Stock market symbol
TSX: MKP
TORONTO, Feb. 22, 2019 /CNW/ - MCAN Mortgage Corporation
("MCAN", the "Company" or "we") announced net income of
$3.5 million ($0.15 per share) for the fourth quarter ended
December 31, 2018, down 67% from
$10.8 million ($0.47 per share) in the fourth quarter of
2017. Net income for the fourth quarter of 2018 included a
$4.2 million unrealized loss on
marketable securities, which negatively impacted earnings per share
by $0.17. Net income for fiscal
2018 was $36.3 million ($1.54 per share), a decrease of $3.6 million (9%) from $39.9 million ($1.72 per share) in 2017.
Highlights
Financial Performance
Q4 2018
- The aforementioned unrealized loss of $4.2 million consisted entirely of a reduction in
the fair value of the real estate investment trust ("REIT")
component of our marketable securities portfolio. Subsequent to
year end, the value of the marketable securities portfolio
recovered, consistent with the broader market. In Q4 2017, we
recorded an unrealized gain on marketable securities of
$2.3 million through accumulated
other comprehensive income in accordance with IAS 39.
- Equity income from MCAP Commercial LP ("MCAP") decreased by
$2.2 million (40%) from Q4 2017 due
to a reduced ownership interest and compressed spreads, which were
consistent with the broader market.
- Return on average shareholders' equity was 4.66% in Q4 2018
compared to 14.63% in Q4 2017.
Fiscal 2018
- Income from non-marketable securities decreased by $3.5 million (39%) from 2017 as a result of lower
distribution income from our investment in Crown Realty II Limited
Partnership ("Crown LP") as it sold the last remaining property in
its opportunity fund.
- Equity income from MCAP decreased by $1.2 million (9%) from 2017 due to a reduction in
our ownership interest from 14.41% in 2017 to 13.71% at
December 31, 2018 and compressed
spreads.
- Unrealized net loss on securities of $3.5 million relating to our marketable
securities REIT portfolio, partially offset by $2.6 million and $0.4
million of realized and unrealized net gains on our
investments in Crown LP and the KingSett High Yield Fund
("KSHYF").
- Return on average shareholders' equity was 11.90% in 2018
compared to 13.75% in 2017.
- Net corporate mortgage spread income increased by $0.9 million (3%) from 2017 due to the average
corporate mortgage portfolio balance increasing by 2%. The spread
of corporate mortgages over term deposits remained unchanged at
3.07% from 2017.
Corporate Activity
Q4 2018
- Corporate assets of $1.22 billion
at December 31, 2018 decreased by
$15 million (1%) from September 30, 2018.
- Corporate mortgage portfolio decreased by $43 million (4%) in Q4 2018, consisting of
$20 million of net portfolio growth
and the transfer of $63 million of
insured single family to the securitized portfolio.
- Uninsured single family portfolio increased by $34 million (16%) during Q4 2018 due to a 53%
increase in originations from Q3 2018.
- Insured single family portfolio increased by $35 million during Q4 2018 (excluding the impact
of the transfer to the securitized portfolio noted above). New
originations of $28 million decreased
by $7 million from Q3 2018 but
remained consistent with our growth strategy.
- Construction and commercial portfolios decreased by
$53 million (9%) during Q4 2018,
consistent with the moderation of our corporate portfolio in this
product type.
- Corporate mortgage originations decreased to $86 million (8%) in Q4 2018 compared to
$93 million in Q4 2017, including
increases of $29 million and
$12 million in uninsured and insured
single family, offset by decreases in commercial originations of
$33 million and construction
originations of $20 million.
Fiscal 2018
- Corporate assets increased by $42
million (4%) from December 31,
2017, reflecting an increase of $59
million (7%) in the corporate mortgage portfolio.
- Corporate mortgage portfolio activity included increases of
$57 million in uninsured single
family, $42 million in construction
and $31 million in insured single
family, partially offset by decreases of $43
million in uninsured completed inventory and $28 million in commercial.
- Corporate mortgage originations increased by 32% to
$391 million in 2018 from
$295 million in 2017, including
increases of $76 million and
$55 million in uninsured and insured
single family, respectively.
CEO Commentary
"Our corporate mortgage portfolio and net corporate mortgage
spread income increased 7% and 3% respectively during 2018, despite
market conditions," said Karen
Weaver, Chief Executive Officer, Interim. "We continue
to be focused on building our business and delivering a sustainable
dividend to shareholders. As Interim CEO, it is a pleasure to
lead a committed and talented executive team in achieving our
objectives".
Dividend
- The Board of Directors (the "Board") declared a first quarter
dividend of $0.32 per share on
February 22, 2019 to be paid
March 29, 2019 to shareholders of
record as of March 15, 2019.
Credit Quality
- The impaired total mortgage ratio increased to 0.12% at
December 31, 2018 from 0.03% at
September 30, 2018 and 0.09% at
December 31, 2017.
- The impaired corporate mortgage ratio increased to 0.23% at
December 31, 2018 from 0.06% at
September 30, 2018 and 0.20% at
December 31, 2017.
