Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX:FC), today
released its financial statements for its predecessor entity Firm Capital
Mortgage Investment Trust (the "Trust") for the fiscal year ended December 31,
2010.
EARNINGS & RETURN ON EQUITY
Net earnings for the year ended December 31, 2010 totaled $14,235,843 compared
to $14,453,196 for the year ended December 31, 2009. For the fourth quarter
ended December 31, 2010, net earnings amounted to $3,757,347 compared to
$3,285,321 for the same period ended in 2009. 2010 basic weighted average net
earnings per unit of $1.008 compared to $1.041 per unit for 2009. The 2010 net
earnings represent an annualized return on average Unitholders' equity of 10.52%
per annum. This return on Unitholders' equity equates to 947 basis points per
annum over the average One Year Government of Canada Treasury Bill yield for the
year and is well in excess of the Corporation's target yield objective of 400
basis points per annum over the One Year Treasury Bill yield.
DISTRIBUTION OVERVIEW 2010:
Monthly distributions for 2010 equaled $.078 per month, for a total $0.936 per
unit, which, together with the year end Special Distribution of $0.070,
represents total distributions for 2010 of $1.006 per unit, a decrease from 2009
distributions of $1.041 per unit.
INVESTMENT PORTFOLIO TURNS:
In 2010 annual mortgages discharged was $133 million with new mortgages funded
of $169 million. This represents a significant turn of the portfolio enabling
management to re-invest the funds in evolving market conditions. As the
portfolio revolves, the Trust is able to manage the portfolio size and return on
equity based on the pricing of new investments.
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Trust's mortgage portfolio as at December 31, 2010 are as follows:
-- Total Gross Mortgage Portfolio equals $205,310,929
-- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 87.2% of our total portfolio, and total
Conventional mortgages with loan to values under 75% comprise 93.9% of
our total portfolio.
-- Special Profit Mortgage Investments total 6.1% of the portfolio.
-- Approximately 70% of the portfolio matures within 12 months. This
results in a continuously revolving portfolio, allowing management to
assess market conditions.
-- The Average Face Interest Rate on the portfolio is 9.21% per annum.
-- Regionally, the portfolio is diversified approximately as follows:
Ontario 75.9%, Alberta 15.2%, British Columbia 3.1%, with the balance
(5.8%) being in other provinces.
-- Mortgage portfolio breakdown by loan size is as follows:
Amount Number of Mortgages Total Amount
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$0-$1,000,000 44 21,699,044
$1,000,001-$2,000,000 26 37,249,909
$2,000,001-$3,000,000 13 33,347,737
$3,000,001-$4,000,000 8 28,610,069
$4,000,001-$5,000,000 8 35,830,295
$5,000,001-$10,000,000 8 48,573,875
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Total 107 $ 205,310,929
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LOAN LOSS PROVISION UPDATE:
Management has always taken a proactive approach to allowance provision
reserves. This is a prudent approach to protecting our Shareholders' equity.
Loan loss provisions at the start of the fiscal year amounted to $2,700,000.
During 2010 a further $280,000 was added to the provision for a total of
$2,980,000, representing 1.45% of the gross loan portfolio.
FINANCING UPDATE:
The Corporation is pleased to announce that at the end of September 2010 its
principal banker renewed its warehousing credit facility for a further year to
mature September 30, 2011 with a right at maturity to lock in any balance
outstanding for a second year term, should a renewal not be concluded at the end
of the first year renewal. The Corporation currently has $21.4 million drawn on
its credit facility.
UNRECOGNIZED INCOME COLLECTED:
As at December 31, 2010, the Trust has banked non-refundable fee income of
$372,514, which will be recognized as income over the term of the corresponding
investments.
DIVIDEND AND SHARE PURCHASE PLAN:
The Corporation has in place a Dividend Reinvestment Plan (DRIP) and Unit
Purchase Plan that is available to its Shareholders. The plans allows
participants to have their monthly cash dividends reinvested in additional
shares and grants participants the right to purchase, without commission,
additional shares, up to a maximum of $12,000 per annum.
ABOUT THE CORPORATION
The Corporation, through its Mortgage Banker, Firm Capital Corporation, is a
non-bank lender providing residential and commercial short-term bridge and
conventional real estate financing, including construction, mezzanine and equity
investments. The Corporation's investment objective is the preservation of
Shareholders' equity, while providing Shareholders with a stable stream of
monthly dividends from investments. The Corporation achieves its investment
objectives by pursuing a strategy of growth through investments in selected
niche markets that are under-serviced by large lending institutions. Lending
activities to date continue to develop a diversified mortgage portfolio,
producing a stable return to Shareholders. Full reports of the financial results
of the Corporation for the year are outlined in the audited financial statements
and the related management discussion and analysis of Firm Capital, available on
the SEDAR website at www.sedar.com. In addition, supplemental information is
available on Firm Capital's website at www.firmcapital.com.
