and forgive me if I missed this in this quarter's commentary around the interest rate swap. I believe that was expired or has expired. How should we be thinking about the total interest rate costs for -- on the financing programs in place today. I think it was running more in the sort of 3.5% range. And if we take out that interest rate swap, it steps up a bit. So what's -- are there -- is there another swap in place? Where do we sit on total financing costs?

Jaeme, it's Tracy. So swap rolled off, it was fixing us at 4% on $250 million of the credit facilities. So with it rolling off a whole credit facility now is priced at 200 basis points over CA. So it's coming in around 2.4 at the end of the year. I think in considering our strategy and cost of financing going forward, given we are primarily a variable rate book, we've decided to run on the cost side on a variable rate as well and match the 2 together.

Yes. Did we put the actual dollar value to the reduction in interest expense with the hedge floating off on an annualized basis? Is that a number that we have out there?

Yes, we didn't put it out there, but -- so you're stating about, on average, obviously...

It's $4 million.

So $4 million [indiscernible] of course, is a just as a sound bite, yes. I mean, $4 million in reduced interest expense for that $200 million portion of the facility -- excuse me, $250 million.

Yes.

Okay. Okay. Got it. And then as it relates to the investment properties and the rental income that's coming from that property, that's all that's driving that rental income or net rental income line or [indiscernible] there? So the -- I guess, the assumption is that once that property is officially sold and off the books, we won't have anything flowing through that line item anymore. Is that correct?

Yes, absolutely. That's the only thing that's in there is that full portfolio.

But just at -- restating the obvious, it will be replaced with interest income from another loan, right?

Of course. And then last one for me, just as interest rates start to tick higher, are you -- what's the conversation with your customers, your clients? How does that affect their businesses, or their opportunity sets as interest rates move higher? Is there anything from that perspective either at growth on that or on credit stresses as the costs move higher for your customers?

Yes, it's Geoff here. Yes, absolutely. I mean, I think for us, in almost all instances, obviously, the key piece of our analysis or one of the key -- critical pieces of our analysis is certainly our exit, how do we get repaid. Oftentimes, that's through a refinancing of some description. And so certainly, there's expectations that those longer-term rates, I mean, they have gone up, and they expect them to continue to go up. And so it absolutely affects how much we're potentially willing to lend. Certainly, we're -- we run various sensitivities and add increased buffers based on our expectations of where rates are going to go to ensure that everyone is working towards a common goal and looking for successful execution.

Yes. And I'll just add, I think, the borrowers were certainly used to a higher underlying interest rate environment, right, in a way it was kind of on sale. It was a very good time to be a borrower. COVID is 1 positive aspect if you were a real estate owner with some access to some very cheap capital. Again, in our line of work, the coupons tend to serve more rule today and even tend to be a little more strict. But I do think the borrowers that we deal with are experienced, sophisticated borrowers who are used to a more -- and have an expectation to be returning to a more normalized rate environment.

Yes. I mean, the usual real estate inflation hedge kind of argument there as well. Obviously, as rates go up, cap rates are likely to follow. But at the same time, potential for decent growth in the underlying rents to partially offset. I mean, all of these things are things we think about. But certainly, absolutely. It's a big topic and a discussion and consideration, certainly for our borrowers in terms of what they're going to pay for an asset, right? So it's an active part of the discussion.

There are no further questions at this time. I'll turn back the call over to Blair Tamblyn.

Okay. Great. So again, I'd like to thank everyone for taking the time to participate on the call today. Obviously, if there are any additional questions, please feel free to reach out to us directly, and have a good afternoon. That's it from us, operator.

This concludes today's conference call. Thank you for participating. You may now disconnect.