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

Good day, ladies and gentlemen. Welcome to Timbercreek Financial's Second 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. With me on the call today are Scott Rowland, our Chief Investment Officer; Tracy Johnston, our Chief Financial Officer; and Geoff McTait, who leads the Canadian Originations and Global Syndications business. The second quarter reflected steady execution against our key priorities. We maintained stable distributable income, delivered strong origination activity and continue to reduce our staged loan exposure. During the quarter, we advanced approximately $154 million, reflecting positive market conditions. Net investment income for the quarter was solid at $24.9 million. We generated distributable income of $14.6 million or $0.18 per share, resulting in a payout ratio of 97.7%. We believe our current earnings profile continues to support the monthly dividend while providing opportunities for further improvement as capital tied up in staged positions continues to be redeployed into performing investments. At the same time, we continue to execute on several important asset management initiatives and made meaningful progress reducing our staged loan exposure through a combination of resolutions, sale processes and other asset-specific strategies. Overall, we're very encouraged by the underlying activity levels in the business and the stability of distributable income and the progress we're making against our key priorities for 2026. 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 as well as asset management activity related to staged loans and then hand things over to Geoff to discuss origination trends and the lending environment. At a high level, the portfolio remains well aligned with our long-standing investment strategy and risk framework. At quarter end, just over 81% of the portfolio was invested in cash flowing properties and multi-residential assets represented approximately 60% of investments. The emphasis on income-producing real estate has been a core element of our strategy through multiple market cycles and remains unchanged today. At quarter end, first mortgages represented approximately 94% of investments. The weighted average loan-to-value was 68.3%. The weighted average interest rate for the quarter was 7.6% compared to 7.7% in Q1 and 8.6% a year ago. The decline primarily reflects lower benchmark rates and the repayment of certain higher rate investments. Importantly, approximately 90% of the portfolio remains invested in floating rate loans with contractual floors and substantially all of those loans are currently operating at their floor rates. This continues to provide meaningful support to portfolio yields despite the lower rate environment. While lower benchmark rates have reduced portfolio yields over the past year, the earnings impact has been moderated by increased syndication activity, healthy fee generation and lower borrowing costs. Together, these factors continue to support the portfolio's overall earnings profile and distributable income generation. The portfolio remains well diversified by geography and asset type. 97% of invested capital remains concentrated in Ontario, BC, Quebec and Alberta, with a focus on major urban markets that benefit from stronger liquidity. As Blair mentioned, we continue to make meaningful progress on our remaining Stage 2 and Stage 3 positions during the quarter. Since year-end, Stage 3 balances have declined by more than 51%, reflecting the successful execution of multiple asset-specific resolution strategies and completed exits. During the quarter, we resolved 2 Calgary Stage 3 positions through receiver-led sales processes and continue advancing several of our larger remaining files. In terms of expected credit losses during the quarter, a significant portion was related to the Vancouver retail portfolio and reflects the carrying costs associated with positioning the asset for sale and advancing the exit strategy. We also updated valuation assumptions on certain Victoria assets to reflect current transaction activity and evolving sale processes. While these adjustments impacted earnings in the quarter, they are occurring alongside continued progress on the underlying exit strategies. Although additional work remains, we believe we are now in the later stages of resolving many of the larger stage positions that have weighed on the portfolio in recent years. As these assets are resolved and capital is recycled into new mortgage investments, we expect an increasing proportion of portfolio to contribute to earnings and distributable income generation. At this point, I'll turn things over to Geoff.

Thanks, Scott, and good afternoon, everyone. Commercial real estate activity continued to improve through the second quarter, supported by increasing transaction volumes, improving financing market stability and healthy borrower demand across our target markets. We advanced approximately $154 million during the quarter, including 11 new mortgage investments and additional advances on existing relationships. Originations remain concentrated within our core lending categories, particularly multi-residential opportunities with attractive risk-adjusted returns. Year-to-date, we have advanced approximately $315 million through 24 new investments, representing a meaningful increase over the same period last year. Repayments totaled approximately $250 million during the quarter. While elevated, this activity was consistent with our expectations and reflects the healthy turnover characteristics of a transitional lending portfolio. More importantly, these repayments provide meaningful capacity to recycle capital into new opportunities while generating fee income that supports distributable income. Additionally, I would note that the quarter end portfolio balance is a point-in-time measure that excludes an additional $100 million net that was subsequently deployed in early July. This further highlights the robust originations activity through the first half with a resulting current portfolio balance of approximately $1.24 billion. Syndication activity also remained strong during the quarter, continuing to support balance sheet capacity while contributing to earnings and distributable income. In summary, we continue to see an active flow of opportunities across our core markets and believe conditions remain supportive of robust origination activity through the balance of the year. I'll now turn the call over to Tracy.

