CALGARY, Alberta, Nov. 29, 2017 (GLOBE NEWSWIRE) -- 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, 2017. The three-month period represents the third quarter of the company’s 2017 fiscal year.
Third Quarter Financial Results
Builders Capital’s third quarter financial performance reflects lingering impacts related to the lengthy downturn in Alberta’s economy and to having a block of capital tied up in unproductive inventory assets during the period. However, the company’s results also reflect initial signs of stabilization and recovery in the region’s real estate markets. Mortgage revenue for the three months ended September 30, 2017 increased to $855,000, up by 5.6% from the $807,000 reported in Q3 2016. The Q3 2017 revenue represents annualized gross revenue of 12.7% of gross share capital, compared to 13.7% in 2016. It consisted of $788,000 in interest and $67,000 in lender fees charged to borrowers. The lender fees exceeded management fees paid to Builders Capital Management Corp., the company’s property manager, by 9.5%.
Third quarter operating expenses of $108,000, excluding a provision for mortgage losses and interest expense, were up $22,000 from $86,000 last year. The year-over-year increase reflects legal fees for setting up the dividend reinvestment plan instituted earlier in 2017, as well as annual banking fees and costs relating to private placements.
Management set aside $103,000 during the quarter for potential loan losses. To date, the company has accumulated a total of $1.2 million to provide for loan losses, of which $956,000 has been applied against specific foreclosed properties or discharged mortgages. The company bases its planned quarterly provision for loan losses on an analysis of historical bad debts by its portfolio manager and a current analysis of the construction finance marketplace.
As expected, Builders Capital’s strategy of charging slightly lower rates to borrowers in order to ensure a full mortgage book and higher quality lending opportunities had a negative impact on third quarter comprehensive income. Results were also impacted by the increase in the company’s Q2 and Q3 provision for mortgage losses. Due to the combined impact of these factors, third quarter comprehensive income decreased by 7.8% to $596,000, or $0.23 per share, from $646,000, or $0.28 per share, in Q3 2016. The Q3 2017 income translates to earnings of $0.36 per Class A Non-Voting Share, compared to earnings of $0.47 per Class A Non-Voting Share in Q3 2016.
“Our portfolio in Q3 included foreclosed properties that have a combined value of $3.6 million,” said Sandy Loutitt, President of Builders Capital. ”While these unproductive assets hampered our third quarter performance, we are actively marketing these properties and are optimistic about our ability to sell them in due course. To mitigate this impact in the interim, and also to be consistent with our larger capital base secured through recent share offerings, we have increased our line of credit to $4.5 million and invested additional funds from the line into revenue-producing mortgages, resulting in the 10.8% increase in our mortgage book at the end of the third quarter. Subsequent to the quarter-end, we borrowed an additional $1.3 million from our bank against the inventory and have invested these proceeds into profitable mortgages. Even with this increase, our debt-to-equity remains very conservative at approximately 20%.”
“Going forward, we are comfortable with the value of our portfolio and our provision for mortgage losses, and confident in our ability to prosper in the current market conditions,” added Loutitt.
For the nine months ended September 30, 2017, revenue was $2.5 million, representing a 1.5% decrease from $2.6 million in the same period of 2016. Year-to-date revenue comprised $2.3 million in interest and $0.2 million in lender fees, representing annualized gross revenue of 12.9% of the weighted average gross share capital, compared to 13.7% in 2016. Lender fees for the first nine months exceeded management fees by 8%.
Nine-month operating expenses, excluding a provision for mortgage losses and interest expense, were within expectations at 10.7% of revenues, compared to 10.0% in 2016.
For the nine-month period, comprehensive income of $1.8 million, or $0.74 per share, declined by 15% from $2.1 million, or $0.87 per share, in 2016. This translates to earnings of $1.22 per Class A Non-Voting Share, compared to earnings of $1.50 per Class A Non-Voting Share in the first nine months of 2016.
On July 25, 2017, as previously reported, Builders Capital closed a private placement for 50,000 Class A Non-Voting shares at $10.00 per share for gross proceeds of $500,000. Subsequent to the quarter-end, on November 8, 2017, the company closed an additional private placement for 52,000 Class A Non-Voting Shares at $10.00 per share for gross proceeds of $520,000. The net proceeds of these offerings have been invested in mortgage loans.
At September 30, 2017, Builders Capital’s mortgage portfolio consisted of 23 mortgage loans with an aggregate value of $26.6 million. All mortgage transactions conducted during the year were consistent with the company’s tight focus on financing short-term, wood-frame residential construction in strong urban markets. During the third quarter of 2017, $5.2 million in mortgages were purchased or funded and $3.6 million was received as mortgage repayments. The acquisition of $0.7 million in mortgages and sale of $0.6 million in mortgages helped to ensure full cash utilization and create the required liquidity.
On September 20, 2017, 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, 2017. This distribution was paid on October 31, 2017. 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. Third quarter earnings generated by the company exceeded the amount required to pay planned Class A Non-Voting Share dividends by a healthy 1.8 times.
On October 25, 2017, again based on income for the third quarter of 2017, the Board declared a dividend of $0.2057 per share to Class B Non-Voting shareholders of record on that date. This distribution was also paid on October 31, 2017.
The company continues to see signs of stabilization and initial recovery in Southern Alberta’s housing market. Recent data from the Canadian Real Estate Board (CREA) showed an 8.5% increase in Alberta residential sales activity in the first 10 months of 2017 compared to the same period in 2016. Also according to CREA, the provincial average price for homes sold in the first 10 months of 2017 was 1.5% higher than a year earlier, with the October 2017 average price 1% higher than it was in October 2016.
Looking forward, Canada Mortgage and Housing Corporation (CMHC) is predicting more balanced market conditions in the Alberta housing market through 2018 and a gradual increase in average home prices.
Management believes that the levels of housing starts forecast by CMHC across its key markets are more than adequate to support the growth of the company’s business in the near term. It also expects that margins on new construction will remain viable, particularly in Alberta, where building costs have generally decreased and selling prices appear to be stabilizing.
While the outlook is improving, the company cautions that the extended downturn has taken its toll on builders in the Alberta market and it is possible that Builders Capital will need to take additional steps to collect on some of its mortgage assets over the coming months. However, the company is optimistic that it has weeded out the most significant vulnerabilities in the portfolio, and is confident in its ability to enforce current mortgages.
The company also 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.
“Our share structure continues to work as intended,” said Loutitt. “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 45% of their actual figure, we would still have been in a position to pay Class A shareholders their full, planned quarterly dividend,” said Loutitt.
“We remain confident in our ability to keep our capital fully utilized and to continue to grow our business,” he continued. “Given our current relatively small market share and the opportunities that exist to further expand our geographic footprint, we are well positioned to continue sourcing high-quality lending opportunities that appropriately balance risk while maintaining attractive returns for shareholders.”
A more detailed discussion of the company’s financial results can be found in Builders Capital’s third quarter 2017 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 29, 2017.
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.
For more information, please contact:
John Strangway, Chief Financial Officer
Telephone: (403) 685-9888