Disclosure: Builders Capital Mortgage Corp. 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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Price and Volume (1-year)
Portfolio Details
Mortgage advancements were up 24% YoY; repayments were up 1% YoY. As a result, mortgage receivables (net) were up 31% YoY, to a record-high of $43M vs our forecast of $40M
First mortgages increased 7 pp YoY to 98%, implying lower risk. Increased exposure to AB, and decreased exposure to B.C. as management is observing more attractive opportunities, and fewer competitors in AB
Remains focused on single-family units (construction)
The average mortgage size was down 26%, implying lower risk. LTV remained unchanged
The average lending rate declined, primarily due to the BoC’s rate cuts
Stage three mortgages (impaired) decreased 0.9 pp to 4.7% of mortgages, a notable contrast to the broader MIC sector, which saw a rise in impairments
In summary, we believe the portfolio’s risk profile decreased (two red vs three green signals), driven by a significant increase in first mortgages, and fewer stage three mortgages
Financials
Revenue was up 11.0% YoY, beating our estimate by 1.5%, primarily due to higher than anticipated mortgage advancements. However, EPS held steady at $1.04, in line with our estimate, as higher loan loss provisions offset revenue growth
Dividends increased 0.36 pp to 11.12% of shareholders’ equity
Dividends for Class A investors remained unchanged at $0.80/share, implying a yield of 9.36
Debt/capital increased 4 pp to 14%, due to higher lending activity. In Q4, the company raised $7.5M of an ongoing $50M unsecured bond financing
Bondholders rank pari passu (equal) with shareholders, and receive the same distributions, effectively making them equity investors
FRC’s Projections and Valuation
We believe the ongoing $50M bond financing should allow BCF to more than double its AUM; MIC credit lines are typically capped at 50% of receivables
As the bond financing carries a higher cost of capital than BCF’s line of credit, we are lowering our 2025 EPS estimate
However, we believe the company can comfortably distribute its committed $0.80/share annual dividend
We note that BCF should be able to distribute $0.80/share even if lending rates decline by 2%, and loan loss provisions are increased by 250%
Sector multiples are down 2% since our previous report in December 2024. As a result, our fair value estimate decreased from $10.13 to $9.92/share
We are reiterating our BUY rating, and adjusting our fair value estimate from $10.13 to $9.92/share, implying an expected return of 25% (including dividends) in the next 12 months. BCF's 2024 financials largely aligned with our expectations. Although lower interest rates have historically benefited MIC/financial stocks, current geopolitical uncertainties, trade disputes, and the looming threat of a tariff-driven economic downturn are creating headwinds for the broader Canadian equity market. As illustrated in the sensitivity table above, BCF’s ability to sustain its dividend in stressed scenarios is a key strength.
Risks
Maintaining our risk rating of 3
The following, we believe, are the key risks of the company:
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