Solutions for borrowers, brokers and investors

AMIC's Performance During COVID-19

May 8, 2020

As the COVID-19 pandemic continues to evolve, Advanced Mortgage Investment Corporation (or "AMIC") will continue to provide updates on any aspects of our business that could potentially affect our shareholders.

The latest podcast (link below) from Advanced MIC CEO Michael Hapke accompanies this update.

 

We invite you to review the previous post dated April 9, 2020 (below). The April 9 post sets out pre-COVID baseline performance and economic data and also discusses how we expect COVID-19 might change the risk factors that are outlined in the AMIC Offering Memorandum. This post presents data that updates the original April 9 disclosures.

Let's start by looking at changes in economic data and AMIC performance metrics since April 9.

 

Ottawa Fundamentals

It is management's position that the underlying fundamentals of AMIC's lending area — Ottawa and surrounding areas of Eastern Ontario — continues to remain strong. AMIC continues to derive comfort from the stability and resilience of the local economy while taking a prudent approach to monitoring unempoyment and real estate market trends.

 

Ottawa Unemployment Rate

One of the metrics that AMIC continues to monitor is Ottawa's unemployment rate. Statistics Canada has come out with additional data on unemployment in Canada.  Some points of interest to AMIC and our shareholders:

  • The national unemployment rate for April 2020 has increased to 13.0% from 7.8% in March.  
  • Ontario's unemployment rate saw a corresponding increase of 3.7%, increasing from 7.6% to 11.3% for the same periods.
  • Although Ottawa's unemployment rate rose from 4.9% to 6.3%, it remains one of the lowest in the country.
  • Statistics Canada reports that the industries which continue to be relatively less affected by the COVID-19 economic shutdown included utilities, public administration, finance insurance and real estate.

As part of its COVID-19 response, AMIC continues to review its borrowers' employment by the sector in which the principal borrower works.

  • The above chart (which contains data through to May 7, 2020) shows that:
    • 30.4% of AMIC's principal borrowers are employed in the public sector.
    • Just under 50% of AMIC principal borrowers are self-employed.

It is management's continued position that, due to the sector-related advantages described above, the Ottawa employment market will remain stronger than the employment markets of other major Canadian centres.

 

Ottawa Real Estate Market

The Ottawa Real Estate Board (or "OREB") reported the following on May 5, 2020:

  • "April's average sale price for a condominium-class property was $327,813, an increase of 6.3 per cent from this time last year while the average sale price of a residential-class property was $521,694, an increase of 6.8 per cent from a year ago. Year to date figures show a 15.1 per cent and an 18.5 per cent increase in average sale prices for residential and condominiums, respectively."
  • "Members of the Ottawa Real Estate Board sold 913 residential properties in April through the Board’s Multiple Listing Service® System, compared with 2,025 in April 2019, a decrease of 55 per cent. April's sales included 700 in the residential-property class, down 56 per cent from a year ago, and 213 in the condominium-property category, a decrease of 51 per cent from April 2019. The five-year average for April unit sales is 1,692."
  • "'While the number of unit sales has decreased substantially, residential prices are still holding their own and are up over last year's figures, with properties often selling above askin price', Burgoyne reports. 'There is still a holdover of pent up demand in our marketplace. We believe that when the market opend up again, although it won't be business as usual, sales will rebound and make up for the decline the spring market has experienced', she adds."
  • "In addition to residential and condominium sales, OREB Members assisted clients with renting 947 properties since the beginning of the year compared to 778 at this time last year."

OREB data as above is one of the tools used by AMIC to determine the value of the properties that secure the mortgages in its portfolio.

AMIC has presented its property valuation methods elsewhere on this web site. In AMIC's opinion, the mortgage portfolio at February 29, 2020, was well-secured based on standard valuation methods.  To see a more detailed analysis, please scroll down to the April 9, 2020 update.  

Overall, AMIC believes that the fundamentals of the Ottawa real estate market are holding. AMIC continues to consider the mortgage portfolio to be well secured. As of the date of this report, data available to AMIC (which is collected in order to comply IFRS standards) does not support AMIC using a "mark to market" approach to property values. The data also does not support an increase to AMIC's loss provision over and above what is already being calculated on a per-property basis. Refer to AMIC's financial statements for details of its loss provision methodology.

AMIC will continue to monitor economic analysis and reports like this model-driven assessment by DBRS Morningstar in order to analyze its portfolio. At the same time, we will continue to formulate our position based on real-time data.

