TSX Symbol FC.UN
TORONTO, March 10 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), today released its financial statements for the fiscal year ended December 31, 2008.
EARNINGS --------
Net earnings for the year ended December 31, 2008 totaled $14,700,534 compared to $12,885,048 for the year ended December 31, 2007. For the fourth quarter ended December 31, 2008, net earnings amounted to $3,724,484 compared to $3,149,386 for the same period ended in 2007. 2008 basic weighted average net earnings per unit of $1.115 compared to $1.021 per unit for 2007. The 2008 net earnings represent an annualized return on average Unitholders' equity of 11.58% per annum. This return on Unitholders' equity equates to 897 basis points per annum over the average One Year Government of Canada Treasury Bill yield for the year and is well in excess of the Trust's target yield objective of 400 basis points per annum over the One Year Treasury Bill yield.
DISTRIBUTION OVERVIEW 2008:
---------------------------
Monthly distributions for 2008 equaled $.078 per month, for a total $0.936
per unit, which, together with the year end Special Distribution of $0.17,
represents total distributions for 2008 of $1.106 per unit, an increase from
2007 distributions of $1.021 per unit.
INVESTMENT PORTFOLIO TURNS:
---------------------------
In 2008 annual mortgage discharges equated to $146 million. This
represents a significant turn of the portfolio enabling management to
re-invest the funds in evolving market conditions. As the portfolio revolves,
the Trust is able to manage the portfolio size and return on equity based on
the pricing of new investments.
MORTGAGE PORTFOLIO HIGHLIGHTS:
------------------------------
Details on the Trust's mortgage portfolio as at December 31, 2008 are as
follows:
- Total Gross Mortgage Portfolio equals $225,795,801
- Conventional first mortgages, being those mortgages with loan to
values less than 75%, comprise 79% of our total portfolio, and total
Conventional mortgages with loan to values under 75% comprise 92% of
our total portfolio.
- Special Profit Mortgage Investments total 8% of the portfolio.
- Approximately 85% of the portfolio matures within 12 months. This
results in a continuously revolving portfolio, allowing management to
assess market conditions.
- The Average Face Interest Rate on the portfolio is 9.79% per annum.
- Regionally, the portfolio is diversified approximately as follows:
Ontario 78.7%, Alberta 13.0%, British Columbia 3.0%, with the balance
(5.3%) being in other provinces.
- Mortgage portfolio breakdown by loan size is as follows:
Amount Number of Mortgages Total Amount
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$0-$1,000,000 102 $ 50,312,656
$1,000,001-$2,000,000 41 58,862,432
$2,000,001-$3,000,000 19 47,901,321
$3,000,001-$4,000,000 9 30,752,871
$4,000,001-$5,000,000 5 22,092,160
$5,000,001-$6,000,000 3 15,874,361
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179 $225,795,801
LOAN LOSS PROVISION UPDATE:
---------------------------
Management has always taken a proactive approach to allowance provision
reserves. This is a prudent approach to protecting our Unitholders' equity.
Loan loss provisions at the start of the fiscal year amounted to $1,725,000.
During 2008 a further $675,000 was added to the provision for a total of
$2,400,000, representing 1.06% of the gross loan portfolio.
FINANCING UPDATE:
-----------------
The Trust is pleased to announce that at the end of September 2008 its
principal banker renewed its warehousing credit facility for a further year to
mature September 31, 2009 with a right at maturity to lock in any balance
outstanding for a second year term, should a renewal not be concluded at the
end of the first year renewal.
UNRECOGNIZED INCOME COLLECTED:
------------------------------
As at December 31, 2008, the Trust has banked non-refundable fee income of
$400,792, 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 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. 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.
