Timbercreek Financial Corp.

Thank you, operator. Good afternoon, everyone.

Thanks for joining us to discuss the third quarter financial results today. I'm joined as usual by Scott Rowland, CIO, Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndications.

With respect to portfolio growth, which we've been communicating on regularly, we're up by approximately $50 million year-to-date with an expectation that will increase by year-end. Looking at Q3 specifically, transaction activity, while solid, was mildly behind our expected pace as the residual effects of the macro uncertainty we discussed in recent quarters continues to play out.

As Geoff will elaborate on, we are pleased with the pipeline in general, although a few material commitments expected to fund in Q3 did push into Q4. Combined with the large unexpected repayment that's brought the overall portfolio down modestly from Q2.

The Q3 spillover volume in conjunction with strong Q4 commitments and additional pipeline volume should still generate the portfolio growth we anticipated for the full year and result in higher revenue. To put a finer point on this, we've had more than $200 million of funded and committed deals so far in Q4.

Our overall optimism continues to reflect improved market conditions as recalibrated commercial real estate valuations and a reduced interest rate environment have set the foundation for a new real estate cycle. In short, the conditions are favorable for a period of sustained strong transaction activity.

We upsized the credit facility with this outlook in mind. Given these factors, the third quarter financial performance was mixed.

Net investment income was steady at $25.4 million. DI was modestly below last quarter at $0.17 per share, partly reflecting the constraints on new investment activity in the quarter, as mentioned.

This drove a higher payout ratio in this quarter. As we've said before, the payout ratio will move around during the year and then settle in our targeted range for the full year.

We expect to deliver full year results in this range based on a higher activity levels in Q4. Lastly, we continue to demonstrate progress with the remaining stage loans as we return this balance back to historical levels.

On the remaining stage loans, the revaluation of 2 investments drove a higher ECL in this quarter, which lowered our reporting earnings in the period. Scott will expand on this in his remarks.

In summary, I would reiterate our confidence in the continued ability to deliver stable monthly income through a conservative strategy grounded in income-producing assets. Our core objective is to deliver strong risk-adjusted returns primarily comprised of distributions for our investors, the goal we've consistently met over the long term.

One key indicator of this performance is our 10-year IRR, which today stands around 7.8%. This track record reflects our disciplined approach and ability to navigate evolving market dynamics.

I will now ask Scott to cover the portfolio review. Scott?

Thanks, Blair, and good afternoon. I'll quickly cover the portfolio metrics and provide a brief update on key developments with the stage loans, and Geoff will comment on the originations activity and lending environment.

Looking at portfolio KPIs. Most were consistent with recent periods and historical performance.

At quarter end, 82% of our investments were in cash flowing properties. Multi-residential real estate assets continue to comprise the largest portion of the portfolio at roughly 57%.

First mortgages represented 94% of the portfolio. The weighted average LTV for Q3 was 67.9%, which is up a bit from recent quarters.

We've previously communicated that we expect LTV to tick higher in 2025 as we lean into the market with reset asset valuations, and we are seeing that. We continue to be very comfortable in this range in this economic environment.

The portfolio's weighted average interest rate was 8.3% in Q3 versus 8.6% in Q2 and 9.3% in Q3 last year. The decrease reflects the Bank of Canada's policy rate cuts bringing the WAIR closer to a long-term average of roughly 8%.

The rates coming down, we're seeing a corresponding decrease in interest expense on the credit facility, supporting a healthy net interest margin. The portfolio WAIR is also protected by the high percentage of floating rate loans with rate floors above 85% of the portfolio at quarter end.

Roughly 93% of the loans with floors are currently at their rate floors. In terms of asset allocation by region, there were no major shifts to highlight with approximately 92% of the capital invested in Ontario, B.C., Quebec and Alberta and focused on urban markets.

From an asset management perspective, we resolved close to $19 million in Stage 2 loans since our last earnings call. More recently, we provided an update on the Stephen Avenue Place office asset in Calgary.

