TORONTO, May 12, 2020 /CNW/ - MCAN Mortgage Corporation
("MCAN", the "Company" or "we") (TSX: "MKP") reported a net loss of
$9.7 million ($0.40 loss per share) for the first quarter ended
March 31, 2020, a decrease of 168%
from net income of $14.3 million
($0.60 earnings per share) in the
first quarter of 2019. In the first quarter of 2020, we recorded a
$15.7 million net loss on securities
compared to an $8.0 million net gain
on securities in the first quarter of 2019, due primarily to fair
value changes in our real estate investment trust ("REIT")
portfolio. The net loss on securities in Q1 2020 negatively
impacted earnings per share by $0.65,
while the net gain on securities in Q1 2019 positively impacted
earnings per share by $0.34.
The Board of Directors (the "Board") declared a second quarter
dividend of $0.34 per share on
May 12, 2020 to be paid June 30, 2020 to shareholders of
record as of June 15, 2020.
Highlights
Business and Financial Update
- Corporate assets totalled $1.43
billion at March 31, 2020, an
increase of $64 million (5%) from
December 31, 2019.
- Corporate mortgage portfolio totalled $1.19 billion at March 31,
2020, an increase of $99
million (9%) from December 31,
2019.
- Uninsured single family portfolio totalled $396 million at March 31,
2020, an increase of $13
million (3%) from December 31,
2019.
- Uninsured single family originations were $52 million in Q1 2020, a decrease of
$5 million (9%) from Q4 2019 and a
decrease of $11 million (18%) from Q1
2019.
- Insured single family originations were $100 million in Q1 2020, an increase of
$40 million (67%) from Q4 2019 and an
increase of $61 million (160%) from
Q1 2019.
- Securitization volumes totalled $95
million in Q1 2020, a decrease of $9
million (8%) from $104 million
in Q4 2019 and an increase of $67
million (235%) from $28
million in Q1 2019. Securitization volumes in Q1 2020
consisted of $80 million of insured
single family mortgages (Q4 2019 - $104
million; Q1 2019 - $28
million) and $15 million of
insured multi family mortgages (Q4 2019 - $nil; Q1 2019 - $nil).
Securitization maturities continue to exceed new securitization
volumes in Q1 2020, resulting in a 4% decrease from Q4 2019.
- Construction and commercial portfolios totalled $590 million at March 31,
2020, an increase of $39
million (7%) from December 31,
2019.
- Net corporate mortgage spread income1 increased by
$0.8 million from Q1 2019. The net
corporate mortgage spread income1 increased due to a
higher average corporate mortgage portfolio balance1 of
$1.14 billion in Q1 2020 compared to
$971 million in Q1 2019. This
increase was partially offset by a reduction in the spread of
corporate mortgages over term deposit interest1 to 2.62%
in Q1 2020 from 2.73% in Q1 2019. The decrease in the spread of
corporate mortgages over term deposit interest1 is due
to a portfolio mix with a greater proportion of single family to
construction and commercial loans, continued market competition,
and increases to term deposit funding and related costs.
- The provision for credit losses on our corporate mortgage
portfolio increased by $1.8 million
from Q1 2019. The increase in the provision for credit losses on
our corporate mortgage portfolio reflects projected macroeconomic
scenarios and economic inputs along with qualitative adjustments.
Key judgments include the speed and shape of economic recovery and
the impact of government stimulus. These judgments have been made
with reference to the facts, projections and other circumstances as
of March 31, 2020, based on
information available as of that date. IFRS 9 does not permit the
use of hindsight in measuring provisions for credit losses. Since
March 31, 2020, forecasts around the
impact of COVID-19 on the economy and the timing of recovery have
continued to evolve. Any changes in forward-looking information
subsequent to March 31, 2020, will be
reflected in the measurement of provisions for credit losses in
future periods, as appropriate. This may add significant
variability to provisions for credit losses in future periods.
- Effective January 1, 2020, the
Company sold its investment in the Crown Realty II Limited
Partnership core fund units for $33
million, representing the fair value as at December 31, 2019.
