TORONTO, Aug. 7, 2019 /CNW/ - MCAN Mortgage
Corporation ("MCAN", the "Company" or "we") (TSX: "MKP") reported
net income of $8.9 million
($0.37 per share) for the second
quarter ended June 30, 2019, a
decrease of 20% from $11.1 million
($0.47 per share) in the second
quarter of 2018. In the second quarter of 2019, we recorded a
$1.0 million net realized and
unrealized loss on securities compared to a $3.3 million net realized and unrealized gain in
the second quarter of 2018. Year to date, we reported net
income of $23.2 million ($0.97 per share), an increase of 7% from
$21.7 million ($0.92 per share) for the same period in 2018.
Highlights
Financial Performance
Q2 2019
- Return on average shareholders' equity1 of 11.27% in
Q2 2019, a decrease of 3.27% from 14.54% in Q2 2018.
- Net corporate mortgage spread income decreased by $0.5 million from Q2 2018. The average corporate
mortgage portfolio balance1 increased to $1,003 million in Q2 2019 from $913 million in Q2 2018; this increase was more
than offset by a reduction in net spread of corporate mortgages
over term deposits1 to 2.66% in Q2 2019 from 3.17% in Q2
2018.
- The decrease in net spread was largely due to an increase in
the proportion of our corporate mortgage portfolio held in single
family mortgages and an increase in the average term deposit
interest rate during this period. Increases to the Bank of
Canada overnight rate have led to
a gradual increase in the interest rate on newly issued term
deposits since mid-2018. These factors were partially offset by the
increased yield on our primarily floating-rate construction loan
portfolio as a result of the increases to the overnight rate.
- Equity income from MCAP Commercial LP ("MCAP") totalled
$4.7 million in Q2 2019, an increase
of $1.5 million (48%) from
$3.2 million in Q2 2018, due to
higher net interest income on securitized mortgages, servicing and
administration revenue, mortgage origination fees and investment
income earned.
- The Q2 2019 net realized and unrealized loss related primarily
to our real estate investment trust ("REIT") portfolio, whereas Q2
2018 included net realized and unrealized gains of $2.0 million related to our investment in Crown
Realty II Limited Partnership and $1.3
million related to our REIT portfolio. The net realized and
unrealized loss in Q2 2019 negatively impacted earnings per share
by $0.04, while the net realized and
unrealized gain in Q2 2018 positively impacted earnings per share
by $0.14.
1 Considered to be a "Non-IFRS
Measure". For further details, refer to the "Non-IFRS Measures"
section of this press release.
|
Year to Date 2019
- Return on average shareholders' equity2 was 14.79%
in 2019, an increase of 0.47% from 14.32% in 2018.
- Net corporate mortgage spread income decreased by $0.7 million from 2018. The average corporate
mortgage portfolio balance2 increased to $987 million in 2019 from $881 million in 2018; this increase was offset by
a reduction in net spread of corporate mortgages over term
deposits2 to 2.70% in 2019 from 3.25% in 2018 due to the
reasons noted above for Q2 2019.
- In Q1 2018, we recognized a $1.7
million gain on the sale of a portion of our partnership
units in MCAP.
- Net realized and unrealized gain on securities of $7.0 million for 2019 year to date, primarily
driven by our REIT portfolio, compared to a net realized and
unrealized gain of $3.3 million in
2018 which was comprised of the Q2 2018 items noted above. The 2019
year to date net realized and unrealized gain positively impacted
earnings per share by $0.29 while the
net realized and unrealized gain in 2018 positively impacted
earnings per share by $0.14.
2
Considered to be a "Non-IFRS Measure". For further details,
refer to the "Non-IFRS Measures" section of this press
release.
|
Business Activity
- Corporate assets totalled $1.26
billion at June 30, 2019, an
increase of $3 million (0.2%) from
March 31, 2019 and $40 million (3%) from December 31, 2018.
- Corporate mortgage portfolio totalled $1.0 billion at June 30,
2019, an increase of $5
million (1%) from March 31,
2019 and $79 million (9%) from
December 31, 2018.
- Uninsured single family portfolio totalled $345 million at June 30,
2019, an increase of $37
million (12%) from March 31,
2019 and $89 million (35%)
from December 31, 2018.
