Mr. Don Coulter reports

MCAN FINANCIAL GROUP ANNOUNCES STRONG 2023 RESULTS AND INCREASES ITS REGULAR CASH DIVIDEND 5.4%

MCAN Mortgage Corp., doing business as MCAN Financial Group, had its highest annual net income in its history of $77.5-million ($2.22 earnings per share) for 2023, an increase from net income of $55.4-million ($1.77 earnings per share) for the prior fiscal year. Return on average shareholders equity (1) was 15.05 per cent for 2023 compared with 12.47 per cent for the prior fiscal year. MCAN reported higher total net income for the year mainly as a result of higher net corporate mortgage spread income as it continued to adjust its portfolio to take advantage of the higher interest rate environment. Its net corporate mortgage spread income (1) increased by $30.7-million for the current fiscal year compared with the prior fiscal year. For the fourth quarter of 2023, it reported net income of $19.9-million (56-cent earnings per share), a decrease from net income of $24.1-million (75-cent earnings per share) in the fourth quarter of 2022. Fourth quarter 2023 return on average shareholders equity (1) was 15.01 per cent compared with 21.17 per cent for the same period in the prior year. While net corporate mortgage spread income was strong and ahead of the prior year, a number of factors impacted its fourth quarter results, including recording a higher provision for credit losses in the current year. It is committed to a strategy of managing controllable factors to protect its bottom line and taking advantage of opportunities that arise in the current market environment.

The board of directors declared a first quarter regular cash dividend of 39 cents per share (a 5.4-per-cent increase on an annualized basis from 2023) to be paid on March 28, 2024, to shareholders of record as of March 15, 2024. As a mortgage investment corporation, it pays out all of its taxable income to shareholders through dividends. Largely as a result of tax timing differences on various investing strategies that it undertook in the second half of 2023, it will not need to distribute a special dividend in the first quarter of 2024.

"I am thrilled to announce that we have achieved exceptional year-end results with our highest net income in our history. We grew our diversified assets by 16 per cent during the year, reaching almost $5-billion at year-end. Our strong performance is a testament to the dedication and hard work of our talented team, coupled with strategic decision making during this uncertain market, to achieve profitable growth," said Don Coulter, chief executive officer. "As we celebrate this remarkable achievement, we remain committed to driving sustainable growth and maximizing shareholder value in the long term."

Highlights:

• Corporate assets totalled $2.76-billion at Dec. 31, 2023, a net increase of $473-million (21 per cent) from Dec. 31, 2022:
  • Construction and commercial mortgages totalled $1.12-billion at Dec. 31, 2023, a net increase of $187-million (20 per cent) from Dec. 31, 2022. Year-to-date 2023, the positive movement in the construction and commercial portfolios is attributed to originations of $666-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 it has not experienced as much runoff in the portfolio as expected. To date, projects continue to progress toward completion.
  • Uninsured residential mortgages totalled $967-million at Dec. 31, 2023, a net increase of $138-million (17 per cent) from Dec. 31, 2022. Uninsured residential mortgage originations totalled $352-million year-to-date 2023, a decrease of $17-million (4 per cent) from the same period in 2022. The economic and interest rate environment and its impact on the housing market and borrowers have caused a slowdown in origination volumes in 2023. However, it has seen an increase in its uninsured residential mortgage renewal rates with renewals of $495-million year-to-date 2023 compared with $435-million year-to-date 2022 as borrowers find it more convenient to stay with their existing lender in the current market environment.
  • Non-marketable securities totalled $110-million at Dec. 31, 2023, an increase of $13-million (13 per cent) from Dec. 31, 2022, with $76-million of remaining capital advances expected to finance over the next five years.
  • Marketable securities totalled $50-million at Dec. 31, 2023, a net decrease of $3-million (6 per cent) from Dec. 31, 2022, due to net unrealized fair value losses. In 2023, it saw real estate investment trust prices decrease due to Bank of Canada interest rate increases and uncertainty around future rate increases and recessionary pressures.
• Securitized mortgages totalled $1.93-billion at Dec. 31, 2023, a net increase of $179-million (10 per cent) from Dec. 31, 2022, due to continued originations being ahead of maturities in the securitized portfolio:
  • Over all, for the year to date, total insured residential origination volumes (including commitments sold) were lower in 2023 as a result of the higher interest rate environment, particularly for first-time homebuyers, who would be a significant portion of the borrowers of insured residential mortgages. Insured residential mortgage originations totalled $523-million year-to-date 2023, a decrease of $65-million (11 per cent) from the same period in 2022. This includes $25-million of insured residential mortgage commitments originated and sold in 2023 compared with $228-million in 2022. Insured residential mortgage securitizations totalled $359-million year-to-date 2023, a decrease of $67-million (16 per cent) from the same period in 2022. Insured residential mortgages being held for coming securitizations totalled $277-million at Dec. 31, 2023, a net increase of $132-million (91 per cent) from Dec. 31, 2022. It uses various channels in financing the insured residential mortgage portfolio, in the context of market conditions and net contributions over the life of the mortgages, to support its overall business.

