Mr. Derek Sutherland reports

MCAN FINANCIAL GROUP ANNOUNCES Q3 2023 RESULTS AND DECLARES $0.38 REGULAR CASH DIVIDEND

MCAN Mortgage Corp. doing business as MCAN Financial Group had net income of $18.5-million (53 cents earnings per share) for the third quarter of 2023, an increase from net income of $11.7-million (37 cents earnings per share) in the third quarter of 2022. Third quarter 2023 return on average shareholder equity was 14.20 per cent compared with 10.52 per cent for the same period in the prior year. Year to date 2023, the company reported net income of $57.6-million ($1.66 earnings per share), an increase from net income of $31.3-million ($1.01 earnings per share) for the same period in the prior year. Year to date 2023 return on average shareholders' equity was 15.06 per cent compared with 9.47 per cent for the same period in the prior year. The company reported higher total net income mainly as a result of higher net corporate mortgage spread income. The company's net corporate mortgage spread income increased by $8.2-million for the current quarter and $25.2-million for the current year to date compared with the same periods in the prior year. While the economy continues to change and provide uncertainty, the company is committed to a strategy of managing controllable factors to protect its bottom line and taking advantage of opportunities that arise.

The board of directors declared a fourth quarter regular cash dividend of 38 cents per share to be paid on Jan. 2, 2024, to shareholders of record as of Dec. 15, 2023. As a mortgage investment corporation, the company pays out all of its taxable income to shareholders through dividends. As a result of tax timing differences on various investing strategies that the company has engaged in, the company currently does not expect to have taxable income per share materially greater than its regular cash dividends per share for 2023. It therefore does not anticipate distributing a special dividend, or if so not a material one, in the first quarter of 2024. Depending on various factors, whether the company distributes a special dividend may be subject to change.

"Our diversified portfolio continues to deliver strong results despite having to closely navigate and monitor market conditions, credit quality, geopolitical conflicts and other economic factors that could impact our business. It has been a very challenging economic environment, yet while the economy will continue to change and provide uncertainty, our entire MCAN team has contributed to successfully growing our business and improving all aspects of our operations," said Derek Sutherland, interim chief executive officer. "Looking ahead, we will continue to focus on the growth and profitability of our business to drive value for all our stakeholders. Our embedded culture of being vigilant and pro-actively managing the business through market volatility forms the roots of our exceptional performance."

Highlights

• Corporate assets totalled $2.67-billion at Sept. 30, 2023, a net increase of $384-million (17 per cent) from Dec. 31, 2022.
• Construction and commercial mortgages totalled $1.09-billion at Sept. 30, 2023, a net increase of $164-million (18 per cent) from Dec. 31, 2022. Year to date 2023, the positive movement in the construction and commercial portfolios is attributed to originations of $480-million in new construction and commercial mortgages, partially offset by maturities and repayments. Originations have been strong this year and some extensions of projects due to normal construction delays or normal delays relating to the permitting and zoning process has meant that the company has not experienced as much run-off in the portfolio as expected. To date, projects continue to progress toward completion.
• Uninsured residential mortgages totalled $956-million at Sept. 30, 2023, a net increase of $128-million (15 per cent) from Dec. 31, 2022. Uninsured residential mortgage originations totalled $284-million year to date 2023, a decrease of $36-million (11 per cent) from the same period in 2022. The company actively manages origination and renewal volumes in order to protect its net interest margins and its bottom line. Volumes were also slower in the first part of 2023 as a result of general market conditions, with many Canadians electing not to participate in the housing market given higher rates and inflation, and uncertainty on further Bank of Canada rate hikes. However, the company has seen an increase in its uninsured residential mortgage renewal rates with renewals of $380-million year to date 2023 compared with $308-million year to date 2022 as borrowers find it more convenient to stay with their current lender in the current market environment.
• Non-marketable securities totalled $112-million at Sept. 30, 2023, an increase of $14-million (15 per cent) from Dec. 31, 2022, with $78-million of remaining capital advances expected to finance over the next five years.
• Marketable securities totalled $46-million at Sept. 30, 2023, a net decrease of $8-million (14 per cent) from Dec. 31, 2022, due to net unrealized fair value losses. In 2023, the company saw more significant declines in REIT prices mainly from the steeply rising interest rate environment.
• Securitized mortgages totalled $1.84-billion at Sept. 30, 2023, a net increase of $84-million (4.8 per cent) from Dec. 31, 2022. Insured residential mortgages totalled $269-million at Sept. 30, 2023, a net increase of $125-million (86 per cent) from Dec. 31, 2022.
  • Over all, for the year to date, total origination volumes (including commitments sold) were lower in 2023 as a result of the higher interest rate environment, particularly for first time home buyers, who would be a significant portion of the borrowers of insured residential mortgages. Insured residential mortgage originations totalled $375-million year to date 2023, a decrease of $125-million (25 per cent) from the same period in 2022. This includes $25-million of insured residential mortgage commitments originated and sold compared with $184-million in 2022. Insured residential mortgage securitizations totalled $232-million year to date 2023, a decrease of $83-million (26 per cent) from the same period in 2022. The company uses various channels in funding the insured residential mortgage portfolio, in the context of market conditions and net contributions over the life of the mortgages, in order to support the company's overall business.

