Is it boom time for mortgage investment corporations?

For several years before 2012 there were only three mortgage investment corporations (MICs) trading on the Toronto Stock Exchange.
These days, they have plenty of company. Since the beginning of 2012, a total of eight new mortgage investment funds with a market cap of almost $2 billion have started trading on the TSX and two more have filed a prospectus in the past couple of weeks to raise money and ultimately join them on the TSX.
The most obvious reason for the profusion of public mortgage investment vehicles is the hunger for yield among investors in today’s ultra-low interest rate environment.
With fixed rate investment returns struggling to keep ahead of inflation, there is plenty of demand for MICs, which hold out the promise of high yields, tax efficiency and lower volatility. At least that is what investors think. The picture, it turns out, is more complicated.
Timbercreek’s take
“The MIC business is pretty interesting because there weren’t very many other public players in the first four years of our existence,” said Andrew Jones, Managing Director of Debt Investments with Timbercreek Asset Management Inc. “That has all changed in the last 12 months or so, it hasn’t been that long.”
Timbercreek, one of the country’s largest non-bank commercial lenders, has witnessed a significant decline in the availability of traditional mortgage capital for experienced real estate investors since 2006.
This lack of traditional mortgage capital has provided a niche for smaller, non-bank lenders that are willing to provide the quick turnaround and customized terms (such as interest only, short-term, 18-60 month mortgages) that represent the sweet spot for real estate investors.
The alternative asset class is well-known to high net-worth investors. The advantage of the publicly traded MICs is they offer the same sort of investments without a hefty minimum investment or accredited investor requirements, superior liquidity and more stringent disclosure standards.
Prior to the 2012 MIC boom, the sector was dominated by Timbercreek’s Mortgage Investment Corp., Firm Capital Mortgage Investment Corp. and MCAN Mortgage Corp.
The success of the older public MIC players and the superior disclosure and transparency they provided may have also prompted private mortgage investment players to go public as well, he said. “I think the private guys were having a lot of trouble raising money, so their option was if they were going to raise any money they had to list.”
MIC momentum
“What happened in 2012 was Trez Capital decided to raise money in a public MIC, virtually in an identical form to the one that we had, and they raised a couple hundred million over the 12 months,” he said. That success prompted Timbercreek and MIC to both launch senior MIC funds.
Other players entered the MIC space for different reasons. Atrium Mortgage Investment Corp. and Return On Innovation Management Ltd. (with three MICs) were existing funds which sought and obtained listings.
“ROI listed because they had to, they had some structural issues” that we solved by listing while Atrium listed to give their investors added liquidity, said the Timbercreek executive.
As well, First National Mortgage Investment Fund was launched into the MIC space.
In total, the market capitalization of MICs in Canada is about $2.7-billion today.
Not all MICs are created equal
The new MICs’ strategy “worked well for them for a while, but you ended up with a lot of product in the market, I think it was confusing to the investors and I think that a lot of investors are now looking at it saying, `Is there enough places for them to put their money if they are all competing with each another’ and `Do these guys really know how to manage public funds?’” That’s the real question, Jones noted.
Timbercreek had the luxury of starting small and growing slowly. “There are a lot of bugs to work out, it is a difficult process, you want to balance your payout and your cash flows very carefully. There’s regulatory compliance, being able to manage your asset allocation, your MIC requirements.
“Those are all very difficult, tricky things, we have infrastructure to do that and we have the track record of doing that and it is not as easy as managing a bunch of mortgage loans.”
Jones’ argument implies that there will eventually be a shift to quality among investors.
Timbercreek’s MIC trades at a premium to its net asset value and issue price. “That is not the case with everyone else, Atrium is the only group I think that is anywhere near their issue price or NAV, and Firm Capital but they are a different vehicle with a different track record.”
“The groups that are getting punished on the stock market are the ones that are newer, smaller, less liquidity, less experienced,” he concluded.
Click here for more background information on mortgage investment corporations.

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