TSX Symbol FC.UN
TORONTO, March 8 /CNW/ - Firm Capital Mortgage Investment Trust (the
"Trust") (TSX FC.UN), released today its financial statements for the fiscal
year ended December 31, 2005.
Net earnings for the year ended December 31, 2005 totaled $10,466,611,
being the amount that was distributed to Unitholders for the year. Net
earnings per unit based on the weighted average number of units outstanding
during the year totaled $0.939. Net earnings represented a return on weighted
average Unitholders' equity of 10.16% per annum. This return on Unitholders'
equity equates to 709 basis points per annum over the average One Year
Government of Canada Treasury Bill yield 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. Distributions to Unitholders for the 2005 year totaled
$0.935 per unit.
As at December 31, 2005, the Trust's mortgage portfolio increased to
$164,981,562 as compared to $120,347,225 as at December 31, 2004, representing
an increase of 37%. The portfolio continued to be heavily concentrated in
first mortgages. As at December 31, 2005, the average portfolio face interest
rate was 9.29%. Management continues to reduce risk by syndicating investments
to ensure that the Trust is not significantly exposed to any single mortgage
investment.
The Trust has in place a Distribution Reinvestment Plan (DRIP) and Unit
Purchase Plan that is available to its Unitholders. The plans allow
participants to have their monthly cash distributions reinvested in additional
Trust units and grants participants the right to purchase additional units.
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.
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Financial Statements of
FIRM CAPITAL MORTGAGE
INVESTMENT TRUST
Years ended December 31, 2005 and 2004
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
December 31, 2005 and 2004
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2005 2004
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Assets
Amounts receivable and prepaid expenses $ 1,600,688 $ 1,510,577
Mortgages (note 4) 164,981,562 120,347,225
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$166,582,250 $121,857,802
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness (note 5) $ 39,472,417 $ 15,080,493
Accounts payable and accrued liabilities 433,464 324,508
Unearned income 316,467 98,364
Loans payable (note 6) 7,304,447 10,466,973
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47,526,795 25,970,338
Unitholders' equity (note 7):
Issued and outstanding:
12,570,072 units (2004 - 10,424,369) 119,055,455 95,887,464
Commitments (note 4)
Contingent liabilities (notes 11 and 12)
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$166,582,250 $121,857,802
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See accompanying notes to financial statements.
On behalf of the Trustees:
"ELI Dadouch"
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"Jonathan Mair"
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FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Earnings
Years ended December 31, 2005 and 2004
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2005 2004
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Interest and fees earned, net of Trust Manager
interest allocation (note 11) $ 12,469,989 $ 10,752,849
Less interest expense 1,317,354 789,528
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Net interest income 11,152,635 9,963,321
Expenses:
General and administrative 666,024 569,225
Allowance for loan losses 20,000 65,000
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686,024 634,225
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Net earnings for the year $ 10,466,611 $ 9,329,096
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Net earnings per unit (note 8):
Basic $ 0.939 $ 0.936
Diluted 0.939 0.936
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Unitholders' Equity
Years ended December 31, 2005 and 2004
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2005 2004
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Trust units (note 7):
Balance, beginning of year $ 95,887,464 $ 70,156,679
Proceeds from issuance of units 24,559,504 27,201,872
Public offering costs (1,413,242) (1,471,087)
Unit-based compensation 21,729 -
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Balance, end of year $119,055,455 $ 95,887,464
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Cumulative earnings:
Balance, beginning of year $ 30,632,510 $ 21,303,414
Net earnings for the year 10,466,611 9,329,096
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Balance, end of year $ 41,099,121 $ 30,632,510
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Cumulative distributions to unitholders:
Balance, beginning of year $ 30,632,510 $ 21,303,414
Distributions to unitholders 10,466,611 9,329,096
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Balance, end of year $ 41,099,121 $ 30,632,510
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Total unitholders' equity $119,055,455 $ 95,887,464
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Units issued and outstanding 12,570,072 10,424,369
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Cash Flows
Years ended December 31, 2005 and 2004
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2005 2004
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Cash provided by (used in):
Operating activities:
Net earnings for the year $ 10,466,611 $ 9,329,096
Items not affecting cash:
Allowance for loan losses 20,000 65,000
Unit-based compensation 21,729 -
Net changes in non-cash items:
Increase in amounts receivable and
prepaid expenses (90,111) (505,841)
Increase (decrease) in accounts payable
and accrued liabilities and unearned
income 327,059 (14,463)
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10,745,288 8,873,792
Financing activities:
Proceeds from issuance of units 24,559,504 27,201,872
Increase in bank indebtedness, net 24,391,924 137,941
Increase (decrease) in loans payable, net (3,162,526) 7,064,400
Public offering costs (1,413,242) (1,471,087)
Distributions to unitholders (10,466,611) (9,329,096)
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33,909,049 23,604,030
Investing activities:
Funding of mortgages (145,081,741) (102,096,252)
Discharge of mortgages 100,427,404 69,618,430
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(44,654,337) (32,477,822)
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Increase in cash, being cash, beginning
and end of year $ - $ -
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Supplemental disclosure:
Interest paid $ 1,024,795 $ 771,309
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Years ended December 31, 2005 and 2004
1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's Mortgage Banker is
Firm Capital Corporation and the Trust Manager is FC Treasury
Management Inc.
2. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosures 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) Revenue recognition:
(i) Interest income:
Interest income is accounted for on the accrual basis, and is
recorded net of the Trust Manager spread interest described in
note 11. Commitment fees received are amortized into income
over the expected term of the mortgage.
