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
----------------------------------------------------------------------------
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.
Contacts: Firm Capital Mortgage Investment Corporation Eli
Dadouch President & Chief Executive Officer (416)
635-0221www.firmcapital.com
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