Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX:FC), today
released its financial statements for the second quarter ended June 30, 2011.
EARNINGS
Comprehensive income and profit ("Profit") for the quarter ended June 30, 2011
totaled $3,461,415 compared to Operations profit of $3,295,389 for the quarter
ended June 30, 2010. Profit for the quarter ended June 30, 2011 exceeded
dividends by $31,768 or $0.003 per share. The second quarter Profit represents
an annualized return on average Shareholders' equity of 9.72% per annum. This
return on Shareholders' equity equates to 841 basis points per annum over the
average one year Government of Canada Treasury bill yield for the quarter and is
well in excess of the Corporation's target yield objective of 400 basis points
per annum over the one year Treasury bill yield.
DIVIDEND OVERVIEW:
Monthly dividends for the second quarter totaled $0.234 per share ($0.078 per
share per month).
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Corporation's mortgage portfolio as at June 30, 2011 are as follows:
-- Total gross portfolio equals $236,501,237 ($233,521,237 net of
impairment provision of $2,980,000).
-- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 85% of our total portfolio, and total
conventional mortgages with loan to values under 75% comprise 91% of our
total portfolio.
-- Non-conventional mortgages and related investments total 9% of the
portfolio.
-- Approximately 52% 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 8.95% per annum.
-- Regionally, the portfolio is diversified approximately as follows:
Ontario 81.3%, Alberta 12.7%, British Columbia 5.0%, with the balance
(1.0%) being in other provinces.
-- Mortgage portfolio breakdown by investment is as follows:
Amount Number of Mortgages Total Amount
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$0-$1,000,000 49 $ 25,700,194
$1,000,001-$2,000,000 27 42,407,205
$2,000,001-$3,000,000 12 29,491,688
$3,000,001-$4,000,000 5 17,355,348
$4,000,001-$5,000,000 7 31,225,295
$5,000,001-$10,000,000 12 90,321,507
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Total 112 $ 236,501,237
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IMPAIRMENT PROVISION UPDATE:
Management has always taken a proactive approach to impairment provisions. This
is a prudent method of protecting our Shareholders' equity. Impairment
provisions totaled $2,980,000, representing 1.26% of the gross loan portfolio as
at June 30, 2011.
DIVIDEND AND SHARE PURCHASE PLAN:
The Corporation has in place a Dividend Reinvestment Plan (DRIP) and Share
Purchase Plan that is available to its Shareholders. The plans allows
participants to have their monthly cash dividends reinvested in additional
Corporation units and grants participants the right to purchase, without
commission, additional units, up to a maximum of $12,000 per annum.
ABOUT THE CORPORATION
The Corporation, 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 Corporation's investment objective is the preservation of
Shareholders' equity, while providing Shareholders with a stable stream of
monthly dividends from investments. The Corporation 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 Shareholders. Full
reports of the financial results of the Corporation 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 dividends, 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 Corporation's mic
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 Corporation is able
to invest in mortgages at rates consistent with rates historically achieved;
adequate mortgage investment opportunities are presented to the Corporation; and
adequate bank indebtedness and bank loans are available to the Corporation.
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 Corporation
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 Corporation.
Unaudited Interim Condensed Financial Statements of
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Balance Sheets
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June 30, 2011 Dec. 31, 2010 Jan. 1, 2010
(unaudited) (unaudited) (unaudited)
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Assets
Cash - - $ 1,444,339
Amounts receivable and prepaid
expenses (note 5) $ 3,196,455 $ 2,371,563 1,706,383
Mortgage investments (note 6) 233,521,237 202,330,929 167,128,297
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$ 236,717,692 $ 204,702,492 $ 170,279,019
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Liabilities and Equity
Bank indebtedness (note 7) $ 38,221,178 $ 5,005,825 -
Accounts payable and accrued
liabilities 781,061 1,482,580 $ 410,064
Unearned income 491,296 372,514 202,481
Shareholder dividend and
unitholder distribution
payable 1,144,979 2,127,845 2,543,120
Loans payable (note 8) 3,852,429 4,289,249 10,714,637
Convertible debentures (note 9) 50,741,938 53,628,803 23,681,244
Conversion option of
convertible debentures (note
4(e)(ii)) - - 222,182
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Total liabilities excluding net
assets attributable to
unitholders 95,232,881 66,906,816 37,773,728
----------------------------------------------------------------------------
Net assets attributable to
unitholders (note 10) - - 132,505,291
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Shareholders' / Unitholders'
equity 141,609,593 138,117,502 -
Retained earnings / (deficit) (124,782) (321,826) -
----------------------------------------------------------------------------
Total equity 141,484,811 137,795,676 -
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Commitments (note 6)
Contingent liabilities (note
17)
----------------------------------------------------------------------------
$ 236,717,692 $ 204,702,492 $ 170,279,019
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Comprehensive Income
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30/11 June 30/10 June 30/11 June 30/10
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Interest and fees
earned (notes 3
(b) and 15) $ 4,729,790 $ 4,033,295 $ 9,515,886 $ 8,049,560
Less interest
expense (note 16) 1,140,777 573,889 2,185,092 1,105,466
----------------------------------------------------------------------------
Net interest and
fee income 3,589,013 3,459,406 7,330,794 6,944,094
General and
administrative
expenses 127,598 164,017 322,461 342,286
Impairment loss on
mortgages (note
6)
----------------------------------------------------------------------------
127,598 164,017 322,461 342,286
----------------------------------------------------------------------------
Operations profit
for the period $ 3,461,415 $ 3,295,389 $ 7,008,333 $ 6,601,808
Finance costs
Change in fair
value of the
conversion option
of convertible
debentures (note
4(e)(ii)) - 24,033 - (321,826)
Distributions to
unitholders (note
10) - (2,474,744) - (5,731,903)
----------------------------------------------------------------------------
Comprehensive
income and profit
(loss) for the
period, and
change in net
assets
attributable to
unitholders for
the period,
respectively $ 3,461,415 $ 844,678 $ 7,008,333 $ 548,079
----------------------------------------------------------------------------
Profit per share
(note 12)
Basic $ 0.237 N/A $ 0.483 N/A
Diluted $ 0.237 N/A $ 0.482 N/A
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Changes in Equity
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec 31, 2010 June 30, 2010
(Unaudited) (Unaudited) (Unaudited)
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Shareholders' / Unitholders'
Equity
Shares / Units (note 11):
Balance, beginning of period $ 137,343,502 - 132,275,299
Reclassification of trust units
from liability to equity (note
10) - $ 132,505,299 -
Proceeds from issuance of
shares / units 368,137 4,818,203 2,753,270
Conversion of debentures to
shares 3,195,000 20,000 -
----------------------------------------------------------------------------
Balance, end of period $ 140,906,639 $ 137,343,502 $ 135,028,569
----------------------------------------------------------------------------
Equity component of convertible
debenture (note 9):
Balance, beginning of period $ 774,000 - -
Conversion of debentures to
shares $ (71,046) - -
Reclassification of trust units
from liability to equity (note
10) - $ 544,000 $ 544,000
Equity component of debenture
issued during the period - 230,000 230,000
----------------------------------------------------------------------------
Balance, end of period $ 702,954 $ 774,000 $ 774,000
