• The company is pursuing a $50M bond financing. We believe this financing is indicative of the company’s robust pipeline of mortgages. Bondholders will participate on a pari passu (equal) basis with shareholders.
  • Although transaction volumes in the past 12 months have been considerably lower than historic levels, residential property prices have remained resilient. We anticipate transaction volumes picking up in H2-2024, driven by lower interest rates.
  • Anticipating lower rates, we project higher demand for high-yielding stocks, such as BCF. We believe the current price level presents a narrow window to attain a 9.5% yield.

Key Financials (FYE - Dec 31)

(C$)

2023

2024(F)

2025(F)

Mortgage Receivables(net)

$32,697,763

$35,112,698

$36,868,333

Revenues

$4,675,142

$4,987,257

$4,714,758

Net Income

$3,293,458

$3,686,503

$3,200,241

EPS

$1.04

$1.17

$1.01

Dividends per Share (Class A)

$0.80

$0.80

$0.80

Dividend Yield

9.01%

9.36%

9.36%

*See last page for important disclosures, rating and risk definitions. All figures in C$ unless otherwise specified.

Portfolio Details

Mortgage advancements were down 23% YoY; repayments were up 44% YoY

As a result, mortgage receivables declined 4% QoQ to $31M; we are maintaining our year-end estimate at $35M

We will incorporate the impact of the ongoing bond financing into our models upon its completion

First mortgages increased, implying lower risk

Source: FRC/Company

Increased exposure to B.C.


Remains focused on single-family units (construction)


The average mortgage size was down 4% QoQ


Source: FRC/Company

LTV was down 1.6 pp QoQ, implying lower risk

The average lending rate declined slightly, primarily due to higher first mortgages

Source: FRC/Company

  Foreclosed properties increased QoQ, from 2.0% to 4.6% of the portfolio

However, stage three mortgages (impaired) decreased QoQ, from 5.6% to 2.3% of mortgages

Management raised loan loss allowances by 0.27 pp QoQ to 2.53% of mortgages, aligning with our estimate

*Red (green) indicates an increase (decrease) in risk level.
Source: FRC

In summary, we believe the portfolio’s risk profile has decreased (one red vs four green signals)

Financials


Revenue was up 9% YoY, beating our estimate by 4%, due to higher than expected lending rates

EPS was down 2% YoY due to higher loan loss provisions, but beat our estimate by 5%

Loan loss provisions were in line with our estimate

Source: FRC/Company

*Yields were calculated based on the average share price for the given time period. Note: Class A non-voting common shares are publicly listed, while Class B non-voting common shares are held by management and private investors. In terms of dividend distribution, Class A shares (public investors) rank first, followed by Class B shares. Class A shares will be paid $0.80 per share, before dividends are paid to Class B shares.

Dividends for Class A investors remained unchanged at $0.80/share, implying a yield of 9.4%

Source: FRC Company

Debt/capital declined due to softer originations, and higher repayments

FRC's Projections and Valuation

Source: FRC

As interest rates have been higher than expected YTD, we are raising our 2024 EPS estimate by 5%

Source: FRC

We note that the MIC should be able to distribute declared annual dividends ($0.80/share) even if loan loss allowances are raised by 500%

Source: S&P Capital IQ/FRC

Sector multiples are down 3% since our previous report in April 2024, and 28% below pre-pandemic levels

Our fair value estimate decreased from $10.18 to $10.05/share, driven by lower sector multiples, partially offset by our higher 2024 EPS estimate

We are reiterating our BUY rating, and adjusting our fair value estimate from $10.18 to $10.05/share, implying an expected return of 27% (including dividends) in the next 12 months. Key risks include a softer mortgage origination market, and higher default rates. Anticipating lower interest rates, we foresee a potential rally in MIC/financial stocks in H2-2024. Although lower rates can compress profit margins, the resulting economic boost, and potential for higher valuations, will likely have a more significant positive impact.

Risks

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 recession