Audited Financial Statements of
FIRM CAPITAL MORTGAGE
INVESTMENT TRUST
Years Ended December 31, 2008 and 2007
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
December 31, 2008 and 2007
2008 2007
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Assets
Amounts receivable and prepaid expenses
(note 5) $ 1,986,112 $ 2,093,026
Mortgage investments (note 6) 223,395,801 233,731,967
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$ 225,381,913 $ 235,824,993
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness (note 7) $ 27,337,813 $ 52,593,158
Accounts payable and accrued liabilities 618,541 820,000
Unearned income 275,856 335,721
Unitholder distribution payable 3,430,390 2,186,413
Loans payable (note 8) 37,729,228 36,002,060
Convertible debenture (note 9) 23,973,019 23,753,430
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93,364,847 115,690,782
Unitholders' equity (note 10): 132,017,066 120,134,211
Issued and outstanding:
13,832,219 units (2007 - 12,638,227)
Commitments (note 6)
Contingent liabilities (note 16)
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$ 225,381,913 $ 235,824,993
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Earnings
Years ended December 31, 2008 and 2007
2008 2007
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Interest and fees earned, net of Trust
Manager interest allocation (note 14) $ 22,194,452 $ 19,683,209
Less interest expense (note 15) 6,037,747 5,709,529
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Net interest and fee income 16,156,705 13,973,680
Expenses:
General and administrative 781,171 788,632
Unrealized loss in value of mortgages
(note 6) 675,000 300,000
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1,456,171 1,088,632
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Net earnings for the year $ 14,700,534 $ 12,885,048
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Net earnings per unit (note 11)
Basic $ 1.115 $ 1.021
Diluted $ 1.072 $ 0.989
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
Years ended December 31, 2008 and 2007
2008 2007
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Trust units (note 10):
Balance, beginning of year $ 119,753,729 $ 119,297,099
Proceeds from issuance of units 12,174,931 456,630
Offering costs (rights offering and private
placement) (292,076) -
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Balance, end of year $ 131,636,584 $ 119,753,729
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Equity component of convertible debentures
(note 9):
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Balance, beginning and end of year $ 380,482 $ 380,482
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Cumulative earnings:
Balance, beginning of year $ 66,174,234 $ 53,289,186
Net earnings for the year 14,700,534 12,885,048
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Balance, end of year $ 80,874,768 $ 66,174,234
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Cumulative distributions to unitholders:
Balance, beginning of year $ 66,174,234 $ 53,289,186
Distributions to unitholders (note 12) 14,700,534 12,885,048
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Balance, end of year $ 80,874,768 $ 66,174,234
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Total unitholders' equity $ 132,017,066 $ 120,134,211
Units issued and outstanding (note 10) 13,832,219 12,638,227
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Cash Flows
Years ended December 31, 2008 and 2007
2008 2007
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Cash provided by (used in):
Operating activities
Net earnings $ 14,700,534 $ 12,885,048
Net changes in non-cash items
Fair value adjustment - mortgages 675,000 300,000
Implicit interest rate in excess of
coupon rate - convertible debentures 219,589 216,219
Decrease (increase) in amounts
receivable and prepaid expenses 106,914 (18,336)
Increase (decrease) in accounts payable
and accrued liabilities (201,459) 248,009
Increase (decrease) in unearned income (59,865) 30,114
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15,440,713 13,661,054
Financing activities:
Proceeds from issuance of units 12,174,931 456,630
Increase (decrease) in bank indebtedness (25,255,344) 12,491,474
Increase (decrease) in loans payable (net) 1,727,168 10,018,887
Equity offering costs (292,076) -
Distributions to unitholders paid during
year (13,456,557) (10,698,635)
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(25,101,878) 12,268,356
Investing activities:
Funding of mortgage investments (136,173,898) (173,281,137)
Discharge of mortgage investments 145,835,063 147,351,727
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9,661,165 (25,929,410)
Increase in cash, being cash, beginning and
end of year $ - $ -
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Supplemental cash flow information
Interest paid (note 15) $ 6,082,982 $ 5,206,353
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Years ended December 31, 2008 and 2007
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is
Firm Capital Corporation and the trust manager is FC Treasury
Management Inc.
2. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosure are in accordance with Canadian generally accepted
accounting principles ("GAAP").
(a) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year.
The most significant estimates that the Trust is required to
make relate to the fair value of the mortgage investments (Note
2b). 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.
3. New accounting policies:
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 is currently in the process of evaluating the potential
impact of IFRS to its financial statements. This will be an ongoing
process as the International Accounting Standards Board and the AcSB
issue new standards and recommendations. The Trust's financial
performance and financial position as disclosed in the Trust's
current GAAP financial statements may be significantly different when
presented in accordance with IFRS.
5. Amounts receivable and prepaid expenses: The following is a breakdown
of amounts receivable and prepaid expenses as at December 31, 2008
and 2007:
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2008 2007
Amount Amount
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Interest receivable $ 1,783,105 $ 1,869,412
Prepaid expenses 142,774 108,881
Fees receivable 60,233 114,733
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Amounts receivable and prepaid expenses $ 1,986,112 $ 2,093,026
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6. Mortgage Investments:
The following is a breakdown of the mortgage investments as at
December 31, 2008 and 2007:
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2008 2007
Amount % Amount %
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Conventional first mortgages $ 178,473,671 79.0 $ 195,367,641 83.0
Conventional non-first
mortgages 29,635,034 13.2 25,642,548 10.9
Special mortgage investments 17,687,096 7.8 14,446,778 6.1
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Total mortgage investments
(at cost) $ 225,795,801 100.0 235,456,967 100.0
Fair value adjustment (2,400,000) (1,725,000)
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Fair value $ 223,395,801 $ 233,731,967
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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 $2,400,000 as at
December 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 9.79% (2007 - 9.55%) and mature between 2009
and 2012.
The un-advanced funds under the existing mortgage portfolio (which
are commitments of the Trust) amounted to $23,424,066 as at
December 31, 2008 (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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2009 $ 189,077,615
2010 27,536,086
2011 3,000,000
2012 6,182,100
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$ 225,795,801
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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 $27,337,813
(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. The Trust is currently in
compliance with all financial covenants during 2008 and was in
compliance at all times during 2008.
8. Loans payable:
First priority charges on specific mortgage investments have been
granted as security for the loans payable. The loans mature on dates
consistent with those of the underlying mortgages. The loans are on a
non-recourse basis and bear interest at rates ranging from 3.75% to
7.55% as at December 31, 2008 (2007 - 6.25% to 7.55%). The Trust's
principal balance outstanding under the mortgages for which a first
priority charge has been granted is $49,023,836 as at December 31,
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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2009 $ 35,990,308
2010 1,738,920
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$ 37,729,228
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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:
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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
-------------------------------------------------------------------------
Liability, beginning of year $ 23,753,430 $ 23,537,211
Implicit interest rate in excess of coupon
rate 48,131 45,230
Amortization of debenture financing costs 171,458 170,989
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Liability, end of year $ 23,973,019 $ 23,753,430
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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.
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:
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2008 2007
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Balance, beginning of period 12,638,227 12,593,549
New units from exercise of options - 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
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Balance, end of period 13,832,219 12,638,227
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(b) Incentive option plan:
In 2005, 415,000 options were issued to trustees, directors,
officers and employees of the Trust Manager and Mortgage
Banker, with an exercise price of $9.90 per unit. The options
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 nominal and
therefore no related compensation expense has been recorded by
the Trust.
As at December 31, 2008, 427,500 options remained outstanding
(December 31, 2007 - 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.
(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.
