Magenta Capital Corporation (MCC) is one of Canada’s oldest (1994) and largest Mortgage Investment Corporation (MIC) managers with current mortgage assets under administration exceeding $125 million. Please refer to What Is A Mortgage Investment Corporation?
MCC sources, underwrites and manages a portfolio of primarily residential 1st mortgages, secured by properties located primarily in metropolitan Ottawa and Kingston, Ontario, two of the strongest, most recession resistant real estate markets in the country. The mortgage portfolio is funded by way of share capital and bank credit facilities. Revenues are generated primarily by mortgage interest, and secondarily by fees and penalties. Principal expenses are management fees and bank loan interest. The Income Tax Act requires that 100% of a MIC’s annual net income be distributed to its shareholders in the form of a dividend. The dividend may be received in cash, or reinvested by way of a stock dividend.
Shares may be held within an RSP, RRIF or TFSA or directly. Directly held shares may be registered individually, jointly, in trust or in the name of a corporation.
Magenta shares possess the key characteristics demanded by discerning investors:
1. High Return—Long Term Capital Appreciation
Magenta has an unbroken 18 year record of elevated shareholder returns having achieved an average annual compounded rate of return of 11.52% since inception. The Magenta II Class “A” Shares currently being offered are intended to generate a “Target Yield” of not less than the Government of Canada 2 Year Bond yield at the beginning of the fiscal year (June 1st) plus 5.50%. Over Magenta II’s first 9 years of operation ended May 31, 2011, the Target Yield has ranged from 6.76% (2010) to 10.10% (2008) with an average of 8.30%. The Class “A” Share average annual compounded rate of return was 9.46% in the first 9 years of operations. Investors have enjoyed watching every $1.00 invested steadily grow to $2.26. Please refer to the historical investment performance data attached.
As reflected in the comparative data attached, investment returns have exceeded those generated by Canadian short and long term bonds and major stock indices over the last 1, 5, 10 and 20 year periods.
The price paid for high investment returns over time is normally volatility—sometimes wildly fluctuating prices and unpredictable annual returns. Magenta has not only outpaced alternative investments in terms of long term capital growth—it has done so by way of consistently elevated returns achieved year in and year out, in good markets and in bad, over the last 18 years.
Magenta II share values do not fluctuate in response to market forces like publicly traded stocks, bonds and income trusts, or mutual fund unit values. Even investment grade bonds will decline sharply in value in response to a widely expected increase in interest rates. Shares have a constant value equivalent to issue price.
3. Capital Preservation/Risk
All savvy investors understand that there is indeed a positive correlation between risk and return. Magenta II shares are backed by a large, professionally managed, residential mortgage portfolio. Almost 90% of the portfolio is currently invested in 1st mortgages, secured primarily by single family, owner occupied homes. Lending activity is concentrated in the Ottawa and Kingston, Ontario regions. These real estate markets are inherently stable, strong and recession resistant by virtue of the significant presence of the public sector in both regional economies resulting in stable and appreciating property values. Portfolio exposure to rural and rental properties is expressly limited. Portfolio weightings and individual mortgage quality are verified by independent audit.
Any mortgage investment vehicle is ultimately only as good as the real estate securing the mortgages. This is particularly critical in bad economic times when default rates typically increase and property values may soften. Investors should look very carefully at the composition and quality of any lender’s mortgage assets. A mortgage investment vehicle wherein there is significant exposure to commercial, second and other higher risk mortgages, may generate good returns in good times, but is clearly more likely to suffer loan loss and diminished or even negative returns in bad times. By contrast, the overwhelming majority of Magenta II’s portfolio is always comprised of residential first mortgages. Moreover, the Company does not invest in mortgages secured by commercial real estate.
Similarly, a lender with significant exposure to geographical markets susceptible to a downturn in real estate values is vulnerable to a spike in default and loan loss that could erode investor returns and even result in a capital loss. Western Canada being a commodity based economy has historically been prone to boom bust cycles in real estate prices. The BC lower mainland market is particularly overheated and prices have already started to fall. SW Ontario’s traditional manufacturing based economy has yet to fully recover from the 2008-09 recession. The Toronto market has seen significant corrections in the past and many observers currently anticipate another sharp downturn given the substantial run-up in prices over the last decade largely fueled by historically low interest rates. Loan losses in Western Canada can also be magnified by borrower friendly mortgage laws that severely hamstring a lender’s ability to effect repayment of a mortgage in default and absolve the borrower of any personal liability in the event sale proceeds are insufficient to effect full repayment of principal and interest. By contrast, Ontario has the most lender friendly mortgage laws in the country. Lenders can initiate collection proceedings as soon as the mortgage is 15 days in arrears and the borrower is personally responsible for any shortfall.
Magenta’s lending activity is concentrated in Ottawa and Kingston, Ontario. Year over year average Ottawa house prices have only ever declined five times since 1956 with the largest annual decrease being 4.3% in 1961.
The Company applies a very disciplined, regimented and sophisticated approach to mortgage underwriting. All key variables impacting risk, including location, property type, credit rating (Beacon Score) income and employment are all incorporated into the underwriting model.
Mortgages produce regular income. As prescribed within the Income Tax Act (ITA), a Mortgage Investment Corporation (MIC) must distribute 100% of its annual net income to its shareholders in the form of a dividend. Magenta II shares have historically generated elevated levels of investment income relative to alternative fixed income investments such as bonds or GICs. Investors have the option of receiving their monthly dividends in cash by way of electronic bank deposit or reinvesting in additional shares.
Shareholders may redeem their shares with one month’s notice.
6. Management as Owner
Gavin Marshall, CEO, currently holds $5.8 million in shares ($2.4 million in Magenta II). The CEO has acquired an additional $3.1 million in shares since December 31, 2011 ($2.2 million in Magenta II). Consolidated employee investment is currently $6.8 million.
Magenta II shares offer an attractive combination of strong returns achieved year in and year out throughout our 18 year history, low risk by virtue of the strength and location of the residential real estate securing our mortgages, and the ability to pay regular income, that compares favourably with alternative fixed income investments and indeed with the full spectrum of investment options available today. Other mortgage investment vehicles may offer the promise of higher returns during a given year or market cycle by investing in higher risk mortgages secured by commercial and other non-residential real estate, real estate located in weaker markets more vulnerable to economic downturn, mortgages featuring weaker borrower covenants and second or lower ranking mortgages. However, this is inconsistent with our mission: to consistently generate strong, stable returns and preserve investment capital by investing in primarily residential 1st mortages in strong, stable, recession resistant real estate markets.
Magenta advises potential investors to read all informational material carefully before investing