Navigating Market Headwinds with a Conservative Lending Strategy

• In 2024, mortgage receivables increased 2% YoY to $295M vs our estimate of $313M. Net income was up 29% to $24M, beating our estimate by 2%. The weighted average yield across all shares increased 1.1 pp (percentage points) to 8.2%,  exactly matching our estimate from our previous report in May 2024.
• The MIC remains focused on low-LTV/first mortgages on single family residential units in B.C., AB, and ON. As of December 2024, first mortgages accounted for 95% of the portfolio. The weighted average loan-to-value was 53%. Unlike many comparable MICs, the fund does not use leverage to enhance yields.
• 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. Consequently, we anticipate Fisgard’s transaction volumes to rise this year.

• We find high-yielding funds, like Fisgard, 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, Fisgard had $11.69M in stage three (impaired) mortgages (4% of the portfolio vs the sector average of 6%), spread across 11 of 527 properties. We believe the MIC’s low LTV (53%) puts them in a comfortable position. 
• We are projecting a yield of 7.2% in 2025 (2024: 8.2%) vs management’s guidance of 7.0%-8.0%.

Investment Strategy

Short-term loans secured by real estate

• Targets first mortgages on already-built single family residential units in B.C., AB, and ON
• Maximum LTV of 75% at the time of origination
• Uses limited leverage to enhance yields
• Currently, about 5% of  mortgages are syndicated

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

FCC’s yield is lower than comparables as it operates a relatively low-risk fund, driven by high exposure to first mortgages, and low LTV, and debt/capital. FCC has fewer stage three mortgages

Portfolio Details (YE: December 31st) 

In FY2024, mortgage receivables were up 2% YoY to $295M vs our forecast of $313M

NAV remained flat at $1/share. Debt to capital decreased YoY from 5% to nil vs the sector average of 22%. Unlike many comparable MICs, the fund does not use leverage to enhance yields

Despite market rates falling in H2-2024, the MIC's largely fixed-rate portfolio led to a modest YoY increase in lending rates. As mortgages mature, we expect cash to be reinvested at lower rates

First mortgages remained stable at 95%, reflecting management's focus on maintaining a low-risk profile. The average mortgage was $586k, up 14% YoY. Duration decreased, implying lower risk 

Stage three mortgages rose 181 bp YoY to 4% of the portfolio vs the sector average of 6%; several comparable MICs reported material increases in stage three mortgages in 2024. Redemptions were down 2 pp YoY to 6% of invested capital, indicating  investor confidence

In summary, we believe the portfolio’s risk profile has increased due to higher stage three mortgages. However, the fund remains comfortably positioned with a low LTV of 53

Financials 

2024 revenue was up 19.0% YoY, beating our estimate by 1.6%, amid higher lending rates. Distributions were up 30% YoY, beating our estimate by 1.9%. Distributions/Equity increased by 1.1 pp YoY to 8.2%

Due to higher lending rates, the yield on class B shares increased from 7.2% in 2023, to 8.3% in 2024 vs our forecast of 8.2%. Three options for investors. Class B (five-year) dominates the mix. Unusual payments

After year-end, the MIC received a CRA Notice of Reassessment for 2020 and 2021, indicating up to $4.0M in additional taxes. The MIC is appealing the decision, and has submitted its response. While awaiting a resolution, the MIC proactively made a $4.2M payment to prevent the accrual of interest, and late payment penalties. Of this, $1.1M will be covered by retained earnings as of year-end 2024, with the remaining $3.1M to be allocated over net income through 2027, reducing yields during that period. We note that this reflects a worst-case scenario; if the CRA rules in the MIC’s favor, yields will improve accordingly.

FRC Projections and Rating

With rates trending downward, we foresee yields declining in 2025 and 2026. We are projecting yields of 7.2% in 2025, and 6.3% in 2026; these forecasts already account for the worst-case scenario related to the tax payments noted above

Our estimate for the 2025 yield varies between 6.4% and 7.5%, as loan loss provisions and lending rates vary

We are reiterating our overall rating of 2-, and risk rating of 2. We believe the MIC remains committed to its low-risk mandate, emphasizing low LTV first mortgages and minimal leverage

We find high-yielding funds, like Fisgard, 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

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

• Operates in a highly competitive sector
• Investments in mortgages are typically affected by macroeconomic conditions, and local real estate markets
• A downturn in the real estate sector may impact the company’s deal flow
• Capital preservation is not guaranteed
• No guaranteed distributions 
• Timely deployment of capital is critical
• Default rates can rise during recession

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