Timbercreek Financial Corporation (TF.TO) is a business that specializes in residential mortgage loans and is a recommended buy. It is a rare buy recommendation from me for a business that has a third-party management structure. However, I have nothing but nice things to say about this management arrangement. It appears that for once I have located a third-party management situation where the third-party manager values the business and makes intelligent business decisions. The change of pace is probably because the manager also runs another business that is responsible for locating all of Timbercreek Financial Corporations clients. Thus, it would seem that there is a symbiotic relationship between the two and that their interests are aligned, this means nothing but good things for investors. Combined with Timbercreek’s conservative loan portfolio, stable cash flows, and a well-covered dividend this makes Timbercreek an easy low-risk addition to anyone’s portfolio.
When I saw that Timbercreek was managed by a third party, I initially cringed. In the past, I have found situations involving third-party management where shareholder value is blatantly being destroyed. This is not the case here though, in fact, it appears that the manager's interests are aligned with Timbercreek’s since both are engaged in different aspects of the same business. Since management essentially locates clients for Timbercreek, it stands to reason that they have a vested interest in keeping Timbercreek running smoothly.
When valuing a business, such as Timbercreek, that essentially borrows money from a bank and then lends it out again profiting from the difference between the two interest rates. I am most concerned with how careful the business is being when they are lending their money out. Since if they are unscrupulous and suffer a high default rate on their loans they go bankrupt and cease to exist as a business. Luckily, 92% of the loans that Timbercreek has issued are first mortgages. It is also important to note that of this 92 % of loans about 84% are for income producing properties including apartment buildings. This increases my confidence in the safety of Timbercreek’s loans, although I would have liked to have seen specific data on the creditworthiness of its clients but, that information is not provided.
The quantitative factors also provide clear support for investing in Timbercreek. Here’s a juicy bit of information, Timbercreek’s total dividend has nearly doubled since 2015. It is also clearly stated in their regulatory filings that they pay out nearly all of their cash flow as a dividend. So, when I say the dividend is well covered, it is, because the dividend essentially is the cash flow. Now, this raised a serious question for me; how does Timbercreek cover its debts with essentially zero cash on hand? Well, it would seem their plan to cover the next large chunk of debt that is coming due is to issue more common stock.
Again, normally I hate this practice, just like I normally hate third-party management but here it works. The reason I say that this practice seems to work for Timbercreek is because of its dividend and the increasing cash flow that has doubled since 2015. If cash flow is increasing and the nominal amount of the dividend is rising then, management can issue more shares of common stock without diluting the current dividend yield. If the growth in the firm's cash flows were to halt, I would prefer to see management find different ways of resolving their issue with debt maturities.
It is also important to note in this rising interest rate environment that about 35% of the loans Timbercreek has originated are floating interest rate loans. These floating interest rates allow the business a certain degree of protection in this rising interest rate environment. I believe this is Timbercreek’s preferred type of loan moving forward as well. Again, this signals that intelligent management is taking place at Timbercreek.
Timbercreek Financial Corporation is a recommended buy. It currently sits trading on the Toronto Stock Exchange which shouldn’t result in higher trading fees for investors in the United States. I mention this since often investing in overseas stocks entails a substantially larger trading fee. Timbercreek is currently churning out a safe 7% dividend yield, and its total dividend is increasing. If one were to buy into this stock, they would be receiving a steady stream of income that is exceedingly safe. A long-term holder of this stock would want to make sure that the third-party manager continues to play nice. As well as that Timbercreek doesn’t start taking on riskier loans. If an investor keeps an eye on those to variables it should be relatively smooth sailing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.