Forward-Looking Statements
This news release contains forward-looking statements within the meaning of
applicable securities laws including, among others, statements concerning our
objectives, our strategies to achieve those objectives, our performance, our
mortgage portfolio and our distributions, as well as 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 our
estimates and assumptions that are subject to risks and uncertainties, including
those described in our Annual Information Form under "Risk Factors" (a copy of
which can be obtained at www.sedar.com), which could cause our actual results
and performance to differ materially from the forward-looking statements
contained in this circular. Those risks and uncertainties include, among others,
risks associated with mortgage lending, dependence on the Corporation's manager
and mortgage banker, competition for mortgage lending, real estate values,
interest rate fluctuations, environmental matters, Unitholder liability and the
introduction of new tax rules. Material factors or assumptions that were applied
in drawing a conclusion or making an estimate set out in the forward-looking
information include, among others, that the Corporation is able to invest in
mortgages at rates consistent with rates historically achieved; adequate
mortgage investment opportunities are presented to the Corporation; and adequate
bank indebtedness and bank loans are available to the Corporation. Although the
forward-looking information continued in this new release is based upon what
management believes are reasonable assumptions, there can be no assurance that
actual results and performance will be consistent with these forward-looking
statements.
All forward-looking statements in this news release are qualified by these
cautionary statements. Except as required by applicable law, the Corporation
undertakes no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
Audited Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Years Ended December 31, 2010 and 2009
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
December 31, 2010 and 2009
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2010 2009
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Assets
Cash $ - $ 1,444,339
Amounts receivable and prepaid expenses (note
4) 2,371,563 1,706,383
Mortgage investments (note 5) 202,330,929 167,128,297
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$ 204,702,492 $ 170,279,019
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness (note 6) $ 5,005,825 $ -
Accounts payable and accrued liabilities 1,482,580 410,064
Unearned income 372,514 202,481
Unitholder distribution payable 2,127,845 2,543,120
Loans payable (note 7) 4,289,249 10,714,637
Convertible debentures (note 8) 53,628,803 23,681,244
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66,906,816 37,551,546
Unitholders' equity (note 9): 137,795,676 132,727,473
Issued and outstanding:
14,377,333 units (2009 - 13,896,829)
Commitments (note 5)
Contingent liabilities (note 15)
Subsequent events (note 20)
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$ 204,702,492 $ 170,279,019
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See accompanying notes to financial statements.
On Behalf of The Directors:
"Eli Dadouch"
"Jonathan Mair"
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FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Earnings
Years Ended December 31, 2010 and 2009
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2010 2009
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Interest and fees earned, net of Trust Manager
interest allocation (note 13) $ 18,703,612 $ 18,401,481
Less interest expense (note 14) 2,877,078 2,820,560
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Net interest and fee income 15,826,534 15,580,921
Expenses:
General and administrative 1,310,691 827,725
Change in unrealized loss in value of
mortgages (note 5) 280,000 300,000
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1,590,691 1,127,725
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Net earnings for the year $ 14,235,843 $ 14,453,196
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Net earnings per unit (note 10)
Basic $ 1.008 $ 1.041
Diluted $ 0.984 $ 1.011
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Changes in Unitholders' Equity
Years Ended December 31, 2010 and 2009
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2010 2009
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Trust units (note 9):
Balance, beginning of year $ 132,355,149 $ 131,636,584
Proceeds from issuance of units 4,818,103 204,583
Conversion of debentures to units 20,000 513,982
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Balance, end of year $ 137,193,252 $ 132,355,149
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Equity component of convertible debentures
(note 8):
Balance, beginning of year $ 372,324 $ 380,482
Equity component of debenture issued during
the year 230,000 -
Conversion of debenture to units - (8,158)
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Balance, end of year $ 602,324 $ 372,324
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Cumulative earnings:
Balance, beginning of year $ 95,327,964 $ 80,874,768
Net earnings for the year 14,235,843 14,453,196
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Balance, end of year $ 109,563,807 $ 95,327,964
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Cumulative distributions to unitholders:
Balance, beginning of year $ 95,327,964 $ 80,874,768
Distributions to unitholders (note 11) 14,235,843 14,453,196
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Balance, end of year $ 109,563,807 $ 95,327,964
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Total unitholders' equity $ 137,795,676 $ 132,727,473
Units issued and outstanding (note 9) 14,377,333 13,896,829
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Cash Flows
Years Ended December 31, 2010 and 2009
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2010 2009
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Cash provided by (used in):
Operating activities:
Net earnings $ 14,235,843 $ 14,453,196
Net changes in non-cash items
Change in unrealized loss in value of
mortgages 280,000 300,000
Implicit interest rate in excess of
coupon rate - convertible debentures 57,689 51,218
Deferred finance cost amortization
- convertible debentures 228,941 170,989
(Increase) decrease in amounts receivable
and prepaid expenses (665,180) 279,729
Increase (decrease) in accounts payable
and accrued liabilities 1,072,516 (208,477)
Increase (decrease) in unearned income 170,033 (73,375)
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15,379,842 14,973,280
Financing activities:
Proceeds from issuance of units 4,818,103 196,425
Proceeds from convertible debenture issued 31,443,000
Debenture offering costs (1,531,971)
Increase (decrease) in bank indebtedness 5,005,825 (27,337,813)
Decrease in loans payable (6,425,388) (27,014,591)
Distributions to unitholders paid during
year (14,651,118) (15,340,466)
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18,658,450 (69,496,445)
Investing activities:
Funding of mortgage investments (168,832,314) (94,267,430)
Discharge of mortgage investments 133,349,682 150,234,934
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(35,482,632) 55,967,504
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Increase (decrease) in cash $ (1,444,339) $ 1,444,339
Cash, beginning of year 1,444,339 -
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Cash, end of year $ - $ 1,444,339
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Supplemental cash flow information
Interest paid (note 14) $ 2,230,662 $ 2,719,095
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Years Ended December 31, 2010 and 2009
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end trust
created for the benefit of the unitholders, pursuant to the Declaration of Trust
dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is Firm
Capital Corporation and the trust manager is FC Treasury Management Inc.
2. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial disclosure are in
accordance with Canadian generally accepted accounting principles ("GAAP").
(a) Use of estimates:
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
The most significant estimates that the Trust is required to make relate to the
fair value of the mortgage investments (notes 2(b) and 5). These estimates may
include assumptions regarding local real estate market conditions, interest
rates and the availability of credit, cost and terms of financing, the impact of
present or future legislation or regulation, prior encumbrances and other
factors affecting the mortgage and underlying security of the mortgage
investments.
These assumptions are limited by the availability of reliable comparable data,
economic uncertainty, ongoing geopolitical concerns and the uncertainty of
predictions concerning future events. Illiquid credit markets, volatile equity
markets and declines in consumer spending have combined to increase the
uncertainty inherent in such estimates and assumptions. Accordingly, by their
nature, estimates of fair value are subjective and do not necessarily result in
precise determinations. Should the underlying assumptions change, the estimated
fair value could vary by a material amount.
(b) Mortgage investments:
Mortgage investments are stated at estimated fair value with changes in fair
value reflected in net earnings in accordance with Canadian Institute of
Chartered Accountants ("CICA") Accounting Guideline 18 and CICA Handbook Section
3855. Fair value is the amount of consideration that would be agreed upon in an
arm's length transaction between knowledgeable, willing parties who are under no
compulsion to act. The fair value of Mortgage investments approximates their
carrying values due to the fact that the majority of the mortgages are (i)
short-term in nature with terms of 12 months or less, (ii) repayable in full, at
any time at the option of the borrower prior to maturity without penalty, and
(iii) have minimum specified interest rates for mortgages with floating rates
linked to bank prime. When, in management's opinion, collection of principal on
a particular mortgage investment is no longer reasonably assured, the fair value
of the mortgage investment is reduced to reflect the estimated net realizable
recovery from the collateral securing the mortgage loan.
(c) Convertible debentures:
The Trust's convertible debentures are classified into debt and equity
components. The equity component represents the estimated value of the
conversion rights of the holders.
(d) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and is recorded net of
the Trust Manager interest spread described in note 13. Commitment fees received
are amortized over the expected term of the mortgage.
(ii) Special mortgage investments:
Special profit participations earned by the Trust on special mortgage
investments are recognized and included in interest and fees earned only once
the receipt of such amounts is certain.
(e) Unit-based compensation:
The Trust has unit-based compensation plans (i.e. incentive option plan) which
are described in note 9. The Trust accounts for its unit-based compensation
using the fair value method, under which compensation expense is measured at the
grant date and recognized over the vesting period.
(f) Basic and diluted net earnings per unit:
Basic net earnings per unit is computed by dividing net earnings for the period
by the weighted average number of units outstanding during the year. Diluted net
earnings per unit is computed similarly to basic net earnings per unit, except
that the weighted average number of units outstanding is increased to include
additional units from the assumed exercise of incentive option units and the
conversion of the convertible debentures, if dilutive. The number of additional
units is calculated by assuming that outstanding incentive options were
exercised and that proceeds from such exercises were used to acquire units at
the average market price during the year. The additional units would also
include those units issuable upon the assumed conversion of the convertible
debentures, with an adjustment to net earnings for the year to add back any
interest paid to the debenture holders. These common equivalent units are not
included in the calculation of the weighted average number of units outstanding
for diluted earnings per unit when the effect would be anti-dilutive.
(g) Comprehensive income:
CICA Section 1530, "Comprehensive Income", requires the presentation of a
Statement of Comprehensive Income where certain gains and losses that would
otherwise be recorded as part of net earnings are presented in other
comprehensive income until it is considered appropriate to recognize it in net
earnings. The Trust does not have any material income from these sources and as
such a Statement of Comprehensive Income has not been included in these
financial statements.
(h) Financial instruments - recognition and measurement:
CICA Section 3855, "Financial Instruments - Recognition and Measurement",
establishes standards for recognizing and measuring financial assets and
financial liabilities including non-financial derivatives. In accordance with
this standard, the Trust is required to classify its financial assets as one of
the following: (i) held-to-maturity, (ii) loans and receivables, (iii) held for
trading or (iv) available for sale. All financial liabilities must be classified
as: (i) held for trading or (ii) other liabilities. The Trust's designations on
adoption are as follows:
Cash and amounts receivable are classified as "loans and receivables" and are
measured at amortized cost.
