Transcript
Rob:
Hey guys, I’m Rob Tétrault from robtetrault.com, head of the Tetrault Wealth Advisory Group here at CG Wealth Management. I am pumped today. We’ve got a fantastic guest. Good buddy of mine, Cam Goodnough. I mean we tried to get someone else, but he’s good enough for now. That’s a joke.
I’m really excited to have him here. We’re in Winnipeg. He’s in town. Not every day we get a CEO of a publicly listed company on the TSX in town chatting in our office in Winnipeg. We’re thrilled to have you here Cam.
Cam:
Thanks for having me.
Rob:
Yeah, it’s our pleasure. So, today we’re talking about private debt. We’re going talk about your story a bit. I want to hear how you got involved with financial services. I want to hear about Timbercreek, their role, how you see it fitting. Really, private debt has changed a lot in the last 10, 15, 20 years, even 50 years. It’s a lot more available now than ever was, and we’ll talk about that in a sec too.
Let’s talk about you and how you started in financial services industry. Where are you from originally?
Cam:
A town called Smithville, Southern Ontario – small town, about 2,500 people. My parents are both from Saskatchewan and it was great. It was a kind of a Huck Finn existence until you were about 14 or 15, and then all you want to do is get out of that town.
My travels took me to university. I went to the University of Windsor, got my undergrad in commerce. Ultimately, still didn’t know what I wanted to do with my life as you’re pretty young and you’re still figuring things out. I ended up going to do my grad work at, my MBA, and my law degree at Osgoode Hall and Schulich at York University,
Rob:
That’s an okay university, but I went to U of T, it’s a little better for my law school, but anyways…
Cam:
(Chuckles) and that’s where I found out about investment banking. I come from where I came from. It wasn’t a topic of conversation around kitchen table and that’s it. And it was at that school, at that point that I found out about investment banking, started exploring what, what that meant, what that would look like and that was my start in financial services. Out of school, I joined Merrill Lynch in their corporate finance group. And you know, back then, late ‘90’s, spend a lot of time on technology and technology IPOs and that ended in the early 2000’s had to reinvent myself. And at that point …
Rob:
So, you were actually an investment banker late ‘90’s with the tech run up in the tech wreck
Cam:
Yes.
Rob:
Oh, that must’ve been really exciting.
Cam:
It was, you’re working on some fantastic deals. Some really interesting companies. You’d have story. I mean, I’m not necessarily going to dive too deep today, but there were some ludicrous things that were happening at valuation, valuations and multiples of number of engineers in terms of figuring out how you value a pre revenue company and you really opened your eyes.
And that really set the foundation for me around value and what is it that I’m paying for and what am I really getting for what I’m paying for. And that that’s has stuck with me.
In 2001 when you had the start of the collapse of NASDAQ, I was still young at this point and mobile in terms of profession and in terms of focus area, and there was an empty seat available in the financial services area of the firm.
So, I made the move from technology, pre-IPO financing stuff to financial services, spent a lot of time digging into banks and insurance companies and wealth managers and I really found an affinity for wealth managers.
Particularly when you were covering somebody who was a really good investment professional who understood value. Speaking back to my lessons through the tech bubble, crash, whatever you want to call it, that was really my start in my introduction to, not just private debt, but just wealth management generally around the different asset classes. How does this strategy work? How does that strategy work? What are the pros and cons of the various strategies?
Rob:
Were you advising wealth advisors, or were you a Wealth advisor at that point?
Cam:
At that point I was advising the companies themselves, whether they’re publicly traded like a CI or financial, or whether they were private companies, we were delivering and whatever financial services they needed funding in terms of fund launches or in terms of capital market needs, raising debt, raising equity, mergers and acquisitions, that sort of thing. And that really fueled my interest in the space.
At this point, I’m now at RBC and then ultimately culminated my career at TD. At TD, I found this young company called Timbercreek. They were small and they weren’t particularly well covered by the large institutions and I’ve got to really know the two founders there, spent a lot of time with them, raised, started raising them capital for the predecessor funds to typically financial and ultimately in 2016 advise them on the merger of a couple of their companies that created at the form Timbercreek financial.
And it was out of that, Hugo and Blair talked to me about joining Timbercreek. At that point, having spent 17 or 18 years in investment banking, it was a chance to do what I’d been on the other side of the table, what I’ve been advising others to do.
Rob:
So now you’re CEO of Timbercreek financial, it’s 2016.
Cam:
Yes.
