The COVID-19 pandemic has disrupted daily life across Canada, with individuals, businesses and governments significantly impacted. Understandably, this upheaval has sparked concern among Canadians regarding their finances and investments.
At W.A. Robinson group, we are committed to clear and open communication with our investors and partners to answer their questions and alleviate their concerns. With this in mind, our CEO Matthew Robinson shares his insights on the current situation in the following Q&A.
Your COVID-19 Questions Answered
What is Frontenac’s mandate, and has it changed during the COVID-19 pandemic?
At Frontenac, our mandate is straightforward: capital preservation with a consistent return. What does this mean in practice? It means that not losing your money is more important to us than doubling it.
We’ve been in business for over 37 years, and since the beginning, our approach has remained consistent. We acknowledge that our investors have entrusted their money to us to invest responsibly, so we don’t take big risks. During boom times, some people dismiss this approach as they see it as missing out on higher returns. We have seen this a lot in recent years, when financial decision-making for many people resembled gambling more than investing. Yet during downturns – like the one we’re facing now – the value of our conservative mandate really comes into focus.
How is the pandemic affecting Frontenac?
We’ve transitioned quite well as circumstances have changed, and most of our team is currently working from home. Finance has been deemed an essential business, so we’ve continued to operate throughout the pandemic.
We were well prepared for the shift to remote work as this was already part of our growth strategy. On the other hand, we’re a tight-knit group and so we miss seeing each other at the office. Some of our partners such as mortgage brokers and appraisers have seen their work become more complicated as working on-site with clients has become more challenging.
Restrictions on new building permits have delayed the closing of new construction loans, yet Pillar (our mortgage lending operation) has seen an overall increase in new mortgage applications in the past couple months. Meanwhile, we have so far seen no significant financial impact on our Frontenac fund and investor returns.
What risk management steps have you taken to protect Frontenac staff and operations?
As a conservative organization operating in the financial sector, risk management is at the core of what we do. This means that we have proactively developed, reviewed and updated our risk management plans over the years. These plans prepare us to respond and adapt quickly in all sorts of scenarios, from blackouts and fires to financial downturns and pandemics. Our proactive planning and preparations have helped us keep our staff safe and maintain smooth operations with minimal disruption.
What safeguards are in place to protect Frontenac investors and preserve their capital?
Investors trust us because we act with competency, consistency and care. We take this trust very seriously, and so we put numerous safeguards in place to ensure capital preservation and help us deliver a consistent return.
Pillar offers only first mortgages in Ontario outside the GTA with the loan-to-value ratio capped at a maximum of 80%. First mortgages mean we’re first in line to recoup our money if something goes wrong, and the maximum loan-to-value ratio of 80% means we have a healthy equity cushion in the event of a default.
Meanwhile, we’re in a very good cash position currently, and we don’t use leverage. Although we have a line of credit, we use this to manage our cash flow rather than to finance investments. Taken together, these factors point to a strong financial position.
Have you conducted financial stress testing of operations, and if so, what did the process reveal?
Stress testing is part of the underwriting process for every Pillar mortgage. Our team looks closely at every application to understand all aspects of the applicant’s story and assess their ability to service a mortgage. We consider how their ability to make mortgage payments would be affected in different scenarios, and then we price our mortgage to reflect the level of risk. We have also carried out analysis to understand how Frontenac could be affected if Pillar were to see an increase in defaults on its mortgages.
Given all the safeguards mentioned above, we believe Frontenac is in a healthy position currently and well prepared should defaults begin to rise.
Why is Frontenac in a better position than many of your competitors?
When I look at our competitors, I see a lot of leverage. While this can drive rapid growth in boom times, it also poses a risk for capital preservation. Many mortgage investment corporations (MICs) are sold by offering memorandum, which is not public. This means there is less transparency regarding their operations and financial performance, but there have been signs that some of these competitors are facing challenges currently. There are also MICs that are publicly traded on the TSX, and some of these have seen sharp drops in their share prices.
While all MICs tend to be grouped together, there are in fact vast differences in the risk profiles of their underlying portfolios and structures. For Frontenac, our no-leverage strategy and focus on owner-occupied residential first mortgages with a maximum loan-to-value ratio of 80% are huge differentiators in terms of risk level. Other MICs with a less conservative approach are likely facing significantly higher risk factors currently.
There are many competitors in our industry, so investors have plenty of options. People choose to invest in Frontenac because we’re conservative. I’m proud that we have not lost money for any of our investors in more than 37 years thanks to our competency, consistency and care. I believe these traits will continue to serve us well as we face the current crisis.
What are your hopes for the months ahead?
First and foremost, I would like to see this pandemic behind us. This is clearly a sad and scary time for many people, and so the sooner it’s over, the better. At the same time, I’m encouraged by the way we’ve come together as Canadians to take this seriously and behave responsibly. We’re going to get through this, and I hope we will rally to help those who have been hit the hardest when we emerge at the other end.
From a financial perspective, I hope we learn from these difficult times and remember these lessons going forward. As the dust from this pandemic settles, we will have an opportunity to look at our lives holistically – in terms of our families, our priorities and our finances – and choose more meaningful and sustainable paths forward. That’s my hope for the better days to come.