TSX Symbol FC.UN
TORONTO, July 16 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), released today its financial statements for the second quarter ended June 30, 2008.
Net earnings for the second quarter ended June 30, 2008 increased to $3,917,718 from $3,155,115 for the same period last year. Basic weighted average earnings per unit for the second quarter amounted to $0.303 versus $0.250 last year. Net earnings for the six month period ended June 30, 2008 increased to $7,492,005 from $6,513,723 for the same period last year. Basic weighted average earnings per unit for the six month period ended June 30, 2008 increased to $0.586 versus $0.517 last year.
For the six month period ended June 30, 2008, net earnings exceeded distributions by $1,502,708, representing $0.115 per unit, based on the number of units outstanding at June 30, 2008. The Trust distributes the balance of its net earnings, less distributions made up to November 30 of that year, to Unitholders of record as at December 31. Net earnings for the six month period ended June 30, 2008 represented an annualized return on average Unitholders' equity of 12.61% per annum. This return on Unitholders' equity equates to 975 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 June 30, 2008, the Trust's mortgage portfolio, net of fair value adjustment, stood at $244,645,057 as compared to $233,731,967 as at December 31, 2007. The portfolio continued to be heavily concentrated in first mortgages.
The Trust, through its Mortgage Banker, Firm Capital Corporation, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate finance, including construction, mezzanine and equity investments. The Trust's investment objective is the preservation of Unitholders' equity, while providing Unitholders with a stable stream of monthly distributions from investments. The Trust achieves its investment objectives by pursuing a strategy of growth through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to Unitholders.
Additional information about the Trust, including the Management's Discussion and Analysis relating to the financial statements, will be available on the SEDAR website at www.sedar.com.
Unaudited Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
For the Six Months Ended June 30, 2008
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.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
June 30, 2008, with comparative figures for December 31, 2007 and
June 30, 2007
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June 30, Dec. 31, June 30,
2008 2007 2007
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
Assets
Amounts receivable and
prepaid expenses $ 2,217,213 $ 2,093,026 $ 1,973,143
Mortgage investments
(note 5) 244,645,057 233,731,967 204,952,996
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$246,862,270 $235,824,993 $206,926,139
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Liabilities and
Unitholders' Equity
Liabilities:
Bank indebtedness (note 6) $ 44,527,864 $ 52,593,158 $ 34,237,971
Accounts payable and
accrued liabilities 561,288 820,000 461,214
Unearned income 299,813 335,721 296,781
Unitholder distribution
payable 1,021,684 2,186,413 984,397
Loans payable (note 7) 50,463,679 36,002,060 26,608,102
Convertible debenture
(note 8) 23,862,382 23,753,430 23,644,266
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120,736,710 115,690,782 86,232,731
Unitholders' equity (note 9): 126,125,560 120,134,211 120,693,408
Issued and outstanding:
13,098,509 units
(2007 - 12,620,468)
Commitments (note 5)
Contingent liabilities
(note 15)
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$246,862,270 $235,824,993 $206,926,139
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Earnings
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3 Month Period 6 Month Period
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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Interest and fees
earned, net of
Trust Manager
interest
allocation
(note 13) $ 5,778,363 $ 4,715,947 $ 11,257,026 $ 9,569,415
Less interest
expense (note 14) 1,468,119 1,264,080 3,176,404 2,590,439
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Net interest and
fee income 4,310,244 3,451,867 8,080,622 6,978,976
Expenses:
General and
administrative 192,526 201,752 388,617 370,253
Unrealized loss
in value of
mortgages
(note 5) 200,000 95,000 200,000 95,000
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392,526 296,952 588,617 465,253
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Net earnings for
the period $ 3,917,718 $ 3,155,115 $ 7,492,005 $ 6,513,723
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Net earnings per
unit (note 10)
Basic $ 0.303 $ 0.250 $ 0.586 $ 0.517
Diluted $ 0.288 $ 0.243 $ 0.559 $ 0.500
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
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June 30, Dec. 31, June 30,
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) (164,037) - -
Proceeds from issuance of units 4,652,679 456,630 274,825
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Balance, end of period $124,242,371 $119,753,729 $119,571,924
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Equity component of convertible
debentures (note 8):
Balance, beginning of period $ 380,482 $ 380,482 $ 380,482
