Firm Capital Annual Report 2018 COVER v4.pdf 1 2019-03-29 2:06:38 PM
2018
ANNUAL REPORT
BUILDING RELATIONSHIPS
Mortgage Investment Corporation
MORTGAGE INVESTMENT CORPORATION
PROFILE
Firm Capital Mortgage Investment Corporation, through its Mortgage Banker, Firm Capital Corporation, is
PROFILE
a non-bank lender providing residential and commercial real estate finance. The Corporation’s investment
Firm Capital Mortgage Investment Corporation, through its Mortgage Banker, Firm Capital Corporation, is
objective is the preservation of Shareholders’ Equity, while providing Shareholders with a stable stream of
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monthly dividends from the Corporation’s investments, targeting returns on equity in excess of 400 basis
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points over Government of Canada one year average treasury bill yields . The Corporation achieves its
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investment objectives by pursuing a strategy of growth through investments in select niche markets that are
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under-serviced by large lending institutions .
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The shares are listed on the Toronto Stock Exchange, stock symbol - FC
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MORTGAGE BANKER PROFILE
Boutique Mortgage Lenders®
MORTGAGE BANKER PROFILE
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Where Mortgage Deals Get Done®
CONTENTS
PROFILE
Firm Capital Mortgage Investment Corporation, through its Mortgage Banker, Firm Capital Corporation, is
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Letter To Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CONTENTS
2
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Responsibility for Financial Reporting . . . . . . . . . . . . . . 25
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Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . 31
Balance Sheets(cid:3) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:21)(cid:19)
Consolidated Statements of Changes in Shareholders Equity . . . . . . . 32
Statements of Income(cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:21)(cid:20)
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 34
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Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
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Dividend Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Notes to Financial Statements(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3) (cid:21)(cid:23)
Performance Graph(cid:3) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:23)(cid:22)
(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:3) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:17) (cid:23)(cid:22)
MORTGAGE BANKER PROFILE
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Where Mortgage Deals Get Done®
Where Mortgage Deals Get Done®
CONTENTS
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Notes to Financial Statements(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3) (cid:21)(cid:23)
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LETTER TO SHAREHOLDERS
LETTER TO SHAREHOLDERS
We are pleased to report to you on the 2018 results for Firm Capital Mortgage Investment Corporation (the
We are pleased to report to you the 2018 results for Firm Capital Mortgage Investment Corporation (the
“Corporation”) .
“Corporation”).
Managing risk and maintaining a strong balance sheet is our main priority. We mitigate risk by maintaining a
diversified portfolio that has the majority of the investments shared with other investor partners. We are
continually monitoring all markets and rebalancing the portfolio to reflect the current environment and market
conditions. In 2018, we were able to generate dividends to Shareholders of $0.986 per share, while
maintaining a loan loss provision of $4,950,000, representing approximately 1% of the Corporation’s assets.
HIGHLIGHTS
DIVIDENDS
For the year ended December 31, 2018, the Corporation declared dividends totaling $0.986 per share versus
$1.006 per share for the year ended December 31, 2017. The December 2018 special dividend was 5 cents
per unit.
PROFIT
Income and profit (referred to herein as “Profit”) for year ended December 31, 2018 of $25,750,696 represents
approximately a 3.7% increase compared to $24,821,438 reported for the year ended December 31, 2017.
Basic weighted average profit per share for the year ended December 31, 2017 was $0.986, compared to the
$1.019 per share reported for the year ended December 31, 2017.
DIVERSIFIED PORTFOLIO
The Corporation’s Investment Portfolio at December 31, 2018 totaled $520.1 million (before impairment
provision) consisting of 231 separate investments. The average interest rate on the Corporation’s investments
at December 31, 2018 was 8.58% per annum.
VERY SHORT-TERM PORTFOLIO WITH SIGNIFICANT ANNUAL TURNOVER
In 2018, the Investment Portfolio repayments totaled $328 million with new investments during the year totaling
$287 million. This turn is the key to our investment approach and demonstrates the short-term bridge financing
nature of the portfolio.
2019 OUTLOOK
We encourage Shareholders to read the Management Discussion and Analysis in this report and our Outlook
for 2019.
ELI DADOUCH
President
Chief Executive Officer
ELI DADOUCH
President
Chief Executive Officer
JONATHAN MAIR
Executive Vice President
Chief Operating Officer
BORIS BARIL
Chief Financial Officer
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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Building Relationshipstoday and tomorrow MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
OUR BUSINESS
Firm Capital Mortgage Investment Corporation (the “Corporation”) is a non-bank lender, investing
predominantly in short-term residential and commercial real estate mortgage loans and real estate
related debt investments. The Corporation operates as a mortgage investment corporation under
the Income Tax Act (Canada). Mortgage investment corporations have no income tax payable
provided that they satisfy the requirements in subsection 130.1(6) of the Income Tax Act
(Canada).
The Corporation’s primary investment objective is the preservation of shareholders’ equity, while
providing shareholders with a stable stream of dividends from the Corporation’s investments. The
Corporation achieves its investment objectives by pursuing a strategy of investing in loans in
select niche real estate markets that are under-serviced by larger financial institutions. The
Corporation’s more specific objective is to hold an investment portfolio that:
(i)
(ii)
(iii)
(iv)
is widely diversified across many investments;
is concentrated in first mortgages;
reduces exposure as a result of participation in various loan syndicates; and
is primarily short-term in nature.
Firm Capital Corporation (the “Mortgage Banker”) is the Corporation’s mortgage banker and acts
as the Corporation’s loan originator, underwriter, servicer, and syndicator. The Corporation’s
affairs are administered by FC Treasury Management Inc. (the “Corporation Manager”).
The Corporation has in place a Dividend Reinvestment Plan (“DRIP”) and a Share Purchase Plan
(collectively, with the DRIP, the “Plans”) that are available to its shareholders. The Plans allow
participants to have their monthly cash dividends reinvested in additional common shares of the
Corporation (“Shares”) and grant participants the right to purchase additional Shares.
Shareholders who wish to enroll or who would like further information about the Plans should
contact Investor Relations at (416) 635-0221.
Additional information on the Corporation, its Plans, and its investment portfolio is available on
the Corporation’s web site at www.firmcapital.com. Additional information about the Corporation,
including its Annual Information Form (“AIF”), can be found on the SEDAR website at
www.sedar.com.
BASIS OF PRESENTATION
The Corporation has adopted International Financial Reporting Standards (“IFRS”), as issued by
the International Accounting Standards Board, as its basis of financial reporting. The
Corporation’s functional and reporting currency is the Canadian dollar.
The following discussion is dated as of March 12, 2019 and should be read in conjunction with
the audited financial statements of the Corporation and the notes thereto for the years ended
December 31, 2018 and 2017, as well as the Management’s Discussion and Analysis, including
the section on “Risk and Uncertainties”, along with each of the quarterly reports for 2018 and
2017.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 1
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Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
HIGHLIGHTS
PROFIT
Profit for the three months ended December 31, 2018 was $6,097,699 as compared to $6,122,660
for the same period in the prior year. Profit for the year ended December 31, 2018 increased by
3.7% to $25,750,696 as compared to the $24,821,438 reported for the year ended December 31,
2017. Profit for the year ended December 31, 2017 included the recognition of a one-time special
income on one of the Corporation’s non-conventional investments in the amount of $2,737,500.
Total special income (other income) that occurred during the year ended December 31, 2017 was
$3,072,099 compared to $331,251 for the year ended December 31, 2018. Excluding the one-
time special income, profit for 2018 was 17% higher as compared to a normalized 2017.
INTEREST AND FEES REVENUE
Interest and fees revenue for the three months ended December 31, 2018 increased by 2.1% to
$11,503,377 as compared to $11,270,747 reported for the same period in 2017. The increase is
primarily derived from higher fee income with interest income remaining comparable as a result
of the increase in the weighted average portfolio interest rate, being offset by a smaller average
portfolio size. Interest and fees revenue for the year ended December 31, 2018 increased by
16.4% to $46,982,013 as compared to $40,351,170 for the year ended December 31, 2017. The
increase is primarily derived from increased commitment and renewal fees plus higher interest
income (resulting from a larger average investment portfolio in fiscal 2018 over the comparable
2017 and from an increase in the weighted average portfolio interest rate) offset by the lower
special income in 2018.
INVESTMENT PORTFOLIO
The Corporation’s investment portfolio (the “Investment Portfolio”) as at December 31, 2018,
decreased by $40.6 million to $520.9 million in comparison to $561.5 million as at December 31,
2017 (gross of impairment provision). The provision for credit losses as at December 31, 2018
was $4.95 million (December 31, 2017 – $5.70 million).
RETURN ON EQUITY
The Corporation continues to exceed its yield objective of producing a return on shareholders’
equity in excess of 400 basis points over the average one-year Government of Canada Treasury
bill yield. Profit for the year ended December 31, 2018 represents an annual return on
shareholders’ equity (based on the month end average shareholders’ equity during the year) of
9.01%, representing return on shareholders’ equity of 707 basis points per annum over the
average one year Government of Canada Treasury bill yield of 1.94%.
COMPLETION OF A CONVERTIBLE DEBENTURE OFFERINGS
On November 23, 2018, the Corporation completed a public offering of 25,000 5.50% convertible
unsecured subordinated debentures at a price of $1,000 per debenture for gross proceeds of
$25,000,000. The debentures mature on January 31, 2026 and interest is paid semi-annually.
The debentures are convertible at the option of the holder at any time prior to the maturity date at
a conversion price of $14.60.
On June 21, 2018, the Corporation completed a public offering of 25,000 5.40% 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, 2025 and interest is paid semi-annually. The
debentures are convertible at the option of the holder at any time prior to the maturity date at a
conversion price of $15.00.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 2
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
INVESTMENT PORTFOLIO
The Corporation’s Investment Portfolio totaled $515,994,509 as at December 31, 2018 (net of the
provision for impairment of $4,950,000) and was $555,801,977 (net of an impairment allowance
of $5,700,000) as at December 31, 2017. The Investment Portfolio is comprised of 231
investments (251 as at December 31, 2017). The average gross investment size (excluding the
provision for impairment) was approximately $2.3 million with 17 investments individually
exceeding $7.5 million. As at December 31, 2018, 181 of the 231 investments are individually less
than $2.5 million.
December 31, 2018
December 31, 2017
Mortgage Amount
$0 - $2,500,000
$2,500,001 - $5,000,000
$5,000,001 - $7,500,000
$7,500,001 +
Number
181
27
6
17
231
Total Amount
(before provision)
$
$
165,349,152
94,921,879
37,775,714
222,897,764
520,944,509
% of
Portfolio Number
197
27
10
17
251
31.7%
18.2%
7.3%
42.8%
100%
Total Amount
(before provision)
$
169,511,967
96,807,234
48,217,047
246,965,728
561,501,976
$
% of
Portfolio
30.2%
17.2%
%
Change
(2.5%)
(1.9%)
8.6% (21.7%)
(9.7%)
(7.2%)
44.0%
100%
Unadvanced committed funds under the existing Investment Portfolio amounted to $89 million as
at December 31, 2018 (December 31, 2017 – $92 million).
The allocation of the Investment Portfolio between the five main investment categories (as well
as the weighted average interest rate) is as follows:
December 31, 2018
December 31, 2017
% of
Portfolio
Investment Categories
Conventional First Mortgages
Conventional Non-First Mortgages
Related Investments
Discounted Debt
Non-Conventional Mortgages
Total Investments
Less: Impairment Provision
$
Investment Portfolio
* The yield on Discounted Debt Investments will be determined upon final repayment of the investments.
Outstanding
amount
399,214,814
41,808,791
70,259,622
5,336,525
4,324,757
520,944,509
(4,950,000)
515,994,509
W.A
Interest
Rate
8.47%
9.21%
9.44%
-
9.23%
8.58%
$
$
$
$
$
$
76.6% 7.78%
8.0% 9.05%
13.5% 9.73%
1.0%
0.9% 11.11%
8.09%
100%
W.A
Interest
Rate
Outstanding
amount
427,591,758
57,187,248
69,636,557
5,392,900
1,693,514
561,501,977
(5,700,000)
555,801,977
$
$
$
-
%
% of
Change
Portfolio
(6.6%)
76.1%
(26.9%)
10.2%
0.9%
12.4%
(1.0%)
1.0%
0.3% 155.4%
100%
(7.2%)
The $40.6 million decrease in the Investment Portfolio (before the provision for impairment) was
mainly due to the decrease in the size of the conventional first and conventional non-first
mortgages, partially offset by the increase in the related investment category and non-
conventional mortgages.
Conventional first mortgages decreased by 6.6% and represented 76.6% of the Corporation’s
portfolio as at December 31, 2018 and 76.1% as at December 31, 2017. Conventional non-first
mortgages decreased by 26.9% and represented 8.0% of the Investment Portfolio at December
31, 2018 and 10.2% December 31, 2017. Both conventional first mortgage and conventional non-
first mortgage decreases are a result of investment repayment in these categories exceeding new
funding. Related investments increased by 0.9% and represented 13.5% of the Corporation’s
Investment Portfolio as at December 31, 2018 in comparison to 12.4% at December 31, 2017.
Discounted debt investments decreased by 1.0% and represented 1.0% of the Investment
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 3
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Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio, at December 31, 2018 and 2017. Non-conventional mortgages increased by 155.4%
as a result of funding new investments and represented 0.9% of the Investment Portfolio at
December 31, 2018 and 0.3% at December 31, 2017.
The weighted average face interest rate on the Corporation’s Investment Portfolio was 8.58% per
annum as at December 31, 2018 compared to 8.09% per annum as at December 31, 2017.
The provision for impairment is $4,950,000 as at December 31, 2018 (December 31, 2017 -
$5,700,000), of which $4,265,000 represents the total amount of management's estimate of the
shortfall between the investment balances and the estimated recoverable amount from the
security under the specific loans. As at December 31, 2018, the Corporation carries a collective
provision balance of $685,000 (December 31, 2017 - $400,000).
The allocation of the Investment Portfolio between its seven types of investments is as follows:
December 31, 2018
December 31, 2017
Property Type
Construction Mortgages
Single Family
Land
Condo (Including multi unit condo loans)
Multi Family Residential Mortgages
Related Investments
Other
81
57
58
8
4
14
9
231
Total Amount
(before provision)
$
112,395,511
51,468,471
182,614,627
40,628,403
43,010,019
70,259,622
20,567,856
520,944,509
$
% of
Portfolio Number
98
62
53
12
3
13
10
251
21.6%
9.9%
35.1%
7.7%
8.3%
13.5%
3.9%
100%
Total Amount
(before provision)
$
172,550,850
47,697,780
156,749,455
51,686,674
45,701,051
69,636,557
17,479,611
561,501,977
$
% of
Portfolio
8.5%
27.9%
%
Change
30.7% (34.9%)
7.9%
16.5%
9.2% (21.4%)
(5.9%)
8.1%
0.9%
12.4%
17.7%
3.2%
(7.2%)
100%
The Corporation continues to focus its lending into core markets that can be monitored closely
during evolving economic conditions. The
Investment Portfolio has some geographic
diversification with 8.5% of the investments in the portfolio secured by properties outside of
Ontario, compared to 13.3% as at December 31, 2017.
December 31, 2018
December 31, 2017
Geographic Segment
Greater Toronto Area
Non-GTA Ontario
Quebec
Alberta
Saskatchewan
Other
Portfolio (excluding Related Investments)
Related Investments
Number
161
44
3
2
2
5
217
14
231
Total Amount
(before provision)
$
292,815,303
119,616,945
8,634,670
4,000,000
10,914,942
14,703,027
450,684,887
70,259,622
520,944,509
$
$
% of
65.0%
26.5%
1.9%
0.9%
2.4%
3.3%
100%
Portfolio Number
186
36
4
7
2
3
238
13
251
Total Amount
(before provision)
$
323,167,700
103,225,547
26,357,552
17,877,234
12,975,036
8,262,350
491,865,420
69,636,557
561,501,977
$
$
% of
Portfolio
65.7%
21.0%
%
Change
(9.4%)
15.9%
5.4% (67.2%)
3.6% (77.6%)
2.6% (15.9%)
78.0%
1.7%
100%
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 4
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
The allocation of the Investment Portfolio between underlying the security type, is as follows:
Underlying Security Type
Residential
Commercial
Related Investments
Number
203
14
14
231
December 31, 2018
Total Amount
(before provision)
$
$
392,109,235
58,575,652
70,259,622
520,944,509
% of
Portfolio Number
221
17
13
251
75.3%
11.2%
13.5%
100%
December 31, 2017
Total Amount
(before provision)
$
435,895,456
55,969,964
69,636,557
561,501,977
$
% of
Portfolio
%
Change
77.6% (10.0%)
4.7%
10.0%
0.9%
12.4%
(7.2%)
100%
residential category
The
family dwellings,
condominiums, residential land, residential construction, and multifamily residential.
includes mortgages on single
residential
The Corporation’s strategy is to mitigate loan loss risk by focusing on those areas of mortgage
lending that have historically withstood market corrections and retained their underlying real
estate asset value while limiting its exposure to those real estate asset classes that do not.
The weighted average loan to value ratio on conventional mortgages (being the combined
conventional first and conventional non-first mortgages) is approximately 60% based on the
appraisals obtained at the time of funding each mortgage loan.
Included in conventional first mortgages are three United States ("US") dollar denominated
investments (at amortized cost) of $5,709,177 (US$4,185,000) (December 31, 2017 - $nil).
Included in related investments (at FVTPL) are two US dollar denominated investments of
$5,376,199 (US$3,940,917), (December 31, 2017 - $5,958,875 (US$4,750,000)). These
investments are a participation by the Corporation in limited partnerships that have provided
preferred equity to real estate entities in the US. Income recorded on this investment during the
year ended December 31, 2018 was $730,633 (US$562,948), (December 31, 2017 – $71,267
(US$55,896) and are included in interest and fees income.
With respect to loans with no provision, the Investment Portfolio as at December 31, 2018 had
two investments with balances totaling $1,474,000 (December 31, 2017 – two investments with
balances totaling $2,361,437) with contractual interest arrears greater than 60 days past due
amounting to $48,727 (December 31, 2017 – $35,188). Management has determined there to be
no impairment requiring a provision (December 31, 2017 – $nil).
The Investment Portfolio as at December 31, 2018 includes thirteen investments totaling
$19,735,486 (December 31, 2017 – six investments of $28,901,947) with maturity dates that are
past due and for which no extension or renewal was in place. Four of the thirteen investments
were paid out during the first quarter of 2019, reducing the balance by $4,076,794, and additional
four investments totaling $10,629,767 (December 31, 2017 – three investments of $12,918,805)
have a provision against them included in the Corporation’s provision for impairment. The
remaining five investments with maturity dates that are past due, and for which no extension or
renewal was in place, totaling $5,028,925 (December 31, 2017 – three investments of
$15,983,142), are considered not to require a provision.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 5
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Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2018, the Investment Portfolio continued to be heavily concentrated in short-
term investments with 74.2% of the portfolio maturing by December 31, 2019 and 97.0% maturing
on or before December 31, 2020. The short-term nature of the portfolio provides the Corporation
with the ability to continually revolve the portfolio and adapt to changes in the real estate market.
Principal repayments based on contractual maturity dates are as follows:
December 31, 2018
Total Amount
(before provision)
$
$
$
$
$
386,039,333
129,133,938
5,525,000
246,238
520,944,509
% of
Portfolio
74.2%
24.8%
1.0%
0.0%
100%
2019
2020
2021
2022
Number
180
49
1
1
231
A significant number of the Corporation’s investments are shared with other syndicate partners
including several members of the Board of Directors and senior management of the Mortgage
Banker and/or officers and directors of the Corporation. The Corporation ranks equally with other
members of the syndicate as to receipt of principal, interest, and fees. As at December 31, 2018,
205 of the Corporation’s 231 investments (investment amount of $500,624,695) are shared with
other participants, and for 38 of which (investment amount of $140,454,938) the Corporation is a
participant for less than 50 percent of the loan amount.
Certain members of the Board of Directors and senior management and their related entities co-
invested approximately $80 million with the Corporation alongside its December 31, 2018
portfolio.
The Mortgage Banker services the entire investment in which the Corporation is a participant, on
behalf of all participants and except for the case of investments with a first priority syndicate
participant (i.e. Loans Payable), the Corporation ranks equally with other members of the
syndicate as to receipt of principal, interest, and fees.
RESULTS OF OPERATIONS
INTEREST AND FEES AND OTHER INCOME
For the three months ended December 31, 2018, interest and fees and other income earned
increased by approximately 2% to $11,528,868 compared to $11,333,133 for the three months
ended December 31, 2017. During the fourth quarter of 2018 the average interest was greater,
but the average size of the investment portfolio was lower as compared to the fourth quarter of
2017. For the year ended December 31, 2018, interest and fees and other income earned
increased by 9% to $47,313,264 compared to $43,423,269 for the year ended December 31,
2017. During 2018, the average size of the Investment Portfolio and average interest rates were
greater than during 2017.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 6
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest and fees earned for the three months and year ended December 31, 2018 and December
31, 2017 are broken down as follows:
Three Months Ended
Interest
Commitment & Renewal Fees
Other Income
Year Ended
Interest
Commitment & Renewal Fees
Other income
$
Dec. 31, 2018
10,623,533
879,844
25,491
11,528,868
$
$
Dec. 31, 2018
44,466,299
2,515,714
331,251
47,313,264
$
%
92%
8%
0%
100%
%
94%
5%
1%
100%
$
Dec. 31, 2017
10,741,397
529,350
62,386
11,333,133
$
$
Dec. 31, 2017
38,519,968
1,831,202
3,072,099
43,423,269
$
%
93%
5%
1%
100%
%
94%
4%
2%
100%
%
Change
(1%)
66%
(59%)
2%
%
Change
15%
37%
(89% )
9%
For the three months ended December 31, 2018 interest income was $10,623,533, a decrease of
1% from $10,741,397 as reported for the comparable period 2017. For the year ended December
31, 2018 interest income was $44,466,299, an increase of 15% from $38,519,968 as reported for
2017. The increase in interest income is a result of the Corporation generating a higher average
interest rate on the Investment Portfolio and holding a larger average Investment Portfolio over
2017. However, the portfolio declined due to higher discharges towards the end of 2018, resulting
in a lower December 31, 2018 balance than December 31, 2017. For the three months ended
December 31, 2018 and 2017, interest income represents 92% and 93% of the Corporation’s
revenues, respectively. For the year ended December 31, 2018 and 2017, interest income, for
both years, represents 94% of the Corporation’s revenues.
For the three months ended December 31, 2018, commitment and renewal fees were $879,844,
an increase of 66% from $529,350 reported in the prior comparable period. For the year ended
December 31, 2018, commitment and renewal fees were $2,515,714, an increase of 37% from
$1,831,202 for the year ended December 31, 2017. As at December 31, 2018, the Corporation
had deferred commitment fee revenue of $795,486 (December 31, 2017 – $910,822). The
Corporation’s policy is to recognize commitment fees over the term of the related loan. The
unrecognized component of the fees is recorded as deferred revenue on the Corporation’s
balance sheet. These fees have been received and are not refundable to borrowers.
For the three months ended December 31, 2018, other income was $25,491 a decrease of 59%
from $62,386 as reported for the three months ended December 31, 2017. For the year ended
December 31, 2018, other income was $331,251 a decrease of 89% from $3,072,099 as reported
for the year ended December 31, 2017. The first quarter of 2017 included the recognition of
special income in the amount of $2,737,500, earned on one of the Corporation’s non-conventional
special investments. Other income relates to certain fees and interest generated from a number
of the Corporation’s non-conventional mortgages and the timing of earning of such income is not
necessarily consistent in each period. The timing of the recognition and collection of other income
is difficult to predict and the collection of a particular amount is not a reflection of the future
collection of such income. Non-conventional mortgage investments can attract higher loss risk
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 7
8
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
due to their subordinate ranking to other mortgage charges and/or high loan to value ratio.
Consequently, this higher risk is compensated for by a higher rate of return. The Corporation
remains very selective in cautiously sourcing high yielding, non-conventional mortgages that meet
the Corporation’s investment criteria.
CORPORATION MANAGER SPREAD INTEREST ALLOCATION
The Corporation Manager, through an interest spread arrangement, received for the three months
ended December 31, 2018 $993,850 (2017 – $992,162). For the year ended December 31, 2018,
the spread interest amounted to $3,932,134 (2017 – $3,639,094), as the Corporation’s average
Investment Portfolio over the year was larger in comparison to 2017.
INTEREST EXPENSE
For the three months ended December 31, 2018, interest expense increased by 2% to $3,672,297
as compared to $3,588,973 for the three months ended December 31, 2017. For the year ended
December 31, 2018, interest expense increased by 13% to $14,908,334 as compared to
$13,223,349 for the year ended December 31, 2017. Interest expense is higher for the year
ended December 31, 2018 when compared to the previous year, as a result of the Corporation
having a larger average loans payable amount and convertible debentures outstanding, which
was partly offset by a reduction in the overall bank indebtedness balance during 2018.
Interest expense is broken down as follows:
Three Months Ended
Bank Interest Expense
Loan Payable Interest Expense
Debenture Interest Expense
Year Ended
Bank Interest Expense
Loan Payable Interest Expense
Debenture Interest Expense
$
Dec. 31, 2018
224,803
340,855
3,106,639
3,672,297
$
$
Dec. 31, 2018
1,541,320
2,223,767
11,143,247
14,908,334
$
%
6%
9%
85%
100%
%
10%
8%
82%
100%
$
Dec. 31, 2017
381,928
671,989
2,535,056
3,588,973
$
$
Dec. 31, 2017
1,372,878
1,005,264
10,845,207
13,223,349
$
%
11%
19%
71%
100%
%
12%
1%
87%
100%
%
Change
(41%)
(49%)
23%
2%
%
Change
12%
121%
3%
13%
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES
For the three months ended December 31, 2018, G&A expenses increased by $67,234 to
$307,632 compared to the $240,398 for the three months ended December 31, 2017. For the
year ended December 31, 2018, G&A expenses increased by $87,492 to $1,044,375 compared
to the $956,883 for year ended December 31, 2017.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 8
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
THE PROVISION FOR IMPAIRMENT ON INVESTMENT PORTFOLIO AND INTEREST
RECEIVABLE
The provision for impairment for the three months ended December 31, 2018 was $455,497 (2017
– $388,000) and for the year ended December 31, 2018 was $1,667,325 (2017 – $1,240,000)
Further details are described in the Provision for Impairment section.
INCOME & PROFIT (“PROFIT”)
Profit for the three months ended December 31, 2018 was reported at $6,097,699 as compared
to $6,122,660 for the same period in the prior year which represents a decrease of 0.4%. Profit
for the year ended December 31, 2018 was reported at $25,750,696 which represents an increase
of 3.7% in comparison to the $24,821,438 for the year ended December 31, 2017.
Profit for the three months ended December 31, 2018 represented an annualized return on
shareholders’ equity (based on the month end average shareholders’ equity in the quarter) of
8.50%. This return on shareholders’ equity represents 656 basis points per annum over the
average one-year Government of Canada Treasury bill yield of 1.94% and is well in excess of the
Corporation’s stated target yield objective of 400 basis points per annum over the average one-
year Government of Canada Treasury bill yield. For the year ended December 31, 2018, the
annual return on shareholders’ equity (based on the month end average shareholders’ equity
during the year) is 9.01%, and 707 basis points over the one-year Government of Canada
Treasury bill yield of 1.94%. The above return on shareholders’ equity is a non-IFRS financial
measure and does not have any standardized meaning prescribed by IFRS and is therefore
unlikely to be comparable to similar measures presented by other issuers. This non-IFRS
measure provides useful information to the Corporation’s shareholders as it provides a measure
of return generated on the Corporation’s equity base.
TOTAL COMPREHENSIVE INCOME
The Corporation has invested in units and debentures of publicly traded real estate investment
trusts. Upon the adoption of IFRS 9 on January 1, 2018 the Corporation classifies these
investments at FVTPL and any changes in the fair value of the marketable securities and
debenture portfolio are reflected in the statement of income.
The change in fair value of marketable securities and debenture investments reclassified to
income for the three months ended December 31, 2018 was $nil (2017 – $135,362). The realized
gains on disposal of marketable securities and debenture investments reclassified to income for
the year ended December 31, 2018 were $nil compared (2017 – $458,435).
PROFIT PER SHARE
Basic weighted average profit per share for the three months ended December 31, 2018, was
$0.233, which is 0.9% lower than the $0.235 per share reported for the three months ended
December 31, 2017. Basic weighted average profit per share for the year ended December 31,
2018, was $0.986, which is 3.2% lower than the $1.019 per share reported for the year ended
December 31, 2017. Profit for the year ended December 31, 2017, included the recognition of a
one-time special income on one of the Corporation’s non-conventional investments in the amount
of $2,737,500. Total special income (other income) that was recorded during the year ended
December 31, 2017 amounted to $3,072,099 compared to $331,251 for the year ended December
31, 2018.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 9
10 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Diluted weighted average profit per share for the three months ended December 31, 2018, was
$0.231, which is largely in-line with the $0.232 per share reported for the three months ended
December 31, 2017. Diluted weighted average profit per share for the year ended December 31,
2018, was $0.963, which is 2.1% lower than the $0.984 per share reported for the year ended
December 31, 2017.
QUARTERLY FINANCIAL INFORMATION
($ in millions except per unit amounts)
Operating revenue
Interest expense
Corporation manager spread interest allocation
General & administrative expenses
Impairment loss on investment portfolio
Profit
Profit per share
- Basic
- Diluted
Dividends per share
$
Dec. 31
2018
11.53
3.67
0.99
0.31
0.46
6.10
$
$
Sep. 30
2018
12.39
3.81
0.96
0.23
0.46
6.93
$
$
Jun. 30
2018
11.64
3.68
0.97
0.25
0.45
6.29
$
$
Mar. 31
2018
11.74
3.75
1.00
0.26
0.30
6.43
$
$
Dec. 31
2017
11.33
3.60
0.99
0.24
0.39
6.11
$
$
Sep. 30
2017
10.92
3.63
0.94
0.22
0.23
5.90
$
$
Jun. 30
2017
9.93
3.01
0.87
0.28
-
5.77
$
$
Mar. 31
2017
11.70
3.00
0.83
0.22
0.63
7.02
$
$0.233
$0.231
$0.284
$0.265
$0.253
$0.234
$0.241
$0.237
$0.234
$0.247
$0.241
$0.234
$0.235
$0.232
$0.304
$0.241
$0.237
$0.234
$0.238
$0.234
$0.234
$0.311
$0.284
$0.234
DIVIDENDS
For the three months and year ended December 31, 2018, the Corporation declared dividends
totaling $7,432,171 and $25,750,696, respectively, or $0.284 and $0.986 per share versus
$7,923,428 and $24,821,438 or $0.304 and $1.006 per share for the three months and year ended
December 31, 2017. The number of shares outstanding at December 31, 2018 was 26,143,544,
compared to 26,064,310 at December 31, 2017.
Year Ended
Cash Flows From Operating Activities
(net of cash interest paid)
Profit
Declared Dividends
Excess Cash Flows From Operating Activities
Over Declared Dividends
Profit Over Declared Dividends
Dec. 31, 2018
27,335,019
$
Dec. 31, 2017
27,714,278
$
Change
(1% )
$
$
25,750,696
25,750,696
$
$
24,821,438
24,821,438
4%
4%
1,584,323
$
$
-
2,892,840
$
$
-
CHANGES IN FINANCIAL POSITION
AMOUNTS RECEIVABLE & PREPAID EXPENSES
The amounts receivable and prepaid expenses totaled $3,875,248 as at December 31, 2018
(comprised of interest receivable of $3,472,030, prepaid expenses of $128,701, fees receivable
of $254,881, and other income receivable of $19,636), compared to $5,226,204 as at December
31, 2017.
MARKETABLE SECURITIES
The Corporation holds publicly traded units of one Canadian real estate investment trust. The
units were acquired through the exercise of warrants that were granted by the issuers as part of
a loan facility in which the Corporation was a participant. The units generate distributions that are
consistent with the Corporation’s overall yield objective. The $199,204 balance reported on the
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 10
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporation’s balance sheet as at December 31, 2018 represents the fair value of the marketable
securities comprising the portfolio (December 31, 2017 – $210,194). The Corporation’s purchase
price for the units was $175,025. The approximate average interest yield on the cost of these
investments is 10.00% per annum.
BANK INDEBTEDNESS
As at December 31, 2018 and December 31, 2017, bank indebtedness was $32,704,070 and
$60,268,468, respectively.
LOANS PAYABLE
As at December 31, 2018, the Corporation had loans payable of $14,718,382 (December 31,
2017 – $51,662,949). First priority charges on specific mortgage investments are 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 their contractual rates.
The Corporation’s principal balance outstanding under the mortgages for which a priority charge
has been granted was $18,672,754 at December 31, 2018 (December 31, 2017 – $67,694,104).
CONVERTIBLE DEBENTURES
As at December 31, 2018, the Corporation has eight series of convertible debentures outstanding,
as outlined below:
Ticker
Symbol
FC.DB.C
FC.DB.D
FC.DB.E
FC.DB.F
FC.DB.G
FC.DB.H
FC.DB.I
FC.DB.J
Total / Average
Coupon
Issue Date Maturity Date
5.25% Mar. 31, 2012 Mar. 31, 2019
4.75% Mar. 28, 2013 Mar. 31, 2020
5.30% Apr. 17, 2015 May. 31, 2022
5.50% Dec. 22, 2015 Dec. 31, 2022
5.20% Dec. 21, 2016 Dec. 31, 2023
5.30% Jun. 27, 2017 Aug. 31, 2024
5.40% Jun. 21, 2018 Jun. 30, 2025
5.50% Nov. 23, 2018 Jan. 31, 2026
5.29%
$
$
Current
Principal
20,485,000
20,000,000
25,000,000
23,000,000
22,500,000
26,500,000
25,000,000
25,000,000
187,485,000
Strike Price
Per Share
$
14.80
15.80
13.95
14.00
15.25
15.25
15.00
14.60
Carrying
Value
20,422,154
19,734,544
24,329,835
22,105,324
21,440,326
25,279,056
23,599,710
23,083,484
179,994,433
$
$
As at December 31, 2018, the principal balance for the outstanding convertible debentures was
$187,485,000. The recorded convertible debenture carrying value as at December 31, 2018 was
$179,994,433, compared to $157,464,904 as at December 31, 2017. The weighted average
effective interest rate is 5.29% per annum (5.26% as at December 31, 2017).
On December 27, 2018, the Corporation completed an early redemption of its 5.40% convertible
unsecured subordinated debentures, which were scheduled to mature on February 28, 2019. It
was a cash redemption of the aggregate principal amount of $25,738,000 and all accrued interest
to the time of Redemption Date.
On November 23, 2018, the Corporation closed a $25,000,000 aggregate principal amount of
5.50% convertible unsecured subordinated debentures due January 31, 2026. These debentures
bear interest at a rate of 5.50% per annum, payable semi-annually in arrears on the day of June
and December each year commencing on December 31, 2018. The debentures mature on
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 11
12 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
January 31, 2026 and are convertible at the holder’s option into common shares of the
Corporation at a conversion price of $14.60.
On June 21, 2018, the Corporation closed a $25,000,000 aggregate principal amount of 5.40%
convertible unsecured subordinated debentures due June 30, 2025. These debentures bear
interest at a rate of 5.40% per annum, payable semi-annually in arrears on the day of June and
December each year commencing on December 31, 2018. The debentures mature on June 30,
2025 and are convertible at the holder’s option into common shares of the Corporation at a
conversion price of $15.00.
OTHER LIABILITIES
Other liabilities for the Corporation include the following:
Additional Liabilities
Accounts Payable and Accrued Liabilities
Deferred Revenue
Shareholders' Dividend Payable
Total
$
Dec. 31, 2018
2,018,504
1,179,220
3,346,374
6,544,098
$
$
Dec. 31, 2017
2,649,558
1,294,556
3,857,518
7,801,632
$
% Change
(24%)
(9%)
(13%)
(16% )
Accounts payable and accrued liabilities decreased by 24% to $2,018,506 as at December 31,
2018, compared to $2,649,558 as at December 31, 2017. Accounts payable and accrued liabilities
include interest payable of $1,379,501 and accrued liabilities of $639,005.
Deferred revenue is comprised of commitment fees generated on the Corporation’s mortgage
investments and interest income received in advance. As at December 31, 2018, the portion
related to commitment fees was $795,485 (December 31, 2017 – $910,821) and the portion
related to interest income was $383,735 (December 31, 2017 – $383,735). The Corporation’s
policy is to recognize commitment fees over the term of the related loan. The unrecognized
component of the fees is recorded as deferred revenue on the Corporation’s balance sheet.
SHAREHOLDERS’ EQUITY
Shareholders’ equity at December 31, 2018 totaled $286,107,978 compared to $284,040,422 as
at December 31, 2017. The Corporation had 26,143,544 shares issued and outstanding as at
December 31, 2018 compared to 26,064,310 as at December 31, 2017. The increase in shares
is attributable to shares issued as part of the At-The-Market (“ATM”) share issue program and
shares issued under the dividend reinvestment plan and stock option plan.
PROVISION FOR IMPAIRMENT
Investments consist of participation in mortgage loans and real estate related debt investments.
Such investments are recognized initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition, the investments are measured at amortized cost using
the effective interest method, less any provision for impairment. The Company assesses
individually significant investments at each reporting date to determine whether there is objective
evidence of impairment. The provision for impairment in respect of the investments measured at
amortized cost is calculated as the difference between its carrying amount and the amount of the
future cash flows estimated to be recovered on the loan security. Estimates and assumptions are
made as to the gross sale proceeds that would be generated on the forced sale of the real property
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 12
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
securing the related mortgage loan and reflect estimates of the current local market conditions.
Estimates are made as to the costs of enforcing under the mortgage loan and of realizing on the
real property. In particular, judgment by management is required in the estimation of the amount
and timing of future cash flows when determining the provision for impairment. These estimates
are based on assumptions about a number of factors and actual results may differ, resulting in
future changes to the provision. Changes in the provision for impairment are recognized in the
statement of income and reflected in the provision for impairment against the investments. Interest
on the impaired asset continues to be recognized to the extent it is deemed to be collectible.
The provision for credit loss is as follows:
Conventional First Mortgages
Conventional Non-First Mortgages
Related Investments
Discounted Debt Investments
Non-Conventional Mortgages
Total Specific Provision
Collective Allowance
IFRS 9 Collective Allowance
Total Provision
The changes to the provision
Balance at January 1, 2018
Provision for credit losses
Transfer to (from):
Stage 1
Stage 2
Stage 3
Allocation of provision to interest receivable
Balance at December 31, 2018
December 31, 2018
Outstanding amount
December 31, 2017
Outstanding amount
3,293,000
3,620,866
-
-
860,000
112,000
4,265,000
-
685,000
4,950,000
-
-
1,180,000
499,134
5,300,000
400,000
-
5,700,000
Stage 1 Stage 2
400,000
285,000
-
-
-
-
-
685,000
Stage 3
5,300,000
1,382,325
Total
5,700,000
1,667,325
-
-
-
-
-
-
-
-
(2,417,325)
4,265,000
(2,417,325)
4,950,000
-
-
-
-
-
-
-
-
The loans comprising the Investment Portfolio are stated at amortized cost and FVTPL. The
provision for impairment is $4,950,000 as at December 31, 2018, of which $4,265,000 represents
the total amount of management's estimate of the shortfall between the investment balances and
the estimated recoverable amount from the security under the specific loans in default.
The Corporation also assessed collectively for impairment to identify potential future losses, by
grouping the Investment Portfolio with similar risk characteristics to determine whether a collective
provision should be recorded due to loss events for which there is objective evidence but whose
effects are not yet evident. Based on the amounts determined by the analysis, the Corporation
used judgement to determine the amounts calculated. As at December 31, 2018, the Corporation
carries a collective provision of $685,000 (December 31, 2017 – $400,000).
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 13
14 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commencing in the second quarter of 2018, the provision pertaining to the uncollectible interest
receivable was credited against amounts receivable as opposed to the Investment Portfolio. As
at December 31, 2018, the Corporation has allocated the impairment provision in the amount of
$2,417,325 (2017 – nil) to interest receivable related to loans in default.
GROSS CARRYING VALUE OF EXPOSURE BY RISK RATING
The following table presents the gross carrying amount of the investment portfolio stated at
amortized cost subject to IFRS 9 impairment requirements by internal risk ratings used by the
Corporation for credit risk purposes.
The internal risk ratings presented in the table below are defined as follows:
Category
Low
Low to Medium
Medium
Medium to high
High
Stage 1
Low
Low to Medium
Medium
Medium to High
High
Stage 2
Medium
Medium to High
Stage 3
Default
Total
Impairment provision
Carrying amount
Borrower
Quality
Certainty of
Repayment
Property
Location
Strong
Medium\Strong
Medium
Weak\Medium
Weak
Strong
High
High\Moderate Medium\Strong
Moderate
Low\Moderate Weak\Medium
Low
Medium
Weak
Loan to
Value
Low
Low\Medium
Medium
Medium\High
High
Conventional
first
mortgages
Conventional
non-first
mortgages
Related
investments
Discounted
debt
investments
Non-
conventional
mortgages
$
22,778,707
98,364,457
163,343,498
47,554,392
7,848,500
$
7,024,993
8,038,456
22,644,010
588,000
1,846,667
1,666,666
-
-
-
21,649,614
11,331,937
-
26,343,708
399,214,814
3,978,000
395,236,814
$
$
$
41,808,791
$
54,023,423
-
-
$
41,808,791
$
54,023,423
$
-
-
54,023,423
-
-
-
-
-
-
$
-
$
-
188,525
-
-
-
256,757
180,000
1,950,000
938,000
-
-
-
-
-
-
5,148,000
5,336,525
860,000
4,476,525
$
$
1,000,000
4,324,757
112,000
4,212,757
$
$
Total
$
29,803,700
106,848,195
240,190,931
50,092,392
10,633,167
-
23,316,280
11,331,937
-
32,491,708
504,708,310
4,950,000
499,758,310
$
$
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 14
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
RELATED PARTY TRANSACTIONS
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 are measured at fair value.
The Corporation's Manager (a company related to certain officers and/or directors of the
Corporation) receives an allocation of interest, referred to as the Corporation Manager spread
interest, calculated at 0.75% per annum of the Corporation's daily outstanding performing
investment balances. For the three months ended December 31, 2018, this amount was $993,850
(December 31, 2017 - $992,162). For the year ended December 31, 2018, this amount was
$3,932,134 (2017 - $3,638,094). Included in accounts payable and accrued liabilities at December
31, 2018 are amounts payable to the Corporation's Manager of $314,105 (December 31, 2017 -
$341,367).
For the three months ended December 31, 2018, the total directors' fees expensed was $91,000
(2017 - $71,000). For the year ended December 31, 2018, the total directors' fees expensed were
$304,000 (2017 - $272,333). Key management personnel are also directors of the Corporation
and receive compensation from the Corporation's Manager. The Directors held 492,837 shares
in the Corporation as at December 31, 2018 (December 31, 2017 - 481,768).
For the three months ended December 31, 2018 the Corporation did not grant any options (2017
– nil) under the incentive options plan. For the year ended December 31, 2018 the Corporation
did not grant any options (2017 – 70,000).
The Mortgage Banker (a company related to officers and/or directors of the Corporation) 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 of the commitment and
renewal fees generated from the Corporation's investments; and 25% of all of 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 of the Corporation is net of the loan
servicing fees paid to the Mortgage Banker of approximately $524,000 for the year ended
December 31, 2018 (2017 - $485,000) and approximately $133,000 for the three months ended
December 31, 2018 (2017 - $132,000). The Mortgage Banker also retains all overnight float
interest and incidental fees and charges payable by borrowers on the Corporation's investments.
The Corporation Management Agreement and Mortgage Banking Agreement contain provisions
for the payment of termination fees to the Corporation Manager and Mortgage Banker in the event
that the respective agreements are either terminated or not renewed.
A significant number 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.
During the first quarter of 2018, the two mortgage investments totaling $1,400,000 (December 31,
2017- two mortgage investments totaling $1,400,000) that were issued to a borrower controlled
by an independent director of the Corporation were fully repaid.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 15
16 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Corporation holds a mortgage investment totaling $5,148,000 at December 31, 2018
(classified as discounted debt investment) that originated from the purchase of a mortgage loan
from a Schedule 1 bank at a discount to its original principal balance (December 31, 2017 -
$4,985,500). The Corporation’s investment is by way of a participation in a mortgage loan to the
entity that took title to the real estate following the completion of the enforcement foreclosure that
occurred after the purchase of the underlying Schedule 1 bank mortgage. The Corporation is a
pari passu participant in the mortgage, having the same rights as all other participants in the loan.
The entity that holds title to the real estate as agent is related to the other participants in the
mortgage loan investment, including entities related to certain directors of the Corporation, and
for this reason, the borrower is classified as a related party. For the three and twelve months
ended December 31, 2018, the Corporation recognized interest and fees earned of $nil
(December 31, 2017 - $nil) from this investment. The impairment provision recorded on this loan
was $860,000 as at December 31, 2018 (December 31, 2017 - $1,180,000). Recoveries under
the investment resulting from the sale of the secured real estate will be treated the same as for
all non-conventional mortgage investments held by the Corporation.
Aggregate compensation paid to key management personnel (including payments to related
parties for their recovery of overhead costs), all consisting of short-term employee compensation,
was $548,799 for the three months ended December 31, 2018 (2017 - $542,482) and for the year
ended December 31, 2018 $2,196,744 (2017 – $2,083,453), all of which was paid by the
Corporation's Manager and not by the Corporation.
Related party transactions are further discussed and detailed in the Corporation’s AIF and in Note
13 of the accompanying financial statements.
INCOME TAXES
The Corporation qualifies as a mortgage investment corporation within the meaning of 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 the first 90 days of the following taxation year. In
order to maintain its status as a mortgage investment corporation, the Corporation must
continually meet all criteria enumerated in the relevant section of the Income Tax Act (Canada)
throughout such taxation year. The Corporation intends to maintain its status as a mortgage
investment corporation and intends to distribute sufficient dividends in the year and in future years
to ensure that the Corporation has no tax payable under the Income Tax Act (Canada).
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 deferred income taxes is required.
CRITICAL ACCOUNTING ESTIMATES
The determination of the impairment provision for the Investment Portfolio is a critical accounting
estimate.
The Investment Portfolio is classified as loans and receivables. Such investments are recognized
initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, the mortgage loans are measured at amortized cost using the effective interest
method, less any impairment losses. The investments are assessed at each reporting date to
determine an impairment provision. Losses are recognized in the statement of income and
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 16
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
reflected in the provision account against the mortgage investments. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed
through income or profit. Management is required to consider the estimated future cash flow
recovery from the collateral securing the mortgage investments. The estimation of cash flow
recovery is performed on an individual mortgage basis and is based on assumptions pertinent to
each mortgage investment. Each mortgage analysis often has unique factors that are considered
in determining the cash flow and realizable value of the underlying security. The estimates are
based on historical experience and other assumptions that management believes are responsible
and appropriate in the circumstances. Actual results may differ from these estimates.
In addition to those estimates, assumptions and judgements listed in the consolidated financial
statements for the year ended December 31, 2018, the Corporation has identified new judgement
areas as a result of the adoption of IFRS 9 as follows:
CLASSIFICATION & MEASUREMENT OF FINANCIAL ASSETS
Mortgage investments and other loans are classified based on the business model for managing
assets and the contractual cash flow characteristics of the asset. The Corporation exercises
judgment in determining both the business model for managing the assets and whether cash flows
comprise solely of principal and interest.
MEASUREMENT OF EXPECTED CREDIT LOSS
The expected credit loss model requires the recognition of credit losses based on 12 months of
expected losses for performing loans and recognition of lifetime losses on performing loans that
have experienced a significant increase in credit risk since origination.
The determination of a significant increase in credit risk takes into account different factors and
varies by nature of investment. The Company assumes that the credit risk on a financial asset
has increased significantly if it is more than 30 days past due as well as other criteria, such as
watch list status and changes in weighted probability of default since origination.
The assessment of significant increase in credit risk requires experienced credit judgment. In
determining whether there has been a significant increase in credit risk and in calculating the
amount of expected credit losses, the Corporation must rely on estimates and exercise judgment
regarding matters for which the ultimate outcome is unknown. These judgments include changes
in circumstances that may cause future assessments of credit risk to be materially different from
current assessments, which could require an increase or decrease in the provision for credit
losses.
The calculation of expected credit losses includes the explicit incorporation of forecasts of future
economic inputs, such as house price indices.
FINANCIAL INSTRUMENTS
The fair values of amounts receivable and prepaid expenses, bank indebtedness, accounts
payable and accrued liabilities, and shareholder dividends payable approximate their carrying
values due to their short-term maturities.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 17
18 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
The fair value of the Investment Portfolio approximates its carrying value as the majority of the
loans are fully open for repayment at any time without penalty and have floating interest rates.
There is no quoted price in an active market for the mortgage and loan investments or mortgage
syndication liabilities. Management makes its determinations of fair value based on its
assessment of the current lending market for mortgage and loan investments of same or similar
terms. As a result, the fair value of mortgage and loan investments is based on Level 3 on the fair
value hierarchy.
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 repayment of the underlying loan that
secures the loan payable, 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 of the debenture portfolio investment has been determined based on the closing
price of convertible debenture securities of the respective listed entities on the Toronto Stock
Exchange for the respective date.
The fair value of marketable securities has been determined based on the closing price of the
security of the respective listed entities on the Toronto Stock Exchange for the respective date.
The fair value of loans on the debenture portfolio approximates its carrying value due to the fact
that it is fully open for repayment and has a floating rate of interest.
The tables in note 16 of the financial statements present the fair values of the Corporation's
financial instruments as at December 31, 2018 and December 31, 2017. It does not include fair
value information for financial assets and financial liabilities not measured at fair value if the
carrying amount is a reasonable approximation of fair value.
CONTRACTUAL OBLIGATIONS
Contractual obligations as at December 31, 2018 are due as follows:
Total
Less than 1
year
Bank indebtedness
Accounts payable and accrued liabilities
Shareholder dividends payable
Loans payable
Convertible debentures
Subtotal - Liabilities
Future advances under portfolio
Liabilities and contractual obligations
$
32,704,070
2,018,506
3,346,374
14,718,382
187,485,000
240,272,332
89,188,507
329,460,839
$
$
$
32,704,070
2,018,506
3,346,374
14,718,382
20,485,000
73,272,332
89,188,507
162,460,839
$
$
1-3 years
-
$
-
-
-
68,000,000
68,000,000
-
68,000,000
$
$
4 - 7 years
-
$
-
-
-
99,000,000
99,000,000
-
99,000,000
$
$
SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are described in note 3 of the Corporation’s financial statements
for the three months ended December 31, 2018 and year ended December 31, 2018.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 18
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
19
Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Corporation’s intent to qualify as a mortgage investment corporation, the
Corporation intends to distribute no less than 100% of the taxable income of the Corporation,
determined in accordance with the Income Tax Act (Canada), to its shareholders. The result is
that growth in the Investment Portfolio can only be achieved through the raising of additional
equity, issuing debt, and utilizing available borrowing capacity. As at December 31, 2018, the
Corporation had not utilized its full leverage availability, being a maximum of 50% of its first
mortgage investments. Unadvanced committed funds under the existing Investment Portfolio
amounted to $89 million as at December 31, 2018 (December 31, 2017 - $91 million). These
commitments are anticipated to be funded from the Corporation’s credit facility and borrower
repayments under the Investment Portfolio. The Corporation has a revolving line of credit with its
principal banker to fund the timing differences between mortgage advances and mortgage
repayments. There are limitations in the availability of funds under the revolving line of credit,
which is made up of a committed component and a demand component. The Corporation’s
investments are predominantly short-term in nature, and as such, the continual repayment by
borrowers of existing mortgage investments creates liquidity for ongoing investments and funding
commitments.
RISKS AND UNCERTAINTIES
The Corporation follows investment guidelines and operating policies. The Board of Directors, in
its discretion, may amend or approve investments that exceed these guidelines and policies as
investments are made. These policies govern such matters as: (i) restricting exposure per
mortgage investment; (ii) requirements for director approvals; and (iii) implementation of
operational risk management policies.
The Corporation’s directors take an active role in approving each and every investment the
Corporation makes. During fiscal year 2018, 170 investment approvals were sent to the Board of
Directors (2017 – 141). The Corporation shall not make an investment, which exceeds $1 million,
unless approved by no less than three of the Independent Directors.
The Corporation is faced with the following ongoing risk factors, among others, that would affect
shareholders’ equity and the Corporation’s ability to generate returns. A greater discussion of risk
factors that affect the Corporation are included in the AIF under the section “Risk Factors”, which
section is incorporated herein by reference.
Economic conditions that would result in a significant decline in real estate values and corresponding
loan losses.
Under various federal, provincial and municipal laws, an owner or operator of real property could
become liable for the cost of removal or remediation of certain hazardous or toxic substances released
on or in its properties or disposed of at other locations. The existence of such liability can have a
negative impact on the value of the underlying real property securing a mortgage. The Corporation
does not own the real property securing its Investment Portfolio and thus would not attract the
environmental liability that an owner would be exposed to. In rare circumstances where a mortgage is
in default, the Corporation may take possession of real property and may become liable for
environmental issues as a mortgagee in possession. The Corporation obtains phase 1 environmental
reports for mortgages where the Mortgage Banker determines that such reports would be prudent given
the nature of the underlying property.
The inability to obtain borrowings and leverage, thus reducing yield enhancement.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 19
20 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Dependence on the Corporation Manager and Mortgage Banker. The Corporation’s earnings are
impacted by the Mortgage Banker’s ability to source and generate appropriate investments that provide
sufficient yields while maintaining pre-determined risk parameters. The Corporation has also entered
into long-term contracts with the Mortgage Banker and the Corporation Manager, as more particularly
described in the AIF. The Corporation is exposed to adverse developments in the business and affairs
of the Corporation Manager and Mortgage Banker, since the day to day activities of the Corporation
are run by the Corporation Manager and since all of the Corporation’s investments are originated by
the Mortgage Banker.
Portfolio face rate fluctuations. The interest rate earned on the Corporation’s Investment Portfolio
fluctuates given that (i) it continually revolves given that it is short term in nature; and (ii) the portfolio
is predominately floating rate interest with floors.
Interest rate risk. The Corporation’s operating loan is floating rate and an increase in short term rates
would increase the Corporation’s cost of borrowing.
No guaranteed return. There is no guarantee as to the return that an investment in Shares of the
Corporation will earn.
Qualification as a Mortgage Investment Corporation. Although the Corporation intends to qualify at all
times as a mortgage investment corporation, no assurance can be provided in this regard. If for any
reason the Corporation does not maintain its qualification as a mortgage investment corporation under
the Tax Act, dividends paid by the Corporation on the Shares will cease to be deductible by the
Corporation in computing its income and will no longer be deemed by the rules in the Tax Act that apply
to mortgage investment corporations to have been received by shareholders as bond interest or a
capital gain, as the case may be. In consequence, the rules in the Tax Act regarding the taxation of
public corporations and their shareholders should apply, with the result that the combined corporate
and shareholder tax may be significantly greater.
Availability of investments. Our ability to make investments in accordance with our objectives and
investment policies depends upon the availability of suitable investments and the general economy
and marketplace. Increased competition in the lending market place in which the Corporation operates
from chartered banks or other public or private lending entities may impact the availability of suitable
investments and achievable investment yields for the Corporation.
Limited sources of borrowing. The Canadian financial marketplace is characterized as having a limited
number of financial institutions that provide credit to entities such as ours. The limited availability of
sources of credit may limit our ability to obtain additional leverage, if required.
Liquidity risk. Liquidity risk is the risk the Corporation will not be able to meet its financial obligations
as they come due. The Corporation’s approach to managing liquidity risk is to ensure, to the extent
possible, that it always has sufficient liquidity to meet its liabilities when they come due, under both
normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Corporation’s credit worthiness. The Corporation manages liquidity risk by forecasting cash flows from
operations and anticipated investing and financing activities. If the Corporation is unable to continue to
have access to its loans and mortgages syndications and revolving operating facility, the size of the
Corporation’s loan and mortgage investments will decrease and the income historically generated
through holding larger investments by utilizing leverage will not be earned.
Demand loan bank indebtedness. A significant component of the Corporation’s bank indebtedness is
in the form of a demand facility, repayment of which can be demanded by the bank at any time.
Specific investment risk for non-conventional mortgage and second mortgage investments. Non-
conventional and second mortgage investments attract higher loan loss risk due to their subordinate
ranking to other mortgage charges and sometimes high loan to value ratio. Consequently, this higher
risk is compensated for by a higher rate of return. In order to mitigate risk and maintain a well-
diversified Investment Portfolio, the operating policies of the Corporation generally limit the amount of
Conventional Non-First Mortgage investments to a maximum of 30% of the Corporation’s capital,
subject to the Board of Directors’ approval for any modifications to the operating policies.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 20
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
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MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
Reliance on Borrowers. After the funding of an investment, we rely on borrowers to maintain adequate
insurance and proper adherence to environmental regulations during the ongoing management of their
properties.
Credit Risk. The Investment Portfolio is exposed to credit risk. Credit risk is the risk that a counterparty
to a financial investment will fail to fulfill its obligations or Commitment, resulting in a financial loss to
the corporation.
Change in Legislation. There can be no assurance that certain laws applicable to the Corporation,
including Canadian federal and provincial tax legislation, commodity and sales tax legislation, tax
proposals, other governmental policies or regulations and governmental, administrative or judicial
interpretation thereof, will not change in a manner that will adversely affect the Corporation or
fundamentally alter the tax consequences to shareholders acquiring, holding or disposing of Shares.
Currency risk. Currency risk is the risk that the fair value or future cash flows of the Corporation's
foreign currency-denominated investments and cash and cash equivalents will fluctuate based on
changes in foreign currency exchange rates. Consequently, the Corporation is subject to currency
fluctuations that may impact its financial position and results of operations. The Corporation manages
its currency risk on its investments by borrowing the same amount as the investment in the same
currency. As a result, a change in exchange rate of the Canadian dollar against the U.S. dollar will not
change the net income and comprehensive income and equity. As a result, a change in exchange rate
of the Canadian dollar against the U.S. dollar will not result in a material change to the net income and
comprehensive income and equity.
SUBSEQUENT EVENT
On March 1, 2019, the Corporation completed an equity offering of 1,520,000 common shares at
a price of $13.20 per share for gross proceeds of $20,064,000. The over-allotment option was
exercised in full and the Corporation issued an additional 228,000 shares at a price of $13.20 per
share for gross proceeds of $3,009,600. The total shares issued was 1,748,000.
RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS
Management is responsible for the information disclosed in this MD&A, and has in place the
appropriate information systems, procedures, and controls to ensure that the information used
internally by management and disclosed externally is complete, reliable, and timely. In addition,
the Corporation’s Audit Committee and Board of Directors provide an oversight role with respect
to all public financial disclosures by the Corporation, and have reviewed and approved this MD&A
as well as the unaudited interim condensed consolidated financial statements as at December
31, 2018 and 2017.
CONTROLS AND PROCEDURES
The Corporation maintains appropriate information systems, procedures, and controls to ensure
that information disclosed externally is complete, reliable, and timely. The Corporation’s Chief
Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their direct
supervision of, the design and operating effectiveness of the Corporation’s disclosure controls
and procedures (as defined in National Instrument 52-109, Certification of Disclosure in Issuers’
Annual and Interim Filings) as at December 31, 2017 and December 31, 2018 and have
concluded that such disclosure controls and procedures were appropriately designed and were
operating effectively.
The Corporation has also established adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of the Corporation’s financial reporting and the
preparation of the financial statements for external purposes in accordance with IFRS for periods
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 21
22 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
effective January 1, 2010. The Corporation’s Chief Executive Officer and the Chief Financial
Officer assessed, or caused an assessment under their direct supervision of, the design and
operating effectiveness of the Corporation’s internal controls over financial reporting (as defined
in National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings)
as at December 31, 2018. Based on that assessment, it was determined that the Corporation’s
internal controls over financial reporting were appropriately designed and were operating
effectively.
The Corporation did not make any changes to the design of the Corporation’s internal controls
over financial reporting period ended December 31, 2018 that would have materially affected, or
would be reasonably likely to materially affect, the Corporation’s internal controls over financial
reporting.
It should be noted that a control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, including instances of fraud, if any, have been detected.
These inherent limitations include, among other items: (i) that management’s assumptions and
judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii)
the impact of any undetected errors; and (iii) controls may be circumvented by the unauthorized
acts of individuals, by collusion of two or more people, or by management override. The design
of any system of controls is also based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
FORWARD LOOKING INFORMATION
Certain information included in this MD&A contains forward-looking statements within the
meaning of applicable securities laws including, among others, statements concerning our 2018
objectives and our strategies to achieve those objectives, 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 below in this
MD&A under Risks and Uncertainties, which could cause our actual results to differ materially
from the forward-looking statements contained in this MD&A. Those risks and uncertainties
include risks associated with mortgage lending, competition for mortgage lending, real estate
values, interest rate fluctuations, environmental matters, and shareholder liability. Material factors
or assumptions that were applied in drawing a conclusion or making an estimate set out in the
forward-looking information include the assumption that there is not a significant decline in the
value of the general real estate market; market interest rates remain relatively stable; the
Corporation is generally able to sustain the size of its Investment Portfolio; adequate investment
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 22
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
23
Building Relationshipstoday and tomorrow
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
opportunities are presented to the Corporation; and adequate bank indebtedness are available to
the Corporation. Although the forward-looking information contained in this MD&A is based upon
what management believes are reasonable assumptions, there can be no assurance that actual
results will be consistent with these forward-looking statements.
All forward-looking statements in this MD&A 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.
OUTLOOK
The Corporation will continue to focus on disciplined investment decisions, risk management and
exit strategies, keeping in mind the significant historical increase in real estate valuations in certain
geographical and asset segments.
This approach could result in a decrease in the Corporation’s Investment Portfolio if repayments
exceed new investments. The impact of this can be mitigated with higher interest rates on new
investments and taking larger portions of investments.
Firm Capital Mortgage Investment Corporation • 2018 • Fourth Quarter Page 23
24 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
MANAGEMENT’S RESPONSIBILTY FOR FINANCIAL REPORTING
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
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ELI DADOUCH
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(cid:3)
President
(cid:3)
(cid:3)
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Chief Executive Officer
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BORIS BARIL
Chief Financial Officer
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Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
25
Building Relationshipstoday and tomorrow INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Firm Capital Mortgage Investment Corporation
Opinion
We have audited the consolidated financial statements of Firm Capital Mortgage Investment Corporation
(the “Entity”), which comprise:
the consolidated balance sheets as at December 31, 2018 and 2017
the consolidated statements of income for the years then ended
the consolidated statements of comprehensive income for the years then ended
the consolidated statements of changes in shareholders’ equity for the years then ended
the consolidated statements of cash flows for the years then ended
•
•
•
•
•
• and notes to the consolidated financial statements, including a summary of significant accounting
policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated balance sheets of the Entity as at December 31, 2018 and 2017, and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International
Financial Reporting Standards (IFRS) .
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards . Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit
of the Financial Statements” section of our auditors’ report .
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit
of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance
with these requirements .
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion .
Other Information
Management is responsible for the other information . Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions .
the information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Glossy Annual Report” .
Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon .
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit and remain alert for indications that the other
information appears to be materially misstated .
26 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
INDEPENDENT AUDITOR’S REPORT
We obtained the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions as at the date of this auditors’ report . If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in the auditors’ report .
We have nothing to report in this regard .
The information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Glossy Annual Report” is expected to be made available to us after the date
of this auditors report . If, based on the work we will perform on this information, we conclude that there is
a material misstatement of this other information, we are required to report that fact to those charged with
governance .
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with International Financial Reporting Standards (IFRS), and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error .
In preparing the financial statements, management is responsible for assessing the Entity’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Entity or to cease
operations, or has no realistic alternative but to do so .
Those charged with governance are responsible for overseeing the Entity’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes
our opinion .
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material misstatement
when it exists .
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit .
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion.
• The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control .
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
27
Building Relationshipstoday and tomorrow INDEPENDENT AUDITOR’S REPORT
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Entity’s internal control .
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management .
the
Evaluate
the overall presentation, structure and content of
• Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events or
Page 4
conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report
to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify
our opinion . Our conclusions are based on the audit evidence obtained up to the date of our auditors’
financial
report . However, future events or conditions may cause the Entity to cease to continue as a going
statements, including the disclosures, and whether the financial statements
concern .
represent the underlying transactions and events in a manner that achieves fair
• Evaluate the overall presentation, structure and content of the financial statements, including the
presentation.
disclosures, and whether the financial statements represent the underlying transactions and events in
Communicate with those charged with governance regarding, among other
a manner that achieves fair presentation .
matters, the planned scope and timing of the audit and significant audit findings,
• Communicate with those charged with governance regarding, among other matters, the planned scope
including any significant deficiencies in internal control that we identify during our
audit.
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit .
Provide those charged with governance with a statement that we have complied
• Provide those charged with governance with a statement that we have complied with relevant ethical
with relevant ethical requirements regarding independence, and communicate
requirements regarding independence, and communicate with them all relationships and other matters
with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
that may reasonably be thought to bear on our independence, and where applicable, related safeguards .
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
Obtain sufficient appropriate audit evidence regarding the financial information of
activities within the group to express an opinion on the financial statements. We are responsible for the
the entities or business activities within the group to express an opinion on the
direction, supervision and performance of the group audit . We remain solely responsible for our audit
financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit
opinion .
opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors' report is Saqib Jawed.
Toronto, Canada
March 12, 2019
28 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Balance Sheets
Consolidated Balance Sheets
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Balance Sheets
(in Canadian dollars)
(in Canadian dollars)
As at
Assets
Amounts receivable and prepaid expenses (note 4)
Marketable securities (note 5)
Investment portfolio (note 6)
Total assets
December 31, 2018
As at
December 31, 2017
December 31, 2018
December 31, 2017
Assets
$
Amounts receivable and prepaid expenses (note 4)
Marketable securities (note 5)
Investment portfolio (note 6)
Total assets
$
3,875,248
199,204
515,994,509
520,068,961
5,226,204
210,194
555,801,977
561,238,375
$
$
Liabilities
Liabilities
Bank indebtedness (note 7)
Accounts payable and accrued liabilities
Deferred revenue
Shareholders' dividends payable
Loans payable (note 8)
Convertible debentures (note 9)
Total liabilities
$
$
Bank indebtedness (note 7)
32,704,070
Accounts payable and accrued liabilities
2,018,504
Deferred revenue
1,179,220
Shareholders' dividends payable
3,346,374
Loans payable (note 8)
14,718,382
Convertible debentures (note 9)
179,994,433
Total liabilities
233,960,983
$
$
60,268,468
2,649,558
1,294,556
3,857,518
51,662,949
157,464,904
277,197,953
Shareholders' Equity
Shareholders' Equity
Common shares (note 10)
Equity component of convertible debentures
Stock options (note 10)
Contributed surplus
Deficit
Accumulated other comprehensive income
Total shareholders' equity
Commitments (note 6)
Contingent liabilities (note 15)
Total liabilities and shareholders' equity
$
$
Common shares (note 10)
282,362,724
3,254,000
Equity component of convertible debentures
91,633
Stock options (note 10)
686,276
Contributed surplus
(286,655)
Deficit
Accumulated other comprehensive income
--
Total shareholders' equity
286,107,978
$
281,377,245
2,780,000
93,556
76,276
(321,826)
35,171
284,040,422
$
Commitments (note 6)
Contingent liabilities (note 15)
$
Total liabilities and shareholders' equity
520,068,961
$
561,238,375
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
On behalf of the Directors:
On behalf of the Directors:
"Eli Dadouch" "Jonathan Mair"
ELI DADOUCH JONATHAN MAIR
"Eli Dadouch" "Jonathan Mair"
ELI DADOUCH JONATHAN MAIR
Director Director
Director Director
2
2
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
29
$
3,875,248
$
5,226,204
199,204
515,994,509
210,194
555,801,977
$
520,068,961
$
561,238,375
$
32,704,070
$
60,268,468
$
233,960,983
$
277,197,953
$
282,362,724
$
281,377,245
2,018,504
1,179,220
3,346,374
14,718,382
179,994,433
3,254,000
91,633
686,276
(286,655)
--
2,649,558
1,294,556
3,857,518
51,662,949
157,464,904
2,780,000
93,556
76,276
(321,826)
35,171
$
286,107,978
$
284,040,422
$
520,068,961
$
561,238,375
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Statements of Income
Consolidated Statements of Income
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Revenues
Interest and fees income
Other income
Realized gains on disposal of debenture portfolio investments (note 5)
Realized gains on disposal of marketable securities investments (note 5)
Operating expenses
Corporation manager spread interest allocation (note 13)
Interest expense (note 14)
General and administrative expenses
Unrealized foreign exchange loss (gain)
Realized foreign exchange loss
Provision for impairment on investment portfolio and interest receivable (note 6)
Income and profit for the year
Profit per share (note 11)
Basic
Diluted
See accompanying notes to consolidated financial statements.
2018
2017
$
46,982,013
331,251
--
--
47,313,264
$
40,351,170
3,072,099
240,618
217,817
43,881,704
3,932,134
14,908,334
1,044,375
(1,059)
11,459
1,667,325
21,562,568
$
3,639,094
13,223,349
956,883
940
--
1,240,000
19,060,266
$
$
25,750,696
$
24,821,438
$0.986
$0.963
$1.019
$0.984
3
30 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Income and profit for the year
Other comprehensive income:
Nine Months Ended
2018
2017
$
25,750,696
$
24,821,438
Change in fair value of available for sale marketable securities and
debenture investments (note 5)
Realized gains on disposal of marketable securities and debenture
investments reclassified to income (note 5)
--
--
130,362
(458,435)
Total Comprehensive income for the year
$
25,750,696
$
24,493,365
See accompanying notes to consolidated financial statements.
4
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
31
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Statements of Changes in Shareholder’s Equity
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Equity
component of
convertible
debentures
Common shares
Stock options
Contributed
surplus
Surplus
(Deficit)
Accumulated other
comprehensive
income
Shareholders'
equity
Balance at December 31, 2017
Cumulative effect of adopting IFRS 9
Balance at January 1, 2018
Issuance of shares
Offering costs
Proceeds from issuance of shares from dividend reinvestment
Conversion and redemption of debentures
Equity component of debentures issued during the year (note 9)
Stock based compensation (note 10 (b))
Exercise of stock options (note 10 (b))
Income and profit for the year
Dividends to shareholders
Balance at December 31, 2018
$
$
$
$
$
$
$
$
281,377,245
-
281,377,245
735,818
(35,382)
47,520
-
-
-
237,523
-
-
282,362,724
2,780,000
-
2,780,000
-
-
-
(610,000)
1,084,000
-
-
-
-
3,254,000
93,556
-
93,556
-
-
-
-
-
-
(1,923)
-
-
91,633
76,276
-
76,276
-
-
-
610,000
-
-
-
-
-
686,276
($321,826)
35,171
($286,655)
-
-
-
-
-
-
-
25,750,696
(25,750,696)
(286,655)
$35,171
(35,171)
-
-
-
-
-
-
-
-
-
-
$
-
$
284,040,422
-
$284,040,422
735,818
(35,382)
47,520
-
1,084,000
-
235,600
25,750,696
(25,750,696)
286,107,978
$
$
$
$
$
Shares issued and outstanding (note 10)
26,143,544
Balance at January 1, 2017
Issuance of shares
Offering costs
Proceeds from issuance of shares from dividend reinvestment
Conversion and redemption of debentures
Equity component of debentures issued during the year (note 9)
Stock based compensation (note 10 (b))
Exercise of stock options (note 10 (b))
Change in fair value of available for sale marketable securities and
debenture investments (note 5)
Realized gains on disposal of marketable securities and debenture
investments reclassified to income
Income and profit for the year
Dividends to shareholders
Balance at December 31, 2017
Equity
component of
convertible
debentures
$
2,800,000
-
-
-
(230,000)
210,000
-
-
Common shares
$
236,031,386
44,303,727
(1,345,374)
676,082
155,648
-
-
1,555,776
Stock options
Contributed
surplus
Surplus
(Deficit)
$
95,123
-
-
-
-
-
11,030
(12,597)
$
1,924
-
-
-
74,352
-
-
-
($321,826)
-
-
-
-
-
-
-
Accumulated other
comprehensive
income (loss)
$363,244
-
-
-
-
-
-
-
Shareholders'
equity
$
238,969,851
44,303,727
(1,345,374)
676,082
-
210,000
11,030
1,543,179
-
-
-
-
-
130,362
130,362
-
-
-
281,377,245
$
-
-
-
2,780,000
$
-
-
-
93,556
$
-
-
-
76,276
$
-
24,821,438
(24,821,438)
(321,826)
(458,435)
-
-
35,171
(458,435)
24,821,438
(24,821,438)
284,040,422
Shares issued and outstanding (note 10)
26,064,310
See accompanying notes to consolidated financial statements.
5
32 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Statements of Cash Flows
Statements of Cash Flows
(in Canadian dollars)
Cash provided by (used in):
Operating activities:
Income and profit for the year
Adjustments for:
Financing costs (net of implicit interest rate and deferred finance cost
amortization)
Implicit interest rate in excess of coupon rate - convertible debentures (note 9)
Deferred finance cost amortization - convertible debentures (note 14)
Provision for impairment on investment portfolio and interest receivable
Realized gains on disposal of debenture portfolio investments (note 5)
Realized gains on disposal of marketable securities investments (note 5)
Share-based compensation
Unrealized loss on marketable securities investments (note 5)
Net change in non-cash operating items:
Accrued interest payable
Receivable and prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
Net cash flow from operating activities
Financing activities:
Issuance of shares in new offerings
Issuance of shares from dividend reinvestment
Exercise of stock options
Proceeds from convertible debentures issued (note 9)
Repayment of convertible debentures (note 9)
Debenture offering costs (note 9)
Equity offering costs
Funding (repayment) of loans payable (net)
Repayment of loan on debenture portfolio
Cash interest paid (note 14)
Dividends to shareholders paid during the year (note 12)
Net cash flow from (used in) financing activities
Investing activities:
Disposition of marketable securities
Disposition of debenture portfolio investments
Funding of investment portfolio
Discharging of investment portfolio
Net cash flow from (used in) investing activities
Net increase (decrease) in cash flow for the year
Bank indebtedness, beginning of year
Bank indebtedness, end of year
Cash flows from operating activities include:
Interest received
Supplementary cash flow information :
Conversions of debenture to shares (note 9)
See accompanying notes to consolidated financial statements.
6
2018
2017
$
25,750,696
$
24,821,438
13,187,646
11,582,725
437,426
1,283,262
1,667,325
--
--
(1,923)
10,990
415,179
1,225,446
1,240,000
(240,618)
(217,817)
11,030
--
485,960
(1,066,371)
(631,054)
(115,336)
41,008,621
$
(386,246)
(503,013)
547,928
414,705
38,910,757
$
735,818
47,520
237,523
50,000,000
(25,738,000)
(2,369,157)
(35,382)
(36,944,567)
--
(13,673,606)
(26,261,840)
(54,001,691)
$
23,025,300
676,082
1,543,179
26,500,000
(10,164,573)
(1,328,710)
(1,345,374)
51,662,949
(1,295,184)
(11,196,478)
(23,392,893)
54,684,298
$
--
--
(287,000,225)
327,557,693
40,557,468
$
2,099,067
2,221,366
(374,838,421)
262,091,077
(108,426,911)
$
$
27,564,398
(60,268,468)
(32,704,070)
$
$
$
(14,831,856)
(45,436,612)
(60,268,468)
$
43,283,752
$
38,077,048
$
-
$
21,278,427
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
33
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
1.
Organization of Corporation:
Firm Capital Mortgage Investment Corporation (the "Corporation"), through its mortgage banker, Firm Capital Corporation (the "Mortgage
Banker), is a non-bank lender providing primarily residential and commercial short-term bridge and conventional real estate financing,
including construction, mezzanine, and equity investments. The shares of the Corporation are listed on the Toronto Stock Exchange
under the symbol "FC". The Corporation is a Canadian mortgage investment corporation and the registered office of the Corporation is
163 Cartwright Avenue, Toronto, Ontario, M6A 1V5. FC Treasury Management Inc. is the Corporation's manager (the "Corporation
Manager"). The Corporation was incorporated pursuant to the laws of the Province of Ontario on October 22, 2010.
2.
(a)
Basis of presentation:
Statement of compliance:
The consolidated financial statements of the Corporation have been prepared by management in accordance with International Financial
Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB").
The consolidated financial statements were approved by the Board of Directors on March 12, 2019.
These consolidated financial statements include the adoption of IFRS 9 Financial Instruments effective January 1, 2018, without
restatement of comparative periods. Significant changes to accounting policies are described in note 3(a).
(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 ("FVTPL") which are measured at fair value at each reporting date.
(c)
Principles of consolidation
The consolidated financial statements comprise the financial statements of the Corporation and its subsidiaries which includes FC Finance
Trust. Subsidiaries are fully consolidated from the date on which the Corporation obtains control, and continue to be consolidated until the
date that such control ceases. Control exists when the Corporation has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefit from its activities. All intercompany transactions and balances are eliminated upon
consolidation.
(d)
Functional and presentation currency:
These financial statements are presented in Canadian dollars, which is the Corporation's functional currency.
(e)
Critical 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 dates of the financial statements and the reported amounts of revenues
and expenses during the year. 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. Revisions to accounting estimates are recognized in the year in which estimates are revised. Those estimates and
judgements have been applied in a manner consistent with previous years and there are no known trends, commitments, events or
uncertainties that management believes will materially affect the methodology or assumptions utilized in making those estimates and
judgements in these audited financial statements. The significant estimates and judgements used in determining the recorded amount for
assets and liabilities in the financial statements are as follows:
7
34 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Provision for impairment - The most significant estimates that the Corporation is required to make relate to the impairment of the
investments (notes 3(a) and 6). These estimates 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, adverse
changes in the payment status of borrowers, 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. Accordingly, by their nature, estimates of impairment are subjective and do not
necessarily result in precise determinations of the actual outcome. Should the underlying assumptions change, the estimated fair value
could vary by a material amount.
Classification of investment portfolio - Investment portfolio is classified based on the assessment of business model and the cash flow
characteristics of the investments. The Corporation exercises judgement in determining the classification of loans in the investment
portfolio into measurement categories (note 3(a)).
Measurement of fair values - The Corporation's accounting policies and disclosures require the measurement of fair values for both
financial and non-financial assets and liabilities.
When measuring the fair value of an asset or liability, the Corporation uses market observable data where possible. Fair values are
categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2:
Level 3:
Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities,
either directly (that is, as prices) or indirectly (that is, derived from prices)
Inputs for the assets or liabilities that are not based on observable market data (that is, unobservable
inputs)
The Corporation reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or
appraisals are used to measure fair values, the Corporation will assess the evidence obtained from the third parties to support the
conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations
should be classified.
The information about the assumptions made in measuring fair value is included in note 16.
3.
Significant accounting policies:
The Corporation's accounting policies and its standards of financial disclosure set out below are in accordance with IFRS.
(a)
Financial instruments
The Corporation adopted IFRS 9 effective January 1, 2018, without restatement of comparative periods. Changes in accounting policies
resulting from the adoption of IFRS 9 as of January 1, 2018 are described below:
Classification & Measurement of Financial Assets
Recognition and initial measurement
The Corporation on the date of origination or purchase recognizes loans, debt and equity securities, deposits and subordinated
debentures at the fair value of consideration paid. Regular-way purchases and sales of financial assets are recognized on the settlement
date. All other financial assets and liabilities are initially recognized on the date at which the Corporation becomes a party to the
contractual provisions of the instrument.
8
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
35
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The initial measurement of a financial asset or liability is at fair value plus transaction costs that are directly attributable to its purchase or
issuance. For instruments measured at fair value through profit or loss, transaction costs are recognized immediately in profit or loss.
Financial assets include both debt and equity instruments.
Debt instruments
Debt instruments, including loans and debt securities, are classified into one of the following measurement categories:
(i)
(ii)
(iii)
Amortized cost;
Fair value through other comprehensive income (FVOCI); or
Fair value through profit or loss (FVTPL) for trading related assets.
Classification of debt instruments is determined based on:
(i)
(ii)
The business model under which the asset is held; and
The contractual cash flow characteristics of the instrument.
Business model assessment
Business model assessment involves determining whether financial assets are managed in order to generate cash flows from collection of
contractual cash flows. The Corporation takes into consideration the following factors:
How the performance of assets in a portfolio is evaluated and reported;
(i)
(ii)
The risks that affect the performance of assets held within a business model and how those risks are managed; and
(iii)
Whether the assets are held for trading purposes.
Cash flow characteristics assessment
The contractual cash flow characteristics assessment involves assessing the contractual features of an instrument to determine if they
give rise to cash flows that are consistent with a basic lending arrangement. Contractual cash flows are consistent with a basic lending
arrangement if they represent cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
Principal is defined as the fair value of the instrument at initial recognition. Principal may change over the life of the instruments due to
repayments.
Interest is defined as consideration for the time value of money and the credit risk associated with the principal amount outstanding and for
other basic lending risks and costs (liquidity risk and administrative costs), as well as a profit margin.
In performing this assessment, the Corporation takes into consideration contractual features that could change the amount or timing of
contractual cash flows, such that the cash flows are no longer consistent with a basic lending arrangement. If the Corporation identifies
any contractual features that could modify the cash flows of the instrument such that they are no longer consistent with a basic lending
arrangement, the related financial asset is classified and measured at FVTPL.
Debt instruments measured at amortized cost
Debt instruments are measured at amortized cost if they are held within a business model whose objective is to hold for collection of
contractual cash flows where those cash flows represent solely payments of principal and interest. After initial measurement, debt
instruments in this category are carried at amortized cost using the effective interest method. The effective interest rate is the rate that
discounts estimated future cash payments or receipts through the expected life of the financial asset to the gross carrying amount of a
financial asset. Amortized cost is calculated taking into account any discount or premium on acquisition, transaction costs and fees that
are an integral part of the effective interest rate. Amortization is included in Interest income in the Consolidated Statement of Income.
Impairment on debt instruments measured at amortized cost is calculated using the expected credit loss approach. Loans and debt
securities measured at amortized cost are presented net of the allowance for credit losses (ACL) in the Consolidated Balance Sheets.
9
36 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Debt instruments measured at FVOCI
Debt instruments are measured at FVOCI if they are held within a business model whose objective is both to hold for collection of
contractual cash flows and to sell financial assets, where the assets’ cash flows represent payments that are solely payments of principal
and interest. Subsequent to initial recognition, unrealized gains and losses on debt instruments measured at FVOCI are recorded in other
comprehensive Income (OCI), unless the instrument is designated in a fair value hedge relationship.
Impairment on debt instruments measured at FVOCI is calculated using the expected credit loss approach. The ACL on debt instruments
measured at FVOCI does not reduce the carrying amount of the asset in the Consolidated Balance Sheets, which remains at its fair value.
Instead, an amount equal to the provision that would arise if the assets were measured at amortized cost is recognized in OCI with a
corresponding charge to provision for impairment in the Consolidated Statement of Income. The accumulated provision recognized in OCI
is recycled to the Consolidated Statement of Income upon derecognition of the debt instrument.
Debt instruments measured at FVTPL
Debt instruments measured at FVTPL include assets held for trading purposes, assets held as part of a portfolio managed on a fair value
basis and assets whose cash flows do not represent payments that are solely payments of principal and interest. These instruments are
measured at fair value in the Consolidated Balance Sheets, with transaction costs recognized immediately in the Consolidated Statement
of Income as part of Non-interest income. Realized and unrealized gains and losses are recognized as part of Non-interest income in the
Consolidated Statement of Income.
Equity instruments
Equity instruments are measured at FVTPL, unless an election is made to designate them at FVOCI upon purchase. For equity
instruments measured at FVTPL, changes in fair value are recognized as part of other income in the Consolidated Statement of Income.
The Corporation can elect to classify non-trading equity instruments at FVOCI. This election will be used for certain equity investments for
strategic or longer term investment purposes. The FVOCI election is made upon initial recognition on an instrument-by instrument basis
and once made is irrevocable.
Impairment
The impairment model measures credit loss allowances using a three-stage approach based on the extent of credit deterioration since
origination:
Stage 1 – Where there has not been a significant increase in credit risk (SIR) since initial recognition of a financial instrument, an amount
equal to 12 months expected credit loss is recorded. The expected credit loss is computed using a probability of default occurring over the
next 12 months. For those instruments with a remaining maturity of less than 12 months, a probability of default corresponding to
remaining term to maturity is used.
Stage 2 – When a financial instrument experiences a SIR subsequent to origination but is not considered to be in default, it is included in
Stage 2. This requires the computation of expected credit loss based on the probability of default over the remaining estimated life of the
financial instrument.
Stage 3 – Financial instruments that are considered to be in default are included in this stage. Similar to Stage 2, the allowance for credit
losses captures the lifetime expected credit losses.
Measurement of expected credit loss
The probability of default (PD), exposure at default (EAD), and loss given default (LGD) inputs used to estimate expected credit losses are
modelled based on macroeconomic variables that are most closely related with credit losses in the relevant portfolio. Details of these
statistical parameters/inputs are as follows:
PD – The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain
time over the remaining estimated life, if the facility has not been previously derecognized and is still in the portfolio.
EAD – The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the
exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected
drawdowns on committed facilities, and accrued interest from missed payments.
10
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
37
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
LGD – The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the
difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any
collateral. It is usually expressed as a percentage of the EAD.
Macroeconomic factors
In its models, the Corporation relies on forward looking information as economic inputs, such as house price indices. The inputs and
models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial
statements. To reflect this, qualitative adjustments or overlays may be made as temporary adjustments using expert credit judgement.
Assessment of significant increase in credit risk (SIR)
At each reporting date, the Corporation assesses whether there has been a significant increase in credit risk for exposures since initial
recognition by comparing the risk of default occurring over the remaining expected life from the reporting date and the date of initial
recognition. The assessment considers borrower-specific quantitative and qualitative information without consideration of collateral, and
the impact of forward-looking macro-economic factors, management judgement and delinquency and monitoring.
The common assessments for SIR on investment portfolios include macroeconomic outlook, management judgement, and delinquency
and monitoring. Forward looking macroeconomic factors are a key component of the macroeconomic outlook. The importance and
relevance of each specific macroeconomic factor depends on the type of product, characteristics of the financial instruments and the
borrower and the geographical region. Quantitative models may not always be able to capture all reasonable and supportable information
that may indicate a significant increase in credit risk. Qualitative factors may be assessed to supplement the gap. With regards to
delinquency and monitoring, there is a rebuttable presumption that the credit risk of the financial instrument has increased since initial
recognition when contractual payments are more than 30 days overdue.
Presentation of allowance for credit losses in the Statement of Financial Position
(i)
(ii)
Financial assets measured at amortized cost: as a deduction from the gross carrying amount of the financial assets;
Debt instruments measured at fair value through other comprehensive income: no provision is recognized in the Statement of
Financial Position because the carrying value of these assets is their fair value. However, the provision determined is presented in
the accumulated other comprehensive income.
Definition of default
The Corporation considers a financial instrument to be in default as a result of one or more loss events that occurred after the date of initial
recognition of the instrument and the loss event has a negative impact on the estimated future cash flows of the instrument that can be
reliably estimated. This includes events that indicate:
(i)
(ii)
(iii)
(iv)
significant financial difficulty of the borrower;
default or delinquency in interest or principal payments;
high probability of the borrower entering a phase of bankruptcy or a financial reorganization;
measurable decrease in the estimated future cash flows from the loan or the underlying assets that back the loan.
The Corporation considers that default has occurred and classifies the financial asset as impaired when it is more than 90 days past due,
unless reasonable and supportable information demonstrates that a more lagging default criterion is appropriate.
Individual provision for impairment
For loans that are considered individually impaired the Corporation assesses on a case-by-case basis at each reporting period whether an
individual provision for loan losses is required.
For those loans where objective evidence of impairment exists and the Corporation has determined a loan to be impaired, impairment is
determined based on the Corporation's aggregate exposure to the customer considering the following factors:
(i)
(ii)
the customer's ability to generate sufficient cash flow to service debt obligations;
the extent of other creditors' commitments ranking ahead of, or pari passu with, the Corporation and the likelihood of other creditors
continuing to support the company; and
(iii)
the realizable value of security (or other credit mitigants) and likelihood of successful repossession.
11
38 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and
comparing the resultant present value with the loan's current carrying amount. This results in interest income being recognized using the
original effective interest rate.
Collective provision for impairment
For loans that have not been individually assessed as being impaired, the Corporation pools them into groups to assess them on a
collective basis. Collective provisions are calculated for performing loans. Provisions related to performing loans estimate probable
incurred losses that are inherent in the portfolio but have not yet been specifically identified as impaired.
Internal risk rating parameters are used in calculation of the collective provision for impairment.
basis for calculating the quantitative portion of the collective provision for performing loans:
Internal risk rating parameters form the
(i)
(ii)
Probability of Default rates (PD) which are based upon the internal rating for each borrower;
Loss Given Default ratings (LGD); and
(iii)
Exposure at Default factors (EAD).
Funded exposures are multiplied by the borrower's PD and by the relevant LGD parameter.
Committed but undrawn exposure are multiplied by the borrower's PD, by the relevant LGD parameter, and by the relevant EAD
parameter. A model stress component is also applied to recognize uncertainty in the credit risk parameter and the fact that current actual
loss rates may differ from the long-term averages included in the model.
Write-off
Investment portfolio and interest receivable (and the related provision for impairment accounts) are normally written off, either partially or
in full, when there is no realistic prospect of recovery. Write-off is generally after receipt of any proceeds from the realization of security.
In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further
recovery, write-off may be earlier.
Investment portfolio - Policy prior to January 1, 2018:
The investment portfolio is classified as loans and receivables. Such investments are recognized initially at cost plus any directly
attributable transaction costs. Subsequent to initial recognition, the investment portfolio is measured at amortized cost using the effective
interest method, less any impairment provisions.
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.
12
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
39
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The Corporation assesses individually significant investments at each reporting date to determine whether there is objective evidence of
impairment. An impairment loss in respect of the investments measured at amortized cost is calculated as the difference between its
carrying amount including interest and the present value of the future cash flows estimated to be recovered on the loan security. Estimates
and assumptions are made as to the gross sale proceeds that would be generated on the forced sale of the real property securing the
related mortgage loan, and reflect estimates of the current local market conditions. Estimates are made as to the costs of enforcing under
the mortgage loan and of realizing on the real property. In particular, judgment by management is required in the estimation of the amount
and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of
factors and actual results may differ, resulting in future changes to the provision. Losses are recognized in the statement of income and
reflected in an impairment provision against the investments.
Investments that have been assessed individually and found not to be impaired and all individually insignificant mortgages are then
assessed collectively, in groups of mortgages with similar risk characteristics, to determine whether a collective provision should be
recorded due to incurred loss events for which there is objective evidence but whose effects are not yet evident.
(b)
Revenue recognition:
(i)
(ii)
Interest and fee income: Interest income earned is accounted for using the effective interest method. Commitment fees
received are amortized to profit and loss over the expected term of the investment.
Non-conventional mortgages: At each reporting period the Corporation determines the fair value of the special profit and
interest participation receivable on non-conventional mortgages. Any changes in fair value are recognized in Other Income.
(c)
Share-based compensation:
The Corporation has a share-based compensation plan (i.e. incentive option plan), which is described in note 10(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 tax is required for the Corporation and its subsidiaries.
(e)
Financial assets and liabilities:
Financial assets include the Corporation's amounts receivable, marketable securities, and investment portfolio. Financial liabilities include
bank indebtedness, accounts payable and accrued liabilities, shareholder dividend payable, loans payable, and convertible debentures.
The Corporation classified its financial assets into the following categories: financial assets at amortized cost, FVOCI, or FVTPL.
Marketable securities have been designated as FVTPL. Internal reporting and performance measurement of these investments are on a
fair value basis and are based on prices as quoted in an active public marketplace. Amounts receivable and the investment portfolio are
classified as amortized cost with some related investments at FVTPL.
13
40 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The Corporation classifies its financial liabilities at amortized cost.
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. Financial assets classified as FVOCI are subsequently measured at fair value using the bid/ask price, with gains and
losses recognized in other comprehensive income. Financial assets classified as at FVTPL are subsequently measured at fair value using
the bid/ask price, with gains and losses recognized in profit or loss. Financial instruments classified at amortized cost are subsequently
measured at amortized cost less any costs of impairment.
Financial assets and liabilities - Policy prior to January 1, 2018:
Financial assets include the Corporation's amounts receivable, marketable securities, and investment portfolio. Financial liabilities include
bank indebtedness, accounts payable and accrued liabilities, shareholder dividend payable, loans payable, and convertible debentures.
The Corporation classified its financial assets into the following categories: financial assets at fair value through profit or loss ("FVTPL"),
loans and receivables, and available for sale. Marketable securities have been designated as available for sale. Internal reporting and
performance measurement of these investments are on a fair value basis and are based on prices as quoted in an active public
marketplace. Amounts receivable and prepaid expenses and investment portfolio are classified as loans and receivables.
The Corporation classified its financial liabilities into the other liabilities category.
Recognition and measurement of financial instruments:
The Corporation determined 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. Financial assets classified as FVOCI are subsequently measured at fair value using the bid/ask price, with gains and
losses recognized in other comprehensive income. Financial assets classified as at FVTPL are subsequently measured at fair value using
the bid/ask price, with gains and losses recognized in profit or loss. Financial instruments classified at amortized cost are subsequently
measured at amortized cost less any costs of impairment.
(f)
Derecognition of financial assets and liabilities:
(i)
Financial assets:
The Corporation derecognized a financial asset when the contractual rights to the cash flows from the financial asset expires, or it
transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of
ownership of the financial asset are transferred, or in which the Corporation neither transfers nor retains substantially all the risks
and rewards of ownership and it does not retain control of the financial asset. Any interest in such transferred financial assets that
qualify for derecognition that is created or retained by the Corporation is recognized as a separate asset or liability. On
derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the
portion of the asset transferred), and the sum of (a) the consideration received (including any new asset obtained less any new
liability assumed) and (b) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in
profit or loss.
The Corporation enters into transactions whereby it transfers mortgage or loan investments recognized on its statements of
financial position, but retains either all or substantially all of the risks and rewards of the transferred mortgage or loan investments.
If all or substantially all risks and rewards are retained, then the transferred mortgage or loan investments are not derecognized.
14
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
41
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
In transactions in which the Corporation neither retains nor transfers substantially all the risks and rewards of ownership of a
financial asset and it retains control over the asset, the Corporation continues to recognize the asset to the extent of its continuing
involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.
(ii)
Financial liabilities:
The Corporation derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires.
(g)
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.
(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. Dividends to shareholders are recognized in shareholders' 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 potential dilutive convertible debentures and any options granted under the incentive option plan.
(j)
Foreign currency translation:
Transactions amounts denominated in foreign currencies are translated into Canadian dollar equivalents at the rate of exchange prevailing
at the time of the transactions. Carrying values of monetary assets and liabilities are translated at exchange rates prevailing at the dates
of the consolidated statements of financial position. Foreign exchange gains and losses on the receipt of the payments from translations
are included in realized gains/loss on foreign exchange in the consolidated statements of income and comprehensive income. All
unrealized foreign gains and losses on monetary assets and liabilities are included in unrealized foreign exchange gain/loss in the
consolidated statements of income and comprehensive income.
(k)
IFRS 15, Revenue from contracts with customers ("IFRS 15")
The Corporation adopted the standard on January 1, 2018 and applied the requirements of the standards retrospectively. IFRS 15
replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the
Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue: Barter Transaction Involving Advertising
Services.
The implementation of IFRS 15 did not have a significant impact on the consolidated financial statements.
15
42 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
Accounts payable and accrued liabilities
Deferred revenue
Shareholders' dividends payable
Loans payable
Convertible debentures
Total liabilities
Shareholders' Equity
Common shares
Equity component of convertible
debentures
Stock options
Contributed surplus
Deficit (1)
Accumulated other comprehensive
income (1)
Total shareholders' equity
8
9
10
10
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
(l)
Transition to IFRS 9
Reconciliation of IAS 39 to IFRS 9
The following table provides the impact from the transition to IFRS 9 on the Consolidated Balance Sheets at transition date, January 1,
2018. The impact consists of reclassification and remeasurement.
Reclassification and remeasurement
These adjustments reflect the movement of balances between categories and changes to carrying values of the items on the Consolidated
Balance Sheets with an impact to shareholder's equity.
As at January 1, 2018
Note
basis
IAS 39
Measurement
IAS 39
Carrying
amount
Reclassification Remeasurement
IFRS 9
Carrying
amount
IFRS 9
Measurement
basis
Assets
Amounts receivable and prepaid
expenses
Marketable securities (1)
Investment portfolio (2)
Investment portfolio (2)
Total assets
Liabilities
4
5
6
6
Loans and receivables
Available for sale
Loans and receivables
Loans and receivables
$
5,226,204
210,194
555,801,977
-
$
561,238,375
-
$
-
(6,518,875)
6,518,875
$
-
-
$
-
-
-
$
-
$
5,226,204
210,194
549,283,102
6,518,875
561,238,375
$
Amortized cost
FVTPL
Amortized cost
FVTPL
Bank indebtedness
7
Other Liabilities
$
60,268,468
Other Liabilities
Other Liabilities
Other Liabilities
Other Liabilities
Other Liabilities
2,649,558
1,294,556
3,857,518
51,662,949
157,464,904
277,197,953
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$
-
$
60,268,468
Amortized cost
2,649,558
1,294,556
3,857,518
51,662,949
157,464,904
277,197,953
$
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
281,377,245
-
2,780,000
93,556
76,276
(321,826)
-
-
-
35,171
35,171
284,040,422
$
(35,171)
$
-
-
-
-
-
-
-
$
-
$
281,377,245
2,780,000
93,556
76,276
(286,655)
-
284,040,422
$
Total liabilities and shareholders' equity
$
561,238,375
$
-
$
-
$
561,238,375
(1)
Available for sale (AFS) marketable securities (December 31, 2017 - $210,194) previously fair valued through AOCI are now
classified as FVTPL, which results in reclassification of AOCI to Deficit.
(2)
Upon adoption of IFRS 9, the Corporation identified three investments which did not meet the SPPI criterion and have been
reclassified at FVTPL.
16
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
43
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Recognition of the provision for impairment balance from IAS 39 to IFRS 9
The following table reconciles the closing impairment allowance for financial assets in accordance with IAS 39 and provisions for loan
commitment and financial guarantee contracts in accordance with IAS 39 Provisions, Contingent Liabilities and Contingent Assets as at
December 31, 2017 to the opening provision for credit losses as at January 1, 2018:
Impairment allowance
under IAS 39 as at
December 31, 2017
Remeasurement
Impairment
allowance
under IFRS 9 as
at
January 1, 2018
Investment portfolio
Total
$
$
5,700,000
5,700,000
$
-
$
-
$
$
5,700,000
5,700,000
4.
Amounts receivable and prepaid expenses:
The following is a breakdown of amounts receivable and prepaid expenses as at December 31, 2018 and December 31, 2017:
Interest receivable, net of impairment provision (note 6)
Prepaid expenses
Fees receivable
Special profit income receivable
Amounts receivable and prepaid expenses
5.
Marketable securities:
December 31, 2018
3,472,030
$
128,701
254,881
19,636
3,875,248
$
December 31, 2017
4,715,194
$
233,836
254,097
23,077
5,226,204
$
The Corporation holds units in publicly traded real estate investment trusts and debentures of publicly traded real estate investment trusts,
which are classified as FVTPL (2017 - classified as available for sale). The fair value of the units and debentures is based on the closing
price of the investments, which are actively traded in the marketplace and any adjustments to fair value are reflected in other income. The
fair value of the marketable securites at December 31, 2018 is $199,204 (December 31, 2017 - $210,194). For the year ended December
31, 2018, the Corporation recorded an unrealized loss of $10,990 (December 31, 2017 - an unrealized gain of $130,362). For 2017, the
corresponding increases (decreases) are reflected in other comprehensive income. Upon the adoption of IFRS 9 on January 1, 2018, the
corresponding increases (decreases) are reflected in other income.
For the year ended December 31, 2018, the Corporation recorded realized gains on disposal of marketable securities and debenture
investments reclassified to income of $nil (December 31, 2017 - $458,435).
17
44 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
6.
Investment portfolio:
The following is a breakdown of the investment portfolio as at December 31, 2018 and December 31, 2017:
December 31, 2018
IFRS 9
December 31, 2017
IAS 39
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Total investments (at amortized cost)
Provision for impairment
Total investments (at amortized cost), net
Related investments (at FVTPL)
Total investments (at FVTPL)
Investment portfolio
By geography:
Canada
United States
Total
$
399,214,814
41,808,791
54,023,423
5,336,525
4,324,757
504,708,310
(4,950,000)
499,758,310
16,236,199
16,236,199
515,994,509
$
$
$
504,909,133
11,085,376
515,994,509
76.6%
8.0%
10.4%
1.1%
0.8%
96.9%
3.1%
100%
97.9%
2.1%
100%
$
$
427,591,758
57,187,248
69,636,557
5,392,900
1,693,514
561,501,977
76.1%
10.2%
12.4%
1.0%
0.3%
100.0%
(5,700,000)
555,801,977
-
-
$
555,801,977
$
$
549,843,102
5,958,875
555,801,977
100%
98.9%
1.1%
100%
The amounts for the year ended December 31, 2018 have been prepared in accordance with IFRS 9; prior period amounts have not been
restated.
Included in conventional first mortgages are three United States ("US") dollar denominated investments (at amortized cost) of $5,709,177
(US$4,185,000) (December 31, 2017 - $nil).
Included in related investments (classified at FVTPL) are two US dollar denominated investments of $5,376,199 (US$3,940,917),
(December 31, 2017 - $5,958,875 (US$4,750,000)). These investments are a participation by the Corporation in limited partnerships that
have provided preferred equity to real estate entities in the US. Income recorded on these investments during the year ended December
31, 2018 was $730,663 (US$562,948), (December 31, 2017 - $71,267 (US$55,896) and are included in interest and fees income.
Related investments (classified as FVTPL) also include two investments (December 31, 2017 - one investment) of $10,860,000
(December 31, 2017 - $560,000).
Income recorded related to FVTPL included in interest and fees income is $730,663 (2017 - $71,267).
As at December 31, 2018, $18,672,754 (December 31, 2017 - $67,694,104) of the mortgages within the conventional first mortgage
portfolio have first priority syndicate participations totaling $14,718,382 (December 31, 2017 - $51,662,949) (recorded on the Corporation's
balance sheets as loans payable) (see note 8). The Corporation's net investment in these mortgages is $3,954,372 (December 31, 2017 -
$16,031,155).
18
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
45
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
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.
The amounts for the year ended December 31, 2018 have been prepared in accordance with IFRS 9. The following is a breakdown of the
investment portfolio:
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Total investment portfolio
Gross carrying
amount
$
December 31, 2018
Provision for
impairment
$
399,214,814
41,808,791
70,259,622
5,336,525
4,324,757
520,944,509
$
$
3,978,000
-
-
860,000
112,000
4,950,000
Net carrying amount
395,236,814
$
41,808,791
70,259,622
4,476,525
4,212,757
515,994,509
$
Included in the total provision for impairment of $4,950,000 is a collective allowance of $685,000.
The amounts for the year ended December 31, 2017 have been prepared in accordance with IAS 39; prior period amounts have not been
restated. The following is a breakdown of the investment portfolio:
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Collective provision
Total
Gross carrying
amount
$
December 31, 2017
Allowance for
credit losses
$
427,591,758
57,187,248
69,636,557
5,392,900
1,693,514
-
561,501,977
3,620,866
-
-
1,180,000
499,134
400,000
5,700,000
Net carrying amount
$
423,970,892
57,187,248
69,636,557
4,212,900
1,194,380
(400,000)
555,801,977
$
$
$
The following is a breakdown of the provision for impairment credit losses of the investment portfolio as at December 31, 2018:
Gross impaired
loans
$
December 31, 2018
Provision for
impairment
$
Net
$
36,352,685
-
-
5,148,000
1,938,000
43,438,685
3,978,000
-
-
860,000
112,000
4,950,000
32,374,685
-
-
4,288,000
1,826,000
38,488,685
$
$
$
$
$
43,438,685
-
43,438,685
$
$
4,950,000
-
4,950,000
$
$
38,488,685
-
38,488,685
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Total investment portfolio
By geography:
Canada
United States
Total
19
46 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The following is a breakdown of the allowance for credit losses of the investment portfolio as at December 31, 2017:
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Collective provision
Total
By geography:
Canada
United States
Total
Gross carrying
amount
$
December 31, 2017
Allowance for
credit losses
$
22,983,809
-
-
4,985,500
1,000,000
-
28,969,309
3,620,866
-
-
1,180,000
499,134
400,000
5,700,000
Net carrying amount
19,362,943
$
-
-
3,805,500
500,866
(400,000)
23,269,309
$
$
$
$
$
28,969,309
-
28,969,309
$
$
5,700,000
-
5,700,000
$
$
23,269,309
-
23,269,309
The following table presents the gross investments at amortized cost as at December 31, 2018:
Gross investments at amortized cost
As at December 31, 2018
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Total
By geography:
Canada
United States
Total
Stage 1
$
Stage 2
$
Stage 3
$
Total
$
339,889,554
40,142,125
54,023,423
188,525
3,324,757
437,568,384
32,981,552
1,666,666
-
-
-
34,648,218
26,343,708
-
-
5,148,000
1,000,000
32,491,708
399,214,814
41,808,791
54,023,423
5,336,525
4,324,757
504,708,310
$
$
$
$
$
$
431,859,207
5,709,177
437,568,384
$
$
34,648,218
-
34,648,218
$
$
32,491,708
-
32,491,708
$
$
498,999,133
5,709,177
504,708,310
The following table presents the provision for credit losses on loans as at December 31, 2018:
Provision for impairment of credit losses on loans
As at December 31, 2018
Conventional first mortgages
Conventional non-first mortgages
Related investments
Discounted debt investments
Non-conventional mortgages
Total
By geography:
Canada
United States
Total
Stage 1
$
$
$
$
573,000
-
-
-
112,000
685,000
685,000
-
685,000
Stage 2
-
$
-
-
-
-
$
-
-
$
-
$
-
Stage 3
$
Total
$
3,405,000
-
-
860,000
-
4,265,000
3,978,000
-
-
860,000
112,000
4,950,000
$
$
$
$
4,265,000
-
4,265,000
$
$
4,950,000
-
4,950,000
20
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
47
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The following table presents the changes to the provision for credit losses on loans as at December 31, 2018:
The changes to the provision
Balance at January 1, 2018
Provision for credit losses
Transfer to (from):
Stage 1
Stage 2
Stage 3
Allocation of provision to interest receivable
Balance at December 31, 2018
Stage 1
$
400,000
285,000
Stage 2
-
$
-
Stage 3
$
5,300,000
1,382,325
Total
$
5,700,000
1,667,325
-
-
-
-
685,000
$
-
-
-
-
$
-
-
-
-
(2,417,325)
4,265,000
$
-
-
-
(2,417,325)
4,950,000
$
The loans comprising the investment portfolio are stated at amortized cost and FVTPL. The provison for impairment is $4,950,000 as at
December 31, 2018, of which $4,265,000 represents the total amount of management's estimate of the shortfall between the investment
balances and the estimated recoverable amount from the security under the specific loans in default. The Corporation also assessed
collectively for impairment to identify potential future losses, by grouping the investment portfolio with similar risk characteristics, to
determine whether a collective allowance should be recorded due to loss events for which there is objective evidence but whose effects
are not yet evident. Based on the amounts determined by the analysis, the Corporation used judgement to determine the amounts
calculated. As at December 31, 2018, the Corporation carries a collective allowance of $685,000. The Corporation has allocated the
impairment provision in the amount of $2,417,325 (2017 - nil) to interest receivable (note 4) related to loans in default.
Gross carrying value of exposure by risk rating
The following table presents the gross carrying amount of the investment portfolio stated at amortized cost subject to IFRS 9 impairment
requirements by internal risk ratings used by the Corporation for credit risk purposes.
The internal risk ratings presented in the table below are defined as follows:
Category
Low
Low to Medium
Medium
Medium to High
High
Borrower
Quality
Strong
Medium\Strong
Medium
Weak\Medium
Weak
Certainty of
Repayment
Property
Location
Strong
High
High\Moderate Medium\Strong
Moderate
Low\Moderate
Low
Medium
Weak\Medium
Weak
Loan to
Value
Low
Low\Medium
Medium
Medium\High
High
Conventional
first
mortgages
Conventional
non-first
mortgages
Related
investments
Discounted
debt
investments
Non-
conventional
mortgages
Stage 1
Low
Low to Medium
Medium
Medium to High
High
Stage 2
Medium
Medium to High
Stage 3
Default
Total
Impairment provision
Carrying amount
$
22,778,707
98,364,457
163,343,498
47,554,392
7,848,500
$
7,024,993
8,038,456
22,644,010
588,000
1,846,667
21,649,614
11,331,937
-
26,343,708
399,214,814
3,978,000
395,236,814
$
$
1,666,666
-
-
-
-
$
-
54,023,423
-
-
-
-
-
-
$
-
$
-
188,525
-
-
-
-
-
-
256,757
180,000
1,950,000
938,000
-
-
-
5,148,000
5,336,525
860,000
4,476,525
$
$
1,000,000
4,324,757
112,000
4,212,757
$
$
$
41,808,791
$
54,023,423
-
-
$
41,808,791
$
54,023,423
21
Total
$
29,803,700
106,848,195
240,190,931
50,092,392
10,633,167
-
23,316,280
11,331,937
-
32,491,708
504,708,310
4,950,000
499,758,310
$
$
48 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The loans comprising the Investment portfolio bear interest at the weighted average rate of 8.58% per annum (December 31, 2017 -
8.09% per annum) and mature between 2019 and 2022.
The unadvanced funds under the existing investment portfolio (which are commitments of the Corporation) amounted to $89,188,507 as at
December 31, 2018 (December 31, 2017 - $91,953,643).
Principal repayments based on contractual maturity dates are as follows:
2019
2020
2021
2022
$
$
386,039,333
129,133,938
5,525,000
246,238
520,944,509
Borrowers who have open loans generally have the option on notice to repay principal at any time prior to the maturity date without penalty,
subject to written notice, according to each mortgage loan.
The Corporation enters into participation agreements with respect to certain mortgage investments from time to time, whereby the other
participating investors take the senior position and the Corporation retains a subordinated position. Under these certain participation
agreements, the Corporation has retained a residual portion of the credit and/or default risk as a result of holding the subordinated interest
in the mortgage and has therefore not met the de-recognition criteria described in the notes to the annual financial statements.
The portion of such mortgage interests held by the priority participant is included in investment portfolio and recorded as loans payable
(note 8). Any gross interest and fees earned on the priority participant’s interests and the related interest expense is recognized in income
and profit.
22
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
49
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
As at December 31, 2018, the carrying value of the priority participants'
payable was $14,718,382 (December 31, 2017 - $51,662,949).
interests in the Corporation's investment portfolio and loans
With respect to loans with no provision, the Investment Portfolio as at December 31, 2018 had two investments with balances totaling
$1,474.000 (December 31, 2017 – two investments with balances totaling $2,361,437) with contractual interest arrears greater than 60
days past due amounting to $48,727, (December 31, 2017 – $35,188). Management has determined that no provision for impairment is
required (December 31, 2017 – $nil).
The investment portfolio as at December 31, 2018 includes thirteen investments totaling $19,735,486 (December 31, 2017 - six
investments totaling $28,901,947) with maturity dates that are past due and for which no extension or renewal was in place. Four of the
thirteen investments were paid out during the first quarter of 2019, reducing the balance by $4,076,794, and an additional four investments
totaling $10,629,767 (December 31, 2017 - three investments totaling $12,918,805) have an allowance against them included in the
Corporation's provision for impairment. The remaining five investments with maturity dates that are past due, and for which no extension
or renewal was in place, totalling $5,028,925 (December 31, 2017 - three investments totaling $15,983,142) are considered not to require
a provision.
As at December 31, 2018, 205 of the Corporations’ 231 investments (investment amount of $500,624,695) are shared with other
participants.
The Mortgage Banker services the entire investment in which the Corporation is a participant, on behalf of all participants and except for
the case of investments with a first priority syndicate participant, the Corporation ranks equally with other members of the syndicate as to
receipt of principal, interest and income.
7.
Bank indebtedness:
The Corporation has entered into credit arrangements of which $32,704,070 has been drawn as at December 31, 2018 (December 31,
2017 - $60,268,468).
Interest on bank indebtedness is predominantly charged at a 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 had a committed term to
December 31, 2018 and has been extended to December 31, 2019 (as further detailed in note 17 (c)). Bank indebtedness is secured by a
general security agreement. The credit agreement contains certain financial covenants that must be maintained. As at December 31,
2018 and December 31, 2017, the Corporation was in compliance with all financial covenants.
8.
Loans payable:
First priority charges on specific mortgage investments have been granted as security for the loans payable. The loans mature on dates
consistent with those of the underlying mortgages. The loans are on a non-recourse basis and bear interest at the weighted average
effective rate of 6.09% as at December 31, 2018 (December 31, 2017 – 5.34%). The Corporation's principal balance outstanding under
the mortgages for which a first priority charge has been granted is $18,672,754 as at December 31, 2018 (December 31, 2017 -
$67,694,104).
The loans are repayable at the earlier of the contractual expiry date of the underlying mortgage investments and the date the underlying
mortgage is repaid. Repayments based on contractual maturity dates are as follows:
2019
$
14,718,382
23
50 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
9.
Convertible debentures:
Carrying value, beginning of year
Issued
Conversions of debentures to shares
Repayments upon maturity
Implicit interest rate in excess of coupon rate
Deferred finance cost amortization
Carrying value, end of year
Year Ended
December 31, 2018
157,464,904
$
46,546,839
-
(25,738,000)
437,426
1,283,262
179,994,433
$
$
Year Ended
December 31, 2017
162,305,989
24,961,290
(21,278,427)
(10,164,573)
415,179
1,225,446
157,464,904
$
The breakdown of the convertible debentures for the year ended December 31, 2018 presented in the above table is as follows:
$
Balance,
beginning of
period
25,445,554
20,173,140
19,515,688
24,136,563
21,889,426
21,235,666
25,068,867
Issued
$
-
-
-
-
-
-
-
-
-
23,489,730
23,057,109
Conversions
$
-
-
-
-
-
-
-
-
Implicit interest
rate in excess of
coupon rate
$
90,947
114,465
66,713
21,632
48,907
40,036
25,294
20,328
9,104
Deferred
finance cost
amortization
$
201,497
134,549
152,143
171,640
166,991
164,624
184,895
89,652
17,271
Repayments upon
Redemption
$
(25,738,000)
-
-
-
-
-
-
-
Balance,
end of period
$
-
20,422,154
19,734,544
24,329,835
22,105,324
21,440,326
25,279,056
23,599,710
23,083,484
Maturity date
Feb 28, 2019
Mar 31, 2019
Mar 31, 2020
May 31, 2022
Dec 31, 2022
Dec 31, 2023
Aug 31, 2024
Jun 30, 2025
Jan 31, 2026
Convertible
debenture
5.40%
5.25%
4.75%
5.30%
5.50%
5.20%
5.30%
5.40%
5.50%
Total
$
157,464,904
437,426
As at December 31, 2018, debentures payable bear interest at the weighted average effective rate of 5.29% per annum (December 31,
2017 - 5.26% per annum). Notwithstanding the carrying value of the convertible debentures, the principal balance outstanding to the
debenture holders is $187,485,000 as at December 31, 2018 (December 31, 2017 - $163,223,000).
(25,738,000)
179,994,433
46,546,839
$
-
1,283,262
$
$
$
$
$
On December 27, 2018, the Corporation completed an early redemption of its 5.40% convertible unsecured subordinated debentures,
which were scheduled to mature on February 28, 2019. It was a cash redemption of the aggregate principal amount of $25,738,000 and all
accrued interest to the time of Redemption Date.
On November 23, 2018, the Corporation completed a public offering of 25,000 5.50% convertible unsecured subordinated debentures at a
price of $1,000 per debenture for gross proceeds of $25,000,000, less issuance costs of $1,182,887. The debentures mature on January
31, 2026 and interest is paid semi-annually on the last day of June and December of each year. The debentures are convertible at the
option of the holder at any time prior to the maturity date at a conversion price of $14.60. The debentures may not be redeemed by the
Corporation prior to January 31, 2022. On or after January 31, 2022, but prior to January 31, 2024, the debentures are redeemable at a
price equal to the principal, plus accrued and unpaid 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 5 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 January 31, 2024 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus
accrued and unpaid 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, on not more than 60 days' and not less than 40 days' prior notice, 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 day preceding the redemption or maturity date.
24
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
51
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The convertible debentures were allocated into liability and equity components on the date of issuance as follows:
Liability
Equity
Principal
$
24,240,000
760,000
$
25,000,000
On June 21, 2018, the Corporation completed a public offering of 25,000 5.40% convertible unsecured subordinated debentures at a price
of $1,000 per debenture for gross proceeds of $25,000,000, less issuance costs of $1,186,270. The debentures mature on June 30, 2025
and interest is paid semi-annually on the last day of June and December of each year. The debentures are convertible at the option of the
holder at any time prior to the maturity date at a conversion price of $15.00. The debentures may not be redeemed by the Corporation
prior to June 30, 2021. On or after June 30, 2021, but prior to June 30, 2023, the debentures are redeemable at a price equal to the
principal, plus accrued and unpaid 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
5 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
June 30, 2023 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued and
unpaid 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, on not more than 60 days' and not less than 40 days' prior notice, 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 day preceding the redemption or maturity date.
The convertible debentures were allocated into liability and equity components on the date of issuance as follows:
$
$
24,676,000
324,000
25,000,000
Liability
Equity
Principal
25
52 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The breakdown of the convertible debentures for the year ended December 31, 2017 presented in the above table is as follows:
$
Balance,
beginning of
period
31,243,770
25,177,718
19,930,572
19,300,141
23,944,422
21,676,254
21,033,112
Convertible
debenture
5.75%
5.40%
5.25%
4.75%
5.30%
5.50%
5.20%
5.30%
Total
Issued
$
-
Conversions
$
(21,278,427)
-
-
-
-
-
-
-
-
-
-
-
-
-
$
(21,278,427)
Implicit interest
rate in excess of
coupon rate
$
Deferred
finance cost
amortization
$
166,807
173,458
134,549
152,143
171,640
166,991
164,624
95,234
1,225,446
$
Repayments
upon maturity
$
(10,164,573)
-
-
-
-
-
-
-
$
(10,164,573)
Balance,
end of period
$
-
25,445,554
20,173,140
19,515,688
24,136,563
21,889,426
21,235,666
25,068,867
157,464,904
$
Maturity date
Oct 31, 2017
Feb 28, 2019
Mar 31, 2019
Mar 31, 2020
May 31, 2022
Dec 31, 2022
Dec 31, 2023
Aug 31, 2024
32,423
94,378
108,019
63,404
20,501
46,181
37,930
12,343
415,179
-
$
162,305,989
24,961,290
24,961,290
$
$
On June 27, 2017, the Corporation completed a public offering of 26,500 5.30% convertible unsecured subordinated debentures at a price
of $1,000 per debenture for gross proceeds of $26,500,000, less issuance costs of $1,328,710. The debentures mature on August 31,
2024 and interest is paid semi-annually on the last day of February and August of each year. The debentures are convertible at the option
of the holder at any time prior to the maturity date at a conversion price of $15.25. The debentures may not be redeemed by the
Corporation prior to August 31, 2020. On or after August 31, 2020, but prior to August 31, 2022, the debentures are redeemable at a price
equal to the principal, plus accrued and unpaid 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 5 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 August 31, 2022 and prior to the maturity date, the debentures are redeemable at a price equal to the principal amount plus accrued
and unpaid 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, on not more than 60 days' and not less than 40 days' prior notice, 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 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
Equity
Principal
$
$
26,290,000
210,000
26,500,000
On September 20, 2017, the Corporation completed an early redemption of its 5.75% convertible unsecured subordinated debentures,
which were scheduled to mature on October 31, 2017. This series of convertible unsecured subordinated debentures had a conversion
price of $15.90 per share. As part of the early redemption, the holders of the debentures were provided an option to convert at 95% of the
weighted average market price per share for the preceding 20 trading days ending on the fifth trading day preceding the redemption date
(being September 13, 2017). Of the outstanding $31,443,000 principal, $21,278,427 was converted to 1,759,944 common shares at a
price of $12.09 per share and the remaining balance of $10,164,573 was repaid in cash.
26
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
53
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
10.
Shareholders' equity:
The beneficial interest in the Corporation is represented by a single class of shares that 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, 2018:
Balance, beginning of year
At-the-market program
Equity offering costs
Options exercised in the year
New shares issued during the period under Dividend Reinvestment Plan
Balance, end of year
The following shares were issued and outstanding as at December 31, 2017:
Balance, beginning of year
New shares from equity offering
New shares from debenture conversion (note 9)
Debenture equity conversion
Equity offering costs
Options exercised in the year
New shares issued during the year under Dividend Reinvestment Plan
Balance, end of year
# of shares
26,064,310
55,600
-
20,000
3,634
26,143,544
# of shares
22,490,489
1,633,000
1,759,944
-
-
131,000
49,877
26,064,310
Amount
281,377,245
735,818
(35,382)
237,523
47,520
282,362,724
Amount
236,031,386
23,025,300
21,278,427
155,648
(1,345,374)
1,555,776
676,082
281,377,245
$
$
$
$
During the twelve months ended December 31, 2018, the Corporation issued 55,600 shares at a weighted average price of $13.23 per
share for gross proceeds of $735,818 from its At-The-Market ("ATM") program as previously announced.
During the third quarter of 2017, the Corporation completed an early redemption of 5.75% convertible unsecured subordinated debentures
due October 31, 2017. Of the outstanding $31,443,000 principal, $21,278,427 was converted to common shares at a price of $12.09 per
share, which equaled to 95% of the weighted average market price per share for the preceding 20 trading days ending on the fifth trading
day preceding the redemption date. The remaining balance of $10,164,573 was repaid in cash.
27
54 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
During the first quarter of 2017, the Corporation completed an equity offering of 1,420,000 common shares at a price of $14.10 per share
for gross proceeds of $20,022,000. The over-allotment option was exercised in full and the Corporation issued an additional 213,000
shares at a price of $14.10 per share for gross proceeds of $3,003,300. The total shares issued was 1,633,000.
(b)
Incentive option plan:
Balance at December 31, 2016
Options issued
Options exercised
Balance at December 31, 2017
Options exercised
Balance at December 31, 2018
# of options
1,007,250
70,000
(131,000)
946,250
(20,000)
926,250
$
$
$
Amount
95,123
11,030
(12,597)
93,556
(1,923)
91,633
During the year ended December 31, 2018, the Corporation did not grant any options.
During the year ended December 31, 2017, the Corporation granted 70,000 options to directors of the Corporation at an exercise price of
$13.15 per share. These options were fully vested upon granting.
During the year ended December 31, 2018, 20,000 options were exercised by an officer of the Corporation.
During the year ended December 31, 2017, 131,000 options were exercised, of which 125,000 options were exercised by officers of the
Corporation.
(c)
Dividend reinvestment plan and direct share purchase plan:
The Corporation has a dividend reinvestment plan and direct share purchase plan for its shareholders that allows participants to reinvest
their monthly cash dividends or purchase additional shares of the Corporation at a share price equivalent to the weighted average price of
shares for the preceding five-day period.
11.
Per share amounts:
Profit per share calculation:
The following table reconciles the numerators and denominators of the basic and diluted profit per share for the year ended December 31,
2018 and 2017.
Basic profit per share calculation:
Numerator for basic profit per share:
Net income and profit for the period
Denominator for basic profit per share:
Weighted average shares
Basic profit per share
Three months ended
2018
2017
2018
2017
6,097,699
$
6,122,660
$
25,750,696
$
24,821,438
26,124,729
0.233
$
24,511,623
0.250
$
26,109,949
0.986
$
24,362,355
1.019
28
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
55
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
Diluted profit per share calculation:
Numerator for diluted profit per share:
Net income and profit for the period
Interest on convertible debentures
Net profit for diluted profit per share
Denominator for diluted profit per share:
Weighted average shares
Net shares that would be issued:
Three months ended
2018
2017
2018
2017
$
$
6,097,699
1,963,191
8,060,890
$
$
6,122,660
2,533,661
8,656,321
$
$
25,750,696
9,474,914
35,225,610
$
$
24,821,438
9,334,991
34,156,429
26,124,729
24,511,623
26,109,949
24,362,355
Assuming the proceeds from options are used to
repurchase units at the average share price
Assuming debentures are converted
Diluted weighted average shares
Diluted profit per share:
85,938
8,639,788
34,850,455
0.231
$
70,621
11,091,621
35,673,865
0.243
$
85,938
10,366,838
36,562,725
0.963
$
88,948
10,248,953
34,700,256
0.984
$
12.
Dividends:
The Corporation intends to make dividend payments to the shareholders on a monthly basis on or about the 15th day of each following
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, 2018, the Corporation recorded dividends of $25,750,696 (2017 - $24,821,438) to its shareholders.
Dividends were $0.986 per share (2017 - $1.006 per share).
13.
Related party transactions and balances:
The Corporation's Manager (a company related to certain officers and/or directors of the Corporation) receives an allocation of interest,
referred to as the Corporation Manager spread interest, calculated at 0.75% per annum of the Corporation's daily outstanding performing
investment balances. For the year ended December 2018 this amount was $3,932,134 (2017 - $3,639,094). Included in accounts payable
and accrued liabilities at December 31, 2018 are amounts payable to the Corporation's Manager of $314,105 (December 31, 2017 -
$341,367).
For the year ended December 31, 2018, the total directors' fee expensed was $304,000 (2017 - $272,333). Certain key management
personnel are also directors of the Corporation and receive compensation from the Corporation's Manager. The Directors held 492,837
shares in the Corporation as at December 31, 2018 (December 31, 2017 - 481,768).
For the year ended December 31, 2018, no directors were awarded options.
29
56 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
For the year ended December 31, 2017, two directors were awarded 70,000 options under the incentive plan.
The Mortgage Banker (a company related to certain officers and/or directors of the Corporation) 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 of
the commitment and renewal fees generated from the Corporation's investments; and 25% of all of 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 of the Corporation is net of the loan servicing fees paid to the Mortgage Banker of approximately $524,000 for the year ended
December 31, 2018 (2017 - $485,000). 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 Management Agreement and Mortgage Banking Agreement contains provisions for the payment of termination fees to
the Corporation Manager and Mortgage Banker in the event that the respective agreements are either terminated or not renewed.
A significant number 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.
During the first quarter of 2018, the two mortgage investments totaling $1,400,000 (December 31, 2017- two mortgage investments
totaling $1,400,000) that were issued to a borrower controlled by an independent director of the Corporation were fully repaid.
The Corporation holds a mortgage investment totaling $5,148,000 at December 31, 2018 (classified as discounted debt investment) that
originated from the purchase of a mortgage loan from a Schedule 1 bank at a discount to its original principal balance (December 31, 2017
- $4,985,500). The Corporation’s investment is by way of a participation in a mortgage loan to the entity that took title to the real estate
following the completion of the enforcement foreclosure that occurred after the purchase of the underlying Schedule 1 bank mortgage. The
Corporation is a pari passu participant in the mortgage, having the same rights as all other participants in the loan. The entity that holds
title to the real estate as agent is related to the other participants in the mortgage loan investment, including entities related to certain
directors of the Corporation, and for this reason, the borrower is classified as a related party. For the year ended December 31, 2018, the
Corporation recognized interest and fees earned of $nil (2017 - $nil) from this investment. The impairment provision recorded on this loan
was $860,000 as at December 31, 2018 (December 31, 2017 - $1,180,000).
Key management compensation:
Aggregate compensation paid to key management personnel (including payments to related parties for their recovery of overhead costs),
consisted of short-term employee compensation. For the year ended December 31, 2018 the compensation was $2,196,744 (2017 -
$2,083,453), all of which was paid by the Corporation's Manager and not by the Corporation.
30
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
57
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
14.
Interest expense:
Bank interest expense
Loans payable interest expense
Debenture interest expense
Interest expense
Deferred finance cost amortization - convertible
debentures
Implicit interest rate in excess of coupon rate -
convertible debentures
Change in accrued interest payable
Cash interest paid
15.
Contingent liabilities:
Three months ended
2018
2017
2018
2017
$
$
$
$
224,802
340,855
3,106,640
3,672,297
(377,259)
381,929
671,989
2,535,056
3,588,974
(289,437)
1,541,319
2,223,767
11,143,248
14,908,334
(1,283,262)
1,372,878
1,005,264
10,845,207
13,223,349
(1,225,446)
$
$
$
$
(116,170)
(100,667)
(437,426)
(415,179)
550,043
3,728,911
$
$
(329,422)
2,869,448
485,960
13,673,606
$
$
(386,246)
11,196,478
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 a material impact on these financial statements.
16.
Fair value:
The fair values of amounts receivable, bank indebtedness, accounts payable and accrued liabilities, and shareholders dividends payable
approximate their carrying values due to their short-term maturities.
The fair value of the investment portfolio approximates its carrying value as the majority of the loans are repayable in full at any time
without penalty and generally have floating interest rates. There is no quoted price in an active market for the mortgage and loan
investments or mortgage syndication liabilities. The Corporation makes its determinations of fair value based on its assessment of the
current lending market for mortgage and loan investments of same or similar terms. As a result, the fair value of mortgage and loan
investments is based on Level 3 of the fair value hierarchy.
The following table presents the changes in related investments (at FVTPL) as at December 31, 2018
Changes to related investments at FVTPL
Balance at January 1, 2018
Funding of investments
Discharging of investments
Balance at December 31, 2018
$
$
6,518,875
11,289,679
(1,572,354)
16,236,200
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 repayment of the underlying loan that secures the loan payable, 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 of marketable securities has been determined based on the closing price of the security of the respective listed entities on
the Toronto Stock Exchange for the respective date.
31
58 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
The tables below present the fair values of the Corporation's financial instruments as at December 31, 2018 and December 31, 2017.
It
does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a
reasonable approximation of fair value:
2018
Marketable securities
Convertible debentures
December 31, 2017
Marketable securities
Convertible debentures
17.
Risk management:
Level 1
Level 2
Level 3
Total
$ 199,204 - - $ 199,204
182,566,500 - - 182,566,500
Level 1
Total
$ 210,194 - - $ 210,194
164,306,323 - - 164,306,323
Level 3
Level 2
The Corporation is exposed to the symptoms and effects of global economic conditions and other factors that could adversely affect its
business,
these risk factors are beyond the Corporation's direct control. The
Corporation Manager and Board of Directors play an active role in monitoring the Corporation's key risks and in determining the policies
that are best suited to manage these risks. There has been no change in the process since the previous year.
financial condition, and operating results. Many of
The Corporation's business activities, including its use of financial
significant of which are interest rate risk, credit and operational risks, and liquidity risk.
instruments, exposes the Corporation to various risks, the most
(a)
Interest rate risk:
Interest rate risk is the risk that fair value of future cash flows of financial assets or financial liabilities will fluctuate because of changes in
market interest rates.
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 on existing investments while the floating component linked to bank prime allows for increased interest earnings on a component of
the investments where short-term market rates increase.
(i)
Interest income risk:
A significant portion of the Corporation's investment portfolio comprise investments in short term mortgage loans that generally are repaid
by the borrowers in under twenty-four months. The reinvestment of funds received from such repayments are invested at current market
interest rates. As such, the weighted average interest rate applicable to the investment portfolio changes with time. This creates an
ongoing risk that the weighted average interest rate on the investment portfolio will decrease, which will have a negative impact on the
Corporation's interest income and net profit.
32
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
59
Building Relationshipstoday and tomorrow FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
(ii)
Interest expense risk:
The Corporation's floating-rate debt comprises bank indebtedness, and loan on debenture portfolio investment, with each bearing interest
based on bank prime and/or based on short term bankers' acceptance interest rates as a benchmark.
At December 31, 2018, 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:
Financial assets:
Amounts receivable and prepaid expenses
Marketable securities
Investment portfolio
Financial liabilities:
Bank indebtedness
Accounts payable and accrued liabilities
Shareholders dividends payable
Loans payable
Convertible debentures
Total increase
(b)
Credit and operational risks:
Carrying Value
-1%
+1%
$
3,875,248
199,204
515,994,509
-
-
(1,330,969)
-
-
4,026,693
32,704,070
2,018,504
3,346,374
14,718,382
179,994,433
$
327,041
-
-
-
-
(1,003,928)
$
(327,041)
-
-
-
-
3,699,652
$
Credit risk is the possibility that a borrower under one of the mortgages comprising the investment portfolio, may be unable to honour the
debt commitment as a result of a negative change in the borrowers' financial position or market conditions that could result in a loss to the
Corporation.
Any instability in the real estate sector or an adverse change in economic conditions in Canada could result in declines in the value of real
property securing the Corporation's investments. There have been significant increases in real estate values in various sectors of the
Canadian market over the past few years. A correction or revaluation of real estate in such sectors will result in a reduction in values of
the real estate securing mortgage loans that comprise the Corporation's investment portfolio. This could result in impairments in the
mortgage loans or loan losses in the event the real estate security has to be realized upon by the lender. The Corporation's maximum
exposure to credit risk is represented by the fair values of amounts receivable and the investment portfolio.
(c)
Liquidity risk:
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting its financial obligations as they become due.
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) availability
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).
33
60 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
As at December 31, 2018,
the Corporation had not utilized its full leverage availability, being a guideline of 50% of its first mortgage
investments. Unadvanced committed funds under the existing investment portfolio amounted to $89,188,507 as at December 31, 2018
(December 31, 2017 - $91,953,643). These commitments are anticipated to be funded from the Corporation's credit facility and borrower
repayments. The Corporation has a demand revolving line of credit of $70 million and a committed revolving line of credit with its principal
banker to fund the timing differences between investment advances and investment repayments. The committed line of $20 million is a
committed facility with a maturity date extended to September 30, 2019.
If the committed line is not renewed on September 30, 2019, the
terms of the facility allow for the Corporation to repay the balance owed on September 30, 2019 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
If it is not extended at maturity, repayments under the Corporation's investment portfolio would be
with another lender if not renewed.
utilized to repay the bank indebtedness. There are limitations in the availability of
funds under the revolving line of credit. The
Corporation's investments are 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 payable, 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, 2018 are due as follows:
Bank indebtedness
Accounts payable and accrued liabilities
Shareholders dividends payable
Loans payable
Convertible debentures
Subtotal - Liabilities
Future advances under portfolio
Liabilities and contractual obligations
$
$
Total
32,704,070
2,018,504
3,346,374
14,718,382
187,485,000
240,272,330
89,188,507
329,460,837
$
$
Less than 1 year
32,704,070
2,018,504
3,346,374
14,718,382
20,485,000
73,272,330
89,188,507
162,460,837
$
$
1-3 years
-
$
-
-
-
68,000,000
68,000,000
-
68,000,000
$
$
4 - 7 years
-
$
-
-
-
99,000,000
99,000,000
-
99,000,000
$
$
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 debentures (assuming the amounts remain unchanged) would be $9,108,366 for less than 1 year, $16,016,500 for 1
to 3 years and $19,592,000 for 4 to 7 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.
34
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
61
Building Relationshipstoday and tomorrow
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
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 convertible debentures 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 guidelines
and investment operating policies. The Corporation's guidelines include the following: 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 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. Capital is defined as the sum of shareholders'
equity plus the face amount of convertible debentures.
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 is in
compliance with all such bank covenants.
(e)
Currency risk:
Currency risk is the risk that the fair value or future cash flows of the Corporation's foreign currency-denominated investments and cash
and cash equivalents will fluctuate based on changes in foreign currency exchange rates. Consequently, the Corporation is subject to
currency fluctuations that may impact its financial position and results of operations. The Corporation manages its currency risk on its
investments by borrowing the same amount as the investment in the same currency. As a result, a 1% change in the exchange rate of the
Canadian dollar against the U.S. dollar will not result in a significant change to the net income and comprehensive income and equity.
18.
Supplementary information:
The following table reconciles the changes in cash flows from financing activities for loans payable and convertible debentures:
Balance, beginning of the year
Financing cash flow activities:
Repayment of loans payable
Proceeds from convertible debentures issued
Debenture offering costs
Repayment of convertible debentures
Total cash flow from financing activities
Financing non-cash activities:
Convertible debenture equity (note 9)
Implicit interest rate in excess of coupon rate (note 14)
Deferred finance cost amortization (note 14)
Total non-cash flow financing activities
Loans Payable
Convertible
Debentures
51,662,949
157,464,904
(36,944,567)
-
-
-
(36,944,567)
-
-
-
-
-
50,000,000
(2,369,159)
(25,738,000)
21,892,841
(1,084,000)
437,426
1,283,262
636,688
Balance, end of the year
14,718,382
179,994,433
35
62 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
FIRM CAPITAL MORTGAGE INVESTMENT CORPORATION
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(in Canadian dollars)
19.
Subsequent event:
On March 1, 2019, the Corporation completed an equity offering of 1,520,000 common shares at a price of $13.20 per share for gross proceeds of
$20,064,000. The over-allotment option was exercised in full and the Corporation issued an additional 228,000 shares at a price of $13.20 per share
for gross proceeds of $3,009,600. The total shares issued was 1,748,000.
36
Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
63
Building Relationshipstoday and tomorrow Total Return Since IPO
Total Return Since IPO
An Attractive Investment
MORTGAGE INVESTMENT CORPORATION
$484
$685
0 %
1 . 1
1
+
$100
$100
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Since Oct . 5th, 1999 till December 31st, 2017
Since Oct. 5th, 1999 till December 31st, 2018
Since Oct . 5th, 1999 till Dec . 31st, 2018
An investment in Firm Capital, since its initial public offering, has generated an attractive return for investors .
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Since the IPO in 1999, a $100 investment in Firm Capital has appreciated to $685 when factoring in full dividend
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reinvestment over the same period . The compounded annual growth rate or “CAGR” in Firm Capital Mortgage
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Investment Corporation shares, since 1999 has been in excess of 10 .52%
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DIVIDEND REINVESTMENT PLAN
DIVIDEND REINVESTMENT PLAN
Shareholders are reminded that they can participate in the Corporations Dividend Reinvestment Plan and Share
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Purchase Plan . The plan allows participants to have their monthly dividend reinvested in additional shares .
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SHARE PURCHASE PLAN
SHARE PURCHASE PLAN
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Once registered with the plan, participants have the right to purchase additional Shares at 5 day weighted average
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market price from the Corporation, totaling no greater than $12,000 per year and no less than $250 .00 per month .
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Participating Shareholders pay no commission .
For further information, including answers to frequently asked questions about the program, please refer to
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our website: www.firmcapital.com. To enroll, please contact your investment advisor or, if you are a registered
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Shareholder, complete the Authorization Form located on our website and forward to our Transfer Agent,
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Computershare Trust Company of Canada, at the address noted on the website . You can also contact Investor
(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3) (cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3)(cid:36)(cid:74)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:88)(cid:87)(cid:72)(cid:85)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3) (cid:55)(cid:85)(cid:88)(cid:86)(cid:87)(cid:3) (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:82)(cid:73)(cid:3) (cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:68)(cid:15)(cid:3) (cid:68)(cid:87)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)
Relations at the Corporation by calling 416-635-0221, who will assist you in enrolling in the program .
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64 Firm Capital Mortgage Investment Corporation ● 2018 ● Annual Report
Building Relationships today and tomorrow
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MORTGAGE INVESTMENT CORPORATION
REAL ESTATE FINANCING SOLUTIONS
Mortgage Banker Sample Transactions:
BRIDGE LOAN
$61,500,000
SECOND MORTGAGE
Land refinancing for an active
861,113 sq. ft. mixed-use
construction project
TORONTO, ON
BRIDGE LOAN
$12,000,000
SECOND MORTGAGE
68 residential building
lots
INVENTORY LOAN
$13,500,000
FIRST MORTGAGE
38 condominium
units
LAND LOAN
$3,450,000
FIRST MORTGAGE
16 future residential
building lots
CONSTRUCTION LOAN
$54,000,000
FIRST MORTGAGE
12 storey 239 rental
apartment units
TORONTO, ON
BRAMPTON, ON
OSHAWA, ON
BRIDGE LOAN
$1,750,000
FIRST MORTGAGE
1,843 sq. ft. luxury
condo
CONSTRUCTION LOAN
$1,705,000
FIRST MORTGAGE
3,483 sq. ft.
custom home
BRIDGE LOAN
$1,400,000
FIRST MORTGAGE
2,950 sq. ft.
commercial building
STOUFFVILLE, ON
TORONTO, ON
TORONTO, ON
TORONTO, ON
LAND & CONSTRUCTION LOAN
$4,500,000
CONSTRUCTION LOAN
$47,725,000
INFILL CONSTRUCTION LOAN
CONSTRUCTION LOAN
$1,475,000
$11,700,000
FIRST MORTGAGE
5 townhouse units &
1 single family custom home
FIRST MORTGAGE
15 storey 189 unit
condominium building
SECOND MORTGAGE
5,085 sq. ft. luxury
custom home
FIRST MORTGAGE
15 townhouses and
1 single family home
TORONTO, ON
RICHMOND HILL, ON
TORONTO, ON
VAUGHAN, ON
BOUTIQUE MORTGAGE LENDERS
® PROVIDING REAL ESTATE CAPITAL FOR:
BRIDGE FINANCING
RESIDENTIAL FINANCING
COMMERCIAL FINANCING
STRUCTURED REAL ESTATE FINANCING
TAILORED MORTGAGE ENGINEERING BY FIRM CAPITAL
Building Relationships | since 1988
A Non-Bank Lender Providing Construction, Bridge,
Equity and Conventional Real Estate Financing
T: 416.635.0221 • F: 416.635.1713 • www.FirmCapital.com
Ontario Mortgage Brokerages, Lenders and Administrators Act LIC. #10164, Administrators LIC. #11442