Timbercreek Financial Corp
Annual Report 2015

Plain-text annual report

Timbercreek Mortgage Investment Corporation 2015 Annual Report Timbercreek Mortgage Investment Corporation Timbercreek Mortgage Investment Corporation is a leading provider of non-bank mortgage financing offering shorter-duration, customized financing solutions to commercial real estate investors. By bringing together three core elements of thorough underwriting, active management and strong governance, we are able to fulfill the requirements of this borrower market while providing strong risk-adjusted yield for our shareholders. Our varied portfolio of mortgage investments is primarily secured by income-producing properties and is well-diversified by asset type, by borrower and across key growth markets throughout the country. Drivers of Our Success Our Strategy Throughout 2015, our focus continued to be on making high-quality investments secured by high-quality assets. This goal has been achieved primarily through mortgage loans secured by income-producing properties and disciplined portfolio diversification. Together, these strategies allow us to generate superior risk-adjusted yield for shareholders. Our People Our investors benefit from Timbercreek’s robust orgination and asset management platform. Our origination team covers Canada from east to west, leveraging strong relationships with commercial real estate borrowers and extensive networks of mortgage broker and investment banker contacts. The origination team, coupled with the underwriting, funding and servicing team at Timbercreek, are seasoned specialists with experience spanning varying economic cycles, and as such are a critical component of our success. Superior Customer Service Timbercreek works directly with borrowers to develop customized solutions and formulate strong exit strategies to help ensure a successful investment from start to finish. This commitment, combined with ongoing communication with borrowers throughout the lifecycle of each loan, has earned Timbercreek a well-deserved reputation for exceptional customer service. 87% of portfolio is secured by income-producing properties $4.6 billion in mortgage and loan originations by Timbercreek since inception Repeat borrowers represent 76% of new business since inception 2015 Company Highlights 11% portfolio growth 13% growth in earnings 78% first mortgage positions 70% weighted average loan-to-value $262.6 million in new mortgage investments funded (50 loans) 69% portfolio turnover Timbercreek Mortgage Investment Corporation 1 Why Multi-Residential Real Estate? 61% of the loans in our portfolio are secured by multi-residential real estate Mortgage Investment Corporations are required to invest at least 50% of their assets in mortgages secured by housing* which can include a wide range of residential property types including single-family homes, condominiums, residential land and development projects, retirement and multi-residential, among others. At Timbercreek, we have chosen to deliver on this requirement by lending primarly against multi-residential real estate for the following reasons: Strong Exit Strategy: compared to other commercial real estate sectors, including other residential property types, multi-residential real estate has the lowest historical vacancy rates and strongest historical risk-adjusted returns. These features combine to drive demand from investors. Lower Probability of Default: multi-residential real estate provides a strong, stable multi-tenant income stream which is available to service debt. Why do multi-residential investors seek capital from Timbercreek? In short, our financing solutions allow multi-residential investors to: - acquire assets when a conventional lender cannot accommodate tight closing timelines; - provide financing through a renovation period when conventional financing, focused on income already in place, does not provide sufficient capital; and - provide second mortgages against stabilized assets where the borrower is unlocking capital for new investments. Diversification by Asset Type Multi-residential 60.7% Multi-residential: 60.7% Hotel: 1.3% Retail: 17.9% Office: 8.9% Single-family residential: 0.9% Industrial: 0.9% Unimproved land: 5.7% Self-storage: 0.8% Retirement: 2.2% Other residential: 0.7% 88% of second mortgages secured by multi-residential real estate * Income Tax Act 2 Timbercreek Mortgage Investment Corporation Sample Investments C B , r e v u o c n a V , e s U - d e x i M K S , a n i g e R & n o o t a k s a S , l a i t n e d i s e r - i t l u M This newly-constructed, residential/retail complex is located in Grandview-Woodlands – a mature Vancouver neighbourhood characterized by a mix of commercial, industrial, single-family and multi-family residential stock, with rich ethnic features. The loan was used to bridge financing during the lease-up period for the retail units within the property, and is secured by the 20 fully-leased, income-generating, high-end residential rental units, with a Starbucks-anchored retail component. This blanket first-mortgage loan was used for the acquisition and improvement of a 759-suite portfolio of 11 multi-residential buildings located in prime downtown Saskatoon and Regina locations, in close proximity to schools, transit and retail amenities. Property improvements will include; exterior upgrades, modernization of lobbies and hallways and some in-suite enhancements. Under new ownership, the portfolio will be repositioned with significant upside in expected income, making it an attractive portfolio for securing the loan. CrITerIA Asset type Loan size Position Term Loan-to-value InvesTMenT Mixed Use - Residential & Retail $6,000,000 First Mortgage 18 months 68.0% CrITerIA Asset type Loan size Position Term Loan-to-value InvesTMenT Multi-residential $45,663,166 First Mortgage 24 months 55.8% Timbercreek Mortgage Investment Corporation 3 Letter to Shareholders I am pleased to provide this report on the results that Timbercreek Mortgage Investment Corporation achieved in 2015 – a year in which we accomplished our stated goals, achieved healthy growth at no cost to credit quality, and maintained our deep focus on prudent risk management for our investors. First, the headline results: through 2015 we were able to grow the portfolio by over 10% and earnings by over 12%; all while reducing overall risk in the portfolio. In 2015, our exposure to first mortgages increased to 78% (up 9% from 2014) and by the end of the year, 87% of our loans were secured by income- producing properties. Our earnings growth in 2015 also allowed us to generate distributable income in excess of dividends paid to shareholders. During the course of the year, over $290 million was repaid across 55 loans; which confirms that our high-quality borrowers were able to execute on their projects effectively. At the same time, robust deal flow from our experienced origination team, supported by a thorough due diligence process, allowed us to deploy over $260 million in new deals. The portfolio is currently comprised of 100 mortgage loans with an average size of $4.4 million. At the end of 2015, our exposure was well-diversified across major geographic markets with our largest exposure focused in Ontario (35%), Quebec (20%), and Saskatchewan (15.3%). We continuously monitor all markets and property types and seek to rebalance the portfolio with an eye on managing risk. At the end of 2015, we had just under 6% exposure in Alberta, one of the more volatile markets; which was a slight decrease from our exposure at the end of 2014 – and lower than all of our market peers. For 2015, as in previous years, our attention continued to be on lending primarily against cash-flowing real estate. Over 87% of our portfolio is secured by real estate with rental income in place, compared to 84% a year earlier. Furthermore, we have maintained a high concentration of exposure to multi-residential real estate, which currently represents over 60% of our portfolio. In fact, in the last quarter, over 65% of total capital deployed was to loans secured by apartment buildings. We continue to target these assets because they display some of the strongest fundamentals when compared to other commercial real estate sectors, and because properties with rental income in place provide better stability compared to some other property types, such as land or properties under construction. This stability offers more certainty in our exit strategies, as rental income can service debt if required. After apartment buildings, our second-highest exposure is 4 Timbercreek Mortgage Investment Corporation to retail properties (18%). These retail loans are primarily secured by grocery-anchored neighbourhood shopping centres, as well as certain infill mixed-use properties in Canada’s largest cities. While we have always maintained a very conservative approach to lending, over the past year our commitment to risk management strengthened. This renewed emphasis is illustrated by an uptick in our first-mortgage exposure – from 69.5% at the end of 2014 to 78.0% at the end of 2015 – as well as by our increased allocation to loans secured by cash-flowing properties. While this did contribute to a reduction in our weighted average interest rate, which declined slightly over the year from an average of 9.4% in 2014 to an average of 9.1% in 2015, we believe the improvements to credit quality have positioned the portfolio to withstand volatility in the market. Another change over the course of 2015 was to our weighted average remaining term-to-maturity, which dropped slightly from 1.4 years at the end of 2014 to 1.2 years at the end of 2015. This short duration allows us to maintain a certain level of control as a lender, as it allows us to re-set interest rates and actively manage the portfolio through different market cycles. When I look back at the results we produced in 2015 and forward to the accomplishments we expect in 2016, I am reminded that these results were generated by the many people who have come together to produce our success. At the forefront are you, our investors; who place your trust and confidence in our investment strategy – which is deployed by our investment team as they work to protect your capital and produce stable income. Thank you to each and every one of you, investment team member and investor alike. Of course, this work is also overseen by our Board of Directors and Mortgage Advisory Committee, to whom my appreciation goes out as well. On behalf of everyone here at Timbercreek Mortgage Investment Corporation, my pledge to you is that we will carefully and thoughtfully implement our investment strategy in 2016. I look forward to reporting further success during the upcoming year. Andrew Jones Chief Executive Officer Timbercreek Mortgage Investment Corporation April 2016 Management’s Discussion and Analysis For the year ended December 31, 2015 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 24, 2016. 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. Timbercreek Mortgage Investment Corporation 5 BUsIness OvervIeW Timbercreek Mortgage Investment Corporation (the “Company”) is a mortgage investment corporation domiciled in Canada. The registered office of the Company is 25 Price Street, Toronto, Ontario M4W 1Z1. The Company is incorporated under the laws of the Province of Ontario by articles of incorporation dated April 30, 2008. The common shares of the Company are publicly traded on the Toronto Stock Exchange (“TSX”) under the symbol “TMC”. 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. The Company has entered into a management agreement with Timbercreek Asset Management Inc. (the “Manager”) dated September 13, 2013. The Manager is responsible for the day-to-day operations and providing all general management, mortgage servicing and administrative services to the Company. 