Bank indebtedness, Accounts payable and accrued liabilities, Unitholder
distribution payable, Loans payable and Convertible debentures are classified as
"other liabilities" and are measured at fair value on inception and amortized
using the effective interest rate method.
3. Accounting changes:
Future accounting changes:
The Canadian Accounting Standards Board ("AcSB") confirmed that the adoption of
International Financial Reporting Standards ("IFRS") would be effective for the
interim and annual periods beginning on or after January 1, 2011 for Canadian
publicly accountable profit-oriented enterprises. IFRS will replace Canada's
current GAAP for these enterprises. Comparative IFRS information for the
previous fiscal year will also have to be reported. These new standards are
expected to be effective for the Trust in the first quarter of 2011.
The Trust is currently evaluating the impact of adopting IFRS and its primary
accounting principles and developing its change over plan.
4. Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid expenses as at
December 31, 2010 and 2009:
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2010 2009
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Interest receivable $ 1,803,224 $ 1,450,807
Prepaid expenses 111,800 160,903
Special income receivable 389,198 -
Fees receivable 67,341 94,673
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Amounts receivable and prepaid expenses $ 2,371,563 $ 1,706,383
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5. Mortgage investments:
The following is a breakdown of the mortgage investments as at December 31, 2010
and 2009:
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2010 Amount % 2009 Amount %
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Conventional first mortgages $179,004,150 87.2 $135,464,430 79.8
Conventional non-first mortgages 13,785,737 6.7 12,768,832 7.5
Special mortgage investments 12,521,042 6.1 21,595,035 12.7
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Total mortgage investments (at
cost) $205,310,929 100.0 $169,828,297 100.0
Fair value adjustment (2,980,000) (2,700,000)
Fair value $202,330,929 $167,128,297
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Conventional first mortgages are loans secured by a first priority mortgage
charge with loan to values not exceeding 75%. Conventional non-first mortgages
are loans with mortgages not registered in first priority with loan to values
not exceeding 75%. Special mortgage investments are loans that in some cases
have loans to value that exceed or may exceed 75% and are the investments that
are the source of all special profit participations earned by the Trust.
Mortgages are stated at fair value as discussed in Note 2(b). The fair value
adjustment in the amount of $2,980,000 as at December 31, 2010 (2009 -
$2,700,000) represents the total amount of management's estimate of the
shortfall between the mortgage investment principal balances and the estimated
net realizable recovery from the collateral securing the mortgage loans.
In June 2009, the AcSB amended CICA Handbook Section 3862, Financial Instruments
- Disclosures, by providing enhanced disclosure requirements for fair value
measurements of financial instruments and liquidity risks. HB 3862 establishes a
three-level valuation hierarchy for disclosure of financial instruments measured
at fair value based upon the degree to which the inputs used to value an asset
or liability as of the measurement date are observable:
Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices); and
Level 3: inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
The Trust's mortgage investments are measured at fair value using inputs not
based on observable data. As a result, all mortgage investments have been
classified in Level 3 of the valuation hierarchy.
A reconciliation of Level 3 assets is as follows:
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2010 2009
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Mortgage investment balance, beginning of
year $ 167,128,297 $ 223,395,801
Funding of mortgage investments 168,832,314 94,267,430
Discharge of mortgage investments (133,349,682) (150,234,934)
Change in unrealized loss included in
earnings (280,000) (300,000)
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Mortgage investment balance, end of year $ 202,330,929 $ 167,128,297
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The mortgages are secured by real property, bear interest at the weighted
average rate of 9.21% (2009 - 10.05%) and mature between 2011 and 2015.
The unadvanced funds under the existing mortgage portfolio (which are
commitments of the Trust) amounted to $18,406,862 as at December 31, 2010 (2009
- $12,709,686).
Principal repayments based on contractual maturity dates are as follows:
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2011 134,653,814
2012 56,204,179
2013 6,400,718
2014 6,821,210
2015 and thereafter 1,231,008
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$ 205,310,929
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Borrowers who have open mortgages have the option to repay principal at any time
prior to the maturity date.
6. Bank indebtedness:
The Trust has entered into credit arrangements of which $5,005,825 as at
December 31, 2010 (2009 - $NIL) has been drawn. Interest on bank indebtedness is
predominately charged at a formula rate that varies with bank prime and may have
a component with a fixed interest rate established based on a formula linked to
Bankers Acceptance rates. The credit arrangement comprises a revolving operating
facility, a component of which is a demand facility and a component of which has
a committed term to September 30, 2011. Bank indebtedness is secured by a
general security agreement. The credit agreement contains certain financial
covenants that must be maintained. As at December 31, 2010 and 2009, the Trust
was in compliance with all financial covenants.
7. Loans payable:
First priority charges on specific mortgage investments have been granted as
security for the loans payable. The loans mature on dates consistent with those
of the underlying mortgages. The loans are on a non-recourse basis and bear
interest at rates ranging from 3.50% to 6.45% as at December 31, 2010 (2009 -
2.50% to 7.55%). The Trust's principal balance outstanding under the mortgages
for which a first priority charge has been granted is $5,392,156 as at December
31, 2010 (2009 - $14,224,566).
