Squirrel warns of Auckland house price correction risks in fundraising

Squirrel Group, the mortgage broker and peer-to-peer lender, cites an Auckland housing market correction that could significantly slow sales as a risk to its $4.97 million private equity crowdfunding offer currently under way.

It quantified the risk by citing the city's experience during the global financial crisis when sales volumes dropped to 1500 per month during 2008. That's 50% lower than housing turnover in 2015.

Squirrel Mortgages has a target of arranging more than $1 billion of residential mortgages annually by 2017, up from the $800 million forecast for the March 2016 financial year. If a housing correction occurs, it has modelled a 40% reduction ($400 million) in forecast volumes and a 25% drop in settlements per adviser for the 2017 financial year.

That would mean a short-term group operating loss of $1.4 million in 2017, just as it plans to list on the sharemarket, before recovering to an operating profit of $1.2 million the following year.

Main mitigants against the risk are that, despite a rise in Auckland house prices, it hasn't been a period of high turnover and there's an estimated shortage of 25,000 houses over the next two years with significant building activity under way that could fuel sales, the offer document said. Squirrel also has growing annuity and trail recurring income that will help smooth out income flows if mortgage volumes fluctuate, it said.

Without a correction, it is forecasting group earnings before interest, tax, depreciation and amortisation (ebitda) of $612,274 in the 2016 financial year, $567,482 in 2017, $3.45 million in 2018 and $7.2 million by 2019. Its fledgling peer-to-peer lending business, Squirrel Money, is forecast to post an ebitda loss of just over $1 million in the 2016 financial year, and to break even by 2018.

Squirrel is seeking to raise $1.97 million through a private offer on equity crowdfunding platform Snowball Effect and a further $3 million through a wholesale offer for a maximum shareholding of 17.9%, valuing the company pre-offer at $22.9 million. The minimum amount to be raised across both offers is $1 million.

Shares on offer, at a minimum parcel of $5,000, are investment class only, which means they get dividends but no voting rights. Investors who put in $100,000 or more get ordinary shares with voting rights.

If the offer is fully subscribed, founder and chief executive John Bolton will reduce his current 91 percent stake, held through a family trust, to 74.8 percent. He subscribed for 470,000 shares in the offer, reinvesting funds he receives from the repayment of a $175,506 loan to Squirrel Mortgages.

The offer document said Squirrel, started in 2008, has increased mortgage volumes by an average 57 percent per year for the past four years. Currently, the residential mortgage value arranged by brokers is thought to be about one-third of New Zealand's mortgage market but Australian experience suggests that could trend toward half the market.

The Auckland-based company is currently trialling three brokers across Waikato and the Bay of Plenty to assess the viability of rolling out a nationwide brand. While the offer's financial projections are based on organic growth, Squirrel is considering following last November's acquisition of its first broker, Aspire Advisors, with some other larger brokers.

Half a million dollars of the money raised will go on building a new mortgage management system, improving the submission and settlement process. Long-term it wants to have direct links into its bank lenders so clients can see everything in one place as platforms like Xero and MYOB have done for business.

It has also earmarked $250,000 for adding web financial tools such as advanced mortgage calculators into its online application.

"Artificial intelligence and machine learning will play a significant role in the future of financial services, so we are keen to embrace this technology early in some small way," the offer said.

Most of the money will bolster its peer-to-peer lending platform, which is targeted to increase lending from the current $1.7 million to $154 million within three years.

Some $2 million is budgeted to set up a liquidity fund that can settle new loans and allow the company to do marketing campaigns that won't be limited by relying on sufficient investors' funds. Unlike other peer-to-peer lenders, Squirrel Money doesn't use a wholesale funder such as a bank.

A further half million is earmarked for its seed reserve fund which has to hit 4%  reserves in its first year under its licence conditions. The company put $100,000 into the fund on launch last year and needs another $500,000 depending on growth.

(BusinessDesk)