TII.V - Terra Firma Capital Corp

[SafetyinNumbers]

Terra Firma lends based on land values to real estate developers. Following the GFC, less banks are willing to provide these types of loans, especially in the US where TII has most (90%+) of its investments. As a result, the company can earn high returns on first mortgages at less than 75% LTVs. They further enhance those returns by syndicating 90% of these loans to retail investors who pay fees to gain access to these returns.

 

The historical returns of the business have been less than ideal but returns seem to be accelerating and they are returning capital to shareholders.

 

They have maxed out the NCIB the last two years and just introduced a small dividend, starting in 3 weeks.

 

In terms of metrics, at the current share price of $0.53, P/E is 6.6x (annualizing Q2 of C$0.02 EPS), P/B is 0.6x, dividend yield of 3.8%.

 

While the company looks pretty levered because of the accounting of the syndicated loans, it’s not really. The syndicated portion of the loans is non-recourse so if you back those out debt/equity is about 0.5x.

 

The recent presentation is here:

 

https://www.tfcc.ca/wp-content/uploads/2019/09/Updated-TFCC-Presentation-September-2019-As-of-Sept-5-2019-1.pdf

 

 

[matts]

Interesting idea. Thank you for posting it.

 

Why do you think the company is trading at just 0.6 book?

[wisowis]

Returns seem to be correlated with the increase in portfolio size over the past couple of years, but portfolio size seems to be actually down this year vs. last...so shouldn't returns flatten out at best?

[SafetyinNumbers]

Returns seem to be correlated with the increase in portfolio size over the past couple of years, but portfolio size seems to be actually down this year vs. last...so shouldn't returns flatten out at best?

 

I think the dip in the portfolio size was temporary. They closed a deal subsequent to the quarter ending and the pipeline appears to be bigger than the expected repayments for the remainder of 2019 so it should start growing again.

 

As for why it trades at 0.6x book, I think it’s mostly because ROE’s haven’t exceeded 10% for the past few years. They looked like they were making progress in 2016 to getting a valuation closer to book value but ran into trouble with a Toronto area borrower on loans that were made before the new CEO came on board. While they recovered the funds, it took a long time and investors sold the stock and never looked back. I think it’s just taking time to rebuild credibility.

 

[wisowis]

Thoughts on the regulatory risks of selling the syndicated products to retail investors? At least in Canada, some very shady (private) companies have sold syndicated mortgages in the past and retail investors have ended up losing their shirts.

 

[SafetyinNumbers]

Thoughts on the regulatory risks of selling the syndicated products to retail investors? At least in Canada, some very shady (private) companies have sold syndicated mortgages in the past and retail investors have ended up losing their shirts.

 

They have their own capital at risk so they do differentiate themselves in that way. They have also invested in some fintech initiatives to streamline the compliance requirements that have come from some of those shady companies.

[Stuart D]

Thanks for posting.

 

On slide 11 (of 26) there is a simplified look at their business model.

 

Under "Syndicate Investors" there is US$69m. Just for illustration (to help me understand how this works) if the assets underlying the US$69m go to zero, does that mean:

 

1. The Syndicate Investors would lose their money; and

2. Terra Firma Capital would see the Assets disappear from the balance sheet, but ALSO see the liabilities underlying that asset (i.e. the Syndicate investors money) disappear from the balance sheet?

 

If ^that is the case, it would seem TII.V carry minimal risk at the company level.

[Foreign Tuffett]

Interesting idea, but if you're interested in a land value/first mortgage-based lender why own this instead of Farmer Mac? Farmer Mac (1) has a 45% loan-to-value ratio in (2) a safer/less speculative asset class (farmland) and (3) has a structural cost of capital advantage via being backstopped by the US Treasury (it's a GSE).

[SafetyinNumbers]

Thanks for posting.

 

On slide 11 (of 26) there is a simplified look at their business model.

 

Under "Syndicate Investors" there is US$69m. Just for illustration (to help me understand how this works) if the assets underlying the US$69m go to zero, does that mean:

 

1. The Syndicate Investors would lose their money; and

2. Terra Firma Capital would see the Assets disappear from the balance sheet, but ALSO see the liabilities underlying that asset (i.e. the Syndicate investors money) disappear from the balance sheet?

