Stock market symbol
TSX: MKP
TORONTO, Aug. 11, 2017 /CNW/ - MCAN Mortgage Corporation
("MCAN", the "Company" or "we") reported Q2 2017 net income of
$8.9 million, down from $13.6 million in Q2 2016. Earnings per
share decreased to $0.39 in Q2 2017
from $0.59 in Q2 2016. The
decreases were largely driven by the recognition of $3.8 million of distribution income in Q2 2016
from our investment in Crown Realty II Limited Partnership ("Crown
LP").
Highlights
Net Income
Q2 2017
- Net income was $8.9 million in Q2
2017, a decrease of $4.7 million
(34%) from $13.6 million in Q2 2016.
- Earnings per share decreased by $0.20 (34%) to $0.39 in Q2 2017 from $0.59 in Q2 2016.
- Decrease of 7.7% in return on average shareholders' equity to
12.37% in Q2 2017 from 20.10% in Q2 2016.
- The decreases in the above amounts in Q2 2017 were largely
driven by the above-noted recognition of $3.8 million of distribution income from Crown LP
in Q2 2016, in addition to lower corporate mortgage interest and
equity income from MCAP Commercial LP ("MCAP") in Q2 2017.
Year to Date 2017
- For 2017 year to date, we earned net income of $19.2 million, a decrease of $2.2 million (10%) from $21.4 million in 2016.
- Earnings per share decreased by $0.10 (11%) to $0.83 per share for 2017 year to date from
$0.93 per share in 2016.
- Return on average shareholders' equity decreased to 13.37% for
2017 year to date from 16.02% in 2016.
- The decreases in the above amounts in 2017 were primarily due
to lower corporate mortgage interest income from a lower average
portfolio balance and lower equity income from MCAP. Year to
date distribution income from Crown LP was comparable to 2016.
Dividend
- Consistent with the prior quarter, the Board of Directors (the
"Board") declared a 2017 third quarter dividend of $0.32 per share to be paid on September 29, 2017 to shareholders of record as
of September 15, 2017. This
dividend represents a 10% increase over the corresponding 2016
dividend of $0.29 per share.
Corporate Activity
- Corporate assets totalled $1.20
billion at June 30, 2017, a
net increase of $68 million from
$1.13 billion at March 31, 2017. Q2 2017 activity included
increases of $51 million in mortgages
and $14 million in cash.
- The corporate mortgage portfolio increased by $51 million during Q2 2017 to $912 million from $861
million, comprised of increases of $33 million in completed inventory loans,
$17 million in commercial loans,
$11 million in construction loans and
$7 million in insured single family,
partially offset by a decrease of $17
million in uninsured single family. This activity
includes a reclassification of $27
million of completed construction projects from the
construction portfolio to the completed inventory portfolio during
Q2 2017.
- For 2017 year to date, corporate assets have increased by
$12 million (1.0%), which included
increases of $8 million in corporate
mortgages and $3 million in our
equity investment in MCAP.
Credit Quality
- Impaired mortgages improved to $4.4
million from $6.0 million
during Q2 2017.
- The impaired total mortgage ratio improved to 0.12% from 0.19%
during Q2 2017.
- The impaired corporate mortgage ratio improved to 0.27% from
0.44% during Q2 2017.
- Total mortgage arrears improved to $22
million from $48 million
during Q2 2017. The June 30,
2017 balance consists entirely of single family mortgages,
$7.5 million of which were
uninsured. The decrease from March
31st was primarily due to two Saskatchewan-based loans from the same
borrowing group totalling $19
million, which were in arrears at March 31st, being paid current during
the quarter. As at June 30,
2017, these borrowers were still in default, however our
interest in the loans was paid current by a subordinated lender in
the loans during the quarter, and therefore the loans were not in
arrears as at June 30, 2017. We
expect the loans to pay out in full in the third quarter of 2017
with no loss of principal or interest.
- Net write-offs were 4.7 basis points of the average corporate
portfolio in Q2 2017 compared to 4.5 basis points in Q2
2016.
- The average loan to value ratio ("LTV") of our uninsured single
family portfolio based on an industry index of current real estate
values was 53.7% at June 30, 2017
compared to 56.5% at March 31,
2017.
Capital
- Our Common Equity Tier 1, Tier 1 and Total Capital to
risk-weighted assets ratios were 21.69% on the transitional basis
and 21.47% on the "all-in" basis at June 30,
2017 compared to 22.43% and 22.23%, respectively, at
March 31, 2017.
- Our leverage ratio was 10.82% as at June
30, 2017 compared to 10.87% at March
31, 2017.
