Toronto, Ontario – February 22, 2019. 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.
“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”.
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.
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/.
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.
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.
For further information, please contact:
MCAN Mortgage Corporation
Chief Executive Officer, Interim
Vice President and Chief Financial Officer
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:
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