- Equity income from MCAP Commercial LP ("MCAP") totalled
$3.4 million in Q1 2020, an increase
of $0.8 million (34%) from
$2.6 million in Q1 2019, which was
due to higher net interest income on securitized mortgages,
mortgage origination fees and net investment revenue less interest
expense, partially offset by higher financial instrument losses in
MCAP.
- Since the third quarter of 2019, proceeds of disposition in our
REIT portfolio totalled $16 million
and effective January 1, 2020, we
sold our position in the Crown Realty II Limited Partnership core
fund, realizing a further $33 million
in sale proceeds, resulting in total real estate equity sales of
$49 million. These dispositions
helped set up the Company for future investment opportunities,
providing us with both liquidity and capital.
- Return on average shareholders' equity1 of (11.84)%
for 2020 year to date, a decrease of 30.20% from 18.36% in
2019.
CEO Commentary
"In the first quarter, MCAN's business continued the strong
momentum we achieved in 2019, successfully growing our assets
while enhancing our risk profile and capital positions.
During the quarter, we also continued to recycle capital with the
disposition of our investment in the core units of the Crown Realty
II Limited Partnership LP," said Karen
Weaver, President and Chief Executive Officer. "Since
the impact of the COVID-19 pandemic began to be felt in mid-March,
the Company has and is continuing to manage its business and invest
in line with our long term strategy. We are also pursuing
opportunities to invest in marketable and non marketable securities
which may arise during the year as a result of market volatility
and broader impacts to the economy as a result of COVID-19.
We entered the COVID-19 crisis with a strong capital position and
will remain vigilant in the execution of all business matters with
heightened focus, given the nature and extent of the crisis and its
impact on the economy and the Canadian consumer. We are
grateful for the health of our workforce and their families and
appreciate the continuing support of the Board as we continue to
guide MCAN's business through the COVID-19 pandemic."
Credit Quality
- The impaired corporate mortgage ratio1 was 0.39% at
March 31, 2020 compared to 0.32% at
December 31, 2019.
- The impaired total mortgage ratio1 was 0.28% at
March 31, 2020 compared to 0.23% at
December 31, 2019.
- Total mortgage arrears1 were $36 million at March 31,
2020 compared to $16 million
at December 31, 2019.
- Net write-offs were $69,000 (2.4
basis points) of the average corporate portfolio in Q1 2020
compared to $23,000 (0.9 basis
points) in Q1 2019. All write-offs relate to the uninsured single
family mortgage portfolio.
- Average loan to value ratio of our uninsured single family
portfolio based on an industry index of current real estate values
was 61.5% at March 31, 2020 compared
to 64.0% at December 31,
2019.
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") and Tier 1 Capital to
risk-weighted assets ratios1,2 were 21.80% at
March 31, 2020 compared to 22.52% at
December 31, 2019. Total Capital to
risk-weighted assets ratio1,2 was 22.17% at March 31, 2020 compared to 22.52% at December 31, 2019.
- The leverage ratio1 was 11.70% at March 31, 2020 compared to 12.58% at December 31, 2019.
- The income tax assets to capital ratio1 was 5.03 at
March 31, 2020 compared to 4.93 at
December 31, 2019.
- We issued 204,894 new common shares through the Dividend
Reinvestment Program ("DRIP") in Q1 2020 compared to 241,920 new
common shares in Q1 2019. The DRIP participation rate was 17% for
the 2020 first quarter dividend (2019 first quarter - 26%).
1 Considered to be a "Non-IFRS Measure". For further
details, refer to the "Non-IFRS Measures" section of this news
release.
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2 Effective March 31, 2020, the total capital ratio
includes Tier 2 capital comprising Stage 1 and Stage 2 allowances
on our mortgage portfolio.
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Further, in
accordance with OSFI's transitional arrangements for capital
treatment of expected loss provision, a portion of Stage 1 and
Stage 2 allowances that would otherwise be included in Tier 2
capital are included in CET 1 capital. The adjustment to CET 1
capital will be measured each quarter as the increase in Stage 1
and Stage 2 allowances relative to December 31, 2019. The increase
is subject to a scaling factor that will decrease over time and is
currently set at 70% in fiscal 2020, 50% in fiscal 2021 and 25% in
fiscal 2022. Prior period ratios have not been
restated.
