MTG.TO - Timbercreek Senior Mortgage Investment Corporation

[gym97]

Hi Guys, I've been reading this board for a while now on and off and thought I would post something. I've been finding it difficult to find good ideas so I was holding onto a lot of cash. I've since discovered something called Timbercreek Senior Mortgage Fund and I've basically kept a lot of my cash there, basically until I can find a way to deploy it in equities. Obviously you're not going to make equity like returns on this, at least in the long run, but it seems like an excellent alternative while you wait.

 

My question to the board is, am I taking some undue risk here? Would you just hold real cash instead?

 

Here are the basic facts:

 

1) Timbercreek originates senior mortgages. They are typically shorter-term, floating rate, interest only, bridge-financing type loans in Canada on income producing properties. Average pricing is 2yr GOC + 350bps so call it ~4.75%. They have enough scale on their platform to be a meaningful player in this niche space in Canada. They have a $500 million portfolio.

 

2) 90%+ of the portfolio is income producing. The portfolio is spread out across properties in Canada although somewhat concentrated in Ontario. There's a nice mix of office, industrial, residential, etc.

 

3) They do use some leverage but leverage currently stands at 11.9% of the funds assets. I don't think its their intention to blow their brains out on leverage.

 

4) The average LTV of the portfolio is 45.1%. I would assume the appraisals are "fresh" given the tenor of loans are very short (i.e. recently done) but it seems like a big margin of safety.

 

5) They recently converted from an "Investment Fund" to a "Public Company". Most of this is due to some regulatory uncertainty and long story short, converting to a public co. eliminates this. As a result, fees go up (audit, reporting) but they no longer pay trailer fees to advisers (hence the sell-off in my opinion).

 

My reasoning for holding onto it as cash are:

 

1) Risk is low, very unlikely you would lose money given LTV, income producing nature of portfolio and diversity of loan portfolio. There is basically no interest rate risks as loans are all floating rate so ultra low duration.

 

2) Dividend yield is 7%. Eventually, this should converge to at least 5.5% (100bps or so above GOC+350bps) in my opinion after all the brokers are done selling this off providing some potential capital appreciation (call that approx. 10% upside). Before, you could redeem the investment units at NAV so no discount ever existed (i.e. redeem them at approx. $10)

 

3) It is reasonably liquid if we are talking under $200,000 of combined hold (not sure how much cash you guys, obviously it would vary)

 

4) You are getting returns fairly close to a standard high yield bond fund but with taking much lower risk IMO. I would place this risk as comparable to a secured bonds that a typical REIT would issue. Yields on those bonds are nowhere near 7%.

 

Am I missing something? Should I just hold pure cash instead? I know this is a value board and I'm not saying that this should be your best idea in the portfolio but something worth holding while you wait for some good opportunities to show up.

 

They are reporting today and having a conference call tomorrow. Anybody interested could dial in and ask a few questions.