Disclosure: Vector Mortgage Trust has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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Risks
The yields presented above reflects the weighted average for all share classes.
An Overview of Mortgage Investment Entities (MIEs)
Short-term loans secured by real estate. 12 employees
MIEs provide short-term loans, typically one to two years, secured by Canadian real estate. With more flexible lending guidelines than traditional lenders, MIEs can offer tailor-made solutions to meet specific borrower needs. Unlike banks, which have lengthy due diligence processes, MIEs can respond quickly to urgent capital requirements. As a result, they are able to charge higher interest rates than banks and other conventional lenders.
Key features:
MIEs are audited and regulated by their respective provincial securities commissions. However, they are not subject to federal mortgage lending rules, such as reserve requirements or LTV limits, because, unlike banks and other financial institutions, MIEs do not accept public deposits.
In a recent market study conducted for the Canada Mortgage and Housing Corporation (“CMHC”), we estimated that there are approximately 200 MIEs in the country managing approximately $20B, accounting for 0.9% of the total residential mortgage credit in Canada ($2.3T).
Company Overview and Manager Background
Founded in 2022 and based in Toronto, the fund is managed by the Vector Group—a private mortgage lender established by the Oelbaum and Laurie families in 1969. Serving the Greater Golden Horseshoe Area (GGHA) in southern Ontario, Vector has originated over $1.25B in loans to date. The group currently manages approximately $500M in mortgages, with roughly half allocated to the fund, and the remainder in syndicated deals funded by high-net-worth individuals, and family offices.
Management have invested $16M in the fund, and owns 6% of the fund’s units. Allows investors to gain exposure to a diversified pool of mortgages, providing access to real estate-secured lending
VMT is a mutual fund trust with a business model similar to that of a Mortgage Investment Corporation (MIC). Unlike MICs, which must hold at least 50% of their assets in residential mortgages and are restricted to Canadian investments, a mutual fund trust like VMT has greater flexibility, including the ability to invest internationally. To maintain its tax-exempt status, VMT must distribute 100% of its taxable income to investors.
Corporate Structure
Vector and its affiliates receive 1.10%-1.60% p.a. of mortgages outstanding as management and other fees (depending on unit class), along with 100% of origination/renewal fees charged to borrowers (which are typically 1%-2% of the mortgage amount), and nil performance fees. Overall, we believe the fund’s fee structure is in line with other MIEs of comparable size.
Offers four classes of trust units. Focused on short-term loans to developers
Investment Strategy
Benefits of land deals include:
The main risk for land deals is that they generate no revenue, so borrowers must have cash reserves to pay mortgage interest. Additionally, there can be delays in the borrower’s exit strategy, usually through a sale.
The fund focuses mainly on pre-development and raw land for residential use, with selective exposure to income-producing properties
Source: Fund - https://vectorfinancial.com/recent-transactions/
The following table shows how Vector’s portfolio compares to other MICs (with AUM of $100M+) focused on residential construction/development mortgages.
Vector’s yield has consistently outperformed, driven by lower loan loss provisions. Its portfolio features a lower LTV, fewer stage 3 (impaired) mortgages, and a smaller average mortgage size. The fund does not use leverage to enhance yields
Its portfolio demonstrates intra-provincial diversification, yet it remains heavily concentrated within Ontario
Portfolio Details (YE: December 31st)
Mortgage receivables rose 65% over two years, from $138M at the end of 2022, to $228M by the end of 2024
In 2024, originations were up 51%; repayments were up 90%. First mortgages (“A” position) accounted for 90% of total mortgages
* “A” lenders hold a priority (senior) position over “B” lenders. - Source: Fund / FRC
Focuses almost exclusively within a one-hour radius of the GTA. Residential land accounted for 73% of the portfolio. The weighted average LTV was just 45% vs the sector average of 62%
Stage 3 (impaired) mortgages accounted for 4.4% of the portfolio vs the sector average of 5.6%
Financials
2024 revenue was up 23% YoY, driven by higher mortgage receivables. Distributions were up 28% YoY. Distributions per unit were up 1%
The yield increased from 10.39% in 2023, to 10.51% in 2024 (Class F/I)
FRC Projections and Rating
Management is targeting a yield of prime + 5% p.a., or 9%-10% this year. With rates trending downward, we foresee yields declining in 2025 and 2026
We are projecting yields of 9.2% in 2025, and 8.7% in 2026. Our estimate for the 2025 yield varies between 8.2% and 9.6%, as loan loss provisions and lending rates vary
We are initiating coverage with an overall rating of 2-, and risk rating of 3. We find high-yielding funds, like VMT, increasingly attractive in the current declining rate environment. This is because MIE 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):
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