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Shareholders' /
Unitholders' equity $ 141,609,593 $ 138,117,502 $ 135,802,569
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings / deficit
Retained earnings, beginning of
period ($321,826) - -
Dividends / distributions to
shareholders / unitholders
(note 13) (6,811,289) $ (8,503,941) ($810,629)
Comprehensive income and profit
for the period 7,008,333 8,182,115 548,079
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Retained earnings / (deficit),
end of period $ (124,782) $ (321,826) $ (262,550)
----------------------------------------------------------------------------
Shares / units issued and
outstanding (note 11) 14,679,223 14,377,333 14,171,850
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Cash Flows
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Three Months Ended Six Months Ended
June 30/11 June 30/10 June 30/11 June 30/10
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Cash provided by
(used in):
Operating
activities:
Profit (loss) for
the period $ 3,461,415 $ 844,678 $ 7,008,333 $ 548,079
Adjustments for:
Distribution to
unitholders - 2,474,744 - 5,731,903
Change in fair
value of
conversion option
for Convertible
debentures - (24,033) - 321,826
Implicit interest
rate in excess of
Coupon rate -
convertible
debentures 21,205 13,518 44,722 26,828
Deferred finance
cost amortization
- convertible
debentures 96,664 42,630 192,267 84,792
Net changes in non-
cash items:
Increase in
amounts
receivable and
prepaid expenses (175,092) 94,208 (824,892) 11,957
Decrease in
accounts payable
and accrued
liabilities (1,039,770) (472,063) (701,519) (78,586)
Increase in
unearned income 116,165 33,797 118,782 36,450
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2,480,587 3,007,479 5,837,693 6,683,249
Financing
activities:
Proceeds from
issuance of shares 163,910 2,286,318 368,236 2,753,270
Increase in bank
indebtedness 18,621,651 9,919,518 33,215,353 12,923,656
Decrease in loans
payable (net) (35,925) (37,365) (436,820) (3,166,253)
Increase (decrease)
in dividend and
distributions
payable 10,308 17,881 (982,866) (1,437,716)
Dividends to
shareholders paid
during the period (3,429,647) (810,629) (6,811,289) (810,629)
Distribution to
unitholders (2,474,744) (5,731,903)
----------------------------------------------------------------------------
Net cash flow from
(used in) financing
activities 15,330,297 8,900,979 25,352,614 4,530,425
Investing
activities:
Funding of mortgage
investments (51,924,287) (44,485,829) (91,472,794) (72,540,283)
Discharge of
mortgage
investments 34,113,403 32,577,371 60,282,487 61,326,609
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Net cash flow from
(used in) investing
activities (17,810,884) (11,908,458) (31,190,307) (11,213,674)
----------------------------------------------------------------------------
Increase in cash,
being cash,
beginning and end
of period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from operating activities include:
Interest received $ 4,698,998 $ 3,925,981 $ 8,963,561 $ 7,781,294
Interest paid (note
16) $ 1,904,711 $ 910,930 $ 2,040,651 $ 972,290
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See accompanying notes to unaudited interim condensed financial statements.
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to unaudited interim condensed Financial Statements
Three and six months ended June 30, 2011 and 2010
Firm Capital Mortgage Investment Corporation (the "Corporation"), 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 shares
of the Corporation are listed on the Toronto Stock Exchange under the symbol
"FC".
1. Organization of Corporation:
On November 30, 2010, Firm Capital Mortgage Investment Trust (the "Trust")
entered into a plan of arrangement ("Reorganization"), whereby the Trust was
converted from an income trust structure into the public corporation, Firm
Capital Mortgage Investment Corporation, effective January 1, 2011. The
Corporation was incorporated pursuant to the laws of the Province of Ontario on
October 22, 2010 for the purposes of participating in the Reorganization.
Pursuant to the Reorganization, units of the Trust ("Units" or "Trust Units")
were exchanged on a one-for-one basis for common shares of the Corporation.
Holders of Units therefore became the sole shareholders of the Corporation
effective January 1, 2011.
As part of the Reorganization, the Trust was wound up and its assets were
distributed to the Corporation. The Reorganization was treated as a change in
business form rather than a change in control, and therefore, has been accounted
for as a continuity of interest. The carrying amounts of assets, liabilities,
and unitholders' equity in the financial statements of the Trust immediately
prior to the Reorganization were the same as the carrying values of the
Corporation immediately following the Reorganization. References to common
shares, shareholders and dividends of the Corporation were formerly referred to
as units, unitholders, and distributions under the Trust. Comparative amounts in
these and future financial statements during 2011 are those of the Trust.
The Corporation's mortgage banker is Firm Capital Corporation and the
Corporation's manager is FC Treasury Management Inc.
2. Basis of presentation:
(a) Statement of compliance:
These condensed interim financial statements have been prepared in accordance
with International Accounting Standards ("IAS") 34, Interim Financial Reporting
and using the accounting policies described herein. The three months ended March
31, 2011 interim financial statements are the Corporation's first International
Financial Reporting Standards ("IFRS") condensed financial statements for part
of the period covered by the first IFRS annual financial statements and IFRS 1
First-time Adoptions of International Financial Reporting Standards ("IFRS 1").
The unaudited interim condensed financial statements do not include all of the
information required for full annual financial statements and should be read in
conjunction with the notes to the Corporation's audited financial statements for
the year ended December 31, 2010.
An explanation of how the transition to IFRS has affected the reported financial
position, financial performance and cash flows of the Corporation is provided in
note 4. This note includes reconciliations of equity and total comprehensive
income for comparative periods and of equity at the date of transition, being
January 1, 2010, from reporting under Canadian generally accepted accounting
principles ("Canadian GAAP" or "previous GAAP") to those reported for those
periods and at the date of transition under IFRS.
These unaudited interim condensed financial statements were approved by the
Board of Directors on August 5, 2011.
(b) Basis of measurement:
The unaudited interim condensed financial statements have been prepared on the
historical cost basis, except for financial instruments classified as fair value
through profit or loss, which are measured at fair value.
(c) Functional and presentation currency:
These unaudited interim condensed financial statements are presented in Canadian
dollars, which is the Corporation's functional currency.
(d) Use of estimates and judgements:
The preparation of financial statements requires management to make judgements,
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. Actual amounts may differ from these
estimates.
Significant judgement made by the Corporation relates to the classification of
trust units between equity and liability (see note 10).
The most significant estimates that the Corporation is required to make relate
to the impairment of the mortgage investments (notes 3(a) and 6). 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 and volatile
equity markets have combined to increase the uncertainty inherent in such
estimates and assumptions. Accordingly, by their nature, estimates of impairment
are subjective and do not necessarily result in precise determinations. Should
the underlying assumptions change, the estimated fair value could vary by a
material amount.
3. Summary of significant accounting policies:
The Corporation's accounting policies and its standards of financial disclosure
set out below are in accordance with IFRS and have been applied consistently to
all periods presented in these consolidated interim condensed financial
statements and in preparing the opening IFRS balance sheet as at January 1, 2010
for the purposes of the transition to IFRS.
