Firm Capital Mortgage Investment Corporation Announces Results

TSX Symbol FC

TORONTO, March 15, 2013 /CNW/ - Firm Capital Mortgage Investment Corporation (the "Corporation") (TSX FC), today released its financial statements for the quarter and fiscal year ended December 31, 2012.

PROFIT & RETURN ON EQUITY

Profit for the fourth quarter ended December 31, 2012 increased by 6% to $4,071,325 as compared to $3,843,403 for the same period last year.  Basic weighted average profit per share for the fourth quarter ended December 31, 2012 was $0.243, which is lower in comparison to the $0.256 reported for the fourth quarter ended December 31, 2011. For the year ended December 31, 2012, profit increased by 14% to $16,755,292 as compared to $14,659,462 for the year ended December 31, 2011.  Basic weighted average profit per share for the year ended December 31, 2012 of $0.999 was slightly higher in comparison to the $0.995 for the year ended December 31, 2011. Profit for the year ended December 31, 2012 represented an annualized return on shareholders' equity of 9.83%. This return on shareholders' equity represents 874 basis points per annum over the average Government of Canada One Year Treasury Bill yield and is well in excess of the Corporation's stated target yield objective of 400 basis points per annum over the average One Year Treasury Bill yield.

DIVIDENDS:

For the twelve months ended December 31, 2012, the Corporation paid dividends totaling $16,755,292 versus $14,659,462 for the twelve months ended December 31, 2011.  The Corporation distributed 100% of its profits to shareholders.

INVESTMENT PORTFOLIO HIGHLIGHTS:

Details on the Corporation's investment portfolio as at December 31, 2012 are as follows:

• Total gross investment portfolio equals $297,217,271
• Conventional first mortgages, being those mortgages with loan to values less than 75%, comprise 62.3% of our total 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 9.03% per annum.
• Regionally, the portfolio is diversified approximately as follows: Ontario 74.6%, Alberta 15.1%, Quebec 8.2% and British Columbia 2.1%.
• Investment portfolio breakdown by loan size is as follows:

Amount	Number of Investments	%	Total Amount		%
$0 - $2,500,000	98	71%	$	83,230,849	28%
$2,500,001 - $5,000,000	22	16%		75,932,651	26%
$5,000,001 - $7,500,000	10	7%		56,508,748	19%
$7,500,000 +	9	6%		81,545,023	27%
	139	100%	$	297,217,271	100%

 

IMPAIRMENT PROVISION:

Management has always taken a proactive approach to the loan impairment provision. This is a prudent approach to protecting our Shareholders' equity. Impairment provisions increased by $200,000 over 2011 to $3,180,000 representing 1.1% of the gross loan portfolio.

UNRECOGNIZED INCOME COLLECTED:

As at December 31, 2012, the Corporation has banked non-refundable fee income of $520,055, which will be recognized as income over the term of the corresponding investments.

FINANCING UPDATE

On March 4, 2013, the Corporation entered into an agreement to sell, on a bought deal basis, to a syndicate of underwriters, $20,000,000 aggregate principal amount of 4.75% convertible unsecured subordinated debentures due March 31, 2020 (the "Debentures") at a price of $1,000 per Debenture.  The Corporation has granted the underwriters an over-allotment option to purchase up to $3,000,000 additional aggregate principal amount of Debentures, exercisable, in whole or in part, at any time until 30 days following the closing of the offering.  The Debentures will bear interest at a rate of 4.75% per annum, payable semi-annually in arrears on the last day of March and September in each year commencing September 30, 2013, and will mature on March 31, 2020 (the "Maturity Date").  The Debentures will be convertible at the holder's option into common shares of the Corporation (the "Shares") at any time prior to the earlier of the Maturity Date and the date fixed for redemption at a conversion price of $15.80 per Share (the "Conversion Price"), subject to adjustment in certain circumstances.

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 shares at a 2% discount to market 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, shareholder 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.

 

Financial Statements of

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION

Years Ended December 31, 2012 and 2011

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Balance Sheets

(In Canadian dollars)

As at		December 31, 2012			December 31, 2011
Assets
Amounts receivable and prepaid expenses (note 4)	$	3,026,057		$	3,478,338
Investment portfolio (note 5)		294,037,271			271,048,591
Total assets	$	297,063,328		$	274,526,929
Liabilities and Shareholders' Equity
Bank indebtedness (note 6)	$	24,379,151		$	37,763,021
Accounts payable and accrued liabilities		1,741,192			1,354,639
Unearned income		520,055			556,991
Shareholder dividend payable		2,300,218			2,008,118
Loans payable (note 7)		9,045,731			15,649,081
Convertible debentures (note 8)		82,698,573			69,134,395
Total liabilities		120,684,920			126,466,245
Shareholders' Equity		176,700,234			148,382,510
Deficit		(321,826)			(321,826)
Total shareholders' equity		176,378,408			148,060,684
Commitments (note 5)
Contingent liabilities (note 15)
Subsequent events (note 20)
Total liabilities and shareholders' equity	$	297,063,328		$	274,526,929

See accompanying notes to financial statements

On behalf of the Directors:

"Eli Dadouch"

"Jonathan Mair"

 

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION

Statements of Comprehensive Income

Years ended December 31, 2012 and 2011

(In Canadian dollars)

			2012			2011
Interest and fees earned		$	27,321,896		$	22,562,666
			27,321,896			22,562,666
Corporation manager interest allocation (note 13)			2,138,032			1,784,991
Interest expense (note 14)			7,189,428			5,348,266
General and administrative expenses			1,039,144			769,947
Impairment loss on investment portfolio (note 5)			200,000			-
			10,566,604			7,903,204
Total comprehensive income and profit for the year		$	16,755,292		$	14,659,462
Profit per share (note 10):
Basic		$	0.999		$	0.995
Diluted		$	0.989		$	0.981

See accompanying notes to financial statements

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Statements of Changes in Equity
Years ended December 31, 2012 and 2011


(In Canadian dollars) 

			2012			2011
Shareholders' equity
Shares (note 9):
Balance, beginning of year		$	147,200,878		$	137,343,502
Proceeds from issuance of shares			22,447,040			764,376
Offering costs			(1,014,560)			-
Conversion of debentures to shares			6,349,000			9,093,000
Balance, end of year		$	174,982,358		$	147,200,878
Equity component of convertible debentures (note 8):
Balance, beginning of year		$	1,181,632		$	774,000
Conversion of debentures to shares			(153,756)			(202,368)
Equity component of debentures issued during the year			690,000			610,000
Balance, end of year		$	1,717,876		$	1,181,632
Total shareholders' equity		$	176,700,234		$	148,382,510
Deficit:
Deficit, beginning of year		$	(321,826)		$	(321,826)
Dividends to shareholders (note 11)			(16,755,292)			(14,659,462)
Comprehensive income and profit for the year			16,755,292			14,659,462
Deficit, end of year		$	(321,826)		$	(321,826)
Total Shareholders' Equity		$	176,378,408		$	148,060,684
Shares issued and outstanding (note 9)			17,425,884			15,213,018

See accompanying notes to financial statements

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Statements of Cash Flows
Years ended December 31, 2012 and 2011

(In Canadian dollars)

						2012			2011
Cash provided by (used in):
Operating activities:
	Comprehensive income and profit for the year				$	16,755,292		$	14,659,462
	Adjustments for:
		Interest Expense (net of implicit interest rate and accrued interest)				6,278,736			4,812,094
		Change in impairment loss on investment portfolio				200,000			-
		Implicit interest rate in excess of coupon rate - convertible debentures				247,853			91,487
		Deferred finance cost amortization - convertible debentures				662,839			482,190
	Net changes in non-cash operating items:
		Increase (decrease) in accrued interest				(211,679)			(449,418)
		Decrease (increase) in amounts receivable and prepaid expenses				452,281			(1,106,775)
		Increase (decrease) in accounts payable and accrued liabilities				386,552			(127,941)
		Increase (decrease) in unearned income				(36,936)			184,477
Net cash flows from operating activities						24,734,938			18,545,576
Financing activities:
	Proceeds from issuance of shares					22,447,040			764,376
	Proceeds from convertible debentures issued					20,485,000			25,738,000
	Debenture offering costs					(946,270)			(1,305,453)
	Offering costs					(1,014,560)			-
	Funding/repayment of loans payable (net)					(6,603,350)			11,359,832
	Cash interest paid					(6,067,057)			(4,362,676)
	Dividends to shareholders paid during the year					(16,463,193)			(14,779,189)
Net cash flows from financing activities						11,837,610			17,414,890
Investing activities:
	Funding of investments					(203,555,247)			(235,636,265)
	Discharge of investments					180,366,569			166,918,603
Net cash flows used in investing activities						(23,188,678)			(68,717,662)
Bank indebtedness, beginning of year						(37,763,021)			(5,005,825)
Net (increase) decrease in bank indebtedness for the year						13,383,870			(32,757,196)
Bank indebtedness, end of year					$	(24,379,151)		$	(37,763,021)
Cash flows from operating activities include:
	Interest received				$	25,176,412		$	20,195,020

See accompanying notes to financial statements

FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION

Notes to Financial Statements

Years ended December 31, 2012 and 2011

(in Canadian dollars)

---

Toronto Toronto 1. Organization of the 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 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 shareholders' 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.

2. Basis of presentation:

These financial statements were approved by the Board of Directors on March 14, 2013.

(a) Statement of compliance:

The financial statements of the Corporation have been prepared by management in accordance with International Financial Reporting Standards ("IFRS").

(b) Basis of measurement:

The 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 financial statements are presented in Canadian dollars, which is the Corporation's functional currency.

(d) Use of estimates and judgements:

The preparation of the financial statements requires management to make estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.  Actual results could differ from those estimates.

In making estimates, management relies on external information and observable conditions where possible, supplemented by internal analysis as required.  Those estimates and judgements have been applied in a manner consistend with prior periods and there are no known trends, commitments, events or uncertainties that we believe will materially affect the methodology or assumptions utilized in making those estimates and judgements in these audited financial statements.  The estimates and judgements used in determining the recorded amount for assets and liabilities in the financial statements include the following:

Investment impairment - The most significant estimates that the Corporation is required to make relate to the impairment of the investments (notes 3(a) 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 investments and underlying security of the 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 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 financial statements.

(a) Investment portfolio:

The Investment portfolio is classified as loans and receivable investments.  Such investments are recognized initially at cost plus any directly attributable transaction costs.  Subsequent to initial recognition, the investment loans are measured at amortized cost using the effective interest method, less any impairment losses.

The 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 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 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.  Commitment fees received are amortized over the expected term of the investment.

(ii) Non-conventional mortgages:   Special profit and interest participations earned by the Corporation on non-conventional mortgages 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 9(b).  The expense of equity-settled incentive option plans 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 ("MIC") 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 to the extent the dividends were not deducted previously.  The Corporation intends to maintain its status as a MIC and intends to distribute sufficient dividends in the year and in future years to ensure that the Corporation is not subject to income taxes.  Accordingly, for financial statement reporting purposes, the tax deductibility of the Corporation's dividends results in the Corporation being effectively exempt from taxation and no provision for current or future income taxes is required.

(e) Financial assets and liabilities:

Financial assets include the Corporation's amounts receivable and investment portfolio.  Financial liabilities include bank indebtedness, accounts payable and accrued liabilities, shareholder dividend payable, loans payable, unearned income, and convertible debentures.

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 cost, adjusted for directly attributable transaction costs.

(f) Compound financial instruments:

Compound financial instruments issued by the Corporation comprise convertible debentures that can be converted into shares of the Corporation 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 as 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 the 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 of 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 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) Basic and diluted per share calculation:

The Corporation presents basic and diluted profit per share data for its common shares.  Basic per share amounts are calculated by dividing the profit and loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the year.  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

(j) Future changes in accounting policies:

IFRS 7 - Financial Instruments: Disclosures ("IFRS 7"), as amended by the IASB in October 2010, requires entities to provide the disclosures for all transferred financial assets that are not derecognized and for a continuing involvement in a transferred financial asset, existing at the reporting date, irrespective of when the related transfer transaction occurred.  The amendment is effective for annual periods beginning on or after January 1, 2012.  IFRS 7 was further amended by the IASB in December, 2011.  The amendment requires entities to provide disclosures related to offsetting financial assets and liabilities.  The amendment is effective for annual periods beginning on or after January 1, 2014.

IFRS 9 - Financial Instruments ("IFRS 9") will replace IAS 39 - Financial Instruments: Recognition and Measurement ("IAS 39").  IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification options in IAS 39.  The approach in IFRS 9 is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets.  IFRS 9 was amended by the IASB in October, 2010 to provide guidance on the classification and reclassification of financial liabilities, their measurement, and the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss.  When an entity elects to measure a financial liability at fair value, gains or losses due to changes in the credit risk of the instrument must be recognized in other comprehensive income.  IFRS 9 is effective for annual periods beginning on or after January 1, 2015.

The Corporation is currently evaluating the impact of these new and amended standards on this financial statements.

4. Amounts receivable and prepaid expenses:

The following is a breakdown of amounts receivable and prepaid expenses as at December 31, 2012 and December 31, 2011.

		2012				2011
Interest receivable	$	2,672,621			$	2,779,473
Prepaid expenses		127,472				152,478
Fees receivable		169,733				134,876
Special income receivable		-				411,511
Accounts receivable		56,231				-
Amounts receivable and prepaid expenses	$	3,026,057			$	3,478,338

5. Investment portfolio:

The following is a breakdown of the investment portfolio as at December 31, 2012 and December 31, 2011:

		December 31, 2012					December 31, 2011
Conventional first mortgages		$	185,038,057	62.26%			$	186,641,808	68.11%
Conventional non-first mortgages			34,472,723	11.60%				41,927,607	15.30%
Related investments			34,916,788	11.75%				19,958,571	7.28%
Discounted Debt Investments			9,370,300	3.15%				1,441,850	0.53%
Non-conventional mortgages			33,419,403	11.24%				24,058,755	8.78%
Total investments (at amortized cost)		$	297,217,271	100.00%			$	274,028,591	100.00%
Impairment provision			(3,180,000)					(2,980,000)
Investment portfolio		$	294,037,271				$	271,048,591

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 mortgage charges not registered in first priority with loan to values not exceeding 75%.  Related investments are loans that may not necessarily be secured by mortgage charge security.  Discounted debt investments are loans purchased from arms-length third parties at a discount to their face value.  Non-conventional mortgages are loans that in some cases have loan to values that exceed or may exceed 75% and are investments that are the source of all special profit participation earned by the Corporation.

Investment portfolio is stated at amortized cost.  The impairment provision in the amount of $3,180,000 as at December 31, 2012 represents the total amount of management's estimate of the shortfall between the investment principal balances and the estimated recoverable amount from the security under the loans.

The loans comprising the Investment portfolio bear interest at the weighted average rate of 9.03% per annum (2011 - 9.06% per annum) and mature between 2013 and 2016.

The un-advanced funds under the existing investment portfolio (which are commitments of the Corporation) amounted to $43,212,906 as at December 31, 2012 (December 31, 2011 - $30,845,331).

Principal repayments based on contractual maturity dates are as follows:

2013														204,866,166
2014														74,992,947
2015														16,001,658
2016														1,356,500
													$	297,217,271

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

6. Bank indebtedness:

The Corporation has entered into credit arrangements of which $24,379,151 as at December 31, 2012 (December 31, 2010 - $37,763,021) has been drawn.  Interest on bank indebtedness is predominantly 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 facililty, a component of which is a demand facility and a component of which has a committed term to September 30, 2013.  Bank indebtedness is secured by a general security agreement.  The credit agreement contains certain financial covenants that must be maintained.  As at December 31, 2012 and December 31, 2011, the Corporation 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-rescourse basis and bear interest at rates ranging from 4.70% to 6.45% as at December 31, 2012 (December 31, 2011 - 3.50% to 6.45%).  The Corporation's principal balance outstanding under the mortgages for which a first priority charge has been granted is $15,353,601 as at December 31, 2012 (December 31, 2011 - $26,334,738).

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:

2014													$	8,898,405
2015														147,326
													$	9,045,731

8. Convertible debentures:

	Year-Ended			Year-Ended
	December 31, 2012			December 31, 2011
	Total Debentures			Total Debentures
Liability component, beginning of year	$	69,134,395		$		53,628,803
Issued	18,848,730			23,822,547
Conversions of debentures to shares	(6,349,000)			(9,093,000)
Adjustment to fair value of conversion option	153,756			202,368
Implicit interest rate in excess of coupon rate	247,853			91,487
Deferred finance cost amortization	662,839			482,190
Liability component, end of year	$	82,698,573		$		69,134,395

 

The breakdown of the Total Debentures for the year ended December 31, 2012 presented in the above table is as follows:
	6.00%			5.75%			5.40%				5.25%
	Convertible			Convertible			Convertible				Convertible
	Debenture			Debenture			Debenture				Debenture			TOTAL
Liability component, beginning of year	$	15,225,091		$	30,021,130		$		23,888,174		-			$		69,134,395
Issued	-			-			-				$	18,848,730		18,848,730
Conversions	(6,349,000)			-			-				-			(6,349,000)
Adjustment to fair value of conversion	153,756													153,756
Implicit interest rate in excess of coupon rate	61,718			29,136			93,733				63,266			247,853
Deferred finance cost amortization	171,457			212,020			173,934				105,428			662,839
Liability component, end of year	$	9,263,022		$	30,262,286		$		24,155,841		$	19,017,424		$		82,698,573
Maturity Date	Jun 30, 2013			Oct 31, 2017			Feb 28, 2019				Mar 31, 2019
The breakdown of the Total Debentures for the year ended December 31, 2011 is as follows:
	6.00%			5.75%			5.40%
	Convertible			Convertible			Convertible
	Debenture			Debenture			Debenture				TOTAL
Liability component, beginning of year	$	23,886,736		$	29,742,067		-				$	53,628,803
Issued	-			-			$		23,822,547		23,822,547
Conversions	(9,093,000)			-			-				(9,093,000)
Adjustment to fair value of conversion option	202,368										202,368
Implicit interest rate in excess of coupon rate	57,998			30,117			3,372				91,487
Deferred finance cost amortization	170,989			248,946			62,255				482,190
Liability component, end of year	$	15,225,091		$	279,063		$		23,888,174		$	69,134,395

 

In 2012, $6,349,000 (2011 - $9,093,000) of 6.00% debentures were converted by the debenture holders to 540,323 shares of the Corporation.

In the third quarter of 2011, the Corporation completed a public offering of 25,738, 5.40% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $25,738,000.  The debentures mature on February 28, 2019 and interest is paid semi-annually on February 28 and August 31.  The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $14.35.  The debentures may not be redeemed by the Corporation prior to August 31, 2014.  On and after August 31, 2014, but prior to February 29, 2016, the debentures are redeemable at a price equal to the principal, plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days notice, provided that the weighted average trading price of the shares on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price.

On and after February 29, 2016 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days prior notice.  On redemption or at maturity, the Corporation may, at its option, elect to satisfy its obligations to pay 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.

The convertible debentures were allocated into liability and equity components on the date of issuance as follows:
Liability	$	25,128,000
Equity	610,000
Principal	$	25,738,000

In the first quarter of 2012, the Corporation completed a public offering of 20,485, 5.25% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $20,485,000.  The debentures mature on March 31, 2019 and interest is paid semi-annually on March 31 and September 30.  The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $14.80.  The debentures may not be redeemed by the Corporation prior to March 31, 2015.  On or after March 31, 2015, but prior to March 31, 2016, the debentures are redeemable at a price equal to the principal, plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days' notice, provided that the weighted average trading price of the shares on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price.  On or after March 31, 2016 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Corporation's option on not more than 60 days' and not less than 30 days' prior notice.  On redemption or at maturity, the Corporation may, at its option, elect to satisfy its obligation to pay all or a portion of the principal 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.

 

The convertible debentures were allocated into liability and equity components on the date of issuance as follows:
Liability	$	19,795,000
Equity	690,000
Principal	$	20,485,000

 

As at December 31, 2012, debentures payable bear interest at weighted average effective rate of 5.55% (2011 - 5.68%) per annum.  Notwithstanding the carrying value of the convertible debentures, the principal balance outstanding to the debenture holders is $86,668,000 as at December 31, 2012 (2011 - $72,532,000).

9. Shareholders' equity:

On January 1, 2011, all outstanding units were exchanged on a one-for-one basis for common shares of the Corporation, as described in Note 1.  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 issued and outstanding:
The following shares were issued and outstanding as at December 31, 2012:
		# of shares		Amount
Balance, beginning of year		15,213,018		$	147,200,878
New shares from conversion of debentures		540,323		6,349,000
New shares from public offering		1,541,000		20,726,450
New shares issued during the period under Dividend Reinvestment Plan		131,543		1,720,590
Offering costs		-		(1,014,560)
Balance, end of year		17,425,884		$	174,982,358

 

The following shares were issued and outstanding as at December 31, 2011:
	# of shares		Amount
Balance, beginning of year	14,377,333		$	137,343,502
New shares from conversion of debentures	773,861		9,093,000
New shares issued during the year under Dividend Reinvestment Plan	61,824		764,376
Balance, end of year	15,213,018		$	147,200,878

 

In the first quarter of 2012, the Corporation completed a public offering of 1,541,000 shares at $13.45 per share.

(b) Incentive option plan:

As at December 31, 2012, no options remained outstanding (December 31, 2011 - NIL).

(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.

10. Per share amounts:

(a) Profit per share calculation:

The following table reconciles the numerators and denominators of the basic and diluted profit per share for the years ended December 31, 2012 and 2011.

Basic profit per share calculation:
		2012			2011
Numerator for basic profit per share:
	Profit	$	16,755,292		$		14,659,462
Denominator for basic profit per share:
	Weighted average shares	16,769,964			14,730,516
Basic profit per share		$	0.999		$		0.995

 

Diluted profit per share calculation:
		2012			2011
Numerator for diluted profit per share:
	Profit:	$	16,755,292		$	14,659,462
	Interest on convertible debentures	5,661,059			4,069,958
Net profit for diluted profit per share		$	22,416,351		$	18,729,420
Denominator for diluted profit per share:
Weighted average shares		16,769,964			14,730,516
Net shares that would be issued:
	Assuming debentures are converted	5,890,066			4,362,472
Diluted weighted average shares		22,660,030			19,092,988
Diluted profit per share		$	0.989		$	0.981

 

11. 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 the 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.

For the year ended December 31, 2012, the Corporation recorded dividends of $16,755,292 (2011 - $14,659,462) to its shareholders. Dividends were $0.999 per share (2011 - $0.99 per share).

12. 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 provided for a transition period until 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.

13. Related party transactions and balances:

The Corporation's Manager (a company controlled by some of the directors) receives an allocation of interest, referred to as Corporation Manager spread interest, calculated at 0.75% per annum of the Corporation's daily outstanding performing investment balances. For the year ended December 31, 2012, this amount was $2,138,032 (2011 - $1,784,991). Included in accounts payable and accrued liabilities at December 31, 2012 are amounts payable to the Corporation's Manager of $179,141 (December 31, 2011 - $204,988).

The total directors' fee paid for the year was $173,250 (2011 - $183,000). This amount has been fully settled during the year. The listing of the members of the board of directors is shown in the annual report. The key management personnel are also directors of the Corporation and receive compensation from the Corporation Manager. The directors held 370,080 shares in the Corporation as at the end of the financial year.

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 investments; 75% of all the commitment and renewal fees generated from the Corporation's investments; and 25% of all the special profit income generated from the non-conventional 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 $285,000 for the year ended December 31, 2012 (2011 - $238,000).  The Mortgage Banker also retains all overnight float interest and incidental fees and charges payable by borrowers on the Corporation's investments.  The Corporation's share of commitment and renewal fees is recorded in income and for the year ended December 31, 2012 was $1,099,552 (2011 - $1,038,317) and applicable special profit income for the year ended December 31, 2012 was $1,152,785 (2011 - $353,081).

The Corporation's Management Agreement and Mortgage Banking Agreement contains provisions for the payment and 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 investments 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.

Mortgage investments totalling $13,500,000 (December 31, 2011 - $15,560,000) were issued to borrowers controlled by certain directors of the Corporation. Each investment is dealt with in accordance with the Corporation's existing investment and operating policies and is personally guaranteed by the related directors.

Key management compensation:

Aggregate compensation for key management personnel (all being short term employee benefits) was $1,329,271 in 2012, all of which was paid by the Mortgage Banker and nothing by the Corporation.

14.Interest expense:
	2012				2011
Bank interest expense	$	898,795			$	900,741
Loans payable interest expense	629,574				377,567
Debenture interest expense	5,661,059				4,069,958
Interest expense	$	7,189,428			$	5,348,266
Deferred finance cost amortization - convertible debentures	(662,839)				(444,685)
Implicit interest rate in excess of coupon rate - convertible debentures	(247,853)				(91,487)
Change in accrued interest	(211,679)				(449,418)
Cash Interest Paid	$	6,067,057			$	4,362,676

 

15. Contingent liabilities:

The Corporation is involved in certain litigation arising out of the ordinary course of investing in loans.  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.


16. Fair value of financial instruments:

The fair values of amounts receivable, bank indebtedness, accounts payable and accrued liabilities and shareholder dividend payable approximate their carrying values due to their short-term maturities.

The fair value of investment portfolio approximates its carrying value as the majority of the loans are repayable in full at any time without penalty, and have floating interest rates.

The fair values of loans payable approximate their carrying values due to the fact that the majority of the loans are: (i) repayable in full, at any time upon the borrower under the underlying loan that secures the loan payable repaying their loan without penalty, and (ii) have floating interest rates linked to bank prime.

The fair value of convertible debentures, including their conversion option, has been determined based on the closing price of the debentures of the Corporation on the Toronto Stock Exchange for the respective date.  The fair value has been estimated at December 31, 2012 to be $87,541,693 (2011 - $73,722,648).  This is a level 1 input which is based on a quoted price in an active market.


17. Risk management:

(a) Interest rate risk:

The Corporation's operations are subject to interest rate fluctuations.  The interest rate on the majority of the 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, loans payable and convertible debentures, with the bank indebtedness and loans payable bearing interest based on bank prime and/or based on short term Bankers Acceptance interest rates as a benchmark.

At December 31, 2012, if interest rates at that date had been 100 basis points lower or higher, with all other variables held constant, comprehensive income and equity for the year would be affected as follows:

		Carrying Value		-1%			+1%
Financial assets
	Amounts receivable and prepaid expenses	3,026,057		-			-
	Investment portfolio	294,037,271		$	(39,485)		$		524,539
Financial liabilities
	Bank indebtedness	24,379,151		243,792			(243,792)
	Accounts payable and accrued liabilities	1,741,191		-			-
	Shareholder dividend payable	2,300,218		-			-
	Loans payable	9,045,731		71,217			(71,217)
	Convertible debentures	82,530,325		-			-
Total increase				$	275,524		$		209,530

 

(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 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 the investment portfolio.

(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 portfolio.  Liquidity risk is managed by ensuring that the sum of (i) availabililty under the Corporation's bank borrowing line, (ii) the sourcing of other borrowing facilities, and (iii) projected repayments under the existing investment portfolio, exceeds projected needs (including funding of further advances under existing and new investments).

As at December 31, 2012, the Corporation had not utilized its full leverage availability, being a guideline of 60% of its first mortgage investments.  Un-advanced committed funds under the existing investment portfolio amounted to $43,212,906 as at December 31, 2012 (December 31, 2011 - $30,845,331).  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 investment advances and investment repayments.  The bank borrowing line is a committed facility with a maturity date of September 30, 2013.  If the loan is not renewed on September 30, 2013, the terms of the facility allow for the Corporation to repay the balance owed on September 30, 2013 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 investment 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 investments and predominantly short-term in nature, and as such, the continual repayment by borrowers of existing investments creates liquidity for ongoing investments and funding commitments.  Loans payable relate to borrowings on specific investments 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 investment 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, 2012 are due as follows:

	Total			Less than 1 year			1 - 3 years			4 - 6 years
Bank indebtedness	$	24,379,151		$	24,379,151		-			-
Accounts payable anaccrued liabililties	1,741,192			1,741,192			-			-
Shareholder dividend payable	2,300,218			2,300,218			-			-
Loans payable	9,045,731			-			9,045,731			-
Convertible debentures	86,300,000			8,634,000			-			77,666,000
Subtotal - Liabilities	$	123,766,292		$	37,054,561		$	9,045,731		$		77,666,000
Future advances undeportfolio	43,212,906			43,212,906
Liabilities and contractual obligations	$	166,979,198		$	80,267,467		$	9,045,731		$		77,666,000

 

The bank indebtedness and loans payable are liabilities resulting from the funding of the Corporation's investments.  Repayment of investments results in a direct and corresponding pay down of the bank indebtedness and/or loans payable.  The obligations for future advances under the Corporation's investment portfolio are anticipated to be funded from the Corporation's credit facility and borrower repayments.  Upon funding of same, the funded amount forms part of the Corporation's investments.

Interest payments on loans payable (assuming outstanding amounts and the bank prime interest rate remain unchanged) would be $457,994 for less than 1 year, $915,988 for 1 to 3 years and $1,373,982 for 4 to 6 years.  Interest payments on debentures (assuming the amounts remain unchanged) would be $4,532,307 for less than 1 year, $8,805,594 for 1 to 3 years and $13,078,881 for 4 to 6 years.

(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 10% of the amount of its capital in any single conventional first mortgage where the loan to value on such loan is less than 60%, (ii) will not invest more than 8% of the amount of its capital in any single conventional first mortgage where the loan to value on such loan is between 60% and 70%, (iii) will not invest more than 5% of the amount of its capital in any single conventional first mortgages where the loan to value on such loan exceeds 70%, (iv) will not invest more than 2.5% of the amount of its capital in any single non-conventional mortgage or conventional investment that it is not a first mortgage, and (v) will only borrow funds in order to acquire or invest in 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 events:

On March 4, 2013, the Corporation entered into an agreement to sell, on a bought deal basis, to a syndicate of underwriters, $20,000,000 aggregate principal amount of 4.75% convertible unsecured subordinated debentures due March 31, 2020 (the "Debentures") at a price of $1,000 per Debenture.  The Corporation has granted the underwriters an over-allotment option to purchase up to $3,000,000 additional aggregate principal amount of Debentures, exercisable, in whole or in part, at any time until 30 days following the closing of the offering.  The Debentures will bear interest at a rate of 4.75% per annum, payable semi-annually in arrears on the last day of March and September in each year commencing September 30, 2013, and will mature on March 31, 2020 (the "Maturity Date").  The Debentures will be convertible at the holder's option into common shares of the Corporation (the "Shares") at any time prior to the earlier of the Maturity Date and the date fixed for redemption at a conversion price of $15.80 per Share (the "Conversion Price"), subject to adjustment in certain circumstances.


The offering is scheduled to close on or about March 28, 2013, and is subject to regulatory approval.

SOURCE: Firm Capital Mortgage Investment Corporation

Firm Capital Mortgage Investment Corporation
Eli Dadouch
President & Chief Executive Officer
[phone]