Record Q1 Revenue / Pursuing a $50M Bond Financing

Metrics	Value
Current Price	CAD $8.55
Fair Value	CAD $10.05
Risk	3
52 Week Range	CAD $8.07-9.00
Shares O/S (M)	3.16
Market Cap. (M)	CAD $27
Current Yield (%)	9.4
P/E (forward)	10.7
P/B	0.9

Report Highlights

In Q1-2024, BCF reported record revenue (up 9% YoY) due to higher lending rates. However, EPS decreased 2% due to higher loan loss provisions. EPS was 5% higher than our estimate. While loan loss provisions were in line, lending rates were higher than anticipated.
Annual dividends remained unchanged at $0.80/share, implying a yield of 9.4%.
We believe the portfolio’s risk profile has decreased due to higher first mortgages, and lower LTV.

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