Thanks, Geoff, and good afternoon, everyone. Net investment income on financial assets measured at amortized costs totaled $24.9 million during Q2, essentially unchanged from both prior quarter and the comparative period. Portfolio growth, increased fee generation and lower funding costs largely offset the impact of lower benchmark interest rates. Distributable income totaled $14.6 million or $0.18 per share compared to $14.5 million in the first quarter. The payout ratio remained within our targeted range of 97.7%. Net income and comprehensive income totaled $7.8 million for the quarter compared to $12.4 million in the prior period. As Scott discussed, the increase in expected credit losses reflects updated assumptions related to certain Stage 2 and Stage 3 positions and capital advance as part of ongoing resolution strategies. Importantly, net income before expected credit losses remained stable at $14.5 million or $0.18 per share compared with the same or $0.17 per share in Q2 of last year. We believe this provides a useful view of the underlying earning capacity of the portfolio as Stage 1 resolutions continue to progress. This slide highlights the stability of our distributable income over time despite fluctuations in IFRS earnings resulting from the timing of credit provisions and valuation adjustments. As we've consistently said, distributable income remains the best measure of the recurring cash generating ability of the portfolio and its capacity to support the monthly dividend. Over the medium term, quarterly distributable income per share has generally ranged between $0.17 and $0.21, averaging approximately $0.19 per share. The consistency of our distributable income profile reflects both the underlying earning power of the portfolio and the benefits of active capital deployment across the business. Looking quickly at the balance sheet. Net mortgage investments totaled approximately $1.14 billion at quarter end, an increase of approximately $30 million year-over-year. Credit utilization increased during the quarter, reflecting the pace of origination activity. At the same time, the company continued to generate liquidity through repayments, syndication activity and staged asset resolutions, supporting the ongoing recycling of capital into new lending opportunities. With an active pipeline and several resolution initiatives continuing to progress, we believe we are well positioned to redeploy capital into opportunities that meet our risk and return objectives. With that, I'll turn the call back to Scott for closing remarks.

Thanks, Tracy. As we enter the second half of 2026, our focus remains on executing against the same priorities that drove results in the first half of the year, disciplined originations, staged loan resolutions and redeploying capital into investments that enhance earnings generation. The progress achieved on staged loan resolutions over the past several quarters is creating an increasingly attractive opportunity set for capital redeployment. With more than $314 million of originations completed year-to-date and an active near-term pipeline, we continue to see opportunities to put recovered capital back to work across our core lending categories. That concludes our prepared remarks. We'll now open the call to questions.

[Operator Instructions] The first question comes from Stephen Boland.

Can you just talk about -- obviously, multi-unit is your kind of bread and butter, but can you just talk about the environment for some of the other segments? Like the market, as you mentioned, was stabilized, but I'm just curious which ones are leading and which ones are trailing, if you don't mind?

Yes. Listen, it's Geoff. Happy to answer that question. I mean, yes, obviously, the multi-risk space continues to kind of be a primary focus of ours as a mix, obviously, and given the historical stability in this market, irrespective of some softness in the broader residential markets over the last period of time. But we do continue to see that as a primary focus for sure. Additionally, we are starting to see some broader activity, again, somewhat of a broader indication of improving transactional and market activity outside of multi-resi and industrial would kind of be the second primary class that I think we've been speaking about over the last number of quarters as kind of the other primary food group for us to this point in time. But listen, of late, we are starting to see -- I mean, retail continues to be an opportunity that's out there. We're looking at opportunities. They get bid pretty competitively. So again, it's one-offs on those, and we don't expect to do a ton of that business, but we are seeing some increased trading activity in the retail space. And then we are also starting to see more office opportunities. Again, I think we're looking at those cautiously out of the gate for sure. But the frequency of office transactions and the opportunities to consider financing them has been more prevalent certainly over the last quarter than we've seen in the months or years prior to that point. So that's, again, I think, a broader indication of where transaction activity is occurring. We're seeing activity in the student residence space, in the retirement home space, some lesser activity, but a product we like in the self-storage space and the manufactured housing space. Again, that tends to be -- these are smaller one-off opportunities. But again, pretty historically stable manufactured housing, in particular, much more aligned with residential generally. But again, it is a broadening scope of asset classes that we're starting to see more so than has been the case in prior quarters over the last year or 2.

