In our Timbercreek initiation, we highlighted the company as a compelling capital rotation trade within publicly traded MICs. Portfolio construction is the primary reason…

… with the lender’s geographic mix and skew towards income-producing properties screening attractively versus peers (Atrium, Firm Capital), especially considering its valuation discount.

Timbercreek’s book is diversified across core markets, with roughly a third tied to Ontario - most of which resides in the GTA. This is much less exposure than peers…

… with Firm Capital holding nearly 90% of its portfolio in Ontario and Atrium nearing that mark on its GTA exposure alone. It’s no secret the GTA has been a challenging market in recent years, with sales activity and prices falling…

… while multi-family vacancy rates have risen significantly over the same period.

These dynamics have made development less attractive, pushing high-density land values down nearly 30% since 2018.

While the market should find its footing at some point and isn’t the only region under stress, we view Timbercreek’s geographic diversification favourably.

The collateral backing each MIC’s portfolio also varies dramatically, with Timbercreek having over 80% of its book secured by income-producing assets…

… while peers don’t provide a number. Based on available disclosures, we assume Atrium and Firm Capital have the majority of their portfolios tied to assets with no cash flow (construction, land, intensification, etc.).

TF’s income-producing focus enables it to write loans at higher LTVs and take on more leverage, given it can assume control of an asset until it finds a buyer if the borrower defaults…

… while assets without cash flow would be under more pressure to sell given the associated holding costs. With unabsorbed multi-unit inventory at record levels…

… moving a development asset in a worst-case scenario could prove challenging, while Timbercreek should have an easier time managing through stress.

While portfolio construction varies by MIC, they’ve all felt the impact of the BoC’s tightening cycle in 2022 - with staged loan balances climbing…

… resulting in higher provisioning activity.

That provisioning activity has weighed on Timbercreek’s book value more than peers, driven mainly by dividend policy…

… as it pays a higher base yield (justified by income-producing collateral), while peers use special dividends frequently to match their distribution to net income.

Importantly, those provisions are non-cash - with TF’s distributable income more than covering payments to shareholders…

… with upside as staged resolutions are reached and capital gets redeployed into performing loans. With TF shares trading at ~0.8x book value (peak peer discount)…

… those resolutions should be a re-rate catalyst as well, with the >$120M discount to book value vastly overstating the impairment risk in our view - which we cover in the full report.