Builders Capital Mortgage Corp.
TSX VENTURE : BCF

Builders Capital Mortgage Corp.

May 09, 2016 08:00 ET

Builders Capital Mortgage Corp. Reports 2016 Q1 Results

Income Exceeds Funds Required to Pay Dividends to Public Shareholders by 2.7 Times; Company Maintains Focus on Geographic Diversification, Year-Over-Year Debt-To-Equity Ratio Significantly Reduced

CALGARY, ALBERTA--(Marketwired - May 9, 2016) - Builders Capital Mortgage Corp. (TSX VENTURE:BCF) (Builders Capital or the company) today released financial results for the three months ended March 31, 2016, which represents the first quarter of the company's 2016 fiscal year. Under the two-tier share structure established at its inception as a publicly traded mortgage investment corporation (MIC) in 2013, Builders Capital grants full dividend priority to publicly-held Class A Non-Voting Shares over Class B Non-Voting Shares held by management and private investors.

"As expected, our first quarter results were impacted by the challenges that our primary Southern Alberta marketplace continues to experience; however, given the current economic climate, we are pleased with our financial performance," said Sandy Loutitt, President of Builders Capital. "Consistent with Q1 2015, earnings during the first quarter exceeded the amount required to pay planned Class A Non-Voting Share dividends by a healthy 2.7 times."

"In addition to continuing to geographically diversify our portfolio, we have significantly reduced our use of leverage, bringing our debt-to-equity ratio down to 7.1% from 17.2% at March 31, 2015," Loutitt continued. "We remain comfortable with the value of our portfolio and confident in our ability to prosper through difficult times."

First Quarter Financial Results

In the first three months of 2016, Builders Capital generated mortgage revenue of $898,000, which was improved over the $879,000 recorded in the final quarter of last year but down by $67,000 from the $965,000 generated Q1 2015. The 2016 Q1 revenue represented annualized gross revenue of 15.4% of the weighted average gross share capital, compared to 16.1% in the same period last year. Revenue consisted of $821,000 in interest and $77,000 in lender fees charged to borrowers. Lender fee revenue for the period exceeded management fees by $19,000, or 32%.

First quarter operating expenses of $80,000 were unchanged from 2015, representing 8.9% of revenue, compared to 8.2% of revenue last year. The 2016 operating expenses were within expectations and compared favourably to the 10.7% of revenue forecast in the company's business plan.

Builders Capital set aside $66,000 during the quarter to provide for loan losses. This amount was based on a current analysis of the construction finance marketplace by Builders Capital Management Corp., which manages the company's mortgage portfolio, as well as an analysis of historical bad debts. It is a collective provision and does not relate to any individual mortgage. To-date, Builders Capital has set aside a total of $663,000 for loan losses, which it believes is sufficient to cover potential write-downs in the company's mortgage portfolio. The accumulated balance includes $130,000 that has been applied to a 2015 property foreclosure.

Comprehensive income for Q1 was affected by the slowing of the Alberta real estate market, as well as more cautious use of the company's line of credit. The credit balance decreased by 6.4% to $726,000, or $0.31 per share from $775,200, or $0.32 per share, in Q1 2015. Consistent with last year, first quarter income translates into earnings of $0.53 per Class A Non-Voting Share.

Mortgage Portfolio

At March 31, 2016, Builders Capital's mortgage portfolio consisted of 32 mortgage loans with an aggregate value of $24.4 million. All mortgage transactions conducted during the year were consistent with Builders Capital's tight focus on financing short-term, wood-frame residential construction in strong urban markets. During the first quarter, mortgages were purchased or funded in the amount of $4.2 million, and $4.3 million was received as proceeds of sale, or as repayments on loans. The acquisition of $1.4 million and sale of $1.1 million in mortgages helped to ensure full cash utilization and create the needed liquidity. As expected, with the considerably slower real-estate market in Alberta, which has resulted in borrowers taking substantially longer to sell their completed projects, Builders Capital saw a concurrent year-over-year reduction in its capital turnover. During the three months, the company turned over 19.3% of its invested capital, compared to 35.7% in Q1 2015.

At quarter-end, mortgages on properties in Alberta represented 84% of the portfolio, compared to 87% at the end of Q1 2015, while mortgage holdings in British Columbia had been increased to 10% of the portfolio's total value from 6% in 2015. Saskatchewan mortgage holdings represented the remaining 6% of the portfolio in both years.

Distributions

On March 21, 2016, based on income for the quarter, the company's Board of Directors declared a dividend of $0.1973 per Class A Non-Voting Share to shareholders of record on March 31, 2016. This distribution was paid on April 30, 2016 and is recorded as payable in the company's condensed consolidated interim financial statements. The dividend amount was calculated to provide an annualized 8% return for the quarter on the $10.00 initial Class A Non-Voting Share price.

