HarbourEdge Issues and Concerns
Dec 31, 2019 17:35:42 GMT
disappointedinvestor, forexloonie, and 2 more like this
Post by Moderator on Dec 31, 2019 17:35:42 GMT
Posted on behalf of marley
Starting in 2015 a “small group of investors” - ten that grew to over 100 in 2019 - asked HarbourEdge management for more information on the mortgage and real estate investments in the fund and requested Investor Meetings where management could explain the status of the portfolio and the financial statements.
GOVERNANCE
Caveat Emptor (buyer beware)
No outside, independent Directors. The Board consists only of the four senior officers of Harbour Edge including Larry Dunn, Tim Dwyer, Bob Turbitt and Steve Prest who is the Chief Investment Officer
Investors have few protections other than suitability requirements and the rights provided by the Ontario Business Corporations Act.
Harbour Edge management has put up total resistance to holding Annual Meetings or any Shareholder Meeting to present and review the financial statements
Directors not interested by Investors asks and feedback. Always willing to meet one on one or with small groups where the discussion can be controlled
Management gave itself total control over all decisions and contracted out of fiduciary responsibility while also granting itself complete indemnification against any and all possible claims. It is our position that they owe a fiduciary duty to investors.
Directors ignore their fiduciary duty. Repeatedly, Harbour Edge management has said what they are proposing is equally good for investors and Harbour Edge. Our position is that it is a fiduciary obligation of all investment managers that investors interests take priority – investors interests always come first in any fiduciary relationship.
Management has resisted repeated requests for more information on the portfolio – full transparency and disclosure. Numerous requests for additional information have simply gone unanswered.
Management has claimed continuously that they have substantial investments in the fund and that therefore their interests are aligned with the investors. In the Circular they wrote:
REDEMPTIONS
The ELO (early liquidity option at a 15% discount to NAV) was initiated in Q3 2015 when an investment advisor applied for redemption on behalf of many of their clients after becoming concerned with the quality of the mortgages in the portfolio.
The total ELO was $60 million of which $52 million came from the investment advisor and was not completed until January 2019
Regular redemptions were “suspended temporarily” in Q3 2015 and have not been resumed since.
We have been advised that redemptions on record are $80 million at the end of 2019
The various reorganization plans have each put a limit on the amount of redemptions that would be permitted such that redemptions would not be fully paid out for 3 – 5 years or longer.
THE MORTGAGE PORTFOLIO
Dividend steadily declined in the last 5 years. Interest earned from the Mortgage portfolio is the primary source of the funds ability to pay Dividends but the size of the mortgage portfolio has been declining steadily each year for the last 5 years to the point where at 06/19 it was $106.7 million and the impaired amount was $13.6 million which leaves $93.1 million as performing.
Mortgage foreclosures have increased each year (these are properties taken as settlement of debt) as per the financial statements which we believe understates the actual percentage of the portfolio that has been foreclosed
2015: 12.08%
2106: 27.58%
2017: 30.14%
2018: 37.54%
2019: 44.59%
The Shareholders Deficiency at June 30/19 was $21.9 million net of the ELO accounting gain of $9.1 million. Thus on a gross basis the Shareholder
Deficiency would have been $31.0 million. This $31 million is a direct result of reporting the value of the “assets taken as settlement of debt” at the lower of cost or market value. On the basis of “cost” (or debt owed by the borrowers at time of foreclosure) the face value of the defaulted loans that were foreclosed would actually be $126.3 million ($95.3 + $31.0). Using this grossed-up value for Assets Taken As Settlement of Debt would increase the total value of Loans and Mortgages + Assets Taken As Settlement of Debt from the reported $197.5 million to $228.5 million and the foreclosure rate would therefore be 55.3% ($126.8 million as a percentage of $228.5 million)
A foreclosure rate whether it be 45% or 55.3% exceeds that of any other MIC in Canada by a significant margin which combined with a write down of
$21 million makes the fund a high risk investment.
Although the contractual term of mortgages is short: 6-18 months (current average is 8.7 months which is up from 4.0 at 06/16). The reality is that actual maturities are much longer as borrowers have not repaid at contractual maturity and HMIC has almost always extended maturity dates sometimes several times, making these into medium or even longer term mortgages.
In a recent meeting management proudly stated that one mortgage has been on the books since the inception of the fund
Because Harbour Edge have foreclosed on so many mortgages it is difficult – without more complete disclosure – to know the financial capacity of current borrowers to repay their loans.
We have asked for estimated repayment dates for the mortgages to get a better idea of the quality of the mortgages but have had no reply
FORECLOSURES
Despite repeated requests for more detailed information on foreclosed properties Harbour Edge has failed to disclose this information
Court records exist for one property where Harbour Edge appointed a receiver and the record is revealing. The property is in Perth Ontario:
REAL ESTATE (HRAC)
The Schedules provided by Harbour Edge do not disclose enough information for investors to evaluate the quality of the properties or the possible risks and returns.
