Timbercreek Financial Corp
Annual Report 2014

Plain-text annual report

Timbercreek Mortgage Investment Corporation’s objective is to generate an attractive, stable income stream for shareholders while preserving capital. Timbercreek Mortgage Investment Corporation Annual Report 2014 Timbercreek Mortgage Investment Corporation (Timbercreek MIC) is a provider of shorter duration, customised financing solutions to professional real estate investors. Our well-diversified portfolio of mortgage investments, primarily secured by income-producing properties, provides a strong, risk- adjusted yield for investors. Drivers of Our Success Our Strategy Our People Our focus continues to be on making high-quality investments secured by high-quality assets. This is achieved primarily through mortgage loans secured by income- producing properties and disciplined portfolio diversifi cation. These strategies, coupled with the fact that we pass through all lender fees to investors, allow us to generate superior risk-adjusted yield for shareholders. Our investors benefi t from Timbercreek’s robust origination and asset management platform. Our origination team covers Canada east to west, leveraging strong relationships with commercial real estate borrowers and their extensive network of mortgage broker and investment banker contacts. These professionals, coupled with the experienced underwriting, funding and servicing specialists, have been a critical component of our success. Superior Customer Service Customer service means more than providing expedited funding. Timbercreek works directly with borrowers to develop customised solutions and formulate strong exit strategies to help their investments succeed. This commitment, combined with ongoing communication with borrowers throughout the lifecycle of the loan, has earned Timbercreek a reputation for exceptional customer service. NO principal impairments since inception $3.7 billion in mortgage originations by Timbercreek since inception Repeat borrowers represent 76% of new business 2014 Company Highlights $401.3 million in new mortgage investments funded (68 loans) $382.6 million in full repayments and partial paydowns (59 loans fully repaid) 25% portfolio growth 113% portfolio turnover 70% fi rst mortgage positions 71% weighted average loan-to-value Timbercreek Mortgage Investment Corporation 1 Our Diff erentiator: Income-Producing Properties Real estate investors use short-term structured fi nancing at various stages of the investment process, often prior to stabilization. Our focus is primarily on mortgage loans that are secured by assets that are further along in this process – where buildings have already been constructed, stabilization is more imminent and there is typically some income in place. Unimproved Land Construction Acquisition Renovations Disposition Timbercreek’s Focus • • Facilitating property acquisitions Funding redevelopment strategies designed to improve occupancy and net operating income • Providing open fi nancings for dispositions – unencumbered sales We focus on income-producing assets because they off er: 1. Stronger exit strategies. Investor demand for cash-fl owing real estate tends to be a lot less elastic than for properties that rely on speculative sales for exit, such as the sale of condominiums, houses or undeveloped land. 2. Lower probability of default. Rental income is available to service the debt, decreasing the probability of impairment. 2 Timbercreek Mortgage Investment Corporation Disciplined Investment Strategy Broad diversifi cation is an essential component of our risk-mitigation strategy. This strategy is designed to minimize concentration risk across several categories including asset type, geography and borrower. Diversity by Region and Asset Type Our portfolio currently consists of 105 loans spread across eight regions and ten asset classes. We focus on loans secured by real estate with strong liquidity characteristics, such as properties located in urban markets with stable cash-fl ow. Regional Mix Asset Type Ontario 44.4% With more urban cities than any other province, Ontario remains an area of focus for our business. Multi-residential 60.7% We strategically maintain a higher concentration of exposure to multi-residential real estate (primarily rental apartments) due to its inherently stable cash-fl ow and diversifi ed tenant base. Ontario: 44.4% Saskatchewan: 15.3% Québec: 14.3% British Columbia: 9.9% Alberta: 6.3% Other: 5.3% Manitoba: 3.3% Nova Scotia: 1.2% Multi-residential: 60.7% Retail: 14.3% Offi ce: 8.0% Unimproved land: 6.9% Hotel: 3.1% Retirement: 3.0% Industrial: 1.6% Single-family residential: 1.1% Self-storage: 0.9% Other-residential: 0.4% Timbercreek Mortgage Investment Corporation 3 Sample Investments North Vancouver, BC Vaughan, ON The City of North Vancouver is a waterfront municipality on the north shore of Burrard Inlet, directly across from Vancouver, BC. The city offers all the benefits of a small, well-urbanized waterfront community – perfect for those enjoying their golden years. This 97-unit retirement residence lies one block west of North Vancouver’s major north-south artery. The loan is being used to refinance an existing second mortgage. Located just outside Toronto, the City of Vaughan is one of the fastest growing municipalities in Canada, with a population that has nearly doubled in size since 1991. The City of Vaughan ranks as #1 neighbourhood in Ontario and as #20 in Canada according to the Canadian Real Estate Wealth’s 2014 ‘Top 100 Neighbourhoods across Canada for Investment’ survey. This first mortgage acquisition financing is on a 58,130 square foot medical office building in Woodbridge, a suburban community in the City of Vaughan. Criteria Asset type Loan size ($1 – $25M) Term (3 months – 3 years) Interest Fees Investment Retirement $1,250,000 36 months 9% 0.75% Criteria Asset type Loan size ($1 – $25M) Term (3 months – 3 years) Interest Fees Investment Office $2,425,000 36 months 9% 2.00% 4 Timbercreek Mortgage Investment Corporation Letter to Shareholders I am pleased to report to you on the 2014 results for Timbercreek Mortgage Investment Corporation (Timbercreek MIC); a year where we deployed a record level of capital in a volatile market and were able to do so without compromising the quality of our portfolio. Over the course of 2014 we had repayments of $383 million, which is equivalent to 113% turnover in the portfolio. While this exceptional turnover did present some challenges with maintaining full deployment through the year, it demonstrates the quality of our mortgage investments and borrowers. Over 90% of our loans are repaid ahead of schedule which means our clients are successfully executing on their business plan. This further illustrates the thoroughness of our underwriting process. This turnover fueled a record year of investment activity as well, with $499 million in capital deployed resulting in year-over-year portfolio growth of 25%. By year-end, we had not only achieved our stated goal of having all cash deployed, but we had exceeded that by drawing on the credit facility for an additional $9 million. What we are most proud to report is that we were able to achieve this in a market that saw periods of abnormally high competition and unprecedented low bond yields. We attribute this success to our exceptional origination and underwriting team. Managing risk is a top priority in our business and something we believe diff erentiates us from other mortgage investment corporations in the market. One of the key strategies we use for managing risk is our focus on investing primarily in loans secured by income-producing properties. We strategically target these assets because we believe that demand for properties with some form of rental income in-place is higher and more stable than demand for land or properties under construction. This stability provides more certainty in the exit strategies of our loans and allows us to sell properties faster in the event of foreclosure, minimizing the likelihood of impairment. We also feel there is a lower probability of default on a loan when the property has existing cash-fl ow available to service the debt. We further mitigate risk by maintaining a portfolio that is well diversifi ed geographically, by asset type and borrower. Our portfolio currently consists of 105 loans across more than ten asset types with exposure in almost all provinces across the country. We are continuously monitoring all markets and rebalancing the portfolio to ensure we are generating the best risk-adjusted returns for shareholders. For example, we had limited investment activity in Alberta during the days of higher oil prices as we found competition and pricing to be very aggressive. As a result, we currently have just 6% of our portfolio secured by properties in that market and no exposure to oil sector tenants. With the lower oil prices now helping to stabilize the Alberta market and a signifi cant reduction in capital available through conventional lenders in that market, Alberta is once again becoming more attractive. We are starting to see more high-quality opportunities to lend on solid underlying real estate with reasonable long-term valuations. to educate the market on the quality of Timbercreek MIC’s mortgage investments and bringing attention to this mispricing in an eff ort to improve trading conditions. As a lender, the outlook on bond yields is very important to our business. We do believe, however, that key factors relating to the structure of our loans and fundamentals in the market will help protect current and future investments from the impacts of lower bond yields. Our current investments are protected by the fact that the loans are fi xed rate loans or fl oating rate loans with fl oor rates that are equivalent to the rate on funding. In terms of future investment potential, we are starting to see spreads widening as lenders set limits to the rates at which they are willing to lend. Given the high-quality of the security in our portfolio, we believe we are providing an exceptional fi xed- income alternative in the market. We are also closely monitoring economic trends that would impact valuations across Canadian commercial real estate. Although we do see valuations fl uctuate in diff erent markets and asset classes over time (as was our experience in Alberta earlier last year), we believe that, as a whole, the Canadian commercial real estate market will remain stable for the foreseeable future. Our thesis is supported by the fact that there remains a high concentration of institutional and private investors with very long-term investment horizons and conservative debt structures. We also believe the limited level of new supply that has come to market over the years will help to stabilize values. As we look ahead to 2015, we believe the momentum generated through the last quarter of 2014 provides a strong foundation for success this year. With a fully invested portfolio and access to a larger facility to maintain full deployment going forward, we expect to avoid the impacts of cash drag that were experienced in 2014. We also continue to see strong lending opportunities to redeploy proceeds from repayments as our borrowers continue to successfully execute on their investment plans. As always, there are a number of people to thank for our successes over the past year. Foremost, I would like to thank you, our shareholders, for your continued confi dence and support of our investment strategy. Our entire investment team is dedicated to ensuring you receive a protected capital base and stable income – I thank them for that. Finally, I’d like to express my gratitude to our Board of Directors and Mortgage Advisory Committee for their guidance and oversight which continues to be invaluable. From everyone here at Timbercreek MIC, we will continue our steadfast investment approach and look forward to reporting further success in the coming year. Despite this strong focus on mitigating risk, we believe our shares are currently trading in the market at a yield that that does not properly refl ect the strong credit quality of the underlying portfolio. We are committed to continuing Andrew Jones Chief Executive Offi cer Timbercreek Mortgage Investment Corporation March 2015 Timbercreek Mortgage Investment Corporation 5 Management’s Discussion and Analysis For the year ended December 31, 2014 FORWARD-LOOKING STATEMENTS Forward-looking statement advisory The terms, the “Company”, “we”, “us” and “our” in the following Management Discussion & Analysis (“MD&A”) refer to Timbercreek Mortgage Investment Corporation (the “Company”). This MD&A may contain forward- looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. These statements are typically identified by expressions like “believe”, “expects”, “anticipates”, “would”, “will”, “intends”, “projected”, “in our opinion” and other similar expressions. By their nature, forward-looking statements require us to make assumptions which include, among other things, that (i) the Company will have sufficient capital under management to effect its investment strategies and pay its targeted dividends to shareholders, (ii) the investment strategies will produce the results intended by the Manager, (iii) the markets will react and perform in a manner consistent with the investment strategies and (iv) the Company is able to invest in mortgages of a quality that will generate returns that meet and/or exceed the Company’s targeted investment returns. Forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will prove not to be accurate. We caution readers of this MD&A not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to, general market conditions, interest rates, regulatory and statutory developments, the effects of competition in areas that the Company may invest in and the risks detailed from time to time in the Company’s public disclosures. For more information on risks, please refer to the “Risks and Uncertainties” section in this MD&A, and the “Risk Factors” section of our Annual Information Form (“AIF”), which can be found on the SEDAR website at www.sedar.com. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Company, investors and others should carefully consider these factors, as well as other uncertainties and potential events and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Company and Timbercreek Asset Management Inc. (the “Manager”) do not undertake, and specifically disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. This MD&A is dated February 25, 2015. Disclosure contained in this MD&A is current to that date, unless otherwise noted. Additional information on the Company, its dividend reinvestment plan and its mortgage investments is available on the Company’s website at www.timbercreekmic.com. Additional information about the Company, including its AIF, can be found at www.sedar.com. 6 Timbercreek Mortgage Investment Corporation BUSINESS OVERVIEW Timbercreek Mortgage Investment Corporation (the “Company”) is incorporated under the laws of the Province of Ontario by Articles of Incorporation dated April 30, 2008. On September 13, 2013, in connection with the Transition as explained below, the Company filed articles of amendment effective as of September 13, 2013 (the “Effective Date”), to amend, among other things, certain provisions of the articles of the Company related to the rights attached to the redeemable Class A and Class B shares and voting shares, and provided for the creation of a new class of common shares, for which all existing classes of redeemable shares were exchanged. On November 29, 2013 (the “Exchange Date”), all issued and outstanding Class A and Class B shares were exchanged into common shares. The Company invests in mortgage investments selected and determined to be high quality by the Manager. The Company is, and intends to continue to be, qualified as a mortgage investment corporation (“MIC”) as defined under Section 130.1(6) of the Income Tax Act (Canada) (“ITA”). The fundamental investment objectives of the Company are to (i) preserve shareholder capital of the Company and (ii) provide shareholders with a stable stream of monthly dividends. The Company intends to meet its investment objectives by investing in a diversified portfolio of mortgage investments, consisting primarily of conventional mortgage investments secured directly by multi-residential, retirement, office, retail and industrial real property across Canada, primarily located in urban markets and surrounding areas. TRANSITION TO PUBLIC COMPANY REGIME On September 12, 2013, the Company received shareholder’s approval for the Company’s transition (the “Transition”) from the Canadian securities regulatory regime for investment funds to the regulatory regime for non-investment fund reporting issuers (the “Public Company Regime”). Beginning on the Effective Date, the Company is subject to, and files all continuous disclosure materials in compliance with the Public Company Regime requirements pursuant to National Instrument 51-102 Continuous Disclosure Obligations, which includes preparation and filing of its audited financial statements in accordance with International Financial Reporting Standards (“IFRS”), along with a Management’s Discussion and Analysis. As part of the Transition, the Company provided a one-time special redemption right of up to 15% of the issued and outstanding redeemable shares of each class (the “Special Redemption”). The Company redeemed requests from holders of 1,674,568 Class A shares and 259,771 Class B shares for the Special Redemption. The total redemptions payable of $18.0 million were paid on November 27, 2013. On the Exchange Date, the Company exchanged all of the 32,829,013 outstanding Class A shares and 3,887,053 outstanding Class B shares into a newly created class of common shares. The common shares commenced trading on the Toronto Stock Exchange (“TSX”) on November 29, 2013, continuing under the symbol ‘TMC’, and the Class A shares ceased to trade after the close of market on November 28, 2013. Additionally, Messrs. Ugo Bizzarri and Andrew Jones were elected as additional directors of the Company. Effective September 13, 2013, the Company entered into a new management agreement with the Manager and terminated its management agreement with Timbercreek Asset Management Ltd., a wholly owned subsidiary of the Manager. The Manager is responsible for the day-to-day operations and providing all general management, mortgage servicing and administrative services for the Company’s mortgage investments. In connection with the Transition, the Company incurred total costs of $3.8 million, which includes soliciting dealer fees, soliciting broker fees, audit fees, legal fees and other related costs. The Manager elected to assume responsibility for $0.3 million of costs relating to the Transition. Timbercreek Mortgage Investment Corporation 7 BASIS OF PRESENTATION This MD&A has been prepared to provide information about the financial results of the Company for the year ended December 31, 2014 (the “Year”). This MD&A should be read in conjunction with the consolidated financial statements for the years ended December 31, 2014 and 2013, which are prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). The functional and reporting currency of the Company is Canadian dollars and unless otherwise specified, all amounts in this MD&A are in thousands of Canadian dollars, except per share and other non-financial data. Copies of these documents have been filed electronically with securities regulators in Canada through the System for Electronic Document Analysis and Retrieval (“SEDAR”) and may be accessed through the SEDAR website at www.sedar.com. NON-IFRS MEASURES The Company prepares and releases consolidated financial statements in accordance with IFRS. In this MD&A, as a complement to results provided in accordance with IFRS, the Company discloses certain financial measures not recognized under IFRS and that do not have standard meanings prescribed by IFRS (collectively the “non- IFRS measures”). These non-IFRS measures are further described below. The Company has presented such non-IFRS measures because the Manager believes they are relevant measures of the ability of the Company to earn and distribute cash dividends to shareholders and to evaluate the Company’s performance. These non-IFRS measures should not be construed as alternatives to net income and comprehensive income or cash flows from operating activities as determined in accordance with IFRS as indicators of the Company’s performance. • Expense ratio – represents total expenses (excluding financing costs, net operating (gain) loss on foreclosed properties held for sale (“FPHFS”), fair value adjustment on FPHFS, transition related costs and provision for mortgage investments loss) for the stated period, expressed as an annualized percentage of total assets less mortgage syndication liabilities; • Fixed expense ratio – represents expenses as calculated under expense ratio, less performance fees, for the stated period, expressed as an annualized percentage of total assets less mortgage syndication liabilities; • Net mortgage investments – represents total mortgage investments, net of mortgage syndication liabilities and before adjustments for interest receivable, unamortized lender fees and allowance for mortgage investments loss as at the reporting date; • Average net mortgage investment – represents the total net mortgage investments divided by the total number of mortgage investments at the reporting date; • Average net mortgage investment portfolio – represents the monthly average of the net mortgage investments portfolio over the stated period; • Weighted average interest rate – represents the weighted average interest rate (not including lender fees) on the net mortgage investments at the reporting date; • Weighted average lender fees – represents the cash lender fees received on individual mortgage investments during the stated period, expressed as a percentage of the Company’s advances on those mortgage investments. If the entire lender fees is received but the mortgage investment is not fully funded, the denominator is adjusted to include the Company’s unadvanced commitment; • Weighted average loan-to-value – a measure of advanced and unadvanced mortgage commitments on a mortgage investment, including priority or pari-passu debt on the underlying real estate, as a percentage of the fair value of the underlying real estate collateral at the time of approval of the mortgage investment. For construction/redevelopment mortgage investments, fair value is based on an ‘as completed’ basis; • Leverage – represents the total of gross convertible debentures and the total credit facility balance divided by total assets less any amounts that are reflected as mortgage syndication liabilities; • Targeted dividend yield – represents the average 2-Year Government of Canada Bond Yield plus 550 basis points; • Actual dividend yield – represents the total per share dividend for the stated period for Class A shares and common shares divided by the trading close price for the stated period; 8 Timbercreek Mortgage Investment Corporation • Adjusted net income (loss) and comprehensive income (loss) – represents net income (loss) and comprehensive income (loss) for the stated period excluding Transition related costs, issuance costs of redeemable shares and dividends to holders of redeemable shares; • Adjusted earnings per share – represents the total adjusted net income (loss) and comprehensive income (loss) divided by the weighted average outstanding shares for the stated period; • Turnover ratio – represents total mortgage repayments during the stated period, expressed as a percentage of the average net mortgage investment portfolio for the stated period; and • Payout ratio – represents total dividends paid and declared for payment to the holders of redeemable shares and common shares during the stated period, divided by distributable income for the stated period. RECENT DEVELOPMENTS AND OUTLOOK The Company had a very active year in 2014. The mortgage investments portfolio performed well throughout the year with $383 million in loans repaid equating to a portfolio turnover of 112.6% the largest volume of repayments the Company has ever experienced. To offset this, the Manager successfully funded $499 million in new mortgage investments and additional fundings which resulted in portfolio growth of 25% year-over- year. Investment activity continued to be disciplined with a strong focus towards mortgage investments primarily secured by income producing properties and also on maintaining a well-diversified portfolio, both geographically and by product type. Although the market saw a lot of competitive pressure through the first and second quarters of 2014, the Manager did continue to source quality mortgage investments opportunities. This momentum increased through the fourth quarter, as competition appeared to become less aggressive. As a result, new mortgage investments and additional advances totalling $186 million were funded in the quarter [the Companies most active quarter to-date] and the weighted average interest rate rose from 9.2% at the end of the third quarter of 9.4% at December 31, 2014. Following the extraordinary repayments that the Company experienced in the first half of 2014, the Manager has been focused on more consistently utilizing the credit facility to ensure the portfolio is fully funded at all times. These efforts resulted in having all excess cash deployed and the credit facility drawn by $9.1 million at year end. Despite having yet another record quarter for repayments, the focus on having the portfolio more than 100% deployed has helped to mitigate the impacts of cash drag and has allowed the Company to generate income available for distribution which exceeded the amount of the actual distribution during the quarter. Since year- end, the Company has increased its credit facility from $35 million to $50 million, which should further assist in managing cash flows going forward. The Company has maintained minimal exposure to the Alberta real estate market in the most recent quarters due to concerns around aggressive valuations and competition. As a result, the Company does not feel it is directly exposed in any material way to downward pressure on oil prices. However, under the current conditions and the abrupt exit from conventional lenders the Alberta market has become more attractive. The Company will be actively seeking opportunities to capitalize on the lack of capital available in that market in order to generate strong risk-adjusted returns by providing alternative sources of capital for high-quality real estate investors. Heading into 2015, the Company is well positioned to succeed. With a fully deployed, well-diversified portfolio of mortgage investments primarily secured by income-producing properties, a more normalized competitive environment and access to a larger facility to cushion the impacts of turn-over, the Company is on track to generate income sufficient to meet its targeted dividends. Timbercreek Mortgage Investment Corporation 9 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 FINANCIAL HIGHLIGHTS STATEMENT OF FINANCIAL POSITION HIGHLIGHTS As at KEY FINANCIAL POSITION INFORMATION Mortgage investments, including mortgage syndications December 31, 2014 December 31, 2013 December 31, 2012 $ 616,174 $ 442,166 $ 407,140 Total assets Credit facility Convertible debentures Total liabilities CAPITAL STRUCTURE Net assets attributable to holders of redeemable shares Shareholders’ equity Convertible debentures, gross Credit facility limit1 Unutilized credit facility Leverage2 COMMON SHARE INFORMATION Number of common shares outstanding Number of Class A redeemable shares outstanding Number of Class B redeemable shares outstanding Closing trading price Market capitalization 1 Subsequent to year end, the credit facility was increased to $50.0 million. Subsequent to year end, the credit facility was increased to $50.0 million. 1 2 Refer to non-IFRS measures section, where applicable. 2 Refer to non-IFRS measures section, where applicable. 634,069 8,837 32,387 269,123 – 364,946 34,500 35,000 25,924 10.5% 40,701,528 – – 467,406 – – 130,838 – 336,568 – 25,000 25,000 0.0% 408,895 8,706 – 53,367 355,528 – – 25,000 16,164 2.4% 36,964,028 – – – 34,561,122 3,742,597 10.16 351,141 $ $ $ $ 8.32 338,637 $ $ 9.17 338,960 TIMBERCREEK MORTAGE INVESTMENT CORPORATION 6 10 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 Operating Results Highlights Operating Results Highlights Three months ended December 31, Year ended December 31, 2014 2013 2014 2013 2012 Net interest income Income from operations $ 9,774 $ 9,926 $ 36,710 $ 39,731 $ 38,655 7,438 6,844 28,272 25,487 29,178 Net income (loss) and comprehensive income (loss) Earnings per share (basic and diluted) 1 Adjusted net income (loss) and comprehensive income (loss)2 Adjusted earnings per share (basic and diluted)2 Dividends to shareholders Cash flow from operating activities Distributable income Distributable income per share (basic and diluted) Targeted dividend yield2 Actual dividend yield2 Payout ratio2 Dividends per share: Class A Class B Common 5,812 0.14 5,812 0.14 7,326 7,984 8,013 0.20 6.52% 8.58% 91.4% – – 4,050 0.17 6,624 0.17 4,953 4,025 7,536 0.20 6.61% 8.52% 97.8% 0.063 0.067 24,917 0.63 507 0.65 (402) n/a 24,917 28,361 28,826 0.63 0.74 0.81 30,263 26,185 27,899 0.71 6.55% 9.16% 108.5% – – 29,274 23,812 30,204 0.79 6.61% 8.33% 96.9% 0.630 0.670 29,201 32,551 29,505 0.83 6.61% 7.68% 99.0% 0.780 0.828 $ 0.180 $ 0.134 $ 0.762 $ 0.134 $ – NET MORTGAGE INVESTMENTS INFORMATION 2 Net mortgage investments 397,341 317,154 397,341 317,154 368,253 Total number of net investments 105 96 105 96 77 Average net mortgage investments $ 3,784 $ 3,304 $ 3,784 $ 3,304 $ 4,783 Weighted average interest rate Weighted average lender fee3 Turnover ratio 9.4% 1.5% 9.8% 1.6% 9.4% 1.6% 9.8% 1.7% 37.3% 24.2% 112.6% 79.8% 10.1% 1.7% 80.1% 1 The Company has not disclosed earnings (loss) per share for the year ended December 31, 2012 as the Company did not have equity 1 The Company has not disclosed earnings (loss) per share for the year ended December 31, 2012 as the Company did not have equity instruments, as defined in IAS 33, Earnings per Share as the redeemable shares were classified as a financial liability in the statements of financial position. instruments, as defined in IAS 33, Earnings per Share as the redeemable shares were classified as a financial liability in the statements of 2 Refer to non-IFRS measures section, where applicable. financial position. 3 The Company has revised weighted average lender fee ratios for prior periods based on an updated definition included in non-IFRS measures. 2 Refer to non-IFRS measures section, where applicable. 3 The Company has revised weighted average lender fee ratios for prior periods based on an updated definition included in non-IFRS measures. TIMBERCREEK MORTAGE INVESTMENT CORPORATION 7 Timbercreek Mortgage Investment Corporation 11 For the three months ended December 31, 2014 (“Q4 2014”) and December 31, 2013 (“Q4 2013”) • The Company funded 17 new net mortgage investments (Q4 2013 – 18) totalling $170.8 million (Q4 2013 – $51.8 million), had additional advances on existing mortgage investments totalling $14.9 million (Q4 2013 – $2.1 million) and received full repayments on 12 mortgage investments (Q4 2013 – 11) and partial pay downs totalling $134.4 million (Q4 2013 – $85.8 million), resulting in net mortgage investments of $397.3 million as at December 31, 2014 (September 30, 2014 – $346.1 million), an increase of 14.8% from September 30, 2014. • Net interest income earned by the Company was $9.8 million (Q4 2013 – $9.9 million), a decrease of $0.1 million, or 1.5%, from Q4 2013. The decrease over Q4 2013 is mainly due to a lower average net mortgage investment portfolio at the outset of Q4 2014 that resulted from greater than normal repayments in Q2 2014 and Q3 2014. • The Company received lender fees of $2.5 million (Q4 2013 – $0.7 million) or a weighted average lender fee of 1.5% (Q4 2013 – 1.6%). The increase in lender fees is directly related to the significant increase in advances on new mortgage investments of $119.0 million made in Q4 2014 relative to Q4 2013. • The Company generated income from operations of $7.4 million (Q4 2013 – $6.8 million), an increase of $0.6 million, or 8.7%, from Q4 2013. The increase in income from operations is mainly attributed to the decreased provision for mortgage investments loss and general and administrative expenses relative to Q4 2013 and is partially offset by the increase in management and performance fees relative to Q4 2013. • The Company recorded an unrealized fair value loss on two of its FPHFS totalling $0.8 million. • The Company declared dividends to common shareholders of $7.3 million (Q4 2013 – $7.4 million, inclusive of Class A, Class B and common share dividends). Since inception, the dividends have exceeded the Company’s targeted dividend yield of the 2-Year Government of Canada Bond Yield (“2-Yr GOC Yield”) plus 550 basis points. • • In October 2014, the Company amended the credit facility agreement, increasing the facility to $35.0 million, while also extending the term for an additional two years at the same pricing, and adding an option to increase the facility limit to $60.0 million, subject to certain terms and conditions. Subsequent to year end, the Company completed a $15.0 million increase on the credit facility, taking its total available borrowing limit to $50.0 million. For the years ended December 31, 2014 (the “Year” or “2014”) and December 31, 2013 (“2013”) • The Company funded 68 new net mortgage investments (2013 – 69) totalling $401.3 million (2013 – $198.7 million), had additional advances on existing mortgage investments totalling $98.0 million (2013 – $42.6 million) and received full repayments on 59 mortgage investments (2013 – 50) and partial pay downs totalling $382.6 million (2013 – $283.1 million), resulting in net mortgage investments of $397.3 million at December 31, 2014 (December 31, 2013 – $317.2 million), an increase of 25.3% from December 31, 2013. • Net interest income earned by the Company was $36.7 million (2013 – $39.7 million), a decrease of $3.0 million, or 7.6%, from 2013. The decrease over 2013 is mainly due to a lower average net mortgage investment portfolio resulting from greater than average repayments. • The Company received lender fees of $5.8 million (2013 – $3.6 million) or a weighted average lender fee of 1.6% (2013 – 1.7%). The increase in lender fees is directly related to the significant increase in advances on new mortgage investments of $202.6 million made in 2014 relative to 2013. • The Company generated income from operations of $28.3 million (2013 – $25.5 million), an increase of $2.8 million, or 10.9%, from 2013. Although 2014 has generated lower net interest income relative to 2013, it has been offset by the reduction in expenses resulting from no Transition costs and trailer fees and a higher mortgage loss provision experienced in 2013. • The Company recorded a $0.3 million collective mortgage provision along with a $0.8 million unrealized fair value loss on two of its FPHFS. • The Company declared dividends to common shareholders of $30.3 million (2013 – $29.3 million, inclusive of Class A, Class B and common share dividends). Since inception, the dividends have exceeded the Company’s targeted dividend yield. • The Company foreclosed on the underlying security of a mortgage investment with outstanding principal and costs of $69.6 million and accrued interest of $1.8 million. This underlying security was subsequently 12 Timbercreek Mortgage Investment Corporation sold to a third party, with the proceeds from the sale repaying all of the outstanding principal and interest from the mortgage investment and resulted in a gain of $0.1 million. • The Board of Directors appointed Andrew Jones as Chief Executive Officer (“CEO”) of the Company, effective January 20, 2014, to replace Blair Tamblyn. Blair Tamblyn remains as Chairman of the Board of Directors. • On February 25, 2014, the Company completed a public offering of $30.0 million 6.35% convertible debentures, including exercising the over-allotment option of $4.5 million, for net proceeds of $32.5 million (the “debentures”), which were used to fund additional net mortgage investments. • The Board of Directors appointed David Melo as Chief Financial Officer (“CFO”) of the Company, effective March 25, 2014, to replace Ugo Bizzarri. Ugo Bizzarri was elected to the Board of Directors as part of the Transition. • On April 24, 2014, the Company closed on a public offering of 3,737,500 common shares, including exercising the over-allotment option, at a price of $9.35 per share. The Company received net proceeds of TIMBERCREEK MORTGAGE INVESTMENT CORPORATION $33.2 million, which were used to fund additional net mortgage investments. • • In October 2014, the Company amended and extended the credit facility agreement as described above. Management’s Discussion and Analysis Subsequent to year end, the Company completed a $15.0 million increase on the credit facility, taking its total available borrowing limit to $50.0 million. For the year ended December 31, 2014 ANALYSIS OF FINANCIAL INFORMATION FOR THE YEAR Distributable income ANALYSIS O F FINANCIA L INFORM ATION FOR TH E YEAR Distributable incom e Net income and comprehensive income $ 5,812 $ 4,051 $ 24,917 $ 507 Three months ended December 31, Year ended December 31, 2014 2013 2014 2013 Less: amortization of lender fees Add: one-time Transition related costs Add: lender fees received during the period Add: amortization of financing costs, credit facility Add: amortization of financing costs, debentures Add: accretion expense, debentures Add: issuance cost of redeemable shares Add: net operating (gain) loss from FPHFS Add: fair value adjustments on FPHFS Add: provision for mortgage investments loss Add: dividends to holders of redeemable shares Distributable income Less: Dividends to holders of redeemable shares Less: Dividends to common shareholders (Over) under distribution Distributable income per share (basic and diluted) Payout ratio Turnover ratio (1,297) – 2,482 35 94 29 – 58 800 – – 8,013 – (7,326) (960) (4,437) (4,266) 156 714 27 – – 3 182 – 950 2,413 7,536 (2,414) (4,953) – 5,820 129 303 96 – 171 650 250 – 27,899 – (30,263) 3,530 3,633 144 – – 3 182 – 2,150 24,321 30,204 (24,321) (4,953) $ $ 687 $ 169 $ (2,364) $ 930 0.20 $ 0.20 $ 0.71 $ 91.4% 37.3% 97.8% 24.2% 108.5% 112.6% 0.79 96.9% 79.8% The distributable income reconciliation above provides a link between the Company’s IFRS reporting The distributable income reconciliation above provides a link between the Company’s IFRS reporting requirements, and its ability to generate recurring profit for distribution. requirements, and its ability to generate recurring profit for distribution. The Board of Directors have set a dividend policy that is predicated on what they believe to be a long-term The Board of Directors have set a dividend policy that is predicated on what they believe to be a long-term sustainable objective. A number of factors are assessed and evaluated each time the Board of Directors reviews sustainable objective. A number of factors are assessed and evaluated each time the Board of Directors reviews and approves dividends, including, but not limited to, forward-looking cash flow information such as budgets and forecasts. and approves dividends, including, but not limited to, forward-looking cash flow information such as budgets and forecasts. The Company experienced turnover of 112.6% in 2014, the highest in the Company’s history. The turnover, coupled with the cash drag normally experienced following an equity or debenture raise, resulted in dividends Timbercreek Mortgage Investment Corporation 13 in excess of distributable income of 108.5%. In Q4 2014, we made significant strides, including full deployment of cash plus usage of our credit facility. We expect to be continually leveraged in 2015 to minimize cash drag, while targeting a payout ratio of 100%. TIMBERCREEK MORTAGE INVESTMENT CORPORATION 10 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION The Company experienced turnover of 112.6% in 2014, the highest in the Company’s history. The turnover, coupled with the cash drag normally experienced following an equity or debenture raise, resulted in dividends in excess of distributable income of 108.5%. In Q4 2014, we made significant strides, including full deployment of cash plus usage of our credit facility. We expect to be continually leveraged in 2015 to minimize cash drag, while targeting a payout ratio of 100%. Management’s Discussion and Analysis For the year ended December 31, 2014 Statements of Income and Comprehensive Income Statem ents of Incom e and Com prehensive Incom e Net interest income $ 9,774 $ 9,926 (1.5)% $ 36,710 $ 39,731 (7.6%) Three months ended % Year ended % December 31, Change December 31, Change 2014 2013 2014 2013 Expenses Income from operations Net operating gain (loss) from FPHFS Fair value adjustment of FPHFS Financing costs: Interest on credit facility Interest on convertible debentures Issuance costs of redeemable shares Dividends to holders of redeemable shares (2,336) 7,438 (58) (800) (87) (681) – – (3,082) 24.2% (8,438) (14,244) 40.8% 6,844 8.7% 28,272 25,487 (182) 68.4% – (100.0%) (195) 55.9% – (3) (100.0%) 100.0% (2,414) 100.0% (171) (650) (275) (2,259) – – 10.9% 6.1% (182) – (100.0%) (474) 42.2% – (3) (100.0%) 100.0% (24,321) 100.0% Net income and comprehensive income $ 5,812 $ 4,050 58.3% $ 24,917 $ 507 4933.6% Earnings per share (basic and diluted) 1 1 Earnings per share for 2013 has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of 1 Earnings per share for 2013 has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of redeemable redeemable shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the Company. Company. (16.4%) (2.4%) 0.63 0.65 0.14 0.17 $ $ $ $ Net interest incom e 1 For Q4 2014 and the Year, the Company earned net interest income of $9.8 million and $36.7 million, Net interest income1 For Q4 2014 and the Year, the Company earned net interest income of $9.8 million and $36.7 million, respectively (Q4 2013 – $9.9 million; 2013 – $39.7 million). Net interest income is made up of the following: respectively (Q4 2013 – $9.9 million; 2013 – $39.7 million). Net interest income is made up of the following: (a) Interest income (a) Interest income For Q4 2014 and the Year, the Company earned $8.4 million and $32.0 million (Q4 2013 – $8.7 million; 2013 – $34.9 million) in interest income on the net mortgage investments. The decrease over the 2013 For Q4 2014 and the Year, the Company earned $8.4 million and $32.0 million (Q4 2013 – $8.7 million; 2013 – $34.9 million) in interest income on the net mortgage investments. The decrease over the 2013 comparable periods is mainly due to a lower average net mortgage investment portfolio resulting from greater than comparable periods is mainly due to a lower average net mortgage investment portfolio resulting from average repayments, coupled with a lower weighted average interest rate relative to 2013. The weighted greater than average repayments, coupled with a lower weighted average interest rate relative to 2013. average interest rate on the net mortgage investments decreased over the Year, from 9.8% at December 31, 2013 to 9.4% at December 31, 2014, mainly due to increased competition faced during the Year, placing downward pressure on lending rates. The weighted average interest rate on the net mortgage investments decreased over the Year, from 9.8% at December 31, 2013 to 9.4% at December 31, 2014, mainly due to increased competition faced during the Year, placing downward pressure on lending rates. (b) Lender fee income (b) Lender fee income 2013 – $0.7 million; 2013 – $3.6 million), or a weighted average lender fee of 1.5% and 1.6% respectively During Q4 2014 and the Year, the Company received lender fees of $2.5 million and $5.8 million (Q4 2013 – $0.7 million; 2013 – $3.6 million), or a weighted average lender fee of 1.5% and 1.6% respectively (Q4 2013 – During Q4 2014 and the Year, the Company received lender fees of $2.5 million and $5.8 million (Q4 1.6%; 2013 – 1.7%). The lender fees are amortized using the effective interest rate method over the expected life of the mortgage investments to interest income. For Q4 2014 and the Year, lender fees of $1.3 million and (Q4 2013 – 1.6%; 2013 – 1.7%). The lender fees are amortized using the effective interest rate method over $4.4 million respectively, (Q4 2013 – $1.0 million; 2013 – $4.3 million) were amortized to lender fee income. The lender fees generated by the Company continue to be a significant component of income resulting the expected life of the mortgage investments to interest income. For Q4 2014 and the Year, lender fees from mortgage investment turnover. The Manager does not retain any portion of the lender fees, ensuring management interests are aligned with the Company. of $1.3 million and $4.4 million respectively, (Q4 2013 – $1.0 million; 2013 – $4.3 million) were amortized to lender fee income. The lender fees generated by the Company continue to be a significant 1 For analysis purposes, net interest income and its component parts are discussed net of payments made on account of mortgage 1. syndications to provide the reader with a more representative reflection of the Company’s performance. For analysis purposes, net interest income and its component parts are discussed net of payments made on account of mortgage syndications to provide the reader with a more representative reflection of the Company’s performance. TIMBERCREEK MORTAGE INVESTMENT CORPORATION 11 14 Timbercreek Mortgage Investment Corporation (c) Other income For Q4 2014 and the Year, the Company earned $0.1 million and $0.2 million (Q4 2013 – $0.3 million; 2013 – $0.5 million) in other income. Other income includes fees earned on advances of mortgage investments, prepayment penalties and exit fees earned on mortgage investment repayments and other miscellaneous fees. Expenses For Q4 2014 and the Year, the Company’s expense ratio was 2.2% and 2.0% (Q4 2013 – 2.3%; 2013 – 2.5%), including a fixed expense ratio of 1.5% and 1.5% (Q4 2013 – 1.9%; 2013 – 1.9%). The decrease in the expense and fixed expense ratios relative to the 2013 comparable periods is primarily driven by the growth in total assets, resulting from the equity and debenture offerings in 2014. Management fees (a) Management fees As part of the Transition, the Company entered into a new management agreement with Timbercreek Asset Management Inc. (the “Manager”) and terminated its management agreement with Timbercreek Asset Management Ltd., a wholly owned subsidiary of the Manager. Under the new management agreement, the Company pays the Manager an annual management fee of 1.20% per annum of the gross assets of the Company, calculated and paid monthly in arrears, plus applicable taxes. The gross assets are calculated as the total assets of the Company before deducting any liabilities, less any mortgage syndication liabilities. For Q4 2014 and the Year, the Company incurred management fees of $1.4 million and $5.4 million respectively (Q4 2013 – $1.2 million; 2013 – $5.0 million). The increase is directly related to the increase in gross assets. (b) Performance fees Under the new management agreement, the Manager continues to be entitled to a performance fee. In any calendar year where the Company has net earnings available for distribution to shareholders in excess of the hurdle rate (the “Hurdle Rate”), which is defined as the average 2-Yr GOC Yield for the 12-month period then ended plus 450 basis points, the Manager is entitled to receive from the Company a performance fee equal to 20% of the net earnings of the Company available to distribute over the Hurdle Rate. The net earnings of the Company shall mean the net income before performance fees of the Company in accordance with applicable accounting principles and adjusted for certain other non-cash adjustments as defined in the management agreement. For Q4 2014 and the Year, the Company accrued performance fees of $0.7 million and $2.0 million (Q4 2013 – $0.3 million; 2013 – $1.9 million). The annualized Hurdle Rate for the Year was 5.6% (2013 – 5.6%). Trailer fees In conjunction with the shareholder approval for the Transition, the Company is no longer required to pay trailer fees to the brokers effective from the quarter ended September 30, 2013. Prior to Q3 2013, the Company paid each registered dealer a trailer fee equal to 0.50% annually of the net redemption value per Class A share held by clients of the registered dealers, calculated and paid at the end of each calendar quarter. As such, the Company paid no trailer fees during the Year (2013 – $0.7 million). General and administrative For Q4 2014 and the Year, the Company incurred general and administrative expenses of $0.2 million and $0.8 million (Q4 2013 – $0.4 million; 2013 - $0.9 million). General and administrative expenses consist mainly of audit fees, professional fees, director fees and other operating costs associated with operating the Company and administration of the mortgage investment portfolio. The operating expense ratio for the Year equated to 0.2% (2013 – 0.3%), at December 31, 2014. The decrease is mainly due to an increase in assets resulting from the equity and debenture offerings, coupled with additional costs savings. Net operating (gain) loss from foreclosed properties held for sale The Company consolidates the operating activities of the foreclosed properties held for sale. The net operating (gain) loss from foreclosed properties held for sale for Q4 2014 and the Year were $0.1 million and $0.2 million respectively (Q4 2013 – $0.2 million; 2013 – $0.2 million). Timbercreek Mortgage Investment Corporation 15 Fair value adjustment on foreclosed properties held for sale During Q3 2014, the Company foreclosed on a mortgage investment which had gone into default earlier in the Year. The Company sold the property with a net gain on the sale of $0.1 million. The Company also recorded an unrealized fair value loss of $0.8 million on the FPHFS. The adjustments pertain to two of its properties. For our property located in Pemberton, BC, we have reduced the value by $0.4 million, in-line with the appraised value. The property is now stabilized with full commercial occupancy and the apartments are being occupied for short term rentals. For our apartment condominium conversion property located in Saskatoon, SK, the Company recorded an adjustment loss of $0.4 million relating to costs it incurred to get the property ready for disposition. Interest on credit facility Financing costs include interest paid on amounts drawn on the credit facility, stand-by fees charged on unutilized credit facility amounts and amortization of financing costs which were incurred on closing of the credit facility. Financing costs for Q4 2014 and the Year relating to the credit facility were $0.1 million and $0.3 million, respectively (Q4 2013 – $0.2 million; 2013 – $0.5 million). The Company incurred $0.3 million of financing costs in the Year on amending and extending the term of the credit facility. These costs are amortized over the new term of the credit facility. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis Management’s Discussion and Analysis For the year ended December 31, 2014 For the year ended December 31, 2014 Interest on convertible debentures During Q1 2014, the Company issued $34.5 million of 6.35% convertible unsecured subordinated debentures. Interest costs related to the debentures are recorded in financing costs using the effective interest rate method. For Q4 2014 and the Year, interest on the debentures of $0.7 million and $2.3 million (Q4 2013 – nil; 2013 – nil), is made up of the following: Interest on the debentures Interest on the debentures Amortization of issue costs Amortization of issue costs Accretion of equity component of the debentures Accretion of equity component of the debentures $ $ $ $ 558 558 93 93 29 29 680 680 $ $ $ $ 1,860 1,860 303 303 96 96 2,259 2,259 Three months ended Three months ended December 31, 2014 December 31, 2014 Year ended Year ended December 31, 2014 December 31, 2014 Dividends to holders of common shares and redeemable shares Dividends to holders of common shares and redeemable shares The Company intends to pay dividends to shareholders on a monthly basis within 15 days following the end of Dividends to holders of common shares and redeemable shares The Company intends to pay dividends to shareholders on a monthly basis within 15 days following the end of The Company intends to pay dividends to shareholders on a monthly basis within 15 days following the end of each month. Below is a summary of the dividends to holders of common shares and holders of redeemable each month. Below is a summary of the dividends to holders of common shares and holders of redeemable each month. Below is a summary of the dividends to holders of common shares and holders of redeemable shares. shares. shares. Three months ended December 31, 2014 Three months ended December 31, 2014 Year ended December 31, 2014 Year ended December 31, 2014 Dividends Dividends per share per share Total Total Dividends Dividends per share per share Total Total Common shares Common shares $ $ 0.180 0.180 $ $ 7,326 7,326 $ $ 0.762 0.762 $ $ 30,263 30,263 Three months ended December 31, 2013 Three months ended December 31, 2013 Year ended December 31, 2013 Year ended December 31, 2013 Dividends Dividends per share per share Total Total Dividends Dividends per share per share Class A Class A Class B Class B Common shares Common shares $ $ 0.063 0.063 0.067 0.067 0.134 0.134 $ $ $ $ 2,170 2,170 $ $ 244 244 4,953 4,953 0.630 0.630 0.670 0.670 0.134 0.134 7,367 7,367 $ $ Total Total $ $ 21,876 21,876 2,445 2,445 4,953 4,953 29,274 29,274 The actual dividend yield for the Year of 9.16% on common shares (2013 – 8.33% on combined Class A and The actual dividend yield for the Year of 9.16% on common shares (2013 – 8.33% on combined Class A and The actual dividend yield for the Year of 9.16% on common shares (2013 – 8.33% on combined Class A and common shares) is in excess of the Company’s targeted dividend yield of 6.55% (2013 – 6.61%). common shares) is in excess of the Company’s targeted dividend yield of 6.55% (2013 – 6.61%). common shares) is in excess of the Company’s targeted dividend yield of 6.55% (2013 – 6.61%). Earnings per share Earnings per share Earnings per share for the Year was $0.63 per share (2013 – $0.65 per share). Income for 2014 was lower due to Earnings per share for the Year was $0.63 per share (2013 – $0.65 per share). Income for 2014 was lower due to lower net income for the Year (2013 net income is adjusted for dividends to holders of redeemable shares and lower net income for the Year (2013 net income is adjusted for dividends to holders of redeemable shares and issuance costs of redeemable shares) which was partially offset by the reduction in expenses resulting from no issuance costs of redeemable shares) which was partially offset by the reduction in expenses resulting from no Transition costs and trailer fees and a higher mortgage loss provision experienced in 2013. Transition costs and trailer fees and a higher mortgage loss provision experienced in 2013. Timbercreek Mortgage Investment Corporation 16 Earnings per share for 2013 has been calculated as if the Transition occurred on January 1, 2013 and as a result, Earnings per share for 2013 has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of redeemable shares and issuance costs of redeemable shares for the year ended dividends to holders of redeemable shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the Company. December 31, 2013 have been added back to the net loss of the Company. STATEM EN T OF FIN AN CIAL PO SITIO N STATEM EN T OF FIN AN CIAL PO SITIO N Net m ortgage investm ents Net m ortgage investm ents The balance of net mortgage investments is as follows: The balance of net mortgage investments is as follows: TIMBERCREEK MORTAGE INVESTMENT CORPORATION 14 TIMBERCREEK MORTAGE INVESTMENT CORPORATION 14 Earnings per share Earnings per share for the Year was $0.63 per share (2013 – $0.65 per share). Income for 2014 was lower due to lower net income for the Year (2013 net income is adjusted for dividends to holders of redeemable shares and issuance costs of redeemable shares) which was partially offset by the reduction in expenses resulting from no Transition costs and trailer fees and a higher mortgage loss provision experienced in 2013. Earnings per share for 2013 has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of redeemable shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the Company. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis Management’s Discussion and Analysis For the year ended December 31, 2014 For the year ended December 31, 2014 STATEMENT OF FINANCIAL POSITION Net mortgage investments The balance of net mortgage investments is as follows: Gross mortgage investments, including mortgage Gross mortgage investments, including mortgage syndications syndications Mortgage syndications liabilities Mortgage syndications liabilities December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013 Change Change $ $ $ $ $ $ 616,174 616,174 (219,581) (219,581) 396,593 396,593 (4,392) (4,392) 4,890 4,890 250 250 397,341 397,341 442,166 442,166 (124,379) (124,379) 317,787 317,787 (4,691) (4,691) 3,508 3,508 550 550 317,154 317,154 174,008 174,008 (95,202) (95,202) 78,806 78,806 299 299 1,382 1,382 (300) (300) Interest receivable Interest receivable Unamortized lender fees Unamortized lender fees Allowance for mortgage investments loss Allowance for mortgage investments loss Net mortgage investments Net mortgage investments As at December 31, 2014, the Company’s mortgage investments portfolio is comprised of 105 mortgage As at December 31, 2014, the Company’s mortgage investments portfolio is comprised of 105 mortgage As at December 31, 2014, the Company’s mortgage investments portfolio is comprised of 105 mortgage investments (December 31, 2013 – 96), with a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) investments (December 31, 2013 – 96), with a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) investments (December 31, 2013 – 96), with a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) and an average mortgage investment of $3.8 million (December 31, 2013 – $3.3 million). and an average mortgage investment of $3.8 million (December 31, 2013 – $3.3 million). and an average mortgage investment of $3.8 million (December 31, 2013 – $3.3 million). 80,187 80,187 $ $ $ $ $ $ Portfolio allocation Portfolio allocation Portfolio allocation As at December 31, the Company’s net mortgage investments were allocated across the following categories: As at December 31, the Company’s net mortgage investments were allocated across the following categories: As at December 31, the Company’s net mortgage investments were allocated across the following categories: (a) Security Position (a) Security position (a) Security position First mortgages First mortgages Non-first mortgages Non-first mortgages # of Net # of Net Mortgage Mortgage Investments Investments 84 84 21 21 105 105 December 31, 2014 December 31, 2014 % of Net % of Net Mortgage Mortgage Investments Investments 69.5% 69.5% 30.5% 30.5% 100.0% 100.0% # of Net # of Net Mortgage Mortgage Investments Investments 72 72 24 24 96 96 December 31, 2013 December 31, 2013 % of Net % of Net Mortgage Mortgage Investments Investments 61.1% 61.1% 38.9% 38.9% 100.0% 100.0% The Company’s allocation to first mortgages has increased moderately by 8.4% over the Year. During the The Company’s allocation to first mortgages has increased moderately by 8.4% over the Year. During the Year, the Company co-invested in several first mortgage investments with Timbercreek Senior Mortgage The Company’s allocation to first mortgages has increased moderately by 8.4% over the Year. During the Year, the Company co-invested in several first mortgage investments with Timbercreek Senior Mortgage Investment Corporation (“TSMIC”) and holds subordinate first mortgage positions in these co-investments Year, the Company co-invested in several first mortgage investments with Timbercreek Senior Mortgage Investment Corporation (“TSMIC”) and holds subordinate first mortgage positions in these co-investments in relation to TSMIC. Investment Corporation (“TSMIC”) and holds subordinate first mortgage positions in these co-investments in in relation to TSMIC. relation to TSMIC. (b) Region (b) Region ON ON AB AB QC QC BC BC SK SK MB MB OT OT NS NS # of Net # of Net Mortgage Mortgage Investments Investments 50 50 11 11 16 16 10 10 7 7 6 6 3 3 2 2 December 31, 2013 December 31, 2014 December 31, 2013 December 31, 2014 % of Net % of Net % of Net % of Net Mortgage Mortgage Mortgage Mortgage Investments Investments Investments Investments 51.4% 44.4% 51.4% 44.4% 12.6% 6.3% 12.6% 6.3% 13.7% 14.3% 13.7% 14.3% 14.5% 9.9% 14.5% 9.9% 3.3% 15.3% 15.3% 3.3% Timbercreek Mortgage Investment Corporation 2.5% 3.3% 2.5% 3.3% 1.1% 5.3% 1.1% 5.3% 0.9% 1.2% 0.9% 1.2% # of Net # of Net Mortgage Mortgage Investments Investments 47 47 15 15 14 14 9 9 5 5 3 3 2 2 1 1 105 105 100.0% 100.0% 96 96 100.0% 100.0% TIMBERCREEK MORTAGE INVESTMENT CORPORATION 15 TIMBERCREEK MORTAGE INVESTMENT CORPORATION 15 17 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 Gross mortgage investments, including mortgage syndications Mortgage syndications liabilities Interest receivable Unamortized lender fees Allowance for mortgage investments loss December 31, 2014 December 31, 2013 Change $ 616,174 $ 442,166 $ 174,008 (219,581) 396,593 (4,392) 4,890 250 (124,379) 317,787 (4,691) 3,508 550 (95,202) 78,806 299 1,382 (300) Net mortgage investments $ 397,341 $ 317,154 $ 80,187 As at December 31, 2014, the Company’s mortgage investments portfolio is comprised of 105 mortgage investments (December 31, 2013 – 96), with a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) and an average mortgage investment of $3.8 million (December 31, 2013 – $3.3 million). As at December 31, the Company’s net mortgage investments were allocated across the following categories: Portfolio allocation (a) Security position First mortgages Non-first mortgages December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments 84 21 105 69.5% 30.5% 100.0% 72 24 96 61.1% 38.9% 100.0% The Company’s allocation to first mortgages has increased moderately by 8.4% over the Year. During the Year, the Company co-invested in several first mortgage investments with Timbercreek Senior Mortgage Investment Corporation (“TSMIC”) and holds subordinate first mortgage positions in these co-investments (b) Region in relation to TSMIC. (b) Region December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments ON AB QC 50 11 16 44.4% 6.3% 14.3% 47 15 14 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 10 7 9.9% 15.3% BC SK 9 5 MB 6 3.3% 3 OT Management’s Discussion and Analysis 2 For the year ended December 31, 2014 105 100.0% 5.3% 1.2% NS 96 2 3 1 51.4% 12.6% 13.7% 14.5% 3.3% 2.5% 1.1% 0.9% 100.0% The Company continues to maintain a diversified portfolio of net mortgage investments primarily across The Company continues to maintain a diversified portfolio of net mortgage investments primarily across TIMBERCREEK MORTAGE INVESTMENT CORPORATION 15 Canada, with its greatest concentration in Canada’s largest provinces. As at December 31, 2014, 74.9% of Canada, with its greatest concentration in Canada’s largest provinces. As at December 31, 2014, 74.9% of the the net mortgage investments (December 31, 2013 – 92.2%) were allocated across Ontario, Quebec, British net mortgage investments (December 31, 2013 – 92.2%) were allocated across Ontario, Quebec, British Columbia and Alberta. The Company has continued to maintain significant exposure to Ontario as it is Columbia and Alberta. The Company has continued to maintain significant exposure to Ontario as it is Canada’s most populated province with the greatest number of metropolitan cities. Of note, the Company has a low exposure to the Alberta market, which has experienced volatility stemming from the recent drop in Canada’s most populated province with the greatest number of metropolitan cities. Of note, the Company oil prices. has a low exposure to the Alberta market, which has experienced volatility stemming from the recent drop in oil prices. (c) Maturity (c) Maturity Maturing 2014 Maturing 2015 Maturing 2016 Maturing 2017 Maturing 2018 December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments – 42 32 30 1 105 0.0% 38.5% 34.2% 24.9% 2.4% 100.0% 38 41 16 1 – 96 32.0% 51.3% 15.1% 1.6% 0.0% 100.0% The Company’s portfolio turnover rate for the Year was 112.6% (2013 – 79.8%). The Company’s strong portfolio turnover helps generate fee income, all of which goes to the Company, and helps ensure the The Company’s portfolio turnover rate for the Year was 112.6% (2013 – 79.8%). The Company’s strong portfolio turnover helps generate fee income, all of which goes to the Company, and helps ensure the Company Company is able to respond quickly to a changing interest rate environment. The weighted average term of is able to respond quickly to a changing interest rate environment. The weighted average term of the the portfolio as at December 31, 2014 is 2.1 years (December 31, 2013 – 2.2 years), in-line with the portfolio’s portfolio as at December 31, 2014 is 2.1 years (December 31, 2013 – 2.2 years), in-line with the portfolio’s target maturity of 1.5 – 3.0 years. The weighted average remaining term to maturity as at December 31, 2014 target maturity of 1.5 – 3.0 years. The weighted average remaining term to maturity as at December 31, 2014 is 1.4 years (December 31, 2013 – 1.2 years). A majority of the mortgage investments contain a prepayment is 1.4 years (December 31, 2013 – 1.2 years). A majority of the mortgage investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance, which would in effect reduce the weighted average remaining term to maturity. maintenance, which would in effect reduce the weighted average remaining term to maturity. (d) Asset type December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments Multi-residential Office 18 Retail Timbercreek Mortgage Investment Corporation Retirement Industrial Unimproved land Other-residential Hotels Self-storage Single-family residential 50 15 14 5 4 8 2 3 2 2 60.7% 8.0% 14.3% 3.0% 1.6% 6.9% 0.4% 3.1% 0.9% 1.1% 36 15 14 8 7 6 4 2 2 2 96 51.7% 13.6% 13.2% 12.5% 1.8% 4.1% 0.9% 1.2% 0.7% 0.3% 100.0% 105 100.0% TIMBERCREEK MORTAGE INVESTMENT CORPORATION 16 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 The Company continues to maintain a diversified portfolio of net mortgage investments primarily across Canada, with its greatest concentration in Canada’s largest provinces. As at December 31, 2014, 74.9% of the net mortgage investments (December 31, 2013 – 92.2%) were allocated across Ontario, Quebec, British Columbia and Alberta. The Company has continued to maintain significant exposure to Ontario as it is Canada’s most populated province with the greatest number of metropolitan cities. Of note, the Company has a low exposure to the Alberta market, which has experienced volatility stemming from the recent drop in oil prices. (c) Maturity Maturing 2014 Maturing 2015 Maturing 2016 Maturing 2017 Maturing 2018 December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments – 42 32 30 1 105 0.0% 38.5% 34.2% 24.9% 2.4% 100.0% 38 41 16 1 – 96 32.0% 51.3% 15.1% 1.6% 0.0% 100.0% The Company’s portfolio turnover rate for the Year was 112.6% (2013 – 79.8%). The Company’s strong portfolio turnover helps generate fee income, all of which goes to the Company, and helps ensure the Company is able to respond quickly to a changing interest rate environment. The weighted average term of the portfolio as at December 31, 2014 is 2.1 years (December 31, 2013 – 2.2 years), in-line with the portfolio’s target maturity of 1.5 – 3.0 years. The weighted average remaining term to maturity as at December 31, 2014 is 1.4 years (December 31, 2013 – 1.2 years). A majority of the mortgage investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance, which would in effect reduce the weighted average remaining term to maturity. (d) Asset Type (d) Asset type December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments Multi-residential Office Retail Retirement Industrial Unimproved land 50 15 14 5 4 8 60.7% 8.0% 14.3% 3.0% 1.6% 6.9% 36 15 14 8 7 6 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Other-residential 0.4% 4 2 Hotels 3 3.1% 2 Self-storage Management’s Discussion and Analysis For the year ended December 31, 2014 Single-family residential 100.0% 1.1% 105 96 2 2 0.9% 2 2 51.7% 13.6% 13.2% 12.5% 1.8% 4.1% 0.9% 1.2% 0.7% 0.3% 100.0% The Company has developed a lending niche predominantly targeting short-term mortgages, secured by The Company has developed a lending niche predominantly targeting short-term mortgages, secured by cash-flowing properties, while specializing in multi-residential real estate assets. Historically, the Company cash-flowing properties, while specializing in multi-residential real estate assets. Historically, the Company has had very little exposure to land development, single-family residential and construction loans, where demand is largely impacted by the strength or weakness of the Canadian housing market. has had very little exposure to land development, single-family residential and construction loans, where TIMBERCREEK MORTAGE INVESTMENT CORPORATION 16 demand is largely impacted by the strength or weakness of the Canadian housing market. (e) Interest Rate (e) Interest rate 9.99% or lower 10.00%–10.99% 11.00% or greater December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments 67 21 17 105 76.4% 9.1% 14.5% 100.0% 47 23 26 96 59.3% 22.7% 18.0% 100.0% The weighted average interest rate, excluding lender fee income, on the net mortgage investments at The weighted average interest rate, excluding lender fee income, on the net mortgage investments at December 31, 2014 was 9.4% (December 31, 2013 – 9.8%). Although the weighted average interest rate has December 31, 2014 was 9.4% (December 31, 2013 – 9.8%). Although the weighted average interest rate has decreased over the Year, it is still significantly greater than the Company’s target dividend for the Year of decreased over the Year, it is still significantly greater than the Company’s target dividend for the Year 6.55% (December 31, 2013 – 6.61%), equal to the 2-Yr GOC Yield plus 550 basis points, while providing of 6.55% (December 31, 2013 – 6.61%), equal to the 2-Yr GOC Yield plus 550 basis points, while providing sufficient margin for operating expenses of the Company. sufficient margin for operating expenses of the Company. (f) Loan-to-value December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments 55% or less 56%–60% 61%–65% 66%–70% 71%–75% 76%–80% 81%–85% 20 10 13 11 17 19 15 105 9.3% 7.2% 8.8% 14.5% 18.6% 11.5% 30.1% 26 6 9 11 10 13 21 15.1% 3.0% 5.1% 9.8% 13.1% 19.1% 34.8% 100.0% 100.0% Timbercreek Mortgage Investment Corporation 96 19 As at December 31, 2014, the weighted average loan-to-value on the mortgage investment portfolio was 70.8% (December 31, 2013 – 70.8%), well below the maximum threshold of 85%. M ortgage syndication liabilities The Company enters into certain mortgage participation agreements with third party lenders, using senior and subordinated participation, whereby the third party lenders take the senior position and the Company retains the subordinated position. These agreements generally provide an option to the Company to repurchase the senior position, but not the obligation, at a purchase price equal to the outstanding principal amount of the lenders’ proportionate share together with all accrued interest. During the Year, the mortgage syndication TIMBERCREEK MORTAGE INVESTMENT CORPORATION 17 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 The Company has developed a lending niche predominantly targeting short-term mortgages, secured by cash-flowing properties, while specializing in multi-residential real estate assets. Historically, the Company has had very little exposure to land development, single-family residential and construction loans, where demand is largely impacted by the strength or weakness of the Canadian housing market. (e) Interest rate 9.99% or lower 10.00%–10.99% 11.00% or greater December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments 67 21 17 105 76.4% 9.1% 14.5% 100.0% 47 23 26 96 59.3% 22.7% 18.0% 100.0% The weighted average interest rate, excluding lender fee income, on the net mortgage investments at December 31, 2014 was 9.4% (December 31, 2013 – 9.8%). Although the weighted average interest rate has decreased over the Year, it is still significantly greater than the Company’s target dividend for the Year of 6.55% (December 31, 2013 – 6.61%), equal to the 2-Yr GOC Yield plus 550 basis points, while providing sufficient margin for operating expenses of the Company. (f) Loan-to-value (f) Loan-to-value 55% or less 56%–60% 61%–65% 66%–70% 71%–75% 76%–80% 81%–85% December 31, 2014 December 31, 2013 # of Net Mortgage % of Net Mortgage # of Net Mortgage % of Net Mortgage Investments Investments Investments Investments 20 10 13 11 17 19 15 105 9.3% 7.2% 8.8% 14.5% 18.6% 11.5% 30.1% 100.0% 26 6 9 11 10 13 21 96 15.1% 3.0% 5.1% 9.8% 13.1% 19.1% 34.8% 100.0% As at December 31, 2014, the weighted average loan-to-value on the mortgage investment portfolio was As at December 31, 2014, the weighted average loan-to-value on the mortgage investment portfolio was 70.8% (December 31, 2013 – 70.8%), well below the maximum threshold of 85%. 70.8% (December 31, 2013 – 70.8%), well below the maximum threshold of 85%. M ortgage syndication liabilities Mortgage syndication liabilities The Company enters into certain mortgage participation agreements with third party lenders, using senior and The Company enters into certain mortgage participation agreements with third party lenders, using senior and subordinated participation, whereby the third party lenders take the senior position and the Company retains subordinated participation, whereby the third party lenders take the senior position and the Company retains the subordinated position. These agreements generally provide an option to the Company to repurchase the the subordinated position. These agreements generally provide an option to the Company to repurchase the senior position, but not the obligation, at a purchase price equal to the outstanding principal amount of the senior position, but not the obligation, at a purchase price equal to the outstanding principal amount of the lenders’ proportionate share together with all accrued interest. During the Year, the mortgage syndication lenders’ proportionate share together with all accrued interest. During the Year, the mortgage syndication liabilities have increased to $219.6 million (December 31, 2013 – $124.4 million), as the Company syndicated on several newly funded mortgages investments during the Year. Mortgage syndication liabilities will vary from quarter to quarter and is dependent on the type of investments seen at any particular time, and not necessarily indicative of a future trend. TIMBERCREEK MORTAGE INVESTMENT CORPORATION 17 Foreclosed properties held for sale During the Year, the Company foreclosed on two properties (2013 – two) and reclassified the carrying amount of the outstanding principal, interest receivable, costs incurred and related allowance for mortgage investments loss to foreclosed properties held for sale. The fair value of the remaining foreclosed properties held for sale as at December 31, 2014 is $13.9 million (December 31, 2013 – $11.4 million). The Company has engaged third party managers to operate the properties while they are held for sale. The Company felt it was prudent to foreclose on a mortgage investment which had gone into default earlier in the year. As part of the foreclosure process, the Manager sought to control the process and acquired the syndicated first mortgage while attracting multiple interested purchasers. The Company subsequently sold the property, recouping all of its principal and costs of $69.6 million and accrued interest of $1.8 million, and also recognized a gain on the sale of $0.1 million. The purchaser also obtained mortgage financing from the Company in respect of the property. During the Year, the Company closed on the sale of eight residential units from one of the foreclosed properties for net proceeds of $1.4 million (2013 – nil). During Q4 2014, the Company recorded an unrealized fair value loss on the FPHFS of $0.8 million. Allowance for mortgage investments loss As at December 31, 2014, the Company has concluded that there is no objective evidence of impairment on any individual mortgage investment. At a collective level, the Company assesses for impairment to identify losses that have been incurred, but not yet identified, on an individual basis. As part of the Company’s analysis, it has grouped mortgage investments with similar risk characteristics, including geographical exposure, collateral type, loan-to-value, counterparty and other relevant groupings, and assesses them for impairment using statistical data. Based on the amounts determined by the analysis, the Company uses judgement to determine whether or not the actual future losses are expected to be greater or less than the amounts calculated. 20 Timbercreek Mortgage Investment Corporation During the Year, the Company recognized a collective impairment allowance of $0.3 million (December 31, 2013 – nil) and specific impairment allowance of nil (December 31, 2013 – $2.2 million). During the Year, the Company foreclosed on the underlying security relating to an impaired mortgage investment and reclassified $0.6 million from allowance for mortgage investments loss to FPHFS. Net working capital Net working capital decreased by $11.9 million to $0.1 million at December 31, 2014 from $12.0 million at December 31, 2013, mainly due to the reduction of cash on hand through the funding of net mortgage investments. Credit facility The Company has a credit facility with an available limit of $35.0 million (December 31, 2013 – $25.0 million). The Company amended and restated the credit facility on October 31, 2014, extending the term for an additional two years and increasing the available limit to $35.0 million, with an option to increase the limit to $60.0 million, subject to certain terms and conditions. Subsequent to year end, the Company completed an additional $15.0 million increase on the credit facility, taking its total available borrowing limit to $50.0 million. The credit facility is subject to an interest rate equal to the bank’s prime rate of interest plus 1.50% (December 31, 2013 – bank’s prime rate of interest plus 1.50%). The credit facility is secured by a general security agreement over the Company’s assets. As at December 31, 2014, $9.1 million was outstanding on the credit facility (December 31, 2013 – nil). The excess capacity will allow the Company to keep the portfolio more than 100% invested and minimize the impact of unanticipated portfolio turnover. Interest costs related to the credit facility are recorded in financing costs using the effective interest rate method. For the Year, interest on the credit facility of $0.3 million (2013 – $0.5 million) is included in financing costs. As at December 31, 2014, there were $0.2 million (December 31, 2013 – $0.1 million) in unamortized financing costs related to the placement of the credit facility netted against the outstanding facility balance. For the Year, the Company has amortized financing costs of $0.1 million (2013 – $0.1 million) to interest expense using the effective interest rate method. Convertible debentures In Q1 2014, the Company completed a public offering of $34.5 million, 6.35% convertible unsecured subordinated debentures for net proceeds of $32.5 million (the “debentures”). The debentures are listed on the TSX under the symbol ‘TMC.DB’, mature on March 31, 2019, with interest payable semi-annually on March 31 and September 30 of each year. The Company believes that a modest amount of structural leverage coupled with increased borrowing under the credit facility is accretive to net earnings, while still maintaining a low risk profile. Overall, total leverage including the maximum credit facility amount plus the convertible debentures at December 31, 2014, equates to approximately 16% of total assets, less mortgage syndication liabilities, an amount we believe is conservative. The debentures are convertible into common shares at the option of the holder at any time prior to their maturity at a conversion price of $11.25 per common share, subject to adjustment in certain events in accordance with the trust indenture governing the terms of the debentures. Upon issuance of the debentures, the liability component of the debentures was recognized initially at the fair value of a similar liability that does not have an equity conversion option. The difference between these two amounts of $0.6 million has been recorded as equity, with the remaining $31.9 million allocated to long-term debt. The discount on the debentures is being accreted such that the liability at maturity will equal the face value of $34.5 million. The issue costs of $2.0 million were proportionately allocated to the liability and equity components. The issue costs allocated to the liability component are amortized over the term of the debentures using the effective interest rate method. Common shares The Company is authorized to issue an unlimited number of common shares. The holders of common shares are entitled to receive notice of and to attend and vote at all meetings of the shareholders of the Company. The holders of the common shares shall be entitled to receive dividends as and when declared by the Board of Directors. Timbercreek Mortgage Investment Corporation 21 On April 24, 2014, the Company closed on a public offering of 3,737,500 common shares, including exercising the overallotment option, at a price of $9.35 per common share. The Company received gross proceeds of $34.9 million. In connection with the above-noted share offering, the Company incurred $1.8 million in issuance costs. There were no equity offerings during the year ended December 31, 2013. Dividend reinvestment plan As part of the Transition, the Company has amended and restated its dividend reinvestment plan (“DRIP”) effective as of November 20, 2013. The amended and restated DRIP (the “Amended DRIP”) replaces in its entirety the original DRIP (the “Original DRIP”) established by the Company on May 19, 2010. During the Year, 332,009 common shares were purchased on the open market under the Amended DRIP (2013 – 198,574 Class A shares issued and 194,948 Class A shares purchased on the open market under the Original DRIP; 35,250 common shares purchased on the open market under the Amended DRIP). Normal course issuer bid On November 13, 2014, the Company received the approval of the TSX to commence a second normal course issuer bid (the “Second Bid”) to purchase for cancellation up to a maximum of 4,052,822 common shares; representing approximately 10% of the public float of common shares as of November 11, 2014. Furthermore, subject to certain exemptions for block purchases, the purchases are limited to 13,170 common shares on any one trading day. The Second Bid commenced on November 17, 2014 and provides the Company with the flexibility to repurchase common shares for cancellation until its expiration on November 16, 2015, or such earlier date as the Second Bid is complete. From November 17, 2014 to December 31, 2014, the Company did not acquire any common shares for cancellation. The Company may use the 2014 NCIB to repurchase shares in years where the Company has income in excess of its dividends that would be accretive to shareholders. Non-executive director deferred share unit plan Commencing January 1, 2015, the Company instituted a non-executive director deferred share unit plan (the “Plan”) whereby, up to 100% of the compensation for a director may be paid to the director in the form of deferred share units (“DSUs”), payable quarterly in arrears. Directors may elect once every year, in accordance with the Plan, as to how much (if any) of his/her compensation will be paid in DSUs, having regard at all times to the ownership guidelines of the Plan. The portion of a director’s compensation which is not payable in the form of DSUs shall be paid by the Company in cash, quarterly in arrears. The purpose of the Plan is to (a) enhance the Company’s ability to provide long-term incentive compensation to directors which is linked to the performance of the Company and not dilutive to shareholders, (b) assist the Company in attracting, retaining and motivating its directors and (c) promote a closer alignment of interests between directors and the shareholders of the Company. As part of the Plan, each director must seek to acquire and maintain a direct or indirect ownership of common shares or deferred share units of the Company that has a value equal to at least three times the Director’s annual board retainer and meeting fees. Each director is to achieve this level of ownership within five years of becoming a director, subject to the requirement, being January 1, 2015 for the current directors. STATEMENT OF CASH FLOWS Cash from operating activities Cash from operating activities for the Year was $26.2 million (2013 – $23.8 million), an increase of $2.4 million, or 10.0%, from 2013. The increase is primarily a result of the increase in lender fees received during the Year of $2.2 million relative to 2013, a result of the significant turnover experienced in 2014. Cash from investing activities Cash utilized in investing activities for the Year was $80.9 million (2013 - $40.6 million, net cash received) and consisted of net proceeds from disposal and capital improvements on FPHFS of $35.4 million and the repayments of net mortgage investments of $382.6 million, less the funding of net mortgage investments of $498.9 million. 22 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Cash from financing activities Sources of cash from financing activities consisted of net proceeds from the Company’s issuance of convertible debentures of $32.5 million, issuance of common shares of $33.2 million and the Company’s advances on the credit facility of $9.1 million. After interest payments on the debentures and credit facility of $1.7 million and payment of dividends of $30.3 million, the net cash provided by financing activities was $42.8 million for the Year. Management’s Discussion and Analysis For the year ended December 31, 2014 QUARTERLY FINANCIAL INFO RM ATION QUARTERLY FINANCIAL INFORMATION The following is a quarterly summary of the Company’s results for the eight most recently completed quarters: The following is a quarterly summary of the Company’s results for the eight most recently completed quarters: Net interest income Expenses 1 Income from operations Net operating gain (loss) from FPHFS Fair value adjustment of FPHFS Financing costs: Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013 Q1 2013 $ 9,774 $ 8,660 $ 9,465 $ 8,811 $ 9,926 $ 9,888 $ 9,397 $ 10,520 (2,336) (2,042) 7,438 6,618 (2,049) 7,416 (2,011) 6,800 (3,082) 6,844 (5,622) (2,690) (2,851) 4,266 6,707 7,669 (58) (800) 81 149 (97) − (97) − (182) − − − − − − − Interest on credit facility (87) (67) (57) (64) (195) (98) (91) (90) Interest on convertible debentures Issuance costs of redeemable shares Dividends to holders of redeemable shares Total financing costs Net income (loss) and comprehensive income (loss) Earnings per share (basic and diluted) 2 (681) (671) (664) (243) − − − − − − − − (768) (738) (721) (307) − (3) − − − − − − (2,414) (2,612) (7,299) (7,311) (7,297) (7,397) (7,402) (7,387) $ 5,812 $ 6,110 $ 6,598 $ 6,396 $ 4,050 $ (3,131) $ (695) $ 282 $ 0.14 $ 0.15 $ 0.17 $ 0.17 $ − $ − $ − $ − 1 Q3 2013 includes one-time costs of $3.4 million relating to the Transition. 1 Q3 2013 includes one-time costs of $3.4 million relating to the Transition. 2 Earnings per share for quarters in 2013 has not been presented as the Company did not have equity instruments, as defined in IAS 33, 2 Earnings per share for quarters in 2013 has not been presented as the Company did not have equity instruments, as defined in IAS 33, Earnings per Share, as the redeemable shares were classified as financial liability in the statements of financial position. Earnings per Share, as the redeemable shares were classified as financial liability in the statements of financial position. The variations in net income (loss) and comprehensive income (loss) by quarter are mainly attributed to the The variations in net income (loss) and comprehensive income (loss) by quarter are mainly attributed to the following: following: In any given quarter, the Company is subject to volatility from portfolio turnover from both scheduled and (i) (i) In any given quarter, the Company is subject to volatility from portfolio turnover from both scheduled and early repayments. As a result, net interest income is susceptible to quarterly fluctuations. The Company early repayments. As a result, net interest income is susceptible to quarterly fluctuations. The Company models the portfolio throughout the year factoring in both scheduled and probable repayments, and the models the portfolio throughout the year factoring in both scheduled and probable repayments, and the corresponding new mortgage advances to determine its distributable income on a calendar year basis. corresponding new mortgage advances to determine its distributable income on a calendar year basis. (ii) Within expenses the Company accrues the performance fee payable to the Manager. Given that the (ii) Within expenses the Company accrues the performance fee payable to the Manager. Given that the performance fee is adjusted for cash items, the volatility of cash receipts in the year (mainly relating to lender fees) will typically have an impact on the amount expensed. Further, through Q2 2013, the Company was required to pay a trailer fee to registered dealers on a quarterly basis. was required to pay a trailer fee to registered dealers on a quarterly basis. lender fees) will typically have an impact on the amount expensed. Further, through Q2 2013, the Company performance fee is adjusted for cash items, the volatility of cash receipts in the year (mainly relating to (iii) The dividends to holders of redeemable shares and issuance costs relating to redeemable shares were presented in the statement of income (loss) and comprehensive income (loss) until October 2013. Following (iii) The dividends to holders of redeemable shares and issuance costs relating to redeemable shares were the Exchange Date, the dividends to common shareholders are presented in the statement of changes in presented in the statement of income (loss) and comprehensive income (loss) until October 2013. Following equity. the Exchange Date, the dividends to common shareholders are presented in the statement of changes in equity. TIMBERCREEK MORTAGE INVESTMENT CORPORATION 22 Timbercreek Mortgage Investment Corporation 23 RELATED PARTY TRANSACTIONS As at December 31, 2014, due to Manager includes management and performance fees payable of $2.0 million (December 31, 2013 – $2.3 million) and $6 (December 31, 2013 – $3) related to costs incurred by the Manager on behalf of the Company. The Manager is responsible for the general management and day to day operations of the Company and, through Timbercreek Mortgage Servicing Inc. (“TMSI”), a related party by virtue of common management, acts as the Company’s mortgage servicer and administrator. As at December 31, 2014, included in other assets is $3.0 million (December 31, 2013 – $1.0 million) of cash held in trust for the Company by TMSI, the balance of which relates to mortgage funding holdbacks and prepaid mortgage interest received from various borrowers. In the pursuit of meeting its investment objectives, the Company, from time to time and at the discretion of the Manager, syndicates its mortgage investments. As at December 31, 2014, the Company, TSMIC, Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”) and Timbercreek Canadian Direct LP, related parties by virtue of common management, have co-invested in several mortgage investments totalling $701.9 million (December 31, 2013 – $703.4 million). The Company’s share in these gross mortgage investments is $268.9 million (December 31, 2013 – $151.1 million). Of these co-invested mortgages, a mortgage investment of $1.1 million (December 31, 2013 – $1.0 million) was provided to a limited partnership which is partially owned by T4Q. As at December 31, 2014, no amount (December 31, 2013 – $0.3 million) is receivable by the Company from TSMIC relating to amounts paid by the Company on behalf of TSMIC. The above related party transactions are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. COMMITMENTS AND CONTINGENCIES In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgages and loans. Where required, management records adequate provisions in the accounts. Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the Company’s financial position. CRITICAL ACCOUNTING ESTIMATES In the preparation of the consolidated financial statements, the Manager has made judgments, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In making estimates, the Manager relies on external information and observable conditions where possible, supplemented by internal analysis as required. Those estimates and judgments have been applied in a manner consistent with the prior period and there are no known trends, commitments, events or uncertainties that we believe will materially affect the methodology or assumptions utilized in making those estimates and judgments in the consolidated financial statements. The significant estimates and judgments used in determining the recorded amount for assets and liabilities in the consolidated financial statements are as follows: Mortgage investments The Company is required to make an assessment of the impairment of mortgage investments. Mortgage investments are considered to be impaired only if objective evidence indicates that one or more events (“loss events”) have occurred after its initial recognition, that have a negative effect on the estimated future cash flows of that asset. Specifically, the Company will consider loss events including, but not limited to: 1) payment default by a borrower; 2) whether security of the mortgage negatively impacted by some event; and 3) financial difficulty experienced by a borrower. The estimation of future cash flows includes assumptions about local real estate market conditions, market interest rates, availability and terms of financing, underlying value of the security and various other factors. These assumptions are limited by the availability of reliable comparable market data, economic uncertainty and the uncertainty of future events. Accordingly, by their nature, estimates of impairment are subjective and may not necessarily be comparable to the actual outcome. Should the underlying assumptions change, the estimated future cash flows could vary. 24 Timbercreek Mortgage Investment Corporation The Company applies judgment in assessing the relationship between parties with which it enters into participation agreements in order to assess the derecognition of transfers relating to mortgage investments. Measurement of fair values The Company’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or liability, the Company uses market observable data where possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). • Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The Manager reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or appraisals are used to measure fair values, the Manager will assess the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Information about the assumptions made in measuring fair value is included in notes 5 and 18 to the consolidated financial statements for the year ended December 31, 2014. CHANGES IN ACCOUNTING POLICIES Except for the changes below, the Company has consistently applied the accounting policies set out to all periods presented in its consolidated financial statements for the years ended December 31, 2014 and 2013. (a) Convertible debentures: The convertible debentures are a compound financial instrument as it contains both a liability and an equity component. At the date of issuance, the liability component of convertible debentures is recognized at its estimated fair value of a similar liability that does not have an equity conversion option and the residual is allocated to the equity component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a convertible debenture is measured at amortized cost using the effective interest rate method. The equity component is not re-measured subsequent to initial recognition and will be transferred to share capital when the conversion option is exercised or, if unexercised, at maturity. Interest, losses and gains relating to the financial liability are recognized in profit or loss. (b) Changes in accounting policies The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2014. These changes were made in accordance with the applicable transitional provisions. (i) IAS 32, Financial Instruments: Presentation (“IAS 32”) In December 2011, the IASB published Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) and issued new disclosure requirements in IFRS 7, Financial Instruments: Disclosures, with the amendments applied retrospectively. The implementation of this standard had no impact on the consolidated financial statements. Timbercreek Mortgage Investment Corporation 25 (ii) IFRIC 21, Levies (“IFRIC 21”) In 2013, the IASB issued IFRIC 21. This standard addresses accounting for a liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets (“IAS 37”). A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes. The standard is applied retrospectively. The implementation of this standard had no impact on the consolidated financial statements. (c) Future changes in accounting policies A number of new standards, amendments to standards and interpretations are effective in future periods and have not been applied in preparing the consolidated financial statements. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these standards early. (i) IFRS 9, Financial Instruments (“IFRS 9”) On July 24, 2014, the IASB issued IFRS 9. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. The standard will be effective for annual periods beginning on or after January 1, 2018 and will be applied retrospectively with some exemptions. The Company is currently assessing the impact of the new standard on its consolidated financial statements. (ii) IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014, the IASB issued IFRS 15. The new standard provides a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts within the scope of the standard on leases, insurance contracts and financial instruments. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2017 and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements. OUTSTANDING SHARE DATA As at February 25, 2015, the Company’s authorized capital consists of an unlimited number of common shares, of which 40,701,528 are issued and outstanding. In addition, as at the date of this MD&A, 3,066,667 common shares are issuable upon conversion or redemption of the debentures (based on the conversion price of $11.25 per common share). CAPITAL STRUCTURE AND LIQUIDITY Capital structure The Company manages its capital structure in order to support ongoing operations while focusing on its primary objectives of preserving shareholder capital and generating a stable monthly cash dividend to shareholders. During the Year, the Company added the debentures to its capital structure to complement the common shares and the increase to the limit on its credit facility. The Company believes that the modest amount of structural leverage gained from the debentures is accretive to net earnings, while having a low impact on the risk profile of the business. The Company anticipates meeting all of its contractual liabilities (described below) using its mix of capital structure and cash flow from operating activities. The Company reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage investment opportunities, the availability of capital and anticipated changes in general economic conditions. Liquidity Access to liquidity is an important element of the Company as it allows the Company to implement its investment strategy. The Company is, and intends to continue to be, qualified as a MIC as defined under Section 130.1(6) of the ITA and, as a result, is required to distribute not less than 100% of the taxable income of the Company to its shareholders. The Company manages its liquidity position through various sources of cash flows including cash generated from operations, equity and debenture offerings and the credit facility. 26 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Management’s Discussion and Analysis For the year ended December 31, 2014 flows including cash generated from operations, equity and debenture offerings and the credit facility. The Company has a borrowing ability of $35.0 million through its credit facility and intends to utilize the credit facility to manage the fluctuations in cash flows as a result of the timing of mortgage investment fundings and increase on the credit facility, taking its total available borrowing limit to $50.0 million. As at December 31, 2014, The Company has a borrowing ability of $35.0 million through its credit facility and intends to utilize the credit repayments and other working capital needs. Subsequent to year end, the Company completed a $15.0 million facility to manage the fluctuations in cash flows as a result of the timing of mortgage investment fundings and repayments and other working capital needs. Subsequent to year end, the Company completed a $15.0 million increase on the credit facility, taking its total available borrowing limit to $50.0 million. As at December 31, 2014, the Company is in compliance with its credit facility covenants and expects to remain in compliance going the Company is in compliance with its credit facility covenants and expects to remain in compliance going forward. forward. The Company routinely forecasts cash flow sources and requirements, including unadvanced commitments, to The Company routinely forecasts cash flow sources and requirements, including unadvanced commitments, to ensure cash is efficiently utilized. ensure cash is efficiently utilized. The following are the contractual maturities of financial liabilities as at December 31, 2014, including expected The following are the contractual maturities of financial liabilities as at December 31, 2014, including expected interest payments: interest payments: Carrying Contractual Within Following values cash flows a year year 3–5 years Accounts payable and accrued expenses $ 856 $ 856 $ 856 $ Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility 1 Convertible debentures Total liabilities Unadvanced gross mortgage commitments 2,442 1,976 484 2,560 9,076 32,387 49,781 – 2,442 1,976 484 2,560 9,825 43,803 61,946 2,442 1,976 484 2,560 409 2,191 10,918 107,367 107,367 $ – – – – – 9,416 2,197 11,613 – – – – – – – 39,415 39,415 – Total contractual liabilities $ 49,781 $ 169,313 $ 118,285 $ 11,613 $ 39,415 1 1 Includes interest on the credit facility assuming the outstanding balance is not repaid until its maturity in October 2016. Includes interest on the credit facility assuming the outstanding balance is not repaid until its maturity in October 2016. As at December 31, 2014, the Company had a cash position of $0.5 million (December 31, 2013 – $12.3 million) As at December 31, 2014, the Company had a cash position of $0.5 million (December 31, 2013 – $12.3 million) and an unutilized credit facility of $25.9 million (December 31, 2013 – $25.0 million). The Company is confident and an unutilized credit facility of $25.9 million (December 31, 2013 – $25.0 million). The Company is confident that it will be able to finance its operations using the cash flow generated from operations and the credit facility. that it will be able to finance its operations using the cash flow generated from operations and the credit facility. Included within the unadvanced mortgage commitments is $42.8 million relating to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. partners. The Company expects the syndication partners to fund this amount. Included within the unadvanced mortgage commitments is $42.8 million relating to the Company’s syndication Cash generated from operating activities consisted primarily of net income and comprehensive income of Cash generated from operating activities consisted primarily of net income and comprehensive income of $25.5 $25.5 million. Cash from operating activities is also impacted by changes in operating items such as, interest receivable, other assets and accounts payable and accrued expenses. million. Cash from operating activities is also impacted by changes in operating items such as, interest receivable, other assets and accounts payable and accrued expenses. Financial assets FIN AN CIAL IN STRUM EN TS FINANCIAL INSTRUMENTS Financial assets The Company’s cash and cash equivalents, other assets and mortgage investments, including mortgage syndications, are designated as loans and receivables and are measured at amortized cost. The fair values of cash and cash equivalents and other assets approximate their carrying amounts due to their short-term nature. The syndications, are designated as loans and receivables and are measured at amortized cost. The fair values of fair value of mortgage investments, including mortgage syndications, approximate their carrying value given the mortgage investments consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. cash and cash equivalents and other assets approximate their carrying amounts due to their short-term nature. The Company’s cash and cash equivalents, other assets and mortgage investments, including mortgage TIMBERCREEK MORTAGE INVESTMENT CORPORATION 27 Financial liabilities The Company’s accounts payable and accrued expenses, dividends payable, due to Manager, mortgage funding holdbacks, prepaid mortgage interest, credit facility, convertible debentures and mortgage syndication liabilities are designated as other financial liabilities and are measured at amortized cost. With the exception of convertible debentures and mortgage syndication liabilities, the fair value of these financial liabilities approximate their carrying amounts due to their short-term nature. The fair value of mortgage syndication liabilities approximate their carrying value given the mortgage investments consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. The fair value of the convertible debentures is based on the market trading price of convertible debentures at the reporting date. Timbercreek Mortgage Investment Corporation 27 RISKS AND UNCERTAINTIES The Company is subject to certain risks and uncertainties that may affect the Company’s future performance and its ability to execute on its investment objectives. We have processes and procedures in place in an attempt to control or mitigate certain risks, while other risks cannot be or are not mitigated. Material risks that cannot be mitigated include a significant decline in the general real estate market, interest rates changing markedly, being unable to make mortgage investments at rates consistent with rates historically achieved, not having adequate mortgage investment opportunities presented to us, and not having adequate sources of bank financing available. The Company’s business activities, including its use of financial instruments, exposes the Company to various risks, the most significant of which are interest rate risk, credit risk, and liquidity risk. (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial assets or financial liabilities will fluctuate because of changes in market interest rates. As of December 31, 2014, $89.9 million of mortgage investments bear interest at variable rates. Of these, $84.9 million of mortgage investments include a “floor rate” to protect their negative exposure, while two mortgage investments totalling $5.0 million bear interest at a variable rate without a “floor rate”. If there were a decrease of 0.50% in interest rates, with all other variables constant, the impact from variable rate mortgage investments would be a decrease in net income of $25. However, if there were a 0.50% increase in interest rates, with all other variables constant, it would result in an increase in net income of $0.5 million. The Company manages its sensitivity to interest rate fluctuations by generally entering into fixed rate mortgage investments or adding a “floor-rate” to protect its negative exposure. In addition, the Company is exposed to interest rate risk on the credit facility, which has a balance of $9.0 million as at December 31, 2014. Based on the outstanding balance of the credit facility as at December 31, 2014, a 0.50% decrease in interest rates, with all other variables constant, will increase net income by $45 annually, arising mainly as a result of lower interest expense payable on the credit facility. A 0.50% increase in interest rates would have an equal but opposite effect on the net income of the Company. The Company’s other assets, which includes interest receivable, accounts payable and accrued expenses, prepaid mortgage interest, mortgage funding holdbacks, dividends payable and due to Manager have no exposure to interest rate risk due to their short-term nature. Cash and cash equivalents carry a variable rate of interest and are subject to minimal interest rate risk and the debentures have no exposure to interest rate risk due to their fixed interest rate. (b) Credit risk Credit risk is the possibility that a borrower may be unable to honour its debt commitments as a result of a negative change in market conditions that could result in a loss to the Company. The Company mitigates this risk by the following: (i) adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); (ii) all mortgage investments are approved by the independent mortgage advisory committee before funding; and (iii) actively monitoring the mortgage investments and initiating recovery procedures, in a timely manner, where required. The maximum exposure to credit risk at December 31, 2014 is the carrying values of its net mortgage investments, including interest receivable, amounting to $401.7 million (December 31, 2013 – $321.8 million). The Company has recourse under these mortgage investments in the event of default by the borrower; in which case, the Company would have a claim against the underlying collateral. (c) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting its financial obligations as they become due. This risk arises in normal operations from fluctuations in cash flow as a result of the 28 Timbercreek Mortgage Investment Corporation timing of mortgage investment advances and repayments and the need for working capital. Management routinely forecasts future cash flow sources and requirements to ensure cash is efficiently utilized. For a discussion of the Company’s liquidity, cash flow from operations and mitigation of liquidity risk, see the “Capital Structure and Liquidity” section in this MD&A. For a full discussion of the risks and uncertainties affecting the Company, please also refer to the “Risk Factors” section of our AIF for the Year. DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the Company, under their direct supervision, have designed disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”) to provide reasonable assurance that material information relating to the Company is gathered and reported to the CEO and CFO and have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS during the during the year ended December 31, 2014. As at December 31, 2014, the Company’s disclosure controls and procedures were reviewed and the effectiveness of their design and operation was evaluated. This evaluation confirmed the effectiveness of the design and operation of disclosure controls and procedures as at December 31, 2014. The CEO and the CFO assessed, or under their direct supervision caused an assessment of, the design and operating effectiveness of the Company’s internal controls over financial reporting as at December 31, 2014. Based on that assessment they determined that the Company’s internal controls over financial reporting were appropriately designed and were operating effectively in accordance with the COSO Internal Control - Independent Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Given the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, among other items: (i)that management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii)controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. There were no changes made in our internal controls over financial reporting during the year ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. ADDITIONAL INFORMATION Phone Calling the Company at 1-866-898-8868, Carrie Morris, Managing Director Capital Markets & Corporate Communications. Shareholders who wish to enroll in the DRIP or who would like further information about the plan should contact Corporate Communications at (416) 306-9967 ext. 7266 (collect if long distance). Internet Visiting SEDAR at www.sedar.com; or the Company’s website at www.timbercreekmic.com Mail Writing to the Company at: Timbercreek Mortgage Investment Corporation Attention: Corporate Communications 1000 Yonge Street, Suite 500, Toronto, Ontario M4W 2K2 Timbercreek Mortgage Investment Corporation 29 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Timbercreek Mortgage Investment Corporation We have audited the accompanying consolidated fi nancial statements of Timbercreek Mortgage Investment Corporation (the “Company”), which comprise the consolidated statements of fi nancial position as at December 31, 2014 and December 31, 2013, the consolidated statements of net income and comprehensive income, changes in shareholders’ equity and net assets attributable to holders of redeemable shares and cash fl ows for the years then ended, and notes, comprising a summary of signifi cant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated fi nancial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the consolidated fi nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the eff ectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements. We believe that the audit evidence we have obtained in our audits is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated fi nancial statements present fairly, in all material respects, the consolidated fi nancial position of the Company as at December 31, 2014 and December 31, 2013, and its consolidated fi nancial performance and its consolidated cash fl ows for the years then ended, in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants February 25, 2015 Toronto, Canada 30 Timbercreek Mortgage Investment Corporation CONSOLIDATED STATEMENTS OF FINANCIAL POSITION TIMBERCREEK MORTGAGE INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS Cash and cash equivalents Other assets (note 14(e)) Mortgage investments, including mortgage syndications (note 4) Foreclosed properties held for sale (note 5) Total assets LIABILITIES AND EQUITY Accounts payable and accrued expenses Dividends payable (note 11(b)) Due to Manager (note 14(a)) Mortgage funding holdbacks Prepaid mortgage interest Credit facility (note 6) Convertible debentures (note 7) Mortgage syndication liabilities (note 4) Total liabilities As at December 31, 2014 2013 $ 463,092 $ 12,348,449 3,582,038 1,540,102 616,173,629 13,850,521 634,069,280 855,527 2,442,092 1,975,958 483,762 2,560,472 8,836,959 32,387,457 219,581,032 269,123,259 442,165,777 11,351,435 467,405,763 592,421 2,476,592 2,349,736 28,809 1,011,565 − − 124,378,929 130,838,052 Shareholders’ equity Total liabilities and equity 364,946,021 336,567,711 $ 634,069,280 $ 467,405,763 Commitments and contingencies (notes 4 and 19) Subsequent events (notes 6, 11(b) and 22) See accompanying notes to the consolidated financial statements. Timbercreek Mortgage Investment Corporation 31 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 2 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME Years ended December 31, 2014 2013 Interest income: Interest, including mortgage syndications $ 37,043,393 $ 39,024,302 Fees and other income, including mortgage syndications 5,144,675 5,083,354 Gross interest income 42,188,068 44,107,656 Interest and fees expense on mortgage syndications (note 4(b)) (5,477,861) (4,376,377) Net interest income 36,710,207 39,731,279 Expenses: Management fees (note 12(a)) Performance fees (note 12(a)) Trailer fees (note 12(b)) Transition related costs (note 1) Provision for mortgage investments loss (note 4(c)) Net foreign exchange (gain) loss (note 8) General and administrative Total expenses Income from operations 5,421,686 4,974,029 1,954,557 1,940,688 − − 737,199 3,530,417 250,000 2,150,000 (7,977) 5,436 819,650 906,208 8,437,916 14,243,977 28,272,291 25,487,302 Net operating loss from foreclosed properties held for sale Fair value adjustment on foreclosed properties held for sale (note 5) 170,748 650,421 181,845 − Financing costs: Interest on credit facility (note 6) Interest on convertible debentures (note 7) Issuance costs of redeemable shares (note 10) Dividends to holders of redeemable shares (note 10(a)) Total financing costs 274,550 2,259,432 − − 474,778 − 2,680 24,321,067 2,533,982 24,798,525 Net income and comprehensive income $ 24,917,140 $ 506,932 Earnings per share (note 13) Basic and diluted $ 0.63 $ 0.65 See accompanying notes to the consolidated financial statements. 32 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 3 CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE SHARES TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Year ended December 31, 2014 Common Shares Retained Earnings Equity Component of Convertible Debentures Total Shareholders’ equity, beginning of year $ 337,367,498 $ (799,787) $ – $ 336,567,711 Issuance of common shares, net of issue costs 33,179,940 Equity component of convertible debentures, net Dividends to the holders of common shares Issuance of common shares under dividend reinvestment plan Repurchase of common shares – – (30,263,327) 3,047,862 (3,047,862) – – – – – 33,179,940 544,557 544,557 – – – – (30,263,327) 3,047,862 (3,047,862) 24,917,140 Net income and comprehensive income – 24,917,140 Shareholders’ equity, end of year $ 370,547,438 $ (6,145,974) $ 544,557 $ 364,946,021 Year ended December 31, 2013 Net assets attributable to holders of redeemable shares, beginning of Class A Shares Class B Shares Common Retained Shares Earnings Total year $ 319,585,511 $ 35,942,459 $ – $ – $ 355,527,970 Gross proceeds from issuance of redeemable shares Issuance of redeemable shares under dividend reinvestment plan – 5,000,000 3,706,252 – Redemption of redeemable shares (15,511,769) (2,553,549) Repurchase of redeemable shares under normal course issuer bid Repurchase of redeemable shares under dividend reinvestment plan (3,351,744) (1,803,199) – – Exchange of redeemable shares 1,037,375 (1,037,375) – – – – – – (299,929,559) (37,437,939) 337,367,498 – – – – – – – 5,000,000 3,706,252 (18,065,318) (3,351,744) (1,803,199) – – Exchange of redeemable shares to common shares Dividends to the holders of common shares Issuance of common shares under dividend reinvestment plan Repurchase of common shares Net income (loss) and comprehensive income (loss) – – – – – – – (4,953,182) (4,953,182) 319,073 (319,073) – – 319,073 (319,073) (3,732,867) 86,404 – 4,153,395 506,932 Shareholders’ equity, end of year $ – $ – $ 337,367,498 $ (799,787) $ 336,567,711 See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOW Timbercreek Mortgage Investment Corporation 33 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 5 CONSOLIDATED STATEMENTS OF CASH FLOW TIMBERCREEK MORTGAGE INVESTMENT CORPORATION OPERATING ACTIVITIES Net income and comprehensive income Amortization of lender fees Lender fees received Provision for mortgage investments loss Financing costs Interest income, net of syndications Interest income received, net of syndications Fair value adjustment on foreclosed properties held for sale Net foreign exchange (gain) loss Change in non-cash operating items: Restricted cash Interest receivable Other assets Accounts payable and accrued expenses Due to Manager Prepaid mortgage interest Mortgage funding holdbacks FINANCING ACTIVITIES Proceeds from issuance of convertible debentures, net of issue costs Proceeds from issuance of common shares, net of issue costs Redemption of Class A and B redeemable shares Proceeds from issuance of Class B redeemable shares Advances from (repayment of) credit facility Interest paid Repurchase of redeemable shares for cancellation Issuance costs of redeemable shares Dividends to holders of redeemable shares Dividends to holders of common shares INVESTING ACTIVITIES Capital improvements to foreclosed properties Proceeds from disposition of foreclosed properties Years ended December 31, 2014 2013 $ 24,917,140 $ 506,932 (4,437,326) (4,266,467) 5,819,505 250,000 3,633,287 2,150,000 2,533,982 24,798,525 (32,045,133) (34,976,627) 30,498,572 32,583,906 650,421 33,456 – (33,456) – 395,088 (1,048,966) – (2,277,526) (1,065,865) (339,195) (373,778) 1,548,907 454,953 (347,575) (119,775) 654,330 (100,453) 26,185,012 23,811,850 32,533,220 33,179,940 – – – – (18,065,318) 5,000,000 9,075,926 (8,836,425) (1,694,372) (452,440) – – – (5,154,943) (2,680) (23,042,920) (30,297,827) (2,476,590) 42,796,887 (53,031,316) (331,838) (1,251,462) 35,776,846 – Funding of mortgage investments, net of mortgage syndications (498,944,602) (241,306,257) Discharge of mortgage investments, net of mortgage syndications 382,632,338 283,132,963 Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year (80,867,256) 40,575,244 (11,885,357) 11,355,778 12,348,449 992,671 Cash and cash equivalents, end of year $ 463,092 $ 12,348,449 34 See accompanying notes to the consolidated financial statements. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 6 Notes to Financial Statements Years Ended December 31, 2014 and 2013 Timbercreek Mortgage Investment Corporation (the “Company”) is a mortgage investment corporation domiciled in Canada. The registered office of the Company is 1000 Yonge Street, Suite 500, Toronto, Ontario M4W 2K2. The Company is incorporated under the laws of the Province of Ontario by Articles of Incorporation dated April 30, 2008. Effective September 13, 2013 (the “Effective Date”), the Company filed articles of amendment with the Ministry of Government Services of Ontario in connection with the Transition, as defined in note 1 below, to amend, among other things, certain provisions of the articles of the Company related to the rights attached to the redeemable Class A, Class B and voting classes of shares, and provide for the creation of a new class of common shares for which all existing classes of redeemable shares were exchanged on November 29, 2013. The investment objective of the Company is, with a primary focus on capital preservation, to acquire and maintain a diversified portfolio of mortgage investments that generate income which allows the Company to pay monthly dividends to shareholders. 1. TRANSITION TO PUBLIC COMPANY REGIME On September 12, 2013, the Company received shareholder approval for the Company’s transition (the “Transition”) from the Canadian securities regulatory regime for investment funds to the regulatory regime for non-investment fund reporting issuers (the “Public Company Regime”). Beginning on the Effective Date, the Company is subject to and files all continuous disclosure materials in compliance with the Public Company Regime requirements, which includes preparation of its financial statements in accordance with International Financial Reporting Standards (“IFRS”), along with a Management’s Discussion and Analysis. As part of the Transition, the Company provided a one-time special redemption right of up to 15% of the issued and outstanding shares of each class of redeemable shares (the “Special Redemption”). The Company redeemed requests from holders of 1,674,568 Class A shares and 259,771 Class B shares for the Special Redemption. The total redemption payable of $18,026,557 was paid on November 27, 2013. On November 29, 2013 (the “Exchange Date”), the Company exchanged all of the 32,829,013 outstanding Class A shares and 3,887,053 outstanding Class B Shares into a newly created class of common shares. The common shares commenced trading on the Toronto Stock Exchange (“TSX”) on November 29, 2013, continuing under the symbol ‘TMC’ and the Class A shares ceased to trade after the close of market on November 28, 2013. Also effective September 13, 2013, the Company entered into a new management agreement with Timbercreek Asset Management Inc. (the “Manager”) and terminated its management agreement with Timbercreek Asset Management Ltd., a wholly owned subsidiary of the Manager. The Manager is responsible for the day-to-day operations and providing all general management, mortgage servicing and administrative services for the Company’s mortgage investments. In connection with the Transition, the Company incurred total costs of $3,780,417, which includes soliciting dealer fees, soliciting broker fees, audit fees, legal fees and other related costs. Timbercreek Asset Management Inc., in its capacity as the Manager, elected to assume responsibility for $250,000 of costs relating to the Transition. 2. BASIS OF PREPARATION (a) Statement of compliance These consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) and were approved by the Board of Directors on February 25, 2015. (b) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company. Timbercreek Mortgage Investment Corporation 35 Notes to Financial Statements Years Ended December 31, 2014 and 2013 (c) Basis of measurement These consolidated financial statements have been prepared on the historical cost basis except for foreclosed properties held for sale and foreign exchange forward contract which are measured at fair value on each reporting date. (d) Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including Timbercreek Mortgage Investment Fund. All intercompany transactions and balances are eliminated upon consolidation. (e) Use of estimates and judgments In the preparation of these consolidated financial statements, the Manager has made judgments, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In making estimates, the Manager relies on external information and observable conditions where possible, supplemented by internal analysis as required. Those estimates and judgments have been applied in a manner consistent with the prior period and there are no known trends, commitments, events or uncertainties that the Manager believes will materially affect the methodology or assumptions utilized in making those estimates and judgments in these consolidated financial statements. The significant estimates and judgments used in determining the recorded amount for assets and liabilities in the consolidated financial statements are as follows: Mortgage investments The Company is required to make an assessment of the impairment of mortgage investments. Mortgage investments are considered to be impaired only if objective evidence indicates that one or more events (“loss events”) have occurred after its initial recognition, that have a negative effect on the estimated future cash flows of that asset. The estimation of future cash flows includes assumptions about local real estate market conditions, market interest rates, availability and terms of financing, underlying value of the security and various other factors. These assumptions are limited by the availability of reliable comparable market data, economic uncertainty and the uncertainty of future events. Accordingly, by their nature, estimates of impairment are subjective and may not necessarily be comparable to the actual outcome. Should the underlying assumptions change, the estimated future cash flows could vary materially. The Company applies judgment in assessing the relationship between parties with which it enters into participation agreements in order to assess the derecognition of transfers relating to mortgage investments. Measurement of fair values The Company’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or liability, the Company uses market observable data where possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). • Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The Manager reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or appraisals are used to measure fair values, the Manager will assess 36 Timbercreek Mortgage Investment Corporation Notes to Financial Statements Years Ended December 31, 2014 and 2013 the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified. The information about the assumptions made in measuring fair value is included in the following notes: Note 5 – Foreclosed properties held for sale; and Note 18 – Fair value measurements. 3. SIGNIFICANT ACCOUNTING POLICIES (a) Cash and cash equivalents The Company considers highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value to be cash equivalents. Cash and cash equivalents are classified as loans and receivables and carried at amortized cost. (b) Mortgage investments The mortgage investments are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, the mortgage investments are measured at amortized cost using the effective interest method, less any impairment losses. The mortgage investments are assessed on each reporting date to determine whether there is objective evidence of impairment. A financial asset is considered to be impaired only if objective evidence indicates that one or more loss events have occurred after its initial recognition, that have a negative effect on the estimated future cash flows of that asset. The Company considers evidence of impairment for mortgage investments at both a specific asset and collective level. All individually significant mortgage investments are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identifiable at an individual mortgage level. Mortgage investments that are not individually significant are collectively assessed for impairment by grouping together mortgage investments with similar risk characteristics. In assessing collective impairment, the Company reviews historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgments as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of specific mortgage investments is calculated as the difference between its carrying amount including accrued interest and the present value of the estimated future cash flows discounted at the investment’s original effective interest rate. Losses are recognized in profit and loss and reflected in an allowance account against the mortgage investments. When a subsequent event causes the amount of an impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (c) Foreclosed properties held for sale When the Company obtains legal title of the underlying security of an impaired mortgage investment, the carrying value of the mortgage investment, which comprises of principal, costs incurred, accrued interest and the related provision for mortgage investment loss, if any, is reclassified from mortgage investments to foreclosed properties held for sale (“FPHFS”). At each reporting date, FPHFS are measured at fair value, with changes in fair value recorded in profit or loss in the period they arise. The Company uses management’s best estimate to determine fair value of the properties, which may involve frequent inspections, engaging realtors to assess market conditions based on previous property transactions or, retaining professional appraisers to provide independent valuations. Contractual interest on the mortgage investment is discontinued from the date of transfer from mortgage investments to FPHFS. Net income or loss generated from FPHFS, if any, is recorded as net operating (gain) loss from FPHFS, while fair value adjustments on FPHFS are recorded separately. Timbercreek Mortgage Investment Corporation 37 Notes to Financial Statements Years Ended December 31, 2014 and 2013 (d) Foreign exchange forward contract The Company held a derivative financial instrument to hedge its foreign currency risk exposure for a mortgage investment. Derivatives are recognized initially at fair value, with transaction costs recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value at the end of each reporting period. Any resulting gain or loss is recognized in profit or loss unless the derivative is designated and effective as a hedging instrument under IFRS. The Company elected to not account for its derivative instrument as a hedge. (e) Dividends Dividends to holders of common shares are recognized in the consolidated statement of changes in shareholders’ equity and net assets attributable to holders of redeemable shares. Prior to the Transition, dividends to holders of redeemable shares were recognized in the consolidated statements of net income and comprehensive income as financing costs. (f) Convertible debentures The convertible debentures are a compound financial instrument as they contain both a liability and an equity component. At the date of issuance, the liability component of the convertible debentures is recognized at its estimated fair value of a similar liability that does not have an equity conversion option and the residual is allocated to the equity component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a convertible debenture is measured at amortized cost using the effective interest rate method. The equity component is not re-measured subsequent to initial recognition and will be transferred to share capital when the conversion option is exercised, or, if unexercised at maturity. Interest, losses and gains relating to the financial liability are recognized in profit or loss. (g) Income taxes It is the intention of the Company to qualify as a mortgage investment corporation (“MIC”) for Canadian income tax purposes. As such, the Company is able to deduct, in computing its income for a taxation year, dividends paid to its shareholders during the year or within 90 days of the end of the year. The Company intends to maintain its status as a MIC and pay dividends to its shareholders in the year and in future years to ensure that it will not be subject to income taxes. Accordingly, for financial statement reporting purposes, the tax deductibility of the Company’s dividends results in the Company being effectively exempt from taxation and no provision for current or deferred taxes is required for the Company and its subsidiaries. (h) Financial instruments Financial instruments are classified as one of the following: (i) fair value through profit and loss (“FVTPL”), (ii) loans and receivables, (iii) held-to-maturity, (iv) available-for-sale, or (v) other liabilities. Financial instruments are recognized initially at fair value, plus, in the case of financial instruments not FVTPL, any incremental direct transaction costs. Financial assets and liabilities classified as FVTPL are subsequently measured at fair value with gains and losses recognized in profit and loss. Financial instruments classified as held-to-maturity, loans and receivables or other liabilities are subsequently measured at amortized cost. Available-for-sale financial instruments are subsequently measured at fair value and any unrealized gains and losses are recognized through other comprehensive income. The classifications of the Company’s financial instruments are outlined in note 18. Prior to the Transition, net assets attributable to holders of redeemable shares were carried on the consolidated statements of financial position at net asset value. The presentation of net assets attributable to holders of redeemable shares reflected, in total, that the interests of the holders were limited to the net assets of the Company. After the Transition, redeemable shares were exchanged to common shares and are classified as shareholders’ equity in the statement of financial position, as outlined in note 1. 38 Timbercreek Mortgage Investment Corporation Notes to Financial Statements Years Ended December 31, 2014 and 2013 (i) Derecognition of financial assets and liabilities Financial assets The Company derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or in which the Company neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in such transferred financial assets that qualify for derecognition that is created or retained by the Company is recognized as a separate asset or liability. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. The Company enters into transactions whereby it transfers mortgage investments recognized on its statement of financial position, but retains either all, substantially all, or a portion of the risks and rewards of the transferred mortgage investments. If all or substantially all risks and rewards are retained, then the transferred mortgage or loan investments are not derecognized. In transactions in which the Company neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Company continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Financial liabilities The Company derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires. (j) Interest and fee income Interest income includes interest earned on the Company’s mortgage investments and interest earned on cash and cash equivalents. Interest income earned on the mortgage investments is accounted for using the effective interest method. Lender fees received are an integral part of the yield on the mortgage investments and are amortized to profit and loss over the expected life of the specific mortgage investment using the effective interest rate method. Forfeited lender fees are taken to profit and loss at the time a borrower has not fulfilled the terms and conditions of a lending commitment and payment has been received. (k) Changes in accounting policies Except for the changes below, the Company has consistently applied the accounting policies set out to all periods presented in these consolidated financial statements. The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2014. These changes were made in accordance with the applicable transitional provisions. (i) IAS 32, Financial Instruments: Presentation (“IAS 32”) In December 2011, the IASB published Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) and issued new disclosure requirements in IFRS 7, Financial Instruments: Disclosures, with the amendments applied retrospectively. The implementation of this standard had no impact on these consolidated financial statements. (ii) IFRIC 21, Levies (“IFRIC 21”) In 2013, the IASB issued IFRIC 21. This standard addresses accounting for a liability to pay a levy within the scope of IAS 37, Provisions, contingent liabilities and contingent assets (“IAS 37”). A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes. The standard is applied retrospectively. The implementation of this standard had no impact on these consolidated financial statements. Timbercreek Mortgage Investment Corporation 39 Notes to Financial Statements Years Ended December 31, 2014 and 2013 (l) Future changes in accounting policies A number of new standards, amendments to standards and interpretations are effective in future periods and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these standards early. (i) IFRS 9, Financial Instruments (“IFRS 9”) On July 24, 2014, the IASB issued IFRS 9. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. The standard will be effective for annual periods beginning on or after January 1, 2018 and will be applied retrospectively with some exemptions. The Company is currently assessing the impact of the new standard on its consolidated financial statements. (ii) IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) In May 2014, the IASB issued IFRS 15. The new standard provides a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts within the scope of the standard on leases, insurance contracts and financial instruments. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2017 and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact of the new standard on its consolidated financial statements. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 4. MORTGAGE INVESTMENTS, INCLUDING MORTGAGE SYNDICATIONS As at December 31, 2014 Mortgage investments, including mortgage Gross mortgage investments Mortgage syndication liabilities Net syndications (a) and (b) $ 617,038,177 $ (219,697,422) $ 397,340,755 Interest receivable 5,125,457 (733,560) 4,391,897 Unamortized lender fees Allowance for mortgage investments loss (c) As at December 31, 2013 Mortgage investments, including mortgage 622,163,634 (220,430,982) 401,732,652 (5,740,005) (250,000) 849,950 − (4,890,055) (250,000) $ 616,173,629 $ (219,581,032) $ 396,592,597 Gross mortgage investments Mortgage syndication liabilities Net syndications (a) and (b) $ 441,136,647 $ (123,982,494) $ 317,154,153 Interest receivable 5,384,798 (694,227) 4,690,571 Unamortized lender fees Allowance for mortgage investments loss (c) 446,521,445 (124,676,721) 321,844,724 (3,805,668) (550,000) 297,792 − (3,507,876) (550,000) $ 442,165,777 $ (124,378,929) $ 317,786,848 As at December 31, 2014, un-advanced mortgage commitments under the existing gross mortgage investments As at December 31, 2014, un-advanced mortgage commitments under the existing gross mortgage amounted to $107,366,854 (December 31, 2013 – $61,563,733). Subsequent to the year ended December 31, 2014, investments amounted to $107,366,854 (December 31, 2013 – $61,563,733). Subsequent to the year ended December 31, 2014, $4,867,098 of the commitments have been funded. $4,867,098 of the commitments have been funded. 40 (a) Net m ortgage investm ents Timbercreek Mortgage Investment Corporation Interest in first mortgages Interest in non-first mortgages December 31, 2014 $ 276,022,401 % 61 39 % 69 31 December 31, 2013 $ 193,574,221 121,318,354 123,579,932 100 $ 397,340,755 100 $ 317,154,153 The mortgage investments are secured by real property, bear interest at a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) and mature between 2015 and 2018 (December 31, 2013 – 2014 and 2017). A majority of the mortgage investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance. For the year ended December 31, 2014, the Company received total lender fees, net of fees relating to mortgage syndication liabilities, of $5,819,505 (2013 – $3,633,287), which are amortized to interest income over the term of the related mortgage investments using the effective interest rate method. Principal repayments, net of mortgage syndications, based on contractual maturity dates are as follows: TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 14 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 As at December 31, 2014 Mortgage investments, including mortgage syndications (a) and (b) $ 617,038,177 $ (219,697,422) $ 397,340,755 Interest receivable 5,125,457 (733,560) 4,391,897 Gross Mortgage mortgage syndication investments liabilities Net Unamortized lender fees Allowance for mortgage investments loss (c) 622,163,634 (220,430,982) 401,732,652 (5,740,005) (250,000) 849,950 − (4,890,055) (250,000) $ 616,173,629 $ (219,581,032) $ 396,592,597 Gross Mortgage mortgage syndication investments liabilities Net As at December 31, 2013 Mortgage investments, including mortgage syndications (a) and (b) $ 441,136,647 $ (123,982,494) $ 317,154,153 Interest receivable 5,384,798 (694,227) 4,690,571 Unamortized lender fees Allowance for mortgage investments loss (c) 446,521,445 (124,676,721) 321,844,724 (3,805,668) (550,000) 297,792 − (3,507,876) (550,000) $ 442,165,777 $ (124,378,929) $ 317,786,848 As at December 31, 2014, un-advanced mortgage commitments under the existing gross mortgage investments amounted to $107,366,854 (December 31, 2013 – $61,563,733). Subsequent to the year ended December 31, 2014, Notes to Financial Statements Years Ended December 31, 2014 and 2013 $4,867,098 of the commitments have been funded. (a) Net mortgage investments (a) Net m ortgage investm ents Interest in first mortgages Interest in non-first mortgages December 31, 2014 $ 276,022,401 121,318,354 % 61 39 December 31, 2013 $ 193,574,221 123,579,932 % 69 31 100 $ 397,340,755 100 $ 317,154,153 The mortgage investments are secured by real property, bear interest at a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) and mature between 2015 and 2018 (December 31, 2013 – 2014 and 2017). The mortgage investments are secured by real property, bear interest at a weighted average interest rate of 9.4% (December 31, 2013 – 9.8%) and mature between 2015 and 2018 (December 31, 2013 – 2014 and 2017). A majority of the mortgage investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance. A majority of the mortgage investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION For the year ended December 31, 2014, the Company received total lender fees, net of fees relating to mortgage syndication liabilities, of $5,819,505 (2013 – $3,633,287), which are amortized to interest income For the year ended December 31, 2014, the Company received total lender fees, net of fees relating to mortgage syndication liabilities, of $5,819,505 (2013 – $3,633,287), which are amortized to interest income over the term of the related mortgage investments using the effective interest rate method. Notes to the Consolidated Financial Statements over the term of the related mortgage investments using the effective interest rate method. Years ended December 31, 2014 and 2013 Principal repayments, net of mortgage syndications, based on contractual maturity dates are as follows: Principal repayments, net of mortgage syndications, based on contractual maturity dates are as follows: TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 14 2015 2016 2017 2018 Total (b) M ortgage syndication liabilities (b) Mortgage syndication liabilities $ 152,977,148 135,955,083 98,816,265 9,592,259 $ 397,340,755 senior and subordinated participation, whereby the third party lenders take the senior position and the Company retains the subordinated position. The Company generally retains an option to repurchase the The Company has entered into certain mortgage participation agreements with third party lenders, using lenders’ proportionate share together with all accrued interest. Under certain participation agreements, the The Company has entered into certain mortgage participation agreements with third party lenders, using senior and subordinated participation, whereby the third party lenders take the senior position and the Company retains the subordinated position. The Company generally retains an option to repurchase the senior position, but not the obligation, at a purchase price equal to the outstanding principal amount senior position, but not the obligation, at a purchase price equal to the outstanding principal amount of the of the lenders’ proportionate share together with all accrued interest. Under certain participation agreements, the Company has retained a residual portion of the credit and/or default risk as it is holding the residual interest in the mortgage investment and therefore has not met the de-recognition criteria. As a result, the lender’s portion of the mortgage is recorded as a mortgage investment with the transferred position recorded as a non-recourse mortgage syndication liability. The interest and fees earned on the transferred participation interests and the related interest expense is recognized in profit and loss. In non-recourse mortgage syndication liability. The interest and fees earned on the transferred participation addition, the Company may sell pari-pasu interests in certain mortgage investments which meet the interests and the related interest expense is recognized in profit and loss. In addition, the Company may sell criteria for de-recognition under IFRS. Company has retained a residual portion of the credit and/or default risk as it is holding the residual interest in the mortgage investment and therefore has not met the de-recognition criteria. As a result, the lender’s portion of the mortgage is recorded as a mortgage investment with the transferred position recorded as a pari-pasu interests in certain mortgage investments which meet the criteria for de-recognition under IFRS. As at December 31, 2014, the carrying value of the transferred assets in gross mortgage investments, As at December 31, 2014, the carrying value of the transferred assets in gross mortgage investments, including related interest receivable and unearned lender fees, and corresponding mortgage syndication liabilities is $219,581,032 (December 31, 2013 – $124,378,929). For the year ended December 31, 2014, including related interest receivable and unearned lender fees, and corresponding mortgage syndication the Company has also recognized interest income of $4,998,260 (2013 – $4,047,676) and fee income of $479,601 (2013 – $328,701) and a corresponding interest and fee expense of $5,477,861 (2013 – $4,376,377) in the statements of net income and comprehensive income. The fair value of the transferred assets and mortgage syndication liabilities approximate their carrying values (see note 18). Company has also recognized interest income of $4,998,260 (2013 – $4,047,676) and fee income of $479,601 liabilities is $219,581,032 (December 31, 2013 – $124,378,929). For the year ended December 31, 2014, the (2013 – $328,701) and a corresponding interest and fee expense of $5,477,861 (2013 – $4,376,377) in the statements of net income and comprehensive income. The fair value of the transferred assets and mortgage syndication liabilities approximate their carrying values (see note 18). (c) Allowance for m ortgage investm ents loss As at December 31, 2014, the Company has concluded that there is no objective evidence of impairment on any individual mortgage investment. At a collective level, the Company assesses for impairment to identify Timbercreek Mortgage Investment Corporation losses that have been incurred, but not yet identified, on an individual basis. As part of the Company’s 41 analysis, it has grouped mortgage investments with similar risk characteristics, including geographical exposure, collateral type, loan-to-value, counterparty and other relevant groupings, and assesses them for impairment using statistical data. Based on the amounts determined by the analysis, the Company uses judgement to determine whether or not the actual future losses are expected to be greater or less than the amounts calculated. $2,150,000). to FPHFS. For the year ended December 31, 2014, the Company recognized a collective impairment allowance of $250,000 (December 31, 2013 – nil) and specific impairment allowance of nil (December 31, 2013 – During the year ended December 31, 2014, the Company foreclosed on the underlying security relating to an impaired mortgage investment and reclassified $550,000 from allowance for mortgage investments loss TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 15 Notes to Financial Statements Years Ended December 31, 2014 and 2013 (c) Allowance for mortgage investments loss As at December 31, 2014, the Company has concluded that there is no objective evidence of impairment on any individual mortgage investment. At a collective level, the Company assesses for impairment to identify losses that have been incurred, but not yet identified, on an individual basis. As part of the Company’s analysis, it has grouped mortgage investments with similar risk characteristics, including geographical exposure, collateral type, loan-to-value, counterparty and other relevant groupings, and assesses them for impairment using statistical data. Based on the amounts determined by the analysis, the Company uses judgement to determine whether or not the actual future losses are expected to be greater or less than the amounts calculated. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION TIMBERCREEK MORTGAGE INVESTMENT CORPORATION For the year ended December 31, 2014, the Company recognized a collective impairment allowance of $250,000 (December 31, 2013 – nil) and specific impairment allowance of nil (December 31, 2013 – $2,150,000). Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 Years ended December 31, 2014 and 2013 During the year ended December 31, 2014, the Company foreclosed on the underlying security relating to an impaired mortgage investment and reclassified $550,000 from allowance for mortgage investments loss to FPHFS. For the year ended December 31, 2013 the Company recognized an impairment provision of $2,150,000 For the year ended December 31, 2013 the Company recognized an impairment provision of $2,150,000 For the year ended December 31, 2013 the Company recognized an impairment provision of $2,150,000 relating to impaired mortgage investments, which represented the total amount of the Manager’s estimate relating to impaired mortgage investments, which represented the total amount of the Manager’s estimate relating to impaired mortgage investments, which represented the total amount of the Manager’s of the shortfall between the principal balances, costs incurred and accrued interest and the estimated of the shortfall between the principal balances, costs incurred and accrued interest and the estimated estimate of the shortfall between the principal balances, costs incurred and accrued interest and the recoverable amount of the underlying security of the mortgage investment. recoverable amount of the underlying security of the mortgage investment. estimated recoverable amount of the underlying security of the mortgage investment. During the year ended December 31, 2013, the Company foreclosed on the underlying securities relating to During the year ended December 31, 2013, the Company foreclosed on the underlying securities relating to During the year ended December 31, 2013, the Company foreclosed on the underlying securities relating two impaired mortgage investments and reclassified $1,600,000 from allowance for mortgage investments to two impaired mortgage investments and reclassified $1,600,000 from allowance for mortgage two impaired mortgage investments and reclassified $1,600,000 from allowance for mortgage investments investments loss to FPHFS. loss to FPHFS. loss to FPHFS. The changes in the allowance for mortgage investments loss during the years ended December 31, 2014 and 2013 were as follows: The changes in the allowance for mortgage investments loss during the years ended December 31, 2014 and The changes in the allowance for mortgage investments loss during the years ended December 31, 2014 and 2013 were as follows: 2013 were as follows: Balance, beginning of year Balance, beginning of year Provision for mortgage investments Provision for mortgage investments loss loss Allowance for mortgage investments loss reclassified to FPHFS Allowance for mortgage investments loss reclassified to FPHFS Balance, end of year Balance, end of year Years ended December 31, Years ended December 31, 2014 2014 $ $ 550,000 $ 550,000 $ 2013 2013 – – 250,000 250,000 (550,000) (550,000) 2,150,000 2,150,000 (1,600,000) (1,600,000) $ $ 250,000 $ 250,000 $ 550,000 550,000 5. FO RECLOSED PROPERTIES HELD FO R SALE 5. FO RECLOSED PROPERTIES HELD FO R SALE 5. FORECLOSED PROPERTIES HELD FOR SALE As at December 31, 2014, there are three FPHFS (December 31, 2013 – two) which are recorded at their fair As at December 31, 2014, there are three FPHFS (December 31, 2013 – two) which are recorded at their fair As at December 31, 2014, there are three FPHFS (December 31, 2013 – two) which are recorded at their fair value of $13,850,521 (December 31, 2013 – $11,351,435). The changes in the FPHFS during the year ended value of $13,850,521 (December 31, 2013 – $11,351,435). The changes in the FPHFS during the year ended value of $13,850,521 (December 31, 2013 – $11,351,435). The changes in the FPHFS during the year ended December 31, 2014 were as follows: December 31, 2014 were as follows: December 31, 2014 were as follows: Balance, beginning of year Balance, beginning of year Foreclosed properties reclassified from mortgage investments Foreclosed properties reclassified from mortgage investments Capital improvements Capital improvements Fair market value adjustment Fair market value adjustment Disposition of foreclosed properties Disposition of foreclosed properties Balance, end of year Balance, end of year Years ended December 31, Years ended December 31, 2014 2014 $ $ 11,351,435 11,351,435 $ $ 2013 2013 – – 75,681,402 75,681,402 10,099,973 10,099,973 331,838 331,838 (650,421) (650,421) (72,863,733) (72,863,733) 1,251,462 1,251,462 – – – – $ 13,850,521 $ $ 13,850,521 $ 11,351,435 11,351,435 42 During the year ended December 31, 2014, the Company closed on the sale of eight residential units in one During the year ended December 31, 2014, the Company closed on the sale of eight residential units in one Timbercreek Mortgage Investment Corporation of the foreclosed properties for net proceeds of $1,363,733. of the foreclosed properties for net proceeds of $1,363,733. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 16 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 16 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Notes to Financial Statements Years Ended December 31, 2014 and 2013 Years ended December 31, 2014 and 2013 During the year ended December 31, 2014, the Company closed on the sale of eight residential units in one of the foreclosed properties for net proceeds of $1,363,733. mortgage investment with outstanding principal and costs of $69,581,592 and accrued interest of During the year ended December 31, 2014, the Company also foreclosed on the underlying security of a During the year ended December 31, 2014, the Company also foreclosed on the underlying security of a mortgage investment with outstanding principal and costs of $69,581,592 and accrued interest of $1,768,829. $1,768,829. This underlying security was subsequently sold, with the proceeds of sale repaying all of the This underlying security was subsequently sold, with the proceeds of sale repaying all of the outstanding principal and costs and accrued interest from the mortgage investment and resulted in a gain of $149,579. The purchaser also obtained mortgage financing from the Company in respect of the property. of $149,579. The purchaser also obtained mortgage financing from the Company in respect of the property. outstanding principal and costs and accrued interest from the mortgage investment and resulted in a gain During the year ended December 31, 2014, the Company recorded an unrealized fair value loss of $800,000 During the year ended December 31, 2014, the Company recorded an unrealized fair value loss of $800,000 on the FPHFS. on the FPHFS. The fair value measurements have been categorized as a level 3 fair value based on inputs to the valuation The fair value measurements have been categorized as a level 3 fair value based on inputs to the valuation techniques used. The key valuation techniques used in measuring the fair values of the FPHFS are set out in techniques used. The key valuation techniques used in measuring the fair values of the FPHFS are set out in the following table: the following table: Valuation Technique Direct Capitalization Method. The valuation method is based on stabilized net operating income (‘NOI’) divided by an overall capitalization rate. Direct Sales Comparison Significant unobservable inputs ¥ Stabilized NOI is based on the location, type and quality of the property and supported current market rents for similar properties, adjusted for estimated vacancy rates and expected operating costs. ¥ Capitalization rate is based on location, size and quality of the property and taking into account market data at the valuation date. The fair value is based on comparison to recent sales of properties of similar types, locations and quality. Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase (decrease) if: ¥ Stabilized NOI was higher (lower) ¥ Overall capitalization rates were lower (higher) The significant unobservable input is adjustments due to characteristics specific to each property that could cause the fair value to differ from the property to which it is being compared. 6. CREDIT FACILITY 6. CREDIT FACILITY 31, 2013 – $25,000,000). The Company amended and restated the credit facility on October 31, 2014, As at December 31, 2014, the Company has a credit facility with an available limit of $35,000,000 (December As at December 31, 2014, the Company has a credit facility with an available limit of $35,000,000 (December 31, 2013 – $25,000,000). The Company amended and restated the credit facility on October 31, 2014, extending the term for an additional two years and increasing the available limit to $35,000,000, with an extending the term for an additional two years and increasing the available limit to $35,000,000, with an option to increase the limit to $60,000,000, subject to certain terms and conditions. Subsequent to year end, option to increase the limit to $60,000,000, subject to certain terms and conditions. Subsequent to year end, the Company completed a $15,000,000 increase of the credit facility, taking its total available borrowing limit the Company completed a $15,000,000 increase of the credit facility, taking its total available borrowing to $50,000,000. The credit facility is subject to an interest rate equal to the bank’s prime rate of interest plus limit to $50,000,000. The credit facility is subject to an interest rate equal to the bank’s prime rate of interest 1.50% (December 31, 2013 – bank’s prime rate of interest plus 1.50%). The credit facility is secured by a general plus 1.50% (December 31, 2013 – bank’s prime rate of interest plus 1.50%). The credit facility is secured by a security agreement over the Company’s assets. As at December 31, 2014, $9,075,926 was outstanding on the credit facility (December 31, 2013 – nil). general security agreement over the Company’s assets. As at December 31, 2014, $9,075,926 was outstanding on the credit facility (December 31, 2013 – nil). Interest costs related to the credit facility are recorded in financing costs using the effective interest rate Interest costs related to the credit facility are recorded in financing costs using the effective interest rate method. For the year ended December 31, 2014, interest on the credit facility of $274,550 (2013 – $474,778) is included in financing costs. method. For the year ended December 31, 2014, interest on the credit facility of $274,550 (2013 – $474,778) is included in financing costs. As at December 31, 2014, there were $238,967 (December 31, 2013 – $107,603) in unamortized financing costs TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 17 related to the placement of the credit facility netted against the outstanding balance. For the year ended December 31, 2014, the Company has amortized financing costs of $129,328 (2013 – $143,859) to interest expense using the effective interest rate method. Timbercreek Mortgage Investment Corporation 43 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 As at December 31, 2014, there were $238,967 (December 31, 2013 – $107,603) in unamortized financing costs related to the placement of the credit facility netted against the outstanding balance. For the year ended December 31, 2014, the Company has amortized financing costs of $129,328 (2013 – $143,859) to interest expense using the effective interest rate method. 7. CON VERTIBLE D EBEN TURES On February 25, 2014, the Company completed a public offering of $30,000,000, with an overallotment option of $4,500,000 that was completed on March 3, 2014, of 6.35%, convertible unsecured subordinated Notes to Financial Statements Years Ended December 31, 2014 and 2013 debentures for net proceeds of $32,533,220 (the “debentures”). The debentures mature on March 31, 2019 with interest payable semi-annually on March 31 and September 30 of each year. The first interest payment 7. CONVERTIBLE DEBENTURES occurred on September 30, 2014 and was for $1,302,447. The debentures are convertible into common the terms of the debentures. shares at the option of the holder at any time prior to their maturity at a conversion price of $11.25 per On February 25, 2014, the Company completed a public offering of $30,000,000, with an overallotment option of $4,500,000 that was completed on March 3, 2014, of 6.35%, convertible unsecured subordinated debentures common share, subject to adjustment in certain events in accordance with the trust indenture governing for net proceeds of $32,533,220 (the “debentures”). The debentures mature on March 31, 2019 with interest payable semi-annually on March 31 and September 30 of each year. The first interest payment occurred on September 30, 2014 and was for $1,302,447. The debentures are convertible into common shares at the option of the holder at any time prior to their maturity at a conversion price of $11.25 per common share, subject to March 31, 2018, the debentures will be redeemable by the Company, in whole or in part, from time to time at adjustment in certain events in accordance with the trust indenture governing the terms of the debentures. The debentures will not be redeemable prior to March 31, 2017. On and after March 31, 2017 and prior to given is not less than 125% of the conversion price. On and after March 31, 2018 and prior to the maturity the Company’s sole option, at a price equal to the principal amount thereof plus accrued and unpaid The debentures will not be redeemable prior to March 31, 2017. On and after March 31, 2017 and prior to interest up to but excluding the date of redemption on not more than 60 days’ and not less than 30 days’ March 31, 2018, the debentures will be redeemable by the Company, in whole or in part, from time to time at prior written notice, provided that the current market price as of the date on which notice of redemption is the Company’s sole option, at a price equal to the principal amount thereof plus accrued and unpaid interest up to but excluding the date of redemption on not more than 60 days’ and not less than 30 days’ prior written notice, provided that the current market price as of the date on which notice of redemption is given is not less than 125% of the conversion price. On and after March 31, 2018 and prior to the maturity date, the debentures will be redeemable, in whole or in part, from time-to-time at the Company’s sole option at a price equal to the principal amount thereof plus accrued and unpaid interest to, but excluding, the date of redemption on not more than 60 days’ and not less than 30 days’ prior written notice. option at a price equal to the principal amount thereof plus accrued and unpaid interest to, but excluding, date, the debentures will be redeemable, in whole or in part, from time-to-time at the Company’s sole the date of redemption on not more than 60 days’ and not less than 30 days’ prior written notice. Upon issuance of the debentures, the liability component of the debentures was recognized initially at the fair value of a similar liability that does not have an equity conversion option. The difference between these Upon issuance of the debentures, the liability component of the debentures was recognized initially at the fair value of a similar liability that does not have an equity conversion option. The difference between these two amounts of $577,478 has been recorded as equity, with the remaining $31,955,742 allocated to long-term debt. two amounts of $577,478 has been recorded as equity, with the remaining $31,955,742 allocated to long- term debt. The discount on the debentures is being accreted such that the liability at maturity will equal the face value The discount on the debentures is being accreted such that the liability at maturity will equal the face value of $34,500,000. The issue costs of $1,966,780 were proportionately allocated to the liability and of $34,500,000. The issue costs of $1,966,780 were proportionately allocated to the liability and equity equity components. The issue costs allocated to the liability component are amortized over the term of the components. The issue costs allocated to the liability component are amortized over the term of the debentures using the effective interest rate method. debentures using the effective interest rate method. The debentures are allocated as follows at year-end: The debentures are allocated as follows at year-end: Issued December 31, 2014 $ 34,500,000 Issue costs, net of amortization TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Equity component Issue costs attributed to equity component Notes to the Consolidated Financial Statements Accretion for the year (1,664,236) (577,478) 32,921 96,250 Years ended December 31, 2014 and 2013 Debentures, end of year $ 32,387,457 Interest costs related to the debentures are recorded in financing costs using the effective interest rate Interest costs related to the debentures are recorded in financing costs using the effective interest rate method. For the year ended December 31, 2014, interest on the debentures is included in financing costs and method. For the year ended December 31, 2014, interest on the debentures is included in financing costs is made up of the following: and is made up of the following: TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 18 Interest on the convertible debentures Amortization of issue costs Accretion of equity component of the convertible debentures Year ended December 31, 2014 $ 1,860,638 302,544 96,250 $ 2,259,432 8. FO REIGN EXCHAN GE FO RW ARD CON TRACT In May 2013, the Company entered into a foreign exchange forward contract with its bank to lock in the Company’s rate to exchange U.S. dollars into Canadian dollars for a mortgage investment. In May 2014, the 44 contract was terminated, resulting in a gain of $7,977 (2013 – $5,436 unrealized net foreign exchange loss) Timbercreek Mortgage Investment Corporation upon the repayment of the Company’s U.S. dollar denominated mortgage investment. 9. VOTING SH ARES As part of the Transition outlined in note 1, on the Exchange Date, all voting shares were re-purchased for a nominal amount and cancelled. The voting shares were held by certain shareholders of the Manager. 10. REDEEM ABLE SH ARES As part of the Transition outlined in note 1, on the Exchange Date all classes of redeemable shares, including Class A and Class B shares, were exchanged into common shares at the ratios specified in note 11. Prior to the Transition, Class A shares were publicly listed on the TSX under the symbol ‘TMC’. Class B shares were privately held and there was no market through which these shares could be sold. The Company was authorized to issue these classes of shares, which were redeemable at the holder's option and were subject to different fee structures. The Company classifies financial instruments issued as either financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. The redeemable shares were classified as financial liabilities and presented as ‘net assets attributable to holders of redeemable shares’ in the statements of financial position. The changes in the number of Class A and Class B shares were as follows: TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 19 Notes to Financial Statements Years Ended December 31, 2014 and 2013 8. FOREIGN EXCHANGE FORWARD CONTRACT In May 2013, the Company entered into a foreign exchange forward contract with its bank to lock in the Company’s rate to exchange U.S. dollars into Canadian dollars for a mortgage investment. In May 2014, the contract was terminated, resulting in a gain of $7,977 (2013 – $5,436 unrealized net foreign exchange loss) upon the repayment of the Company’s U.S. dollar denominated mortgage investment. 9. VOTING SHARES As part of the Transition outlined in note 1, on the Exchange Date, all voting shares were re-purchased for a nominal amount and cancelled. The voting shares were held by certain shareholders of the Manager. 10. REDEEMABLE SHARES As part of the Transition outlined in note 1, on the Exchange Date all classes of redeemable shares, including Class A and Class B shares, were exchanged into common shares at the ratios specified in note 11. Prior to the Transition, Class A shares were publicly listed on the TSX under the symbol ‘TMC’. Class B shares were privately held and there was no market through which these shares could be sold. The Company was TIMBERCREEK MORTGAGE INVESTMENT CORPORATION authorized to issue these classes of shares, which were redeemable at the holder’s option and were subject TIMBERCREEK MORTGAGE INVESTMENT CORPORATION to different fee structures. The Company classifies financial instruments issued as either financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. The Notes to the Consolidated Financial Statements redeemable shares were classified as financial liabilities and presented as ‘net assets attributable to holders of Notes to the Consolidated Financial Statements redeemable shares’ in the statements of financial position. Years ended December 31, 2014 and 2013 Years ended December 31, 2014 and 2013 The changes in the number of Class A and Class B shares were as follows: Year ended December 31, 2013 Year ended December 31, 2013 Redeemable shares outstanding, beginning of year Redeemable shares outstanding, beginning of year Issued Issued Issuance of redeemable shares under dividend reinvestment plan Issuance of redeemable shares under dividend reinvestment plan Exchanged Exchanged Redeemed Redeemed Repurchased Repurchased Exchanged to common shares Exchanged to common shares Redeemable shares outstanding, end of year Redeemable shares outstanding, end of year Class A Class A 34,561,122 34,561,122 – – 393,522 393,522 110,685 110,685 (1,678,568) (1,678,568) (557,748) (557,748) (32,829,013) (32,829,013) – – Class B Class B 3,742,597 3,742,597 508,647 508,647 – – (104,420) (104,420) (259,771) (259,771) – – (3,887,053) (3,887,053) – – During the year ended December 31, 2013, the Company completed a non-brokered private placement of During the year ended December 31, 2013, the Company completed a non-brokered private placement of During the year ended December 31, 2013, the Company completed a non-brokered private placement of 508,647 Class B shares for gross proceeds of $5,000,000. In connection with the above-noted share offering, 508,647 Class B shares for gross proceeds of $5,000,000. In connection with the above-noted share offering, 508,647 Class B shares for gross proceeds of $5,000,000. In connection with the above-noted share offering, the Company incurred $2,680 in issuance costs. Under IFRS, Class A and Class B shares were considered the Company incurred $2,680 in issuance costs. Under IFRS, Class A and Class B shares were considered debt the Company incurred $2,680 in issuance costs. Under IFRS, Class A and Class B shares were considered debt instruments prior to the Transition, and accordingly, the Company recorded these issuance costs instruments prior to the Transition, and accordingly, the Company recorded these issuance costs through debt instruments prior to the Transition, and accordingly, the Company recorded these issuance costs through profit and loss. profit and loss. through profit and loss. (a) Dividends to holders of redeemable shares (a) Dividends to holders of redeem able shares (a) Dividends to holders of redeem able shares Prior to the Transition, the Company paid the following dividends to holders of redeemable shares: Prior to the Transition, the Company paid the following dividends to holders of redeemable shares: Prior to the Transition, the Company paid the following dividends to holders of redeemable shares: Year ended December 31, 2013 Year ended December 31, 2013 Class A Class A Class B Class B Total Total Dividends per share Dividends per share $ 0.630 $ 0.630 0.670 0.670 Total Total 21,876,011 21,876,011 2,445,056 2,445,056 24,321,067 24,321,067 $ $ $ $ (b) Norm al course issuer bid (b) Norm al course issuer bid On June 6, 2013, the Company received the approval of the TSX to commence a normal course issuer bid Timbercreek Mortgage Investment Corporation On June 6, 2013, the Company received the approval of the TSX to commence a normal course issuer bid (the “Bid”) to purchase for cancellation up to 3,476,193 Class A shares, representing approximately 10% of the (the “Bid”) to purchase for cancellation up to 3,476,193 Class A shares, representing approximately 10% of the Class A shares float on June 4, 2013. The purchases were limited, during any 30-day period during the term Class A shares float on June 4, 2013. The purchases were limited, during any 30-day period during the term of the Bid, to 695,458 Class A shares in the aggregate. The Bid commenced on June 10, 2013, and provided 45 of the Bid, to 695,458 Class A shares in the aggregate. The Bid commenced on June 10, 2013, and provided the Company with the flexibility to repurchase Class A shares for cancellation until its expiration on June 9, the Company with the flexibility to repurchase Class A shares for cancellation until its expiration on June 9, 2014, or such earlier date as the Bid is complete. From June 18, 2013 to November 29, 2013, the date of the 2014, or such earlier date as the Bid is complete. From June 18, 2013 to November 29, 2013, the date of the exchange of the Company Class A shares to common shares, the Company acquired for cancellation exchange of the Company Class A shares to common shares, the Company acquired for cancellation 362,800 Class A shares at a cost of $3,351,744. 362,800 Class A shares at a cost of $3,351,744. 11. COM M ON SHARES 11. COM M ON SHARES As outlined in note 1, on the Effective Date, the shareholders of the Company approved the automatic As outlined in note 1, on the Effective Date, the shareholders of the Company approved the automatic exchange of all outstanding Class A shares and Class B shares into a new class of common shares. The exchange of all outstanding Class A shares and Class B shares into a new class of common shares. The exchange ratio approved was 1 to 1 for each Class A share and an exchange ratio for each of the Class B exchange ratio approved was 1 to 1 for each Class A share and an exchange ratio for each of the Class B Shares equal to the quotient obtained by dividing the net redemption value per Class B share by the net Shares equal to the quotient obtained by dividing the net redemption value per Class B share by the net redemption value per Class A share on the last business day of the month immediately preceding such redemption value per Class A share on the last business day of the month immediately preceding such TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 20 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 20 Notes to Financial Statements Years Ended December 31, 2014 and 2013 (b) Normal course issuer bid On June 6, 2013, the Company received the approval of the TSX to commence a normal course issuer bid (the “Bid”) to purchase for cancellation up to 3,476,193 Class A shares, representing approximately 10% of the Class A shares float on June 4, 2013. The purchases were limited, during any 30-day period during the term of the Bid, to 695,458 Class A shares in the aggregate. The Bid commenced on June 10, 2013, and provided the Company with the flexibility to repurchase Class A shares for cancellation until its expiration on June 9, 2014, or such earlier date as the Bid is complete. From June 18, 2013 to November 29, 2013, the date of the exchange of the Company Class A shares to common shares, the Company acquired for cancellation 362,800 Class A shares at a cost of $3,351,744. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 11. COMMON SHARES Notes to the Consolidated Financial Statements As outlined in note 1, on the Effective Date, the shareholders of the Company approved the automatic Years ended December 31, 2014 and 2013 exchange of all outstanding Class A shares and Class B shares into a new class of common shares. The exchange ratio approved was 1 to 1 for each Class A share and an exchange ratio for each of the Class B Shares equal to the quotient obtained by dividing the net redemption value per Class B share by the net redemption value per Class A share on the last business day of the month immediately preceding such exchange date. On the Exchange Date, 32,829,013 Class A shares and 3,887,053 Class B Shares were exchanged into 36,964,028 common shares. exchange date. On the Exchange Date, 32,829,013 Class A shares and 3,887,053 Class B Shares were exchanged into 36,964,028 common shares. On November 29, 2013, upon the completion of the exchange in accordance with the Company’s articles, the common shares commenced trading on the TSX, continuing under the symbol ‘TMC’. On November 29, 2013, upon the completion of the exchange in accordance with the Company’s articles, the common shares commenced trading on the TSX, continuing under the symbol ‘TMC’. The Company is authorized to issue an unlimited number of common shares. The holders of common The Company is authorized to issue an unlimited number of common shares. The holders of common shares are entitled to receive notice of and to attend and vote at all meetings of shareholders of the shares are entitled to receive notice of and to attend and vote at all meetings of shareholders of the Company. The holders of the common shares shall be entitled to receive dividends as and when declared by Company. The holders of the common shares shall be entitled to receive dividends as and when declared by the Board of Directors. the Board of Directors. The common shares are classified within shareholders’ equity in the statements of financial position. Any The common shares are classified within shareholders’ equity in the statements of financial position. Any incremental costs directly attributable to the issuance of common shares are recognized as a deduction from shareholders’ equity. incremental costs directly attributable to the issuance of common shares are recognized as a deduction from shareholders’ equity. On April 24, 2014, the Company closed on a public offering for 3,737,500 common shares, including On April 24, 2014, the Company closed on a public offering for 3,737,500 common shares, including exercising the overallotment option, at a price of $9.35 per common share. The Company received gross exercising the overallotment option, at a price of $9.35 per common share. The Company received gross proceeds of $34,945,625 and incurred $1,765,685 in issuance costs. proceeds of $34,945,625 and incurred $1,765,685 in issuance costs. The changes in the number of common shares were as follows: The changes in the number of common shares were as follows: Years ended December 31, Balance, beginning of year Issued Issued as a result of exchange Repurchased Issued under dividend reinvestment plan Balance, end of year (a) Dividend reinvestm ent plan (a) Dividend reinvestment plan 2014 2013 36,964,028 3,737,500 – – – 36,964,028 (332,009) 332,009 (35,250) 35,250 40,701,528 36,964,028 The Company amended and restated its dividend reinvestment plan effective as of November 20, 2013. The The Company amended and restated its dividend reinvestment plan effective as of November 20, 2013. The amended and restated dividend reinvestment plan (the “Amended DRIP”) replaces in its entirety the original DRIP (the “Original DRIP”) established by the Company on May 19, 2010. amended and restated dividend reinvestment plan (the “Amended DRIP”) replaces in its entirety the original DRIP (the “Original DRIP”) established by the Company on May 19, 2010. The Amended DRIP provides eligible beneficial and registered holders of common shares of the Company with a means to reinvest dividends declared and payable on such common shares in additional common The Amended DRIP provides eligible beneficial and registered holders of common shares of the Company with a means to reinvest dividends declared and payable on such common shares in additional common shares. For purposes of the Amended DRIP, “common shares” includes any Class A shares of the Company 46 Timbercreek Mortgage Investment Corporation prior to their exchange into common shares on the Exchange Date, pursuant to the amendment to the articles of the Company that came into effect on September 13, 2013. Under the Amended DRIP, shareholders may enroll to have their cash dividends reinvested to purchase additional common shares. The Manager can elect to purchase common shares on the open market or issue common shares from treasury. For the year ended December 31, 2014, 332,009 common shares were purchased on the open market under the Amended DRIP (2013 – 198,574 Class A shares issued and 194,948 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 21 Notes to Financial Statements Years Ended December 31, 2014 and 2013 shares. For purposes of the Amended DRIP, “common shares” includes any Class A shares of the Company prior to their exchange into common shares on the Exchange Date, pursuant to the amendment to the articles of the Company that came into effect on September 13, 2013. Under the Amended DRIP, shareholders may enroll to have their cash dividends reinvested to purchase additional common shares. The Manager can elect to purchase common shares on the open market or issue common shares from treasury. For the year ended December 31, 2014, 332,009 common shares were purchased on the open market under the Amended DRIP (2013 – 198,574 Class A shares issued and 194,948 Class A shares purchased on the open market under the Original DRIP; 35,250 common shares purchased on the open market under the Amended DRIP). (b) Dividends to holders of common shares The Company intends to pay dividends on a monthly basis within 15 days following the end of each month. During the year ended December 31, 2014, the Company declared dividends of $30,263,327, or $0.762 per share, to the holders of common shares (2013 – $4,953,183, $0.134 per share). As at December 31, 2014, $2,442,092 (December 31, 2013 – $2,476,592) was payable to the holders of common shares. Subsequent to December 31, 2014, the Company declared dividends of $2,442,092 ($0.060 per share) to the holders of common shares. (c) Normal course issuer bid On November 13, 2014, the Company received the approval of the TSX to commence a second normal course issuer bid (the “Second Bid”) to purchase for cancellation up to a maximum of 4,052,822 common shares, representing approximately 10% of the public float of common shares as of November 11, 2014. The Second Bid commenced on November 17, 2014 and provides the Company with the flexibility to repurchase common shares for cancellation until its expiration on November 16, 2015, or such earlier date as the Second Bid is complete. From November 17, 2014 to December 31, 2014, the Company did not acquire any common shares for cancellation. 12. EXPENSES (a) Management and performance fees The Manager is responsible for the day-to-day operations of the Company, including administration of the Company’s mortgage investments. As a part of the Transition detailed in note 1, the Company entered into a new management agreement with the Manager effective from September 13, 2013. Under the new management agreement, the Company shall pay to the Manager, a management fee equal to 1.20% per annum of the gross assets of the Company, calculated and paid monthly in arrears, plus applicable taxes. Gross Assets is defined as the total assets of the Company before deducting any liabilities, less any amounts that are reflected as mortgage syndication liabilities related to syndicated mortgage investments that are held by third parties. The initial term of the new management agreement is 10 years from the Effective Date and is automatically renewed for successive five year terms at the expiration of the initial term. For the year ended December 31, 2014, the Company incurred management fees of $5,421,686 (2013 – $4,974,029). Under the new management agreement, the Manager continues to be entitled to a performance fee. In any calendar year where the Company has net earnings available for distribution to shareholders in excess of the hurdle rate (the “Hurdle Rate”), which is defined as the average two-year Government of Canada Bond Yield for the 12-month period then ended plus 450 basis points, the Manager is entitled to receive from the Company a performance fee equal to 20% of the net earnings of the Company available to distribute over the Hurdle Rate, plus applicable taxes. The net earnings of the Company shall mean the net income before performance fees of the Company in accordance with applicable accounting principles and adjusted for certain other non-cash adjustments as defined in the management agreement. The performance fee is payable to the Manager within 15 days of the issuance of the Company’s audited annual consolidated financial statements for that calendar year. The performance fee accrued for the year ended December 31, 2014 is $1,954,557 (2013 – $1,940,688). Timbercreek Mortgage Investment Corporation 47 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 Notes to Financial Statements Years Ended December 31, 2014 and 2013 of the Company's audited annual consolidated financial statements for that calendar year. The performance fee accrued for the year ended December 31, 2014 is $1,954,557 (2013 – $1,940,688). (b) Trailer fees Prior to September 13, 2013, the Company paid each registered dealer a trailer fee equal to 0.50% annually of the net redemption value per Class A share for each Class A share held by clients of the (b) Trailer fees Prior to September 13, 2013, the Company paid each registered dealer a trailer fee equal to 0.50% annually of the net redemption value per Class A share for each Class A share held by clients of the registered dealer, calculated and paid at the end of each calendar quarter. In conjunction with the Transition, effective September 13, 2013 the Company no longer pays trailer fees on Class A shares to registered dealers. As such, the Company paid no Class A trailer fees for the year ended December 31, 2014 (2013 – Transition, effective September 13, 2013 the Company no longer pays trailer fees on Class A shares to $737,199). registered dealer, calculated and paid at the end of each calendar quarter. In conjunction with the registered dealers. As such, the Company paid no Class A trailer fees for the year ended December 31, 2014 (2013 – $737,199). 13. EARNINGS PER SHARE 13. EARN IN GS PER SH ARE Earnings per share has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of redeemable shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the Company in the calculation of earnings per share. Earnings per share has been calculated as if the Transition occurred on January 1, 2013 and as a result, dividends to holders of redeemable shares and issuance costs of redeemable shares for the year ended December 31, 2013 have been added back to the net loss of the Company in the calculation of earnings per (a) Basic and diluted earnings per share share. Basic and diluted earnings per share are calculated by dividing net income attributable to common (a) Basic and diluted earnings per share shares by the weighted average number of common shares during the year. Years ended December 31, Numerator for earnings per share: 2014 2013 Net income and comprehensive income $ 24,917,140 $ 506,932 Issuance costs of redeemable shares Dividends to holders of redeemable shares – – Net income attributable to common shares 24,917,140 2,680 24,321,067 24,830,679 Denominator for earnings per share: Weighted average of common shares (basic and diluted) Earnings per share – basic and diluted $ $ 39,544,439 0.63 $ $ 38,444,103 0.65 Basic and diluted earnings per share are calculated by dividing net income attributable to common shares by the weighted average number of common shares during the year. 14. RELATED PARTY TRANSACTIONS (a) As at December 31, 2014, due to Manager includes management and performance fees payable of 14. RELATED PARTY TRAN SACTIO N S $1,970,131 (December 31, 2013 – $2,346,745) and $5,827 (December 31, 2013 – $2,991) related to costs incurred by the Manager on behalf of the Company. (a) As at December 31, 2014, due to Manager includes management and performance fees payable of $1,970,131 (December 31, 2013 – $2,346,745) and $5,827 (December 31, 2013 – $2,991) related to costs (b) As at December 31, 2014, no amount (December 31, 2013 – $281,126) is receivable by the Company from incurred by the Manager on behalf of the Company. TSMIC relating to amounts paid by the Company on behalf of TSMIC. (b) As at December 31, 2014, no amount (December 31, 2013 – $281,126) is receivable by the Company from TSMIC relating to amounts paid by the Company on behalf of TSMIC. (c) As at December 31, 2014, included in other assets is $3,044,234 (December 31, 2013 – $1,040,374) of cash held in trust by Timbercreek Mortgage Servicing Inc., the Company’s mortgage servicing and (c) As at December 31, 2014, included in other assets is $3,044,234 (December 31, 2013 – $1,040,374) of cash administration provider, a company controlled by the Manager. The balance relates to mortgage funding holdbacks and prepaid mortgage interest received from various borrowers. held in trust by Timbercreek Mortgage Servicing Inc., the Company’s mortgage servicing and administration provider, a company controlled by the Manager. The balance relates to mortgage funding holdbacks and prepaid mortgage interest received from various borrowers. (d) As at December 31, 2014, the Company, Timbercreek Senior Mortgage Investment Corporation (“TSMIC”), Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”) and Timbercreek Canadian Direct LP, related parties by virtue of common management, have co invested in several mortgage investments totalling $701,930,591 (December 31, 2013 – $703,448,560). The Company’s share in these mortgage investments is $268,906,244 (December 31, 2013 – $151,103,561). TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 23 (e) A mortgage investment of $1,147,226 (December 31, 2013 – $1,044,252) was provided to a limited partnership which is partially owned by T4Q. 48 Timbercreek Mortgage Investment Corporation Notes to Financial Statements Years Ended December 31, 2014 and 2013 (f) The Manager has borne total costs of $250,000 relating to the Transition, which are not included in the Transition related costs in the statements of income (loss) and comprehensive income (loss). The above related party transactions are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 15. INCOME TAXES As of December 31, 2014, the Company has non-capital losses carried forward for income tax purposes of $19,938,146 (December 31, 2013 – $14,672,000), which will expire between 2029 and 2034 if not used. The Company also has future deductible temporary differences resulting from share issuances, prepaid mortgage interest, unearned income and financing costs for income tax purposes of $14,608,322 (December 31, 2013 – $12,040,000). 16. CAPITAL RISK MANAGEMENT The Company manages its capital structure in order to support ongoing operations while focusing on its primary objectives of preserving shareholder capital and generating a stable monthly cash dividend to shareholders. The Company defines its capital structure to include common shares, debentures and the credit facility. The Company reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage investment opportunities, the availability of capital and anticipated changes in general economic conditions. The Company’s investment restrictions and asset allocation model incorporate various restrictions and investment parameters to manage the risk profile of the mortgage investments. There have been no changes in the process over the previous year. At December 31, 2014, the Company was in compliance with its investment restrictions. Pursuant to the terms of the credit facility, the Company is required to meet certain financial covenants, including a minimum interest coverage ratio, minimum adjusted shareholders’ equity and maximum non-debenture indebtedness to adjusted shareholders’ equity. For the year ended December 31, 2014, the Company was in compliance with all financial covenants. 17. RISK MANAGEMENT The Company is exposed to the symptoms and effects of global economic conditions and other factors that could adversely affect its business, financial condition and operating results. Many of these risk factors are beyond the Company’s direct control. The Manager and Board of Directors play an active role in monitoring the Company’s key risks and in determining the policies that are best suited to manage these risks. There has been no change in the process since the previous year. The Company’s business activities, including its use of financial instruments, exposes the Company to various risks, the most significant of which are interest rate risk, credit risk, and liquidity risk. (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial assets or financial liabilities will fluctuate because of changes in market interest rates. As of December 31, 2014, $89,906,305 of net mortgage investments bear interest at variable rates. Of these, $84,887,448 of net mortgage investments include a “floor rate” to protect their negative exposure, while two mortgage investments totalling $5,018,857 bear interest at a variable rate without a “floor rate”. If there were a decrease of 0.50% in interest rates, with all other variables constant, the impact from variable rate mortgage investments would be a decrease in net income of $25,094. However, if there were a 0.50% increase in interest rates, with all other Timbercreek Mortgage Investment Corporation 49 Notes to Financial Statements Years Ended December 31, 2014 and 2013 variables constant, it would result in an increase in net income of $449,532. The Company manages its sensitivity to interest rate fluctuations by generally entering into fixed rate mortgage investments or adding a “floor-rate” to protect its negative exposure. In addition, the Company is exposed to interest rate risk on the credit facility, which has a balance of $9,075,926 as at December 31, 2014. Based on the outstanding balance of the credit facility as at December 31, 2014, a 0.50% decrease in interest rates, with all other variables constant, will increase net income by $45,380 annually, arising mainly as a result of lower interest expense payable on the credit facility. A 0.50% increase in interest rates would have an equal but opposite effect on the net income of the Company. The Company’s other assets, which includes interest receivable, accounts payable and accrued expenses, prepaid mortgage interest, mortgage funding holdbacks, dividends payable and due to Manager have no exposure to interest rate risk due to their short-term nature. Cash and cash equivalents carry a variable rate of interest and are subject to minimal interest rate risk and the debentures have no exposure to interest rate risk due to their fixed interest rate. (b) Credit risk Credit risk is the possibility that a borrower may be unable to honour its debt commitments as a result of a negative change in market conditions that could result in a loss to the Company. The Company mitigates this risk by the following: (i) adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); (ii) all mortgage investments are approved by the independent mortgage advisory committee before funding; and (iii) actively monitoring the mortgage investments and initiating recovery procedures, in a timely manner, where required. The maximum exposure to credit risk at December 31, 2014 is the carrying values of its net mortgage investments, including interest receivable, amounting to $401,732,652 (December 31, 2013 – $321,844,724). The Company has recourse under these mortgage investments in the event of default by the borrower; in which case, the Company would have a claim against the underlying collateral. 50 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 The maximum exposure to credit risk at December 31, 2014 is the carrying values of its net mortgage investments, including interest receivable, amounting to $401,732,652 (December 31, 2013 – $321,844,724). The Company has recourse under these mortgage investments in the event of default by the borrower; in Notes to Financial Statements Years Ended December 31, 2014 and 2013 which case, the Company would have a claim against the underlying collateral. (c) Liquidity risk (c) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting its financial obligations as Liquidity risk is the risk that the Company will encounter difficulty in meeting its financial obligations as they become due. This risk arises in the normal operations from fluctuations in cash flow as a result they become due. This risk arises in the normal operations from fluctuations in cash flow as a result of the of the timing of mortgage investment advances and repayments and the need for working capital. Management routinely forecasts future cash flow sources and requirements to ensure cash is efficiently timing of mortgage investment advances and repayments and the need for working capital. Management utilized. routinely forecasts future cash flow sources and requirements to ensure cash is efficiently utilized. The following are the contractual maturities of financial liabilities as at December 31, 2014, including The following are the contractual maturities of financial liabilities as at December 31, 2014, including expected interest payments: expected interest payments: December 31, 2014 values cash flows a year year 3–5 years Carrying Contractual Within Following Accounts payable and accrued expenses $ 855,527 $ 855,527 $ 855,527 $ Dividends payable 2,442,092 2,442,092 2,442,092 Due to Manager 1,975,958 1,975,958 1,975,958 Mortgage funding holdbacks Prepaid mortgage interest 483,762 483,762 483,762 2,560,472 2,560,472 2,560,472 $ – – – – – Credit facility 9,075,926 9,824,690 408,417 9,416,273 – – – – – – Convertible debentures 32,387,457 43,803,185 2,190,750 2,196,752 39,415,683 Total liabilities 49,781,194 61,945,686 10,916,978 11,613,025 39,415,683 Unadvanced mortgage commitments Total contractual – 107,366,854 107,366,854 – – liabilities $ 49,781,194 $ 169,312,540 $ 118,283,832 $ 11,613,025 $ 39,415,683 and an unutilized credit facility of $25,924,074 (December 31, 2013 – $25,000,000). The Company is As at December 31, 2014, the Company had a cash position of $463,092 (December 31, 2013 – $12,348,449) As at December 31, 2014, the Company had a cash position of $463,092 (December 31, 2013 – $12,348,449) and an unutilized credit facility of $25,924,074 (December 31, 2013 – $25,000,000). The Company is confident that it will be able to finance its operations using the cash flow generated from operations and the credit facility. Included within the unadvanced mortgage commitments is $42,774,960 relating to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. confident that it will be able to finance its operations using the cash flow generated from operations and the credit facility. Included within the unadvanced mortgage commitments is $42,774,960 relating to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. 18. FAIR VALUE M EASUREM EN TS The following table shows the carrying amounts and fair values of assets and liabilities: TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 26 Timbercreek Mortgage Investment Corporation 51 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Notes to the Consolidated Financial Statements Years ended December 31, 2014 and 2013 Notes to Financial Statements Years Ended December 31, 2014 and 2013 18. FAIR VALUE MEASUREMENTS The following table shows the carrying amounts and fair values of assets and liabilities: As at December 31, 2014 Assets measured at fair value Carrying Value Other financial FVTPL liabilities Fair value Loans and receivable Foreclosed properties held for sale $ – $ 13,850,521 $ – $ 13,850,521 Assets not measured at fair value Cash and cash equivalents Other assets Mortgage investments, including mortgage syndications Financial liabilities not measured at fair value Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks 463,092 3,582,038 616,173,629 – – – – – – – – – – – – – 463,092 3,582,038 – 616,173,629 855,527 855,527 2,442,092 2,442,092 1,975,958 1,975,958 483,762 483,762 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION Prepaid mortgage interest 2,560,472 – – 2,560,472 Credit facility – Notes to the Consolidated Financial Statements Convertible debentures – – – 8,836,959 8,836,959 32,387,457 35,017,500 Mortgage syndication liabilities Years ended December 31, 2014 and 2013 $ – $ – $ 219,581,032 $ 219,581,032 As at December 31, 2013 Assets measured at fair value Carrying Value Other financial FVTPL liabilities Fair value Loans and receivable Foreclosed properties held for sale $ – $ 11,351,435 $ – $ 11,351,435 Assets not measured at fair value Cash and cash equivalents Other assets Mortgage investments, including mortgage syndications Financial liabilities measured at FVTPL 12,348,449 1,540,102 442,165,777 – – – – – 12,348,449 1,540,102 – 442,165,777 Foreign exchange forward contract 71,696 71,696 Financial liabilities not measured at fair value Accounts payable and accrued expenses – – 520,725 520,725 Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest – 2,476,592 TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 27 2,349,736 2,476,592 2,349,736 – – – – – – – 28,809 28,809 1,011,565 1,011,565 Mortgage syndication liabilities $ – $ – $ 124,378,929 $ 124,378,929 The valuation techniques and the inputs used for the Company’s financial instruments are as follows: 52 Timbercreek Mortgage Investment Corporation (a) M ortgage investm ents and m ortgage syndication liabilities There is no quoted price in an active market for the mortgage investments or mortgage syndication liabilities. The Manager makes its determination of fair value based on its assessment of the current lending market for mortgage investments of same or similar terms. Typically, the fair value of these mortgage investments and mortgage syndication liabilities approximate their carrying values given the amounts consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. As a result, the fair value of mortgage investments is based on level 3 inputs. (b) Other financial assets and liabilities The fair values of cash and cash equivalents, other assets, accounts payable and accrued expenses, dividends payable, due to Manager, mortgage funding holdbacks, prepaid mortgage interest and credit facility approximate their carrying amounts due to their short-term maturities. (c) Foreign exchange forward contracts Foreign exchange forward contracts are measured at fair value using the market comparison technique. The fair values are based on broker quotes from Bloomberg. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments. As a result, the fair value of foreign exchange forward contract is based on level 2 inputs. TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 28 Notes to Financial Statements Years Ended December 31, 2014 and 2013 The valuation techniques and the inputs used for the Company’s financial instruments are as follows: (a) Mortgage investments and mortgage syndication liabilities There is no quoted price in an active market for the mortgage investments or mortgage syndication liabilities. The Manager makes its determination of fair value based on its assessment of the current lending market for mortgage investments of same or similar terms. Typically, the fair value of these mortgage investments and mortgage syndication liabilities approximate their carrying values given the amounts consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. As a result, the fair value of mortgage investments is based on level 3 inputs. (b) Other financial assets and liabilities The fair values of cash and cash equivalents, other assets, accounts payable and accrued expenses, dividends payable, due to Manager, mortgage funding holdbacks, prepaid mortgage interest and credit facility approximate their carrying amounts due to their short-term maturities. (c) Foreign exchange forward contracts Foreign exchange forward contracts are measured at fair value using the market comparison technique. The fair values are based on broker quotes from Bloomberg. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments. As a result, the fair value of foreign exchange forward contract is based on level 2 inputs. (d) Convertible debentures The fair value of the convertible debentures is based on the market closing price of convertible debentures at the reporting date. There were no transfers between level 1, level 2 and level 3 during the year ended December 31, 2014 and 2013. 19. COMMITMENTS AND CONTINGENCIES In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgages. Where required, management records adequate provisions in the accounts. Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a materially adverse effect on the Company’s financial position. 20. KEY MANAGEMENT PERSONNEL COMPENSATION The Company paid $90,231 (2013 – $105,642) to the members of the Board of Directors and nil (2013 – $31,108) to the Independent Review Committee for their services to the Company. The compensation to the senior management of the Manager is paid through the management fees paid to the Manager (note 12(a)). 21. COMPARATIVES Comparative figures have been re-classified, where necessary, to conform with changes in presentation in the current year. Timbercreek Mortgage Investment Corporation 53 Notes to Financial Statements Years Ended December 31, 2014 and 2013 22. SUBSEQUENT EVENTS (a) Non-executive director deferred share unit plan Commencing January 1, 2015, the Company instituted a non-executive director deferred share unit plan (the “Plan”) whereby, up to 100% of the compensation for a director may be paid to the director in the form of deferred share units (“DSUs”), payable quarterly in arrears. Directors may elect once every year, in accordance with the Plan, as to how much (if any) of his/her compensation will be paid in DSUs, having regard at all times for the ownership guidelines of the Plan. The portion of a director’s compensation which is not payable in the form of DSUs shall be paid by the Company in cash, quarterly in arrears. (b) Credit facility amendment Subsequent to year end, the Company completed a $15,000,000 increase on the credit facility, increasing its total available borrowing limit to $50,000,000. 54 Timbercreek Mortgage Investment Corporation Board of Directors The directors of Timbercreek Mortgage Investment Corporation have deep experience, established reputations and extensive contacts in the commercial real estate and mortgage lending community, as well as in the capital markets and asset management sectors in Canada. Zelick L. Altman Independent Director, Timbercreek MIC Managing Director, LaSalle Investment Management (Canada) Ugo Bizzarri Director, Timbercreek MIC Co-Founder and Managing Director, Portfolio Management & Investments, Timbercreek Asset Management Craig A. Geier Independent Director and Audit Committee Chair, Timbercreek MIC Chairman and CEO, Microbonds Inc. Andrew Jones Director and CEO, Timbercreek MIC Managing Director, Debt Investments, Timbercreek Asset Management W. Glenn Shyba Independent Director and Audit Committee Chair, Timbercreek MIC Principal, Origin Merchant Partners Blair Tamblyn Chairman, Timbercreek MIC Co-Founder, Managing Director and CEO, Timbercreek Asset Management Derek J. Watchorn, LL.B. Independent Director, Timbercreek MIC Consultant Independent Mortgage Advisory Committee Chris Humeniuk President and CEO, Community Trust Ken Lipson President and CIO, TMDL Asset Management Inc. Pamela Spackman Committee Chair Consultant Head Office 1000 Yonge Street, Suite 500 Toronto, ON M4W 2K2 T 416.306.9967 F 416.848.9494 E inquiries@timbercreek.com timbercreekmic.com Stock Exchange Listing TSX: TMC Auditors KPMG LLP Transfer Agent & Registrar CIBC Mellon Trust Company 320 Bay Street Toronto, ON M5H 4A6 Legal Counsel McCarthy Tétrault LLP 

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