TORONTO, Nov. 10,
2022 /CNW/ - MCAN Mortgage Corporation d/b/a MCAN
Financial Group ("MCAN", the "Company" or "we") (TSX: MKP) reported
net income of $11.7 million
($0.37 earnings per share) for the
third quarter of 2022, a decrease from net income of $13.0 million ($0.47 earnings per share) in the third quarter of
2021. Third quarter 2022 return on average shareholders'
equity1 was 10.52% compared to 13.22% in the prior
year. Year to date, we reported net income of $31.3 million ($1.01 earnings per share), a decrease from net
income of $48.3 million ($1.84 earnings per share) in 2021. Year to date
return on average shareholders' equity1 was 9.47%
compared to 17.40% in the prior year. We reported lower total
net income mainly as a result of unrealized fair value losses on
our REIT portfolio due to the current market environment partially
offset by growth in our core mortgage and lending business.
Our net corporate mortgage spread income1 increased by
$3.8 million from Q3 2021 and
$11.2 million from year to date 2021.
We are pleased with that and it affirms our strategy going into
these economic headwinds of working on controllable factors to
protect our bottom line. Unrealized fair value gains and
losses on our REIT portfolio were a $5.0
million unrealized loss ($0.16
loss per share) for the third quarter of 2022 and a $12.0 million unrealized loss ($0.39 loss per share) year to date 2022 compared
to a $1.0 million unrealized gain
($0.04 earnings per share) for the
third quarter of 2021 and a $11.4
million unrealized gain ($0.43
earnings per share) for year to date 2021. Excluding the
unrealized fair value gains and losses on our REIT portfolio,
current net income would have been higher for the quarter and year
to date compared to prior year. While we expect continued
volatility in the REIT market, we are invested for the long-term
and we continue to realize the benefits of solid cash flows and
distributions from these investments.
The Board of Directors declared a fourth quarter regular cash
dividend of $0.36 per share to be
paid January 3, 2023 to shareholders of record as of
December 15, 2022. As a mortgage investment corporation,
we pay out all of our taxable income to shareholders through
dividends. At this time, we do not expect to have taxable
income per share greater than our regular cash dividends per
share.
"Our third quarter results from our core lending business were
in line with our expectations and affirm our strategy of protecting
our net mortgage interest. The current rising interest rate
environment, housing market challenges and inflation are all
causing uncertainty in the Canadian economy," said Karen Weaver, President and Chief Executive
Officer. "Our business has various levers and attributes that are
positive for managing net mortgage interest income in a rising
interest rate environment including the one year term of our
uninsured residential mortgages, the primarily floating rates on
our construction portfolio and realigning the duration of our term
deposit funding. We remain focused on achieving solid margins
in our mortgage and lending business and, where possible,
rebalancing within our risk appetite, to higher yielding
construction products for affordable housing, for which there is
still strong demand in Canada's
supply constrained urban markets."
Highlights
- Corporate assets totalled $2.27
billion at September 30, 2022,
a net increase of $111 million (5%)
from December 31, 2021 driven mainly
by growth in our major assets:
-
- Construction and commercial mortgages totalled $879 million at September
30, 2022, a net increase of $102
million (13%) from December 31,
2021. Construction and commercial mortgage originations
totalled $414 million year to date
2022, a decrease of $155 million
(27%) from the same period in 2021. We will look to rebalance
through the remainder of this year and next year, if possible, to a
higher proportion of construction and commercial loans that fit
within our risk appetite and capital requirements.
- Uninsured residential mortgages totalled $848 million at September
30, 2022, a net increase of $65
million (8%) from December 31,
2021. Uninsured residential mortgage originations totalled
$320 million year to date 2022, a
decrease of $96 million (23%) from
the same period in 2021. We are also actively rebalancing to a
lower proportion of uninsured residential mortgage originations
compared to higher yielding residential construction loans.
- Non-marketable securities totalled $93
million at September 30, 2022,
an increase of $28 million (44%) from
December 31, 2021 with $86 million of remaining capital advances
expected to fund mainly over the next five years.
- Marketable securities totalled $52
million at September 30, 2022,
a net decrease of $11 million (17%)
from December 31, 2021 comprised of
$7 million of REIT purchases net of
$4 million of REIT sales and
$14 million of net realized and
unrealized fair value losses.
- Securitized mortgages totalled $1.69
billion at September 30, 2022,
a net increase of $108 million (7%)
from December 31, 2021 primarily due
to continued originations and securitization volumes:
-
- Insured residential mortgage originations totalled $499 million year to date 2022, a decrease of
$135 million (21%) from the same
period in 2021. This includes $184
million of insured residential mortgage commitments
originated and sold compared to $65
million in 2021. We launched our insured adjustable
rate residential mortgage product in Q1 2022. Unlike traditional
insured variable rate mortgages, payments on our insured adjustable
rate residential mortgages increase or adjust as interest rates
rise with no changes to loan amortization. We also underwrite
our insured adjustable rate mortgages for credit quality
accordingly and our borrowers expect their payments under this new
product to change as interest rates rise. Insured residential
mortgage securitizations totalled $314
million year to date 2022, a decrease of $268 million (46%) from the same period in
2021. We decreased our insured residential mortgage
originations and securitization volumes and increased the volume of
our insured residential mortgage commitment sales given the
extremely tight and even negative securitization spreads. We
use various channels in the insured residential mortgage market, in
the context of market conditions and net contributions over the
life of the mortgages, in order to support our overall
business.
Financial Update
- Net corporate mortgage spread income1 increased by
$3.8 million for Q3 2022 from Q3 2021
and increased $11.2 million for year
to date 2022 from 2021 mainly due to a higher average corporate
mortgage portfolio balance. For Q3 2022, there was an
increase in the spread of corporate mortgages over term deposit
interest and expenses from Q3 2021 due to a larger increase in
average mortgage rates, including our floating rate residential
construction mortgages, compared to the increase in average term
deposit rates due to actual and expected Bank of Canada rate increases. For year to date
2022, there was a decrease in the spread of corporate mortgages
over term deposit interest and expenses from year to date 2021
mainly due to (i) an increase in average term deposit rates as a
result of the same factors as for Q3 2022 mentioned above, as well
as dislocation in the term deposit market at the start of the
Russia/Ukraine conflict which caused increased demand
by financial institutions for term deposit funding; and (ii) a
decrease in our average mortgage rates from continued market
competition keeping mortgage rates low in our residential mortgage
portfolio.
- Net securitized mortgage spread income1 decreased by
$0.5 million for Q3 2022 from Q3 2021
and decreased $1.1 million for year
to date 2022 over the same period in 2021 mainly due to a decrease
in the spread of securitized mortgages over liabilities partially
offset by a higher average securitized mortgage portfolio balance
from originations of insured residential mortgages. We have
seen the spread of securitized mortgages over liabilities decline
on securitizations in 2022 mainly as a result of a larger increase
in average securitization liability interest expense, from
significantly increasing Government of Canada bond yields as we have entered a rising
interest rate environment, compared to the increase in our average
mortgage rates.
- For Q3 2022, we had a provision for credit losses on our
corporate mortgage portfolio of $0.9
million compared to a recovery of credit losses of
$0.1 million in Q3 2021. For
year to date 2022, we had a provision for credit losses on our
corporate mortgage portfolio of $27
thousand compared to a recovery of credit losses of
$0.3 million for year to date 2021.
For 2022, the provisions were mainly due to the shift in economic
forecasts from the pandemic to the recent uncertainty around
inflation and the rising interest rate environment as well as
growth in our portfolio. For 2021, the recoveries were mainly
due to economic forecasts being more optimistic amid vaccine
roll-outs at that time.
- Equity income from MCAP Commercial LP ("MCAP") totalled
$8.2 million in Q3 2022, an increase
of $2.6 million (47%) from
$5.6 million in Q3 2021, and totalled
$19.7 million for year to date 2022,
an increase of $0.5 million (3%) from
$19.2 million year to date 2021. The
increase in both the quarter and year to date was primarily due to
higher servicing and administration revenue resulting from higher
assets under management, and higher financial instrument gains
resulting from (i) hedge gains; (ii) favourable fair value
adjustments; and (iii) lower hedge costs. These were
partially offset by (i) lower net interest income on securitized
mortgages due to compressed spreads as a result of the rising
interest rate environment; (ii) lower mortgage origination fees
from lower spreads and origination volumes due to market
conditions; (iii) higher interest expense; and (iv) higher
operating expenses mainly attributed to higher
headcount.
- In Q3 2022, we recorded a $5.1
million net unrealized loss on securities compared to a
$1.0 million net unrealized gain on
securities in Q3 2021. Year to date net realized and unrealized
loss on securities was $13.8 million
for 2022 compared to a year to date net unrealized gain on
securities of $11.4 million for 2021.
We are seeing continued declines in REIT prices from the rising
interest rate environment and current geopolitical conflicts
compared to optimism in 2021 around vaccine roll-outs. While we
expect continued volatility in the REIT market, we are invested for
the long-term and we continue to realize the benefits of solid cash
flows and distributions from these investments. In Q1 2022, one
REIT in our portfolio had a mandatory corporate action resulting in
privatization and as such we recognized a $1.8 million realized
loss.
