TSX Symbol FC.UN
TORONTO, May 5 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), today released its financial statements for the first quarter ended March 31, 2009.
EARNINGS --------
Net earnings for the quarter ended March 31, 2009 totaled $3,640,040 compared to $3,574,288 for the quarter ended March 31, 2008. Net earnings for the quarter ended March 31, 2009 exceeded distributions by $392,627 or $0.028 per unit. Basic weighted average net earnings per unit of $0.262 for the quarter ended March 31, 2009 compared to $0.283 per unit for the comparable period in 2008. The first quarter net earnings represent an annualized return on average Unitholders' equity of 10.98% per annum. This return on Unitholders' equity equates to 1021 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:
----------------------
Monthly distributions for first quarter equaled $.078 per month, for a
total $0.234 per unit.
INVESTMENT PORTFOLIO TURNS:
---------------------------
In the first quarter mortgage discharges equated to $20,347,626 million.
This represents a significant turn of the portfolio enabling management to
re-invest 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 March 31, 2009 are as
follows:
- Total Gross Mortgage Portfolio equals $215,369,642
- Conventional first mortgages, being those mortgages with loan to
values less than 75%, comprise 78% 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 91% 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 9.98% per annum.
- Regionally, the portfolio is diversified approximately as follows:
Ontario 77.8%, Alberta 13.8%, British Columbia 3.1%, with the balance
(5.3%) being in other provinces.
- Mortgage portfolio breakdown by loan size is as follows:
Mortgage Portfolio Breakdown
Amount Number of Mortgages Total Amount
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$0-$1,000,000 98 $ 48,375,320
$1,000,001-$2,000,000 44 64,252,441
$2,000,001-$3,000,000 18 45,906,884
$3,000,001-$4,000,000 7 23,978,136
$4,000,001-$5,000,000 6 27,336,861
$5,000,001-$6,000,000 1 5,520,000
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Total 174 $ 215,369,642
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LOAN LOSS PROVISION UPDATE:
---------------------------
Management has always taken a proactive approach to loan loss provision
reserves. This is a prudent approach to protecting our Unitholders' equity.
Loan loss provisions at the start of the fiscal year amounted to $2,400,000.
During first quarter a further $200,000 was added to the provision for a total
of $2,600,000, representing 1.21% of the gross loan portfolio.
UNRECOGNIZED INCOME COLLECTED:
------------------------------
As at March 31, 2009, the Trust has banked non-refundable fee income of
$326,932, which will be recognized as income over the term of the
corresponding investments and, in one circumstance, as a specific investment
is repaid.
DISTRIBUTION AND UNIT PURCHASE PLAN:
------------------------------------
The Trust has in place a Distribution Reinvestment Plan (DRIP) and Unit
Purchase Plan that is available to its Unitholders. The plans allows
participants to have their monthly cash distributions reinvested in additional
Trust units and grants participants the right to purchase, without commission,
additional units, up to a maximum of $12,000 per annum.
ABOUT THE TRUST
---------------
The Trust, through its Mortgage Banker, Firm Capital Corporation, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction, mezzanine and equity investments. The Trust's investment objective is the preservation of Unitholders' equity, while providing Unitholders with a stable stream of monthly distributions from investments. The Trust achieves its investment objectives through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to Unitholders. Full reports of the financial results of the Trust for the year are outlined in the audited financial statements and the related management discussion and analysis of Firm Capital, available on the SEDAR website at www.sedar.com. In addition, supplemental information is available on Firm Capital's website at www.firmcapital.com.
Forward-Looking Statements
This news release contains forward-looking statements within the meaning of applicable securities laws including, among others, statements concerning our objectives, our strategies to achieve those objectives, our performance, our mortgage portfolio and our distributions, as well as statements with respect to management's beliefs, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "expect", "intent", "estimate", "anticipate", "believe", "should", "plans" or "continue" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management.
These statements are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our Annual Information Form under "Risk Factors" (a copy of which can be obtained at www.sedar.com), which could cause our actual results and performance to differ materially from the forward-looking statements contained in this circular. Those risks and uncertainties include, among others, risks associated with mortgage lending, dependence on the Trust's trust manager and mortgage banker, competition for mortgage lending, real estate values, interest rate fluctuations, environmental matters, Unitholder liability and the introduction of new tax rules. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include, among others, that the Trust is able to invest in mortgages at rates consistent with rates historically achieved; adequate mortgage investment opportunities are presented to the Trust; and adequate bank indebtedness and bank loans are available to the Trust. Although the forward-looking information continued in this new release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results and performance will be consistent with these forward-looking statements.
