Stock market symbol
TSX: MKP
TORONTO, May 9, 2017 /CNW/ - MCAN Mortgage
Corporation ("MCAN", the "Company" or "we") reported a 32% increase
in Q1 2017 net income of $10.3
million, up from $7.8 million
in Q1 2016. Earnings per share increased 29% to $0.44 in Q1 2017 from $0.34 in Q1 2016.
Highlights
Net Income
- Net income was $10.3 million in
Q1 2016, an increase of $2.5 million
(32%) from $7.8 million in Q1 2016.
We earned significant income from financial investments and other
loans in Q1 2017, offset by lower corporate mortgage interest and
equity income from MCAP Commercial LP ("MCAP").
- Earnings per share increased by $0.10 (29%) to $0.44 in Q1 2017 from $0.34 in Q1 2016.
- Increase of 2.6% in return on average shareholders' equity to
14.37% in Q1 2017 from 11.80% in Q1 2016.
- Gross distribution income of $3.5
million realized from Crown LP financial investment in Q1
2017 (offset by a corresponding reduction to accumulated other
comprehensive income).
Dividend
- The Board of Directors (the "Board") declared a 7% increase to
the quarterly dividend from $0.30 per
share to $0.32 per share effective
with the 2017 second quarter dividend to be paid June 30, 2017 to shareholders of record as of
June 15, 2017.
Corporate Activity
- Corporate assets totalled $1.13
billion at March 31, 2017, a
net decrease of $55 million from
$1.19 billion at December 31, 2016. This was comprised of
decreases of $43 million in mortgages
and $17 million in cash, and an
increase of $4 million in marketable
securities.
- The corporate mortgage portfolio decreased during Q1 2017 to
$861 million from $904 million, comprised of decreases of
$29 million in insured single family,
$19 million in uninsured single
family and $15 million in commercial,
partially offset by increases of $11
million in construction and $9
million in completed inventory loans.
- Increase of $2 million in Q1 2017
in our higher-yielding corporate non-mortgage investments,
consisting of marketable securities, our equity investment in MCAP
and financial investments.
- We recorded a $785,000 gain on
the partial sale of our investment in MCAP. Our equity interest in
MCAP was reduced from 14.74% to 14.35% during Q1 2017 as a result
of this sale and the issuance of new partnership units in
MCAP.
Securitization Activity
- We securitized $48 million of
insured single family mortgages in Q1 2017, primarily through the
CMB program. We did not earn any income on these securitization
transactions as a result of reduced spreads in the securitization
market and interest rate volatility during Q1 2017.
Credit Quality
- Total mortgage arrears increased to $48
million from $27 million
during Q1 2017. The increase was primarily due to two Saskatchewan-based loans totalling
$19 million going into arrears during
the quarter, for which the borrower has filed for protection under
the Companies' Creditors Arrangement Act ("CCAA"). Both properties
have been listed for sale. We do not expect to incur a loss on
either loan as a result of the value of the underlying collateral,
and have therefore not recorded individual allowances. Uninsured
single family arrears increased to $11.7
million from $8.9 million
during Q1 2017, while the remaining arrears balances relate to
insured single family mortgages.
- Impaired mortgages increased to $6.0
million from $4.5 million
during Q1 2017
- The impaired total mortgage ratio increased to 0.19% from 0.14%
during Q1 2017.
- The impaired corporate mortgage ratio increased to 0.44% from
0.31% during Q1 2017.
- Net write-offs were 11.9 basis points of the average corporate
portfolio in Q1 2017, increased from 3.5 basis points in Q1 2016.
The Q1 2017 amount includes 9.7 bps related to the write-off of
capitalized legal fees on a construction loan for which an
individual allowance had already been recorded, therefore there was
no impact to net income. The remaining balance relates to uninsured
single family write-offs.