HarbourEdge has stated that their advantage is their expertise in construction and institutional finance whereas banks look at construction projects from a pure numbers point of view. Notwithstanding Larry Dunn has a reputation of being a successful developer HMIC is not a development company but is an alternative finance company which is a numbers business.
In an attempt to better understand future prospects for recovery in the property portfolio we have requested
Over the 2 months between April 30, 2019 and June 2019 two properties were revalued upward by an amount more than sufficient to offset 7 properties that were marked down in value. The two properties in question are Perth and the Minas NS property. The notes to the audited statements say that “assets are carried at the lower of cost and NAV”. We have asked management to explain how the upward revaluations of these properties can be justified?
FEES
HE management has suspended management fees since 2016 but have continued to charge and collect mortgage commitment fees which can be substantial. We have asked repeatedly for an accounting of all commitment fees paid to Harbour Edge over the past 4 years but have yet to receive a reply.
The only public record of commitment fees paid to Harbour Edge appear in court ordered receiverships. We have uncovered such records in the case of the Ottawa Holiday Inn project and Perth. In both cases the record shows that Harbour Edge collected over $500,000 in fees.
We have also asked for a detailed list of all defaulted loans where the commitment fee was not collected from the borrower as these fees may be recoverable by the fund rather than retained by management.
We have repeatedly stated that management fees should only be reinstated when investors capital has been fully restored + some opportunity cost to compensate investors for the loss of access to their capital.
FINANCIALS
Shareholders' Deficiency and Assets Taken in Settlement of Debt
Unaudited financial statements reported Shareholders' Deficiency of $14,062 at December 31, 2015. Six months later the June 30, 2016 audited statements reported Shareholders' Deficiency of $21,867,206. This deficiency of $21.9 million would have been $31.0 million except for the fact that HMIC recorded an accounting gain of $9.1 million in May 2016 from the ELO.
Over the same 6 months period Assets Taken in Settlement of Debt increased from $29,972,308 (Dec. 31/15) to $69,392,606 (Jun. 30/16).
Investors have never been given an explanation of specifically "what happened?" to cause such dramatic change in this 6 months period in either the unaudited or audited statements although the audited statements did note the $9.1 million gain from the ELO and HE did report that appraisals on many security properties came in much lower.
So "what happened?" is left for investors to figure out on their own, a challenging task with so little information.
It seems that Harbour Edge is capitalizing “carrying/developments costs”:
$5.3 million between June 2018 and April 2019 and a further $3.5 million between April 2019 and June 30 2019. We have asked them to explain how a dollar spent on carrying and development automatically increases the value to the property by a dollar?
The provision for credit losses (Note 4 on page 9) increased by $2,749,051 from $3,705,852 to $6,454,903 but was not reflected in the Income Statement. We have asked for an explanation.
INVESTOR QUESTIONS
1. Has HMIC updated your KYC?
2. Do you believe that HMIC preferred shares continue to meet your suitability requirements?
3. Do you think HarbourEdge should hold an annual meeting to present and explain the financial statements?
Starting in 2015 a “small group of investors” - ten that grew to over 100 in 2019 - asked HarbourEdge management for more information on the mortgage and real estate investments in the fund and requested Investor Meetings where management could explain the status of the portfolio and the financial statements.
GOVERNANCE
Caveat Emptor (buyer beware)
- Harbour Edge (Asset Management Corporation) is registered with the OSC as an exempt market dealer (EMD) and is a “non-reporting issuer” which means according to the OSC that “there are no terms or conditions for this registrant” and the only real protections investors have is the Know Your Client (KYC) and suitability requirements. After many discussions with senior OSC officials, it is clear that Harbour Edge, as an EMD, does not fall under their jurisdiction other than for suitability concerns or legal issues (such as the issuance of common shares for HRAC) especially as it is under a court ordered plan of arrangement.
- No HMIC personnel are registered with the OSC so that employees do not have to meet the OSC’s minimum education or registration requirements and are not subject to OSC compliance rules other than establishing “suitability” for each investor based on their KYC.
- HMIC is registered with FSRA (regulates mortgage brokering) as a “mortgage administrator”. Because HMIC has no employees registered as mortgage brokers it does not come under the jurisdiction of FSRA which means there are no regulatory protections available to investors as there are in the cases of Pace, Paramount and Fortress.
- Reality is that many investors did not read the Offering Memorandum or thoroughly or understand it. Many invested in HMIC on the basis of confidence and trust in management believing they had invested in a low risk fund where they could get their money back on demand. That trust and confidence has now been shaken though legally “caveat emptor” still applies especially to a non-reporting issuer such as HMIC
No outside, independent Directors. The Board consists only of the four senior officers of Harbour Edge including Larry Dunn, Tim Dwyer, Bob Turbitt and Steve Prest who is the Chief Investment Officer
Investors have few protections other than suitability requirements and the rights provided by the Ontario Business Corporations Act.