All forward-looking statements in this news release are qualified by these cautionary statements. Except as required by applicable law, the Trust undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
NOTICE UNDER NATIONAL INSTRUMENT 51-102
National Instrument 51-102: Continuous Disclosure Requirements requires
that these interim financial statements be accompanied by this notice which
indicates that these financial statements have not been reviewed by the
auditors of Firm Capital Mortgage Investment Trust.
Unaudited Financial Statements of
FIRM CAPITAL MORTGAGE
INVESTMENT TRUST
For the Three Months Ended March 31, 2009
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
March 31, 2009, with comparative figures for December 31, 2008 and March
31, 2008
-------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31,
2009 2008 2008
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
Assets
Amounts receivable and
prepaid expenses (note 5) $ 2,094,245 $ 1,986,112 $ 2,250,884
Mortgage investments (note 6) 212,769,642 223,395,801 230,117,058
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$214,863,887 $225,381,913 $232,367,942
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Liabilities and
Unitholders' Equity
Liabilities:
Bank indebtedness (note 7) $ 24,953,885 $ 27,337,813 $ 43,323,055
Accounts payable and
accrued liabilities 901,120 618,541 966,760
Unearned income 201,996 275,856 281,068
Unitholder distribution
payable 1,082,471 3,430,390 986,643
Loans payable (note 8) 31,287,034 37,729,228 42,155,296
Convertible debenture (note 9) 23,513,706 23,973,019 23,807,814
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81,940,212 93,364,847 111,520,636
Unitholders' equity (note 10): 132,923,675 132,017,066 120,847,306
Issued and outstanding:
13,877,836 units
(2008 - 12,649,263)
Commitments (note 6)
Contingent liabilities (note 16)
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$214,863,887 $225,381,913 $232,367,942
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Earnings
-------------------------------------------------------------------------
3 Month 3 Month
Period Period
March 31, March 31,
2009 2008
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Interest and fees earned, net of Trust
Manager interest allocation (note 14) $ 5,021,614 $ 5,478,664
Less interest expense (note 15) 945,962 1,708,285
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Net interest and fee income 4,075,652 3,770,379
Expenses:
General and administrative 235,612 196,091
Unrealized loss in value of mortgages
(note 6) 200,000 -
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435,612 196,091
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Net earnings for the period $ 3,640,040 $ 3,574,288
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Net earnings per unit (note 11):
Basic $ 0.262 $ 0.283
Diluted $ 0.255 $ 0.271
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
-------------------------------------------------------------------------
Mar. 31, Dec. 31, Mar. 31,
2009 2008 2008
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
Trust units (note 9):
Balance, beginning of period $131,636,584 $119,753,729 $119,753,729
Offering costs - (292,076) (14,648)
Proceeds from issuance of units 522,140 12,174,931 112,739
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Balance, end of period $132,158,724 $131,636,584 $119,851,820
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Equity component of convertible
debentures (note 8):
Balance, beginning of period $ 380,482 $ 380,482 $ 380,482
Impact of conversion of
debenture to units (8,158) - -
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Balance, end of period $ 372,324 $ 380,482 $ 380,482
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Cumulative earnings:
Balance, beginning of period $ 80,874,768 $ 66,174,234 $ 66,174,234
Net earnings for the period 3,640,040 14,700,534 3,574,288
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Balance, end of period $ 84,514,808 $ 80,874,768 $ 69,748,522
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Cumulative distributions
to unitholders:
Balance, beginning of period $ 80,874,768 $ 66,174,234 $ 66,174,234
Distributions to
unitholders (note 12) 3,247,413 14,700,534 2,959,284
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Balance, end of period $ 84,122,181 $ 80,874,768 $ 69,133,518
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Total unitholders' equity $132,923,675 $132,017,066 $120,847,306
Units issued and
outstanding (note 10) 13,877,836 13,832,219 12,649,263
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Cash Flows
-------------------------------------------------------------------------
3 Month 3 Month
Period Period
March 31, March 31,
2009 2008
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Cash provided by (used in):
Operating activities
Net earnings for the period $ 3,640,040 $ 3,574,288
Net changes in non-cash items:
Fair value adjustment - mortgages 200,000 -
Implicit interest rate in excess of
