TORONTO, ONTARIO--(Marketwire - Aug. 5, 2011) - Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX:FC), today released its financial statements for the second quarter ended June 30, 2011.
EARNINGS
Comprehensive income and profit ("Profit") for the quarter ended June 30, 2011 totaled $3,461,415 compared to Operations profit of $3,295,389 for the quarter ended June 30, 2010. Profit for the quarter ended June 30, 2011 exceeded dividends by $31,768 or $0.003 per share. The second quarter Profit represents an annualized return on average Shareholders' equity of 9.72% per annum. This return on Shareholders' equity equates to 841 basis points per annum over the average one year Government of Canada Treasury bill yield for the quarter and is well in excess of the Corporation's target yield objective of 400 basis points per annum over the one year Treasury bill yield.
DIVIDEND OVERVIEW:
Monthly dividends for the second quarter totaled $0.234 per share ($0.078 per share per month).
MORTGAGE PORTFOLIO HIGHLIGHTS:
Details on the Corporation's mortgage portfolio as at June 30, 2011 are as follows:
- Total gross portfolio equals $236,501,237 ($233,521,237 net of impairment provision of $2,980,000).
- Conventional first mortgages, being those mortgages with loan to values less than 75%, comprise 85% of our total portfolio, and total conventional mortgages with loan to values under 75% comprise 91% of our total portfolio.
- Non-conventional mortgages and related investments total 9% of the portfolio.
- Approximately 52% of the portfolio matures within 12 months. This results in a continuously revolving portfolio, allowing management to assess market conditions.
- The average face interest rate on the portfolio is 8.95% per annum.
- Regionally, the portfolio is diversified approximately as follows: Ontario 81.3%, Alberta 12.7%, British Columbia 5.0%, with the balance (1.0%) being in other provinces.
- Mortgage portfolio breakdown by investment is as follows:
| Amount | Number of Mortgages | Total Amount | ||
| $0-$1,000,000 | 49 | $ | 25,700,194 | |
| $1,000,001-$2,000,000 | 27 | 42,407,205 | ||
| $2,000,001-$3,000,000 | 12 | 29,491,688 | ||
| $3,000,001-$4,000,000 | 5 | 17,355,348 | ||
| $4,000,001-$5,000,000 | 7 | 31,225,295 | ||
| $5,000,001-$10,000,000 | 12 | 90,321,507 | ||
| Total | 112 | $ | 236,501,237 |
IMPAIRMENT PROVISION UPDATE:
Management has always taken a proactive approach to impairment provisions. This is a prudent method of protecting our Shareholders' equity. Impairment provisions totaled $2,980,000, representing 1.26% of the gross loan portfolio as at June 30, 2011.
DIVIDEND AND SHARE PURCHASE PLAN:
The Corporation has in place a Dividend Reinvestment Plan (DRIP) and Share Purchase Plan that is available to its Shareholders. The plans allows participants to have their monthly cash dividends reinvested in additional Corporation units and grants participants the right to purchase, without commission, additional units, up to a maximum of $12,000 per annum.
ABOUT THE CORPORATION
The Corporation, through its mortgage banker, Firm Capital Corporation, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction, mezzanine and equity investments. The Corporation's investment objective is the preservation of Shareholders' equity, while providing Shareholders with a stable stream of monthly dividends from investments. The Corporation achieves its investment objectives through investments in selected niche markets that are under-serviced by large lending institutions. Lending activities to date continue to develop a diversified mortgage portfolio, producing a stable return to Shareholders. Full reports of the financial results of the Corporation for the year are outlined in the audited financial statements and the related management discussion and analysis of Firm Capital, available on the SEDAR website at www.sedar.com. In addition, supplemental information is available on Firm Capital's website at www.firmcapital.com.
Forward-Looking Statements
This news release contains forward-looking statements within the meaning of applicable securities laws including, among others, statements concerning our objectives, our strategies to achieve those objectives, our performance, our mortgage portfolio and our dividends, as well as statements with respect to management's beliefs, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "expect", "intent", "estimate", "anticipate", "believe", "should", "plans" or "continue" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management.
These statements are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described in our Annual Information Form under "Risk Factors" (a copy of which can be obtained at www.sedar.com), which could cause our actual results and performance to differ materially from the forward-looking statements contained in this circular. Those risks and uncertainties include, among others, risks associated with mortgage lending, dependence on the Corporation's mic manager and mortgage banker, competition for mortgage lending, real estate values, interest rate fluctuations, environmental matters, Unitholder liability and the introduction of new tax rules. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include, among others, that the Corporation is able to invest in mortgages at rates consistent with rates historically achieved; adequate mortgage investment opportunities are presented to the Corporation; and adequate bank indebtedness and bank loans are available to the Corporation. Although the forward-looking information continued in this new release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results and performance will be consistent with these forward-looking statements.
All forward-looking statements in this news release are qualified by these cautionary statements. Except as required by applicable law, the Corporation undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
NOTICE UNDER NATIONAL INSTRUMENT 51-102
National Instrument 51-102: Continuous Disclosure Requirements requires that these interim financial statements be accompanied by this notice which indicates that these financial statements have not been reviewed by the auditors of Firm Capital Mortgage Investment Corporation.
| Unaudited Interim Condensed Financial Statements of |
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| For the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited) |
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| Unaudited Interim Condensed Balance Sheets |
| June 30, 2011 | Dec. 31, 2010 | Jan. 1, 2010 | ||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||
| Assets | ||||||||
| Cash | - | - | $ | 1,444,339 | ||||
| Amounts receivable and prepaid expenses (note 5) | $ | 3,196,455 | $ | 2,371,563 | 1,706,383 | |||
| Mortgage investments (note 6) | 233,521,237 | 202,330,929 | 167,128,297 | |||||
| $ | 236,717,692 | $ | 204,702,492 | $ | 170,279,019 | |||
| Liabilities and Equity | ||||||||
| Bank indebtedness (note 7) | $ | 38,221,178 | $ | 5,005,825 | - | |||
| Accounts payable and accrued liabilities | 781,061 | 1,482,580 | $ | 410,064 | ||||
| Unearned income | 491,296 | 372,514 | 202,481 | |||||
| Shareholder dividend and unitholder distribution payable | 1,144,979 | 2,127,845 | 2,543,120 | |||||
| Loans payable (note 8) | 3,852,429 | 4,289,249 | 10,714,637 | |||||
| Convertible debentures (note 9) | 50,741,938 | 53,628,803 | 23,681,244 | |||||
| Conversion option of convertible debentures (note 4(e)(ii)) | - | - | 222,182 | |||||
| Total liabilities excluding net assets attributable to unitholders | 95,232,881 | 66,906,816 | 37,773,728 | |||||
| Net assets attributable to unitholders (note 10) | - | - | 132,505,291 | |||||
| Shareholders' / Unitholders' equity | 141,609,593 | 138,117,502 | - | |||||
| Retained earnings / (deficit) | (124,782 | ) | (321,826 | ) | - | |||
| Total equity | 141,484,811 | 137,795,676 | - | |||||
| Commitments (note 6) | ||||||||
| Contingent liabilities (note 17) | ||||||||
| $ | 236,717,692 | $ | 204,702,492 | $ | 170,279,019 | |||
| See accompanying notes to unaudited interim condensed financial statements. | ||||||||
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| Unaudited Interim Condensed Statements of Comprehensive Income |
| Three Months Ended | Six Months Ended | ||||||||||
| June 30/11 | June 30/10 | June 30/11 | June 30/10 | ||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||
| Interest and fees earned (notes 3 (b) and 15) | $ | 4,729,790 | $ | 4,033,295 | $ | 9,515,886 | $ | 8,049,560 | |||
| Less interest expense (note 16) | 1,140,777 | 573,889 | 2,185,092 | 1,105,466 | |||||||
| Net interest and fee income | 3,589,013 | 3,459,406 | 7,330,794 | 6,944,094 | |||||||
| General and administrative expenses | 127,598 | 164,017 | 322,461 | 342,286 | |||||||
| Impairment loss on mortgages (note 6) | |||||||||||
| 127,598 | 164,017 | 322,461 | 342,286 | ||||||||
| Operations profit for the period | $ | 3,461,415 | $ | 3,295,389 | $ | 7,008,333 | $ | 6,601,808 | |||
| Finance costs | |||||||||||
| Change in fair value of the conversion option of convertible debentures (note 4(e)(ii)) | - | 24,033 | - | (321,826 | ) | ||||||
| Distributions to unitholders (note 10) | - | (2,474,744 | ) | - | (5,731,903 | ) | |||||
| Comprehensive income and profit (loss) for the period, and change in net assets attributable to unitholders for the period, respectively | $ | 3,461,415 | $ | 844,678 | $ | 7,008,333 | $ | 548,079 | |||
| Profit per share (note 12) | |||||||||||
| Basic | $ | 0.237 | N/A | $ | 0.483 | N/A | |||||
| Diluted | $ | 0.237 | N/A | $ | 0.482 | N/A | |||||
| See accompanying notes to unaudited interim condensed financial statements. |
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| Unaudited Interim Condensed Statements of Changes in Equity |
| June 30, 2011 | Dec 31, 2010 | June 30, 2010 | |||||||
| (Unaudited) | (Unaudited) | (Unaudited) | |||||||
| Shareholders' / Unitholders' Equity | |||||||||
| Shares / Units (note 11): | |||||||||
| Balance, beginning of period | $ | 137,343,502 | - | 132,275,299 | |||||
| Reclassification of trust units from liability to equity (note 10) | - | $ | 132,505,299 | - | |||||
| Proceeds from issuance of shares / units | 368,137 | 4,818,203 | 2,753,270 | ||||||
| Conversion of debentures to shares | 3,195,000 | 20,000 | - | ||||||
| Balance, end of period | $ | 140,906,639 | $ | 137,343,502 | $ | 135,028,569 | |||
| Equity component of convertible debenture (note 9): | |||||||||
| Balance, beginning of period | $ | 774,000 | - | - | |||||
| Conversion of debentures to shares | $ | (71,046 | ) | - | - | ||||
| Reclassification of trust units from liability to equity (note 10) | - | $ | 544,000 | $ | 544,000 | ||||
| Equity component of debenture issued during the period | - | 230,000 | 230,000 | ||||||
| Balance, end of period | $ | 702,954 | $ | 774,000 | $ | 774,000 | |||
| Total Shareholders' / Unitholders' equity | $ | 141,609,593 | $ | 138,117,502 | $ | 135,802,569 | |||
| Retained earnings / deficit | |||||||||
| Retained earnings, beginning of period | ($321,826 | ) | - | - | |||||
| Dividends / distributions to shareholders / unitholders (note 13) | (6,811,289 | ) | $ | (8,503,941 | ) | ($810,629 | ) | ||
| Comprehensive income and profit for the period | 7,008,333 | 8,182,115 | 548,079 | ||||||
| Retained earnings / (deficit), end of period | $ | (124,782 | ) | $ | (321,826 | ) | $ | (262,550 | ) |
| Shares / units issued and outstanding (note 11) | 14,679,223 | 14,377,333 | 14,171,850 | ||||||
| See accompanying notes to unaudited interim condensed financial statements. |
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| Unaudited Interim Condensed Statements of Cash Flows |
| Three Months Ended | Six Months Ended | |||||||||||||
| June 30/11 | June 30/10 | June 30/11 | June 30/10 | |||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||
| Cash provided by (used in): | ||||||||||||||
| Operating activities: | ||||||||||||||
| Profit (loss) for the period | $ | 3,461,415 | $ | 844,678 | $ | 7,008,333 | $ | 548,079 | ||||||
| Adjustments for: | ||||||||||||||
| Distribution to unitholders | - | 2,474,744 | - | 5,731,903 | ||||||||||
| Change in fair value of conversion option for Convertible debentures | - |
(24,033 | ) | - | 321,826 | |||||||||
| Implicit interest rate in excess of Coupon rate – convertible debentures | 21,205 |
13,518 | 44,722 | 26,828 | ||||||||||
| Deferred finance cost amortization – convertible debentures | 96,664 |
42,630 | 192,267 | 84,792 | ||||||||||
| Net changes in non-cash items: | ||||||||||||||
| Increase in amounts receivable and prepaid expenses |
(175,092 | ) | 94,208 | (824,892 | ) | 11,957 | ||||||||
| Decrease in accounts payable and accrued liabilities |
(1,039,770 |
) | (472,063 | ) | (701,519 | ) | (78,586 | ) | ||||||
| Increase in unearned income | 116,165 | 33,797 | 118,782 | 36,450 | ||||||||||
| 2,480,587 | 3,007,479 | 5,837,693 | 6,683,249 | |||||||||||
| Financing activities: | ||||||||||||||
| Proceeds from issuance of shares | 163,910 | 2,286,318 | 368,236 | 2,753,270 | ||||||||||
| Increase in bank indebtedness | 18,621,651 | 9,919,518 | 33,215,353 | 12,923,656 | ||||||||||
| Decrease in loans payable (net) | (35,925 | ) | (37,365 | ) | (436,820 | ) | (3,166,253 | ) | ||||||
| Increase (decrease) in dividend and distributions payable | 10,308 | 17,881 | (982,866 | ) | (1,437,716 | ) | ||||||||
| Dividends to shareholders paid during the period | (3,429,647 | ) | (810,629 | ) | (6,811,289 | ) | (810,629 | ) | ||||||
| Distribution to unitholders | (2,474,744 | ) | (5,731,903 | ) | ||||||||||
| Net cash flow from (used in) financing activities | 15,330,297 | 8,900,979 | 25,352,614 | 4,530,425 | ||||||||||
| Investing activities: | ||||||||||||||
| Funding of mortgage investments | (51,924,287 | ) | (44,485,829 | ) | (91,472,794 | ) | (72,540,283 | ) | ||||||
| Discharge of mortgage investments | 34,113,403 | 32,577,371 | 60,282,487 | 61,326,609 | ||||||||||
| Net cash flow from (used in) investing activities | (17,810,884 | ) | (11,908,458 | ) | (31,190,307 | ) | (11,213,674 | ) | ||||||
| Increase in cash, being cash, beginning and end of period | $ | - | $ | - | $ | - | $ | - | ||||||
| Cash flows from operating activities include: | |||||||||
| Interest received | $ | 4,698,998 | $ | 3,925,981 | $ | 8,963,561 | $ | 7,781,294 | |
| Interest paid (note 16) | $ | 1,904,711 | $ | 910,930 | $ | 2,040,651 | $ | 972,290 | |
| See accompanying notes to unaudited interim condensed financial statements. |
| FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION |
| Notes to unaudited interim condensed Financial Statements |
| Three and six months ended June 30, 2011 and 2010 |
Firm Capital Mortgage Investment Corporation (the "Corporation"), through its mortgage banker, Firm Capital Corporation, is a non-bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction, mezzanine and equity investments. The shares of the Corporation are listed on the Toronto Stock Exchange under the symbol "FC".
1. Organization of Corporation:
On November 30, 2010, Firm Capital Mortgage Investment Trust (the "Trust") entered into a plan of arrangement ("Reorganization"), whereby the Trust was converted from an income trust structure into the public corporation, Firm Capital Mortgage Investment Corporation, effective January 1, 2011. The Corporation was incorporated pursuant to the laws of the Province of Ontario on October 22, 2010 for the purposes of participating in the Reorganization.
Pursuant to the Reorganization, units of the Trust ("Units" or "Trust Units") were exchanged on a one-for-one basis for common shares of the Corporation. Holders of Units therefore became the sole shareholders of the Corporation effective January 1, 2011.
As part of the Reorganization, the Trust was wound up and its assets were distributed to the Corporation. The Reorganization was treated as a change in business form rather than a change in control, and therefore, has been accounted for as a continuity of interest. The carrying amounts of assets, liabilities, and unitholders' equity in the financial statements of the Trust immediately prior to the Reorganization were the same as the carrying values of the Corporation immediately following the Reorganization. References to common shares, shareholders and dividends of the Corporation were formerly referred to as units, unitholders, and distributions under the Trust. Comparative amounts in these and future financial statements during 2011 are those of the Trust.
The Corporation's mortgage banker is Firm Capital Corporation and the Corporation's manager is FC Treasury Management Inc.
2. Basis of presentation:
(a) Statement of compliance:
These condensed interim financial statements have been prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting and using the accounting policies described herein. The three months ended March 31, 2011 interim financial statements are the Corporation's first International Financial Reporting Standards ("IFRS") condensed financial statements for part of the period covered by the first IFRS annual financial statements and IFRS 1 First-time Adoptions of International Financial Reporting Standards ("IFRS 1"). The unaudited interim condensed financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the notes to the Corporation's audited financial statements for the year ended December 31, 2010.
An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation is provided in note 4. This note includes reconciliations of equity and total comprehensive income for comparative periods and of equity at the date of transition, being January 1, 2010, from reporting under Canadian generally accepted accounting principles ("Canadian GAAP" or "previous GAAP") to those reported for those periods and at the date of transition under IFRS.
These unaudited interim condensed financial statements were approved by the Board of Directors on August 5, 2011.
(b) Basis of measurement:
The unaudited interim condensed financial statements have been prepared on the historical cost basis, except for financial instruments classified as fair value through profit or loss, which are measured at fair value.
(c) Functional and presentation currency:
These unaudited interim condensed financial statements are presented in Canadian dollars, which is the Corporation's functional currency.
(d) Use of estimates and judgements:
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual amounts may differ from these estimates.
Significant judgement made by the Corporation relates to the classification of trust units between equity and liability (see note 10).
The most significant estimates that the Corporation is required to make relate to the impairment of the mortgage investments (notes 3(a) and 6). These estimates may include assumptions regarding local real estate market conditions, interest rates and the availability of credit, cost and terms of financing, the impact of present or future legislation or regulation, prior encumbrances and other factors affecting the mortgage and underlying security of the mortgage investments.
These assumptions are limited by the availability of reliable comparable data, economic uncertainty, ongoing geopolitical concerns and the uncertainty of predictions concerning future events. Illiquid credit markets and volatile equity markets have combined to increase the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of impairment are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated fair value could vary by a material amount.
3. Summary of significant accounting policies:
The Corporation's accounting policies and its standards of financial disclosure set out below are in accordance with IFRS and have been applied consistently to all periods presented in these consolidated interim condensed financial statements and in preparing the opening IFRS balance sheet as at January 1, 2010 for the purposes of the transition to IFRS.
(a) Mortgage investments:
Mortgage investments are classified as loans and receivable investments. Such investments are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition the mortgage loans are measured at amortized cost using the effective interest method, less any impairment losses.
The mortgage investments are assessed at each reporting date to determine whether there is objective evidence of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of an asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of the mortgage investments measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognized in the statement of comprehensive income and reflected in an allowance account against the mortgage investments. Interest on the impaired asset continues to be recognized through the unwinding of the discount if it is considered collectable. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
(b) Revenue recognition:
| (i) | Interest and fee income: | |
| Interest income is accounted for on the accrual basis, and is recorded net of the Corporation Manager interest spread described in note 15. Commitment fees received are amortized over the expected term of the mortgage. | ||
| (ii) | Special investments: | |
| Special profit participations earned by the Corporation on special investments are recognized and included in interest and fees earned only once the receipt of such amounts is certain. |
(c) Share-based compensation:
The Corporation has share-based compensation plans (i.e. incentive option plan) which are described in note 11. The expense of equity-settled incentive option plan are measured based on fair value of the awards of each tranche at the grant date. The expense is recognized on a proportionate basis consistent with the vesting features of each tranche of the grant.
(d) Income taxes:
The Corporation is a mortgage investment corporation pursuant to the Income Tax Act (Canada). As such, the Corporation is entitled to deduct from its taxable income dividends paid to shareholders during the year or within 90 days of the end of the year. The Corporation tends to maintain its status as a mortgage investment corporation and will distribute sufficient dividends in the year and in future years to ensure that the Corporation is not subject to income taxes. Accordingly, for financial statement reporting purposes, the tax deductibility of the Corporation's dividends results in the Corporation being effectively exempt from taxation and no provision for current or future income taxes is required.
(e) Financial assets and liabilities:
Financial assets includes the Corporation's cash, amounts receivable and mortgage investments. Financial liabilities include the bank indebtedness, accounts payable and accrued liabilities, unearned income, shareholder dividend and unitholder distribution payable, loans payable, liability component of convertible debentures and trust units (until June 8, 2010).
Recognition and measurement of financial instruments
The Corporation determines the classification of its financial assets and liabilities at initial recognition. Financial instruments are recognized initially at fair value and in the case of financial assets and liabilities carried at amortized costs, adjusted for directly attributable transaction costs.
The Corporation has designated its cash as held-for-trading, which is measured at fair value. Amounts receivable and mortgage investments are classified as loans and receivables, which are measured at amortized cost.
Bank indebtedness, accounts payable and accrued liabilities, unearned income, shareholder dividend and unitholder distribution payable, loans payable, liability component of convertible debentures and trust units (until June 8, 2010) are classified as other financial liabilities, which are also measured at amortized cost.
The Corporation had neither available-for-sale, nor held-to-maturity instruments as at or during the six months ended June 30, 2011 and 2010.
(f) Compound financial instruments:
Compound financial instruments issued by the Corporation comprise convertible debentures that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. Interest, dividends, losses and gains relating to the financial liability are recognized in profit or loss. Distributions to the equity holders are recognized in equity, net of any tax benefit.
(g) Hybrid financial instruments:
Hybrid financial instruments comprise convertible debentures which contain an embedded derivative related to the conversion feature to Trust units from its issuance to June 8, 2010. The embedded derivative is measured at fair value at initial recognition, and subsequently at every reporting period with fair value changes recorded in profit or loss. The difference between the consideration received and the fair value of the embedded derivatives, is attributed to the debt host contract at initial recognition which is subsequently measured at amortized cost using the effective interest method.
(h) Share capital:
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity.
(i) Trust Units:
Trust units are classified as a liability from January 1, 2010 to June 8, 2010 and as equity from June 9, 2010 to December 31, 2010, as further detailed in note 10.
(j) Basic and diluted per share calculation:
The Corporation presents basic and diluted earnings profit or loss per share data for its common shares. Basic per share amounts are calculated by dividing the profit or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period. Diluted per share amounts are calculated using the "if converted method" and are determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for the effects of all dilutive potential convertible debentures and granted incentive option plan.
(k) New standards and interpretations not yet adopted:
IFRS 9, Financial Instruments
IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the Corporation's accounting for its financial assets. Specifically, IFRS 9 requires financial assets to be classified into two measurement categories, those measured at fair value and those measured at amortized cost. The standard is not applicable until January 1, 2013 but is available for early adoption. The Corporation has not early adopted IFRS 9 for the period ended June 30, 2011, and the extent of the impact has not been determined.
IFRS 7, Financial Instruments – Disclosure
An amendment to IFRS 7 issued in October 2010 will enhance disclosure requirements relating to the transfer of financial assets. This will include disclosures for transfers of financial assets that are derecognized in their entirety as well as those that are not. The effective date for the amendment will be for annual periods beginning on or after July 1, 2011. Although earlier application is permitted (subject to disclosure of that fact), the Corporation has not chosen to early adopt the amendment for the period ended June 30, 2011, and the extent of the impact has not been determined.
4. Transition to IFRS:
The Corporation has adopted IFRS effective January 1, 2010 ("the transition date") and has prepared its opening IFRS statement of financial position as at that date. Prior to the adoption of IFRS, the Corporation prepared its financial statements in accordance with Canadian GAAP.
The accounting policies set out in note 3 have been applied in preparing the financial statements for the six months ended June 30, 2011, the comparative information presented in these financial statements for the six months ended June 30, 2010 and the year ended December 31, 2010 and in the preparation of an opening IFRS balance sheet at January 1, 2010.
In preparing its opening IFRS balance sheet, the Corporation has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Corporation's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables:
(a) Exemptions from full retrospective application:
First-time adopters of IFRS must apply the provisions of IFRS 1. IFRS 1 requires adopters to retrospectively apply all IFRS standards as of the reporting date with certain optional exemptions and certain mandatory exemptions.
In preparing these unaudited interim condensed financial statements in accordance with IFRS 1, the Corporation has applied the mandatory exemption from full retrospective application of IFRS for estimates. The mandatory exemption requires that estimates previously determined under Canadian GAAP cannot be revised due to the application of IFRS, except when necessary to reflect differences in accounting policies.
(b) Reconciliation of equity as reported under Canadian GAAP and IFRS:
The following is a reconciliation of equity as previously reported under Canadian GAAP to IFRS on January 1, 2010:
| Canadian GAAP |
Effect of transition to IFRS |
Restated under IFRS |
||
| January 1, 2010 | ||||
| Assets | ||||
| Cash | 1,444,339 | - | 1,444,339 | |
| Amounts receivable and prepaid expenses | 1,706,383 | - | 1,706,383 | |
| Mortgage investments | 167,128,297 | - | 167,128,297 | |
| 170,279,019 | - | 170,279,019 | ||
| Liabilities and Equity | ||||
| Bank indebtedness | - | - | - | |
| Accounts payable and accrued liabilities | 410,064 | - | 410,064 | |
| Unearned income | 202,481 | - | 202,481 | |
| Shareholder dividend and unitholder distribution payable | 2,543,120 | - | 2,543,120 | |
| Loans payable | 10,714,637 | - | 10,714,637 | |
| Convertible debentures (note 4(e)(ii)) | 23,681,244 | - | 23,681,244 | |
| Conversion option of convertible debentures (note 4(e)(ii)) | - | 222,182 | 222,182 | |
| Total liabilities excluding net assets attributable to unitholders | 37,551,546 | 222,182 | 37,773,728 | |
| Net assets attributable to unitholders (note 4(e)(i)) | - | 132,505,291 | 132,505,291 | |
| Shareholders' / Unitholders' equity (note 4(e)(i)) | 132,727,473 | (132,727,473 | ) | - |
| Retained earnings / (deficit) | - | - | - | |
| Total equity | 132,727,473 | (132,727,473 | ) | - |
| 170,279,019 | - | 170,279,019 | ||
The following is a reconciliation of equity as previously reported under Canadian GAAP to IFRS on June 30, 2010:
| Canadian GAAP |
Effect of transition to IFRS |
Restated under IFRS |
|||
| June 30, 2010 | |||||
| Assets | |||||
| Cash | - | - | - | ||
| Amounts receivable and prepaid expenses | 1,694,426 | - | 1,694,426 | ||
| Mortgage investments | 178,341,971 | - | 178,341,971 | ||
| 180,036,397 | - | 180,036,397 | |||
| Liabilities and Equity | |||||
| Bank indebtedness | 11,479,317 | - | 11,479,317 | ||
| Accounts payable and accrued liabilities | 331,478 | - | 331,478 | ||
| Unearned income | 238,931 | - | 238,931 | ||
| Shareholder dividend and unitholder distribution payable | 1,105,404 | - | 1,105,404 | ||
| Loans payable | 7,548,384 | - | 7,548,384 | ||
| Convertible debentures (note 4(e)(ii)) | 23,792,864 | - | 23,792,864 | ||
| Conversion option of convertible debenture (note 4(e)(ii)) | - | - | - | ||
| Total liabilities excluding net assets attributable to unitholders | 44,496,378 | - | 44,496,378 | ||
| Net assets attributable to unitholders (note 4(e)(i)) | - | - | - | ||
| Shareholders' / Unitholders' equity (note 4(e)(i)) | 135,540,019 | 262,550 | 135,802,569 | ||
| Retained earnings / (deficit) | - | (262,550 | ) | (262,550 | ) |
| Total equity | 135,540,019 | - | 135,540,019 | ||
| 180,036,397 | - | 180,036,397 | |||
The following is a reconciliation of shareholders' equity as previously reported under Canadian GAAP to IFRS on December 31, 2010:
| Canadian GAAP |
Effect of transition to IFRS |
Restated under IFRS |
|||
| December 31, 2010 | |||||
| Assets | |||||
| Cash | - | - | - | ||
| Amounts receivable and prepaid expenses | 2,371,563 | - | 2,371,563 | ||
| Mortgage investments | 202,330,929 | - | 202,330,929 | ||
| 204,702,492 | - | 204,702,492 | |||
| Liabilities and Equity | |||||
| Bank indebtedness | 5,005,825 | - | 5,005,825 | ||
| Accounts payable and accrued liabilities | 1,482,580 | - | 1,482,580 | ||
| Unearned income | 372,514 | - | 372,514 | ||
| Shareholder dividend and unitholder distribution payable | 2,127,845 | - | 2,127,845 | ||
| Loans payable | 4,289,249 | - | 4,289,249 | ||
| Convertible debentures (note 4(e)(ii)) | 53,628,803 | - | 53,628,803 | ||
| Conversion option of convertible debentures (note 4(e)(ii)) | - | - | - | ||
| Total liabilities excluding net assets attributable to unitholders | 66,906,816 | 66,906,816 | |||
| Net assets attributable to unitholders (note 4(e)(i)) | - | - | - | ||
| Shareholders' / Unitholders' equity (note 4(e)(i)) | 137,795,676 | 321,826 | 138,117,502 | ||
| Retained earnings / (deficit) (note 4(e)(i)) | (321,826 | ) | (321,826 | ) | |
| Total equity | 137,795,676 | - | 137,795,676 | ||
| 204,702,492 | - | 204,702,492 | |||
(c) Reconciliation of comprehensive income, as reported under Canadian GAAP and IFRS:
The following is a reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS for the three months ended June 30, 2010:
| Canadian GAAP |
Effect of transition to IFRS |
Restated under IFRS |
|||
| Three Months Ended June 30, 2010 | |||||
| Interest and fees earned | 4,033,295 | - | 4,033,295 | ||
| Less interest expense | 573,889 | - | 573,889 | ||
| Net interest and fee income | 3,459,406 | - | 3,459,406 | ||
| General and administrative expenses | 164,017 | - | 164,017 | ||
| Impairment loss on mortgages (note 4(e)(iii)) | - | - | - | ||
| 164,017 | - | 164,017 | |||
| Operations profit for the period | 3,295,389 | - | 3,295,389 | ||
| Finance costs | |||||
| Change in the fair value of the conversion option of convertible debentures (note 4(e)(ii)) | - | 24,033 | 24,033 | ||
| Distributions to unitholders (note 4(e)(i)) | - | (2,474,744 | ) | (2,474,744 | ) |
| Comprehensive income and profit (loss) for the period, and changes in net assets attributable to unitholders for the period, respectively | 3,295,389 | (2,450,711 | ) | 844,678 | |
The following is a reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS for the six months ended June 30, 2010:
| Canadian GAAP |
Effect of transition to IFRS |
Restated under IFRS |
|||
| Six Months Ended June 30, 2010 | |||||
| Interest and fees earned | 8,049,560 | - | 8,049,560 | ||
| Less interest expense | 1,105,466 | - | 1,105,466 | ||
| Net interest and fee income | 6,944,094 | - | 6,944,094 | ||
| General and administrative expenses | 342,286 | - | 342,286 | ||
| Change in unrealized loss in value of mortgages (4(e)(iii) | - | - | - | ||
| Impairment loss on mortgages (4(e)(iii) | - | - | - | ||
| 342,286 | - | 342,286 | |||
| Operations profit for the period | 6,601,808 | - | 6,601,808 | ||
| Finance costs | |||||
| Change in the fair value of the conversion option of convertible debentures (note 4(e)(ii)) | - | (321,826 | ) | (321,826 | ) |
| Distributions to unitholders (note 4(e)(i)) | - | (5,731,903 | ) | (5,731,903 | ) |
| Comprehensive income and profit (loss) for the period, and changes in net assets attributable to unitholders for the period, respectively | 6,601,808 | (6,053,729 | ) | 548,079 | |
Reconciliation of comprehensive income as previously reported under Canadian GAAP to IFRS for the year ended December 31, 2010:
| Canadian GAAP | Effect of transition to IFRS | Restated under IFRS |
|||||
| Year Ended December 31, 2010 | |||||||
| Interest and fees earned | 18,703,612 | 18,703,612 | |||||
| Less interest expense | 2,877,078 | 2,877,078 | |||||
| Net interest and fee income | 15,826,534 | 15,826,534 | |||||
| General and administrative expenses | 1,310,690 | 1,310,690 | |||||
| Change in unrealized loss in value of mortgages (4(e)(iii) | 280,000 | (280,000 | ) | - | |||
| Impairment loss on mortgages (4(e)(iii) | - | 280,000 | 280,000 | ||||
| 1,590,690 | - | 1,590,690 | |||||
| Operations profit for the period | $ | 14,235,844 | $ | 14,235,844 | |||
| Finance costs | |||||||
| Change in fair value of conversion option of convertible debentures (note 4(e)(ii)) | (321,826 | ) | (321,826 | ) | |||
| Distributions to unitholders (note 4(e)(i)) | (5,731,903 | ) | (5,731,903 | ) | |||
| Comprehensive income and profit (loss) for the period, and changes in net assets attributable to unitholders for the period, respectively | 14,235,844 | (6,053,729 | ) | 8,182,115 | |||
(d) Impact on the statement of cash flows:
The IFRS adjustments made to the comparative consolidated statement of net income for the three and six months ended June 30, 2010 (as described above) have been made to the statement of cash flows as at the same date. Consistent with the Corporation's accounting policy choice under IAS 7, Statement of Cash Flows, interest paid and interest received have been included in cash flow from operating activities in the statement of cash flows. There were no other significant IFRS transition differences noted.
(e) Details of the material adjustments to the balance sheet and comprehensive income:
(i) Previously under Canadian GAAP, the Trust Units were classified as equity instruments. In accordance with IAS 32, Financial Instruments: Presentation, the Trust Units are classified as a liability from January 1, 2010 to June 8, 2010 as the units impose an obligation requiring distribution of taxable income to unitholders until that date. Thereafter the Trust Units are classified as equity as further detailed in note 10.
The Corporation measures its Trust Unit liability at amortized cost and presents it at the amount of residual net assets.
As a result, the Corporation has recorded the liability at the cash amount originally exchanged for the Trust Units plus cumulative earnings and distributions to unitholders. The effect of classification is to reduce the shareholders' equity and increase liabilities (net assets attributable to unitholders) by $132.5 million at January 1, 2010.
At June 30, 2011 and December 31, 2010, the Corporation reclassified $0.3 million for the impact of change in fair value of the conversion option from January 1, 2010 to June 8, 2010 as further detailed in note 4(e)(ii)
Consistent with the classification of the Trust Units as a liability, distributions paid to unitholders are considered as financing cost in the statement of comprehensive income for these periods.
As the Trust Units are treated as floating rate liability, any changes in the distributions based on changes to income levels are expensed in the period in which they occur.
(ii) For the period from January 1, 2010 to June 8, 2010, the convertible debentures contain an option to convert into the liability classified trust units. As the conversion option of convertible debt is not otherwise closely related to the debt host, it constitutes a liability-classified embedded derivative, which is carried at fair value. Fair value is calculated using market prices at the end of each reporting period. The fair value adjustment is recorded as part of finance costs on the unaudited interim condensed statements of comprehensive income.
On June 9, 2010, the fair value of the conversion option of convertible debt is reclassified to equity as the convertible debentures are now accounted for as compound financial instruments. For the period from June 9, 2010 to December 31, 2010, the equity portion is not re-measured.
(iii) The Corporation has reviewed its mortgage investments for impairment and adjusted the unaudited interim condensed financial statements for impairment losses on mortgages previously reported. Amounts for change in unrealized losses of mortgages have been removed to conform with Corporation's presentation under IFRS.
5. Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid expenses as at June 30, 2011, December 31, 2010 and January 1, 2010:
| June 30, 2011 | Dec. 31, 2010 | Jan. 1, 2010 | ||||
| Amount | Amount | Amount | ||||
| Interest receivable | $ | 2,599,390 | $ | 1,803,224 | $ | 1,450,807 |
| Prepaid expenses | 66,018 | 111,800 | 160,903 | |||
| Special income receivable | 452,948 | 389,198 | - | |||
| Fees receivable | 78,099 | 67,341 | 94,673 | |||
| Amounts receivable and prepaid expenses | $ | 3,196,455 | $ | 2,371,563 | $ | 1,706,383 |
6. Mortgage investments:
The following is a breakdown of the mortgage investments as at June 30, 2011, December 31, 2010 and January 1, 2010:
| June 30, 2011 | Dec. 31, 2010 | January 1, 2010 | ||||||||||
| Amount | % | Amount | % | Amount | % | |||||||
| Conventional first mortgages | $ | 201,513,660 | 85.2 | $ | 179,004,150 | 87.2 | $ | 135,464,430 | 79.8 | |||
| Conventional non-first mortgages | 13,559,919 | 5.7 | 13,785,737 | 6.7 | 12,768,832 | 7.5 | ||||||
| Special mortgage investments | 21,427,658 | 9.1 | 12,521,042 | 6.1 | 21,595,035 | 12.7 | ||||||
| Total mortgage investments (at cost) | $ | 236,501,237 | 100.0 | $ | 205,310,929 | 100.0 | $ | 169,828,297 | 100.0 | |||
| Impairment provision | (2,980,000 | ) | (2,980,000 | ) | (2,700,000 | ) | ||||||
| Mortgage investments | $ | 233,521,237 | $ | 202,330,929 | $ | 167,128,297 | ||||||
Conventional first mortgages are loans secured by a first priority mortgage charge with loan to values not exceeding 75%. Conventional non-first mortgages are loans with mortgages not registered in first priority with loan to values not exceeding 75%. Special mortgage investments are loans that in some cases have loans to value that exceed or may exceed 75% and are the investments that are the source of all special profit participations earned by the Corporation.
Mortgages are stated at amortized cost as discussed in note 3(a). The impairment loss in the amount of $2,980,000 as at June 30, 2011 represents the total amount of management's estimate of the shortfall between the mortgage investment principal balances and the estimated net realizable recovery from the collateral securing the mortgage loans.
The mortgages are secured by real property, bear interest at the weighted average rate of 8.95% (2010 – 9.46%) and mature between 2011 and 2015.
The un-advanced funds under the existing mortgage portfolio (which are commitments of the Corporation) amounted to $26,781,886 as at June 30, 2011 (December 31, 2010 - $18,406,862 and January 1, 2010 - $12,709,686).
Principal repayments based on contractual maturity dates are as follows:
| 2011 | $80,622,275 |
| 2012 | 78,608,591 |
| 2013 | 69,448,194 |
| 2014 | 6,738,620 |
| 2015 | 1,083,557 |
| $236,501,237 |
Borrowers who have open mortgages have the option to repay principal at any time prior to the maturity date.
7. Bank indebtedness:
The Corporation has entered into credit arrangements of which $38,221,178 as at June 30, 2011 (December 31, 2010 - $5,005,825 & January 1, 2010 - nil) has been drawn. Interest on bank indebtedness is predominately charged at a formula rate that varies with bank prime and may have a component with a fixed interest rate established based on a formula linked to Bankers Acceptance rates. The credit arrangement comprises a revolving operating facility, a component of which is a demand facility and a component of which has a committed term to September 30, 2011. Bank indebtedness is secured by a general security agreement. The credit agreement contains certain financial covenants that must be maintained. As at June 30, 2011, December 31, 2010 and January 1, 2010, the Corporation was in compliance with all financial covenants.
8. Loans payable:
First priority charges on specific mortgage investments have been granted as security for the loans payable. The loans mature on dates consistent with those of the underlying mortgages. The loans are on a non-recourse basis and bear interest at rates ranging from 3.50% to 6.45% as at June 30, 2011 (December 31, 2010 3.50% to 6.45%). The Corporation's principal balance outstanding under the mortgages for which a first priority charge has been granted is $4,845,794 as at June 30, 2011 (December 31, 2010 - $5,392,156 & January 1, 2010 - $14,224,566).
The loans are repayable at the earlier of the contractual expiry date of the underlying mortgage investment and the date the underlying mortgage is repaid. Repayments based on contractual maturity dates are as follows:
| 2011 | $ 1,723,584 |
| 2012 | - |
| 2013 | - |
| 2014 | 1,974,895 |
| 2015 | 153,950 |
| $ 3,852,429 |
9. Convertible debentures:
| Six Months Ended June 30, 2011 | |||||||||||||
| 6.00% | 5.75% | ||||||||||||
| Convertible | Convertible | Year Ended | As At | ||||||||||
| Debentures | Debentures | Total | Dec. 31, 2010 | Jan. 1, 2010 | |||||||||
| Principal balance, beginning of period | $ | 23,886,736 | $ | 29,742,167 | $ | 53,628,903 | $ | 23,681,244 | $ | 23,681,244 | |||
| Issued | 29,680,929 | ||||||||||||
| Conversions | (3,195,000 | ) | - | (3,195,000 | ) | (20,000 | ) | ||||||
| Adjustment to fair value of conversion option from conversions | 71,046 | 71,046 | |||||||||||
| Implicit interest rate in excess of coupon rate | 28,549 | 16,174 | 44,723 | 57,689 | |||||||||
| Deferred finance cost amortization | 84,791 | 107,475 | 192,266 | 228,941 | |||||||||
| Principal balance, end of period | 20,876,122 | 29,865,816 | 50,741,938 | 53,628,803 | 23,681,244 | ||||||||
On April 24, 2006, the Corporation completed a public offering of 25,000 6% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $25,000,000. The debentures mature on June 30, 2013 and interest is paid semi-annually on June 30 and December 31. The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $11.75. The debentures could not be redeemed by the Corporation prior to June 30, 2009. On and after June 30, 2009, but prior to June 30, 2010, the debentures were redeemable at a price equal to the principal, plus accrued interest, at the Corporation's option on not more than 60 days and not less than 30 days notice, provided that the weighted average trading price of the shares on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after June 30, 2010 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days' prior notice. On redemption or at maturity, the Corporation may, at its option, elect to satisfy its obligation to pay all or a portion of the principal amount of the debenture by issuing that number of shares of the Corporation obtained by dividing the principal amount being repaid by 95% of the weighted average trading price of the shares for the 20 consecutive trading days ending on the fifth trading day preceding the redemption or maturity date.
In 2009, $536,000 of debentures were converted by the debenture holders to 45,617 shares of the Corporation. In 2010, $20,000 of debentures were converted by the debenture holders to 1,702 shares of the Corporation. During the first six months of 2011, $3,195,000 of debentures were converted by the debenture holders to 271,909 shares of the Corporation.
In the fourth quarter of 2010, the Corporation completed a public offering of 31,443, 5.75% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $31,443,000. The debentures mature on October 31, 2017 and interest is paid semi-annually on April 30 and October 31. The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $15.90. The debentures may not be redeemed by the Corporation prior to October 31, 2013. On and after October 31, 2013, but prior to October 31, 2014, the debentures are redeemable at a price equal to the principal, plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days notice, provided that the weighted average trading price of the shares on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after October 31, 2014 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days prior notice. On redemption or at maturity, the Corporation may, at its option, elect to satisfy its obligation to pay all or a portion of the principal amount of the debenture by issuing that number of shares of the Corporation obtained by dividing the principal amount being repaid by 95% of the weighted average trading price of the shares for the 20 consecutive trading days ending on the fifth trading day preceding the redemption or maturity date.
As at June 30, 2011, debentures payables bear interest at weighted average effective rate of 5.85% per annum.
Notwithstanding the carrying value of the convertible debentures, the principal balance outstanding to the debenture holders is $52,692,000.
10. Net assets attributable to unitholders
During the period, the Corporation performed an assessment of the characteristics of the Trust units in existence during the period from January 1, 2010 to December 31, 2010 (the "Units"), against the criteria set forth per IAS 32, Financial Instruments: Presentation.
For the period from January 1, 2010 to June 8, 2010, the Trust Units are presented as a liability due to the Trust's requirement to distribute taxable income to the unitholders and distributions made on the Trust Units is recorded as finance costs in the statement of comprehensive income. The liability was measured at amortized cost of the Trust Units, which includes any residual net assets attributable to unitholders.
On June 9, 2010, the distribution policy set out in the Trust's Declaration of Trust was modified such that there was no longer a requirement for the Trust to distribute cash. As such, equity classification criteria were determined to be met from that point.
Changes in the number of trust units and in their carrying amounts were as follows during the six months ended June 30, 2010:
| Units | Amounts | ||||
| Balance, beginning of period | 13,896,829 | $ | 141,463,944 | ||
| New units from exercise of options | 249,000 | 2,465,800 | |||
| New units issued during the period under Distribution Reinvestment Plan | 26,021 | 287,470 | |||
| Trust units re-classified as equity (June 9, 2010) | (14,171,850 | ) | (144,217,214 | ) | |
| Balance, end of period | - | $ | - | ||
As at January 1, 2010 the number of trust units outstanding was 13,896,829 at a carry amount of $132,505,291.
11. Shareholders' equity:
On January 1, 2011, all outstanding Units were exchanged on a one-for-one basis for common shares of the Corporation.
The beneficial interests in the Corporation are represented by a single class of shares which are unlimited in number. Each share carries a single vote at any meeting of shareholders and carries the right to participate pro rata in any dividends.
(a) Shares and Units issued and outstanding:
The following shares were issued and outstanding as at June 30, 2011:
| Balance, beginning of period | 14,377,333 |
| New shares from conversion of debentures (note 9) | 271,909 |
| New shares issued during the period under Dividend Reinvestment Plan | 29,981 |
| Balance, end of period | 14,679,223 |
The following units were issued and outstanding as at December 31, 2010:
| Balance, beginning of year | 13,896,829 |
| New units from conversion of debentures (note 9) | 1,702 |
| New units from exercise of options | 427,500 |
| New units issued during the period under Distribution Reinvestment Plan | 51,302 |
| Balance, end of year | 14,377,333 |
The following units were issued and outstanding as at June 30, 2010:
| Balance, beginning of period – Trust units re-classified as equity (June 9, 2010) | 14,171,850 |
| Balance, end of period | 14,171,850 |
(b) Incentive option plan:
In 2005, 415,000 options were issued to directors, officers and employees of the Corporation Manager and Mortgage Banker, with an exercise price of $9.90 per share. The options were exercisable any time up to November 17, 2010. The options vested on the grant date. At December 31, 2010, 415,000 share options have been exercised.
In 2008, 35,000 options were issued to directors with an exercise price of $9.94. The options were exercisable any time up to October 7, 2013. The fair value of those share options, given the small number of options issued and given the low volatility in the Corporation's share trading price, is not material and therefore no related compensation expense has been recorded by the Corporation. At December 31, 2010, 35,000 options have been exercised.
As at June 30, 2011, no options remained outstanding (December 31, 2010 - NIL & January 1, 2010 - 427,500).
(c) Dividend reinvestment plan and direct share purchase plan:
The Corporation has a dividend reinvestment plan and direct share purchase plan for its shareholders which allows participants to reinvest their monthly cash dividends in additional Corporation shares at a share price equivalent to the weighted average price of shares for the preceding five day period.
12. Per share amounts:
(a) Profit per share calculation:
As the trust units were liability-classified until June 8, 2010 and the full change for the period from January 1, 2010 to June 8, 2010 in net assets is allocated thereto, there is no profit per unit presented for the six months ended June 30, 2010.
The following tables reconcile the numerators and denominators of the basic and diluted profit per share for the three and six months ended June 30, 2011.
Basic profit per share calculation:
| Three months ended | Six months ended | ||||
| June 30, 2011 | June 30, 2011 | ||||
| Numerator for basic profit per share: | |||||
| Profit | $ | 3,461,415 | $ | 7,008,333 | |
| Denominator for basic profit per share: | |||||
| Weighted average shares | 14,621,705 | 14,516,228 | |||
| Basic profit per share | $ | 0.237 | $ | 0.483 | |
| Diluted profit per share calculation: | |||||
| Three months ended | Six months ended | ||||
| June 30, 2011 | June 30, 2011 | ||||
| Numerator for diluted profit per share: | |||||
| Profit | $ | 3,461,415 | $ | 7,008,333 | |
| Interest on convertible debentures | 892,014 | 1,820,491 | |||
| Net profit for diluted profit per share | $ | 4,353,429 | $ | 8,828,824 | |
| Denominator for diluted profit per share: | |||||
| Weighted average shares | 14,621,705 | 14,516,228 | |||
| Net shares that would be issued assuming convertible debentures are converted | 3,785,973 | 3,785,973 | |||
| Diluted weighted average shares | 18,407,678 | 18,302,201 | |||
| Diluted profit per share | $ | 0.237 | $ | 0.482 | |
(b) Pro forma per unit calculation
Management has chosen to disclose pro forma basic and diluted profit per unit for the three and six months ended June 30, 2010 in order to provide an indication of the Trust's business performance that is comparable to how performance is otherwise measured when the instruments that represent residual interests in the entity qualify as equity instruments. The calculation eliminates "change in fair value of the conversion option of convertible debentures" and "distributions to unitholders" from the numerator and uses the liability classified units as denominator. For disclosure purposes only, the Corporation has determined the operations profit per share using the same basis that would apply in accordance with IAS 33 Earnings Per Share.
The following tables reconcile the numerators and denominators of pro forma basic and diluted operations profit per unit:
Basic operations profit per share calculation:
| Three months ended | Six months ended | ||||
| June 30, 2010 | June 30, 2010 | ||||
| Numerator for basic operations profit per share: | |||||
| Operations profit | $ | 3,295,389 | $ | 6,601,808 | |
| Denominator for basic operations profit per unit: | |||||
| Weighted average units | 14,001,865 | 13,958,462 | |||
| Pro forma profit per unit | $ | 0.235 | $ | 0.473 | |
| Diluted pro forma profit per unit calculation: | |||||
| Three months ended | Six months ended | ||||
| June 30, 2010 | June 30, 2010 | ||||
| Numerator for diluted pro forma profit per share: | |||||
| Operations profit | $ | 3,295,389 | $ | 6,601,808 | |
| Interest on convertible debentures | 423,108 | 845,540 | |||
| Net operations profit for diluted operations profit per unit | $ | 3,718,497 | $ | 7,447,348 | |
| Denominator for diluted operations profit per unit: | |||||
| Weighted average units | 14,001,865 | 13,958,462 | |||
| Net units that would be issued: | |||||
| Assuming the proceeds from incentive options are used to repurchase units at the average unit price | 24,298 | 48,606 | |||
| Assuming convertible debentures are converted | 2,082,043 | 2,082,043 | |||
| Diluted weighted operations profit per unit | 16,108,206 | 16,089,111 | |||
| Diluted pro forma profit per unit | $ | 0.231 | $ | 0.463 | |
13. Dividends:
The Corporation intends to make dividend payments to the shareholders on a monthly basis on or about the 15th day of each month. The operating policies of Corporation set out that the Corporation intends to distribute to shareholders within 90 days after the year end at least 100% of the net income of the Corporation determined in accordance with the Income Tax Act (Canada), subject to certain adjustments. The net income of the Corporation determined in accordance with the Income Tax Act (Canada), for the period ended June 30, 2011 was $7,177,458 (2010 - $6,597,746).
For the six months ended June 30, 2011, the Corporation recorded dividends of $6,811,289 (2010 - $6,542,532) to its shareholders. Dividends were $0.468 (2010 - $0.468) per share.
14. Income taxes:
The Income Tax Act (Canada) contains legislation (the "SIFT Rules") affecting the tax treatment of "specified investment flow-through" ("SIFT") trusts. A SIFT includes a publicly traded trust. The SIFT Rules provide for a transition period unit 2011 for publicly traded trusts like the Trust, which existed prior to November 1, 2006. Under the SIFT Rules, distributions of certain types of income by a SIFT are not deductible in computing the SIFT's taxable income, and a SIFT is subject to tax on such income at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. The SIFT rules do not apply to a corporation that qualifies as a mortgage investment corporation under the Income Tax Act (Canada). The Trust completed the necessary tax restructuring to qualify as a mortgage investment corporation effective January 1, 2011.
15. Related party transactions and balances:
Transactions with related parties are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties, and in management's view represents fair market value.
The Corporation Manager (a company controlled by some of the directors) receives an allocation of mortgage interest, referred to as Corporation Manager spread interest, calculated as 0.75% per annum of the Corporation's daily outstanding performing mortgage investment balances. For the six months ended June 30, 2011, this amount was $789,928 (2010 - $629,523), and for the three month period ending June 30, 2011 this amount was $410,017 (2010 - $324,003), and was deducted from interest and fees earned.
The Mortgage Banker (a company controlled by a director) receives certain fees from the borrowers as follows: loan servicing fees equal to 0.10% per annum on the principal amount of each of the Corporation's mortgage investments; 75% of all the commitment and renewal fees generated from the Corporation's mortgage investments; and 25% of all the special profit income generated from the non- conventional mortgage investments after the Corporation has yielded a 10% per annum return on its investments. Interest and fee income is net of the loan servicing fees paid to the Mortgage Banker of approximately $105,000 for the six month period ended June 30, 2011 (2010 - $84,000). The Mortgage Banker also retains all overnight float interest and incidental fees and charges payable by borrowers on the Corporation's mortgage investments. The Corporation's share of commitment and renewal fees recorded in income for the six months ended June 30, 2011 was $395,711 (2010 - $464,408) and for the three month period ended June 30, 2011 was $226,177 (2010 - $197,716) and applicable special profit income for the six months ended June 30, 2011 was $150,375 (2010 - $317,848) and for the three month period ended June 30, 2011 was $119,857 (2010 - $207,174).
The Corporation Management Agreement and Mortgage Banking Agreement contains provisions for the payment of termination fees to the Corporation Manager and Mortgage Banker in the event that the respective agreements are either terminated or not renewed.
Several of the Corporation's mortgages are shared with other investors of the Mortgage Banker, which may include members of management of the Mortgage Banker and/or Officers or directors of the Corporation. The Corporation ranks equally with other members of the syndicate as to receipt of principal and income.
Mortgages totalling $8,760,000 (December 31, 2010 - $8,760,000 and January 1, 2010 - $1,760,000) were issued to borrowers controlled by certain directors of the Corporation. Each mortgage is dealt with in accordance with the Corporation's existing investment and operating policies and is personally guaranteed by the related directors.
16. Interest expense:
| Three months ended | Six months ended | |||||||||||
| June 30, 2011 |
June 30, 2010 |
June 30, 2011 |
June 30, 2010 |
|||||||||
| Bank interest expense | $ | 208,917 | $ | 84,594 | $ | 284,844 | $ | 121,284 | ||||
| Loans payable interest expense | 39,846 | 66,187 | 79,757 | 138,642 | ||||||||
| Debenture interest expense | 892,014 | 423,108 | 1,820,491 | 845,540 | ||||||||
| Interest expense | $ | 1,140,777 | $ | 573,889 | $ | 2,185,092 | $ | 1,105,466 | ||||
| Deferred finance cost amortization – convertible debenture | (96,665 | ) | (42,630 | ) | (192,267 | ) | (84,792 | ) | ||||
| Implicit interest rate in excess of coupon rate – convertible debentures | (21,205 | ) | (13,518 | ) | (44,722 | ) | (26,828 | ) | ||||
| Change in accrued interest | 881,804 | 393,189 | 92,548 | (21,556 | ) | |||||||
| Cash interest paid | $ | 1,904,711 | $ | 910,930 | $ | 2,040,651 | $ | 972,290 | ||||
17. Contingent liabilities:
The Corporation is involved in certain litigation arising out of the ordinary course of investing in mortgages. Although such matters cannot be predicted with certainty, management believes the claims are without merit and does not consider the Corporation's exposure to such litigation to have an impact on these financial statements.
18. Fair value of financial instruments:
The fair value of amounts receivable, bank indebtedness, accounts payable and accrued liabilities and shareholder dividend payable approximate their carry values due to their short-term maturities.
The fair value of loans payable approximate their carrying values due to the fact that the majority of the loans are (i) short-term in nature with terms of 12 months or less, (ii) repayable in full, at any time upon the borrower under the underlying mortgage that secures the loan payable repaying their mortgage without penalty, and (iii) have floating interest rates linked to bank prime.
The fair value of the convertible debentures, including their conversion option, has been determined based on the closing price of the debentures of the Corporation on the TSX for the respective date. The fair value has been estimated at June 30, 2011 to be $53,996,688 (June 30, 2010 - $24,773,104, December 31, 2010 - $56,305,890).
The fair value of the trust units as at June 30, 2010 has been determined based on the June 30, 2010 closing price of the units of the Corporation on the TSX. The fair value has been estimated at June 30, 2010 to be $161,417,372. The fair value of the shares as at June 30, 2011 has been determined based on the June 30, 2011 closing price of the shares of the Corporation on the TSX. The fair value has been estimated at June 30, 2011 to be $184,224,249. The fair value of the units as at December 31, 2010 has been determined based on the December 31, 2010 closing price of the units of the Corporation on the TSX. The fair value has been estimated at December 31, 2010 to be $171,090,263.
19. Risk management:
(a) Interest rate risk:
The Corporation's operations are subject to interest rate fluctuations. The interest rate on the majority of mortgage investments is set at the greater of a floor rate and a formula linked to bank prime. The floor interest rate mitigates the effect of a drop in short term market interest rates while the floating component linked to bank prime allows for increased interest earnings where short term market rates increase.
The Corporation's debt comprises bank indebtedness and loans payable, with the majority of such debt bearing interest based on bank prime and/or based on short term Bankers Acceptance interest rates as a benchmark.
At June 30, 2011, if interest rates at that date had been 100 basis points lower or higher, with all other variables held constant, net income for the three month period would be affected as follows:
| Carrying Value | -1% | +1% | ||||||
| Financial assets | ||||||||
| Mortgage investments | $ | 233,521,237 | $ | (4,400 | ) | $ | 55,925 | |
| Financial liabilities | ||||||||
| Bank indebtedness | 38,221,178 | 95,553 | (95,553 | ) | ||||
| Accounts payable and accrued liabilities | 781,061 | - | - | |||||
| Unearned income | 491,296 | - | - | |||||
| Shareholder dividend payable | 1,144,979 | |||||||
| Loans payable | 3,852,429 | (4,309 | ) | 4,309 | ||||
| Total increase (decrease) | $ | 86,844 | ($35,319 | ) | ||||
At June 30, 2010 if interest rates at that date had been 100 basis points lower or higher, with all other variables held constant, net income for the three month period would be affected as follows:
| Carrying Value | -1% | +1% | ||||||
| Financial assets | ||||||||
| Mortgage investments | $ | 178,341,971 | $ | (26,980 | ) | $ | 43,776 | |
| Financial liabilities | ||||||||
| Bank indebtedness | 11,479,317 | 57,397 | (57,397 | ) | ||||
| Accounts payable and accrued liabilities | 331,478 | |||||||
| Unearned income | 238,931 | |||||||
| Unitholder distribution payable | 1,105,404 | |||||||
| Loans payable | 7,548,384 | (25,183 | ) | 25,183 | ||||
| Total increase (decrease) | $ | 5,234 | $ | 11,562 | ||||
(b) Credit and operational risks:
Any instability in the real estate sector and an adverse change in economic conditions in Canada could result in declines in the value of real property securing the Corporation's mortgage investments. The Corporation mitigates this risk by adhering to the investment and operating policies set out in its Declaration of Corporation.
The Corporation's maximum exposure to credit risk is represented by the fair values of amounts receivable and mortgage investments.
(c) Liquidity risk:
The Corporation's liquidity requirements relate to its obligations under its bank indebtedness, loans payable, convertible debentures and its obligations to make future advances under its existing mortgage portfolio. Liquidity risk is managed by ensuring that the sum of (i) availability under the Corporation's bank borrowing line, (ii) the sourcing of other borrowing facilities, and (iii) projected repayments under the existing mortgage portfolio, exceeds projected needs (including funding of further advances under existing and new mortgage investments).
As at June 30, 2011, the Corporation had not utilized its full leverage availability, being a maximum of 60% of its first mortgage investments. Un-advanced committed funds under the existing mortgage portfolio amounted to $26,781,886 as at June 30, 2011 (2010 - $11,089,779). These commitments are anticipated to be funded from the Corporation's credit facility and borrower repayments. The Corporation has a revolving line of credit with its principal banker to fund the timing differences between mortgage advances and mortgage repayments. The bank borrowing line is a committed facility with a maturity date of September 30, 2011. If the loan is not renewed on September 30, 2011, the terms of the facility allow for the Corporation to repay the balance owed on September 30, 2011 within 12 months. In the current economic climate and capital market conditions, there are no assurances that the bank borrowing line will be renewed or that it could be replaced with another lender if not renewed. If it is not extended at maturity, repayments under the Corporation's mortgage portfolio would be utilized to repay the bank indebtedness. There are limitations in the availability of funds under the revolving line of credit. The Corporation's mortgages are predominantly short-term in nature, and as such, the continual repayment by borrowers of existing mortgage investments creates liquidity for ongoing mortgage investments and funding commitments. Loans payable relate to borrowings on specific mortgages within the Corporation's portfolio and only have to be repaid once the specific loan is paid out by the Borrower.
If the Corporation is unable to continue to have access to its bank borrowing line and loans payables, the size of the Corporation's mortgage portfolio will decrease and the income historically generated through holding a larger portfolio by utilizing leverage will not be earned.
Contractual obligations as at June 30, 2011 are due as follows:
| Total | Less than 1 | 1 – 3 | 4 – 6 years | |||||
| year | years | |||||||
| Bank indebtedness | $ | 38,221,178 | $ | 38,221,178 | ||||
| Loans payable | 3,852,429 | 1,723,583 | 2,128,846 | |||||
| Convertible debenture | 52,692,000 | 21,249,000 | 31,443,000 | |||||
| Subtotal – Liabilities | 94,765,607 | 39,944,761 | 21,249,000 | 33,571,846 | ||||
| Future advances under mortgages | 26,781,886 | 26,781,886 | ||||||
| Liabilities and contractual obligations | $ | 121,547,493 | $ | 66,726,647 | $ | 21,249,000 | $ | 33,571,846 |
The bank indebtedness and loans payable are liabilities resulting from the funding of the Corporation's mortgage investments. Repayment of mortgage investments results in a direct and corresponding pay down of the bank indebtedness and/or loans payable. The obligations for future mortgage advances under the Corporation's mortgage portfolio are anticipated to be funded from the Corporation's credit facility and borrower mortgage repayments. Upon funding of same, the funded amount forms part of the Corporation's mortgage investments.
(d) Capital risk management:
The Corporation defines capital as being the funds raised through the issuance of publicly traded securities of the Corporation. The Corporation's objectives when managing capital/equity are:
- to safeguard the Corporation's ability to continue as a going concern, so that it can continue to provide returns for shareholders, and
- to provide an adequate return to shareholders by obtaining an appropriate amount of debt, commensurate with the level of risk.
The Corporation manages the capital/equity structure and makes adjustments to it in light of changes in economic conditions. In order to maintain or adjust the capital structure, the Corporation may issue new shares or repay bank indebtedness (if any) and loans payable.
The Corporation's investment guidelines, which can be varied at the discretion of the Board of Directors, incorporate various guideline restrictions and investment operating policies. The Corporation's guideline states that the Corporation (i) will not invest more than 5% of the amount of its capital in any single conventional first mortgage, (ii) will not invest more than 2.5% of the amount of its capital in any single non-conventional mortgage or conventional mortgage that is not a first mortgage, and (iii) will only borrow funds in order to acquire or invest in mortgage investments in amounts up to 60% of the book value of the Corporation's portfolio of conventional first mortgages.
The Corporation is required by its Bank lender to maintain various covenants, including minimum equity amount, interest coverage ratios, indebtedness as a percentage of the performing first mortgage portfolio size and indebtedness to total assets. The Corporation has complied with all such Bank covenants.
20. Subsequent Event:
On August 3, 2011, the Corporation entered into an agreement to sell, on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., $22,500,000 aggregate principal amount of 5.40% convertible unsecured subordinated debentures, due February 28, 2019. Each debenture is convertible into shares of the Corporation at the option of the holder at a conversion price of $14.35 per share. The net proceeds of the offering will be used to repay bank indebtedness. As part of the offering the Corporation granted the underwriters an over-allotment option for up to $3,375,000 of additional debentures that 30 days following closing.
21. Financial statement review:
These unaudited interim condensed financial statements have not been reviewed by the Corporation's auditors.
Contact Information:
Eli Dadouch
President & Chief Executive Officer
(416) 635-0221