 

AMIC Performance

As noted below in the April 9 message:

  • "In addition to determining that the AMIC mortgage porfolio is well secured, another important baseline for this discussion is to reconfirm that as at February 29, 2020, which marks the end of the second quarter of AMIC's 2020 fiscal year, AMIC's portfolio was in good standing, there were no material changes to any of the risk factors in the OM, the MIC was fully compliant with the Income Tax Act, and all of the MIC's corporate obligations were met."

Since February 29, 2020, the AMIC mortgage portfolio has continued to perform.

 

No Payments Returned May 1

As of the date of this report, the MIC is conducting its lending business as usual but screening all transactions through the filter of additional risk factors triggered by COVID-19.

  • No payments due May 1, 2020, were returned due to NSF.
  • No payments due on either March 1, 2020, or April 1, 2020, were returned due to NSF.
  • As reported on April 9, three AMIC borrowers have requested and been approved for the capitalization of their April interest payments.
  • The same three borrowers were approved for the capitalization of their May interest payments
  • Borrowers who request capitalized payments for June and subsequent months will have their requests reviewed on a case-by-case basis. Please see the April 9 message for more information about payment capitalization.

 

Originations and Discharges Continue

  • AMIC is continuing to process new applications, renewals, discharges and routine administrative matters as per the April 9 report.
  • 6 new mortgages were funded in April.
  • 2 mortgages were discharged in April.
  • 2 mortgages matured in April and were renewed.
  • No new technical default matters have arisen.

 

Review of Risk Factors

As of May 8, 2020, AMIC has reviewed the risk factors in the OM and agrees with the assessment of and updats to risk factors as presented on April 9, 2020 (below). AMIC will continue to review and update its risk factor outlooks as conditions change.

 


 

 

April 9, 2020

In light of the circumstances created by the COVID-19 pandemic, Advanced Mortgage Investment Corporation (or "AMIC") has compiled an update as to how the risk factors identified in the AMIC Offering Memorandum (or "OM") may change along with a discussion of how those possible changes might potentially impact AMIC and its shareholders.

Please read the summary and data below. You may also want to listen to the podcast (link below) recorded by Advanced MIC CEO Michae Hapke.

 

 

AMIC cannot predict the duration of risk factor changes triggered by the COVID-19 epidemic however the Manager and Agent will be reviewing market conditions and updating this information as it becomes available. Pleae see the forward-looking statements information at the bottom of this page and in the OM.

AMIC specifically identifies risk factors on pages 3, 6, 8, 23 and 44 of the OM however there may be risk factors that are identified separately elsewhere in the document. Please contact your dealing representative at any time if you have any questions.

The OM categories risk factors as:

  • investment risk
  • issuer risk, and
  • industry risk.

Before we delve into the risk factors, we will review some recent market and performance data.

 

Ottawa Fundamentals

It is management's position that the underlying fundamentals of AMIC's lending area — Ottawa and surrounding areas of Eastern Ontario — remain strong. AMIC derives comfort from the stability and resilience of the local economy while taking a prudent approach to monitoring unempoyment and real estate market trends.

 

Ottawa Unemployment Rate

One of the metrics that AMIC will monitor in the coming weeks is Ottawa's unemployment rate. Statistics Canada is presenting some interesting observations about labour market conditions including the following:

  • The national unemployment rate rose 2.2% in March. The national unemployment rate in March was 7.8%, up from 5.6% in February.
  • Ontario's unemployment rate saw a corresponding increase of 2.1% from 5.5% to 7.6%.
  • Ottawa's unemployment rate climbed .7% from 4.2% to 4.9% for the same period.
  • Nationally, employment in the public sector decreased by 3.7% in March while the self-employment sector reported a decrease of 1.2%.
  • As part of its COVID-19 response, AMIC reviewed its borrowers' employment by the sector in which the principal borrower works.

  • The above chart (which contains data through to March 26, 2020) shows that:
    • 25.6% of AMIC's principal borrowers are employed in the public sector.
    • Over 50% of AMIC principal borrowers are self-employed.
  • Neither AMIC nor Statscan have data to indicate how many Ottawa residents and/or how many AMIC borrowers have applied for or are in need of income supplements via the government's COVID-19 relief plans. As this data becomes available, we will strive to add it to this report.

