TSX Symbol FC.UN
TORONTO, March 13 /CNW/ - Firm Capital Mortgage Investment Trust (the "Trust") (TSX FC.UN), released today its financial statements for the fiscal year ended December 31, 2006.
Net earnings for the year ended December 31, 2006 totaled $12,190,065, being the amount that was distributed to Unitholders for the year. Basic net earnings per unit based on the weighted average number of units outstanding during the year totaled $0.969. Net earnings represented a return on weighted average Unitholders' equity of 10.21% per annum. This return on Unitholders' equity equates to 605 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 2006 year totaled $0.969 per unit.
As at December 31, 2006, the Trust's mortgage portfolio increased to $208,102,557 as compared to $164,981,562 as at December 31, 2005, representing an increase of 26%. The portfolio continued to be heavily concentrated in first mortgages. As at December 31, 2006, the average portfolio face interest rate was 9.48%. 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 allows 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.
Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Years Ended December 31, 2006 and 2005
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Balance Sheets
December 31, 2006 and 2005
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2006 2005
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Assets
Amounts receivable and prepaid expenses $ 2,074,690 $ 1,600,688
Mortgages (note 3) 208,102,557 164,981,562
Deferred financing costs - convertible
debenture (note 4) 1,111,662 -
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$ 211,288,909 $ 166,582,250
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Liabilities and Unitholders' Equity
Liabilities:
Bank indebtedness (note 5) $ 40,101,684 $ 39,472,417
Accounts payable and accrued liabilities 571,991 433,464
Unearned income 305,607 316,467
Loans payable (note 6) 25,983,173 7,304,447
Convertible debenture (note 7) 24,648,873 -
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$ 91,611,328 $ 47,526,795
Unitholders' equity (note 8): 119,677,581 119,055,455
Issued and outstanding:
12,593,549 units (2005 - 12,570,072)
Commitments (note 3)
Contingent liabilities (note 14)
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$ 211,288,909 $ 166,582,250
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statements of Earnings
Years ended December 31, 2006 and 2005
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2006 2005
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Interest and fees earned, net of
Trust Manager interest allocation
(note 12) $ 17,500,633 $ 12,469,989
Less interest expense (note 13) 4,280,356 1,317,354
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Net interest and fee income 13,220,277 11,152,635
Expenses:
General and administrative 720,212 666,024
Allowance for loan losses 310,000 20,000
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1,030,212 686,024
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Net earnings for the year $ 12,190,065 $ 10,466,611
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Net earnings per unit (note 9)
Basic $ 0.969 $ 0.939
Diluted $ 0.951 $ 0.939
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Unitholders' Equity
Years ended December 31, 2006 and 2005
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2006 2005
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Trust units (note 8)
Balance, beginning of year $ 119,055,455 $ 95,887,464
Proceeds from issuance of units 241,644 24,559,504
Public offering costs - (1,413,242)
Unit based compensation - 21,729
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Balance, end of year $ 119,297,099 $ 119,055,455
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Equity component of convertible
debenture (note 7)
Balance, beginning of year - -
Equity component of convertible
debenture issued 380,482 -
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Balance, end of year 380,482 -
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Cumulative earnings
Balance, beginning of year $ 41,099,121 $ 30,632,510
Net earnings 12,190,065 10,466,611
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Balance, end of year $ 53,289,186 $ 41,099,121
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Cumulative distributions to unitholders
Balance, beginning of year $ 41,099,121 $ 30,632,510
Distributions to unitholders 12,190,065 10,466,611
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Balance, end of year $ 53,289,186 $ 41,099,121
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Total unitholders equity $ 119,677,581 $ 119,055,455
Units issued and outstanding (Note 8(a)) 12,593,549 12,570,072
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Statement of Cash Flows
Years ended December 31, 2006 and 2005
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2006 2005
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Cash provided by (used in):
Operating activities
Net earnings for the year $ 12,190,065 $ 10,466,611
Net changes in non-cash items
Increase in allowance for loan losses 310,000 20,000
Deferred financing cost amortization 117,584 21,729
Implicit interest rate in excess of
coupon rate - convertible debenture 29,355 -
Decrease (increase) in amounts receivable
and prepaid expenses (474,002) (90,111)
Increase (decrease) in accounts payable
and accrued liabilities 138,527 108,956
Increase (decrease) in unearned income (10,860) 218,103
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12,300,669 10,745,288
Financing activities:
Proceeds from issuance of units 241,644 24,559,504
Proceeds from convertible debenture 25,000,000 -
Increase (decrease) in bank indebtedness 629,267 24,391,924
Increase (decrease) in loans payable 18,678,726 (3,162,526)
Public offering costs - (1,413,242)
Debenture offering costs (1,229,246) -
Distributions to unitholders (12,190,065) (10,466,611)
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31,130,326 33,909,049
Investing activities:
Funding of mortgages (139,563,985) (145,081,741)
Discharge of mortgages 96,132,990 100,427,404
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(43,430,995) (44,654,337)
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Increase in cash, being cash, beginning
and end of year $ - $ -
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Supplemental cash flow information
Interest paid (note 13) $ 4,045,315 $ 1,287,010
Supplemental disclosure of non-cash
financing and investing activities
Equity component of convertible
debenture issued $ 380,482 $ -
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See accompanying notes to financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT TRUST
Notes to Financial Statements
Years ended December 31, 2006 and 2005
1. Organization of Trust:
Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end
trust created for the benefit of the unitholders, pursuant to the
Declaration of Trust dated July 13, 1999, as amended and restated.