- The average loan to value ratio ("LTV") of our uninsured single
family portfolio based on an industry index of current real estate
values was 56.5% at March 31, 2017,
unchanged from 56.5% at December 31,
2016.
Capital
- Our Common Equity Tier 1, Tier 1 and Total Capital to
risk-weighted assets ratios were 22.43% on the transitional basis
and 22.23% on the "all-in" basis at March
31, 2017 compared to 22.98% and 22.55%, respectively, at
December 31, 2016.
- Our leverage ratio was 10.87% at March
31, 2017 compared to 10.46% at December 31, 2016.
- Income tax asset capacity was $278
million at March 31, 2017
compared to $209 million at
December 31, 2016. This balance
represents the additional amount of corporate assets in which we
could invest within the rules of the Income Tax Act
(Canada) (the "Tax Act").
Outlook
Market conditions
The Bank of Canada forecast for
2017 Canadian GDP growth is 2.5%, an increase over actual 1.9%
growth in Q4 2016. The relatively low levels of expected
economic growth continue to lessen the probability of increased
interest rates for 2017. The Federal Reserve has increased
the discount rate and indicated that further increases are likely
in 2017, which has produced an increase in U.S. bond yields and
also impacted the interest rate market in Canada. We expect housing markets to continue
to benefit from historically low interest rates, but we also expect
a slowdown in housing as a result of the impact of regulatory
changes and new taxes recently announced in Ontario and announced last year in
British Columbia.
Canadian residential real estate markets continue to have mixed
performances as regional markets adjust with local economic
conditions. The Prairie Provinces continue to demonstrate
weakness as oil prices below $50 have
a negative impact on employment. Other regional economies
continue to benefit from the lower Canadian dollar which has helped
to strengthen employment in the manufacturing sector. The Canadian
dollar continues to trade at a discount to the U.S. dollar due to
weak world-wide commodity prices, a stronger U.S. economy, higher
U.S. interest rates and the potential for further U.S. rate
increases.
We expect financial markets to experience increased volatility
in 2017 with the U.S. potentially revisiting foreign trade
policies. We have seen fluctuations in stock markets in
reaction to announced policies that will impact U.S. trade. We
expect to see increased volatility in international currencies as
trade deals impact corporate strategies. In Canada, the impact of a weak oil sector and
soft commodity prices continues to affect a significant portion of
the stock market.
Ontario and British Columbia have continued to exhibit
strong fundamentals and growth, with GDP growth driven by exports
and immigration. In Alberta,
housing markets have continued to slow as a result of lower oil
prices and weakening employment. We continue to focus our
origination in Ontario and
British Columbia and monitor our
exposure to Alberta. We are selective in our origination of
new residential construction projects.
Real estate conditions
Canadian housing market conditions continue to be mixed. The
Toronto housing market has
experienced 31% price inflation year over year in March 2017.
Price inflation in Toronto
continues to be well in excess of levels supported by employment
and income growth.
Vancouver has experienced a
slowing of sales and price inflation following changes in mortgage
underwriting rules and the 15% tax on non-resident real estate
purchases enacted in mid-2016. The tax was intended to help
restore housing affordability for residents in the Metro Vancouver
Area by raising non-residents' cost of purchasing and, on the
margin, discouraging foreign speculation. The greatest impact
of this foreign buyer tax has been on homes selling above
$5 million.
While some of the price inflation in both Toronto and Vancouver is driven by low mortgage rates and
lot supply shortages, we believe that price inflation at these high
levels increases the risk of a price correction. We have been
operating with more conservative underwriting and credit policies
for uninsured mortgages (especially for self-employed
applicants). We have also limited our originations in insured
single family as a result of narrower spreads while we closely
monitor both portfolios.
Regulatory Changes
On April 20, 2017 the Ontario government announced reforms to
Ontario's rental and housing
market in hopes of cooling the red-hot real estate market in
Toronto and salvaging affordable
rental options for residents. The Ontario government has put together a 16-point
plan to address high home price inflation. Given the recency
of the announcement, we are currently not able to determine the
magnitude of the impact on MCAN. We will monitor housing and
mortgage markets to quantify this impact.