The loans are repayable at the earlier of the contractual expiry date of the
underlying mortgage investment and the date the underlying mortgage is repaid.
Repayments based on contractual maturity dates are as follows:
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2011 $ 2,092,123
2014 2,040,968
2015 156,158
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$ 4,289,249
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8. Convertible debentures:
On April 24, 2006, the Trust completed a public offering of 25,000 6%
convertible unsecured subordinated debentures at a price of $1,000 per debenture
for gross proceeds of $25,000,000. The debentures mature on June 30, 2013 and
interest is paid semi-annually on June 30 and December 31. The debentures are
convertible at the option of the holder at any time prior to the maturity date
at a conversion price of $11.75. The debentures may not be redeemed by the Trust
prior to June 30, 2009. On and after June 30, 2009, but prior to June 30, 2010,
the debentures were redeemable at a price equal to the principal, plus accrued
interest, at the Trust's option on not more than 60 days and not less than 30
days notice, provided that the weighted average trading price of the units on
the Toronto Stock Exchange for the 20 consecutive trading days ending five
trading days preceding the date on which the notice of redemption is given is
not less than 125% of the conversion price. On and after June 30, 2010 and prior
to the maturity date, the debentures are redeemable at a price equal to the
principal amount plus accrued interest, at the Trust's option on not more than
60 days and not less than 30 days prior notice. On redemption or at maturity,
the Trust may, at its option, elect to satisfy its obligation to pay all or a
portion of the principal amount of the debenture by issuing that number of units
of the Trust obtained by dividing the principal amount being repaid by 95% of
the weighted average trading price of the units for the 20 consecutive trading
days ending on the fifth trading day preceding the redemption or maturity date.
The convertible debentures were allocated into liability and equity components
on the date of issuance as follows:
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Liability $ 24,619,518
Equity 380,482
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Principal $ 25,000,000
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On January 6, 2009, $536,000 of debentures were converted by the debenture
holders to 45,617 units of the Trust. On July 9, 2010, $20,000 of debentures
were converted by the debenture holders to 1,702 units of the Trust.
In the fourth quarter of 2010, the Trust completed a public offering of 31,443
5.75% convertible unsecured subordinated debentures at a price of $1,000 per
debenture for gross proceeds of $31,443,000. The debentures mature on October
31, 2017 and interest is paid semi-annually on April 30 and October 31. The
debentures are convertible at the option of the holder at any time prior to the
maturity date at a conversion price of $15.90. The debentures may not be
redeemed by the Trust prior to October 31, 2013. On and after October 31, 2013,
but prior to October 31, 2014, the debentures are redeemable at a price equal to
the principal, plus accrued interest, at the Trust's option on not more than 60
days and not less than 30 days notice, provided that the weighted average
trading price of the units on the Toronto Stock Exchange for the 20 consecutive
trading days ending five trading days preceding the date on which the notice of
redemption is given is not less than 125% of the conversion price. On and after
October 31, 2014 and prior to the maturity date, the debentures are redeemable
at a price equal to the principal amount plus accrued interest, at the Trust's
option on not more than 60 days and not less than 30 days prior notice. On
redemption or at maturity, the Trust may, at its option, elect to satisfy its
obligation to pay all or a portion of the principal amount of the debenture by
issuing that number of units of the Trust obtained by dividing the principal
amount being repaid by 95% of the weighted average trading price of the units
for the 20 consecutive trading days ending on the fifth trading day preceding
the redemption or maturity date.
The convertible debentures were allocated into liability and equity components
on the date of issuance as follows:
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Liability $ 31,213,000
Equity 230,000
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Principal $ 31,443,000
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The accretion of the liability component of the convertible debentures, which
increases the liability component from the initial allocation on the date of
issuance, is included in interest expense.
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2010 2009
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Liability, beginning of year $ 23,681,244 $ 23,973,019
Issuance of new debentures, net of deferred
financing costs 29,680,929
Conversion of debentures to equity (20,000) (513,982)
Implicit interest rate in excess of coupon
rate 57,689 51,218
Amortization of debenture financing costs 228,941 170,989
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Liability, end of period $ 53,628,803 $ 23,681,244
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Deferred financing costs relating to the issuance of convertible debentures are
not presented as a separate asset on the balance sheet and are netted against
the carrying value of the convertible debenture.
Notwithstanding the carrying value of the convertible debentures, the principal
balance outstanding to the debenture holders is $55,887,000 (2009 -
$24,464,000).
9. Unitholders' equity:
The beneficial interests in the Trust are represented by a single class of units
which are unlimited in number. Each unit carries a single vote at any meeting of
unitholders and carries the right to participate pro rata in any distributions.
