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What are we looking for?

According to Equifax’s most recent Consumer Quarterly Credit Trends Report, new Canadian mortgage originations and average loan amounts in the first quarter of 2023 were down 42 per cent and 13.9 per cent, respectively, compared to the first quarter of 2022. Moody’s sees housing prices bottoming out at the start of 2024. That outlook is also supported in the Canada Mortgage and Housing Corp.’s spring 2023 report.

On June 7, the Bank of Canada increased its policy interest rate a further 25 basis points to 4.75 per cent. With that backdrop, are there firms that finance mortgages that are investment opportunities?

The screen

We used StockCalc’s screener to select the 10 largest mortgage finance companies on the TSX and TSX-V. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

Discounted cash flow (DCF value) is a valuation technique in which cash flow projections are discounted back to the present to calculate value per share;

A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;

An adjusted book value (ABV) is calculated by multiplying the company’s book value per share by its historical price-to-book ratio.

If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code “Globe30,” which offers a 30-day free trial and special pricing for the second month.

What we found

Mortgage Finance Stocks

NameTickerMarket Cap ($ Mil)Recent Close ($)StockCalc Val ($)Diff (%)DCF Value($)Price Comps($)ABV ($)Analyst Target ($)1 Year Return (%)Div. Yield (%)
First National FinancialFN-T2308.238.5039.502.648.1924.2848.7839.5013.16.2
Home Capital GrHCG-T1669.343.7041.61-4.830.7738.1039.7744.0050.71.4
ECN CapitalECN-T788.73.213.364.799.073.361.325.03-50.01.3
Timbercreek FinancialTF-T622.07.438.007.72.224.508.468.00-5.69.3
MCAN FinancialMKP-T576.116.5617.928.29.7813.9417.8819.00-0.48.7
Atrium MortgageAI-T487.611.1912.077.88.917.4713.2813.50-4.48.0
Firm Cap Mortgage InvFC-T369.810.7010.962.49.036.4714.1912.25-6.98.8
Dominion Lending CentresDLCG-T111.82.312.6615.32.694.450.553.50-29.65.2
Terra Firma CapTII-X32.45.756.8519.127.394.207.5910.721.54.2
Builders Capital MortgageBCF-X28.98.898.930.58.727.749.480.00-0.18.9

Source: StockCalc

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from our models and analyst target data.

This industry includes companies that originate, purchase, sell and service mortgage and equity loans. Mortgage lenders make money from origination fees, yield spread premiums, closing costs, mortgage-backed securities and loan servicing.

A mortgage company may be a chartered bank, a credit union, a trust company or another financial institution that provides mortgage loans. As with other asset firms (such as banks, insurance and wealth management) our models prioritize the ABV calculation, if possible, in the overall Weighed Average valuation. Of special note for income investors is that eight of these 10 companies pay a dividend yield in excess of 4 per cent.

Let’s look at a couple of these companies:

First National Financial Corp. (FN-T) is a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multiunit) and commercial mortgages.

In the first quarter of 2023, First National had $133-billion in mortgages under administration and saw a 7-per-cent increase in new mortgage originations in the first quarter of 2023 compared with the same quarter in 2022. The company’s outlook for the second quarter of 2023 is for lower single-family originations, but with improving originations through the second half of the year. Our valuation models for FN-T are at or below the recent close price with the analyst consensus price slightly above.

Terra Firma Capital Corp. (TII-X) shows the greatest upside on our list. Terra Firma provides short-term financing (one to five years) to real estate developers and owners of income properties at various stages of development.

Most of our models show upside for Terra Firma. Its book value per share (an important measure for asset firms and the basis for our ABV calculation) is currently $10.65, 85 per cent over the current share price. The price-to-book ratio (current stock price divided by book value per share, also used in ABV) is 0.54, the lowest for the group shown. The company has also stated it is reviewing strategic alternatives.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 11:34am EDT.

SymbolName% changeLast
FN-T
First National Financial Corp
-0.4%37.49
ECN-T
Ecn Capital Corp
0%1.72
TF-T
Timbercreek Financial Corp
+0.13%7.48
MKP-T
Mcan Mortgage Corp
+0.58%15.57
AI-T
Atrium Mortgage Investment Corp
0%11.04
FC-T
Firm Capital Mortgage Inv. Corp
-1.17%10.96
DLCG-T
Dominion Lending Centres Inc
-0.33%2.99
BCF-X
Builders Capital Mortgage Corp
+4.07%8.95

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