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, 2015 (the “Year”). This MD&A should be read in conjunction with the consolidated financial statements for the years ended December 31, 2015 and 2014, which are prepared in accordance with International Financial Reporting Standards (“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 Company’s ability to earn and distribute cash dividends to shareholders and to evaluate its 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. • 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 portfolio – represents the daily average of net mortgage investments for the stated period; • 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; 6 Timbercreek Mortgage Investment Corporation • 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; • Leverage – represents the total of gross convertible debentures and the total credit facility balance divided by total assets less mortgage syndication liabilities; • Weighted average interest rate for the period – represents the weighted average of daily interest rates (not including lender fees) on the net mortgage investments for the stated period; • 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 fee is received but the mortgage investment is not fully funded, the denominator is adjusted to include the Company’s unadvanced commitment; • Adjusted net income and comprehensive income – represents net income and comprehensive income 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 and comprehensive income divided by the weighted average outstanding shares for the stated period; • Targeted dividend yield – represents the average 2-Year Government of Canada Bond Yield for the stated period plus 550 basis points; • Actual dividend yield – represents the annualized total per-share dividend for common shares divided by the trading close price as at the reporting date; • Expense ratio – represents total expenses (excluding financing costs, net operating (income) loss on foreclosed properties held for sale (“FPHFS”), fair value adjustment on FPHFS 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; and • Payout ratio – represents total common share dividends paid and declared for payment, divided by distributable income for the stated period. reCenT DeveLOPMenTs AnD OUTLOOK The Company’s performance through 2015 was strong. By successfully achieving our stated goal of maintaining full deployment of cash through the year, the Company was able to grow net interest income by over 17% and generate distributable income in excess of dividends paid to shareholders. Investment activity also remained healthy with more than $260 million in new mortgage investments funded resulting in portfolio growth of over 10%. This portfolio growth was also achieved without compromising credit quality. More than ever, risk management is a top priority for our business. We achieve this through a number of strategies which include, focusing our lending in larger urban cities, targeting mortgage investments secured by cash-flowing properties, as well as through thorough underwriting of the asset, the stability of the cash-flow, the financial stability of the borrower and the experience of the manager among other risk factors. At year-end, over 87% of the Company’s mortgage investments were secured by properties with existing rental income and 60% of the portfolio was secured by multi-residential real estate (apartment buildings) which we believe to be the most stable property type with well diversified cash-flow streams. The portfolio’s exposure to first mortgages grew to 78% from 69% a year earlier and, as at December 31, 2015, weighted average loan-to-value in the portfolio was 70%. We also continue to maintain the lowest exposure to Alberta in the sector with just 5.7% allocation to that market down slightly from 6.1% at the end of Q3. Aside from the Alberta market and certain areas of the office sector, we believe fundamentals in the commercial real estate market across Canada continue to remain healthy, creating a good environment for mortgage lending. This is primarily a result of continued demand for investment properties from both domestic investors benefiting from the lower cost of mortgage debt and foreign investors capitalizing on the attractively priced Canadian dollar. Timbercreek Mortgage Investment Corporation 7 We were pleased with the Company’s strong performance in 2015 and continue to believe we hold one of the highest quality mortgage portfolios in the market today, providing an exceptional risk-adjusted yield to investors. With a fully deployed, well-diversified portfolio of mortgage investments primarily secured by income-producing properties, we expect to continue this strong momentum through 2016. FInAnCIAL HIGHLIGHTs FInAnCIAL POsITIOn As at KEY FINANCIAL POSITION INFORMATION Mortgage investments, including mortgage syndications Total assets Credit facility Convertible debentures Total liabilities CAPITAL STRUCTURE CAPITAL STRUCTURE CAPITAL STRUCTURE Shareholders’ equity Convertible debentures, gross Credit facility Credit facility limit Leverage1 COMMON SHARE INFORMATION Number of common shares outstanding Closing trading price Market capitalization 1 Refer to non-IFRS measures section, where applicable. 1. Refer to non-IFRS measures section, where applicable. December December 31, 2015 31, 2015 December December 31, 2014 31, 2014 December December 31, 2013 31, 2013 750,703 $ 616,174 $ 442,166 766,734 $ 634,069 $ 467,406 53,812 32,778 404,404 $ $ $ 9,075 $ 32,387 $ – – 269,123 $ 130,838 362,329 $ 364,946 $ 336,568 34,500 $ 34,500 $ 53,812 $ 9,075 $ – – 60,000 $ 35,000 $ 25,000 19.3% 10.5% – 40,523,728 40,523,728 40,701,528 40,701,528 36,964,028 36,964,028 7.58 $ 8.32 $ 9.17 307,170 $ 338,637 $ 338,960 $ $ $ $ $ $ $ $ $ $ $ 8 Timbercreek Mortgage Investment Corporation OPerATInG resULTs Net interest income Income from operations Net income and comprehensive income Earnings per share (basic and diluted) Adjusted net income and comprehensive income1 Adjusted earnings per share (basic and diluted)1 Dividends to shareholders Distributable income Distributable income per share (basic and diluted) Targeted dividend yield1 Actual dividend yield1 Payout ratio1 Dividends per share Class A Class B Common 1. Refer to non-IFRS measures section, where applicable. 1 Refer to non-IFRS measures section, where applicable. TThhrreeee mmoonntthhss eennddeedd DDeecceemmbbeerr 3311,, YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 22001155 22001144 22001133 $ 10,814 $ 9,774 $ 43,004 $ 36,710 $ 39,731 $ $ $ $ $ $ $ $ 8,427 $ 7,438 $ 32,750 $ 28,272 $ 25,487 6,905 $ 5,812 $ 28,021 $ 24,917 $ 507 0.17 $ 0.14 $ 0.69 $ 0.63 $ 0.65 6,905 $ 5,812 $ 28,021 $ 24,917 $ 28,361 0.17 $ 0.14 $ 0.69 $ 0.63 $ 0.74 7,296 $ 7,326 $ 29,253 $ 30,263 $ 29,274 7,256 $ 8,013 $ 29,484 $ 27,899 $ 30,204 0.18 $ 0.20 $ 0.73 $ 0.71 $ 0.79 6.07% 9.42% 100.6% 6.52% 6.05% 6.55% 6.61% 8.58% 9.50% 9.16% 8.33% 91.4% 99.2% 108.5% 96.9% $ $ $ – $ – $ – $ – $ – $ – $ – $ 0.630 – $ 0.670 0.180 $ 0.180 $ 0.720 $ 0.762 $ 0.134 For the three months ended December 31, 2015 (“Q4 2015”) and December 31, 2014 (“Q4 2014”) • The Company funded 10 new net mortgage investments (Q4 2014 – 17) totalling $62.6 million (Q4 2014 – $170.8 million), had additional advances on existing mortgage investments totalling $23.8 million (Q4 2014 – $14.9 million) and received full repayments on 20 mortgage investments (Q4 2014 – 12) and partial paydowns totalling $91.2 million (Q4 2014 – $134.4 million), resulting in net mortgage investments of $439.5 million as at December 31, 2015 (September 30, 2015 – $444.3 million). • Net interest income earned by the Company was $10.8 million (Q4 2014 – $9.8 million), an increase of $1.0 million, or 10.6%, from Q4 2014. The increase over Q4 2014 is mainly due to an increase of over $84.1 million in the average net mortgage investments portfolio during Q4 2015 relative to Q4 2014. This was facilitated by increased use of the credit facility during Q4 2015. Weighted average interest rate for the period decresed to 8.9% compared to 9.5% during Q4 2014. • Non-refundable cash lender fees received by the Company was $0.9 million (Q4 2014 – $2.5 million) or a weighted average lender fee of 1.4% (Q4 2014 – 1.5%). Fees generated in 2015 are within our target percentage range with Q4 2014 an exception on a nomial basis mainly due to a significant increase in advances on new mortgage investments of $108.2 million in Q4 2014 relative to Q4 2015. • Income from operations generated by the Company was $8.4 million (Q4 2014 – $7.4 million), an increase of $1.0 million, or 13.3%, from Q4 2014. The increase in income from operations is mainly attributed to a larger average net mortgage investments portfolio during Q4 2015 relative to Q4 2014. • The Company recorded a net unrealized fair value loss of $374 (Q4 2014 - $800) on its FPHFS. • The Company generated net income and comprehensive income of $6.9 million (Q4 2014 – $5.8 million), an increase of $1.1 million, or 18.8%, from Q4 2014, resulting in earnings per share of $0.17 for Q4 2015 (Q4 2014 – $0.14). Timbercreek Mortgage Investment Corporation 9 • The Board of Directors declared dividends to common shareholders of $7.3 million (Q4 2014 – $7.3 million), or $0.18 (Q4 2014 – $0.18) per share, consistent with the previous quarter. 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. • The Company acquired 22,700 common shares (Q4 2014 – nil) for cancellation under its normal course issuer bid (the “2014 bid”) at a cost of $172 (Q4 2014 – nil) at an average purchase price of $7.59 per common share. Subsequent to year end, the Company reinstituted the normal course issuer bid (the “2015 bid”) following TSX approval. For the years ended December 31, 2015 (the “Year” or “2015”) and December 31, 2014 (“2014”) • The Company funded 50 new net mortgage investments (2014 – 68) totalling $262.6 million (2014 – $401.3 million), had additional advances on existing mortgage investments totalling $70.9 million (2014 – $98.0 million) and received full repayments on 55 mortgage investments (2014 – 59) and partial paydowns totalling $291.3 million (2014 – $382.6 million), resulting in net mortgage investments of $439.5 million as at December 31, 2015 (December 31, 2014 – $397.3 million), an increase of 10.6% from December 31, 2014. • Net interest income earned by the Company was $43.0 million (2014 – $36.7 million), an increase of $6.3 million, or 17.1%, from 2014. The increase over 2014 is mainly due an increase of $75.8 million in the average net mortgage investments portfolio during 2015, from increased use of the credit facility. Weighted average interest rate for the period decresed to 9.1% compared to 9.4% during 2014. • Non-refundable cash lender fees received by the Company was $4.3 million (2014 – $5.8 million) or a weighted average lender fee of 1.2% (2014 – 1.6%). The decrease in lender fees is directly related to the significant increase in advances on new mortgage investments of $138.7 million made in 2014 relative to 2015. • The Company generated income from operations of $32.8 million (2014 – $28.3 million), an increase of $4.5 million, or 15.8%, from 2014. The increase in income from operations is attributed to a larger average net mortgage investments portfolio during 2015, although reduced in part by a specific provision for mortgage investment loss, and higher management and performance fees. • The Company recorded a $900 specific mortgage provision (2014 – nil), no collective mortgage provision (2014 - $250) along with a $524 (2014 - $650) fair value loss on its FPHFS. • The Board of Directors declared dividends to common shareholders of $29.3 million (2014 – $30.3 million), or $0.720 (2014 – $0.762) per share. 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. • The Company generated net income and comprehensive income of $28.0 million (2014 – $24.9 million), an increase of $3.1 million, or 12.5%, from 2014, resulting in earnings per share of $0.69 for 2015 (2014 – $0.63). • The Company acquired 177,800 common shares (2014 – nil) for cancellation under its 2014 bid at a cost of $1.4 million (2014 – nil) at an average purchase price of $7.79 per common share. • 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 in the form of deferred share units (“DSUs”). For 2015, the directors, on average, have elected to receive 94% of their compensation in DSUs. For 2015, 17,022 DSUs were issued and outstanding totalling $0.1 million. 10 Timbercreek Mortgage Investment Corporation AnALYsIs OF FInAnCIAL InFOrMATIOn FOr THe PerIOD Distributable income TThhrreeee mmoonntthhss eennddeedd DDeecceemmbbeerr 3311,, YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 22001155 22001144 Net income and comprehensive income $ 6,905 $ 5,812 $ 28,021 $ 24,917 Less: amortization of lender fees Add: lender fees received Add: amortization of financing costs, credit facility Add: amortization of financing costs, debentures Add: accretion expense, debentures Add: net operating (income) loss from FPHFS Add: unrealized fair value adjustments on FPHFS Add: provision for mortgage investments loss DDiissttrriibbuuttaabbllee iinnccoommee Less: dividends on common shares ((OOvveerr))//uunnddeerr ddiissttrriibbuuttiioonn Distributable income per share (basic and diluted) Payout ratio Turnover ratio (1,076) 950 56 (10) 29 28 374 – (1,297) 2,482 (4,966) 4,280 (4,437) 5,820 35 94 29 58 800 – 221 277 113 114 524 900 129 303 96 171 650 250 $ $ 7,256 (7,296) 8,013 29,484 (7,326) (29,253) 27,899 (30,263) (40) $ 687 $ 231 $ (2,364) 0.18 $ 0.20 $ 0.73 $ 0.71 100.6% 21.1% 91.4% 37.3% 99.2% 69.2% 108.5% 112.6% The distributable income reconciliation above provides a link between the Company’s IFRS reporting requirements and its ability to generate recurring profit for distribution. The Company expects minor fluctuations in payout ratios throughout the year as dividends are straight-lined while we experience fluctuations in distributable income. During 2015, the Company increased utilization of the credit facility which resulted in an increase in net interest income over the comparable 2014 periods. As a result, the Company was able to achieve a strong year with distributable income in excess of our current distribution and a payout ratio of just under 100%. Timbercreek Mortgage Investment Corporation 11 statements of income and comprehensive income TThhrreeee mmoonntthhss eennddeedd DDeecceemmbbeerr 3311,, YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 %% CChhaannggee 22001155 22001144 %% CChhaannggee Net interest income $ 10,814 $ 9,774 10.6% $ 43,004 $ 36,710 17.1% Expenses (2,387) (2,336) (2.2%) (10,253) (8,438) (21.5%) Income from operations 8,427 7,438 13.3% 32,750 28,272 15.8% Net operating (loss) from foreclosed properties held for sale (28) (58) 51.6% (114) (171) 33.0% Fair value adjustment of foreclosed properties held for sale (374) (800) 53.3% (524) (650) 19.4% Financing costs: Interest on credit facility Interest on convertible debentures NNeett iinnccoommee aanndd ccoommpprreehheennssiivvee iinnccoommee EEaarrnniinnggss ppeerr sshhaarree ((bbaassiicc aanndd ddiilluutteedd)) (554) (566) (87) (544.0%) (681) 16.8% (1,520) (2,571) (275) (453.5%) (2,259) (13.8)% $$ 66,,990055 $$ 55,,881122 1188..88%% $$ 2288,,002211 $$ 2244,,991177 1122..55%% $$ 00..1177 $$ 00..1144 $$ 00..6699 $$ 00..6633 net interest income1 For Q4 2015 and the Year, the Company earned net interest income of $10.8 million and $43.0 million (Q4 2014 – $9.8 million; 2014 – $36.7 million). Net interest income includes the following: (a) Interest income For Q4 2015 and the Year, the Company earned $9.7 million and $37.9 million (Q4 2014 – $8.4 million; 2014 – $32.0 million) in interest income on the net mortgage investments or an increase of 16.5% and 19.5%, respectively. The increase over the 2014 comparable periods is mainly due to a larger average net mortgage investments portfolio driven by increased utilization of the Company’s credit facility borrowing. The weighted average interest rate for Q4 2015 and 2015 was 8.9% and 9.1% (Q4 2014 – 9.5%; 2014 – 9.4%) on the net mortgage investments. The weighted average interest rate has declined as a result of higher allocation towards first mortgages which tend to carry lower risk along with downward pressure on interest rates in the market. (b) Lender fee income During Q4 2015 and the Year, the Company received lender fees of $0.9 million and $4.3 million (Q4 2014 – $2.5 million; 2014 – $5.8 million), or a weighted average lender fee of 1.4% and 1.2% (Q4 2014 – 1.5%; 2014 – 1.6%). The decreasein lender fees is directly related to the significant increase in advances on new mortgage investments of $138.7 million made in 2014 relative to 2015. The lender fees are amortized using the effective interest rate method over the expected life of the mortgage investments to lender fee income but are paid out in the year they are received (see Distributable Income section). For Q4 2015 and 2015, lender fees of $1.1 million and $5.0 million (Q4 2014 – $1.3 million; 2014 – $4.4 million) were amortized to lender fee income. The lender fees generated by the Company continue to be a significant component of income resulting from mortgage investment turnover. The Manager does not retain any portion of the lender fees in order to ensure management’s interests are aligned with shareholders. expenses For Q4 2015 and the Year, the Company’s expense ratio was 2.1% and 2.0% (Q4 2014 – 2.2%; 2014 – 2.0%), including a fixed expense ratio of 1.6% and 1.5% (Q4 2014 – 1.5%; 2014 – 1.5%). The increase in expenses is mainly related to higher professional fees and directors fees as compared to 2014. 1 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. 12 Timbercreek Mortgage Investment Corporation Management fees (a) Management fees The Company has entered into a management agreement with Timbercreek Asset Management Inc. (the “Manager”) and under the 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 2015 and the Year, the Company incurred management fees of $1.6 million and $6.0 million (Q4 2014 – $1.4 million; 2014 – $5.4 million). The increase is directly related to the increase in gross assets averaging $444.2 million in 2015, in comparison to $399.8 million in 2014. (b) Performance fees Under the management agreement, the Manager is 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 2015 and 2015, the Company accrued performance fees of $0.6 million and $2.4 million (Q4 2014 – $0.7 million; 2014 – $2.0 million), which represents a decrease of $0.1 million and an increase of $0.4 million, or (20.6%) and 24.1%, respectively. The increase in performance fee is attributed to a decrease in the average 2-Yr GOC Yield from 1.02% and 1.05% for Q4 2014 and 2014 to 0.57% and 0.55% for Q4 2015 and 2015, coupled with an increase in the Company’s net earnings available to distribute over the Hurdle Rate. Provision for mortgage investments loss For Q4 2015 and 2015, the Company has recognized a specific impairment allowance of nil and $0.9 million (Q4 2014 – nil; 2014 – nil) relating to a mortgage investment which represents the total outstanding balance as at December 31, 2015. For Q4 2015 and 2015, the Company did not recognize a collective impairment allowance (Q4 2014 – nil; 2014 – $0.3 million). General and administrative For Q4 2015 and 2015, the Company incurred general and administrative expenses of $228 and $967 (Q4 2014 – $197; 2014 – $811). 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 investments portfolio. The increase in general and administrative expenses relative to the comparable 2014 periods is attributed to increased professional fees and director fees related to the new DSU plan. The operating expense ratio for Q4 2015 and 2015 equated to 0.2% (0.2% for both Q4 2014 and 2014). net operating loss from foreclosed properties held for sale The Company consolidates the operating activities of the foreclosed properties held for sale. The net operating loss from foreclosed properties held for sale for Q4 2015 and 2015 were $28 and $114 (Q4 2014 – $58; 2014 – $171). The loss is primarily attributable to fixed operating expenses at our property located in Montreal, QC which are being incurred while the property is held for sale. Fair value adjustment on foreclosed properties held for sale During Q4 2015 and 2015, the Company recorded an unrealized fair value loss of $374 and $524 (Q4 2014 – $800; 2014 – $650), respectively on the FPHFS. Interest on credit facility The Company actively monitors its advances and repayments while efficiently using bankers’ acceptances (“BA”) for the majority of its borrowings to minimize interest costs. Financing costs include interest paid on amounts drawn on the credit facility, standby 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 2015 and 2015 relating to the credit facility were $554 and $1,520 (Q4 2014 – $86; 2014 – $274). The increase over the Timbercreek Mortgage Investment Corporation 13 comparable 2014 periods are directly related to the significant increase in credit facility utilization during Q4 2015 and 2015. The weighted average credit utilization for Q4 2015 and 2015 was $51.4 million and $30.9 million. The Company incurred $0.2 million of financing costs during 2015 on the increase of the credit facility. These costs are amortized over the term of the credit facility. 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 2015 and 2015, interest on the debentures of $0.6 million and $2.6 million (Q4 2014 – $0.7 million; 2014 – $2.3 million), is made up of the following: Interest on the convertible debentures Interest on the convertible debentures Amortization of issue costs Amortization of issue costs Accretion of equity component of the Accretion of equity component of the convertible debentures convertible debentures $ $ $ $ TThhrreeee mmoonntthhss eennddeedd TThhrreeee mmoonntthhss eennddeedd DDeecceemmbbeerr 3311,, DDeecceemmbbeerr 3311,, 22001144 22001144 558 558 93 93 22001155 22001155 548 548 (10) (10) $ $ 29 29 567 567 $ $ 29 29 680 680 $ $ $ $ YYeeaarr eennddeedd YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, DDeecceemmbbeerr 3311,, 22001144 22001144 1,860 1,860 303 303 $ $ 22001155 22001155 2,180 2,180 277 277 113 113 2,570 2,570 $ $ 96 96 2,259 2,259 earnings per share For Q4 2015 and 2015, earnings per share increased to $0.17 and $0.69 (Q4 2014 - $0.14; 2014, - $0.63). Overall, net income and comprehensive income for Q4 2015 and 2015 was higher from the comparable 2014 periods, primarily due to higher net interest income generated from a larger net mortgage investments portfolio, but was reduced in part by higher management and performance fees and a specific provision for mortgage investments loss. $ $ DDeecceemmbbeerr 3311,, 22001155 DDeecceemmbbeerr 3311,, 22001155 750,703 750,703 (310,049) (310,049) 440,654 440,654 (6,534) (6,534) 4,204 4,204 1,150 1,150 443399,,447744 443399,,447744 $$ $$ DDeecceemmbbeerr 3311,, DDeecceemmbbeerr 3311,, 22001144 22001144 616,174 616,174 (219,581) (219,581) 396,593 396,593 (4,392) (4,392) 4,890 4,890 250 250 339977,,334411 339977,,334411 $ $ $$ $$ sTATeMenT OF FInAnCIAL POsITIOn net mortgage investments The balance of net mortgage investments is as follows: Mortgage investments, including mortgage syndications Mortgage investments, including mortgage syndications Mortgage syndication liabilities Mortgage syndication liabilities Interest receivable Interest receivable Unamortized lender fees Unamortized lender fees Allowance for mortgage investment loss Allowance for mortgage investment loss NNeett mmoorrttggaaggee iinnvveessttmmeennttss NNeett mmoorrttggaaggee iinnvveessttmmeennttss 14 Timbercreek Mortgage Investment Corporation Net mortgage investments statistics and ratios1 Net mortgage investments statistics and ratios1 stnemtsevni egagtrom ten fo rebmun latoT stnemtsevni egagtrom ten fo rebmun latoT tnemtsevni egagtrom ten egarevA tnemtsevni egagtrom ten egarevA Average net mortgage investment portfolio Average net mortgage investment portfolio Weighted average interest rate Weighted average interest rate seef rednel egareva dethgieW seef rednel egareva dethgieW oitar revonruT oitar revonruT )sraey( mret egareva dethgieW )sraey( mret egareva dethgieW )sraey( ytirutam ot mret gniniameR )sraey( ytirutam ot mret gniniameR Net mortgage investments secured by cash- Net mortgage investments secured by cash- eulav-ot-naol egareva dethgieW eulav-ot-naol egareva dethgieW flowing properties flowing properties doirep eht rof doirep eht rof ,13 rebmeceD dedne raeY ,13 rebmeceDdedne shtnom eerhT ,13 rebmeceD dedne raeY ,13 rebmeceDdedne shtnom eerhT 4102 4102 4102 4102 5102 5102 5102 5102 $ $ $ $ 001 001 $593,4 $593,4 501 501 487,3 487,3 435,374 $ 351,251 435,374 $ 351,251 %5.9 %5.9 %5.1 %5.1 %3.73 %3.73 1.2 1.2 4.1 4.1 83.8% 83.8% %8.07 %8.07 %9.8 %9.8 %4.1 %4.1 %1.12 %1.12 1.2 1.2 2.1 2.1 87.2% 87.2% %4.07 %4.07 $ $ $ $ 001 001 593,4 593,4 415,840 415,840 %1.9 %1.9 %2.1 %2.1 %2.96 %2.96 1.2 1.2 2.1 2.1 87.2% 87.2% %4.07 %4.07 501 501 $ 487,3 $ 487,3 $ 340,009 $ 340,009 %4.9 %4.9 %6.1 %6.1 %6.211 %6.211 1.2 1.2 4.1 4.1 83.8% 83.8% %8.07 %8.07 1. 1. Refer to non-IFRS measures section, where applicable. 1 Refer to non-IFRS measures section, where applicable. Refer to non-IFRS measures section, where applicable. The Company has developed a lending niche predominantly targeting short-term mortgage investments, secured by cash-flowing properties, while specializing in multi-residential real estate assets. The Company focuses its efforts on diversifying the mortgage investment portfolio, with its greatest concentration in Canada’s largest provinces. As at December 31, 2015, 70.1% (December 31, 2014 – 74.9%) of the net mortgage investments were allocated across Ontario, Quebec, British Columbia and Alberta. 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. Portfolio allocation The Company’s net mortgage investments were allocated across the following categories: (a) security Position segagtrom tsriF segagtrom tsriF segagtrom tsrif-noN segagtrom tsrif-noN # of Net Mortgage # of Net Investments Mortgage Investments 28 28 81 81 100 100 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net Mortgage % of Net Investments Mortgage Investments %0.87 %0.87 %0.22 %0.22 100.0% 100.0% 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net Mortgage % of Net Investments Mortgage Investments %5.96 %5.96 %5.03 %5.03 100.0% 100.0% # of Net Mortgage # of Net Investments Mortgage Investments 48 48 12 12 105 105 Timbercreek Mortgage Investment Corporation 15 (b) region NO NO CQ CQ KS NO KS TO CQ TO CB KS CB BA TO BA BM CB BM SN BA SN BM SN (c) Maturity 5102 gnirutaM 5102 gnirutaM 6102 gnirutaM 6102 gnirutaM 7102 gnirutaM 5102 gnirutaM 7102 gnirutaM 8102 gnirutaM 6102 gnirutaM 8102 gnirutaM 7102 gnirutaM 8102 gnirutaM (d) Asset Type laitnediser-itluM laitnediser-itluM liateR liateR eciffO laitnediser-itluM eciffO dnal devorpminU liateR dnal devorpminU tnemeriteR eciffO tnemeriteR sletoH dnal devorpminU sletoH laitnediser ylimaf-elgniS tnemeriteR laitnediser ylimaf-elgniS lairtsudnI sletoH lairtsudnI egarots-fleS laitnediser ylimaf-elgniS egarots-fleS laitnediser rehtO lairtsudnI laitnediser rehtO egarots-fleS laitnediser rehtO # of Net # of Net Mortgage Mortgage Investments Investments # of Net 63 Mortgage 63 22 Investments 22 9 63 9 4 22 4 21 9 21 7 4 7 8 21 8 2 7 2 001 8 001 2 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net % of Net Mortgage 5102 ,13 rebmeceD Mortgage Investments Investments % of Net %1.53 Mortgage %1.53 %9.91 Investments %9.91 %3.51 %1.53 %3.51 %5.9 %9.91 %5.9 %4.9 %3.51 %4.9 %7.5 %5.9 %7.5 %2.4 %4.9 %2.4 %9.0 %7.5 %9.0 %0.001 %2.4 %0.001 %9.0 # of Net # of Net Mortgage Mortgage Investments Investments # of Net 05 Mortgage 05 61 Investments 61 7 05 7 3 61 3 01 7 01 11 3 11 6 01 6 2 11 2 501 6 501 2 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net % of Net Mortgage 4102 ,13 rebmeceD Mortgage Investments Investments % of Net %4.44 Mortgage %4.44 %3.41 Investments %3.41 %3.51 %4.44 %3.51 %3.5 %3.41 %3.5 %9.9 %3.51 %9.9 %3.6 %3.5 %3.6 %3.3 %9.9 %3.3 %2.1 %3.6 %2.1 %0.001 %3.3 %0.001 %2.1 001 %0.001 501 %0.001 # of Net # of Net Mortgage Mortgage Investments Investments # of Net – Mortgage – 14 Investments 14 94 – 94 01 