Effective January 1, 2017, the
Office of the Superintendent of Financial Institutions Canada
("OSFI") introduced new minimum capital adequacy requirements for
mortgage insurers. These changes are expected to increase
premiums on mortgage portfolio insurance paid by lenders which may
impact rates charged to borrowers.
In late 2016, the Department of Finance announced new mortgage
regulations.
The impact of these new regulations to date are as follows:
- Lower origination volumes of prime insured mortgages.
- Lower National Housing Act ("NHA") MBS issuance volumes, which
has tightened NHA MBS spreads.
- No change to overall market CMB issuance levels.
- Mortgage funding costs through the NHA MBS program are now
similar the CMB program. Historically mortgage funding costs
through the CMB program have been lower than NHA MBS.
- Renewed interest in residential mortgage-backed securities
("RMBS") funding. Canadian banks have been exploring possible
investor interest in RMBS. The collateral pool behind the
securities would range from prime uninsurable mortgages to near
prime uninsured mortgages.
- Stable to modest decline for insured mortgage rates due to
increased competition amongst lenders.
We continue to evaluate the impact of regulatory changes to the
market and MCAN. We believe that the effect of multiple
legislative changes in a short time period will require a minimum
of 6-12 months to begin providing clarity on the direction of the
mortgage market in Canada.
Impact on MCAN
We will continue to monitor housing market developments as they
evolve and will continue to ensure that our mortgage portfolio
remains well positioned. Our corporate assets declined 4.6%
during the quarter compared to our stated annual growth target of
10%. Given the noted discussion above relating to the
markets, we believe there is higher uncertainty that this target
will be attained in 2017. In 2017, we expect to continue to
make adjustments to the composition of our balance sheet as we
evaluate the risks and rewards of each of our product lines.
We believe that MCAN is well positioned to adapt to changes in
mortgage and housing markets given that we, as a regulated
financial institution, have access to both the insured
securitization market as well as the term deposit funding
market.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan ("DRIP") is a program that
provides MCAN with a reliable source of new capital and existing
shareholders an opportunity to acquire additional shares at a
discount to market value. Under the DRIP, dividends paid to
shareholders are automatically reinvested in common shares issued
out of treasury at the weighted average trading price for the 5
days preceding such issue less a discount of 2%. For further
information on how to enrol in the DRIP, please refer to the
Management Information Circular dated March
10, 2017 or visit our website at
www.mcanmortgage.com/investor-relations/investor-materials.
Non-IFRS Measures
The following metrics are considered to be Non-IFRS measures and
are defined in the "Non-IFRS Measures" section of the MD&A:
Return on Average Shareholders' Equity, Taxable Income,
Taxable Income Per Share, Average Interest Rate, Net Interest
Income, Impaired Mortgage Ratios, Mortgage Arrears, Common Equity
Tier 1, Tier 1 and Total Capital Ratios, Total Exposures,
Regulatory Assets, Leverage Ratio, Assets to Capital Multiple; Risk
Weighted Assets Ratios, Tier 1, Tier 2, Tier 3 and Total Liquid
Assets and Liquidity Ratios, Income Tax Assets, Income Tax
Liabilities, Income Tax Capital, Income Tax Assets to Capital
Ratio, Income Tax Asset Capacity, Market Capitalization, Book Value
per Common Share and Limited Partner's At-Risk Amount.
Further Information
Complete copies of the Company's 2017 First Quarter Report will
be filed on the System for Electronic Document Analysis and
Retrieval ("SEDAR") at www.sedar.com and on the Company's website
at www.mcanmortgage.com.
