You’ve probably never heard of a Mortgage Investment Corporation (MIC) as an investment. If you haven’t don’t fret, cause we hadn’t either, at least not until a few months ago. If you have, feel free to let us know your experience with them in the comments below.
A couple of months ago, the topic of Mortgage Investment Corporations (MIC) was brought to our attention. Having never heard of these entities before, we were undoubtedly curious. Following that initial conversation, where we were seduced with potential returns between 7% and 12%, we began a quest to find out more about these investment vehicles and the associated risks.
Not much is known about Mortgage Investment Corporations (MICs) owing to the fact that the vast majority of MICs are generally private companies. Thus, in order to compile the information below, we have had to rely heavily on the insights and expertise of Dougal Shewan, the President/Director for V.W.R. Capital Corp, a Mortgage Investment Corporation (MIC) and his associate Dimitri Kosturos.
Biography: Dougal Shewan is the President/Managing Broker for Royal LePage Wolstencroft, President of Dominion Lending Centres Valley Financial Centres Inc. and the President/Director for V.W.R. Capital Corp.
Dougal Shewan obtained his B.Comm and M.B.A. from the University of British Columbia. He holds membership in the Real Estate Institute of B.C., the Real Estate Institute of Canada and he holds the professional designations of RI and FRI.
In July 2000, Mr. Shewan was elected to the Real Estate Council of British Columbia. He served as vice chair and chair in 2005 and 2006 respectively. The Real Estate Council regulates the licensing, education and discipline of real estate licencees under the Real Estate Services Act for the Province of British Columbia. Dougal currently serves as a director of the Real Estate Errors and Omissions Corporation of British Columbia.
Dougal is a member of the Mortgage Brokers Association of B. C. and the Fraser Valley Real Estate Board. He was the 2006 recipient of the Fraser Valley Real Estate Board “John Armeneau Professional Award”.
Q: So what is a Mortgage Investment Corporation (MIC)?
A: Mortgage Investment Corporations are businesses established specifically for mortgage lending in Canada. MIC’s invest primarily in residential mortgages, but can also invest in commercial, industrial, development and construction mortgages. All of these mortgages are pooled together and shares are issued to investors. The investor benefits by having a large pool of secured and diversified mortgages.
MICs are similar to other corporations in that they elect directors and officers, appoint committees, hire employees, and issue shares. Generally, a MIC will authorize and issue several different classes of shares including common voting shares and preferred non-voting shares. While both share classes are entitled to receive dividends, it is the non-voting preference shareholder that normally receives them.
The MIC itself pays no income tax as the profits are flowed through to the shareholders and taxed at their hands. This is advantageous to an investor who has purchased M.I.C. shares through a self directed registered retirement savings plan (RRSP) or a self directed registered retirement income fund (RRIF), as the tax is deferred until the funds are redeemed or annuitized. In the case on Tax Free Savings Accounts (TFSA), the dividends earned are tax free when withdrawn. Individuals and other corporations are generally eligible to purchase M.I.C. shares; however, all M.I.C. dividend payments are deemed interest income for taxation purposes.
In essence, a M.I.C. is like a mortgage mutual fund.
Q: Mr Shewan, why don’t you tell us a little bit about your company, V.W.R. Capital? What are V.W.R. Capital’s goals/strategies going forward? Where would you like to see V.W.R. Capital in 3 years?
A: V.W.R. Capital Corp. (VWR) is a Mortgage Investment Corporation (MIC) established under the Income Tax Act (Canada). We are engaged in the business of providing private loans secured primarily by first and second mortgages against properties in British Columbia and Alberta. Since VWR is widely held (currently 326 shareholders), it issues an offering memorandum (OM), which details its complete operating activities. The OM is updated annually or sooner if operating policies have changed.
[Click Here To Read VWR Capital’s Offering Memorandum]
Our primary goal moving forward is to keep providing our investors with a stable and consistent rate of return. Over the last fifteen years, the return has averaged 11.23% net to shareholders. We accomplish this by maintaining prudent and conservative lending practices.