(ii) Non-conventional mortgages:
Special profit participations earned by the Trust on non-
conventional mortgages are recognized upon receipt of such
amounts.
(c) 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.
(d) Financial instruments:
The carrying values of the Trust's amounts receivable, mortgages,
bank indebtedness, accounts payable and accrued liabilities and
loans payable approximate their fair values due to their short-
term nature.
(e) United-based compensation:
The Trust has unit-based compensation plans which are described
in note 7. 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.
3. Change in accounting policy:
Effective January 1, 2005, the Trust adopted The Canadian Institute
of Chartered Accountants' Accounting Guideline 18, relating to the
measurement of its investments. Under this new standard, mortgages
are measured at fair value. The change in accounting policy is
applied prospectively, whereby amounts presented in prior periods
have not been restated for this change. This change in accounting
policy has not resulted in any change in the carrying value of the
mortgages.
4. Mortgages:
The following is a breakdown of the mortgages as at December 31, 2005
and 2004:
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2005 2004
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Amount % Amount %
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Conventional
first
mortgages $135,295,004 81.5 $101,537,769 83.6
Conventional
second
mortgages 16,148,324 9.7 8,592,537 7.1
Non-
conventional
mortgages 14,653,234 8.8 11,311,919 9.3
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166,096,562 100.0 121,442,225 100.0
Allowance for
loan losses 1,115,000 1,095,000
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$164,981,562 $120,347,225
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The mortgages are secured by the underlying properties, bear interest
at the weighted average rate of 9.29% (2004 - 9.79%) and mature
between 2005 and 2010. Included with mortgages are two loans not
directly secured by real property totalling $3,285,000 (2004 - nil).
The continuity of allowance for loan losses is as follows:
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2005 2004
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Balance, beginning of year $ 1,095,000 $ 1,030,000
Increase during the year 20,000 65,000
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Balance, end of year $ 1,115,000 $ 1,095,000
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The unadvanced funds under the mortgage portfolio amounted to
$43,810,378 as at December 31, 2005 (2004 - $36,109,426).
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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2006 $ 97,123,699
2007 46,411,903
2008 13,221,664
2009 8,901,310
2010 437,986
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$166,096,562
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Borrowers on open loans have the option to repay principal at anytime
prior to maturity dates.
5. Bank indebtedness:
The Trust has entered into credit arrangements of which $39,472,417
(2004 - $15,080,493) has been drawn. Interest on bank indebtedness is
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.
6. 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 5.30% to
6.85% (2004 - 4.50% to 6.85%). Interest expense on loans payable for
the year ended December 31, 2005 was $458,867 (2004 - $296,649).
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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2006 $ 3,457,572
2007 777,032
2009 3,069,843
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$ 7,304,447
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7. 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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2005 2004
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Balance, beginning of year 10,424,369 8,017,589
New units from public offering during the
year 2,130,000 2,170,000
New units issued during the year under
Distribution Reinvestment Plan 15,703 11,780
New units issued during the year from
Exercise of Options - 225,000
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Balance, end of year 12,570,072 10,424,369
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(b) Incentive option plan:
340,000 options were authorized, of which 232,500 options were
issued in October 1999 to trustees, directors, officers and
employees of the Trust Manager and Mortgage Banker, with an
exercise price of $10 per unit. All of the issued options were
exercisable any time during the initial five-year period of the
Trust ending on October 6, 2004. In the fourth quarter of 2004,
225,000 options were exercised for total proceeds to the Trust of
$2,250,000 and 7,500 expired. Effective October 6, 2004, there
are no outstanding issued options and there were 115,000
remaining authorized un-issued options.
At the Trust's 2004 Annual Meeting, a further 300,000 options
were authorized. 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 is the estimated fair value of each option 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.
(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 allow participants to
reinvest their monthly cash distributions in additional trust
units at a unit price equivalent to the weighted average price of
units for the preceding five-day period.
8. Per unit amounts:
Basic earnings per unit have been computed using the weighted average
number of units outstanding during the year ended December 31, 2005
of 11,142,238 (2004 - 9,963,183).
Diluted earnings per unit have been computed using the treasury stock
method. The adjusted weighted average number of units outstanding
used for the computation of diluted earnings for the year ended
December 31, 2005 was 11,147,606 (2004 - 9,963,183).
9. 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) to
the unitholders. For the year ended December 31, 2005, the Trust
recorded distributions of $10,466,611 (2004 - $9,329,096) to its
unitholders. Distributions were $0.935 (2004 - $0.935) per unit.
10. 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.
11. 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
year ended December 31, 2005 this amount was $1,008,051 (2004 -
$813,623), 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 $134,000 (2004 -
$108,000). 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 for the year ended December 31, 2005 was $513,018 (2004 -
$640,707) and applicable special profit income for the year ended
December 31, 2005 was $576,032 (2004 - $766,718).
The Trust Management Agreement and Mortgage Banking Agreement contain
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.
The Trust has acquired or invested in mortgages that originally
formed part of a portfolio of loans acquired by a syndicate in which
the Trust is a participant. The Trust's share of any profit earned on
the sales of the subject mortgages to the Trust is not recognized
until the Trust is paid out of the mortgages in full. The related
deferred income amount as at December 31, 2005 was $24,445 (2004 -
$98,364) and is included in accounts payable and accrued liabilities.
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, or in priority to, other members of the syndicate
as to receipt of principal and income.
Mortgages totalling $1,440,000 at December 31, 2005 (2004 -
$2,769,194) were issued to borrowers controlled by certain Trustees
of the Trust. Each mortgage is personally guaranteed by the related
Trustee.
12. Contingent liability:
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.
13. Comparative figures:
Certain 2004 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2005.
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