MCAN is a public company listed on the Toronto Stock Exchange
("TSX") under the symbol MKP and is a reporting issuer in all
provinces and territories in Canada. MCAN also qualifies as a
mortgage investment corporation ("MIC") under the Income Tax Act
(Canada) (the "Tax Act").
The Company's primary objective is to generate a reliable
stream of income by investing its corporate funds in a portfolio of
mortgages (including single family residential, residential
construction, non-residential construction and commercial loans),
as well as other types of financial investments, loans and real
estate investments. MCAN employs leverage by issuing term deposits
eligible for Canada Deposit Insurance Corporation ("CDIC") deposit
insurance up to a maximum of five times capital (on a
non-consolidated tax basis in the MIC entity) as permitted by the
Tax Act. The term deposits are sourced through a network of
independent financial agents. As a MIC, MCAN is entitled to deduct
from income for tax purposes 100% of dividends, except for capital
gains dividends, which are deducted at 50%. Such dividends
are received by the shareholders as interest income and capital
gains dividends, respectively.
MCAN's wholly-owned subsidiary, Xceed, is an originator of
residential first-charge mortgage products across Canada. As
such, Xceed operates primarily in one industry segment through its
sales team and mortgage brokers.
MCAN is also an NHA MBS issuer.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND
STATEMENTS
This press release contains "forward-looking statements" within
the meaning of applicable Canadian securities laws. The words
"may," "believe," "will," "anticipate," "expect," "planned,"
"estimate," "project," "future," and other expressions that are
predictions of or indicate future events and trends and that do not
relate to historical matters identify forward-looking statements.
Such statements reflect management's current beliefs and are based
on information currently available to management. The
forward-looking statements in this press release include, among
others, statements and assumptions with respect to:
- the current business environment and outlook;
- possible or assumed future results;
- ability to create shareholder value;
- business goals and strategy;
- the stability of home prices;
- effect of challenging conditions on us;
- factors affecting our competitive position within the housing
markets;
- the price of oil and its impact on housing markets in
Western Canada;
- sufficiency of our access to capital resources; and
- the timing of the effect of interest rate changes on our cash
flows.
The material factors or assumptions that were identified and
applied by us in drawing conclusions or making forecasts or
projections set out in the forward-looking statements include, but
are not limited to:
- the Company's ability to successfully implement and realize on
its business goals and strategy;
- factors and assumptions regarding interest rates;
- housing sales and residential mortgage borrowing
activities;
- the effect of competition;
- government regulation of the Company's business;
- computer failure or security breaches;
- future capital and funding requirements;
- the value of mortgage originations;
- the expected margin between interest earned on mortgage
portfolios and interest paid on deposits;
- the relative continued health of real estate markets;
- acceptance of the Company's products in the marketplace;
- availability of key personnel;
- the Company's operating cost structure; and
- the current tax regime.
Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and
other factors, which may cause the actual results to differ
materially from the anticipated future results expressed or implied
by such forward-looking statements. Factors that could cause actual
results to differ materially from those set forth in the
forward-looking statements include, but are not limited to:
- global market activity;
- worldwide demand for and related impact on oil and other
commodity prices;
- changes in government and economic policy;
- changes in general economic, real estate and other
conditions;
- changes in interest rates;
- changes in CMB and MBS spreads and swap rates;
- MBS and mortgage prepayment rates;
- mortgage rate and availability changes;
- adverse legislation or regulation;
- availability of CMB and MBS issuer allocation;
- technology changes;
- confidence levels of consumers;
- ability to raise capital and term deposits on favourable
terms;
- our debt and leverage;
- competitive conditions in the homebuilding industry, including
product and pricing pressures;
- ability to retain our executive officers and other
employees;
- litigation risk;
- relationships with our mortgage originators; and
- additional risks and uncertainties, many of which are beyond
our control, referred to in this press release and our other public
filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake
no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or
otherwise. However, any further disclosures made on related
subjects in subsequent reports should be consulted.
SOURCE MCAN Mortgage Corporation