Equity component of convertible
debentures issued - - -
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Balance, end of period $ 380,482 $ 380,482 $ 380,482
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Cumulative earnings:
Balance, beginning of period $ 66,174,234 $ 53,289,186 $ 53,289,186
Net earnings for the period 7,492,005 12,885,048 6,513,723
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Balance, end of period $ 73,666,239 $ 66,174,234 $ 59,802,909
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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) 5,989,297 12,885,048 5,772,720
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Balance, end of period $ 72,163,531 $ 66,174,234 $ 59,061,906
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Total unitholders' equity $126,125,560 $120,134,211 $120,693,409
Units issued and outstanding
(note 9) 13,098,509 12,638,227 12,620,468
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Cash Flows
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3 Month Period 6 Month Period
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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Cash provided by
(used in):
Operating
activities
Net earnings
for the period $ 3,917,717 $ 3,155,115 $ 7,492,005 $ 6,513,723
Net changes in
non-cash items
Increase in
fair value
adjustment 200,000 95,000 200,000 95,000
Implicit
interest rate
in excess of
coupon rate -
convertible
debenture 54,568 53,849 108,952 107,055
Decrease
(increase)
in amounts
receivable
and prepaid
expenses 33,671 (35,645) (124,187) 101,547
Increase
(decrease)
in accounts
payable and
accrued
liabilities (405,472) (415,913) (258,712) (110,777)
Increase
(decrease)
in unearned
income 18,745 13,257 (35,908) (8,826)
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3,819,229 2,865,663 7,382,150 6,697,722
Financing activities:
Proceeds from
issuance of
units 4,539,940 233,447 4,652,679 274,825
Increase
(decrease)
in bank
indebtedness 1,204,809 5,288,161 (8,065,294) (5,863,713)
Increase
(decrease) in
loans payable 8,308,383 (515,213) 14,461,619 624,929
Increase
(decrease) in
distribution
payable 35,042 26,995 (1,164,729) 984,397
Debenture
offering costs (149,391) - (164,037) -
Distributions
to unitholders (3,030,013) (2,900,953) (5,989,297) (5,772,720)
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10,908,770 2,132,437 3,730,941 (9,752,282)
Investing
activities:
Funding of
mortgages (52,087,680) (39,570,227) (73,642,270) (72,435,052)
Discharge of
mortgages 37,359,681 34,572,127 62,529,179 75,489,612
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(14,727,999) (4,998,100) (11,113,091) 3,054,560
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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) $ 1,794,492 $ 1,564,812 $ 3,273,981 $ 2,426,012
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Three Months and Six Months ended June 30, 2008
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is
Firm Capital Corporation and the trust manager is FC Treasury
Management Inc.
2. Basis of Presentation:
The unaudited interim period financial statements were prepared in
accordance with Canadian generally accepted accounting principles
("GAAP") and follow the same accounting policies and methods of
application with those used in the preparation of the audited
financial statements for the year ended December 31, 2007. Under
Canadian GAAP, additional disclosure is required in annual financial
statements and accordingly the interim financial statements should be
read together with the audited financial statements and the
accompanying notes included in Firm Capital Mortgage Investment
Trust's 2007 Annual Report.
3. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosure are in accordance with Canadian generally accepted
accounting principles ("GAAP").
(a) Mortgage investments:
Mortgage investments are stated at estimated fair value in
accordance with Canadian Institute of Chartered Accountants
Accounting Guideline 18. Fair value is the amount of
consideration that would be agreed upon in an arm's length
transaction between knowledgeable, willing parties who are under
no compulsion to act. The fair value of Mortgage investments
approximate their carry values due to the fact that the majority
of the mortgages are (i) are short-term in nature with terms of
12 months or less, (ii) repayable in full, at any time at the
option of the borrower prior to maturity without penalty, and
(iii) have minimum specified interest rates for mortgages with
floating rates linked to bank prime. When, in management's
opinion, collection of principal on a particular mortgage
investment is no longer reasonably assured, the fair value of the
mortgage investment is reduced to reflect the estimated net
realizable recovery from the collateral securing the mortgage
loan.
(b) Convertible debentures:
The Trust's convertible debentures are classified into debt and
equity components. The equity component represents the estimated
value of the conversion rights of the holders.
(c) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and
is recorded net of the Trust Manager interest spread
described in note 13. Commitment fees received are amortized
over the expected term of the mortgage.