Pursuant to the Declaration of Trust, the Trust's mortgage banker is
Firm Capital Corporation and the trust manager is FC Treasury
Management Inc.
2. Summary of significant accounting policies:
The Trust's accounting policies and its standards of financial
disclosure are in accordance with Canadian generally accepted
accounting principles ("GAAP").
(a) 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) Deferred financing costs
The costs incurred to issue the Trust's convertible debenture
are amortized over the term of the debenture and the
amortization is included in interest expense.
(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
allocation described in note 12. 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 upon receipt of
such amounts.
(e) 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.
(f) Financial instruments:
The carrying values of the Trust's amounts receivable, bank
indebtedness, accounts payable and accrued liabilities and
loans payable approximate their fair values due to their
short-term nature. The carrying value of the Trust's mortgages
approximate their fair value because the majority of the
mortgages are generally (i) short term, and/or (ii) open for
repayment by borrowers without bonus or penalty, and/or (iii)
have interest rates that adjust upwards with increases in bank
prime, subject to a floor interest rate. The fair values of the
convertible debentures are estimated to be $24,909,922 at
December 31, 2006 due to changes in interest rates since the
debentures were issued. The fair values have been estimated
based on current market rates for debts with similar terms and
conditions.
(g) Unit-based compensation:
The Trust has unit-based compensation plans (i.e. incentive
option plan) which are described in note 8(b). 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.
(h) 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
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 year. 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 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.
(i) Financial instruments and comprehensive income:
The CICA has issued new accounting rules on financial
instruments, hedges and comprehensive income that require an
entity to account for all of its financial assets and
liabilities at fair value. The new rules are effective
January 1, 2007, at which time the Trust will remeasure its
financial assets and liabilities, at fair value and report a
new section of shareholders' equity called other comprehensive
income, as appropriate.
The Trust is determining the impact that these changes in
accounting policy will have on its financial statements once
adopted.
3. Mortgages
The following is a breakdown of the mortgages as at December 31, 2006
and 2005:
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2006 2005
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Amount % Amount %
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Conventional first
mortgages $ 170,806,640 81.4 $ 135,295,004 81.5
Conventional non-first
mortgages 26,049,819 12.5 16,148,324 9.7
Non-conventional mortgages
& related investments 12,671,098 6.1 14,653,234 8.8
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209,527,557 100.0 166,096,562 100.0
Allowance for loan losses 1,425,000 1,115,000
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$ 208,102,557 $ 164,981,562
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The mortgages are secured by real property, bear interest at the
weighted average rate of 9.48% (2005 - 9.29%) and mature between 2007
and 2011. Included with mortgages is one loan not directly secured on
real property totalling $1,408,584 (2005 - two loans totalling
$3,285,000).
The continuity of allowance for loan losses is as follows:
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2006 2005
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Balance, beginning of year 1,115,000 1,095,000
Increase during the year 310,000 20,000
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Balance - End of year 1,425,000 1,115,000
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The unadvanced funds under the existing mortgage portfolio (which are
commitments of the Trust) amounted to $40,759,332 as at December 31,
2006 (2005 - $43,810,378).
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 $ 147,035,417
2008 47,429,063
2009 13,263,414
2010 426,855
2011 1,372,808
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$ 209,527,557
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Borrowers who have open loans have the option to repay principal at
anytime prior to the maturity date.
4. Deferred financing costs:
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2006 2005
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Deferred financing costs
- convertible debenture 1,229,246 -
Accumulated amortization (117,584) -
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1,111,662 -
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5. Bank indebtedness:
The Trust has entered into credit arrangements of which $40,101,684
(2005 - $39,472,417) 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.
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
8.50% (2005 - 5.30% to 6.85%).
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 $ 1,671,700
2008 16,975,982
2009 726,415
2010 6,435,254
2011 173,822
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$ 25,983,173
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7. 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
preceeding 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.
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, April 24, 2006 $ 24,619,518
Implicit interest rate in excess of
Coupon rate 29,355
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Liability, December 31, 2006 $ 24,648,873
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8. 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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2006 2005
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Balance, beginning of year 12,570,072 10,424,369
New units from public offering during
the year - 2,130,000
New units issued during the year under
Distribution Reinvestment Plan 23,477 15,703
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Balance, end of year 12,593,549 12,570,072
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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 volatililty 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 preceeding five day period.