Credit Quality
- Impaired corporate mortgage ratio1 was 0.00% at
September 30, 2022 compared to 0.01%
at June 30, 2022 and 0.05% at
December 31, 2021.
- Impaired total mortgage ratio1 was 0.01% at
September 30, 2022 compared to 0.02%
at June 30, 2022 and 0.03% at
December 31, 2021.
- Arrears total mortgage ratio1 was 1.11% at
September 30, 2022 compared to 0.36%
at June 30, 2022 and 0.46% at
December 31, 2021. The increase
in the arrears total mortgage ratio is primarily due to two
construction mortgages where asset recovery programs are being
initiated and we expect to recover all past due interest and
principal. We have a strong track record with our asset
recovery program should the need arise. Our realized loan losses on
our construction portfolio have been negligible in the last 10
years.
- Average loan to value ratio ("LTV") of our uninsured
residential mortgage portfolio based on an industry index of
current real estate values was 58.1% at September 30, 2022 compared to 58.1% at
June 30, 2022 and 60.3% at
December 31, 2021.
Capital
- In 2021, we filed a Prospectus Supplement to our Base Shelf
prospectus establishing an at-the-market equity program ("ATM
Program") to issue up to $30 million
common shares to the public from time to time over a 2 year period
at the market prices prevailing at the time of sale. The volume and
timing of distributions under the ATM Program will be determined at
our sole discretion. During Q3 2022, we sold 600 common shares at a
weighted average price of $17.10 for
gross and net proceeds of $11
thousand. Year to date 2022, we sold 236,600 common
shares at a weighted average price of $17.88 for gross proceeds of $4.2 million and net proceeds of $4.1 million including $85
thousand of commission paid to our agent and $30 thousand of other share issuance costs under
the ATM Program.
- We issued $28.8 million in new
common shares on March 31, 2022 from
our 2022 first quarter special stock dividend to shareholders.
- We issued $2.0 million in new
common shares in Q3 2022 (Q3 2021 - $1.4
million) and $7.4 million year
to date 2022 ($5.8 million - year to
date 2021) through the Dividend Reinvestment Plan ("DRIP").
The DRIP participation rate for the 2022 third quarter dividend was
17% (2022 second quarter - 17%; 2021 third quarter - 17%).
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.
- Income tax assets to capital ratio3 was 5.76 at
September 30, 2022 compared to 5.53
at June 30, 2022 and 5.29 at
December 31, 2021.
- Common Equity Tier 1 ("CET 1") and Tier 1 Capital to
risk-weighted assets ratios2 were 18.35% at September 30, 2022 compared to 18.82% at
June 30, 2022 and 20.26% at
December 31, 2021. Total Capital to
risk-weighted assets ratio2 was 18.64% at September 30, 2022 compared to 19.09% at
June 30, 2022 and 20.54% at
December 31, 2021.
- Leverage ratio2 was 8.88% at September 30, 2022 compared to 8.82% at
June 30, 2022 and 9.41% at
December 31, 2021.
1
|
Considered to be a
non-GAAP and other financial measure. For further details, refer to
the "Non-GAAP and Other Financial Measures" section of this new
release. Non-GAAP and other financial measures and ratios
used in this document are not defined terms under IFRS and,
therefore, may not be comparable to similar terms used by other
issuers.
|
2
|
These measures have
been calculated in accordance with OSFI's Leverage Requirements and
Capital Adequacy Requirements guidelines. Effective March 31,
2020, the total capital ratio reflects the inclusion of stage 1 and
stage 2 allowances on the Company's mortgage portfolio in Tier 2
capital. In accordance with OSFI's transitional arrangements for
capital treatment of ECL issued March 27, 2020, 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, if any, in
stage 1 and stage 2 allowances compared to the corresponding
allowances at December 31, 2019. The increase, if any, is subject
to a scaling factor that will decrease over time and was 70% in
fiscal 2020, 50% in fiscal 2021 and is set at 25% in fiscal
2022.
|
3
|
Tax balances are
calculated in accordance with the Tax Act.
|
Further Information
Complete copies of the Company's 2022 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.mcanfinancial.com.
For our Outlook, refer to the "Outlook" section of the 2022
Third Quarter Report.
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 Income Tax Act
(Canada) (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 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 that 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 the Office of
the Superintendent of Financial Institutions Canada
("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.
Our MCAN Home division operates through MCAN's wholly owned
subsidiary, XMC Mortgage Corporation, which has legally changed its
name effective April 1, 2022, to MCAN
Home Mortgage Corporation.