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Outlook
Market Outlook
The Canadian economy, market and the world as we knew it in
early March took a dramatic turn due to the COVID-19 pandemic. The
impact on the Canadian economy has been further magnified by the
recent collapse in oil prices. Leading up to this, the Canadian
markets where we do business were strong, with an affordable
housing shortage, strong employment and were experiencing a
positive impact from growing immigration.
We do not know how COVID-19 will evolve and whether the gradual
reopening of the economy will cause further waves of infections and
subsequently, further retraction. A return to full operations
across all economic sectors is not anticipated until there is a
vaccine that is effective and widely disseminated globally.
As a result, the return to normalization of economic activity is
expected to be protracted over an extended period of time and will
encompass continuing restrictions on the conduct of business and
normal day to day life of Canadians.
Business Outlook
We conduct our business activities in the context of the market,
economic outlook, demand for housing, asset quality and financial
health of the Canadian economy. Since mid-March, the Company
has been focused on managing all of its business activities in the
context of the COVID-19 pandemic and the new economic, business and
daily living environment in Canada. We efficiently mobilized
to remote operations within one week and have since then been
executing our business effectively.
While we have observed reduced sales activity in the housing
market, which may impact mortgage origination volumes, it remains
early in the pandemic and assessment of the impact will depend on
many factors including the effectiveness of government and
regulatory action. We believe that our strategy will continue
to serve us well in the crisis. We are a prudent and
disciplined lender and investor and have strong relationships with
our brokers, borrowers, servicers and strategic partners. We
continue to see deal flow in all our product lines, as well as loan
repayments from completed construction projects. Our business
activities will continue, with enhanced focus on all key lending
metrics given the heightened uncertainty.
Single Family
The Canadian housing markets, particularly in Vancouver, Toronto and Ottawa, were very active leading up to the
implementation of emergency government containment measures across
Canada in mid-March. While
social distancing protocols changed and slowed the real estate sale
process immediately, these activities did not stop.
Certainly, many buyers and sellers are sidelined due to employment
and other uncertainties, but for many, these activities continue.
We expect new mortgage volumes relating to purchases to decline
across our targeted markets. However, given that the duration
of uninsured single family mortgages is short, activity relating to
refinances and renewals is expected to become the key driver of
business activity.
In these unprecedented times, we are committed to working with
our borrowers on a case-by-case basis to provide effective
alternatives that help them manage the challenges they are facing
due to COVID-19. This support includes payment deferrals of
up to six months on existing mortgages for those who are
eligible. We continue to be prudent in our approach to income
confirmation and assessing creditworthiness over the long
term. We are focused on keeping abreast of all changes in the
market that could negatively impact our business or that could
create opportunities in line with our risk appetite.
Construction and Commercial Business
While we expect some construction site delays and a slowdown in
sales activity for a period of time, our construction project
finance loans are progressing forward without major delays or
credit issues in the markets where we do business. We have
seen some slowdowns in interior unit finishing due to social
distancing protocols and workplace safety rules. Furthermore,
certain municipal staff inspections have been delayed. These
delays may impact the timing of repayments; however, they have not
changed the overall expected outcome of the project success or loan
performance at this time.
We entered this pandemic with strong underlying demand for new
residential units in Toronto and
Vancouver. We expect to see some change in demand in 2020
that may continue forward and we will pivot our business
accordingly. We will continue to apply our prudent approach
to underwriting criteria in line with our risk appetite with a
focus on well-located and affordable residential product with
experienced borrowers where we have existing relationships.
The extent to which the COVID-19 pandemic impacts our business,
results of operations and financial condition will depend on the
scope and duration of the crisis and the overall effectiveness of
actions that are taken by various governmental agencies.
