TSX Symbol FC.UN
TORONTO, Nov. 5 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), released today its financial statements for the third quarter ended September 30, 2008.
Net earnings for the third quarter ended September 30, 2008 increased to $3,484,045 from $3,221,939 for the same period last year. Basic weighted average earnings per unit for the third quarter amounted to $0.261 versus $0.255 last year. Net earnings for the nine month period ended September 30, 2008 increased to $10,976,050 from $9,735,662 for the same period last year. Basic weighted average earnings per unit for the nine month period ended September 30, 2008 increased to $0.846 versus $0.772 last year.
For the nine month period ended September 30, 2008, net earnings exceeded distributions by $1,863,732, representing $0.135 per unit, based on the number of units outstanding at September 30, 2008. The Trust distributes the balance of its net earnings, less distributions made up to November 30 of that year, to Unitholders of record as at December 31. Net earnings for the nine month period ended September 30, 2008 represented an annualized return on average Unitholders' equity of 11.74% per annum. This return on Unitholders' equity equates to 882 basis points per annum over the average One Year Government of Canada Treasury Bill yield for the related period, 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.
For the nine month period ended September 30, 2008, net earnings exceeded distributions by $1,863,732 representing $0.135 per unit (based on the number of units outstanding at September 30, 2008).
As at September 30, 2008, the Trust's mortgage portfolio, net of fair value adjustment, stood at $248,658,885 as compared to $233,731,967 as at December 31, 2007. The portfolio continued to be heavily concentrated in first mortgages.
The Trust has in place a Distribution Reinvestment Plan (DRIP) and Unit Purchase Plan that is available to its Unitholders. The plans allow participants to have their monthly cash distributions reinvested in additional Trust units and grants participants the right to purchase additional units.
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 finance, 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 by pursuing a strategy of growth through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to Unitholders.
Additional information about the Trust, including the Management's Discussion and Analysis relating to the financial statements, will be available on the SEDAR website at www.sedar.com.
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, 2008
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Balance Sheets
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Sept. 30, 2008 Dec. 31, 2007 Sept. 30, 2007
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
Assets
Amounts receivable
and prepaid expenses $ 2,439,937 $ 2,093,026 $ 1,988,079
Mortgage investments
(note 5) 248,658,885 233,731,967 210,194,972
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$ 251,098,822 $ 235,824,993 $ 212,183,051
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness
(note 6) $ 42,732,217 $ 52,593,158 $ 29,540,984
Accounts payable
and accrued liabilities 1,025,235 820,000 1,057,172
Unearned income 323,640 335,721 326,633
Unitholder distribution
payable 1,078,913 2,186,413 985,260
Loans payable (note 7) 48,072,374 36,002,060 35,499,918
Convertible debenture
(note 8) 23,917,606 23,753,430 23,698,759
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117,149,985 115,690,782 91,108,726
Unitholders' equity
(note 9): 133,948,837 120,134,211 121,074,325
Issued and outstanding:
13,832,219 units
(2007 - 12,631,540)
Commitments (note 5)
Contingent liabilities (note 15)
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$ 251,098,822 $ 235,824,993 $ 212,183,051
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Earnings
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3 Month Period 9 Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Interest and fees
earned, net of
Trust Manager
interest allocation
(note 13) $ 5,414,603 $ 4,891,355 $16,671,629 $14,460,770
Less interest
expense (note 14) 1,602,547 1,455,468 4,778,951 4,045,907
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Net interest and
fee income 3,812,056 3,435,887 11,892,678 10,414,863
Expenses:
General and
administrative 178,011 213,948 566,628 584,201
Unrealized loss
in value of
mortgages
(note 5) 150,000 - 350,000 95,000
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328,011 213,948 916,628 679,201
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Net earnings for
the period $ 3,484,045 $ 3,221,939 $10,976,050 $ 9,735,662
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Net earnings per
unit (note 10)
Basic $ 0.261 $ 0.255 $ 0.846 $ 0.772
Diluted $ 0.253 $ 0.247 $ 0.811 $ 0.747
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Unitholders' Equity
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Sept. 30, 2008 Dec. 31, 2007 Sept. 30, 2007
(Unaudited) (Audited) (Unaudited)
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Trust units (note 9):
Balance, beginning
of period $ 119,753,729 $ 119,297,099 $ 119,297,099
Offering costs
(rights offering
