Niche lender Equitable Group announced strong second quarter results Friday.
Some highlights:
- Its mortgage portfolio has doubled in the past five years to reach $10 billion
- In the last year alone, its single-family mortgage originations jumped 65% to $483 million
- Its Q2 net income jumped 40% YoY.
“This growth (in single family balances) reflects not only strong production numbers, but also success with our retention methods,” said president and CEO Andrew Moore during the company’s earnings conference call.
Here are other noteworthy blurbs from the company’s Q2 earnings release, conference call and analyst coverage:
- The company says its growth in production reflects “The strength of Equitable’s relationships with its mortgage broker network, strong activity in real estate markets and changes in the competitive environment.”
- National Bank Financial (NBF) sees several factors contributing to Equitable’s positive outlook, including:
- Modest competition in non-prime lending
- Market share gains from financial institutions that have reduced lending to self-employed borrowers due to “more scarce bulk insurance from CMHC and greater scrutiny on mortgage underwriting standards from OSFI”
- An improving margin mix as the company focuses on originating higher-margin non-prime residential mortgages. (NBF says spreads on Equitable’s non-securitized loans are “typically 200 bps wider” than for securitized mortgages.)
- Equitable is currently underwriting:
- “hardly…any condos” in the Toronto region as it sees heightened risk in that market
- “5-10%” lower loan-to-values in the Vancouver market as prices are “more susceptible to softness”
- “5% less” loan-to-value in Calgary than Ontario due to a “lack of strength in the covenant” (i.e., It’s easier to “walk away from your mortgage.” For this reason, Equitable has always had lower LTVs in Alberta.)
Steve Huebl, CMT
Once Equitable finds a way to securitize uninsured mortgages, the stock will double.
You could say the same for Home Trust and other alternative lenders.
Is this a public company? I’d love to short the stock… The way you describe it, well it frankly excites me…
This is indeed a public company. Ticker is ETC on the TSX. Its larger rival, Home Trust, is also TSX-listed; ticker HCG. Have fun shorting stocks that are trading at 5.5 and 6.5 times earnings. If you were a mutual fund manager, I would short you.
You don’t know that ETC is public but you want to short it. Is that a joke?
The best thing about dumb shorts is that they cover too late. If there is one thing you remember in life let it be this: Cocky investors get their heads squeezed like a teenage pimple.
Both of thses companies are well run money spinners. Of the two; Home Trust is the more interesting stock because of its larger capital base and its management’s depth of experience in handling real estate downturns.
That being said; shorting a stock is not just a function of a vote against management nor simply a decision based on price /earnings ratios.
Although both of these companies can withstand a downturn in the real estate markets they will be singled out; rightly or wrongly, as exposed to a reversal in property prices and most likely once it becomes clear to everyone that house prices are going backwards these companies (and the big banks for that matter) will see their share prices drop.
That’s all a short seller needs: share prices drop at the right time and the short seller profits.
So although these are great companies, this precise time in the Canadian real estate cycle may make them a short seller target.
Home Trust was heavily shorted down to $42 in June. It’s now almost $50. How did that work out for the shorts?
Careful what you wish for boys…when something increases in value this quickly, especially stock, it may be time to excercise more than ususal strict due diligence, especially in this environment. On the flip side if they are good to brokers, power to you, so get your deals funded. However be wary of the stock pricings.Time in marker beats market timing.
Believe me I am NOT a short seller. I also was aware there was activity on HCG in June from an article in the Globe last week.
Both of these companies are terrific lenders for the brokerage community and are becoming bigger partners as more lenders change to adapt to B-20 guidlines.
My observations are about a trying to profit from a changing market cycle in Real Estate world.
HT is a good stock for delivering excellent ROE (25%+) consistently and is a bargain at its current price. The real concern for me would be their sucession plan; not sure there is another Gerry Soloway in the ranks.
ETC is also an undervalued and under-traded stock. It too has started delivering 20+% ROE. The difference between the two companies is that one is in its infancy while the other is in maturity. Both will play a crucial role in filling the gaps created by tighter lending by the banks precipitated by the Feds. So the intermediate future is bright for both companies.
You short based on future earnings, not historical… Wayne Gretzky says go where the puck will be, not where it is currently.
Problem is, you don’t know where the puck will be.
Where do the loan-to-value statistics come from?