Together, they will impact the speed at which the economy rebounds
and the timeline to recovery. Currently, all impacts are
uncertain and are systemic to the country. MCAN's management
and Board are committed to proactively and effectively managing the
Company's strategy, business activities and team through the
pandemic into the future. We remain optimistic and support
the actions taken by the government and regulators as we believe
that to date, they are positive for the economy, consumers and our
business.
This Outlook contains forward-looking statements. For
further information, please refer to the "A Caution About
Forward-Looking Information and Statements" section of this news
release.
Dividend Reinvestment Plan
The 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 five days preceding such
issue less a discount of 2% until further notice from MCAN.
For further information on how to enroll in the DRIP, please refer
to the Management Information Circular dated March 13, 2020 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 2020 first
quarter MD&A: Return on Average Shareholders' Equity, Net
Corporate Mortgage Spread Income, Spread of Corporate Mortgages
over Term Deposit Interest, Average Corporate Mortgage Portfolio
Balance, Impaired Mortgage Ratios, Mortgage Arrears, Common Equity
Tier 1, Tier 1, Tier 2 and Total Capital Ratios, Leverage Ratio and
Income Tax Assets to Capital Ratio.
Further Information
Complete copies of the Company's Q1 2020 Quarterly 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 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 that are eligible for Canada Deposit Insurance Corporation
deposit insurance and are sourced through a network of independent
financial agents. We manage our capital and asset balances
based on the regulations and limits of both the Tax Act and
OSFI.
As a MIC, we are entitled to deduct the dividends that we pay
to shareholders from our taxable income. Regular dividends
are treated as interest income to shareholders for income tax
purposes. We are also able to pay capital gains dividends,
which would be treated as capital gains to shareholders for income
tax purposes. Dividends paid to foreign investors may be subject to
withholding taxes. To meet the MIC criteria, 67% of our
non-consolidated assets measured on a tax basis are required to be
held in cash or cash equivalents and residential mortgages.
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 news release contains forward-looking information within
the meaning of applicable Canadian securities laws. All
information contained in this news release, other than statements
of current and historical fact, is forward-looking information. All
of the forward-looking information in this news 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 news
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;
- international trade and geopolitical uncertainties and their
impact on the Canadian economy;
- the impact of global health pandemics on the Canadian economy
and globally, including the recent global outbreak of
COVID-19;
- the price of oil and its impact on housing markets in
Western Canada;
- sufficiency of our access to capital resources;
- the timing of the effect of interest rate changes on our cash
flows; and
- the declaration and payment of dividends.
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 we identified and were
applied by us in drawing conclusions or making forecasts or
projections set out in the forward-looking information 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 and the cost to us of
such regulation, including the anticipated impact of government
actions related to COVID-19;
- systems failure or cyber and security breaches;
- the economic and social impact, and management and duration, of
COVID-19
- 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;
- the stage of the real estate cycle and the maturity phase of
the mortgage market;
- impact on housing demand from changing population demographics
and immigration patterns;
- 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 and rates of
default;
- availability of key personnel;
- our operating cost structure;
- the current tax regime; and
- operations within our equity investments.
Reliance should not be placed on forward-looking information
because it involves known and unknown risks, uncertainties and
other factors, which may cause actual results to differ materially
from anticipated future results expressed or implied by such
forward-looking information. Factors that could cause actual
results to differ materially from those set forth in the
forward-looking information include, but are not limited to:
- global market activity and trade policies;
- levels of foreign investment in Canada and its real estate market;
- worldwide demand for and related impact on oil and other
commodity prices;
- changes in climate and environmental policies;
- changes in government and economic policy;
- changes in general economic, real estate and other
conditions;
- the effects of global health pandemics on the Canadian economy
and globally and the Company's business, including the impact of
COVID-19
- 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;
- digital and technology evolution and disruptions;
- 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 investments in MCAP,
marketable securities and non-marketable securities;
- our exposure to litigation;
- our ability to respond to and reposition ourselves within a
changing market;
- our relationships with third-party mortgage originators and
servicers;
- changes in operations within our equity investments; and
- additional risks and uncertainties, many of which are beyond
our control, referred to in this news 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 or revise any forward-looking
information after the date of this news 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