With investors flocking to investments such as quality CANADIAN real estate property and mortgages secured by CANADIAN real estate, interest in the Mortgage Investment Corporation ( MIC ) has grown significantly. Professional well-managed MICs are generally debt-free and deliver reasonable consistent dividends in the 5% to 7% range. They are not equity (stock and mutual fund) plays that tend to fluctuate dramatically in value, but are income and growth investments (you can either take your dividends in cash for income or you can reinvest your dividends for growth). Most MICs qualify for various Canadian Registered Savings and Registered Pension plan investment. Fisgard MIC for example, qualifies for the
- TFSA – Tax Free Savings Account
- RRSP – Registered Retirement Savings Plan
- RRIF – Registered Retirement Income Fund
- RESP – Registered Education Savings Plan
- LIF – Life Income Fund
- LRIF – Locked-In Retirement Income Fund
- LIRA – Locked-In Retirement Account
- IPP – Individual Pension Plan
- RDSP – Registered Disability Savings Plan
When considering a MIC investment the following are important:
1) Track Record and Longevity
2) Consistency of Dividends
3) Predictability of Dividends
4) Mortgage Portfolio Performance
5) Concentration of Mortgage Investments
Concentration is very important. Ask management about its largest mortgages and what percentage they make up of the entire portfolio. High concentration translates into high risk. Be wary of MICs that have a high concentration of mortgage money with a particular borrower (or a particular group of related borrowers). Also be wary of MICs that have a high concentration of mortgages in a particular type of mortgage, i.e. land development, construction, etc. as opposed to safer finished real estate products such as single family homes. Also be wary of MICs that have a high concentration of mortgages in a particular geographical area, i.e. a high percentage of mortgages in small rural communities that do not demonstrate growth and economic stability.
6) Management Experience and Qualifications
7) Better Business Bureau and references
8) Redemption (cash out) Provisions
9) Regulatory Compliance
10) Types of Mortgage Investments
11) Geographical Location of Mortgage Investments
12) Mortgage Approval Process
13) Early Redemption Privileges
Like most financial investments, early redemption (cashing out before maturity) comes at a cost. Few MICs are simply redeemable on demand. It’s hard for a MIC to function that way as its mortgages are rarely, if ever, payable “on demand”. Just make sure you are satisfied with the MIC’s early redemption policy and the cost associated with early redemption. An example of an early redemption feature is Fisgard’s Compassionate Early Redemption provision. This particular feature allows an investor, upon the death of a spouse or partner, to cash in the investment prior to the maturity date without penalty. Look for these types of early redemption features in the MIC you are considering.
14) Dividend Statements
Ask for a sample of the MIC’s Dividend Statement, and be satisfied that it is clear and easy to read. There is no reason for a MIC to have a confusing or complicated dividend statement. A MIC is a relatively straight-forward investment (mortgages secured by Canadian real estate property), so its dividend statement should be quite simple.
15) Liquidation Value
16) Related Funds
17) Investment by Principals
18) Loans to Insiders and Related Parties
Does the MIC lend to its managers, directors, officers, employees or related parties? This may not be illegal, but is not a good practice, even though it may be disclosed in the Offering Memorandum or Prospectus. Definitely something to ask about, and watch carefully.
19) Relationships of MIC fund to MIC Management
20) Conflict Possibilities
The higher the risk represented by a particular mortgage, the higher the finders/brokers fee will be. Ask why a manager should be paid a fee by a borrower (a fee based on the level of risk) at the same time as the manager is being paid by the investors to manage their money, keeping it as secure as possible. Is this a conflict of interest? Why don’t finders fees and brokerage fees go directly to the MIC fund for the benefit of the investors?
There are a number of fees that managers collect on a mortgage. Here are some:
- mortgage application fees
- processing and administrative fees
- mortgage renewal fees
- late payment fees
- NSF fees
- mortgage discharge fees
- lender fees
- finders (brokerage) fees
- demand notice fees
- foreclosure processing fees
Why should MIC investors be put at greater risk because the MIC manager collects a larger fee from a mortgage that poses higher risk? It’s a question you should ask – and insist be clearly answered.
