Timbercreek Financial 2018 Annual Report $1.2B institutional- quality portfolio 10+ year track record, no principal losses Canada’s leading non-bank commercial lender $750+ mm market cap Protecting investor capital Our portfolio management strategy at Timbercreek Financial has always started with the objective of protecting our investors’ capital. This forms the foundation of how we originate, structure, monitor and collect the mortgages we invest in. For more than 10 years, through different cycles and periods of high volatility in financial markets, this defensive-minded strategy has served us well. + Generating attractive returns While managing risk, our team is also focused on generating attractive returns through regular monthly cash dividends. We concentrate on lending mostly against high-quality, stable assets – such as rental apartments and office buildings – that offer durable and consistent income streams. In 2018, against a backdrop of equity market volatility, we delivered on both these core investment objectives for our investors. Timbercreek Financial 1 HOW WE PROTECT CAPITAL AND MANAGE RISK In building and managing a growing portfolio of loans, we place a major emphasis on capital preservation, which starts with a proven focus on income-producing real estate assets that provide stable, predictable income to service our debt through potential ups and downs in the market. Diversification is critical for risk management. We reduce risk by ensuring the portfolio is highly diversified by geography, asset type and borrower. An average investment size of $9.8 million at year- end being less than 1% of the total portfolio is evidence of our disciplined risk management approach. In addition to constructing the portfolio conservatively, our team takes an active, hands-on approach to managing our positions. Being proactive increases the likelihood of a positive outcome if and when issues arise. In more than 10 years, we have had no principal losses – a track record we work very hard to maintain. DIVERSIFIED BY ASSETS Multi-residential Retail Office Unimproved land Hotels Industrial Retirement Self-storage Other-residential Single-family residential 40.1% 18.8% 13.5% 10.1% 4.9% 4.8% 4.1% 1.7% 1.6% 0.4% DIVERSIFIED BY REGION Ontario British Columbia Alberta Other Quebec 42.5% 23.5% 20.9% 7.0% 6.1% 87.5% income-producing properties 93.2% percentage of first mortgages 67.1% weighted average loan-to-value 1.2 year average term to maturity Other: $82M $275M $244M $71M $497M 124 mortgage investments $9.8M average mortgage investment size 2/3 of business from repeat borrowers 2 Timbercreek Financial SAMPLE INVESTMENTS Multi-Residential The borrower needed to refinance existing first and second mortgage loans prior to full stabilization and lease-up of the multi- residential property in a well-located area near Quebec City. Amount: $50,500,000 Position: First mortgage Term: 24 months Interest Rate: 5.60% Retail/Office The borrower increased its existing first mortgage with Timbercreek to $21 million to free up equity for the acquisition of a separate investment property. Amount: $21,000,000 Position: First mortgage Term: 24 months Interest Rate: Floating at prime rate + 2.55% through month 30; prime rate + 4.80% thereafter Industrial The borrower needed capital to refinance construction debt on a newly built warehouse and distribution facility in a well-located industrial park in Alberta. Retail/Office The borrower (a repeat customer) needed financing to acquire and reposition this mixed-use property in Kitsilano, one of the strongest Vancouver sub-markets. Amount: $6,670,000 Position: First mortgage Term: 24 months Interest Rate: 6.50% for months 1-23; 8.50% thereafter Amount: $82,000,000 Position: First mortgage Term: 25 months Interest Rate: prime +3.45% first 24 months; prime +5.45% thereafter Timbercreek Financial 3 3 $0.76 distributable income per share in 2018 7.4% dividend yield in 2018 TF TSX-listed $0.69 dividends per share in 2018 44 Timbercreek Financial LETTER TO SHAREHOLDERS In 2018, against a generally challenging backdrop in the equity markets, Timbercreek Financial reported strong financial results and delivered on its core objectives: protecting investor capital and generating consistent monthly income through a high-quality, diversified portfolio of mortgages and other real estate investments. We will continue to manage your Company with a conservative investment strategy and appreciate the support and trust you have placed in us. It goes without saying, but the backbone of our financial performance is a direct reflection of the quality of the investments in the portfolio. Thus, investment selection and portfolio construction are at the centre of what we do, supported by our experienced team, hands- on investment process and proven access to deal flow. With over a 10-year history and close to 500 transactions, we have earned a strong reputation as a lender of choice for sophisticated commercial borrowers, and this was evident last year. New investments and advances totalled close to $800 million – a record year for capital deployment. At year end, the total mortgage portfolio increased to $1.2 billion, from $1.1 billion at the end of 2017, and our enhanced return portfolio grew to roughly $105 million, up from $70.5 million at the end of 2017. Our key portfolio QUARTERLY DISTRIBUTABLE INCOME (Per Share) metrics underscore the conservative positioning that is so fundamental to our investment approach. More than 87% of the investments were secured income-producing real estate, and 40% of the mortgage portfolio was secured by rental apartments, an asset class with highly stable and predictable cash flow characteristics. In 2018, our exposure to multi-residential properties was lower than that of 2017, largely due to faster-than-anticipated repayments, increased competition, and more attractive deal flow coming from other categories. While our exposure to any single asset category will vary from year to year, we expect multi-residential to remain our largest lending category. Timbercreek is one of the country’s largest apartment operators and understands this asset class exceptionally well. As a short-term lender with a national presence, we are uniquely positioned to take advantage of opportunities as they arise in specific regions, and in 2018 we increased our lending activity in British Columbia and Alberta in response to specific opportunities in those markets. In Alberta, for example, we are benefiting from limited competition as other lenders have pulled out of the market or restricted their capital, creating an opportunity to transact on high-quality assets at lower valuations. While we monitor geographic concentration at the macro level, at the deal level we look for the best risk-return profile that meets our target hurdles. 0.20 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Timbercreek Financial 5 5 An important portfolio objective in 2018 was to increase the average interest rate in our mortgage investment portfolio in order to offset the rise of our borrowing cost. To that end, the Company was able to reinvest our short duration portfolio into higher yielding investments, delivering a 40 basis point increase in the weighted average interest rate to 7.5% for the year ended 2018 (versus the year ended 2017). We were also successful at increasing our floating rate investments from 12% for year end of 2017 to 58% of the total portfolio at the 2018 year end. The combination of strong transaction activity, a larger balance sheet, and higher average interest rate resulted in strong gains in our investment income and income from operations in 2018, which increased by 6.9% and 7.5%, respectively, over 2017. Importantly, we delivered consistent monthly income. Since the merger in 2016, our distributable income – the key metric to which we manage the business – has remained in a steady range each quarter, and in 2018 we generated $0.76 per share, up slightly from the prior year. At current share price levels, this represents a yield of approximately 7.4.% per annum. We remain optimistic on the environment and outlook for 2019 based on the quality of the deal flow we are seeing and the general competitive strength in the market for our financing solutions. Our emphasis remains on first mortgages on income-producing commercial assets with strong sponsors in urban centres, which provide the most attractive risk-adjusted returns for our shareholders. Although we anticipate near-term competition for multi- residential assets, we do not see this affecting our ability to find enough quality investment opportunities for the portfolio. We continue to compete for and win business based on customization, speed of execution and service. On behalf of management and the Board of Directors, thank you for your continued support and we look forward to reporting on our progress throughout 2019. Sincerely, Cameron Goodnough Chief Executive Officer Timbercreek Financial March 2019 6 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted 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 Financial Corp. (the “Company” or “Timbercreek Financial”). 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 and other investments 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 System for Electronic Document Analysis and Retrieval (“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 March 4, 2019. 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.timbercreekfinancial.com. Additional information about the Company, including its AIF, can be found at www.sedar.com. 7 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted BUSINESS OVERVIEW Timbercreek Financial Corp. is a leading non-bank lender providing financing solutions to qualified real estate investors who are generally in a transitional phase of the investment process. Timbercreek Financial fulfills a financing requirement that is not well serviced by the commercial banks: primarily shorter duration, structured financing. Real estate investors typically use short- term mortgages to bridge a period (generally one to five years) during which they conduct property repairs, redevelop the property or purchase another investment. These short-term “bridge” mortgages are typically repaid with traditional bank mortgages (lower cost and longer-term debt) once the transitional period is over or a restructuring is complete or from proceeds generated on the sale of assets. Timbercreek Financial focuses primarily on lending against income-producing real estate such as multi-residential, retail and office properties. This emphasis on cash-flowing properties is an important risk management strategy. Timbercreek Financial, through its Manager, has established preferred lender status with many active real estate investors by providing prompt response to borrowers to facilitate quick execution on investment opportunities and by providing flexible terms so borrowers can maximize their efficiencies in executing on opportunities and realizing on profits. Timbercreek Financial works with borrowers throughout the terms of their mortgages to ensure that their capital requirements are met and, if requested, considers modifications of or extensions to the terms of their mortgages to accommodate additional opportunities that may arise or changes that may occur. 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”). 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, 2018. This MD&A should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2018 and 2017, which are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. 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 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 total net income and comprehensive income or cash flows from operating activities as determined in accordance with IFRS as indicators of the Company’s performance. 