(ii) 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
June 30, 2008, December 31, 2007 and June 30, 2007:
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June 30, 2008 Dec. 31, 2007
Amount % Amount %
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Conventional first
mortgages $207,752,248 84.3 $195,367,641 83.0
Conventional non-first
mortgages 26,060,392 10.6 25,642,548 10.9
Non-conventional mortgages
& related investments 12,757,417 5.1 14,446,778 6.1
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Total mortgage investments
(at cost) $246,570,057 100.0 235,456,967 100.0
Fair value adjustment 1,925,000 1,725,000
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Fair value $244,645,057 $233,731,967
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------------------------------------------------
June 30, 2007
Amount %
------------------------------------------------
Conventional first
mortgages $172,593,114 83.6
Conventional non-first
mortgages 22,987,519 11.1
Non-conventional mortgages
& related investments 10,892,363 5.3
------------------------------------------------
Total mortgage investments
(at cost) $206,472,996 100.0
Fair value adjustment 1,520,000
------------------------------------------------
Fair value $204,952,996
------------------------------------------------
------------------------------------------------
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 $1,925,000 as at June 30, 2008 represents the total
amount of management's estimate of the shortfall between the mortgage
investment principal and accrued interest balances and the estimated
net realizable recovery from the collateral securing the mortgage
loans.
The mortgages are secured by real property, bear interest at the
weighted average rate of 9.28% (2007 - 9.52%) and mature between 2008
and 2012.
The un-advanced funds under the existing mortgage portfolio (which
are commitments of the Trust) amounted to $37,633,143 as at June 30,
2008 (June 30, 2007 - $44,488,862 & 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 $127,588,318
2009 101,940,615
2010 13,571,124
2011 3,000,000
2012 470,000
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$246,570,057
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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 $44,527,864
(June 30, 2007 - $34,237,971 & 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 6.25% to
7.55% as at June 30, 2008 (2007 - 5.35% to 7.25%). The Trust's
principal balance outstanding under the mortgages for which a first
priority charge has been granted is $64,911,932 as at June 30, 2008
(2007 - $34,519,550).
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 $32,491,439
2009 13,772,240
2010 4,200,000
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$50,463,679
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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 23,692 22,264
Amortization of debenture financing costs 85,260 84,792
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Liability, end of period $23,862,382 $23,644,266
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Deferred financing costs relating to the issuance of convertible
debentures are no longer presented as a separate asset on the balance
sheet and are now netted against the carrying value of the
convertible debenture.
Notwithstanding the carry value of the convertible debenture, the
principal balance outstanding to the debenture holders is
$25,000,000.
9. Unitholders' equity:
The beneficial interests in the Trust are represented by a single
class of units which are unlimited in number. Each unit carries a
single vote at any meeting of unitholders and carries the right to
participate pro rata in any distributions.
(a) The following units are issued and outstanding:
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June 30, Dec. 31, June 30,
2008 2007 2007
Amount Amount Amount
---------------------------------------------------------------------
Balance, beginning of period 12,638,227 12,593,549 12,593,549
New units from exercise
of options - 22,500 17,500
New units from Rights Offering 439,982 - -
New units issued during the
year under Distribution
Reinvestment Plan 20,300 22,178 9,419
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Balance, end of period 13,098,509 12,638,227 12,620,468
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(b) Incentive option plan:
In November, 2005, 415,000 options were issued to trustees,
directors, officers and employees of the Trust Manager and
Mortgage Banker, with an exercise price of $9.90 per unit. The
options are exercisable any time up to November 17, 2010. The
fair value of the unit options used to compute compensation
expense of $21,729 (which was recorded in the fourth quarter of
2005) is the estimated fair value of all options granted on the
grant date. This was calculated for the options granted during
the 2005 using the Black-Scholes option pricing model with the
following assumptions: expected distribution yield is 9.44%,
expected volatility is 8.83%; risk free interest rate is 3.96%;
and expected option life in years is 5. The options vested on the
grant date. During 2007 22,500 unit options were exercised. As at
June 30, 2008, 392,500 options remained outstanding.
(c) Distribution reinvestment plan and direct unit purchase plan:
The Trust has a distribution reinvestment plan and direct unit
purchase plan for its unitholders which allows participants to
reinvest their monthly cash distributions in additional trust
units at a unit price equivalent to the weighted average price of
units for the 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 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.
