Good day, ladies and gentlemen. Welcome to Timbercreek Financial's third quarter earnings call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session for analysts. Analysts are asked to raise their hand to register for a question. As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Tamblyn. Please go ahead.
Great. Thank you. Good afternoon, everyone. Thank you for joining us to discuss the third quarter financial results. As usual, I'm joined by Scott Rowland, CIO, Tracy Johnston, CFO, and Geoff McTait, Head of Canadian Originations and Global Syndications. In the face of continued equity market volatility and rising interest rates, we produced another solid quarter for shareholders. As you hear from the team today, our mortgage portfolio remains in very good shape, demonstrating the durability through market cycles that has become a hallmark of our income-focused investment philosophy. As we anticipated, we benefited from the rapid rise in interest rates. This translated into a much higher average interest rate for the portfolio and, most important, strong growth in our investment income and distributable income.
We also expected this rate environment to cause a temporary slowdown in transaction activity as buyers and sellers adjust to this new reality. Looking beyond the near term, we expect activity to pick up again, and our experience suggests these transitional periods often serve as a tailwind for lenders like Timbercreek. With that, I'll turn it over to Scott to discuss the portfolio trends and the market conditions. Scott.
Thanks, Blair, and good afternoon. As Blair mentioned, the portfolio has performed well. No new additions to either Stage II or Stage III loans. Otherwise, our entire mortgage portfolio is current, and we have seen a material increase in our weighted average interest rate given the majority of our loans are floating rate. Looking at the portfolio, at quarter end, 89.3% of our investments were in cash flowing properties, down from 90.8 in Q2, and 64.9% in multifamily residential assets, including retirement. We remain almost entirely invested in urban markets, which provide superior liquidity. In terms of risk management metrics, first mortgages represented 90.9% of the portfolio, down a bit from 92.5 in Q2. Our weighted average LTV for Q3 was 69.4, basically in line with 69.9 in Q2.
The portfolio's weighted average interest rate, or WAIR, was 8.5%, up considerably from an average of 7.2% in Q2. Our WAIR exiting this quarter, importantly, was 9.2%. Origination activity and turnover were lower in Q3 as we signaled as a probable outcome on our Q2 earnings call. We invested roughly CAD 88.8 million in new mortgage investments and additional advances on existing mortgages. New funding was once again primarily directed towards our core multifamily residential assets. This was offset by repayments of CAD 41.2 million, syndications of CAD 26.9 million. The net result was an increase of roughly CAD 20 million from Q2 to CAD 1.26 billion. Third quarter turnover was lower than normal at 3.3% versus 8.1 in Q2.
While Q3 typically sees reduced volume, this quarter was more unique as borrowers weighed the changing interest rate environment against their business plans for refinancing, acquisitions, or sales. As we enter the final quarter of the year, we are seeing an increase in market activity and have line of sight on repayments that will increase turnover and in turn, our capacity to fund new opportunities. The portfolio remains well-diversified and concentrated in urban markets in the largest provinces, with approximately 96% of the portfolio in Ontario, BC, Quebec, and Alberta. There were no material changes from Q2 with respect to geographic concentration, and we continue to be pleased with the quality of the deal flow in our core markets and asset types. Regarding our non-core portfolio, I'm pleased to announce that the restructuring of our CAD 24 million fair value position on Northgate Mall is finally closing.
This is actually happening today. A new third-party first mortgage for CAD 19 million is in place with a significant future CapEx facility to complete additional leasing of the mall. This frees CAD 19 million for accretive reinvestment by Timbercreek and ends our future capital investment of the property. Timbercreek is retaining CAD 5 million of exposure, secured by a CAD 6.5 million second mortgage on a two-year term at a current pay market rate. This creates a CAD 1.5 million gain opportunity if the mortgage is repaid in full. We are satisfied with the conclusion here and believe the current owner has the leasing expertise to create additional value that will see our second mortgage repaid in full. At this point, I'll turn it over to Tracy to review the financials in more detail.