For how to enroll in the DRIP, please refer to the Management
Information Circular dated March 11, 2022 or visit our website
at www.mcanfinancial.com. 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%.
Non-GAAP and Other Financial Measures
This news release references a number of non-GAAP and other
financial measures and ratios to assess our performance such as
return on average shareholders' equity, net corporate mortgage
spread income, net securitized mortgage spread income, impaired
corporate mortgage ratio, impaired total mortgage ratio, and
arrears total mortgage ratio. These measures are not
calculated in accordance with International Financial Reporting
Standards ("IFRS"), are not defined by IFRS and do not have
standardized meanings that would ensure consistency and
comparability between companies using these measures. These
metrics are considered to be non-GAAP and other financial measures
and are incorporated by reference and defined in the "Non-GAAP and
Other Financial Measures" section of our 2022 Third Quarter
MD&A available on SEDAR at www.sedar.com. Below are
reconciliations for our non-GAAP financial measures included in
this news release using the most directly comparable IFRS financial
measures.
Net Corporate Mortgage Spread Income
Non-GAAP
financial measure that is an indicator of net interest
profitability of income-earning assets less cost of funding for our
corporate mortgage portfolio. It is calculated as the
difference between corporate mortgage interest and term deposit
interest and expenses.
(in
thousands)
|
Q3
|
Q3
|
Change
|
YTD
|
YTD
|
Change
|
For the Periods
Ended September 30
|
2022
|
2021
|
($)
|
2022
|
2021
|
($)
|
Mortgage interest -
corporate assets
|
$ 27,216
|
$ 19,072
|
|
$ 70,539
|
$ 51,387
|
|
Term deposit interest
and expenses
|
12,330
|
8,013
|
|
31,033
|
23,041
|
|
Net Corporate
Mortgage Spread Income
|
$ 14,886
|
$ 11,059
|
$
3,827
|
$ 39,506
|
$ 28,346
|
$ 11,160
|
Net Securitized Mortgage Spread Income
Non-GAAP
financial measure that is an indicator of net interest
profitability of income-earning securitization assets less cost of
securitization liabilities for our securitized mortgage
portfolio. It is calculated as the difference between
securitized mortgage interest and interest on financial liabilities
from securitization.
(in
thousands)
|
Q3
|
Q3
|
Change
|
YTD
|
YTD
|
Change
|
For the Periods
Ended September 30
|
2022
|
2021
|
($)
|
2022
|
2021
|
($)
|
Mortgage interest -
securitized assets
|
$
7,949
|
$
7,478
|
|
$ 22,804
|
$ 21,376
|
|
Interest on financial
liabilities from securitization
|
6,214
|
5,222
|
|
17,096
|
14,561
|
|
Net Securitized
Mortgage Spread Income
|
$
1,735
|
$
2,256
|
$
(521)
|
$
5,708
|
$
6,815
|
$ (1,107)
|
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, economic environment and
outlook;
- the impact of global health pandemics on the Canadian economy
and globally;
- 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;
- the performance of our investments;
- factors affecting our competitive position within the housing
lending market;
- international trade and geopolitical uncertainties and their
impact on the Canadian economy, including the Russia/Ukraine conflict;
- sufficiency of our access to capital resources;
- the timing and 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;
- government regulation of our business and the cost to us of
such regulation;
- the economic and social impact, management, and duration of a
pandemic;
- factors and assumptions regarding interest rates, including the
effect of Bank of Canada actions
already taken;
- the effect of supply chain issues;
- the effect of inflation;
- housing sales and residential mortgage borrowing
activities;
- the effect of household debt service levels;
- the effect of competition;
- systems failure or cyber and security breaches;
- the availability of funding and capital to meet our
requirements;
- investor appetite for securitization products;
- 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, and market conditions relating to, our
equity and other investments.
External conflicts such as the Russia/Ukraine conflict and post-pandemic government
and Bank of Canada actions taken,
have resulted in uncertainty relating to the Company's internal
expectations, estimates, projections, assumptions and beliefs,
including with respect to the Canadian economy, employment
conditions, interest rates, supply chain issues, inflation, levels
of housing activity and household debt service levels. There can be
no assurance that such expectations, estimates, projections,
assumptions and beliefs will continue to be valid. The impact
the previous pandemic or any further variants or outbreaks,
including measures to prevent their spread and related government
actions adopted in response thereto, will have on our business
continues to be uncertain and difficult to predict.
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, the
risks and uncertainties referred to in our Annual Information Form
for the year ended December 31, 2021, our 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 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