and private placement) (224,037) - -
Proceeds from issuance
of units 12,174,931 456,630 388,700
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Balance, end of period $ 131,704,623 $ 119,753,729 $ 119,685,799
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Equity component of
convertible debentures (note 8):
Balance, beginning
of period $ 380,482 $ 380,482 $ 380,482
Equity component of
convertible debentures
issued - - -
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Balance, end of period $ 380,482 $ 380,482 $ 380,482
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Cumulative earnings:
Balance, beginning
of period $ 66,174,234 $ 53,289,186 $ 53,289,186
Net earnings for
the period 10,976,050 12,885,048 9,735,662
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Balance, end of period $ 77,150,284 $ 66,174,234 $ 63,024,848
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Cumulative
distributions
to unitholders:
Balance, beginning
of period $ 66,174,234 $ 53,289,186 $ 53,289,186
Distributions to
unitholders (note 11) 9,112,318 12,885,048 8,727,618
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Balance, end of period $ 75,286,552 $ 66,174,234 $ 62,016,804
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Total unitholders'
equity $ 133,948,837 $ 120,134,211 $ 121,074,325
Units issued and
outstanding (note 9) 13,832,219 12,638,227 12,631,540
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Cash Flows
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3 Month Period 9 Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Cash provided by
(used in):
Operating activities
Net earnings for
the period $ 3,484,045 $ 3,221,939 $10,976,050 $ 9,735,662
Net changes in
non-cash items
Increase in fair
value adjustment 150,000 - 350,000 95,000
Implicit interest
rate in excess of
coupon rate -
convertible
debenture 55,224 54,493 164,176 161,548
Decrease
(increase)
in amounts
receivable and
prepaid
expenses (222,724) (14,936) (346,911) 86,611
Increase
(decrease)
in accounts
payable
and accrued
liabilities 463,947 595,958 205,235 485,181
Increase
(decrease)
in unearned
income 23,827 29,852 (12,081) 21,026
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3,954,319 3,887,306 11,336,469 10,585,028
Financing activities:
Proceeds from
issuance of units 7,522,253 113,876 12,174,932 388,701
Increase (decrease)
in bank
indebtedness (1,795,647) (4,696,987) (9,860,941) (10,560,700)
Increase (decrease)
in loans payable (2,391,305) 8,891,816 12,070,314 9,516,745
Increase (decrease)
in distribution
payable 57,229 863 (1,107,500) 985,260
Equity offering
costs (60,000) - (224,037) -
Distributions to
unitholders (3,123,021) (2,954,898) (9,112,318) (8,727,618)
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209,509 1,354,670 3,940,450 (8,397,612)
Investing activities:
Funding of
mortgages (39,326,209) (47,584,754) (112,968,479)(119,681,028)
Discharge of
mortgages 35,162,381 42,342,778 97,691,560 117,493,612
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(4,163,828) (5,241,976) (15,276,919) (2,187,416)
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Increase in cash,
being cash,
beginning and
end of period $ - $ - $ - $ -
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Supplemental
cash flow
information
Interest paid
(note 14) $ 1,196,094 $ 867,646 $ 4,759,475 $ 3,378,449
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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, 2008
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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, 2007. 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 2007 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) Mortgage investments:
Mortgage investments are stated at estimated fair value in
accordance with Canadian Institute of Chartered Accountants
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 carry 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.
(b) 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.
(c) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and
is recorded net of the Trust Manager interest spread
described in note 13. Commitment fees received are
amortized over the expected term of the mortgage.
(ii) Special mortgage investments:
Special profit participations earned by the Trust on
special mortgage investments are recognized only once the
receipt of such amounts is certain.
(d) 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 revenue and expenses during the year. Actual
results could differ from those estimates.
(e) Unit-based compensation:
The Trust has unit-based compensation plans (i.e. incentive
option plan) which are described in note 9. The Trust accounts
for its unit-based compensation using the fair value method,
under which compensation expense is measured at the grant date
and recognized over the vesting period.
(f) Basic and diluted net earnings per unit:
Basic net earnings per unit is computed by dividing net earnings
for the 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) Hedges:
CICA Section 3865, "Hedges", specifies the requirements for the
use of hedge accounting. The Trust does not apply hedge
accounting.
(i) 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.
