TSX Symbol FC.UN
TORONTO, Oct. 23 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), released today its financial statements for the third quarter ended September 30, 2007.
Net earnings for the third quarter ended September 30, 2007 increased to $3,221,939 from $3,150,562 for the same period last year. Basic weighted average earnings per unit for the third quarter amounted to $0.255 versus $0.250 last year. Net earnings for the nine month period ended September 30, 2007 increased to $9,735,662 from $9,161,537 for the same period last year. Basic weighted average earnings per unit for the nine month period ended September 30, 2007 increased to $0.772 versus $0.729 last year. For the nine month period ended September 30, 2007, net earnings exceeded distributions by $1,008,044, representing $0.08 per unit. The Trust distributes the balance of its net earnings, less distributions made up to November 30 of that year, to Unitholders of record as at December 31. Net earnings for the nine month period ended September 30, 2007 represented an annualized return on average Unitholders' equity of 10.84% per annum. This return on Unitholders' equity equates to 660 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 September 30, 2007, the Trust's mortgage portfolio, net of loan loss provision, stood at $210,194,972 as compared to $208,102,557 as at December 31, 2006. The portfolio continues to be heavily concentrated in first mortgages based in Ontario.
The Trust is not involved in the sub-prime mortgage investment marketplace and has no exposure to the securitization market. The Trust's investments are comprised of mortgages registered on properties primarily for the short-term bridge financing and interim financing purposes, secured on residential, development and investment properties. Residential single family owner occupied housing mortgage investments have loan to values not exceeding 75%, and these investments represent a very small percentage of the Trust's portfolio. The Trust's investment objective is the preservation of Unitholders' equity, while providing Unitholders with a stable stream of monthly distributions from investments. The Trust achieves its investment objectives by pursuing a strategy of growth through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to Unitholders.
Firm Capital Corporation, as Mortgage Banker to the Trust, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate finance, including construction, mezzanine and equity investments.
Additional information about the Trust, including the Management's Discussion and Analysis relating to the financial statements, will be available on the SEDAR website at www.sedar.com.
Unaudited Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
For the Nine Months Ended September 30, 2007
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
September 30, 2007, with comparative figures for December 31, 2006 and
September 30, 2006
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Sept. 30, Dec. 31, Sept. 30,
2007 2006 2006
(Unaudited) (Audited) (Unaudited)
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Assets
Amounts receivable and
prepaid expenses $ 1,988,079 $ 2,074,690 $ 1,798,555
Mortgages (note 5) 210,194,972 208,102,557 200,764,020
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$212,183,051 $210,177,247 $202,562,575
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Liabilities and
Unitholders' Equity
Liabilities:
Bank indebtedness (note 6) $ 29,540,984 $ 40,101,684 $ 31,845,147
Accounts payable and
accrued liabilities 1,057,172 571,991 901,136
Unearned income 326,633 305,607 301,281
Unitholder distribution
payable 985,260 - 943,792
Loans payable (note 7) 35,499,918 25,983,173 24,786,944
Convertible debenture
(note 8) 23,698,759 23,537,211 23,533,317
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$ 91,108,726 $ 90,499,666 $ 82,311,617
Unitholders' equity (note 9): 121,074,325 119,677,581 120,250,958
Issued and outstanding:
12,631,540 units
(2006 - 12,583,893)
Commitments (note 5)
Contingent liabilities
(note 15)
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$212,183,051 $210,177,247 $202,562,575
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statements of Earnings
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3 Month Period 9 Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2007 2006 2007 2006
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Interest and fees
earned, net of
Trust Manager
interest
allocation
(note 13) $ 4,891,355 $ 4,590,249 $ 14,460,770 $ 12,606,821
Less interest
expense (note 14) 1,455,468 1,214,744 4,045,907 2,899,444
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Net interest and
fee income 3,435,887 3,375,505 10,414,863 9,707,377
Expenses:
General and
administrative 213,948 224,943 679,201 545,840
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Net earnings for
the period $ 3,221,939 $ 3,150,562 $ 9,735,662 $ 9,161,537
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Net earnings per
unit (note 10)
Basic $ 0.255 $ 0.250 $ 0.772 $ 0.729
Diluted $ 0.247 $ 0.240 $ 0.747 $ 0.712
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
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Sept. 30, Dec. 31, Sept. 30,
2007 2006 2006
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(Unaudited) (Audited) (Unaudited)
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Trust units (note 9)
Balance, beginning of period $119,297,099 $119,055,455 $119,055,455