(a) Mortgage investments:
Mortgage investments are classified as loans and receivable investments. Such
investments are recognized initially at fair value plus any directly
attributable transaction costs. Subsequent to initial recognition the mortgage
loans are measured at amortized cost using the effective interest method, less
any impairment losses.
The mortgage investments are assessed at each reporting date to determine
whether there is objective evidence of impairment. A financial asset is impaired
if objective evidence indicates that a loss event has occurred after the initial
recognition of an asset, and that the loss event had a negative effect on the
estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of the mortgage investments measured at amortized
cost is calculated as the difference between its carrying amount and the present
value of the estimated future cash flows discounted at the asset's original
effective interest rate. Losses are recognized in the statement of comprehensive
income and reflected in an allowance account against the mortgage investments.
Interest on the impaired asset continues to be recognized through the unwinding
of the discount if it is considered collectable. When a subsequent event causes
the amount of impairment loss to decrease, the decrease in impairment loss is
reversed through profit or loss.
(b) Revenue recognition:
(i) Interest and fee income:
Interest income is accounted for on the accrual basis, and is
recorded net of the Corporation Manager interest spread described in
note 15. Commitment fees received are amortized over the expected
term of the mortgage.
(ii) Special investments:
Special profit participations earned by the Corporation on special
investments are recognized and included in interest and fees earned
only once the receipt of such amounts is certain.
(c) Share-based compensation:
The Corporation has share-based compensation plans (i.e. incentive option plan)
which are described in note 11. The expense of equity-settled incentive option
plan are measured based on fair value of the awards of each tranche at the grant
date. The expense is recognized on a proportionate basis consistent with the
vesting features of each tranche of the grant.
(d) Income taxes:
The Corporation is a mortgage investment corporation pursuant to the Income Tax
Act (Canada). As such, the Corporation is entitled to deduct from its taxable
income dividends paid to shareholders during the year or within 90 days of the
end of the year. The Corporation tends to maintain its status as a mortgage
investment corporation and will distribute sufficient dividends in the year and
in future years to ensure that the Corporation is not subject to income taxes.
Accordingly, for financial statement reporting purposes, the tax deductibility
of the Corporation's dividends results in the Corporation being effectively
exempt from taxation and no provision for current or future income taxes is
required.
(e) Financial assets and liabilities:
Financial assets includes the Corporation's cash, amounts receivable and
mortgage investments. Financial liabilities include the bank indebtedness,
accounts payable and accrued liabilities, unearned income, shareholder dividend
and unitholder distribution payable, loans payable, liability component of
convertible debentures and trust units (until June 8, 2010).
Recognition and measurement of financial instruments
The Corporation determines the classification of its financial assets and
liabilities at initial recognition. Financial instruments are recognized
initially at fair value and in the case of financial assets and liabilities
carried at amortized costs, adjusted for directly attributable transaction
costs.
The Corporation has designated its cash as held-for-trading, which is measured
at fair value. Amounts receivable and mortgage investments are classified as
loans and receivables, which are measured at amortized cost.
Bank indebtedness, accounts payable and accrued liabilities, unearned income,
shareholder dividend and unitholder distribution payable, loans payable,
liability component of convertible debentures and trust units (until June 8,
2010) are classified as other financial liabilities, which are also measured at
amortized cost.
The Corporation had neither available-for-sale, nor held-to-maturity instruments
as at or during the six months ended June 30, 2011 and 2010.
(f) Compound financial instruments:
Compound financial instruments issued by the Corporation comprise convertible
debentures that can be converted to share capital at the option of the holder,
and the number of shares to be issued does not vary with changes in their fair
value. The liability component of a compound financial instrument is recognized
initially at the fair value of a similar liability that does not have an equity
conversion option. The equity component is recognized initially at the
difference between the fair value of the compound financial instrument as a
whole and the fair value of the liability component. Any directly attributable
transaction costs are allocated to the liability and equity components in
proportion to their initial carrying amounts. Subsequent to initial recognition,
the liability component of a compound financial instrument is measured at
amortized cost using the effective interest method. The equity component of a
compound financial instrument is not re-measured subsequent to initial
recognition. Interest, dividends, losses and gains relating to the financial
liability are recognized in profit or loss. Distributions to the equity holders
are recognized in equity, net of any tax benefit.
(g) Hybrid financial instruments:
Hybrid financial instruments comprise convertible debentures which contain an
embedded derivative related to the conversion feature to Trust units from its
issuance to June 8, 2010. The embedded derivative is measured at fair value at
initial recognition, and subsequently at every reporting period with fair value
changes recorded in profit or loss. The difference between the consideration
received and the fair value of the embedded derivatives, is attributed to the
debt host contract at initial recognition which is subsequently measured at
amortized cost using the effective interest method.
(h) Share capital:
Common shares are classified as equity. Incremental costs directly attributable
to the issue of common shares are recognized as a deduction from equity.
(i) Trust Units:
Trust units are classified as a liability from January 1, 2010 to June 8, 2010
and as equity from June 9, 2010 to December 31, 2010, as further detailed in
note 10.
(j) Basic and diluted per share calculation:
The Corporation presents basic and diluted earnings profit or loss per share
data for its common shares. Basic per share amounts are calculated by dividing
the profit or loss attributable to common shareholders of the Corporation by the
weighted average number of common shares outstanding during the period. Diluted
per share amounts are calculated using the "if converted method" and are
determined by adjusting the profit or loss attributable to common shareholders
and the weighted average number of common shares outstanding, adjusted for the
effects of all dilutive potential convertible debentures and granted incentive
option plan.
(k) New standards and interpretations not yet adopted:
IFRS 9, Financial Instruments
IFRS 9 introduces new requirements for classifying and measuring financial
assets and is likely to affect the Corporation's accounting for its financial
assets. Specifically, IFRS 9 requires financial assets to be classified into two
measurement categories, those measured at fair value and those measured at
amortized cost. The standard is not applicable until January 1, 2013 but is
available for early adoption. The Corporation has not early adopted IFRS 9 for
the period ended June 30, 2011, and the extent of the impact has not been
determined.
IFRS 7, Financial Instruments - Disclosure
An amendment to IFRS 7 issued in October 2010 will enhance disclosure
requirements relating to the transfer of financial assets. This will include
disclosures for transfers of financial assets that are derecognized in their
entirety as well as those that are not. The effective date for the amendment
will be for annual periods beginning on or after July 1, 2011. Although earlier
application is permitted (subject to disclosure of that fact), the Corporation
has not chosen to early adopt the amendment for the period ended June 30, 2011,
and the extent of the impact has not been determined.
4. Transition to IFRS:
The Corporation has adopted IFRS effective January 1, 2010 ("the transition
date") and has prepared its opening IFRS statement of financial position as at
that date. Prior to the adoption of IFRS, the Corporation prepared its financial
statements in accordance with Canadian GAAP.