- Total mortgage arrears were $16
million at December 31, 2018,
down from $17 million at September 30, 2018 and $18
million at December 31,
2017.
- Net write-offs were nil basis points of the average corporate
portfolio in Q4 2018 compared to 1.5 basis points in Q4 2017;
annual ratios were 2.8 basis points of the average corporate
portfolio in 2018 compared to 5.7 basis points in 2017.
- Average loan to value ratio ("LTV") of our uninsured single
family portfolio based on an industry index of current real estate
values was 58.2% at December 31, 2018
compared to 57.1% at September 30,
2018 and 52.6% at December 31,
2017.
Capital
- Common Equity Tier 1, Tier 1 and Total Capital to risk-weighted
assets ratios were 21.66% at December 31,
2018 compared to 20.58% at September
30, 2018 and 21.26% at December 31,
2017.
- The leverage ratio was 11.79% at December 31, 2018 compared to 11.35% at
September 30, 2018 and 11.31% at
December 31, 2017.
- The income tax assets to capital ratio was 4.64 at December 31, 2018 compared to 4.90 at
September 30, 2018 and 4.60 at
December 31, 2017.
- We manage our capital and asset balances based on the
regulations and limits of both the Income Tax Act
(Canada) (the "Tax Act") and the
Office of the Superintendent of Financial Institutions
("OSFI").
Outlook
Real Estate Market Conditions
Canadian residential real estate markets continue to have a
mixed performance as regional markets adjust to both regulatory
changes and local economic conditions. We expect overall
Canadian housing market conditions to experience downward pricing
pressure and uncertainty throughout 2019 with sustained headwinds
if interest rates continue to rise, challenging
affordability.
We expect continued weakness in resale markets through 2019
given recent increases in unsold homes in certain markets. This has
also led to a reduction in housing starts. In October 2018, the Bank of Canada announced a further increase to its
benchmark interest rate to 1.75%. We expect interest rates to
continue to increase throughout 2019, placing further pressures on
consumer spending and housing/mortgage affordability.
Both the Greater Vancouver Area
and the Greater Toronto Area
markets experienced reduced sales during 2018 as a result of the
new mortgage rules, other statutory changes designed to cool the
housing markets and overall mortgage and housing market dynamics.
The Prairie province economies are expected to continue to be
challenged due to oil prices and the complexities in moving oil to
markets.
Notwithstanding the above, we began to observe some small signs
of recovery beginning in the second half of 2018 as buyers
continued to adjust to the new mortgage rules and the increasing
interest rate environment. We continue to closely monitor the
markets where we lend to ensure that we can capitalize on
opportunities for growth in our quality portfolio.
Regulatory Changes
Effective January 1, 2018,
additional granularity was added to Guideline B‐20, Residential
Mortgage Underwriting Practices and Procedures ("Guideline
B-20") by OSFI, including a stress test for uninsured
mortgages. We believe that the uninsured stress test has
reduced the volume of mortgages that we approve based on the
borrower's ability to service the higher mortgage rates used in the
stress test.
Impact on MCAN
MCAN has historically repositioned itself to adapt our portfolio
to changing market dynamics. Consistent with our disclosures
in the Second Quarter and Third Quarter outlooks, we continue to
reposition our mortgage portfolio to focus more on single family
mortgages and less on construction lending given the uncertainty in
the housing market, the impact of increasing rates, the overall
economy and related risk factors.
Our construction lending activity is considered to have a higher
risk profile compared to our other lending activities. We believe
that it is prudent to continue to closely manage lending activities
in this business segment as we view that we are approaching the end
of a real estate cycle. We believe that single family lending
typically provides a more moderate risk profile. Accordingly, we
will focus on leveraging the success that we had in this market
during the last half of 2018 and continue to grow our single family
origination volumes in 2019.
To assist with our single family growth plans, we launched
programs to attract potential loans through the brokerage community
and we increased our internal sales capabilities. In
addition, through MCAP and other originators, we have increased our
single family mortgage acquisitions. We expect to continue to
use acquisitions to supplement our own underwriting activities to
grow our balance sheet. These acquisition activities are
subject to satisfactory loan quality and pricing. We also expect to
continue to increase our securitization of insured single family
mortgages. All of these single family activities provide the
Company with the opportunity to realize a continuing income stream
on mortgage renewal which improves long-term profitability
notwithstanding the current mortgage spread environment.
We observed historically low spread levels on our single family
mortgage originations in 2018 and foresee this continuing into 2019
as we compete with other lenders for originations. Notwithstanding
these competitive market conditions, increased interest rates and
the regulatory changes related to Guideline B‐20, we are focused on
growing our origination volumes. We also expect to continue
to invest in sustainable internal operating platforms to ensure
that there are efficient processes and systems in place to support
profitable growth in our single family business that is in line
with our risk management objectives.