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:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Numerator for basic earnings per unit:
Net earnings $ 14,700,534 $ 12,885,048
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Denominator for basic earnings per unit:
Weighted average units 13,187,057 12,616,382
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per unit $ 1.115 $ 1.021
-------------------------------------------------------------------------
Diluted earnings per unit calculation:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Numerator for diluted earnings per unit:
Net earnings $ 14,700,534 $ 12,885,048
Interest on convertible debentures 1,719,589 1,716,219
-------------------------------------------------------------------------
Net earnings for diluted earnings per unit $ 16,420,123 $ 14,601,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Denominator for diluted earnings per unit:
Weighted average units 13,187,057 12,616,382
Net units that would be issued:
Assuming the proceeds from options - 22,076
are used to repurchase units
at the average unit price
Assuming convertible debentures are
converted 2,127,660 2,127,660
-------------------------------------------------------------------------
Diluted weighted average units 15,314,717 14,765,606
-------------------------------------------------------------------------
Diluted earnings per unit $ 1.072 $ 0.989
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 year ended December 31, 2008 was $13,999,645
(2007 - $12,398,473).
For the year ended December 31, 2008, the Trust recorded
distributions of $14,700,534 (2007 - $12,885,048) to its unitholders.
Distributions were $1.106 (2007 - $1.021) 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
year ended December 31, 2008 this amount was $1,810,899 (2007 -
$1,592,107), 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 $241,000 for the
year ended December 31, 2008 (2007 - $212,000). The Mortgage Banker
also retains all overnight float interest and incidental fees and
charges payable by borrowers on the Trust's mortgage investments. The
Trust's share of commitment and renewal fees recorded in income for
the year ended December 31, 2008 was $891,196 (2007 - $933,872) and
applicable special profit income for the year ended December 31, 2008
was $985,534 (2007 - $554,646).
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 December 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.
15. Interest:
2008 2007
Bank interest expense $ 2,098,960 $ 2,156,534
Loans payable interest expense 2,219,198 1,836,776
Debenture interest expense 1,719,589 1,716,219
-------------------------------------------------------------------------
Interest expense $ 6,037,747 $ 5,709,529
Deferred finance cost amortization
- convertible debentures (171,458) (170,989)
Implicit interest rate in excess of
coupon rate - convertible debentures (48,131) (45,230)
Change in accrued interest 264,825 (286,957)
-------------------------------------------------------------------------
Cash interest paid $ 6,082,982 $ 5,206,353
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 2008 closing price on the TSX. The fair
value has been estimated at December 31, 2008 to be $17,500,000 (2007
- $23,000,000).
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 December 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 year ended December 31, 2008 would be affected as
follows:
Carrying Value Interest Rate Risk
--------------------------------------------
-1% +1%
---------------------------------------------------------------------
Financial assets
Amounts receivable $ 1,986,112 $ - $ -
Mortgage investments 233,395,801 (114,628) 120,067
Financial liabilities
Bank indebtedness 27,337,813 273,378 (273,378)
Accounts payable
and accrued
liabilities 641,610
Unearned income 275,856
Unitholder
distribution
payable 3,430,390
Loans payable 37,729,228 323,787 (323,787)
-------------------------
-------------------------
Total increase (decrease) $ 482,537 ($477,098)
-------------------------
-------------------------
(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 December 31, 2008, 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 $23,424,066 as at December 31, 2008
($49,359,642 as at December 31, 2007). 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, 2009. If the loan is not renewed on September 30, 2009, the terms
of the facility allow for the Trust to repay the balance owed on
September 30, 2009 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 - 3 4 - 6
1 year years years
-------------------------------------------------------------------------
Bank indebtedness $27,337,813 $27,337,813
-------------------------------------------------------------------------
Loans payable 37,729,228 35,990,308 1,738,920
-------------------------------------------------------------------------
Convertible debenture 25,000,000 $25,000,000
-------------------------------------------------------------------------
Subtotal -
Liabilities $90,067,041 $63,328,121 $1,738,920 $25,000,000
-------------------------------------------------------------------------
Future advances
under mortgages 23,424,066 23,424,066
-------------------------------------------------------------------------
Liabilities and
contractual
obligations $113,491,107 $86,752,187 $1,738,920 $25,000,000
-------------------------------------------------------------------------
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 units 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 2007 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2008.