$4.18—Stale · unknown old
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$4.18—Stale · unknown old
Operator: Good day, ladies and gentlemen. Welcome to Timbercreek Financial's Second Quarter Earnings Call. As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Tamblynn. Please go ahead.
Robert Tamblyn: 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 Johnson, our Chief Financial Officer; and Jeff McPeate, 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 stage 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 stage 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 stage 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?
Scott Rowland: 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 stage loans and then hand things over to Jeff 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 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 of 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, B.C., Quebec and Alberta with a focus on major urban markets that benefit from strong 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 large main files. In terms of expected credit losses during the quarter, 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 large stage positions that have weighed on the portfolio in years. As these assets are resolved and capital as we spend to new mortgage investments, we expect an increasing proportion of the portfolio to contribute to earnings and distributable income generation. At this point, I'll turn things over to Jeff.
Geoff McTait: Thanks, Scott, and good afternoon, everyone. Commercial real estate activity continued to improve through the second quarter, supported by increasing transaction volumes, improving finance markets billability 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've 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 the resulting current portfolio balance of approximately $1.24 billion. Syndication activity also remained strong during the quarter. It's 1 to support balance sheet capacity while contributing to earnings and distributable income. In summary, the low earnings across our core markets and believe conditions remain supportive of a robust origination activity through the balance of the year. I'll now turn the call over to Tracy.
Tracy Johnston: Thanks, Geoff. Good afternoon, everyone. Income on financial assets measured at amortized costs totaled $24.9 million during Q2, essentially unchanged from both the 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 I and Stage II 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 earnings capacity of the portfolio as stage loan 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 stage asset resolutions, supporting the ongoing recycling of capital into new lending opportunities. With an active pipeline and several resolution initiatives continue 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.
Scott Rowland: 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, stage loan resolutions, and redeploying capital into investments that enhance earnings generation. The progress achieved on stage 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: The first question comes from Stephen Boland.
Stephen Boland: Can you just talk about, obviously, multi-unit is you're 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, we don't mind.
Geoff McTait: Yes. Listen, it's Geoff. Happy to answer that question. I mean, yes, obviously, the multi-res space continues to kind of to be a primary focus of ours a mic obviously, and given the historical stability in this market, our respective 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-resin 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 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 manufacturing the 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.
Stephen Boland: 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.
Geoff McTait: Yes, I don't know if -- 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 here. 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 activities. I'd say, it's been 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. The repayments, I think, is a little bit more consistent throughout the year.
Scott Rowland: Yes. I'll add to that. Like it's Scott. Often, actually, we see Q4 as a major repayment like so this was a little high for QCT. But exactly to Jeff'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 boards feel they could refinance -- we only get that sort of 60 days heads up on that opening, 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 is sort of 1 falls after the other.
Operator: Next call comes from Graham.
Unknown Analyst: This is Gabriel from Bolton. To say that syndication pickup. -- obviously is a higher return for timber. I'm just wondering, can you just talk about how the teams thinking about this part of the book a bit.
Robert Tamblyn: Sorry. Who's speaking? I couldn't quite hear you there.
Unknown Analyst: Yes. Sorry about that. Hopefully, this is better.
Geoff McTait: Okay. Perfect. Yes. So I was thinking about the syndication has 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 no 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 stands like 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's remained 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 or the flow support, which has been the case for the last couple of quarters.
Robert Tamblyn: Gabriel, it's Blair. I'll just maybe clarify 1 point. From a yield enhancement perspective, 1 of the ways that's helpful is I think you're getting at is catchment point for the A note can be higher. So the note the return on that note, the equity yield on that is higher than it might be if we use the credit facility. We're only 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.
Unknown Analyst: Right. Yes. And then original 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?
Geoff McTait: Yes. So the back half we're expecting is going to play out as generally speaking, is data being outweighted relative to the first half. Pipeline activity remains strong. Again, since the end of the quarter, we continue 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 seller is being able to sort of meet on pricing. And obviously, pricing has softened such that we're lending into positions at lower basis. 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.
Robert Tamblyn: Yes. It's a good question, Gabriel. I mean, understandably, people are interested to hear how we're progressing with the stage loans. But if you take that, whatever, $200 million-ish and put that aside and talk about the other $1.1 billion, that part of the portfolio is healthier than -- well, it is in very good shape. And on an absolute basis and relative to some of those that we compete with. So that's -- it's important to kind of point that in as well.
Unknown Analyst: Yes, it just seems like the business is going well, and it's things are on track. Maybe I'll just touch on 1 more continuing on this origination line. And the last, I'll just wrap it up with that, which is -- are you seeing any indirect origination benefits now that you've had the CMHC activity at TMS I for a while now. I wonder you could touch on that?
Geoff McTait: Yes. No, listen, absolutely. I mean I think -- the CMHC business has introduced us to absolutely a new subset of borrowers that we didn't necessarily have prior relationships with. I mean borrowers who are primarily CMHC borrowers, they tend to obviously deal with CMHC lenders. And where when they have their needs, they tend to go back to that primary lender for those other products that they need. And now that we do have the CMHC product. It is, again, initiating conversations and resulting in new deal flow from those groups. Obviously, from a CMHC standpoint. But to your question, for the interim facilities that fundamentally they also do need. Again, whether it's the project isn't quite ready to go to CMHC or any combination of midterm potential needs. They now have -- we've had conversations with them about CMHC product, and now they are having conversations with us about the other products that we offer. So it's definitely been -- there have been indirect benefits from that program for the benefit of TF as was part of what was intended here in launching that program.