Harbour Edge management has put up total resistance to holding Annual Meetings or any Shareholder Meeting to present and review the financial statements
Directors not interested by Investors asks and feedback. Always willing to meet one on one or with small groups where the discussion can be controlled
- One investor has characterized these meeting as being more about “intimidation and dismissiveness”
Management gave itself total control over all decisions and contracted out of fiduciary responsibility while also granting itself complete indemnification against any and all possible claims. It is our position that they owe a fiduciary duty to investors.
Directors ignore their fiduciary duty. Repeatedly, Harbour Edge management has said what they are proposing is equally good for investors and Harbour Edge. Our position is that it is a fiduciary obligation of all investment managers that investors interests take priority – investors interests always come first in any fiduciary relationship.
Management has resisted repeated requests for more information on the portfolio – full transparency and disclosure. Numerous requests for additional information have simply gone unanswered.
Management has claimed continuously that they have substantial investments in the fund and that therefore their interests are aligned with the investors. In the Circular they wrote:
- “The principals, officers and directors of Harbouredge all have a significant amount of our net worth invested in Harbouredge and are truly personally invested in this result in the same way you are”
- After carefully examining the Shareholder list we could identify a total investment on the part of the management team and family members of $3.8 million. It appears that one member of the management team has no investment in the fund. In funds of this nature management is usually committed to the extent of 5% to 10%. (which would be $10 to $20 million in the case of Harbour Edge)
REDEMPTIONS
The ELO (early liquidity option at a 15% discount to NAV) was initiated in Q3 2015 when an investment advisor applied for redemption on behalf of many of their clients after becoming concerned with the quality of the mortgages in the portfolio.
The total ELO was $60 million of which $52 million came from the investment advisor and was not completed until January 2019
Regular redemptions were “suspended temporarily” in Q3 2015 and have not been resumed since.
- One investor stated in a letter to management that “your ability to freeze the fund should have been highlighted in bold on the first page” (of the OM)
We have been advised that redemptions on record are $80 million at the end of 2019
The various reorganization plans have each put a limit on the amount of redemptions that would be permitted such that redemptions would not be fully paid out for 3 – 5 years or longer.
THE MORTGAGE PORTFOLIO
Dividend steadily declined in the last 5 years. Interest earned from the Mortgage portfolio is the primary source of the funds ability to pay Dividends but the size of the mortgage portfolio has been declining steadily each year for the last 5 years to the point where at 06/19 it was $106.7 million and the impaired amount was $13.6 million which leaves $93.1 million as performing.
Mortgage foreclosures have increased each year (these are properties taken as settlement of debt) as per the financial statements which we believe understates the actual percentage of the portfolio that has been foreclosed
2015: 12.08%
2106: 27.58%
2017: 30.14%
2018: 37.54%
2019: 44.59%
The Shareholders Deficiency at June 30/19 was $21.9 million net of the ELO accounting gain of $9.1 million. Thus on a gross basis the Shareholder
Deficiency would have been $31.0 million. This $31 million is a direct result of reporting the value of the “assets taken as settlement of debt” at the lower of cost or market value. On the basis of “cost” (or debt owed by the borrowers at time of foreclosure) the face value of the defaulted loans that were foreclosed would actually be $126.3 million ($95.3 + $31.0). Using this grossed-up value for Assets Taken As Settlement of Debt would increase the total value of Loans and Mortgages + Assets Taken As Settlement of Debt from the reported $197.5 million to $228.5 million and the foreclosure rate would therefore be 55.3% ($126.8 million as a percentage of $228.5 million)
A foreclosure rate whether it be 45% or 55.3% exceeds that of any other MIC in Canada by a significant margin which combined with a write down of
$21 million makes the fund a high risk investment.
Although the contractual term of mortgages is short: 6-18 months (current average is 8.7 months which is up from 4.0 at 06/16). The reality is that actual maturities are much longer as borrowers have not repaid at contractual maturity and HMIC has almost always extended maturity dates sometimes several times, making these into medium or even longer term mortgages.
In a recent meeting management proudly stated that one mortgage has been on the books since the inception of the fund
Because Harbour Edge have foreclosed on so many mortgages it is difficult – without more complete disclosure – to know the financial capacity of current borrowers to repay their loans.
We have asked for estimated repayment dates for the mortgages to get a better idea of the quality of the mortgages but have had no reply
FORECLOSURES
Despite repeated requests for more detailed information on foreclosed properties Harbour Edge has failed to disclose this information
Court records exist for one property where Harbour Edge appointed a receiver and the record is revealing. The property is in Perth Ontario:
- Harbour Edge advanced $6.5 million in 2011 which after two extensions and additions became $16 million
- The borrower has been in default since December 2015 and HMIC appointed a receiver in May 2016 and 4 months later put the property up for sale at $15 million with no offers.