coupon rate - convertible debentures 54,669 54,384
Decrease (increase) in amounts
receivable and prepaid expenses (108,133) (157,857)
Increase in accounts payable
and accrued liabilities 282,579 146,760
Decrease in unearned income (73,860) (54,653)
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3,995,295 3,562,922
Financing activities:
Proceeds from issuance of units - 112,739
Decrease in bank indebtedness (2,383,928) (9,270,104)
Increase (decrease) in loans payable (net) (6,442,194) 6,153,236
Increase (decrease) in distribution payable (2,347,919) (1,199,770)
Equity offering costs - (14,648)
Distributions to unitholders (3,247,413) (2,959,284)
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(14,421,454) (7,177,831)
Investing activities:
Funding of mortgage investments (9,921,467) (21,554,589)
Discharge of mortgage investments 20,347,626 25,169,498
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10,426,159 3,614,909
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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 15) $ 586,362 $ 1,479,489
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is
Firm Capital Corporation and the trust manager is FC Treasury
Management Inc.
2. Basis of Presentation:
The unaudited interim period financial statements were prepared in
accordance with Canadian generally accepted accounting principles
("GAAP") and follow the same accounting policies and methods of
application with those used in the preparation of the audited
financial statements for the year ended December 31, 2008. Under
Canadian GAAP, additional disclosure is required in annual financial
statements and accordingly the interim financial statements should be
read together with the audited financial statements and the
accompanying notes included in Firm Capital Mortgage Investment
Trust's 2008 Annual Report.
3. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosure are in accordance with Canadian generally accepted
accounting principles ("GAAP").
(a) Use of estimates:
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year.
The most significant estimates that the Trust is required to make
relate to the fair value of the mortgage investments (Note 3b).
These estimates may include assumptions regarding local real
estate market conditions, interest rates and the availability of
credit, cost and terms of financing, the impact of present or
future legislation or regulation, prior encumbrances and other
factors affecting the mortgage and underlying security of the
mortgage investments.
These assumptions are limited by the availability of reliable
comparable data, economic uncertainty, ongoing geopolitical
concerns and the uncertainty of predictions concerning future
events. Illiquid credit markets, volatile equity markets and
declines in consumer spending have combined to increase the
uncertainty inherent in such estimates and assumptions.
Accordingly, by their nature, estimates of fair value are
subjective and do not necessarily result in precise
determinations. Should the underlying assumptions change, the
estimated fair value could by a material amount.
(b) Mortgage investments:
Mortgage investments are stated at estimated fair value in
accordance with Canadian Institute of Chartered Accountants
("CICA") Accounting Guideline 18. Fair value is the amount of
consideration that would be agreed upon in an arm's length
transaction between knowledgeable, willing parties who are under
no compulsion to act. The fair value of Mortgage investments
approximate their carrying values due to the fact that the
majority of the mortgages are (i) are short-term in nature with
terms of 12 months or less, (ii) repayable in full, at any time at
the option of the borrower prior to maturity without penalty, and
(iii) have minimum specified interest rates for mortgages with
floating rates linked to bank prime. When, in management's
opinion, collection of principal on a particular mortgage
investment is no longer reasonably assured, the fair value of the
mortgage investment is reduced to reflect the estimated net
realizable recovery from the collateral securing the mortgage
loan.
(c) Convertible debentures:
The Trust's convertible debentures are classified into debt and
equity components. The equity component represents the estimated
value of the conversion rights of the holders.
(d) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and is
recorded net of the Trust Manager interest spread described in
note 14. Commitment fees received are amortized over the
expected term of the mortgage.
(ii) Special mortgage investments:
Special profit participations earned by the Trust on special
mortgage investments are recognized only once the receipt of
such amounts is certain.
(e) Unit-based compensation:
The Trust has unit-based compensation plans (i.e. incentive option
plan) which are described in note 10. The Trust accounts for its
unit-based compensation using the fair value method, under which
compensation expense is measured at the grant date and recognized
over the vesting period.
