Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX:FC), today
released its financial statements for the third quarter ended September 30,
2011.
EARNINGS
Comprehensive income and profit ("Profit") for the nine months ended September
30, 2011 totaled $10,816,059 compared to Operations profit of $10,478,496 for
the nine months ended September 30, 2010. Profit for the nine months ended
September 30, 2011 exceeded dividends by $515,738 or $0.035 per share.
Comprehensive income and profit ("Profit") for the quarter ended September 30,
2011 totaled $3,807,725 compared to Operations profit of $3,876,688 for the
quarter ended September 30, 2010. Profit for the quarter ended September 30,
2011 exceeded dividends by $318,693 or $0.021 per share. The third quarter
Profit represents an annualized return on average Shareholders' equity of 10.54%
per annum. This return on Shareholders' equity equates to 954 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 third quarter totaled $0.234 per share ($0.078 per
share per month).
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Corporation's mortgage portfolio as at September 30, 2011 are as
follows:
-- The gross portfolio totaled $275,288,812 ($272,308,812 net of impairment
provision of $2,980,000).
-- Conventional first mortgages, being those mortgages with loan to values
less than 75%, comprise 70.1% of our total portfolio, and total
conventional mortgages with loan to values less than 75% comprise 83.5%
of our total portfolio.
-- Non-conventional mortgages and related debt investments total 16.5% of
the portfolio.
-- Approximately 54% of the portfolio matures within 12 months. This
results in a continuously revolving portfolio, allowing management to
assess market conditions.
-- The average face interest rate on the portfolio is 9.14% per annum.
-- Regionally, the portfolio is diversified approximately as follows:
Ontario 82.2%, Alberta 10.8%, British Columbia 6.3%, with the balance
(0.7%) being in other provinces.
-- Mortgage portfolio breakdown by investment is as follows:
Mortgage Portfolio Breakdown
Number of
Amount Mortgages Total Amount
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$0-$1,000,000 53 $ 27,575,817
$1,000,001-$2,000,000 22 34,850,584
$2,000,001-$3,000,000 12 29,527,028
$3,000,001-$4,000,000 6 20,592,746
$4,000,001-$5,000,000 10 44,383,946
$5,000,001 + 16 118,358,691
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Total 119 $ 275,288,812
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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 remain unchanged at $2,980,000, representing 1.08% of the gross loan
portfolio as at September 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 Nine Months Ended September 30, 2011 and 2010
(Unaudited)
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Balance Sheets
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Sept. 30, Dec. 31,
2011 2010 Jan. 1, 2010
(unaudited) (unaudited) (unaudited)
Assets
Cash - - $ 1,444,339
Amounts receivable and prepaid
expenses (note 5) $ 3,793,225 $ 2,371,563 1,706,383
Mortgage investments (note 6) 272,308,812 202,330,929 167,128,297
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$ 276,102,037 $ 204,702,492 $ 170,279,019
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Liabilities and Equity
Bank indebtedness (note 7) $ 39,344,291 $ 5,005,825 -
Accounts payable and accrued
liabilities 1,947,657 1,482,580 $ 410,064
Unearned income 587,388 372,514 202,481
Shareholder dividend and
unitholder distribution payable 1,163,396 2,127,845 2,543,120
Loans payable (note 8) 15,718,403 4,289,249 10,714,637
Convertible debentures (note 9) 72,534,817 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 131,295,952 66,906,816 37,773,728
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Net assets attributable to
unitholders (note 10) - - 132,505,291
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Shareholders' / Unitholders'
equity 144,612,173 138,117,502 -
Retained earnings / (deficit) 193,912 (321,826) -
Total equity 144,806,085 137,795,676 -
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Commitments (note 6)
Contingent liabilities (note 17)
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$ 276,102,037 $ 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
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Three Months Ended
Sept. 30/11 Sept. 30/10
(unaudited) (unaudited)
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Interest and fees earned (notes 3 (b) and 15) $ 5,549,965 $ 4,790,238
Less interest expense (note 16) 1,512,029 683,135
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Net interest and fee income 4,037,936 4,107,103
General and administrative expenses 230,211 230,415
Impairment loss on mortgages (note 6) - -
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230,211 230,415
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Operations profit for the period $ 3,807,725 $ 3,876,688
Finance costs
Change in fair value of the conversion
option of convertible debentures (note
4(e)(ii)) - -
Distributions to unitholders (note 10) - -
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- -
Comprehensive income and profit for the
period, and change in net assets attributable
to unitholders for the period, respectively $ 3,807,725 $ 3,876,688
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Profit per share (note 12)
Basic $ 0.257 N/A
Diluted $ 0.252 N/A
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FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Unaudited Interim Condensed Statements of Comprehensive Income
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Nine Months Ended
Sept. 30/11 Sept. 30/10
(unaudited) (unaudited)
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Interest and fees earned (notes 3 (b) and 15) $ 15,065,851 $ 12,839,797
Less interest expense (note 16) 3,697,121 1,788,601
