Transcript Document

TRUST ▪ INSIGHT ▪ VISION
TERRA FIRMA
CAPITAL CORPORATION
Private & Confidential
March 2015
Forward-Looking Statements
This presentation contains certain statements that may be “forward-looking statements.” All
statements in this document, other than statements of historical fact, that address events or
developments that Terra Firma Capital Corporation (“the Company” or “Terra Firma”) expects to occur,
are forward-looking statements. Forward-looking statements are statements that are not historical
facts and may be, identified by the words “expects,” “plans,” “anticipates,” “believes,” “intends,”
“estimates,” “projects,” “potential” and similar expressions, or that events or conditions “will,”
“would,” “may,” “could” or “should” occur.
Although the Company believes the expectations expressed in such forward-looking statements are
based upon reasonable assumptions, such statements are not guarantees of future performance and
actual results may differ materially from those in the forward- looking statements. Factors that could
cause the actual results to differ materially from those in forward-looking statements include, failure to
successfully negotiate or subsequently close transactions, adverse results from mortgage investments
and general economic, market or business conditions. Investors are cautioned that any such
statements are not guarantees of future performance and actual results may differ materially from
those projected in the forward-looking statements. Forward-looking statements are based on the
beliefs, estimates and opinions of the Company's management on the date the statements are made.
The Company undertakes no obligation to update these forward-looking statements in the event that
management's beliefs, estimates or opinions, or other factors, change.
1
Company Background
Terra Firma is a real estate finance company
that offers customized debt and equity
solutions to developers and property owners
Ticker Symbol
- Track record of growth and profitability
Shares outstanding (basic)
41,582,300
52 week Trading Range
$0.35 – 0.91
Total Assets (YE2014)
$86.3 million
Market cap (basic)
~$33 million
Market cap (fully diluted)
~$48 million
Q4 2014 EPS (fully diluted)
$0.02
-
Revenue and Net Income up 39% and 69%,
respectively in 2014 vs. 2013
Revenue and Net Income up 14% and 23%,
respectively in Q4 2014 vs. Q4 2013
2014 Return on invested capital 23.9% (pretax)
Share Price (as at March 25,
2015)
EPS (basic/fully diluted)
TTM P/E (as at Dec 31, 2014)
(Basic)
TSXV:TII
$0.79
$0.10 / $0.08
8X
TTM P/BV (as at Dec 31, 2014)
1.3X
Insider Ownership
~30%
2
Terra Firma – Strategic Capital Partner
Terra Firma provides customized real estate financing solutions
which achieve “equity-like” returns in a “debt-like” structure:
– Offers a full spectrum of structured real estate financing solutions to
developers and owners
– Terra Firma investment will rank in priority to borrower ’s equity
– Over $200MM in loan originations with average IRR >15%
– Over $130MM in assets under management
Core focus is on:
– Investing with well established developers who are bankable, but are
underserved by conventional banks
– Quality commercial and residential assets
– Income producing properties
– Targeted urban and suburban markets both in Canada and U.S.
3
Competitive Landscape
Terra Firma is “inside” the risk of equity but has the potential to
generate similar returns
TFCC
Return
Equity
Mez
Banks
Risk
4
Substantial Growth Opportunities
 Opportunities:
– Permanent need for non-bank capital
– Canadian real estate debt market dominated by banks
– Large segment of the Canadian mortgage market is either not serviced by traditional
bank lending or conservatively leveraged
– Limited availability of capital from conventional lenders provides TFCC the
opportunity to create mid tier capital (subordinate to senior debt but in priority to
equity) at attractive yields
 Terra Firma:
– Full service asset management platform (fully licensed with FSCO)
– Established reputation and extensive contacts in the commercial real estate and
mortgage lending community
– True partners with its clients in their real estate endeavor drives repeat business
– Investments are diversified by borrower geography, Loan-to-Value, industry types and
maturity dates
5
Equity Like Returns
Sample Financing Structure
•
TFCC originates total loan of 75% LTV at 8%
p.a.+ 2% fee
25%
•
Tranches the loan into Senior “A” Note (50%)
and Junior “B” Note (25%)
Junior B Note
25% LTV
@ 15% p.a.
•
“A” Note is priced at P+1.50% + 1% fee (4.5%)
•
Remaining yield to “B” Note is 15% p.a.
before fee
•
TFCC will typically invest only in the “B” Note
and funds from it’s balance sheet
•
TFCC can adjust the size of the Tranches to
achieve the ultimate package for the
borrower
•
TFCC can participate at Equity Level
Equity
Total
Debt
75%
LTV
Senior A Note
50% LTV
@ 4.5% p.a.