(a) The following units are issued and outstanding:
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2010 2009
----------------------------------------------------------------------------
Balance, beginning of year 13,896,829 13,832,219
New units from conversion of debentures (note 8) 1,702 45,617
New units from exercise of options 427,500 -
New units issued during the year under
Distribution Reinvestment Plan 51,302 18,993
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Balance, end of year 14,377,333 13,896,829
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(b) Incentive option plan:
In 2005, 415,000 options were issued to trustees, directors, officers and
employees of the Trust Manager and Mortgage Banker, with an exercise price of
$9.90 per unit. The options were exercisable any time up to November 17, 2010.
The options vested on the grant date. At December 31, 2010, 415,000 unit options
have been exercised.
In 2008, 35,000 options were issued to trustees with an exercise price of $9.94.
The options were exercisable any time up to October 7, 2013. The fair value of
those unit options, given the small number of options issued and given the low
volatility in the Trust's unit trading price, is not material and therefore no
related compensation expense has been recorded by the Trust. At December 31,
2010, 35,000 options have been exercised.
As at December 31, 2010, no options remained outstanding (2009 - 427,500)
(c) Distribution reinvestment plan and direct unit purchase plan:
The Trust has a distribution reinvestment plan and direct unit purchase plan for
its unitholders which allows participants to reinvest their monthly cash
distributions in additional trust units at a unit price equivalent to the
weighted average price of units for the preceding five day period.
10. Per unit amounts:
The following table reconciles the numerators and denominators of the basic and
diluted earnings per unit.
Basic earnings per unit calculation:
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2010 2009
----------------------------------------------------------------------------
Numerator for basic earnings per unit:
Net earnings $ 14,235,843 $ 14,453,196
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Denominator for basic earnings per unit:
Weighted average units 14,119,651 13,880,979
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Basic earnings per unit $ 1.008 $ 1.041
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Diluted earnings per unit calculation:
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2010 2009
----------------------------------------------------------------------------
Numerator for diluted earnings per unit:
Net earnings $ 14,235,843 $ 14,453,196
Interest on convertible debentures (note 14) 2,135,889 1,690,488
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Net earnings for diluted earnings per unit $ 16,371,732 $ 16,143,684
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Denominator for diluted earnings per unit:
Weighted average units 14,119,651 13,880,979
Net units that would be issued:
Assuming the proceeds from options are used
to repurchase units at the average unit
price - -
Assuming convertible debentures are
converted 2,513,775 2,082,043
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Diluted weighted average units 16,633,426 15,963,022
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Diluted earnings per unit $ 0.984 $ 1.011
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11. Distributions:
The Trust makes distributions to the unitholders on a monthly basis on or about
the 15th day of each month. The Declaration of Trust provides that the Trust
intends to distribute to unitholders by year end at least 100% of the net income
of the Trust determined in accordance with the Income Tax Act (Canada), subject
to certain adjustments. The net income of the Trust determined in accordance
with the Income Tax Act (Canada), for the year ended December 31, 2010 was
$14,212,874 (2009 - $13,912,108).
For the year ended December 31, 2010, the Trust recorded distributions of
$14,235,843 (2009 - $14,453,196) to its unitholders. Distributions were $1.006
(2009 - $1.041) per unit.
12. Income taxes:
The Trust is taxed as a mutual fund trust for income tax purposes. Pursuant to
the Declaration of Trust, the Trust intends to distribute its income for income
tax purposes each year to such an extent that it will not be liable for income
tax under Part 1 of the Income Tax Act (Canada). For financial statement
reporting purposes, the tax deductibility of the Trust's distributions is
treated as an exemption from taxation as the Trust expects to distribute all of
its income to unitholders.
On June 22, 2007, Bill C-52, which significantly modifies the income tax rules
applicable to certain publicly traded or listed trusts and partnerships,
received Royal Assent. In particular, certain income of (and distributions made
by) these entities will be taxed in a manner similar to income earned by (and
distributions made by) a corporation. These rules will be effective for the 2007
taxation year with respect to trusts which commence public trading after October
31, 2006. For trusts which were publicly traded or listed prior to November 1,
2006, the application of the rules will be delayed to the earlier of (i) the
trust's 2011 taxation year, and (ii) a taxation year of the trust in which the
trust exceeds normal growth as determined by reference to the normal growth
guidelines, as amended from time to time, unless that excess arose as a result
of a prescribed transaction. As currently structured, the Trust will be subject
to these new rules, once applicable.
On December 15, 2006, the Department of Finance (Canada) released the normal
growth guidelines for income trusts and other flow-through entities that qualify
for the four-year transitional relief. The guidance, as amended from time to
time, establish objective tests with respect to how much an income trust is
permitted to grow without jeopardizing its transitional relief. If the limits
described in the normal growth guidelines are exceeded, the Trust may lose its
transitional relief and thereby become immediately subject to the new rules. The
Trust has not exceeded these limits.
The Trust has determined that the new rules adversely affect the marketability
of the Trust's units, and the Trust's distributable cash. As such on January 1,
2011, the Trust completed its conversion to a corporation and subsequent to
December 31, 2010 operates as a dividend paying Mortgage Investment Corporation
under the Income Tax Act (Canada) to maintain its flow through status. The costs
for the conversion of the Trust to a Corporation ($387,622) were expensed by the
Trust in the fourth quarter of 2010.
