Recalibrated Real Estate Valuations Will Drive Stronger Mortgage Portfolio Deployment And Income Stability

Catalysts

About Timbercreek Financial

Timbercreek Financial provides flexible, income oriented mortgage financing to income producing commercial real estate, with a focus on multifamily and industrial assets in major Canadian urban markets.

What are the underlying business or industry changes driving this perspective?

• Recalibrated commercial real estate valuations combined with lower benchmark interest rates are creating a more attractive entry point for new loans, which may support higher deployment volumes and contribute to growth in net investment income and earnings.
• A deep pipeline of multifamily and industrial bridge and construction loans, fueled by persistent housing demand and constrained industrial supply, positions the portfolio to expand from its current base toward management's capacity targets, which may support revenue growth and scale driven operating leverage in net margins.
• The gradual resolution and monetization of legacy Stage 2 loans, including challenged office and development exposures, will free up capital to be redeployed into higher yielding, cash flowing assets, which may provide a lift to portfolio yield, distributable income and reported earnings over time.
• Increased capacity on the upsized credit facility, combined with improving credit spreads in a lower policy rate environment, enhances Timbercreek's ability to fund incremental originations at attractive risk adjusted returns, which may support both revenue growth and a stable to improving net interest margin.
• Stable long term client relationships and repeat business with established borrowers, supported by the firm's CMHC approved lender status, may translate into consistent portfolio turnover, incremental fee income and improved distributable income per share as transaction activity accelerates through the next real estate cycle.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Timbercreek Financial's revenue will grow by 30.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 66.0% today to 55.8% in 3 years time.
• Analysts expect earnings to reach CA$70.9 million (and earnings per share of CA$0.8) by about December 2028, up from CA$38.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 14.9x today. This future PE is lower than the current PE for the CA Diversified Financial industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.62%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in challenged commercial segments such as Calgary office and large urban redevelopment projects in Vancouver and Toronto could lead to further expected credit loss revaluations on Stage 2 loans, depressing reported net income and reducing distributable income over time.
• If transaction delays continue and large, unexpected repayments outpace new originations, the mortgage portfolio may stagnate below the targeted capacity range. This could constrain net investment income growth and limit operating leverage in net margins.
• A prolonged environment of lower benchmark interest rates without a commensurate expansion in credit spreads or fee income could push the weighted average interest rate on the portfolio down faster than funding costs decline, compressing net interest margin and earnings.
• Higher loan to value ratios as Timbercreek leans into reset valuations in 2025 may increase loss severity in a downturn or if real estate values fall further. This could lead to additional provisions and weaker long term returns on equity and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$7.75 for Timbercreek Financial based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$127.2 million, earnings will come to CA$70.9 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of CA$6.84, the analyst price target of CA$7.75 is 11.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.