Record Receivables and Earnings with Reduced Risk Profile

• In 2024, mortgage receivables increased 21% YoY to $476M, exceeding our forecast by 10%. In Q1-2025, receivables increased 10% YTD to $521M - the highest in Capital Direct I Income Trust’s (CDIT) history.  
• CDIT is one of the larger Mortgage Investment Entities (MIEs) in Canada. The MIE remains focused on first/second mortgages for single family residential units in B.C. and ON. 
• In 2024, the fund achieved record revenue and net income. Net income was up 27% to $34M, beating our estimate by 14%, driven by higher lending rates, and mortgage receivables. The yield on class F units increased 1.1 pp to 9.8% in 2024 (our forecast was 9.4%), and to 10.1% in Q1-2025.
• Since May 2024, the BoC has cut rates seven times (225 bp), with the potential for one or two more cuts this year, driven by  high unemployment, escalating geopolitical/trade risks, and concerns over potential weakness in GDP growth. 

• We find high-yielding funds, like CDIT, 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.
• At the end of 2024, CDIT had $20M (4% of the portfolio vs the sector average of 6%) in stage three (impaired) mortgages, down from $29M (7% of the portfolio) at the end of 2023, a notable contrast to the broader MIC sector, which saw a rise in impairments. 
• We are projecting a yield of 9.3% in 2025 vs 9.8% in 2024,  while raising our overall rating from 2- to 2.

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

Capital Direct has lower first mortgages, average mortgage size, and LTV. Debt to capital is higher. Yield is higher even though management pays a performance fee in addition to management fees; most comparable MIC do not charge performance-based fees

In 2024, mortgage receivables were up 21% to $476M, 10% higher than our forecast. In Q1-2025, receivables increased 10% YTD to $521M

In 2024, debt to capital increased 5 pp to 34%, in line with comparables (20%-40%). The interest coverage ratio was also in line with comparables (3x-5x) 

Exposure to first mortgages increased 4 pp to 59%, implying lower risk profile . LTV increased slightly 

Trimmed B.C. and ON exposure, with a corresponding increase in AB, implying enhanced geographical diversification. The average mortgage size increased 13% to $216k. Duration decreased, but remained lower than the historic average 

In 2024, stage three mortgages decreased 3.3 pp YoY to 4.1% 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 has decreased (four green vs three red signals), primarily driven by higher first mortgages, and lower stage three mortgages

Financials 

2024 revenue was up 30% YoY, beating our estimate by 16%, driven by higher lending rates and mortgage receivables. Net income was up 27% YoY, beating our estimate by 14%

In Q1-2024, revenue and net income were up 38% YoY, and 40% YoY, respectively. The yield on class F units increased from 8.63% in 2023, to 9.77% in 2024 (our forecast was 9.35%), and to 10.11% in Q1-2025 

Units Outstanding and Ownership

35M units outstanding at the end of Q1-2025, up 18% YoY

• Class A - offered to investors directly
• Class F - offered to funds managed by portfolio managers, and other fee-based investment advisors 
• Class C - offered to investors who purchase units through dealers (IIROC and Exempt Market Dealers)

FRC Projections and Rating

With rates trending downward, we foresee yields declining in 2025 and 2026. We are projecting yields of 9.3% in 2025, and 8.8% in 2026

Our estimate for the 2025 yield varies between 8.7% and 9.7%, as loan loss provisions and lending rates vary

We find high-yielding funds, like Capital Direct, 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 believe the MIE 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.

Risks

• Loans are short term and need to be sourced and replaced quickly
• Lower housing prices will result in higher LTVs 
• Investors’ principal is not guaranteed
• No guaranteed minimum distributions
• The fund has the ability to use leverage, increasing exposure to negative events
• Second mortgages carry higher risk
• Default rates can rise during recession

APPENDIX