14 01 001 94 001 01 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net % of Net Mortgage 5102 ,13 rebmeceD Mortgage Investments Investments % of Net – Mortgage – %4.54 Investments %4.54 %8.53 – %8.53 %8.81 %4.54 %8.81 %0.001 %8.53 %0.001 %8.81 # of Net # of Net Mortgage Mortgage Investments Investments # of Net 24 Mortgage 24 23 Investments 23 03 24 03 1 23 1 501 03 501 1 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net % of Net Mortgage 4102 ,13 rebmeceD Mortgage Investments Investments % of Net %5.83 Mortgage %5.83 %2.43 Investments %2.43 %9.42 %5.83 %9.42 %4.2 %2.43 %4.2 %0.001 %9.42 %0.001 %4.2 001 %0.001 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net % of Net Mortgage 5102 ,13 rebmeceD Mortgage Investments Investments % of Net 60.7% Mortgage 60.7% %9.71 Investments %9.71 %9.8 60.7% %9.8 %7.5 %9.71 %7.5 %2.2 %9.8 %2.2 %3.1 %7.5 %3.1 %9.0 %2.2 %9.0 %9.0 %3.1 %9.0 %8.0 %9.0 %8.0 %7.0 %9.0 %7.0 %0.001 %8.0 %0.001 %7.0 # of Net # of Net Mortgage Mortgage Investments Investments # of Net 95 Mortgage 95 21 Investments 21 8 95 8 6 21 6 5 8 5 2 6 2 1 5 1 3 2 3 1 1 1 3 3 3 001 1 001 3 501 %0.001 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net % of Net Mortgage 4102 ,13 rebmeceD Mortgage Investments Investments % of Net 60.7% Mortgage 60.7% %3.41 Investments %3.41 %0.8 60.7% %0.8 %9.6 %3.41 %9.6 %0.3 %0.8 %0.3 %1.3 %9.6 %1.3 %1.1 %0.3 %1.1 %6.1 %1.3 %6.1 %9.0 %1.1 %9.0 %4.0 %6.1 %4.0 %0.001 %9.0 %0.001 %4.0 # of Net # of Net Mortgage Mortgage Investments Investments # of Net 50 Mortgage 50 41 Investments 41 51 50 51 8 41 8 5 51 5 3 8 3 2 5 2 4 3 4 2 2 2 2 4 2 501 2 501 2 001 %0.001 501 %0.001 16 Timbercreek Mortgage Investment Corporation (e) Interest rate rewol ro %99.9 rewol ro %99.9 %99.01-%00.01 %99.01-%00.01 retaerg ro %00.11 retaerg ro %00.11 (f) Loan-to-value ssel ro %55 ssel ro %55 %06-%65 %06-%65 %56-%16 %56-%16 %07-%66 %07-%66 %57-%17 %57-%17 %08-%67 %08-%67 %58-%18 %58-%18 # of Net # of Net Mortgage Mortgage Investments Investments 57 57 11 11 41 41 001 001 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net % of Net Mortgage Mortgage Investments Investments %1.68 %1.68 %3.6 %3.6 %6.7 %6.7 %0.001 %0.001 # of Net # of Net Mortgage Mortgage Investments Investments 76 76 12 12 71 71 501 501 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net % of Net Mortgage Mortgage Investments Investments %4.67 %4.67 %1.9 %1.9 %5.41 %5.41 %0.001 %0.001 # of Net # of Net Mortgage Mortgage Investments Investments 91 91 8 8 8 8 61 61 61 61 51 51 81 81 001 001 5102 ,13 rebmeceD 5102 ,13 rebmeceD % of Net % of Net Mortgage Mortgage Investments Investments %7.7 %7.7 %4.61 %4.61 %3.8 %3.8 %5.61 %5.61 %2.7 %2.7 %0.61 %0.61 %9.72 %9.72 %0.001 %0.001 # of Net # of Net Mortgage Mortgage Investments Investments 02 02 01 01 31 31 11 11 71 71 91 91 51 51 501 501 4102 ,13 rebmeceD 4102 ,13 rebmeceD % of Net % of Net Mortgage Mortgage Investments Investments %3.9 %3.9 %2.7 %2.7 %8.8 %8.8 %5.41 %5.41 %6.81 %6.81 %5.11 %5.11 %1.03 %1.03 %0.001 %0.001 Mortgage 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 2015, the mortgage syndication liabilities have increased to $310.0 million (December 31, 2014 – $219.6 million) as the Company syndicated several mortgage investments. Mortgage syndication liabilities vary from quarter to quarter and are dependent on the type of investments seen at any particular time, and not necessarily indicative of a future trend. Foreclosed properties held for sale The fair value of the remaining foreclosed properties held for sale as at December 31, 2015 is $12.8 million (December 31, 2014 – $13.9 million). The Company has engaged third party managers to operate the properties while they are held for sale. During 2015, the Company closed on the sale of three residential units (2014 – eight) on one of the foreclosed properties for net proceeds of $0.5 million (2014 – $1.0 million). During 2015, the Company recorded an unrealized fair value adjustment on the FPHFS of $0.5 million (Q4 2014 – $0.6 million). During 2014, the Company foreclosed on the underlying security of two mortgage investments with outstanding principal and costs of $73.7 million and accrued interest of $2.5 million. This underlying security on mortgage investment was subsequently sold, with the proceeds of sale repaying all of the outstanding principal, costs and accrued interest from the mortgage investment and resulted in a gain of $0.1 million. The purchaser also obtained mortgage financing from the Company in respect of that property. Timbercreek Mortgage Investment Corporation 17 Allowance for mortgage investments loss For Q4 2015 and 2015, the Company has recognized a specific impairment allowance of nil and $0.9 million (Q4 2014 – nil; 2014 – nil) relating to a mortgage investment which represents the total outstanding balance of the mortgage investment. The mortgage investment has been the subject of a litigation for several years and in Q3 2015 the litigation process moved into a settlement phase, the outcome of which remains uncertain. The Company has taken a provision for the entire amount as it felt that it was prudent to provide for a provision that captures the entire amount of mortgage investment. Should the future outcome be positive to the Company, upon finalization of the settlement, the provision will be reversed by the final settlement amount. 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. As at December 31, 2015, the Company has a collective impairment allowance of $0.3 million (December 31, 2014 – $0.3 million) and a specific impairment allowance of $0.9 million (December 31, 2014 – nil). net working capital Net working capital increased by $1.7 million to $1.8 million at December 31, 2015 from $0.1 million at December 31, 2014. The change is mainly due to the increase in other assets and mortgage interest receivable for net mortgage investments where certain mortgages allow the borrowers to accrue interest. Credit facility As at December 31, 2015, the Company has a credit facility with an available limit of $60.0 million (December 31, 2014 – $35.0 million). On January 30, 2015, the Company completed a $15.0 million increase on the credit facility, taking its total available borrowing limit to $50.0 million. On March 24, 2015, the Company executed the accordion feature of the credit facility, increasing the available borrowing limit to $60.0 million. The credit facility bears interest at either the prime rate of interest plus 1.5%, or bankers’ acceptances (“BA”) with a stamping fee of 2.5% of the face amount of such BA. The credit facility is secured by a general security agreement over the Company’s assets. The credit facility matures on October 31, 2016 and the Company expects to renew the facility at similar terms prior to the maturity date. As at December 31, 2015, $53.8 million was outstanding on the credit facility (December 31, 2014 – $9.1 million). The credit facility allows the Company to better manage the impact of unanticipated portfolio turnover and avoid holding a cash balance. During Q4 2015 and 2015, the Company significantly increased its utilization of the credit facility relative to the comparable 2014 periods, with a significant portion of borrowing through BAs in order to reduce financing costs. As at December 31, 2015, there were $188 (December 31, 2014 – $239) in unamortized financing costs related to the placement of the credit facility netted against the outstanding facility balance. For Q4 2015 and 2015, the Company has amortized financing costs of $57 and $221 (Q4 2014 – $35; 2014 – $129) to interest expense using the effective interest rate method. Convertible debentures In 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 December 31 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 available including the maximum credit facility amount plus the convertible debentures at December 31, 2015, equates to approximately 20% of total assets, net of mortgage syndications. 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. 18 Timbercreek Mortgage Investment Corporation 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. shareholders’ equity (a) 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 are entitled to receive dividends as and when declared by the Board of Directors. 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. (b) Dividends The Company intends to pay dividends to shareholders on a monthly basis within 15 days following the end of each month. During Q4 2015 and 2015, the Board of Directors declared dividends of $7.3 million and $29.3 million, or $0.18 and $0.72 per common share (Q4 2014 – $7.3 million, $0.18 per common share; 2014 – $30.3 million, $0.762 per common share). (c) Dividend reinvestment plan The Company’s dividend reinvestment plan (the “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. Under the 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. During Q4 2015 and 2015, 106,425 and 397,612 common shares were purchased on the open market (Q4 2014 – 87,204; 2014 – 332,009 common shares). (d) normal course issuer bid On November 13, 2014, the Company received the approval of the TSX to commence the 2014 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, at that time, on November 11, 2014 and expired on November 16, 2015. Furthermore, subject to certain exemptions for block purchases, the purchases were limited to 13,170 common shares on any one trading day. During Q4 2015 and 2015, the Company acquired 22,700 and 177,800 common shares for cancellation at a cost of $172 and $1.4 million at an average price of $7.59 and $7.79 per common share respectively. Subsequent to year end, the Company received TSX approval to re-instate the 2015 bid to purchase for cancellation up to a maximum of 4,105,569 common shares, representing approximately 10% of the public float of common shares as of December 22, 2015. The 2015 bid commenced on January 6, 2016 and provides the Company with the flexibility to repurchase common shares for cancellation until its expiration on January 5, 2017, or such earlier date as the 2015 bid is complete. From January 6, 2016 to February 24, 2016, the Company did not acquire any common shares for cancellation. (e) non-executive director deferred share unit plan Commencing January 1, 2015, the Company instituted a non-executive director deferred share unit plan for the purpose of: (i) enhancing the Company’s ability to provide long-term incentive compensation to directors which is linked to performance of the Company and not dilutive to shareholders, (ii) assisting the Company in attracting, retaining and motivating its directors; and (iii) promoting a closer alignment of interests between directors and shareholders of the Company. Under the Plan, up to 100% of the compensation for a director may be paid to the director in the form of DSUs, credited quarterly in arrears. Directors may elect annually, in accordance with the Plan, as to how much (if any) of the compensation will Timbercreek Mortgage Investment Corporation 19 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. The fair market value is the volume weighted average price of a common share as reported on the TSX for the 20 trading days immediately preceding that day (the “Fair Market Value”). DSUs granted entitle the directors to also accumulate DSUs equal to the monthly cash dividends, assuming the reinvestment of the dividends into units is based upon the Fair Market Value of the common shares on the dividend payment date. Following each calendar quarter, the director’s DSU account will be credited with the number of DSUs calculated by multiplying the total compensation payable in DSUs divided by the Fair Market Value. Each director is also entitled to an additional number of DSUs that is equal to the result of multiplying 25% of the director’s DSU issuance up to a maximum value of $5 per annum. The Plan will pay a lump sum payment in cash equal to the number of DSUs held by each director multiplied by the Fair Market Value of one common share as of the 24th business day after publication of the consolidated financial statements following a director’s departure from the Board of Directors. In conjunction with the Plan, the Company has also adopted a share ownership guideline for the non- executive directors. The ownership guidelines require that each non-executive director acquire and maintain a level of ownership that has a value equal to at least three times their annual retainer and meeting fees, within a five year period. For the Year, the directors, on average, have elected to receive 94% of their compensation in DSUs. For Q4 2015 and 2015, 5,303 and 17,022 DSUs were issued and outstanding and no DSUs were exercised or cancelled resulting in a DSU expense of $125, based on a Fair Market Value of $7.33 per common share. As at December 31, 2015, $51 in DSUs relating to Q4 2015 will be issued subsequent to year-end which are included in accrued expenses. sTATeMenT OF CAsH FLOWs net cash from operating activities Cash from operating activities for the Year was $30.9 million (2014 – $26.2 million), an increase of $4.7 million, or 18.1%. The increase is primarily a result of greater net income and comprehensive income and the change in non-cash operating items compared to 2014. net cash from financing activities Uses of cash from financing activities for 2015 consisted of the Company’s net advances on the credit facility of $44.7 million (2014 – $9.1 million), which were made in order to advance new net mortgage investments. The Company paid interest on the debentures and credit facility of $3.7 million (2014 – $1.7 million), common share dividends of $29.3 million (2014 – $30.3 million) as well as purchases of common shares under the 2014 bid of $1.4 million (2014 – nil). The net cash provided by financing activities for 2015 was $10.4 million (2014 – $42.8 million). In 2014, the Company raised proceeds of $32.5 million from the issuance of convertible debentures and $33.2 million from the issuance of common shares. net cash used in investing activities Net cash used in investing activities for 2015 was $41.6 million (2014 – $80.9 million) and consisted of the funding of net mortgage investments of $333.5 million (2014 – $498.9 million), which was offset by the repayments of net mortgage investments of $291.3 million (2014 – $382.6 million). In addition, the Company received proceeds from disposal of FPHFS of $0.5 million (2014 – $35.4 million). 