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: Six months ended:
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Numerator for basic
earnings per unit:
Net earnings $3,917,717 $3,155,115 $7,492,005 $6,513,723
-------------------------------------------------------------------------
Denominator for basic
earnings per unit:
Weighted average units 12,939,191 12,611,918 12,791,675 12,603,412
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Basic earnings per unit $0.303 $0.250 $0.586 $0.517
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Diluted earnings per
unit calculation:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months ended: Six months ended:
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Numerator for diluted
earnings per unit:
Net earnings $3,917,717 $3,155,115 $7,492,005 $6,513,723
Interest on
convertible debentures 429,568 428,849 858,952 857,056
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Net earnings for diluted
earnings per unit $4,347,285 $3,583,964 $8,350,957 $7,370,779
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Denominator for diluted
earnings per unit:
Weighted average units 12,939,191 12,611,918 12,791,675 12,603,412
Net units that would
be issued:
Assuming the proceeds
from options are used
to repurchase units at
the average unit price 11,415 30,669 15,340 31,744
Assuming convertible
debentures are
converted 2,127,660 2,127,660 2,127,660 2,127,660
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Diluted weighted average
units 15,078,265 14,770,246 14,934,675 14,762,816
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Diluted earnings per unit $0.288 $0.243 $0.559 $0.500
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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 six month period ended June 30, 2008 was
$7,227,780 (2007 - $6,281,000).
For the six months ended June 30, 2008, the Trust recorded
distributions of $5,989,297 (2007 - $5,772,720) to its unitholders.
Distributions were $0.468 (2007 - $0.458) 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
six months ended June 30, 2008 this amount was $879,101 (2007 -
$763,251), and for the three month period ended June 30, 2008 this
amount was $436,640 (June 30, 2007 - $383,510), 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 $117,000 for the
six month period ended June 30, 2008 (2007 - $102,000). 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 six months ended June 30, 2008 was $417,824 (2007 - $460,715)
and for the three month period ended June 30, 2008 was $246,635
(June 30, 2007 - $271,181) and applicable special profit income for
the six months ended June 30, 2008 was $808,594 (2007 - $436,052) and
for the three month period ended June 30, 2008 was $593,606 (June 30,
2007 - $109,780).
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 June 30, 2008 (2007 - $1,760,000)
were issued to borrowers controlled by certain Trustees of the Trust.
Each mortgage is dealt with in accordance with the Trust's existing
investment and operating policies and is personally guaranteed by the
related Trustee.
14. Interest:
-------------------------------------------------------------------------
Three Months ended: Six months ended:
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Bank interest expense $ 474,542 $ 469,203 $1,188,039 $ 947,811
Loans payable interest
expense 564,008 366,028 1,129,413 785,572
Debenture interest expense 429,568 428,849 858,952 857,056
-------------------------------------------------------------------------
Interest expense $1,468,119 $1,264,080 $3,176,404 $2,590,439
Deferred finance cost
amortization - convertible
Debenture (42,630) (42,630) (85,260) (84,792)
Implicit interest rate in
excess of coupon rate -
Convertible debentures (11,938) (53,849) (23,692) (107,055)
Change in accrued interest 380,941 397,211 206,530 27,420
-------------------------------------------------------------------------
Cash interest paid $1,794,492 $1,564,812 $3,273,981 $2,426,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 June 30, 2008 closing price on the TSX. The fair value
has been estimated at June 30, 2008 to be $24,250,000 (2007 -
$24,625,000).
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 June 30, 2008, if interest rates at that date had been 100 basis
points lower or higher, with all other variables held constant, net
income for the six month period ended June 30, 2008 would have been
affected as follows:
Carrying Value Interest Rate Risk
------------------------------------------
-1% +1%
---------------------------------------------------------------------
Financial assets
Amounts Receivable 2,217,213
Mortgage Investments 244,645,057 (69,772) $122,498
Financial liabilities
Bank indebtedness 44,527,864 223,557 (223,557)
Accounts payable and
accrued liabilities 561,288
Unearned income 299,813
Unitholder distribution
payable 1,021,684
Loans payable 50,463,679 252,318 (252,318)
-------------------------
-------------------------
Total increase (decrease) 406,103 (353,377)
-------------------------
-------------------------
(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
cannot invest more than 5% of the amount of its capital in any
single conventional first mortgage and cannot 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.