Financial update

• Net corporate mortgage spread income increased by $8.2-million for Q3 2023 from Q3 2022 and increased $25.2-million for year to date 2023 from year to date 2022 mainly due to a higher average corporate mortgage portfolio balance from continued net mortgage originations and renewals, and an increase in the spread of corporate mortgages over term deposit interest and expenses mainly from the company's floating rate residential construction mortgages. On the term deposit side, the company has been actively managing its interest rate risk during this period of higher interest rates by continually reviewing, and if necessary, changing the laddering of the duration of the company's term deposits relative to its corporate mortgage portfolio. The company is seeing the increase in average term deposit rates generally exceeding the pace of increase in its mortgage portfolio, given the amount of term deposits that the company originated coupled with the impact of maturing lower-rate term deposits.
• Net securitized mortgage spread income decreased by $300,000 for Q3 2023 from Q3 2022 and decreased $900,000 for year to date 2023 from year to date 2022 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. Since 2022, the company have seen the spread of securitized mortgages over liabilities decline on securitizations mainly as a result of higher securitization liability interest expense from higher government of Canada bond yields in a rising interest rate environment.
• For Q3 2023, the company had a provision for credit losses on the company's corporate mortgage portfolio of $400,000 compared with a provision for credit losses of $900,000 in Q3 2022. For year to date 2023, the company had a provision for credit losses on its corporate mortgage portfolio of $2.4-million compared with a provision for credit losses of $27,000 for year to date 2022. For year to date 2023, the provision was mainly due to growth in the company's portfolio and less favourable underlying economic forecasts.
• Equity income from MCAP Commercial LP totalled $4.3-million in Q3 2023, a decrease of $3.9-million (48 per cent) from $8.2-million in Q3 2022, and totalled $17.6-million for year to date 2023, a decrease of $2.1-million (11 per cent) from $19.7-million year to date 2022. For year to date 2023, the decrease was primarily due to (i) lower mortgage origination fees from lower mortgage originations and sales; (ii) a decrease in fair value adjustments on mortgages due to the higher interest rate environment; and (iii) higher interest expense on credit facilities. These were partially offset by (i) higher securitized mortgage interest income from a higher average securitized portfolio; (ii) higher hedge gains; (iii) higher investment revenue from higher average mortgage rates; and (iv) lower mortgage origination expenses from lower origination volumes.
• In Q3 2023, the company recorded a $1.6-million net unrealized loss on the company's marketable and non-marketable securities compared with a $5.1-million net unrealized loss on the company's marketable securities in Q3 2022. Year to date net unrealized loss on marketable and non-marketable securities was $5.6-million for 2023 compared with a year-to-date net realized and unrealized loss on the company's marketable securities of $13.8-million for 2022. In 2023, the company saw REIT prices decrease due to Bank of Canada interest rate increases resuming and uncertainty around future rate increases and recessionary pressures. In 2022, the company saw more significant declines in REIT prices mainly from the steeply rising interest rate environment. The company is invested for the long term and it continues to realize the benefits of solid cash flows and distributions from these investments. Year to date, the company received distributions of $2.8-million (distribution yield of 6.22 per cent) from its REITs compared with $2.7-million (distribution yield of 5.86 per cent) in 2022. In Q3 2023, the company had a $2.1-million unrealized gain on its non-marketable securities investments due to value-add leasing activity on one underlying property investment. In year to date 2022, the company also had a $1.8-million realized loss on one REIT in its portfolio that had a mandatory corporate action resulting in its privatization.