20 Timbercreek Mortgage Investment Corporation QUArTerLY FInAnCIAL InFOrMATIOn The following is a quarterly summary of the Company’s results for the eight most recently completed quarters: Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Net interest income $ 10,814 $ 10,161 $ 11,532 $ 10,496 $ 9,774 $ 8,660 $ 9,465 $ 8,811 sesnepxE Income from operations Net operating income (loss) from SFHPF Fair value adjustment of FPHFS :stsoc gnicnaniF )783,2( 8,427 )82( (374) )641,3( )184,2( )932,2( )633,2( )240,2( )940,2( )110,2( 7,015 9,051 8,257 7,438 6,618 7,416 6,800 62 − )03( (150) )28( − )85( (800) 18 149 )79( − )79( − Interest on credit facility (554) (208) (477) (281) (87) (67) (57) (64) Interest on convertible serutnebed Total financing costs Net income and comprehensive )665( (1,120) )376( 881 )276( (1,149) )066( (941) )186( (768) )176( (738) )466( )342( (721) (307) emocni $ 509,6 $ $061,6 $432,7$227,7 $ 218,5 693,6 $895,6$ 011,6 EEaarrnniinnggss ppeerr sshhaarree ((bbaassiicc aanndd ddiilluutteedd)) $$ 00..1177 $$ 00..1155 $$ 00..1199 $$ 00..1188 $$ 00..1144 $$ 00..1155 $$ 00..1177 $$ 00..1177 The variations in net income and comprehensive income by quarter are mainly attributed to the following: (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 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; (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 in any quarter; (iii) In any given quarter, the Company is subject to volatility from fair value adjustments to FPHFS and provision for mortgage investment loan resulting in fluctuations in quarterly net income and comprehensive income; and (iv) The utilization of the credit facility to fund mortgage investments results in higher net interest income, which is partially offset by higher financing costs. reLATeD PArTY TrAnsACTIOns As at December 31, 2015, due to Manager includes management and performance fees payable of $2.4 million (December 31, 2014 – $2.0 million) and nil (December 31, 2014 – $6) 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 company controlled by the Manager, is the Company’s mortgage servicer and administrator. As at December 31, 2015, included in other assets is $2.2 million (December 31, 2014 – $3.0 million) of cash held in trust for the Company by TMSI, the balance of which relates to mortgage funding holdbacks, prepaid mortgage interest and lender fees received from various borrowers. In addition to the above related party transactions, the Company has transacted with other entities managed by the Manager. As at December 31, 2015, the Company, Timbercreek Senior Mortgage Investments Corporation (“TSMIC”), Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”), Timbercreek Global Real Estate Fund and Timbercreek Canadian Direct LP, related parties by virtue of common management, have co-invested in Timbercreek Mortgage Investment Corporation 21 several gross mortgage investments totalling $702.6 million (December 31, 2014 – $701.9 million). During 2015, the Company, along with its related parties, funded $355.7 million in co-invested gross mortgage investments and received repayments of $364.6 million. As at December 31, 2015, the Company’s share in these gross mortgage investments is $286.3 million (December 31, 2014 – $268.9 million). Included in these amounts is a net mortgage investment of $1.3 million (December 31, 2014 – $1.1 million) loaned to a limited partnership in which T4Q is invested. 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 investments. 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: (i) payment default by a borrower; (ii) whether security of the mortgage negatively impacted by some event; and (iii) 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. 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: 22 Timbercreek Mortgage Investment Corporation • 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 17 to the consolidated financial statements for the year ended December 31, 2015. 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, 2015 and 2014. (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) non-executive director deferred share unit plan Commencing January 1, 2015, the Company’s non-executive directors are participating in a deferred share unit plan (the “Plan”) in respect of their compensation as directors of the Company. The benefit resulting from the grant of DSUs under the Plan is recorded in profit and loss when awarded. DSUs granted are included within accrued expenses based on the fair market value of the DSUs on the date of grant and are subsequently measured at each reporting date at their fair value with changes in the carrying amount recognized in profit and loss. 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. (a) Annual Improvements to IFrs (2012-2014) cycle On September 25, 2014, the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. One of the amendments was made to clarify the disclosure of information “elsewhere in the interim financial report” under IAS 34 Interim Financial Reporting. The amendment will apply for annual periods beginning on or after January 1, 2016. Earlier application is permitted. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on its financial statements. Timbercreek Mortgage Investment Corporation 23 (b) Disclosure Initiative: Amendments to IAs 1 On December 18, 2014, the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports (the “Disclosure Initiative”). The amendments are effective for annual periods beginning on or after January 1, 2016 with early adoption permitted. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on its financial statements. (c) 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 mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively, with some exemptions, with early adoption permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. The Company intends to adopt IFRS 9 (2014) in its financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. (d) IFrs 15, revenue from Contracts with Customers (“IFrs 15”) In May 2014, the IASB issued IFRS 15, which provides a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall within the scope of other IFRSs. The new standard is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with earlier application permitted. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue: Barter Transactions Involving Advertising Services. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. The Company does not expect the standard to have a material impact on its financial statements. OUTsTAnDInG sHAre DATA As at February 24, 2016, the Company’s authorized capital consists of an unlimited number of common shares, of which 40,523,728 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 2015, the Company further increased the available borrowing limit of the credit facility to complement the common shares and convertible debentures. The Company believes that the modest amount of structural leverage gained from the debentures and credit facility 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. 24 Timbercreek Mortgage Investment Corporation 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, the credit facility and syndicating mortgage investments to partners. The Company has a borrowing ability of $60.0 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 repayments and other working capital needs. As at December 31, 2015, the Company is in compliance with its credit facility covenants and expects to remain in compliance going forward. The Company routinely forecasts cash flow sources and requirements, including unadvanced commitments, to ensure cash is efficiently utilized. The following are the contractual maturities of financial liabilities as at December 31, 2015, including expected interest payments: Carrying Contractual Within Following values cash flows a year year 3-5 years Accounts payable and accrued expenses $ 1,104 $ 1,104 $ 1,104 $ elbayap sdnediviD reganaM ot euD Mortgage funding holdbacks tseretni egagtrom diaperP Credit facility1 serutnebed elbitrevnoC seitilibail latoT Unadvanced gross mortgage commitments2 Total contractual liabilities 134,2 524,2 822 071,1 218,35 877,23 134,2 524,2 822 071,1 107,55 916,14 134,2 524,2 822 071,1 107,55 191,2 $ − − − − − − − − − − − − 191,2 732,73 $ $ 245,49 $ 272,501 $ 448,56 $ 191,2 $ 732,73 – 119,888 119,888 − − 94,542 $ 225,160 $ 185,732 $ 2,191 $ 37,237 1 Includes interest based upon the current prime interest rate plus 1.5% on the credit facility, assuming the outstanding balance is not repaid until its maturity in October 2016. 2 Unadvanced mortgage commitments include syndication commitments from third party investors totaling $75.3 million. As at December 31, 2015, the Company had a cash position of $140 (December 31, 2014 – $463) and an unutilized credit facility of $6.2 million (December 31, 2014 – $25.9 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. Included within the unadvanced mortgage commitments is $75.3 million (December 31, 2014 – $42.8 million) relating to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. FInAnCIAL InsTrUMenTs Financial assets The Company’s other assets and mortgage investments, including mortgage syndications, are designated as loans and receivables and are measured at amortized cost. The fair values of other assets approximate their carrying amounts due to their short-term nature. The 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. 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 25 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. There have been no changes to the Company, which may affect the overall risk of the Company. (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, 2015, $94.3 million of mortgage investments bear interest at variable rates. Of these, $91.1 million of mortgage investments include a “floor rate” to protect their negative exposure, while two mortgage investments totalling $3.0 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 $16. 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 $53.8 million as at December 31, 2015. Based on the outstanding balance of the credit facility as at December 31, 2015, a 0.50% decrease in interest rates, with all other variables constant, would increase net income by $269 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 include 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) ensuring 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, 2015 is the carrying values of its net mortgage investments, including interest receivable, amounting to $446.0 million (December 31, 2014 – $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. 26 Timbercreek Mortgage Investment Corporation (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 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 COnTrOLs 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, 2015. As at December 31, 2015, 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, 2015. During 2015, the Manager implemented a new mortgage administration and portfolio management software. This new software allows the Manager to monitor the portfolio in real time. The Manager has assessed that the new software did not cause significant or material changes to the design of internal controls over financial reporting. 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, 2015. 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 Internal Control ‒ Integrated 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. Timbercreek Mortgage Investment Corporation 27 ADDITIOnAL InFOrMATIOn Phone Call the Company at 1-844-304-9967, Carrie Morris, Managing Director Capital Markets & Corporate Communications. Shareholders who wish to enroll in the dividend reinvestment plan or who would like further information about the plan should contact Corporate Communications at (416) 923-9967 ext. 7266. (collect if calling long distance.) Internet Visit SEDAR at www.sedar.com; or the Company’s website at www.timbercreekmic.com Mail Write to the Company at: Timbercreek Mortgage Investment Corporation Attention: Corporate Communications 25 Price Street Toronto, Ontario M4W 1Z1 28 Timbercreek Mortgage Investment Corporation INDEPENDENT AUDITORS’ REPORT To the Shareholders of Timbercreek Mortgage Investment Corporation We have audited the accompanying consolidated financial statements of Timbercreek Mortgage Investment Corporation (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2015 and December 31, 2014, the consolidated statements of net income and comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements entation of the consolidated financial 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 financial 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 financial 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial 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 financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. 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 financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2015 and December 31, 2014, and its consolidated financial performance and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants February 24, 2016 Toronto, Canada Timbercreek Mortgage Investment Corporation 29 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS stnelaviuqe hsac dna hsaC ))b(21 eton( stessa rehtO Mortgage investments, including mortgage )4 eton( snoitacidnys Foreclosed properties held for sale )5 eton( ,13 rebmeceD ta sA 2015 2014 $ 178,931 $ 290,364 590,450,3 830,285,3 770,307,057 926,371,616 664,638,21 125,058,31 stessa latoT $ 905,337,667 082,960,436 $ LIABILITIES AND EQUITY Accounts payable and accrued sesnepxe $ 565,301,1 $ 725,558 Dividends payable (note 8(b) ) ))a(21 eton( reganaM ot euD skcabdloh gnidnuf egagtroM tseretni egagtrom diaperP )6 eton( ytilicaf tiderC )7 eton( serutnebed elbitrevnoC Mortgage syndication liabilities (not )4 e seitilibail latoT 424,134,2 007,524,2 678,128 508,961,1 618,426,35 781,877,23 290,244,2 859,579,1 267,384 274,065,2 959,638,8 754,783,23 056,840,013 230,185,912 320,404,404 952,321,962 ytiuqe ’sredloherahS Total liabilities and equity Commitments and contingencies (notes 4 and 18) 684,923,263 120,649,463 $ 766,733,509 $ 634,069,280 SS eeee aa cc cc oo mm pp aa nn yy ii nn gg nn oo tteess ttoo tthh ee cc oo nn ss oo llii dd aa tteedd ffii nn aa nn cc ii aa ll ss ttaa tteemm eenn ttss .. 30 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 2 CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME Years ended December 31, 2015 2014 :emocni tseretnI Interest, including mortgage syndicatio sn $ 940,292,94 $ 393,340,73 Fees and other income, including mortgage syndications 5,901,313 5,144,675 emocni tseretni ssorG 263,391,55 860,881,24 Interest and fees expense on mortgage syndications (note 4(b)) (12,189,740) (5,477,861) emocni tseretni teN 226,300,34 702,017,63 :sesnepxE )01 eton( seef tnemeganaM )01 eton( seef ecnamrofreP Provision for mortgage investments loss (note 4(c)) evitartsinimda dna lareneG sesnepxe latoT snoitarepo morf emocnI 439,559,5 680,034,2 900,000 413,769 686,124,5 755,459,1 250,000 376,118 433,352,01 619,734,8 32,750,288 28,272,291 Net operating loss from foreclosed properties held for sale Fair value adjustment on foreclosed properties held for sale (note 5) 114,345 523,944 170,748 650,421 :stsoc gnicnaniF )6 eton( ytilicaf tiderc no tseretnI Interest on convertible debentures )7 eton( stsoc gnicnanif latoT 975,915,1 779,075,2 655,090,4 055,472 234,952,2 289,335,2 Net income and comprehensive in emoc $ 344,120,82 $ 041,719,42 )11 eton( erahs rep sgninraE Basic and diluted $ 0.69 $ 0.63 SS eeee aa cc cc oo mm pp aa nn yy ii nn gg nn oo tteess ttoo tthh ee cc oo nn ss oo llii dd aa tteedd ffii nn aa nn cc ii aa ll ss ttaa tteemm eenn ttss .. Timbercreek Mortgage Investment Corporation 31 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, 22001155 CCoommmmoonn SShhaarreess RReettaaiinneedd EEaarrnniinnggss EEqquuiittyy CCoommppoonneenntt ooff CCoonnvveerrttiibbllee DDeebbeennttuurreess TToottaall Shareholders’ equity, beginning of year $ 370,547,438 $ (6,145,974) $ 544,557 $ 364,946,021 Dividends – (29,252,594) Issuance of common shares under dividend reinvestment plan Repurchase of common shares under 3,161,373 dividend reinvestment plan (3,161,373) Repurchase of common shares under normal course issuer bid (1,385,384) – – – Net income and comprehensive income – 28,021,443 – – – – – (29,252,594) 3,161,373 (3,161,373) (1,385,384) 28,021,443 SShhaarreehhoollddeerrss’’ eeqquuiittyy,, eenndd ooff yyeeaarr $$ 336699,,116622,,005544 $$ ((77,,337777,,112255)) $$ 554444,,555577 $$ 336622,,332299,,448866 YYeeaarr eennddeedd DDeecceemmbbeerr 3311,, 22001144 CCoommmmoonn SShhaarreess RReettaaiinneedd EEaarrnniinnggss EEqquuiittyy CCoommppoonneenntt ooff CCoonnvveerrttiibbllee DDeebbeennttuurreess TToottaall Shareholders’ equity, beginning of year $ 337,367,498 $ (799,787) $ – $ 336,567,711 Issuance of common shares, net 33,179,940 Equity component of convertible debentures, net Dividends Issuance of common shares under dividend reinvestment plan Repurchase of common shares under – – 3,047,862 dividend reinvestment plan (3,047,862) – – (30,263,327) – – Net income and comprehensive income – 24,917,140 – 33,179,940 544,557 544,557 – – – – (30,263,327) 3,047,862 (3,047,862) 24,917,140 SShhaarreehhoollddeerrss’’ eeqquuiittyy,, eenndd ooff yyeeaarr $$ 337700,,554477,,443388 $$ ((66,,114455,,997744)) $$ 554444,,555577 $$ 336644,,994466,,002211 SSeeee aaccccoommppaannyyiinngg nnootteess ttoo tthhee ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss.. 32 Timbercreek Mortgage Investment Corporation TIMBERCREEK MORTGAGE INVESTMENT CORPORATION 4 CONSOLIDATED STATEMENTS OF CASH FLOWS OOPPEERRAATTIINNGG AACCTTIIVVIITTIIEESS Net income and comprehensive income Amortization of lender fees Lender fees received Provision for mortgage investment loss Financing costs Net foreign exchange loss Fair value adjustment on foreclosed properties held for sale Change in non-cash operating items: Interest receivable Other assets Accounts payable and accrued expenses Due to Manager Prepaid mortgage interest Mortgage funding holdbacks FFIINNAANNCCIINNGG AACCTTIIVVIITTIIEESS Proceeds from issuance of convertible debentures, net Proceeds from issuance of common shares, net Repurchase of common shares for cancellation Advances from (repayments of) credit facility, net Interest paid Dividends paid IINNVVEESSTTIINNGG AACCTTIIVVIITTIIEESS Capital improvements to foreclosed properties held for sale Proceeds from disposition of foreclosed properties held for sale YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 $ 28,021,443 $ 24,917,140 (4,965,838) (4,437,326) 4,279,673 900,000 4,090,556 – 523,944 (2,485,665) 914,599 236,103 449,742 (1,390,667) 338,114 5,819,505 250,000 2,533,982 33,456 650,421 (2,595,527) (2,277,526) (339,195) (373,778) 1,548,907 454,953 3300,,991122,,000044 2266,,118855,,001122 – – (1,385,382) 44,736,549 (3,679,818) 32,533,220 33,179,940 – 9,075,926 (1,694,372) (29,263,262) (30,297,827) 1100,,440088,,008877 4422,,779966,,888877 (59,703) 549,814 (331,838) 35,776,846 Funding of mortgage investments, net of mortgage syndications (333,478,035) (498,944,602) Discharges of mortgage investments, net of mortgage syndications 291,344,612 382,632,338 Decrease in cash and cash equivalents Cash and cash equivalents, beginning of year ((4411,,664433,,331122)) ((8800,,886677,,225566)) (323,221) 463,092 (11,885,357) 12,348,449 CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss,, eenndd ooff yyeeaarr $$ 113399,,887711 $$ 446633,,009922 SSeeee aaccccoommppaannyyiinngg nnootteess ttoo tthhee ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss.. Timbercreek Mortgage Investment Corporation 33 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 1. COrPOrATe InFOrMATIOn Timbercreek Mortgage Investment Corporation (the “Company”) is a mortgage investment corporation domiciled in Canada. The registered office of the Company is 25 Price Street, Toronto, Ontario M4W 1Z1. The Company is incorporated under the laws of the Province of Ontario by Articles of Incorporation dated April 30, 2008. The common shares of the Company are traded on the Toronto Stock Exchange (“TSX”) under the symbol “TMC”. 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. The Company has entered into a management agreement with Timbercreek Asset Management Inc. (the “Manager”) dated September 13, 2013. The Manager is responsible for the day-to-day operations and for providing all general management, mortgage servicing and administrative services to the Company. 2. BAsIs OF PrePArATIOn (a) statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements were approved by the Board of Directors on February 24, 2016. (b) Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company. (c) Basis of measurement These consolidated financial statements have been prepared on the historical cost basis except for foreclosed properties held for sale, 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 34 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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 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 16 – 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 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. 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 is 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. Timbercreek Mortgage Investment Corporation 35 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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. (d) 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 remeasured 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. (e) 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. (f) 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 classified as 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 36 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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 16. (g) 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. (h) 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. (i) non-executive director deferred share unit plan Commencing January 1, 2015, the Company’s non-executive directors began participating in a deferred share unit plan (the “Plan”) which allows the directors to elect to receive their compensation in the form of deferred share units (“DSUs”). The benefit resulting from the grant of DSUs under the Plan is recorded in profit and loss when awarded. DSUs granted are included within accrued expenses based on the fair market value of the DSUs on the date of grant and are subsequently measured at each reporting date at their fair value with changes in the carrying amount recognized in profit and loss. Timbercreek Mortgage Investment Corporation 37 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 (j) 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) Annual Improvements to IFrs (2012-2014) cycle On September 25, 2014, the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. One of the amendments was made to clarify the disclosure of information “elsewhere in the interim financial report” under IAS 34 Interim Financial Reporting. The amendment will apply for annual periods beginning on or after January 1, 2016. Earlier application is permitted. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on its financial statements. (ii) Disclosure Initiative: Amendments to IAs 1 On December 18, 2014 the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports (the “Disclosure Initiative”). The amendments are effective for annual periods beginning on or after January 1, 2016 with early adoption permitted. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The Company does not expect the amendments to have a material impact on its financial statements. (iii) 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 mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions with early adoption permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. The Company intends to adopt IFRS 9 (2014) in its financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. (iv) IFrs 15, revenue from Contracts with Customers (“IFrs 15”) In May 2014, the IASB issued IFRS 15 which provides a comprehensive framework for recognition, measurement and disclosure of revenue from contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall within the scope of other IFRSs. The new standard is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with earlier application permitted. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue: Barter Transactions Involving Advertising Services. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined. 38 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 4. MOrTGAGe InvesTMenTs, InCLUDInG MOrTGAGe sYnDICATIOns AAss aatt DDeecceemmbbeerr 3311,, 22001155 AAss aatt DDeecceemmbbeerr 3311,, 22001155 Mortgage investments, including mortgage GGrroossss mmoorrttggaaggee GGrroossss iinnvveessttmmeennttss mmoorrttggaaggee iinnvveessttmmeennttss MMoorrttggaaggee ssyynnddiiccaattiioonn MMoorrttggaaggee lliiaabbiilliittiieess ssyynnddiiccaattiioonn lliiaabbiilliittiieess (309,751,038) $ NNeett NNeett 439,474,178 syndications (notes 4(a) and (b)) Mortgage investments, including mortgage Interest receivable syndications (notes 4(a) and (b)) $ $ Interest receivable Unamortized lender fees 749,225,216 $ 749,225,216 $ 7,648,090 (309,751,038) $ (1,113,951) 439,474,178 6,534,139 7,648,090 756,873,306 (1,113,951) (310,864,989) 6,534,139 446,008,317 756,873,306 (5,020,229) (310,864,989) 816,339 446,008,317 (4,203,890) Unamortized lender fees Allowance for mortgage investments loss (note 4(c)) (5,020,229) (1,150,000) 816,339 – (4,203,890) (1,150,000) Allowance for mortgage investments loss (note 4(c)) AAss aatt DDeecceemmbbeerr 3311,, 22001144 AAss aatt DDeecceemmbbeerr 3311,, 22001144 Mortgage investments, including mortgage syndications (notes 4(a) and (b)) Mortgage investments, including mortgage Interest receivable syndications (notes 4(a) and (b)) Interest receivable Unamortized lender fees (1,150,000) $$ 775500,,770033,,007777 $$ ((331100,,004488,,665500)) $$ 444400,,665544,,442277 (1,150,000) – $$ 775500,,770033,,007777 $$ ((331100,,004488,,665500)) $$ 444400,,665544,,442277 GGrroossss mmoorrttggaaggee GGrroossss iinnvveessttmmeennttss mmoorrttggaaggee iinnvveessttmmeennttss 617,038,177 $ $ 617,038,177 5,125,457 $ $ MMoorrttggaaggee ssyynnddiiccaattiioonn MMoorrttggaaggee lliiaabbiilliittiieess ssyynnddiiccaattiioonn lliiaabbiilliittiieess (219,697,422) $ NNeett NNeett 397,340,755 (219,697,422) $ (733,560) 397,340,755 4,391,897 5,125,457 622,163,634 (733,560) (220,430,982) 4,391,897 401,732,652 622,163,634 (5,740,005) (220,430,982) 849,950 401,732,652 (4,890,055) Unamortized lender fees Allowance for mortgage investments loss (note 4(c)) (5,740,005) (250,000) 849,950 − (4,890,055) (250,000) Allowance for mortgage investments loss (note 4(c)) $$ (250,000) 616,173,629 $$ 616,173,629 $$ $$ (219,581,032) $$ − (250,000) 396,592,597 (219,581,032) $$ 396,592,597 As at December 31, 2015, unadvanced mortgage commitments under the existing gross mortgage investments amounted to $119,887,655 (December 31, 2014 – $107,366,854). (a) net mortgage investments Interest in first mortgages Interest in first mortgages Interest in non-first mortgages Interest in non-first mortgages DDeecceemmbbeerr 3311,, 22001155 DDeecceemmbbeerr 3311,, 22001155 342,572,965 $ $ 342,572,965 96,901,213 %% %% 69 69 31 %% %% 78 78 22 DDeecceemmbbeerr 3311,, 22001144 DDeecceemmbbeerr 3311,, 22001144 276,022,401 276,022,401 121,318,354 $ $ 22 110000 96,901,213 $$ 443399,,447744,,117788 31 110000 121,318,354 $$ 339977,,334400,,775555 110000 $$ 443399,,447744,,117788 110000 $$ 339977,,334400,,775555 The mortgage investments are secured by real property and mature between 2016 and 2018 (December 31, 2014 – 2015 and 2018). The weighted average interest rate earned on net mortgage investments for the year ended December 31, 2015 was 9.1% (December 31, 2014 – 9.4%). 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, 2015, the Company received total lender fees, net of fees relating to mortgage syndication liabilities, of $4,279,673 (December 31, 2014 – $5,819,505), which are amortized to interest income over the term of the related mortgage investments using the effective interest rate method. Timbercreek Mortgage Investment Corporation 39 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 Principal repayments, net of mortgage syndications, based on contractual maturity dates are as follows: 2016 2017 2018 Total $ 199,567,023 157,207,885 82,699,270 $ 439,474,178 (b) Mortgage syndication liabilities 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 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 derecognition 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 addition, the Company may sell pari-pasu interests in certain mortgage investments that meet the criteria for derecognition under IFRS. As at December 31, 2015, 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 $310,048,650 (December 31, 2014 – $219,581,032). For the year ended December 31, 2015, the Company has also recognized interest income of $11,375,469 (December 31, 2014 – $4,998,260) and fee income of $814,271 (2014 – $479,601) and a corresponding interest and fee expense of $12,189,740 (2014 – $5,477,861) 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 12). (c) Allowance for mortgage investments loss During the year ended December 31, 2015, the Company has recognized a specific impairment allowance of $900,000 (2014 – nil) relating to one impaired mortgage investment, which represents the outstanding principal and accrued interest as at December 31, 2015. The Company also assesses for impairment to identify potential future losses on a collective 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. For 2015, no additional collective impairment allowance (December 31, 2014 – $250,000) was recognized. During 2014, the Company foreclosed on the underlying security relating to one impaired mortgage investment and reclassified $550,000 from allowance for mortgage investments loss to foreclosed properties held for sale (“FPHFS”). 40 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 The changes in the allowance for mortgage investments loss during the years ended December 31, 2015 and 2014 were as follows: Balance, beginning of year Balance, beginning of year Provision for mortgage investments loss Provision for mortgage investments 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 YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001144 22001144 550,000 550,000 250,000 250,000 (550,000) (550,000) 250,000 250,000 22001155 22001155 250,000 $ 250,000 $ 900,000 900,000 − − 1,150,000 $ 1,150,000 $ $ $ $ $ 5. FOreCLOseD PrOPerTIes HeLD FOr sALe As at December 31, 2015, there are three FPHFS (December 31, 2014 – three), which are recorded at their fair value of $12,836,466 (December 31, 2014 – $13,850,521). The fair value has been categorized as a level 3 fair value, based on inputs to the valuation techniques used. The changes in the FPHFS during the years ended December 31, 2015 and 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, net Fair market value adjustment, net Disposition of foreclosed properties Disposition of foreclosed properties BBaallaannccee,, eenndd ooff yyeeaarr BBaallaannccee,, eenndd ooff yyeeaarr $ $ 22001155 22001155 13,850,521 $ 13,850,521 $ YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001144 22001144 11,351,435 11,351,435 75,681,402 75,681,402 331,838 331,838 (650,421) (650,421) (72,863,733) (72,863,733) $$ 1122,,883366,,446666 $$ 1133,,885500,,552211 $$ 1122,,883366,,446666 $$ 1133,,885500,,552211 − − 59,703 59,703 (523,944) (523,944) (549,814) (549,814) During the year ended December 31, 2015, the Company closed on the sale of three (2014 – eight) residential units in one of the foreclosed properties for net proceeds of $549,814 (2014 – $1,363,733). During the year ended December 31, 2015, the Company recorded an unrealized fair market value adjustment of $523,944 (2014 – $800,000) on foreclosed properties. During the year ended December 31, 2014, the Company foreclosed on underlying security of two mortgage investments with outstanding principal and costs of $73,720,203 and accrued interest of $2,511,199. The underlying security on one mortgage investment was subsequently sold, with the proceeds of sale repaying all of the outstanding principal, 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 that property. Timbercreek Mortgage Investment Corporation 41 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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 the following table: Valuation Valuation Technique Technique Direct Capitalization Direct Capitalization Method. The Method. The valuation method is valuation method is based on stabilized based on stabilized net operating net operating income (‘NOI’) income (‘NOI’) divided by an overall divided by an overall capitalization rate. capitalization rate. Significant unobservable inputs Significant unobservable inputs • Stabilized NOI is based on the • Stabilized NOI is based on the location, type and quality of the location, type and quality of the property and supported by current property and supported by current market rents for similar properties, market rents for similar properties, adjusted for estimated vacancy rates adjusted for estimated vacancy rates and expected operating costs. and expected operating costs. • Capitalization rate is based on • Capitalization rate is based on location, size and quality of the location, size and quality of the property and takes into account property and takes into account market data at the valuation date. market data at the valuation date. Direct Sales Direct Sales Comparison Comparison The fair value is based on comparison to The fair value is based on comparison to recent sales of properties of similar types, recent sales of properties of similar types, locations and quality. locations and quality. Inter-relationship between key Inter-relationship between key unobservable inputs and fair unobservable inputs and fair value measurement value measurement The estimated fair value would The estimated fair value would increase (decrease) if: increase (decrease) if: • Stabilized NOI was higher • Stabilized NOI was higher (lower) (lower) • Overall capitalization rates • Overall capitalization rates were lower (higher) were lower (higher) The significant unobservable The significant unobservable input is adjustments due to input is adjustments due to characteristics specific to each characteristics specific to each property that could cause the property that could cause the fair value to differ from the fair value to differ from the property to which it is being property to which it is being compared. compared. 6. CreDIT FACILITY Credit facility balance Credit facility balance Unamortized financing costs Unamortized financing costs TToottaall ccrreeddiitt ffaacciilliittyy TToottaall ccrreeddiitt ffaacciilliittyy DDeecceemmbbeerr 3311,, DDeecceemmbbeerr 3311,, $ $ 22001155 22001155 53,812,475 53,812,475 (187,659) (187,659) 5533,,662244,,881166 5533,,662244,,881166 $$ $$ DDeecceemmbbeerr 3311,, DDeecceemmbbeerr 3311,, 22001144 22001144 9,075,926 9,075,926 (238,967) (238,967) 88,,883366,,995599 88,,883366,,995599 $ $ $$ $$ The Company has a credit facility with a syndicate of lenders with an available limit of $60,000,000 (December 31, 2014 – $35,000,000) bearing interest at either the prime rate of interest plus 1.5%, or bankers’ acceptances (“BA”) with a stamping fee of 2.5% of the face amount of such BA. The credit facility is secured by a general security agreement over the Company’s assets. The credit facility matures on October 31, 2016. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For the year ended December 31, 2015, included in financing costs is interest on the credit facility of $1,298,407 (2014 – $145,222) and financing costs amortization of $221,172 (2014 – $129,328). 7. COnverTIBLe DeBenTUres 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 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 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. 42 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 The debentures will not be redeemable prior to March 31, 2017. On and after March 31, 2017 and prior to March 31, 2018, the debentures will be redeemable by the Company, 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 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. 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. 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 equity components. The issue costs allocated to the liability component are amortized over the term of the debentures using the effective interest rate method. The debentures are allocated as follows: Issued Issue costs, net of amortization Equity component Issue costs attributed to equity component Cumulative accretion of equity component DDeebbeennttuurreess,, eenndd ooff yyeeaarr DDeecceemmbbeerr 3311,, 22001155 $ 34,500,000 (1,386,828) (577,478) 32,921 209,572 $$ 3322,,777788,,118877 Interest costs related to the debentures are recorded in financing costs using the effective interest rate method. Interest on the debentures is included in financing costs and is made up of the following: Interest on the convertible debentures $ 2,180,247 $ 1,860,638 Amortization of issue costs Accretion of equity component of the convertible debentures Total 277,408 113,322 302,544 96,250 $ 2,570,977 $ 2,259,432 YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 8. COMMOn sHAres The Company is authorized to issue an unlimited number of common shares. Holders of common shares are entitled to receive notice of and to attend and vote at all shareholder meetings. The holders of the common shares are entitled to receive dividends as and when declared by the Board of Directors. 