Financial update:

• Net corporate mortgage spread income (1) is derived from both its residential lending portfolio and its construction and commercial portfolio. It increased by $5.5-million for fourth quarter 2023 from fourth quarter 2022 and increased $30.7-million for year-to-date 2023 from year-to-date 2022 mainly due to a higher average corporate mortgage portfolio balance from continued mortgage originations and renewals, and an increase in the spread of corporate mortgages over term deposit interest and expenses. The increase in the spread was mainly attributable to the rising interest rate environment's impact on floating rates on residential construction loans that are well above their floor rates.
• Net securitized mortgage spread income (1) increased marginally by $100,000 for Q4 2023 from Q4 2022 due to a higher average securitized mortgage portfolio balance from insured residential mortgage originations as it continued to increase its mortgage lending in the Alberta and B.C. urban markets. For year-to-date 2023, net securitized mortgage spread income (1) decreased $700,000 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 and renewals of insured residential mortgages. It has 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 higher interest rate environment.
• For Q4 2023, it had a provision for credit losses on its corporate mortgage portfolio of $2.1-million compared with a recovery of credit losses of $1.1-million in Q4 2022. For year-to-date 2023, it had a provision for credit losses on its corporate mortgage portfolio of $4.5-million compared with a recovery of credit losses of $1.1-million for year-to-date 2022. For year-to-date 2023, the provision was mainly due to growth in its portfolio, less favourable underlying economic forecasts relating to unemployment rates and housing prices, and model enhancements.
• Equity income from MCAP Commercial LP totalled $4.4-million in Q4 2023, a decrease of $2.5-million (35 per cent) from $6.9-million in Q4 2022, and totalled $22.0-million for year-to-date 2023, a decrease of $4.6-million (17 per cent) from $26.6-million year-to-date 2022. For Q4 2023 and year-to-date 2023, the decrease was primarily due to: (i) lower mortgage origination fees from lower mortgage volumes sold; (ii) a decrease in fair value adjustments on mortgages due to the higher 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 servicing and administration income from higher assets under management; and (iii) higher investment revenue from higher average mortgage rates on non-securitized mortgages.
• In Q4 2023, it recorded a $2.0-million net unrealized fair value gain on its marketable and non-marketable securities compared with a $1.7-million net unrealized fair value gain in Q4 2022. Year-to-date net unrealized loss on its marketable and non-marketable securities was $3.6-million for 2023 compared with a year-to-date net realized and unrealized loss of $12.1-million for 2022. With respect to its marketable securities, year-to-date 2023 and 2022 saw REIT prices decrease due to Bank of Canada interest rate increases and uncertainty around future rate increases and recessionary pressures. Year to date, it received distributions of $3.6-million (distribution yield (1) of 6.44 per cent) from its REITs compared with $3.6-million (distribution yield (1) of 6.01 per cent) in 2022. With respect to its non-marketable securities, year-to-date 2023, it recorded: (i) a $3.4-million unrealized loss mainly related to two underlying properties from general commercial real estate headwinds increasing capitalization rates, as well as increased debt servicing costs that impact overall returns; and (ii) a $3.0-million unrealized gain related to construction and leasing completion and value-add activity on two underlying property investments. Its non-marketable securities are either held for long-term capital appreciation or distribution income, and they tend to improve the diversification and risk and reward characteristics of its overall investment portfolio; however, the real estate development funds tend to have less predictable cash flows that are predicated on the completion of the development projects within the funds.