8% cost to
Borrower
Overall IRR is ~19.0% including fee
6
Risk vs. Return
Terra Firma Investments have less risk than typical equity investments:
 Lower LTV
 Equity subordination
 Security and registration on title
 Personal guarantees
 Fixed minimum return
 Current return on a monthly basis
 Compensated for delays in project completion
 TFCC does not provide guarantees to senior lenders
 Are not subject to capital call or cost overruns
7
Syndication Activities
Terra Firma further developed a robust syndication platform
 Raised over $77 million in third party capital from high net worth individuals
 TFCC funds loans from its balance sheet and recycles it with syndications
 TFCC and its principals retain approximately 20% of the deal and act as Mortgage
Administrator
 Alter some of the features of the loan to make it more retail friendly
 Terra Firma earns an additional 200bp to 500bp spread plus the commitment fee
 No recourse to Terra Firma
 In house function – no fees or commissions paid
8
Disciplined Approach / Creative Structure
 Deals are sourced through current network of industry participants, brokers and repeat clients
 Loan types include:
– First mortgages
– Second mortgages
– Construction loans
– Bridge loans
- Equity loans
 Income Producing Properties
 Development projects – Residential, Retail, and Student housing, mostly infill locations
 Average loan size – $5 million and up
 Term – 6 months to 5 years
 Commitment Fee – 2%+
 Rates:
– First mortgages starting at 7%
– Second mortgages starting at 10%
 Target return on TFCC equity – 15% -- HISTORIC RETURNS RANGE FROM 10% to 35%
All Loans subject to approval by internal investment committee
9
Loan Originations & Syndications Since 2011
Millions of dollars
Loan Originations
Loan Syndications
$120.0
$100.3
$100.0
$80.0
$61.7
$58.7
$60.0
$48.9
$40.3
$40.0
$25.4
$22.3
$20.0
$14.6
$0.0
2011
2012
2013
2014
10
Consistent Bottom Line Growth
Net income
3,500,000
3,238,383
3,000,000
2,500,000
2,000,000
1,699,287
1,500,000
1,251,980
1,000,000
500,000
287,000
110,000
2010
2011
2012
2013
2014
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Total Commitments & Number of Investments
Commitments
Number of Investments
$120.0
$100.3
$100.0
$millions
$80.0
$58.7
$60.0
$40.3
$40.0
$22.3
20
$20.0
14
10
7
$0.0
2011
2012
2013
2014
12
*
Loan Portfolio
Loan Portfolio *
$144,448,809
160,000,000
$137,703,809
140,000,000
120,000,000
100,000,000
$93,715,542
80,000,000
60,000,000
$54,382,398
40,000,000
$23,883,018
20,000,000
$1,252,250
2010
* Includes A tranche held by Senior lender
2011
2012
2013
2014
13
FUTURE GROWTH OPPORTUNITIES
 Terra Firma investment methodology is highly scalable
 Growth in investment activity and profitability will be the
following areas:
 Repeat business from existing clients
 Increase market share in the GTA
 Expand geographic footprint into the US
 Move up and down the capital structure
 Develop new products for our investors and clients
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US OPPORTUNITIES
 A significant expansion into the US will provide TFCC strong growth
prospects and diversification of risk
 The US housing industry is positioned for rapid growth and increased
value in the short to medium term especially in urban in -fill locations
 The market for housing development capital is underserved with little
competition
 Investment yields for housing development remain high on risk
adjusted basis
 Glenn Watchorn has the experience and established track record to
manage the US expansion plan
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SIGNIFICANT ROOM IN U.S. FOR GROWTH JUST TO
HIT HISTORIC NORMS
16
CASE STUDY: Houston Transaction *
Loan Terms
Houston Market
 $13MM recapitalization loan
 18% rate of interest
 Single-family lot development currently
cash-flowing
 Well capitalized and reputable
Developer
 62% Loan to Completed Value
 Located in the southeast quadrant of
Houston  servicing commuters to the
Galveston Port, Texas Medical Center,
NASA and downstream oil jobs
(refineries)
 Glenn Watchorn has a successful track
record in placing over $275MM in
equity/debt financings in Houston
market over the past 4 years
 Key Stats:
 Largest housing market in the US
 One of the fastest growing
markets with 2x the national rate
of growth in jobs and population
 Extremely affordable 
approximately 70% of households
can afford the median priced
home
 Undersupply of lots 
approximately 14 months of
inventory while historical
equilibrium is 25 months
 Housing market is undersupplied
by approximately 25% based on
jobs per permit
* This transaction is in process and there is no assurance that it will close
17
CASE STUDY: Atlanta Transaction *
Loan Terms
 $3.5MM Land loan for the future
development of multi-family
residential
 Option to provide up to $9MM on
the project financing
 15% rate of interest