As we disclosed, we applied for the court appointment of a receiver on behalf of the syndicate of secured creditors. Following the termination of forbearance period with the borrower.

This is the next step on the path to realization and to protect the interest of all stakeholders in the property. As a reminder, Timbercreek holds approximately 11% interest in this loan on a pari passu basis with other lenders.

Revaluation of this asset was the largest contributor to an ECL increase of $5.9 million in the quarter. The $3 million related to this exposure and $2.1 million related to the Vancouver retail portfolio slated for redevelopment into multifamily.

Both revaluations were driven by current market appraisals and reflect the overall challenges in their respective markets. We are actively working towards the resolution and monetization of the outstanding stage loans and continue to advance the remaining files.

While a few challenges remain, we expect to see further progress over the coming quarters with the expectation of ultimately returning this portion of the portfolio to historical norms. Ultimately, the redeployment of this capital into more profitable loans will be a significant tailwind for revenue growth.

I'll now ask Geoff to comment on the transaction activity in the portfolio.

Thanks, Scott. As Blair highlighted, new investments in the quarter were solid, although transaction delays pushed some meaningful Q3 committed volume into Q4.

During the quarter, we advanced over $131.1 million new net mortgage investments and advances, all targeting low LTV multifamily assets. These were offset by total mortgage portfolio repayments of $191 million, including a large $83 million repayment in September as also outlined in our press release, resulting in a turnover ratio of 18.2% and a portfolio balance a bit over $1.05 billion down $60 million from Q2 levels.

The short-term variations aside, we are seeing continued opportunity in the conventional multifamily bridge and construction space, in addition to the multi-tenant industrial lending space. The market also continues to respond well to Timbercreek Capital CMHC approved lender status which is leading to more opportunities with existing clients and interest from new prospects.

Looking forward, our Q4 transaction pipeline is strong, including approximately $200 million already funded or committed at this point in the quarter, with continued momentum anticipated through year-end. Our position in the market with strong client relationships continue to support our ability to deploy capital into high-quality loans and return to growth mode.

I will now pass the call over to Tracy to review the financial highlights. Tracy?

Thanks, Geoff, and good afternoon, everyone. As we look at the main drivers of income, the average portfolio size has grown year-over-year, offset by the WAIR returning to a more typical range following BOC rate cuts.

Q3 net investment income on financial assets measured at amortized costs was $25.4 million, consistent with Q2 of this year and Q3 of last year. We reported distributable income of $14.1 million or $0.17 per share versus $15 million and $0.18 per share in Q3 last year.

Payout ratio on DI was elevated this quarter as a result of market conditions that have been discussed. We recorded a reserve of $5.9 million this quarter, as Scott highlighted, driven primarily by the revaluation of 2 loans.

Net income was $8.5 million this quarter and net income before ECL was $14.3 million, the same level as Q3 2024. Looking at quarterly earnings per share over the past 3 years with and without ECL, you will see it's been quite stable as has DI per share.

Over the medium term, the quarterly DI per share has been between $0.17 and $0.21 per share, averaging just over $0.19 over this time period. Looking quickly at the balance sheet.

The value of the net mortgage portfolio, excluding syndications, was just over $1.05 billion at the end of the quarter, an increase of about $37 million year-over-year. The balance on the credit facility was $283 million at the end of Q3 down from $345 million at the end of Q2.

The credit utilization rate at the end of the quarter was 75%. We expect to utilize the facility more significantly in Q4 given the volume Geoff highlighted.

As Blair highlighted with the upsizing of the credit facility and repayments, we have ample capacity to deploy new capital against the pipeline Geoff and team are building. I will now turn the call back to Scott for closing comments.

Thanks, Tracy. We're encouraged by the overall outlook.

Despite some short-term transaction delays given current macro conditions, we believe that the combination of interest rate cuts and strengthening fundamentals will lead to the next upswing in the real estate cycle. This bodes well for future transaction activity at an attractive risk-return basis.

Q4 investment activity is expected to be robust, allowing us to grow the portfolio in 2025. We are delivering a stable monthly dividend, currently yielding over 9.5%.

And we continue to make progress on resolving the majority of the stage loans, and we look forward to freeing up this capital for new investments. That completes our prepared remarks.

With that, we will open the call for questions.

I just want to check that you can hear me first. Just wanted to start on the Calgary and Vancouver properties against which the ECLs were taking.

Just wondering about sort of the outlook and exit strategy for the Calgary property? And then maybe just a little bit of color on progress with Vancouver, it looked like that was the first specific update since it was initially placed into Q3.

So maybe just update on strategy and potentially a time line for both of those if you have any visibility?

Yes, that's a good question. So let's start with the Calgary office.

That is a specific asset, right? It was a loan that we originated in 2018 actually so it was a pre-Covid loan, which has been part of the challenge.

At this point, the lending syndicate, we have decided to sort of take control of the asset, and we are looking to likely test the market for sale. That will take a bit of time.

But I would say we will likely be launching a process in early Q1 to test the market. It's not to say we're necessarily going to sell but I think we're at the point we'd like to have that visibility into the market.

And as part of that process, we did an updated valuation, which is what drove the ECL. So it is -- look, we look at Calgary office.

While there's a couple of green shoots, it remains challenging. And so that revaluation was just reflective of what we think is the current market conditions.

When it comes to Vancouver so the second part of your question, we do have -- it's kind of a similar story. If I look at Vancouver and Toronto.

Both of those markets on the development basis remains challenged. There is -- it's just part of the supply and demand in those markets right now.

And so from time to time, we do continue to do asset valuations and so this basically reflecting an updated view what we think is the current market for those assets. As far as time line goes, these are going through approval processes with the city.

We are definitely in the final innings of those. The borrower is in the final innings of getting those approvals.

And I would say somewhere between Q4 and Q1, we expect that to be complete. And then going to market, the borrowers like us getting off those loans, like there's obviously a few different ways that can happen.

But we sort of expect to sort of see resolution to those sometime in the sort of middle quarters of 2026. That would be my sort of assessment to date.

Okay. Great.

That's very helpful. And then just as a follow-up, again, relating to both of those loans.

Potential for further ECLs in the coming quarters, obviously, depending on these time lines, but just sort of an outlook on the provisioning front for both of those.

Yes. Look, the view is the current market value of these things.

And I would sit there and say for development in these markets are pretty much near the bottom, if you want to look at historical time lines, it's been a pretty aggressive markdown of what you would say sort of land values are in sort of the Vancouver, Toronto markets, and certainly, office values in Calgary. It is fairly low, pretty much of a trough.

So I'd say where these valuations are fairly reflective. I can't predict what's going to happen to the market in the future.

But certainly, the current outlook of value is nowhere near a high point.

Maybe a general question. I'm just wondering about -- you talked about growth at the end of the presentation.

I'm just -- I'm trying to see if your outlook has changed for 2026 in terms of what you can grow, what rate -- is the balance sheet a little bit constrained at this point? You mentioned your additional debt capacity.

How are you navigating that? And is there any -- what can you do here besides -- so if you're getting robust kind of growth and commitments, are you going to have to syndicate more?

I'm just trying to get an idea for 2026, what your outlook is?

Yes. That's a great question.

I think I'm going back to -- thinking back to those comments we made on the last call, I'd say it's just very consistent. A key driver for growth for us, right, is capacity.

As we mentioned in the MD&A, we're able to upsize our primary credit facility up to $600 million. That produced -- that gives us a fair amount of powder to continue to grow the book.

So if we look at Q4 sort of the commitments that we have and with the line where it is, I think it is sort of consistent. I don't know exactly what we said from last quarter.

I'm just...

For 2026, I mean are you comfortable like in terms of -- I know you've got the extension or the increase in the line. I'm just -- do you feel the balance sheet constrained at all, I'm just trying to...

I think that -- listen, I think that existing capacity gets us to -- I'm sort of looking at Tracy here too, but I think it gets us to sort of the $1.2 billion, $1.3 billion level. We feel very confident we can hit those numbers.