(f) Basic and diluted net earnings per unit:
Basic net earnings per unit is computed by dividing net earnings
for the year by the weighted average number of units outstanding
during the year. Diluted net earnings per unit is computed
similarly to basic net earnings per unit, except that the weighted
average number of shares outstanding is increased to include
additional shares from the assumed exercise of incentive option
units and the conversion of the convertible debentures, if
dilutive. The number of additional units is calculated by assuming
that outstanding incentive options were exercised and that
proceeds from such exercises were used to acquire units at the
average market price during the year. The additional units would
also include those units issuable upon the assumed conversion of
the convertible debentures, with an adjustment to net earnings for
the year to add back any interest paid to the debenture holders.
These common equivalent units are not included in the calculation
of the weighted average number of units outstanding for diluted
earnings per unit when the effect would be anti-dilutive.
(g) Comprehensive income:
CICA Section 1530, "Comprehensive Income", requires the
presentation of a Statement of Comprehensive Income where certain
gains and losses that would otherwise be recorded as part of net
earnings are presented in other comprehensive income until it is
considered appropriate to recognize it in net earnings. The Trust
does not have any material income from this source and as such a
Statement of Comprehensive Income has not been included in these
financial statements.
(h) Financial instruments - recognition and measurement:
CICA Section 3855, "Financial Instruments - Recognition and
Measurement", establishes standards for recognizing and measuring
financial assets and financial liabilities including non-financial
derivatives. In accordance with this standard, the Trust is
required to classify its financial assets as one of the following:
(i) held-to-maturity, (ii) loans and receivables, (iii) held for
trading or (iv) available for sale. All financial liabilities must
be classified as: (i) held for trading or (ii) other liabilities.
The Trust's designations on adoption are as follows:
Amounts receivable are classified as "loans and receivables"
and are measured at amortized cost.
Bank indebtedness, Accounts payable and accrued liabilities,
Unitholder distribution payable, Loans payable and Convertible
debentures are classified as "Other Liabilities" and are
measured at fair value on inception and amortized using the
effective interest rate method.
(i) Capital disclosures and financial instrument disclosure and
presentation:
Effective January 1, 2008, the Trust adopted CICA Handbook Section
1535 "Capital Disclosures", Section 3862 "Financial Instruments -
Disclosure" and Section 3863 "Financial Instruments -
Presentation". Under Section 1535, the Trust is required to
disclose both qualitative and quantitative information that
enables users of financial statements to evaluate the entity's
objectives, policies and processes for managing capital. See note
18(d), "Capital risk management" for disclosures made under this
Section. Under Section 3862, the Trust is required to disclose the
significance of financial instruments to the Trust's financial
position and performance, the nature and extent of risks arising
from these instruments to which the Trust is exposed, and how the
Trust manages those risks. See note 18, "Financial instrument
risk" for disclosures made under this Section. Section 3863
establishes standards for presentation of financial instruments
and non-financial derivatives. There has been no financial impact
to the financial statements due to the adoption of this Section.
4. Future accounting changes:
The Canadian Accounting Standards Board (AcSB") confirmed that the
adoption of IFRS would be effective for the interim and annual
periods beginning on or after January 1, 2011 for Canadian publicly
accountable profit-oriented enterprises. IFRS will replace Canada's
current GAAP for these enterprises. Comparative IFRS information for
the previous fiscal year will also have to be reported. These new
standards will be effective for the Trust in the first quarter of
2011.