It is management's position that, due to the sector-related advantages described above, the Ottawa employment market will remain stronger than the employment markets of other major Canadian centres.

 

Ottawa Real Estate Market

The Ottawa Real Estate Board (or "OREB") reported the following on April 3, 2020:

  • "March’s average sale price for a condominium-class property was $369,311, an increase of 27.3 per cent from this time last year while the average sale price of a residential-class property was $559,739, an increase of 16.5 per cent from a year ago. Year to date figures show an 18.8 per cent and a 23.2 per cent increase in average sale prices for residential and condominiums, respectively."
  • "Members of the Ottawa Real Estate Board sold 1,525 residential properties in March through the Board’s Multiple Listing Service® System, compared with 1,507 in March 2019, an increase of only 1.2 per cent. March’s sales included 1,170 in the residential-property class, up 3.3 per cent from a year ago, and 355 in the condominium-property category, a decrease of 5.1 per cent from March 2019. The five-year average for March unit sales is 1,465."
  • "When asked about the impact of Covid-19 on the number of new listings on the market, Burgoyne speculates, 'The shortage of inventory has driven down the number of new listings for the past several years, so we cannot accurately state that the decrease in March was due to Covid-19 where we saw 1,579 new residential listings and 469 for condos. The 5-year average is 2,217 and 665, respectively. I believe that April’s number will provide a truer and more legitimate reflection of the impact of Covid-19 on our local real estate market.'"
  • "In addition to residential and condominium sales, OREB Members assisted clients with renting 746 properties since the beginning of the year compared to 550 at this time last year."

OREB data as above is one of the tools used by AMIC to determine the value of the properties that secure the mortgages in its portfolio.

AMIC also monitors reports like this April 11 broadcast by realtor Paul Rushforth (starting at around 2:45).

AMIC has presented its property valuation methods elsewhere on this web site. In AMIC's opinion, the mortgage portfolio at February 29, 2020, was well-secured based on standard valuation methods.

As part of its COVID-19 review, AMIC analyzed the mortgage portfolio (with balances as at March 26, 2020) to attempt to determine the current loan-tovalue (or "LTV") of the portfolio based on:

  • the appraisal at inception, and
  • the most recent Brookfield RPS data as at February 29, 2020.

The chart below shows the outcome of this analysis:

In the chart above:

  • The solid red columns indicate the total encumbrances on each property.
    • This could be an AMIC first mortgage or a combination of a third-party first mortgage and and AMIC second mortgage.
    • The data uses the most recently verified first mortgage balance (at funding or at renewal) and the AMIC mortgage balance as at March 22, 2020.
  • The red background indicates the appraised value of each property at inception.
  • The grey line shows the Brookfield RPS value as of the 2020 Q2 report from February 29, 2020.
  • Note there are three properties reported as having an appraised value in excess of $1 million.
    • These are muti-family properties.
    • Two are subject to a pending discharge via a CMHC-insured refinance by the borrowers.
    • These properties are considered as outliers by Brookfield so they do not have a Brookfield valuation.
  • Per the standard Brookfield report, properties that were funded recently (e.g. within Q2) would not normally have a valuation above the appraised value.
  • It is important to note that the LTVs presented above included capitalized commitment and/or renewal fees. The net advance of the mortgage is net of capitalized commitment and/or renewal fees. The MIC lends up to 85% LTV before the fees are capitalized. Capitalized fees are a balance sheet item: funds are not advanced to the borrowers to pay the capitalized fees. The LTV based on actual deployed funds would be lower than we have shown above.

 

Summary of Ottawa Employment and Real Estate Market Fundamentals

Elsewhere on this web site AMIC has provided charts that show the history of changes to the average Ottawa home price.

  • The last time the average home price in Ottawa dropped was 1994, 1995 and 1996 when prices dropped from $147k to $140k, or approx. 5%.
  • There is no data from OREB to support a reduction in the average Ottawa home price.
  • Per CMHC, the vacancy rate for rental properties in Ottawa as at January 15, 2020, was 1.8%.

Overall, AMIC believes that the fundamentals of the Ottawa real estate market are holding. Therefore, AMIC continues to consider the mortgage portfolio to be well secured.

AMIC will continue to monitor economic analysis and reports like this one from RBC's Robert Hogue in order to analyze its portfolio. At the same time, we will continue to formulate our position based on real-time data.