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Net interest and fee income 11,368,730 11,051,196
General and administrative expenses 552,671 572,700
Impairment loss on mortgages (note 6) - -
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552,671 572,700
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Operations profit for the period $ 10,816,059 $ 10,478,496
Finance costs
Change in fair value of the conversion
option of convertible debentures (note
4(e)(ii)) - (321,826)
Distributions to unitholders (note 10) - (5,731,903)
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- (6,053,729)
Comprehensive income and profit for the
period, and change in net assets attributable
to unitholders for the period, respectively $ 10,816,059 $ 4,424,767
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Profit per share (note 12)
Basic $ 0.739 N/A
Diluted $ 0.731 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
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Sept. 30, Sept. 30,
2011 Dec 31, 2010 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 549,599 4,818,203 3,343,882
Conversion of debentures to shares 5,798,000 20,000 20,000
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Balance, end of period $ 143,691,101 $ 137,343,502 $ 135,639,181
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Equity component of convertible
debenture (note 9):
Balance, beginning of period $ 774,000 - -
Conversion of debentures to shares (128,928) - -
Reclassification of trust units
from liability to equity (note
10) - $ 544,000 $ 544,000
Equity component of debenture
issued during the period 276,000 230,000 230,000
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Balance, end of period $ 921,072 $ 774,000 $ 774,000
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Total Shareholders' / Unitholders'
equity $ 144,612,173 $ 138,117,502 $ 136,413,181
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Retained earnings / deficit
Retained earnings, beginning of
period $ (321,826) - -
Dividends / distributions to
shareholders /
unitholders (note 13) (10,300,321) ($8,503,941) ($4,136,591)
Comprehensive income and profit
for the period 10,816,059 8,182,115 4,424,767
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Retained earnings / (deficit), end
of period $ 193,912 $ (321,826) $ 288,176
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Shares / units issued and
outstanding (note 11) 14,915,341 14,377,333 14,231,004
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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 Nine Months Ended
Sept. 30/11 Sept. 30/10 Sept. 30/11 Sept. 30/10
(unaudited) (unaudited) (unaudited) (unaudited)
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Cash provided by (used
in):
Operating activities:
Profit for the period $3,807,725 $3,876,688 $10,816,059 $4,424,767
Adjustments for:
Distribution to
unitholders - - - 5,731,903
Change in fair value
of conversion option
for
Convertible
debentures - - - 321,826
Implicit interest rate
in excess of
Coupon rate -
convertible
debentures 21,531 13,729 66,253 40,558
Deferred finance cost
amortization
- convertible
debentures 115,632 43,099 307,899 127,890
Net changes in non-cash
items:
Increase in amounts
receivable and
prepaid expenses (596,769) (343,092) (1,421,662) (331,134)
Increase in accounts
payable
and accrued
liabilities 1,166,597 379,072 465,078 300,486
Increase in unearned
income 96,092 68,421 214,874 104,871
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4,610,808 4,037,917 10,448,501 10,721,167
Financing activities:
Proceeds from issuance
of shares 181,462 590,613 549,699 3,343,883
Proceeds from
convertible debenture
issued 25,738,000 - 25,738,000 -
Debenture offering
costs (1,261,167) - (1,261,167) -
Increase in bank
indebtedness 1,123,113 13,694,832 34,338,466 26,618,488
Increase (decrease) in
loans payable (net) 11,865,974 (870,730) 11,429,154 (4,036,983)
Increase (decrease) in
dividend and
distributions payable 18,417 4,614 (964,449) (1,433,102)
Dividends to
shareholders paid
during the period (3,489,032) (3,325,962) (10,300,321) (4,136,592)
Distribution to
unitholders - - - (5,731,903)
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Net cash flow from
financing activities 34,176,767 10,093,367 59,529,382 14,623,791
Investing activities:
Funding of mortgage
investments (95,129,712)(40,981,397) (186,602,507) (113,521,680)
Discharge of mortgage
investments 56,342,137 26,850,113 116,624,624 88,176,722
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Net cash flow used in
investing activities (38,787,575) (14,131,284) (69,977,883) (25,344,958)
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Increase in cash, being
cash, beginning and end
of period $- $- $- $-
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Cash flows from
operating activities
include:
Interest received $4,541,590 $3,840,328 $12,715,223 $10,992,098
Interest paid (note 16) $447,418 $265,927 $2,488,066 $1,281,329
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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 nine months ended September 30, 2011 and 2010
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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 were 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 November 1, 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 the equity-settled incentive
option plan is 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 intends to maintain its status as a mortgage
investment corporation and intends to 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 nine months ended September 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:
The following new or amended IFRS have been issued by IASB: IFRS 7, Financial
Instruments - Disclosures; IFRS 9, Financial Instruments; IFRS 10, Consolidated
Financial Statements; IFRS 11, Joint Arrangements; and IFRS 13, Fair Value
Measurements. The Corporation is assessing the impact of these standards.