Operator: The next call comes from Graham.
Graham Ryding: Great. Maybe I could just start with the -- there was an asset that the GTA improved land mortgage that was moved to fair value profit loss. Can you just explain, I guess, why that 1 moves to fair value and profit loss and doesn't sit in your mortgage receivable portfolio.
Tracy Johnston: Yes. Sure, Tracy. So that one, do have a bit of an equity component at the end in terms of structuring that deal and ultimate sales. So because of that, it moves it to fair value through profit and loss. So only deals that are solely payments of principal and interest remain within our amortized cost book. And any time there's any sort of equity characteristics to the deals they move to fair value for profit and loss.
Graham Ryding: Okay. That makes sense. You made some good progress on Stage 3 mortgages this quarter. There's still about 20% of your portfolio in stage 2 and 3 -- should we expect PCLs to remain elevated over the near term as you sort of work to bring that Stage 2, Stage 3 mix down back towards that sort of historical 7% to 10% range?
Robert Tamblyn: I mean I guess, as it is large -- as we talked about yesterday, they -- we have visibility into the resolution of frankly, all of them that are remaining to get back down to that. There will always be a few that cycle through, as we've talked about before, and that should be kind of the baseline of that 7% to 9% or whatever the number may be in that neighborhood. For the other, call it 12%, yes, we certainly expect those to continue to be resolved. And stand kind of behind our guidance that the expectation is most, if not all, will have much better visibility to resolution by the end of the year or be resolved. So there's this -- we're looking at this sort of being measured in quarters, obviously not years to kind of be back in a position to be talking about kind of growth rather than stage loans.
Graham Ryding: Okay. So your message that you you feel comfortable with the valuations where they're currently marked.
Robert Tamblyn: Absolutely. Today. Of course, I mean, if we're not comfortable with them, we wouldn't be carrying them there. As we've talked about before, there's -- they're all a little bit different. Sometimes it's a sponsor issue. Sometimes it's an asset issue. Sometimes it's a market issue kind of at a higher level. And we continue to focus on full recoveries in some circumstances, as we've talked about in the past, with specific examples. The math kind of tells you that a bird in hand is sometimes better than 2 in the bush. If you're going to be able to turn around and redeploy whatever that is quickly. So -- and you'll generate whatever a 12% equity yield on that. So we continue to focus on full recoveries. Will we get full recoveries we'll see, but they're going to be resolved 1 way or the other.
Graham Ryding: Okay. Fair. I thought that was an encouraging data point. You said the portfolio is back up to $1.24 billion as of July. It looked like your leverage was 48% as of the end of -- so what's the implied leverage in the business that's sort of sitting behind a $1.24 billion in sort of net portfolio today?
Tracy Johnston: It's similar. So it carries again just as the book has grown and on a pro rata basis, the leverage increases. So we're still hovering around that mark and then obviously have that $1.24 billion is a net number, but we have the syndication ability as well, right, to continue making that churn and growing the portfolio that way. But we're not going to move off that leverage point.
Graham Ryding: Okay. And then my last question. Just the rental income was $1.8 million in the quarter. It was, I think, $1 million last quarter. What's a reasonable run rate for that line?
Tracy Johnston: That would be more of onetime items that are going through there. So we had an investment in condos that are closing, and it's been a great investment, but you shouldn't really -- there'll be a little bit more but not the same run rate.
Robert Tamblyn: But will be replaced, obviously, what that capital is redeployed in the mortgage, of course.
Operator: The next question comes from Jamie.
Jaeme Gloyn: Okay. Sorry, I had some difficulties. Just 1 quick one, actually, around the lender fees on new and renewed mortgages, it seems to be lower than what we've seen in years past consistent with recent quarters, but just lower than years past. So I was just wondering if you can give us a little more guidance or color into that result and what it looks like going forward on lender fees.
Tracy Johnston: Yes. I think you should continue to expect it to continue in the range that we've been reporting this year.
Robert Tamblyn: I don't know why it would have been -- I mean, obviously, it ties in with originations, right? So the fees as a percentage of principal advanced are pretty consistent. So as Geoff said, if we're going to do whatever the number is I'm not -- are we going to originate more than last year. same is not. I mean is the same, right? So I mean -- it shouldn't -- was there anything maybe there was.
Scott Rowland: I might be a little closer to it. Like I would just add it, Scott. I just actually, I agree with you it was a little lower in Q2, but that comes back to that timing of the repayments and the new loans. So we had to in June that slipped to early July, Jim. So like those -- so would be a little higher than normal, I would say. So I would say, overall, for the full year, I think we're actually tracking for -- I'm expecting fees to be higher than last year. I see what you're looking at, though, the Q2 did come in a little low and that we did have about, I want to say, it's about $80 million worth of deals that flipped into July where normally Q3 is a little lower for us. Q3 is going to be a little higher and Q2 is a little lower. That's a fair observation.
Operator: There are no other questions at this time. So I'll turn the meeting back to Blair for closing remarks.
Robert Tamblyn: Great. Thank you. Thanks, everyone, for joining us today. As usual, we look forward to speaking to you again in about 90 days. And of course, if you have any questions in the interim, please do reach out. We're always happy to chat. Have a good afternoon.