 75% Loan to Value
 “A” location in Midtown Atlanta
 Glenn Watchorn has over 12 years
experience working in the Atlanta
market and with this Developer
* This transaction is in process and there is no assurance that it will close
Atlanta Market
 Key Stats:
 A resurgent market with 1.5x
the national rate of growth in
jobs and population
 Extremely affordable 
approximately 75% of
households can afford the
median priced home
 Housing market is
undersupplied by
approximately 50% based on
jobs per permit
18
Sampling of Projects Financed by Terra Firma
$13.3 million
Bay Street, “Trophy” Condo, Toronto, ON
$3.6 million Commercial Plaza
Hamilton, ON
$6.6 million Low rise Condo
Development , Toronto, ON
$6.2 million Multi-Family
Ottawa, ON
$1.5 million Student Housing
Waterloo, ON
19
Multiple Revenue Drivers
Total 2014 revenue: $12.4 million
Commitment fees: 2-4%
Co-lender fees: 0.5-1%
Co-lender spread: up to 500bps
Syndication fees: 50bps-400bps
Profit participation: varies
2014 Yield on invested capital (before tax) 23.9%
*varies subject to project type
20
Clients and Partners
Terra Firma takes pride in its growing list of clients and partners
▫ Reichmann International Development Corporation
▫ Lanterra Developments
▫ Urbancorp Development Corporation
▫ Atrium Mortgage Investment Corporation
▫ Golden Equity
▫ BSAR Group of Companies
▫ Lindvest
▫ Empire
▫ Laurentian Bank
▫ MCAN
▫ MCAP
21
Senior Management Team
Y. Dov Meyer - Chief Executive Officer
Formerly, Co-founder and Chief Investment Officer of IPC US REIT and Manager of HGI Debt Fund. Directly
responsible for growing IPC to a total asset value of close to $2 billion. He held a number of positions with the Paul
Reichmann Group of Companies and has over 20 years of real estate and public market experience.
Glenn Watchorn – President and Chief Operating Officer
Mr. Watchorn is the former co-chief operating officer of Tricon Capital Group Inc., a North American residential real
estate investment company, where he was responsible for investment strategy and for the sourcing, underwriting
and management of over $1.2 billion of investments in the U.S. and Canada. Prior to joining Tricon in 2002, Mr.
Watchorn was vice-president, corporate, for Intracorp Developments Ltd., a real estate development company that
manages and develops residential and commercial projects throughout Canada.
Mano Thiyagarajah – Chief Financial Officer & Corporate Secretary
Held various senior finance positions in public and private real estate and asset management companies, including
TransGlobe Apartment REIT, Sentinel Real Estate Corporation, O&Y REIT and Morguard Corporation. Participated in
three successful subsequent units and convertible debenture offerings totaling $411 million in first 24 months, post
the initial public offering at TransGlobe Apartment REIT.
The Terra Firma team has over 50 years of real estate experience
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Strong Independent Board of Directors
John Kaplan – Chairman
Current Director of Runnymede Development Corporation Limited, where he was also President
from 2000-2013. Is presently a principal of several real estate concerns including Metropia,
Trademarek Communities and Haber Homes
Philip Reichmann – Director
Co-founded O&Y Properties Corporation and O&Y REIT and served as Chief Executive Officer. He is
a Founding Partner of ReichmannHauer Capital Partners
Seymour Temkin – Director
Headed the Canadian real estate practice of Deloitte & Touche LLP for 15 years. He is a Chair of
the board of directors and a member of the audit committee of GT Canada Medical Properties
Real Estate Investment Trust
Dr. Chris Bart – Director
Professor of Strategic Market Leadership at DeGroote School of Business (at McMaster since
1981). He has published over 100 articles, cases and reviews and he is best known for his
pioneering research which has demonstrated the positive impact that mission statements have on
organizational performance
Reuben Rosenblatt – Director
Chair and a senior member of the Real Estate Practice Group, Minden Gross LLP. First recipient of
the Ontario Bar Association Award of Excellence in Real Estate in January 1996
23
Recent Financial Highlights
In CND $000
FY 2014
FY2013
% change
Revenue
$12.39 mm
$8.90 mm
39.2%
Net Operating Income
$4.14 mm
$2.30 mm
80.0%
Net Income
$3.24 mm
$1.70 mm
90.6%
EPS - basic
$0.10
$0.06
66.7%
BV/share
$0.59
$0.42
40.5%
24
Recent Financial Highlights
In CND $000
Q4 2014
Q4 2013
% change
Revenue
$3.51 mm
$3.08 mm
14%
Net Operating Income
$1,150,815
$999,874
15%
$919,747
$748,026
23%
EPS - basic
$0.02
$0.02
0%
BV/share
$0.59
$0.45
31%
Income
25
Summary
 Highly accretive business model with focused lending strategy
 Strong growth over the last three years
 Diversified, high quality mortgage portfolio in Canada and U.S. with
substantial growth opportunities
