Timbercreek Financial Corp. ($TF)

Good day, ladies and gentlemen, and welcome to Timbercreek Financial's 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.

Thank you. Good afternoon, everyone, and thank you for joining us. With me on the call today are Scott Rowland, our Chief Investment Officer; Tracy Johnson, our Chief Financial Officer; and Geoff McTait, who leads Canadian Originations and Global Syndication. Q1 marked a good start 2026 with strong origination activity and continued progress in repositioning the portfolio. During the quarter, we deployed $224 million and the portfolio has grown nearly 15% year-over-year to approximately $1.24 billion, reflecting the same level of lending activity we've seen over the past 12 months. Net investment income for the quarter was solid at $25.1 million. Our distributable income was $0.18 per share resulting in a payout ratio of 98.5%. Importantly, we continue to make steady progress resolving the legacy stage loans and redeploying that capital into high-quality income-producing investments, which we expect will continue to strengthen the earnings power of the portfolio as we move through 2026. The underlying cash-generating strength of the portfolio remains intact and our core lending platform continues to perform as expected. With improving transaction activity in commercial real estate and a strong pipeline of opportunities, we're well positioned to deliver the portfolio growth through the balance of the year. With that, I'll turn the call over to Scott to walk through the portfolio in more detail. Scott?

Thanks, Blair, and good afternoon, everyone. I'll spend a few minutes reviewing portfolio composition and performance, touch on asset management activity related to stage loans, and then hand things over to Geoff to discuss origination trends. At a high level, the portfolio remains well aligned with our long-standing risk framework. At quarter end, just over 81% of the portfolio was invested in cash flowing properties. And multiresidential assets continue to represent the largest single asset class at approximately 60%. First mortgages accounted for roughly 95% of the portfolio at the end of Q1. The weighted average loan-to-value was 66.5%. The weighted average interest rate for the quarter was 7.7% compared to 8.1% in Q4 and 8.7% a year ago. This reflects the impact of the Bank of Canada rate reductions over the past year. Importantly, 88.4% of the portfolio is floating rate with contractual rate floors, and the vast majority of those loans are currently operating at their [indiscernible] levels. As rates have come down, we are also seeing opportunities to capture incremental margin through a combination of a lower cost of bank financing and higher fee contribution as transaction volumes increase. This dynamic is consistent with our experience managing the portfolio through previous rate cycles. In terms of the asset allocation by region, 92% of the capital is concentrated in Ontario British Columbia, Quebec and Alberta and forecasted -- and focused on urban markets. As Blair highlighted, we continue to make steady progress on our remaining Stage 2 and Stage 3 loans. Over the past year, most of these files have advanced meaningfully, whether through zoning approvals, leasing improvements, preparation for sale. As these milestones are achieved, assets are increasingly positioned for resolution. For example, 2 Stage 3 Calgary assets, Downtown Office Tower and adjacent retail building were sold subsequent to quarter end. Capital recovered through these processes is being redeployed into new income-producing loans, and we expect this capital recycling to continue throughout 2026 and for the percentage of stage loans to decrease materially. At this point, I'll turn things over to Geoff to discuss origination activity and the lending environment.

Thanks, Scott, and good afternoon, everyone. While the commercial real estate market continues to show signs of stabilization, supported by improving transaction activity across the country, broader geopolitical volatility has tempered the pace of recovery and contributed to some increased interest rate uncertainty. Against this backdrop, however, Timbercreek successfully deployed $224 million during the first quarter, across 13 new investments and incremental advances, primarily focused on lower LTV multi-residential opportunities. This deployment was largely offset by repayments totaling $223 million, reflecting both the short duration nature of our model, and successful outcomes on prior originations. While this level of repayment moderated sequential portfolio growth, turnover represents a healthy source of capital recycling creating ongoing opportunities to redeploy capital and generate fee income to support distributable income as origination activity remains elevated. A higher cost of long-term debt appears to be driving increased appetite for our interim floating rate product as long-term debt decisions are being delayed in hopes of a near-term resolution of the Iran conflict, and a resulting softening of the yield curve. As such, momentum from Q4, Q1 has carried into the second quarter with an active current pipeline conditions that are supportive of continued robust origination activity through the balance of the year. Our ability to syndicate select transactions with institutional partners, provides additional capacity and supports earnings in DI while maintaining discipline on the balance sheet. I'll now turn the call over to Tracy to review the financial results in more detail.