8 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted 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; Other investments – represents total other investment, before adjustments for interest receivable and unamortized lender fees as at the reporting date; Convertible debentures, par – represents total convertible debentures, before adjustments for the reclassification of the convertible components of the debentures to equity; 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; 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 total of par value of convertible debentures and the total credit facilities 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 daily period; Weighted average interest rate of other investments – represents the weighted average of daily interest rates (not including lender fees) on the other interest bearing loan investments within the enhanced return portfolio for the daily period; Weighted average interest rate of all loans for the period – represents the weighted average of daily interest rates (not including lender fees) on the net mortgage investments and other interest bearing loan investments within the enhanced return portfolio for the daily period; Weighted average lender fees – represents the cash lender fees received on individual investments during the stated period, expressed as a percentage of the Company’s advances on those investments. If the entire lender fee is received but the investment is not fully funded, the denominator is adjusted to include the Company’s unadvanced commitment; Weighted average lender fees on mortgage investments– 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 total net income and comprehensive income – represents total net income and comprehensive income for the stated period excluding termination of management contracts, transaction costs relating to the amalgamation of Timbercreek Mortgage Investment Corporation and Timbercreek Senior Mortgage Investment Corporation on June 30, 2016 (“Amalgamation”) and bargain purchase gain; Adjusted earnings per share – represents the total adjusted total net income and comprehensive income divided by the weighted average outstanding shares for the stated period; Distributable income – represents the Company’s ability to generate recurring cash flows for dividends by removing the effect of amortization, accretion, unrealized fair value adjustments, allowance for mortgage investments loss, termination of management contracts, transaction costs 9 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted relating to the Amalgamation, bargain purchase gain, and unrealized gain or loss from total net income and comprehensive income; Distributable income per share – represents the total distributable income divided by the weighted average common outstanding shares for the stated period; Expense ratio – represents total expenses excluding financing costs, net operating (gain) loss from foreclose properties held for sale (“FPHFS”), fair value adjustment on FPHFS, allowance for mortgage investments loss, termination of management contracts, transaction costs relating to the Amalgamation and bargain purchase gain 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; Payout ratio on earnings per share – represents total common share dividends paid and declared for payment, divided by total net income and comprehensive income for the stated period; and Payout ratio on distributable income – represents total common share dividends paid and declared for payment, divided by distributable income for the stated period. RECENT DEVELOPMENTS AND OUTLOOK In 2018, against a backdrop of general equity market volatility, Timbercreek Financial reported strong financial results and delivered on its core objectives to protect investor capital and generate consistent distributable income through a high-quality, diversified portfolio of mortgages and other real estate investments on income-producing real estate. It was a record year for new investments, and the mortgage portfolio increased to $1.2 billion at year end. In addition to the strong transaction activity, the Company was successful at transitioning a sizable portion of the portfolio to floating rate loans with rate floors to preserve net margins in a rising rates environment and protect against downside volatility. The transition to floating rate is partly responsible for the year-over-year increase in our average interest rate of 16 basis points. During 2018, Timbercreek Financial further increased its capital base to support the expansion of the investment portfolio. In the fourth quarter, the Company completed a private placement offering of $14.4 million. Borrower demand continues to be robust, which positions the Company well to continue to deliver on its investment objectives in 2019. PORTFOLIO ACTIVITY During Q4 2018, Timbercreek Financial funded 17 new mortgage investments totaling $212.2 million and made additional advances of $27.5 million. Portfolio turnover was 13.8%, compared with 12.1% in Q3 2018. The net value of our total mortgage portfolio, excluding syndications, was approximately $1.2 billion at the end of Q4 2018, an increase of $74 million from Q3 2018. Our draw on the credit facility (excluding the credit facility associated with investment properties) stood at $478.1 million at the end of Q4 2018, compared to $413.4 million at the end of Q3 2018. We continue to review a significant pipeline of quality investment opportunities. Timbercreek Financial competes based on customization, speed of execution and its long history and reputation in the market. At the end of Q4 2018, the enhanced return portfolio was $104.6 million, which included $91.0 million of other investments and $13.7 million of net equity in investment properties, and represented approximately 7.6% of the total assets net of syndications. This is an increase of $4.2 million over Q3 2018, mainly due to the funding of three existing investments, investment properties and an indirect real estate development. 10 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted We believe Timbercreek Financial offers investors an attractive yield with a superior risk profile. Our risk management strategy includes a focus on lending to income-producing assets and an emphasis on first mortgages. Our exposure to first mortgages was 93.2% of the net mortgage portfolio at year end, up from 91.5% in Q3 2018. Our weighted average loan-to-value ratio was 67.1%, similar to Q3 2018 and below our internal target of 70%. Our weighted average interest rate on all loans was 7.6% in Q4 2018, up from 7.5% in Q3 2018. The weighted average interest rate on all loans on December 31, 2018 was 7.5%. In recent quarters, we have increased the use of floating rate loans with rate floors, which reduces margin pressure within our mortgage portfolio in a rising interest rate environment and protects against downside volatility. As at December 31, 2018, 57.7% of the total loan portfolio was invested in floating rate loans compared to 12.1% as at December 31, 2017. Although higher rates can be obtained by investing in higher risk loans, our focus is primarily on income-producing, lower-risk segments of the market such as multi-residential apartment buildings. At year end, 87.5% of the mortgage investments were secured by income-producing properties, which underscores our focus on cash-flowing properties as a risk management strategy. Approximately 40.1% of the portfolio at year end was secured by multi-residential real estate (apartment buildings), which is a stable asset class with predictable cash-flow streams. Regulatory changes, including the B20 guidelines, have resulted in some residential-focused lenders shifting capital and exposure to commercial assets such as apartment buildings. Timbercreek Financial continues to compete effectively for these assets based on customization, speed of execution and its long history and reputation in the multi-family sector. The net mortgage portfolio remains heavily weighted towards Canada’s largest provinces, with approximately 93.0% of the mortgage portfolio invested in Ontario, British Columbia, Alberta and Quebec, the majority of which are in urban markets that generally experience better real estate liquidity and thus offer a better risk profile. The percentage of assets invested in British Columbia increased to 23.5% from 12.2% at the end of 2017, as the Company continued to capitalize on several attractive financing opportunities in the Vancouver area with long-standing clients. In addition, the Company increased its exposure in Alberta from 12.1% to 20.9%, as that market continues to improve and competition remains limited, delivering strong risk adjusted returns. 11 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted FINANCIAL HIGHLIGHTS Financial Position As at KEY FINANCIAL POSITION INFORMATION Mortgage investments, including mortgage syndications Other investments1 Investment properties Total assets Credit facility Convertible debentures Total liabilities CAPITAL STRUCTURE Shareholders’ equity Convertible debentures, par1 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. December 31, 2018 December 31, 2017 December 31, 2016 $ $ $ $ $ $ $ $ $ $ $ $ 1,796,822 90,957 46,494 1,945,031 508,939 131,597 1,229,066 715,965 136,800 533,277 47.3% 81,632,844 8.75 714,287 $ $ $ $ $ $ $ $ $ $ $ $ 1,554,369 57,934 42,748 1,664,759 394,046 163,946 1,011,637 653,122 171,300 433,277 46.4% 74,277,356 9.62 714,548 $ $ $ $ $ $ $ $ $ $ $ $ 1,549,849 9,828 — 1,573,970 299,000 76,757 927,298 646,672 80,300 350,000 37.0% 73,858,499 8.72 644,046 12 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted OPERATING RESULTS Net investment income Net rental income Income from operations Other income, net Total net income and comprehensive income Earnings per share (basic)2 Earnings per share (diluted)2 Adjusted total net income and comprehensive income1 Adjusted earnings per share (basic)1 Adjusted earnings per share (diluted)1 Dividends to shareholders Dividends per common share Payout ratio on earnings per share1 Distributable income1 Distributable income per share1,3 Payout ratio on distributable income1,3 Three months ended December 31, 2018 25,169 $ 358 $ 2017 23,178 99 21,661 $ 19,644 1,217 $ – 15,263 $ 12,876 0.19 $ 0.18 $ N/A $ N/A $ N/A $ 14,076 $ 0.173 $ 92.2% 16,302 $ 0.20 $ 86.3% 0.17 0.17 N/A N/A N/A 12,769 0.172 99.2% 13,681 0.18 93.3% Year ended December 31, $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2018 94,958 821 81,003 1,217 53,068 0.67 0.67 N/A N/A N/A 54,890 0.682 103.4% 60,105 0.76 91.3% $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2017 88,937 193 75,374 – 52,204 0.70 0.70 N/A N/A N/A 50,736 0.685 97.2% 55,262 0.75 91.8% $ $ $ $ $ $ $ $ $ $ $ $ $ 2016 61,422 – 51,231 – 45,999 0.80 0.80 39,940 0.70 0.70 39,895 0.702 86.7% 42,636 0.74 93.5% $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1 Refer to non-IFRS measures section. 2 Excluding other income, net, the both basic and diluted earnings per share would have been $0.17 and $0.65 and payout ratio on earnings per share would have been 100.2% and 105.9% for three months and year ended December 31, 2018, respectively. 3 Excluding other income, net, the distributable income per share would have been $0.19 and $0.74 and payout ratio on distribution income would have been 93.3% and 93.2% for three months and year ended December 31, 2018, respectively. For the three months ended December 31, 2018 (“Q4 2018”) and December 31, 2017 (“Q4 2017”) The Company funded 17 new net mortgage investments (Q4 2017 – 11) totaling $212.2 million (Q4 2017 – $100.9 million), made additional advances on existing mortgage investments totaling $27.5 million (Q4 2017 – $39.6 million) and received full repayments on 14 mortgage investments (Q4 2017 – 13) and partial repayments totaling $165.5 million (Q4 2017 – $119.1 million). As a result, the net mortgage portfolio, net of foreign exchange translation gain of $0.6 million, as at December 31, 2018 has increased by $74.8 million to $1,211.0 million (September 30, 2018 – $1,136.2 million), or 6.6% from September 30, 2018. Other investments within the enhanced return portfolio was $91.0 million, including an allowance for credit loss of $215 (September 30, 2018 - $87.2 million and $233, respectively). Net increase of $3.7 million in the quarter was mainly due to $2.0 million in loan repayments, offset by $4.8 million in loan advances. Net investment income earned was $25.2 million (Q4 2017 - $23.2 million), an increase of $2.0 million, or 8.6% from Q4 2017, mainly due to an increase in average net mortgage balance of $1,169.7 million compared to $1,098.1 million during Q4 2017, increase in weighted average interest rate, and increase of income generated from other investments within the enhanced return portfolio. The weighted average interest rate of all loans during the fourth quarter was 7.6% (Q4 2017 - 7.1%) compared to 7.5% in Q3 2018. 