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Timbercreek Financial is an alternative lender focused on providing shorter-term bridge financing (typically around two years) to real estate investors in a transitional phase (property redevelopment, repairs, etc.). The company has a $1.2B net mortgage portfolio today, with the following characteristics:

Stemming from the rapid rise in interest rates post-pandemic, Timbercreek is working through abnormally high staged loan balances. We believe the market has mispriced this risk, creating a compelling opportunity on two fronts:

Because the current staged loan balance is underearning, there should be upside in earnings and distributable income as resolutions are reached and capital gets redeployed – potentially creating conditions for special dividends in the future.

Timbercreek Financial is a leading non-bank lender that provides shorter-duration structured financing solutions to commercial real estate investors across Canada. As a Mortgage Investment Corporation (MIC), the company raises capital (debt and equity) to fund mortgage loans, with the interest and fees generated from those loans distributed back to shareholders (MICs must pay out 100% of taxable income). Through a combination of portfolio diversification, conservative underwriting, and experienced management at Timbercreek Capital – the company has paid a consistent dividend through various economic backdrops.

Given the shorter-term nature of Timbercreek’s loan activity, the company’s book typically rolls over fast enough to mitigate the impact of interest rate fluctuations. However, in 2022 the Bank of Canada aggressively tightened – hiking the policy rate 475 bps in a year and a half. This flowed through to Timbercreek, which saw staged loan balances rise to uncharacteristically high levels (over 20% of total loans) – resulting in negative market sentiment. With the market pricing in ~$120M of losses, we believe this sentiment is far too aggressive (more on this later). As the company works through its outstanding staged loan balances through the year, investors should firm up on a “true” go-forward book value and shift focus to the redeployment impact of capital currently tied up in underperforming assets. Together, we believe these two drivers create a compelling opportunity to secure a >10% dividend yield with valuation upside.

Timbercreek Financial manages a mortgage investment portfolio of over $1.2B on a net basis, spread across 114 loans. The portfolio is well-diversified, with the following characteristics:

Importantly, 95% of its loans are in the first mortgage position and over 80% of the portfolio is backed by income-producing properties. This compares favourably to public peers with a greater focus on development loans and provides a margin of safety in the event of borrower default – where Timbercreek can step in and manage the asset until it finds a buyer.

Timbercreek’s offering is appealing to commercial real estate investors in a transitional phase (property redevelopments, repairs, etc.). The company can win in this market versus traditional lenders thanks to:

As a result of this flexibility, roughly two thirds of Timbercreek’s business comes from repeat borrowers. Timbercreek Capital’s in-house team could become even more important to TF’s origination activity, with a subsidiary of the manager (Timbercreek Mortgage Servicing Inc.) securing CMHC approved lender status last year – which is important for two reasons:

With origination volume picking up in recent quarters and an improved outlook for commercial real estate transaction activity, Timbercreek’s pipeline should remain strong through the balance of the year.

That origination activity is an important driver of Timbercreek’s distributable income (DI), with an average lender fee of approximately 1% charged at the inception of each loan. These fees are complementary to interest income, given the flexibility extended to borrowers warrants a higher rate for Timbercreek – with the weighted average interest rate (WAIR) of the portfolio sitting just under 8% currently.

That WAIR has compressed by more than 200 bps in recent years on the back of rate cuts – but net interest margins have remained healthy for two reasons. First, most of the company’s loans are variable rate and include interest rate floors – mitigating the impact of rate cuts while preserving the upside capture from rate hikes. Of the 88% of loans with negotiated rate floors, essentially all of them are earning at that floor instead of lower.

While rate floors insulate Timbercreek from the impact of rate cuts, its credit facility reprices lower immediately – reducing the company’s funding costs and preserving a healthy net interest margin. Given MICs operate a “closed loop” model, the application of leverage is also key to generating an adequate yield on equity.

Syndication is another lever it uses to enhance equity yield, which splits a mortgage loan into two tranches:

The math on this is straightforward. Applying leverage either directly through the credit facility or structurally through syndication increases portfolio risk but generates a higher return per dollar of equity exposure - with syndication offering the most attractive returns.