The accounting policies set out in note 3 have been applied in preparing the
financial statements for the six months ended June 30, 2011, the comparative
information presented in these financial statements for the six months ended
June 30, 2010 and the year ended December 31, 2010 and in the preparation of an
opening IFRS balance sheet at January 1, 2010.
In preparing its opening IFRS balance sheet, the Corporation has adjusted
amounts reported previously in financial statements prepared in accordance with
Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS
has affected the Corporation's financial position, financial performance and
cash flows is set out in the following tables and the notes that accompany the
tables:
(a) Exemptions from full retrospective application:
First-time adopters of IFRS must apply the provisions of IFRS 1. IFRS 1 requires
adopters to retrospectively apply all IFRS standards as of the reporting date
with certain optional exemptions and certain mandatory exemptions.
In preparing these unaudited interim condensed financial statements in
accordance with IFRS 1, the Corporation has applied the mandatory exemption from
full retrospective application of IFRS for estimates. The mandatory exemption
requires that estimates previously determined under Canadian GAAP cannot be
revised due to the application of IFRS, except when necessary to reflect
differences in accounting policies.
(b) Reconciliation of equity as reported under Canadian GAAP and IFRS:
The following is a reconciliation of equity as previously reported under
Canadian GAAP to IFRS on January 1, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
January 1, 2010
----------------------------------------------------------------------------
Assets
Cash 1,444,339 - 1,444,339
Amounts receivable and prepaid
expenses 1,706,383 - 1,706,383
Mortgage investments 167,128,297 - 167,128,297
----------------------------------------------------------------------------
170,279,019 - 170,279,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness - - -
Accounts payable and accrued
liabilities 410,064 - 410,064
Unearned income 202,481 - 202,481
Shareholder dividend and unitholder
distribution payable 2,543,120 - 2,543,120
Loans payable 10,714,637 - 10,714,637
Convertible debentures (note 4(e)(ii)) 23,681,244 - 23,681,244
Conversion option of convertible
debentures (note 4(e)(ii)) - 222,182 222,182
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 37,551,546 222,182 37,773,728
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - 132,505,291 132,505,291
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 132,727,473 (132,727,473) -
Retained earnings / (deficit) - - -
----------------------------------------------------------------------------
Total equity 132,727,473 (132,727,473) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
170,279,019 - 170,279,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of equity as previously reported under
Canadian GAAP to IFRS on June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
June 30, 2010
----------------------------------------------------------------------------
Assets
Cash - - -
Amounts receivable and prepaid
expenses 1,694,426 - 1,694,426
Mortgage investments 178,341,971 - 178,341,971
----------------------------------------------------------------------------
180,036,397 - 180,036,397
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness 11,479,317 - 11,479,317
Accounts payable and accrued
liabilities 331,478 - 331,478
Unearned income 238,931 - 238,931
Shareholder dividend and unitholder
distribution payable 1,105,404 - 1,105,404
Loans payable 7,548,384 - 7,548,384
Convertible debentures (note 4(e)(ii)) 23,792,864 - 23,792,864
Conversion option of convertible
debenture (note 4(e)(ii)) - - -
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 44,496,378 - 44,496,378
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - - -
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 135,540,019 262,550 135,802,569
Retained earnings / (deficit) - (262,550) (262,550)
----------------------------------------------------------------------------
Total equity 135,540,019 - 135,540,019
----------------------------------------------------------------------------
----------------------------------------------------------------------------
180,036,397 - 180,036,397
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of shareholders' equity as previously reported
under Canadian GAAP to IFRS on December 31, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
December 31, 2010
----------------------------------------------------------------------------
Assets
Cash - - -
Amounts receivable and prepaid expenses 2,371,563 - 2,371,563
Mortgage investments 202,330,929 - 202,330,929
----------------------------------------------------------------------------
204,702,492 - 204,702,492
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness 5,005,825 - 5,005,825
Accounts payable and accrued
liabilities 1,482,580 - 1,482,580
Unearned income 372,514 - 372,514
Shareholder dividend and unitholder
distribution payable 2,127,845 - 2,127,845
Loans payable 4,289,249 - 4,289,249
Convertible debentures (note 4(e)(ii)) 53,628,803 - 53,628,803
Conversion option of convertible
debentures (note 4(e)(ii)) - - -
----------------------------------------------------------------------------
Total liabilities excluding net assets
attributable to unitholders 66,906,816 66,906,816
----------------------------------------------------------------------------
Net assets attributable to unitholders
(note 4(e)(i)) - - -
----------------------------------------------------------------------------
Shareholders' / Unitholders' equity
(note 4(e)(i)) 137,795,676 321,826 138,117,502
Retained earnings / (deficit) (note
4(e)(i)) (321,826) (321,826)
----------------------------------------------------------------------------
Total equity 137,795,676 - 137,795,676
----------------------------------------------------------------------------
----------------------------------------------------------------------------
204,702,492 - 204,702,492
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Reconciliation of comprehensive income, as reported under Canadian GAAP and
IFRS:
The following is a reconciliation of comprehensive income as previously reported
under Canadian GAAP to IFRS for the three months ended June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Three Months Ended June 30, 2010
----------------------------------------------------------------------------
Interest and fees earned 4,033,295 - 4,033,295
Less interest expense 573,889 - 573,889
----------------------------------------------------------------------------
Net interest and fee income 3,459,406 - 3,459,406
General and administrative expenses 164,017 - 164,017
Impairment loss on mortgages (note
4(e)(iii)) - - -
----------------------------------------------------------------------------
164,017 - 164,017
----------------------------------------------------------------------------
Operations profit for the period 3,295,389 - 3,295,389
Finance costs
Change in the fair value of the
conversion option of convertible
debentures (note 4(e)(ii)) - 24,033 24,033
Distributions to unitholders (note
4(e)(i)) - (2,474,744) (2,474,744)
----------------------------------------------------------------------------
Comprehensive income and profit (loss)
for the period, and changes in net
assets attributable to unitholders for
the period, respectively 3,295,389 (2,450,711) 844,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of comprehensive income as previously reported
under Canadian GAAP to IFRS for the six months ended June 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Six Months Ended June 30, 2010
----------------------------------------------------------------------------
Interest and fees earned 8,049,560 - 8,049,560
Less interest expense 1,105,466 - 1,105,466
----------------------------------------------------------------------------
Net interest and fee income 6,944,094 - 6,944,094
General and administrative expenses 342,286 - 342,286
Change in unrealized loss in value of
mortgages (4(e)(iii) - - -
Impairment loss on mortgages (4(e)(iii) - - -
----------------------------------------------------------------------------
342,286 - 342,286
----------------------------------------------------------------------------
Operations profit for the period 6,601,808 - 6,601,808
Finance costs
Change in the fair value of the
conversion option of convertible
debentures (note 4(e)(ii)) - (321,826) (321,826)
Distributions to unitholders (note
4(e)(i)) - (5,731,903) (5,731,903)
----------------------------------------------------------------------------
Comprehensive income and profit (loss)
for the period, and changes in net
assets attributable to unitholders for
the period, respectively 6,601,808 (6,053,729) 548,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of comprehensive income as previously reported under Canadian
GAAP to IFRS for the year ended December 31, 2010:
Effect of Restated
transition under
Canadian GAAP to IFRS IFRS
Year Ended December 31, 2010
----------------------------------------------------------------------------
Interest and fees earned 18,703,612 18,703,612
Less interest expense 2,877,078 2,877,078
----------------------------------------------------------------------------
Net interest and fee income 15,826,534 15,826,534
General and administrative expenses 1,310,690 1,310,690
Change in unrealized loss in value
of mortgages (4(e)(iii) 280,000 (280,000) -
Impairment loss on mortgages
(4(e)(iii) - 280,000 280,000
----------------------------------------------------------------------------
1,590,690 - 1,590,690
----------------------------------------------------------------------------
Operations profit for the period $ 14,235,844 $ 14,235,844
Finance costs
Change in fair value of conversion
option of convertible debentures
(note 4(e)(ii)) (321,826) (321,826)
Distributions to unitholders (note
4(e)(i)) (5,731,903) (5,731,903)
----------------------------------------------------------------------------
Comprehensive income and profit
(loss) for the period, and changes
in net assets attributable to
unitholders for the period,
respectively 14,235,844 (6,053,729) 8,182,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(d) Impact on the statement of cash flows:
The IFRS adjustments made to the comparative consolidated statement of net
income for the three and six months ended June 30, 2010 (as described above)
have been made to the statement of cash flows as at the same date. Consistent
with the Corporation's accounting policy choice under IAS 7, Statement of Cash
Flows, interest paid and interest received have been included in cash flow from
operating activities in the statement of cash flows. There were no other
significant IFRS transition differences noted.
