MCAN FINANCIAL GROUP ANNOUNCES 2022 RESULTS AND DECLARES $0.36 REGULAR CASH DIVIDEND
REPORTS STELLAR RESULTS FOR Q4 2022
TORONTO, Feb. 23, 2023 /CNW/ - MCAN Mortgage Corporation d/b/a MCAN Financial Group ("MCAN", the "Company" or "we") (TSX: MKP) reported net income of $24.1 million ($0.75 earnings per share) for the fourth quarter of 2022, an increase from net income of $16.1 million ($0.57 earnings per share) in the fourth quarter of 2021. Fourth quarter 2022 return on average shareholders' equity1 was 21.17% compared to 15.39% in the prior year. Year to date, we reported net income of $55.4 million ($1.77 earnings per share), a decrease from net income of $64.4 million ($2.40 earnings per share) in 2021. Year to date return on average shareholders' equity1 was 12.47% compared to 16.86% 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 inflationary and rising interest rate environment, partially offset by growth in our core mortgage and lending business.
Our net corporate mortgage spread income1 increased by $5.5 million from Q4 2021 and $16.7 million from year to date 2021. We committed to a strategy going into these economic headwinds of working on controllable factors to protect our bottom line. Year to date, our unrealized fair value gains and losses on our REIT portfolio was a $10.3 million unrealized loss ($0.33 loss per share) compared to a $10.9 million unrealized gain ($0.41 earnings per share) in the prior year. Excluding the unrealized fair value gains and losses on our REIT portfolio, current net income would have been higher compared to prior year. We expect continued volatility in the REIT market. We are long term investors and continue to realize the benefits of solid cash flows and distributions from these investments.
The Board of Directors declared a first quarter regular cash dividend of $0.36 per share (holding dividends consistent with 2022 given the current economic backdrop). The dividend will be paid on March 31, 2023 to shareholders of record as of March 15, 2023. As a mortgage investment corporation, we pay out all of our taxable income to shareholders through dividends. Our regular cash dividends for 2022 are sufficient to cover our taxable income, and therefore we will not be distributing a special stock dividend in March 2023 along with the regular cash dividend.
"Our fourth quarter results from our core lending business surpassed our expectations and affirm our strategy of protecting our net mortgage interest. While inflation and interest rate increases may have peaked, the higher interest rate environment and related housing market challenges are 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 higher interest rate environment, including the floating rates on our construction and commercial portfolios and realigning the duration of our term deposit funding. While we remain focused on achieving solid margins in our mortgage and lending business, we will also continue to look for opportunities to grow. Our shareholders showed strong support for our business and strategy, as we completed an oversubscribed rights offering in December 2022, raising $34.1 million of capital to fund our asset growth. I commend our entire team for their role in successfully responding to challenging change in the economy and mortgage and housing markets."
Corporate assets totalled $2.28 billion at December 31, 2022, a net increase of $121 million (6%) from December 31, 2021:
Securitized mortgages totalled $1.75 billion at December 31, 2022, a net increase of $168 million (11%) from December 31, 2021 primarily due to continued originations and securitization volumes:
Net corporate mortgage spread income1 increased by $5.5 million for Q4 2022 from Q4 2021 and increased $16.7 million for year to date 2022 from 2021 mainly due to a higher average corporate mortgage portfolio balance from continued net mortgage originations and an increase in the spread of corporate mortgages over term deposit interest and expenses mainly from our floating rate residential construction mortgages. On the term deposit side, we have had a greater focus on raising shorter duration deposits, therefore resulting in a smaller increase in our average term deposit rates.
Net securitized mortgage spread income1 decreased by $0.7 million for Q4 2022 from Q4 2021 and decreased $1.8 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 higher securitization liability interest expense from significantly increasing Government of Canada bond yields in 2022 in a rising interest rate environment.
For Q4 2022, we had a recovery of credit losses on our corporate mortgage portfolio of $1.1 million compared to a provision for credit losses of $0.8 million in Q4 2021. For year to date 2022, we had a recovery of credit losses on our corporate mortgage portfolio of $1.1 million compared to a provision for credit losses of $0.5 million for year to date 2021. For 2022, the recovery was mainly due to a more favourable provincial outlook and assumptions for our loans in Alberta, as well as improving economic forecasts from expectations that both inflation and Bank of Canada interest rate increases may be nearing a peak. For 2021, the provision was mainly due to growth in our portfolio.
