TII.V - Terra Firma Capital Corp

[Philbert77]

giving this one a bump. Seems pretty cheap here. Q2 will not be good. But its trading at a huge discount to BVPS. Any thoughts?

[Philbert77]

more recent insider buying: https://m.canadianinsider.com/company?ticker=TII

[sculpin]

Terra Firma Capital Corp

 

Rating: Buy

unchanged

12-Month Target: C$10.00

RESEARCH NOTE | May 15, 2020

 

 

Short-term Pain, Long-term Gain

 

Investment Thesis. The North American housing market relies on access to development capital

to fund its growth. The U.S. market remains underfunded following the housing crisis and with the

onset of COVID-19, provides a huge opportunity for Terra Firma to leverage its experience

operating in distressed markets. The experience of senior management on both sides of the

border is a competitive advantage. The business model is highly scalable and offers considerable

operating leverage. In our view, TII’s risk/reward profile makes it a unique and attractive

investment opportunity.

 

Event

 

Terra Firma reported Q1/20 results which showed the first indication of the COVID-19

slowdown. Demand for residential development financing remains robust, although the

company is pausing its lending activities until the outlook is more certain.

 

Highlights

 

 Q1 Overview | Despite starting the quarter on a “strong footing”, COVID-19 hit

late in the quarter which impacted global debt and equity markets, dampened

consumer sentiment, and ultimately caused the company to elect not to close on

$38M of the $48M in possible transactions in its pipeline. Even with the impact, TII

still managed to grow revenue and earnings marginally y/y, but both came in

slightly below our estimates. Additionally, the loan book and average realized

interest rate both decreased by a marginal amount sequentially.

 

 COVID-19 Impact on TII & U.S. Housing | Prior to the outbreak, the U.S. housing

market was off to a roaring start in 2020; however, the COVID-19 outbreak caused

a complete reversal in sentiment. TII has fared quite well so far as its U.S.

positions are all in “good standing”, having received close to all promised interest

payments. Looking longer term, the virus will likely continue to be disruptive and

could potentially lead to a material slowdown in land development over the next

few quarters, which will slow growth of Terra Firma’s pipeline (but shouldn’t last

too long). We believe the near-term turmoil presents a significant opportunity for

Terra Firma because of its exposure to leading residential housing sub-markets in

the U.S. at a time when now, more than ever, banks will likely curtail lending

activities. The company continues to have a good relationship and be in close

contact with Texas Capital Bank; this, along with its book equity of ~$40M, should

allow it to continue to grow AUM without the need for additional capital.

 

Valuation & Conclusion

 

TII is a profitable, growing lender that offers investors upside, a solid yield (~5%),

strong inside ownership and remains inexpensive, trading at ~0.4x book and ~5x run

rate P/E. Short-term COVID-19 impact aside, we continue to believe the company’s

compelling fundamentals and strong track record (having raised +C$350M from

investors with a zero loss rate) are not accurately reflected in the current share price,

trading at $4.00, well below its long-term average 1.0x book value multiple. Exiting

COVID-19, we expect deal flow to be robust, as home builders and land developers

look to restart their businesses while faced with a lack of traditional funding sources.

Early indicators are pointing to increased security and higher deposit and interest

rates, which combine to mean that Terra Firma may be able to loan money with more

security and a higher interest rate. We are rolling forward our valuation to 2021, given

that we expect it to be a more normalized year. Using our 12x P/E multiple we maintain

our C$10.00 target, which is supported by the company’s C$9.94/sh book value. We

reiterate our Buy rating.

 

Corey Hammill, Senior Analyst | 416.361.0754 | chammill@paradigmcap.com

 

[Philbert77]

"Terra Firma has taken all the necessary steps to safeguard its employees and its capital in order to weather the storm. While this has meant no new originations during the quarter, the Company’s Adjusted Net Income remained healthy,” said Glenn Watchorn, CEO of Terra Firma Capital Corporation. “It seems somewhat counterintuitive, but the housing market in the U.S. has been very strong during the crisis with many of our borrowers reporting record sales over the months of May, June and July. We believe that this is largely due to record-low mortgage rates, low supply, pent-up demand and the overall health of the housing market prior to the crisis. Consequently, Terra Firma is now actively pursuing new originations. We are also currently working on several transactions that had previously been postponed, which are expected to close by the end of Q3."

 

https://www.tfcc.ca/wp-content/uploads/2020/08/Aug-12-2020-Press-Release-Terra-Firma-Capital-Corporation-Reports-Second-Quarter-2020-Financial-Results.pdf