BCI Annual Report

F2021-Corporate-Annual-Report

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Mortgages Delivering positive returns from a diverse $7.0 billion portfolio borrowers in Canada and the United States. Investments are diversified by loan size, region, and property type with a focus on QuadReal's areas of conviction, which include residential and industrial. QuadReal continues to build on a strong Canadian program, with investments in the U.S. to provide BCI clients with geographical and borrower diversification. QuadReal's management of the program includes detailed underwriting, credit, and financial analysis of all major tenants, guarantors, and borrowers. Their in-house servicing team oversees all payments, discharges, cash flows, insurance expiries, and borrower property tax payments. Effective January 2021, BCI and QuadReal, in collaboration with our clients, consolidated the four mortgage pooled funds — Construction Mortgage Fund, Mezzanine Mortgage Fund, Fixed Term Mortgage Fund, and U.S. Mortgage Opportunity Fund — into one program, the BCI QuadReal Mortgage Program. By combining separate mortgage pools with similar investment objectives and characteristics, QuadReal will realize efficiencies and increase potential returns through diversification. The consolidated pooled fund allows QuadReal to: • expand the breadth of permissible investment products and geographies to increase diversification • improve their ability to participate in more investment opportunities • leverage and obtain favourable credit terms when liquidity is needed or beneficial in the future PERFORMANCE ANALYSIS Many of QuadReal's borrowers were impacted by the pandemic, particularly those with retail, hospitality, or service-related tenants. Some borrowers requested payment deferrals due to loss or expected loss of rental income during the period of heightened uncertainty. Most construction loans were also impacted by delays and increased costs, due to virus safety protocols, site shut-downs, staff availability, supply chain delays, and cost increases. The team assessed all loans to determine repayment ability and risk in the circumstances. For some loans, QuadReal worked with borrowers to allow payment deferrals and loan extensions, as well as to structure enhanced loan security and reporting where applicable. The Construction Mortgage Fund, which finances commercial and multi-residential developments, returned 5.3 per cent 1 against its benchmark of 2.2 per cent. The outperformance is attributed to a number of interest rate floors established within the existing loans that created an increased return in a falling interest rate environment. The Mezzanine Mortgage Fund finances high loan-to-value loans offered to commercial developers and property owners. The fund returned 4.7 per cent 1 against a benchmark of 4.0 per cent. Outperformance is attributed to the resolution of several mortgages in mid to late 2020 with no principal loss to which valuation adjustments had previously been applied. OUR APPROACH Since fiscal 2020, QuadReal has served as the manager of BCI's mortgage program. As a significant lender to the commercial real estate industry, QuadReal focuses on direct mortgage investments with strong-yielding and attractive risk-return profiles. Their strategy includes new loan origination on resilient property types located in markets with strong fundamentals. The program targets fixed term, construction, and mezzanine 1 The Construction Mortgage, Mezzanine Mortgage, and Fixed Term Mortgage funds are reported for the nine-month period of April 1 to December 31, 2020. 2 0 2 0 - 2 0 2 1 C o r p o r a t e A n n u a l R e p o r t M a n a g e m e n t ' s D i s c u s s i o n a n d A n a l y s i s 4 3

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