You’re going to hear a lot more about mortgage investment corporations in the near future.
MICs, as they are better known, are investment vehicles that offer mortgages to higher risk borrowers. Much like the old income trusts, they pass on their income from these loans to investors tax-free, and their distributions are then taxed as interest income rather than dividends.
Although the most recent MIC to catch the market’s attention is Trez Capital, which just closed its $100-million initial public offering of structured units, it was Timbercreek who really got Bay Street comfortable with this product. Firm Capital is also a MIC, but it differs from the other two because the entire firm is publicly traded, while Trez and Timbercreek have created individuals funds that trade.
These investment vehicles have been getting lots of attention because they’re right in the market’s sweet spot. Not only are they tied to real estate, which everyone seems to love right now, they offer juicy yields. Trez Capital’s latest deal went out at 7 per cent.
So what exactly do MICs do? Unlike banks, which more or less lend to stable borrowers at fixed rates, MICs lend to people like multi-residential property owners who need short-term cash to repair their units. The loan lengths might be six to 36 months, and the interest rate will float.
Make no mistake, banks and MICs aren’t lending to the same tier of clients. MICs undoubtedly offer riskier loans, and for that reason, it’s a bit odd that Trez and Timbercreek have targeted their funds directly to unsophisticated retail investors. In interviews, both firms acknowledged this mismatch, but they argue that their sophisticated management teams should suppress any fears. They say that as long as the loan portfolios are managed well, investors have no reason to worry.
Trez also noted that it's not as though the firm is out lending wildly to developers who are cashing in on Toronto’s condo boom. Managing partner Michael Nisker noted that MICs must have 50 per cent of assets in things like multi-residential apartments, student housing and seniors housing, and the balance goes out to a combination of commercial, industrial and office assets.
Still, retail investors should question why firms like Trez and Timbercreek have issued structured products rather than go public like Firm Capital. Currently, Firm’s yield is just north of 7 per cent, which matches Trez’s, yet retail investors who bought into Trez's recent IPO automatically lost 5.25 per cent of their investment when their units started to trade. This money went to brokers who get paid big commissions to sell these deals.
However, that doesn't seem to bother investors. Trez’s deal was oversubscribed. Timbercreek has also come to the market many times since it launched its first fund four years ago. If all goes according to plan, you can expect to see Trez again too. Mr. Nisker has plans to raise up to $500-million.