Proceeds from issuance
of units 388,700 241,644 142,550
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Balance, end of period $119,685,799 $119,297,099 $119,198,005
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Equity component of convertible
debenture (note 8)
Balance, beginning of period 380,482 - -
Equity component of convertible
debenture issued - 380,482 380,482
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Balance, end of period 380,482 380,482 380,482
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Cumulative earnings
Balance, beginning of period $ 53,289,186 $ 41,099,121 $ 41,099,121
Net earnings 9,735,662 12,190,065 9,161,537
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Balance, end of period $ 63,024,848 $ 53,289,186 $ 50,260,658
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Cumulative distributions
to unitholders
Balance, beginning of period $ 53,289,186 $ 41,099,121 $ 41,099,121
Distributions to unitholders 8,727,618 12,190,065 8,489,065
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Balance, end of period $ 62,016,804 $ 53,289,186 $ 49,588,186
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Total unitholders equity $121,074,325 $119,677,581 $120,250,958
Units issued and outstanding 12,631,540 12,593,549 12,583,893
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Unaudited Statement of Cash Flows
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3 Month Period 9 Month Period
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2007 2006 2007 2006
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Cash provided by
(used in):
Operating
activities
Net earnings for
the period $ 3,221,939 $ 3,150,562 $ 9,735,662 $ 9,161,537
Net changes in
non-cash items
Increase in
allowance for
loan losses - 80,000 95,000 80,000
Implicit
interest rate
in excess of
coupon rate -
convertible
debenture 54,493 51,937 161,548 89,735
Decrease
(increase)
in amounts
receivable
and prepaid
expenses (14,936) (81,800) 86,611 (197,867)
Increase
(decrease)
in accounts
payable and
accrued
liabilities 596,821 509,194 1,470,441 1,411,464
Increase
(decrease)
in unearned
income 29,852 (32,434) 21,026 (15,186)
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3,888,169 3,677,459 11,570,288 10,529,683
Financing
activities:
Proceeds from
issuance of
units 113,876 62,229 388,701 142,550
Proceeds from
convertible
debenture - - - 25,000,000
Increase
(decrease)
in bank
indebtedness (4,696,987) (405,348) (10,560,700) (7,627,270)
Increase
(decrease) in
loans payable 8,891,816 8,869,645 9,516,745 17,482,497
Debenture
offering costs - - - (1,175,937)
Distributions
to unitholders (2,954,898) (2,830,917) (8,727,618) (8,489,065)
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1,353,807 5,695,609 (9,382,872) 25,332,775
Investing
activities:
Funding of
mortgages (47,584,754) (32,243,476) (119,681,028) (105,590,679)
Discharge of
mortgages 42,342,778 22,870,408 117,493,612 69,728,221
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(5,241,976) (9,373,068) (2,187,416) (35,862,458)
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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) $ 867,646 $ 696,380 $ 3,378,449 $ 2,362,315
See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Three Months and Nine Months ended September 30, 2007
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1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is
Firm Capital Corporation and the trust manager is FC Treasury
Management Inc.
2. 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, 2006, except as
indicated in Note 3. 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 2006 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) Mortgages
Mortgages are stated at fair value. 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. An allowance for loan losses is recorded
against the portfolio where fair value is determined to be less
than the original value.
(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 period by the weighted average number of units
outstanding during the reporting period. 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
debenture, 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 reporting
period. The additional units would also include those units
issuable upon the assumed conversion of the convertible
debenture, with an adjustment to net earnings for the period 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.
4. Changes in accounting policy:
Effective January 1, 2007, the Trust adopted the new accounting
standards issued by the Canadian Institute of Chartered Accountants,
relating to financial instruments. In accordance with this new
standard, the Trust has classified 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 have been classified as: (i) held for trading or (ii)
other liabilities. The adoption of this standard has not resulted in
a material change in the carry value of any of the Trust's assets or
liabilities.
In accordance with this new standard, 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
included in the carrying value of the convertible debenture. This
change in accounting policy has not resulted in a material change in
the net carrying value of the convertible debenture and as such no
resulting entry has been made to Unitholders Equity.
The new standard requires the presentation of a Statement of
Comprehensive Income. 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.