(e) Details of the material adjustments to the balance sheet and comprehensive
income:
(i) Previously under Canadian GAAP, the Trust Units were classified as equity
instruments. In accordance with IAS 32, Financial Instruments: Presentation, the
Trust Units are classified as a liability from January 1, 2010 to June 8, 2010
as the units impose an obligation requiring distribution of taxable income to
unitholders until that date. Thereafter the Trust Units are classified as equity
as further detailed in note 10.
The Corporation measures its Trust Unit liability at amortized cost and presents
it at the amount of residual net assets.
As a result, the Corporation has recorded the liability at the cash amount
originally exchanged for the Trust Units plus cumulative earnings and
distributions to unitholders. The effect of classification is to reduce the
shareholders' equity and increase liabilities (net assets attributable to
unitholders) by $132.5 million at January 1, 2010.
At June 30, 2011 and December 31, 2010, the Corporation reclassified $0.3
million for the impact of change in fair value of the conversion option from
January 1, 2010 to June 8, 2010 as further detailed in note 4(e)(ii)
Consistent with the classification of the Trust Units as a liability,
distributions paid to unitholders are considered as financing cost in the
statement of comprehensive income for these periods.
As the Trust Units are treated as floating rate liability, any changes in the
distributions based on changes to income levels are expensed in the period in
which they occur.
(ii) For the period from January 1, 2010 to June 8, 2010, the convertible
debentures contain an option to convert into the liability classified trust
units. As the conversion option of convertible debt is not otherwise closely
related to the debt host, it constitutes a liability-classified embedded
derivative, which is carried at fair value. Fair value is calculated using
market prices at the end of each reporting period. The fair value adjustment is
recorded as part of finance costs on the unaudited interim condensed statements
of comprehensive income.
On June 9, 2010, the fair value of the conversion option of convertible debt is
reclassified to equity as the convertible debentures are now accounted for as
compound financial instruments. For the period from June 9, 2010 to December 31,
2010, the equity portion is not re-measured.
(iii) The Corporation has reviewed its mortgage investments for impairment and
adjusted the unaudited interim condensed financial statements for impairment
losses on mortgages previously reported. Amounts for change in unrealized losses
of mortgages have been removed to conform with Corporation's presentation under
IFRS.
5. Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid expenses as at
June 30, 2011, December 31, 2010 and January 1, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec. 31, 2010 Jan. 1, 2010
Amount Amount Amount
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest receivable $ 2,599,390 $ 1,803,224 $ 1,450,807
Prepaid expenses 66,018 111,800 160,903
Special income receivable 452,948 389,198 -
Fees receivable 78,099 67,341 94,673
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amounts receivable and prepaid
expenses $ 3,196,455 $ 2,371,563 $ 1,706,383
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Mortgage investments:
The following is a breakdown of the mortgage investments as at June 30, 2011,
December 31, 2010 and January 1, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2011 Dec. 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------------
Conventional
first mortgages $ 201,513,660 85.2 $ 179,004,150 87.2 $ 135,464,430 79.8
Conventional
non-first
mortgages 13,559,919 5.7 13,785,737 6.7 12,768,832 7.5
Special mortgage
investments 21,427,658 9.1 12,521,042 6.1 21,595,035 12.7
----------------------------------------------------------------------------
Total mortgage
investments (at
cost) $ 236,501,237 100.0 $ 205,310,929 100.0 $ 169,828,297 100.0
Impairment
provision (2,980,000) (2,980,000) (2,700,000)
----------------------------------------------------------------------------
Mortgage
investments $ 233,521,237 $ 202,330,929 $ 167,128,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Corporation.
Mortgages are stated at amortized cost as discussed in note 3(a). The impairment
loss in the amount of $2,980,000 as at June 30, 2011 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 8.95% (2010 - 9.46%) and mature between 2011 and 2015.
The un-advanced funds under the existing mortgage portfolio (which are
commitments of the Corporation) amounted to $26,781,886 as at June 30, 2011
(December 31, 2010 - $18,406,862 and January 1, 2010 - $12,709,686).
Principal repayments based on contractual maturity dates are as follows:
----------------------------------------------------------------------------
2011 $80,622,275
----------------------------------------------------------------------------
2012 78,608,591
2013 69,448,194
2014 6,738,620
2015 1,083,557
----------------------------------------------------------------------------
$236,501,237
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Borrowers who have open mortgages have the option to repay principal at any time
prior to the maturity date.
7. Bank indebtedness:
The Corporation has entered into credit arrangements of which $38,221,178 as at
June 30, 2011 (December 31, 2010 - $5,005,825 & January 1, 2010 - nil) 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,
2011. Bank indebtedness is secured by a general security agreement. The credit
agreement contains certain financial covenants that must be maintained. As at
June 30, 2011, December 31, 2010 and January 1, 2010, the Corporation was in
compliance with all financial covenants.
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 3.50% to 6.45% as at June 30, 2011 (December 31,
2010 3.50% to 6.45%). The Corporation's principal balance outstanding under the
mortgages for which a first priority charge has been granted is $4,845,794 as at
June 30, 2011 (December 31, 2010 - $5,392,156 & January 1, 2010 - $14,224,566).