13. Related party transactions and balances:
Transactions with related parties are in the normal course of business and are
recorded at the exchange amount, which is the amount of consideration
established and agreed to by the related parties, and in management's view
represents fair market value.
The Trust Manager (a company controlled by some of the trustees), pursuant to
the Trust Management Agreement and Declaration of Trust, receives an allocation
of mortgage interest referred to as Trust Manager spread interest, calculated as
0.75% per annum of the Trust's daily outstanding performing mortgage investment
balances. For the year ended December 31, 2010 this amount was $1,394,583 (2009
- $1,442,176), and was deducted from interest and fees earned.
The Mortgage Banker (a company controlled by a Trustee), pursuant to the
Mortgage Banking Agreement and Declaration of Trust, receives certain fees from
the borrowers as follows: loan servicing fees equal to 0.10% per annum on the
principal amount of each of the Trust's mortgage investments; 75% of all the
commitment and renewal fees generated from the Trust's mortgage investments and
25% of all the special profit income generated from the non-conventional
mortgage investments after the Trust has yielded a 10% per annum return on its
investments. Interest and fee income is net of the loan servicing fees paid to
the Mortgage Banker of approximately $186,000 for the year ended December 31,
2010 (2009 - $192,000). The Mortgage Banker also retains all overnight float
interest and incidental fees and charges payable by borrowers on the Trust's
mortgage investments. The Trust's share of commitment and renewal fees recorded
in income for the year ended December 31, 2010 was $825,427 (2009 - $833,226)
and applicable special profit income for the year ended December 31, 2010 was
$1,892,342 (2009 - $463,890).
The Trust Management Agreement and Mortgage Banking Agreement contains
provisions for the payment of termination fees to the Trust Manager and Mortgage
Banker in the event that the respective agreements are either terminated or not
renewed.
Several of the Trust's mortgages are shared with other investors of the Mortgage
Banker, which may include members of management of the Mortgage Banker and/or
Officers or Trustees of the Trust. The Trust ranks equally with other members of
the syndicate as to receipt of principal and income.
Mortgages totalling $8,760,000 (2009 - $1,760,000) were issued to borrowers
controlled by certain Trustees of the Trust. Each mortgage is dealt with in
accordance with the Trust's existing investment and operating policies and is
personally guaranteed by the related Trustee.
14. Interest expense:
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2010 2009
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Bank interest expense $ 483,907 $ 333,285
Loans payable interest expense 257,282 796,787
Debenture interest expense 2,135,889 1,690,488
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Interest expense $ 2,877,078 $ 2,820,560
Deferred finance cost amortization -
convertible Debenture (228,941) (170,989)
Implicit interest rate in excess of coupon
rate - Convertible debentures (57,689) (51,218)
Change in accrued interest (359,786) 120,742
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Cash interest paid $ 2,230,662 $ 2,719,095
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15. Contingent liabilities:
The Trust is involved in certain litigation arising out of the ordinary course
of investing in mortgages. Although such matters cannot be predicted with
certainty, management believes the claims are without merit and does not
consider the Trust's exposure to such litigation to have an impact on these
financial statements.
16. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness, accounts payable and
accrued liabilities and unitholder distribution payable, approximate their carry
values due to their short-term maturities.
The fair value of loans payable approximate their carrying values due to the
fact that the majority of the loans are (i) are short-term in nature with terms
of 12 months or less, (ii) repayable in full, at any time upon the borrower
under the underlying mortgage that secures the loan payable repaying their
mortgage without penalty, and (iii) have floating interest rates linked to bank
prime.
The fair value of the convertible debentures has been determined based on the
December 31, 2010 closing price of units of the Trust on the TSX. The fair value
has been estimated at December 31, 2010 to be $56,305,890 (2009 - $24,708,640).
17. Risk management:
(a) Interest rate risk:
The Trust's operations are subject to interest rate fluctuations. The interest
rate on the majority of mortgage investments is set at the greater of a floor
rate and a formula linked to bank prime. The floor interest rate mitigates the
effect of a drop in short term market interest rates while the floating
component linked to bank prime allows for increased interest earnings where
short term market rates increase.
The Trust's debt comprises bank indebtedness and loans payable, with the
majority of such debt bearing interest based on bank prime and/or based on short
term Bankers Acceptance interest rates as a benchmark.
At December 31, 2010 and December 31, 2009 if interest rates at that date had
been 100 basis points lower or higher, with all other variables held constant,
net income for the period would be affected as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Carrying Interest Rate Risk Carrying Interest Rate Risk
Value -1% +1% Value -1% +1%
Financial
assets
Mortgage
invest-
ments $202,330,929 ($20,800) $126,487 $167,128,297 ($54,725) $60,164
Financial
liabili-
ties
Loans
payable 4,289,249 20,921 (20,921) 10,714,637 74,409 (74,409)
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Total
increase
(decrease) $121 ($105,566) $19,684 ($14,245)
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(b) Credit and operational risks:
Any instability in the real estate sector and an adverse change in economic
conditions in Canada could result in declines in the value of real property
securing the Trust's mortgage investments. The Trust mitigates this risk by
adhering to the investment and operating policies set out in its Declaration of
Trust.
