“Risk” refers to the possibility of loss of principal, or alternatively to a rate of investment return below expectations or requirements.
Dividend income investments such as securities of mortgage investment corporations (“MIC”) are generally considered to be a more conservative investment than other securities, but these types of investments still carry a variety of risks that investors need to be aware of. Diversification can be a good way to minimize many of the risks inherent in MICs and is something you should discuss with your professional advisor. Before making investment decisions, investors should carefully consider whether investment products/services are suitable considering their financial position, investment objectives and experiences, risk tolerance and other relevant circumstances. Meanwhile the following is a summary of some of the risks associated with EquityLine MIC and similar MICs investors should understand.
• Changes in Land Values. The Corporation’s investments in mortgage loans will be secured by real estate, the value of which can fluctuate. The value of real estate is affected by general economic conditions, local real estate markets, the attractiveness of the property to tenants where applicable, competition from other available properties, fluctuations in occupancy rates, operating expenses and other factors. In particular, recent disruptions to the credit and financial markets in North America, Europe and worldwide and local economic disruptions in areas where the borrowers of the mortgage loans are located may adversely affect the value of the real estate on which the mortgage loans are secured and the ability of the borrowers to repay the mortgage loans and thereby negatively impact the Corporation’s business and the value of its mortgage portfolio and securities. While independent appraisals are often obtained before the Corporation makes any mortgage investments, the appraised values provided therein, even where reported on an “as is” basis, are not necessarily reflective of the market value of the underlying real property.
• Securities not liquid. Our Series B preferred shares and Series H preferred shares are not liquid. There is no market through which they can be sold by purchasers in Canada. They are also subject to a number of transferability and resale restrictions which means holders may not be able to sell these securities unless they can rely on an exemption from the prospectus registration. However, they can be redeemed under the terms of our redemption policy as described in the Offering Memorandum.
• Speculative Nature of the Our Securities. Our securities should be considered speculative due to the nature of the Corporation’s business and involves certain risks. There is no guarantee that an investment in the securities of the Corporation will earn any positive return in the short or long term and investors must be able to bear the risk of a complete loss of their investment and have no need for immediate liquidity in their investment.
• Cash Limit on Paying Redemptions. Redemption rights under the Articles of the Corporation are restricted and provide only a limited opportunity for shareholders to liquidate their investment in the shares of the Corporation.
• No Assurance of Achieving Investment Objectives or Paying Distributions. There is no assurance that the Corporation will be able to achieve its investment objectives or be able to pay distributions at all or at the targeted levels or preserve capital.
• Limited Voting Rights. The shareholders of preferred shares of the Corporation have limited voting rights and are not be entitled to receive notice of or to attend any meeting of shareholders of the Corporation or to vote at any such meeting, except in cases where a fundamental change to the Corporation or change to the terms of the applicable class or series of Offered Shares is proposed.
• Concentration and Composition of the Portfolio. The Portfolio is primarily invested in residential mortgages although the Corporation also may hold some cash and cash equivalents on a transitional basis. As of the date hereof, the Portfolio does not include any commercial mortgages or any residential mortgages outside of Ontario. The Portfolio is currently invested in the Province of Ontario, Canada. A lack of diversification may result in the Corporation being exposed to economic downturns or other events that have an adverse and disproportionate effect on particular types of security, industry or geography. Investments in mortgages are relatively illiquid.
• Subordinated Loans and Mortgages. Some of the mortgages in which the Corporation intends to invest may be considered to be higher risk than conventional senior debt financing because the Corporation may not have a first-ranking charge on the underlying property.
• No Guarantees. There can be no assurance that mortgage loans of the Corporation will result in a guaranteed rate of return or any return to holders of Offered Shares or that losses will not be suffered on one or more mortgage loans. Moreover, at any point in time, the interest rates being charged for mortgages are reflective of the general level of interest rates and, as interest rates fluctuate, it is expected that the aggregate yield on mortgage investments will also change.
• Reliance on Borrowers Insurance. After funding a mortgage, although the Corporation may monitor the situation and has its own limited insurance policies in place, the Corporation relies upon borrowers to maintain adequate insurance and for proper adherence to environmental regulations.
