Firm Capital Mortgage Investment Corporation Announces Results

TORONTO, ONTARIO--(Marketwire - March 10, 2011) - Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX:FC), today released its financial statements for its predecessor entity Firm Capital Mortgage Investment Trust (the "Trust") for the fiscal year ended December 31, 2010.

EARNINGS & RETURN ON EQUITY

Net earnings for the year ended December 31, 2010 totaled $14,235,843 compared to $14,453,196 for the year ended December 31, 2009. For the fourth quarter ended December 31, 2010, net earnings amounted to $3,757,347 compared to $3,285,321 for the same period ended in 2009. 2010 basic weighted average net earnings per unit of $1.008 compared to $1.041 per unit for 2009. The 2010 net earnings represent an annualized return on average Unitholders' equity of 10.52% per annum. This return on Unitholders' equity equates to 947 basis points per annum over the average One Year Government of Canada Treasury Bill yield for the year 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.

DISTRIBUTION OVERVIEW 2010:

Monthly distributions for 2010 equaled $.078 per month, for a total $0.936 per unit, which, together with the year end Special Distribution of $0.070, represents total distributions for 2010 of $1.006 per unit, a decrease from 2009 distributions of $1.041 per unit.

INVESTMENT PORTFOLIO TURNS:

In 2010 annual mortgages discharged was $133 million with new mortgages funded of $169 million. This represents a significant turn of the portfolio enabling management to re-invest the funds in evolving market conditions. As the portfolio revolves, the Trust is able to manage the portfolio size and return on equity based on the pricing of new investments.

MORTGAGE PORTFOLIO HIGHLIGHTS:

Details on the Trust's mortgage portfolio as at December 31, 2010 are as follows:

• Total Gross Mortgage Portfolio equals $205,310,929
• Conventional first mortgages, being those mortgages with loan to values less than 75%, comprise 87.2% of our total portfolio, and total Conventional mortgages with loan to values under 75% comprise 93.9% of our total portfolio.
• Special Profit Mortgage Investments total 6.1% of the portfolio.
• Approximately 70% 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 9.21% per annum.
• Regionally, the portfolio is diversified approximately as follows: Ontario 75.9%, Alberta 15.2%, British Columbia 3.1%, with the balance (5.8%) being in other provinces.
• Mortgage portfolio breakdown by loan size is as follows:

Amount	Number of Mortgages		Total Amount
$0-$1,000,000	44		21,699,044
$1,000,001-$2,000,000	26		37,249,909
$2,000,001-$3,000,000	13		33,347,737
$3,000,001-$4,000,000	8		28,610,069
$4,000,001-$5,000,000	8		35,830,295
$5,000,001-$10,000,000	8		48,573,875
Total	107	$	205,310,929

LOAN LOSS PROVISION UPDATE:

Management has always taken a proactive approach to allowance provision reserves. This is a prudent approach to protecting our Shareholders' equity. Loan loss provisions at the start of the fiscal year amounted to $2,700,000. During 2010 a further $280,000 was added to the provision for a total of $2,980,000, representing 1.45% of the gross loan portfolio.

FINANCING UPDATE:

The Corporation is pleased to announce that at the end of September 2010 its principal banker renewed its warehousing credit facility for a further year to mature September 30, 2011 with a right at maturity to lock in any balance outstanding for a second year term, should a renewal not be concluded at the end of the first year renewal. The Corporation currently has $21.4 million drawn on its credit facility.

UNRECOGNIZED INCOME COLLECTED:

As at December 31, 2010, the Trust has banked non-refundable fee income of $372,514, which will be recognized as income over the term of the corresponding investments.

DIVIDEND AND SHARE PURCHASE PLAN:

The Corporation has in place a Dividend Reinvestment Plan (DRIP) and Unit Purchase Plan that is available to its Shareholders. The plans allows participants to have their monthly cash dividends reinvested in additional shares and grants participants the right to purchase, without commission, additional shares, 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 by pursuing a strategy of growth through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to 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 distributions, 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 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.

Audited Financial Statements of

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Years Ended December 31, 2010 and 2009

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Balance Sheets

December 31, 2010 and 2009

			2010		2009
Assets
Cash			$	-	$	1,444,339
Amounts receivable and prepaid expenses (note 4)				2,371,563		1,706,383
Mortgage investments (note 5)				202,330,929		167,128,297
			$	204,702,492	$	170,279,019
Liabilities and Unitholders' Equity
Liabilities:
	Bank indebtedness (note 6)		$	5,005,825	$	-
	Accounts payable and accrued liabilities			1,482,580		410,064
	Unearned income			372,514		202,481
	Unitholder distribution payable			2,127,845		2,543,120
	Loans payable (note 7)			4,289,249		10,714,637
	Convertible debentures (note 8)			53,628,803		23,681,244
				66,906,816		37,551,546
Unitholders' equity (note 9):				137,795,676		132,727,473
	Issued and outstanding:
		14,377,333 units (2009 - 13,896,829)
Commitments (note 5)
Contingent liabilities (note 15) Subsequent events (note 20)
			$	204,702,492	$	170,279,019
See accompanying notes to financial statements.
On Behalf of The Directors: "Eli Dadouch" "Jonathan Mair"

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Statements of Earnings

Years Ended December 31, 2010 and 2009

			2010		2009
Interest and fees earned, net of Trust Manager interest allocation (note 13)			$	18,703,612	$	18,401,481
Less interest expense (note 14)				2,877,078		2,820,560
Net interest and fee income				15,826,534		15,580,921
Expenses:
	General and administrative			1,310,691		827,725
	Change in unrealized loss in value of mortgages (note 5)			280,000		300,000
				1,590,691		1,127,725
Net earnings for the year			$	14,235,843	$	14,453,196
Net earnings per unit (note 10)
		Basic	$	1.008	$	1.041
		Diluted	$	0.984	$	1.011

See accompanying notes to financial statements.

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Statements of Changes in Unitholders' Equity

Years Ended December 31, 2010 and 2009

	2010		2009
Trust units (note 9):
Balance, beginning of year	$	132,355,149	$	131,636,584
Proceeds from issuance of units		4,818,103		204,583
Conversion of debentures to units		20,000		513,982
Balance, end of year	$	137,193,252	$	132,355,149
Equity component of convertible debentures (note 8):
Balance, beginning of year	$	372,324	$	380,482
Equity component of debenture issued during the year		230,000		-
Conversion of debenture to units		-		(8,158	)
Balance, end of year	$	602,324	$	372,324
Cumulative earnings:
Balance, beginning of year	$	95,327,964	$	80,874,768
Net earnings for the year		14,235,843		14,453,196
Balance, end of year	$	109,563,807	$	95,327,964
Cumulative distributions to unitholders:
Balance, beginning of year	$	95,327,964	$	80,874,768
Distributions to unitholders (note 11)		14,235,843		14,453,196
Balance, end of year	$	109,563,807	$	95,327,964
Total unitholders' equity	$	137,795,676	$	132,727,473
Units issued and outstanding (note 9)		14,377,333		13,896,829

See accompanying notes to financial statements.

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Statements of Cash Flows

Years Ended December 31, 2010 and 2009

			2010			2009
Cash provided by (used in):
Operating activities:
	Net earnings		$	14,235,843		$	14,453,196
	Net changes in non-cash items
		Change in unrealized loss in value of mortgages		280,000			300,000
		Implicit interest rate in excess of coupon rate – convertible debentures		57,689			51,218
		Deferred finance cost amortization – convertible debentures		228,941			170,989
		(Increase) decrease in amounts receivable  and prepaid expenses		(665,180	)		279,729
		Increase (decrease) in accounts payable and accrued liabilities		1,072,516			(208,477	)
		Increase (decrease) in unearned income		170,033			(73,375	)
				15,379,842			14,973,280
Financing activities:
	Proceeds from issuance of units			4,818,103			196,425
	Proceeds from convertible debenture issued			31,443,000
	Debenture offering costs			(1,531,971	)
	Increase (decrease) in bank indebtedness			5,005,825			(27,337,813	)
	Decrease in loans payable			(6,425,388	)		(27,014,591	)
	Distributions to unitholders paid during year			(14,651,118	)		(15,340,466	)
				18,658,450			(69,496,445	)
Investing activities:
	Funding of mortgage investments			(168,832,314	)		(94,267,430	)
	Discharge of mortgage investments			133,349,682			150,234,934
				(35,482,632	)		55,967,504
Increase (decrease) in cash			$	(1,444,339	)	$	1,444,339
Cash, beginning of year				1,444,339			-
Cash, end of year			$	-		$	1,444,339
Supplemental cash flow information
	Interest paid (note 14)		$	2,230,662		$	2,719,095

See accompanying notes to financial statements.

FIRM CAPITAL MORTGAGE INVESTMENT TRUST

Notes to Financial Statements

Years Ended December 31, 2010 and 2009

1. Organization of Trust:

Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end trust created for the benefit of the unitholders, pursuant to the Declaration of Trust dated July 13, 1999, as amended and restated.

Pursuant to the Declaration of Trust, the Trust's mortgage banker is Firm Capital Corporation and the trust manager is FC Treasury Management Inc.

2. Summary of significant accounting policies:

The Trust's accounting policies and its standards of financial disclosure are in accordance with Canadian generally accepted accounting principles ("GAAP").

(a) Use of estimates:

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year.

The most significant estimates that the Trust is required to make relate to the fair value of the mortgage investments (notes 2(b) and 5). 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, volatile equity markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of fair value 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.

(b) Mortgage investments:

Mortgage investments are stated at estimated fair value with changes in fair value reflected in net earnings in accordance with Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline 18 and CICA Handbook Section 3855. Fair value is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of Mortgage investments approximates their carrying values due to the fact that the majority of the mortgages are (i) short-term in nature with terms of 12 months or less, (ii) repayable in full, at any time at the option of the borrower prior to maturity without penalty, and (iii) have minimum specified interest rates for mortgages with floating rates linked to bank prime. When, in management's opinion, collection of principal on a particular mortgage investment is no longer reasonably assured, the fair value of the mortgage investment is reduced to reflect the estimated net realizable recovery from the collateral securing the mortgage loan.

(c) Convertible debentures:

The Trust's convertible debentures are classified into debt and equity components. The equity component represents the estimated value of the conversion rights of the holders.

(d) Revenue recognition:

(i) Interest and fee income:

Interest income is accounted for on the accrual basis, and is recorded net of the Trust Manager interest spread described in note 13. Commitment fees received are amortized over the expected term of the mortgage.

(ii) Special mortgage investments:

Special profit participations earned by the Trust on special mortgage investments are recognized and included in interest and fees earned only once the receipt of such amounts is certain.

(e) Unit-based compensation:

The Trust has unit-based compensation plans (i.e. incentive option plan) which are described in note 9. The Trust accounts for its unit-based compensation using the fair value method, under which compensation expense is measured at the grant date and recognized over the vesting period.

(f) Basic and diluted net earnings per unit:

Basic net earnings per unit is computed by dividing net earnings for the period by the weighted average number of units outstanding during the year. Diluted net earnings per unit is computed similarly to basic net earnings per unit, except that the weighted average number of units outstanding is increased to include additional units from the assumed exercise of incentive option units and the conversion of the convertible debentures, if dilutive. The number of additional units is calculated by assuming that outstanding incentive options were exercised and that proceeds from such exercises were used to acquire units at the average market price during the year. The additional units would also include those units issuable upon the assumed conversion of the convertible debentures, with an adjustment to net earnings for the year to add back any interest paid to the debenture holders. These common equivalent units are not included in the calculation of the weighted average number of units outstanding for diluted earnings per unit when the effect would be anti-dilutive.

(g) Comprehensive income:

CICA Section 1530, "Comprehensive Income", requires the presentation of a Statement of Comprehensive Income where certain gains and losses that would otherwise be recorded as part of net earnings are presented in other comprehensive income until it is considered appropriate to recognize it in net earnings. The Trust does not have any material income from these sources and as such a Statement of Comprehensive Income has not been included in these financial statements.

(h) Financial instruments – recognition and measurement:

CICA Section 3855, "Financial Instruments – Recognition and Measurement", establishes standards for recognizing and measuring financial assets and financial liabilities including non-financial derivatives. In accordance with this standard, the Trust is required to classify its financial assets as one of the following: (i) held-to-maturity, (ii) loans and receivables, (iii) held for trading or (iv) available for sale. All financial liabilities must be classified as: (i) held for trading or (ii) other liabilities. The Trust's designations on adoption are as follows:

Cash and amounts receivable are classified as "loans and receivables" and are measured at amortized cost.

Bank indebtedness, Accounts payable and accrued liabilities, Unitholder distribution payable, Loans payable and Convertible debentures are classified as "other liabilities" and are measured at fair value on inception and amortized using the effective interest rate method. 

3. Accounting changes:

Future accounting changes:

The Canadian Accounting Standards Board ("AcSB") confirmed that the adoption of International Financial Reporting Standards ("IFRS") would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards are expected to be effective for the Trust in the first quarter of 2011.

The Trust is currently evaluating the impact of adopting IFRS and its primary accounting principles and developing its change over plan.

4. Amounts receivable and prepaid expenses:

The following is a breakdown of amounts receivable and prepaid expenses as at December 31, 2010 and 2009:

	2010		2009
Interest receivable	$	1,803,224	$	1,450,807
Prepaid expenses		111,800		160,903
Special income receivable		389,198		-
Fees receivable		67,341		94,673
Amounts receivable and prepaid expenses	$	2,371,563	$	1,706,383

5. Mortgage investments:

The following is a breakdown of the mortgage investments as at December 31, 2010 and 2009:

	2010 Amount			%	2009 Amount			%
Conventional first mortgages	$	179,004,150		87.2	$	135,464,430		79.8
Conventional non-first mortgages		13,785,737		6.7		12,768,832		7.5
Special mortgage investments		12,521,042		6.1		21,595,035		12.7
Total mortgage investments (at cost)	$	205,310,929		100.0	$	169,828,297		100.0
Fair value adjustment		(2,980,000	)			(2,700,000	)
Fair value	$	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 Trust.

Mortgages are stated at fair value as discussed in Note 2(b). The fair value adjustment in the amount of $2,980,000 as at December 31, 2010 (2009 - $2,700,000) 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.

In June 2009, the AcSB amended CICA Handbook Section 3862, Financial Instruments – Disclosures, by providing enhanced disclosure requirements for fair value measurements of financial instruments and liquidity risks. HB 3862 establishes a three-level valuation hierarchy for disclosure of financial instruments measured at fair value based upon the degree to which the inputs used to value an asset or liability as of the measurement date are observable:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The Trust's mortgage investments are measured at fair value using inputs not based on observable data. As a result, all mortgage investments have been classified in Level 3 of the valuation hierarchy.

A reconciliation of Level 3 assets is as follows:

	2010			2009
Mortgage investment balance, beginning of year	$	167,128,297		$	223,395,801
Funding of mortgage investments		168,832,314			94,267,430
Discharge of mortgage investments		(133,349,682	)		(150,234,934	)
Change in unrealized loss included in earnings		(280,000	)		(300,000	)
Mortgage investment balance, end of year	$	202,330,929		$	167,128,297

The mortgages are secured by real property, bear interest at the weighted average rate of 9.21% (2009 – 10.05%) and mature between 2011 and 2015.

The unadvanced funds under the existing mortgage portfolio (which are commitments of the Trust) amounted to $18,406,862 as at December 31, 2010 (2009 - $12,709,686).

 Principal repayments based on contractual maturity dates are as follows:

2011		134,653,814
2012		56,204,179
2013		6,400,718
2014		6,821,210
2015 and thereafter		1,231,008
	$	205,310,929

Borrowers who have open mortgages have the option to repay principal at any time prior to the maturity date.

6. Bank indebtedness:

The Trust has entered into credit arrangements of which $5,005,825 as at December 31, 2010 (2009 - $NIL) has been drawn. Interest on bank indebtedness is predominately charged at a formula rate that varies with bank prime and may have a component with a fixed interest rate established based on a formula linked to Bankers Acceptance rates. The credit arrangement comprises a revolving operating facility, a component of which is a demand facility and a component of which has a committed term to September 30, 2011. Bank indebtedness is secured by a general security agreement. The credit agreement contains certain financial covenants that must be maintained. As at December 31, 2010 and 2009, the Trust was in compliance with all financial covenants.

7. 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 December 31, 2010 (2009 – 2.50% to 7.55%). The Trust's principal balance outstanding under the mortgages for which a first priority charge has been granted is $5,392,156 as at December 31, 2010 (2009 - $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	$	2,092,123
2014		2,040,968
2015		156,158
	$	4,289,249

8. Convertible debentures:

On April 24, 2006, the Trust completed a public offering of 25,000 6% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $25,000,000. The debentures mature on June 30, 2013 and interest is paid semi-annually on June 30 and December 31. The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $11.75. The debentures may not be redeemed by the Trust prior to June 30, 2009. On and after June 30, 2009, but prior to June 30, 2010, the debentures were redeemable at a price equal to the principal, plus accrued interest, at the Trust's option on not more than 60 days and not less than 30 days notice, provided that the weighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after June 30, 2010 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Trust's option on not more than 60 days and not less than 30 days prior notice. On redemption or at maturity, the Trust 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 units of the Trust obtained by dividing the principal amount being repaid by 95% of the weighted average trading price of the units for the 20 consecutive trading days ending on the fifth trading day preceding the redemption or maturity date.

The convertible debentures were allocated into liability and equity components on the date of issuance as follows:

Liability	$	24,619,518
Equity		380,482
Principal	$	25,000,000

On January 6, 2009, $536,000 of debentures were converted by the debenture holders to 45,617 units of the Trust. On July 9, 2010, $20,000 of debentures were converted by the debenture holders to 1,702 units of the Trust.

In the fourth quarter of 2010, the Trust 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 Trust 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 Trust's option on not more than 60 days and not less than 30 days notice, provided that the weighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days 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 Trust's option on not more than 60 days and not less than 30 days prior notice. On redemption or at maturity, the Trust 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 units of the Trust obtained by dividing the principal amount being repaid by 95% of the weighted average trading price of the units for the 20 consecutive trading days ending on the fifth trading day preceding the redemption or maturity date.

The convertible debentures were allocated into liability and equity components on the date of issuance as follows:

Liability	$	31,213,000
Equity		230,000
Principal	$	31,443,000

The accretion of the liability component of the convertible debentures, which increases the liability component from the initial allocation on the date of issuance, is included in interest expense.

	2010			2009
Liability, beginning of year	$	23,681,244		$	23,973,019
Issuance of new debentures, net of deferred financing costs		29,680,929
Conversion of debentures to equity		(20,000	)		(513,982	)
Implicit interest rate in excess of coupon rate		57,689			51,218
Amortization of debenture financing costs		228,941			170,989
Liability, end of period	$	53,628,803		$	23,681,244

Deferred financing costs relating to the issuance of convertible debentures are not presented as a separate asset on the balance sheet and are netted against the carrying value of the convertible debenture. 

Notwithstanding the carrying value of the convertible debentures, the principal balance outstanding to the debenture holders is $55,887,000 (2009 - $24,464,000).

9. Unitholders' equity:

The beneficial interests in the Trust are represented by a single class of units which are unlimited in number. Each unit carries a single vote at any meeting of unitholders and carries the right to participate pro rata in any distributions.

(a) The following units are issued and outstanding:

	2010	2009
Balance, beginning of year	13,896,829	13,832,219
New units from conversion of debentures (note 8)	1,702	45,617
New units from exercise of options	427,500	-
New units issued during the year under Distribution Reinvestment Plan	51,302	18,993
Balance, end of year	14,377,333	13,896,829

(b) Incentive option plan:

In 2005, 415,000 options were issued to trustees, directors, officers and employees of the Trust Manager and Mortgage Banker, with an exercise price of $9.90 per unit. The options were exercisable any time up to November 17, 2010. The options vested on the grant date. At December 31, 2010, 415,000 unit options have been exercised.

In 2008, 35,000 options were issued to trustees with an exercise price of $9.94. The options were exercisable any time up to October 7, 2013. The fair value of those unit options, given the small number of options issued and given the low volatility in the Trust's unit trading price, is not material and therefore no related compensation expense has been recorded by the Trust. At December 31, 2010, 35,000 options have been exercised.

As at December 31, 2010, no options remained outstanding (2009 – 427,500)

(c) Distribution reinvestment plan and direct unit purchase plan:

The Trust has a distribution reinvestment plan and direct unit purchase plan for its unitholders which allows participants to reinvest their monthly cash distributions in additional trust units at a unit price equivalent to the weighted average price of units for the preceding five day period.

10. Per unit amounts:

The following table reconciles the numerators and denominators of the basic and diluted earnings per unit.

Basic earnings per unit calculation:

		2010		2009
Numerator for basic earnings per unit:
	Net earnings	$	14,235,843	$	14,453,196
Denominator for basic earnings per unit:
	Weighted average units		14,119,651		13,880,979
Basic earnings per unit		$	1.008	$	1.041
Diluted earnings per unit calculation:
			2010		2009
Numerator for diluted earnings per unit:
	Net earnings	$	14,235,843	$	14,453,196
	Interest on convertible debentures (note 14)		2,135,889		1,690,488
Net earnings for diluted earnings per unit		$	16,371,732	$	16,143,684
Denominator for diluted earnings per unit:
	Weighted average units		14,119,651		13,880,979
	Net units that would be issued:
	Assuming the proceeds from options are used to repurchase units at the average unit price		-		-
	Assuming convertible debentures are converted		2,513,775		2,082,043
Diluted weighted average units			16,633,426		15,963,022
Diluted earnings per unit		$	0.984	$	1.011

11. Distributions:

The Trust makes distributions to the unitholders on a monthly basis on or about the 15^th day of each month. The Declaration of Trust provides that the Trust intends to distribute to unitholders by year end at least 100% of the net income of the Trust determined in accordance with the Income Tax Act (Canada), subject to certain adjustments. The net income of the Trust determined in accordance with the Income Tax Act (Canada), for the year ended December 31, 2010 was $14,212,874 (2009 - $13,912,108).

For the year ended December 31, 2010, the Trust recorded distributions of $14,235,843 (2009 - $14,453,196) to its unitholders. Distributions were $1.006 (2009 - $1.041) per unit.

12. Income taxes:

The Trust is taxed as a mutual fund trust for income tax purposes. Pursuant to the Declaration of Trust, the Trust intends to distribute its income for income tax purposes each year to such an extent that it will not be liable for income tax under Part 1 of the Income Tax Act (Canada). For financial statement reporting purposes, the tax deductibility of the Trust's distributions is treated as an exemption from taxation as the Trust expects to distribute all of its income to unitholders.

On June 22, 2007, Bill C-52, which significantly modifies the income tax rules applicable to certain publicly traded or listed trusts and partnerships, received Royal Assent. In particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to income earned by (and distributions made by) a corporation. These rules will be effective for the 2007 taxation year with respect to trusts which commence public trading after October 31, 2006. For trusts which were publicly traded or listed prior to November 1, 2006, the application of the rules will be delayed to the earlier of (i) the trust's 2011 taxation year, and (ii) a taxation year of the trust in which the trust exceeds normal growth as determined by reference to the normal growth guidelines, as amended from time to time, unless that excess arose as a result of a prescribed transaction. As currently structured, the Trust will be subject to these new rules, once applicable.

On December 15, 2006, the Department of Finance (Canada) released the normal growth guidelines for income trusts and other flow-through entities that qualify for the four-year transitional relief. The guidance, as amended from time to time, establish objective tests with respect to how much an income trust is permitted to grow without jeopardizing its transitional relief. If the limits described in the normal growth guidelines are exceeded, the Trust may lose its transitional relief and thereby become immediately subject to the new rules. The Trust has not exceeded these limits.

The Trust has determined that the new rules adversely affect the marketability of the Trust's units, and the Trust's distributable cash. As such on January 1, 2011, the Trust completed its conversion to a corporation and subsequent to December 31, 2010 operates as a dividend paying Mortgage Investment Corporation under the Income Tax Act (Canada) to maintain its flow through status. The costs for the conversion of the Trust to a Corporation ($387,622) were expensed by the Trust in the fourth quarter of 2010.

13. 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 Trust Manager (a company controlled by some of the trustees), pursuant to the Trust Management Agreement and Declaration of Trust, receives an allocation of mortgage interest referred to as Trust Manager spread interest, calculated as 0.75% per annum of the Trust's daily outstanding performing mortgage investment balances. For the year ended December 31, 2010 this amount was $1,394,583 (2009 - $1,442,176), and was deducted from interest and fees earned.

The Mortgage Banker (a company controlled by a Trustee), pursuant to the Mortgage Banking Agreement and Declaration of Trust, receives certain fees from the borrowers as follows: loan servicing fees equal to 0.10% per annum on the principal amount of each of the Trust's mortgage investments; 75% of all the commitment and renewal fees generated from the Trust's mortgage investments and 25% of all the special profit income generated from the non-conventional mortgage investments after the Trust has yielded a 10% per annum return on its investments. Interest and fee income is net of the loan servicing fees paid to the Mortgage Banker of approximately $186,000 for the year ended December 31, 2010 (2009 - $192,000). The Mortgage Banker also retains all overnight float interest and incidental fees and charges payable by borrowers on the Trust's mortgage investments. The Trust's share of commitment and renewal fees recorded in income for the year ended December 31, 2010 was $825,427 (2009 - $833,226) and applicable special profit income for the year ended December 31, 2010 was $1,892,342 (2009 - $463,890).

The Trust Management Agreement and Mortgage Banking Agreement contains provisions for the payment of termination fees to the Trust Manager and Mortgage Banker in the event that the respective agreements are either terminated or not renewed.

Several of the Trust's mortgages are shared with other investors of the Mortgage Banker, which may include members of management of the Mortgage Banker and/or Officers or Trustees of the Trust. The Trust ranks equally with other members of the syndicate as to receipt of principal and income.

Mortgages totalling $8,760,000 (2009 - $1,760,000) were issued to borrowers controlled by certain Trustees of the Trust. Each mortgage is dealt with in accordance with the Trust's existing investment and operating policies and is personally guaranteed by the related Trustee.

14. Interest expense:

	2010			2009
Bank interest expense	$	483,907		$	333,285
Loans payable interest expense		257,282			796,787
Debenture interest expense		2,135,889			1,690,488
Interest expense	$	2,877,078		$	2,820,560
Deferred finance cost amortization – convertible Debenture		(228,941	)		(170,989	)
Implicit interest rate in excess of coupon rate - Convertible debentures		(57,689	)		(51,218	)
Change in accrued interest		(359,786	)		120,742
Cash interest paid	$	2,230,662		$	2,719,095

15. Contingent liabilities:

The Trust is involved in certain litigation arising out of the ordinary course of investing in mortgages. Although such matters cannot be predicted with certainty, management believes the claims are without merit and does not consider the Trust's exposure to such litigation to have an impact on these financial statements.

16. Fair value of financial instruments:

The fair value of amounts receivable, bank indebtedness, accounts payable and accrued liabilities and unitholder distribution 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) are 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 has been determined based on the December 31, 2010 closing price of units of the Trust on the TSX. The fair value has been estimated at December 31, 2010 to be $56,305,890 (2009 - $24,708,640).

17. Risk management:

(a) Interest rate risk:

The Trust'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 Trust's debt comprises bank indebtedness and loans payable, with the majority of such debt bearing interest based on bank prime and/or based on short term Bankers Acceptance interest rates as a benchmark.

At December 31, 2010 and December 31, 2009 if interest rates at that date had been 100 basis points lower or higher, with all other variables held constant, net income for the period would be affected as follows:

		2010					2009
		Carrying	Interest Rate Risk				Carrying	Interest Rate Risk
		Value	-1%		+1%		Value	-1%		+1%
Financial assets
	Mortgage investments	$202,330,929	($20,800	)	$126,487		$167,128,297	($54,725	)	$60,164
Financial liabilities
	Loans payable	4,289,249	20,921		(20,921	)	10,714,637	74,409		(74,409	)
Total increase (decrease)			$121		($105,566	)		$19,684		($14,245	)

(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 Trust's mortgage investments. The Trust mitigates this risk by adhering to the investment and operating policies set out in its Declaration of Trust.

The Trust's maximum exposure to credit risk is represented by the fair values of amounts receivable and mortgage investments. 

(c) Liquidity risk:

The Trust'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 Trust'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 December 31, 2010, the Trust had not utilized its full leverage availability, being a maximum of 60% of its first mortgage investments. Un-advanced committed funds under the existing mortgage portfolio amounted to $18,406,862 as at December 31, 2010 (2009 - $12,709,686). These commitments are anticipated to be funded from the Trust's credit facility and borrower repayments. The Trust has a revolving line of credit with its principal banker to fund the timing differences between mortgage advances and mortgage repayments. The bank borrowing line is a committed facility with a maturity date of September 30, 2011. If the loan is not renewed on September 30, 2011, the terms of the facility allow for the Trust to repay the balance owed on September 30, 2011 within twelve 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 Trust'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 Trust'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 Trust's portfolio and only have to be repaid once the specific loan is paid out by the Borrower.

If the Trust is unable to continue to have access to its bank borrowing line and loans payables, the size of the Trust'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 December 31, 2010 are due as follows:

	Total		Less than 1 year		1 – 3 years		4 – 6 years
Bank indebtedness	$	5,005,825	$	5,005,825
Loans payable		4,289,249		2,092,123				2,197,126
Convertible debenture		55,887,000				24,444,000		31,443,000
Subtotal – Liabilities	$	65,182,074	$	7,097,948	$	24,444,000	$	33,640,126
Future advances under mortgages		18,406,862		18,406,862
Liabilities and contractual obligations	$	83,588,936	$	25,504,810	$	24,444,000	$	33,640,126

The bank indebtedness and loans payable are liabilities resulting from the funding of the Trust'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 Trust's mortgage portfolio are anticipated to be funded from the Trust's credit facility and borrower mortgage repayments. Upon funding of same, the funded amount forms part of the Trust's mortgage investments.

(d) Capital risk management:

The Trust defines capital as being the funds raised through the issuance of publicly traded securities of the Trust. The Trust's objectives when managing capital/equity are:

• to safeguard the Trust's ability to continue as a going concern, so that it can continue to provide returns for unitholders, and
• to provide an adequate return to unitholders by obtaining an appropriate amount of debt, commensurate with the level of risk.

The Trust 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 Trust may issue new units or repay bank indebtedness (if any) and loans payable. 

The Trust's Declaration of Trust incorporates various mortgage investing restrictions and investment operating policies. The Trust cannot invest more than 5% of the amount of its capital in any single conventional first mortgage and cannot 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. The Trust may only borrow funds in order to acquire or invest in mortgage investments in amounts up to 60% of the book value of the Trust's portfolio of conventional first mortgages. The Trust has complied with all such restrictions in its Declaration of Trust.

The Trust 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 Trust has complied with all such Bank covenants.

19. Comparative figures:

Certain 2009 comparative figures have been reclassified to conform with the financial statement presentation adopted in 2010.

20. Subsequent events:

On January 1, 2011, the Trust completed an approved plan of arrangement pursuant to which the Trust was reorganized into Firm Capital Mortgage Investment Corporation, which will operate as a Mortgage Investment Corporation under the Income Tax Act (Canada) (refer to note 12).