TSX Symbol FC.UN
TORONTO, April 30 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), released today its financial statements for the first quarter ended March 31, 2008.
Net earnings for the first quarter ended March 31, 2008 increased to $3,574,288 from $3,358,608 for the same period last year. Basic weighted average earnings per unit for the first quarter amounted to $0.283 versus $0.267 last year. For the three month period ended March 31, 2008, net earnings exceeded distributions by $615,004, representing $0.048 per unit. 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 three month period ended March 31, 2008 represented an annualized return on average Unitholders' equity of 11.87% per annum. This return on Unitholders' equity equates to 875 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.
As at March 31, 2008, the Trust's mortgage portfolio, net of fair value adjustment, stood at $230,117,058 as compared to $233,731,967 as at December 31, 2007. The portfolio continues to be heavily concentrated in first mortgages based in Ontario. Although the portfolio balance as at March 31, 2008 was slightly lower than as at December 31, 2007, the average daily portfolio balance during the first quarter of 2008 of $237 million was 3.5% higher than the average daily portfolio balance during the fourth quarter of 2007 of $227 million.
In light of the continuing publicity related to the securitization market and the sub-prime mortgage industry, the Trust feels it is important to clarify that the Trust is not involved in the sub-prime mortgage investment marketplace and has no exposure to the securitization market. The Trust's investments are comprised of mortgages registered on properties primarily for the short-term bridge financing and interim financing purposes, secured on residential, development and investment properties. Residential single family owner occupied housing mortgage investments have loan to values not exceeding 75%, and these investments represent a very small percentage of the Trust's portfolio. 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.
Firm Capital Corporation, as Mortgage Banker to the Trust, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate finance, including construction, mezzanine and equity investments.
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 Three Months Ended March 31, 2008
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
March 31, 2008, with comparative figures for December 31, 2007 and
March 31, 2007
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Mar. 31, Dec. 31, Mar. 31,
2008 2007 2007
(Unaudited) (Audited) (Unaudited)
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Assets
Amounts receivable and prepaid
expenses $ 2,250,884 $ 2,093,026 $ 1,937,498
Mortgage investments (note 5) 230,117,058 233,731,967 200,049,897
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$232,367,942 $235,824,993 $201,987,395
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Liabilities and Unitholders'
Equity
Liabilities:
Bank indebtedness (note 6) $ 43,323,055 $ 52,593,158 $ 28,949,810
Accounts payable and accrued
liabilities 966,760 820,000 877,128
Unearned income 281,068 335,721 283,524
Unitholder distribution
payable 986,643 2,186,413 957,401
Loans payable (note 7) 42,155,296 36,002,060 27,123,315
Convertible debenture (note 8) 23,807,814 23,753,430 23,590,417
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111,520,636 115,690,782 81,781,595
Unitholders' equity (note 9): 120,847,306 120,134,211 120,205,800
Issued and outstanding:
12,649,263 units
(2007 - 12,597,384)
Commitments (note 5)
Contingent liabilities (note 15)
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$232,367,942 $235,824,993 $201,987,395
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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 3 Month
Period Period
March 31, March 31,
2008 2007
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Interest and fees earned, net
of Trust Manager interest
allocation (note 13) $ 5,478,664 $ 4,853,468
Less interest expense (note 14) 1,708,285 1,326,359
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Net interest and fee income 3,770,379 3,527,109
Expenses:
General and administrative 196,091 168,501
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196,091 168,501
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Net earnings for the period $ 3,574,288 $ 3,358,608
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Net earnings per unit (note 10):
Basic $ 0.283 $ 0.267
Diluted $ 0.271 $ 0.257
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
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March 31, Dec. 31, March 31,
2008 2007 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) (14,648) - -
Proceeds from issuance of units 112,739 456,630 41,378
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Balance, end of period $119,851,820 $119,753,729 $119,338,477
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Equity component of convertible
debentures (note 8):
Balance, beginning of period $ 380,482 $ 380,482 $ -
Equity component of convertible
debentures issued - - 380,482
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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 3,574,288 12,885,048 3,358,608
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Balance, end of period $ 69,748,522 $ 66,174,234 $ 56,647,794
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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) 2,959,284 12,885,048 2,871,767
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Balance, end of period $ 69,133,518 $ 66,174,234 $ 56,160,953
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Total unitholders' equity $120,847,306 $120,134,211 $120,205,800
Units issued and outstanding
(note 9) 12,649,263 12,638,227 12,597,384
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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 3 Month
Period Period
March 31, March 31,
2008 2007
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Cash provided by (used in):
Operating activities
Net earnings for the period $ 3,574,288 $ 3,358,608
Items not affecting cash:
Accretion in convertible debentures 54,384 53,207
Net changes in non-cash operating items:
Decrease (increase) in amounts receivable
and prepaid expenses (157,857) 137,190
Increase in accounts payable and accrued
liabilities 146,760 305,137
Decrease in unearned income (54,653) (22,083)
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3,562,922 3,832,059
Financing activities:
Proceeds from issuance of units 112,739 41,378
Decrease in bank indebtedness (9,270,104) (11,151,873)
Increase in loans payable 6,153,236 1,140,142
Increase (decrease) in distribution payable (1,199,770) 957,401
Rights offering costs (14,648) -
Distributions to unitholders (2,959,284) (2,871,767)
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(7,177,831) (11,884,718)
Investing activities:
Funding of mortgage investments (21,554,589) (32,864,826)
Discharge of mortgage investments 25,169,498 40,917,486
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3,614,909 8,052,660
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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) $ 1,479,489 $ 903,362
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
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) Non-conventional mortgages:
Special profit participations earned by the Trust on
non-conventional mortgages 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 March
31, 2008, December 31, 2007 and March 31, 2007:
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March 31, 2008 Dec. 31, 2007 March 31, 2007
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Amount % Amount % Amount %
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Conventional
first
mortgages $194,394,221 83.8 $195,367,641 83.0 $168,306,095 83.4
Conventional
non-first
mortgages 22,400,238 9.7 25,642,548 10.9 20,668,386 10.3
Non-conventional
mortgages &
related
investments 15,047,599 6.5 14,446,778 6.1 12,500,416 6.2
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Total
mortgage
investments
(at cost) $231,842,058 100.0 235,456,967 100.0 $201,474,897 100.0
Fair value
adjustment 1,725,000 1,725,000 1,425,000
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Fair value $230,117,058 $233,731,967 $200,049,897
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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 secured by either a second or third
priority mortgage charge with loan to values not exceeding 75%.