• Competition. The performance of the Corporation depends, in large part, on the Manager’s ability to source or acquire mortgage loans at favourable yields. The Manager competes with individuals, corporations and institutions for investment opportunities in the financing of real property. Certain of these competitors may have greater resources than the Corporation and may therefore operate with greater flexibility. As a result, the Manager may not be able to source or acquire sufficient mortgage loans at favourable yields or at all.
• Sensitivity to Interest Rates. If there is a decline in interest rates (as measured by the indices upon which the interest rates of the Corporation’s mortgages are based), the Corporation may find it difficult to source or otherwise generate additional mortgages bearing rates sufficient to achieve targeted annualized dividends or other distributions on its outstanding securities.
• Fluctuations in Dividends. The funds available for dividends will vary according to, among other things, the value of the Portfolio and the interest and fees earned thereon. Fluctuations in the market value of the Portfolio may occur for a number of reasons beyond the control of the Manager or the Corporation.
• Availability of Investments. Because the Corporation relies on the Manager and its Affiliated brokerage, EquityLine Financial, to source mortgages it invests in, the Corporation is exposed to adverse developments in the business and affairs of the Manager and EquityLine Financial, to the management and financial strength of each and to the ability of each to operate its business profitably.
• Risks Related to Mortgage Extensions and Mortgage Defaults. The Manager may from time to time deem it appropriate to extend or renew the term of a mortgage past its maturity, or to accrue the interest on a mortgage, in order to provide the borrower with increased repayment flexibility. In these circumstances the Corporation is subject to the risk that the principal and/or accrued interest of such mortgage may not be repaid in a timely manner or at all, which could impact the cash flows of the Corporation during the period in which it is granting this accommodation. Further, in the event that the valuation of the asset has fluctuated substantially due to market conditions, there is a risk that the Corporation may not recover all or substantially all of the principal and interest owed to the Corporation in respect of such mortgage.
• Renewal of Mortgages Comprising the Portfolio. There can be no assurances that any of the mortgages comprising the Portfolio can or will be renewed at the same interest rates and terms, or in the same amounts as are currently in effect.
• Foreclosure and Related Costs. One or more borrowers could fail to make payments according to the terms of their loan and the Corporation could therefore be forced to exercise its rights as mortgagee. The recovery of a portion of the Corporation’s assets may not be possible for an extended period of time during this process and there are circumstances where there may be complications in the enforcement of the Corporation’s rights as mortgagee. Legal fees and expenses and other costs incurred by the Corporation in enforcing its rights as mortgagee against a defaulting borrower are borne by the Corporation.
• Conflict of Interest. Directors and officers of the Corporation are, and may continue to be, directors, officers or shareholders of other entities, including the Manager and EquityLine Financial, whose operations may, from time to time, be in direct competition with those of the Corporation or with entities which may, from time to time, provide financing to, or make equity investments in competitors of the Corporation.
• Non-Arm’s Length Transactions. Certain transactions contemplated by the Corporation’s structure involve non-arm’s length parties. As such, certain contractual terms usually contained in documentation that is negotiated at arm’s length are not necessarily included in the agreements among the Corporation, the Manager and EquityLine Financial as those terms would not have the same effect as they would in transactions between unrelated parties.
• Litigation Risks. The Corporation may, from time to time, become involved in legal proceedings in the course of its business. The costs of litigation and settlement can be substantial and there is no assurance that such costs will be recovered in whole or at all.
• Securities Regulatory Risks. In the ordinary course of business, the Corporation may be subject to ongoing reviews by the securities regulators, who have broad powers to pass, interpret, amend and change the interpretation of securities laws from time to time and broad powers to protect the public interest and to impose terms, conditions, restrictions or requirements regarding registration under securities laws. Further, the securities regulators have the authority to retroactively deny the benefit of an exemption from prospectus or registration requirements otherwise provided for in the securities laws where the regulator considers it necessary to do so to protect investors or the public interest. While management of the Corporation believes that its position regarding compliance with securities laws is appropriate and supportable, it is possible that securities matters may be reviewed and challenged by the securities authorities. If such challenge were to succeed, it could have a material adverse effect on the Corporation. There can be no assurance that Applicable Securities Laws or the securities regulators’ interpretation thereof or the practices of the securities regulators will not be changed or re-interpreted in a manner that adversely affects the Corporation.
