CALGARY, ALBERTA--(Marketwired - Nov. 28, 2016) - Builders Capital Mortgage Corp. (TSX VENTURE:BCF) (Builders Capital or the company) today released financial results for the three and nine months ended September 30, 2016. The three-month period represents the third quarter of the company's 2016 fiscal year.
Third Quarter Financial Results
As expected, Builders Capital's performance in Q3 was impacted by the economic difficulties its primary Southern Alberta marketplace continues to experience. Mortgage revenue for the three months ended September 30, 2016 was $0.8 million, down by 17% from the nearly $1.0 million reported in 2015. The 2016 revenue represents annualized gross revenue of 13.7% of gross share capital, compared to 15.7% last year. It consisted of $745,000 in interest and $62,000 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.
Third quarter operating expenses, excluding a provision for mortgage losses and interest, were $86,000, or 10.6% of revenue. This was up from $79,000, or 8.2% of revenue, in 2015 but well within expectations.
Management set aside $60,000 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. The provision is collective 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 Q3 decreased to $646,000, or $0.28 per share, from $779,000, or $0.32 per share, in 2015. The 2016 income translates to earnings of $0.47 per Class A Non-Voting Share, compared to earnings of $0.53 per Class A Non-Voting Share in the third quarter of 2015.
Nine-Month Financial Results
For the year-to-date, mortgage revenue was $2.6 million, or 14.5% of gross share capital, compared to $2.9 million, or 15.9% of gross share capital, in 2015. The 2016 nine-month revenue comprised $2.4 million in interest and $200,000 in lender fees charged to borrowers. For the nine months, lender fee revenue exceeded management fees by $24,000, or 13.7%.
Year-to-date operating expenses, excluding funds set aside to provide for mortgage losses and interest, totaled $255,000. This was up by 8.5% from $235,000 in 2015 and represented 10% 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 nine months, Builders Capital accumulated $189,000 to provide for loan losses.
Comprehensive income for the year-to-date was $2.1 million, or $0. 87 per share, down from $2.3 million, or $0.95 per share, last year. The 2016 income translates into nine-month earnings of $1.50 per Class A Non-Voting Share, compared to $1.59 per Class A Non-Voting Share for the same period of 2015. The effective Class A Non-Voting Share dividend cover ratio for the nine months was 2.5 times, compared to 2.7 times in 2015.
"Given the sustained economic havoc continued oil price volatility has wreaked on the Southern Alberta market, we are pleased with our performance for the year-to-date," said Sandy Loutitt, President of Builders Capital. "In addition to maintaining a full mortgage book, we have made excellent progress toward our goal of geographically diversifying our mortgage holdings. In particular, we have strengthened our position in British Columbia, increasing our holdings in the province to 26% of the portfolio's total value from 13% at the end of Q2 and 8% a year ago."
"We have enjoyed similar success in driving up our turnover of invested capital over the past nine months, taking our turnover rate from 19.3% in Q1 to 28.6% in Q2 and 32% in Q3," continued Loutitt. "While we have not yet reached the ratios we achieved in 2015 and 2014, we are cautiously optimistic that this increased velocity of lending will continue to pick up going forward, supported by a somewhat recovered price for oil and our ongoing geographic diversification."
At September 30, 2016, Builders Capital's mortgage portfolio consisted of 30 mortgage loans with an aggregate value of $24 million. All mortgage transactions conducted during the third quarter were consistent with the company's tight focus on financing short-term, wood-frame residential construction in strong urban markets. During the three-month period, $8.1 million in mortgages were purchased or funded and $9.1 million was received as proceeds of sale or loan repayments. The acquisition of $1.4 million in mortgages and sale of $1.9 million in mortgages helped to ensure full cash utilization and create liquidity as required.
During the quarter, the company completed the sale of a property it repossessed in Regina, Saskatchewan in Q2 of this year. Builders Capital has taken a write-down of $68,700 for this default from its accumulated allowance for loan losses. The net return on this investment since inception was 6.9%.
The company also commenced foreclosure proceedings against a mortgagor in Fort McMurray, Alberta in Q3. The security for this loan consisted of two completed homes and an empty lot. Both homes have been sold and the empty lot is being held as inventory for resale. The default resulted in a write-down of $277,000. The loan generated a net return of 8.1%.
On September 20, 2016, based on income for the third quarter, the company's Board of Directors declared a dividend of $0.2016 per Class A Non-Voting Share to shareholders of record on September 30, 2016. This distribution was paid on October 31, 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 October 24, 2016, again based on income for the third quarter, the Board declared a dividend of $0.3717 per share to Class B Non-Voting shareholders of record on that date. This distribution was also paid on October 31, 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 its business. In Southern Alberta, the company anticipates that economic uncertainty will persist in slowing real estate activity over the short term, but expects that margins on new construction will remain viable.
"It takes time to realize on an inventory of mortgages that were advanced and valued in a more robust economy," said Louttit. "While it is entirely possible that we will need to take additional steps to collect on some of our mortgage assets over the coming months, we are optimistic that we have weeded out the most significant vulnerabilities in the portfolio. We are also 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 third quarter earnings had been only 43% 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 Third 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 November 28, 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.