The Trust 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 March 31, 2009, December 31, 2008 and March 31, 2008:
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March 31, Dec. 31, March 31,
2009 2008 2008
Amount Amount Amount
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Interest receivable $ 1,940,549 $ 1,783,105 $ 2,022,870
Prepaid expenses 114,060 142,774 163,011
Fees receivable 39,636 60,233 65,003
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Amounts receivable and
prepaid expenses $ 2,094,245 $ 1,986,112 $ 2,250,884
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6. Mortgage Investments:
The following is a breakdown of the mortgage investments as at March
31, 2009, December 31, 2008 and March 31, 2008:
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March 31, 2009 Dec. 31, 2008 March 31, 2008
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Amount % Amount % Amount %
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Conventional
first
mortgages $166,915,172 77.5 $178,473,671 79.0 $194,394,221 83.8
Conventional
non-first
mortgages 31,387,352 14.6 29,635,034 13.2 22,400,238 9.7
Special
mortgages
investments 17,067,118 7.9 17,687,096 7.8 15,047,599 6.5
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Total mortgage
investments
(at cost) $215,369,642 100.0 $225,795,801 100.0 $231,842,058 100.0
Fair value
adjustment 2,600,000 2,400,000 1,725,000
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Fair value $212,769,642 $223,395,801 $230,117,058
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Conventional first mortgages are loans secured by a first priority
mortgage charge with loan to values not exceeding 75%. Conventional
non-first mortgages are loans with mortgages not registered in first
priority with loan to values not exceeding 75%. Special mortgage
investments are loans that in some cases have loans to value that
exceed or may exceed 75% and are the investments that are the source
of all special profit participations earned by the Trust.
Mortgages are stated at estimated fair value in accordance with CICA
Accounting Guideline 18. Estimated fair value is based on discounted
cash flows. The discount interest rate utilized by the Trust is
equivalent to the weighted average interest rate on the mortgage
portfolio since the majority of the mortgages are (i) are short-term
in nature with terms of 12 months or less, (ii) repayable in full, at
any time at the option of the borrower prior to maturity without
penalty, and (iii) have minimum specified interest rates for
mortgages with floating rates linked to bank prime. When, in
management's opinion, collection of principal on a particular
mortgage investment is no longer reasonably assured, the value of the
mortgage investment is reduced to reflect the estimated net
realizable recovery from the collateral securing the mortgage loan.
The Fair value adjustment in the amount of $2,600,000 as at March 31,
2009 represents the total amount of management's estimate of the
shortfall between the mortgage investment principal balances and the
estimated net realizable recovery from the collateral securing the
mortgage loans.
The mortgages are secured by real property, bear interest at the
weighted average rate of 9.98% (2008 - 9.47%) and mature between 2009
and 2012.
The un-advanced funds under the existing mortgage portfolio (which
are commitments of the Trust) amounted to $22,925,450 as at March 31,
2009 (March 31, 2008 - $37,038,926 & December 31, 2008 -
$23,424,066).
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 $ 159,784,501
2010 46,263,978
2011 3,000,000
2012 6,321,163
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$ 215,369,642
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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 $24,953,885
(March 31, 2008 - $43,323,055 & December 31, 2008 - $27,337,813) has
been drawn. Interest on bank indebtedness is predominately charged at
a formula rate that varies with bank prime and may have a component
with a fixed interest rate established based on a formula linked to
Bankers Acceptance rates. The credit arrangement comprises a
revolving operating facility, a component of which is a demand
facility and a component of which has a committed term to September
30, 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 and was in compliance at all times during
2009.
8. Loans payable:
First priority charges on specific mortgage investments have been
granted as security for the loans payable. The loans mature on dates
consistent with those of the underlying mortgages. The loans are on a
non-recourse basis and bear interest at rates ranging from 2.75% to
7.55% as at March 31, 2009 (2008 - 5.50% to 7.55%). The Trust's
principal balance outstanding under the mortgages for which a first
priority charge has been granted is $39,140,258 as at March 31, 2009
(2008 - $54,017,688).
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 $ 29,550,658
2010 1,736,376
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$ 31,287,034
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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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2009 2008
---------------------------------------------------------------------
Liability, beginning of period $23,973,019 $23,753,430
Conversion of debentures to equity (513,982) -
Implicit interest rate in excess
of coupon rate 12,508 11,754
Amortization of debenture
financing costs 42,161 42,630
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Liability, end of period $23,513,706 $23,807,814
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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
$24,464,000.
On January 6, 2009, $536,000 of debentures were converted by the
debenture holder to 45,617 units of the Trust.
10. Unitholders' equity:
The beneficial interests in the Trust are represented by a single
class of units which are unlimited in number. Each unit carries a
single vote at any meeting of unitholders and carries the right to
participate pro rata in any distributions.