13 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted 57.7% of the total loan portfolio was invested in loans with floating rates (Q4 2017 - 12.1%) compared to 43.4% in Q3 2018. Non-refundable cash lender fees received were $2.4 million (Q4 2017 – $1.8 million), for a weighted average lender fees on mortgage investments of 0.9% (Q4 2017 – 1.0%). The Company generated income from operations of $21.7 million (Q4 2017 – $19.6 million), an increase of $2.1 million or 10.3% from Q4 2017. The Company generated net income and comprehensive income of $15.3 million (Q4 2017 – $12.9 million) or earnings per share $0.19, basic and $0.18 diluted (Q4 2017 – $0.17, basic and diluted). The Company declared $14.1 million in dividends (Q4 2017 – $12.8 million) to common shareholders, a payout ratio of 92.2% (Q4 2017 – 99.2%) on an earnings per share basis. The Company generated distributable income of $16.3 million (Q4 2017 – $13.7 million) or distributable income per share of $0.20 (Q4 2017 – $0.18), a payout ratio of 86.3% (Q4 2017 – 93.3%) on a distributable income basis. During Q4 2018, the Company issued 57,500 of common shares for gross proceeds of $534 at an average price of $9.28 per common share and paid $11 in commission to the agent, pursuant to the equity distribution agreement for the Company’s ATM Program dated June 21, 2018. The Company completed a private placement offering on October 19, 2018 for gross proceeds of $14.4 million at a price of $9.22 and issued 1,561,331 of common shares as a result of the transaction. During Q4 2018, the Company recognized net other income of $1.2 million, primarily from the recovery of HST credits from 2015 and prior. For the years ended December 31, 2018 (“2018”) and December 31, 2017 (“2017”) The Company funded 56 new net mortgage investments (2017 – 47) totaling $673.4 million (2017 – $404.7 million), made additional advances on existing mortgage investments totaling $124.3 million (2017 – $128.2 million) and received full repayments on 46 mortgage investments (2017 – 55) and partial repayments totaling $691.4 million (2017 – $428.8 million). As a result, the net mortgage investment portfolio as at December 31, 2018 has increased by $107.4 million, net of foreign exchange translation gain of $1.1 million, which is hedged through currency contracts, to $1,211.0 million (December 31, 2017 – $1,103.6 million), or 9.7% from December 31, 2017. Other investments within the enhanced return portfolio was $91.0 million (December 31, 2017 - $57.9 million), a net increase of $33.1 million in 2018 (2017 – $48.1 million). Net increase was primarily due to $16.5 million in loan repayments, offset by $43.9 million in loan advances, funding of $2.7 million in a participating loan, $3.1 million from disposition of marketable securities and funding of $5.3 million in an indirect real estate development through a joint venture. Net investment income earned was $95.0 million (2017 – $88.9 million), an increase of $6.1 million, or 6.9% from 2017 mainly due to an increase in weighted average interest rate on all loans to 7.4% (YTD 2017 - 7.2%) and increase in other investments within the enhanced return portfolio to $91.0 million (December 31, 2017 - $57.9 million). The Company generated income from operations of $81.0 million (2017 – $75.4 million), an increase of $5.6 million or 7.5% from 2017. The Company generated net income and comprehensive income of $53.1 million (2017 – $52.2 million) or earnings per share $0.67, basic and diluted (2017 – $0.70, basic and diluted). The Company declared $54.9 million in dividends (2017 – $50.7 million) to common shareholders resulting in a payout ratio of 103.4% (2017 – 97.2%) on an earnings per share basis. 14 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted The Company generated distributable income of $60.1 million (2017 – $55.3 million) or distributable income per share of $0.76 (2017 – $0.75) resulting in a payout ratio of 91.3% (2017 – 91.8%) on a distributable income basis. On February 7, 2018 and February 16, 2018, the Company completed a public offering of 4,302,000 plus an over-allotment option of 545,300 common shares, respectively, at $9.30 per common share for total net proceeds of $42.3 million. On February 13, 2018, the Company completed the exercise of a portion of the accordion feature, which increased the commitments of the lenders by $40.0 million and on November 16, 2018, the Company exercised remainder portion of the accordion feature of $60.0 million, bringing the credit limit to $500.0 million. On June 21, 2018, the Company entered into an equity distribution agreement with a Canadian financial institution (“ATM Program”), having an aggregate offering amount up to $70 million for sale to the public. During 2018, the Company issued 458,100 of common shares for gross proceeds of $4.3 million at an average price of $9.33 per common share and paid $87 in commission to the agent, pursuant to the ATM Program. On July 3, 2018, the Company completed payment of $35.1 million for the redemption of the 6.35% Convertible Unsecured Debentures. On October 19, 2018, the Company completed a private placement offering of 1,561,331 common shares at $9.22 per common share for total net proceeds of $13.9 million. During 2018, the Company recognized net other income of $1.2 million, primarily from the recovery of HST credits from 2015 and prior. 15 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted ANALYSIS OF FINANCIAL INFORMATION FOR THE PERIOD Distributable income Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 Net income and comprehensive income $ 15,263 $ 12,876 $ 53,068 $ 52,204 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: unrealized fair value (gain) loss on FPHFS1 Add: net operating loss (gain) from FPHFS Add: net realized and unrealized foreign exchange (gain) loss Add: unrealized loss (gain) on equity investments Add: allowance for mortgage investments loss Distributable income2 Less: dividends on common shares Under distribution Distributable income per share3 (2,318) 2,359 354 299 62 29 15 – 112 127 16,302 (14,076) 2,226 0.20 $ $ $ $ (2,193) 1,766 352 409 91 – 41 – 39 300 13,681 (12,769) 912 0.18 (8,328) 11,342 1,248 1,767 384 109 39 – (74) 550 60,105 (54,890) 5,215 0.76 $ $ $ $ (7,858) 6,802 1,266 1,438 314 193 (69) 129 43 800 55,262 (50,736) 4,526 0.75 1 Excludes net realized gain of $3 from sale of FPHFS in year ended December 31, 2017. 2 Refer to non-IFRS measures section. 3 Excluding other income, net, the distributable income per share would have been $0.19 and $0.74 for three months and year ended December 31,2018, respectively. The distributable income reconciliation above provides a link between the Company’s IFRS reporting requirements and its ability to generate recurring cash flows for dividends. 16 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted STATEMENT OF NET INCOME AND COMPREHENSIVE INCOME Net investment income $ 25,169 $ 23,178 8.6% $ 94,958 $ 88,937 6.8% Three months ended December 31, % Change Year ended December 31, % Change 2018 2017 2018 2017 Net rental income Expenses1 Income from operations Other income, net Net operating (loss) income from foreclosed properties held for sale Fair value loss on foreclosed properties held for sale Financing costs: 358 (3,866) 21,661 1,217 (15) (29) 99 261.6% (3,633) 19,644 – (6.4)% 10.3% 100% (40) 62.5% 146 (119.9)% 821 (14,776) 81,003 1,217 (39) (109) 193 325.4% (13,756) 75,374 – (7.4)% 7.5% 100% 70 (155.7)% (190) 42.6% Interest on credit facility (5,368) (3,986) (34.7)% (18,376) (13,074) (40.6)% Interest on convertible debentures Net income and comprehensive income (basic) Net income and comprehensive income (diluted) Earnings per share (basic)2 Earnings per share (diluted)2 (2,203) (2,886) 23.7% (10,628) (9,976) (6.5)% $ 15,263 $ $ $ 17,466 0.19 0.18 $ $ $ $ 12,878 18.5% $ 53.068 $ 52,204 1.7% 15,080 15.8% 0.17 0.17 $ $ $ 59,094 0.67 0.67 $ $ $ 59,466 (0.6)% 0.70 0.70 1 Amounts include allowance for mortgage investments loss. 2 Excluding other income, net, basic and diluted earnings per share would have been $0.17 and $0.65. NET INVESTMENT INCOME2 For Q4 2018 and 2018, the Company earned net investment income of $25.2 million and $95.0 million (Q4 2017 – $23.2 million; 2017 – $88.9 million). Net investment income includes the following: a. Interest income During Q4 2018 and 2018, the Company earned $22.7 million and $86.0 million (Q4 2017 – $20.0 million; 2017 – $78.9 million) of interest income on net mortgage investments and collateralized loans in the enhanced return portfolio. The weighted average interest rate on net mortgage investments during Q4 2018 increased to 7.3% compared to 6.9% in Q4 2017 and increased to 7.2% in 2018 compared to 7.0% in 2017. During Q4 2018 and 2018, other investments generated net interest income of $1.9 million and $6.5 million (Q4 2017 - $1.3 million and 2017 – $4.4 million) with a weighted average interest rate of 11.2% and 11.4%, respectively (Q4 2017 - 11.4% and 2017 – 11.5%). b. Lender fee income During Q4 2018 and 2018, the Company received non-refundable cash lender fees of $2.4 million and $11.3 million (Q4 2017 – $1.8 million; 2017 – $6.8 million), or a weighted average lender fee of 0.9% and 1.1%, respectively (Q4 2017 – 1.0%; 2017 – 1.0%). Lender fees are received upfront and are amortized to 2 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. 17 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted income over the life of the respective loan, using the effective interest rate method. For Q4 2018 and 2018, lender fees of $2.3 million and $8.3 million (Q4 2017 – $2.2 million; 2017 – $7.9 million) were amortized to lender fee income. Lender fees continue to be a significant component of income as a result of mortgage investment turnover. The Manager does not retain any portion of the lender fees in order to ensure management’s interests are aligned with the shareholders. c. Other income During Q4 2018 and 2018, the Company earned other income of $207 and $605 (Q4 2017 - $1.0 million; 2017 - $2.1 million). d. Other income, net The Company earned one-time net other income of $1.2 million, primarily from the recovery of HST credits from 2015 and prior. NET RENTAL INCOME FROM INVESTMENT PROPERTIES The net rental income from investment properties for Q4 2018 and 2018 was $358 and $821, respectively (Q4 2017 $99 and 2017 – $193). EXPENSES For Q4 2018 and 2018, the expense ratio was 1.1% and 1.0%, respectively (Q4 2017 and 2017 – 1.1% and 1.1%, respectively). Management fees The management fee is equal to 0.85% per annum of the gross assets of the Company, calculated and paid monthly in arrears, plus applicable taxes. Gross assets are defined as the total assets of the Company less unearned revenue before deducting any liabilities, less any amounts that are reflected as mortgage syndication liabilities. For Q4 2018 and 2018, the Company incurred management fees of $3.1 million and $11.9 million (Q4 2017 – $2.8 million; 2017 – $10.6 million). The increase is directly related to the increase in gross assets averaging $1,268.7 million in 2018, compared to $1,147.0 million in 2017. Servicing fees As part of the management agreement, the Manager is entitled to a servicing fee equal to 0.10% per annum, plus applicable taxes, of the amount of any senior tranche of a mortgage that is syndicated by the Manager to a third party investor on behalf of the Company, where the Company retains the corresponding subordinated portion. For Q4 2018 and 2018, the Company incurred $163 and $622, respectively (Q4 2017 and 2017 – $97 and $580) in servicing fees. General and administrative For Q4 2018 and 2018, the Company incurred general and administrative expenses of $478 and $1,725, respectively (Q4 2017 – $397; 2017 – $1,727). General and administrative expenses consist mainly of audit fees, professional fees, director fees, other operating costs and administration of the mortgage and other investments portfolio. 18 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted INTEREST ON CREDIT FACILITY – MORTGAGE INVESTMENTS The Company actively monitors its advances and repayments while efficiently using bankers’ acceptances 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 2018 and 2018 relating to the credit facility were $5.2 million and $17.2 million, respectively (Q4 2017 – $3.7 million; 2017 – $12.6 million). The increase over the comparable 2017 periods is directly related to the increase in credit facility utilization and prime rate during 2018. The average credit utilization in 2018 was $384.9 million compared to $340.3 million in 2017. As at December 31, 2018, the Company had a credit facility balance of $478.1 million (December 31, 2017 - $365.9 million). As at December 31, 2018, the Company has incurred financing costs of $4.9 million relating to the credit facility, which includes upfront fees, legal and other costs. During Q4 2018 and 2018, the Company incurred additional financing costs of $857 and $1,189, the majority of which relates to the exercise of the accordion feature. The financing costs are netted against the outstanding balance of the credit facility and are amortized over the term of the new credit facility agreement. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For Q4 2018 and 2018, included in financing costs is interest on the credit facility of $4.8 million and $16.0 million (Q4 2017 – $3.3 million; 2017 – $11.4 million) and financing costs amortization of $348 and $1.2 million (Q4 2017 – $351; 2017 – $1.3 million). INTEREST ON CREDIT FACILITY – INVESTMENT PROPERTIES As a co-owner of the Saskatchewan Portfolio, the Company entered into a credit facility agreement with a Schedule 1 Bank in August 2017. Under the terms of the agreement, the co-ownership have a maximum available credit of $162.6 million. The gross initial advance on the credit facility was $144.6 million. The Company’s share of the initial advance was $29.6 million plus $109 of unamortized financing costs. This credit facility will mature on August 10, 2019 with an option to extend the credit facility by one year. The credit facility provides the co-owners with the option to borrow at either the prime rate of interest plus 1.50%, or at the bankers’ acceptances with a stamping fee of 2.50% (“Canadian Dollar Loans”), or at LIBOR plus 2.50%. The credit facility is secured by a first charge on specific assets with a gross carrying value of $227.2 million. The Company’s share of the carrying value is $46.5 million. As at December 31, 2018, the Company had a credit facility balance of $32.8 million (December 31, 2017 - $30.1 million. Financing costs for Q4 2018 and 2018 relating to the credit facility were $176 and $1.2 million, respectively (Q4 2017 and 2017 - $455). During the year ended December 31, 2018, the co-owners borrowed both LIBOR and prime rate loans from the credit facility. At the time of borrowing LIBOR loans, which are denominated in U.S. dollars, the co-owners concurrently entered into cross-currency swaps to effectively convert the LIBOR loans into Canadian Dollar Loans, which were unwound in December 2018. As at December 31, 2018, $160.4 million of Canadian Dollar Loans were outstanding on the credit facility. The Company’s share of the outstanding amount is $32.8 million. EARNINGS PER SHARE For Q4 2018, basic and diluted earnings per share were $0.19 and $0.18 and for 2018, basic and diluted earnings per share were $0.67 (Q4 2017 – basic and diluted earnings per share $0.17; 2017 – basic and diluted earnings per share $0.70). In accordance with IFRS, convertible debentures are considered for potential dilution in the calculation of the diluted earnings per share. Each series of convertible debentures is considered individually and only those with dilutive effect on earnings are included in the diluted earnings per share calculation. 