CALGARY, ALBERTA--(Marketwired - Aug. 10, 2016) - Builders Capital Mortgage Corp. (TSX VENTURE:BCF) (Builders Capital or the company) today released financial results for the three and six months ended June 30, 2016. The three-month period represents the second quarter of the company's 2016 fiscal year.
Second Quarter Financial Results
As expected, Builders Capital's performance in Q2 was impacted by the economic difficulties that its primary Southern Alberta marketplace continues to experience. Mortgage revenue for the three months ended June 30, 2016 of $0.9 million was down by 9% from the amount reported in 2015. This represents annualized gross revenue of 14.7% of the weighted average gross share capital, compared to 15.6% last year. The 2016 Q2 revenue consisted of $796,000 in interest and $61,000 in lender fees charged to borrowers. The lender fees more than offset management fees paid to Builders Capital Management Corp., the company's property manager.
Second quarter operating expenses, excluding a provision for mortgage losses and interest, were $89,000, or 10.4% of revenue. This was up from $76,000, or 8.1% of revenue, in 2015 but well within expectations.
Management set aside $64,000 during the quarter to provide for potential loan losses. This amount was based on an analysis of historical bad debts by Builders Capital Management Corp., which manages Builders Capital's mortgage portfolio, as well as current analysis of the construction finance marketplace. This is a collective provision and does not relate to any individual mortgage.
Due both to the slower Alberta economy and more cautious use of Builders Capital's line of credit, comprehensive income for Q2 decreased to $678,000, or $0.29 per share, from $773,000, or $0.30 per share, in 2015. The 2016 income translates into earnings of $0.50 per Class A Non-Voting Share, compared to earnings of $0.53 per Class A Non-Voting Share in the second quarter of 2015. Given the dividend priority granted to Class A Non-Voting Shares held by the public, the effective Class A Non-Voting Share dividend coverage ratio for the quarter was 2.5 times, compared to 2.6 times in Q2 2015.
Six-Month Financial Results
For the year-to-date, mortgage revenue was $1.8 million, representing annualized gross revenue of 15% of the weighted average gross share capital, compared to $1.9 million, or 16% of gross share capital, in 2015. The 2016 first-half revenue consisted of $1.6 million in interest and $138,000 in lender fees charged to borrowers. For the six months, lender fee revenue exceeded management fees by $21,000, or 18%.
First-half operating expenses, excluding funds set aside to provide for mortgage losses and interest, totaled $170,000. This was up by 9% from $156,000 in 2015 and represented 9.7% of revenue, compared to 8.1% of revenue last year. As with the quarterly result, the 2016 operating expenses were within expectations and compared favourably to the forecast level. Over the six months, Builders Capital accumulated $129,000 to provide for loan losses.
Comprehensive income for the first half was $1.4 million, or $0.60 per share, down slightly from $1.5 million, or $0.64 per share, last year. The 2016 income translates into six-month earnings of $1.03 per Class A Non-Voting Share, compared to $1.06 per Class A Non-Voting Share for the first half of 2015. The effective Class A Non-Voting Share dividend cover ratio for the six-month period was 2.6 times, compared to 2.7 times in 2015.
"We continue to be pleased with our financial results," said Sandy Loutitt, President of Builders Capital. "Despite the difficult economic climate that persisted in Southern Alberta through the first half of 2016, we maintained a full mortgage book. We also continued to enhance our geographic diversification, increasing mortgages held on properties in British Columbia to 13% of the total portfolio value from 7% at the end of Q2 2015."
Loutitt said that the company's capital turnover continues to be impacted by the considerably slower real-estate market in Alberta. In addition to lengthening the time it takes borrowers to sell their completed inventory, the slower Alberta economy has made some builders more cautious about taking on new projects. "While our Q2 turnover decreased to 28.6% from 36.5% last year, this was a significant improvement from the 19.3% we recorded in the first quarter of the year," he stated. "We are hopeful that a somewhat recovered price for oil, combined with our ongoing geographic diversification, will continue to push our capital turnover back toward our historical averages."
At June 30, 2016, Builders Capital's mortgage portfolio consisted of 31 mortgage loans with an aggregate value of $26.7 million. All mortgage transactions conducted during the quarter were consistent with Builders Capital's tight focus on financing short-term, wood-frame residential construction in strong urban markets. During the three months, $5.6 million in mortgages were purchased or funded and $5.4 million was received as proceeds of sale or loan repayments. The acquisition of $2.8 million in mortgages helped to ensure full cash utilization and create liquidity as required.
During the quarter, the company foreclosed on one property in Saskatchewan, on which it has now accepted a conditional offer. If this sale closes, the total write-down on the loan will be approximately $62,000 and the net return on the investment since inception will be 7.7%
On June 21, 2016, based on income for the quarter, the company's Board of Directors declared a dividend of $0.1995 per Class A Non-Voting Share to shareholders of record on June 30, 2016. This distribution was paid on July 29, 2016. 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 July 26, 2016, again based on income for the quarter, the Board declared a dividend of $0.3677 per share to Class B Non-Voting shareholders of record on that date. This distribution was also paid on July 29, 2016.
Builders Capital continues to believe that the levels of housing starts forecast by Canada Mortgage and Housing Corporation in its western Canadian markets are more than adequate to support the growth of the company's business. In Southern Alberta, the company anticipates that economic uncertainty will persist in slowing real estate activity over the short term, driving some lenders from the region, but expects that margins on new construction will remain viable.
Builders Capital also expects that slower turnover of its invested capital over the near term will continue to equate to lower lender fees as mortgages with fixed terms will be more likely to remain outstanding until their full term expires. As a result, the outstanding funds will not be available to write new loans prior to this.
"As the real estate market in Alberta has continued to slow, selling prices have dropped and marketing times have lengthened, driving our loan-to-value ratios higher than we would like," said Loutitt. "In some cases, we are having to take additional steps to collect on our mortgage assets. We are very confident in our ability to enforce mortgage agreements."
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 second quarter earnings had been only 40% 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."
A more detailed discussion of the company's financial results can be found in Builders Capital's 2016 Second Quarter Management's Discussion and Analysis, which will be posted along with unaudited interim condensed financial statements for the quarter on the company's website (www.builderscapital.ca) and SEDAR (www.sedar.com) on August 10, 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.
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.