Toronto, May 7, 2009– Home Equity Income Trust [TSX: HEQ.UN (HOMEQ or the Trust)], which pays cash distributions earned from a portfolio of reverse mortgages originated by Canadian Home Income Plan (CHIP), today announced its financial results for the quarter ended March 31, 2009.
Despite ongoing global financial and economic uncertainty during the quarter, the Trust again displayed resilience and produced encouraging results. “While we cannot know for certain that the worst is behind us, we are cautiously optimistic that recent developments internal and external to our business will continue to have positive effects on our performance”, said President and CEO Steven Ranson.
As announced in Q4, 2008, the Trust intends to apply to the Minister of Finance for its subsidiary, Canadian Home Income Plan (“CHIP”), to become a federally regulated Schedule I bank to be known as HomEquity Bank. At the April 30th annual and special meeting, the Trust‘s unitholders voted in favour of converting its business structure from an income trust to a taxable corporation (the “Conversion”) prior to HomEquity Bank being continued as a Schedule I bank. The objective of obtaining a bank charter is to enable HomEquity Bank to access retail deposits sourced through deposit brokers so as to grow the Trust’s consolidated reverse mortgage portfolio and increase its spread income. Retail deposits represent a stable and cost effective source of funds that will be used to supplement the wholesale funding strategy the Trust has followed since its IPO in 2002. “We are very pleased that our unitholders support our plan to continue CHIP as a bank. Obtaining unitholder approval for the conversion is a critical step in the process”, stated Mr. Ranson.
During Q1, the Trust continued to work diligently towards this end and, subject to the review and approval of its application by the Office of the Superintendent of Financial Institutions and the Minister of Finance, the Trust continues to target operating HomEquity Bank commencing in the third quarter of 2009. In the interim, the Trust has taken specific actions to conserve its cash resources. Steps have been taken to reduce the average mortgage amount for new customers and marketing activity has been scaled back. Until such time as HomEquity Bank becomes fully operational, these actions will result in originations being temporarily reduced. During the quarter the portfolio grew by 12% to $826 million and mortgage originations of $15 million were in accordance with guidance issued in Q4 2008.
As a result of conservative underwriting policies, the mortgage portfolio currently has an average loan-to-value of 36%, which will reduce an anticipated drop in residential real estate. Over the last several years HOMEQ has refined its underwriting inputs to reduce risk in the event of declining property values. In particular, better than expected experience with regard to assumed future interest rates and expected occupancy terms will help to offset the near term effects of falling real estate values. As at March 31, 2009 less than 2% of the portfolio had a loan to value of over 70% and less than 10% of the portfolio had a loan to value of over 60%.
In order to ensure immediate availability of funds to finance new originations, in 2008 the Trust increased its cash holdings to higher than historical levels. The increased level of cash has had a near term negative impact on normalized income as the interest rate earned on the investment of the cash balances is less than the cost of the debt. In addition, the difference between the Prime Rate and the rate on Government of Canada Treasury Bills (“T-Bills”), on which mortgage rates have historically been based, and the rate on Bankers’ Acceptances (“BAs”), on which the Trust’s debt and hedging instruments are based, deviated significantly from historical norms. Both of these situations have resulted in a reduction of spread percentage during the last year.
In response, in 2008 the Trust increased the interest rate charged for new mortgages and changed the interest rate reset methodology. These changes, however, will take some time to be fully reflected in the Trust’s results until such time as a greater proportion of the Trust’s portfolio is priced using the new methodology. In addition, during 2009, the difference between the T-Bills and BAs has begun to return to historical norms which, should it persist, will also help to restore spread percentage to higher rates. During Q1, 2009, spread percentage of 2.95% was in accordance with guidance issued in Q4, 2008.
Normalized income in Q1 2009 amounted to $3.1 million and normalized income per unit was $0.22 per unit, 25% lower than Q1 2008. During the quarter the Trust incurred $0.5 million of costs associated with the Conversion. Normalized income net of these costs was $3.6 million or $0.25 per unit, a decrease of 13% per unit from Q1 2008. The decrease is mainly due to the reduction in spread income earned on the portfolio as discussed above.
“It is our responsibility to consider the near and long term financial health of the Trust and to adopt measures that ensure the ongoing success of the business, recognizing that access to capital markets may remain difficult for some time. We are well positioned to take advantage of the significant benefits of CHIP’s continuance as a Schedule I bank and the eventual stabilization of the financial markets to continue to profitably build our portfolio.”
Quarterly Financial Statements and Conference Call
The Q1 2009 interim financial statements are available on the Trust’s website at www.homeq.ca and www.sedar.com.
HOMEQ will hold a conference call to discuss these financial results on May 8, 2009, at 8:30 am (Eastern).
Available on the call to answer questions will be Steven Ranson, President and Chief Executive Officer, and Gary Krikler, Senior Vice President and Chief Financial Officer.
To participate in the conference call, please dial 1-888-892-3255.
A live audio webcast (listen-only mode) of the conference call will be available at www.homeq.ca.
An archived recording of the call will be available at 1-800-937-6305 (conference ID 515746).
The Trust uses a number of financial measures to assess its performance. Some measures are calculated in accordance with GAAP, such as operating margin and net income. Other measures such as distributable cash and net spread are non-GAAP measures. These measures do not have standardized meanings under GAAP and may not be comparable to similar measures used by other trusts and companies.
Forward Looking Statements
Home Equity Income Trust from time to time makes written and verbal forward-looking statements about business objectives, operations, performance, and financial condition, including, in particular, the forecast of cash distributions and anticipated dividend policy, the Trust's plans relating to the conversion and the establishment of HomEquity Bank, and the likelihood of HOMEQ's success in developing and expanding its business. These may be included in the Annual Reports, regulatory filings, reports to unitholders, press releases, Trust presentations and other communications. These forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies as described in the Trust’s Annual Information Form and the Management Discussion and Analysis in its most recent financial statements, many of which are beyond the control of HOMEQ. Actual results may differ materially from those expressed or implied by such forward-looking statements. HOMEQ does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time except as required by applicable securities laws.
About Home Equity Income Trust
Home Equity Income Trust provides unitholders with monthly cash distributions from a portfolio of reverse mortgages originated by its wholly owned subsidiary Canadian Home Income Plan Corporation. As of March 31, 2009, the portfolio generating cash returns to the Trust comprised approximately 7,000 reverse mortgages with an accrued value of $826 million, secured by residential properties across Canada worth approximately $2.3 billion. CHIP (www.chip.ca), has been the main underwriter of reverse mortgages in Canada since pioneering the concept in 1986.
The Trust’s units trade on the Toronto Stock Exchange under the symbol HEQ.UN. Additional information on HOMEQ, including annual and quarterly reports can be viewed at www.homeq.ca.