- Uninsured single family originations were $56 million in Q2 2019, a decrease of
$8 million (12%) from Q1 2019 and an
increase of $31 million (123%) from
Q2 2018.
- Insured single family originations were $57 million in Q2 2019, an increase of
$19 million (49%) from Q1 2019 and
$31 million (116%) from Q2 2018.
- Insured single family securitization volumes were $75 million in Q2 2019, an increase of
$47 million (168%) from Q1 2019 and
$29 million (63%) from Q2 2018.
- Construction and commercial portfolios totalled $524 million at June 30,
2019, a decrease of $20
million (4%) from March 31,
2019 and $24 million (4%) from
December 31, 2018.
CEO Commentary
"We continued to gain momentum in our single family business
this quarter," said Karen Weaver,
President and Chief Executive Officer. "We believe that we are well
positioned to adapt to business opportunities and challenges in
2019, having sound capital and liquidity positions, high quality
assets, strong business partnerships and a talented and committed
team."
Dividend
- The Board of Directors declared a third quarter dividend of
$0.32 per share on August 7, 2019 to be paid September 30, 2019 to shareholders of record as
of September 13, 2019.
Credit Quality
- The impaired corporate mortgage ratio3 was 0.27% at
June 30, 2019 compared to 0.30% at
March 31, 2019 and 0.34% at
December 31, 2018.
- The impaired total mortgage ratio3 was 0.19% at
June 30, 2019 compared to 0.24% at
March 31, 2019 and 0.27% at
December 31, 2018.
- Total mortgage arrears3 were $15 million at June 30,
2019 compared to $19 million
at March 31, 2019 and $16 million at December
31, 2018.
- Net write-offs were $18,000 (less
than 1 basis point) of the average corporate portfolio in Q2 2019
compared to $243,000 (11 basis
points) in Q2 2018.
- Average loan to value ratio ("LTV") of our uninsured single
family portfolio based on an industry index of current real estate
values was 65.6% at June 30, 2019
compared to 65.0% at March 31, 2019
and 63.8% at December 31, 2018.
3
Considered to be a "Non-IFRS Measure". For further details,
refer to the "Non-IFRS Measures" section of this press
release.
|
Capital
- 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").
- Common Equity Tier 1 ("CET 1"), Tier 1 and Total Capital to
risk-weighted assets ratios4 were 22.40% at June 30, 2019 compared to 22.09% at March 31, 2019 and 21.66% at December 31, 2018.
- The leverage ratio4 was 12.16% at June 30, 2019 compared to 12.05% at March 31, 2019 and 11.79% at December 31, 2018.
- The income tax assets to capital ratio4 was 4.71 at
June 30, 2019 compared to 4.69 at
March 31, 2019 and 4.64 at
December 31, 2018.
- We issued 88,914 new common shares through the Dividend
Reinvestment Program ("DRIP") in Q2 2019 compared to 92,669 in Q2
2018. The DRIP participation rate was 18% for the 2019 second
quarter dividend (2018 second quarter - 19%).
4 Considered to be a "Non-IFRS
Measure". For further details, refer to the "Non-IFRS Measures"
section of this press release.
|
Outlook
Market Outlook
The Bank of Canada's most
recent forecast for GDP growth for 2019 is 1.3%. Canadian job
growth is steady and unemployment at June
30, 2019 was 5.5% after hitting a 44 year low in
May 2019 at 5.4%. There are
regional differences in jobs and unemployment, but the Canadian
economy is currently substantially operating near capacity.
The interest rate outlook is for no change for the second half of
2019, a significant reversal from prior forecasts of potentially
three increases in 2019.
Housing market sales volumes appear to have stabilized after
cooling in the first quarter of 2019 and there is speculation that
markets might have plateaued. Regional differences in our
markets show average price declines in Vancouver and Calgary and average price increases in
Toronto. In most major
markets, housing shortages will continue to drive demand for
residential construction over the long term.
