In this hot housing market, are mortgage finance companies an investing opportunity?

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What are we looking for?

Average house prices nationally climbed 23.1 per cent in April on a year-over-year basis, according to the Canadian Real Estate Association. At the same time five-year mortgage rates have dropped from 2.5 per cent prepandemic to a bit more than 1.5 per cent.

On the commercial real estate side, global deal volume dropped 36 per cent on a year-over-year basis, owing to pandemic-related economic stagnation and an uncertain pricing environment, according to Deloitte.

With that backdrop, are there firms that finance this industry – through home mortgages or for commercial real estate – presenting investment opportunities?

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The screen

We used StockCalc’s screener to select the 10 largest mortgage finance companies trading on the Toronto Stock Exchange or TSX Venture Exchange. 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 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 companies presenting an investment oppurtunity

Company Ticker Mkt. Cap. ($ Mil.) Recent Close ($) StockCalc Val. ($) Diff. (%) DCF Value ($) Price Comps ($) ABV ($) Analyst Tgt. ($) Div. Yld. (%) 1Y Rtn. (%)
First National Financial FN-T 3117.5 51.99 47.83 -8.0 49.79 39.79 43.19 53.60 4.0 81.7
Equitable Group EQB-T 2374.4 140.00 140.35 0.2 272.62 119.67 114.46 164.50 1.1 106.4
Home Capital Group HCG-T 1769.7 34.80 36.30 4.3 28.38 51.78 31.15 42.38 n/a 77.1
Timbercreek Financial TF-T 768.7 9.49 9.05 -4.7 5.60 5.51 8.52 0.00 7.3 21.3
Atrium Mortgage AI-T 600.2 14.14 14.30 1.2 14.70 8.07 13.06 15.00 6.4 29.4
Firm Capital Mortgage FC-T 458.0 14.84 15.19 2.4 16.51 8.26 14.86 15.50 6.3 34.9
MCAN Mortgage MKP-T 458.5 17.53 18.40 5.0 20.25 22.62 17.18 0.00 7.7 56.0
Dominion Lending Centres DLCG-X 184.9 3.95 4.33 9.6 8.40 7.44 0.89 5.75 n/a 295.0
Terra Firma Capital Corp. TII-X 30.9 5.46 8.73 60.0 26.54 10.20 7.06 9.65 3.7 41.5
Builders Capital Mortgage BCF-X 27.7 9.51 9.54 0.3 9.97 14.54 9.26 0.00 8.4 33.0

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. Of note for income investors: Half of the companies shown have a dividend yield in excess of a 6 per cent.

This industry includes companies that originate, purchase, sell, and service mortgage and equity loans. A mortgage company may be a chartered bank, a credit union, a trust company or other financial institution providing mortgage loans. The models primarily use the adjusted book value calculation, if possible, in determining the overall weighted average valuation. In addition, non-valuation measures of performance tracked by analysts, including mortgages under administration (MUA) and originations, are mentioned below.

Let’s look at a couple of these companies:

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First National Financial Corp. has MUA of $120-billion and saw an increase in new mortgage originations of 16 per cent ($6.2-billion) in the first quarter owing to growth in new single family mortgages. First National is one of only two companies on the list showing as overvalued, primarily owing to our ABV calculation. This is partially driven by the company having the highest price-to-book ratio (current price divided by book value per share, also used in ABV) of the group. Its price-to-book is currently more than six, whereas the rest are less than two. Our valuation models for First National range from the high $30s to low $50s.

The company showing the greatest upside on our list is Terra Firma Capital Corp. Terra Firma provides financing to real estate developers and owners of income properties at various stages of development. All of our models show upside for Terra Firma. For example, its book value per share (an important measure for asset firms and the basis for our ABV calculation) is $9.42, which is 72 per cent over its current price. Its price-to-book ratio is 0.58, the lowest for the group shown.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

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

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