And then growth beyond that, right, then we're looking at are you raising equity and debt together to continue to grow. And I think as we resolve the staging loans, the book has that much more flexibility, right, to continue to grow.

With interest rate cuts resolving the stage loans, I think that sets the stage or positive action on the stock, which I think then -- obviously, that would allow you to go in and raise equity and then match that with that to continue to grow. So if I look at this in stages, we are where we are today, I think the existing debt capacity gets us to that $1.2 billion, $1.3 billion.

And then future growth from that, right, that's an equity matching with, I think, with an improved stock price, right? But that's a story we'll tell through 2026.

Yes, I agree. Steve, it's Blair.

The only thing I'd add sort of as a parallel swim lane to growth of the balance sheet is obviously the growth of revenue. So as we've talked about a few times, I mean, as the portfolio turns over and the pace of transaction picks up as -- which is a result of commercial real estate fundamental stabilizing, we'll generate more revenue, right?

And that ties in with a loan that's -- you pick Calgary office. I mean, a loan that is in forbearance obviously is generating less interest income than a loan that is freshly originated generating, call it, like roughly on 11.

So drive revenue as sort of -- both are important, of course, but we expect revenue to grow as in addition to what you would correlate with the balance sheet, if that makes sense.

Yes. Okay.

That's great. And then second question is the Stage 2 and 3, I believe, increased quarter-over-quarter.

I mean should we start -- and you're talking about resolving those loans. Should we start to see that number sequentially come down like quarter after quarter?

I know it can be lumpy, but -- is there going to be improvement in those starting even in Q4?

It's hard to pick the exact quarter, Steve, I'd like to spell it out, but I think we actually had -- we've had ongoing improvement and reductions over time. But yes, it is lumpy.

And the loans we've been talked about on this call today is the majority of what's left, dollar wise and so it is unusual and these are in these aren't like popping up new stage 1, stage 2 loans. These are pretty much the ones that have been around for a while that have longer time lines to resolve.

But we do plan to get rid of them and sort of go back to historic norms.

Steve, if you think about it going back, there's -- and I don't have the number at hand, but we've worked through quite a few of them. And I think arguably, 1 every quarter.

I mean we announced the one that was resolved in this quarter earlier. And so to answer your question directly, like we do expect there to be resolutions in Q4.

It's just -- like it's super active, right? As we talked about, like they're negotiated.

And to the extent you try to force things it generally reduces the validity or isn't helpful to the outcome.

Okay. And I'll sneak 1 more in.

Just in terms of the credit facility. I know you got the increase of size.

Was there any other changes, rate, covenants, anything like that you can mention? Or it's just -- you just got more money.

Yes. Well, we got more money, increased 2 new banks into the syndicate, which is great, but more importantly, improved economics.

So our spread has come in back to kind of where we were historically, which is great and then no changes on covenants.

Okay. And can you mention spread?

Maybe it's in the disclosure, I apologize if it is?

I don't think it is. It's -- why don't we say that it's come in by 25 basis points.

Curious on the $200 million funded or committed. How does that look from a geographic and asset class perspective?

Jaeme, I think we missed the first part of your question, but I think you were asking just what is sort of the makeup of the Q4 outlook?

You got it. Yes.

Thank you.

Yes. I mean I would say -- it's Geoff here.

Pretty consistent with the portfolio overall. It's a combination of, I'd say, primarily Ontario and Quebec.

And it is -- the vast majority is residential income with the balance being industrial.

And would these be some like new customer borrowers or existing former clients, just a little bit more -- just curious on how that portfolio is shaping up for Q4 and then...

Yes. So listen, I mean I think there's some very strong repeat business within that new volume in addition to some new prospects, but it's predominantly repeat business with existing clients that we've seen good churn with, right?

So we're focused on and managing total exposure with individual groups, but are seeing good churn. They're executing on their plan, they're refinancing our existing exposures and then taking on new opportunities.

