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Press release from Marketwire

Firm Capital Mortgage Investment Trust Announces Third Quarter Results

Thursday, November 04, 2010

Firm Capital Mortgage Investment Trust Announces Third Quarter Results18:11 EDT Thursday, November 04, 2010TORONTO, ONTARIO--(Marketwire - Nov. 4, 2010) - Firm Capital Mortgage Investment Trust (the "Trust") (TSX:FC.UN), today released its financial results for the third quarter ended September 30, 2010.Management of the Trust is focused on the preservation of unitholders' equity and it is important for unitholders to understand that protecting our equity and maintaining a strong foundation for years to come is our key strategic objective. Management believes that our disciplined approach to lending demonstrates management's focus on the long term and that it is not taking unnecessary risks to generate short term gains. As always, we will only grow the Trust's portfolio if we are satisfied with the security and return on new investments. EARNINGS Net earnings for the quarter ended September 30, 2010 totaled $3,876,688 compared to $3,688,459 for the quarter ended September 30, 2009. Net earnings for the quarter ended September 30, 2010 exceeded distributions by $550,726 or $0.039 per unit. Basic weighted average net earnings per unit of $0.273 for the quarter ended September 30, 2010 compared to $0.266 per unit for the comparable period in 2009. The third quarter net earnings represent an annualized return on average Unitholders' equity of 11.39% per annum. This return on Unitholders' equity equates to 1025 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 Trust's target yield objective of 400 basis points per annum over the one year treasury bill yield. DISTRIBUTION OVERVIEW: Monthly distributions for the third quarter equaled $.078 per month, for a total of $0.234 per unit. MORTGAGE PORTFOLIO HIGHLIGHTS: Details on the Trust's mortgage portfolio as at September 30, 2010 are as follows:Total gross mortgage portfolio equals $195,173,255 ($192,473,255 net of fair value adjustment of $2,700,000) Conventional first mortgages, being those mortgages with loan to values less than 75%, comprise 86.3% of our total portfolio, and total conventional mortgages with loan to values under 75% comprise 91.7% of our total portfolio. Non-conventional mortgages and related investments total 8.3% of the portfolio. Approximately 73% 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 9.30% per annum. Regionally, the portfolio is diversified approximately as follows: Ontario 80.6%, Alberta 13.7%, British Columbia 3.4%, with the balance (2.3%) being in other provinces. Mortgage portfolio breakdown by investment is as follows: Mortgage Portfolio BreakdownAmountNumber of MortgagesTotal Amount$0- $1,000,0005731,864,888$1,000,001- $2,000,0002131,375,072$2,000,001- $3,000,0001333,704,683$3,000,001- $4,000,000517,095,118$4,000,001- $5,000,000626,485,105$5,000,001-$10,000,000954,648,389Total111$195,173,255 LOAN LOSS PROVISION UPDATE: Management has always taken a proactive approach to loan loss provision reserves. This is a prudent method of protecting our Unitholders' equity. Loan loss provisions totaled $2,700,000, representing 1.40% of the gross loan portfolio as at September 30, 2010. DISTRIBUTION AND UNIT PURCHASE PLAN: The Trust has in place a Distribution Reinvestment Plan (DRIP) and Unit Purchase Plan that is available to its Unitholders. The plans allows participants to have their monthly cash distributions reinvested in additional Trust units and grants participants the right to purchase, without commission, additional units, up to a maximum of $12,000 per annum. ABOUT THE TRUST The Trust, 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 Trust's investment objective is the preservation of Unitholders' equity, while providing Unitholders with a stable stream of monthly distributions from investments. The Trust 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 Unitholders. Full reports of the financial results of the Trust are outlined in the 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 StatementsThis 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 Trust's trust 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 Trust is able to invest in mortgages at rates consistent with rates historically achieved; adequate mortgage investment opportunities are presented to the Trust; and adequate bank indebtedness and bank loans are available to the Trust. 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 Trust undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.Unaudited Financial Statements ofFIRM CAPITAL MORTGAGE INVESTMENT TRUSTFor the Nine Months Ended September 30, 2010NOTICE UNDER NATIONAL INSTRUMENT 51-102National 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 Trust.FIRM CAPITAL MORTGAGE INVESTMENT TRUSTBalance Sheets September 30, 2010, with comparative figures for December 31, 2009 and September 30, 2009Sept. 30, 2010Dec. 31, 2009Sept. 30, 2009(Unaudited)(Audited)(Unaudited)AssetsCash$-$1,444,339$-Amounts receivable and prepaid expenses (note 5)2,037,5171,706,3831,787,972Mortgage investments (note 6)192,473,255167,128,297174,155,526$194,510,772$170,279,019$175,943,498Liabilities and Unitholders' EquityLiabilities:Bank indebtedness (note 7)$25,174,149$-$2,134,815Accounts payable and accrued liabilities710,550410,064809,681Unearned income307,352202,481134,636Unitholder distribution payable1,110,0182,543,1201,083,045Loans payable (note 8)6,677,65410,714,63714,124,289Convertible debenture (note 9)23,829,69223,681,24423,625,04157,809,41537,551,54641,911,507Unitholders' equity (note 10):136,701,357132,727,473134,031,991Issued and outstanding:14,231,004 units (2009 – 13,885,195)Commitments (note 6)Contingent liabilities (note 16)$194,510,772$170,279,019$175,943,498See accompanying notes to financial statements.FIRM CAPITAL MORTGAGE INVESTMENT TRUSTUnaudited Statements of Earnings3 Month Period9 Month PeriodSept. 30, 2010Sept. 30, 2009Sept. 30, 2010Sept. 30, 2009Interest and fees earned, net of Trust Manager interest allocation (note 14)$4,790,238$4,451,976$12,839,797$14,249,477Less interest expense (note 15)683,135577,0101,788,6012,253,257Net interest and fee income4,107,1033,874,96611,051,19611,996,220Expenses:General and administrative230,415186,507572,700628,345Unrealized loss in value of mortgages (note 6)---200,000230,415186,507572,700828,345Net earnings for the period$3,876,688$3,688,459$10,478,496$11,167,875Net earnings per unit (note 11)Basic$0.273$0.266$0.746$0.805Diluted$0.264$0.257$0.728$0.779See accompanying notes to financial statements.FIRM CAPITAL MORTGAGE INVESTMENT TRUSTStatements of Unitholders' EquitySept. 30, 2010Dec. 31, 2009Sept. 30, 2009(Unaudited)(Audited)(Unaudited)Trust units (note 10):Balance, beginning of period$132,355,149$131,636,584$131,636,584Proceeds from issuance of units3,343,883204,583598,307Conversion of debentures to units20,000513,982-Balance, end of period$135,719,032$132,355,149$132,234,891Equity component of convertible debentures (note 9):Balance, beginning of period$372,324$380,482$380,482Impact of conversion of debenture to units-(8,158)(8,158)Balance, end of period$372,324$372,324$372,324Cumulative earnings:Balance, beginning of period$95,327,964$80,874,768$80,874,768Net earnings for the period10,478,49614,453,19611,167,875Balance, end of period$105,806,460$95,327,964$92,042,643Cumulative distributions to unitholders:Balance, beginning of period$95,327,964$80,874,768$80,874,768Distributions to unitholders (note 12)9,868,49514,453,1969,743,099Balance, end of period$105,196,459$95,327,964$90,617,867Total unitholders' equity$136,701,357$132,727,473$134,031,991Units issued and outstanding (note 10)14,231,00413,896,82913,885,195See accompanying notes to financial statements.FIRM CAPITAL MORTGAGE INVESTMENT TRUSTUnaudited Statements of Cash Flows3 Month Period9 Month PeriodSept. 30, 2010Sept. 30, 2009Sept. 30, 2010Sept. 30, 2009Cash provided by (used in):Operating activities:Net earnings for the period$3,876,688$3,688,459$10,478,496$11,167,875Net changes in non-cash itemsIncrease in fair value adjustment---200,000Implicit interest rate in excess of coupon rate – convertible debenture13,72912,90240,55838,114Deferred finance cost amortization – convertible debenture43,09943,099127,890127,890(Increase) decrease in amounts receivable and prepaid expenses(343,092)(12,279)(331,134)198,140Decrease in accounts payable and accrued liabilities379,072383,156300,486191,140Increase (decrease) in unearned income68,4212,977104,871(141,220)4,037,9174,118,31410,721,16711,781,939Financing activities:Proceeds from issuance of units590,61376,1673,343,88376,167Increase (decrease) in bank indebtedness13,694,832(2,781,476)26,618,488(25,202,998)Decrease in loans payable(870,730)(12,768,256)(4,036,983)(23,604,939)Increase (decrease) in distribution payable4,614574(1,433,102)(2,347,345)Distributions to unitholders(3,325,962)(3,248,273)(9,868,495)(9,743,099)10,093,367(18,721,264)14,623,791(60,822,214)Investing activities:Funding of mortgages(40,981,397)(27,575,156)(113,521,680)(44,334,055)Discharge of mortgages26,850,11342,178,10688,176,72293,374,330(14,131,284)14,602,950(25,344,958)49,040,275Increase in cash, being cash, beginning and end of period$-$-$-$-Supplemental cash flow informationInterest paid (note 15)$265,927$191,594$1,281,329$1,837,479See accompanying notes to financial statements.FIRM CAPITAL MORTGAGE INVESTMENT TRUSTNotes to Financial StatementsThree Months and Nine Months ended September 30, 2010(Unaudited)1. Organization of Trust:Firm Capital Mortgage Investment Trust (the "Trust") is a closed-end trust created for the benefit of the unitholders, pursuant to the Declaration of Trust dated July 13, 1999, as amended and restated.Pursuant to the Declaration of Trust, the Trust's mortgage banker is Firm Capital Corporation and the trust manager is FC Treasury Management Inc.2. Basis of Presentation:The unaudited interim period financial statements were prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and follow the same accounting policies and methods of application with those used in the preparation of the audited financial statements for the year ended December 31, 2009. Under Canadian GAAP, additional disclosure is required in annual financial statements and accordingly the interim financial statements should be read together with the audited financial statements and the accompanying notes included in Firm Capital Mortgage Investment Trust's 2009 Annual Report.3. Summary of significant accounting policies:The Trust's accounting policies and its standards of financial disclosure are in accordance with GAAP.(a) Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.The most significant estimates that the Trust is required to make relate to the fair value of the mortgage investments (note 3(b)). These estimates may include assumptions regarding local real estate market conditions, interest rates and the availability of credit, cost and terms of financing, the impact of present or future legislation or regulation, prior encumbrances and other factors affecting the mortgage and underlying security of the mortgage investments.These assumptions are limited by the availability of reliable comparable data, economic uncertainty, ongoing geopolitical concerns and the uncertainty of predictions concerning future events. Illiquid credit markets, volatile equity markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of fair value are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated fair value could vary by a material amount.(b) Mortgage investments:Mortgage investments are stated at estimated fair value with changes in fair value reflected in net earnings in accordance with Canadian Institute of Chartered Accountants ("CICA") Accounting Guideline 18 and CICA Handbook Section 3855. Fair value is the amount of consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of Mortgage investments approximates their carrying values due to the fact that the majority of the mortgages are (i) short-term in nature with terms of 12 months or less, (ii) repayable in full, at any time at the option of the borrower prior to maturity without penalty, and (iii) have minimum specified interest rates for mortgages with floating rates linked to bank prime. When, in management's opinion, collection of principal on a particular mortgage investment is no longer reasonably assured, the fair value of the mortgage investment is reduced to reflect the estimated net realizable recovery from the collateral securing the mortgage loan.(c) Convertible debenture:The Trust's convertible debenture is classified into debt and equity components. The equity component represents the estimated value of the conversion rights of the holders.(d) Revenue recognition:(i) Interest and fee income: Interest income is accounted for on the accrual basis, and is recorded net of the Trust Manager interest spread described in note 14. Commitment fees received are amortized over the expected term of the mortgage.(ii) Special mortgage investments:Special profit participations earned by the Trust on special mortgage investments are recognized and included in interest and fees earned only once the receipt of such amounts is certain.(e) Unit-based compensation: The Trust has unit-based compensation plans (i.e. incentive option plan) which are described in note 10. The Trust accounts for its unit-based compensation using the fair value method, under which compensation expense is measured at the grant date and recognized over the vesting period.(f) Basic and diluted net earnings per unit: Basic net earnings per unit is computed by dividing net earnings for the period by the weighted average number of units outstanding during the period. Diluted net earnings per unit is computed similarly to basic net earnings per unit, except that the weighted average number of units outstanding is increased to include additional units from the assumed exercise of incentive option units and the conversion of the convertible debentures, if dilutive. The number of additional units is calculated by assuming that outstanding incentive options were exercised and that proceeds from such exercises were used to acquire units at the average market price during the period. The additional units would also include those units issuable upon the assumed conversion of the convertible debentures, with an adjustment to net earnings for the period to add back any interest paid to the debenture holders. These common equivalent units are not included in the calculation of the weighted average number of units outstanding for diluted earnings per unit when the effect would be anti-dilutive.(g) Comprehensive income: CICA Section 1530, "Comprehensive Income", requires the presentation of a Statement of Comprehensive Income where certain gains and losses that would otherwise be recorded as part of net earnings are presented in other comprehensive income until it is considered appropriate to recognize it in net earnings. The Trust does not have any material income from these sources and as such a Statement of Comprehensive Income has not been included in these financial statements.(h) Financial instruments – recognition and measurement: CICA Section 3855, "Financial Instruments – Recognition and Measurement", establishes standards for recognizing and measuring financial assets and financial liabilities including non-financial derivatives. In accordance with this standard, the Trust is required to classify its financial assets as one of the following: (i) held-to-maturity, (ii) loans and receivables, (iii) held for trading or (iv) available for sale. All financial liabilities must be classified as: (i) held for trading or (ii) other liabilities. The Trust's designations on adoption are as follows:Cash and amounts receivable are classified as "loans and receivables" and are measured at amortized cost.Bank indebtedness, Accounts payable and accrued liabilities, Unitholder distribution payable, Loans payable and Convertible debentures are classified as "other liabilities" and are measured at fair value on inception and amortized using the effective interest rate method. 4. Accounting changes:Future accounting changes:The Canadian Accounting Standards Board ("AcSB") confirmed that the adoption of International Financial Reporting Standards ("IFRS") would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canada's current GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards are expected to be effective for the Trust in the first quarter of 2011.The Trust has identified potential IFRS & Canadian GAAP differences as well as the related IFRS policy choices and does not believe that there will be a significant impact on the Balance Sheet or Statement of Earnings and there are no significant systems implications. At this time the Trust is considering possible IFRS policy choices for each potential IFRS & Canadian GAAP difference identified. The Trust has established a conversion plan to identify and address implementation issues and to ensure an orderly transition in 2011. Consequently, four phases have been identified; (i) Scoping, (ii) Planning, (iii) Design and Build and (iv) Implement and Review.The Trust has completed the design and build phase and expects to complete the implement and review phase by December 31, 2010.5. Amounts receivable and prepaid expenses:The following is a breakdown of amounts receivable and prepaid expenses as at September 30, 2010, December 31, 2009 and September 30, 2009:Sept. 30, 2010Dec. 31, 2009Sept. 30, 2009Interest receivable$1,856,748$1,450,807$1,584,856Prepaid expenses133,365160,903194,130Fees receivable47,40494,6738,986Amounts receivable and prepaid expenses$2,037,517$1,706,383$1,787,9726. Mortgage investments:The following is a breakdown of the mortgage investments as at September 30, 2010, December 31, 2009 and September 30, 2009:Sept. 30, 2010Dec. 31, 2009Sept. 30, 2009Amount%Amount%Amount%Conventional first mortgages$168,413,87086.3$135,464,43079.8$141,201,29579.9Conventional non-first mortgages10,576,1315.412,768,8327.517,943,74210.2Special mortgage investments16,183,2548.321,595,03512.717,610,4899.9Total mortgage investments (at cost)$195,173,255100.0$169,828,297100.0$176,755,526100.0Fair value adjustment2,700,0002,700,000 2,600,000Fair value$192,473,255$167,128,297$174,155,526Conventional first mortgages are loans secured by a first priority mortgage charge with loan to values not exceeding 75%. Conventional non-first mortgages are loans with mortgages not registered in first priority with loan to values not exceeding 75%. Special mortgage investments are loans that in some cases have loans to value that exceed or may exceed 75% and are the investments that are the source of all special profit participations earned by the Trust.Mortgages are stated at fair value as discussed in Note 3(b). The fair value adjustment in the amount of $2,700,000 as at September 30, 2010 represents the total amount of management's estimate of the shortfall between the mortgage investment principal balances and the estimated net realizable recovery from the collateral securing the mortgage loans.In June 2009, the AcSB amended CICA Handbook Section 3862, Financial Instruments – Disclosures, by providing enhanced disclosure requirements for fair value measurements of financial instruments and liquidity risks. HB 3862 establishes a three-level valuation hierarchy for disclosure of financial instruments measured at fair value based upon the degree to which the inputs used to value an asset or liability as of the measurement date are observable:Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); andLevel 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).The Trust's mortgage investments are measured at fair value using inputs not based on observable data. As a result, all mortgage investments have been classified in Level 3 of the valuation hierarchy.A reconciliation of Level 3 assets is as follows:Sept. 30, 2010Dec. 31, 2009Sept. 30, 2009Mortgage investment balance, beginning of period$167,128,297$223,395,801$223,395,801Funding of mortgage investments113,521,68094,267,43044,334,055Discharge of mortgage investments(88,176,722)(150,234,934)(93,374,330)Change in unrealized loss included in earnings-(300,000)(200,000)Mortgage investment balance, end of period$192,473,255$167,128,297$174,155,526The mortgages are secured by real property, bear interest at the weighted average rate of 9.30% (2009 – 10.14%) and mature between 2010 and 2015.The un-advanced funds under the existing mortgage portfolio (which are commitments of the Trust) amounted to $14,887,396 as at September 30, 2010 (September 30, 2009 - $14,709,372 & December 31, 2009 - $12,709,686).Principal repayments based on contractual maturity dates are as follows:2010$43,399,0232011112,045,078201229,148,50920136,752,90220142,592,50520151,235,238$195,173,255Borrowers who have open mortgages have the option to repay principal at any time prior to the maturity date. 7. Bank indebtedness:The Trust has entered into credit arrangements of which $25,174,149 as at September 30, 2010 (September 30, 2009 - $2,134,815 & December 31, 2009 - $NIL) has been drawn. Interest on bank indebtedness is predominately charged at a formula rate that varies with bank prime and may have a component with a fixed interest rate established based on a formula linked to Bankers Acceptance rates. The credit arrangement comprises a revolving operating facility, a component of which is a demand facility and a component of which has a committed term to September 30, 2011. Bank indebtedness is secured by a general security agreement. The credit agreement contains certain financial covenants that must be maintained. As at September 30, 2010 and 2009, the Trust 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 3.25% to 6.85% as at September 30, 2010 (2009 – 2.50% to 7.55%). The Trust's principal balance outstanding under the mortgages for which a first priority charge has been granted is $9,177,830 as at September 30, 2010 (2009 - $18,486,799).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:2010$3,038,38820111,408,00020142,074,0042015157,262$6,677,6549. Convertible debentures:On April 24, 2006, the Trust completed a public offering of 25,000 6% convertible unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of $25,000,000. The debentures mature on June 30, 2013 and interest is paid semi-annually on June 30 and December 31. The debentures are convertible at the option of the holder at any time prior to the maturity date at a conversion price of $11.75. The debentures may not be redeemed by the Trust prior to June 30, 2009. On and after June 30, 2009, but prior to June 30, 2010, the debentures are redeemable at a price equal to the principal, plus accrued interest, at the Trust's option on not more than 60 days and not less than 30 days notice, provided that the weighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after June 30, 2010 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued interest, at the Trust's option on not more than 60 days and not less than 30 days prior notice. On redemption or at maturity, the Trust may, at its option, elect to satisfy its obligation to pay all or a portion of the principal amount of the debenture by issuing that number of units of the Trust obtained by dividing the principal amount being repaid by 95% of the weighted average trading price of the units for the 20 consecutive trading days ending on the fifth trading day preceding the redemption or maturity date.The convertible debentures were allocated into liability and equity components on the date of issuance as follows:Liability$25,000,000Equity380,482Principal$24,619,518The accretion of the liability component of the convertible debentures, which increases the liability component from the initial allocation on the date of issuance, is included in interest expense.Sept. 30, 2010Sept. 30, 2009Liability, beginning of period$23,681,244$23,973,019Conversion of debentures to equity(20,000)(513,982)Implicit interest rate in excess of coupon rate40,55838,114Amortization of debenture financing costs127,890127,890Liability, end of period$23,829,692$23,625,041Deferred financing costs relating to the issuance of convertible debentures are not presented as a separate asset on the balance sheet and are netted against the carrying value of the convertible debenture. Notwithstanding the carrying value of the convertible debentures, the principal balance outstanding to the debenture holders is $24,444,000.On January 6, 2009, $536,000 of debentures were converted by the debenture holder to 45,617 units of the Trust. On July 9, 2010, $20,000 of debentures were converted by the debenture holder to 1,702 units of the Trust.10. Unitholders' equity:The beneficial interests in the Trust are represented by a single class of units which are unlimited in number. Each unit carries a single vote at any meeting of unitholders and carries the right to participate pro rata in any distributions.(a) The following units are issued and outstanding: Sept. 30, 2010Dec. 31, 2009Sept. 30, 2009Balance, beginning of period13,896,82913,832,21913,832,219New units from conversion of debentures (note 9)1,70245,61745,617New units from exercise of options294,000--New units issued during the period under Distribution Reinvestment Plan38,47318,9937,359Balance, end of period14,231,00413,896,82913,885,195(b) Incentive option plan:In 2005, 415,000 options were issued to trustees, directors, officers and employees of the Trust Manager and Mortgage Banker, with an exercise price of $9.90 per unit. The options are exercisable any time up to November 17, 2010. The options vested on the grant date. 316,500 unit options have been exercised to date.In 2008, 35,000 options were issued to trustees with an exercise price of $9.94. The options are exercisable any time up to October 7, 2013. The fair value of those unit options, given the small number of options issued and given the low volatility in the Trust's unit trading price, is not material and therefore no related compensation expense has been recorded by the Trust. As at September 30, 2010, 133,500 options remained outstanding (2009 – 427,500)(c) Distribution reinvestment plan and direct unit purchase plan:The Trust has a distribution reinvestment plan and direct unit purchase plan for its unitholders which allows participants to reinvest their monthly cash distributions in additional trust units at a unit price equivalent to the weighted average price of units for the preceding five day period.11. Per unit amounts:The following table reconciles the numerators and denominators of the basic and diluted earnings per unit.Basic earnings per unit calculation:Three Months ended:Nine months ended:Sept. 30, 2010Sept. 30, 2009Sept. 30, 2010Sept. 30, 2009Numerator for basic earnings per unit:Net earnings$3,876,688$3,688,459$10,478,496$11,167,875Denominator for basic earnings per unit:Weighted average units14,204,79813,880,18914,041,29713,877,626Basic earnings per unit$0.273$0.266$0.746$0.805Diluted earnings per unit calculation:Three Months ended:Nine months ended:Sept. 30, 2010Sept. 30, 2009Sept. 30, 2010Sept. 30, 2009Numerator for diluted earnings per unit:Net earnings$3,876,688$3,688,459$10,478,496$11,167,875Interest on convertible debentures423,613422,9611,269,1531,267,325Net earnings for diluted earnings per unit$4,300,301$4,111,420$11,747,649$12,435,200Denominator for diluted earnings per unit:Weighted average units14,204,79813,880,18914,041,29713,877,626Net units that would be issued:Assuming the proceeds from options are used to repurchase units at the average unit price20,53814,59816,746-Assuming convertible debentures are converted2,080,3402,082,0432,080,3402,082,043Diluted weighted average units16,305,67615,976,82616,138,38315,959,669Diluted earnings per unit$0.264$0.257$0.728$0.77912. Distributions:The Trust makes distributions to the unitholders on a monthly basis on or about the 15th day of each month. The Declaration of Trust provides that the Trust will distribute to unitholders by year end at least 100% of the net income of the Trust determined in accordance with the Income Tax Act (Canada), subject to certain adjustments. The net income of the Trust determined in accordance with the Income Tax Act (Canada), for the nine month period ended September 30, 2010 was $10,523,617 (2009 - $10,669,485).For the nine months ended September 30, 2010, the Trust recorded distributions of $9,868,495 (2009 - $9,743,099) to its unitholders. Distributions were $0.702 (2009 - $0.702) per unit.13. Income taxes:The Trust is taxed as a mutual fund trust for income tax purposes. Pursuant to the Declaration of Trust, the Trust is required to distribute its income for income tax purposes each year to such an extent that it will not be liable for income tax under Part 1 of the Income Tax Act (Canada). For financial statement reporting purposes, the tax deductibility of the Trust's distributions is treated as an exemption from taxation as the Trust distributed and is committed to continue to distributing all of its income to unitholders.On June 22, 2007, Bill C-52, which significantly modifies the income tax rules applicable to certain publicly traded or listed trusts and partnerships, received Royal Assent. In particular, certain income of (and distributions made by) these entities will be taxed in a manner similar to income earned by (and distributions made by) a corporation. These rules will be effective for the 2007 taxation year with respect to trusts which commence public trading after October 31, 2006. For trusts which were publicly traded or listed prior to November 1, 2006, the application of the rules will be delayed to the earlier of (i) the trust's 2011 taxation year, and (ii) a taxation year of the trust in which the trust exceeds normal growth as determined by reference to the normal growth guidelines, as amended from time to time, unless that excess arose as a result of a prescribed transaction. As currently structured, the Trust will be subject to these new rules, once applicable.On December 15, 2006, the Department of Finance (Canada) released the normal growth guidelines for income trusts and other flow-through entities that qualify for the four-year transitional relief. The guidance, as amended from time to time, establish objective tests with respect to how much an income trust is permitted to grow without jeopardizing its transitional relief. If the limits described in the normal growth guidelines are exceeded, the Trust may lose its transitional relief and thereby become immediately subject to the new rules. The Trust has not exceeded these limits.The Trust is considering these legislative changes and their possible impact to the Trust. The new rules (including the normal growth guidelines) may adversely affect the marketability of the Trust's units and the ability of the Trust to undertake financings and acquisitions, and, at such time as the new rules apply to the Trust, the distributable cash of the Trust may be materially reduced.On June 9, 2010 the Trust announced that it would seek unitholder approval to convert to a corporation and operate as a Mortgage Investment Corporation under the Income Tax Act (Canada) to maintain its flow through status. The majority of the costs for the conversion of the Trust to a Corporation will be incurred and expensed by the Trust in the fourth quarter of 2010.The Trust expects that its distributions will not be subject to tax prior to 2011. The Trust has not recorded future income taxes on temporary differences since all such material differences are expected to be reversed prior to 2011. In addition, as the temporary differences between accounting and taxable income will all, or substantially all, reverse during the transitional period when the tax rate is 0%, a future tax asset or liability was not recorded.14. Related party transactions and balances:Transactions with related parties are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties, and in management's view represents fair market value.The Trust Manager (a company controlled by some of the trustees), pursuant to the Trust Management Agreement and Declaration of Trust, receives an allocation of mortgage interest referred to as Trust Manager spread interest, calculated as 0.75% per annum of the Trust's daily outstanding performing mortgage investment balances. For the nine months ended September 30, 2010 this amount was $967,405 (2009 - $1,114,100), and for the three month period ending September 30, 2010 this amount was $337,882 (2009 - $340,109), and was deducted from interest and fees earned.The Mortgage Banker (a company controlled by a Trustee), pursuant to the Mortgage Banking Agreement and Declaration of Trust, receives certain fees from the borrowers as follows: loan servicing fees equal to 0.10% per annum on the principal amount of each of the Trust's mortgage investments; 75% of all the commitment and renewal fees generated from the Trust's mortgage investments and 25% of all the special profit income generated from the non-conventional mortgage investments after the Trust has yielded a 10% per annum return on its investments. Interest and fee income is net of the loan servicing fees paid to the Mortgage Banker of approximately $129,000 for the nine month period ended September 30, 2010 (2009 - $149,000). The Mortgage Banker also retains all overnight float interest and incidental fees and charges payable by borrowers on the Trust's mortgage investments. The Trust's share of commitment and renewal fees recorded in income for the nine months ended September 30, 2010 was $642,816 (2009 - $652,889) and for the three month period ended September 30, 2010 was $178,408 (2009 - $213,965) and applicable special profit income for the nine months ended September 30, 2010 was $796,979 (2009 - $336,620) and for the three month period ended September 30, 2010 was $479,132 (2009 - $165,250).The Trust Management Agreement and Mortgage Banking Agreement contains provisions for the payment of termination fees to the Trust Manager and Mortgage Banker in the event that the respective agreements are either terminated or not renewed.Several of the Trust's mortgages are shared with other investors of the Mortgage Banker, which may include members of management of the Mortgage Banker and/or Officers or Trustees of the Trust. The Trust ranks equally with other members of the syndicate as to receipt of principal and income.Mortgages totalling $8,760,000 at September 30, 2010 (2009 - $1,760,000) were issued to borrowers controlled by certain Trustees of the Trust. Each mortgage is dealt with in accordance with the Trust's existing investment and operating policies and is personally guaranteed by the related Trustee.15. Interest expense:Three Months ended:Nine months ended:Sept. 30, 2010Sept. 30, 2009Sept. 30, 2010Sept. 30, 2009Bank interest expense$190,904$20,944$312,187$297,579Loans payable interest expense68,618133,105207,261688,353Debenture interest expense423,613422,9611,269,1531,267,325Interest expense$683,135$577,010$1,788,601$2,253,257Deferred finance cost amortization – convertible Debenture(43,099)(43,099)(127,890)(127,890)Implicit interest rate in excess of coupon rate - Convertible debentures(13,730)(12,902)(40,558)(38,114)Change in accrued interest(360,379)(329,415)(338,824)(249,774)Cash interest paid$265,927$191,594$1,281,329$1,837,47916. Contingent liabilities:The Trust is involved in certain litigation arising out of the ordinary course of investing in mortgages. Although such matters cannot be predicted with certainty, management believes the claims are without merit and does not consider the Trust's exposure to such litigation to have an impact on these financial statements.17. Fair value of financial instruments:The fair value of amounts receivable, bank indebtedness, accounts payable and accrued liabilities and unitholder distribution payable, approximate their carry values due to their short-term maturities. The fair value of loans payable approximate their carrying values due to the fact that the majority of the loans are (i) are short-term in nature with terms of 12 months or less, (ii) repayable in full, at any time upon the borrower under the underlying mortgage that secures the loan payable repaying their mortgage without penalty, and (iii) have floating interest rates linked to bank prime.The fair value of the convertible debentures has been determined based on the September 30, 2010 closing price of units of the Trust on the TSX. The fair value has been estimated at September 30, 2010 to be $25,079,544 (2009 - $24,349,019).18. Risk management:(a) Interest rate risk:The Trust's operations are subject to interest rate fluctuations. The interest rate on the majority of mortgage investments is set at the greater of a floor rate and a formula linked to bank prime. The floor interest rate mitigates the effect of a drop in short term market interest rates while the floating component linked to bank prime allows for increased interest earnings where short term market rates increase. The Trust's debt comprises bank indebtedness and loans payable, with the majority of such debt bearing interest based on bank prime and/or based on short term Bankers Acceptance interest rates as a benchmark.At September 30, 2010 and September 30, 2009 if interest rates at that date had been 100 basis points lower or higher, with all other variables held constant, net income for the period would be affected as follows:Carrying Value-1%+1%Financial assetsMortgage investments$192,473,255($39,013)$124,325Financial liabilitiesBank indebtedness25,174,149188,806(188,806)Loans payable6,677,654(33,348)33,348Total increase (decrease)$116,445($31,133)(b) Credit and operational risks:Any instability in the real estate sector and an adverse change in economic conditions in Canada could result in declines in the value of real property securing the Trust's mortgage investments. The Trust mitigates this risk by adhering to the investment and operating policies set out in its Declaration of Trust.The Trust's maximum exposure to credit risk is represented by the fair values of amounts receivable and mortgage investments. (c) Liquidity risk:The Trust's liquidity requirements relate to its obligations under its bank indebtedness, loans payable, convertible debentures and its obligations to make future advances under its existing mortgage portfolio. Liquidity risk is managed by ensuring that the sum of (i) availability under the Trust's bank borrowing line, (ii) the sourcing of other borrowing facilities, and (iii) projected repayments under the existing mortgage portfolio, exceeds projected needs (including funding of further advances under existing and new mortgage investments). As at September 30, 2010, the Trust had not utilized its full leverage availability, being a maximum of 60% of its first mortgage investments. Un-advanced committed funds under the existing mortgage portfolio amounted to $14,887,396 as at September 30, 2010 (2009 - $14,709,372). These commitments are anticipated to be funded from the Trust's credit facility and borrower repayments. The Trust has a revolving line of credit with its principal banker to fund the timing differences between mortgage advances and mortgage repayments. The bank borrowing line is a committed facility with a maturity date of September 30, 2011. If the loan is not renewed on September 30, 2011, the terms of the facility allow for the Trust to repay the balance owed on September 30, 2011 within twelve months. In the current economic climate and capital market conditions, there are no assurances that the bank borrowing line will be renewed or that it could be replaced with another lender if not renewed. If it is not extended at maturity, repayments under the Trust's mortgage portfolio would be utilized to repay the bank indebtedness. There are limitations in the availability of funds under the revolving line of credit. The Trust's mortgages are predominantly short-term in nature, and as such, the continual repayment by borrowers of existing mortgage investments creates liquidity for ongoing mortgage investments and funding commitments. Loans payable relate to borrowings on specific mortgages within the Trust's portfolio and only have to be repaid once the specific loan is paid out by the Borrower.If the Trust is unable to continue to have access to its bank borrowing line and loans payables, the size of the Trust's mortgage portfolio will decrease and the income historically generated through holding a larger portfolio by utilizing leverage will not be earned.Contractual obligations as at September 30, 2010 are due as follows:TotalLess than 1 year1 – 3 years4 – 6 yearsBank indebtedness$25,174,149$25,174,149Loans payable6,677,6543,038,3881,408,0002,231,266Convertible debenture24,444,00024,444,000Subtotal – Liabilities$56,295,803$28,212,537$25,852,000$2,231,266Future advances under mortgages14,887,39614,887,396Liabilities and contractual obligations$71,183,199$43,099,933$25,852,000$2,231,266The bank indebtedness and loans payable are liabilities resulting from the funding of the Trust's mortgage investments. Repayment of mortgage investments results in a direct and corresponding pay down of the bank indebtedness and/or loans payable. The obligations for future mortgage advances under the Trust's mortgage portfolio are anticipated to be funded from the Trust's credit facility and borrower mortgage repayments. Upon funding of same, the funded amount forms part of the Trust's mortgage investments.(d) Capital risk management:The Trust defines capital as being the funds raised through the issuance of publicly traded securities of the Trust. The Trust's objectives when managing capital/equity are:to safeguard the Trust's ability to continue as a going concern, so that it can continue to provide returns for unitholders, and to provide an adequate return to unitholders by obtaining an appropriate amount of debt, commensurate with the level of risk. The Trust manages the capital/equity structure and makes adjustments to it in light of changes in economic conditions. In order to maintain or adjust the capital structure, the Trust may issue new units or repay bank indebtedness (if any) and loans payable. The Trust's Declaration of Trust incorporates various mortgage investing restrictions and investment operating policies. The Trust cannot invest more than 5% of the amount of its capital in any single conventional first mortgage and cannot invest more than 2.5% of the amount of its capital in any single non-conventional mortgage or conventional mortgage that is not a first mortgage. The Trust may only borrow funds in order to acquire or invest in mortgage investments in amounts up to 60% of the book value of the Trust's portfolio of conventional first mortgages. The Trust has complied with all such restrictions in its Declaration of Trust.The Trust is required by its Bank lender to maintain various covenants, including minimum equity amount, interest coverage ratios, indebtedness as a percentage of the performing first mortgage portfolio size, and indebtedness to total assets. The Trust has complied with all such Bank covenants.19. Comparative figures:Certain 2009 comparative figures have been reclassified to conform with the financial statement presentation adopted in 2010.20. Subsequent Event:On October 12, 2010, the Trust completed an offering of $27,500,000 aggregate principal amount of 5.75% convertible unsecured subordinated debentures, due October 31, 2017. Each debenture is convertible into units of the Trust at the option of the holder at a conversion price of $15.90 per unit. The net proceeds of the offering were used to repay bank indebtedness. As part of the offering the Trust granted the underwriters an over-allotment option for up to $4,125,000 of additional debentures that expires on November 12, 2010.FOR FURTHER INFORMATION PLEASE CONTACT: Eli DadouchFirm Capital Mortgage Investment TrustPresident & Chief Executive Officer(416) 635-0221www.firmcapital.com