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 three and nine months ended September 30, 2011, the
comparative information presented in these financial statements for the three
and nine months ended September 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
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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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three and nine months ended September 30, 2011 and 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of equity as previously reported under
Canadian GAAP to IFRS on September 30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
September 30, 2010
----------------------------------------------------------------------------
Assets
Cash - - -
Amounts receivable and prepaid
expenses $2,037,517 - $2,037,517
Mortgage investments 192,473,255 - 192,473,255
----------------------------------------------------------------------------
$194,510,772 - $194,510,772
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Bank indebtedness $25,174,149 - $25,174,149
Accounts payable and accrued
liabilities 710,550 - 710,550
Unearned income 307,352 - 307,352
Shareholder dividend and
unitholder distribution
payable 1,110,018 - 1,110,018
Loans payable 6,677,654 - 6,677,654
Convertible debentures (note
4(e)(ii)) 23,829,692 - 23,829,692
Conversion option of
convertible debenture (note
4(e)(ii)) - - -
----------------------------------------------------------------------------
Total liabilities excluding
net assets attributable to
unitholders 57,809,415 - 57,809,415
----------------------------------------------------------------------------
Net assets attributable to
unitholders (note 4(e)(i)) - - -
----------------------------------------------------------------------------
Shareholders' / Unitholders'
equity (note 4(e)(i)) 136,701,357 ($288,176) 136,413,181
Retained earnings / (deficit) - 288,176 288,176
----------------------------------------------------------------------------
Total equity 136,701,357 - 136,701,357
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$194,510,772 - $194,510,772
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of 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 September
30, 2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Three Months Ended September 30, 2010
----------------------------------------------------------------------------
Interest and fees earned $4,790,238 - $4,790,238
Less interest expense 683,135 - 683,135
----------------------------------------------------------------------------
Net interest and fee income 4,107,103 - 4,107,103
General and administrative
expenses 230,415 - 230,415
Impairment loss on mortgages
(note 4(e)(iii)) - - -
----------------------------------------------------------------------------
$230,415 - $230,415
----------------------------------------------------------------------------
Operations profit for the period 3,876,688 - 3,876,688
Finance costs
Change in the fair value of the
conversion option of convertible
debentures (note 4(e)(ii)) - - -
Distributions to unitholders
(note 4(e)(i)) - - -
----------------------------------------------------------------------------
Comprehensive income and profit
for the period, and changes in
net assets attributable to
unitholders for the period,
respectively $3,876,688 - $3,876,688
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following is a reconciliation of comprehensive income as previously
reported under Canadian GAAP to IFRS for the nine months ended September 30,
2010:
Effect of Restated
Canadian transition under
GAAP to IFRS IFRS
Nine Months Ended September 30, 2010
----------------------------------------------------------------------------
Interest and fees earned $12,839,797 - $12,839,797
Less interest expense 1,788,601 - 1,788,601
----------------------------------------------------------------------------
Net interest and fee income 11,051,196 - 11,051,196
General and administrative
expenses 572,700 - 572,700
Change in unrealized loss in value
of mortgages (4(e)(iii) - - -
Impairment loss on mortgages
(4(e)(iii) - - -
----------------------------------------------------------------------------
572,700 - 572,700
----------------------------------------------------------------------------
Operations profit for the period 10,478,496 - 10,478,496
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 $10,478,496 ($6,053,729) $4,424,767
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of comprehensive income as previously reported under Canadian
GAAP to IFRS for the year ended December 31, 2010:
Effect of Restated
Canadian transition under
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 statement of comprehensive income
for the three and nine months ended September 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 statement of
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 September 30, 2010 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
September 30, 2011, December 31, 2010 and January 1, 2010:
Sept. 30, 2011 Dec. 31, 2010 Jan. 1, 2010
----------------------------------------------------------------------------
Interest receivable $3,243,966 $1,803,224 $1,450,807
Prepaid expenses 122,848 111,800 160,903
Special income receivable 389,198 389,198 -