As we look to maintain the level of our investment in
construction and commercial loans during 2019, while at the same
time growing the single family business, we do not expect
significant growth in our net interest margins in the near
term. Beyond 2019, we expect to return to our targeted
long-term growth rate in corporate assets of 10% and to realize
improved increases in net interest margin.
We are starting 2019 with a strong capital position and asset
capacity that can be profitably deployed as opportunities
arise. We have an eager and committed management team that we
announced in the fourth quarter. Collectively, the team has
deep industry and company experience and is focused on driving our
business strategy forward. Overall, we believe that our
strategy in the near term is prudent given our view of the current
risks to the Canadian economy and housing markets. Over the long
term we are focused on growing our balance sheet and providing
growing returns and sustainable dividends to our
shareholders.
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
9, 2018 or visit our website at
www.mcanmortgage.com/investors/regulatory-filings/.
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, Average
Balance, Net Interest Income, Impaired Mortgage Ratios, Mortgage
Arrears, Common Equity Tier 1, Tier 1 and Total Capital Ratios,
Total Exposures, Regulatory Assets, Leverage Ratio, Risk Weighted
Asset 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 2018 Annual 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 Tax Act.
The Company's objective is to generate a reliable stream of
income by investing its funds in a diversified portfolio of
Canadian mortgages, including single family residential,
residential construction, non-residential construction and
commercial loans, as well as other types of securities, loans and
real estate investments. MCAN employs leverage by issuing term
deposits eligible for Canada Deposit Insurance Corporation ("CDIC")
deposit insurance. We manage our capital and asset
balances based on the regulations and limits of both the Tax
Act and OSFI. 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 50% of capital gains dividends
and 100% of non-capital gains dividends that are paid to
shareholders. Such dividends are taxed in the hands of our
shareholders as capital gains dividends and interest income,
respectively, to the extent that they are held in a non-registered
plan. Dividends paid to foreign investors may be subject to
withholding taxes.
MCAN's wholly-owned subsidiary, XMC Mortgage Corporation
("XMC"), is an originator of single family residential mortgage
products across Canada.
MCAN is also an NHA MBS issuer.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND
STATEMENTS
This press release contains forward-looking information within
the meaning of applicable Canadian securities laws. All
information contained in this press release, other than statements
of current and historical fact, is forward-looking information. All
of the forward-looking information in this press release is
qualified by this cautionary note. Often, but not always,
forward-looking information can be identified by the use of words
such as "may," "believe," "will," "anticipate," "expect,"
"planned," "estimate," "project," "future," and variations of these
or similar words or other expressions that are predictions of or
indicate future events and trends and that do not relate to
historical matters. Forward-looking information in this press
release includes, among others, statements and assumptions with
respect to:
- the current business environment and outlook;
- possible or assumed future results;
- our ability to create shareholder value;
- our business goals and strategy;
- the potential impact of new regulations and changes to existing
regulations;
- the stability of home prices;
- the 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.
Forward-looking information is not, and cannot be, a guarantee
of future results or events. Forward-looking information reflects
management's current beliefs and is based on information currently
available to management. Forward-looking information is based on,
among other things, opinions, assumptions, estimates and analyses
that, while considered reasonable by us at the date the
forward-looking information is provided, inherently are subject to
significant risks, uncertainties, contingencies and other factors
that may cause actual results and events to be materially different
from those expressed or implied by the forward-looking
information.
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:
- our ability to successfully implement and realize on our
business goals and strategy;
- factors and assumptions regarding interest rates;
- housing sales and residential mortgage borrowing
activities;
- the effect of competition;
- government regulation of our business;
- computer failure or security breaches;
- the availability of funding and capital to meet our
requirements;
- the value of mortgage originations;
- the expected margin between interest earned on mortgage
portfolios and interest paid on deposits;
- the relative uncertainty and volatility of real estate
markets;
- acceptance of our products in the marketplace;
- our ability to forecast future changes to borrower credit and
credit scores, loan to value ratios and other forward-looking
factors used in assessing expected credit losses;
- availability of key personnel;
- our 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 Canada Mortgage
Bonds ("CMB") and mortgage-backed securities ("MBS") spreads and
swap rates;
- MBS and mortgage prepayment rates;
- mortgage rate and availability changes;
- adverse legislation or regulation, including recent changes
implemented by OSFI and the potential for higher capital and
liquidity requirements for real estate lending;
- availability of CMB and MBS issuer allocation;
- technology changes;
- confidence levels of consumers;
- our 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;
- our ability to retain our executive officers and other
employees;
- the success of the business underlying our investment in MCAP,
marketable securities and non-marketable securities;
- litigation risk;
- our ability to respond to and reposition ourselves within a
changing market;
- our relationships with our mortgage originators;
- additional risks and uncertainties, many of which are beyond
our control, referred to in this MD&A and our other public
filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake
no obligation to publicly update or revise any forward-looking
information after the date of this press release whether as a
result of new information, future events or otherwise or to explain
any material difference between subsequent actual events and any
forward-looking information. However, any further disclosures
made on related subjects in subsequent reports should be
consulted.
SOURCE MCAN Mortgage Corporation