Credit quality:

• Impaired corporate mortgage ratio (1) was 3.26 per cent at Dec. 31, 2023, compared with 1.76 per cent at Sept. 30, 2023, and 1.66 per cent at Dec. 31, 2022. At Dec. 31, 2023, impaired mortgages mainly represent five impaired construction mortgages where asset recovery programs have been initiated, and it expects to recover all past due interest and principal.
• Impaired total mortgage ratio (1) was 1.82 per cent at Dec. 31, 2023, compared with 0.99 per cent at Sept. 30, 2023, and 0.89 per cent at Dec. 31, 2022. The increase to its impaired total mortgage ratio is related to the same construction mortgages discussed above.
• Arrears total mortgage ratio (1) was 2.70 per cent at Dec. 31, 2023, compared with 2.16 per cent at Sept. 30, 2023, and 1.57 per cent at Dec. 31, 2022. The majority of its residential mortgage arrears activity occurs in the one- to 30-day category, in which the bulk of arrears is resolved and does not migrate to arrears categories over 30 days. While greater than 30 days arrears have increased in its residential mortgages, it is still low compared with the size of its portfolio and low relative to industry norms. It believes that it has a quality residential mortgage loan portfolio. With respect to its construction and commercial loan portfolio, it has a strong record with its default management processes and asset recovery programs as the need arises.
• Average loan to value ratio of its uninsured residential mortgage portfolio based on an industry index of current real estate values was 63.4 per cent at Dec. 31, 2023, compared with 67.0 per cent at Sept. 30, 2023, and 62.1 per cent at Dec. 31, 2022.

Capital:

• It manages its capital and asset balances based on the regulations and limits of both the Income Tax Act (Canada) and the Office of the Superintendent of Financial Institutions Canada.
• In 2023, it renewed its: (i) base shelf prospectus; and (ii) at-the-market equity program established pursuant to a prospectus supplement to its base shelf prospectus, allowing it to issue up to $30-million in 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 MCAN's sole discretion. During 2023, it 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.
• It issued $14.5-million in new common shares through the dividend reinvestment plan in 2023 compared with $7.4-million in 2022. The DRIP participation rate was 30 per cent for the fourth quarter 2023 dividend (fourth quarter 2022 dividend: 28 per cent). The DRIP participation rate for 2023 dividends was 29 per cent (2022: 20 per cent).
• Income tax assets to capital ratio (3) was 5.52 at Dec. 31, 2023, compared with 5.14 at Sept. 30, 2023, and 4.93 at Dec. 31, 2022.
• Common equity Tier 1 and Tier 1 capital to risk-weighted asset ratios (2) were 17.61 per cent at Dec. 31, 2023, compared with 17.72 per cent at Sept. 30, 2023, and 19.60 per cent at Dec. 31, 2022. Total capital to risk-weighted asset ratio (2) was 17.91 per cent at Dec. 31, 2023, compared with 17.98 per cent at Sept. 30, 2023, and 19.83 per cent at Dec. 31, 2022. Leverage ratio (2) was 9.49 per cent at Dec. 31, 2023, compared with 9.76 per cent at Sept. 30, 2023, and 9.83 per cent at Dec. 31, 2022. Beginning June 30, 2023, its total capital and leverage ratios decreased due to OSFI's revised rules that incorporate Basel III reforms that came into effect. All of its capital and leverage ratios are within its regulatory and internal risk appetite guidelines.

(1) Considered to be a non-generally accepted accounting principle and other financial measure. Non-GAAP and other financial measures and ratios used in this document are not defined terms under international financial reporting standards and, therefore, may not be comparable with 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 ratios in 2022 reflected 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 were included in CET 1 capital. The adjustment to CET 1 capital was measured each quarter as the increase, if any, in Stage 1 and Stage 2 allowances compared with the corresponding allowances at Dec. 31, 2019. The increase, if any, was subject to a scaling factor that decreased over time and was 25 per cent in fiscal 2022.

(3) Tax balances are calculated in accordance with the tax act.

Further information

Complete copies of the company's 2023 annual report will be filed on SEDAR+ and on the company's website.

For its outlook, refer to the outlook section of the 2023 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 under the tax act. MCAN is the largest MIC in Canada and the only federally regulated MIC.

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.

For how to enroll in the dividend reinvestment plan, please refer to the management information circular dated March 13, 2023, or visit the MCAN website. 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 per cent until further notice from MCAN.

We seek Safe Harbor.