• Ability to Manage Growth. The Corporation intends to grow its mortgage portfolio. In order to effectively deploy its capital and monitor its loans and investments in the future, the Corporation will need to retain additional personnel and may be required to augment, improve or replace existing systems and controls, each of which can divert the attention of management from their other responsibilities and present numerous challenges. As a result, there can be no assurance that the Corporation will be able to effectively manage its growth and, if it is unable to do so, the Corporation’s mortgages, the Portfolio and the price of the Offered Shares, may be materially adversely affected.
• Qualification as a MIC. Although the Corporation always intends to qualify as a MIC, no assurance can be provided in this regard. If for any reason the Corporation does not maintain its qualification as a MIC under the Tax Act, dividends paid by the Corporation on its securities will cease to be deductible by the Corporation in computing its income. They will also no longer be deemed to have been received by holders of securities as interest or a capital gain, with the result that the combined corporate and shareholder tax may be significantly greater.
• Reliance on the Manager. Pursuant to the Management Agreement, the Manager will advise the Corporation in a manner consistent with the investment objective, the Portfolio Restrictions and the investment restrictions of the Corporation and will be responsible for the management and direction of the affairs of the Corporation relating to the administration and evaluation of the existing and potential mortgages of the Corporation.
• Reliance on Key Personnel. The Corporation’s success depends in large measure on certain key executive personnel of the Corporation, and as a result of the Management Agreement, key executive personnel of the Manager. The loss of services of such key personnel could have a material adverse effect on the Corporation.
• Employee Errors or Misconduct. There have been a number of highly publicized cases involving fraud or other misconduct by employees in the investment industry in recent years and, notwithstanding the measures we intend to take to deter and prevent such activity, there is the risk that employee misconduct could occur. Misconduct by employees could include binding us to transactions that exceed authorized limits or present unacceptable risks, or concealing from us unauthorized or unsuccessful activities, which in either case, may result in unknown and unmanaged risks or losses.
• Borrowing and Leverage Risks. The Corporation may borrow funds using its mortgages as security in order to provide operating flexibility. In the event that the Corporation could not meet the obligations of such loans pertaining to the payment of interest or the repayment of principal, the Corporation could incur substantial costs in order to protect the investments of the Corporation while managing the repayment of such a loan facility and/or the Corporation could lose some or all of its assets as a result of lenders exercising their rights of foreclosure and sale.
• Potential Liabilities Associated with the Purchase of Mortgages. Although the Corporation completes due diligence reviews in respect of any mortgage it intends to purchase, there may be liabilities and contingencies that the Corporation did not discover or failed to quantify in its due diligence conducted prior to consummation of any mortgage acquisition and accordingly, the Corporation may not be indemnified for some or all of these liabilities and contingencies, which will negatively affect distributions to holders of securities of Corporation.
• Restrictions on Ownership and Repurchase of Shares. Under the Income Tax Act (Canada) as a MIC no shareholder of the Corporation is permitted, together with related persons, at any time to hold directly or indirectly more than 25% of any class or series of the issued shares of the Corporation. The Corporation has the right to repurchase any such shares and such repurchases of shares could be significant and could engender similar risks to those that arise in the context of significant redemptions of shares.
• Change in Legislation. There can be no assurance that certain laws applicable to the Corporation, including Canadian federal and provincial tax laws, tax proposals, other governmental policies or regulations and governmental, administrative or judicial interpretation thereof, will not change in a manner that will adversely affect the Corporation, its business or fundamentally alter the tax consequences to shareholders acquiring, holding or disposing of the Corporation’s securities.
• Reliance on Assumptions. The Corporation’s investment objectives and strategy have been formulated based on the Manager’s analysis and expectations regarding recent economic developments in Canada, and specifically Ontario. Such analysis may be incorrect and such expectations may not be realized; in which case the Corporation may not generate sufficient funds to allow the Corporation to pay targeted distributions.
The specific risk factors related to our Series B preferred shares and Series H preferred shares are set out in more detail under the “Risk Factors” section of our Offering Memorandum which can be obtained from our website at equitylinemic.com or from the dealing representatives engaged to sell our securities. The specific risk factors related to our Series A preferred shares are set out in more detail under the “Risk Factors” section of our prospectus dated November 21, 2018 which is available on the Jamaican Stock Exchange website and in the “Documents” section of this website.