[At Fisgard, for example, all of the above fees go to the investors – not to the manager. This is part of Fisgard’s conflict avoidance policy.]
21) General and Specific Reserves
22) Liquidity and Cash Flow
Some MICs are involved in mortgages on construction and development projects. These mortgages involve progressive performance advances which are amounts advanced against the construction or development from time to time as the project progresses. These periodic performance advances are called draws, and a well-managed MIC always has adequate capital available to fund these draws as they come due. If the MIC doesn’t have this capital you should be careful about investing. When researching MICs for possible investment make sure the manager proves to you that the MIC has sufficient capital resources – either cash on hand or readily available through an operating line – to fund all draw obligations. If it is not clear that the MIC can meet its draw obligations, do not invest. A MIC that cannot meet its draw obligations is in the precarious position of being sued by its borrowers.
23) Borrowings (Leverage) and Cash Management
Invest only in MICs that clearly demonstrate a long history of prudent cash management. Cash flow is everything in a MIC. It is not unusual for a MIC to have a bank Line-of-Credit (operating line), but there is a material difference between a MIC that uses its LOC for leverage and a MIC that uses its LOC for short-term purposes, such as being able to forward-commit to mortgage investment opportunities. Ideally a well-run MIC should have 100% of its capital working (earning interest on mortgage investments) and have very little in the bank, just enough for day to day operations. The MIC should have an operating line that allows it to commit to mortgage opportunities even though it may not have the money in the bank at the time. This type of borrowing is prudent, but should be used only on a short-term basis.
24) 1st and 2nd Mortgages
Junior (2nd) mortgages are lucrative investments, but carry greater risk and require specialized experience to be selected and managed properly. Exercise caution when considering investing in a MIC that has a high percentage of the dollar volume of its mortgage portfolio in 2nd mortgages. I stress dollar volume as a MIC may have a relatively small percentage of the number of its mortgages in 2nd mortgages, but that small number may represent a disproportionately high percentage of the MICs overall portfolio dollar volume. Be careful of that type of portfolio. A well-run secure MIC will always have a high percentage of its mortgage investments in quality 1st (senior) mortgage securities. It’s just safer.
25) Redemption Rights
26) Insured Mortgages and Title Insurance
You should also enquire as to whether the MIC in question carries Title Insurance, such as that provided by First Canadian Title or other title insurers. Very few MICs have such an arrangement, but certain MICs may have a contract with a title insurance company. It’s a good arrangement to have.
27) Registered Plan Trustee Fees
If you are considering investing in a MIC through one or another of Canada’s Registered Plans such as the RRSP, RRIF, TFSA, RESP, LIF, LRIF, LIRA, IPP or RDSP, be sure to confirm the trustee costs of maintaining the Plans. Some MICs offer more economical plans than others. For example, the RRSP or RRIF in a particular plan may cost $125 to open the Plan, a certain fee per contribution, and $125 to close the Plan, whereas in other MICs the trustee costs could be higher or lower. In the case of an investment such as the Tax Free Savings Account ( TFSA ) which is limited to a $5,000 contribution per year, or a regular (most often monthly) limited contribution investment such as a Registered Education Savings Plan ( RESP ) or the Registered Disability Savings Plan ( RDSP ) the trustee costs can be prohibitive. Be sure to examine these costs carefully before investing.
[Fisgard’s RRSP/RRIF costs $100+tax per year for the primary plan-holder and $75+tax per year for the secondary plan-holder (such as the Spousal RRSP or Spousal RRIF). Fisgard’s RESP costs $24 per year, and its TFSA costs $36 per year, with no set-up and closing-out fees. Fisgard’s RESP and TFSA costs are very low compared to the vast majority of MICs in Canada.]