While syndication offers the most attractive interest rates for Timbercreek, it also gives the lender an avenue to originate more business than the balance sheet can hold on its own – increasing the relative contribution from lender fees. TF’s syndication partners also benefit (institutional asset managers, community banks, etc.), given they may not have in-house origination capabilities and benefit from:

Importantly, the actual LTV of the loan remains within Timbercreek’s risk profile (mid-to-high 60s) – ensuring the initial equity cushion based on the underlying asset value mitigates the impact of negative credit migration.

Taken together, Timbercreek structures its book to generate consistent distributable income through the cycle – implementing rate floors to mitigate rate volatility risk and applying leverage to enhance equity yield.

While Timbercreek was able to capture higher interest rates following the Bank of Canada’s aggressive 2022 tightening cycle, the variable rate nature of the book put a portion of its borrowers under pressure – with debt service costs rising and equity positions eroding from falling real estate values. Together, this pushed over 20% of loans into stage 2 and 3 – well above the 7% average management expects to return to over the next year.

In response to this pressure in the portfolio, Timbercreek has built its loan loss reserves considerably since 2022 – which sit just under $40M (or ~3% of net loans) as of Q1. While the provisions taken to build this account have been a headwind to EPS, they’re non-cash in nature – leaving distributable income unimpacted.

Over this period of stress, Timbercreek’s book value multiple compressed to just over 0.8x – significantly below its long-term average of ~1.0x as the market priced in expectations for loan impairments in the at-risk portion of the portfolio. At current prices, the gap between reported book value and market value is $119M – a discount we believe vastly overstates the true impairment risk in the portfolio.

To put this in perspective, the total staged loan balance sits at $277M as of Q1 – $25M of which has been resolved since and should show up with Q2 results. So, roughly $250M of remaining staged loan exposure – or $165M of “excess” exposure over and above a normalized 7% staged loan balance. Assuming the market continues to price TF at ~1x book value, the implied loss rates are staggering – with the $119M discount representing roughly 45% and 60% impairment on the total and excess staged loan balances, respectively. Assuming the staged loan balance is 30% levered (staged loans have lower leverage than performing loans), this would represent roughly 70% and 100% equity wipeout on the total and excess staged loan balances.

One could argue that the discount reflects expectations for impairment and for future credit deterioration over and above what already exists in the book today. We expect the risk here is minimal, so long as we don’t see a repeat of 2022 rate volatility. With staged loan balances relatively flat over the last two years and management’s outlook for staged loan reductions, we believe Timbercreek should make substantial progress on resolutions through the balance of the year. With our more modest impairment assumptions (see the next section), these resolutions should be a re-rate catalyst – as investors get clarity on the true goforward book value and capital redeployment benefit.

Despite management’s outlook for most of the excess staged loan balance to be resolved within the year, we believe the timing and magnitude of these resolutions is the biggest source of investor uncertainty today – specifically on its $30M Calgary office exposure (stage 3) and $158M Vancouver retail exposure (stage 2).

On the former, Timbercreek resolved ~$11M after Q1 – which we assume requires no further ECL given a provision was already taken in the quarter. On Vancouver, roughly half of its exposure has been listed for sale as of Q1 and the company expects to clear up ~75% of it by the end of the year.

With public Canadian retail REITs trading at a ~10% discount to reported fair values today, we expect that Timbercreek will see some impairment upon the sale of these assets. Assuming an additional 10-20% haircut tied to private market illiquidity, our best guess for loan losses tied to TF’s Vancouver exposure falls somewhere between $30-50M – which we believe is conservative. Importantly, we believe losses in the remainder of the portfolio will be negligible – making our estimated staged loan recovery rates (green) much higher than the market-implied recovery rates (red).

To put some numbers around this gap, assuming a return to a normalized stage loan balance of 7% we calculate a market-implied capital recovery of $65-85M. That sits meaningfully below our estimate of $145-160M of recovered capital, anchored around a 20-30% impairment on Timbercreek’s stated Vancouver exposure.

As staged loan resolutions materialize, the market-implied impairment on recovered capital would translate to a cumulative EPS headwind of $1.25-1.50. That’s more than double our assumed impact, which we believe reflects a re-rate opportunity if our estimates are directionally correct – as investors realize the worst-case scenario being priced in today is far from reality.

