Steady Performance, Promising Outlook Amidst Rate Cuts

• In FY2024 (ended September 2023), mortgage receivables were down 5% YoY to $184M. The yield declined 0.1 pp to 9.7%, but exceeded our estimate by 0.6 pp, driven by higher than anticipated lending rates. FCMIC has been able to raise lending rates quickly, as 70% of its mortgages are floating rate.
• The MIC remains focused on first mortgages on single family residential units in B.C. 

• As of September 2024, FCMIC had $12M (6.3% of the portfolio) in stage three (impaired) mortgages, spread across nine out of 275 properties,  largely unchanged from the end of FY2023. We believe FCMIC’s low LTV (54%) puts them in a comfortable position. FCMIC does not expect any significant losses from these impaired mortgages, a belief reinforced by both management and their auditor, who have allocated only 0.1% of the portfolio to loan loss allowances.
• The Bank of Canada has lowered rates five times this year, totaling 175 basis points, which should boost FCMIC’s transaction volumes in 2025. We expect further rate cuts ahead, prompted by slower GDP growth, elevated unemployment, and cooling inflation.
• We find high-yielding funds, like FCMIC, increasingly attractive in the current declining rate environment. This is because MIC lending rates are less elastic, meaning their yields tend to decline less in a falling rate environment, and rise more slowly in a rising rate environment.
• We are projecting a yield of 8.5% in FY2025 (FY2024: 9.7%).

Investment Strategy

Short-term loans secured by real estate. FCMIC has a lower risk-profile, driven by higher first mortgages, and lower LTV

• Primary focus on single-family residential units in B.C. 
• <25% of assets will be invested in industrial and commercial mortgages
• <30% of assets will be invested in second mortgages
• Terms of less than two years
• <75% LTV 

The following table shows how FCMIC’s portfolio compares to other MICs (with AUM of $100M+) focused on single-family residential units.

FCMIC's portfolio is concentrated in B.C., indicating limited geographic diversification 

In FY2024, FCMIC achieved above-average yields while maintaining a lower risk profile, primarily due to its substantial share of floating-rate mortgages. In contrast, most MICs consist entirely of fixed-rate mortgages

Portfolio Details (YE: September 30th) 

In FY2024, mortgage receivables were down 5% YoY to $184M, 13% lower than our estimate, due to higher repayments 

Debt/capital declined 16 pp to 10%, driven by softer lending activity, and higher equity

In FY2024, mortgage originations were up 3% YoY, while repayments were up 13%

Exposure to first mortgages declined, implying higher risk 

The average mortgage size was down 11% YoY, implying lower risk. Exposure to residential units (already built) increased 7 pp to 73%, implying lower risk

At the end of FY2024, 56% of mortgages were in the Greater Vancouver area

LTV decreased marginally  

FCMIC’s lending rates have quickly responded to market rates, as 70% of its mortgages are floating rate

Nil realized losses. Stage three (impaired) mortgages remained largely unchanged at 6% of mortgages 

Management has not allocated any material loan loss allowances as they are not expecting any material losses from impaired mortgages, given the security held against them; we note that this is highly unusual as most MICs typically allocate 0.2%-1.0% of their mortgages to loan loss allowances 

In summary, we believe the portfolio’s risk profile has decreased, with one red, and four green signals

Financials

FY2024 revenue was up 13% YoY, beating our estimate by 7%, due to higher lending rates

Net income was up 14% YoY, beating our estimate by 11%

The yield declined slightly, down 0.1 pp to 9.7%, but exceeded our estimate by 0.6 pp

FRC Rating

With rates expected to trend downward, we foresee yields declining in 2025

We are projecting yields of 8.5% in FY2025, and 8.0% in FY2026

Our estimate for the FY2025 yield varies between 6.4% and 9.6%, as loan loss provisions and lending rates vary

Given the recent and anticipated rate cuts by the BoC, yields are set to decline. However, we believe the risk of higher default rates is easing, and the mortgage origination market is likely to gain momentum in 2025. We find high-yielding funds, like FCMIC, increasingly attractive in the current declining rate environment. This is because MIC lending rates are less elastic, meaning their yields tend to decline less in a falling rate environment, and rise more slowly in a rising rate environment.

Risks

We believe the MIC is exposed to the following key risks (not exhaustive):

• Operates in a highly competitive sector 
• Timely deployment of capital is crucial 
• A downturn in the real estate sector may impact the company’s deal flow
• Geographical concentration 
• Distributions are not guaranteed 
• Leverage increases the fund’s exposure to negative events 
• Although the MIC’s primary focus is on first mortgages, it may invest in second mortgages which carry higher risk 
• Default rates can rise during recession

APPENDIX