Strengthened Portfolio and Dividend Resilience

• In 2024, mortgage receivables (net) increased 31% to $43M vs our estimate of $40M. Q4 saw the bulk of receivables growth, funded by proceeds from a $7.5M bond financing.
• Revenue was up 11.0% YoY, beating our estimate by 1.5%.  However, EPS held steady at $1.04, in line with our estimate, as higher loan loss provisions offset revenue growth. Annual regular dividends remained unchanged at $0.80/share, reflecting a yield of 9.36%.
• We believe the MIC has lowered its risk profile, driven by a higher allocation to first mortgages. Additionally, stage three mortgages (impaired) decreased 0.9 pp YoY to 4.7% of mortgages, a notable contrast to the broader MIC sector, which saw a rise in impairments.
• Since June 2024, the BoC has cut rates seven times (225 bp), with the potential for one or two more cuts this year, due to slowing GDP growth, high unemployment, and cooling inflation. Consequently, we anticipate BCF’s transaction volumes to rise this year.

• While lower rates have historically boosted MIC/financial stocks, Trump’s tariff threats have negatively impacted both Canadian and U.S. equities across the board. Although tariffs will not directly affect MICs, we believe they could be impacted by a potential tariff-induced recession.
• Given the uncertainties, we are taking a cautious stance on MIC/financial stocks. We expect Trump may reverse or soften his new tariff measures due to their potential negative impact on U.S. consumers and businesses. Should this occur, we would revert to a bullish stance on MICs.
• We believe BCF is well-positioned to navigate economic uncertainties, given its strengthened portfolio, featuring more first mortgages, and fewer stage-three mortgages.
• We believe BCF can sustain its $0.80/share annual dividend this year, even if lending rates drop 2%, and provisions rise 250%, underscoring its resilience and low-risk profile.

Price and Volume (1-year)

Portfolio Details 

Mortgage advancements were up 24% YoY; repayments were up 1% YoY. As a result, mortgage receivables (net) were up 31% YoY, to a record-high of $43M vs our forecast of $40M 

First mortgages increased 7 pp YoY to 98%, implying lower risk. Increased exposure to AB, and decreased exposure to B.C. as management is observing more attractive opportunities, and fewer competitors in AB  

Remains focused on single-family units (construction)

The average mortgage size was down 26%, implying lower risk. LTV remained unchanged 

The average lending rate declined, primarily due to the BoC’s rate cuts

Stage three mortgages (impaired) decreased 0.9 pp to 4.7% of mortgages, a notable contrast to the broader MIC sector, which saw a rise in impairments

In summary, we believe the portfolio’s risk profile decreased (two red vs three green signals), driven by a significant increase in first mortgages, and fewer stage three mortgages

Financials

Revenue was up 11.0% YoY, beating our estimate by 1.5%, primarily due to higher than anticipated mortgage advancements. However, EPS held steady at $1.04,  in line with our estimate, as higher loan loss provisions offset revenue growth

Dividends increased 0.36 pp to 11.12% of shareholders’ equity 

Dividends for Class A investors remained unchanged at $0.80/share, implying a yield of 9.36

Debt/capital increased 4 pp to 14%, due to higher lending activity. In Q4, the company raised $7.5M of an ongoing $50M unsecured bond financing

Bondholders rank pari passu (equal) with shareholders, and receive the same distributions, effectively making them equity investors 

FRC’s Projections and Valuation

We believe the ongoing $50M bond financing should allow BCF to more than double its AUM; MIC credit lines are typically capped at 50% of receivables

As the bond financing carries a higher cost of capital than BCF’s line of credit, we are lowering our 2025 EPS estimate

 However, we believe the company can comfortably distribute its committed $0.80/share annual dividend

We note that BCF should be able to distribute $0.80/share even if lending rates decline by 2%, and loan loss provisions are increased by 250%

Sector multiples are down 2% since our previous report in December 2024. As a result, our fair value estimate decreased from $10.13 to $9.92/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $10.13 to $9.92/share, implying an expected return of 25% (including  dividends) in the next 12 months.  BCF's 2024 financials largely aligned with our expectations. Although lower interest rates have historically benefited MIC/financial stocks, current geopolitical uncertainties, trade disputes, and the looming threat of a tariff-driven economic downturn are creating headwinds for the broader Canadian equity market. As illustrated in the sensitivity table above, BCF’s ability to sustain its dividend in stressed scenarios is a key strength.

Risks 

Maintaining our risk rating of 3

The following, we believe, are the key risks of the company:

• Market concentration: BCF’s primary market is residential construction
• Allows borrowers to defer interest payments till maturity
• Credit and collateral 
• Timely deployment of capital is critical
• Distributions are not guaranteed
• Investments in mortgages are typically affected by macroeconomic conditions, and local real estate markets
• The company uses leverage, increasing the fund’s exposure to negative events
• Default rates can rise during recessions

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