Firm Capital Mortgage Investment Corporation (the "Corporation")
(TSX: FC), today released its financial statements for the second
quarter ended June 30, 2011.
EARNINGS
Comprehensive income and profit ("Profit") for the quarter ended
June 30, 2011 totaled $3,461,415 compared to Operations profit of
$3,295,389 for the quarter ended June 30, 2010. Profit for the
quarter ended June 30, 2011 exceeded dividends by $31,768 or $0.003
per share. The second quarter Profit represents an annualized
return on average Shareholders' equity of 9.72% per annum. This
return on Shareholders' equity equates to 841 basis points per
annum over the average one year Government of Canada Treasury bill
yield for the quarter 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.
DIVIDEND OVERVIEW:
Monthly dividends for the second quarter totaled $0.234 per
share ($0.078 per share per month).
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Corporation's mortgage portfolio as at June 30,
2011 are as follows:
-- Total gross portfolio equals $236,501,237 ($233,521,237 net of
impairment provision of $2,980,000).
-- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 85% of our total portfolio, and total
conventional mortgages with loan to values under 75% comprise 91% of our
total portfolio.
-- Non-conventional mortgages and related investments total 9% of the
portfolio.
-- Approximately 52% 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 8.95% per annum.
-- Regionally, the portfolio is diversified approximately as follows:
Ontario 81.3%, Alberta 12.7%, British Columbia 5.0%, with the balance
(1.0%) being in other provinces.
-- Mortgage portfolio breakdown by investment is as follows:
Amount Number of Mortgages Total Amount
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$0-$1,000,000 49 $ 25,700,194
$1,000,001-$2,000,000 27 42,407,205
$2,000,001-$3,000,000 12 29,491,688
$3,000,001-$4,000,000 5 17,355,348
$4,000,001-$5,000,000 7 31,225,295
$5,000,001-$10,000,000 12 90,321,507
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Total 112 $ 236,501,237
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IMPAIRMENT PROVISION UPDATE:
Management has always taken a proactive approach to impairment
provisions. This is a prudent method of protecting our
Shareholders' equity. Impairment provisions totaled $2,980,000,
representing 1.26% of the gross loan portfolio as at June 30,
2011.
DIVIDEND AND SHARE PURCHASE PLAN:
The Corporation has in place a Dividend Reinvestment Plan (DRIP)
and Share Purchase Plan that is available to its Shareholders. The
plans allows participants to have their monthly cash dividends
reinvested in additional Corporation units and grants participants
the right to purchase, without commission, additional units, 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 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
dividends, 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 mic 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.
NOTICE UNDER NATIONAL INSTRUMENT 51-102
National Instrument 51-102: Continuous Disclosure Requirements
requires that these interim financial statements be accompanied by
this notice which indicates that these financial statements have
not been reviewed by the auditors of Firm Capital Mortgage
Investment Corporation.
Unaudited Interim Condensed Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Balance Sheets
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June 30, 2011 Dec. 31, 2010 Jan. 1, 2010
(unaudited) (unaudited) (unaudited)
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Assets
Cash - - $ 1,444,339
Amounts receivable and prepaid
expenses (note 5) $ 3,196,455 $ 2,371,563 1,706,383
Mortgage investments (note 6) 233,521,237 202,330,929 167,128,297
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$ 236,717,692 $ 204,702,492 $ 170,279,019
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Liabilities and Equity
Bank indebtedness (note 7) $ 38,221,178 $ 5,005,825 -
Accounts payable and accrued
liabilities 781,061 1,482,580 $ 410,064
Unearned income 491,296 372,514 202,481
Shareholder dividend and
unitholder distribution
payable 1,144,979 2,127,845 2,543,120
Loans payable (note 8) 3,852,429 4,289,249 10,714,637
Convertible debentures (note 9) 50,741,938 53,628,803 23,681,244
Conversion option of
convertible debentures (note
4(e)(ii)) - - 222,182
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Total liabilities excluding net
assets attributable to
unitholders 95,232,881 66,906,816 37,773,728
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Net assets attributable to
unitholders (note 10) - - 132,505,291
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Shareholders' / Unitholders'
equity 141,609,593 138,117,502 -
Retained earnings / (deficit) (124,782) (321,826) -
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Total equity 141,484,811 137,795,676 -
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Commitments (note 6)
Contingent liabilities (note
17)
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$ 236,717,692 $ 204,702,492 $ 170,279,019
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Comprehensive Income
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30/11 June 30/10 June 30/11 June 30/10
(unaudited) (unaudited) (unaudited) (unaudited)
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Interest and fees
earned (notes 3
(b) and 15) $ 4,729,790 $ 4,033,295 $ 9,515,886 $ 8,049,560
Less interest
expense (note 16) 1,140,777 573,889 2,185,092 1,105,466
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Net interest and
fee income 3,589,013 3,459,406 7,330,794 6,944,094
General and
administrative
expenses 127,598 164,017 322,461 342,286
Impairment loss on
mortgages (note
6)
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127,598 164,017 322,461 342,286
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Operations profit
for the period $ 3,461,415 $ 3,295,389 $ 7,008,333 $ 6,601,808
Finance costs
Change in fair
value of the
conversion option
of convertible
debentures (note
4(e)(ii)) - 24,033 - (321,826)
Distributions to
unitholders (note
10) - (2,474,744) - (5,731,903)
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Comprehensive
income and profit
(loss) for the
period, and
change in net
assets
attributable to
unitholders for
the period,
respectively $ 3,461,415 $ 844,678 $ 7,008,333 $ 548,079
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Profit per share
(note 12)
Basic $ 0.237 N/A $ 0.483 N/A
Diluted $ 0.237 N/A $ 0.482 N/A
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Changes in Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec 31, 2010 June 30, 2010
(Unaudited) (Unaudited) (Unaudited)
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Shareholders' / Unitholders'
Equity
Shares / Units (note 11):
Balance, beginning of period $ 137,343,502 - 132,275,299
Reclassification of trust units
from liability to equity (note
10) - $ 132,505,299 -
Proceeds from issuance of
shares / units 368,137 4,818,203 2,753,270
Conversion of debentures to
shares 3,195,000 20,000 -
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Balance, end of period $ 140,906,639 $ 137,343,502 $ 135,028,569
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Equity component of convertible
debenture (note 9):
Balance, beginning of period $ 774,000 - -
Conversion of debentures to
shares $ (71,046) - -
Reclassification of trust units
from liability to equity (note
10) - $ 544,000 $ 544,000
Equity component of debenture
issued during the period - 230,000 230,000
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Balance, end of period $ 702,954 $ 774,000 $ 774,000
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Total Shareholders' /
Unitholders' equity $ 141,609,593 $ 138,117,502 $ 135,802,569
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Retained earnings / deficit
Retained earnings, beginning of
period ($321,826) - -
Dividends / distributions to
shareholders / unitholders
(note 13) (6,811,289) $ (8,503,941) ($810,629)
Comprehensive income and profit
for the period 7,008,333 8,182,115 548,079
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Retained earnings / (deficit),
end of period $ (124,782) $ (321,826) $ (262,550)
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Shares / units issued and
outstanding (note 11) 14,679,223 14,377,333 14,171,850
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Cash Flows
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Three Months Ended Six Months Ended
June 30/11 June 30/10 June 30/11 June 30/10
(unaudited) (unaudited) (unaudited) (unaudited)
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Cash provided by
(used in):
Operating
activities:
Profit (loss) for
the period $ 3,461,415 $ 844,678 $ 7,008,333 $ 548,079
Adjustments for:
Distribution to
unitholders - 2,474,744 - 5,731,903
Change in fair
value of
conversion option
for Convertible
debentures - (24,033) - 321,826
Implicit interest
rate in excess of
Coupon rate -
convertible
debentures 21,205 13,518 44,722 26,828
Deferred finance
cost amortization
- convertible
debentures 96,664 42,630 192,267 84,792
Net changes in non-
cash items:
Increase in
amounts
receivable and
prepaid expenses (175,092) 94,208 (824,892) 11,957
Decrease in
accounts payable
and accrued
liabilities (1,039,770) (472,063) (701,519) (78,586)
Increase in
unearned income 116,165 33,797 118,782 36,450
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2,480,587 3,007,479 5,837,693 6,683,249
Financing
activities:
Proceeds from
issuance of shares 163,910 2,286,318 368,236 2,753,270
Increase in bank
indebtedness 18,621,651 9,919,518 33,215,353 12,923,656
Decrease in loans
payable (net) (35,925) (37,365) (436,820) (3,166,253)
Increase (decrease)
in dividend and
distributions
payable 10,308 17,881 (982,866) (1,437,716)
Dividends to
shareholders paid
during the period (3,429,647) (810,629) (6,811,289) (810,629)
Distribution to
unitholders (2,474,744) (5,731,903)
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Net cash flow from
(used in) financing
activities 15,330,297 8,900,979 25,352,614 4,530,425
Investing
activities:
Funding of mortgage
investments (51,924,287) (44,485,829) (91,472,794) (72,540,283)
Discharge of
mortgage
investments 34,113,403 32,577,371 60,282,487 61,326,609
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Net cash flow from
(used in) investing
activities (17,810,884) (11,908,458) (31,190,307) (11,213,674)
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Increase in cash,
being cash,
beginning and end
of period $ - $ - $ - $ -
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Cash flows from operating activities include:
Interest received $ 4,698,998 $ 3,925,981 $ 8,963,561 $ 7,781,294
Interest paid (note
16) $ 1,904,711 $ 910,930 $ 2,040,651 $ 972,290
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to unaudited interim condensed Financial Statements
Three and six months ended June 30, 2011 and 2010
Firm Capital Mortgage Investment 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 shares of the Corporation are listed on the
Toronto Stock Exchange under the symbol "FC".
1. Organization of Corporation:
On November 30, 2010, Firm Capital Mortgage Investment Trust
(the "Trust") entered into a plan of arrangement
("Reorganization"), whereby the Trust was converted from an income
trust structure into the public corporation, Firm Capital Mortgage
Investment Corporation, effective January 1, 2011. The Corporation
was incorporated pursuant to the laws of the Province of Ontario on
October 22, 2010 for the purposes of participating in the
Reorganization.
Pursuant to the Reorganization, units of the Trust ("Units" or
"Trust Units") were exchanged on a one-for-one basis for common
shares of the Corporation. Holders of Units therefore became the
sole shareholders of the Corporation effective January 1, 2011.
As part of the Reorganization, the Trust was wound up and its
assets were distributed to the Corporation. The Reorganization was
treated as a change in business form rather than a change in
control, and therefore, has been accounted for as a continuity of
interest. The carrying amounts of assets, liabilities, and
unitholders' equity in the financial statements of the Trust
immediately prior to the Reorganization were the same as the
carrying values of the Corporation immediately following the
Reorganization. References to common shares, shareholders and
dividends of the Corporation were formerly referred to as units,
unitholders, and distributions under the Trust. Comparative amounts
in these and future financial statements during 2011 are those of
the Trust.
The Corporation's mortgage banker is Firm Capital Corporation
and the Corporation's manager is FC Treasury Management Inc.
2. Basis of presentation:
(a) Statement of compliance:
These condensed interim financial statements have been prepared
in accordance with International Accounting Standards ("IAS") 34,
Interim Financial Reporting and using the accounting policies
described herein. The three months ended March 31, 2011 interim
financial statements are the Corporation's first International
Financial Reporting Standards ("IFRS") condensed financial
statements for part of the period covered by the first IFRS annual
financial statements and IFRS 1 First-time Adoptions of
International Financial Reporting Standards ("IFRS 1"). The
unaudited interim condensed financial statements do not include all
of the information required for full annual financial statements
and should be read in conjunction with the notes to the
Corporation's audited financial statements for the year ended
December 31, 2010.
An explanation of how the transition to IFRS has affected the
reported financial position, financial performance and cash flows
of the Corporation is provided in note 4. This note includes
reconciliations of equity and total comprehensive income for
comparative periods and of equity at the date of transition, being
January 1, 2010, from reporting under Canadian generally accepted
accounting principles ("Canadian GAAP" or "previous GAAP") to those
reported for those periods and at the date of transition under
IFRS.
These unaudited interim condensed financial statements were
approved by the Board of Directors on August 5, 2011.
(b) Basis of measurement:
The unaudited interim condensed financial statements have been
prepared on the historical cost basis, except for financial
instruments classified as fair value through profit or loss, which
are measured at fair value.
(c) Functional and presentation currency:
These unaudited interim condensed financial statements are
presented in Canadian dollars, which is the Corporation's
functional currency.
(d) Use of estimates and judgements:
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the reported
amounts of assets, liabilities, income and expenses. Actual amounts
may differ from these estimates.
Significant judgement made by the Corporation relates to the
classification of trust units between equity and liability (see
note 10).
The most significant estimates that the Corporation is required
to make relate to the impairment of the mortgage investments (notes
3(a) and 6). 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 and volatile equity markets have
combined to increase the uncertainty inherent in such estimates and
assumptions. Accordingly, by their nature, estimates of impairment
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.
3. Summary of significant accounting policies:
The Corporation's accounting policies and its standards of
financial disclosure set out below are in accordance with IFRS and
have been applied consistently to all periods presented in these
consolidated interim condensed financial statements and in
preparing the opening IFRS balance sheet as at January 1, 2010 for
the purposes of the transition to IFRS.
(a) Mortgage investments:
Mortgage investments are classified as loans and receivable
investments. Such investments are recognized initially at fair
value plus any directly attributable transaction costs. Subsequent
to initial recognition the mortgage loans are measured at amortized
cost using the effective interest method, less any impairment
losses.
The mortgage investments are assessed at each reporting date to
determine whether there is objective evidence of impairment. A
financial asset is impaired if objective evidence indicates that a
loss event has occurred after the initial recognition of an asset,
and that the loss event had a negative effect on the estimated
future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of the mortgage investments
measured at amortized cost is calculated as the difference between
its carrying amount and the present value of the estimated future
cash flows discounted at the asset's original effective interest
rate. Losses are recognized in the statement of comprehensive
income and reflected in an allowance account against the mortgage
investments. Interest on the impaired asset continues to be
recognized through the unwinding of the discount if it is
considered collectable. When a subsequent event causes the amount
of impairment loss to decrease, the decrease in impairment loss is
reversed through profit or loss.
(b) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and is
recorded net of the Corporation Manager interest spread described in
note 15. Commitment fees received are amortized over the expected
term of the mortgage.
(ii) Special investments:
Special profit participations earned by the Corporation on special
investments are recognized and included in interest and fees earned
only once the receipt of such amounts is certain.
(c) Share-based compensation:
The Corporation has share-based compensation plans (i.e.
incentive option plan) which are described in note 11. The expense
of equity-settled incentive option plan are measured based on fair
value of the awards of each tranche at the grant date. The expense
is recognized on a proportionate basis consistent with the vesting
features of each tranche of the grant.
(d) Income taxes:
The Corporation is a mortgage investment corporation pursuant to
the Income Tax Act (Canada). As such, the Corporation is entitled
to deduct from its taxable income dividends paid to shareholders
during the year or within 90 days of the end of the year. The
Corporation tends to maintain its status as a mortgage investment
corporation and will distribute sufficient dividends in the year
and in future years to ensure that the Corporation is not subject
to income taxes. Accordingly, for financial statement reporting
purposes, the tax deductibility of the Corporation's dividends
results in the Corporation being effectively exempt from taxation
and no provision for current or future income taxes is
required.
(e) Financial assets and liabilities:
Financial assets includes the Corporation's cash, amounts
receivable and mortgage investments. Financial liabilities include
the bank indebtedness, accounts payable and accrued liabilities,
unearned income, shareholder dividend and unitholder distribution
payable, loans payable, liability component of convertible
debentures and trust units (until June 8, 2010).
Recognition and measurement of financial instruments
The Corporation determines the classification of its financial
assets and liabilities at initial recognition. Financial
instruments are recognized initially at fair value and in the case
of financial assets and liabilities carried at amortized costs,
adjusted for directly attributable transaction costs.
The Corporation has designated its cash as held-for-trading,
which is measured at fair value. Amounts receivable and mortgage
investments are classified as loans and receivables, which are
measured at amortized cost.
Bank indebtedness, accounts payable and accrued liabilities,
unearned income, shareholder dividend and unitholder distribution
payable, loans payable, liability component of convertible
debentures and trust units (until June 8, 2010) are classified as
other financial liabilities, which are also measured at amortized
cost.
The Corporation had neither available-for-sale, nor
held-to-maturity instruments as at or during the six months ended
June 30, 2011 and 2010.
(f) Compound financial instruments:
Compound financial instruments issued by the Corporation
comprise convertible debentures that can be converted to share
capital at the option of the holder, and the number of shares to be
issued does not vary with changes in their fair value. The
liability component of a compound financial instrument is
recognized initially at the fair value of a similar liability that
does not have an equity conversion option. The equity component is
recognized initially at the difference between the fair value of
the compound financial instrument as a whole and the fair value of
the liability component. Any directly attributable transaction
costs are allocated to the liability and equity components in
proportion to their initial carrying amounts. Subsequent to initial
recognition, the liability component of a compound financial
instrument is measured at amortized cost using the effective
interest method. The equity component of a compound financial
instrument is not re-measured subsequent to initial recognition.
Interest, dividends, losses and gains relating to the financial
liability are recognized in profit or loss. Distributions to the
equity holders are recognized in equity, net of any tax
benefit.
(g) Hybrid financial instruments:
Hybrid financial instruments comprise convertible debentures
which contain an embedded derivative related to the conversion
feature to Trust units from its issuance to June 8, 2010. The
embedded derivative is measured at fair value at initial
recognition, and subsequently at every reporting period with fair
value changes recorded in profit or loss. The difference between
the consideration received and the fair value of the embedded
derivatives, is attributed to the debt host contract at initial
recognition which is subsequently measured at amortized cost using
the effective interest method.
(h) Share capital:
Common shares are classified as equity. Incremental costs
directly attributable to the issue of common shares are recognized
as a deduction from equity.
(i) Trust Units:
Trust units are classified as a liability from January 1, 2010
to June 8, 2010 and as equity from June 9, 2010 to December 31,
2010, as further detailed in note 10.
(j) Basic and diluted per share calculation:
The Corporation presents basic and diluted earnings profit or
loss per share data for its common shares. Basic per share amounts
are calculated by dividing the profit or loss attributable to
common shareholders of the Corporation by the weighted average
number of common shares outstanding during the period. Diluted per
share amounts are calculated using the "if converted method" and
are determined by adjusting the profit or loss attributable to
common shareholders and the weighted average number of common
shares outstanding, adjusted for the effects of all dilutive
potential convertible debentures and granted incentive option
plan.
(k) New standards and interpretations not yet adopted:
IFRS 9, Financial Instruments
IFRS 9 introduces new requirements for classifying and measuring
financial assets and is likely to affect the Corporation's
accounting for its financial assets. Specifically, IFRS 9 requires
financial assets to be classified into two measurement categories,
those measured at fair value and those measured at amortized cost.
The standard is not applicable until January 1, 2013 but is
available for early adoption. The Corporation has not early adopted
IFRS 9 for the period ended June 30, 2011, and the extent of the
impact has not been determined.
IFRS 7, Financial Instruments - Disclosure
An amendment to IFRS 7 issued in October 2010 will enhance
disclosure requirements relating to the transfer of financial
assets. This will include disclosures for transfers of financial
assets that are derecognized in their entirety as well as those
that are not. The effective date for the amendment will be for
annual periods beginning on or after July 1, 2011. Although earlier
application is permitted (subject to disclosure of that fact), the
Corporation has not chosen to early adopt the amendment for the
period ended June 30, 2011, and the extent of the impact has not
been determined.
4. Transition to IFRS:
The Corporation has adopted IFRS effective January 1, 2010 ("the
transition date") and has prepared its opening IFRS statement of
financial position as at that date. Prior to the adoption of IFRS,
the Corporation prepared its financial statements in accordance
with Canadian GAAP.
The accounting policies set out in note 3 have been applied in
preparing the financial statements for the six months ended June
30, 2011, the comparative information presented in these financial
statements for the six months ended June 30, 2010 and the year
ended December 31, 2010 and in the preparation of an opening IFRS
balance sheet at January 1, 2010.
In preparing its opening IFRS balance sheet, the Corporation has
adjusted amounts reported previously in financial statements
prepared in accordance with Canadian GAAP. An explanation of how
the transition from Canadian GAAP to IFRS has affected the
Corporation's financial position, financial performance and cash
flows is set out in the following tables and the notes that
accompany the tables:
(a) Exemptions from full retrospective application:
First-time adopters of IFRS must apply the provisions of IFRS 1.
IFRS 1 requires adopters to retrospectively apply all IFRS
standards as of the reporting date with certain optional exemptions
and certain mandatory exemptions.
In preparing these unaudited interim condensed financial
statements in accordance with IFRS 1, the Corporation has applied
the mandatory exemption from full retrospective application of IFRS
for estimates. The mandatory exemption requires that estimates
previously determined under Canadian GAAP cannot be revised due to
the application of IFRS, except when necessary to reflect
differences in accounting policies.
(b) Reconciliation of equity as reported under Canadian GAAP and
IFRS:
The following is a reconciliation of equity as previously
reported under Canadian GAAP to IFRS on January 1, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
January 1, 2010
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Assets
Cash 1,444,339 - 1,444,339
Amounts receivable and prepaid
expenses 1,706,383 - 1,706,383
Mortgage investments 167,128,297 - 167,128,297
----------------------------------------------------------------------------
170,279,019 - 170,279,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness - - -
Accounts payable and accrued
liabilities 410,064 - 410,064
Unearned income 202,481 - 202,481
Shareholder dividend and unitholder
distribution payable 2,543,120 - 2,543,120
Loans payable 10,714,637 - 10,714,637
Convertible debentures (note 4(e)(ii)) 23,681,244 - 23,681,244
Conversion option of convertible
debentures (note 4(e)(ii)) - 222,182 222,182
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 37,551,546 222,182 37,773,728
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - 132,505,291 132,505,291
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 132,727,473 (132,727,473) -
Retained earnings / (deficit) - - -
----------------------------------------------------------------------------
Total equity 132,727,473 (132,727,473) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
170,279,019 - 170,279,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of equity as previously
reported under Canadian GAAP to IFRS on June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
June 30, 2010
----------------------------------------------------------------------------
Assets
Cash - - -
Amounts receivable and prepaid
expenses 1,694,426 - 1,694,426
Mortgage investments 178,341,971 - 178,341,971
----------------------------------------------------------------------------
180,036,397 - 180,036,397
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness 11,479,317 - 11,479,317
Accounts payable and accrued
liabilities 331,478 - 331,478
Unearned income 238,931 - 238,931
Shareholder dividend and unitholder
distribution payable 1,105,404 - 1,105,404
Loans payable 7,548,384 - 7,548,384
Convertible debentures (note 4(e)(ii)) 23,792,864 - 23,792,864
Conversion option of convertible
debenture (note 4(e)(ii)) - - -
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 44,496,378 - 44,496,378
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - - -
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 135,540,019 262,550 135,802,569
Retained earnings / (deficit) - (262,550) (262,550)
----------------------------------------------------------------------------
Total equity 135,540,019 - 135,540,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
180,036,397 - 180,036,397
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of shareholders' equity as
previously reported under Canadian GAAP to IFRS on December 31,
2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
December 31, 2010
----------------------------------------------------------------------------
Assets
Cash - - -
Amounts receivable and prepaid expenses 2,371,563 - 2,371,563
Mortgage investments 202,330,929 - 202,330,929
----------------------------------------------------------------------------
204,702,492 - 204,702,492
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness 5,005,825 - 5,005,825
Accounts payable and accrued
liabilities 1,482,580 - 1,482,580
Unearned income 372,514 - 372,514
Shareholder dividend and unitholder
distribution payable 2,127,845 - 2,127,845
Loans payable 4,289,249 - 4,289,249
Convertible debentures (note 4(e)(ii)) 53,628,803 - 53,628,803
Conversion option of convertible
debentures (note 4(e)(ii)) - - -
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 66,906,816 66,906,816
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - - -
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 137,795,676 321,826 138,117,502
Retained earnings / (deficit) (note
4(e)(i)) (321,826) (321,826)
----------------------------------------------------------------------------
Total equity 137,795,676 - 137,795,676
----------------------------------------------------------------------------
----------------------------------------------------------------------------
204,702,492 - 204,702,492
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Reconciliation of comprehensive income, as reported under
Canadian GAAP and IFRS:
The following is a reconciliation of comprehensive income as
previously reported under Canadian GAAP to IFRS for the three
months ended June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Three Months Ended June 30, 2010
----------------------------------------------------------------------------
Interest and fees earned 4,033,295 - 4,033,295
Less interest expense 573,889 - 573,889
----------------------------------------------------------------------------
Net interest and fee income 3,459,406 - 3,459,406
General and administrative expenses 164,017 - 164,017
Impairment loss on mortgages (note
4(e)(iii)) - - -
----------------------------------------------------------------------------
164,017 - 164,017
----------------------------------------------------------------------------
Operations profit for the period 3,295,389 - 3,295,389
Finance costs
Change in the fair value of the
conversion option of convertible
debentures (note 4(e)(ii)) - 24,033 24,033
Distributions to unitholders (note
4(e)(i)) - (2,474,744) (2,474,744)
----------------------------------------------------------------------------
Comprehensive income and profit (loss)
for the period, and changes in net
assets attributable to unitholders for
the period, respectively 3,295,389 (2,450,711) 844,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of comprehensive income as
previously reported under Canadian GAAP to IFRS for the six months
ended June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Six Months Ended June 30, 2010
----------------------------------------------------------------------------
Interest and fees earned 8,049,560 - 8,049,560
Less interest expense 1,105,466 - 1,105,466
----------------------------------------------------------------------------
Net interest and fee income 6,944,094 - 6,944,094
General and administrative expenses 342,286 - 342,286
Change in unrealized loss in value of
mortgages (4(e)(iii) - - -
Impairment loss on mortgages (4(e)(iii) - - -
----------------------------------------------------------------------------
342,286 - 342,286
----------------------------------------------------------------------------
Operations profit for the period 6,601,808 - 6,601,808
Finance costs
Change in the fair value of the
conversion option of convertible
debentures (note 4(e)(ii)) - (321,826) (321,826)
Distributions to unitholders (note
4(e)(i)) - (5,731,903) (5,731,903)
----------------------------------------------------------------------------
Comprehensive income and profit (loss)
for the period, and changes in net
assets attributable to unitholders for
the period, respectively 6,601,808 (6,053,729) 548,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of comprehensive income as previously reported
under Canadian GAAP to IFRS for the year ended December 31,
2010:
Effect of Restated
transition under
Canadian GAAP to IFRS IFRS
Year Ended December 31, 2010
----------------------------------------------------------------------------
Interest and fees earned 18,703,612 18,703,612
Less interest expense 2,877,078 2,877,078
----------------------------------------------------------------------------
Net interest and fee income 15,826,534 15,826,534
General and administrative expenses 1,310,690 1,310,690
Change in unrealized loss in value
of mortgages (4(e)(iii) 280,000 (280,000) -
Impairment loss on mortgages
(4(e)(iii) - 280,000 280,000
----------------------------------------------------------------------------
1,590,690 - 1,590,690
----------------------------------------------------------------------------
Operations profit for the period $ 14,235,844 $ 14,235,844
Finance costs
Change in fair value of conversion
option of convertible debentures
(note 4(e)(ii)) (321,826) (321,826)
Distributions to unitholders (note
4(e)(i)) (5,731,903) (5,731,903)
----------------------------------------------------------------------------
Comprehensive income and profit
(loss) for the period, and changes
in net assets attributable to
unitholders for the period,
respectively 14,235,844 (6,053,729) 8,182,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(d) Impact on the statement of cash flows:
The IFRS adjustments made to the comparative consolidated
statement of net income for the three and six months ended June 30,
2010 (as described above) have been made to the statement of cash
flows as at the same date. Consistent with the Corporation's
accounting policy choice under IAS 7, Statement of Cash Flows,
interest paid and interest received have been included in cash flow
from operating activities in the statement of cash flows. There
were no other significant IFRS transition differences noted.
(e) Details of the material adjustments to the balance sheet and
comprehensive income:
(i) Previously under Canadian GAAP, the Trust Units were
classified as equity instruments. In accordance with IAS 32,
Financial Instruments: Presentation, the Trust Units are classified
as a liability from January 1, 2010 to June 8, 2010 as the units
impose an obligation requiring distribution of taxable income to
unitholders until that date. Thereafter the Trust Units are
classified as equity as further detailed in note 10.
The Corporation measures its Trust Unit liability at amortized
cost and presents it at the amount of residual net assets.
As a result, the Corporation has recorded the liability at the
cash amount originally exchanged for the Trust Units plus
cumulative earnings and distributions to unitholders. The effect of
classification is to reduce the shareholders' equity and increase
liabilities (net assets attributable to unitholders) by $132.5
million at January 1, 2010.
At June 30, 2011 and December 31, 2010, the Corporation
reclassified $0.3 million for the impact of change in fair value of
the conversion option from January 1, 2010 to June 8, 2010 as
further detailed in note 4(e)(ii)
Consistent with the classification of the Trust Units as a
liability, distributions paid to unitholders are considered as
financing cost in the statement of comprehensive income for these
periods.
As the Trust Units are treated as floating rate liability, any
changes in the distributions based on changes to income levels are
expensed in the period in which they occur.
(ii) For the period from January 1, 2010 to June 8, 2010, the
convertible debentures contain an option to convert into the
liability classified trust units. As the conversion option of
convertible debt is not otherwise closely related to the debt host,
it constitutes a liability-classified embedded derivative, which is
carried at fair value. Fair value is calculated using market prices
at the end of each reporting period. The fair value adjustment is
recorded as part of finance costs on the unaudited interim
condensed statements of comprehensive income.
On June 9, 2010, the fair value of the conversion option of
convertible debt is reclassified to equity as the convertible
debentures are now accounted for as compound financial instruments.
For the period from June 9, 2010 to December 31, 2010, the equity
portion is not re-measured.
(iii) The Corporation has reviewed its mortgage investments for
impairment and adjusted the unaudited interim condensed financial
statements for impairment losses on mortgages previously reported.
Amounts for change in unrealized losses of mortgages have been
removed to conform with Corporation's presentation under IFRS.
5. Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid
expenses as at June 30, 2011, December 31, 2010 and January 1,
2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec. 31, 2010 Jan. 1, 2010
Amount Amount Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest receivable $ 2,599,390 $ 1,803,224 $ 1,450,807
Prepaid expenses 66,018 111,800 160,903
Special income receivable 452,948 389,198 -
Fees receivable 78,099 67,341 94,673
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amounts receivable and prepaid
expenses $ 3,196,455 $ 2,371,563 $ 1,706,383
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Mortgage investments:
The following is a breakdown of the mortgage investments as at
June 30, 2011, December 31, 2010 and January 1, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec. 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------------
Conventional
first mortgages $ 201,513,660 85.2 $ 179,004,150 87.2 $ 135,464,430 79.8
Conventional
non-first
mortgages 13,559,919 5.7 13,785,737 6.7 12,768,832 7.5
Special mortgage
investments 21,427,658 9.1 12,521,042 6.1 21,595,035 12.7
----------------------------------------------------------------------------
Total mortgage
investments (at
cost) $ 236,501,237 100.0 $ 205,310,929 100.0 $ 169,828,297 100.0
Impairment
provision (2,980,000) (2,980,000) (2,700,000)
----------------------------------------------------------------------------
Mortgage
investments $ 233,521,237 $ 202,330,929 $ 167,128,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Corporation.
Mortgages are stated at amortized cost as discussed in note
3(a). The impairment loss in the amount of $2,980,000 as at June
30, 2011 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.
The mortgages are secured by real property, bear interest at the
weighted average rate of 8.95% (2010 - 9.46%) and mature between
2011 and 2015.
The un-advanced funds under the existing mortgage portfolio
(which are commitments of the Corporation) amounted to $26,781,886
as at June 30, 2011 (December 31, 2010 - $18,406,862 and January 1,
2010 - $12,709,686).
Principal repayments based on contractual maturity dates are as
follows:
----------------------------------------------------------------------------
2011 $80,622,275
----------------------------------------------------------------------------
2012 78,608,591
2013 69,448,194
2014 6,738,620
2015 1,083,557
----------------------------------------------------------------------------
$236,501,237
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Borrowers who have open mortgages have the option to repay
principal at any time prior to the maturity date.
7. Bank indebtedness:
The Corporation has entered into credit arrangements of which
$38,221,178 as at June 30, 2011 (December 31, 2010 - $5,005,825
& January 1, 2010 - 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
June 30, 2011, December 31, 2010 and January 1, 2010, the
Corporation was in compliance with all financial covenants.
8. 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 June 30, 2011 (December 31, 2010 3.50% to
6.45%). The Corporation's principal balance outstanding under the
mortgages for which a first priority charge has been granted is
$4,845,794 as at June 30, 2011 (December 31, 2010 - $5,392,156
& January 1, 2010 - $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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 $ 1,723,584
2012 -
2013 -
2014 1,974,895
2015 153,950
----------------------------------------------------------------------------
$ 3,852,429
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Convertible debentures:
Six Months Ended June 30, 2011
--------------------------------------------
6.00% 5.75%
Convertible Convertible
Debentures Debentures Total
----------------------------------------------------------------------------
Principal balance, beginning of
period $ 23,886,736 $ 29,742,167 $ 53,628,903
Issued
Conversions (3,195,000) - (3,195,000)
Adjustment to fair value of
conversion option from
conversions 71,046 71,046
Implicit interest rate in excess
of coupon rate 28,549 16,174 44,723
Deferred finance cost
amortization 84,791 107,475 192,266
----------------------------------------------------------------------------
Principal balance, end of period 20,876,122 29,865,816 50,741,938
----------------------------------------------------------------------------
Year Ended As At
Dec. 31, 2010 Jan. 1, 2010
-------------------------------------------------------------
Principal balance, beginning of
period $ 23,681,244 $ 23,681,244
Issued 29,680,929
Conversions (20,000)
Adjustment to fair value of
conversion option from
conversions
Implicit interest rate in excess
of coupon rate 57,689
Deferred finance cost
amortization 228,941
-------------------------------------------------------------
Principal balance, end of period 53,628,803 23,681,244
-------------------------------------------------------------
On April 24, 2006, the Corporation 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 could
not be redeemed by the Corporation 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 Corporation's option on not more than 60 days and
not less than 30 days notice, provided that the weighted average
trading price of the shares 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
Corporation's option on not more than 60 days' and not less than 30
days' prior notice. On redemption or at maturity, the Corporation
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 shares of the Corporation obtained by dividing the
principal amount being repaid by 95% of the weighted average
trading price of the shares for the 20 consecutive trading days
ending on the fifth trading day preceding the redemption or
maturity date.
In 2009, $536,000 of debentures were converted by the debenture
holders to 45,617 shares of the Corporation. In 2010, $20,000 of
debentures were converted by the debenture holders to 1,702 shares
of the Corporation. During the first six months of 2011, $3,195,000
of debentures were converted by the debenture holders to 271,909
shares of the Corporation.
In the fourth quarter of 2010, the Corporation 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 Corporation 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 Corporation's option on not more than 60
days' and not less than 30 days notice, provided that the weighted
average trading price of the shares 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 Corporation's option on not more than 60 days' and
not less than 30 days prior notice. On redemption or at maturity,
the Corporation 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 shares of the Corporation obtained by
dividing the principal amount being repaid by 95% of the weighted
average trading price of the shares for the 20 consecutive trading
days ending on the fifth trading day preceding the redemption or
maturity date.
As at June 30, 2011, debentures payables bear interest at
weighted average effective rate of 5.85% per annum.
Notwithstanding the carrying value of the convertible
debentures, the principal balance outstanding to the debenture
holders is $52,692,000.
10. Net assets attributable to unitholders
During the period, the Corporation performed an assessment of
the characteristics of the Trust units in existence during the
period from January 1, 2010 to December 31, 2010 (the "Units"),
against the criteria set forth per IAS 32, Financial Instruments:
Presentation.
For the period from January 1, 2010 to June 8, 2010, the Trust
Units are presented as a liability due to the Trust's requirement
to distribute taxable income to the unitholders and distributions
made on the Trust Units is recorded as finance costs in the
statement of comprehensive income. The liability was measured at
amortized cost of the Trust Units, which includes any residual net
assets attributable to unitholders.
On June 9, 2010, the distribution policy set out in the Trust's
Declaration of Trust was modified such that there was no longer a
requirement for the Trust to distribute cash. As such, equity
classification criteria were determined to be met from that
point.
Changes in the number of trust units and in their carrying
amounts were as follows during the six months ended June 30,
2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Units Amounts
--------------------------------------------------------------------------
Balance, beginning of period 13,896,829 $ 141,463,944
New units from exercise of options 249,000 2,465,800
New units issued during the period under
Distribution Reinvestment Plan 26,021 287,470
Trust units re-classified as equity (June 9,
2010) (14,171,850) (144,217,214)
--------------------------------------------------------------------------
Balance, end of period - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
As at January 1, 2010 the number of trust units outstanding was
13,896,829 at a carry amount of $132,505,291.
11. Shareholders' equity:
On January 1, 2011, all outstanding Units were exchanged on a
one-for-one basis for common shares of the Corporation.
The beneficial interests in the Corporation are represented by a
single class of shares which are unlimited in number. Each share
carries a single vote at any meeting of shareholders and carries
the right to participate pro rata in any dividends.
(a) Shares and Units issued and outstanding:
The following shares were issued and outstanding as at June 30,
2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period 14,377,333
New shares from conversion of debentures (note 9) 271,909
New shares issued during the period under Dividend Reinvestment
Plan 29,981
----------------------------------------------------------------------------
Balance, end of period 14,679,223
----------------------------------------------------------------------------
The following units were issued and outstanding as at December
31, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of year 13,896,829
New units from conversion of debentures (note 9) 1,702
New units from exercise of options 427,500
New units issued during the period under Distribution
Reinvestment Plan 51,302
----------------------------------------------------------------------------
Balance, end of year 14,377,333
----------------------------------------------------------------------------
The following units were issued and outstanding as at June 30,
2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period - Trust units re-classified as
equity (June 9, 2010) 14,171,850
----------------------------------------------------------------------------
Balance, end of period 14,171,850
----------------------------------------------------------------------------
(b) Incentive option plan:
In 2005, 415,000 options were issued to directors, officers and
employees of the Corporation Manager and Mortgage Banker, with an
exercise price of $9.90 per share. The options were exercisable any
time up to November 17, 2010. The options vested on the grant date.
At December 31, 2010, 415,000 share options have been
exercised.
In 2008, 35,000 options were issued to directors with an
exercise price of $9.94. The options were exercisable any time up
to October 7, 2013. The fair value of those share options, given
the small number of options issued and given the low volatility in
the Corporation's share trading price, is not material and
therefore no related compensation expense has been recorded by the
Corporation. At December 31, 2010, 35,000 options have been
exercised.
As at June 30, 2011, no options remained outstanding (December
31, 2010 - NIL & January 1, 2010 - 427,500).
(c) Dividend reinvestment plan and direct share purchase
plan:
The Corporation has a dividend reinvestment plan and direct
share purchase plan for its shareholders which allows participants
to reinvest their monthly cash dividends in additional Corporation
shares at a share price equivalent to the weighted average price of
shares for the preceding five day period.
12. Per share amounts:
(a) Profit per share calculation:
As the trust units were liability-classified until June 8, 2010
and the full change for the period from January 1, 2010 to June 8,
2010 in net assets is allocated thereto, there is no profit per
unit presented for the six months ended June 30, 2010.
The following tables reconcile the numerators and denominators
of the basic and diluted profit per share for the three and six
months ended June 30, 2011.
Basic profit per share calculation:
Three months ended Six months ended
June 30, 2011 June 30, 2011
----------------------------------------------------------------------------
Numerator for basic profit per share:
Profit $ 3,461,415 $ 7,008,333
----------------------------------------------------------------------------
Denominator for basic profit per
share:
Weighted average shares 14,621,705 14,516,228
----------------------------------------------------------------------------
Basic profit per share $ 0.237 $ 0.483
----------------------------------------------------------------------------
Diluted profit per share calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2011 June 30, 2011
----------------------------------------------------------------------------
Numerator for diluted profit per
share:
Profit $ 3,461,415 $ 7,008,333
Interest on convertible debentures 892,014 1,820,491
----------------------------------------------------------------------------
Net profit for diluted profit per
share $ 4,353,429 $ 8,828,824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted profit per
share:
Weighted average shares 14,621,705 14,516,228
Net shares that would be issued
assuming convertible debentures are
converted 3,785,973 3,785,973
----------------------------------------------------------------------------
Diluted weighted average shares 18,407,678 18,302,201
----------------------------------------------------------------------------
Diluted profit per share $ 0.237 $ 0.482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Pro forma per unit calculation
Management has chosen to disclose pro forma basic and diluted
profit per unit for the three and six months ended June 30, 2010 in
order to provide an indication of the Trust's business performance
that is comparable to how performance is otherwise measured when
the instruments that represent residual interests in the entity
qualify as equity instruments. The calculation eliminates "change
in fair value of the conversion option of convertible debentures"
and "distributions to unitholders" from the numerator and uses the
liability classified units as denominator. For disclosure purposes
only, the Corporation has determined the operations profit per
share using the same basis that would apply in accordance with IAS
33 Earnings Per Share.
The following tables reconcile the numerators and denominators
of pro forma basic and diluted operations profit per unit:
Basic operations profit per share calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2010 June 30, 2010
----------------------------------------------------------------------------
Numerator for basic operations profit
per share:
Operations profit $ 3,295,389 $ 6,601,808
----------------------------------------------------------------------------
Denominator for basic operations
profit per unit:
Weighted average units 14,001,865 13,958,462
----------------------------------------------------------------------------
Pro forma profit per unit $ 0.235 $ 0.473
----------------------------------------------------------------------------
Diluted pro forma profit per unit
calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2010 June 30, 2010
----------------------------------------------------------------------------
Numerator for diluted pro forma profit
per share:
Operations profit $ 3,295,389 $ 6,601,808
Interest on convertible debentures 423,108 845,540
----------------------------------------------------------------------------
Net operations profit for diluted
operations profit per unit $ 3,718,497 $ 7,447,348
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted operations
profit per unit:
Weighted average units 14,001,865 13,958,462
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase units
at the average unit price 24,298 48,606
Assuming convertible debentures are
converted 2,082,043 2,082,043
----------------------------------------------------------------------------
Diluted weighted operations profit per
unit 16,108,206 16,089,111
----------------------------------------------------------------------------
Diluted pro forma profit per unit $ 0.231 $ 0.463
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Dividends:
The Corporation intends to make dividend payments to the
shareholders on a monthly basis on or about the 15th day of each
month. The operating policies of Corporation set out that the
Corporation intends to distribute to shareholders within 90 days
after the year end at least 100% of the net income of the
Corporation determined in accordance with the Income Tax Act
(Canada), subject to certain adjustments. The net income of the
Corporation determined in accordance with the Income Tax Act
(Canada), for the period ended June 30, 2011 was $7,177,458 (2010 -
$6,597,746).
For the six months ended June 30, 2011, the Corporation recorded
dividends of $6,811,289 (2010 - $6,542,532) to its shareholders.
Dividends were $0.468 (2010 - $0.468) per share.
14. Income taxes:
The Income Tax Act (Canada) contains legislation (the "SIFT
Rules") affecting the tax treatment of "specified investment
flow-through" ("SIFT") trusts. A SIFT includes a publicly traded
trust. The SIFT Rules provide for a transition period unit 2011 for
publicly traded trusts like the Trust, which existed prior to
November 1, 2006. Under the SIFT Rules, distributions of certain
types of income by a SIFT are not deductible in computing the
SIFT's taxable income, and a SIFT is subject to tax on such income
at a rate that is substantially equivalent to the general tax rate
applicable to a Canadian corporation. The SIFT rules do not apply
to a corporation that qualifies as a mortgage investment
corporation under the Income Tax Act (Canada). The Trust completed
the necessary tax restructuring to qualify as a mortgage investment
corporation effective January 1, 2011.
15. 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 Corporation Manager (a company controlled by some of the
directors) receives an allocation of mortgage interest, referred to
as Corporation Manager spread interest, calculated as 0.75% per
annum of the Corporation's daily outstanding performing mortgage
investment balances. For the six months ended June 30, 2011, this
amount was $789,928 (2010 - $629,523), and for the three month
period ending June 30, 2011 this amount was $410,017 (2010 -
$324,003), and was deducted from interest and fees earned.
The Mortgage Banker (a company controlled by a director)
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 Corporation's mortgage investments; 75% of all the commitment
and renewal fees generated from the Corporation's mortgage
investments; and 25% of all the special profit income generated
from the non- conventional mortgage investments after the
Corporation 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 $105,000 for the six month
period ended June 30, 2011 (2010 - $84,000). The Mortgage Banker
also retains all overnight float interest and incidental fees and
charges payable by borrowers on the Corporation's mortgage
investments. The Corporation's share of commitment and renewal fees
recorded in income for the six months ended June 30, 2011 was
$395,711 (2010 - $464,408) and for the three month period ended
June 30, 2011 was $226,177 (2010 - $197,716) and applicable special
profit income for the six months ended June 30, 2011 was $150,375
(2010 - $317,848) and for the three month period ended June 30,
2011 was $119,857 (2010 - $207,174).
The Corporation Management Agreement and Mortgage Banking
Agreement contains provisions for the payment of termination fees
to the Corporation Manager and Mortgage Banker in the event that
the respective agreements are either terminated or not renewed.
Several of the Corporation'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 directors of
the Corporation. The Corporation ranks equally with other members
of the syndicate as to receipt of principal and income.
Mortgages totalling $8,760,000 (December 31, 2010 - $8,760,000
and January 1, 2010 - $1,760,000) were issued to borrowers
controlled by certain directors of the Corporation. Each mortgage
is dealt with in accordance with the Corporation's existing
investment and operating policies and is personally guaranteed by
the related directors.
16. Interest expense:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Bank interest expense $ 208,917 $ 84,594 $ 284,844 $ 121,284
Loans payable interest
expense 39,846 66,187 79,757 138,642
Debenture interest
expense 892,014 423,108 1,820,491 845,540
Interest expense $ 1,140,777 $ 573,889 $ 2,185,092 $ 1,105,466
Deferred finance cost
amortization -
convertible debenture (96,665) (42,630) (192,267) (84,792)
Implicit interest rate
in excess of coupon
rate - convertible
debentures (21,205) (13,518) (44,722) (26,828)
Change in accrued
interest 881,804 393,189 92,548 (21,556)
----------------------------------------------------------------------------
Cash interest paid $ 1,904,711 $ 910,930 $ 2,040,651 $ 972,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. Contingent liabilities:
The Corporation 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 Corporation's
exposure to such litigation to have an impact on these financial
statements.
18. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness,
accounts payable and accrued liabilities and shareholder dividend
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)
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, including their
conversion option, has been determined based on the closing price
of the debentures of the Corporation on the TSX for the respective
date. The fair value has been estimated at June 30, 2011 to be
$53,996,688 (June 30, 2010 - $24,773,104, December 31, 2010 -
$56,305,890).
The fair value of the trust units as at June 30, 2010 has been
determined based on the June 30, 2010 closing price of the units of
the Corporation on the TSX. The fair value has been estimated at
June 30, 2010 to be $161,417,372. The fair value of the shares as
at June 30, 2011 has been determined based on the June 30, 2011
closing price of the shares of the Corporation on the TSX. The fair
value has been estimated at June 30, 2011 to be $184,224,249. The
fair value of the units as at December 31, 2010 has been determined
based on the December 31, 2010 closing price of the units of the
Corporation on the TSX. The fair value has been estimated at
December 31, 2010 to be $171,090,263.
19. Risk management:
(a) Interest rate risk:
The Corporation'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 Corporation'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 June 30, 2011, if interest rates at that date had been 100
basis points lower or higher, with all other variables held
constant, net income for the three month period would be affected
as follows:
Carrying Value -1% +1%
----------------------------------------------------------------------------
Financial assets
Mortgage investments $ 233,521,237 $ (4,400) $ 55,925
Financial liabilities
Bank indebtedness 38,221,178 95,553 (95,553)
Accounts payable and accrued liabilities 781,061 - -
Unearned income 491,296 - -
Shareholder dividend payable 1,144,979
Loans payable 3,852,429 (4,309) 4,309
----------------------
Total increase (decrease) $ 86,844 ($35,319)
----------------------
----------------------
At June 30, 2010 if interest rates at that date had been 100
basis points lower or higher, with all other variables held
constant, net income for the three month period would be affected
as follows:
Carrying Value -1% +1%
----------------------------------------------------------------------------
Financial assets
Mortgage investments $ 178,341,971 $ (26,980) $ 43,776
Financial liabilities
Bank indebtedness 11,479,317 57,397 (57,397)
Accounts payable and accrued liabilities 331,478
Unearned income 238,931
Unitholder distribution payable 1,105,404
Loans payable 7,548,384 (25,183) 25,183
----------------------
Total increase (decrease) $ 5,234 $ 11,562
----------------------
----------------------
(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 Corporation's mortgage
investments. The Corporation mitigates this risk by adhering to the
investment and operating policies set out in its Declaration of
Corporation.
The Corporation's maximum exposure to credit risk is represented
by the fair values of amounts receivable and mortgage
investments.
(c) Liquidity risk:
The Corporation'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 Corporation'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 June 30, 2011, the Corporation 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 $26,781,886 as at June 30, 2011
(2010 - $11,089,779). These commitments are anticipated to be
funded from the Corporation's credit facility and borrower
repayments. The Corporation 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 Corporation to repay the balance owed on
September 30, 2011 within 12 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 Corporation'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 Corporation'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 Corporation's
portfolio and only have to be repaid once the specific loan is paid
out by the Borrower.
If the Corporation is unable to continue to have access to its
bank borrowing line and loans payables, the size of the
Corporation'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 June 30, 2011 are due as
follows:
Total Less than 1 1 - 3 4 - 6 years
year years
--------------------------------------------------
Bank indebtedness $ 38,221,178$ 38,221,178
Loans payable 3,852,429 1,723,583 2,128,846
Convertible debenture 52,692,000 21,249,000 31,443,000
--------------------------------------------------
Subtotal - Liabilities 94,765,607 39,944,761 21,249,000 33,571,846
Future advances under
mortgages 26,781,886 26,781,886
--------------------------------------------------
Liabilities and
contractual obligations $ 121,547,493$ 66,726,647$ 21,249,000$ 33,571,846
--------------------------------------------------
--------------------------------------------------
The bank indebtedness and loans payable are liabilities
resulting from the funding of the Corporation'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
Corporation's mortgage portfolio are anticipated to be funded from
the Corporation's credit facility and borrower mortgage repayments.
Upon funding of same, the funded amount forms part of the
Corporation's mortgage investments.
(d) Capital risk management:
The Corporation defines capital as being the funds raised
through the issuance of publicly traded securities of the
Corporation. The Corporation's objectives when managing
capital/equity are:
-- to safeguard the Corporation's ability to continue as a going concern,
so that it can continue to provide returns for shareholders, and
-- to provide an adequate return to shareholders by obtaining an
appropriate amount of debt, commensurate with the level of risk.
The Corporation 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 Corporation
may issue new shares or repay bank indebtedness (if any) and loans
payable.
The Corporation's investment guidelines, which can be varied at
the discretion of the Board of Directors, incorporate various
guideline restrictions and investment operating policies. The
Corporation's guideline states that the Corporation (i) will not
invest more than 5% of the amount of its capital in any single
conventional first mortgage, (ii) will not 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, and (iii)
will only borrow funds in order to acquire or invest in mortgage
investments in amounts up to 60% of the book value of the
Corporation's portfolio of conventional first mortgages.
The Corporation 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
Corporation has complied with all such Bank covenants.
20. Subsequent Event:
On August 3, 2011, the Corporation entered into an agreement to
sell, on a bought deal basis to a syndicate of underwriters led by
TD Securities Inc., $22,500,000 aggregate principal amount of 5.40%
convertible unsecured subordinated debentures, due February 28,
2019. Each debenture is convertible into shares of the Corporation
at the option of the holder at a conversion price of $14.35 per
share. The net proceeds of the offering will be used to repay bank
indebtedness. As part of the offering the Corporation granted the
underwriters an over-allotment option for up to $3,375,000 of
additional debentures that 30 days following closing.
21. Financial statement review:
These unaudited interim condensed financial statements have not
been reviewed by the Corporation's auditors.
Contacts: Firm Capital Mortgage Investment Corporation Eli
Dadouch President & Chief Executive Officer (416) 635-0221
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