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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 $ 1,723,584
2012 -
2013 -
2014 1,974,895
2015 153,950
----------------------------------------------------------------------------
$ 3,852,429
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Convertible debentures:
Six Months Ended June 30, 2011
--------------------------------------------
6.00% 5.75%
Convertible Convertible
Debentures Debentures Total
----------------------------------------------------------------------------
Principal balance, beginning of
period $ 23,886,736 $ 29,742,167 $ 53,628,903
Issued
Conversions (3,195,000) - (3,195,000)
Adjustment to fair value of
conversion option from
conversions 71,046 71,046
Implicit interest rate in excess
of coupon rate 28,549 16,174 44,723
Deferred finance cost
amortization 84,791 107,475 192,266
----------------------------------------------------------------------------
Principal balance, end of period 20,876,122 29,865,816 50,741,938
----------------------------------------------------------------------------
Year Ended As At
Dec. 31, 2010 Jan. 1, 2010
-------------------------------------------------------------
Principal balance, beginning of
period $ 23,681,244 $ 23,681,244
Issued 29,680,929
Conversions (20,000)
Adjustment to fair value of
conversion option from
conversions
Implicit interest rate in excess
of coupon rate 57,689
Deferred finance cost
amortization 228,941
-------------------------------------------------------------
Principal balance, end of period 53,628,803 23,681,244
-------------------------------------------------------------
On April 24, 2006, the Corporation 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 could not be redeemed by the
Corporation prior to June 30, 2009. On and after June 30, 2009, but prior to
June 30, 2010, the debentures were redeemable at a price equal to the principal,
plus accrued interest, at the Corporation's option on not more than 60 days and
not less than 30 days notice, provided that the weighted average trading price
of the shares 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 Corporation's option on
not more than 60 days' and not less than 30 days' prior notice. On redemption or
at maturity, the Corporation 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 shares of the Corporation obtained by dividing the principal amount
being repaid by 95% of the weighted average trading price of the shares for the
20 consecutive trading days ending on the fifth trading day preceding the
redemption or maturity date.
In 2009, $536,000 of debentures were converted by the debenture holders to
45,617 shares of the Corporation. In 2010, $20,000 of debentures were converted
by the debenture holders to 1,702 shares of the Corporation. During the first
six months of 2011, $3,195,000 of debentures were converted by the debenture
holders to 271,909 shares of the Corporation.
In the fourth quarter of 2010, the Corporation completed a public offering of
31,443, 5.75% convertible unsecured subordinated debentures at a price of $1,000
per debenture for gross proceeds of $31,443,000. The debentures mature on
October 31, 2017 and interest is paid semi-annually on April 30 and October 31.
The debentures are convertible at the option of the holder at any time prior to
the maturity date at a conversion price of $15.90. The debentures may not be
redeemed by the Corporation prior to October 31, 2013. On and after October 31,
2013, but prior to October 31, 2014, the debentures are redeemable at a price
equal to the principal, plus accrued interest, at the Corporation's option on
not more than 60 days' and not less than 30 days notice, provided that the
weighted average trading price of the shares 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 October 31, 2014 and prior to the maturity date, the
debentures are redeemable at a price equal to the principal amount plus accrued
interest, at the Corporation's option on not more than 60 days' and not less
than 30 days prior notice. On redemption or at maturity, the Corporation 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 shares of the
Corporation obtained by dividing the principal amount being repaid by 95% of the
weighted average trading price of the shares for the 20 consecutive trading days
ending on the fifth trading day preceding the redemption or maturity date.
As at June 30, 2011, debentures payables bear interest at weighted average
effective rate of 5.85% per annum.
Notwithstanding the carrying value of the convertible debentures, the principal
balance outstanding to the debenture holders is $52,692,000.
10. Net assets attributable to unitholders
During the period, the Corporation performed an assessment of the
characteristics of the Trust units in existence during the period from January
1, 2010 to December 31, 2010 (the "Units"), against the criteria set forth per
IAS 32, Financial Instruments: Presentation.
For the period from January 1, 2010 to June 8, 2010, the Trust Units are
presented as a liability due to the Trust's requirement to distribute taxable
income to the unitholders and distributions made on the Trust Units is recorded
as finance costs in the statement of comprehensive income. The liability was
measured at amortized cost of the Trust Units, which includes any residual net
assets attributable to unitholders.
On June 9, 2010, the distribution policy set out in the Trust's Declaration of
Trust was modified such that there was no longer a requirement for the Trust to
distribute cash. As such, equity classification criteria were determined to be
met from that point.
Changes in the number of trust units and in their carrying amounts were as
follows during the six months ended June 30, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Units Amounts
--------------------------------------------------------------------------
Balance, beginning of period 13,896,829 $ 141,463,944
New units from exercise of options 249,000 2,465,800
New units issued during the period under
Distribution Reinvestment Plan 26,021 287,470
Trust units re-classified as equity (June 9,
2010) (14,171,850) (144,217,214)
--------------------------------------------------------------------------
Balance, end of period - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
As at January 1, 2010 the number of trust units outstanding was 13,896,829 at a
carry amount of $132,505,291.
11. Shareholders' equity:
On January 1, 2011, all outstanding Units were exchanged on a one-for-one basis
for common shares of the Corporation.
The beneficial interests in the Corporation are represented by a single class of
shares which are unlimited in number. Each share carries a single vote at any
meeting of shareholders and carries the right to participate pro rata in any
dividends.
(a) Shares and Units issued and outstanding:
The following shares were issued and outstanding as at June 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period 14,377,333
New shares from conversion of debentures (note 9) 271,909
New shares issued during the period under Dividend Reinvestment
Plan 29,981
----------------------------------------------------------------------------
Balance, end of period 14,679,223
----------------------------------------------------------------------------
The following units were issued and outstanding as at December 31, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of year 13,896,829
New units from conversion of debentures (note 9) 1,702
New units from exercise of options 427,500
New units issued during the period under Distribution
Reinvestment Plan 51,302
----------------------------------------------------------------------------
Balance, end of year 14,377,333
----------------------------------------------------------------------------
The following units were issued and outstanding as at June 30, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period - Trust units re-classified as
equity (June 9, 2010) 14,171,850
----------------------------------------------------------------------------
Balance, end of period 14,171,850
----------------------------------------------------------------------------
(b) Incentive option plan:
In 2005, 415,000 options were issued to directors, officers and employees of the
Corporation Manager and Mortgage Banker, with an exercise price of $9.90 per
share. The options were exercisable any time up to November 17, 2010. The
options vested on the grant date. At December 31, 2010, 415,000 share options
have been exercised.
In 2008, 35,000 options were issued to directors with an exercise price of
$9.94. The options were exercisable any time up to October 7, 2013. The fair
value of those share options, given the small number of options issued and given
the low volatility in the Corporation's share trading price, is not material and
therefore no related compensation expense has been recorded by the Corporation.
At December 31, 2010, 35,000 options have been exercised.
As at June 30, 2011, no options remained outstanding (December 31, 2010 - NIL &
January 1, 2010 - 427,500).
(c) Dividend reinvestment plan and direct share purchase plan:
The Corporation has a dividend reinvestment plan and direct share purchase plan
for its shareholders which allows participants to reinvest their monthly cash
dividends in additional Corporation shares at a share price equivalent to the
weighted average price of shares for the preceding five day period.