Equity income from MCAP Commercial LP ("MCAP") totalled $6.9 million in Q4 2022, an increase of $0.7 million (10%) from $6.2 million in Q4 2021, and totalled $26.6 million for year to date 2022, an increase of $1.2 million (5%) from $25.5 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 Q4 2022, we recorded a $1.7 million net unrealized gain on securities compared to a $3.4 million net unrealized gain on securities in Q4 2021. Year to date net realized and unrealized loss on securities was $12.1 million for 2022 compared to a year to date net realized and unrealized gain on securities of $14.8 million for 2021. In 2022, we saw (i) REIT prices decrease due to inflation and Bank of Canada rate increases; and (ii) a $1.8 million realized loss during Q1 2022, on one REIT in our portfolio that had a mandatory corporate action resulting in its privatization. For 2021, the net realized and unrealized gain was due to REIT prices increasing from 2020 lows due to the ongoing recovery from the pandemic. Year to date, we received distributions of $3.6 million (distribution yield1 of 6.01%) from our REITs compared to $3.5 million (distribution yield1 of 5.49%) in 2021.
Impaired corporate mortgage ratio1 was 1.66% at December 31, 2022 compared to 0.00% at September 30, 2022 and 0.05% at December 31, 2021. At December 31, 2022, we have two impaired construction mortgages where asset recovery programs are being initiated and we expect to recover all past due interest and principal.
Impaired total mortgage ratio1 was 0.89% at December 31, 2022 compared to 0.01% at September 30, 2022 and 0.03% at December 31, 2021. The increase at December 31, 2022 is the same as described above.
Arrears total mortgage ratio1 was 1.57% at December 31, 2022 compared to 1.11% at September 30, 2022 and 0.46% at December 31, 2021. The increase in the arrears total mortgage ratio is primarily due to three construction and commercial mortgages where either asset recovery programs are being initiated and we expect to recover all past due interest and principal or we expect these mortgages to be brought current in the next quarter. 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 62.1% at December 31, 2022 compared to 58.1% at September 30, 2022 and 60.3% at December 31, 2021.
To support our continued growth and maintain our targeted capital requirements, we initiated a capital raise by way of a rights offering in December 2022 which was oversubscribed and raised $34.1 million of capital. In 2021, we raised $53.2 million through two oversubscribed rights offerings.
In 2021, we filed a Prospectus Supplement to our Base Shelf prospectus establishing an 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 are determined at our sole discretion. We began issuing shares under the ATM Program in Q1 2022. During 2022, we successfully 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.
We issued $7.4 million in new common shares through the Dividend Reinvestment Plan ("DRIP") in 2022 compared to $5.8 million in 2021. The DRIP participation rate was 28% for the 2022 fourth quarter dividend (2021 fourth quarter dividend - 16%). The DRIP participation rate for 2022 dividends was 20% (2021 - 17%).
We issued $28.8 million in new common shares on March 31, 2022 from our 2022 first quarter special stock dividend to shareholders (with fractional shares paid in cash) at the weighted average trading price for the five days preceding the record date of $18.9326. In 2021, we raised $21.1 million from our 2021 first quarter special stock dividend.
Income tax assets to capital ratio3 was 4.93 at December 31, 2022 compared to 5.76 at September 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 19.60% at December 31, 2022 compared to 18.35% at September 30, 2022 and 20.26% at December 31, 2021. Total Capital to risk-weighted assets ratio2 was 19.83% at December 31, 2022 compared to 18.64% at September 30, 2022 and 20.54% at December 31, 2021.
Leverage ratio2 was 9.83% at December 31, 2022 compared to 8.88% at September 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.
Annual and Special Meeting of Shareholders
The Company's Annual and Special Meeting of Shareholders will be held at 4:30pm (Toronto time) on May 9, 2023.
Complete copies of the Company's 2022 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.mcanfinancial.com.
For our Outlook, refer to the "Outlook" section of the 2022 Annual 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 mortgages, 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 broker distribution network across Canada consisting of third party deposit agents and financial advisors. 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"). All of our capital ratios are within our regulatory and internal risk appetite guidelines.
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, MCAN Home Mortgage Corporation, is an originator of residential mortgage products across Canada.
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/investors/regulatory filings/dividends - historical. 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.
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 Annual Management's Discussion and Analysis of Operations ("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.
At December 31
Mortgage interest - corporate assets
Term deposit interest and expenses
Net Corporate Mortgage Spread Income
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.
At December 31
Mortgage interest - securitized assets
Interest on financial liabilities from securitization
Net Securitized Mortgage Spread Income
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 COVID-19 pandemic or any further pandemics, 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 risk that any of the above opinions, estimates or assumptions are inaccurate and the other risks and uncertainties referred to in our Annual Information Form for the year ended December 31, 2022, 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
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