Rob:
At that point Timbercreek financial had a focus on private debt exclusively. Correct?
Cam:
Correct.
Rob:
So, what’s your view on it, and what are the first things you do with respect to Timbercreek?
Cam:
Well, the first thing that we did was assessed the, the risk of the portfolio. That to us was – is – a fundamental tenant. We felt that where we were in the real estate cycle, was probably later than earlier in terms of, you know, what inning are we in. So, we started de-risking the portfolio.
What that means for private debt, we’re a commercial real estate lender. So, all we do is commercial real estate. We don’t do single family residential mortgages. Our sweet spot is between $5 and $50 million. We love apartment building.
Rob:
What would be the loan to value that you’d be doing on these projects?
Cam:
Our average portfolios are about a billion to, would be 67%.
Rob:
And is this exclusively mezzanine financing, kind of short-term stuff?
Cam:
It is short term, but it’s not mezzanine, it’s first mortgages. So, we’re providing first mortgages to real estate companies who are transitioning an asset from or executing a value-add strategy. You can call it either one. So, they’re looking for a short-term bridge solution to take this property from point A to point B or rather the other way around. Take a B asset and make it an A asset, or a C asset and make it a B asset. And at that point we’d get taken out by traditional financers, whoever that is, who have lower cost of capital than we have, or a sale of the property, which we get rebates.
So, our typical mortgages are two years, our average duration in the portfolio ranges. But 1.1, 1.2 years.
Rob:
And this private debt has been around for a while and it serves a ridiculously important purpose because these developments don’t happen otherwise. Right? Like you’ve got a building that needs to either expand or maybe scale up, add some stories. I’m thinking maybe in Toronto and Vancouver.
Cam:
Absolutely repositioning them. I’m renovating them. I’m leasing them up if they’re unreleased or are under market rents. And so, you know, historically this activity was done by the financial institutions. but there was, as the regulations have evolved the need to hold more capital against certain kinds of projects versus other kinds of projects. And you’ve seen a really huge number of entities created over the last 20 years, but really heavily in the last 10 years that are focused on providing private alternatives for professional investors to access debt capital while they’re executing the projects.
And so, our niche –I’ve talked about some of that stuff and our differentiators – is that we are flexible. We don’t have 10,000 mortgages. We have, you know, a 125-150 mortgages. So, we’re flexible in the, you were customizing mortgages each time too, to the borrower’s needs.
We are a real estate company first and foremost. We understand the real estate. We’re a financial provider secondarily, meaning we’re making an assessment on whether we like the real estate, and if a downside scenario were to occur, would we be happy owning this at our loan devaluation, which is very important, and could we complete the other part? Could we complete the project? That’s being done. So, do we like the property? Do we like the sponsor, who’s behind this project? And thirdly, do we like the plan, and do we believe that we need, you know, more apartments in Winnipeg? Do we believe we need more office space in Toronto? Whatever that is.
If we agree with the thesis and we have faith in the sponsor, and first and foremost, have felt and touched and walked through the actual real estate and we liked the location. If those things all tick, that’s a project that we can get behind at the right LTV level.
Rob:
Okay, so now you’ve been CEO. Fast forward a few years. You’re CEO, you’re running Timbercreek Financial. The stock is doing well, the stock is yielding, the stock pays what kind of dividend?
Cam:
On market price, just over 7%.
Rob:
So, the unit holders end up buying the stock at trades on the Toronto stock exchange. They buy the stock. In theory they hold it, they collect the dividend. That’s a quarterly dividend?
Cam:
That is a monthly distribution.
Rob:
Monthly distribution. You’re getting your annual yield to call it about 7%. In theory, the stock should hopefully in your mind, would it grow over time in theory? Is that the plan?
Cam:
Well, we are what I would describe as a, people shouldn’t own us thinking that there’s capital appreciation, right? We are a yield play, or at the end of the day we are a portfolio of mortgages. We lend a dollar and if we do our job right, we get 100 cents back; we don’t get 105 cents back, we get 100 cents back.
We collected interest on the way through and we flow all of that interest income out to our investors. So, it’s literally holding the investors should think of it as holding a portfolio of mortgages and they’re getting a yield out of it and that the share price is publicly traded. So, there is daily ups and downs, but you shouldn’t be thinking there’s a 10% increase or decrease. It shouldn’t be that volatile.
Rob:
Right. I’m glad you mentioned that because this is not, you know, owning real estate or this is not owning a company like a publicly traded equity where you’re hoping to get a yield plus growth. This has a very clear niche. When you talked about access to investors.