- Harbour Edge transferred property to HRAC in 2016 to “complete construction” and spent an additional $2 million bringing total debt (investor capital) to $18 million
- In a court filing in June 2019 HMIC declared the debt due from the borrower to be $29 million (accrued interest of $11 million)
- The borrower neglected to register the property as a condominium so that all deposits and sales had to be refunded.
- The borrower has been charged with multiple counts of fraud
- Perth is shown on HRACs property listing as having a 30/06/19 NAV of $13.7 million, a projected cost to complete of $750,000 and an anticipated Net Sales Price of $14.5 million.
REAL ESTATE (HRAC)
The Schedules provided by Harbour Edge do not disclose enough information for investors to evaluate the quality of the properties or the possible risks and returns.
HarbourEdge has stated that their advantage is their expertise in construction and institutional finance whereas banks look at construction projects from a pure numbers point of view. Notwithstanding Larry Dunn has a reputation of being a successful developer HMIC is not a development company but is an alternative finance company which is a numbers business.
In an attempt to better understand future prospects for recovery in the property portfolio we have requested
- proformas for all properties under or planned for development so that we can better understand how HRACs proposed development program will improve prospects for return of capital to investors.
- the amount of the debt on each property owed to HMIC at the point of foreclosure so that we can know how much investors capital is at risk.
- information on which properties have been appraised and when and whether done by an independent appraiser.
Over the 2 months between April 30, 2019 and June 2019 two properties were revalued upward by an amount more than sufficient to offset 7 properties that were marked down in value. The two properties in question are Perth and the Minas NS property. The notes to the audited statements say that “assets are carried at the lower of cost and NAV”. We have asked management to explain how the upward revaluations of these properties can be justified?
FEES
HE management has suspended management fees since 2016 but have continued to charge and collect mortgage commitment fees which can be substantial. We have asked repeatedly for an accounting of all commitment fees paid to Harbour Edge over the past 4 years but have yet to receive a reply.
The only public record of commitment fees paid to Harbour Edge appear in court ordered receiverships. We have uncovered such records in the case of the Ottawa Holiday Inn project and Perth. In both cases the record shows that Harbour Edge collected over $500,000 in fees.
We have also asked for a detailed list of all defaulted loans where the commitment fee was not collected from the borrower as these fees may be recoverable by the fund rather than retained by management.
We have repeatedly stated that management fees should only be reinstated when investors capital has been fully restored + some opportunity cost to compensate investors for the loss of access to their capital.
FINANCIALS
Shareholders' Deficiency and Assets Taken in Settlement of Debt
Unaudited financial statements reported Shareholders' Deficiency of $14,062 at December 31, 2015. Six months later the June 30, 2016 audited statements reported Shareholders' Deficiency of $21,867,206. This deficiency of $21.9 million would have been $31.0 million except for the fact that HMIC recorded an accounting gain of $9.1 million in May 2016 from the ELO.
Over the same 6 months period Assets Taken in Settlement of Debt increased from $29,972,308 (Dec. 31/15) to $69,392,606 (Jun. 30/16).
Investors have never been given an explanation of specifically "what happened?" to cause such dramatic change in this 6 months period in either the unaudited or audited statements although the audited statements did note the $9.1 million gain from the ELO and HE did report that appraisals on many security properties came in much lower.
So "what happened?" is left for investors to figure out on their own, a challenging task with so little information.
It seems that Harbour Edge is capitalizing “carrying/developments costs”:
$5.3 million between June 2018 and April 2019 and a further $3.5 million between April 2019 and June 30 2019. We have asked them to explain how a dollar spent on carrying and development automatically increases the value to the property by a dollar?
The provision for credit losses (Note 4 on page 9) increased by $2,749,051 from $3,705,852 to $6,454,903 but was not reflected in the Income Statement. We have asked for an explanation.
INVESTOR QUESTIONS
1. Has HMIC updated your KYC?
- According to the Canadian Securities Administrators (CSA) your KYC should include your age, objectives financial assets, liquidity needs, time horizon and risk tolerance and should be updated regularly.
2. Do you believe that HMIC preferred shares continue to meet your suitability requirements?
- According to the CSA A meaningful suitability assessment is required. Assessing suitability is more than a mechanical fact-finding or "tick the box" exercise. It requires meaningful dialogue with the client to obtain a solid understanding of the client's investment needs and objectives, and to explain how a proposed investment strategy is suitable for the client in light of the client's investment needs and objectives.
3. Do you think HarbourEdge should hold an annual meeting to present and explain the financial statements?