And that existing relationship is enabling us to facilitate execution on good time lines and win good deals even with some incremental spread.

Yes. Understood.

Just in terms of the yield, new loans came in at, I believe, 7.3% weighted average interest rate, loans going out the door was 8.3% that was much lower than I think it was in the mid-9s in Q2 going out the door. I'm just curious, I guess, like where -- what is the range of rates right now in the portfolio?

Are there still loans that are well above 9% that are still there that are expected to roll off at some point, too? I'm just trying to really kind of understand I guess, the stability of the weighted average interest rate and yields in general here over the next several quarters?

Yes. I mean it's always a bit of a mix, right?

So we do have some of those loans that exist to have some pretty high floors that over time, to your point, will roll off. Generally speaking, like I think of new originations, if I look at it over prime, this is maybe a helpful context like a credit spread over prime.

We typically are in that kind of 2.75% to 3.25% range. And then what happens with credit spreads, right?

It's an interesting thing. As interest rates go up, credit spreads compress so there's only sort of so much whole loan coupon that necessarily a book can absorb, like a borrower can absorb.

So when we saw like rates go high, it is good for income, but your credit spread is compressing. As rates come down, though, sort of the inverse is true.

So as if time was to continue to fall, we start to be able to expand credit spreads. And the credit spread is ultimately what we are interested in because our cost of funds is also floating so as long as you maintain the sort of that difference that allows us to achieve the equity yield we're looking to achieve.

So it's kind of a -- it's an interesting model. So as rates go down, our credit spread expands, you also tend to get more velocity of churn in the book, which generates more fees.

So the headline WAIR may fall, but more fees to more velocity and higher credit spreads through expansion in a lower rate environment. We've seen this happen through -- we now operate through a few interest rate cycles, and it seems to be a consistent case.

So in a higher interest rate environment, you have less velocity, less fees, the higher WAIR and in a lower interest rate environment, you have more fees and reduced WAIR. What helps us right now in the sort of short to medium term is the floors to your point, like that does provide some positive impact into the book.

And as those roll off, it's true, but then we continue to grow the book in that lower rate environment where you're getting more fees, and we have a bigger book, right? So it is sort of an ever-changing model that we do manage quite closely, ensuring that we sort of end up in that kind of mid-90s payout ratio that we're targeting.

The only thing to add there, perhaps and we all hear a lot about the cost of debt generally. And generally speaking, when we're reading that in the media, it's by and large, you're talking about term debt, right?

So 5- and 10-year money, which can get super cheap. But as you, of course, know, like our business is to provide flexible sort of debt with features that are valuable.

So that kind of is another way of explaining what Scott was saying, like a borrower is willing to -- there's sort of a floor that is willing to be paid to be able to be flexible and creative as they go and execute on their value-add opportunities where they're generating equity returns that are obviously well in excess of what they're paying us if that's helpful.

Yes. Yes.

And the follow-up on that is like obviously, we're going into an environment where you should see expanding profitability given the interest rates set up. But still in the near term, those higher floor loans rolling off will have a bit of a negative impact.

And so I guess I'm just trying to like if you had any visibility on potentially when that inflection point happens. Is it still several quarters away?

Or is it something that's much more visible as those higher rate floor loans are no longer in the portfolio.

No, listen, it is -- we can't predict necessarily when those loans will roll off. They could roll off at different times, right?

We have a fairly consistent rollover of the portfolio, right? Somewhere in that 40%, 50% per year.

And it tends to be pretty evenly distributed through the book. It could be some higher-yielding loans, there could be some lower yield.

Again, to Blair's point before the shorter-term bridge loans are not necessarily driven by just the high rate. It's more around the strategy of the asset.

So if the borrower is looking to reposition itself, regardless of their underlying rates, they probably stay until they've executed their plan. And so that does change the impact of when loans will roll off.

But when we look at the book again as it rolls off, we're originating at a yield based for the current market environment and the current interest rate to make sure that we're in a decent position.