Thanks, Geoff, and good afternoon, everyone. Starting with the income statement. Net investment income on financial assets measured at amortized costs was $25.1 million in Q1, consistent with the prior quarter as portfolio growth and lower financing costs offset the impact of lower benchmark rates. Attributable income for the quarter was $14.5 million or $0.18 per share compared to $15 million in Q4 2025. The payout ratio on distributable income was within our targeted range at 98.5%. Net income for the quarter was $10.4 million included in that results were expected credit losses of $3.7 million reflecting firm sales prices for 2 Stage III assets as sold in Q2 2026. Looking at earnings and distributable income over the past several years, you could see that distributable income per share has remained relatively stable even as IFRS earnings have reflected the timing of credit provisions and valuation adjustments. Over the medium term, quarterly distributable income per share has generally ranged between $0.17 and $0.21 per share with an average of approximately $0.19. This profile reflects the recurring income characteristics of the portfolio, supplemented by fee income as capital is recycled. Looking quickly at the balance sheet. Net mortgage investments, excluding syndications, totaled just over $1.24 billion at quarter end, an increase of approximately $161 million year-over-year. Credit utilization increased at quarter end, reflecting strong origination activity during the quarter. Alongside repayments, asset resolutions and syndication activity, we maintain flexibility to find new opportunities. Overall, we continue to see ample opportunities to deploy capital prudently against the strong origination pipeline as we move through 2026. With that, I'll turn the call back to Scott for closing remarks.

Thanks, Tracey. Looking ahead, we are increasingly constructive on the outlook for Canadian commercial real estate. Transaction activity is improving, financing conditions are becoming more supportive and asset pricing appears to be recalibrating in a way that encourages by your participation. For Timbercreek, this environment supports both origination activity and capital recycling. We expect to continue advancing staged assets towards resolution, redeploying capital into new investments and growing the portfolio in a disciplined manner as the year progresses. Taken together, we believe the company is well positioned for the next phase of the cycle with the portfolio focused on generating stable income, managing risk conservatively and delivering attractive risk-adjusted returns for our shareholders. That concludes our prepared remarks. We'll now open the call to questions.

[Operator Instructions] The first question comes from Graham Ryding.

So originations look pretty healthy in the quarter and also repayments to turnover picked up. Is your message that there's going to be small sort of run rate and something that you sort of a [indiscernible] activity that you could expect to persist through the rest of the year.

Graham, it's Jeff. Yes. No, absolutely. I mean I think we've seen consistent pipeline activity like from, call it, early sort of deal identified LOI issued commitments issued and signed commitments consistently come through the last couple of quarters, and we continue to see that activity today, which it's fulsome across all these categories, and we're feeling confident that this is reflective of what we're expecting going forward.

Okay. Great. And it looked like there's some progress post quarter on the stage loans, I think you called out a couple of Calgary [ Optus ] loans. Anything else that you would sort of call out where you're seeing progress in the stage loans?

Yes, I think the major project, I can say, we're following Graham is we have a significant project in Vancouver. That is currently in the market for sale. That's about -- I'm going to say about 50% of this exposure that I'm thinking about. That's going to be -- it's a longer process. It's probably going to take a quarter or 2. And it's a fully zoned project. It's actively being marketed. So that's the resolution we expect this year. And that will be meaningful for sure.

Okay. Great. And then my last question, just your weighted average rate interest rate did trend down a bit quarter-over-quarter. So it is going to have an impact on your net interest income. Sort of big picture, what would be the sort of main pieces in your business that sort of need to surface in the second half of this year or looking into 2027 in order to get EPS back to a level that meets the dividend and book value per share doesn't experience any further attrition?

Yes, that's a good question. I think we look at it a couple of different ways. First of all, even in the position that we find ourselves in today, right, I think we do cover on a DI basis. I think a couple of different things are happening within the book, Graham. So I think -- and we've operated, right? We've operated even in a lower wear environment than this. So a couple of things that are starting to happen. So as wear comes down, our financing costs are also lower, which obviously offsets a portion of that. The other thing that we're starting to see is margin expansion. So even though the headline wear comes down a bit, we're getting more credit spread above our cost of funds. So we're starting to see -- and this is just sort of reflective borrowers, projects sort of handle certain coupons. So as interest rates are coming down, we're able to increase that credit thread, which although the wear may be lower, our return on equity right can be stabilized. The other thing that's happening is, to Jeff's point a minute ago, as we start to see more acceleration of deal flow, we will churn more fees through the book. That will also materially help with the payout ratio. And I look at all those sort of things are sort of the organic part of the model that works. And then the other thing for us, of course, is the stage loans are a bit of a speed break for us, right, a bit of a headwind for us, of course, because we're not churning that portion of the book. We don't get as effective financing leverage on that portion of the book. And so it's just -- it's earning a lower wear. So as we resolve those loans instead of making you now 5%, 6%-ish on those loans, we redeploy that money. I'm taking equity, this is an equity return, but that's more like a 10% or 11% for us. And that will be, again, a tailwind for us as we roll through 2026. I don't know, Blair, do you want...

Graham, it's clear. We talked to Mike, this is a bit last night. So we're going to share with you guys are probably putting in the presentation as well, a graph that kind of speaks to what Scott [indiscernible]. I mean there was a number of years where prime is lower, wear is lower and our payout ratio was also lower. So it's information that you could find if you wanted to go back 7, 8, 9, 10 years, but we're happy to share it to make it easier. So I certainly wouldn't assume that the lower wear equals higher payout ratio. We can show you that that's not the case.