Subsequent to the quarter-end, on April 25, 2016, again based on income for the quarter, the Board declared a dividend of $0.3667 per share to Class B Non-Voting shareholders of record on that date. This distribution was also paid on April 30, 2016.

Outlook

Builders Capital continues to believe that the levels of housing starts forecast by Canada Mortgage and Housing Corporation in its key western Canadian markets are more than adequate to support the growth of the company's business. In its primary Southern Alberta market, the company anticipates that economic uncertainty will persist in slowing real estate activity and drive some lenders from the region, but expects that margins on new construction will remain viable.

"We are optimistic that the Southern Alberta marketplace, while smaller, will remain a profitable one for us," said Loutitt. "While we expect to continue to see a slower turnover of our invested capital over the near term, we are hopeful that the recent gradual improvements in the price for oil, combined with our ongoing geographic diversification, will push our capital turnover back towards our historical averages."

Loutitt said that, in the meantime, the slower turnover will equate to lower lender fees as mortgages with fixed terms will be more likely to remain outstanding until their full term expires, and the outstanding funds will not be available to write new loans. "We anticipate having to take additional steps to collect on some of our mortgage assets over the coming months and we are very confident in our ability to do so," he stated, emphasizing that the company has multiple strategies in place to limit downside risk.

Builders Capital takes a cautious approach to leverage and maintains a prudent debt-to-equity ratio. By investing only in short-term mortgages, the company maintains the liquidity necessary to preserve capital. It generally restricts mortgage lending to 75% of what it believes the fair market value of a property at any given time to be, ensuring that it holds a targeted minimum of 25% of the value of the project in owner's equity. Investors are also protected by the general allowance for doubtful accounts the company sets aside each quarter before paying dividends. Finally, safeguards built into Builders Capital's share structure give public Class A Non-Voting shareholders priority on all capital as well as income distributions over Class B Non-Voting shareholders.

"With Class B Non-Voting shareholders bearing a much greater proportion of the risk of income fluctuations, even if the quarter's earnings had been only 38% of their actual figure, we would still have been in a position to pay Class A shareholders their full, planned quarterly dividend," said Loutitt. "Going forward, we expect to be able to source sufficient quality lending opportunities to keep our capital fully utilized and to continue to deliver attractive returns to all of our shareholders."

Loutitt added that the company's exposure to the wildfires that led to the evacuation of Fort McMurray, Alberta early this month is limited as it currently has only one mortgage in the city. "We send our heartfelt sympathy to all of those who have been affected," he said.

A more detailed discussion of the company's financial results can be found in Builders Capital's 2016 First Quarter Management's Discussion and Analysis, which will be posted along with un audited consolidated financial statements for the year on the company's website (www.builderscapital.ca) and SEDAR (www.sedar.com) on May 9, 2016.

About Builders Capital

Builders Capital is a mortgage lender providing short-term course of construction financing to builders of residential, wood-frame properties in Western Canada. The company was formed on March 28, 2013 but did not commence active operations until December 12, 2013, on the closing of its initial public offering, following which it acquired a portfolio of mortgages from two predecessor companies. Builders Capital's investment objective is to generate attractive returns, relative to risk, in order to provide stable and steady distributions to shareholders while remaining focused on capital preservation and staying within the criteria mandated for mortgage investment corporations, as defined in the Income Tax Act.

As a MIC, Builders Capital is not subject to income tax provided that it distributes all of its taxable income as dividends to shareholders within 90 days of its December 31st year-end. Such dividends are generally treated by shareholders as interest income, so that each shareholder is in the same tax position as if their proportionate share of mortgage investments made by the company had been made directly by the shareholder.

Forward-Looking Information

This news release contains forward-looking statements within the meaning of applicable securities legislation, including statements with respect to management's beliefs, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "expect", "intent", "estimate", "anticipate", "believe", "should", "plans" or "continue" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. These statements are not guarantees of future performance and are based on estimates and assumptions that are subject to risks and uncertainties which could cause actual results to differ materially from the forward-looking statements contained in this news release. These include, among other things, risks associated with mortgage lending, competition for mortgage lending, real estate values, interest rate fluctuations, environmental matters and the general economic environment. The company cautions that the foregoing list is not exhaustive, as other factors could adversely affect its results, performance or achievements. Readers are cautioned against undue reliance on any forward-looking statements. Although the forward-looking information contained in this news release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Except as required by applicable law, Builders Capital undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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