 

If ^that is the case, it would seem TII.V carry minimal risk at the company level.

 

Yeah, the syndicated loans don't have any recourse to the parent so their risk is limited to the corporate debt which puts it at 0.5x debt/equity.

[SafetyinNumbers]

Interesting idea, but if you're interested in a land value/first mortgage-based lender why own this instead of Farmer Mac? Farmer Mac (1) has a 45% loan-to-value ratio in (2) a safer/less speculative asset class (farmland) and (3) has a structural cost of capital advantage via being backstopped by the US Treasury (it's a GSE).

 

Thanks, I haven't looked at it.

 

I always thought those GSE's have a lot of leverage. I'm a bit weary of too much financial leverage.

[wisowis]

I saw this pop up on my twitter today, maybe somebody will find it useful (I have no affiliation to the author): https://seekingalpha.com/article/4291722-terra-firma-capital-corporation-speculative-buy

 

 

[SafetyinNumbers]

Some insider buying the last few days:

 

https://m.canadianinsider.com/node/7?menu_tickersearch=TII+%7C+Terra+Firma+Capital

[sculpin]

I think it trades at such a discount to book due to the Urbancorp disaster. If they failed to do proper due diligence on a firm right in their own back yard, people question what may be lurking in the Company's move into the US loan business.

 

https://torontolife.com/city/life/anatomy-real-estate-disaster/

 

 

Urbancorp relied heavily on mezzanine debt during its spending spree. One company, Terra Firma Capital Corporation, financed large swaths of Urbancorp’s land purchases starting in 2012. The loans allowed Urbancorp to acquire more and more land, but, in the process, the company took on a huge debt load. While bank lenders usually only finance between 50 and 75 per cent of the land purchase value, Urbancorp was often using a combination of Terra Firma’s loans and bank loans to finance up to 95 per cent of the land purchase price.

[SafetyinNumbers]

I think it trades at such a discount to book due to the Urbancorp disaster. If they failed to do proper due diligence on a firm right in their own back yard, people question what may be lurking in the Company's move into the US loan business.

 

https://torontolife.com/city/life/anatomy-real-estate-disaster/

 

 

Urbancorp relied heavily on mezzanine debt during its spending spree. One company, Terra Firma Capital Corporation, financed large swaths of Urbancorp’s land purchases starting in 2012. The loans allowed Urbancorp to acquire more and more land, but, in the process, the company took on a huge debt load. While bank lenders usually only finance between 50 and 75 per cent of the land purchase value, Urbancorp was often using a combination of Terra Firma’s loans and bank loans to finance up to 95 per cent of the land purchase price.

 

Yeah, probably a big part of it. That deal was done before the current CEO was hired and they did very well on recovery at the end of the day.

[SafetyinNumbers]

Share consolidation to be effective for trading tomorrow.

 

Management thinks that a higher share price, will give them more credibility with borrowers and allow some institutional investors to buy the stock as well. Both of those things are probably true for the first dividend that goes ex on Sept 27 too.

 

https://www.globenewswire.com/news-release/2019/09/23/1919118/0/en/Terra-Firma-Capital-Corporation-Announces-Common-Share-Consolidation.html

[SafetyinNumbers]

 

Big first mortgage investment made for Q4. Should continue momentum in earnings and ROE.

 

 

http://www.globenewswire.com/news-release/2019/10/01/1923248/0/en/Terra-Firma-Capital-Corporation-Announces-the-Closing-of-a-First-Mortgage-Loan-Totaling-US-24-4-Million-in-Austin-Texas.html?ev=1

[SafetyinNumbers]

I sat down with the CEO of TII last week.

 

He sounds pretty frustrated with the share price especially given the opportunity he sees if his cost of capital was lower. I came away thinking of the share price isn’t reasonably higher within 12-18 months, they will consider selling at likely a small discount to book.