4. New accounting policies:
New accounting standards issued in December 2006, Handbook Sections
3862 (Financial Instruments - Disclosures) and Section 3863
(Financial Instruments - Presentation), replace Section 3861
(Financial Instruments - Disclosure and Presentation). The new
standards require increased qualitative and quantitative disclosures
about an entity's exposure to risks arising from financial
instruments and how the entity manages those risks. These new
standards are effective for the Trust commencing on January 1, 2008.
The required note disclosure is set out in note 17 to these financial
statements.
5. Mortgage Investments:
The following is a breakdown of the mortgage investments as at
September 30, 2008, December 31, 2007 and September 30, 2007:
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Sept. 30, Dec. 31, Sept. 30,
2008 2007 2007
Amount % Amount % Amount %
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Conventional
first
mortgages $209,983,903 83.7 $195,367,641 83.0 $177,676,084 83.9
Conventional
non-first
mortgages 24,323,922 9.7 25,642,548 10.9 21,889,384 10.4
Special mortgage
investments 16,426,060 6.6 14,446,778 6.1 12,149,504 5.7
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Total mortgage
investments
(at cost) $250,733,885 100.0 235,456,967 100.0 $211,714,972 100.0
Fair value
adjustment 2,075,000 1,725,000 1,520,000
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Fair value $248,658,885 $233,731,967 $210,194,972
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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
Canadian Institute of Chartered Accountants 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 and/or interest 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 $2,075,000 as at September 30, 2008 represents the
total amount of management's estimate of the shortfall between the
mortgage investment principal and accrued interest 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 9.56% (2007 - 9.54%) and mature between 2008
and 2012.
The un-advanced funds under the existing mortgage portfolio (which
are commitments of the Trust) amounted to $32,157,558 as at September
30, 2008 (September 30, 2007 - $53,577,945 & December 31, 2007 -
$49,359,642).
Credit risk arises from the possibility that mortgagors may
experience financial difficulty and be unable to fulfill their
mortgage commitments. In accordance with the operating policies of
the Declaration of Trust, the Trust mitigates the risk of credit loss
by ensuring that its mix of mortgages is diversified between
conventional and non-conventional mortgages, and by limiting its
exposure to any one mortgagor.
Interest rate risk arises from a mismatch of terms on borrowings to
terms on the mortgage investments. The bank indebtedness bears
interest at a floating rate that fluctuates with bank prime. A
significant portion of the investment portfolio is short term in
nature and also bears interest that fluctuates with bank prime,
subject to an interest rate floor, thereby partially mitigating the
interest rate risk. Interest on loans payable is matched to specific
mortgage investments, thereby ensuring positive interest rate spread.
Principal repayments based on contractual maturity dates are as
follows:
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2008 $ 88,475,214
2009 136,083,132
2010 22,600,539
2011 3,000,000
2012 575,000
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$250,733,885
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Borrowers who have open loans have the option to repay principal at
anytime prior to the maturity date.
6. Bank indebtedness:
The Trust has entered into credit arrangements of which $42,732,217
(September 30, 2007 - $29,540,984 & December 31, 2007 - $52,593,158)
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, 2009. Bank indebtedness is secured by a general security
agreement. The credit agreement contains certain financial covenants
that must be maintained.
7. Loans payable:
First priority charges on specific mortgage investments have been
granted as security for the loans payable. The loans mature on dates
consistent with those of the underlying mortgages. The loans are on a
non-recourse basis and bear interest at rates ranging from 5.00% to
7.55% as at September 30, 2008 (2007 - 5.35% to 7.25%). The Trust's
principal balance outstanding under the mortgages for which a first
priority charge has been granted is $62,071,813 as at September 30,
2008.
The loans are repayable at the earlier of the contractual expiry date
of the underlying mortgage investment and the date the underlying
mortgage is repaid. Repayments based on contractual maturity dates
are as follows:
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2008 $19,623,242
2009 26,707,668
2010 1,741,464
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$48,072,374
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8. Convertible debentures:
On April 24, 2006, the Trust completed a public offering of 25,000 6%
convertible unsecured subordinated debentures at a price of $1,000
per debenture for gross proceeds of $25,000,000. The debentures
mature on June 30, 2013 and interest is paid semi-annually on June 30
and December 31. The debentures are convertible at the option of the
holder at any time prior to the maturity date at a conversion price
of $11.75. The debentures may not be redeemed by the Trust prior to
June 30, 2009. On and after June 30, 2009, but prior to June 30,
2010, the debentures 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:
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Liability $25,000,000
Equity 380,482
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Principal $24,619,518
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The accretion of the liability component of the convertible
debentures, which increases the liability component from the initial
allocation on the date of issuance, is included in interest expense.