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I'll focus on the main highlights of the third quarter. As Scott mentioned, we reported strong growth and income for Q3. Net investment income on financial assets measured at amortized cost was CAD 30 million, up significantly from CAD 22 million in the prior year, reflecting higher weighted average net investments and the benefit of interest rate increases in our variable rate loans. Lender fee income was CAD 1.1 million compared with CAD 2.1 million in Q3 2021. Lower lender fees are primarily driven by the lower turnover and origination volume Scott mentioned. Though there are no new stage three loans, we did increase the provision for loan losses on one of two in the stage three category.
The loan is on a portfolio of condominium assets in Edmonton that are currently for sale, and the provision reflects the softening housing market conditions in Edmonton, primarily as a result of rising interest rates. Q3 net income was strong at CAD 13.5 million compared to CAD 10.4 million in Q3 last year. After adjusting for fair value gains and losses on financial assets measured at fair value through profit and loss, adjusted net income was CAD 13.9 million versus CAD 13.7 million in Q3 2021. Q3 basic and diluted adjusted earnings per share were CAD 0.17, consistent with the prior year. We generated robust distributable income and adjusted distributable income of CAD 16.8 million or CAD 0.20 per share in Q3.
This compares with adjusted distributable income of CAD 13.5 million or CAD 0.17 per share for the same period last year. Q3 payout ratio was a very healthy 86.2% on adjusted distributable income, comfortably below our desired range in the nineties. Turning now to the balance sheet highlights. Net value of the mortgage portfolio, excluding syndications, was CAD 1.26 billion at the end of the quarter, an increase of about CAD 20 million from the second quarter. The enhanced return portfolio increased to CAD 21.2 million from CAD 68.2 million at Q2 2022. Credit facility for mortgage investments was CAD 515 million at the end of Q3, compared with CAD 492 million at the end of Q2.
With approximately CAD 80 million available on credit facility and expected repayments, Timbercreek Financial continues to be in a strong liquidity position entering Q4. Two other items to highlight on the capital markets side. First, we suspended the at-the-market equity program in the quarter due to a depressed stock price as the broader equity market declined. We may reconsider using the ATM program during the remaining allotted 24-month period. During Q3 2022, we have only issued a nominal amount of shares under the ATM. Secondly, in September, we resumed the normal course issuer bid program. During Q3, we repurchased for cancellation 10,000 common shares at an average price of CAD 7.59 per share. We will continue to evaluate opportunities to use this to acquire shares accretively, especially when we trade below book value. I'll now turn the call back to Scott for closing comments.
Thanks, Tracy. I thought I'd spend some time here with closing remarks to provide some thoughts on the outlook of the business, given how rapidly the environment has been changing. We are all aware of the inflationary environment we are currently living in and that central bankers are tackling this issue through raising rates. While I won't provide yet another prediction on when this cycle will end, I will say that it is tricky, with numerous factors from the high price of oil, supply chain issues, COVID, onshoring, low unemployment, and other geopolitical issues all playing a role. This likely results in a longer period of higher rates and a probable recession in 2023. After that, the yield curve suggests a softening of rates, but again, I won't predict exactly when. From Timbercreek's perspective, our floating-rate portfolio has done well.
Led by our increased WAIR, we have generated an 86% DI payout ratio this quarter. Specifically, I'd like to highlight that over 70% of our investments are in multi-family and industrial segments that are well-positioned to generate higher property income in an inflationary environment. From a risk perspective, we also understand that increased borrowing costs can cause stress for certain borrowers. While always vigilant, we are taking extra caution through our underwriting and asset management processes to ensure the ongoing quality of the portfolio. In addition, we are carefully considering risk-return criteria and may give up interest rate to add safety to the book. Our current payout ratio provides some flexibility in making these sort of decisions. While we may not be immune to issues that can emerge, we believe our underlying philosophy of investing in value-add, income-producing properties will serve us well.
That completes our prepared remarks. With that, we will open up the call to questions. Operator?
