CORPORATE PROFILE
SENVEST CAPITAL INC. AND ITS SUBSIDIARIES HAVE BUSINESS
ACTIVITIES IN ASSET MANAGEMENT, REAL ESTATE AND
EQUITY HOLDINGS.
ANNUAL MEETING
THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD
AT THE MONT-ROYAL CENTER, 2200 MANSFIELD STREET,
MONTREAL, QUEBEC ON JUNE 7, 2019 AT 10:00 A.M.
SENVEST CAPITAL INC.
1000 RUE SHERBROOKE ST WEST, SUITE 2400
MONTREAL, (QUEBEC) H3A 3G4
(514) 281-8082
Financial Highlights
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
(years ended December 31)
SUMMARY OF OPERATIONS
Total revenues and investment gains (loss)
Net income (loss) attributable
to common shareholders
Diluted earnings (loss) per share
FINANCIAL DATA
Total assets
Total equity
2018
$
2017
$
2016
$
2015
$
2014
$
(316,619)
488,972
335,828
(166,763)
297,551
(140,086)
(51.72)
165,967
60.03
96,783
34.50
(99,826)
(35.39)
117,298
41.26
2,756,970
969,421
2,976,026
1,063,385
2,563,217
942,562
2,146,380
856,290
2,020,142
821,740
COMMON STOCK INFORMATION
The company’s common shares are listed on the Toronto Stock Exchange under the symbol SEC.
FISCAL QUARTER
First
Second
Third
Fourth
2018
$
2017
$
High
250.00
259.94
230.00
220.00
Low
216.00
218.23
205.00
160.00
High
175.64
211.05
231.55
250.00
Low
162.99
171.00
210.43
226.13
TOTAL ASSETS ($ thousands)
TOTAL EQUITY ($ thousands)
BOOK VALUE PER SHARE
2,976,026
1,063,385
2,563,217
2,756,970
969,421
942,362
344.00
322.00
304.00
2,146,380
2,020,142
856,290
821,740
276.00
264.00
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
2018 annual report
1
OVERALL PERFORMANCE
Equity markets started the fourth quarter with a significant
decline in October. The broader S&P 500 index had its worst
month since September 2011 and its second worst month since
2000, suffering an aggregate $1.7 trillion loss. The Russell
2000 index, comprised of small cap stocks entered correction
territory with a loss in excess of -10%. The Russell 2000 also
had its worst month since September 2011 and its fifth worst
month in ten years. Tech stocks especially had it tough, with
market darlings such as Amazon and Netflix plummeting more
than -20%. However this was just a prelude. The worst was
yet to come as the market went on to experience its worst
December since the great depression.
There were plenty of reasons to choose from in explaining
the end of year swoon: 1) a hawkish Fed raising interest rates
and imposing quantitative tightening in the face of weakening
global economic growth, stoking fears of a policy error; 2) a
flattening yield curve; 3) Trump administration tariffs and a
trade war with China; 4) a partial government shut-down; 5)
hedge fund de-leveraging; and 6) tax loss selling. Headlines
in the middle of December such as “Investors flee U.S. stock
funds at record pace” probably did not help investor sentiment
as liquidity dried up. J.P. Morgan reported that “…monthly
fund flows (mutual funds and ETFs)…in December posted the
largest outflows since 2008.” Apparently it could have been
worse. Offsetting these outflows JP Morgan went on to note,
“A complete disaster was averted by fixed-weight portfolio
rebalances (e.g., pension funds) that were buying a significant
amount of stocks during the last week of the year…[and] both
retail outflows and pension inflows were among the largest in
history (only 2008 and 1987 saw larger flows).” The resulting
whipsaw in prices in December probably didn’t help investor
confidence. In any event, the year 2018 ended up as the worst
for stocks in 10 years.
The price of West Texas Intermediate crude oil (“WTI”), started
the 2018 year around $60 per barrel, steadily moved higher
and peaked at around $76 per barrel in early October. The
belief was that oil price gains were driven by global economic
growth spurring higher demand and a unified OPEC effort to
control supply. Geopolitical issues also helped shape supply
perceptions with the anticipation of US sanctions on Iran
starting in November. Waivers on the purchase of Iranian
oil, however, surprised market participants, especially Saudi
Arabia, which had boosted supply to offset expected Iranian
market withdrawal. US shale producers also started to see a
boost in their production in the latter part of the year. The
combination of a supply surge right at the time that global
growth began to stall and equity markets to tumble resulted
in a swift collapse in oil prices. WTI ended December at about
$46/barrel, almost 40% off its highs of the year set only two
months earlier.
Senvest Capital (“Senvest” or the “Company”) recorded a loss
for the 2018 year, and lagged broader equity indices. Senvest
recorded a net loss attributable to common shareholders of
($140.1) million or ($51.72) per basic and diluted common share
for the year ended December 31, 2018. For the fourth quarter
the net loss attributable to common shareholders was ($152.2)
million or ($56.19) per basic and diluted common share. The
negative results in the fourth quarter were responsible for the
2018 annual loss. This compares to a net income attributable
to common shareholders of $165.9 million or $60.03 per basic
and diluted common share for 2017. The corresponding net
income attributable to common shareholders for the fourth
2
quarter of 2017 was $491 or $0.29 per basic and diluted share.
For the year, the US dollar strengthened against the Canadian
dollar and the result was a currency translation gain of about
$72.9 million from the net loss attributable to common
shareholders. A large part of this gain, or about $44.2 million,
was triggered in the fourth quarter. This amount is not reported
in the Company’s income statement rather it is reflected in its
Comprehensive income. As a result the comprehensive loss
attributable to common shareholders was ($67.2) million for
the year.
The Company’s income from equity investments in 2018 was
the biggest contributor to the results. The net change in equity
investments and other holdings including securities sold
short and derivative liabilities totalled ($368.8) million in the
current year versus $485.9 million in 2017.
(MLNX), Tower Semiconductors
Some of the largest holdings as at December 31, 2018
were, Marriot Vacations (VAC), Radware (RDWR), Mellanox
(TSEM),
Technologies
Northstar Realty Europe (NRE), Paramount Resources (POU),
Seven Generations Energy (VII), and TrueCar (TRUE). (When
the Company refers to its portfolio of holdings, the reference is
to its aggregate portfolio including those in the funds that are
consolidated into the accounts of the Company).
Our Canadian oil and gas exploration and production
companies Paramount Resources
(“POU”) and Seven
Generations Energy Ltd (“VII”) were responsible for a vast
chunk of the fourth quarter loss declining 53% and 28%
respectively. The price of WTI dropped -36% in the quarter.
WTI represents the most recognized, widely traded commodity
against which condensate, a natural gas liquid, is generally
benchmarked for pricing. Condensate and other natural gas
liquids provide the majority of POU’s revenue. While Alberta
condensate historically has traded in line with WTI, starting
in September wider differentials compared to WTI began to
surface and then worsened into the fourth quarter. The wider
differential appeared to stem from an unusual confluence
of factors including transport bottlenecks; historically wide
differentials between WTI and Canadian oil sands crude oil
which resulted in a slowdown of Canadian oil sands production
and in turn a decline in demand for condensate, which is
used as a diluent for the heavy oil produced from oil sands;
competition with U.S. condensate under purchase contracts
with oil sands producers; and seasonal refinery shutdowns in
the U.S., leading to a decline in demand for oil in general.
Compounding the demand issues, condensate supply in
Canada accelerated. The Alberta government then mandated
short term production cuts on large oil producers in order to
ease storage constraints and bring the market into balance.
As a result, the desired-for impact on differentials began to
take hold, with Western Canada Select – WTI differentials
collapsing from an all-time low of -$50 in October to about
-$16 by year end. Many market participants believe that the
differential between Alberta condensate and WTI will stay
around historical norms in 2019 as contracts for imported US
condensate roll off; crude by rail initiatives aid in the growth
of oil sands production; and as pipeline bottlenecks improve
(for example, Enbridge Line 3 although delayed, expected to
turn on sometime in 2020).
semiconductor
Analog
foundry Tower Semiconductor
(“TSEM”) lost -32% and was our biggest decliner outside of the
resource industry. The stock faded during October in line with
Management’s Discussion and Analysis2018 annual report the Philadelphia Semiconductor Index (“SOX”) until a sharp
selloff at the end of October after TSEM reported financial
results which missed analyst expectations and included a cut
in guidance for the year. Management cited overall market
softness coupled with a slower than expected ramp in new
higher margin products which were supposed to replace lower
margin business the company had elected to walk away from.
We believe that management made the right decision with
respect to its customer and product roadmap and expect that
growth should resume in the years ahead.
A relatively new core holding in timeshare operator Marriot
Vacations (“VAC”) has become our biggest position. VAC is the
exclusive worldwide developer, marketer, seller and manager
of timeshare resorts under the brand names Marriott and
Ritz-Carlton Destination Club. The company was spun out
of Marriott International (“MAR”) in November 2011 and in
September 2018 completed a transformational merger with
a former core holding, ILG, Inc (“ILG”). This merger added
the Westin, Sheraton and Hyatt brands to create the largest
portfolio of upper-upscale and luxury brands in the timeshare
industry, in addition to the second largest exchange network
in the world, Interval International. In late 2016, the merger
of hotel giants MAR and Starwood Hotels & Resorts (“STWD”),
likely catalyzed the VAC-ILG combination since the MAR-
STWD merger created inefficient dynamics by having two
competing, separate brand licensees in the timeshare business.
For example, the MAR and STWD loyalty programs provide
a valuable source of timeshare leads and after combining
into one program, the rules of providing sales leads became
more complicated. With a combined loyalty program of about
100 million members, on a unified basis with ILG, VAC now
has a better opportunity to penetrate this customer base further
as it has a combined membership of only about 2 million
following the ILG deal.
Through our ownership of ILG we have gained an appreciation
for the quality of the branded timeshare business. As opposed
to the historical product which involved buying a fixed week
at a specific resort, VAC sells “points” which can be used at
any Marriott Vacations resort in a vast system. Timeshare
customers can also transfer points into hotel stays, cruises
or other entertainment options. This flexibility has helped
nurture a satisfied customer base, which provides an efficient
source of future sales for VAC, as existing customers typically
represent ~50% of timeshare sales. While some may have a
biased impression of the timeshare industry, we believe such a
view is unfounded. The fact that existing customers comprise
such a meaningful percentage of timeshare sales demonstrates
the high customer satisfaction with the product.
Our opinion is the primary driver of weakness in VAC
shares has been its perceived cyclicality, which we believe
is misunderstood. Less than 20% of VAC’s EBITDA is
derived directly from selling timeshare to customers, with
more recurring revenue from annual exchange fees, resort
management fees, consumer financing and resort operations
making up the remaining ~80%. VAC has also evolved to a less
capital intensive business than in prior cycles, as it sources
inventory on a “just in time” basis. These characteristics should
make VAC’s earnings more resilient than the market is pricing
in and allow the company to prosper through business cycles.
Data center networking interconnect equipment provider
Mellanox Technologies (“MLNX”) was the best performing
stock in the portfolio for the fourth quarter as it had a stock
price gain of about +25%. CNBC reported that the company
“…hired a financial advisor to explore a sale after receiving
takeover interest from at least two companies.” This report did
not come as a total surprise given MLNX’s leading technology
and rapidly growing market share in the gigabit Ethernet
interconnect market which it recently entered. Furthermore,
we believe that MLNX would be attractive to a number of
potential suitors.
At Senvest we have bought “bottoms” in the past in sectors
such as technology, financials, and real estate. It is no easy task
which requires conviction and stable capital, both of which we
are fortunate to have. As Stan Druckenmiller, the legendary
investor who we admire greatly recently said in a December
2018 Bloomberg interview, “I’ve never made a buy at a low
that I didn’t just feel terrible and scared to death making it”.
We have yet to see the payoff from our energy investments
as the bottoming process can take longer than expected. We
believe that our core holdings offer excellent risk-reward
and upside potential through a combination of change and
execution effected by management and rising revenues and
earnings. Finally, as long time shareholders know, when we
have conviction in our core holdings and their stock prices
decline, we typically increase our ownership, which we believe
can further augment the upside.
The Senvest Master Fund (Senvest Partners Fund) is focused
primarily on small and mid-cap companies. The fund recorded
a loss of -24.9% net of fees in the fourth quarter and a loss of
-24.1% for the year. With most of the long portfolio invested
in small and mid-cap stocks, the fund underperformed its most
relevant benchmark, the Russell 2000 which was also down
but by a lower amount. The fund also underperformed the S&P
500 index for the year, but does not consider this index as a
benchmark. The Senvest Israel Partners Fund was initiated in
2003 to focus on investing in Israel related companies. This fund
recorded a loss of -5.7% net of fees for the fourth quarter and
was up 2.3% for the year (monthly results of both funds can be
found on the Company’s website). Effective January 1st, 2019,
the Israel Fund broadened its geographic investment mandate
to focus on global technology investments. To better reflect the
evolving global complexion of its technology investments, the
Israel Fund underwent a name change, and is now known as
Senvest Technology Partners. After investing in Israel-related
technology for 15 years, its holdings extend across the global
technology universe. The Technology Fund will maintain the
same investment philosophy and continue to leverage the
existing diligence and understanding of global technology and
end markets. The two funds had approximately $1.5 billion of
net assets under management at December 31, 2018. Both of
these funds are consolidated into the accounts of the Company.
The Company has a portfolio of real estate investments as
at December 31, 2018. One part of this amount represents
investments in different US REITs and partnerships. These
REITs and partnerships are not publicly traded and there is
no established market for them. The most likely scenario for a
disposal of these holdings is an eventual sale of the underlying
real estate properties of the REITs and partnerships and the
distribution to its holders. Also, there are minority interests in
private entities whose main assets are real estate properties. As
described above for the REITs and partnerships, the most likely
3
Management’s Discussion and Analysis2018 annual report scenario for a disposal of these holdings is an eventual sale of
the underlying real estate properties.
Presentation currency
The Company also has investment properties in lands and
buildings. Investment properties are initially measured at cost,
including transaction costs. Subsequent to initial recognition,
investment properties were remeasured at fair value, using
the fair value model. The fair value is based on external
valuations from third party valuators. Gains or losses arising
from changes in fair value of investment properties will be
included in the Company’s net profit or loss. The Company
acquired a majority of these properties pursuant to a business
combination. The Company (the acquirer) purchased 100% of
the voting and equity interests of Bogas Costa Del Sol SL,
Globalbox Arganda SL, Globalbox Rivas SL and Coldstream
SL (the acquirees) on January 16, 2017. The payment was cash
consideration of approximately $9.9 million. The transaction
was accounted for under the purchase method. The net
assets of the acquired companies were valued at fair value
and there was no resulting goodwill on the purchase. There
was no contingent consideration nor any non-controlling
interests that arose due to the transaction. In April 2018 all the
aforementioned companies were merged into one legal entity
called Coldstream SL.
The Company consolidates the Senvest Management LLC entity
that serves as the investment manager of Senvest Partners
and Senvest Israel Partners as well as the general partners
of the funds. The portion of the expected residual returns
of structured entities that do not belong to the Company is
reflected as a non-controlling interest on the statement of
financial position. This non-controlling interest is owned by
an executive of the Company and totalled $104.8 million as
at December 31, 2018 from $119.9 million as at December 31,
2017.
At the end of December 31, 2018, Senvest had total consolidated
assets of $2,757.0 million versus $2,976.0 million at the end
of 2017. Equity investments and other holdings decreased to
$2,155.2 million from $2,533.2 million in December 2017. The
Company purchased $2,143.8 million of investment holdings
in the year and sold $2,315.8 million of such holdings. The
Company’s liabilities decreased to $1,787.5 million this year
versus $1,912.6 million in 2017. The main contributor to this
reduction was a $168.5 million decrease in securities sold short
and derivative liabilities. The proceeds of securities sold short
were $3,901.1 million and the amount of shorts covered was
$4,061.9 million in the period. Both these figures were more
than the corresponding amounts for the prior year. As a whole,
the 2018 year has been more volatile than the prior year.
Functional currency
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the functional currency). The functional currency of the
parent company is the US dollar.
The Company has adopted the Canadian dollar as its
presentation currency, which in the opinion of management
is the most appropriate presentation currency. Historically,
the Company’s consolidated financial statements have been
presented in Canadian dollars, and since the company’s shares
are listed on a Canadian stock exchange, management believes
it would better serve the use of shareholders to continue
issuing consolidated financial statements in Canadian dollars.
The US dollar consolidated financial statements are translated
into the presentation currency as follows: assets and
liabilities – at the closing rate at the date of the consolidated
statement of financial position; and income and expenses –
at the average rate for the period. All resulting changes are
recognized in other comprehensive income (loss) as currency
translation differences. Equity items are translated using the
historical rate.
Risks
Financial risk factors
The Company’s activities expose it to a variety of financial
risks: market risk (including fair value interest rate risk, cash
flow interest rate risk, currency risk and equity price risk),
credit risk and liquidity risk.
The Company’s overall risk management program seeks to
maximize the returns derived for the level of risk to which the
Company is exposed and seeks to minimize potential adverse
effects on the Company’s financial performance. Managing
these risks is carried out by management under policies
approved by the Board.
The Company uses different methods to measure and manage
the various types of risk to which it is exposed; these methods
are explained below.
Market risk
Fair value and cash flow interest rate risks
Interest rate risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate as a result of
changes in market interest rates.
The majority of the Company’s debt is based on floating rates
which expose the Company to cash flow interest rate risk. The
Company does not have a long-term stream of cash flows that
it can match against this type of fixed debt, so it prefers to use
short-term floating rate debt. The Company does not mitigate
its exposure to interest rate fluctuation on floating rate debt. If
interest rates spike, then the Company could enter into interest
rate swaps or more probably just reduce its debt level. As at
December 31, 2018, the Company had listed sufficient equity
securities that it can sell to reduce its floating rate debt to zero.
4
Management’s Discussion and Analysis2018 annual report Currency risks
Currency risk refers to the risk that values of monetary financial
assets and liabilities denominated in foreign currencies will
vary as a result of changes in underlying foreign exchange
rates. The Company’s functional currency is the US dollar.
The Company has foreign currency exposure to the Canadian
dollar, the British pound sterling, the Euro, the Swedish krone,
and the Israeli shekel.
Equity price risk
Equity price risk is the risk that the fair value of equity
investments and other holdings and equities sold short and
derivatives will vary as a result of changes in the market
prices of the holdings. The majority of the Company’s equity
investments and other holdings and all of the securities sold
short are based on quoted market prices as at the consolidated
statement of financial position date. Changes in the market
price of quoted securities and derivatives may be related to
a change in the financial outlook of the investee entities or
due to the market in general. Where non-monetary financial
instruments − for example, equity securities − are denominated
in currencies other than the US dollar, the price, initially
expressed in a foreign currency and then converted into
US dollars, will also fluctuate because of changes in foreign
exchange rates.
Securities sold short represent obligations of the Company
to make future delivery of specific securities and create an
obligation to purchase the security at market prices prevailing
at the later delivery date. This creates the risk that the company’s
ultimate obligation to satisfy the delivery requirements will
exceed the amount of the proceeds initially received or the
liability recorded in the consolidated financial statements. In
addition, the Company has entered into derivative financial
instruments, which have a notional value greater than their
fair value, which is recorded in the financial statements. This
creates a risk that the Company could settle these instruments
at a value greater or less than the amount that they have been
recorded in the financial statements.
The Company’s equity investments and other holdings have
a downside risk limited to their carrying value, while the
risk of equities sold short and derivatives is open-ended. The
Company is subject to commercial margin requirements which
act as a barrier to the open-ended risks of the securities sold
short and derivatives. The Company closely monitors both its
equity investments and other holdings and its equities sold
short and derivatives.
The impact of a 30% change in the market prices of the Company’s equity holdings with quoted value and derivatives, securities sold
short and derivative liabilities as at December 31, 2018 would be as follows (in thousands):
Equity investments and other holdings
Listed equity securities and derivatives
Securities sold short and derivative liabilities
Pre-tax impact on net earnings
Liquidity risk
Fair value
1,949,989
(675,468
)
Estimated fair value
30% price increase
Estimated fair value
30% price decrease
2,534,985
(878,108
)
382,356
1,364,993
(472,828
)
(382,356
)
Liquidity risk is the risk the Company will encounter difficulties
in meeting its financial obligations. The Company’s largest
assets are equity investments and other holdings. Most of these
assets are made up of equities in public holdings which can be
liquidated in a relatively short time. Due to its large holding
of liquid assets, the Company believes that it has sufficient
resources to meet its obligations.
All financial liabilities other than securities sold short and
derivative liabilities, liability for redeemable units and some
other payables as at the consolidated statement of financial
position date mature or are expected to be repaid within one
year. The liquidity risk related to these liabilities is managed
by maintaining a portfolio of liquid investment assets.
Credit risk
Credit risk is the risk that a counterparty will fail to fulfill its
obligations under a contract and will cause the Company to
suffer a loss.
All transactions in listed securities are settled or paid for
upon delivery using approved brokers. The risk of default is
considered minimal, as delivery of securities sold is executed
only once the broker has received payment. Payment is made
on a purchase once the securities have been received by
the broker. The trade will fail if either party fails to meet its
obligations.
The Company is also exposed to counterparty credit risk on
its cash and cash equivalents, restricted short-term investment
and due from brokers.
From time to time, the Company enters into derivative
financial instruments consisting primarily of options and
warrants to purchase or sell equities, equity indices and
currencies, equity swaps, foreign currency forward contracts,
and foreign currency futures contracts. These derivative
instruments are marked to market. There is deemed to be no
credit risk for futures and certain options that are traded on
exchanges. The warrant contracts and certain options that are
not traded on an exchange allow the company to purchase
underlying equities at a fixed price. Equity swaps represent
future cash flows that are agreed to be exchanged between the
Company and counterparties at set dates in the future. Foreign
currency forward contracts are contracts to buy or sell foreign
currencies at a specified price at a future point in time.
5
Management’s Discussion and Analysis2018 annual report Capital risk management
The Company’s objective when managing its capital is to
maintain a solid capital structure appropriate for the nature
of its business. The Company considers its capital to be its
total shareholders equity. The Company manages its capital
structure in light of changes in economic conditions. To
maintain or adjust its capital structure, the Company initiates
normal course issuer bids or adjusts the amount of dividends
paid. The Company monitors capital on the basis of its net
liabilities-to-capital ratio, which is as follows (in millions):
Total net liabilities
Total equity
Net liabilities to
capital ratio
December 31,
2018
December 31,
2017
$1,429.8
$969.4
$1,612.6
$1,063.4
1.47
1.52
The Company’s goal is to maintain its net liabilities to capital
ratio below 2.0 in order to limit the amount of risk. The
Company defines its net liabilities to equal its total liabilities
less its due from brokers. The Company believes that limiting
its net liabilities to capital ratio in this manner is the best way
to control risk. The Company’s net liabilities to capital ratio
was at 1.47 at the end of 2018 from 1.52 at the end of 2017.
Investment Risk
To the extent not discussed above, the Company is subject to
additional risks with respect to the investments made.
The value of the Company’s portfolio may decrease as well as
increase, due to a variety of factors, including general economic
conditions, and market factors. Additionally, investment
decisions made by the Company may not always be profitable
or prove to have been correct. Investment strategies, at any
given time, may incur significant losses. Losses can occur for
a number of reasons, including but not limited to, an overall
decline in the underlying market, a lack of liquidity in the
underlying markets, excessive volatility in a particular market,
government intervention or monetary and/or fiscal policies of
a specific region or country. The profitability of a significant
portion of the Company’s investments also depends to a great
extent upon the Company’s ability to correctly assess the
future course of the price movements of securities and other
investments. There can be no assurance that the Company will
be able to accurately predict these price movements.
The Company’s investment strategy is speculative and involves
risk. The Company trades in options and other derivatives, as
well as using short sales and utilizing leverage. The portfolio
may not be diversified among a wide range of issuers or
industries. In addition, the Company may take concentrated
positions in its high conviction ideas, invest in high yield
securities or invest in foreign markets outside the US and
Canada. Accordingly, the investment portfolio may be subject
to more rapid change in value than would be the case if the
Company were required to maintain a wide diversification in
the portfolios among industries, areas, types of securities and
issuers.
The Company may make investments in the securities of high
growth companies. More specifically, the Company may have
significant investments in smaller-to-medium sized companies
with market capitalizations of less than $2 billion US. While
smaller companies may have potential for rapid growth, they
often involve higher risks because they lack the management
experience, financial resources, product diversification, and
competitive strengths of larger corporations. These factors
make smaller companies far more likely than their larger
counterparts to experience significant operating and financial
setbacks that threaten their short-term and long-term viability.
In addition, in many instances, the frequency and volume
of their trading is substantially less than is typical of larger
companies. As a result, the securities of smaller companies may
be subject to wider price fluctuations and exiting investments
in such securities at appropriate prices may be difficult, or
subject to substantial delay. Furthermore, some of the portfolio
may be invested in technology, technology-related markets
and biotech. These types of companies may allocate greater
than usual amounts to research and product development. The
securities of such companies may experience above-average
price movements associated with the perceived prospects of
success of the research and development programs. Also, these
companies could be adversely affected by lack of commercial
acceptance of a new product or products or by technological
change and obsolescence. Some of these companies may have
limited operating histories. As a result, these companies may
face undeveloped or limited markets, have limited products,
have no proven profit-making history, operate at a loss or
with substantial variations in operating results from period
to period, have limited access to capital and/or be in the
developmental stages of their businesses.
The Company tries to manage the above risks by monitoring its
leverage, actively following its investee companies and trying
to react to market conditions. At the same time the Company
expects its portfolio to exhibit a higher degree of volatility than
portfolios that invest in larger more stable companies and that
invest within more defined limits. As at December 31, 2018,
approximately 88% of the Company’s portfolio was invested in
Level 1 securities. The Company monitors its Level 1 securities
as percentage of its total investments; however, it does not
have a fixed number that this percentage cannot fall below.
Critical accounting estimates and judgments
The Company makes estimates and assumptions concerning
the future that will, by definition, seldom equal actual results.
The following are the estimates applied by management that
most significantly affect the Company’s consolidated financial
statements. These estimates have a significant risk of causing
a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
Consolidation of entities in which the company holds
less than 50% of the voting rights.
Management considers that the company has de facto control
of Senvest Management LLC (SML), RIMA Senvest Master
Fund GP LLC, and Senvest Technology Partners GP LLC.,
three legal entities wholly owned by an executive of the
Company, because of the Company’s board representation and
the contractual terms of the investment advisory agreement.
SML is the investment adviser to the Funds, whereas RIMA
Senvest Master Fund GP LLC is the General Partner of Senvest
Master Fund LP and Senvest Technology Partners GP LLC is
the General Partner of Senvest Technology Partners Master
Fund LP.
Management considers that the Company has control of
Senvest Master Fund LP, Senvest Technology Partners Master
6
Management’s Discussion and Analysis2018 annual report Fund LP and Senvest Cyprus Recovery Investment Partners
LP even though the Company has less than 50% of the voting
rights in each of the Funds. The Company assessed that the
removal rights of non-affiliated unitholders are exercisable
but not strong enough given the Company’s decision-making
authority over relevant activities, the remuneration to which it
is entitled and its exposure to returns. The Company, through
its structured entity, is the majority unitholder of each of
the Funds and acts as a principal while there are no other
unitholders forming a group to exercise their votes collectively.
Fair value estimates of investment properties
The Company has adopted the fair value model in measuring
its investment properties. The fair value of the investment
properties is performed by external independent valuators
located in the area of the properties. Inputs used in the property
valuation models are based on appropriate assumptions
that reflect the type of property and location. Management
reviews the assumptions made and models used to ensure
they correlate with their expectation and understanding of
the market. Changes in assumptions about these factors could
affect the reported fair value of financial instruments.
Fair value estimates of financial instruments
The fair value of financial instruments where no active market
exists or where quoted prices are not otherwise available are
determined by using valuation techniques. In these cases,
the fair values are estimated from observable data in respect
of similar financial instruments or by using models. Where
market observable inputs are not available, they are estimated
based on appropriate assumptions. To the extent practical,
models use only observable data; however, areas such as credit
risk (both the company’s own credit risk and counterparty
credit risk), volatilities and correlations require management
to make estimates. Changes in assumptions about these factors
could affect the reported fair value of financial instruments.
Financial instruments in Level 1
The fair value of financial assets and financial liabilities
traded in active markets are based on quoted market prices
at the close of trading on the balance sheet date. The quoted
market price used for financial assets and financial liabilities
held by the Company is the close price. Investments classified
in Level 1 include active listed equities and derivatives traded
on an exchange. The financial assets classified as Level 1 were
approximately 88% of the total financial assets.
Financial instruments in Level 2
Financial instruments classified with Level 2 trade in markets
that are not considered to be active but are valued based
on quoted market prices, dealer quotations or valuation
techniques that use market data. These valuation techniques
maximize the use of observable market data where available
and rely as little as possible on entity-specific estimates. If
all significant inputs required to fair value an instrument
are observable, the instrument is included in Level 2. These
include corporate bonds, thinly traded listed equities, over-
the-counter derivatives and private equities.
The Company uses a variety of methods and makes assumptions
that are based on market conditions existing at each year-
end date. Valuation techniques used for non-standardized
financial instruments such as options and other over-the-
counter derivatives include the use of comparable recent arm’s
length transactions, reference to other instruments that are
substantially the same, discounted cash flow analyses, option
pricing models and other valuation techniques commonly
used by market participants, making maximum use of market
inputs and relying as little as possible on entity-specific
inputs. The financial assets classified as Level 2 were over 6%
of the total financial assets.
Financial instruments in Level 3
Investments classified in Level 3 have significant unobservable
inputs, as they trade infrequently. Level 3 instruments
consist mainly of unlisted equity investments and real estate
investments. As observable prices are not available for these
securities, the Company has used valuation techniques to
derive the fair value. The financial assets classified as Level 3
were under 6% of the total fair value of financial assets.
Level 3 valuations are reviewed by the Company’s Chief
Financial Officer (CFO), who reports directly to the Board on
a quarterly basis in line with the Company’s reporting dates.
On an annual basis, close to the year-end date, the Company
obtains independent, third party appraisals to determine the
fair value of the Company’s most significant Level 3 holdings.
The annual valuations of the significant level 3 holdings
are carried out externally. The Company’s CFO reviews the
results of the independent valuations. Emphasis is placed on
the valuation model used to determine its appropriateness,
the assumptions made to determine whether it is consistent
with the nature of the investment, and market conditions
and inputs such as cash flow and discount rates to determine
reasonableness.
As at December 31 2018, Level 3 instruments are in various
entities and industries. The real estate investments are made
up of investments in private real estate companies, and in real
estate income trusts and partnerships. For the main Level 3
instruments, the Company relied on appraisals carried out by
independent third party valuators or on recent transactions.
There was no established market for any of these investments,
so the most likely scenario is a disposal of the underlying
assets. For the investments in real estate income trusts and
partnerships, the company relied mainly on audited financial
statements, valuing the assets at fair value. The most likely
scenario is an eventual sale of the underlying properties and
their subsequent distribution to the holders.
Liability for redeemable units
Liability for redeemable units represents the units in the
consolidated funds that are not owned by the Company.
Units may be redeemed as of the end of any calendar quarter;
provided, however, that redemptions made within the first 24
months will be subject to a redemption fee which is payable
to the funds. In addition, there are notice periods of 60 days
that must be given prior to any redemption. Senvest Cyprus
Recovery Investment Fund LP has units that cannot be
redeemed until December 2019. These units are recognized
initially at fair value, net of any transaction costs incurred,
and subsequently measured at redemption amount. At the
individual fund level, this item is not shown as a liability but
as part of shareholders equity. It is deemed to be a liability
only for the consolidated financial statements as they are
prepared from the point of view of the parent company.
7
Management’s Discussion and Analysis2018 annual report Income taxes
The Company is subject to income taxes in numerous
jurisdictions. Significant judgment is required in determining
the worldwide provisions for income taxes. There are many
transactions and calculations for which the ultimate tax
determination is uncertain. The Company recognizes liabilities
for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of
these matters is different from the amounts that were initially
recorded, such differences will impact the current and deferred
income tax assets and liabilities in the year in which such
determination is made.
Year
2018-4
2018-3
2018-2
2018-1
2017-4
2017-3
2017-2
2017-1
QUARTERLY RESULTS
(In thousands except for earnings (loss) per share information)
Total revenue
and investments
gain (losses)
(428,534)
21,225
67,359
23,331
2,234
236,284
121,348
129,106
Net income (loss) –
Common shareholders
Earnings (loss)
Per share
(152,197)
2,478
19,337
(9,704)
491
74,964
42,669
47,843
(56.19)
0.92
7.10
(3.55)
0.29
27.10
15.40
17.24
CONTRACTUAL OBLIGATIONS
(In thousands)
Less than 1 year
1-3 years
4-5 years
Due to Brokers
Operating leases
Other commitments
Total
6,480
1,276
22,371
30,127
-
2,512
-
2,512
-
2,326
-
Total
6,480
6,114
22,371
2,326
34,965
SELECTED ANNUAL INFORMATION
(In thousands except for earnings (loss) per share information)
Total revenue and investment gains (loss)
Net income (loss) – common shareholders
Earnings (loss) per share
2018
(316,619)
(140,086)
(51.72)
2017
488,972
165,967
60.03
2016
335,828
96,783
34.50
Total assets
2,756,970
2,976,026
2,563,217
The Company has had wide swings in profitability from quarter
to quarter in the past two years, as seen above. The profit has
fluctuated a significant amount quarter to quarter. The highest
earning quarter showed a profit of over $70 million and the
least profitable quarter had a loss of over $150 million. These
wide swings are primarily due to the large quarterly mark
to market adjustments in the Company’s portfolio of public
holdings. However, we expect the volatility and choppiness of
the markets to result in wide profit swings from year to year
and from quarter to quarter. Reference is made to the section
on Investment risk above.
The Company maintains accounts with several major financial
institutions in the U.S. who function as the Company’s main
prime brokers. The Company has assets with the prime brokers
pledged as collateral for leverage. Although the prime brokers
are large financial institutions, there is no guarantee that any
financial institution will not become insolvent. In addition,
there may be practical or time problems associated with
enforcing the Company’s rights to its assets in the case of such
insolvency.
While both the U.S. Bankruptcy Code and the Securities
Investor Protection Act seek to protect customer property in
the event of a failure, insolvency or liquidation of a broker
dealer, there is no certainty that, in the event of a failure of
a broker dealer that has custody of the Company’s assets,
the company would not incur losses due to its assets being
unavailable for a period of time, ultimately less than full
recovery of its assets, or both. As a significant majority of the
Company’s assets are in custody with four prime brokers, such
losses could be significant.
8
Management’s Discussion and Analysis2018 annual report On August 14, 2018, Senvest commenced a new normal
course issuer bid to purchase a maximum of 70,000 of its
own common shares until August 13, 2019. There were 51,100
shares repurchased during the year. The number of common
shares outstanding as at December 31, 2018 was 2,688,624
and as at March 29, 2019 was 2,688,624. There were no stock
options outstanding as at December 31 2018 and none have
been issued since 2005.
The Company has financing with a bank, composed of a credit
facility and a guarantee facility. A first ranking movable
hypothec in the amount of $30 million on all of its assets has
been granted as collateral for both of the facilities. According
to the terms of the facilities, the Company is required to
comply with certain financial covenants. During the period,
the Company met the requirements of all the covenants. The
Company also has margin facilities with brokers.
New and amended Accounting standards
adopted in 2018
On January 1, 2018, the Company adopted IFRS 9, ‘Financial
Instruments’, which replaced IAS 39, ‘Financial Instruments:
Recognition and Measurement’ and IFRS 15, ‘Revenue from
Contracts with Customers’ which replaced IAS 18, ‘Revenue’
and IAS 11, ‘Construction Contracts’.
Adoption of IFRS 9, ‘Financial Instruments’
The adoption of IFRS 9 has not had a significant impact
on the financial position or results of the Company. The
Company applied IFRS 9 as at January 1, 2018 retrospectively
in accordance with IAS 8, ‘Accounting policies, Changes in
Accounting Estimates and Errors’, taking into account certain
exceptions provided by IFRS 9. The adoption of this standard
resulted in changes in accounting policies and terminology but
no adjustment to the amounts recognized in the consolidated
financial statements.
The standard introduced new guidelines by which to classify
and measure financial instruments. The guidelines focus
the determination of classification on the nature of future
cash flows and the Company’s business model in which the
financial instrument are evaluated and reported on. As in the
past, the determining factor of classification for the Company’s
financial instruments has been their business model and as a
result their classification has remained the same with some
minor differences. Under IAS 39, the company designated
its non-trading financial assets as through profit and loss.
Under IFRS 9, unless the financial asset’s contractual cash
represent “Solely payments of principal and interest” and are
held within a business model to primarily collect payments of
principal and interest and or sell, the financial instrument will
simply be classified as through profit and loss, therefore the
designation is no longer required.
Adoption of IFRS 15, ‘Revenue from Contracts
with Customers’
The adoption of IFRS 15 has not had a significant impact on
the financial positon or results of the Company. The Company
applied IFRS 15 as at January 1, 2018 retrospectively in
accordance with IAS 8, taking into account certain practical
expedients provided by IFRS 15. The revenues of the Company
within the scope of IFRS 15 ‘are not significant and as such,
the adoption of this standard resulted in changes in accounting
policies but no adjustment to the amounts recognized in the
consolidated financial statements.
The standard deals with revenue recognition and establishes
principles for reporting useful information to users of financial
statements about the nature, amount, timing and uncertainty
of revenue and cash flows arising from an entity’s contracts
with customers. Revenue is recognized when a customer
obtains control of a good or service and thus has the ability to
direct the use and obtain the benefits from the good or service.
Accounting standards and amendments issued
but not yet applied
The Company presents the developments that are relevant to
its activities and transactions. The following revised standards
and amendments are not mandatory for the December 31, 2018
reporting periods and the Company has not early adopted
these standards and amendments.
• IFRS 16, ‘Leases’, was published in January 2016 by the
IASB. This standard will replace the current guidance in IAS
17, Leases, and three related interpretations, and require
lessees to recognize an asset and a lease liability reflecting a
“right-of-use asset” and future lease payments, respectively,
for virtually all lease contracts. The standard applies to the
Company’s annual periods beginning on January 1, 2019.
As at December 31, 2018, the operating leases disclosed in
note 20 to the consolidated financial statements are in scope
with IFRS 16. The Company will adopt IFRS 16 on a modified
retrospective basis whereby the adjustments will be recorded
on January 1, 2019 without adjustments to prior periods.
The Company has assessed the impact of this standard on its
consolidated financial statements the results of which would
as of January 1, 2019 create a right-of-use asset and a lease
liability for approximately $6,000 to be presented on the
consolidated statement of financial position. Starting from
that date, lease expense will be substituted by depreciation
of the right-of-use asset and interest expense on the lease
liability and principal payments on the lease liability will be
presented as financing cash outflows.
• IFRS 10, ‘Consolidated Financial Statements’, and IAS
28, ‘Investments in Associates and Joint Ventures’, were
amended in 2014 to address an inconsistency between those
standards when accounting for the sale or a contribution of
assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full
gain or loss is recognized when the transaction involves a
business combination, whereas a partial gain is recognized
when the transaction involves assets that do not constitute
a business. The mandatory effective date of this amendment
will be determined by the IASB at a future date. Voluntary
application is permitted.
Related party transactions
The Company consolidates the Senvest Management LLC entity
that serves as the investment manager of Senvest Partners
and Senvest Israel Partners as well as the general partners
of the funds. The portion of the expected residual returns
of structured entities that do not belong to the Company is
reflected as a non-controlling interest on the statement of
financial position. This non-controlling interest is owned by
an executive of the Company and totalled $104.8 million as at
December 31, 2018 from $119.9 million as at December 31, 2017.
9
Management’s Discussion and Analysis2018 annual report Significant Equity Investments
INTERNAL CONTROLS
For information on a summary of financial information from
certain significant investees please refer to the 2018 annual
report. The accounts of Senvest Partners, Senvest Technology
Partners and Senvest Cyprus Recovery Investment Fund are
consolidated with the Company’s accounts.
FORWARD LOOKING STATEMENTS
This MD&A contains “forward looking statements” which
reflect the current expectations of management regarding our
future growth, results of operations, performance and business
prospects and opportunities. Wherever possible, words such as
“may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”,
“expect”, “intend”, “estimate”, “aim”, “endeavour”, “likely”,
“think” and similar expressions have been used to identify
these forward looking statements. These statements reflect
our current beliefs with respect to future events and are based
on information currently available to us. Forward looking
statements involve significant known and unknown risks,
uncertainties and assumptions. Many factors could cause our
actual results, performance or achievements to be materially
different from any future results, performance or achievements
that may be expressed or implied by such forward looking
statements including, without limitation, those Risk Factors
listed in the Company’s annual information form. Should one
or more of these risks or uncertainties materialize, or should
assumptions underlying the forward looking statements prove
incorrect, actual results, performance or achievements could
vary materially from those expressed or implied by the forward
looking statements contained in this MD&A. These forward
looking statements are made as of March 29, 2019 and will
not be updated or revised except as required by applicable
securities law.
OTHER FINANCIAL INFORMATION
There is additional financial information about the Company
on Sedar at http://www.sedar.com/ the Company’s website
at www.senvest.com, as well the Company’s or Senvest
Management’s U.S. SEC section 13 and other filings on www.
sec.gov.
Victor Mashaal
Chairman of the Board and President
March 29, 2019
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed
by us in reports filed or submitted under Canadian securities
laws is recorded, processed, summarized and reported
within the time periods specified under those laws, and
include controls and procedures that are designed to ensure
that the information is accumulated and communicated to
management, including Senvest’s President and CEO and
Vice-President and CFO, to allow timely decisions regarding
required disclosure. As at December 31, 2018, management
evaluated, under the supervision of and with the participation
of the CEO and the CFO, the effectiveness of our disclosure
controls and procedures, under National Instrument 52-109
– Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on that evaluation, the CEO and CFO concluded
that our disclosure controls and procedures were effective as
at December 31, 2018.
Internal control over financial reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting under
National Instrument 52-109. Our internal control over
financial reporting is a process designed under the supervision
of the CEO and CFO to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
IFRS. However, because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements on a timely basis. Management evaluated,
under the supervision of and with the participation of the
CEO and the CFO, the effectiveness of our internal control
over financial reporting as at December 31, 2018, based on
the criteria established in the Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based
on that evaluation, the CEO and CFO concluded that our
internal control over financial reporting was effective as at
December 31, 2018. There have been no changes during the
year ended December 31, 2018 in our internal control over
financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
(Management Discussion and Analysis (“MD&A”) provides a review of Senvest Capital Inc.’s operations, performance and financial condition for the period ended December 31, 2018, and should be read in
conjunction with the 2018 annual filings. Readers are also requested to visit the SEDAR website at www.sedar.com for additional information. This MD&A also contains certain forward-looking statements
with respect to the Corporation. These forward-looking statements, by their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by
these forward-looking statements. We consider the assumptions on which these forward-looking statements are based to be reasonable, but caution the reader that these assumptions regarding future events,
many of which are beyond our control may ultimately prove to be incorrect.)
10
Management’s Discussion and Analysis2018 annual report Management’s Report
The consolidated financial statements for the fiscal year ended December 31, 2018 and December 31, 2017, were prepared by the
management of Senvest Capital Inc., reviewed by the Audit Committee and approved by the Board of Directors. They were prepared in
accordance with International Financial Reporting Standards and are consistent with the company’s business.
The company and its subsidiaries maintain a high quality of internal controls, designed to provide reasonable assurance that the
financial information is accurate and reliable. The information included in this Annual Report is consistent with the financial
statements contained herein.
The financial statements have been audited by PricewaterhouseCoopers LLP, the company’s auditors, whose report is provided below.
Victor Mashaal
Chairman of Board and President
Senvest Capital Inc.
March 29, 2019
Independent Auditor’s Report
To the Shareholders of Senvest Capital Inc.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of
Senvest Capital Inc. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and
its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
• the consolidated statements of financial position as at December 31, 2018 and 2017;
• the consolidated statements of income (loss) for the years then ended;
• the consolidated statements of comprehensive income (loss) for the years then ended;
• the consolidated statements of changes in equity for the years then ended;
• the consolidated statements of cash flows for the years then ended; and
• the notes to the consolidated financial statements, which include a summary of significant accounting policies.
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 Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
11
2018 annual report Other information
Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis,
which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and
our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an
opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated 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 consolidated financial statements
or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we
conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report
in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon,
included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter
to those charged with governance.
Responsibilities of management and those charged with governance for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS,
and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’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 Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s 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 these consolidated 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 consolidated 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.
• 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 Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
• 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 conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
auditor’s report to the related disclosures in the consolidated 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 auditor’s report. However, future events
or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
12
2018 annual report We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Jean-Luc Tremblay.
Montréal, Quebec
March 29, 2019
1 CPA auditor, CA, public accountancy permit No. A125840
13
2018 annual report Consolidated Statements of Financial Position
AS AT DECEMBER 31, 2018 AND 2017
(IN THOUSANDS OF CANADIAN DOLLARS)
Note
4
5(a)
5(b)
6
7
8
9
12(b)
5(a)
11
5(b)
6
12(b)
10
13
17
2018
$
2017
$
120,555
462
357,754
2,155,198
20,479
41,161
39,786
12,116
11
9,448
53,122
460
299,996
2,533,174
12,681
30,789
26,738
13,771
-
5,295
2,756,970
2,976,026
5,602
13,026
6,480
748,964
5,755
101,838
918
25,782
879,184
2,276
29,130
16,784
917,511
10,265
16,992
-
43,485
876,198
1,787,549
1,912,641
22,341
194,938
647,357
864,636
104,785
969,421
22,751
122,019
798,718
943,488
119,897
1,063,385
2,756,970
2,976,026
Assets
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Equity investments and other holdings
Investments in associates
Real estate investments
Investment properties
Income taxes receivable
Deferred income tax assets
Other assets
Total assets
Liabilities
Bank advances
Trade and other payables
Due to brokers
Securities sold short and derivative liabilities
Redemptions payable
Subscriptions received in advance
Income taxes payable
Deferred income tax liabilities
Liability for redeemable units
Total liabilities
Equity
Equity attributable to common shareholders
Share capital
Accumulated other comprehensive income
Retained earnings
Total equity attributable to common shareholders
Non-controlling interest
Total equity
Total liabilities and equity
Approved by the Board of Directors
Victor Mashaal, Director
Frank Daniel, Director
14
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Income (Loss)
FOR THE YEARS ENDED DECEMBER 31 2018 AND 2017
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
Revenue
Interest income
Dividend income
Other income
Investment gains (losses)
Net change in fair value of equity investments and other holdings
Dividend expense on securities sold short
Net change in fair value of real estate investments
Net change in fair value of investment properties
Share of profit of associates
Foreign exchange gain (loss)
Total revenue and net investment gains (losses)
Operating costs and other expenses
Employee benefit expense
Interest expense
Transaction costs
Other operating expenses
Change in redemption amount of redeemable units
Income (loss) before income tax
Note
7
2018
$
15,991
10,755
1,250
2017
$
6,972
16,715
2,504
27,996
26,191
(368,796
)
(6,186
)
2,088
2,379
7,325
18,575
485,893
(10,775
)
3,814
1,345
2,182
(19,678
)
(344,615
)
462,781
(316,619
)
488,972
29,211
36,165
13,572
15,287
54,138
40,930
12,037
14,748
94,235
121,853
(232,312
)
146,030
(178,542
)
221,089
Income tax expense (recovery)
12(a)
(14,145
)
23,284
Net income (loss) for the year
Net income (loss) attributable to:
Common shareholders
Non-controlling interest
(164,397
)
197,805
(140,086
)
(24,311
)
165,967
31,838
Earnings (loss) per share attributable to common shareholders
Basic and diluted
14
(51.72
)
60.03
15
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Comprehensive Income (Loss)
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(IN THOUSANDS OF CANADIAN DOLLARS)
Net income (loss) for the year
Other comprehensive income (loss)
Currency translation differences
Comprehensive income (loss) for the year
Comprehensive income (loss) attributable to:
Common shareholders
Non-controlling interest
2018
$
2017
$
(164,397
)
197,805
82,118
(66,014
)
(82,279
)
131,791
(67,167
)
(15,112
)
107,390
24,401
Other comprehensive income (loss) includes currency translation differences arising from the Company’s interest in foreign entities.
Accumulated other comprehensive income (loss) arising from currency translation differences arising from the Company’s interest
in foreign entities will be reclassified to profit and loss upon the disposal of such entities. Currency translation differences arising
from the translation of the parent company’s consolidated financial statements’ translation to the presentation currency will not be
subsequently reclassified to profit and loss.
16
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Equity
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(IN THOUSANDS OF CANADIAN DOLLARS)
Equity attributable to owners of the parent
Share
capital
$
Note
Accumulated
other
comprehensive
income (loss)
$
Retained
earnings
$
Non-
controlling
interests
$
Total
$
Total
equity
$
Balance – December 31, 2016
23,057
180,596
640,816
844,469
98,093
942,562
Net income for the year
Other comprehensive loss
Comprehensive income (loss) for the year
-
-
-
-
165,967
165,967
(58,577
)
-
(58,577
)
31,838
(7,437
)
197,805
(66,014
)
(58,577
)
165,967
107,390
24,401
131,791
Repurchase of common shares
Distributions to non-controlling interests
13
(306
)
-
-
-
(8,065
)
(8,371
)
-
-
-
(2,597
)
(8,371
)
(2,597
)
Balance – December 31, 2017
22,751
122,019
798,718
943,488
119,897
1,063,385
Net loss for the year
Other comprehensive income
Comprehensive income (loss) for the year
-
-
-
-
(140,086
)
(140,086
)
(24,311
)
(164,397
)
72,919
-
72,919
9,199
82,118
72,919
(140,086
)
(67,167
)
(15,112
)
(82,279
)
Repurchase of common shares
13
(410
)
-
(11,275
)
(11,685
)
-
(11,685
)
Balance – December 31, 2018
22,341
194,938
647,357
864,636
104,785
969,421
17
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(IN THOUSANDS OF CANADIAN DOLLARS)
Cash flows provided by (used in)
Operating activities
Net income (loss) for the year
Adjustments for non-cash items
Purchase of equity investments and other holdings held for trading
Purchase of securities sold short and derivative liabilities
Proceeds on sale of equity investments and other holdings held for trading
Proceeds from securities sold short and derivative liabilities
Dividends and distributions received from real estate investments
Changes in working capital items
Net cash provided by (used in) operating activities
Investing activities
Transfers to restricted short-term investments
Purchase of real estate investments
Purchase of investment properties
Purchase of equity investments and other holdings at fair value through profit or loss
Proceeds on sale of equity investments and other holdings at fair value through profit or loss
Proceeds from investments in associates
Acquisition of subsidiaries, net of cash acquired
Net cash used in investing activities
Financing activities
Distributions paid to non-controlling interests
Increase in bank advances
Repurchase of common shares
Proceeds from issuance of redeemable units
Amounts paid on redemption of redeemable units
Net cash provided by financing activities
Increase in cash and cash equivalents during the year
Effect of changes in foreign exchange rates on cash and cash equivalents
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
Amounts of cash flows classified in operating activities:
Cash paid for interest
Cash paid for dividends on securities sold short
Cash received on interest
Cash received on dividends
Cash paid for income taxes
Note
15(a)
15(b)
18
4
2018
$
2017
$
(164,397
)
104,266
(2,143,846
)
(4,061,860
)
2,315,794
3,901,138
9,663
(58,060
)
(97,302
)
36
(14,869
)
(9,909
)
(60,149
)
13,228
972
-
(70,691
)
-
2,970
(11,685
)
265,950
(29,536
)
227,699
59,706
7,727
53,122
120,555
38,853
6,401
14,859
9,301
4,599
197,805
(348,261
)
(1,552,882
)
(2,568,067
)
1,808,257
2,626,988
8,199
(165,844
)
6,195
(32
)
(2,561
)
(7,630
)
(12,457
)
21,949
1,106
(9,658
)
(9,283
)
(2,597
)
1,863
(8,371
)
123,954
(83,137
)
31,712
28,624
(2,480
)
26,978
53,122
40,412
10,699
5,482
13,831
34,528
The accompanying notes are an integral part of these consolidated financial statements.
18
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements. 1 General information
Senvest Capital Inc. (the “Company”) was incorporated under
Part I of the Canada Corporations Act on November 20, 1968
under the name Sensormatic Electronics Canada Limited, and was
continued under the Canada Business Corporations Act under
the same name effective July 23, 1979. On April 21, 1991, the
Company changed its name to Senvest Capital Inc. The Company
and its subsidiaries hold investments in equity and real estate
holdings that are located predominantly in the United States. The
Company’s head office and principal place of business is located
at 1000 Sherbrooke Street West, Suite 2400, Montréal, Quebec
H3A 3G4. The Company’s shares are traded on the Toronto
Stock Exchange under the symbol “SEC”. Refer to note 17 for the
composition of the Company.
2 Summary of significant accounting policies
Basis of preparation
The Company prepares its consolidated financial statements in
accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards
Board (IASB). Certain comparative figures have been reclassified
to conform with the presentation of the Consolidated Financial
Statements for the current year. These reclassifications had
no impact on the Company’s profit or loss or total assets and
liabilities.
The Board of Directors (Board) approved these consolidated
financial statements for issue on March 29, 2019.
The preparation of consolidated financial statements in conformity
with IFRS requires the use of certain critical accounting estimates.
It also requires management to exercise its judgment in the
process of applying the Company’s accounting policies. The
areas involving a higher degree of judgment or complexity or
areas where assumptions and estimates are significant to the
consolidated financial statements are disclosed in note 3.
New and amended accounting standards adopted
in 2018
On January 1, 2018, the Company adopted IFRS 9, ‘Financial
Instruments’, which replaced IAS 39, ‘Financial Instruments:
Recognition and Measurement’ and IFRS 15, ‘Revenue from
Contracts with Customers’ which replaced IAS 18, ‘Revenue’ and
IAS 11, ‘Construction Contracts’.
Adoption of IFRS 9, ‘Financial Instruments’
The adoption of IFRS 9 has not had a significant impact on the
financial position or results of the Company. The Company applied
IFRS 9 as at January 1, 2018 retrospectively in accordance with
IAS 8, ‘Accounting policies, Changes in Accounting Estimates
and Errors’, taking into account certain exceptions provided
by IFRS 9. The adoption of this standard resulted in changes in
accounting policies and terminology but no adjustment to the
amounts recognized in the consolidated financial statements.
The standard introduced new guidelines by which to classify
and measure financial instruments. The guidelines focus the
determination of classification on the nature of future cash
flows and the Company’s business model in which the financial
instruments are evaluated and reported on. As in the past, the
determining factor of classification for the Company’s financial
instruments has been their business model and as a result their
classification has remained the same with some minor differences.
Under IAS 39, the company designated its non-trading financial
assets as through profit and loss. Under IFRS 9, unless the
financial asset’s contractual cash represent “Solely payments of
principal and interest” and are held within a business model to
primarily collect payments of principal and interest and or sell,
the financial instrument will simply be classified as through
profit and loss, therefore the designation is no longer required.
The table below demonstrates the impact on the classification
of financial instruments in these financial statements whereby
previously designated financial instruments are now classified as
financial instruments at fair value through profit and loss with a
subcategory of “Other”. Financial assets previously classified as
Loans and receivables are currently classified under the category
of “Financial assets at amortized cost”.
Financial instrument classification prior to the adoption of IFRS 9
Financial instrument classification after adoption of IFRS 9
Financial assets at fair value through profit or loss
Financial assets held for trading
Equity securities
Debt securities
Derivative financial assets
Held for trading
Equity securities
Debt securities
Derivative financial assets
Financial assets designated as fair value through profit or loss
Financial assets at fair value through profit or loss
Equity securities
Unlisted equity securities
Debt securities
Private investments
Loans and receivable
Financial liabilities held for trading
Equity holdings sold short
Debt securities
Derivative liabilities
Other
Equity securities
Unlisted equity securities
Debt securities
Private investments
Financial assets at amortized cost
Financial liabilities held for trading
Equity holdings sold short
Debt securities
Derivative liabilities
19
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Adoption of IFRS 15, ‘Revenue from Contracts
with Customers’
The adoption of IFRS 15 has not had a significant impact on the
financial positon or results of the Company. The Company applied
IFRS 15 as at January 1, 2018 retrospectively in accordance
with IAS 8, taking into account certain practical expedients
provided by IFRS 15. The revenues of the Company within the
scope of IFRS 15 ‘are not significant and as such, the adoption
of this standard resulted in changes in accounting policies but
no adjustment to the amounts recognized in the consolidated
financial statements.
The standard deals with revenue recognition and establishes
principles for reporting useful information to users of financial
statements about the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity’s contracts with
customers. Revenue is recognized when a customer obtains
control of a good or service and thus has the ability to direct the
use and obtain the benefits from the good or service.
Basis of measurement
The consolidated financial statements have been prepared under
the historical cost convention, except for financial assets and
financial liabilities at fair value through profit or loss, including
derivative instruments, which have been measured at fair value,
and investment properties, which are measured at fair value.
Consolidation
Business Combinations
The acquisition method of accounting is used to account for
all business combinations. The consideration transferred for
the acquisition of a subsidiary comprises the fair values of the
assets transferred. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are, with
limited exceptions, measured initially at their fair values at the
acquisition date. The company recognizes any non-controlling
interest in the acquired entity on an acquisition-by-acquisition
basis either at fair value or at the non-controlling interest’s
proportionate share of the acquired entity’s net identifiable assets.
Acquisition-related costs are expensed as incurred. The excess
of the consideration transferred, amount of any non-controlling
interest in the acquired entity, and acquisition-date fair value
of any previous equity interest in the acquired entity over the
fair value of the net identifiable assets acquired is recorded as
goodwill. If those amounts are less than the fair value of the
net identifiable assets of the business acquired, the difference is
recognized directly in profit or loss as a bargain purchase. If the
business combination is achieved in stages, the acquisition date
carrying value of the acquirer’s previously held equity interest
in the acquiree is remeasured to fair value at the acquisition
date. Any gains or losses arising from such remeasurement are
recognized in profit or loss.
Subsidiaries
Subsidiaries are all entities (including structured entities) over
which the Company has control. The Company controls an
entity when it is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Subsidiaries are
consolidated from the date on which control is transferred to the
Company. They are deconsolidated from the date that control
ceases.
The financial statements of the Company consolidate the accounts
of the Company, its subsidiaries and its structured entities. All
intercompany transactions, balances and unrealized gains
and losses from intercompany transactions are eliminated on
consolidation. Where applicable, amounts reported by subsidiaries,
associates and structured entities have been adjusted to conform
with the Company’s accounting policies.
Investments in associates
Associates are entities over which the Company has significant
influence but not control, generally accompanying a holding of
between 20% to 50% of the voting rights. The financial results
of the Company’s investments in its associates are included in
the Company’s consolidated financial statements according to the
equity method.
Subsequent to the acquisition date, the Company’s share of profits
or losses of associates is recognized in the consolidated statement
of income (loss). The cumulative post-acquisition movements are
adjusted against the carrying amount of the investment. When
the Company’s share of losses in an associate equals or exceeds
its interest in the associate, including any other unsecured
receivables, the Company does not recognize further losses,
unless it has incurred obligations or made payments on behalf
of the associate.
Dilution gains and losses arising from changes in interests in
investments in associates are recognized in the consolidated
statement of income (loss).
The Company assesses at each year-end whether there is any
objective evidence that its interests in associates are impaired.
If impaired, the carrying value of the Company’s share of the
underlying assets of associates is written down to its estimated
recoverable amount (being the higher of fair value less cost to
sell and value in use) and charged to the consolidated statement
of income (loss). In accordance with IAS 36, ‘Impairment of
Assets’, impairment losses are reversed in subsequent years if the
recoverable amount of the investment subsequently increases and
the increase can be related objectively to an event occurring after
the impairment was recognized.
Liability for redeemable units
Liability for redeemable units represents the units in Senvest
Master Fund, L.P., Senvest Technology Partners Master Fund, L.P.
(formerly Senvest Israel Partners Master Fund, L.P.) and Senvest
Cyprus Recovery Investment Partners, L.P. Fund (collectively
the Funds or individually a Fund) that are not owned by the
Company. Senvest Master Fund, L.P. and Senvest Technology
Partners Master Fund, L.P. units may be redeemed as of the end of
any calendar quarter; however, redemptions made within the first
24 months will be subject to a redemption fee of 3% to 5% which
is payable to Senvest Master Fund, L.P. and Senvest Technology
Partners Master Fund, L.P. In addition, there are notice periods
of 60 days that must be given prior to any redemption. Senvest
20
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Cyprus Recovery Investment Partners, L.P. Fund has units that
cannot be redeemed until December 31, 2019. These units are
recognized initially at fair value, net of any transaction costs
incurred, and subsequently units are measured at the redemption
amount.
Redeemable units are issued and redeemed at the holder’s option
at prices based on each Fund’s net asset value per unit at the time
of subscription or redemption. Each Fund’s net asset value per
unit is calculated by dividing the net assets attributable to the
holders of each class of redeemable units by the total number
of outstanding redeemable units for each respective class. In
accordance with the provisions of the Funds’ offering documents,
investment positions are valued at the close price for the purpose
of determining the net asset value per unit for subscriptions and
redemptions.
Non-controlling interests
Non-controlling interests represent equity interests in the
consolidated structured entity owned by outside parties. The
share of net assets of the structured entity attributable to non-
controlling interests is presented as a component of equity. Their
share of net income (loss) and comprehensive income (loss) is
recognized directly in equity. Changes in the parent company’s
ownership interest in the structured entity that do not result in a
loss of control are accounted for as equity transactions.
Foreign currency translation
Functional currency
Items included in the financial statements of each of the
Company’s entities are measured using the currency of the
primary economic environment in which the entity operates
(the functional currency). The functional currency of the parent
company is the US dollar.
Transactions and balances
Foreign currency transactions are translated into the relevant
functional currency using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of foreign currency transactions
and from the translation at year-end exchange rates of monetary
assets and liabilities denominated in currencies other than an
entity’s functional currency are recognized in the consolidated
statement of income (loss).
All foreign exchange gains and losses are presented in the
consolidated statement of income (loss) in foreign exchange
gain (loss).
Consolidation and foreign operations
The financial statements of an entity that has a functional
currency different from that of the parent company are translated
into US dollars as follows: assets and liabilities – at the closing
rate at the date of the consolidated statement of financial position;
and income and expenses – at the average rate for the period (as
this is considered a reasonable approximation of actual rates). All
resulting changes are recognized in other comprehensive loss as
currency translation differences.
When an entity disposes of its interest in a foreign operation, or
loses control or significant influence over a foreign operation,
the foreign exchange gains or losses accumulated in other
comprehensive loss related to the foreign operation are recognized
in net income (loss). If an entity disposes of part of an interest in
a foreign operation which remains a subsidiary, a proportionate
amount of foreign exchange gains or losses accumulated in other
comprehensive loss related to the subsidiary are reallocated
between controlling and non-controlling interests.
Presentation currency
The Company has adopted the Canadian dollar as its presentation
currency, which in the opinion of management is the most
appropriate presentation currency. Historically, the Company’s
consolidated financial statements have been presented in
Canadian dollars, and since the Company’s shares are listed on a
Canadian stock exchange, management believes it would better
serve the use of shareholders to continue issuing consolidated
financial statements
in Canadian dollars. The US dollar
consolidated financial statements described above are translated
into the presentation currency as follows: assets and liabilities –
at the closing rate at the date of the consolidated statement of
financial position; and income and expenses – at the average
rate for the period. All resulting changes are recognized in other
comprehensive loss as currency translation differences. Equity
items are translated using the historical rate.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits held
with banks and other short-term highly liquid investments with
original maturities of three months or less.
Financial assets and liabilities
Classification and measurement
IFRS 9 requires a principles-based approach to the classification
of financial assets based on an entity’s business models and the
financial asset’s contractual cash flow characteristics. Business
models are determined on initial application of IFRS 9 and
reassessed periodically and contractual cash flows characteristics
are assessed to determine whether they are “Solely payments of
principal and interest” (SPPI).
Financial assets, including hybrid contracts, are be classified as
either amortized cost, fair value through other comprehensive
income (FVOCI), or the residual classification of fair value through
profit and loss (FVTPL).
Financial assets with cash flow that are SPPI and are held within
a business model where the objective is to hold the financial
assets in order to collect contractual cash flows (“Hold to collect”
business model) are measured at amortized cost.
Financial assets with cash flow that are SPPI and are held within
a business model where the dual objective is to hold the financial
assets in order to collect contractual cash flows and selling
21
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) financial assets (“Hold to collect and sell” business model) are
measured at FVOCI.
Financial assets with cash flow that are SPPI but are not held
within the “Hold to collect” or “Hold to collect and sell” business
models are measured at FVTPL.
Financial assets that do not meet the SPPI conditions
are measured at FVTPL.
Equity investments held for trading are classified as FVTPL.
For all other equity investments that are not held for trading,
the Company, on initial recognition, may irrevocably elect to
present subsequent changes in the investment’s fair value in
other comprehensive income (loss). This election is made on an
investment-by-investment basis.
Financial liabilities are measured at amortized cost unless they
must be measured at fair value through profit or loss (such has
instruments held for trading or derivatives) or if the Company
elects to measure them at fair value through profit or loss.
The Company assess its business models individually at the level
of the subsidiaries and the associated companies. Information
that is considered in determining the business models includes
policies and objectives for the financial instrument held in each
entity, how risk and performance is measured at the entity level
and reported to management and expected future events for the
financial instrument with respect to valuation, holding period and
selling. All of the group entities’ financial assets are managed on
a fair value basis with the exception of bank balances and short-
term trade receivables. The Company does not hold any long-term
financial assets with the intent of solely collecting payments of
principal and interest or collecting such payments and selling
the assets.
i) Financial assets and financial liabilities held for trading
A financial asset or financial liability is classified as held for
trading if it is acquired or incurred principally for the purpose
of selling or repurchasing in the near term or if on initial
recognition it is part of a portfolio of identifiable financial
investments that are managed together and for which there
is evidence of a recent actual pattern of short-term profit
taking. Derivatives are also categorized as held for trading.
The Company does not classify any derivatives as hedges in a
hedging relationship.
The Company makes short sales in which a borrowed security
is sold in anticipation of a decline in the market value of
that security, or it may use short sales for various arbitrage
transactions.
From time to time, the Company enters into derivative financial
instruments for speculative purposes. These instruments are
marked to market, and the corresponding gains and losses
for the year are recognized in the consolidated statement of
income (loss). The carrying value of these instruments is fair
value, which approximates the amount that would be received
or paid if the derivative were to be transferred to a market
participant at the consolidated statement of financial position
date. The fair value is included in equity investments and
other holdings if in an asset position or equities sold short and
derivative liabilities if in a liability position.
ii) Financial assets managed as fair value through profit or loss
Financial assets managed as fair value through profit or loss
are financial instruments that are not classified as held for
trading but form part of a portfolio that is managed and whose
performance is evaluated on a fair value basis in accordance
with the Company’s documented investment strategy.
The Company’s policy requires management to evaluate
the information about these financial assets and financial
liabilities on a fair value basis together with other related
financial information.
Recognition, derecognition and measurement
Regular way purchases and sales of investments are recognized
on the trade date – the date on which the Company commits to
purchase or sell the investment. Financial assets and financial
liabilities at fair value through profit or loss are initially recognized
at fair value. Transaction costs are expensed as incurred in the
consolidated statement of income (loss).
Subsequent to initial recognition, all financial assets at fair
value through profit or loss are measured at fair value. Gains
and losses arising from changes in the fair value of financial
assets or financial liabilities at fair value through profit or loss
are presented in the consolidated statement of income (loss) in net
change in fair value of equity investments and other holdings or
net change in fair value of real estate investments in the period
in which they arise.
Dividend income from financial assets at fair value through profit
or loss is recognized in the consolidated statement of income
(loss) as dividend income when the company’s right to receive
payment is established. Interest on debt securities at fair value
through profit or loss is recognized in the consolidated statement
of income (loss) in interest income based on the contractual rate
on an accrual basis. Dividend expense from equities sold short
is recognized in the consolidated statement of income (loss) as
dividend expense on equities sold short.
Financial assets and financial liabilities are recognized when the
company becomes a party to the contractual provisions of the
instrument. Financial assets are derecognized when the rights to
receive cash flows from the assets have expired or have been
transferred and the company has transferred substantially all
risks and rewards of ownership.
Financial assets and financial liabilities are offset and the net
amount reported in the consolidated statement of financial
position when there is a legally enforceable and unconditional
right to offset the recognized amounts and when there is an
intention to settle on a net basis or realize the asset and settle the
liability simultaneously.
22
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Financial assets at amortized cost
Classification
Financial assets at amortized cost are non-derivative financial
assets with cash flows that are “solely from the payment of
principal and interest” (SPPI) and that are managed under a “held
to collect” business model.
The company’s financial assets at amortized cost consist of cash
and cash equivalents, restricted short-term investment and due
from brokers, as well as loans to employees, which are included
in other assets.
Recognition and measurement
At initial recognition, the Company measures its financial assets
at its fair value plus transactions costs incurred. The amortized
cost is the amount at which the financial asset is measured at
initial recognition minus the principal repayments, plus or minus
the cumulative amortisation using the effective interest method
of any difference between that initial amount and the maturity
amount and adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts
the estimated future cash receipt through the expected life of
the financial asset to the gross carrying amount of a financial
asset. The calculation does not consider expected credit losses
and includes transaction costs premiums or discounts and fees
paid that are integral to the effective interest rate, such as
origination fees.
When the Company revises the estimate of future cash flows, the
carrying amount of the respective financial asset is adjusted to
reflect the new estimate discounted using the original effective
interest rate. Any changes are recognised in profit or loss.
Interest income is calculated by applying the effective interest
rate to the gross carrying amount of financial assets.
Financial liabilities at amortized cost
Classification
The Company’s financial liabilities at amortized cost are non-
derivative liabilities that comprise bank advances, trade and other
payables, due to brokers, redemptions payable, subscriptions
received in advance and liability for redeemable units.
Recognition and measurement
Trade and other payables are initially recognized at fair value
Subsequently, trade and other payables are measured at amortized
cost using the effective interest method. Bank advances, due
to brokers, redemptions payable and subscriptions received
in advance are recognized initially at fair value, net of any
transaction costs incurred, and subsequently at amortized cost
using the effective interest method.
The effective interest rate is the rate that exactly discounts the
estimated future cash payments through the expected life of the
financial liability to the amortized cost of a financial liability.
The calculation includes transaction costs that are integral to the
effective interest rate.
When the Company revises the estimate of future cash flows, the
carrying amount of the respective financial liability is adjusted to
reflect the new estimate discounted using the original effective
interest rate. Any changes are recognised in profit or loss.
Impairment
IFRS 9 introduces a new impairment model that requires the
recognition of expected credit losses on all financial assets at
amortized cost or at fair value through other comprehensive
income (loss) (other than equity instruments) as well as any loan
commitments and guarantees. The expected credit loss must also
consider forward looking information to recognize impairment
allowances earlier in the lifecycle of a financial asset.
IFRS 9 introduces a three-stage approach to impairment as
follows:
Stage 1 The recognition of 12 month expected credit losses
(ECL), that is the portion of lifetime expected credit
losses from default events that are expected within 12
months of the reporting date, if credit risk has not
Stage 2 Lifetime expected credit losses for financial instruments
for which credit risk has increased significantly since
initial recognition; and
Stage 3 Lifetime expected credit losses for financial instruments
which are credit impaired
Substantially all of the Company’s financial assets at amortized
cost are short-term assets and from sources with low credit
risk. The Company will continue to monitor its financial assets
measured at amortized cost and counterparty risk.
Hedging
IFRS 9 introduces a new hedge accounting model that aligns the
accounting for hedge relationships more closely with an entity’s
risk management activities, permits hedge accounting to be
applied more broadly to a greater variety of hedging instruments
and risks.
The Company did not enter any hedge arrangements and as such
does not apply the hedging requirements from IFRS 9.
Due from and to brokers
Amounts due from and to brokers represent positive and negative
cash balances or margin accounts, and pending trades on the
purchase or sale of securities.
Where terms in the prime brokerage agreements permit the prime
broker to settle margin balances with cash accounts or collateral,
the due from brokers cash balances are offset against the due to
brokers margin balances at each prime broker.
Investment properties
Investment properties are properties held to earn rental income
and/or for capital appreciation and are not occupied by the
Company. Investment properties are measured initially at cost,
including transaction costs. Subsequent to initial recognition,
investment properties are measured at fair value. Changes in fair
values are recognized in the consolidated statement of income
23
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) (loss) as part of net change in fair value of investment properties
in the period in which they arise.
Interest income and dividend income
Interest income
Provision
A provision is recognized if, as a result of a past event, the
Company has a present legal or constructive obligation that
can be estimated reliably and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Income tax
Income tax comprises current and deferred tax. Income tax is
recognized in the consolidated statement of income (loss) except
to the extent that it relates to items recognized directly in equity,
in which case the income tax is also recognized directly in equity.
Current income tax is calculated on the basis of the tax laws
enacted or substantively enacted at the consolidated statement
of financial position date in the countries where the Company
and its subsidiaries operate and generate taxable income (loss).
Management periodically evaluates positions taken in tax returns
with respect to situations in which applicable tax regulation
is subject to interpretation. It establishes provisions where
appropriate on the basis of amounts expected to be paid to the
tax authorities.
Deferred income tax is recognized, using the liability method,
on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
financial statements. However, deferred tax liabilities are not
recognized if they arise from the initial recognition of goodwill;
deferred income tax is not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a
business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss. Deferred income tax
is determined using tax rates (and laws) that have been enacted or
substantively enacted at the consolidated statement of financial
position date and will apply when it is expected that the related
deferred income tax asset will be realized or the deferred income
tax liability settled.
Deferred income tax assets are recognized only to the extent that
it is probable that future taxable profit will be available against
which the temporary differences can be used.
Deferred income tax is provided on temporary differences
arising on investments in subsidiaries and associates, except for
deferred income tax liability where the timing of the reversal of
the temporary difference is controlled by the Company and it is
probable that the temporary difference will not reverse in the
foreseeable future.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income tax assets
and liabilities relate to income taxes levied by the same taxation
authority on either the same taxable entity or different taxable
entities where there is an intention to settle the balances on a
net basis.
Interest income on debt financial assets measured at amortized
cost or fair value through other comprehensive income is
recognized using the effective interest method. It includes interest
income from cash and cash equivalents.
Dividend income
Dividend income is recognized when the Company’s right to
receive payments is established.
Transaction costs
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of an investment.
Transaction costs related to financial assets and financial
liabilities at fair value through profit or loss are expensed as
incurred. Transaction costs for all other financial instruments are
capitalized.
Employee benefits
Post-employment benefit obligations
Employees of companies included in these consolidated financial
statements have entitlements under Company pension plans
which are defined contribution pension plans. The cost of
defined contribution pension plans is charged to expense as
the contributions become payable and is included in the same
line item as the related compensation cost in the consolidated
statement of income (loss).
Share capital
Common shares are classified as equity. Incremental costs directly
attributable to the issue of new common shares or options are
recorded in equity as a deduction, net of tax, from the proceeds.
Dividend distribution
Dividends on the Company’s common shares are recognized in
the Company’s consolidated statement of changes in equity in
the year in which the dividends are declared and approved by the
Company’s Board.
Earnings per share
Basic earnings per share is calculated by dividing the net income
(loss) for the year attributable to equity owners of the parent by
the weighted average number of common shares outstanding
during the year.
Diluted earnings per share are calculated by adjusting the
weighted average number of common shares outstanding to
assume conversion of all potentially dilutive instruments. The
Company currently does not have any dilutive instruments.
24
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Accounting standards and amendments issued but not
yet adopted
The Company presents the developments that are relevant to
its activities and transactions. The following revised standards
and amendments are not mandatory for the December 31, 2018
reporting periods and the Company has not early adopted these
standards and amendments.
• IFRS 16, ‘Leases’, was published in January 2016 by the IASB.
This standard will replace the current guidance in IAS 17,
Leases, and three related interpretations, and require lessees to
recognize an asset and a lease liability reflecting a “right-of-use
asset” and future lease payments, respectively, for virtually all
lease contracts. The standard applies to the Company’s annual
periods beginning on January 1, 2019. As at December 31, 2018,
the operating leases disclosed in note 20 to the consolidated
financial statements are in scope with IFRS 16. The Company
will adopt IFRS 16 on a modified retrospective basis whereby
the adjustments will be recorded on January 1, 2019 without
adjustments to prior periods. The Company has assessed the
impact of this standard on its consolidated financial statements
the results of which would as of January 1, 2019 create a right-
of-use asset and a lease liability for approximately $6,000 to be
presented on the consolidated statement of financial position.
Starting from that date, lease expense will be substituted by
depreciation of the right-of-use asset and interest expense on
the lease liability and principal payments on the lease liability
will be presented as financing cash outflows.
• IFRS 10, ‘Consolidated Financial Statements’, and IAS 28,
‘Investments in Associates and Joint Ventures’, were amended
in 2014 to address an inconsistency between those standards
when accounting for the sale or a contribution of assets
between an investor and its associate or joint venture. The
main consequence of the amendments is that a full gain or
loss is recognized when the transaction involves a business
combination, whereas a partial gain is recognized when the
transaction involves assets that do not constitute a business.
The mandatory effective date of this amendment will be
determined by the IASB at a future date. Voluntary application
is permitted.
3 Critical accounting estimates and judgments
Critical accounting estimates
The Company makes estimates and assumptions concerning
the future that will, by definition, seldom equal actual results.
The following are the estimates applied by management that
most significantly affect the Company’s consolidated financial
statements. These estimates have a significant risk of causing
a significant adjustment to the carrying amounts of assets and
liabilities within the next fiscal year.
Fair value of financial instruments
The fair value of financial instruments where no active market
exists or where listed prices are not otherwise available are
determined by using valuation techniques. In these cases, the
fair values are estimated from observable data in respect of
similar financial instruments or by using models. Where market
observable inputs are not available, they are estimated based
on appropriate assumptions. To the extent practical, models
use only observable data; however, areas such as credit risk
(both the Company’s own credit risk and counterparty credit
risk), volatilities and correlations require management to make
estimates.
Changes in assumptions about these factors could affect the
reported fair value of financial instruments.
Refer to note 16 for risk sensitivity information for the Company’s
financial instruments.
Fair value of investment properties
The Company has adopted the fair value model in measuring its
investment properties. The fair value of the investment properties
is performed by external independent knowledgeable valuators
located in the area of the properties. Inputs used in the property
valuation models are based on appropriate assumptions that
reflect the type of property and location. Management reviews
the assumptions made and models used to ensure they correlate
with their expectation and understanding of the market.
Changes in assumptions about these factors could affect the
reported fair value of investment properties.
Refer to note 9 for risk sensitivity information for the Company’s
investment properties.
Income taxes
The Company is subject to income taxes in numerous jurisdictions.
Significant judgment is required in determining the consolidated
provision for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain.
The Company recognizes liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due.
Where the final tax outcome of these matters is different from the
amounts that were initially recorded, such differences will impact
the current and deferred income tax assets and liabilities in the
year in which such determination is made.
Critical accounting judgments
Consolidation of entities in which the Company holds less
than 50% of the voting rights
Management considers the Company to have de facto control of
Senvest Management L.L.C. (RIMA), RIMA Senvest Master Fund
GP, L.L.C., and Senvest Technology Partners GP, L.L.C. three legal
entities wholly owned by an executive of the Company, because
of the Company’s Board representation and the contractual terms
of the investment advisory agreement. RIMA is the investment
adviser to the Funds, whereas RIMA Senvest Master Fund GP,
L.L.C. is the General Partner. As compensation for its sub-
advisory services, the Company is entitled to receive 60% of the
management and incentive fees earned by RIMA each fiscal year.
Management considers the Company to have control of Senvest
Master Fund, L.P., Senvest Technology Partners, Master Fund L.P.
(formerly Senvest Israel Master Fund L.P.) and Senvest Cyprus
Recovery Investment Fund, L.P. even though the Company has less
than 50% of the voting rights in each of the Funds. The Company
25
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) assessed that the removal rights of non-affiliated unitholders are
exercisable but not strong enough given the Company’s decision-
making authority over relevant activities, the remuneration to
which it is entitled and its exposure to returns. The Company,
through its structured entities, is the majority unitholder of each
of the Funds and acts as a principal while there are no other
unitholders forming a group to exercise their votes collectively.
4 Cash and cash equivalents
Cash on hand and on deposit
Short-term investments
2018
$
117,587
2,968
120,555
2017
$
44,302
8,820
53,122
5 Credit facilities and due from and
due to brokers
a) Credit facilities
Bank advances
In 2014, the Company renegotiated its credit facility with a
bank and has available a demand revolving loan (credit facility)
and a guarantee facility. The credit facility is in the amount of
$3,000 and is payable on demand. As at December 31, 2018,
$5,602 was outstanding (2017 – $2,276). The excess of
overdraft amount of $2,602 was repaid on January 2, 2019.
Under the credit facility, the Company may, upon delivery of
a required notice, opt to pay interest at the bank’s prime rate
plus 0.25%, the bank’s US base rate plus 0.25% or LIBOR plus
1.75% per annum. All of the credit facility available is also
available by way of banker’s acceptances plus a stamping fee
of 1.75% per annum, or by US dollar advances.
Guarantee facility
The Company also has available a EUR 450 thousand
guarantee facility (2017 – EUR 450 thousand) to issue standby
letters of credit. A fee of 1.00% per annum on the face amount
of each standby letter of credit applies. All amounts paid by
the bank under the guarantee facility are payable on demand.
As at December 31, 2018, no standby letters of credit were
outstanding; however, the Company has provided a $462
(2017 – $460) term deposit to guarantee future letters of
credit. This term deposit has been disclosed in restricted short-
term investments on the consolidated statement of financial
position.
In addition, a first-ranking movable hypothec in the amount
of $30,000 on all of the Company’s assets has been granted as
collateral for both the credit and guarantee facilities. According
to the terms of the facilities, the Company is required to
comply with certain financial covenants. As at December 31,
2018 and 2017, the Company had met the requirements of all
the covenants.
b) Due from and due to brokers
The Company has margin facilities with its prime brokers. As
at December 31, 2018 and 2017, the Company’s amounts due
to brokers have no specific repayment terms, and they are
governed by the margin terms set forth in the prime brokerage
agreements. As at December 31, 2018, listed equity securities
and due from brokers amounting to $2,290,774 have been
pledged as collateral (2017 – $2,615,157). The fair value of
the collateral-listed equity securities is calculated daily and
compared to the Company’s margin limits. The prime brokers
can at any time demand full or partial repayment of the margin
balances and any interest thereon or demand the delivery of
additional assets as collateral.
Due from and due to brokers balances are presented on a net
basis by broker in the consolidated statement of financial
position. Under the prime broker agreements, the broker may
upon events of default offset, net and/or regroup any amounts
owed by the Company to the broker by amounts owed to
the Company by the broker. The following tables set out the
offsetting of the Company’s various accounts with prime
brokers.
Gross amounts
due from brokers
$
602,012
19,054
Gross amounts
due from brokers
$
440,284
1,279
Gross amounts
due to brokers
$
244,258
25,534
Gross amounts
due to brokers
$
140,288
18,063
2018
Net
amount
$
357,754
(6,480
)
2017
Net
amount
$
299,996
(16,784
)
Due from brokers
Due to brokers
Due from brokers
Due to brokers
26
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 6
Equity investments and other holdings, securities sold short and derivative liabilities
Equity investments and other holdings
Assets
Financial assets at fair value through profit or loss
Held for trading
Equity securities
Debt securities
Derivative financial assets
Financial assets at fair value through profit or loss
Other
Equity securities
Unlisted equity securities
Debt securities
Private investments
Current portion
Non-current portion
Securities sold short and derivative liabilities
Liabilities
Financial liabilities
Held for trading
Securities sold short
Note
2018
$
2017
$
6(a)
6(b)
1,930,810
92,931
29,588
2,313,472
62,598
85,728
2,053,329
2,461,798
2,329
8,110
6,948
84,482
2,143
8,811
-
60,422
2,155,198
2,533,174
2,053,329
101,869
2,461,798
71,376
Note
2018
$
2017
$
Listed equity securities (proceeds of $768,378; 2017 – $803,845)
Debt securities (proceeds of $71,025; 2017 – $15,644)
Derivative financial liabilities (proceeds of $390; 2017 – $130)
6(a)
637,121
69,275
42,568
748,964
892,203
15,696
9,612
917,511
27
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) a) From time to time, the Company enters into derivative financial instruments consisting primarily of warrants and options to
purchase or sell equity indices and currencies, equity swaps, foreign currency forward contracts and foreign currency futures
contracts. The following tables list the notional amounts, fair values of derivative financial assets and financial liabilities and
net change in fair value by contract type, including swaps, options, warrants, rights, foreign currency futures contracts, foreign
currency forward contracts and swaps and options sold short included in equity investments and other holdings or securities sold
short and derivative liabilities:
Fair value
of derivative
financial
assets
$
16,775
75
12,738
-
-
-
Notional
value
$
148,986
4,229
39,382
-
193,000
-
As at
December 31,
2018
Fair value
of derivative
financial
liabilities
$
37,843
504
-
-
4,221
-
Notional
value
$
66,955
9,660
-
-
-
-
385,597
29,588
76,615
42,568
Fair value
of derivative
financial
assets
$
Notional
value
$
245,124
78,844
1,380
3,476
65,234
186,000
-
781
705
31
5,367
Notional
value
$
81,184
2,202
-
-
-
-
200,720
501,214
85,728
284,106
As at
December 31,
2017
Fair value
of derivative
financial
liabilities
$
7,304
148
-
-
-
2,160
9,612
For the
year ended
December 31,
2018
Net change
in fair value
$
(39,840
)
6,829
731
(32
)
(14,418
)
(3,715
)
(50,445
)
For the
year ended
December 31,
2017
Net change
in fair value
$
46,859
511
656
(283
)
14,786
(2,316
)
60,213
Equity swaps
Equity options
Warrants and rights
Foreign currency options
Foreign currency futures contracts
Foreign currency forward contracts
Equity swaps
Equity options
Warrants and rights
Foreign currency options
Foreign currency futures contracts
Foreign currency forward contracts
b) These holdings are in private entities whose shares/units do not trade in an active market. There is no established market for these
securities. The most likely scenario of a disposal of these holdings is an eventual sale of the underlying entities.
28
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 7
Investments in associates
The following have been included in the consolidated financial statements using the equity method.
Grant and Geary Partners LP(i)
Other immaterial associates
The Company’s share of:
Net income and comprehensive income
Grant and Geary Partners LP(i)
Other immaterial associates
2018
$
19,128
1,351
20,479
6,271
1,054
7,325
2017
$
11,965
716
12,681
1,545
637
2,182
i) Grant & Geary Partners LP is a limited partnership in which the company has an approximate 28.5% economic interest in the
underlying property, which is commercial real estate property held in the United States. The Company’s share of Grant & Geary
Partners LP’s assets and liabilities are approximately 28.5% of assets totalling $87,284 (2017 – 62,433) and liabilities totalling
$20,139 (2017 –20,450)
Commitments, contingent liabilities and borrowing arrangements of associates
There are no commitments, contingent liabilities or borrowing arrangements relating to the Company’s interests in these associates.
8
Real estate investments
Real estate investments comprise the following:
Financial assets at fair value through profit or loss
Investments in private entities
Investments in real estate income trusts and partnerships
Non-current portion
Note
8(a)
8(b)
2018
$
19,467
21,694
41,161
41,161
2017
$
17,630
13,159
30,789
30,789
a) These investments are minority interests in private entities whose main assets are real estate properties. There is no established
market for these investments. The most likely scenario for a disposal of these investments is an eventual sale of the underlying real
estate properties.
b) These real estate investments are in US real estate income trusts (commonly referred to as REITs) and partnerships. A REIT is an
entity that owns and operates income-producing real estate and annually distributes to its holders at least 90% of its taxable
income. The Company’s investments are non-publicly-traded REITs. There is no established market for these REITs and partnerships.
The most likely scenario for a disposal of these holdings is an eventual sale of the underlying real estate properties of the REITs and
partnerships and the distribution to their holders.
29
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 9
Investment properties
Opening balance as at January 1
Acquired through a business combination
Purchases
Capitalized subsequent expenditure
Net gain from fair value adjustment
Currency translation adjustments
Closing balance as at December 31
Non-current portion
a) Amounts recognized in profit or loss for investment properties
Rental income
Direct operating expenses from property that generated rental income
Direct operating expenses from property that does not generate rental income
Net change in fair value of investment properties
b) Contractual obligations
Note
2018
$
26,738
-
8,494
1,416
2,379
759
39,786
39,786
2018
$
3,599
2,939
1,163
2,379
2017
$
1,874
15,482
-
7,630
1,345
407
26,738
26,738
2017
$
2,770
2,168
937
1,345
Refer to note 20 for disclosure of contractual obligations to purchase, construct or develop investment property or for repairs,
maintenance and enhancements.
c) Leasing arrangements
The investment properties are leased to tenants under short-term month-to-month operating leases with rentals payable monthly.
d) Fair value measurements
Investment properties are measured at fair value in these consolidated financial statements. Assumptions and estimates are made
in determining the fair values of the investment properties. Based on the source of the inputs used in determining the fair value,
the Company has classified its investment properties in Level 3 of the fair value hierarchy (a description of the levels is provided
in note 16). There was no transfers between levels for recurring fair value measurements of investment properties during the years
ended December 31, 2018 and 2017.
i) Valuation techniques used to determine Level 3 fair values
The Company obtains independent valuations for its investment properties annually. At the end of each reporting period, the
managers update their assessment of the fair value of each property, taking into account the most recent independent valuations.
The managers determine a property’s value within a range of reasonable fair value estimates.
The best evidence of fair value is current prices in an active markets for similar properties. Where such information is not
available the independent valuators consider information from a variety of sources including:
• current prices in active markets for similar properties in similar markets and in less active market, adjusted to reflect those
differences;
• discounted cash flow projections based on reliable estimates of future cash flows; and
• capitalized income projections based upon a property’s estimated net market income, and a capitalization rate derived from
an analysis of market evidence.
30
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
ii) Fair value measurements using significant unobservable inputs (Level 3)
The following table summarizes the quantitative information about the significant unobservable inputs used in recurring Level 3
fair value measurement. See (i) above for the valuation technique adopted.
Description
Leased buildings and
land – Storage
facilities
Fair value
2018
$
39,786
Valuation
technique
Comparable
sales approach
Significant
unobservable
inputs
Weighted
average input
Reasonably
possible shifts
+/−
Change in
value
$
Value/m2
1,144
10%
+/-4,000
Description
Leased buildings –
Storage facilities
Fair value
2017
$
26,738
Valuation
technique
Comparable
sales approach
Significant
unobservable
inputs
Weighted
average input
$
Reasonably
possible shifts
+/−
Change in
value
$
Value/m2
1,100
10%
+/-2,700
31
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 10
Financial instruments by category and related income, expenses and gains and losses
Assets (liabilities) at fair
value through profit or loss
Assets (liabilities) as per consolidated
statement of financial position
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Held for
trading
$
-
-
-
Equity investments and other holdings
2,053,329
Real estate investments
Other assets*
Bank advances
Trade and other payables
Due to brokers
-
-
-
-
-
Securities sold short and derivative liabilities
(748,964
)
Redemptions payable
Subscriptions received in advance
Liability for redeemable units
-
-
-
Other
$
-
-
-
101,869
41,161
-
-
-
-
-
-
-
Financial
Assets at
amortized cost
$
Financial
liabilities at
amortized cost
$
2018
Total
$
120,555
462
357,754
-
-
4,420
-
-
-
-
-
-
-
-
-
-
-
-
-
(5,602
)
(13,026
)
(6,480
)
120,555
462
357,754
2,155,198
41,161
4,420
(5,602
)
(13,026
)
(6,480
)
-
(748,964
)
(5,755
)
(101,838
)
(879,184
)
(5,755
)
(101,838
)
(879,184
)
1,304,365
143,030
483,191
(1,011,885
)
918,701
Amounts recognized in consolidated
statement of income
Net change in fair value
Interest income (expense)
Net dividend income
(368,990
)
15,477
4,195
(350
)
68
374
(349,318
)
92
-
453
-
453
-
(369,340
)
(36,020
)
(20,022
)
-
4,569
(36,020
)
(384,793
)
* Includes other financial receivables but excludes capital assets and other non-financial assets.
32
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Assets (liabilities) at fair
value through profit or loss
Assets (liabilities) as per consolidated
statement of financial position
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Held for
trading
$
-
-
-
Equity investments and other holdings
2,461,798
Real estate investments
Other assets*
Bank advances
Trade and other payables
Due to brokers
-
-
-
-
-
Securities sold short and derivative liabilities
(917,511
)
Redemptions payable
Subscriptions received in advance
Liability for redeemable units
-
-
Financial
Assets at
amortized cost
$
Financial
liabilities at
amortized cost
$
53,122
460
299,996
-
-
1,767
-
-
-
-
-
-
-
-
-
-
-
-
(2,276
)
(29,130
)
(16,784
)
-
(10,265
)
(16,992
)
Other
$
-
-
-
71,376
30,789
-
-
-
-
-
-
-
2017
Total
$
53,122
460
299,996
2,533,174
30,789
1,767
(2,276
)
(29,130
)
(16,784
)
(917,511
)
(10,265
)
(16,992
)
(876,198
)
(876,198
)
Amounts recognized in consolidated
statement of income
Net change in fair value
Interest income (expense)
Net dividend income
1,544,287
102,165
355,345
(951,645
)
1,050,152
455,939
6,650
4,902
33,768
30
1,038
467,491
34,836
-
324
-
324
-
(40,917
)
-
489,707
(33,913
)
5,940
(40,917
)
461,734
* Includes loans to employees but excludes capital assets and other non-financial assets.
33
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 11
Trade and other payables
Trade payables
Employee benefits accrued
Mortgages
Interest payable
Other
2018
$
684
4,283
3,524
2,044
2,491
13,026
2017
$
1,008
13,946
4,448
4,482
5,246
29,130
Mortgages of $3,524 (2017 – $4,448) are on investment properties acquired through a business combination. The terms of the
mortgages range from four to seven years and bear interest rates of 0.8% to 1.0%. Investment properties of $25,735 (2017 – $15,413)
are pledged as collateral against the mortgages.
12
Income taxes
a) Income tax expense
Current tax
Current tax on income for the year
Adjustments in respect of prior years
Deferred tax
Origination and reversal of temporary differences
Changes in deferred tax rates
2018
$
8,791
(2,510
)
6,281
(20,426
)
-
(20,426
)
(14,145
)
2017
$
24,296
45
24,341
1,660
(2,717
)
(1,057
)
23,284
34
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The tax on the Company’s income before income tax differs from the theoretical amount that would arise using the federal and
provincial statutory tax rate applicable to income of the consolidated entities. The statutory tax rate for 2018 decreased from
26.8% to 26.7% (2017 – from 26.9% to 26.8%). This decrease is in line with Quebec’s tax rate reduction from 11.8% to 11.7%. The
difference between the Company’s income tax and theoretical tax is as follows:
Income (loss) before income tax
Income tax expense (recovery) based on statutory rate of 26.7% (2017 – 26.8%)
Prior year adjustments
Difference in tax rate
Change in deferred tax rates
Portion of income (loss) recoverable in hands of non-controlling interests
Non-taxable dividend
Non-taxable portion of capital gains
Non-deductible expenses
Foreign exchange
Unrecognized deferred income tax assets
Other
Income tax expense (recovery)
b) The analysis of deferred income tax assets and liabilities is as follows:
Deferred income tax assets
Deferred tax assets to be recovered
After more than 12 months
Within 12 months
Deferred income tax assets
Deferred income tax liabilities
Deferred tax liabilities to be settled
After more than 12 months
Within 12 months
Deferred income tax liabilities
2018
$
(178,542
)
(47,671
)
(516
)
3,863
-
5,933
(604
)
9,568
77
15,172
473
(440
)
(14,145
)
2017
$
221,089
59,251
(544
)
6,698
(2,717
)
(8,717
)
(956
)
(15,126
)
72
(14,555
)
191
(313
)
23,284
2018
$
2017
$
11
-
11
25,782
-
25,782
-
-
-
43,485
-
43,485
35
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances
within the same tax jurisdiction, is as follows.
Deffered income tax assets
As at December 31, 2016
Charged to consolidated statement of income
Foreign exchange differences
As at December 31, 2017
Charged to consolidated statement of income
Foreign exchange differences
As at December 31, 2018
Equity
investments
and other
holdings
$
Investments
in associates
$
Real estate
investments
$
1,399
(671
)
(69
)
659
1,407
132
2,198
-
-
-
-
6,495
344
6,839
230
(140
)
(11
)
79
706
44
829
Deffered income tax liabilities
As at December 31, 2016
Charged (credited) to consolidated
statement of income
Effect of tax rate changes
Foreign exchange differences
As at December 31, 2017
Charged (credited) to consolidated
statement of income
Foreign exchange differences
As at December 31, 2018
Equity
investments
and other
holdings
$
Investments
in associates
$
Real estate
investments
$
Investment
properties
$
2,903
36,999
1,701
2,145
(801
)
(236
)
4,011
(1,395
)
277
2,893
5,875
(1,876
)
(2,566
)
47
(40
)
(112
)
38,432
1,596
(10,224
)
2,818
31,026
(723
)
102
975
-
-
-
-
-
1,015
-
1,015
Tax loss
carry-
forward
$
1,049
(1,014
)
(35
)
-
1,015
-
1,015
Other
$
8,674
(8,198
)
-
(292
)
184
516
43
743
Total
$
2,678
(1,825
)
(115
)
738
9,623
520
10,881
Total
$
50,277
(131
)
(2,717
)
(3,206
)
44,223
(10,811
)
3,240
36,652
Deferred income tax assets for temporary differences totalling $9,584 (2017 – $8,518), non-expiring capital loss carry-forwards
totalling $9,837 (2017 – $9,628) and non-expiring operating loss carry-forwards of $6,012 (2017–$9,534) have not been recognized in
the consolidated financial statements. Deferred income tax assets of $1,015 not recognized at the time of a business combination have
been recognized in 2018 and recorded against deferred income tax liability of $1,015 resulting from unrealized gains on investment
properties.
Deferred income tax liabilities have not been recognized on unremitted earnings totalling $84,950 as at December 31, 2018 (2017
– $69,754) with respect to the investment in subsidiaries, branches and associates and interest in joint arrangements because the
Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.
36
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 13
Share capital
Authorized
Unlimited number of common shares, without par value
Movements in the Company’s share capital are as follows:
Balance – Beginning of year
Shares repurchased
Balance – End of year
Number of shares
2,739,724
(51,100
)
2,688,624
2018
Amount
$
22,751
(410
)
22,341
Number of shares
2,777,824
(38,100
)
2,739,724
2017
Amount
$
23,057
(306
)
22,751
In 2018, the Company began a normal course issuer bid to purchase a maximum of 70,000 of its own common shares before
August 13, 2019. In 2018, the Company purchased 51,100 common shares (2017 – 38,100) for a total cash consideration of $11,685
(2017 – $8,370. The excess of the consideration paid over the stated capital was charged to retained earnings in the consolidated
statement of changes in equity.
No dividends were declared in 2018 and 2017.
14
Earnings per share
a) Basic
Net income (loss) attributable to common shareholders
Weighted average number of outstanding common shares
Basic earnings (loss) per share
b) Diluted
For the years ended December 31, 2018 and 2017, there were no dilutive instruments.
2018
$(140,086
)
2,708,761
(51.72
)
2017
$165,967
2,764,851
60.03
37
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 15
Supplementary information to consolidated statements of cash flows
a) Adjustments for non-cash items are as follows:
Net change in fair value of equity investments and other holdings
Net change in fair value of real estate investments
Net change in fair value of investment properties
Share of profit (loss) of associates, adjusted for distributions received
Change in redemption amount of redeemable units
Deferred income tax
b) Changes in working capital items are as follows:
Decrease (increase) in
Due from brokers
Income taxes receivable
Other assets
Increase (decrease) in
Trade and other payables
Due to brokers
Income taxes payable
Note
12(a)
Note
2018
$
368,796
(2,088
)
(2,379
)
(7,325
)
(232,312
)
(20,426
)
104,266
2018
$
(29,942
)
2,716
(3,789
)
(16,737
)
(11,180
)
872
(58,060
)
2017
$
(485,893
)
(3,814
)
(1,345
)
(2,182
)
146,030
(1,057
)
(348,261
)
2017
$
(125,233
)
(14,256
)
72
12,300
(37,516
)
(1,211
)
(165,844
)
38
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 16
Financial risks and fair value
Financial risk factors
The Company’s activities expose it to a variety of financial risks: market risk (including fair value interest rate risk, cash flow interest
rate risk, currency risk and equity price risk), credit risk and liquidity risk.
The Company’s overall risk management program seeks to maximize the returns derived for the level of risk to which the Company is
exposed and seeks to minimize potential adverse effects on the Company’s financial performance. Managing these risks is carried out
by management under policies approved by the Board.
The Company uses different methods to measure and manage the various types of risk to which it is exposed; these methods are
explained below.
Market risk
Fair value and cash flow interest rate risks
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in
market interest rates.
The majority of the Company’s debt is based on floating rates, which exposes the Company to cash flow interest rate risk. The
Company does not have a long-term stream of cash flows that it can match against this type of fixed debt, so it prefers to use short-
term floating rate debt. The Company does not mitigate its exposure to interest rate fluctuation on floating rate debt. If interest rates
spike, then the Company could enter into interest rate swaps or more probably just reduce its debt level. As at December 31, 2018, the
Company has listed equity securities of $1,933,139 (2017 – $2,315,615). It can sell these securities to reduce its floating rate debt. As at
December 31, 2018, a 1% (2017 – 1%) increase or decrease in interest rates, with all other variables remaining constant, would impact
interest expense by approximately $121 over the next 12 months (2017 – $191).
The Company’s exposure to interest rate risk is summarized as follows:
Cash and cash equivalents
Restricted short-term investments
Debt securities
Loans to employees
Credit facilities
Bank advances
Guarantee facility
Trade and other payables
Due to brokers
Mortgages
2018
2017
Between nil and 2.5%
Between nil and 1.0%
Between 0.50% and 0.60%
Between 0.30% and 0.50%
Between 0.75% and 12.5%
Between 1.016% and 12.0%
Non-interest bearing
Non-interest bearing
Prime rate plus 0.25%
Prime rate plus 0.25%
1.0%
1.0%
Non-interest bearing
Non-interest bearing
0.00% to 2.15%
0.8% to 1.0%
0.00% to 1.17%
0.80% to 1.0%
The Company holds held for trading financial assets in debt securities $92,931 (2017 – $62,598) and held for trading financial liabilities
in debt securities of $69,275 (2017 – 15,696).
Debt securities are usually highly sensitive to interest rate changes. Theoretically, when interest rates rise, it causes the value of debt
securities to decline. The opposite generally happens when interest rates fall, then debt securities usually rise in value. A change of
100 basis points in the yield to maturity will affect the fair value of the debt securities held for trading as follows.
39
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Estimated effect on the fair value of debt securities due to:
An increase of 100 basis points in the yield to maturity
A decrease of 100 basis points in the yield to maturity
An increase of 100 basis points in the yield to maturity
A decrease of 100 basis points in the yield to maturity
Currency risk
2018
Financial assets
Held for trading
Debt securities
$
Financial liabilities
Held for trading
Debt securities
$
(2,681
)
2,848
5,830
(6,469
)
2017
Financial assets
Held for trading
Debt securities
$
Financial liabilities
Held for trading
Debt securities
$
(1,846
)
1,944
931
(914
)
Currency risk is the risk that the value of monetary financial assets and financial liabilities denominated in foreign currencies will
vary as a result of changes in underlying foreign exchange rates. The Company is exposed to currency risk due to potential variations
in currencies other than the US dollar. The following tables summarize the Company’s main monetary financial assets and financial
liabilities whose fair value is predominantly determined in currencies other than the US dollar, the Company’s functional currency, and
the effect on pre-tax net income of a 10% change in currency exchange rates:
Financial
assets
$
1,334
1,712
18,245
-
321
21,612
Financial
assets
$
816
-
1,356
-
-
2,172
Financial
liabilities
$
(185,650
)
-
(5,037
)
(6,998
)
(6,681
)
Net
exposure
$
(184,316
)
1,712
13,208
(6,998
)
(6,360
)
(204,366
)
(182,754
)
Financial
liabilities
$
(134,497
)
(816
)
(6,959
)
(2,456
)
(11,091
)
Net
exposure
$
(133,681
)
(816
)
(5,603
)
(2,456
)
(11,091
)
(155,819
)
(153,647
)
2018
Net effect of a
10% increase
or decrease
$
(18,432
)
171
1,321
(700
)
(636
)
(18,276
)
2017
Net effect of a
10% increase
or decrease
$
(13,368
)
(82
)
(560
)
(246
)
(1,109
)
(15,365
)
Canadian dollar
British pound sterling
Euro
Swedish Krone
Israeli shekel
Canadian dollar
British pound sterling
Euro
Swedish Krone
Israeli shekel
40
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Equity price risk
Equity price risk is the risk that the fair value of equity investments and other holdings and equities sold short and derivatives will
vary as a result of changes in the market prices of the holdings. The majority of the Company’s equity investments and other holdings
and all of the equities sold short and derivatives are based on quoted market prices as at the consolidated statement of financial
position date. Changes in the market price of quoted securities and derivatives may be related to a change in the financial outlook of
the investee entities or due to the market in general. Where non-monetary financial instruments − for example, equity securities − are
traded in currencies other than the US dollar, the price, initially expressed in a foreign currency and then converted into US dollars,
will also fluctuate because of changes in foreign exchange rates.
Securities sold short represent obligations of the Company to make future delivery of specific securities and create an obligation
to purchase the security at market prices prevailing at the later delivery date. This creates the risk that the Company’s ultimate
obligation to satisfy the delivery requirements will exceed the amount of the proceeds initially received or the liability recorded in the
consolidated financial statements. In addition, the Company has entered into derivative financial instruments which have a notional
value greater than their fair value which is recorded in the consolidated financial statements. This information is disclosed in note 6(a)
to these consolidated financial statements. This creates a risk that the Company could settle these instruments at a value greater or less
than the amount that they have been recorded in the consolidated financial statements.
The Company’s equity investments and other holdings have a downside risk limited to their carrying value, while the risk of equities
sold short and derivatives is open-end0ed. The Company is subject to commercial margin requirements which act as a barrier to the
open-ended risks of the equities sold short and derivatives. The Company closely monitors both its equity investments and other
holdings and its equities sold short and derivatives.
The impact of a 30% change in the market prices of the Company’s listed equity investments and other holdings and equities sold short
and derivatives would be as follows:
Equity investments and other holdings
Listed equity securities and derivatives
Equities sold short and derivative liabilities
Pre-tax impact on net income
Equity investments and other holdings
Listed equity securities and derivatives
Equities sold short and derivative liabilities
Pre-tax impact on net income
Fair value
$
1,949,989
(675,468
)
Fair value
$
2,395,241
(899,655
)
Estimated fair value
with a 30%
price increase
$
2018
Estimated fair value
with a 30%
price decrease
$
2,534,985
(878,108
)
382,356
1,364,993
(472,828
)
(382,356
)
2017
Estimated fair value
with a 30%
price increase
$
Estimated fair value
with a 30%
price decrease
$
3,113,813
(1,169,551
)
448,676
1,676,668
(629,758
)
(448,676
)
The above analysis assumes that listed equity securities, derivatives equities sold short and derivative liabilities would increase or
decrease at the same rate. As these portfolios are not hedged together, a change in market prices will affect each one differently.
41
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Credit risk
Credit risk is the risk that a counterparty will fail to fulfill its obligations under a contract and will cause the Company to suffer a loss.
The Company is exposed to credit risk from cash and cash equivalents, due from broker and debt investments. Credit risk arising
from funds held at financial institutions are managed by only investing with financial institutions with a minimum A rating. The
Company manages its credit risk exposure from debt securities by closely monitoring the debt issuer and the ratings issued by various
bond rating agencies. All debt security investments are measured at fair value through profit or loss are traded over stock exchanges
therefore exiting a position with increased risk is relatively easy if the credit worthiness of an issuer falls below the company’s
threshold for credit risk exposure.
Credit ratings are presented using Standard & Poor’s rating scale as follows:
Financial assets
Cash and cash equivalents
Restricted short-term investments
Due from brokers
Debt securities
Debt securities
Counterparties without external credit rating
Loans to employees*
Rating
A
A
A
B-
CCC and below
2018
$
120,555
462
357,754
4,592
88,339
2018
$
-
2017
$
53,122
460
299,996
5,304
57,294
2017
$
127
* Related parties with which the Company has not experienced defaults in the past.
Liquidity risk
Liquidity risk is the risk the Company will encounter difficulties in meeting its financial obligations. The Company’s largest assets are
equity investments and other holdings. Most of these assets are made up of equities in listed companies which can be liquidated in
a relatively short time. Due to its large investments in liquid assets, the Company believes that it has sufficient resources to meet its
obligations as they come due.
All financial liabilities other than equities sold short, derivative liabilities and liability for redeemable units as at the consolidated
statement of financial position date mature or are expected to be repaid within one year (2017 – one year). The liquidity risk related
to these liabilities is managed by maintaining a portfolio of liquid investment assets.
Capital risk management
The Company’s objective when managing its capital is to maintain a solid capital structure appropriate for the nature of its business.
The Company considers its capital to be its equity. The Company manages its capital structure in light of changes in economic
conditions. To maintain or adjust its capital structure, the Company initiates normal course issuer bids or adjusts the amount of
dividends paid. The Company monitors capital on the basis of its net debt-to-capital ratio. Net liabilities used in the net debt-to-capital
ratio is calculated by subtracting the due from broker balances from total liabilities. The net debt-to-capital ratio is as follows:
2018
$1,429,795
$969,421
1.47
2017
$1,612,645
$1,063,385
1.52
Net total liabilities
Total equity
Debt-to-capital ratio
42
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The Company’s objective is to maintain a debt-to-capital ratio below 2.0. The Company believes that limiting its debt-to-capital ratio
in this manner is the best way to monitor risk. The Company does not have any externally imposed restrictive covenants or capital
requirements, other than those included in the credit facilities (note 5).
Fair value estimation
The tables below analyze financial instruments carried at fair value by the inputs used in the valuation method. The different levels
have been defined as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly (that is, as
prices) or indirectly (that is, derived from prices); and
Level 3 – Inputs that are not based on observable market data.
The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of
the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is
assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant
adjustment based on unobservable inputs, that measurement is a Level 3. Assessing the significance of a particular input to the fair
value measurement in its entirety requires judgment, considering factors specific to the asset or liability.
The determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable
data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and
provided by independent sources that are actively involved in the relevant market.
The following tables analyze within the fair value hierarchy the Company’s financial assets and financial liabilities measured at fair
value as at December 31, 2018 and 2017:
Assets
Financial assets at fair value through profit or loss
Held for trading
Equity securities
Debt securities
Derivative financial assets
Other
Equity securities
Debt securities
Real estate investments
Liabilities
Financial liabilities
Held for trading
Equity holdings sold short
Debt securities
Derivative liabilities
Level 1
$
Level 2
$
Level 3
$
1,929,381
-
-
2,014
-
-
1,429
92,931
29,588
8,425
2,824
-
-
-
84,482
4,124
41,161
2018
Total
$
1,930,810
92,931
29,588
94,921
6,948
41,161
1,931,395
135,197
129,767
2,196,359
637,121
-
4,221
641,342
-
69,275
38,347
107,622
-
-
-
-
637,121
69,275
42,568
748,964
43
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Assets
Financial assets at fair value through profit or loss
Held for trading
Equity securities
Debt securities
Derivative financial assets
Other
Equity securities
Real estate investments
Liabilities
Financial liabilities
Held for trading
Equity holdings sold short
Debt securities
Derivative liabilities
Level 1
$
Level 2
$
Level 3
$
2,303,077
-
5,367
2,133
-
10,395
50,029
80,361
8,821
-
-
12,569
-
60,422
30,789
2017
Total
$
2,313,472
62,598
85,728
71,376
30,789
2,310,577
149,606
103,780
2,563,963
892,203
-
-
892,203
-
15,696
9,612
25,308
-
-
-
-
892,203
15,696
9,612
917,511
Financial instruments in Level 1
The fair value of financial assets and financial liabilities traded in active markets are based on quoted market prices at the close of
trading on the year-end date. The quoted market price used for financial assets and financial liabilities held by the Company is the
close price. Investments classified in Level 1 include active listed equities and derivatives traded on an exchange.
Financial instruments in Level 2
Financial instruments classified with Level 2 trade in markets that are not considered to be active but are valued based on quoted
market prices, broker quotations or valuation techniques such as financial models that use market data. These valuation techniques
maximize the use of observable market data where available and rely as little as possible on entity-specific estimates. If all significant
inputs required to fair value an instrument are observable, the instrument is included in Level 2. These include corporate bonds, thinly
traded listed equities and derivatives, over-the-counter derivatives and private equities.
The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each year-end date.
Valuation techniques used for non-standardized financial instruments such as options and other over-the-counter derivatives include
the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash
flow analyses, option-pricing models and other valuation techniques commonly used by market participants, making maximum use
of market inputs and relying as little as possible on entity-specific inputs:
Valuation technique
Quoted market prices or broker quotes for similar instruments
Valuation techniques or net asset value based on observable inputs
Quoted market prices or broker quotes for similar instruments
Quoted market prices or broker quotes for similar instruments
Description
Equity securities
Private equities
Debt securities
Derivatives
44
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Financial instruments in Level 3
Investments classified in Level 3 have significant unobservable inputs, as they trade infrequently. Level 3 instruments consist of
unlisted equity investments, debt securities and real estate investments. As observable prices are not available for these securities, the
Company has used valuation techniques to derive the fair value.
Level 3 valuations are reviewed by the Company’s chief financial officer (CFO), who reports directly to the Board on a quarterly basis
in line with the Company’s reporting dates. The Board considers the appropriateness of the valuation models and inputs used. On
an annual basis, close to the year-end date, the Company obtains independent, third party appraisals to determine the fair value of
the Company’s most significant Level 3 holdings. The Company’s CFO reviews the results of the independent valuations. Emphasis is
placed on the valuation model used to determine its appropriateness, the assumptions made to determine whether it is consistent with
the nature of the investment, and market conditions and inputs such as cash flow and discount rates to determine reasonableness.
As at December 31, 2018 and 2017, Level 3 instruments are in various entities and industries.
Real estate investments are disclosed in more detail in note 8, comprising investments in private real estate companies and in real
estate income trusts and partnerships. The real estate companies are involved with various types of buildings in different geographical
locations. For the main Level 3 instruments, the Company relied on appraisals carried out by independent third party valuators.
There was no established market for any of these investments, so the most likely scenario is a disposal of the underlying assets. For
the investments in real estate income trusts and partnerships, the Company relied mainly on audited financial statements, valuing
the assets at fair value. The most likely scenario is an eventual sale of the underlying properties and the subsequent distribution to
the holders.
The following tables present the changes in Level 3 instruments:
As at December 31, 2017
Transferred out of Level 3 i)
Purchases ii)
Sales proceeds
Distributions
Gains (losses) recognized in net income
On financial instruments held at end of year
On financial instruments disposed of during the year
Currency translation adjustments
As at December 31, 2018
Real estate
investments
$
Unlisted
securities
$
30,789
-
14,869
-
(9,663
)
2,088
-
3,078
41,161
72,991
(30,626
)
56,209
(13,556
)
(252
)
(3,545
)
540
6,845
88,606
2018
Total
$
103,780
(30,626
)
71,078
(13,556
)
(9,915
)
(1,457
)
540
9,923
129,767
45
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
As at December 31, 2016
Transferred out of Level 3
Purchases
Sales proceeds
Distributions
Gains (losses) recognized in net income
On financial instruments held at end of year
On financial instruments disposed of during the year
Currency translation adjustments
As at December 31, 2017
Real estate
investments
$
Unlisted
securities
$
35,938
(1,078
)
2,561
-
(8,199
)
3,814
-
(2,247
)
30,789
43,108
-
25,412
(21,111
)
-
18,430
11,132
(3,980
)
72,991
2017
Total
$
79,046
(1,078
)
27,973
(21,111
)
(8,199
)
22,244
11,132
(6,227
)
103,780
i. During the year the company’s private holdings in equity securities and convertible debt in the internet services industry were
transferred out of level 3 pursuant to public offerings. The fair value of these investments became available through quotes prices
from the active markets they traded in and were reclassified to level 1 prior to being sold.
ii. During the year the company made three investments in private holdings in the financial and biotechnology industries totaling
$55,288. There is no established market for these holdings. The most likely disposal of these investments is through a disposition
or a listing of these holdings on a public stock exchange.
46
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED)
The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at
December 31, 2018.
Fair value
(rounded)
2018
$
Valuation
technique
Significant
unobservable
inputs
Weighted
average
input
Reasonably
possible
shifts +/−
Change in
value
$
Description
Unlisted private equity holdings
Pharmaceuticals
– Equity securities
Unlisted private equity holdings
Pharmaceuticals
– Convertible Pref
Unlisted private equity holdings
Financial services
Unlisted private equity holdings
Food and beverage
Unlisted private equity holdings
Software developers
– Convertible bonds
Unlisted private equity holdings
Other
REITs and partnerships
Average change
in indices
Median change
in benchmark
market cap
none
Average market
cap/BV
none
Revenue estimate
Revenue multiple
EBITA multiple
YTM
Revenue estimate
Revenue Multiple
Volatility
13,500
27,300
28,000
14,000
Comparable
company
approach
Recent
Transaction
Comparable
company
approach
Recent
Transaction
Comparable
company
approach
Comparable
company
approach
3,000
2,800
9,700
Black Scholes
option pricing
Comparable
company
approach
Discounted
cash flows
-1.15%
50%
+/-40
-33.94%
10%
+/-190
-
1.44
-
$24.911M
1.83
12.74
41.043%
$1.280M
4.69
37.66%
-
-
10%
+/-1,900
-
$1M
10%
10%
20%
$.250M
10%
20%
$5M
10%
-
+/-500
+/-700
+/-600
+/-45
+/-100
+/-100
+/-35
+/-40
+/-75
The REITs and partnerships
consist of numerous
investments in commercial and
residential properties, each with
different unobservable inputs
tailored to best estimate their
fair value. The inputs disclosed
cover the range used for all
the real estate holdings in the
REITs. A general analysis of the
change in inputs would not
reveal a fair change in value.
Revenue estimate
Revenue multiple
$92.550M
0.89
Discount rate
8.0%-18.2%
Capitalization rate
4.5%-8.5%
Discounted
cash flow term
Rental
growth rate
5-10 years
0%-10%
Real estate investments
in private entities
12,000
19,500
Recent
transactions
Capitalization
model
none
-
-
Rate of return
7.0%
1.0%
-
+2,300
-1,700
47
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) The table below presents the investments whose fair values are measured using valuation techniques classified as Level 3 as at
December 31, 2017.
Description
Fair value
(rounded)
2017
$
Unlisted private equity holdings
Internet services
– Equity securities
Unlisted private equity holdings
Internet services
– Convertible bonds
Unlisted private equity holdings
Pharmaceuticals
Unlisted private equity holdings
Food and beverage
Unlisted private equity holdings
Software developers
Unlisted private equity holdings
Other
REITs
29,700
12,600
13,200
11,000
4,000
2,400
14,500
Valuation
technique
Comparable
company
approach
Recent
transaction
Black-Scholes
option pricing
Comparable debt
method
Recent
Transaction
Comparable
company
approach
Recent
transaction
Recent
transaction
Comparable
company
approach
Discounted
cash flows
Significant
unobservable
inputs
Weighted
average
input
Reasonably
possible
shifts +/−
Change in
value
$
Enterprise
value/users vs
Revenue/users
Number of
users
EV/User
10M
10%
+/-400
+/-700
none
-
-
-
Share price
Yield to maturity
0.38
8.08%
none
-
Revenue estimate
Revenue multiple
$17,000
2.31
none
none
-
-
10%
10%
-
$1M
10%
-
-
+/-15
+/-255
-
+/-100
+/-100
-
-
Revenue estimate
Revenue multiple
$80.57M
1.56
$1M
10%
+/-15
+/-100
Discount rate
7.0%-12%
Capitalization rate
5.0%-9.0%
Discounted
cash flow term
Rental
10-13 years
growth rate (12.0)%-39.10%
The REITs consist of numerous
investments in commercial and
residential properties, each with
different unobservable inputs
tailored to best estimate their
fair value. The inputs disclosed
cover the range used for all
the real estate holdings in the
REITs. A general analysis of the
change in inputs would not
reveal a fair change in value.
Real estate investments
in private entities
16,300
Capitalization
model
Rate of return
7.0%
1.0%
+2,200
-1,600
Assets and liabilities not carried at fair value but for which fair value is disclosed
The carrying amount of cash and cash equivalents, restricted short-term investments, due from brokers, bank advances, credit
facilities, trade and other payables, due to brokers, redemptions payable, and subscriptions received in advance represent a reasonable
approximation of their respective fair value due to their short-term nature.
48
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 17
Disclosure of the composition of the Company
Principal subsidiaries and structured entities
The consolidated financial statements include the accounts of the Company and all of its subsidiaries and structured entities as at
December 31, 2018 and 2017. The principal operating subsidiaries and structured entities and their activities are as follows.
Name
Senvest Global (KY) L.P.
Senvest Global L.P.
RIMA Senvest Master Fund GP, L.L.C.
Senvest Technology Partners GP, L.L.C.
Argentina Capital Inc.
Pennsylvania Properties Inc.
Senvest Equities Inc.
Senvest Fund Management Inc.
Senvest Management L.L.C.
Senvest Master Fund, L.P.
Senvest Technology Partners Master Fund, L.P.
Senvest Cyprus Recovery Investment Fund, L.P.
Punto Box SL
Bogas Costa Del Sol, SL
Global Box Arganda, SL
Global Box Rivas, SL
Coldstream SL
Country of
incorporation
Cayman Islands
United States
United States
United States
Canada
United States
Canada
United States
United States
Cayman Islands
Cayman Islands
Cayman Islands
Spain
Spain
Spain
Spain
Spain
% Interest held
2018
2017
100
100
-
-
100
100
100
100
-
41
53
73
-
-
-
-
100
100
100
-
-
100
100
100
100
-
45
53
73
100
100
100
100
-
Nature of
business
Investment company
Investment company
General partner of
Senvest Master Fund, L.P.
General partner of
Senvest Technology Partners
Master Fund L.P.
Real estate
Real estate
Investment company
Investment company
Investment manager of the Funds
Investment fund
Investment fund
Investment fund
Real estate
Real estate
Real estate
Real estate
Real estate
The total non-controlling interest for the year is a loss of $15,112 (2017 – gain of $24,401), which is mostly attributed to Senvest
Management L.L.C. The change in redemption amount of liability for redeemable units for the year is a decrease of $232,312 (2017 – an
increase of $146,030), all of which is attributed to the Funds.
In 2018, the entities Punto Box SL, Bogas Costa Del Sol, SL, Global Box Arganda, SL, Global Box Rivas, SL amalgamated to form
Coldstream SL.
49
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Set out below is the summarized financial information for each subsidiary that has non-controlling interest (NCI) that is material to
the group. The amounts disclosed are before inter-company eliminations.
Summarized balance sheets
Senvest Management L.L.C.
Assets
Liabilities
Net assets
Accumulated NCI
2018
$
96,954
7,087
89,867
89,867
The participation owned by the parent company is reflected as a liability in the subsidiary’s financial statements.
Summarized statements of comprehensive income (loss)
Revenue and net investment gains (losses)
Expenses
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Net income (loss) allocated to NCI
2018
$
(9,698
)
12,969
(22,667
)
8,250
(14,417
)
(22,667
)
2017
$
113,027
8,994
104,033
104,033
2017
$
37,269
14,866
22,403
(4,773
)
17,630
22,403
The participation allocated to the parent company is reflected as a part of the statement of income (loss) in the subsidiary’s financial
statements.
Distribution paid to NCI
Summarized statements of cash flows
Cash used in operating activities
Cash used in financing activities
Net increase (decrease) in cash and cash equivalents
2018
$
-
2018
$
(1,902
)
-
(1,902
)
2017
$
2,597
2017
$
4,609
(2,597
)
2,012
No guarantees or collateral were provided to the subsidiaries and structured entities except for the guarantee of an operating lease of
Senvest Management L.L.C. The amounts in question have been included in the Company’s commitments in note 20(a). The Company
is not liable for any other contingent liabilities arising in its subsidiaries and structured entities and will not settle any other liabilities
on their behalf.
50
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 18
Acquisition of a subsidiaries
On January 16, 2017, the Company acquired the remaining share capital of Bogas Costa Del Sol SL, Global Box Arganda SL, Global Box
Rivas SL and Coldstream SL. Prior to the acquisition on January 16, 2017, the Company owned as an investment in real estate an interest
of 10% in each of the entities acquired. These companies are all incorporated in Spain and are engaged in the short-term rental of
storage facilities. The purchase price paid for all four entities was a cash consideration of $9,658. There is no contingent consideration.
The transaction was accounted for under the purchase method. The net assets of the acquired companies were valued at fair value, and
there was no resulting goodwill on the purchase. The related debt against the investment properties as at December 31, 2017 totaled
$4,448 and has been included as part of trade and other payables on the consolidated Statement of Financial Position.
Details of the assets and liabilities recognized as a result of the acquisition are as follows:
Cash and cash equivalents
Investment properties
Other assets
Trade and other payables
Mortgages
Net identifiable assets acquired
Less: Pre-held interest
Net assets acquired
Fair value
$
104
15,482
670
(502
)
(5,018
)
10,736
1,078
9,658
The acquired businesses contributed revenues of $2,770 and net loss of $330 to the statement of income (loss) for the period from
January 16, 2017 to December 31, 2017.
19
Related party transactions
Key management compensation
Key management includes the Board, the president and chief executive officer, the vice-president, the secretary-treasurer and the CFO.
The compensation paid or payable to key management for employee services is as follows:
Salaries and other short-term employee benefits
Post-employment benefits – Defined contribution
Management fees
2018
$
7,681
27
7,708
2017
$
13,121
39
13,160
Certain employees and related parties that have invested in the Funds do not pay management fees that are charged to outside
investors. The amount invested by these participants in 2018 totals $86,727 (2017 – $103,454).
51
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) 20
Commitments
a) The future minimum rental payments for premises under long-term leases are as follows:
2019
2020
2021
2022
2023
Thereafter
$
1,276
1,349
1,163
1,163
1,163
952
b) As required by certain of the Company’s equity investments and other holdings, the Company has capital commitments of $13,323.
c) As required by certain of the Company’s real estate investments, the Company has capital commitments of $9,048.
21
Segmented and geographical information
The Company operates in a single reportable segment, which is the management of its own investments and those of the Funds.
The following tables summarize the Company’s revenues by geographical area for the years ended December 31:
Revenue
Interest income
Dividend income
Other income
United States
$
Canada
$
European
Union
$
Argentina
$
12,543
7,573
106
1,184
1,422
442
2,261
671
702
-
216
-
Revenue
Interest income
Dividend income
Other income
United States
$
Canada
$
Great Britain
$
5,450
3,366
903
485
7,450
470
-
255
-
Rest of
European
Union
$
1,037
846
1,131
Argentina
$
-
1,133
-
2018
Total
$
15,991
10,755
1,250
2017
Total
$
6,972
16,715
2,504
Other
$
3
873
-
Other
$
-
3,665
-
52
2018 annual reportNotes to Consolidated Financial StatementsDECEMBER 31, 2018 AND 2017(IN THOUSANDS OF CANADIAN DOLLARS UNLESS OTHERWISE STATED) Board of Directors
Officers
Victor Mashaal
Chairman of the Board & President
Frank Daniel
Secretary-Treasurer
Richard Mashaal
Vice-President
George Malikotsis C.A., C.P.A.
Vice-President, Finance
Senvest Capital Inc.
1000 Sherbrooke West
Suite 2400
Montréal (Québec) H3A 3G4
(514) 281-8082
Victor Mashaal
Chairman of the Board & President
Senvest Capital Inc.
*Ronald G. Assaf
Business Executive
Frank Daniel
Secretary-Treasurer
Senvest Capital Inc.
*David E. Basner
Business Executive
*Jeffrey L. Jonas
Partner, Brown Rudnick L.L.P.
Richard Mashaal
Vice-President
Senvest Capital Inc.
*Member of the Audit Committee
Investor Information
AUDITORS
PricewaterhouseCoopers L.L.P.
Montréal (Canada)
LEGAL COUNSEL
Howard M. Levine
Blake, Cassels & Graydon L.L.P.
1 Place Ville-Marie
Suite 3000
Montreal (Quebec) H3B 4N8
TRANSFER AGENT & REGISTRAR
Computershare Trust Company of Canada
1500 Robert-Bourassa Boulevard
7th Floor
Montréal (Québec) H3A 3S8
Computershare Trust Company of Canada
100 University Street
Toronto (Ontario) M5J 2Y1
53
2018 annual report 54
2018 annual reportThe accompanying notes are an integral part of these consolidated financial statements.