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2008 2007
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Liability, beginning of period $23,753,430 $23,537,211
Implicit interest rate in excess
of coupon rate 35,817 33,658
Amortization of debenture
financing costs 128,359 127,890
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Liability, end of period $23,917,606 $23,698,759
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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
$25,000,000.
9. Unitholders' equity:
The beneficial interests in the Trust are represented by a single
class of units which are unlimited in number. Each unit carries a
single vote at any meeting of unitholders and carries the right to
participate pro rata in any distributions.
(a) The following units are issued and outstanding:
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Sept. 30, 2008 Dec. 31, 2007 Sept. 30, 2007
Amount Amount Amount
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Balance, beginning
of period 12,638,227 12,593,549 12,593,549
New units from exercise
of options - 22,500 22,500
New units from
Rights Offering 439,982 - -
New units from
Private Placement 724,120 - -
New units issued
during the year under
Distribution
Reinvestment Plan 29,890 22,178 15,491
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Balance, end of period 13,832,219 12,638,227 12,631,540
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(b) Incentive option plan:
In November, 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
the 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.
As at June 30, 2008, 392,500 options remained outstanding.
(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 preceeding five day period.
(d) Rights Offering:
In March, 2008 the Trust filed a rights offering, granting
12,646,449 rights to subscribe for up to 1,264,645 units.
Unitholders of record on March 20, 2008 were granted rights to
subscribe for units of the Trust. Each unitholder was entitled
to one right for each unit held on March 20, 2008. A holder of a
right was entitled to subscribe, on May 1, 2008, for one fully
paid unit of the Trust, at a price of $10.10 per unit, for every
ten rights held. Rights not exercised at or before May 1, 2008
were void and have no value. The Trust issued 439,982 units
under the rights offering for gross proceeds of $4,443,818.
(e) Private Placement:
In September, 2008, the Trust completed an equity offering of
724,120 units on a private placement basis, at a price of $10.25
per unit, for total gross proceeds of $7,422,230.
10. Per unit amounts:
The following table reconciles the numerators and denominators of the
basic and diluted earnings per unit.
Basic earnings per unit calculation:
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Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Numerator for basic
earnings per unit:
Net earnings $ 3,484,045 $ 3,221,939 $10,976,050 $ 9,735,662
-------------------------------------------------------------------------
Denominator for
basic earnings
per unit:
Weighted average
units 13,331,565 12,626,740 12,973,121 12,611,273
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Basic earnings
per unit $ 0.261 $ 0.255 $ 0.846 $ 0.772
-------------------------------------------------------------------------
Diluted earnings per unit calculation:
-------------------------------------------------------------------------
Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Numerator for diluted
earnings per unit:
Net earnings $ 3,484,045 $ 3,221,939 $10,976,050 $ 9,735,662
Interest on
convertible
debentures 430,223 429,493 1,289,175 1,286,548
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Net earnings for
diluted earnings
per unit $ 3,914,268 $ 3,651,432 $12,265,225 $11,022,210
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Denominator for
diluted earnings
per unit:
Weighted average
units 13,331,565 12,626,740 12,973,121 12,611,273
Net units that
would be issued:
Assuming the
proceeds from
options 18,150 19,572 15,609 26,673
are used to
repurchase units
at the average
unit price
Assuming conver-
tible debentures
are converted 2,127,660 2,127,660 2,127,660 2,127,660
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Diluted weighted
average units 15,477,375 14,773,971 15,116,389 14,765,606
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Diluted earnings
per unit $ 0.253 $ 0.247 $ 0.811 $ 0.747
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11. Distributions:
The Trust makes distributions to the unitholders on a monthly basis
on or about the 15th day of each month. The Declaration of Trust
provides that the Trust will distribute 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, to Unitholders. The
net income of the Trust determined in accordance with the Income Tax
Act (Canada), for the nine month period ended September 30, 2008 was
$10,531,628 (2007 - $9,422,433).
For the nine months ended September 30, 2008, the Trust recorded
distributions of $9,112,318 (2007 - $8,727,618) to its unitholders.
Distributions were $0.702 (2007 - $0.692) per unit.