Fees receivable 37,213 67,341 94,673
----------------------------------------------------------------------------
Amounts receivable and prepaid
expenses $3,793,225 $2,371,563 $1,706,383
----------------------------------------------------------------------------
6. Mortgage investments:
The following is a breakdown of the mortgage investments as at September 30,
2011, December 31, 2010 and January 1, 2010:
Sept. 30, Dec. 31,
2011 2010 January 1, 2010
----------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------------
Conventional
first mortgages $192,918,638 70.1 $179,004,150 87.2 $135,464,430 79.8
Conventional non-
first mortgages 36,869,679 13.4 13,785,737 6.7 12,768,832 7.5
Special mortgage
investments 45,500,495 16.5 12,521,042 6.1 21,595,035 12.7
----------------------------------------------------------------------------
Total mortgage
investments (at
cost) $275,288,812 100.0 $205,310,929 100.0 $169,828,297 100.0
Impairment
provision (2,980,000) (2,980,000) (2,700,000)
----------------------------------------------------------------------------
Mortgage
investments $272,308,812 $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 September 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 majority of the loan investments are secured by real property, bear interest
at the weighted average rate of 9.14% (2010 - 9.30%) and mature between 2011 and
2015.
The un-advanced funds under the existing mortgage portfolio (which are
commitments of the Corporation) amounted to $32,432,685 as at September 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 $49,621,986
2012 109,550,055
2013 75,625,305
2014 35,517,508
2015 4,973,958
-----------------------------------
$275,288,812
-----------------------------------
-----------------------------------
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 $39,344,291 as at
September 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, 2012. Bank indebtedness is secured by a general security
agreement. The credit agreement contains certain financial covenants that must
be maintained. As at September 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 September 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
$26,440,534 as at September 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 $ 1,721,798
2012 -
2013 -
2014 13,843,759
2015 152,846
-----------------------------------
$15,718,403
-----------------------------------
-----------------------------------
9. Convertible debentures:
----------------------------------------------------------------------------
Nine Months
Ended Year-Ended
Sept. 30, 2011 Dec. 31, 2010 Jan. 1, 2010
------------------------------------------
Total Total Total
Debentures Debentures Debentures
----------------------------------------------------------------------------
Principal balance, Beginning of
period $53,628,903 $23,681,244 $23,681,244
----------------------------------------------------------------------------
Issued 24,200,834 29,680,929
----------------------------------------------------------------------------
Conversions (5,798,000) (20,000)
----------------------------------------------------------------------------
Adjustment to fair value of
conversion option 128,928
----------------------------------------------------------------------------
Implicit interest rate in excess
of coupon rate 66,253 57,689
----------------------------------------------------------------------------
Deferred finance cost amortization 307,899 228,941
----------------------------------------------------------------------------
Principal balance, end of period $72,534,817 $53,628,803 $23,681,244
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The breakdown of the Total Debentures for nine months ended September 30, 2011
presented in the above table is as follows:
----------------------------------------------------------------------------
6.00% 5.75% 5.40%
Convertible Convertible Convertible Total
Debentures Debentures Debentures
----------------------------------------------------------------------------
Principal balance,
Beginning of period $23,886,736 $29,742,167 - $53,628,903
----------------------------------------------------------------------------
Issued - - $24,200,834 24,200,834
----------------------------------------------------------------------------
Conversions (5,798,000) - - (5,798,000)
----------------------------------------------------------------------------
Adjustment to fair value
of conversion option 128,928 - - 128,928
----------------------------------------------------------------------------
Implicit interest rate in
excess of coupon rate 43,159 23,094 - 66,253
----------------------------------------------------------------------------
Deferred finance cost
amortization 127,890 162,104 17,905 307,899
----------------------------------------------------------------------------
Principal balance, end of
period $18,388,713 $29,927,365 $24,218,739 $72,534,817
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the second quarter of 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. 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
nine months of 2011, $5,798,000 of debentures were converted by the debenture
holders to 493,440 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.