Once the bulk of staged loan resolutions are complete, investors should shift focus towards the impact of recycling underperforming capital into performing loans. Management highlighted that staged loan balances generate equity yields ~500 bps lower than what performing loans would generate (due to less leverage), creating an opportunity for meaningful earnings accretion from redeployment. Assuming TF gets back $100M of equity capital, the company could see an EPS uplift of over $0.05, all else equal.

Taken together, the resolution of staged loan balances and the subsequent redeployment of capital are the largest drivers of our forward estimates. We expect 2026 will shape up to be a transition year, with additional impairment charges weighing on full-year results. Given uncertainty around the timing and magnitude of these charges, we’ve excluded them from our forecasts for now (figure 19 provides potential EPS impact). Importantly, we believe the true impairment will be much smaller than what’s implied by the market today – creating a re-rate opportunity as investors tighten their expectations around go-forward book value and look out to 2027.

To give a sense of how rare Timbercreek’s current valuation is, 0.82x book value represents a 7th percentile multiple – with substantially all its time spent at this level coming on the back of this staged loan elevation. While the driver behind the discount is real, the magnitude is driven more by sentiment than logic in our view – creating a somewhat rare opportunity for capital appreciation (MICs are predominantly income vehicles).

Beyond the potential re-rate opportunity is one to secure a historically elevated dividend yield, which sits at 10.6% today – representing a near-8% spread over two-year Government of Canada bonds and comparing favourably to less liquid private real estate funds. With line of sight to staged loan resolutions, a strong outlook for origination activity, and distributable income consistency through previously discussed mechanics – we believe the dividend is sustainable and will normalize to its historical 7-8% as the company executes.

Together, these two levers for investment returns create a valuation “special situation” in what’s typically a slow and steady public equity. Assuming a $40M impairment to Timbercreek’s current book value (the midpoint of our $30-50M loan loss estimate), a 1x multiple would imply a total return of 26%. Importantly, barring any significant macro deterioration we believe Timbercreek shares offer strong downside protection – with positive implied returns even if our impairment estimates are off and the market prices TF well below its reported book value.

The discount isn’t just versus its historical averages either, with Timbercreek trading well below its public peer valuations and yielding 200 bps more. In our view, this makes TF a compelling capital rotation trade within the public MIC universe – especially considering peers have greater exposure to the GTA and to land. With staged loan balances at Atrium and Firm Capital also elevated (18% and 34% as of Q1), Timbercreek’s progress on resolutions is likely to drive a narrowing of the valuation gap.

Timbercreek Financial’s leadership is tenured, with the company’s executives being with the firm for at least five years and bringing decades of industry experience prior to that. That level of longevity lends itself to a management team that works well together and relative to other public entities, TF’s executive compensation is modest – with roughly 50% tied to performance standards.

Given MICs aren’t legally allowed to have a shareholder control over 25% of any class of the corporation’s shares, it isn’t surprising to see that ownership is broad and largely comprised of retail investors (we estimate they account for roughly 95% of the investor base).

In addition to general risks associated with investing, we highlight the following company-specific risks:

Interest rate risk: Like all lenders, Timbercreek is exposed to interest rate risk. Changes to rates impact TF’s interest income potential and funding costs and could flow through to its borrower base – impacting their ability to repay outstanding loans.

Credit risk: Timbercreek Financial takes on credit risk in the normal course of business. While its skew towards income-producing properties, first mortgages, and mid-60s LTV ratios provides insulation against negative credit migration, the risk is still present.

Competitive risk: Timbercreek competes with other lenders for origination opportunities. Increased competitive intensity could result in lower returns or limit the pool of attractive opportunities.

Real estate risk: A significant downturn in real estate values could limit the viability of the assets securing Timbercreek’s mortgage loans and lead to loan losses.

Regulatory risk: Changes to the regulatory environment surrounding MICs could impact Timbercreek’s ability to operate effectively.

Management risk: Timbercreek Financial is managed by Timbercreek Capital and its personnel, who source and underwrite deals as well as actively manage distressed assets. In the event the management agreement was terminated, Timbercreek Financial would need an equally experienced external manager to operate at the same level it currently does.

Liquidity risk: As Timbercreek’s business is focused on effective cash management, the company is exposed to liquidity risk – where loan repayments and commitments don’t match and the company is forced to seek financing at unfavourable terms.

Macroeconomic risk: In a deteriorating macro environment, the demand for mortgages could fall – impacting Timbercreek’s origination activity which could limit portfolio turnover.

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