Posts Record Revenue & EPS While Enhancing Portfolio Quality – FINAL REPORT

Report Highlights

Mortgages outstanding (net) were down 21% YoY to $943M vs our forecast of $1,089M, amid dampened real estate activity. Despite the recent uptick in inflation, and downtick in unemployment, we anticipate the Bank of Canada will cut rates by June/July 2024, driven by rising financial instability, and mortgage costs. We believe transaction volumes will pick up in H2-2024, driven by lower interest rates.

TF maintains its status as the largest MIC, with a high percentage of income producing properties.

In Q4, a major highlight was the full recovery of principal and accrued interest on a $146M portfolio, representing 79% of stage three impaired mortgages at the end of Q3.

At the end of Q4, TF had $171M (15% of the portfolio) in stage three mortgages, and real estate inventory. In the event of needing to foreclose on collateral assets, we believe there would be ample equity to recover the vast majority of invested capital, given TF's first priority on most mortgages, and a low average LTV of 66%.

Our 2024 dividend forecast of $0.75/share, reflects a yield of 9.9%. Anticipating a decline in rates in H2-2024, we find high-yielding funds, such as TF, increasingly appealing. On average, TF’s P/E (forward), and P/B are 8% lower than that of comparables. 

Financials

2023 revenue was up 13% YoY, and EPS was up 19% YoY

Revenue was 0.6% lower than our forecast, while EPS was 0.3% higher

Annual dividends remain unchanged at $0.69/share

TF announced a special dividend of $0.0575/ share, reflecting a bonus yield of 0.8%, surpassing our forecast of $0.03/share

Asset/Capital Structure

Source: Company/FRC

As originations declined, debt to capital dropped by 9 pp YoY to 36%, deviating from the historical range of 40%-45%

Portfolio Update

Mortgage advancements were down 51% YoY

Repayments were down 10% YoY

Net mortgages outstanding were down 21% YoY to $943M vs our forecast of $1,089M

Source: Company/FRC

The average mortgage size was up 2% YoY

Exposure to income producing properties decreased, but remains in line with the historic average

Exposure to single/multi-family and retirement properties (low-risk segments) decreased 3 pp to 64%

Source: Company/FRC

Exposure to first mortgages decreased 4 pp, implying higher risk

Increased exposure to ON, and reduced exposure to QC, implying enhanced diversification

Source: Company/FRC

LTV was down 3 pp, implying lower risk

Source: Company/FRC

Lending rates continue to increase

Stage three (impaired) mortgages, and real- estate inventory, decreased 38% QoQ to $171M (15% of the portfolio)

Source: Company

In summary, we believe the portfolio’s risk profile has decreased primarily due to lower stage three mortgages

FRC Forecasts

Adjusting for the special dividend, slated for payment in Q1-2024, rather than Q4-2023 as we expected, we are raising our 2024 dividend forecast from $0.71 to $0.75/share

Our estimate for the 2024 dividend varies between $0.71 and $0.79/share, using various YoY increases in loan loss allowances

Source: FRC

Comparables Analysis and Valuation

Source: FRC/Various

TF is the largest MIC

TF’s risk profile remains low relative to other MICs considering its high percentage of income producing first mortgages on multi-family residential properties

Source: S&P Capital IQ/FRC

Sector multiples are up 13% since our previous report in November 2023, but 25% below pre-pandemic levels

On average, TF’s multiples are 7% lower than their comparables

Our fair value estimate increased from $9.67 to $9.90/share primarily due to higher sector multiples

We are reiterating our BUY rating, and adjusting our fair value estimate from $9.67 to $9.90/share, implying a potential return of 41% (including dividends) in the next 12 months. As we expect rates will start declining in H2-2024, we anticipate an increase in appetite for high-yielding stocks, such as TF. Key risks include a softer mortgage origination market, and higher default rates.

Risks

We believe the company is exposed to the following risks:

- Operates in a highly competitive sector

- Timely deployment of capital is crucial

- Credit

- A downturn in the real estate sector may impact the company’s deal flow

- Geographical concentration

- Distributions are not guaranteed

- The company uses leverage, increasing the fund’s exposure to negative events

- Although the MIC’s primary focus is on first mortgages, it may invest in second mortgages which carry higher risk

- Default rates can rise during recession