9. 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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2006 2005
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Numerator for basic earnings
per unit:
Net earnings $ 12,190,065 $ 10,466,611
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Denominator for basic earnings per unit:
Weighted average units 12,578,514 11,142,238
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Basic earnings per unit $ 0.969 $ 0.939
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Diluted earnings per unit calculation:
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2006 2005
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Numerator for diluted earnings
per unit:
Net earnings $ 12,190,065 $ 10,466,611
Interest on convertible debentures 1,172,282 -
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Net earnings for diluted earnings
per unit $ 13,362,347 $ 10,466,611
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Denominator for diluted earnings
per unit:
Weighted average units 12,578,514 11,142,238
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase units
at the average unit price 14,951 5,481
Assuming convertible debentures
are converted 1,463,130 -
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Diluted weighted average units 14,056,595 11,147,719
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Diluted earnings per unit $ 0.951 $ 0.939
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10. 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.
For the year ended December 31, 2006, the Trust recorded
distributions of $12,190,065 (2005 - $10,466,611) to its unitholders.
Distributions were $0.969 (2005 - $0.935) per unit.
11. 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.
In respect of the assets and liabilities of the Trust, the net book
value for accounting purposes of those net assets is less than their
tax basis by an amount of approximately $1,600,000 (2005 -
$2,850,000).
On December 21, 2006, the Department of Finance (Canada) ("Finance")
released for public comment draft legislation relating to the
taxation of publicly-traded trusts (such as income trusts and real
estate investment trusts) and partnerships for Canadian federal
income tax purposes (the "Proposals"). There can be no assurance that
the Proposals will be enacted in the form proposed, if at all. The
Proposals create the concept of "specified investment flow-through"
entities, or "SIFTs", which would generally be subject to a new tax
on distributions. The Trust has considered the Proposals and
determined that the Trust could be a SIFT.
Under the Proposals, SIFTs would be taxed on certain distributions of
income made to unitholders. (Returns of capital are not subject to
this tax.) This tax is intended to replicate the entity-level tax
that the SIFT would pay if it were a corporation. In addition, the
Proposals generally provide that such distributions will be taxed in
the hands of unitholders as though they were dividends received by
the unitholders from a taxable Canadian corporation. Therefore,
individual Canadian resident unitholders will be entitled to the
proposed enhanced dividend gross-up and tax credit mechanism.
The Proposals will be effective for the 2007 taxation year with
respect to trusts and partnerships that commence public trading after
October 31, 2006; but the application of the Proposals will be
delayed to the 2011 taxation year with respect to trusts and
partnerships the units of which were publicly traded prior to
November 1, 2006 ("Existing Trusts and Partnerships"). However, at
the time of the Proposals' release, Finance indicated that this
transitional relief might be lost in certain circumstances, including
"undue expansion" of an income trust.
On December 15, 2006, Finance released guidelines that establish
objective tests to determine and limit the amount of growth Existing
Trusts and Partnerships will be permitted without jeopardizing their
transitional relief.
The Trust is considering these announcements and the possible impact
of the Proposals on the Trust. The Proposals may adversely affect the
marketability of the Trust's units and, if they apply to the Trust,
the distributable cash of the Trust may be materially reduced.
12. 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 interest allocation, calculated as 0.75% per annum of the
Trust's daily outstanding performing mortgage investment balances.
For the year ended December 31, 2006 this amount was $1,436,530
(2005 - $1,008,051), 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 $192,000 (2005 -
$134,000). The Mortgage Banker also retains all overnight float
interest and incidental fees and charges payable by borrowers on the
Trust's mortgage investments. The Trust's share of commitment and
renewal fees recorded in income for the year ended December 31, 2006
was $686,765 (2005 - $513,018) and applicable special profit income
for the year ended December 31, 2006 was $580,970 (2005 - $576,032).
The Trust Management Agreement and Mortgage Banking Agreement
contains provisions for the payment of termination fees to the Trust
Manager and Mortgage Banker in the event that the respective
agreements are either terminated or not renewed.
Several of the Trust's mortgages are shared with other investors of
the Mortgage Banker, which may include members of management of the
Mortgage Banker and/or Officers or Trustees of the Trust. The Trust
ranks equally with other members of the syndicate as to receipt of
principal and income.
Mortgages totalling $1,760,000 at December 31, 2006 (2005 -
$1,440,000) 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.
13. Interest
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2006 2005
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Bank interest expense $ 2,006,305 $ 858,487
Loans payable interest expense 1,101,769 458,867
Debenture interest expense 1,172,282 -
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Interest Expense $ 4,280,356 $ 1,317,354
Deferred finance cost amortization
- Convertible debentures (117,584) -
Implicit interest rate in excess of
coupon rate - Convertible debentures (29,355) -
Change in accrued interest (88,102) (30,344)
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Cash interest paid $ 4,045,315 $ 1,287,010
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14. 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.
15. Comparative figures:
Certain 2005 comparative figures have been reclassified to conform
with the financial statement presentation adopted in 2006.