(a) The following units are issued and outstanding:
---------------------------------------------------------------------
March 31, Dec. 31, March 31,
2009 2008 2008
Amount Amount Amount
---------------------------------------------------------------------
Balance, beginning
of period 13,832,219 12,638,227 12,638,227
New units from
Rights Offering - 439,982 -
New units from
Private Placement - 724,120 -
New units from
Debenture Conversion 45,617 - -
New units issued during
the year under
Distribution
Reinvestment Plan - 28,890 11,036
---------------------------------------------------------------------
Balance, end of period 13,877,836 13,832,219 12,649,263
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Incentive option plan:
In 2005, 415,000 options were issued to trustees, directors,
officers and employees of the Trust Manager and Mortgage Banker,
with an exercise price of $9.90 per unit. The options are
exercisable any time up to November 17, 2010. The fair value of
the unit options used to compute compensation expense of $21,729
(which was recorded in the fourth quarter of 2005) is the
estimated fair value of all options granted on the grant date.
This was calculated for the options granted during 2005 using the
Black-Scholes option pricing model with the following
assumptions: expected distribution yield is 9.44%, expected
volatility is 8.83%; risk free interest rate is 3.96%; and
expected option life in years is 5. The options vested on the
grant date. During 2007 22,500 unit options were exercised.
In 2008, 35,000 options were issued to trustees with an exercise
price of $9.94. The options are exercisable any time up to
October 7, 2013. The fair value of those unit options, given the
small number of options issued and given the low volatility in
the Trust's unit trading price, is not material and therefore no
related compensation expense has been recorded by the Trust.
As at March 31, 2009, 427,500 options remained outstanding (March
31, 2008 - 392,500)
(c) Distribution reinvestment plan and direct unit purchase plan:
The Trust has a distribution reinvestment plan and direct unit
purchase plan for its unitholders which allows participants to
reinvest their monthly cash distributions in additional trust
units at a unit price equivalent to the weighted average price of
units for the preceeding five day period.
11. Per unit amounts:
The following table reconciles the numerators and denominators of the
basic and diluted earnings per unit.
Basic earnings per unit calculation:
---------------------------------------------------------------------
Three months ended:
March 31, 2009 March 31, 2008
---------------------------------------------------------------------
Numerator for basic earnings per unit:
Net earnings $3,640,040 $3,574,288
---------------------------------------------------------------------
Denominator for basic earnings
per unit:
Weighted average units 13,874,795 12,644,696
---------------------------------------------------------------------
Basic earnings per unit $0.262 $0.283
---------------------------------------------------------------------
Diluted earnings per unit calculation:
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended:
March 31, 2009 March 31, 2008
---------------------------------------------------------------------
Numerator for diluted earnings
per unit:
Net earnings $3,640,040 $3,574,288
Interest on convertible debentures 422,070 429,384
---------------------------------------------------------------------
Net earnings for diluted earnings
per unit $4,062,110 $4,003,672
---------------------------------------------------------------------
Denominator for diluted earnings
per unit:
Weighted average units 12,874,795 12,644,696
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase units
at the average unit price - 10,796
Assuming convertible debentures are
converted 2,082,043 2,127,660
---------------------------------------------------------------------
Diluted weighted average units 15,956,838 14,783,151
---------------------------------------------------------------------
Diluted earnings per unit $0.255 $0.271
---------------------------------------------------------------------
---------------------------------------------------------------------
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 three month period ended March 31, 2009 was
$3,488,726 (2008 - $3,367,325).
For the quarter ended March 31, 2009, the Trust recorded
distributions of $3,247,413 (2008 - $2,959,284) to its unitholders.
Distributions were $0.234 (2008 - $0.234) 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
quarter ended March 31, 2009 this amount was $403,211 (2008 -
$442,460), 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 $54,000 for the
quarter ended March 31, 2009 (2008 - $59,000). The Mortgage Banker
also retains all overnight float interest and incidental fees and
charges payable by borrowers on the Trust's mortgage investments. The
Trust's share of commitment and renewal fees recorded in income for
the quarter ended March 31, 2009 was $166,730 (2008 - $171,188) and
applicable special profit income for the quarter ended March 31, 2009
was $51,477 (2008 - $214,988).
The Trust Management Agreement and Mortgage Banking Agreement
contains provisions for the payment of termination fees to the Trust
Manager and Mortgage Banker in the event that the respective
agreements are either terminated or not renewed.