So Timber, you know, when I grew up, you couldn’t access private debt like this was not possible. You couldn’t out and just buy access $2 billion, you know, a $100 million or $1 billion fund managers that could actually manage private debt for you. So that’s now changed and it’s impressive, I’d say.
Cam:
Yeah it has changed. The whole world is changing, particularly post financial crisis, you’ve had, investors who might’ve not liked that roller coaster ride and you’ve had this insatiable drive towards yield and stability and uncorrelated returns. That’s happening at all different sophistication levels of the investors.
So, at the pension funds and the large endowment funds that the Harvard’s et cetera, what are they doing there? They’re moving towards private assets. They’re moving towards owning physical real estate, private debt, private equity, infrastructure, energy, and their public components are decreasing. And that capital has allowed, and they need to source that capital.
This isn’t like a stock. We can’t just go out and buy a bunch of private debt. We have to have a team that goes and finds these deals and, and has relationships with the developers and the project managers and then have an underwriting team that has to go through the credit and make sure that we’re satisfied that all the numbers tie, and that all the environmental reports, and the appraisals, and the engineering reports, and everything else is tied down.
Because again, we’re lending a dollar and getting 100 cents back. We don’t have upside. We don’t want to have downside either. So, we have to do all of our work and then finally we have to service that mortgage. So, we need to go out and make sure we’re getting in the interest payments. We’re running, it’s not a bank, but it is a component of what a bank does. Banks are much more diversified.
Rob:
Managing the risk for sure would be an important one.
Cam:
Absolutely. Absolutely. So, you know, we lever, we’ve got an independent board of directors, who have experience in various facets from legal, to accounting, to real estate, to other, we leverage their expertise. We leverage the full team at Timbercreek, across the firm.
Rob:
So, you know, you’re preaching to the choir. Not sure if you know, but those who do follow me, either at the, at robtetrault.com or my YouTube channel, they do know that I’ve been preaching this exact strategy of diversifying outside of asset classes, typical stock and bond asset classes. The big thing for me is uncorrelated assets, right?
If we can get an asset class that generates returns, no matter what happens in the stock market, no matter what happens in China, no matter what happens with President Trump; that to me is an uncorrelated asset class in something that should be in a portfolio. So, who do you see as kind of your ideal investors? Or is there an ideal investor?
Cam:
Yeah. For us it’s the investors that are – what we find is that the vast majority of our investors are moms and pops who are looking to generate a particular return on their profile, on their portfolio, who don’t want excess volatility of their portfolio. They’ve got a number in their head. Maybe the number’s five, maybe the number’s seven, maybe that number is nine, whatever that number of return profile. And they’re using us as a more stable income source and looking elsewhere for either a top up on a capital appreciation or elsewise.
But we are a MIC, a mortgage investment corp, and as a MIC we don’t have to pay corporate tax – that’s the positive. The negative is that in the hands of the investors, our dividends are taxed as interesting cultures. It’s as if they held the mortgages themselves directly and so it makes sense inside an …
Rob:
RRSP, a Tax-Free Savings Account.
Cam:
Exactly. Anything like that where you can shield that income without having to pay tax on it.
Rob:
Yeah, for sure. Yeah. We’ll ask you one more question about the correlation to interest rates relative to what you guys do. Is it a straight thing where interest rates go down, your yield goes down and interest rates go up and your yield goes up? Or is it more complicated than that?
Cam:
If there are, it is a balloon and the moment, you squeeze on one part another part bulges, then you’re squeezing on that part, and another part bulges. There’s a correlation on rates in terms of overall, real estate activity. So as rates are declining, real estate activity generally is increasing.
Now in 2018 we saw three rate hikes, 75 basis points over the year. And yet, 2018 was a banner year for real estate activity. So, it’s not necessarily directly correlated, but overall there is interest rates or in, it looks like we’re back in a declining rate environment again, and you know, that generally has a positive impact on real estate.
Rob:
That’s fantastic. All right guys. Blessed and lucky today to sit down with Cam Goodnough, the CEO of Timbercreek Financial. Really thrilled to have him here. Again, long line of quality guests that we have here. Happy to have you.
Thank you for tuning in again. We appreciate it. Again, I’m Rob Tetrault from robtetrault.com, Head of the Tetrault Wealth Advisory group here at CG Wealth Management. Give us a like, give us a share. Give us your comments. We’d love to hear from you. Thanks for tuning in.