12. Per share amounts:
(a) Profit per share calculation:
As the trust units were liability-classified until June 8, 2010 and the full
change for the period from January 1, 2010 to June 8, 2010 in net assets is
allocated thereto, there is no profit per unit presented for the six months
ended June 30, 2010.
The following tables reconcile the numerators and denominators of the basic and
diluted profit per share for the three and six months ended June 30, 2011.
Basic profit per share calculation:
Three months ended Six months ended
June 30, 2011 June 30, 2011
----------------------------------------------------------------------------
Numerator for basic profit per share:
Profit $ 3,461,415 $ 7,008,333
----------------------------------------------------------------------------
Denominator for basic profit per
share:
Weighted average shares 14,621,705 14,516,228
----------------------------------------------------------------------------
Basic profit per share $ 0.237 $ 0.483
----------------------------------------------------------------------------
Diluted profit per share calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2011 June 30, 2011
----------------------------------------------------------------------------
Numerator for diluted profit per
share:
Profit $ 3,461,415 $ 7,008,333
Interest on convertible debentures 892,014 1,820,491
----------------------------------------------------------------------------
Net profit for diluted profit per
share $ 4,353,429 $ 8,828,824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted profit per
share:
Weighted average shares 14,621,705 14,516,228
Net shares that would be issued
assuming convertible debentures are
converted 3,785,973 3,785,973
----------------------------------------------------------------------------
Diluted weighted average shares 18,407,678 18,302,201
----------------------------------------------------------------------------
Diluted profit per share $ 0.237 $ 0.482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Pro forma per unit calculation
Management has chosen to disclose pro forma basic and diluted profit per unit
for the three and six months ended June 30, 2010 in order to provide an
indication of the Trust's business performance that is comparable to how
performance is otherwise measured when the instruments that represent residual
interests in the entity qualify as equity instruments. The calculation
eliminates "change in fair value of the conversion option of convertible
debentures" and "distributions to unitholders" from the numerator and uses the
liability classified units as denominator. For disclosure purposes only, the
Corporation has determined the operations profit per share using the same basis
that would apply in accordance with IAS 33 Earnings Per Share.
The following tables reconcile the numerators and denominators of pro forma
basic and diluted operations profit per unit:
Basic operations profit per share calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2010 June 30, 2010
----------------------------------------------------------------------------
Numerator for basic operations profit
per share:
Operations profit $ 3,295,389 $ 6,601,808
----------------------------------------------------------------------------
Denominator for basic operations
profit per unit:
Weighted average units 14,001,865 13,958,462
----------------------------------------------------------------------------
Pro forma profit per unit $ 0.235 $ 0.473
----------------------------------------------------------------------------
Diluted pro forma profit per unit
calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, 2010 June 30, 2010
----------------------------------------------------------------------------
Numerator for diluted pro forma profit
per share:
Operations profit $ 3,295,389 $ 6,601,808
Interest on convertible debentures 423,108 845,540
----------------------------------------------------------------------------
Net operations profit for diluted
operations profit per unit $ 3,718,497 $ 7,447,348
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted operations
profit per unit:
Weighted average units 14,001,865 13,958,462
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase units
at the average unit price 24,298 48,606
Assuming convertible debentures are
converted 2,082,043 2,082,043
----------------------------------------------------------------------------
Diluted weighted operations profit per
unit 16,108,206 16,089,111
----------------------------------------------------------------------------
Diluted pro forma profit per unit $ 0.231 $ 0.463
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Dividends:
The Corporation intends to make dividend payments to the shareholders on a
monthly basis on or about the 15th day of each month. The operating policies of
Corporation set out that the Corporation intends to distribute to shareholders
within 90 days after the year end at least 100% of the net income of the
Corporation determined in accordance with the Income Tax Act (Canada), subject
to certain adjustments. The net income of the Corporation determined in
accordance with the Income Tax Act (Canada), for the period ended June 30, 2011
was $7,177,458 (2010 - $6,597,746).
For the six months ended June 30, 2011, the Corporation recorded dividends of
$6,811,289 (2010 - $6,542,532) to its shareholders. Dividends were $0.468 (2010
- $0.468) per share.
14. Income taxes:
The Income Tax Act (Canada) contains legislation (the "SIFT Rules") affecting
the tax treatment of "specified investment flow-through" ("SIFT") trusts. A SIFT
includes a publicly traded trust. The SIFT Rules provide for a transition period
unit 2011 for publicly traded trusts like the Trust, which existed prior to
November 1, 2006. Under the SIFT Rules, distributions of certain types of income
by a SIFT are not deductible in computing the SIFT's taxable income, and a SIFT
is subject to tax on such income at a rate that is substantially equivalent to
the general tax rate applicable to a Canadian corporation. The SIFT rules do not
apply to a corporation that qualifies as a mortgage investment corporation under
the Income Tax Act (Canada). The Trust completed the necessary tax restructuring
to qualify as a mortgage investment corporation effective January 1, 2011.
15. 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 Corporation Manager (a company controlled by some of the directors) receives
an allocation of mortgage interest, referred to as Corporation Manager spread
interest, calculated as 0.75% per annum of the Corporation's daily outstanding
performing mortgage investment balances. For the six months ended June 30, 2011,
this amount was $789,928 (2010 - $629,523), and for the three month period
ending June 30, 2011 this amount was $410,017 (2010 - $324,003), and was
deducted from interest and fees earned.
The Mortgage Banker (a company controlled by a director) 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 Corporation's mortgage investments; 75% of
all the commitment and renewal fees generated from the Corporation's mortgage
investments; and 25% of all the special profit income generated from the non-
conventional mortgage investments after the Corporation 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 $105,000 for the six
month period ended June 30, 2011 (2010 - $84,000). The Mortgage Banker also
retains all overnight float interest and incidental fees and charges payable by
borrowers on the Corporation's mortgage investments. The Corporation's share of
commitment and renewal fees recorded in income for the six months ended June 30,
2011 was $395,711 (2010 - $464,408) and for the three month period ended June
30, 2011 was $226,177 (2010 - $197,716) and applicable special profit income for
the six months ended June 30, 2011 was $150,375 (2010 - $317,848) and for the
three month period ended June 30, 2011 was $119,857 (2010 - $207,174).
The Corporation Management Agreement and Mortgage Banking Agreement contains
provisions for the payment of termination fees to the Corporation Manager and
Mortgage Banker in the event that the respective agreements are either
terminated or not renewed.
Several of the Corporation'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 directors of the Corporation. The Corporation ranks equally
with other members of the syndicate as to receipt of principal and income.
Mortgages totalling $8,760,000 (December 31, 2010 - $8,760,000 and January 1,
2010 - $1,760,000) were issued to borrowers controlled by certain directors of
the Corporation. Each mortgage is dealt with in accordance with the
Corporation's existing investment and operating policies and is personally
guaranteed by the related directors.
