Firm Capital Mortgage Investment : Q2 2023 Report

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 are able to 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:

1. is widely diversified across many investments;
2. is concentrated in first mortgages;
3. reduces exposure as a result of participation in various loan syndicates; and
4. 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.

OUTLOOK

In 2023, the Corporation expects to revolve the Investment Portfolio selectively as there are no assurances on maintaining a stable portfolio size as the primary focus is on security and preservation of capital. The Mortgage Banker continues to reject a significant number of potential investments that do not meet the Corporation's investment criteria and risk tolerance. Active portfolio management will be key during the year with expected unpredictable market conditions.

The Corporation increased its allowance for impairment and fair value loss by $6.3 million, to a total of $16.5 million, while generating earnings per share of $0.50 for the six months ended June 30, 2023. It is Management's and the Board's view that building up loan loss reserves during the year, in the face of the market uncertainty, is a prudent risk management practice. Throughout the current year, Management will continue to assess the performance of the Investment Portfolio and market conditions in assessing the allowance for the impairment (both the general and specific provisions). The focus is on building a strong balance sheet.

At June 30, 2023, the Investment Portfolio consisted of 82% of conventional first mortgages, with 52% maturing in 2023. The Corporation continues to participate in new investments on a disciplined basis with conservative underwriting on real estate in large urban centers.

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 Management's Discussion and Analysis ("MD&A") is dated as of August 2, 2023 and should be read in conjunction with the unaudited interim consolidated financial statements of the Corporation and the notes thereto as at, and for the six months ended June 30, 2023 and 2022, as well as the Corporation's Management's Discussion and Analysis, including the section on "Risks and Uncertainties", and each of our quarterly reports for 2023 and 2022.

MANAGEMENT'S DISCUSSION AND ANALYSIS

HIGHLIGHTS

NET INCOME

For the three months ended June 30, 2023 net income increased by 3.5% to $8,522,355 as compared to $8,237,900 for the same period in 2022. Net income for the six months ended June 30, 2023 increased by 7.1% to $17,234,251, as compared to $16,099,440 reported for the same period in 2022.

EARNINGS PER SHARE

Basic weighted average earnings per share for the three months ended June 30, 2023 was $0.245 (2022 - $0.239). Diluted weighted average earnings per share for the three months ended June 30, 2023 was $0.243 (2022 - $0.237).

Basic weighted average earnings per share for the six months ended June 30, 2023 was $0.500 (2022 - $0.471). Diluted weighted average earnings per share for the six months ended June 30, 2023 was $0.495 (2022 - $0.467).

REVENUES

Revenues for the three months ended June 30, 2023 increased by 26.1% to $17,525,785 as compared to $13,900,240 reported for the same period in 2022. Revenues for the six months ended June 30, 2023 increased by 38% to $36,541,674, as compared to $26,488,033 reported for the same period in 2022. The increase is primarily a result of higher interest income, due to a higher average interest rate (June 30, 2023 - 11.25% vs June 30, 2022 - 8.78%).

INVESTMENT PORTFOLIO

The Corporation's Investment Portfolio decreased by $43 million to $617,904,998 as at June 30, 2023, in comparison to $661,003,596 as at December 31, 2022 (in each case, gross of impairment allowance, fair value adjustment, and unamortized fees). The allowance for impairment and fair value adjustment as of June 30, 2023 was $16,456,000 (December 31, 2022 allowance for impairment and fair value adjustment - $10,160,000), comprising (i) $4,203,000 (December 31, 2022 - $3,700,000) representing 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, (ii) $6,700,000 (December 31, 2022 - $4,700,000) representing the total amount of management's estimate of fair value adjustment on an investment stated at fair value through profit or loss ("FVTPL"), and (iii) a collective allowance balance of $5,553,000 (December 31, 2022 - $1,760,00). The unamortized commitment fees as at June 30, 2023 were $866,801 (December 31, 2021 - $1,101,863).

RETURN ON EQUITY

Income for the three months ended June 30, 2023 represented a return on total shareholders' equity (based on the month end average total shareholders' equity) of 8.49%, representing an annualized return on total shareholders' equity of 384 basis points per annum over the average one-year Government of Canada Treasury bill yield for the period of 4.65%. Although the Corporation failed to exceed the objective of producing a return on shareholders' equity in excess of 400 basis, Management is of the belief that building a strong balance by setting aside adequate loan loss reserves in light of the current economic environment aligns with our current risk tolerance policies. During the quarter Management has increased provisions and fair value adjustments by $2.8 million and in the absence of the increase in the general allowance our return on shareholders' equity for the quarter was 9.29% eclipsing our stated yield objective.

Notwithstanding our increase in provisions that reduced earnings and return on equity, uninterrupted and consistent dividends were achieved that has resulted in an average quarterly yield return of 8.67% per annum based on our average share price.

The above return on total 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS

INVESTMENT PORTFOLIO

The Corporation's Investment Portfolio was $600,582,197 as at June 30, 2023 (net of the allowance for impairment of $9,756,000, fair value loss adjustment of $6,700,000 and unamortized fees of $866,801) and was $649,741,733 as at December 31, 2022 (net of the allowance for impairment of $5,460,000, fair value loss adjustment of $4,700,000 and unamortized fees of $1,101,863). On June 30, 2023, the Investment Portfolio comprised of 239 investments (252 as at December 31, 2022). The average gross investment size was approximately $2.6 million, with 14 investments individually exceeding $7.5 million.

Unadvanced committed funds under the existing Investment Portfolio amounted to $137.8 million as at June 30, 2023 (December 31, 2022 - $146.0 million).

The allocation of the Investment Portfolio between the six main investment categories (as well as the weighted average interest rate) is as follows:

The related debt investments category is a basket of investments that are all participating in debt investments to a variety of third-party borrowers. Such debt investments are not secured by mortgage charges, and instead have other forms of security or recourse.

A debtor in possession loan ("DIP Loan") is a loan obtained by an insolvent debtor while that debtor is restructuring its business under the Companies' Creditors Arrangement Act (Canada). A DIP Loan has "super-priority" security on the assets of the debtor company awarded by the court.

The $43 million decrease in the Investment Portfolio (before the allowance for impairment, fair value adjustments and unamortized fees) was mainly due to the decrease in the amount of the conventional first mortgages, offset by the modest increases in each of the remaining investment categories. During the six months ended June 30, 2023, new investment funding was $89.5 million (2022 - $273.9 million), while repayments during the period were $132.3 million (2022 - $235.1 million), resulting in a decrease in the Investment Portfolio size.

Conventional first mortgages decreased by 8.2% and represented 82.0% of the Investment Portfolio as at June 30, 2023 (83.5% as at December 31, 2022). Conventional non-first mortgages increased by 5.1% and represented 5.7% of the Investment Portfolio as at June 30, 2023 (5.1% as at December 31, 2022). Related debt investments increased by 0.1% and represented 9.7% of the Investment Portfolio as at June 30, 2023 (9.1% as at December 31, 2022). DIP Loans increased by 3.4% and represented 1.0% of the Investment Portfolio as at June 30, 2023 (0.9% as at December 31, 2022). Non-conventional mortgages increased by 0.8% and represented 1.6% of the Investment Portfolio as at June 30, 2023 (1.4% as at December 31. 2022).