CALGARY, ALBERTA--(Marketwired - May 1, 2017) - Builders Capital Mortgage Corp. (TSX VENTURE:BCF) (Builders Capital or the company) today released financial results for the three and 12 months ended December 31, 2016. The three-month period represents the fourth quarter of the company's 2016 fiscal year.
Fourth Quarter Financial Results
As expected, Builders Capital's performance in Q4 was impacted by the persisting economic difficulties in its primary Southern Alberta marketplace. Mortgage revenue for the three months ended December 31, 2016 was $835,000, down by 5% from the $879,000 reported in 2015. The Q4 2016 revenue represents annualized gross revenue of 14% of gross share capital, compared to 14.4% in 2015. It consisted of $768,000 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 12.7%.
Fourth quarter operating expenses, excluding a provision for mortgage losses and interest, were $82,000, or 9.8% of revenue. This was down from $86,000, also 9.8% of revenue, in 2015 and well within expectations.
Management set aside $63,000 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 a current analysis of the construction finance marketplace.
Comprehensive income for the last three months of 2016 increased by 2% to $669,000, or $0.28 per share, up from $656,000, or $0.27 per share, in 2015. The 2016 income translates to earnings of $0.282 per Class A Non-Voting Share, compared to earnings of $0.276 per Class A Non-Voting Share in the final quarter of 2015.
12-Month Financial Results
For the 2016 fiscal year, mortgage revenue of $3.4 million, or 14.4% of gross share capital, was down by 10% from $3.8 million, or 15.6% of gross share capital, in 2015. The 2016 revenue comprised $3.1 million in interest and $268,000 in lender fees charged to borrowers. For the 12 months, lender fee revenue exceeded management fees by 13.4%.
Annual operating expenses, excluding funds set aside to provide for mortgage losses and interest, totaled $337,000. This was up by 5% from $322,000 in 2015 and represented 10% of revenue, compared to 8.5% of revenue in 2015. As with the quarterly result, the 2016 operating expenses were within expectations and compared favourably to the forecast level. Over the 12 months, Builders Capital accumulated $252,000 to provide for loan losses.
As expected, the considerably slower Alberta real estate market had a negative impact on comprehensive income for the year, as did more cautious use of the company's line of credit. Comprehensive income for 2016 was $2.7 million, or $1.15 per share, down by 8.8% from $3 million, or $1.23 per share, in 2015. The 2016 income translates into 12-month earnings of $1.96 per Class A Non-Voting Share, compared to $2.06 per Class A Non-Voting Share in 2015. The effective Class A Non-Voting Share dividend coverage ratio for 2016 was 2.5 times, compared to 2.6 times in 2015.
"The difficult economic conditions in Southern Alberta made for an undeniably challenging year for mortgage lenders, but our strategic focus on providing short-term, course of construction financing to residential builders kept us on a steady course," said Sandy Loutitt, President of Builders Capital. "While our turnover of invested capital lost some momentum with the slowing of real estate activity in Alberta, we stood our ground and maintained a full mortgage book. We also maintained a prudent approach to leverage, recording a very conservative 2% debt-to-equity ratio at year-end."
Loutitt added that the company was pleased with the progress it made in 2016 toward its goal of geographically diversifying its mortgage holdings. "Most notably, we strengthened our position in British Columbia, increasing our holdings in the province to 26% of the portfolio's total value from 13% at mid-year and 8% at the end of 2015," he said.
Mortgage Portfolio
At December 31, 2016, Builders Capital's mortgage portfolio consisted of 32 mortgage loans with an aggregate value of $23.3 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 2016, $21.5 million in mortgages were purchased or funded and $22.5 million was received as proceeds of sale or loan repayments. The acquisition of $6.4 million in mortgages and sale of $4.0 million in mortgages helped to ensure full cash utilization and create the required liquidity.
During the year, the company completed the sale four properties, one that it re-possessed in 2015 and three that were subject to default in 2016.
Distributions
On December 21, 2016, based on income for the year, the company's Board of Directors declared a dividend of $0.2016 per Class A Non-Voting Share to shareholders of record on December 31, 2016. This distribution was paid on January 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.
Subsequent to the year-end, on January 30, 2017, again based on income for 2016, the Board declared a dividend of $0.3718 per share to Class B Non-Voting shareholders of record on that date. This distribution was also paid on January 31, 2017.
Outlook
Builders Capital believes 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.
"We are optimistic that a somewhat recovered price for oil and our ongoing geographic diversification will drive increased velocity of lending as 2017 proceeds," said Loutitt. "In the meantime, we are confident that we are well-positioned to profitably manage our mortgage portfolio."
He continued, "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, and we are very confident in our ability to enforce our current mortgages."
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 Year-end 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 May 1, 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.
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.