Thank you. We will now take any analyst questions. If you have a question, please click the Raise Hand button on the bottom right screen below. I'll pause to take a minute to compile the roster. First question comes from Jaeme Gloyn. Please go ahead. Your line has been unmuted. Just hit unmute yourself.
Oh, sorry. Can you hear me now?
Yes, I can.
Okay, sorry about that. I wanted to ask about the comment on the higher turnover ratio expected in Q4. Are you expecting it to be more in line with historical averages around like the 10-15% range or more like a modest improvement versus this quarter, which was more quiet?
Yeah, historical range.
Historical range.
Maybe after there.
Okay, sounds good. A couple of follow-up questions on that. Would you be able to flesh out which sectors or geographies are seeing demand for mortgage funding? On the other side, on the competitive side, can you give us a sense of how the competitive landscape is shaping out right now? Are the banks and other lenders still active here in this market or have they pulled back somewhat because of the high rate environment?
It's Scott . I'll take a first stab at this question then I think Geoff, I'm looking at Geoff, he can do half of it here. I'll say this, I think the business is still frankly reflective of normal, a normal activity. By that I mean for us, that it's a range of geographies across a range of asset types. You know, we're primarily focused on multi-family and industrial lending, like, right now, and we're seeing that activity in those segments. We're also seeing some office and some retail. I think there's just sort of a return of activity. The LTV ratio. I sort of made this comment a bit in my prepared remarks.
We did see in the summer, basically, you know, with the rapid change in interest rates, you're certainly seeing sort of buyers and sellers, sort of the owners of real estate, sort of sitting on their hands a bit and evaluating sort of what are the next steps. I think as we've come back into the fall and as there's a little more certainty that, you know, hey, listen, rates weren't gonna drop overnight and in fact there was still upward pressure. What that means is that, you know, the owners of real estate had to just sort of make some decisions and some conclusions of what they wanted to do. As that happens, we've started to see a return to volume, a return to that sort of normal pace that you would see.
At the end of the day, most of the loans that we do are sort of two-year, three-year transitional loans, so there's sort of a natural end to borrowers' business plans that sort of re-require and necessitate refinancings. With regards to competition in the market, just quickly, and maybe I'll let Geoff sort of tag in here, but really we are seeing competitors back in the market. But you're right, conventional, some more senior lenders, definitely in this environment is a bit of a risk off approach. I mean, us as well. But we are seeing some pullback and just where, you know, when things are very hot, you see the senior lenders sort of step up out of their normal space, and so they've sort of retrenched. That creates some opportunities in the market for us.
Geoff, do you wanna add some more color?
Yeah. I mean, I think, Scott, you summed it up pretty well. I would say, yeah, very much coming out of the summer into the first couple of weeks of September, we did start seeing an increase of competitive activity. Again, the market is such with high interest rates, you know, interest rates being where they are, you know, the conventional debt that you can actually get on an asset is just less, right? Interest rates are higher. You need incremental income to support the similar debt you could get in a lower interest rate environment. As such, we are seeing borrowers putting more equity into deals.
We are seeing loan-to-values falling, but within that competitive environment, the reality is that we are starting to see a bit of price compression. At the same time, it still is a little bit choppy, right? We're staying vigilant and, you know, evaluating each deal as we always do on the merits of that individual opportunity. We're gonna win some deals, we're gonna lose some deals, in particular as we go through this period of volatility. It's definitely picked up activity-wise across asset class, as Scott said, in terms of what we're seeing repaid is broad-based.
You know, we had a second mortgage paid on a retail asset quite recently as an example of, you know, again, liquidity, be it third party debt, be it borrowers putting in additional equity to delever their positions, be it buyers and sellers rationalizing pricing after a period of being unable to do so. Any combination of things which is just, yeah, creating some additional liquidity in the market and activity as a whole.
Okay. Understood. Yeah. That's helpful. Just my last question on the Stage III portfolio of condominium assets in Edmonton. Could you give us any update on the timing of an exit over there? Just as a follow-up to that, I think your Stage III ACLs are roughly 25% of the Stage III loans now. Is that how much you would expect to lose with an exit, or is there a level of excess allowance for prudence built in over there? Thank you.