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. Timbercreek Mortgage Investment Corporation 43 Balance, beginning of year Issued Repurchased under normal course issuer bid Repurchased under dividend reinvestment plan Issued under dividend reinvestment plan BBaallaannccee,, eenndd ooff yyeeaarr YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 40,701,528 36,964,028 – 3,737,500 (177,800) (397,612) 397,612 – (332,009) 332,009 40,523,728 40,701,528 Interest on the convertible debentures $ 2,180,247 $ 1,860,638 Amortization of issue costs Accretion of equity component of the convertible debentures Total 277,408 113,322 302,544 96,250 $ 2,570,977 $ 2,259,432 YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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 proceeds of $34,945,625 and incurred $1,765,685 in issuance costs. The changes in the number of common shares outstanding were as follows: Balance, beginning of year Issued Repurchased under normal course issuer bid Repurchased under dividend reinvestment plan Issued under dividend reinvestment plan BBaallaannccee,, eenndd ooff yyeeaarr YYeeaarrss eennddeedd DDeecceemmbbeerr 3311,, 22001155 22001144 40,701,528 36,964,028 – 3,737,500 (177,800) (397,612) 397,612 – (332,009) 332,009 40,523,728 40,701,528 (a) Dividend reinvestment plan The Company’s dividend reinvestment plan (the “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. Under the 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, 2015, 397,612 (2014 – 332,009) common shares were purchased on the open market. (b) Dividends 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, 2015, the Company declared dividends of $29,252,594, or $0.72 per share (2014 – $30,263,327, $0.762 per share). As at December 31, 2015, $2,431,424 (December 31, 2014 – $2,442,092) was payable to the holders of common shares. Subsequent to December 31, 2015, the Board of Directors declared dividends of $0.06 per common share, paid on February 12, 2016 to common shareholders of record on January 29, 2016. (c) normal course issuer bid On November 13, 2014, the Company received the approval of the TSX to reinstitute a normal course issuer 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, at that time, on November 11, 2014 and expired on November 16, 2015. During the year ended December 31, 2015, the Company acquired 177,800 common shares (2014 – nil) for cancellation at a cost of $1,385,384 (2014 – nil). On January 4, 2016, the Company received TSX approval to commence a normal course issuer bid (the “Bid”) to purchase for cancellation up to a maximum of 4,105,569 common shares, representing approximately 10% of the public float of common shares as of December 22, 2015. The Bid commenced on January 6, 2016 and provides the Company with the flexibility to repurchase common shares for cancellation until its expiration on January 5, 2017, or such earlier date as the Bid is complete. From January 6, 2016 to February 24, 2016, the Company did not acquire any common shares for cancellation. 9. nOn-eXeCUTIve DIreCTOr DeFerreD sHAre UnIT PLAn Commencing January 1, 2015, the Company instituted a non-executive director deferred share unit plan, whereby up to 100% of the compensation for a director may be paid in the form of DSUs, credited quarterly in arrears. Directors may elect annually, in accordance with the Plan, as to how much (if any) of the 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 fair market value is the volume weighted average price of a common share as reported on the TSX for the 20 trading days immediately preceding that day (the “Fair Market Value”). 44 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 DSUs granted entitle the directors to also accumulate DSUs equal to the monthly cash dividends, assuming reinvestment of the dividends into units based upon the Fair Market Value of the common shares on the dividend payment date. Following each calendar quarter, the director DSU accounts will be credited with the number of DSUs calculated by multiplying the total compensation payable in DSUs divided by the Fair Market Value. Each director is also entitled to an additional number of DSUs that is equal to the result of multiplying 25% of the DSU issued in the quarter up to a maximum value of $5,000 per annum. The Plan will pay a lump sum payment in cash equal to the number of DSUs held by each director multiplied by the Fair Market Value of one common share as of the 24th business day after publication of the consolidated financial statements following a director’s departure from the Board of Directors. For the year ended December 2015, 17,022 DSUs were issued and outstanding and no DSUs were exercised or cancelled resulting in a DSU expense of $124,774 based on a Fair Market Value of $7.33 per common share. As at December 31, 2015, $50,938 in DSUs relating to Q4 2015 will be issued subsequent to year-end which are included in accrued expenses. 10. 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. Under the 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 management agreement is 10 years from September 13, 2013 and is renewed for successive five year terms at the expiration of the initial term. For the year ended December 31, 2015, the Company incurred management fees of $5,955,934 (2014 – $5,421,686). Under the management agreement, the Manager is 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. For the year ended December 31, 2015, the performance fee was $2,430,086 (2014 – 1,954,557). 11. eArnInGs Per sHAre Basic and diluted earnings per share is calculated by dividing net income and comprehensive income by the weighted average number of common shares during the period. Numerator for earnings per share: Net income and comprehensive income Denominator for earnings per share: Years ended December 31, 2015 2014 $ 28,021,443 $ 24,917,140 Weighted average number of common shares (basic and diluted) 40,631,219 39,544,439 Earnings per share – basic detulid dna $ 96.0 $ 36.0 Timbercreek Mortgage Investment Corporation 45 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 12. reLATeD PArTY TrAnsACTIOns (a) As at December 31, 2015, due to Manager includes management and performance fees payable of $2,425,700 (December 31, 2014 – $1,970,131) and no amounts payable (December 31, 2014 – $5,827) related to costs incurred by the Manager on behalf of the Company. (b) As at December 31, 2015, included in other assets is $2,188,556 (December 31, 2014 – $3,044,234) of cash 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, prepaid mortgage interest and lender fees received from various borrowers. (c) In addition to the above related party transactions, the Company has transacted with other funds managed by the Manager, or one of its subsidiaries. As at December 31, 2015, the Company, Timbercreek Senior Mortgage Investment Corporation (“TSMIC”), Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”), Timbercreek Global Real Estate Fund and Timbercreek Canadian Direct LP, related parties by virtue of common management, have coinvested in several gross mortgage investments totaling $702,623,518 (December 31, 2014 – $701,930,591). During the year ended December 31, 2015, the Company, along with its related parties, funded $355,733,675 in co-invested gross mortgage investments and received repayments of $364,633,157. As at December 31, 2015, the Company’s share in these gross mortgage investments is $286,310,931 (December 31, 2014 – $268,906,244). Included in these amounts is a net mortgage investment of $1,265,625 (December 31, 2014 – $1,147,226) loaned to a limited partnership in which T4Q is invested. 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. 13. InCOMe TAXes As of December 31, 2015, the Company has non-capital losses carried forward for income tax purposes of $24,511,000 (December 31, 2014 – $19,938,146), which will expire between 2028 and 2035 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 $10,524,000 (December 31, 2014 – $14,608,322). 14. 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, 2015, 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, 2015, the Company was in compliance with all financial covenants. 15. 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 46 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 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, 2015, $94,286,772 of net mortgage investments bear interest at variable rates. Of these, $91,066,433 of net mortgage investments include a “floor rate” to protect their negative exposure, while two mortgage investments totalling $3,022,339 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 $16,102. 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 $471,434. 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 $53,812,475 as at December 31, 2015. Based on the outstanding credit facility balance as at December 31, 2015, a 0.50% decrease in interest rates, with all other variables constant, will increase net income by $269,062 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, as well as interest receivable, accounts receivable other, 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 risk 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) ensuring 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, 2015 is the carrying values of its net mortgage investments, including interest receivable, amounting to $446,008,316 (December 31, 2014 – $401,732,652). 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 the normal operations from fluctuations in cash flow as a result 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 utilized. Timbercreek Mortgage Investment Corporation 47 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 The following are the contractual maturities of financial liabilities as at December 31, 2015, including expected interest payments: DDeecceemmbbeerr 3311,, 22001155 vvaalluuee ccaasshh ffllooww CCaarrrryyiinngg CCoonnttrraaccttuuaall WWiitthhiinn aa yyeeaarr FFoolllloowwiinngg yyeeaarr 33––55 yyeeaarrss Accounts payable and accrued expenses $ 1,103,565 $ 1,103,565 $ 1,103,565 $ Dividends payable 2,431,424 2,431,424 Due to Manager 2,425,700 2,425,700 2,431,424 2,425,700 Mortgage funding holdbacks Prepaid mortgage interest Credit facility1 821,876 821,876 821,876 1,169,805 1,169,805 1,169,805 53,812,475 55,701,072 55,701,072 $ – – – – – – – – – – – – Convertible debentures 32,778,187 41,618,437 2,190,750 2,190,750 37,236,937 Total liabilities $ 94,543,032 $ 105,271,879 $ 65,844,192 $ 2,190,750 $ 37,236,937 Unadvanced mortgage commitments2 TToottaall ccoonnttrraaccttuuaall – 119,887,655 119,887,655 – – lliiaabbiilliittiieess $$ 9944,,554433,,003322 $$ 222255,,115599,,553344 $$ 118855,,773311,,884477 $$ 22,,119900,,775500 $$ 3377,,223366,,993377 1 Includes interest based upon the current prime rate of interest plus 1.5% on the credit facility assuming the outstanding balance is not repaid until its maturity in October 2016. 2 Unadvanced mortgage commitments include syndication commitments. As at December 31, 2015, the Company had a cash position of $139,871 (December 31, 2014 – $463,092) and an unutilized credit facility balance of $6,187,525 (December 31, 2014 – $25,924,074). 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 $75,274,469 relating to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. 48 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 16. FAIr vALUe MeAsUreMenTs The following table shows the carrying amounts and fair values of assets and liabilities: As at December 31, 2015 Assets measured at fair value CCaarrrryyiinngg VVaalluuee FFaaiirr vvaalluuee OOtthheerr LLooaannss aanndd tthhrroouugghh pprrooffiitt ffiinnaanncciiaall rreecceeiivvaabbllee aanndd lloossss lliiaabbiilliittiieess FFaaiirr vvaalluuee Foreclosed properties held for sale $ – $ 12,836,466 $ – $ 12,836,466 Assets not measured at fair value Cash and cash equivalents Other assets 139,871 3,054,095 Mortgage investments, including mortgage syndications 750,703,077 Financial liabilities not measured at fair value Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility Convertible debentures Mortgage syndication liabilities – – – – – – – – – – – – – – – – – – – – – – 139,871 3,054,095 750,703,077 1,103,565 1,103,565 2,431,424 2,431,424 2,425,700 2,425,700 821,876 821,876 1,169,805 1,169,805 53,624,816 53,624,816 32,778,187 34,758,750 310,048,650 310,048,650 Timbercreek Mortgage Investment Corporation 49 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 As at December 31, 2014 Assets measured at fair value CCaarrrryyiinngg VVaalluuee OOtthheerr ffiinnaanncciiaall FFVVTTPPLL lliiaabbiilliittiieess FFaaiirr vvaalluuee LLooaannss aanndd rreecceeiivvaabbllee 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 Prepaid mortgage interest Credit facility Convertible debentures Mortgage syndication liabilities 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 2,560,472 2,560,472 8,836,959 8,836,959 32,387,457 35,017,500 219,581,032 219,581,032 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 mortgage investments, mortgage syndication liabilities and foreclosed properties held for sale. 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) Convertible debentures The fair value of the convertible debentures is based on a level 1 input, which is the market closing price of convertible debentures at the reporting date. There were no transfers between level 1, level 2 and level 3 of the fair value hierarchy during the year ended December 31, 2015 and 2014. 50 Timbercreek Mortgage Investment Corporation Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 17. COMPensATIOn OF KeY MAnAGeMenT PersOnneL The compensation expense of the members of the Board of Directors amounts to $182,849 (2014 - $83,981), which is paid in a combination of DSUs and cash. The compensation to the senior management of the Manager is paid through the management fees paid to the Manager (note 10). 18. 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. Timbercreek Mortgage Investment Corporation 51 Notes to the Consolidated Financial Statements Years ended December 31, 2015 and 2014 52 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 25 Price Street Toronto, ON M4W 1Z1 T 844.304.9967 e info@timbercreek.com timbercreekmic.com Stock Exchange Listing TSX: TMC, TMC.DB Auditors KPMG LLP Transfer Agent & Registrar CST Trust Company 320 Bay Street Toronto, ON M5H 4A6 Legal Counsel McCarthy Tétrault LLP timbercreekmic.com 

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