 

AMIC Performance

In addition to determining that the AMIC mortgage porfolio is well secured, another important baseline for this discussion is to reconfirm that as at February 29, 2020, which marks the end of the second quarter of AMIC's 2020 fiscal year, AMIC's portfolio was in good standing, there were no material changes to any of the risk factors in the OM, the MIC was fully compliant with the Income Tax Act, and all of the MIC's corporate obligations were met.

Since February 29, 2020, the AMIC mortgage portfolio has continued to perform.

As of the date of this report, the MIC is conducting its lending business as usual but screening all transactions through the filter of additional risk factors triggered by COVID-19.

  • All of the interest payments due on March 1, 2020, were paid as agreed. No March 1 payments were returned due to NSF.
  • No payments due on April 1, 2020, have been returned due to NSF.
  • Only three borrowers have requested and been approved for the capitalization of their April 1 interest payment.
    • The capitalization request requires borrowers to complete a detailed questionnaire about their current financial position. It is not a rubber stamp: undewriters review the request in detail. The questionnaire and the capitalization request become part of their official mortgage file and will be taken into consideration at renewal.
    • At the inception of the mortgage, AMIC routinely instructs the lawyer to register the AMIC charge on title at 105% or more of the approved principal balance. This higher registered amount allows the MIC to capitalize interest or charges related to the mortgage on an as-needed basis.
    • Borrowers who request capitalized payments for May and subsequent months will have their requests reviewed on a case-by-case basis.
  • New mortgage applications are being received and underwritten.
    • AMIC continues to have a strong origination pipeline (or "supply chain") due, as per the OM, to the MIC's close relationship with one of the largest mortgage brokerages in Ottawa.
    • Appraisers and lawyers have modified their services to meet physical distancing recommendations but are otherwise conducting business as usual.
    • AMIC continues to confirm income and employment for all transactions regardless of COVID-19.
    • AMIC is imposing interest reserves for some files where the borrowers' cash flow is impacted by COVID-19. This means that a holdback is taken from the funding proceeds in order to prepay the AMIC mortgage for 3, 6 or more months.
  • The MIC has continued to receive routine discharge requests from borrowers who are selling or refinancing their properties. It does not appear that routine discharges are ceasing due to COVID-19.
  • We will continue to monitor technical default as COVID-19 continues. This can include lapses in payment of property taxes or property insurance premiums. Failure to maintain prior charges in good standing also constitutes a potential technical default.
  • The underwriting team will continue to review renewals as renewal dates approach.

 

Review of Risk Factors

As of April 9, 2020, AMIC has reviewed the risk factors in the OM and has updated certain risk factor outlooks based on the current COVID-19 situation. AMIC will continue to review and update its risk factor outlooks as conditions change.

Investment Risk

Risk Factor Detail Status Analysis
No Assurance of Achieving Objectives or Paying Dividends Potential Impact
  • AMIC does not anticipate significant risk of an inability to continue to pay routine dividends to preferred shareholders however it is still to early to predict how COVID-19 will impact job and real estate markets. If AMIC incurs a loss of income or principal related to a default matter triggered by a COVID-19 issue, the payment of the top-up dividend may be reduced. AMIC does not foresee this outcome at this time based on today's data and market conditions.
  • AMIC does not anticipate significant risk of an inability to achieve the hurdle rate indicated in the OM however as per above loss of income or principal related to a default matter triggered by a COVID-19 issue could significantly reduce the earnings per share and the indvidual rate of return earned by shareholders. AMIC does not foresee this outcome at this time based on today's data and market conditions.
No Market for Shares No Change  
Absence of Management Rights No Change  
Redemption Liquidity Potential Impact
  • It is AMIC's position that it is in the best interest of its shareholders to be as fully invested as possible at all times. This typically means that AMIC may not have undeployed cash available at any given time to satisfy redemption requests.
  • If AMIC's funds are fully deployed, redemption requests would then be funded from cash inflows related to discharges or new share issuance.
  • If there are no discharge transactions and if new issuance ceases, funds may not be available on demand to satisfy redemption requests.
  • AMIC does not foresee this outcome at this time based on today's data and market conditions.
  • Shareholders receive quarterly reports from the issuer that indicate the lending capacity utilization (or "LCU") of the issuer. Shareholders can refer to these reports to determine if the MIC has undeployed cash on hand that can be used for redemptions.
  • LCU is also reported on the issuer's web site monthly.
Restrictions on Ownership and Redemption of Shares No Change  
Suspension of Redemptions Potential Impact
  • AMIC intends to adhere to the redemption policy as stipulated in the OM.
  • At this time, based on current liquidity and cash flow projections, AMIC does not anticipate difficulty in satisfying redemption requests.
  • However it is worth noting that the OM states the following: "The Corporation shall not be obligated to redeem more than 10% of the issued Shares in any fiscal year. The Corporation shall redeem Shares in the order in which the Corporation receives written notices of redemption from Shareholders."