Over the next three years, we will continue to conservatively manage our portfolio and continue our growth, both from external and internal capital. VWR has approximately $90 million invested in private mortgages of which, approximately 70 percent are first mortgages. Over the next three years, the portfolio will grow depending on the demand for private mortgages. Currently VWR is preparing to enter the market in Manitoba on a conservative basis.
Q: What is the difference between a Mortgage Investment Corporation (MIC) and a publicly traded Real Estate Investment Trust (REIT)?
A: A MIC invests primarily in mortgages as required under the legislation in the Income Tax Act. I believe REIT’s invest primarily in revenue producing real estate.
Q: Are MIC’s, in general, and shares in V.W.R. Capital’s investment vehicle, RRSP and TFSA eligible? Can they also be held in non-registered accounts? Are there any conditions to investing in MIC’s, that is, does one have to be an accredited investor or is there a minimum investment etc.?
A: MIC’s are qualified RRSP, RRIF, TFSA and RESP investments. VWR currently accepts investments from registered as well as non-registered accounts. In the case of VWR, we do not have a minimum investment requirement and there is no requirement to be an accredited investor as we issue an OM that is filed with the B.C. Securities Commission (BCSC). VWR takes deposits each quarter and files the appropriate quarterly reports with the BCSC.
Q: How does that an investor in a MIC or V.W.R. Capital keep abreast of the news or the financial results or their investment and the company that is offering that investment? As public companies are expected to file audited financial statements and release material news to the markets is a similar requirement imposed on companies that offer MIC’s as investments?
A: VWR has its financial statements audited and has an annual general meeting as required under the Business Corporation Act. VWR has recently commenced the delivery to its shareholders, two additional newsletters throughout the year, along with the annual reporting letter. As well, the Board of Directors meet two or three times per year for formal Director’s meetings. Finally, given that VWR has a line of credit of $35,000,000 with a major chartered bank, the bank requires monthly reports, audit financial statements and performs their own annual audit. A loan of this magnitude by a chartered bank must indicate a significant level of confidence in VWR.
Q: What are some questions a prudent investor should ask before investing in a Mortgage Investment Corporation?
1. Does the MIC have an information package outlining the investment policy and costs? The package should include the following minimum information:
- Maximum loan to value on any one property;
- Maximum amount as a percentage or in total dollars that can be invested in any one mortgage or to any one mortgagor;
- Policy towards mortgages against commercial and industrial properties and against bare land;
- Policy towards construction financing;
- Location of the mortgages;
- And policy with respect to mortgages on properties that are more expensive.
2. Does the MICs credit committee review each mortgage? In most situations, mortgage brokers manage MICs. The broker should not act as a member of the credit committee, as this puts him/her in a direct conflict of interest given that brokers usually earn a commission for placing the mortgages.
3. Do the directors, members of credit committee and fund manager have their own funds invested? Although a yes to this question does not provide a risk-free investment, it should provide some increased security if assessed in conjunction with other prudent lending policies.
4. Is the MIC levered? Some MICs are levered by a financial institution like a chartered bank. The financial institution will accept certain mortgages owned by the MIC as security for a line of credit. The M.I.C. will then borrow from their line of credit and lend the funds at a higher rate. Generally, levered MICs will be subject to strict lending policies by the financial institution. This should provide for further scrutiny of each mortgage.
5. Can I have copies of audited financial statements? It is important that an accountant conversant with MICs prepare these statements. Audit procedures should ensure strict adherence to the policies stated in the information package.
Thank you Mr. Shewan & Mr. Kosturos!
It’s now time for me to hear from you. After reading the information above, would you consider investing in a Mortgage Investment Corporation (MIC)? If you are already invested in a Mortgage Investment Corporation (MIC) or know someone who has, let us know about your experience in the comments below.
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