Gets easier to grab mortgage yield

A number of mortgage investment corporations have gone public in Canada over the past year and more are on the way, giving investors greater access to an alternative yield play.

“Recently there has been a trend for mortgage managers to create a publicly traded vehicle in order to provide liquidity for their investors,” Anil Tahiliani, portfolio manager of North American equities at McLean & Partners Wealth Management, said in a note to clients.

“As a result, investors today can freely trade these investments that have traditionally required a long-term buy and hold investment.”

The list of TSX-listed mortgage investment corporations or funds (MICs/MIFs) increased to more than 10 entering 2013, from three in 2011.

Some of the new names that entered with either one or multiple IPOs last year include Trez Capital Mortgage Investment Corp., Atrium Mortgage Investment Corp., First National Mortgage Investment Fund and ROI Capital, which join veteran players Firm Capital Corp., MEAN Mortgage Corp. and Timbercreek Asset Management Inc.

The public arena is only going to get more crowded with two preliminary prospectuses filed earlier this year by Builders Mortgage Capital Corp. and Eclipse Residential Mortgage Investment Corp.

Andrew Jones, managing director of debt investments at Timbercreek Asset Management Inc., believes that’s good news for many investors who are shut out of the private MICs market, but want to invest in companies that manage a diversified and secured pool of mortgages.

“Many of the new public MICs/MIFs have existed privately for quite a while,” he said, noting, as a result, that total capital targeting mortgage investments remains stable.

“However, a public listing ensures the MIC is regulated and more transparent with improved reporting for investors. Additionally, there is daily liquidity for investors.”

Mr. Jones, whose firm runs two MIC products with a combined market cap of $700-million, said all of the TSX-listed MICs/MIFs have the same investment objectives to preserve capital and generate stable cash flow for monthly distributions to investors.

Targeted yields tend to be similar at 5% to 8%, but not every private or public MIC is created or operated on the same basis.

“Every fund is different: Some are dedicated to loans for single-family housing, some are focused on land and construction loans, and others secured by cash flowing properties, and some have a mix,” he said. “You need to dig down to the fund’s loans to determine this.”

Mr. Jones said there are several questions investors should get answered before choosing a MIC or MIF to invest in.

For example: What is the security backing the loan? How

Can freely trade investments that have traditionally

required a long-term investment

is the cash flow that is distributed to investors derived? And what is the percentage of loans in arrears?

Another important consideration is the diversification of loans in the portfolio, he said.

“Investors should check the MIC’s disclosure to make sure there’s not too much concentration, for example in one urban market, for their own comfort,” he said. “A strict asset allocation model ensures the portfolio is well diversified by geography, economic sector, term, borrower and loanto-value ratio.”

Mr. Tahiliani agrees investors must understand the underlying risk and return profile of both private and public MICs, but believes they are solid investment vehicles that help provide important diversification benefits.

“We have incorporated MICs in our portfolio mix to help lower volatility while seeking additional income for our clients,” he said.