Several of the Trust's mortgages are shared with other investors of
the Mortgage Banker, which may include members of management of the
Mortgage Banker and/or Officers or Trustees of the Trust. The Trust
ranks equally with other members of the syndicate as to receipt of
principal and income.
Mortgages totalling $1,760,000 at March 31, 2009 (2008 - $1,760,000)
were issued to borrowers controlled by certain Trustees of the Trust.
Each mortgage is dealt with in accordance with the Trust's existing
investment and operating policies and is personally guaranteed by the
related Trustee.
15. Interest:
---------------------------------------------------------------------
3 months ended:
March 31, 2009 March 31, 2008
---------------------------------------------------------------------
Bank interest expense $197,931 $713,496
Loans payable interest expense 325,961 565,405
Debenture interest expense 422,070 429,384
---------------------------------------------------------------------
Interest expense $945,962 $1,708,285
Deferred finance cost amortization
- convertible Debentures (42,162) (42,630)
Implicit interest rate in excess of
coupon rate - convertible debentures (12,508) (11,754)
Change in accrued interest (304,930) (174,412)
---------------------------------------------------------------------
Cash interest paid $586,362 $1,479,489
---------------------------------------------------------------------
---------------------------------------------------------------------
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 March 31, 2009 closing price on the TSX. The fair value
has been estimated at March 31, 2009 to be $21,283,680 (2008 -
$23,500,000).
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 March 31, 2009, if interest rates at that date had been 100
basis points lower or higher, with all other variables held
constant, net income for the quarter would be affected as
follows:
Carrying Value Interest Rate Risk
--------------------------------------------
-1% +1%
-------------------------------------------------------------------------
Financial assets
Amounts receivable $ 2,094,245 $ - $ -
Mortgage investments 212,769,642 (7,817) 7,817
Financial liabilities
Bank indebtedness 24,953,885 62,385 (62,385)
Accounts payable and
accrued liabilities 901,120
Unearned income 201,996
Unitholder distribution
payable 1,082,471
Loans payable 31,287,034 67,206 (67,192)
--------------------------
--------------------------
Total increase (decrease) $ 121,774 ($121,760)
--------------------------
--------------------------
(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 March 31, 2009, the Trust had not utilized its full leverage
availability, being a maximum of 60% of its first mortgage
investments. Un-advanced committed funds under the existing
mortgage portfolio amounted to $22,925,450 as at March 31, 2009
(2008 - $37,038,926). 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 $24,953,885 $24,953,885
-------------------------------------------------------------------------
Loans payable 31,287,034 29,714,545 1,572,489
-------------------------------------------------------------------------
Convertible
debenture 24,464,000 $24,464,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subtotal -
Liabilities $80,704,919 $54,668,430 $1,572,489 $24,464,000
-------------------------------------------------------------------------
Future advances
under mortgages 22,925,450 17,987,751 4,937,699
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and
contractual
obligations $103,630,369 $72,656,181 $6,510,188 $24,464,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 securities of the Trust. The Trust's
objectives when managing capital/equity are:
- to safeguard the entity's ability to continue as a going
concern, so that it can continue to provide returns for
unitholders, and
- to provide an adequate return to unitholders by obtaining an
appropriate amount of debt, commensurate with the level of
risk.
The Trust manages the capital/equity structure and makes
adjustments to it in light of changes in economic conditions. In
order to maintain or adjust the capital structure, the Trust may
issue new units or repay bank indebtedness and loans payable.
The Trust's Declaration of Trust incorporates various mortgage
investing restrictions and investment operating policies. The
Trust can not invest more than 5% of the amount of its capital in
any single conventional first mortgage and can not invest more
than 2.5% of the amount of its capital in any single non-
conventional mortgage or conventional mortgage that is not a first
mortgage. The Trust may only borrow funds in order to acquire or
invest in mortgage investments in amounts up to 60% of the book
value of the Trust's portfolio of conventional first mortgages.
The Trust has complied with all such restrictions in its
Declaration of Trust.
The Trust is required by its Bank lender to maintain various
covenants, including minimum equity amount, interest coverage
ratios, indebtedness as a percentage of the performing first
mortgage portfolio size, and indebtedness to total assets. The
Trust has complied with all such Bank covenants.
19. Comparative figures:
Certain 2008 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2009.