5. Mortgages:
The following is a breakdown of the mortgages as at September 30,
2007, December 31, 2006 and September 30, 2006:
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Sept. 30, 2007 Dec. 31, 2006
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Amount % Amount %
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Conventional first
mortgages $177,676,084 83.9 $170,806,640 81.4
Conventional non-first
mortgages 21,889,384 10.4 26,049,819 12.5
Non-conventional mortgages
& related investments 12,149,504 5.7 12,671,098 6.1
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$211,714,972 100.0 209,527,557 100.0
Allowance for loan losses 1,520,000 1,425,000
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$210,194,972 $208,102,557
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------------------------------------------------
Sept. 30, 2006
------------------------------------------------
Amount %
------------------------------------------------
Conventional first
mortgages $164,286,753 81.3
Conventional non-first
mortgages 24,272,972 12.0
Non-conventional mortgages
& related investments 13,399,295 6.7
------------------------------------------------
$201,959,020 100.0
Allowance for loan losses 1,195,000
------------------------------------------------
$200,764,020
------------------------------------------------
------------------------------------------------
The mortgages are secured by real property, bear interest at the
weighted average rate of 9.54% (2006 - 9.48%) and mature between 2007
and 2011. Included with mortgages is one loan not directly secured on
real property totalling $1,311,043 (2006 - $1,500,000).
The continuity of allowance for loan losses is as follows:
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Nine Months Ended September 30:
2007 2006
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Balance, beginning of period 1,425,000 1,115,000
Increase during the period 95,000 80,000
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Balance - End of period 1,520,000 1,195,000
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The unadvanced funds under the existing mortgage portfolio (which are
commitments of the Trust) amounted to $53,577,945 as at September 30,
2007 (September 30, 2006 - $38,355,338 & December 31, 2006 -
$40,759,332).
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.
Where appropriate, management makes specific provisions for loan
losses. Specific provisions are determined on an item by item basis
and reflect the estimated realizable amount of a mortgage.
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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2007 $44,718,368
2008 131,438,201
2009 29,382,160
2010 6,156,716
2011 19,528
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$211,714,973
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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 $29,540,984
(September 30, 2006 - $31,845,147 & December 31, 2006 - $40,101,684)
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. Bank indebtedness is secured by a general
security agreement. The credit agreement contains certain financial
covenants that must be maintained.
7. Loans Payable
First priority charges on specific mortgage investments have been
granted as security for the loans payable. The loans mature on dates
consistent with those of the underlying mortgages. The loans are on a
non-recourse basis and bear interest at rates ranging from 5.35% to
7.25% (2006 - 5.30% to 8.50%).
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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2007 $3,178,000
2008 21,235,503
2009 10,286,775
2010 799,640
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$35,499,918
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8. Convertible Debenture:
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
debenture, which increases the liability component from the initial
allocation on the date of issuance, is included in interest expense.
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Liability, December 31, 2006 $23,537,211
Implicit interest rate in excess
of coupon rate 33,658
Amortization of debenture
financing costs 127,890
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Liability, September 30, 2007 $23,698,759
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As discussed in Note 4 herein, in accordance with the new accounting
standard adopted by the Trust, Deferred financing costs relating to
the issuance of convertible debentures are no longer presented as a
separate asset on the balance sheet and are now netted against the
carrying value of the convertible debenture.
Notwithstanding the carry value of the convertible debenture, the
principal balance outstanding to the debenture holders is
$25,000,000.
9. Unitholders' equity:
The beneficial interests in the Trust are represented by a single
class of units which are unlimited in number. Each unit carries a
single vote at any meeting of unitholders and carries the right to
participate pro rata in any distributions.
(a) The following units are issued and outstanding:
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Sept. 30, Dec. 31, Sept. 30,
2007 2006 2006
Amount Amount Amount
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Balance, beginning of period 12,593,549 12,570,072 12,570,072
New units issued from
exercise of options 22,500 - -
New units issued during the
year under Distribution
Reinvestment Plan 15,491 23,477 13,821
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Balance, end of period 12,631,540 12,593,549 12,583,893
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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 each option grant 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.
(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.
10. Per unit amounts:
The following table reconciles the numerators and denominators of the
basic and diluted earnings per unit.