And just my second question would be, in terms of repayments, is this typically I know there's seasonality. Is this typically the -- just for modeling purposes, like does this tend to be the high watermark Q2?

Yes. I don't know if it's -- I mean, like I think it's in line with what we would typically expect. And I don't know if it's necessarily a high watermark in Q2 per se. Like I think it is generally fairly consistent throughout the year. Again, it will ebb and flow a little bit in that in and around that range. But I don't think it's an overly seasonal thing. I think it's more originations activity tends to be more seasonal than repayment activity. And frankly, first half, we've been very, very pleased with the levels of activity, I'd say it's been higher than would seasonally be the case for the first half. And the second half, generally for us is where we do the majority of our business, and we continue to expect that to be the case. But repayments, I think, is a little bit more consistent throughout the year.

Yes. I'll add to that, like it's Scott. Often actually, we see Q4 as a major repayment. like this was a little high for Q2. But exactly to Geoff's point, for us, right, repayments sort of create the capacity for loans. So sometimes it is a little random. Some projects get completed sooner or there's a moment in the market that borrowers feel they could refinance. We normally get sort of 60 days heads up that's happening, right? And that helps us create the runway for future loans. So as an example, like Q2, there were significant repayments. And so -- but like I can tell you, in July, we had significant fundings, right? So it's just kind of -- sometimes just sort of one falls after the other.

Next call comes from Graham.

This is Gabriel from Bolton. I think you might have seen that syndication pick up. Obviously, it's a higher return for timber. I'm just wondering, can you talk about how the team is thinking about this part of the book a bit?

Sorry. Who's speaking? I couldn't quite hear you there.

Yes. Sorry about that. Hopefully, this is better.

Yes, it is better.

Okay. Perfect. Yes, so I was thinking about the syndication. It picked up in the quarter, obviously, higher return. I'm just wondering how you're thinking about this part of the book.

Yes. So listen, I think like syndications for us, we think about it, like we utilize it for a handful of reasons, right? I mean I think it's a combination of managing exposure on a given deal. Secondarily, I mean, we utilize it to create incremental originations capacity, right? So obviously, as we syndicate an A note and hold a B note, that capital can be deployed into another opportunity. And then obviously, it really is -- it's a yield enhancement strategy as well, right? So our ability to manage yield and drive optimal yield through syndication, it's another valuable tool from that standpoint. Generally, syndication, we tend to syndicate larger transactions. At the same time, I think of late and certainly, as we think about ways to drive incremental yield into the book, we are looking at opportunities to syndicate smaller loans than we might typically syndicate in order to drive incremental yield and again, incremental originations capacity. And the market from a syndication standpoint, third-party institutional syndication partners, the demand is substantial. I'd say it's probably since Q3, Q4 of last year where demand really started to increase, and it remains at elevated levels. We have lots of interest from our existing partners. We have new partners reaching out looking to work with us and partner with us on transactions. So it does give us meaningful incremental capacity to continue to drive originations where the flow supports it, which has been the case for the last couple of quarters.

Gabriel, it's Blair. I'll just maybe clarify one point. So from a yield enhancement perspective, one of the ways it's helpful as I think you're getting at is the attachment point for the A note can be higher. So the B note, the return on that B note, the equity yield on that is higher than it might be if we use the credit facility. We're only going to do that when the credit facility is effectively fully utilized. So when you see a larger syndication position on our balance sheet, it's certainly a leading indicator of things going well.

Right. Yes, and then your originations are strong. We can see that. So I'm just wondering how you're thinking about like this back half? And then also, I guess, the credit quality as well, right, these recent originated loans, how they're comparing versus the historical averages?

Yes. So the back half we're expecting is going to play out as generally speaking, it has been outweighed relative to the first half. Pipeline activity has remained strong. Again, since the end of the quarter, we've continued to close on significant transactions and have a really strong pipeline through August and September at this point. And again, we continue to originate your, a month, 2 months, 3 months out depending on the specific transaction. So we're feeling very optimistic about the balance of the year and have a current pipeline to support that. In general, we feel very good about, call it, the vintage of loans that we've been originating over the past handful of years, and it continues to be -- again, in a market where transaction activity is increasing, that's partly driven by the buyers and the sellers being able to sort of meet on pricing. And obviously, pricing has softened such that we're lending into positions at lower -- we're feeling good about whatever strategic plan might relate to that particular asset and the probability for us to successfully exit and participate in the value creation that occurs.