12. Income taxes:
The Trust is taxed as a mutual fund trust for income tax purposes.
Pursuant to the Declaration of Trust, the Trust 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). Therefore, no provision for income taxes is
required on income earned by the Trust.
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 establishes objective tests with respect to how much an
income trust is permitted to grow without jeopardizing its
transitional relief. In general, the Trust will be permitted to issue
new equity, which for these purposes includes units and convertible
debt, in each of the next three years equal to the greater of $50
million and a certain percentage of the Trust's market capitalization
as of the end of trading on October 31, 2006 (up to 100% percent
during the transitional period). This latter amount is cumulative to
the extent it is not used in a given year and, accordingly, the Trust
will be permitted to issue new equity during the transitional period
at least equal to its October 31, 2006 market capitalization (subject
to the applicable annual limits). Market capitalization, for these
purposes, is to be measured in terms of the value of the Trust's
issued and outstanding publicly-traded units. If these limits 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 released on December 15, 2006) 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.
13. Related party transactions and balances:
Transactions with related parties are in the normal course of
business and are recorded at the exchange amount, which is the amount
of consideration established and agreed to by the related parties,
and 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, 2008 this amount was $1,356,874 (2007
- $1,168,429), and for the three month period ended September 30,
2008 this amount was $477,774 (September 30, 2007 - $405,178), 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 $181,000 for the
nine month period ended September 30, 2008 (2007 - $156,000). 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, 2008
was $584,126 (2007 - $682,486) and for the three month period ended
September 30, 2008 was $166,302 (September 30, 2007 - $221,771) and
applicable special profit income for the nine months ended September
30, 2008 was $877,111 (2007 - $478,362) and for the three month
period ended September 30, 2008 was $68,517 (September 30, 2007 -
$42,310).
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, 2008 (2007 -
$1,760,000) were issued to borrowers controlled by certain Trustees
of the Trust. Each mortgage is dealt with in accordance with the
Trust's existing investment and operating policies and is personally
guaranteed by the related Trustee.
14. Interest:
-------------------------------------------------------------------------
Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Bank interest
expense $ 560,203 $ 532,729 $ 1,748,242 $ 1,480,540
Loans payable
interest expense 612,121 493,246 1,741,534 1,278,818
Debenture interest
expense 430,223 429,493 1,289,175 1,286,548
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Interest expense $ 1,602,546 $ 1,455,468 $ 4,778,950 $ 4,045,906
Deferred finance
cost amortization -
convertible
Debenture (43,099) (43,099) (128,359) (127,890)
Implicit interest
rate in excess of
coupon rate -
Convertible
debentures (12,125) (11,394) (35,817) (33,658)
Change in accrued
interest (351,229) (533,329) 144,699 (505,909)
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Cash interest paid $ 1,196,094 $ 867,646 $ 4,759,475 $ 3,378,449
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15. Contingent liabilities:
The Trust is involved in certain litigation arising out of the
ordinary course of investing in mortgages. Although such matters
cannot be predicted with certainty, management believes the claims
are without merit and does not consider the Trust's exposure to such
litigation to have an impact on these financial statements.
16. Fair value of financial Instruments:
The fair value of amounts receivable, bank indebtedness, accounts
payable and accrued liabilities, 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, 2008 closing price on the TSX. The fair
value has been estimated at September 30, 2008 to be $24,187,500
(2007 - $24,000,000).
17. 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, 2008, if interest rates at that date had been 100
basis points lower or higher, with all other variables held constant,
net income for a nine month period ended September 30, 2008 would be
affected as follows:
Carrying Value Interest Rate Risk
--------------------------------------------
-1% +1%
---------------------------------------------------------------
Financial assets
Amounts Receivable 2,439,937
Mortgage Investments 248,658,885 (119,451) 162,045
Financial liabilities
Bank indebtedness 42,732,217 320,492 (320,492)
Accounts payable
and accrued
liabilities 1,025,235
Unearned income 323,640
Unitholder
distribution
payable 1,078,913
Loans payable 48,072,374 317,771 (317,771)
-------------------------
-------------------------
Total increase (decrease) 518,812 (476,218)
-------------------------
-------------------------
(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. The balance outstanding
under all impaired mortgage investments held by the Trust does not
exceed 2% of the total portfolio balance.
(c) Liquidity risk
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).
(d) Capital risk management
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.
18. Comparative figures:
Certain 2007 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2008.