Basic earnings per unit calculation:
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Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2007 2006 2007 2006
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Numerator for basic
earnings per unit:
Net earnings $3,221,939 $3,150,562 $9,735,662 $9,161,537
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Denominator for basic
earnings per unit:
Weighted average units 12,626,740 12,580,856 12,611,273 12,575,696
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Basic earnings per unit $0.255 $0.250 $0.772 $0.729
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Diluted earnings per unit
calculation:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2007 2006 2007 2006
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Numerator for diluted
earnings per unit:
Net earnings $3,221,939 $3,150,562 $9,735,662 $9,161,537
Interest on
convertible debentures 429,493 375,000 1,286,548 688,141
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Net earnings for diluted
earnings per unit $3,651,432 $3,525,562 $11,022,210 $9,849,678
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Denominator for diluted
earnings per unit:
Weighted average units 12,626,740 12,580,856 12,611,273 12,575,696
Net units that would
be issued:
Assuming the proceeds
from options are used
to repurchase units at
the average unit price 4,893 9,822 20,005 16,503
Assuming convertible
debentures are
converted 2,127,660 2,127,660 2,127,660 1,239,186
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Diluted weighted average
units 14,759,293 14,718,338 14,758,937 13,831,386
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Diluted earnings per unit $0.247 $0.240 $0.747 $0.712
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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 other than January and on
December 31 in each calendar year. The Declaration of Trust provides
that the Trust will distribute at least 100% of the net income of the
Trust determined in accordance with the Income Tax Act (Canada),
subject to certain adjustments, to Unitholders. The net income of the
Trust determined in accordance with the Income Tax Act (Canada), for
the nine month period ended September 30, 2007 was $9,422,433.
For the nine months ended September 30, 2007, the Trust recorded
distributions of $8,727,618 (2006 - $8,489,065) to its unitholders.
Distributions were $0.692 (2006 - $0.675) 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.
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 in each of the next four 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 over the four years). 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 over the next four years
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 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.
13. Related party transactions and balances:
Transactions with related parties are in the normal course of
business and are recorded at the exchange amount, which is the amount
of consideration established and agreed to by the related parties,
and represents fair market value.
The Trust Manager (a company controlled by some of the trustees),
pursuant to the Trust Management Agreement and Declaration of Trust,
receives an allocation of mortgage interest referred to as Trust
Manager spread interest, calculated as 0.75% per annum of the Trust's
daily outstanding performing mortgage investment balances. For the
nine months ended September 30, 2007 this amount was $1,168,429 (2006
- $1,040,522), and for the three month period ended September 30,
2007 this amount was $405,178 (September 30, 2006 - $373,808), 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 $156,000 for the
nine month period ended September 30, 2007 (2006 - $139,000). The
Mortgage Banker also retains all overnight float interest and
incidental fees and charges payable by borrowers on the Trust's
mortgage investments. The Trust's share of commitment and renewal
fees recorded in income for the nine months ended September 30, 2007
was $682,486 (2006 - $466,181) and for the three month period ended
September 30, 2007 was $221,771 (September 30, 2006 - $158,645) and
applicable special profit income for the nine months ended
September 30, 2007 was $478,362 (2006 - $400,145) and for the three
month period ended September 30, 2007 was $42,310 (September 30, 2006
- $204,017).
The Trust Management Agreement and Mortgage Banking Agreement
contains provisions for the payment of termination fees to the Trust
Manager and Mortgage Banker in the event that the respective
agreements are either terminated or not renewed.
Several of the Trust's mortgages are shared with other investors of
the Mortgage Banker, which may include members of management of the
Mortgage Banker and/or Officers or Trustees of the Trust. The Trust
ranks equally with other members of the syndicate as to receipt of
principal and income.
Mortgages totalling $1,760,000 at September 30, 2007 (2006 -
$1,760,000) were issued to borrowers controlled by certain Trustees
of the Trust. Each mortgage is dealt with in accordance with the
Trust's existing investment and operating policies and is personally
guaranteed by the related Trustee.
14. Interest
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Three Months ended: Nine months ended:
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2007 2006 2007 2006
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Bank interest expense $ 532,729 $ 456,871 $1,480,540 $1,455,084
Loans payable interest
expense 493,246 330,936 1,278,818 704,282
Debenture interest
expense 429,493 426,937 1,286,548 740,078
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Interest expense $1,455,468 $1,214,744 $4,045,906 $2,899,444
Deferred finance cost
amortization - convertible
Debenture (43,099) (41,229) (127,890) (71,255)
Implicit interest rate
in excess of coupon rate -
Convertible debentures (11,394) (10,707) (33,658) (18,480)
Change in accrued interest (533,329) (466,428) (505,909) (447,394)
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Cash interest paid $ 867,646 $ 696,380 $3,378,449 $2,362,315
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15. Contingent liabilities:
The Trust is involved in certain litigation arising out of the
ordinary course of investing in mortgages. Although such matters
cannot be predicted with certainty, management believes the claims
are without merit and does not consider the Trust's exposure to such
litigation to have an impact on these financial statements.
16. Comparative figures:
Certain 2006 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2007.