You don't underestimate that fee income, right? Like it's meaningful when the portfolio is turning over regularly.

Yes. No, understood.

Good afternoon. Can you guys hear me?

Yes, yes. It appears you guys have high confidence that the payout ratio will stabilize in the mid-90s.

What are some of the factors driving that?

Just overall, like if I look at like year-to-date, that's where we're at. Again, Q3 was a little high, given, again, as Geoff was describing just the timing of some transactions.

But it's just really managing the pipeline and where we're seeing investment activity is when you just running through the yield map, it's sort of generates the sort of mid-90s type math. Just running the business normally, Zach.

If the pipeline was not where it is, we wouldn't have the confidence that we do. I think it really comes down I guess at the end of the day.

Yes. I mean the pipeline, just further Blair's point, I mean we look at the pipeline, it obviously was looked at in stages, right?

So there's early stage deal identified, we're working through it. We don't really have a good view as to do we want to bid, where it's going to land?

Are we going to win it. And then obviously, as you go down the path given that we've been working through deals we've issued term sheets, deals, we just have commitment letters, acquisitions with firm time lines, any combination of these things is that sort of increased probability of execution within that pipeline view aligned with the time line that, in our view, again, goes back into our forecast and expectations along with year-to-date gets us to a point where we're comfortable in that range.

Okay. Understood.

Appreciate that. And with softer fundamentals for most property types right now, we're seeing higher vacancy, lower rental rates.

Are you seeing that translate into slower origination activity at all? I know that you mentioned in your prepared remarks that there were some transaction delays.

Yes. So I mean the transaction delays we're talking about, like these are sort of more normal course.

Like there's a real deal, there's a signed up and it's targeted to fund on a certain date. And as they're going through their due diligence process and/or negotiating final conditions to waive maybe an extra week, maybe an extra couple of weeks, any combination of things that -- this is more specific to real transactions than necessarily an indication of the broader environment, right?

I think to your point, certainly, the fundamentals have softened across and again varies dependent on asset class. Again, for us, in general, we are still seeing strong fundamentals underlying the multifamily business and the industrial business, which has been the core of what we're doing, and we are still seeing transaction activity continue.

Again, we benefit from refinancing opportunities as well as mortgages continue to mature and needs to be refinanced even if there is no actual trade occurring, as you get into other asset classes, again, office is one that's been really inactive for the last number of years given the unknowns in that space. We're starting to see tenancy demand increase.

You're starting to see the fundamentals underlying that reality improve. Again, that's something that we're not looking at a ton of.

We've seen opportunities. We haven't found a ton that are overly compelling.

And at the same time, the fundamentals in that space, which has been very uncertain for a period are starting to increase or improve, and that should drive increased activity.

Look, and I'll just add to that is I think it is true, though, right? Like I think we said the softening fundamentals if I go back to -- you go back to '23 as you got sort of heavily into that rate uptick cycle like we started in 2022.

For sure, those weakening fundamentals and the higher cost of debt that cause price mismatches in the market, right, between buyer and seller. And so that is -- this is what's really been driving sort of this more challenging transaction activity, right, because the sellers are trying to hang on and they were trying to believe their 2021 pricing, right?

Their 2021 valuations. As vendors, sellers get more realistic in their price targets, what happens is all of a sudden, okay, so prices come down a bit and then you have that market transaction can occur, right?

The buyer and seller have a median divide and the transaction occurs. So that's what we're talking about.

When we talk about like on the face of this weakens or fundamentals that you mentioned, now you put in the rate cut environment and you have a little more realistic view from the sellers, that's what drives those transaction activities. And then for us, on the lending side, what we like about it is you have a little bit more realistic view of value, values are kind of lower than we would have been lending into 2020, 2021.

If you look at today's environment, you feel pretty good that this is a reset value. More transactions are happening, and we feel pretty good at where we're lending and where our advance rates are.

Thanks. Thanks, everyone, for your time.

Obviously, if you have any further questions, feel free to reach out, we're happy to chat. Have a good afternoon.