 

Issuer Risk

Risk Factor Detail Status Analysis
MIC Tax Designation No Change  
Reliance on the Manager No Change  
Key Personnel No Change  
Composition of the Mortgage Portfolio Potential Impact
  • Until the impacts of COVID-19 on the job and the real estate market are better understood, AMIC cannot predict the volume and nature of the morgage applications it will receive from mortgage brokers.
  • AMIC will continue to monitor the weighted average beacon scores of funded transactions and will report back on this risk factor.
  • AMIC will continue to report on the portfolio composition (currently 100% residential with no construction loans) and the split between first and second mortgages held in the portfolio.
Mortgage Renewals No Change  
Use of Leverage No Change  
Insurance No Change  
Priority Potential Impact
  • Where AMIC holds a second mortgage, borrowers may be able to arrange for a deferral of the monthly interest due on their existing first mortgage. If this deferral is granted, it appears that the first mortgage holder is capitalizing it as an additional amount payable under the first mortgage charge. This increases AMIC's LTV and therefore could increase AMIC's risk on a per-transaction basis.
  • AMIC will be monitoring its second mortgages for this potential outcome.
Default Potential Impact
Changes in Land Property Values Potential Impact
Yield Potential Impact

 

Industry Risk

Risk Factor Detail Status Analysis
Changes in Legislation Potential Impact
  • Although none of the mortgages in the AMIC portfolio are in actual default as of the date of this report, AMIC is monitoring COVID-19 response measures imposed by the provincial government including but not limited to the Attorney General's order suspending residential evictions.
  • If an AMIC mortgage borrower defaults, this suspension of residential evictions could result in a delay in AMIC's ability to gain vacant possession as part of a power of sale action. This delay could in turn prolong the power of sale process. A prolonged power of sale process  could increase expenses related to the action (e.g. property managment, insurance, etc.). Increased costs could reduce the sale proceeds to the MIC.
Competition Potential Impact
  • The COVID-19 situation could give rise to surplus capital being raised and held by market competitors who would then be overcapitalized to the extent that they would be forced to offer reduced pricing to borrowers in order to utilize that liquidity, thereby undercutting AMIC's pricing model to such an extent that AMIC is not able to originate mortgages that provide a rate of return sufficient to achieve the hurdle rate.
  • Conversely, the COVID-19 situation could result in the reverse situation wherein competitors would not able to lend due to a lack of liquidity related to having to fund redemption requests, thereby creating a more favourable lending and pricing environment for AMIC.
  • AMIC is monitoring the market and will report back on this risk factor.
Relationship Between the Corporation, the Manager, and the Agent No Change  

 

Forward-looking statements

Certain statements in this web site (which is incorporated into the issuer's Offering Memorandum by reference) are forward-looking statements. These statements are generally identified by words like “anticipate,” “plan,” “believe,” “intend,” “expect,” “estimate,” “approximate,” and the like, as well as future or conditional verbs such as “will,” “should,” “would” and “could,” or negative versions thereof. Such forward-looking statements reflect the Corporation’s current beliefs and are based on information currently available to it. Because forward-looking statements involve future risks and uncertainties, actual results may be quite different from those expressed or implied in these statements. Examples of such risks and uncertainties include:

  • the risks of competition within the Corporation’s industry;
  • the annual yield of the Corporation that the Manager is targeting;
  • the uncertainty of estimates and projections relating to the real estate industry;
  • fluctuations in interest rates;
  • changes in general economic and business conditions;
  • the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
  • the ability of the Corporation to qualify as a MIC under the Income Tax Act; and
  • the Corporation’s ability to implement its business strategy.

The foregoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect the Corporation’s operations or financial results are included under the heading “Risk Factors” in the Offering Memorandum. The Corporation assumes no obligation to update or revise any forward-looking statements to reflect new events or circumstances, except as required by applicable securities legislation.