Non-conventional mortgages & related investments are loans having
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 $1,725,000 as at March 31, 2008 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 9.47% (2007 - 9.53%) and mature between 2008
and 2012.
The un-advanced funds under the existing mortgage portfolio (which
are commitments of the Trust) amounted to $37,038,926 as at
March 31, 2008 (March 31, 2007 - $43,142,219 & 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 $156,938,515
2009 62,756,000
2010 8,677,543
2011 3,000,000
2012 470,000
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$231,842,058
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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 $43,323,055
(March 31, 2007 - $28,949,810 & December 31, 2007 - $52,593,158) has
been drawn. Interest on bank indebtedness is predominately charged at
rates that vary 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, 2008. 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 5.50% to
7.55% as at March 31, 2008 (2007 - 5.35% to 8.50%). The Trust's
principal balance outstanding under the mortgages for which a first
priority charge has been granted is $54,017,688 as at March 31, 2008
(2007 - $35,335,183).
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 $27,544,382
2009 12,864,362
2010 1,749,552
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$42,155,296
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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 11,754 11,044
Amortization of debenture financing
costs 42,630 42,162
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Liability, end of period $ 23,807,814 $ 23,590,417
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As discussed in Note 4 herein, in accordance with the new accounting
standard adopted by the Trust, 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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March 31, Dec. 31, March 31,
2008 2007 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 -
New units issued during the
year under Distribution
Reinvestment Plan 11,036 22,178 3,835
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Balance, end of period 12,649,263 12,638,227 12,597,384
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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
March 31, 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 proceeding 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 is entitled to
one right for each unit held on March 20, 2008. A holder of a
right is 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
will be void and will have no value.
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:
March 31, March 31,
2008 2007
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Numerator for basic earnings per unit:
Net earnings $ 3,574,288 $ 3,358,608
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Denominator for basic earnings per unit:
Weighted average units 12,644,696 12,594,832
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Basic earnings per unit $ 0.283 $ 0.267
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Diluted earnings per unit calculation:
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Three months ended:
March 31, March 31,
2008 2007
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Numerator for diluted earnings per unit:
Net earnings $ 3,574,288 $ 3,358,608
Interest on convertible debentures 429,384 428,207
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Net earnings for diluted earnings per
unit $ 4,003,672 $ 3,786,815
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Denominator for diluted earnings per
unit:
Weighted average units 12,644,696 12,594,832
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase
units at the average unit price 2,699 7,667
Assuming convertible debentures are
converted 2,127,660 2,127,660
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Diluted weighted average units 14,775,054 14,730,159
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Diluted earnings per unit $ 0.271 $ 0.257
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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 three month period ended March 31, 2008 was
$3,367,325 (2007 - $3,224,466).
For the quarter ended March 31, 2008, the Trust recorded
distributions of $2,959,284 (2007 - $2,871,767) to its unitholders.
Distributions were $0.234 (2007 - $0.228) 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 and accordingly has not recorded future income taxes on
temporary differences expected to be reversed prior to then. 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
quarter ended March 31, 2008 this amount was $442,460
(2007 - $367,331), 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 $59,000
(2007 - $51,000). 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 quarter ended
March 31, 2008 was $171,188 (2007 - $189,535) and applicable special
profit income for the quarter ended March 31, 2008 was $214,988
(2007 - $326,273).
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 March 31, 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:
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3 Months ended:
March 31, March 31,
2008 2007
---------------------------------------------------------------------
Bank interest expense $ 713,496 $ 478,609
Loans payable interest expense 565,405 419,543
Debenture interest expense 429,384 428,207
---------------------------------------------------------------------
Interest expense $ 1,708,285 $ 1,326,359
Deferred finance cost amortization -
convertible Debenture (42,630) (42,162)
Implicit interest rate in excess of
coupon rate -
Convertible debentures (11,754) (11,044)
Change in accrued interest (174,412) (369,791)
---------------------------------------------------------------------
Cash interest paid $ 1,479,489 $ 903,362
---------------------------------------------------------------------
---------------------------------------------------------------------
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 March 31, 2008 closing price on the TSX. The fair value
has been estimated at March 31, 2008 to be $23,500,000
(2007 - $24,750,000).
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 March 31, 2008, 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 have been affected as
follows:
Carrying Value Interest Rate Risk
--------------------------------------------
-1% +1%
---------------------------------------------------------------------
Financial assets
Amounts Receivable 2,250,884
Mortgage Investments 230,117,058 (30,146) $ 51,155
Financial liabilities
Bank indebtedness 43,323,055 108,308 (108,308)
Accounts payable and
accrued liabilities 966,760
Unearned income 281,068
Unitholder distribution
payable 968,643
Loans payable 42,155,296 90,885 (90,885)
----------------------------
----------------------------
Total increase (decrease) 169,047 (140,038)
----------------------------
----------------------------
(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
mortgage. 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
rations, 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.