In the third quarter of 2011, the Corporation completed a public offering of
25,738, 5.40% convertible unsecured subordinated debentures at a price of $1,000
per debenture for gross proceeds of $25,738,000. The debentures mature on
February 28, 2019 and interest is paid semi-annually on February 28 and August
31. The debentures are convertible at the option of the holder at any time prior
to the maturity date at a conversion price of $14.35. The debentures may not be
redeemed by the Corporation prior to August 31, 2014. On and after August 31,
2014, but prior to February 29, 2016, 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 February 29, 2016 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 September 30, 2011, debentures payables bear interest at weighted average
effective rate of 5.69% per annum.
Notwithstanding the carrying value of the convertible debentures, the principal
balance outstanding to the debenture holders is $75,827,000.
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 nine months ended September 30, 2010:
----------------------------------------------------------------------------
Units Amounts
----------------------------------------------------------------------------
Balance, beginning of period 13,896,829 $141,463,944
New units from exercise of options to June 8,
2010 100,500 994,950
New units issued up to June 8, 2010 under
Distribution Reinvestment Plan 22,671 248,778
Trust units re-classified as equity (June 9,
2010) (14,020,000) (142,707,672)
----------------------------------------------------------------------------
Balance, end of period - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
September 30, 2011:
----------------------------------------------------------------------------
Balance, beginning of period 14,377,333
New shares from conversion of debentures (note 9) 493,440
New shares issued during the period under
Dividend Reinvestment Plan 44,568
----------------------------------------------------------------------------
Balance, end of period 14,915,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September
30, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period - Trust units
re-classified as equity (June 9, 2010) 14,020,000
New units issued after June 9, 2010 211,004
----------------------------------------------------------------------------
Balance, end of period 14,231,004
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 September 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 nine months
ended September 30, 2010.
The following tables reconcile the numerators and denominators of the basic and
diluted profit per share for the three and nine months ended September 30, 2011
and the three months ended September 30, 2010.
Basic profit per share calculation:
----------------------------------------------------------------------------
Three months Nine months
ended ended
Sept. 30, 2011 Sept. 30, 2011
----------------------------------------------------------------------------
Numerator for basic profit per share:
Profit $3,807,725 $10,816,059
----------------------------------------------------------------------------
Denominator for basic profit per share:
Weighted average shares 14,840,699 14,625,573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic profit per share $0.257 $0.739
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted profit per share calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended ended
Sept. 30, 2011 Sept. 30, 2011
Numerator for diluted profit per share:
Profit $3,807,725 $10,816,059
Interest on convertible debentures 1,027,681 2,848,172
----------------------------------------------------------------------------
Net profit for diluted profit per share: $4,835,406 $13,664,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted profit per share:
Weighted average shares 14,840,699 14,625,573
Net units that would be issued
assuming debentures are converted 4,355,606 4,056,279
----------------------------------------------------------------------------
Diluted weighted average shares 19,196,305 18,681,852
----------------------------------------------------------------------------
Diluted profit per share $0.252 $0.731
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Pro forma per unit calculation
Management has chosen to disclose pro forma basic and diluted profit per unit
for the nine months ended September 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 Nine months
ended ended
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Numerator for basic operations profit per
share:
Operations profit $3,876,688 $10,478,496
----------------------------------------------------------------------------
Denominator for basic operations profit per
unit:
Weighted average units 14,204,798 14,041,297
----------------------------------------------------------------------------
Pro forma profit per unit $0.273 $0.746
----------------------------------------------------------------------------
Diluted pro forma profit per unit
calculation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended ended
Sept. 30, 2010 Sept. 30, 2010
----------------------------------------------------------------------------
Numerator for diluted pro forma profit per
share:
Operations profit $3,876,688 $10,478,496
Interest on convertible debentures 423,613 1,269,153
----------------------------------------------------------------------------
Net operations profit for diluted operations
profit per unit $4,300,301 $11,747,649
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator for diluted operations profit
per unit:
Weighted average units 14,204,798 14,041,297
Net units that would be issued:
Assuming the proceeds from incentive
options are used to repurchase units at
the average unit price 20,538 16,746
Assuming convertible debentures are
converted 2,080,340 2,080,340
----------------------------------------------------------------------------
Diluted weighted operations profit per unit 16,305,676 16,138,383
----------------------------------------------------------------------------
Diluted pro forma profit per unit $0.264 $0.728
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September 30,
2011 was $10,938,632 (2010 - $10,523,617).
