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Loan advancements were down 50% YoY; repayments were down 34% YoY . Net mortgages outstanding were up 2% QoQ to $902M. We believe transaction volumes will pick up in 2025, driven by lower interest rates
LTV, duration, and the average mortgage size decreased marginally, while exposure to first mortgages increased QoQ. Lending rates decreased due to the BoC’s rate cuts in Q3; note that the 50 bp rate cut in October, along with anticipated future cuts, will continue to push AI’s rates lower
Increased exposure to commercial development projects while scaling back on residential development projects; management is currently focusing on lower-risk property types, such as single-family residential and income-producing commercial properties
Increased exposure to ON. Stage three (impaired) mortgages increased 12% QoQ to 8.7% of mortgages, significantly higher than the historic average of 3.0%
However, management forecasts a sizable decline in stage two and three mortgages in Q4; as a result, we are lowering our full-year estimate for loan loss provisions. Loan loss allowances held steady at 3.2% of mortgages
Overall, we believe the portfolio’s risk profile remains unchanged, with three green and three red signals
Q3 revenue was down 3% YoY, amid lower lending rates, partially offset by higher receivables, coming in 0.9% below our estimate. However, EPS was up 4% YoY, driven by lower loan loss provisions, slightly missing our estimate by 0.7%. In Q3, annual regular dividends remained unchanged at $0.90/share, set to increase to $0.93/share starting December 2024
Debt-to-capital remained within historic levels (40%-45%), but decreased in Q4 following AI's $29M equity raise after Q3
We are lowering our 2024 and 2025 revenue and EPS estimates due to steeper-than-anticipated rate cuts, and the recent equity financing, partially offset by lower loan loss provisions
Our estimate for the 2024 dividend varies between $0.94 and $1.10/share, as loan loss provisions and lending rates vary
Sector multiples are up 4% since our previous report in August 2024. Our fair value estimate increased from $13.03 to $13.08/share due to higher sector multiples, partially offset by the impact of our slightly lower 2024 EPS and dividend estimates
We are reiterating our BUY rating, and adjusting our fair value estimate from $13.03 to $13.08/share, implying a potential return of 25% (including dividends) in the next 12 months. Historically, a declining rate environment has proven beneficial for financial/MIC stocks. With the BoC expected to continue lowering rates, 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.
We believe the company is exposed to the following risks:
