TORONTO, ONTARIO, Nov 05 (MARKET WIRE) --
Firm Capital Mortgage Investment Trust (the "Trust") (TSX: FC.UN), today
released its financial statements for the third quarter ended September
30, 2009.
Management of the Trust is focused on the preservation of unitholders'
equity and it is important for unitholders to understand that protecting
our equity and maintaining a strong foundation for years to come is our
key strategic objective. From September 2008 to date we have seen our
portfolio reduced from $260 million to $174 million confirming that the
short term nature of the portfolio allows it to be adjusted to reflect
current market conditions. Management believes that this disciplined
approach to lending further demonstrates management's focus on the long
term and that is not taking unnecessary risks to generate short term
gains. As always, we will only grow the Trust's portfolio if we are
satisfied with the security and return on new investments.
EARNINGS
Net earnings for the quarter ended September 30, 2009 totaled $3,688,459
compared to $3,484,045 for the quarter ended September 30, 2008. Net
earnings for the quarter ended September 30, 2009 exceeded distributions
by $440,187 or $0.032 per unit. Basic weighted average net earnings per
unit of $0.266 for the quarter ended September 30, 2009 compared to
$0.261 per unit for the comparable period in 2008. The third quarter net
earnings represent an annualized return on average Unitholders' equity of
11.00% per annum. This return on Unitholders' equity equates to 1044
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 Trust's
target yield objective of 400 basis points per annum over the one year
treasury bill yield.
DISTRIBUTION OVERVIEW:
Monthly distributions for the third quarter equaled $.078 per month, for
a total $0.234 per unit.
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Trust's mortgage portfolio as at September 30, 2009 are as
follows:
- Total gross mortgage portfolio equals $176,755,526 ($174,155,526 net of
fair value adjustment of $2,600,000)
- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 80% of our total portfolio, and total
conventional mortgages with loan to values under 75% comprise 90% of our
total portfolio.
- Non-conventional mortgages and related investments total 10% of the
portfolio.
- Approximately 86% 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 10.14% per annum.
- Regionally, the portfolio is diversified approximately as follows:
Ontario 77.7%, Alberta 15.7%, British Columbia 3.3%, with the balance
(3.3%) being in other provinces.
- Mortgage portfolio breakdown by loan size is as follows:
Mortgage Portfolio Breakdown
Amount Number of Mortgages Total Amount
------------------------------------------------------------
$0-$1,000,000 82 43,020,653
$1,000,001-$2,000,000 27 38,233,566
$2,000,001-$3,000,000 17 44,507,523
$3,000,001-$4,000,000 8 27,138,154
$4,000,001-$5,000,000 4 18,335,630
$5,000,001-$6,000,000 1 5,520,000
------------------------------------------------------------
Total 139 $ 176,755,526
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LOAN LOSS PROVISION UPDATE:
Management has always taken a proactive approach to loan loss provision
reserves. This is a prudent approach to protecting our Unitholders'
equity. Loan loss provisions at the start of the fiscal year amounted to
$2,400,000. During 2009 a further $200,000 was added to the provision for
a total of $2,600,000, representing 1.47% of the gross loan portfolio as
at September 30, 2009.
UNRECOGNIZED INCOME COLLECTED:
As at September 30, 2009, the Trust has banked non-refundable fee income
of $134,636, which will be recognized as income over the term of the
corresponding investments and, in one circumstance, as a specific
investment is repaid.
DISTRIBUTION AND UNIT PURCHASE PLAN:
The Trust has in place a Distribution Reinvestment Plan (DRIP) and Unit
Purchase Plan that is available to its Unitholders. The plans allows
participants to have their monthly cash distributions reinvested in
additional Trust units and grants participants the right to purchase,
without commission, additional units, up to a maximum of $12,000 per
annum.
ABOUT THE TRUST
The Trust, 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 Trust's investment objective is the
preservation of Unitholders' equity, while providing Unitholders with a
stable stream of monthly distributions from investments. The Trust
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 Unitholders. Full reports of the financial
results of the Trust 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 Trust's trust 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 Trust is able
to invest in mortgages at rates consistent with rates historically
achieved; adequate mortgage investment opportunities are presented to the
Trust; and adequate bank indebtedness and bank loans are available to the
Trust. 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
Trust 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 Trust.
Unaudited Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
For the Nine Months Ended September 30, 2009
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Balance Sheets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30, 2009 Dec. 31, 2008 Sept. 30, 2008
(Unaudited) (Audited) (Unaudited)
----------------------------------------------------------------------------
Assets
Amounts receivable and
prepaid expenses (note 5) $ 1,787,972 $ 1,986,112 $ 2,439,937
Mortgage investments (note 6) 174,155,526 223,395,801 248,658,885
----------------------------------------------------------------------------
$175,943,498 $225,381,913 $251,098,822
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Liabilities and Unitholders'
Equity
Liabilities:
Bank indebtedness (note 7) $ 2,134,815 $ 27,337,813 $ 42,732,217
Accounts payable and accrued
liabilities 809,681 618,541 1,025,235
Unearned income 134,636 275,856 323,640
Unitholder distribution
payable 1,083,045 3,430,390 1,078,913
Loans payable (note 8) 14,124,289 37,729,228 48,072,374
Convertible debenture (note 9) 23,625,041 23,973,019 23,917,606
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41,911,507 93,364,847 117,149,985
Unitholders' equity (note 10): 134,031,991 132,017,066 133,948,837
Issued and outstanding:
13,885,195 units (2008 -
13,832,219)
Commitments (note 6)
Contingent liabilities (note 16)
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$175,943,498 $225,381,913 $251,098,822
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Earnings
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----------------------------------------------------------------------------
Three Month Period Nine Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Interest and fees
earned, net of Trust
Manager interest
allocation (note 14) $ 4,451,976 $ 5,414,603 $14,249,477 $16,671,629
Less interest expense
(note 15) 577,010 1,602,547 2,253,257 4,778,951
----------------------------------------------------------------------------
Net interest and fee
income 3,874,966 3,812,056 11,996,220 11,892,678
Expenses:
General and
administrative 186,507 178,011 628,345 566,628
Unrealized loss in
value of mortgages
(note 6) - 150,000 200,000 350,000
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186,507 328,011 828,345 916,628
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Net earnings for the
period $ 3,688,459 $ 3,484,045 $11,167,875 $10,976,050
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per unit
(note 11)
Basic $ 0.266 $ 0.261 $ 0.805 $ 0.846
Diluted $ 0.257 $ 0.253 $ 0.779 $ 0.811
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sept. 30,
2009 Dec. 31, 2008 Sept. 30, 2008
(Unaudited) (Audited) (Unaudited)
----------------------------------------------------------------------------
Trust units (note 10):
Balance, beginning of period $131,636,584 $119,753,729 $119,753,729
Offering costs (rights
offering) and private placement - (292,076) (224,037)
Proceeds from issuance of units 598,307 12,174,931 12,174,931
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Balance, end of period $132,234,891 $131,636,584 $131,704,623
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Equity component of convertible
debentures (note 9):
Balance, beginning of period $ 380,482 $ 380,482 $ 380,482
Impact of conversion of
debenture to units (8,158) - -
----------------------------------------------------------------------------
Balance, end of period $ 372,324 $ 380,482 $ 380,482
----------------------------------------------------------------------------
Cumulative earnings:
Balance, beginning of period $ 80,874,768 $ 66,174,234 $ 66,174,234
Net earnings for the period 11,167,875 14,700,534 10,976,050
----------------------------------------------------------------------------
Balance, end of period $ 92,042,643 $ 80,874,768 $ 77,150,284
----------------------------------------------------------------------------
Cumulative distributions to
unitholders:
Balance, beginning of period $ 80,874,768 $ 66,174,234 $ 66,174,234
Distributions to unitholders
(note 12) 9,743,099 14,700,534 9,112,318
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Balance, end of period $ 90,617,867 $ 80,874,768 $ 75,286,552
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Total unitholders' equity $134,031,991 $132,017,066 $133,948,837
Units issued and outstanding
(note 10) 13,885,195 13,832,219 13,832,219
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Cash Flows
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---------------------------------------------------------------------------
Three Month Period Nine Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
---------------------------------------------------------------------------
Cash provided
by (used in):
Operating
activities:
Net earnings
for the period $ 3,688,459 $ 3,484,045 $11,167,875 $10,976,050
Net changes in
non-cash items
Increase in
fair value
adjustment - 150,000 200,000 350,000
Implicit
interest rate
in excess of
coupon rate -
convertible
debenture 12,902 12,125 38,114 35,817
Deferred
finance cost
amortization
- convertible
debenture 43,099 43,099 127,890 128,359
Decrease
(increase) in
amounts
receivable and
prepaid
expenses (12,279) (222,724) 198,140 (346,911)
Increase
(decrease) in
accounts
payable
and accrued
liabilities 383,156 463,947 191,140 205,235
Increase
(decrease) in
unearned income 2,977 23,827 (141,220) (12,081)
---------------------------------------------------------------------------
4,118,314 3,954,319 11,781,939 11,336,469
Financing
activities:
Proceeds from
issuance of
units 76,167 7,522,253 76,167 12,174,932
Increase
(decrease) in
bank
indebtedness (2,781,476) (1,795,647) (25,202,998) (9,860,941)
Increase
(decrease) in
loans payable (12,768,256) (2,391,305) (23,604,939) 12,070,314
Increase
(decrease) in
distribution
payable 574 57,229 (2,347,345) (1,107,500)
Debenture
offering costs - (60,000) ` - (224,037)
Distributions
to unitholders (3,248,273) (3,123,021) (9,743,099) (9,112,318)
---------------------------------------------------------------------------
(18,721,264) 209,509 (60,822,214) 3,940,450
Investing
activities:
Funding of
mortgages (27,575,156) (39,326,209) (44,334,055) (112,968,479)
Discharge of
mortgages 42,178,106 35,162,381 93,374,330 97,691,560
---------------------------------------------------------------------------
14,602,950 (4,163,828) 49,040,275 (15,276,919)
---------------------------------------------------------------------------
Increase in
cash, being
cash, beginning
and
end of period $ - $ - $ - $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplemental
cash flow
information
Interest paid
(note 15) $ 191,594 $1,196,094 $1,837,479 $4,759,475
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---------------------------------------------------------------------------
See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Three Months and Nine Months ended September 30, 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. Basis of Presentation:
The unaudited interim period financial statements were prepared in
accordance with Canadian generally accepted accounting principles
("GAAP") and follow the same accounting policies and methods of
application with those used in the preparation of the audited financial
statements for the year ended December 31, 2008. Under Canadian GAAP,
additional disclosure is required in annual financial statements and
accordingly the interim financial statements should be read together with
the audited financial statements and the accompanying notes included in
Firm Capital Mortgage Investment Trust's 2008 Annual Report.
3. 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 (Note 3(b)). 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
by a material amount.
(b) Mortgage investments:
Mortgage investments are stated at estimated fair value in accordance
with Canadian Institute of Chartered Accountants ("CICA") Accounting
Guideline 18. 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 approximate their carrying values due to the fact that the
majority of the mortgages are (i) are 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 14. 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 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 10. 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
year 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 shares outstanding
is increased to include additional shares 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 this source 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:
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.
(i) Capital disclosures and financial instrument disclosure and
presentation:
Effective January 1, 2008, the Trust adopted CICA Handbook Section 1535
"Capital Disclosures", Section 3862 "Financial Instruments - Disclosure"
and Section 3863 "Financial Instruments - Presentation". Under Section
1535, the Trust is required to disclose both qualitative and quantitative
information that enables users of financial statements to evaluate the
entity's objectives, policies and processes for managing capital. See
note 18(d), "Capital risk management" for disclosures made under this
Section. Under Section 3862, the Trust is required to disclose the
significance of financial instruments to the Trust's financial position
and performance, the nature and extent of risks arising from these
instruments to which the Trust is exposed, and how the Trust manages
those risks. See note 18, "Financial instrument risk" for disclosures
made under this Section. Section 3863 establishes standards for
presentation of financial instruments and non-financial derivatives.
There has been no financial impact to the financial statements due to the
adoption of this Section.
4. Future accounting changes:
The Canadian Accounting Standards Board (AcSB") confirmed that the
adoption of 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 will be effective
for the Trust in the first quarter of 2011.
The Trust has identified all potential IFRS & Canadian GAAP differences
as well as the related IFRS policy choices and has confirmed that there
are no significant systems implications. At this time the Trust is
considering IFRS policy choices for each potential IFRS & Canadian GAAP
difference identified. The Trust has established a conversion plan to
identify and address implementation issues and to ensure an orderly
transition in 2011. Consequently, four phases have been identified; (i)
Scoping, (ii) Planning, (iii) Design and Build and (iv) Implement and
Review.
For the remainder of 2009 the Trust will be completing the scoping and
planning phases of the plan and expects to complete the design and build
phase by September 30, 2010, and the implement and review phase by
December 31, 2010. The Trust continues to monitor and assess the impact
of the convergence of Canadian GAAP and IFRS as new standard changes are
introduced over the transitional period. The Canadian Securities
Administrators issued Staff Notice 52-321, "Early Adoption of
International Financial Reporting Standards", which provides issuers with
the option to early adopt IFRS prior to 2011. It is not the Trust's
intention to early adopt IFRS prior to January 1, 2011. 5. Amounts
receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid expenses
as at September 30, 2009, December 31, 2008 and September 30, 2008:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
Sept. 30, 2009 Dec. 31, 2008 Sept. 30, 2008
Amount Amount Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest Receivable $1,584,856 $1,783,105 $2,007,063
Prepaid expenses 194,130 142,774 271,019
Fees receivable 8,986 60,233 161,855
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----------------------------------------------------------------------------
Amounts receivable and prepaid
expenses $1,787,972 $1,986,112 $2,439,937
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----------------------------------------------------------------------------
6. Mortgage Investments:
The following is a breakdown of the mortgage investments as at September
30, 2009, December 31, 2008 and September 30, 2008:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sept. 30, 2009 Dec. 31, 2008 Sept. 30, 2008
---------------------------------------------------------------------------
Amount % Amount % Amount %
---------------------------------------------------------------------------
Conventional
first
mortgages $141,201,295 79.9 $178,473,671 79.0 $209,983,903 83.7
Conventional
non-first
mortgages 17,943,742 10.2 29,635,034 13.2 24,323,922 9.7
Special
mortgage
investments 17,610,489 9.9 17,687,096 7.8 16,426,060 6.6
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Total mortgage
investments(at
cost) $176,755,526 100.0 $225,795,801 100.0 $250,733,885 100.0
Fair value
adjustment 2,600,000 2,400,000 2,075,000
---------------------------------------------------------------------------
Fair value $174,155,526 $223,395,801 $248,658,885
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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 estimated fair value in accordance with CICA
Accounting Guideline 18. Estimated fair value is based on discounted cash
flows. The discount interest rate utilized by the Trust is equivalent to
the weighted average interest rate on the mortgage portfolio since the
majority of the mortgages are (i) are 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 value
of the mortgage investment is reduced to reflect the estimated net
realizable recovery from the collateral securing the mortgage loan. The
Fair value adjustment in the amount of $2,600,000 as at September 30,
2009 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 10.14% (2008 - 9.56%) and mature between 2009 and 2012.
The un-advanced funds under the existing mortgage portfolio (which are
commitments of the Trust) amounted to $14,709,372 as at September 30,
2009 (September 30, 2008 - $32,157,558 & December 31, 2008 - $23,424,066).
Principal repayments based on contractual maturity dates are as follows:
---------------------------
---------------------------
2009 $76,840,268
2010 79,049,570
2011 14,200,503
2012 3,907,500
2014 2,757,685
---------------------------
$176,755,526
---------------------------
---------------------------
Borrowers who have open loans have the option to repay principal at
anytime prior to the maturity date.
7. Bank indebtedness:
The Trust has entered into credit arrangements of which $2,134,815
(September 30, 2008 - $42,732,217 & December 31, 2008 - $27,337,813) 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, 2010. Bank indebtedness is
secured by a general security agreement. The credit agreement contains
certain financial covenants that must be maintained. The Trust is
currently in compliance with all financial covenants and was in
compliance at all times during 2009.
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 2.50% to 7.55% as at
September 30, 2009 (2008 - 5.00% to 7.55%). The Trust's principal balance
outstanding under the mortgages for which a first priority charge has
been granted is $18,486,799 as at September 30, 2009 (2008 - $62,071,813).
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:
---------------------------
---------------------------
2009 $9,599,888
2010 2,318,253
2014 2,206,148
---------------------------
$14,124,289
---------------------------
---------------------------
9. 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 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 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:
---------------------------
Liability $25,000,000
Equity 380,482
---------------------------
Principal $24,619,518
---------------------------
---------------------------
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.
------------------------------------------------------------------------
---
---------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------
------------------------------------------------------------------------
Liability, beginning of period $23,973,019 $23,753,430
Conversion of debentures to equity (513,982) -
Implicit interest rate in excess of coupon rate 38,114 35,817
Amortization of debenture financing costs 127,890
128,359------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Liability, end of period $23,625,041 $23,917,606
------------------------------------------------------------------------
------------------------------------------------------------------------
Deferred financing costs relating to the issuance of convertible
debentures are no longer presented as a separate asset on the balance
sheet and are now netted against the carrying value of the convertible
debenture.
Notwithstanding the carry value of the convertible debenture, the
principal balance outstanding to the debenture holders is $24,464,000.
On January 6, 2009, $536,000 of debentures were converted by the
debenture holder to 45,617 units of the Trust.
10. 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:
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Nine Months Twelve Months Nine Months
ended: ended: ended:
Sept. 30, 2009 Dec. 31, 2008 Sept. 30, 2008
Amount Amount Amount
--------------------------------------------------------------------------
Balance, beginning of period 13,832,219 12,638,227 12,638,227
New units from Rights Offering - 439,982 439,982
New units from Private
Placement - 724,120 724,120
New units from Debenture
Conversion 45,617 - -
New units issued during the
year under Distribution
Reinvestment Plan 7,359 29,890 29,890
--------------------------------------------------------------------------
Balance, end of period 13,885,195 13,832,219 13,832,219
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 are exercisable any time up to
November 17, 2010. The fair value of the unit options used to compute
compensation expense of $21,729 (which was recorded in the fourth quarter
of 2005) is the estimated fair value of all options granted on the grant
date. This was calculated for the options granted during 2005 using the
Black-Scholes option pricing model with the following assumptions:
expected distribution yield is 9.44%, expected volatility is 8.83%; risk
free interest rate is 3.96%; and expected option life in years is 5. The
options vested on the grant date. During 2007 22,500 unit options were
exercised.
In 2008, 35,000 options were issued to trustees with an exercise price of
$9.94. The options are 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.
As at September 30, 2009, 427,500 options remained outstanding (September
30, 2008 - 392,500)
(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.
11. Per unit amounts:
The following table reconciles the numerators and denominators of the
basic and diluted earnings per unit.
Basic earnings per unit calculation:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months ended: Nine Months ended:
Sept. 30, 2009 Sept. 30, 2008 Sept. 30, 2009 Sept. 30, 2008
---------------------------------------------------------------------------
Numerator for
basic earnings
per unit:
Net earnings $ 3,688,459 $3,484,045 $11,167,875 $10,976,050
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Denominator for
basic earnings
per unit:
Weighted
average units 13,880,189 13,331,565 13,877,626 12,973,121
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Basic earnings
per unit $0.266 $0.261 $0.805 $0.846
---------------------------------------------------------------------------
Diluted
earnings per
unit
calculation:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months ended: Nine months ended:
Sept. 30, 2009 Sept. 30, 2008 Sept. 30, 2009 Sept. 30, 2008
---------------------------------------------------------------------------
Numerator for
diluted
earnings per
unit:
Net earnings $3,688,459 $3,484,045 $11,167,875 $10,976,050
Interest on
convertible
debentures 422,961 430,223 1,267,325 1,289,175
---------------------------------------------------------------------------
Net earnings
for diluted
earnings per
unit $4,111,420 $3,914,268 $12,435,200 $12,265,225
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Denominator for
diluted
earnings per
unit:
Weighted
average units 13,880,189 13,331,565 13,877,626 12,973,121
Net units that
would be
issued:
Assuming the
proceeds from
options
are used to
repurchase
units
at the average
unit price 14,598 18,150 - 15,609
Assuming
convertible
debentures are
converted 2,082,043 2,127,660 2,082,043 2,127,660
---------------------------------------------------------------------------
Diluted
weighted
average units 15,976,826 15,477,375 15,959,669 15,116,389
---------------------------------------------------------------------------
Diluted
earnings per
unit $0.257 $0.253 $0.779 $0.811
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. 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 will 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 nine
month period ended September 30, 2009 was $10,669,485 (2008 -
$10,531,628).
For the nine months ended September 30, 2009, the Trust recorded
distributions of $9,743,099 (2008 - $9,112,318) to its unitholders.
Distributions were $0.702 (2008 - $0.702) per unit.
13. Income taxes:
The Trust is taxed as a mutual fund trust for income tax purposes.
Pursuant to the Declaration of Trust, the Trust is required 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 distributed and is committed to continue to
distributing 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 is considering
these legislative changes and their possible impact to the Trust. The new
rules (including the normal growth guidelines) may adversely affect the
marketability of the Trust's units and the ability of the Trust to
undertake financings and acquisitions, and, at such time as the new rules
apply to the Trust, the distributable cash of the Trust may be materially
reduced.
The Trust expects that its distributions will not be subject to tax prior
to 2011. The Trust has not recorded future income taxes on temporary
differences since all such material differences are expected to be
reversed prior to 2011. In addition, as the temporary differences between
accounting and taxable income will all, or substantially all, reverse
during the transitional period when the tax rate is 0%, a future tax
asset or liability was not recorded.
14. 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 nine months
ended September 30, 2009 this amount was $1,114,100 (2008 - $1,356,874),
and for the three month period ended September 30, 2009 this amount was
$340,109 (2008 - $477,774), 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 $149,000 for the nine month period ended September 30, 2009
(2008 - $181,000). 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 nine months ended September 30, 2009 was
$652,889 (2008 - $584,126) and for the three month period ended September
30, 2009 was $213,965 (2008 - $166,302) and applicable special profit
income for the nine months ended September 30, 2009 was $336,620 (2008 -
$877,111) and for the three month period ended September 30, 2009 was
$165,250 (2008 - $68,517).
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 $1,760,000 at September 30, 2009 (2008 - $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.
15. Interest:
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Three Months ended: Nine months ended:
Sept. 30, Sept. 30,
2009 2008 Sept. 30, 2009 Sept. 30, 2008
--------------------------------------------------------------------------
Bank interest
expense $ 20,944 $ 560,203 $ 297,579 $1,748,242
Loans payable
interest
expense 133,105 612,121 688,353 1,741,534
Debenture
interest
expense 422,961 430,223 1,267,325 1,289,175
--------------------------------------------------------------------------
Interest
expense $ 577,010 $1,602,546 $2,253,257 $4,778,950
Deferred
finance cost
amortization -
convertible
Debenture (43,099) (43,099) (127,890) (128,359)
Implicit
interest rate
in excess of
coupon rate -
Convertible
debentures (12,902) (12,125) (38,114) (35,817)
Change in
accrued
interest (329,415) (351,229) (249,774) 144,699
--------------------------------------------------------------------------
Cash interest
paid $ 191,594 $1,196,094 $1,837,479 $4,759,475
--------------------------------------------------------------------------
--------------------------------------------------------------------------
16. 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.
17. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness, accounts payable
and accrued liabilities, unearned income and unitholder distribution
payable, approximate their carry values due to their short-term
maturities.
The fair value of loans payable approximate their carry 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 September 30, 2009 closing price on the TSX. The fair value has been
estimated at September 30, 2009 to be $24,349,019 (2008 - $24,187,500).
18. Financial instrument risk:
(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 September 30, 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 quarter would be affected as follows:
Carrying Value Interest Rate Risk
-----------------------------------
-1% +1%
-------------------------------------------------------------
Financial assets
Amounts receivable $ 1,787,972 $ - $ -
Mortgage investments 174,155,526 (13,681) 15,046
Financial liabilities
Bank indebtedness 2,134,815 5,337 (5,337)
Accounts payable and
accrued liabilities 809,681
Unearned income 134,636
Unitholder distribution
payable 1,083,045
Loans payable 14,124,289 27,033 (27,033)
--------------------
Total increase (decrease) $ 18,689 ($ 17,324)
--------------------
--------------------
(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 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 September 30, 2009, 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 $14,709,372 as at September 30, 2009 (2008 - $32,157,558).
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
essentially a committed facility with a maturity date of September 30,
2010. If the loan is not renewed on September 30, 2010, the terms of the
facility allow for the Trust to repay the balance owed on September 30,
2010 within twelve months. In the current economic climate and capital
market, 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 are due as follows:
Total Less than 1 year 1 - 3 years 4 - 6 years
Bank indebtedness $ 2,134,815 $ 2,134,815
Loans payable 14,124,289 9,599,888 2,318,253 $ 2,206,148
Convertible
debenture 24,464,000 24,464,000
----------------------------------------------------
Subtotal -
Liabilities $40,723,104 $11,734,703 $ 2,318,253 $26,670,148
Future advances
under mortgages 14,709,372 14,709,372
----------------------------------------------------
Liabilities and
contractual
obligations $55,432,476 $26,444,075 $ 2,318,253 $26,670,148
----------------------------------------------------
----------------------------------------------------
The bank indebtedness and loans payable are liabilities resulting from
the funding of the Trust's mortgage investment asset. 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 investment asset.
(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 entity'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 and loans payable.
The Trust's Declaration of Trust incorporates various mortgage investing
restrictions and investment operating policies. The Trust can not invest
more than 5% of the amount of its capital in any single conventional
first mortgage and can 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. 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 2008 comparative figures have been reclassified to conform with
the financial statement presentation adopted in 2009.
Contacts:
Firm Capital Mortgage Investment Trust
Eli Dadouch
President & Chief Executive Officer
(416) 635-0221
Copyright 2009, Market Wire, All rights reserved.
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