Credit quality

• Impaired corporate mortgage ratio was 1.76 per cent at Sept. 30, 2023 compared with 1.70 per cent at June 30, 2023, and 1.66 per cent at Dec. 31, 2022. At Sept. 30, 2023, the company had two impaired construction mortgages and one commercial loan where asset recovery programs have been initiated and the company expects to recover all past due interest and principal.
• Impaired total mortgage ratio was 0.99 per cent at Sept. 30, 2023, compared with 0.96 per cent at June 30, 2023, and 0.89 per cent at Dec. 31, 2022.
• Arrears total mortgage ratio was 2.16 per cent at Sept. 30, 2023, compared with 1.73 per cent at June 30, 2023, and 1.57 per cent at Dec. 31, 2022. The majority of the company's residential mortgage arrears activity occurs in the one- to 30-day category, in which the bulk of arrears are resolved and do not migrate to arrears categories over 30 days. While greater than 30 days arrears have increased in the company's residential mortgages, it is still low compared with the size of the company's portfolio and low relative to historical norms. The company believes that it has a quality residential mortgage loan portfolio. The company has also had historically low arrears related to its construction and commercial loan portfolios due to its prudent and selective lending methodology and its default management processes in these product types. The company has a strong record with its asset recovery programs should the need arise.
• Average loan-to-value ratio (LTV) of its uninsured residential mortgage portfolio based on an industry index of current real estate values was 67.0 per cent at Sept. 30, 2023, compared with 67.4 per cent at June 30, 2023, and 62.1 per cent at Dec. 31, 2022.

Capital

• During the current quarter, the company renewed its (i) base shelf prospectus; and (ii) ATM program established pursuant to a prospectus supplement to its base shelf prospectus allowing the company to issue up to $30-million common shares to the public from time to time over a two-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 the company's sole discretion. During Q3 2023, the company sold 100,000 common shares at a weighted average price of $16.28 for gross proceeds of $1.6-million and net proceeds of $1.4-million including $33,000 of agent commission paid and $200,000 of other share issuance costs under the ATM program. Year to date 2023, the company sold 153,400 common shares at a weighted average price of $16.12 for gross proceeds of $2.5-million and net proceeds of $2.1-million including $100,000 of agent commission paid and $300,000 of other share issuance costs under the ATM program.
• The company issued $4.0-million in new common shares in Q3 2023 (Q3 2022 -- $2.0-million) and $14.5-million year to date 2023 (year to date 2022 -- $7.4-million) through the dividend reinvestment plan (DRIP). The DRIP participation rate for the 2023 third quarter dividend was 30 per cent (2023 second quarter -- 29 per cent; 2022 third quarter -- 17 per cent). 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 ratio was 5.14 at Sept. 30, 2023, compared with 5.22 at June 30, 2023, and 4.93 at Dec. 31, 2022.
• Common Equity Tier 1 (CET 1) and Tier 1 Capital to risk-weighted assets ratios were 17.72 per cent at Sept. 30, 2023, compared with 17.90 per cent at June 30, 2023, and 19.60 per cent at Dec. 31, 2022. Total capital to risk-weighted assets ratio was 17.98 per cent at Sept. 30, 2023, compared with 18.14 per cent at June 30, 2023, and 19.83 per cent at Dec. 31, 2022. Leverage ratio was 9.76 per cent at Sept. 30, 2023, compared with 9.71 per cent at June 30, 2023, and 9.83 per cent at Dec. 31, 2022. Beginning June 30, 2023, the company's total capital and leverage ratios decreased due to Office of the Superintendent of Financial Institutions Canada's revised rules that incorporate Basel III reforms that came into effect. All of the company's capital and leverage ratios are within the company's regulatory and internal risk appetite guidelines.

For the company's outlook, refer to the outlook section of the 2023 third quarter report.

About MCAN Mortgage Corp.

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 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 Corp. deposit insurance. MCAN is investing in communities and homes for Canadians.

We seek Safe Harbor.