It's Tracy. I'll just comment on the last part of that question there. Sorry, not the valuation. The IFRS 9 model takes an appraised value and applies various stress scenarios. The appraised value, we adjusted it down by 10% and the corresponding provision there is kind of what pops out in the model. Really just on a valuation side, we only took it down 10%, and then that's the corresponding provision that ACL comes out there.
Okay. Could you give any color on an exit over there? Or would you wait till the market sort of settles a bit more?
Just on the timing for the condo piece, I think at the end of the day, it's gonna be closer to 12 months than six, if we continue to exit on an individual asset sale basis. Certainly, the local market there has been impacted by rising rates, as was noted previously. The winter months in Edmonton are, you know, even slower, just more typically. So you know, that's likely pushing into the spring of next year where we'll start seeing some activity. We're additionally exploring potential.
Opportunities to sell the entire remaining inventory in bulk. These are other opportunities that could expedite that timeline, but I'd say 12 months is a reasonable expectation.
Okay. Understood.
Sorry. Just to jump in then on the provision side too. What the model does is, with that 12 months, it effectively takes your appraisal value, but then it adds 12 months of interest. That's kind of in line with the exit period and how the provision effectively proves out.
Okay. Yeah, that makes sense. Okay. That was helpful. Those were all my questions. Thank you.
Thanks.
The next question comes from Graham Ryding. Your line is now open. Please go ahead.
Thanks. Good afternoon, everyone.
Good afternoon, Graham.
Just on the interest rate, 9.2% exiting the quarter, would you expect that to end up closer to 10% by the end of Q4, just given the increase in prime rates expected by year-end, including the October rate hike?
Yeah, I guess I'll answer that. I mean, depending on the increase in prime rates, the book is approximately 93% floating. Yeah, that's probably pretty good math, right? If rates were to go up another 100, right? Essentially. I mean, new business is coming in a little bit lighter than that. You should. High correlation on prime increase to where, for sure.
Okay, great. Just my second question. Recognizing that, you know, each deal is gonna vary, in general, are you able to comment on how your assumptions have changed in regards to exit cap rates and the availability of takeout financing when you're underwriting deals now, perhaps versus the beginning of the year?
Yeah. That's a good question. I mean, you know, for sure. I mean, every underwriting that we do is a bespoke process, but following the same process, right? We spend a great deal of time thinking about the exit on any deal we get ourselves into that, you know, we're signing up for. When we go through that exit analysis, we're using whether it's, you know, on a valuation side, we're looking at, you know, cash flows as well as cap rates. We're forecasting value that way. On the takeout, we are very much looking at forward curves and projected interest rates and what we think that sort of longer term conventional takeout financing will be for us or that's what facilitates the refinancing, right?
Whether that's a CMHC program or a conventional bank program, we have the ability, obviously, to make estimates of sort of what would be the debt coverage that's required for those programs and what's that level of refinancing of debt that the borrower will be able to achieve. When we're upfront in our underwriting and trying to figure out, you know, what are the loan proceeds that we're gonna provide, we go through that analysis of what's our level of comfort between, you know, is there a an obvious conventional takeout or is it a stretch takeout where, you know, if things were to go poorly, it might be a mezz stub left. We do that level of analysis and that's the risk.
One of the key risks that we evaluate in determining a new loan. I'd say it's not a different process, Graham, but it is just, again, more focus, more emphasis, and taking a look at the stress scenarios.
Okay.
Maybe to add to that, I'd say the only other comment I'd add, Graham, is just you know current cap rate environment, you know, call it depending on the asset class, of course, and more on the specific market location. I mean, you're plus or minus 50 basis points higher than you were you know nine months ago. Obviously, there's you know expectation correlation with going forward. So as we look at valuations today and expectations on value, we're taking into consideration the current environments and forward curves that relate to cap rates. To Scott's point on the takeout interest rates.
Got it. Appreciate the color. I'll turn it back.
Thank you.
