TSX: MKP
TORONTO, Nov. 10, 2017 /CNW/ - MCAN Mortgage Corporation
("MCAN", the "Company" or "we") reported Q3 2017 net income of
$9.9 million, up from $9.8 million in Q3 2016. Earnings per share
decreased to $0.42 in Q3 2017 from
$0.43 in Q3 2016.
Highlights
Net Income
Q3 2017
- Net income was $9.9 million in Q3
2017, an increase of $0.1 million
(1%) from $9.8 million in Q3
2016.
- Earnings per share decreased by $0.01 (2%) to $0.42
in Q3 2017 from $0.43 in Q3
2016.
- Return on average shareholders' equity was 13.63% in Q3 2017
compared to 14.08% in Q3 2016.
Year to Date 2017
- For 2017 year to date, we earned net income of $29.1 million, a decrease of $2.1 million (7%) from $31.2 million in 2016.
- Earnings per share decreased by $0.11 (8%) to $1.25
per share for 2017 year to date from $1.36 per share in 2016.
- Return on average shareholders' equity was 13.45% for 2017 year
to date compared to 15.36% in 2016.
- The decrease in net income for 2017 year to date was primarily
due to lower corporate mortgage interest, equity income from MCAP
Commercial LP ("MCAP") and fees, partially offset by higher
distribution income recognized from our investment in the Crown
Realty II Limited Partnership ("Crown LP").
Dividend
- On October 13, 2017, the Board of
Directors (the "Board") declared a 15.6% increase to the quarterly
dividend from $0.32 per share to
$0.37 per share effective with the
2017 fourth quarter dividend to be paid on January 2, 2018 to shareholders of record as of
December 15, 2017.
Corporate Activity
- Corporate assets totalled $1.15
billion at September 30, 2017,
a net decrease of $53 million from
$1.20 billion at June 30, 2017. Q3 2017 activity included
decreases of $45 million in mortgages
and $12 million in cash.
- The corporate mortgage portfolio decreased by $45 million during Q3 2017 to $867 million from $912
million, which included decreases of $19 million in construction loans, $14 million in uninsured single family and
$8 million in commercial loans.
- For 2017 year to date, corporate assets have decreased by
$41 million (3%), consisting
primarily of a decrease of $37
million in corporate mortgages.
Credit Quality
- Impaired mortgages improved to $3.5
million from $4.4 million
during Q3 2017.
- The impaired total mortgage ratio increased to 0.14% from 0.12%
during Q3 2017.
- The impaired corporate mortgage ratio increased to 0.31% from
0.27% during Q3 2017.
- Total mortgage arrears improved to $19
million from $22 million
during Q3 2017. The September 30,
2017 balance consists entirely of single family mortgages,
$7.4 million of which were
uninsured.
- Net write-offs were 4.3 basis points of the average corporate
portfolio in Q3 2017 compared to nil in Q3 2016. Year to date
write-offs were 7.0 basis points in 2017 and 2.7 basis points in
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 51.1% at September 30,
2017 compared to 53.7% at June 30,
2017.
Capital
- Our Common Equity Tier 1, Tier 1 and Total Capital to
risk-weighted assets ratios were 21.58% on the transitional basis
and 21.34% on the "all-in" basis at September 30, 2017 compared to 21.69% and 21.47%,
respectively, at June 30, 2017.
- Our leverage ratio was 11.31% as at September 30, 2017 compared to 10.82% at
June 30, 2017.
- Income tax asset capacity was $313
million at September 30, 2017
compared to $243 million at
June 30, 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") that
govern leverage for mortgage investment corporations.
Outlook
Market conditions
Housing markets continue to face headwinds as a result of recent
regulations enacted by the federal and provincial governments to
cool down real estate markets and mortgage lending in Canada. Consumers are also facing a rising
interest rate environment. After two interest rate hikes in July
and September, the Bank of Canada
is expected to take a "wait and see" approach in considering future
interest rate increases.
Canadian residential real estate markets continue to have a
mixed performance as regional markets adjust to local economic
conditions. The Prairie Provinces continue to demonstrate
weakness as oil prices remain low, 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.
Recently announced increases in immigration levels by the
federal government are expected to positively impact housing
markets, particularly those that are supply-constrained such as
Toronto and Vancouver.
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 sale levels to
slow as buyers react to the uncertainty caused by the multiple rule
changes, the evidence of increases in listings and decreases in
sales volumes. We expect to see some level of weakness in resale
markets as markets adjust to fewer buyers and more available
listings.
Actual sales activity was down 11% in September 2017 compared to the record month in
September in 2016. Sales were down year over year in close to three
quarters of all local markets, led by the Greater Toronto Area and nearby local
markets. Despite this decline in sales activity, year over
year price inflation rose by 10.7% in September 2017.
The Greater Toronto Area
("GTA") saw existing home sales decrease by over 50% in the first
half of the year following the Government of Ontario's announced reforms to rental and
housing markets (see below). We expect the negative impact of the
announced changes to be short lived, similar to what occurred in
the Greater Vancouver market.
There was some evidence of sales level recovery in the GTA in
September and October. 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 inflation,
although at levels below those experienced before the
implementation of the 15% tax on non-resident real estate purchases
enacted in mid-2016. 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 on 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 and into
2018 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 October 2017, the Office of the
Superintendent of Financial Institutions Canada ("OSFI") published
in final form the revised Guideline B-20, Residential Mortgage
Underwriting Practices and Procedures which comes into effect on
January 1, 2018. We expect that
our existing underwriting standards will align with the new B-20
guidelines. The new B-20 guidelines also require a 200 basis
point stress test on the borrower qualifying rate, which will
further enhance credit protection on newly originated
mortgages. We expect this stress test to cause a small
decrease in the proportion of mortgages that we approve. This
increase in the qualifying rate on uninsured mortgages will have
the largest impact on mortgage origination activity.
The prime insured mortgage market decreased this year, as
reported by CMHC in Q2. This is a result of the cumulative
effect of new mortgage insurance rules, the increased cost of
portfolio insurance and the foreign buyers' tax in Vancouver and the Greater Golden Horseshoe of
Ontario. We have been affected by these rules, as insured
mortgage rates have been stable due to increased competition
amongst lenders despite the recent Bank of Canada interest rate hikes.
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 decreased by 3% year to date, compared to our stated
annual growth target of 10%. As a result of the current uncertainty
in mortgage markets, we believe that we will not achieve this
target in 2017. However, we continue to maintain this as our
ongoing target as a measure of our expected annualized growth
objective into 2018 and beyond. 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. Given our available asset
capacity, the market repositioning and changing rules, we feel that
we are well positioned to capitalize on the single family uninsured
asset class by way of internal originations or from mortgage
acquisitions in the upcoming year. Considering the factors
noted above, we currently believe that our financial position will
continue to provide taxable income to support our dividend
policy.
KingSett's announcement during Q2 regarding its agreement to
acquire $1.2 billion in commercial
mortgages from Home Capital has had and may continue to have a
positive impact on future income from our investment in the
KingSett High Yield Fund. During the quarter, we funded an
additional $5.1 million of our
capital commitment relating to our investment in the High Yield
Fund.
We continue to evaluate the impact of regulatory changes on 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.
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 Third 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, XMC Mortgage Corporation
("XMC") (formerly Xceed Mortgage Corporation), is an originator of
residential first-charge mortgage products across Canada. As
such, XMC operates primarily in one industry segment through its
sales team and mortgage brokers. We renamed the subsidiary to
XMC as of September 1, 2017.
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