 

I see book closer to $10 vs the share price of $5.60 now so that leaves very good upside from here. Between now and then, the buyback will be renewed at the end of November and they should be active. Meanwhile, the book continues to grow and they haven’t seen any problems in their portfolio or markets.

 

I also gained a greater understanding of their relationship with Great Gulf (large North American home builder) which owns close to 10% of the company purchased at $6.50, two years ago. Apparently, Great Gulf was interested in starting a finance arm and were convinced to buy a stake in TII instead.

 

I find it interesting that Great Gulf has warrants to acquire another ~10% of the company at $8.50 expiring next August so it’s in TII’s interest in getting the stock above $8.50 by then or it might be a catalyst for Great Gulf to take it private. If I was them, I would try to buy it before the warrant expiry as it may block other potential buyers from paying more.

[SafetyinNumbers]

TII should report next week or at the latest, the week after. The buyback should also be renewed by the end of the month. I have noticed that US listed financials and US home builder stocks have been performing quite well lately while the Canadian small caps with US exposure like TII.V, ACD.TO and IOU.TO have lagged quite a bit.

 

They will probably all get taken out over time if valuations don’t increase.

[SafetyinNumbers]

Terra Firma put up a great quarter, in my view, at least. The stock didn’t budge.

 

TII earned C$0.24 in Q3 and book value increased to C$9.24 vs the stock price at $5.30.

 

So still 0.6x book and closer to 5x annualized Q3 EPS. The ROE crested 10% in the quarter. We should continue to see operating leverage as the loan book grows and financial leverage as they utilize the low cost credit facility that was added this year.

 

Should I keep posting on this name or is there zero interest?

[Spekulatius]

So they lend money for 13-18% interest rates to real estate developers. What could go wrong?

I know it’s a snarky response, but this seems to ave written very high risk all over it.

[SafetyinNumbers]

So they lend money for 13-18% interest rates to real estate developers. What could go wrong?

I know it’s a snarky response, but this seems to ave written very high risk all over it.

 

Lots can go wrong but that’s why it’s valued where it is. The opportunity only exists because banks in the US won’t lend against land after what happened in the GFC. The markets TII invests in are generally considered cheap by traditional measures of housing affordability. Meanwhile, it trades at a big discount to book while not being significantly financially levered.

 

People are very good against protecting themselves against the last crisis. Maybe it will happen again exactly the same way but it just doesn’t seem probable, in my view. With the XHB and XLF much closer to 52 week highs than lows the market is certainly not indicating near term danger but anything can happen.

[ColdandRich]

Terra Firma put up a great quarter, in my view, at least. The stock didn’t budge.

 

TII earned C$0.24 in Q3 and book value increased to C$9.24 vs the stock price at $5.30.

 

So still 0.6x book and closer to 5x annualized Q3 EPS. The ROE crested 10% in the quarter. We should continue to see operating leverage as the loan book grows and financial leverage as they utilize the low cost credit facility that was added this year.

 

Should I keep posting on this name or is there zero interest?

 

There is interest from me, especially after the post you made about talking to the CEO. I have not bought shares yet, but if I sell anything this will probably be the next stock I buy.

[SafetyinNumbers]

Terra Firma put up a great quarter, in my view, at least. The stock didn’t budge.

 

TII earned C$0.24 in Q3 and book value increased to C$9.24 vs the stock price at $5.30.

 

So still 0.6x book and closer to 5x annualized Q3 EPS. The ROE crested 10% in the quarter. We should continue to see operating leverage as the loan book grows and financial leverage as they utilize the low cost credit facility that was added this year.

 

Should I keep posting on this name or is there zero interest?

 

There is interest from me, especially after the post you made about talking to the CEO. I have not bought shares yet, but if I sell anything this will probably be the next stock I buy.

 

That’s encouraging, thanks!

[matts]

Yes, I'm also paying attention. Please keep sharing your thoughts.

 

[SafetyinNumbers]

New Insider at Terra Firma picked up 75k shares yesterday and owns close to 2% of the company after recently coming on board as an MD from Tricon (TCN.TO). Interesting pair trade for him given TCN has a lower ROE and higher P/B.

 

https://m.canadianinsider.com/company?ticker=TII