19 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Convertible debentures that are considered dilutive are required by IFRS to be included in the diluted earnings per share calculation notwithstanding that the conversion price of such convertible debentures may exceed the market price and book value of the Company’s common shares. STATEMENTS OF FINANCIAL POSITION Net mortgage investments The balance of net mortgage investments is as follows: Mortgage investments, including mortgage syndications $ 1,796,822 $ 1,554,369 December 31, 2018 December 31, 2017 Mortgage syndication liabilities Interest receivable Unamortized lender fees Allowance for mortgage investments loss Net mortgage investments (575,040) 1,221,782 (20,578) 8,372 1,417 (440,648) 1,113,721 (16,742) 5,584 1,081 $ 1,210,993 $ 1,103,644 December 31, 2018 Three months ended December 31, 2017 December 31, 2018 Year ended December 31, 2017 Net mortgage investments statistics and ratios1 Total number of net mortgage investments Average net mortgage investment Average net mortgage investment portfolio $ $ Weighted average interest rate for the period Weighted average lender fees Turnover ratio Remaining term to maturity (years) Net mortgage investments secured by cash-flowing properties Weighted average loan-to-value 124 9,762 1,169,696 $ $ 114 9,686 1,098,109 $ $ 124 9,762 1,131,531 $ $ 114 9,686 1,147,004 7.3% 0.9% 13.8% 1.2 87.5% 67.1% 6.9% 1.0% 10.8% 1.1 86.7% 66.0% 7.2% 1.1% 60.6% 1.2 87.5% 67.1% 7.0% 1.0% 40.3% 1.1 86.7% 66.0% 1 Refer to non-IFRS measures section, where applicable. PORTFOLIO ALLOCATION The Company’s net mortgage investments, excluding enhanced return portfolio, were allocated across the following categories: a. Security Position First mortgages Non-first mortgages # of Net Investments % of Net Investments # of Net Investments % of Net Investments December 31, 2018 December 31, 2017 113 11 124 93.2% 6.8% 100.0% 102 12 114 93.0% 7.0% 100.0% 20 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted b. Region Ontario British Columbia Alberta Quebec Other c. Maturity Maturing 2018 2019 2020 2021 2022 2023 and thereafter d. Asset Type Multi-residential Retail Unimproved land Hotels Retirement Industrial Office Self-storage Other-residential Single-family residential # of Net Investments % of Net Investments # of Net Investments % of Net Investments December 31, 2018 December 31, 2017 59 28 13 14 10 124 42.5% 23.5% 20.9% 6.1% 7.0% 100.0% 54 17 9 18 16 114 55.0% 12.2% 12.1% 13.5% 7.2% 100.0% # of Net Investments % of Net Investments # of Net Investments % of Net Investments December 31, 2018 December 31, 2017 0 51 51 20 2 0 124 0.0% 38.4% 40.9% 19.4% 1.3% 0.0% 100.0% 58 35 17 3 1 0 114 50.0% 29.0% 18.0% 2.9% 0.1% 0.0% 100.0% # of Net Investments % of Net Investments # of Net Investments % of Net Investments December 31, 2018 December 31, 2017 65 19 10 4 5 8 8 2 1 2 124 40.1% 18.8% 10.1% 4.9% 4.1% 4.8% 13.5% 1.7% 1.6% 0.4% 100.0% 62 15 10 4 6 6 7 2 1 1 114 50.1% 14.1% 7.0% 8.2% 9.3% 2.1% 7.1% 0.5% 1.5% 0.1% 100.0% ENHANCED RETURN PORTFOLIO As at December 31, 2018, enhanced return portfolio was $104.6 million, which include $91.0 million (December 31, 2017 – $57.9 million) of other investments and $13.7 million (December 31, 2017 - $12.6 million) of net equity in investment properties. 21 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Other investments may include collateralized loans, debentures, participating loans, debentures, joint ventures, finance lease receivables and marketable securities. As at December 31, 2018, the Company has $72.8 million (December 31, 2017 – $44.9 million) of collateralized loan investments, $6.0 million (December 31, 2017 – $5.9 million) of finance lease receivable, $7.5 million (December 31, 2017 – $2.2 million) of indirect development properties, $4.6 million of a participating loan (December 31, 2017 – $1.7 million) and no investment in marketable securities (December 31, 2017 – $3.1 million). During Q4 2018 and 2018, other investments generated net interest income of $1.9 million and $6.5 million (Q4 2017 - $1.3 million and 2017 – $4.2 million) with a weighted average interest rate of 11.2% and 11.4%, respectively (Q4 2017 - 11.4% and 2017 – 11.5%). During Q4 2018 and 2018, the Company earned lender fee income on other investments, net of fees relating to mortgage syndication liabilities, of $154 and $488 (Q4 2017 – $84 and 2017 – $260), respectively. During Q4 2018 and 2018, the Company received total lender fees on other investments, of nil and $683, respectively (Q4 2017 – nil and 2017 – $357), which are amortized to interest income over the term of the related mortgage investments using the effective interest rate method. During Q4 2017, the Company entered into an 20-year emphyteutic lease on a foreclosed property held for sale in Quebec, which had a fair value of $5.4 million at the time of the transaction. Refer to note 4(e) of the Consolidated Financial Statements for the years ended December 31, 2018 and 2017. On August 16, 2017, the Company acquired a 20.46% undivided beneficial interest in the Saskatchewan Portfolio which is comprised of 14 investment properties totaling 1,079 units located in Saskatoon and Regina, Saskatchewan for a total purchase price of $201.7 million (the Company’s share is $41.3 million). As at December 31, 2018, the Company’s share of the investment properties has an aggregate fair value of $46.5 million (December 31, 2017 – $42.7 million) and are pledged as security for the credit facility of the co-ownership. The Company is entitled to receive incremental profits from the excess returns generated over certain thresholds. Refer to notes 5 and 5(b) of the Consolidated Financial Statements for the period ended December 31, 2018 and December 31, 2017 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. The Company has mortgage syndication liabilities of $575.0 million (December 31, 2017 – $440.6 million). In general, 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. ALLOWANCE FOR CREDIT LOSSES (“ACL”) The allowance for credit losses is maintained at a level that we consider adequate to absorb credit-related losses on our mortgage and other investments. The allowance for credit losses amounted to $1.6 million as at December 31, 2018 (December 31, 2017 - $1.1 million, under IAS 39), of which $1.4 million (December 31, 2017 - $1.1 million, under IAS 39) was recorded in mortgage investments and $215 (December 31, 2017 - $nil, under IAS 39) recorded in other investments in our Consolidated Statement of Financial Position. 22 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Allowance for credit losses: Multi-residential Stage 1 Stage 2 Stage 3 Total Gross mortgage investments, including interest receivable $ 851,402 $ — $ 2,790 $ 854,192 Mortgage syndication liabilities, including interest receivable Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other mortgage investments Gross mortgage investments, including interest receivable Mortgage syndication liabilities, including interest receivable Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other loan investments Gross loan investments, including interest receivable Other loan syndication liabilities, including interest receivable Net Allowance for loan losses Other loan Investments, net of allowance and mortgage syndications 322,244 529,158 627 528,531 Stage 1 853,383 253,694 599,689 200 599,489 Stage 1 66,483 — 66,483 212 66,271 — — — — Stage 2 — — — — — — 2,790 3 322,244 531,948 630 2,787 531,318 Stage 3 37,790 — 37,790 587 Total 891,173 253,694 637,479 787 37,203 636,692 Stage 2 Stage 3 — — — — — 7,014 — 7,014 3 Total 73,497 — 73,497 215 7,011 73,282 As at December 31, 2018, finance lease receivable (note 4(e) of consolidated financial statements for the period ended December 31, 2018) and unadvanced commitments (note 4(a) consolidated financial statements for the period ended December 31, 2018) are all considered to be in Stage 1 with minimal ECL. 23 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted The changes in the allowance for credit losses are shown in the following tables. Stage 1 Stage 2 Stage 3 603 24 – – – 627 340 (340) 627 26 – (26) – – – – – (23) – – 26 3 – – 3 Stage 1 Stage 2 Stage 3 1 252 – – – 253 88 (141) 200 209 – – (209) – – – – – – 378 – – 209 587 – – 587 Stage 1 Stage 2 Stage 3 232 (16) (3) – – 213 65 (66) 212 – – – – – – – – – – – – – 3 3 – – 3 Total 629 1 – (26) 26 630 340 (340) 630 Total 210 630 – (209) 209 840 88 (141) 787 Total 232 (16) (3) – 3 216 65 (66) 215 Multi-residential Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period Other mortgage investments Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period Other loan investments Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period 24 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted The following table presents the gross carrying amounts of mortgage and other loan investments, net of syndication liabilities, subject to IFRS 9 impairment requirements by internal risk ratings used by the Company for credit risk management purposes. The internal risk ratings presented in the table below are defined as follows: Low Risk: Mortgage and loan investments that exceed the credit risk profile standard of the Company with a below average probability of default. Yields on these investments are expected to trend lower than the Company’s average portfolio. Medium-Low: Mortgage and loan investments that are typical for the Company’s risk appetite, credit standards and retain a below average probability of default. These mortgage and loan investments are expected to have average yields and would represent a significant percentage of the overall portfolio. Medium-High: Mortgage and loan investments within the Company’s risk appetite and credit standards with an average probability of default. These investments typically carry attractive risk-return yield premiums. High Risk: Mortgage and loan investments within the Company’s risk appetite and credit standards that have an additional element of credit risk that could result in an above average probability of default. These mortgage and loan investments carry a yield premium in return for their incremental credit risk. These mortgage and loan investments are expected to represent a small percentage of the overall portfolio. Default: Mortgage and loan investments that are 90 days past due and when there is objective evidence that there has been a deterioration of credit quality to the extent the Company no longer has reasonable assurance as to the timely collection of the full amount of principal and interest and/or when the Company has commenced enforcement remedies available to it under its contractual agreements. Stage 2 Stage 3 Multi-residential Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other Mortgage investments Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Stage 1 221,309 289,144 18,705 – – 529,158 627 528,531 Stage 1 177,567 341,418 66,644 14,060 – 599,689 200 599,489 2,787 531,318 Stage 2 Stage 3 – – – – – – – – – – – – – – – – – – – – 2,790 2,790 3 – – – – 37,790 37,790 587 Total 221,309 289,144 18,705 – 2,790 531,948 630 Total 177,567 341,418 66,644 14,060 37,790 637,479 787 37,203 636,692 25 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Other loan investments Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Other loan Investments, net of allowance and mortgage syndications NET WORKING CAPITAL Stage 1 Stage 2 Stage 3 Total – – – 66,483 – 66,483 212 66,271 – – – – – – – – – – – – 7,014 7,014 3 – – – 66,483 7,014 73,497 215 7,011 73,282 Net working capital increased by $5.1 million to $19.4 million at December 31, 2018 from $14.3 million at December 31, 2017. CREDIT FACILITY (MORTGAGE INVESTMENTS) Currently, the Company has a $500.0 million credit facility with 10 Canadian banks, secured by a general security agreement over the Company’s assets and its subsidiaries. Originally, the Company entered into a credit facility agreement with a credit limit of $350.0 million and a maturity date of May 2018. On June 20, 2017, the Company increased the credit limit by $50.0 million to $400.0 million, through the utilization of the accordion feature. On December 21, 2017, the Company further amended the credit facility agreement (the “Amended Credit Agreement”) for a credit limit of $400.0 million which may be increased by $100.0 million through an accordion feature, subject to certain conditions. The credit facility will mature on December 20, 2019. On February 13, 2018, the Company completed the exercise of a portion of the accordion feature, which increased the credit limit by $40.0 million to $440.0 million. On November 16, 2018, the Company exercised remainder portion of the accordion feature which increased the credit limit by $60.0 million to $500.0 million, the Company further amended the credit facility agreement (the “Second Amending Agreement to Credit Agreement”) and extended maturity date to December 20, 2020. The rates of interest and fees of the Amended Credit Agreement and previous credit agreements remain unchanged which are either at the prime rate of interest plus 1.25% per annum (December 31, 2017 – prime rate of interest plus 1.25% per annum) or bankers’ acceptances with a stamping fee of 2.25% (December 31, 2017 – 2.25%) and standby fee of 0.5625% per annum (December 31, 2017 – 0.5625%) on the unutilized credit facility balance. As at December 31, 2018, the Company’s qualified credit facility limit is $476.6 million and is subject to a borrowing base as defined in the new amended and restated credit agreement. As at December 31, 2018, the Company has incurred inception to date financing costs of $4.9 million relating to the credit facility, which includes upfront fees, legal and other costs. During the year ended December 31, 2018, the Company incurred financing costs of $1.2 million, the majority of which relates to the exercise of the accordion feature. The financing costs are netted against the outstanding balance of the credit facility and are amortized over the term of the new credit facility agreement. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For the year ended December 31, 2018, included in financing costs is interest on the credit facility of $16.0 million (2017 – $11.4 million) and financing costs amortization of $1.2 million (2017 – $1.2 million). 26 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted CREDIT FACILITY (INVESTMENT PROPERTIES) Concurrently with the Saskatchewan Portfolio acquisition, the Company and the co-owners entered into a credit facility agreement with a Schedule 1 Bank. Under the terms of the agreement, the co-ownership has a maximum available credit of $162.6 million. The gross initial advance on the credit facility was $144.6 million. The Company’s share of the initial advance was $29.6 million plus $109 of unamortized financing costs. This credit facility will mature on August 10, 2019 with an option to extend the credit facility by one year. The credit facility provides the co-owners with the option to borrow at either the prime rate of interest plus 1.50%, or at the bankers’ acceptances with a stamping fee of 2.50% (“Canadian Dollar Loans”), or at LIBOR plus 2.50%. The credit facility is secured by a first charge on specific assets with a gross carrying value of $227.2 million. The Company’s share of the carrying value is $46.5 million. The co-owners of the Saskatchewan Portfolio (note 5) are each individually subject to financial covenants outlined in the investment properties credit facility agreement. Notwithstanding, the lender’s recourse is limited to each co-owner’s proportionate interest in the investment properties credit facility. During the year ended December 31, 2018, the co-owners borrowed to LIBOR and prime rate loans from the credit facility. At the time of borrowing LIBOR loans, which are denominated in U.S. dollars, the co-owners concurrently entered into cross-currency swaps to effectively converting the LIBOR loans into Canadian Dollar Loans, which were unwound in December 2018. As at December 31, 2018, $160.4 million of Canadian dollar loans were outstanding on the credit facility. The Company’s share of the outstanding amount is $32.8 million. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For the year ended December 31, 2018, included in financing costs is interest on the credit facility of $1.1 million (2017 - $432) and financing costs amortization of $52 (2017 - $23). SHAREHOLDERS’ EQUITY a. 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 as well as to receive dividends as 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. On February 7, 2018 and February 16, 2018, the Company completed a public offering of 4,302,000 plus an over-allotment option of 545,300 common shares, respectively, at $9.30 per common share for total net proceeds of $42.3 million. On June 21, 2018, the Company entered into an equity distribution agreement with a Canadian financial institution to offer common shares, having an aggregate offering amount of up to $70 million for sale to the public. On October 19, 2018, the Company completed a private placement offering of 1,561,331 common shares at $9.22 per common share for total net proceeds of $13.9 million. During 2018, the Company issued 458,100 of common shares for gross proceeds of $4.3 million at an average price of $9.33 per common share and paid $87 in commission to the agent, pursuant to the ATM Program’s equity distribution agreement. b. Dividends The Company intends to pay dividends to holders of common shares monthly within 15 days following the end of each month. During Q4 2018 and 2018, the Company declared dividends of $14.1 million and 27 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted $54.9 million, or $0.173 and $0.692 per the Company common share (Q4 2017 – $12.8 million, $0.172 per share; 2017 – $50.7 million, $0.685 per share). As at December 31, 2018, $4.7 million in aggregate dividends (December 31, 2017 – $4.3 million) was payable to the holders of common shares by the Company. Subsequent to December 31, 2018, the Board of Directors of the Company declared dividends of $0.0575 per common share to be paid on February 15, 2019 and March 15, 2019 to the common shareholders of record on January 31, 2019 and February 28, 2019, respectively. c. Dividend reinvestment plan (“DRIP”) The DRIP provided eligible beneficial and registered holders of common shares with a means to reinvest dividends declared and payable on such common shares into additional common shares. Under the DRIP, shareholders could enroll to have their cash dividends reinvested to purchase additional common shares. The common shares can be purchased from the open market based upon the prevailing market rates or from treasury at a price of 98% of the average of the daily volume weighted average closing price on the TSX for the 5 trading days preceding payment, the price of which will not be less than the book value per common share. During Q4 2018 and 2018, no common shares were purchased on the open market (Q4 2017 – nil; 2017 – 37,603), and 105,175 and 483,335 (Q4 2017 - 109,781 and 2017 – 418,857) were issued from treasury. d. Non-executive director deferred share unit plan (“DSU”) Commencing June 30, 2016, the Company instituted a non-executive director deferred share unit plan, whereby a director can elect up to 100% of the compensation be paid in the form of DSUs, credited quarterly in arrears. 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 of the DSU 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”). The directors are entitled to also accumulate additional DSUs equal to the monthly cash dividends, on the DSUs already held by that director determined based on 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. Until June 30, 2018, each director was also entitled to an additional 25% of DSUs that are issued in the quarter 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 as of the 24th business day after publication of the Company’s financial statements following a director’s departure from the Board of Directors. During Q4 2018 and 2018, 7,751 and 23,848 units were issued (2017 - 4,376 and 22,308) and as at December 31, 2018, 51,891 units were outstanding. (December 31, 2017 – 28,043). No DSUs were exercised or canceled, resulting in a DSU expense of $240 (2017 – $205). As at December 31, 2018, $71 in quarterly compensation was granted in DSUs, which will be issued subsequent to December 31, 2018. STATEMENT OF CASH FLOWS Cash from operating activities Cash from operating activities for 2018 was $78.0 million (2017 – $69.5 million). Cash from financing activities Cash used in financing activities for 2018 and cash from financing activities for 2018 consisted of the Company’s net advance on the operating credit facility of $112.2 million (2017 – $65.3 million of net 28 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted advances) and net advances on investment properties credit facility of $2.6 million (2017 – $30.2 million). The Company received net proceeds of $60.3 million from the issuance of common shares. The Company paid interest on the debentures and credit facilities of $29.8 million (2017 – $19.8 million), repaid $34.5 million for the redemption of the 6.35% Convertible Unsecured Debentures and common share dividends of $50.1 million (2017 – $46.5 million). There was no repurchased common shares (2017 – $331). The net cash provided by financing activities for 2018 was $60.7 million (2017 – $115.2 million). Cash used in investing activities Net cash used in investing activities in 2018 was $138.9 million (2017 – $184.1 million) and consisted of the funding of net mortgage investments of $792.7 million (2017 – $474.8 million), offset by repayments of net mortgage investments of $690.3 million (2017 – $374.0 million), funding of other investments of $51.9 million (2017 – $54.0 million), offset by repayments of other investments of $19.6 million (2017 – $11.2 million), net addition to investment properties of $3.6 million (2017 – $41.3 million), and net proceeds from disposition of foreclosed properties held for sale of $227 (2017- $1.0 million). QUARTERLY FINANCIAL INFORMATION The following is a quarterly summary of the Company’s results for the eight most recently completed quarters: Net investment income1 $ 25,169 $ 24,465 $ 23,477 $ 21,847 $ 23,178 $ 23,547 $ 21,448 $ 20,766 Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Net rental income Expenses2 Income from operations1 Other income, net Net operating (loss) gain from FPHFS Fair value (loss) gain of FPHFS Financing costs: 358 (3,866) 21,661 1,217 (15) (29) 135 (3,774) 20,826 — (18) (40) 179 (3,752) 19,904 — (5) (40) 149 (3,386) 18,610 — (2) — 99 (3,633) 19,644 — (40) 146 94 (3,809) 19,832 — 27 — (3,091) 18,357 — 19 (193) (143) — (3,223) 17,543 — 64 — Interest on credit facility (5,368) (4,836) (4,111) (4,061) (3,986) (3,519) (2,831) (2,738) (2,203) (7,571) (2,224) (7,060) (3,321) (7,432) (2,880) (6,941) (2,886) (6,872) (2,899) (6,418) (2,267) (5,098) (1,924) (4,662) $ 15,263 $ 13,708 $ 12,427 11,667 $ 12,876 $ 13,248 $ 13,135 $ 12,945 Interest on convertible debentures Total financing costs Total net income and comprehensive income (basic) Total net income and comprehensive income (diluted) Earnings per share (basic) Earnings per share (diluted) $ 17,466 $ $ 0.19 0.18 15,911 0.17 0.17 $ $ Distributable income1 $ 16,302 $ 14,818 Distributable income per share1 $ 0.20 $ 0.19 1 Refer to non-IFRS measures section, where applicable. 2 Amounts include allowance for mortgage investments loss. $ $ $ $ $ 12,427 $ 12,359 $ 15,080 $ 15,468 $ 14,589 $ 13,695 0.16 0.16 $ $ 0.15 0.15 15,477 $ 13,508 0.20 $ 0.18 $ $ $ $ 0.17 0.17 13,681 0.18 $ $ $ $ 0.18 0.18 $ $ 0.18 0.18 $ $ 0.18 0.17 14,091 $ 14,080 $ 13,410 0.19 $ 0.19 $ 0.18 29 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted The variations in total 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 allowance for mortgage investments resulting in fluctuations in quarterly total net income and comprehensive income; 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, 2018, Due to Manager includes mainly management and servicing fees payable of $1.5 million (December 31, 2017 - $1.1 million). As at December 31, 2018, included in other assets is $3.1 million (December 31, 2017 – $2.4 million) of cash held in trust by Timbercreek Mortgage Servicing Inc. (“TMSI”), the Company’s mortgage servicing and administration provider, a company controlled by the Manager. The balance relates to mortgage funding holdbacks and prepaid mortgage interest received from various borrowers. As at December 31, 2018, the Company has the following mortgage investments which an independent director of the Company is also an officer and/or part-owner of the borrowers of these mortgages: A mortgage investment with a total gross commitment of $84.1 million (December 31, 2017 – $84.1 million). The Company’s share of the commitment is $29.1 million (December 31, 2017 – $29.1 million). During Q2 2018, the mortgage investment was fully repaid (December 31, 2017 – $15.1 million). For the year ended December 31, 2018, the Company has recognized net interest income of $460 (2017 – $922) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $9.5 million (December 31, 2017 – $15.6 million). The Company’s share of the commitment is $3.6 million (December 31, 2017 – $6.0 million), of which $3.6 million (December 31, 2017 – $3.6 million) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $344 (2017 – $341) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $4.3 million (December 31, 2017 – $4.3 million). The Company’s share of the commitment is $4.3 million (December 31, 2017 – $4.3 million), During Q4 2018, the mortgage investment was fully repaid (December 31, 2017 – $2.0 million). For the year ended December 31, 2018, the Company has recognized net interest income of $153 (2017 – $156) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $1.9 million (December 31, 2017 – $1.9 million). The Company’s share of the commitment is $1.9 million (December 31, 2017 – $1.9 million), of which $1.9 million (December 31, 2017 – $1.9 million) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $115 (2017 – $115) from this mortgage investment during the year. 30 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted A mortgage investment with a total gross commitment of $16.5 million (December 31, 2017 – $16.5 million). The Company’s share of the commitment is $2.5 million (December 31, 2017 – $2.5 million), of which $2.5 million (December 31, 2017 – $2.4 million) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $238 (2017 – $84) from this mortgage investment during the year. As at December 31, 2018, the Company and Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”) and Timbercreek Real Estate Financing U.S. Holding LP (“TREF”, Timbercreek U.S. Short Term Debt (Founder) L.P. was rolled-over to TREF in September 2018) are related parties as they are managed by wholly owned subsidiary of the Manager, and they have coinvested in 18 (December 31, 2017 – 19) gross mortgage investments totaling $258.8 million (December 31, 2017 – $358.0 million). The Company’s share in these gross mortgage investments is $178.4 million (December 31, 2017 – $172.2 million). Included in these amounts is two net mortgage investments (December 31, 2017 – one) totaling $23.0 million (December 31, 2017 – $5.7 million) loaned to limited partnerships in which T4Q tis invested. As at December 31, 2018, the Company and T4Q invested in two indirect real estate developments through two investees, totaling $7.5 million (December 31, 2017 – $2.2 million). As at December 31, 2018, the Company is invested in junior debentures of Timbercreek Ireland Private Debt Designated Activity Company totaling $4.6 million or €2.9 million (December 31, 2017 – $1.7 million or €1.1 million), which is included in loan investments within other investments. Timbercreek Ireland Private Debt Designated Activity Company is managed by a wholly owned subsidiary of the Manager. As part of the Saskatchewan Portfolio co-ownership, the Company, T4Q and a third-party co-owner have entered into property management agreements with the Manager. The Manager provides property and leasing services to each of the properties and is entitled to receive property management and capital improvements service fees (the “Property Management Fees”) at the disclosed rates in the agreements. For the year ended December 31, 2018, Property Management Fees of $130 was charged by the Manager to the Company (December 31, 2017 – $52). As at December 31, 2018, $18 was payable to the Manager (December 31, 2017 – $20). COMMITMENTS AND CONTINGENCIES In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgage investments and other 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 judgements, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. 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 judgements 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 judgements in the consolidated financial statements. The significant 31 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted estimates and judgements used in determining the recorded amount for assets and liabilities in the consolidated financial statements are as follows: 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 to the consolidated financial statements for the period ended December 31, 2018: Note 4 - Mortgage and other investments, including mortgage syndications; Note 5 - Investment properties; and Note 19 - Fair value measurements. Syndication liabilities The Company applies judgement in assessing the relationship between parties with which it enters into participation agreements in order to assess the derecognition of transfers relating to mortgage and other investments. Classification of mortgage and other investments Mortgage investments and other loans are classified based on the business model for managing assets and the contractual cash flow characteristics of the asset. We exercise judgment in determining both the business model for managing the assets and whether cash flows of the financial asset comprise solely payments of principal and interest. Measurement of expected credit loss The determination of allowance for credit losses takes into account different factors and varies by nature of investment. These judgments include changes in circumstances that may cause future assessments of credit risk to be materially different form current assessments, which would require an increase or decrease in the allowance of credit risk. Refer to note 3(b) of consolidated financial statements for the period ended December 31, 2018. Convertible debentures The Manager exercises judgement in determining the allocation of the debt and equity components of convertible debentures. The liability allocation is based upon the fair value of a similar liability that does not have an equity conversion option and the residual value is allocated to the equity component. 32 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Business combinations The Manager exercised judgement in determining the accounting treatment of the Amalgamation 21 of the consolidated financial statements for the period ended December 31, 2018, which was accounted for in accordance with IFRS 3 – Business Combinations (“IFRS 3”). The Manager considered the guidance in IFRS 3 in determining which entity is considered the “acquirer” based on the relative voting rights in the combined entity after the transaction, the composition of the governing body of the combined entity and the terms of the exchange of equity interests, among others. Accounting for acquisitions The Company excised judgement in determining whether the acquisition of a property should be accounted for as an asset purchase or business combination. This assessment impacts the treatment of transaction costs, allocation of acquisition costs and whether or not goodwill is recognized. The Manager has determined the acquisitions to be asset purchases as the Company does not acquire an integrated set of processes as part of the transaction that is normally associated with a business combination. SIGNIFICANT ACCOUNTING POLICIES 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 subsequently measured at amortized cost and are carried at amortized cost. Financial instruments Recognition and initial measurement All financial assets and financial liabilities are initially recognized when the Company becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Classification and subsequent measurement - financial assets On initial recognition, a financial asset is classified as measured at: amortized cost; fair value through other comprehensive income (“FVOCI”) - debt investment; or FVTPL. Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and 33 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Company has no debt investments measured at FVOCI. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. Financial assets - Business model assessment: Policy applicable from January 1, 2018 The Company makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: the objectives for the portfolio and the operation of those policies in practice. These include whether management’s strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the assets; how the performance of the portfolio is evaluated and reported to the Company’s management; the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; the frequency, volume and timing of sales of financial assets in prior periods, and the reasons for such sales and expectation about future sales activity. Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Company’s continuing recognition of the syndicated assets. Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL. Financial assets - assessment whether contractual cash flows are solely payments of principal and interest: Policy applicable from January 1, 2018 For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Company considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Company considers: contingent events that would change the amount or timing of cash flows; terms that may adjust the contractual coupon rate, including variable rate features; prepayment and extension features; and terms that limit the Company’s claim to cash flows from specified assets. A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. 34 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Subsequent measurement and gains and losses - financial assets Financial assets at FVTPL Measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss. Financial assets at amortized cost Measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. Debt investments at FVOCI Measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in Other Comprehensive Income (“OCI”). On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss. Financial assets - Policy applicable before January 1, 2018 The Company classified its financial assets into one of the following categories (note 19): Loans and Receivables - Measured at amortized cost using the effective interest method; and FVTPL - Measured at fair value. Net gains and losses, are recognized in profit or loss. Classification, subsequent measurement and gains and losses - financial liabilities Financial liabilities are classified as measured at amortized cost or FVTPL. A financial liability is classified as measured at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on derecognition is also recognized in profit or loss. Impairment of financial assets Policy applicable from January 1, 2018 The Company recognizes loss allowances for expected credit loss (“ECL”) on financial assets measured at amortized cost, unfunded loan commitments and financial guarantee contracts. The Company applies a three-stage approach to measure allowance for credit losses. The Company measures loss allowance at an amount equal to 12 months of expected losses for performing loans if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1) and at an amount equal to lifetime expected losses on performing loans that have experienced a significant increase in credit risk since origination (Stage 2) and at an amount equal to lifetime expected losses which are credit impaired (Stage 3). The determination of a significant increase in credit risk takes into account different factors and varies by nature of investment. The Company assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due interest payment or maturity date, and borrower specific criteria as identified by the Manager. As is typical in shorter duration, structured financing, the Manager does not solely believe there has been a significant deterioration in credit risk or an asset to be credit impaired if mortgage and other investments to go into overhold position past the maturity date for a period greater than 30 days or 90 days, respectively. The Manager actively monitors these mortgage and other investments and applies judgement in determining whether there has been significant increase in credit risk. The Company considers a financial asset to be credit impaired when the borrower is more than 90 days past due and when there is objective evidence that there has been a deterioration of credit quality to the extent the Company no longer has reasonable assurance as to the timely collection of the full amount of principal and interest or/and when the Company has commenced enforcement remedies available to it under its contractual agreements. 35 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted The assessment of significant increase in credit risk requires experienced credit judgment. In determining whether there has been a significant increase in credit risk and in calculating the amount of expected credit losses, we rely on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These judgments include changes in circumstances that may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for credit losses. In cases where a borrower experiences financial difficulties, the Company may grant certain concessionary modifications to the terms and conditions of a loan. Modifications may include payment deferrals, extension of amortization periods, debt consolidation, forbearance and other modifications intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. The Company determines the appropriate remediation strategy based on the individual borrower. If the Company determines that a modification results in expiry of cash flows, the original asset is derecognized while a new asset is recognized based on the new contractual terms. Significant increase in credit risk is assessed relative to the risk of default on the date of modification. If the Company determines that a modification does not result in derecognition, significant increase in credit risk is assessed based on the risk of default at initial recognition of the original asset. Expected cash flows arising from the modified contractual terms are considered when calculating the ECL for the modified asset. For loans that were modified while having a lifetime ECL, the loans can revert to having 12-month ECL after a period of performance and improvement in the borrower’s financial condition. Measurement of ECLs ECLs are probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Lifetime ECLs are the ECLs that result from all possible default event over the expected life of a financial instrument. 