16. Interest expense:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Bank interest expense $ 208,917 $ 84,594 $ 284,844 $ 121,284
Loans payable interest
expense 39,846 66,187 79,757 138,642
Debenture interest
expense 892,014 423,108 1,820,491 845,540
Interest expense $ 1,140,777 $ 573,889 $ 2,185,092 $ 1,105,466
Deferred finance cost
amortization -
convertible debenture (96,665) (42,630) (192,267) (84,792)
Implicit interest rate
in excess of coupon
rate - convertible
debentures (21,205) (13,518) (44,722) (26,828)
Change in accrued
interest 881,804 393,189 92,548 (21,556)
----------------------------------------------------------------------------
Cash interest paid $ 1,904,711 $ 910,930 $ 2,040,651 $ 972,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. Contingent liabilities:
The Corporation 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 Corporation's exposure to such litigation to have an impact on
these financial statements.
18. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness, accounts payable and
accrued liabilities and shareholder dividend payable approximate their carry
values due to their short-term maturities.
The fair value of loans payable approximate their carrying values due to the
fact that the majority of the loans are (i) 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, including their conversion option,
has been determined based on the closing price of the debentures of the
Corporation on the TSX for the respective date. The fair value has been
estimated at June 30, 2011 to be $53,996,688 (June 30, 2010 - $24,773,104,
December 31, 2010 - $56,305,890).
The fair value of the trust units as at June 30, 2010 has been determined based
on the June 30, 2010 closing price of the units of the Corporation on the TSX.
The fair value has been estimated at June 30, 2010 to be $161,417,372. The fair
value of the shares as at June 30, 2011 has been determined based on the June
30, 2011 closing price of the shares of the Corporation on the TSX. The fair
value has been estimated at June 30, 2011 to be $184,224,249. The fair value of
the units as at December 31, 2010 has been determined based on the December 31,
2010 closing price of the units of the Corporation on the TSX. The fair value
has been estimated at December 31, 2010 to be $171,090,263.
19. Risk management:
(a) Interest rate risk:
The Corporation'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 Corporation's debt comprises bank indebtedness and loans payable, with the
majority of such debt bearing interest based on bank prime and/or based on short
term Bankers Acceptance interest rates as a benchmark.
At June 30, 2011, if interest rates at that date had been 100 basis points lower
or higher, with all other variables held constant, net income for the three
month period would be affected as follows:
Carrying Value -1% +1%
----------------------------------------------------------------------------
Financial assets
Mortgage investments $ 233,521,237 $ (4,400) $ 55,925
Financial liabilities
Bank indebtedness 38,221,178 95,553 (95,553)
Accounts payable and accrued liabilities 781,061 - -
Unearned income 491,296 - -
Shareholder dividend payable 1,144,979
Loans payable 3,852,429 (4,309) 4,309
----------------------
Total increase (decrease) $ 86,844 ($35,319)
----------------------
----------------------
At June 30, 2010 if interest rates at that date had been 100 basis points lower
or higher, with all other variables held constant, net income for the three
month period would be affected as follows:
Carrying Value -1% +1%
----------------------------------------------------------------------------
Financial assets
Mortgage investments $ 178,341,971 $ (26,980) $ 43,776
Financial liabilities
Bank indebtedness 11,479,317 57,397 (57,397)
Accounts payable and accrued liabilities 331,478
Unearned income 238,931
Unitholder distribution payable 1,105,404
Loans payable 7,548,384 (25,183) 25,183
----------------------
Total increase (decrease) $ 5,234 $ 11,562
----------------------
----------------------
(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 Corporation's mortgage investments. The Corporation mitigates this
risk by adhering to the investment and operating policies set out in its
Declaration of Corporation.
The Corporation's maximum exposure to credit risk is represented by the fair
values of amounts receivable and mortgage investments.
(c) Liquidity risk:
The Corporation'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 Corporation'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 June 30, 2011, the Corporation 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
$26,781,886 as at June 30, 2011 (2010 - $11,089,779). These commitments are
anticipated to be funded from the Corporation's credit facility and borrower
repayments. The Corporation 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 a committed facility with a maturity date
of September 30, 2011. If the loan is not renewed on September 30, 2011, the
terms of the facility allow for the Corporation to repay the balance owed on
September 30, 2011 within 12 months. In the current economic climate and capital
market conditions, 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 Corporation'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
Corporation'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 Corporation's
portfolio and only have to be repaid once the specific loan is paid out by the
Borrower.
If the Corporation is unable to continue to have access to its bank borrowing
line and loans payables, the size of the Corporation's mortgage portfolio will
decrease and the income historically generated through holding a larger
portfolio by utilizing leverage will not be earned.
Contractual obligations as at June 30, 2011 are due as follows:
Total Less than 1 1 - 3 4 - 6 years
year years
--------------------------------------------------
Bank indebtedness $ 38,221,178$ 38,221,178
Loans payable 3,852,429 1,723,583 2,128,846
Convertible debenture 52,692,000 21,249,000 31,443,000
--------------------------------------------------
Subtotal - Liabilities 94,765,607 39,944,761 21,249,000 33,571,846
Future advances under
mortgages 26,781,886 26,781,886
--------------------------------------------------
Liabilities and
contractual obligations $ 121,547,493$ 66,726,647$ 21,249,000$ 33,571,846
--------------------------------------------------
--------------------------------------------------
The bank indebtedness and loans payable are liabilities resulting from the
funding of the Corporation's mortgage investments. 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 Corporation's mortgage portfolio are anticipated to be funded from the
Corporation's credit facility and borrower mortgage repayments. Upon funding of
same, the funded amount forms part of the Corporation's mortgage investments.
(d) Capital risk management:
The Corporation defines capital as being the funds raised through the issuance
of publicly traded securities of the Corporation. The Corporation's objectives
when managing capital/equity are:
-- to safeguard the Corporation's ability to continue as a going concern,
so that it can continue to provide returns for shareholders, and
-- to provide an adequate return to shareholders by obtaining an
appropriate amount of debt, commensurate with the level of risk.
The Corporation 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 Corporation may issue new shares or repay bank
indebtedness (if any) and loans payable.
The Corporation's investment guidelines, which can be varied at the discretion
of the Board of Directors, incorporate various guideline restrictions and
investment operating policies. The Corporation's guideline states that the
Corporation (i) will not invest more than 5% of the amount of its capital in any
single conventional first mortgage, (ii) will 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, and (iii) will only borrow funds in order
to acquire or invest in mortgage investments in amounts up to 60% of the book
value of the Corporation's portfolio of conventional first mortgages.
The Corporation 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 Corporation has complied with all such Bank covenants.
20. Subsequent Event:
On August 3, 2011, the Corporation entered into an agreement to sell, on a
bought deal basis to a syndicate of underwriters led by TD Securities Inc.,
$22,500,000 aggregate principal amount of 5.40% convertible unsecured
subordinated debentures, due February 28, 2019. Each debenture is convertible
into shares of the Corporation at the option of the holder at a conversion price
of $14.35 per share. The net proceeds of the offering will be used to repay bank
indebtedness. As part of the offering the Corporation granted the underwriters
an over-allotment option for up to $3,375,000 of additional debentures that 30
days following closing.
21. Financial statement review:
These unaudited interim condensed financial statements have not been reviewed by
the Corporation's auditors.
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