That's helpful. And then I think what you're sort of referring to there was just the the stage loans? Like what's the normalized, I think it's 7% of the portfolio in Stage 3 now. Does it need to get down to like a 2% to 3%. Is that a normal level where it's less of a drag on earnings?

Well, I mean, look, every percent is a drag on earnings, right? So we're around 20% historical, we think we get back down to 2 to 5 wherever that number is going to be. All of that is beneficial for us. Yes, I don't think the average would be 2. I think the average would be if we went back and did looked at it. And again, we'll do that because I think it's a reasonable question. So Tracy's telling me it's 7. So I'm going to believe her. So that 13 points we expect that going from 20 to 7, like the vast majority of that should happen this year and not -- so just as a sound by that comes back, it's going to free up at a normal leverage rate, another $100 million to invest at our equity yield, which is sort of 11% to 12%, which probably drops all else being equal, about $5 million to net income. So I know that's a lot of sort of starts right there, but we can go through it if you want. But it's -- yes, of course, it definitely makes a difference. And you should expect it to happen.

That was perfect. Sort of high level, how you're thinking about the business, that's exactly about what I was asking.

The next call comes from Jaeme Gloyn.

Why don't we get an update view of leverage. And where should we expect leverage to trim to? It's kind of right around that 50% mark. Is that something you can take take higher? Or is this where you're comfortable?

James, it's Tracy. I mean we're generally comfortable with where our leverage is. It can tick up a little bit higher, but generally, we keep it at about the same point it is right now. I mean highlighting that a lot of the Stage 2, Stage 3 loans are under levered. So there will be some ability to kind of grow that on redeployment, but overall keeping leverage in general, kind of where we are.

Okay. And so I guess the takeaway is that absent resolution on Stage 2, Stage 3, we're kind of right around the level of where the portfolio is going to the portfolio size, we'll sit here for a few quarters until resolution flows through. I guess that's the fair conclusion.

Yes. Yes. And I mean there's always ways to continue the churn with our syndications as well, right? So you do you are able to kind of grow that on the asset side without taking on the actual structural leverage. So there's ability there to continue the churn and earn fees on those.

The gross you're right is the best [indiscernible]

Yes. Okay. And then with respect to the resolutions, the -- specifically to the Vancouver property, is that something that would be sold on a say, like a whole basis? Or I've seen -- I think you guys a couple of times have had, I'll say, vendor take back loans or mortgages on some of these restructuring and resolutions. So what's the likelihood that we see something along those lines and for the Vancouver loans specifically, I guess, for other loans outstanding...

It's a great question, and it really is case by case. I look at this project. So this is like a zoned development project, a significant one in Vancouver. And so I could very much the scenario where in my expectation would be this is probably a clean takeout. That said, you put a strong borrower that with a good business plan and there's an opportunity for VTB financing? Is it a current stage loan on and it makes sense for us. we'd look at it if it helps facilitate things. So that's hard to predict. I guess part of that asset management process where we like clean recycling that works well. But there's a loan opportunity helps facilitate a deal. Now we view that as accretive to the resolution of the stage loan. There's enough cash and equity, a market rate that works for us. we would look at that as well. So I think we have to -- essentially, we take that on a case-by-case basis.

Yes. Okay. Understood. And then with the 2 resolutions this quarter or I guess based on firm sale prices in -- that closed in Q2. I guess like the concern or the thought that I'm thinking through is we have these other loans in Stage 2 or Stage 3 that are value that x. And was this kind of like a scenario where look, there was a price that was close enough and you take it and you eat a little bit more of a loss than what you were anticipating. Just to get that recycling done, is that like obviously the case by case, I get that, but that's kind of something I'm thinking through in terms of is there further potential for book value erosion as these loans resolve over the course of this year or next year?

It's a very good question. I can say this, right, we do our quarterly valuations every quarter. So we try to be as on top of market as we can. I would sit there and say, though, it's a fair question to ask, right? Like if the right deal -- these are market price transactions, right, in a challenging market in some cases, Calgary office was a good example of a challenged environment. And we sit there and say, when we have a loan that is not being levered through our financing facility that is earning a subpar where you sit there and say, as a portfolio manager, right, like you had to take a bit of a mark to move that asset and then be able to reinvest it, what's that payback period in book value, right? if it's x number of months, it may be a very logical and a smart move for us to do that. So what I can say to you, obviously, as you know, and as you framed it yourself in your question, right, like it's a very tough thing for us to comment on. It's tough for us to predict. It is case by case. I think that is part of the calculus that we evaluate, right? Like is that ability to -- if I met taking a market, we felt it was a good price, and we feel good about our ability to redeploy that capital to have that be accretive in months, not years. I think I would be an advocate for that in certain circumstances.

That's all the questions we have at this time. So I'll turn the call back to Blair Tamblyn for closing remarks.

Thanks, everyone. Appreciate your time as usual. We will continue to work away on the program as discussed and remain optimistic that the quarters ahead will be productive ones. We look forward to talking to you in 90 days. Have a good afternoon.