Frontenac Mortgage Blog

Tapping Ontario’s Mortgage Sector for Stable Returns

Blog-Date-1Nov 05, 2018

The new mortgage rules that came into effect on 1 January 2018 have tightened the criteria for borrowers seeking a mortgage from Canada’s major financial institutions. Unsurprisingly, this has resulted in many prospective homeowners turning to alternative lenders for mortgage financing.

For Frontenac Mortgage Investment Corporation (MIC), this has resulted in a significant growth opportunity as Pillar Financial Services – the mortgage lender funded by Frontenac – has seen a surge in demand for its services. This growth is being compounded by Pillar’s recent expansion into Southwest Ontario, which is opening the door to new markets.

Our track record shows that Frontenac already has the strategic model and expertise needed to generate stable returns from Ontario’s mortgage sector. All we need now is a handful of new investors to build on this success during the current time of opportunity.

Managing Risk, Reducing Volatility

Launched in 2005 as the first MIC offered by prospectus in Canada, Frontenac has stood out from its peers since day one. Today, we remain the only MIC in Canada available by prospectus that is not listed on an exchange.

This is significant for our investors for two key reasons.

First, Frontenac has a different risk profile and investment procedure relative to all other non-listed MICs as they are offered via offering memorandum (OM). Investing in an OM-based MIC requires the signing of a risk form to acknowledge that any claims made in an OM are unverified as the MIC’s documentation is private. In contrast, Frontenac is fully transparent. Our prospectus is reviewed annually by the Ontario Securities Commission, and all our documentation is publicly available via SEDAR. Therefore, there is no requirement to sign a risk form when investing in Frontenac, resulting in less paperwork and a simpler investment process.

Second, the fact that Frontenac is not exchange listed means that we are less exposed to market volatility and the daily fluctuation often seen in the prices of publicly listed securities. Although we do still experience a degree of fluctuation in our unit value, Frontenac offers a higher degree of capital preservation relative to exchange-listed MICs. The implications of this limited volatility are evident in our stable returns, which have averaged between 5.5% and 6.5% per year since our launch.

Canada’s leading conservative MIC

Frontenac is managed by W.A. Robinson Asset Management, which over the past 40+ years has developed a sophisticated, leverage-free model for tapping into Ontario’s rural mortgage market. Our stable returns – with all net income paid out via monthly disbursements – are the result of several key strengths and advantages that set us apart in the MIC space:

The Frontenac portfolio is 99.8% first mortgages.

In contrast, most other MICs, even those that position themselves as conservative, have portfolios with second mortgages making up one- quarter to one-third of the total.

Significance for investors:

  • In general, first mortgages translate to lower risk . All other factors being equal, this allows Frontenac to offer a lower-risk investment opportunity compared to MICs with second mortgages making up a significant part of their portfolio.

Frontenac does not use leverage.

Many other MICs leverage their capital to secure a line of credit and then lend out these funds as mortgages. A leveraged approach exposes these MICs to more risk given the potential for interest rate hikes, and interest costs also eat into their profit margins.

Significance for investors:

  • Our leverage-free approach is an underlying factor in our stable returns, offering investors greater confidence that Frontenac can weather storms related to rising interest rates.

Frontenac specializes in residential mortgages.

We keep things clean and simple by steering clear of commercial mortgages.

Significance for investors:

  • Our focused approach makes it easier for investors to fit Frontenac into their overall investment strategy as a pure residential real estate play.

Frontenac avoids the GTA bubble.

We focus exclusively on the Ontario real estate market outside the Greater Toronto Area, so we face significantly less exposure to the risk of the GTA bubble bursting compared to MICs that are active in that region.

Significance for investors:

  • There has been no shortage of warnings regarding the risks of the GTA bubble. With Frontenac, investors can limit their exposure to this risk.

Frontenac employs quantitative risk management.

We use data-driven risk analysis to better understand risk, price it appropriately and overcome biases in the underwriting process.

Significance for investors:

  • Investing in Frontenac means investing in a professionally run MIC driven by data and expertise, boosting the prospects of stable returns.

mortgage investments versus equities

Ensuring the right fit

As a niche product, Frontenac is not the right fit for everyone. Currently, a fairly small base of advisors makes up our core group of investors. As part of our ongoing capital-raising efforts to tap the current growth opportunity, we are now looking to expand this exclusive group with a limited number of new advisors for whom the Frontenac offering makes sense.

Given our relatively stable returns and monthly disbursements, advisors typically incorporate Frontenac into their portfolios as an alternative to bonds and other fixed-income vehicles. These advisors tend to have expertise related to alternative investments, including experience with MICs, and use Frontenac to gain exposure to the mortgage sector with a different risk profile relative to MICs offered by OM.

As the only non–exchange-traded MIC offered by prospectus, Frontenac offers a unique opportunity to translate the current shift in Ontario’s mortgage sector into stable investment returns. The expertise and track record are already in place – all that’s needed now is to seize the growth potential.

To discuss whether Frontenac may be a good fit for your portfolio: