Published on March 23rd, 2023 by Aristofanis Papadatos
Timbercreek Financial Corporation (TBCRF) has two appealing investment characteristics:
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The combination of a high yield and a monthly dividend render Timbercreek Financial appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Timbercreek Financial.
Timbercreek Financial is a mortgage investment company that provides shorter-duration structured financing solutions to commercial real estate investors in Canada. The company focuses on lending against income-producing real estate properties, such as multi-residential, retail, and office properties in urban markets. Timbercreek Financial was founded in 2016 and is headquartered in Toronto, Canada.
Timbercreek Financial has a service-oriented business approach and thus it offers faster execution and more flexible terms to its borrowers than Canadian financial institutions. This is one of the reasons that explains why its customers resort to Timbercreek Financial instead of using the traditional banking channels.
Approximately 89% of the properties of the portfolio of Timbercreek Financial are income-producing.
Source: Investor Presentation
This feature is paramount, as it renders the loans provided by the company much more reliable. Moreover, 97% of the total portfolio is invested in urban markets, which are reliable.
Due to the nature of its business, Timbercreek Financial is sensitive to the underlying economic conditions. Some of its customers cannot borrow funds via the traditional banking channels and hence they are usually somewhat vulnerable during rough economic periods.
Indeed, Timbercreek Financial was hurt by the fierce recession caused by the coronavirus crisis. In 2020, the company incurred a 39% decrease in its earnings per share, from $0.51 to $0.31. Fortunately, the recession proved short-lived thanks to the unprecedented fiscal stimulus packages offered by the Canadian government in response to the pandemic. As a result, Timbercreek Financial has fully recovered from this crisis.
Timbercreek Financial posted exceptionally strong results in the fourth quarter of 2022. The company grew its net investment income by 40% over the prior year’s quarter, to a new all-time high, and its distributable income by 10%. Nevertheless, as the company will begin to face tough comparisons this year, it is prudent to expect slower growth going forward.
Timbercreek Financial pursues growth by lending funds to new customers at attractive interest rates. It tries to lend funds against income-producing properties in order to make sure that its loans will be serviced without any problems.
Unfortunately, this is easier said than done. To be sure, the company has failed to grow its earnings per share over the last seven years. The uninspiring performance has partly resulted from the devaluation of the Canadian dollar vs. the USD. U.S. investors should be aware that the fluctuation of the exchange rate between these two currencies significantly affects the earnings and the dividends of Timbercreek Financial in USD.
Even when the devaluation of the Canadian dollar is taken into account, Timbercreek Financial still has a poor performance record over the last seven years, as it has hardly grown its bottom line. Therefore, it is prudent for investors to be conservative in their growth expectations.
Given the somewhat volatile performance record of Timbercreek Financial and the sensitivity of its earnings to the gyrations of exchange rates, we find it prudent to expect approximately flat earnings per share over the next five years.
Dividend & Valuation Analysis
Timbercreek Financial is currently offering an exceptionally high dividend yield of 8.9%, which is more than quintuple the 1.6% yield of the S&P 500. The stock is thus an interesting candidate for income-oriented investors, but the latter should be aware that the dividend is far from safe due to its sensitivity to the aforementioned fluctuation of currency exchange rates.
Moreover, Timbercreek Financial currently has a payout ratio of 106%, which is unsustainable in the long run and does not provide a margin of safety. Furthermore, the company is sensitive to the underlying economic conditions. As a result, whenever it faces a potential recession, it may cut its dividend.
It is also important to note that Timbercreek Financial is sensitive to the yield curve. When the risk of an upcoming recession increases, short-term interest rates exceed long-term interest rates. In such a case, the profit margin of Timbercreek Financial in new loans is essentially eliminated. This is exactly what the company is experiencing right now.
In reference to the valuation, Timbercreek Financial is currently trading for 12.1 times its earnings per share in the last 12 months. Given the volatile performance record of the company, we assume a fair price-to-earnings ratio of 12.0 for the stock. Therefore, the current earnings multiple is marginally higher than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will incur a marginal -0.2% annualized drag in its returns.
Taking into account the flat earnings per share over the next five years, the 8.9% current dividend yield and a -0.2% annualized contraction of valuation level, Timbercreek Financial could offer a 7.4% average annual total return over the next five years. This is a decent expected return, but we would require a higher return to recommend buying this volatile stock. Therefore, investors should wait for a significantly lower entry point.
Timbercreek Financial is offering an exceptionally high dividend yield of 8.9% and pays its dividends on a monthly basis. As a result, it may entice some income-oriented investors.
However, the company has a payout ratio of 106% while it is vulnerable to a potential recession as well as the inversion of the yield curve of interest rates. Therefore, the dividend of Timbercreek Financial is far from safe.
Moreover, Timbercreek Financial is characterized by extremely low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
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And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
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- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more