Canadian real estate markets continue to be impacted by the
revised OSFI Guideline B‐20, Residential Mortgage Underwriting
Practices and Procedures ("OSFI Guideline B‐20"), specifically
the stress test. This is expected to continue even
though the base rate used in the stress test, as published by the
Bank of Canada, was reduced by
0.25% in July 2019. Legislation proposed by the Government of
Canada in its March 2019 Federal Budget is not expected to have
a significant impact on the broader housing market. The
mortgage market continues to be extremely competitive as lenders
adjust their strategies in conjunction with legislation. As a
result, the spreads we expect to attain in the market will continue
to be low by our historical standards.
Housing affordability also continues to contribute to market
uncertainty as Canadian household indebtedness remains high.
Positive developments in the labour market, population growth and
continued demand for housing have moderated the impact of the
factors restraining the housing market, to some extent, as
discussed above. If an interruption is experienced in relation to
current population growth trends, employment or actual economic
conditions outside of current expectations, we would expect market
conditions to deteriorate.
Business Outlook
We will continue to ensure that our mortgage portfolio remains
well positioned amidst a mixed market outlook. Profitable
long‐term success in growing our uninsured single family mortgage
portfolio is driven by the continued development of our sales and
marketing programs, strengthening our relationships with the
mortgage broker community and improving our internal underwriting
platform efficiency. Collectively, these initiatives will allow us
to target originations toward our desired markets and borrowers, as
defined by our risk appetite, and will further improve efficiencies
and our ability to grow profitability.
We believe that our current pipeline and business activities
will continue to support growth in our uninsured originations
during 2019, although at spreads lower than our historical levels.
During the first half of 2019, we realized improved yields in our
single family business, however, we expect that this improvement
will have a marginal earnings impact in 2019. Currently,
there is intense competition in the single family mortgage market
that is placing downward pressure on yields, primarily in insured
single family mortgages.
In our construction and commercial business, we expect spread
compression as competition from other lenders increases.
Notwithstanding, we expect this portfolio to grow in the second
half of the year.
We will continue to focus on increasing our originations and
securitizations of insured single family and multi family mortgages
leveraging our internal capabilities and our strategic
partnerships. These activities provide incremental earnings
to MCAN over the term of the securitized portfolio and at
maturity.
We will focus on continuous improvement in our operating
platform throughout the balance of the year and into 2020 to ensure
that our business model meets all strategic, operational and
regulatory objectives over the long term. We believe that our
pragmatic and focused approach to lending, articulated risk
appetite and expertise in loan management will allow us to
effectively grow our business and optimize opportunities. We will
continue to monitor market trends, adjust the composition of our
balance sheet and utilize our chosen business model as we adapt to
changing market dynamics and execute our business plan. Our
targeted annual growth in corporate assets over the long term is
10%, within our risk appetite. Our current 2019 corporate asset
growth outlook continues to be in the range of 5‐8%.
This Outlook contains forward‐looking statements. For further
information, please refer to the "A Caution About Forward‐Looking
Information and Statements" section of this press release.
Dividend Reinvestment Plan
The Dividend Reinvestment Plan ("DRIP") is a program that has
historically provided 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% until further notice from MCAN. For further information
on how to enrol in the DRIP, please refer to the Management
Information Circular dated March 15,
2019 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 2019 second
quarter 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.
Effective January 1, 2019, we
revised the impaired mortgage ratios to include insured mortgages
in the numerator such that the ratios are equal to impaired
mortgages divided by portfolio balance. Prior period ratios have
been restated.
Further Information
Complete copies of the Company's Q2 2019 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
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 primary objective is to generate a reliable
stream of income by investing its corporate 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 deposit
insurance. We manage our capital and asset balances
based on the regulations and limits of both the Tax Act and
the Office of the Superintendent of Financial Institutions. The
term deposits are sourced through a network of independent
financial agents.
As a MIC, we are entitled to deduct the dividends that we pay
to shareholders from our taxable income. Regular dividends
are taxed as interest income to shareholders. We are able to
pay capital gains dividends, which would be taxed as capital gains
to shareholders. Dividends paid to foreign investors may be
subject to withholding taxes.
MCAN's wholly-owned subsidiary, XMC Mortgage Corporation, is
an originator of single family residential mortgage products across
Canada.
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 spread 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 and trade policies;
- 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