The Trust's maximum exposure to credit risk is represented by the fair values of
amounts receivable and mortgage investments.
(c) Liquidity risk:
The Trust's liquidity requirements relate to its obligations under its bank
indebtedness, loans payable, convertible debentures and its obligations to make
future advances under its existing mortgage portfolio. Liquidity risk is managed
by ensuring that the sum of (i) availability under the Trust's bank borrowing
line, (ii) the sourcing of other borrowing facilities, and (iii) projected
repayments under the existing mortgage portfolio, exceeds projected needs
(including funding of further advances under existing and new mortgage
investments).
As at December 31, 2010, the Trust had not utilized its full leverage
availability, being a maximum of 60% of its first mortgage investments.
Un-advanced committed funds under the existing mortgage portfolio amounted to
$18,406,862 as at December 31, 2010 (2009 - $12,709,686). These commitments are
anticipated to be funded from the Trust's credit facility and borrower
repayments. The Trust has a revolving line of credit with its principal banker
to fund the timing differences between mortgage advances and mortgage
repayments. The bank borrowing line is a committed facility with a maturity date
of September 30, 2011. If the loan is not renewed on September 30, 2011, the
terms of the facility allow for the Trust to repay the balance owed on September
30, 2011 within twelve months. In the current economic climate and capital
market conditions, there are no assurances that the bank borrowing line will be
renewed or that it could be replaced with another lender if not renewed. If it
is not extended at maturity, repayments under the Trust's mortgage portfolio
would be utilized to repay the bank indebtedness. There are limitations in the
availability of funds under the revolving line of credit. The Trust's mortgages
are predominantly short-term in nature, and as such, the continual repayment by
borrowers of existing mortgage investments creates liquidity for ongoing
mortgage investments and funding commitments. Loans payable relate to borrowings
on specific mortgages within the Trust's portfolio and only have to be repaid
once the specific loan is paid out by the Borrower.
If the Trust is unable to continue to have access to its bank borrowing line and
loans payables, the size of the Trust's mortgage portfolio will decrease and the
income historically generated through holding a larger portfolio by utilizing
leverage will not be earned.
Contractual obligations as at December 31, 2010 are due as follows:
Less than 1
Total year 1 - 3 years 4 - 6 years
--------------------------------------------------------
Bank indebtedness $ 5,005,825 $ 5,005,825
Loans payable 4,289,249 2,092,123 2,197,126
Convertible
debenture 55,887,000 24,444,000 31,443,000
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Subtotal -
Liabilities $ 65,182,074 $ 7,097,948 $ 24,444,000 $ 33,640,126
Future advances
under mortgages 18,406,862 18,406,862
--------------------------------------------------------
Liabilities and
contractual
obligations $ 83,588,936 $ 25,504,810 $ 24,444,000 $ 33,640,126
--------------------------------------------------------
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The bank indebtedness and loans payable are liabilities resulting from the
funding of the Trust's mortgage investments. Repayment of mortgage investments
results in a direct and corresponding pay down of the bank indebtedness and/or
loans payable. The obligations for future mortgage advances under the Trust's
mortgage portfolio are anticipated to be funded from the Trust's credit facility
and borrower mortgage repayments. Upon funding of same, the funded amount forms
part of the Trust's mortgage investments.
(d) Capital risk management:
The Trust defines capital as being the funds raised through the issuance of
publicly traded securities of the Trust. The Trust's objectives when managing
capital/equity are:
-- to safeguard the Trust's ability to continue as a going concern, so that
it can continue to provide returns for unitholders, and
-- to provide an adequate return to unitholders by obtaining an appropriate
amount of debt, commensurate with the level of risk.
The Trust manages the capital/equity structure and makes adjustments to it in
light of changes in economic conditions. In order to maintain or adjust the
capital structure, the Trust may issue new units or repay bank indebtedness (if
any) and loans payable.
The Trust's Declaration of Trust incorporates various mortgage investing
restrictions and investment operating policies. The Trust cannot invest more
than 5% of the amount of its capital in any single conventional first mortgage
and cannot invest more than 2.5% of the amount of its capital in any single
non-conventional mortgage or conventional mortgage that is not a first mortgage.
The Trust may only borrow funds in order to acquire or invest in mortgage
investments in amounts up to 60% of the book value of the Trust's portfolio of
conventional first mortgages. The Trust has complied with all such restrictions
in its Declaration of Trust.
The Trust is required by its Bank lender to maintain various covenants,
including minimum equity amount, interest coverage ratios, indebtedness as a
percentage of the performing first mortgage portfolio size, and indebtedness to
total assets. The Trust has complied with all such Bank covenants.
19. Comparative figures:
Certain 2009 comparative figures have been reclassified to conform with the
financial statement presentation adopted in 2010.
20. Subsequent events:
On January 1, 2011, the Trust completed an approved plan of arrangement pursuant
to which the Trust was reorganized into Firm Capital Mortgage Investment
Corporation, which will operate as a Mortgage Investment Corporation under the
Income Tax Act (Canada) (refer to note 12).
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