- Income tax asset capacity was $243
million at June 30, 2017
compared to $278 million at
March 31, 2017. 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
We expect housing markets to continue to benefit from
historically low interest rates, but also expect a slowdown in
housing sales 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 remain in the $50 range, which is negatively impacting
employment. Other regional economies previously
benefited from the lower Canadian dollar, which helped to
strengthen employment in the manufacturing sector. These
regional economies now face a strengthening Canadian dollar while a
strong Canadian GDP supports higher interest rates.
Ontario and British Columbia have continued to exhibit
strong fundamentals, with GDP growth driven by exports and
immigration. We continue to focus our origination in
Ontario and British Columbia and selectively lend in
Alberta.
Real estate conditions
Canadian housing market conditions are expected to be volatile
through the remainder of the year. Markets are adjusting to an
unprecedented level of regulatory and policy changes affecting
mortgage insurance rules, foreign buyer taxes, underwriting
requirements for regulated lenders and rising interest rates.
It will take 6 to 12 months to see the full impact of these changes
on housing sale volumes and prices. We expect home sales levels to
slow as buyers react to the uncertainty caused by the multiple rule
changes and evidence of increases in listings and decreases in
sales. We expect to see some level of weakness in the resale
markets as markets adjust to fewer buyers and more available
listings.
The Greater Toronto Area (GTA)
saw existing home sales decrease by 15.1% in June. The GTA is
expected to go through a six-month stall in demand, similar to
Vancouver, as markets react to the
Government of Ontario's announced
reforms to rental and housing markets (see below). That said, the
GTA still has near record lows in available new home lots and the
lowest levels of available new homes in over 15 years.
Vancouver has recovered to more
normal levels of home sales and is experiencing price deflation
following changes in mortgage underwriting rules and the 15% tax on
non-resident real estate purchases enacted in mid-2016. While
June sales decreased by 11.5% from the prior year, they are
relatively healthy against the 10-year average for the month of
June. The greatest impact of the foreign buyer tax has been on
homes selling above $5
million.
While we expect to see lower levels of resale homes for the
remainder of the year in both Toronto and Vancouver, we expect the impact to new home
sales to be minimal due to lot supply shortages and relatively low
mortgage rates.
We believe that there is an increased risk of a price correction
in residential housing through the remainder of the year as prices
adjust from historical highs in many geographic markets. We will
continue to operate with more conservative underwriting and credit
policies for uninsured mortgages through this market
transition.
Regulatory Changes
In July 2017, the Office of the
Superintendent of Financial Institutions Canada ("OSFI") issued an
announcement regarding its expectations for residential mortgage
underwriting for federally regulated financial institutions and
advised that it would be increasing its supervisory intensity and
enhancing its B-20 Guideline, Residential Mortgage Underwriting
Practices and Procedures. The advisory specifically referenced
its intention to clarify and strengthen areas including:
- Requiring a qualifying stress test for all uninsured
mortgages;
- Requiring that Loan-to-Value (LTV) measurements remain dynamic
and adjust for local market conditions where they are used as a
risk control, such as for qualifying borrowers;
- Expressly prohibiting co-lending arrangements that are
designed, or appear to be designed to circumvent regulatory
requirements.
On April 20, 2017 the Ontario government announced reforms to
Ontario's rental and housing
market with the intent of slowing the rapid price increases in the
Toronto real estate market and
providing 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 have increased 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 to 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 uninsured mortgages to near prime
uninsured mortgages.
- Stable to modest decline for insured mortgage rates due to
increased competition amongst lenders.
Impact on MCAN
We will continue to monitor housing markets and market
developments as they evolve, and will continue to ensure that our
mortgage portfolio remains well positioned. Our corporate
assets have increased by 1.0% for the year to date compared to our
stated annual growth target of 10%. Given the noted
discussion above relating to the markets, we believe that there is
higher uncertainty that this target will be attained 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 in the geographic markets we lend to.
KingSett's announcement during Q2 regarding its agreement to
acquire $1.2 billion in commercial
mortgages from Home Capital may have a positive impact on future
income from our investment in the KingSett High Yield Fund.
We continue to evaluate the impact of regulatory changes to the
market and MCAN. We believe that it will require 6-12 months
to see the impact of these changes on construction, home sales, and
mortgage volumes. MCAN has made significant changes to its
underwriting procedures over the past 18 months and we believe that
we are well positioned against the regulatory changes outlined
above, and do not expect a material impact to our financial
results. We believe that MCAN is well positioned to adapt to
changes in mortgage and housing markets.
The Bank of Canada increased
the overnight rate subsequent to quarter end, which led to an
increase in the prime rate. We expect this rate increase to
increase revenues from the floating-rate component of our corporate
mortgage portfolio, while associated increases in funding costs
generally lag since the deposit portfolio is fixed-rate.
Uninsured single family market rates are still very uncertain given
the volatility that we experienced in the spring, however we have
observed increases in rates in this market segment.
Securitization spreads have tightened recently and we expect them
to remain compressed given reduced supply in the insured single
family securitization 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 Second 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