Disclosure: Fisgard Capital Corporation 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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Anticipating lower rates, we find high-yielding funds, such as FCC, increasingly appealing. We are projecting a yield of 8.2% in 2024.
The yields presented above reflects the average for all share classes.
*See last page of this report for important disclosures, rating and risk definitions. All figures in C$ unless otherwise specified
The following table shows how FCC’s portfolio compares to that of other MICs (with AUM of $100M+) focused on single-family residential units.
Source: FRC/Various
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 lower stage three mortgages
In FY2023, mortgage receivables were up 3% YoY to $289M vs our forecast of $300M
Source: Company/FRC
NAV remained flat at $1/share
Debt to capital decreased by 11 pp to 5%, and is significantly lower than that of comparables (15%-30%)
As a result, the interest coverage ratio of FCC is significantly higher (12x vs 3-5x)
First mortgages decreased by 4.7 pp to 94.6%, as the MIC acquired a related fund under management focused on second mortgages
Given FCC’s focus on first mortgages, we believe the incremental risk associated with the recently added second mortgages is temporary, and will diminish as they mature
The average mortgage size was $512,048, up 7% YoY
Source: Company/FRC
Duration decreased, implying lower risk
Residential mortgages decreased by 4.8 pp to 85%
Increased exposure to ON, and decreased exposure to B.C.
Source: Company/FRC
LTV remained flat
Lending rates increased amid higher market rates
Source: Company/FRC
Nil realized losses
Stage three mortgages declined by 49 bp to 2.2% of mortgages
Despite the improvement, for conservatism, management raised allowances by 10 bp to 0.4% of mortgages
•red (green) indicates an increase (decrease) in risk level
Source: FRC
In summary, we believe the portfolio’s risk profile remained unchanged (three green vs three red signals)
2023 revenue was up 31% YoY, beating our estimate by 4%, amid higher lending rates
Distributions were up 45% YoY, beating our estimate by 4%
Note that the above figures may be slightly different from the figures reported by the MIC due to the difference in the method of calculation. We used the average of the opening balance, and year-end balance of the mortgages outstanding, and invested capital, to arrive at the above figures.
Distributions/Equity increased by 1.6 pp YoY to 7.1%
Source: Company/FRC
Due to higher lending rates, the yield on class B shares increased from 5.6% in 2022, to 7.2% in 2023 vs our forecast of 6.9%
The following tables show the structure of the fund:
Source: Company/FRC
Three options for investors
Class B (five-year) dominates the mix
FRC Projections and Rating
The yields presented above reflect the average for all share classes.
Source: FRC
As interest rates have been higher than expected YTD, we are raising our 2024 yield estimate from 7.4% to 8.2%
Our estimate for the 2024 yield varies between 7.8% and 8.4%, using various YoY increases in loan loss allowances
We are reiterating our overall rating of 2-, and a risk rating of 2. Anticipating lower rates, we find high-yielding funds, such as FCC, increasingly appealing. Key risks include a softer mortgage origination market, and higher default rates. We believe a major highlight of Fisgard is its relatively low risk-profile, reflected by a higher percentage of first mortgages, low LTV, and limited use of leverage.
We believe the fund is exposed to the following key risks (not exhaustive):