The next question comes from Jaeme Gloyn. Please go ahead.
Yeah, just, first question is on the Edmonton condo units. Are you able to give us a little bit more color as to like what kind of building this is, age of the building, number of units in the building, how many units you're exposed to, things along those lines, to give us a little bit more comfort around the process.
Yeah. It's a 26 vintage. It's a newer build. It's a downtown location, well located downtown. In terms of total number of units, I think it's like 23 units that are remaining. You know, they're sort of, I'd say, mixed upper quality in terms of the quality of the product. Units are, I'd say, maybe a little bit larger than, you know, a lot of the smaller products that's come into the market. It's good quality product. They're a little bit larger units. We have seen some traction over the last period of time, last number of months. Certainly, I'd say as the Edmonton market recovered from, you know, with price of oil, et cetera.
It sort of coincided with the rising of rates, which has, you know, resulted in some continued softness there. Not a ton of product in that market. Nothing new really being built there. We think, obviously, there's some time to play through here. Again, expect there's demand for these units.
Jaeme, it's Blair. I mean, the other thing that we're looking at is potentially renting some in the short term. I mean, there's some complication to that, but obviously we're not just gonna blow them out into the market. That wouldn't make any sense. That's why Scott and Geoff were both talking to kind of a, you know, 12-month guidance. I mean, hopefully faster. You know, we'll be patient.
Right. Maybe step back to, I guess, 2016 or, like, what was the origin of the loan and the exit strategy?
This was at the time a newly built project or relatively newly built project. I guess it was commenced in 2016. It was effectively complete 2018-2019 when we did the loan. It was like 65% sold at that time. You know, a significantly different market than it is today, certainly. You know, residual inventory to pay out the balance of a construction loan. At that point in time, there had been substantial resales that were, you know, able to compensate the pricing for the balance of the inventory. The sponsor, you know, was higher net worth guy who was intending to occupy one of the units himself, in addition to selling the balance of the units.
Obviously the market hasn't cooperated.
Okay, understood. Two more on this one, actually. Sorry to dig in on it. Are there any other lender partners on the loan alongside Timbercreek, or is this entirely your file?
This is entirely Timbercreek.
Okay. The last one, just, Tracy, in terms of the provision, did I understand correctly that the provision is entirely covering the interest accrual over the next 12 months? Or was there some component of principal write-down, let's say?
Yeah. The first part is the principal write-down of 10%, and that's what runs through the model, is kind of an appraised appraised value. Then you stress it under certain scenarios on the assumption of how long it takes you to get out. In this case, we've said, okay, we'll be out in 12 months, so you apply interest to that, and then it looks, it kind of comes up with, well, what would be the exposure on exit 12 months from now? That's generally how it is. Both principal and future interest.
Okay, got it. Understood. On the ATM, clearly it looks like you shut that down, I guess, right at the beginning of the quarter. Pardon me if I missed this as I was jumping on just a bit late, but was the decision to pause the ATM primarily because of the share price movement or the outlook for mortgage fundings? Or I guess maybe a combination. Maybe a little bit more color about how you're thinking the decision to pause, and then what's your thought process on restarting?
Yeah, I mean, it was entirely really where the share price was and whether or not it was accretive to book. You know, going forward, we'll still look to that. I mean, we've looked more to the NCIB, and we're currently, you know, evaluating what makes most sense from use of our cash resources. We are light on the NCIB. Just looking at the pipeline that Scott and Jeff had on where we want to put cash in light of a low turnover environment, it makes sense to deploy at the yields we're getting versus buying back at this point.
Okay. Great. I think that's it for me. Thank you.
Thanks, Jaeme.
As a reminder, if you have any questions, please use the Raise Hand button at the bottom of the screen. At this time, there's no other questions, so I'll turn the call back to Blair for closing remarks.
Great. Thank you very much, operator. As usual, appreciate your time. Obviously, we're quite pleased with the quarter on an absolute basis and in light of the current market conditions. We'll leave it there and look forward to talking again in 90 days or so. Have a good afternoon.
You all can disconnect.