Steady Performance, Promising Outlook Amidst Rate Cuts

• In FY2024 (ended August 2024), mortgage receivables increased 29% YoY to $169M vs our forecast of $157M. As of December 2024, receivables hit a historic high of $188M.
• In FY2024, the yield increased by 0.3 pp to 9.4%, beating our estimate of 9.2%, driven by higher lending rates, and mortgage receivables. FY2024 net income was up 15% YoY, beating our estimate by 3%. 

• As of December 2024, 89% of mortgages were in ON. The weighted average loan-to-value was 67%. First mortgages accounted for 85% of the portfolio. 
• As of August 2024, Ginkgo had $5.5M (3.3% of the portfolio) in stage three (impaired) mortgages, spread across 15 out of 487 properties, down from $6.9M (5.2% of the portfolio) at the end of August 2023.  This decline is notable, especially as most comparables reported YoY increases in stage three mortgages during the same period.
• The Bank of Canada has lowered rates six times this year, totaling 200 basis points, which should boost Ginkgo’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 Ginkgo, 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 9.0% in FY2025 (FY2024: 9.4%), while raising our overall rating from 2 to 2+. 

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

Ginkgo’s yield aligns with comparables despite higher first mortgages, primarily due to higher LTV mortgages, and higher use of leverage. Lacks geographical diversification, with 90% of its portfolio in Ontario

Source: Company / FRC

In FY2024, mortgage receivables were up 29% to $169M vs our estimate of $157M. As of December 2024, receivables hit a historic high of $188M 

Mortgage advancements were up 10% YoY, while repayments were up 26% YoY. Exposure to first mortgages increased, implying lower risk

Source: Company / FRC

Trimmed exposure to ON, while expanding exposure to AB, implying enhanced geographical diversification. Key focus areas include the GTA, and second-tier cities such as Cambridge, Kitchener, Oshawa, London, and Hamilton

Increased exposure to residential mortgages, implying lower risk. LTV declined

Lending rates have begun to trend lower, aligning with the recent decline in market rates

Stage three (impaired) mortgages decreased 1.9 pp to 3.3% of portfolio. Loan loss allowances decreased 0.4 pp to 1.16% of portfolio; 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 five green vs two red signals

FY2024 revenue was up 18% YoY, beating our estimate by 2%, amid higher than expected mortgage receivables

Net income was up 15% YoY, beating our estimate by 3%

Financials (YE: August 31st)

The FY2024 yield was 9.4% vs our forecast of 9.2%  

Debt-to-capital increased due to higher mortgage advancements but remained within the 20%-40% range observed for comparables

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

We are projecting yields of 9.0% in FY2025, and 8.7% in FY2026. Our FY2025 yield estimate varies between 7.2% and 10.6%, as loan loss provisions and lending rates vary

FRC Projections and Rating

We believe the MIC has demonstrated its ability to deliver strong yields, while reducing portfolio risk by increasing exposure to first mortgages, and lowering impaired mortgages. As a result, we are upgrading our overall rating from 2 to 2+, while keeping the risk rating unchanged at 3.

We find high-yielding funds, like Ginkgo, 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. Given the BoC’s recent and anticipated rate cuts, 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. 

Risks

Investors are exposed to the following risks:

• Loans are short term and need to be sourced and replaced quickly. 
• Concentration risk 
• A downturn in the real estate sector may impact the company’s deal flow
• Lower housing prices will result in higher LTVs 
• Shareholders’ principal is not guaranteed
• The MIC uses leverage, which increases exposure to negative events
• Second mortgages carry higher risk
• Default rates can rise during recession
• Operates in a highly competitive sector 

APPENDIX