For the nine months ended September 30, 2011, the Corporation recorded dividends
of $10,300,321 (2010 - $9,868,495) to its shareholders. Dividends were $0.702
(2010 - $0.702) 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 nine months ended September 30,
2011, this amount was $1,255,165 (2010 - $967,405), and for the three month
period ending September 30, 2011 this amount was $465,237 (2010 - $337,882), 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 $167,000 for the
nine month period ended September 30, 2011 (2010 - $129,000). 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
nine months ended September 30, 2011 was $691,579 (2010 - $642,816) and for the
three month period ended September 30, 2011 was $295,867 (2010 - $178,408) and
applicable special profit income for the nine months ended September 30, 2011
was $218,307 (2010 - $796,979) and for the three month period ended September
30, 2011 was $67,932 (2010 - $479,132).
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 $15,560,000 (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 Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Bank interest expense
$ 366,199 $ 190,904 $ 651,043 $ 312,187
Loans payable interest expense 118,149 68,618 197,906 207,261
Debenture interest expense 1,027,681 423,613 2,848,172 1,269,153
Interest expense $1,512,029 $ 683,135 $3,697,121 $1,788,601
Deferred finance cost
amortization - convertible
debenture (115,632) (43,099) (307,899) (127,890)
Implicit interest rate in excess
of coupon rate - convertible
debentures (21,532) (13,730) (66,253) (40,558)
Change in accrued interest (927,447) (360,379) (834,903) (338,824)
----------------------------------------------------------------------------
Cash interest paid $ 447,418 $ 265,927 $2,488,066 $1,281,329
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September 30, 2011 to be $73,655,835 (September 30, 2010 -
$25,079,544, December 31, 2010 - $56,305,890).
The fair value of the trust units as at September 30, 2010 has been determined
based on the September 30, 2010 closing price of the units of the Corporation on
the TSX. The fair value has been estimated at September 30, 2010 to be
$170,772,048. The fair value of the shares as at September 30, 2011 has been
determined based on the September 30, 2011 closing price of the shares of the
Corporation on the TSX. The fair value has been estimated at September 30, 2011
to be $186,590,916. 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. Convertible debentures
have fixed interest rates.
At September 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 $275,288,812 ($4,400) $97,819
Financial liabilities
Bank indebtedness 39,344,291 98,361 (98,361)
Accounts payable and accrued
liabilities 1,947,657 - -
Unearned income 587,388 - -
Shareholder dividend payable 1,163,396
Loans payable 15,718,403 (34,059) 34,059
-------------------------
Total increase (decrease) $59,902 $33,517
-------------------------
-------------------------
At September 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 $192,473,255 $(39,013) $124,325
Financial liabilities
Bank indebtedness 25,174,149 188,806 (188,806)
Accounts payable and accrued
liabilities 710,550
Unearned income 307,352
Unitholder distribution payable 1,110,018
Loans payable 6,677,654 (33,348) 33,348
-------------------------
Total increase (decrease) $116,445 ($31,133)
-------------------------
-------------------------
(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 September 30, 2011, the Corporation had not utilized its full leverage
availability, being a maximum of 60% of its conventional first mortgage
investments. Un-advanced committed funds under the existing mortgage portfolio
amounted to $32,432,685 as at September 30, 2011 (2010 - $14,887,396). 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, 2012. If the loan is not renewed on September 30,
2012, the terms of the facility allow for the Corporation to repay the balance
owed on September 30, 2012 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 September 30, 2011 are due as follows:
Total Less than 1 1 - 3 4 - 6 years
year years
-----------------------------------------------------
Bank indebtedness $ 39,344,291 $ 39,344,291
Loans payable 15,718,403 1,721,799 $ 13,996,604
Convertible debentures 75,827,000 $ 18,646,000 57,181,000
-----------------------------------------------------
Subtotal - Liabilities 130,889,694 41,066,090 18,646,000 71,177,604
Future advances under
mortgages 32,432,686 32,432,686
-----------------------------------------------------
Liabilities and
contractual
obligations $ 163,322,380 $ 73,498,776 $ 18,646,000 $ 71,177,604
-----------------------------------------------------
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. Financial statement review:
These unaudited interim condensed financial statements have not been reviewed by
the Corporation's auditors.
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