12-months ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is lass than 12 months. The maximum period considered when estimating ECLs is the maximum contractual period over which the Company is exposed to credit risk. When determining the expected credit loss provision, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. We consider past events, current market conditions and reasonable forward-looking supportable information about future economic conditions. In assessing information about possible future economic conditions, we utilized multiple economic scenarios including our base case, which represents the most probable outcome and is consistent with our view of the portfolio. In considering the lifetime of a loan, the contractual period of the loan, including prepayment, extension and other options is generally used. The calculation of expected credit losses includes the explicit incorporation of forecasts of future economic conditions. In determining expected credit losses, we have considered key macroeconomic variables that are relevant to each investment type. Key economic variables include unemployment rate, housing price index and interest rates. The estimation of future cash flows also includes assumptions about local real estate market conditions, 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 forecast is developed internally by the Manager. We exercise experienced credit judgment to incorporate multiple economic forecasts which are probability-weighted in the determination of the final expected credit loss. The allowance is sensitive to changes in both economic forecast and the probability-weight assigned to each forecast scenario. 36 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Credit-impaired financial assets Allowances for Stage 3 are recorded for individually identified impaired loans to reduce their carrying value to the expected recoverable amount. We review our loans on an ongoing basis to assess whether any loans carried at amortized cost should be classified as credit impaired and whether an allowance or write-off should be recorded. The review of individually significant problem loans is conducted at least quarterly by the Manager, who assesses the ultimate collectability and estimated recoveries for a specific loan based on all events and conditions that are relevant to the loan. To determine the amount we expect to recover from an individually significant impaired loan, we use the value of the estimated future cash flows discounted at the loan’s original effective interest rate. The determination of estimated future cash flows of a collateralized impaired loan reflects the expected realization of the underlying security, net of expected costs and any amounts legally required to be paid to the borrower. Presentation of allowance for ECL in the statement of financial position Loss allowances for financial asset measured at amortized cost are deducted from the gross carrying amount of the asset. Write-offs The gross carrying amount of a financial asset is written off when the Company has no reasonable expectation of recovering a financial asset in its entirely or a portion thereof. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Company’s procedures for recovery of amounts due. Policy prior to January 1, 2018 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 estimation of future cash flows includes assumptions about local real estate market conditions, market interest rates, availability and terms of financing, underlying value of the security and various other factors. These assumptions are limited by the availability of reliable comparable market data, economic uncertainty and the uncertainty of future events. Accordingly, by their nature, estimates of impairment are subjective and may not necessarily be comparable to the actual outcome. Should the underlying assumptions change, the estimated future cash flows could vary materially. The Company 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. 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. 37 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted INVESTMENT PROPERTIES Income properties a. The Company has elected to account for its investment properties using the fair value method. A property is determined to be an investment property when it is principally held to earn rental income and/or capital appreciation. Investment properties are initially measured at cost including transaction costs associated with acquiring the properties. Subsequent to initial recognition, the investment properties are carried at fair value. Gains or losses arising from changes in fair value are recognized in profit or loss during the period in which they arise. The investment properties are measured at fair value based on available market evidence, which may be obtained from external appraisals. The Company may also use alternative valuation methods such as discounted cash flow projections or income capitalization methods where appropriate. The fair value of the investment properties reflects, among other things, rental income from current leases and assumptions about rental income from future leases in light of current market conditions. It also reflects any cash outflows (excluding those relating to future capital expenditures) that could be expected in respect of the investment properties. Subsequent capital expenditures are charged to the investment property only when it is probable that future economic benefits of the expenditure will flow to the Company and the cost can be measured reliably. Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount and are recognized in the consolidated statement of net income and comprehensive income at the end of each reporting period of disposal. Property under development b. Property under development for future use as investment property are accounted for as investment property under International Accounting Standard 40, Investment Property. Costs eligible for capitalization to property under development are initially recorded at cost, and subsequent to initial recognition are accounted for using the fair value method. At each reporting date, the property under development is recorded at fair value based on available market evidence. The related gain or loss in fair value is recognized in net income in the year which it arises. The cost of property under development includes direct development costs, realty taxes and borrowing costs that are directly attributable to the development. Borrowing costs associated with direct expenditures on property under development are capitalized. The amount of borrowing costs capitalized is determined by reference to specific to the project. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. Upon practical completion of a development, the development property is transferred to investment properties at the fair value on the date of practical completion. The Company considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally, this occurs when completion of construction and receipt of all necessary occupancy and other material permits. JOINT ARRANGEMENTS The Company is a co-owner of a portfolio of investment properties that are subject to joint control and has determined that all current joint arrangements are joint operations as the Company, through its subsidiaries, is the direct beneficial owner of the Company’s interest in the investment properties. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to assets and obligations for the liabilities, relating to the arrangement. The Company recognizes its share of the assets, liabilities, revenue and expenses generated from the assets in proportion to its rights (note 5). 38 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted 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 principal, costs incurred, accrued interest and the related allowance 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 income/(loss) from FPHFS, while fair value adjustments on FPHFS are recorded separately. Convertible debentures The convertible debentures are a compound financial instrument as they contain both a liability and an equity component. At the date of issuance, the liability component of the convertible debentures is recognized at its estimated fair value of a similar liability that does not have an equity conversion option and the residual is allocated to the equity component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a convertible debenture is measured at amortized cost using the effective interest rate method. The equity component is not re-measured subsequent to initial recognition and will be transferred to share capital when the conversion option is exercised, or, if unexercised at maturity. Interest, losses and gains relating to the financial liability are recognized in profit or loss. Gross interest and other income Gross interest and other income includes interest earned on the Company’s mortgage and other investments, lender fees and interest earned on cash and cash equivalents. Interest income earned on mortgage and other investments is accounted for using the effective interest rate method. Lender fees, an integral part of the yield on mortgage and other investments, are amortized to profit and loss over the expected life of the specific mortgage and other 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. Leases Leases are classified as finance leases if all the risks and rewards incidental to ownership of the leased asset are substantially transferred to the lessee. Otherwise they are classified as operating leases. As lessor in a financing lease, a loan is recognized equal to the investment in the lease, which is calculated as the present value of the minimum payments to be received from the lessee, discounted at the interest rate implicit in the lease, plus any unguaranteed residual value the Company expects to recover at the end of the lease. Finance lease income is recognized in gross interest and other income, including mortgage syndications in the consolidated statement of net income and comprehensive Income. As a lessor in an operating lease, payments received are recognized in profit or loss on a straight-line basis over the lease term. Revenue from operating leases include rent, parking and other sundry revenue from investment properties. 39 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES Financial assets a. 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 does not 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 b. The Company derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires. Foreign currency forward contract The Company may enter into foreign currency forward contracts to economically hedge its foreign currency risk exposure of its mortgage and other investments that are denominated in foreign currencies. The value of forward currency contracts entered into by the Company is recorded as the difference between the value of the contract on the reporting period and the value on the date the contract originated. Any resulting gain or loss is recognized in the statement of net income and comprehensive income unless the foreign currency contract is designated and effective as a hedging instrument under IFRS. The Company has elected to not account for the foreign currency contracts as an accounting hedge. 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. 40 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Changes in accounting policies The Company has adopted IFRS 9 and IFRS 15 effective January 1, 2018 without restatement of comparative periods. IFRS 15, Revenue from contracts with customers (“IFRS 15”) The Company adopted the standard on January 1, 2018 and applied the requirements of the standards retrospectively. IFRS 15 permits the use of exemptions and practical expedients. The Company applied the practical expedient in which contracts that began and were completed within the same annual reporting period before December 31, 2017 or are completed on January 2017 do not require restatement. The implementation of IFRS 15 did not have a significant impact on the Company’s revenue streams from its investment properties. IFRS 9, Financial Instruments (“IFRS 9”) IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. Classification and measurement of financial assets and financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. The adoption of IFRS 9 has not had a significant effect on the Company’s accounting policies related to financial liabilities and derivative financial instruments. The impact of IFRS 9 on the classification and measurement of financial assets is set out below. Under IFRS 9, on initial recognition, a financial asset is classified as measured at: amortized cost; FVOCI - debt investment; FVOCI - equity investment; or FVTPL. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Equity investments are measured at fair value through profit or loss. However, on initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income. This election is made on an investment-by-investment basis. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. On initial recognition, the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. 