 Stable equity yield with potential capital growth upside and risk mitigation
 Strong and well-connected management team with proven access to quality
real estate pipeline
 Favorable valuation at book value
26
TRUST ▪ INSIGHT ▪ VISION
APPENDIX
27
Recent Transactions
Residential
Development
Residential
Development
Development of 72
townhomes
Development of over 650
freehold townhomes
$1,200,000
Deposit Loan
Toronto, ON
$3,500,000
Equity Loan
Toronto, ON
$14,000,000
First Mortgage
Toronto, ON
$950,000
Equity
Toronto, ON
Residential
Development
Residential
Development
Residential
Development
Student Residence
Development
Land acquisition for the
development of mid-rise
Land acquisition for 49
townhomes
Over 900 units in five low
and high rise projects
Construction of 205 bed
project
$2,700,000
Equity
Toronto, ON
$4,390,000
First Mortgage
Woodbridge, ON
$9,200,000
Equity Loan
Toronto, ON
$1,724,000
Mezzanine Loan
Waterloo, ON
Retail
Development
Condominium
Development
Residential
Development
Multifamily
Development
Construction of 29,000
sq. ft. retail development
Land and predevelopment financing of
20 luxury townhomes
$3,500,000
Mezzanine Loan
Toronto, ON
JV to develop 58 townhomes and 26 single
family homes
250 unit apartment
building
$4,600,000
First Mortgage
Hamilton, ON
Residential
Development
Land acquisition for the
develop. of mid-rise condo
$700,000
Preferred Equity
Ajax, ON
Condominium
Development
Development of midrise
mixed use project
$15,800,000
Acquisition Loan
Scarborough, ON
28
Case Study
Trophy Condo Development – Bay & Wellesley, Toronto
Background
 A leading developer in the City acquired a 2 acre site at Bay and Wellesley and approached
Terra Firma to participate in the acquisition and development of a “Trophy” property
 The developer was seeking a JV partner, not a debt financing
 Terra Firma offered an “out of the box” solution, whereby Terra Firma would contribute 1/3
of the equity required, in the form of convertible mezzanine loan secured by the land, with
the option to convert the loan into a 1/3 of the JV equity interest in the development at the
end of the loan period
Outcome
 This structure provided Terra Firma with downside protection and offered an opportunity
for a “second look” at the development prospects at the end of the loan period
 Terra Firma eliminated rezoning, presale and construction financing risks
 More importantly, Terra Firma was able to create a relationship with an established
developer
29
Case Study
685 Queenston Rd., Hamilton, ON
Background
 A developer purchased land in Hamilton, pre-leased to a single tenant
 The Phase II ESA Report indicated the requirement of a site clean-up, which made it
difficult to get an institutional financing
 Terra Firma noted the scope of the site clean-up, a quote for a clean-up and that the City of
Hamilton will make payments over next 10 years to offset the cost of remediation
 After taking into account of the estimated remediation cost, incorporating the value of the
existing structure into the proposed development together with the estimated project
costs, Terra Firma determined the LTV upon completion to be 65%
Outcome
 Terra Firma provided the initial funds for the clean-up and entered into an arrangement
with a Senior Lender to fund 85% of the loan once the property was remediated, creating
an 85:15 A/B split.
 Overall rate to borrower was 7.75% p.a., interest rate to the Senior Lender on the A Piece
was 4.75% p.a.
 The spread yielded a 27% to Terra Firma.
 More importantly, it was a very difficult financing resolved by Terra Firma.
30
Case Study
Five Condominium Developments, Toronto
Background
 An experienced developer with $55 million of equity in five condo development projects
totaling over 800 units (total sellout value of $280 million)
 The five development projects were at various stages, ranging from pre-zoning to fully
built and the properties were 75% to 85% pre-sold
 The developer was seeking to monetize his equity to acquire future development sites in
the GTA. The requested amount was $10 million.
 The Developer had about $31 million in excess equity and estimated profits after servicing
Terra Firma debt and the total principal and accrued interest during the term of the loan
would total only 23.8% of the projected cash available from all closings
 There is sufficient room to deal with potential slippage in excess of the TFCC underwriting
criteria
 Terra Firma cross-collateralized the loan by all 5 projects plus joint and several guarantees
from the Borrower and a floating charge debenture
Outcome
 TFCC provided a loan at 18% p.a. with 2% fee and syndicated $6.2 million to investors at
15% p.a. Investment yields over 30% to Terra Firma
 Terra Firma “followed the money” and participated in future financings which yielded over
20%
31
TRUST ▪ INSIGHT ▪ VISION
THANK YOU