41 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition. The following table and the accompanying notes below explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets as at January 1, 2018. Cash and cash equivalents Other assets Original Classification Loans and Receivables Loans and Receivables Derivative Held-for-trading New Classification under IFRS 9 Original carrying amount under IAS 39 Reclassification New carrying amount under IFRS 9 Amortized Cost Amortized Cost Mandatorily at FVTPL 700 8,606 66 — (890) — 700 7,716 66 Mortgage investments, including mortgage syndications Mortgage investments, including mortgage syndications1 Held to maturity Amortized Cost2 1,554,369 (78,123) 1,476,246 Held to maturity FVTPL — 79,013 79,013 Other investments - collateralized loans Loans and receivables Amortized Cost2 44,883 Other investments - participating loans and marketable securities FVTPL FVTPL 4,847 — — 44,883 4,847 1 $55,198 of syndication balance is measured at amortized cost 2 Mortgage investments and collateralized loans within other investments, that were previously classified as held-to-maturity are now classified at amortized cost. The Company intends to hold the assets to maturity to collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding. Upon adoption of IFRS 9, the Company identified one mortgage investment with a gross carrying value of $79,013. The Company’s portion of this mortgage investment with carrying value of $23,815 includes a profit participation feature, which does not meet the SPPI criterion. Accordingly, the entire gross carrying value, including the profit participation receivable of $890, previously recorded in other assets, has been reclassified at FVTPL. Impairment of financial assets IFRS 9 replaces the “incurred loss” model in IAS 39 with an ECL model. The new impairment model applies for all financial assets measured at amortized cost, contract assets, debt investments at FVOCI and certain off-balance sheet loan commitments and guarantees. The ECL model will result in an allowance for credit losses being recorded on financial assets regardless of whether there has been an actual loss event. Under IFRS 9, credit losses are recognized earlier that under IAS 39 - see note 3(b). For assets in the scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more volatile. The Company has determined that the application of IFRS 9’s impairment requirements at January 1, 2018 has not resulted in significant changes to loss allowance previously recognized. This differs from the Company’s previous approach where the allowance recorded on performing loans was designed to capture only incurred losses whether or not they have been specifically identified. 42 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. The Company has used an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in retained earnings and reserves as at January 1, 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9, but rather those of IAS 39. The determination of the business model within which a financial asset is held have been made on the basis of the facts and circumstances that existed at the date of initial application, 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. IFRS 16, Leases (“IFRS 16”) On January 13, 2016, the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard is not expected to have a significant impact. OUTSTANDING SHARE DATA As at March 4, 2019, the Company’s authorized capital consists of an unlimited number of common shares, of which 81,857,771 are issued and outstanding. 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. The Company believes that the conservative amount of structural leverage gained from the debentures and credit facility is accretive to net earnings, appropriate for 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. 43 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted 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 and credit facilities. The Company has a borrowing ability of $500.0 million through its credit facility – mortgage investments and $33.3 million through its credit facility – investment properties and intends to utilize the credit facility to fund mortgage investments, and other working capital needs. As at December 31, 2018, the Company is in compliance with its credit facilities 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, 2018, including expected interest payments: Carrying value Contractual cash flow Within a year Following year 3–5 years Accounts payable and accrued expenses $ 4,221 $ 4,221 $ 4,221 $ — $ Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility (mortgage investments)1 Credit facility (investment properties)2 Convertible debentures3 4,694 1,493 657 2,425 476,166 32,773 131,597 4,694 1,493 657 2,425 520,818 33,804 144,954 4,694 1,493 657 2,425 21,658 33,804 52,135 — — — — 499,160 — 92,819 Unadvanced mortgage commitments4 Total contractual liabilities $ $ 654,026 $ 713,066 $ 121,087 $ 591,979 $ — 184,265 184,265 — 654,026 $ 897,331 $ 305,352 $ 591,979 $ — — — — — — — — — — — 1. Credit facility (mortgage investments) includes interest based upon December 2018 weighted average interest rate on the credit facility assuming the outstanding balance is not repaid until its maturity on December 20, 2020. 2. Credit facility (investment properties) includes interest based upon December 2018 weighted average interest rate on the credit facility assuming the outstanding balance is not repaid until its maturity on August 10, 2019. 3. The 2016 debentures are assumed to be redeemed on July 31, 2019 as they are redeemable on and after July 31, 2019, the February 2017 debentures are assumed to be redeemed on March 30, 2020 as they are redeemable on and after March 30, 2020 and the June 2017 debentures are assumed to be redeemed on June 30, 2020 as they are redeemable on and after June 30, 2020. 4. Unadvanced mortgage commitments include syndication commitments from third party investors totaling $58.0 million. As at December 31, 2018, the Company had a cash position of $541 (December 31, 2017 – $700), an unutilized credit facility (mortgage investments) balance of $21.9 million (December 31, 2017 – $34.1 million) and an unutilized credit facility (investment properties) balance of $457 (December 31, 2017 – $3.1 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 $58.0 million out of $184.3 million in total (December 31, 2017 – $60.8 million) is to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. FINANCIAL INSTRUMENTS Financial assets The Company’s cash and cash equivalents, other assets, mortgage investments and other investments, including mortgage syndications, are designated as loans and receivables and are measured at amortized 44 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted cost. The fair values of cash and cash equivalents and 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 and other investments consist of short-term mortgages 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 mortgages 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. 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, change in currency rates 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. 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, 2018, $717.5 million of net mortgage investments and $21.8 million of other investments bear interest at variable rates. (December 31, 2017 - $130.7 million and $8.1 million, respectively). $626.0 million of net mortgage investments have a “floor rate” (December 31, 2017 - $109.3 million). If there were a decrease or increase of 0.50% in interest rates, with all other variables constant, the impact from variable rate mortgage investments and other investments would be a decrease in net income of $2.5 million or an increase in net income of $3.7 million, respectively (2017 - $115 and $694, respectively). The Company manages its sensitivity to interest rate fluctuations by managing the fixed/floating ratio in its investment portfolio. The Company is also exposed to interest rate risk on the credit facilities, which has a balance of $510.9 million as at December 31, 2018. (December 31, 2017 - $396.1 million) Based on the outstanding credit facility balance as at December 31, 2018, and assuming it was outstanding for the entire period a 0.50% decrease or increase in interest rates, with all other variables constant, will increase or decrease net income by $2.6 million (2017 - $2.0 million) annually. The Company’s other assets, 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. Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company is exposed to currency risk primarily from 45 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted other investments that are denominated in a currency other than the Canadian dollar. The Company uses foreign currency forwards to approximately hedge the principal balance of future earnings and cash flows caused by movements in foreign exchange rates. Under the terms of the foreign currency forward contracts, the Company buys or sells a currency against another currency at a set price on a future date. As at December 31, 2018, the Company has net mortgage and other investments denominated in foreign currencies of US$5.0 million in net mortgages, US$5.1 million and €2.9 million in other investments (December 31, 2017 – US$15.7 million, US$5.1 million and €1.1 million). The Company has entered into a series of foreign currency contracts to reduce the its exposure to foreign currency risk. As at December 31, 2018, the Company has four U.S. dollars currency contracts with an aggregate notional value of US$10.1 million, at a weighted average forward contract rate of 1.3416 and maturity dates between January and May 2019, and one Euro currency contracts with an aggregate notional value of €2.9 million at a weighted average contract rate of 1.5282, maturing in January 2019. As at December 31, 2018 the Company unwound all outstanding cross-currency swap (December 31, 2017 - nil) . As a result, the Company is not exposed to any significant foreign currency risk. The fair value of the foreign currency forward contract as at December 31, 2018 is a liability of $328 which is included in accounts payable. The valuation of the foreign currency forward contracts was computed using Level 2 inputs which include spot and forward foreign exchange rates. 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. ii. adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); ensuring all new mortgage investments are approved by the investment committee before funding; and iii. actively monitoring the mortgage investments and initiating recovery procedures, in a timely manner, where required. The exposure to credit risk at December 31, 2018 relating to net mortgages and other investments amount to $1,320.0 million (December 31, 2017 – $1,150.2 million). The Company has recourse under these mortgage and the majority of other investments in the event of default by the borrower; in which case, the Company would have a claim against the underlying collateral. Management believes that the potential loss from credit risk with respect to cash that is held in trust at a Schedule I bank by the Company’s transfer agent and operating cash held also at a Schedule 1 bank, to be minimal. The Company is exposed to credit risk from the collection of accounts receivable from tenants. The Manager routinely obtains credit history reports on prospective tenants before entering into a tenancy agreement. 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. 46 Timbercreek Financial Management’s Discussion and Analysis For the year ended December 31, 2018 In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company maintains appropriate information systems, procedures and controls to ensure that information that is publicly disclosed is complete, reliable and timely. The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the Company evaluated, or caused to be evaluated under their direct supervision, the design of the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”)) at December 31, 2018 and, based on that evaluation, have concluded that the design of such disclosure controls and procedures was appropriate. The Manager is responsible for establishing adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS. The CEO and the CFO assessed, or under their direct supervision caused an assessment of, the design of the Company’s internal controls over financial reporting as at December 31, 2018 in accordance with the COSO Internal Control – Independent Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment they determined that the design of the Company’s internal controls over financial reporting was appropriate. There were no changes made in our design of internal controls over financial reporting during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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 judgements could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii) that controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. ADDITIONAL INFORMATION Phone Cameron Goodnough, CEO at 1-844-304-9967 Shareholders who wish to enroll in the DRIP or who would like further information about the plan should contact Corporate Communications at (416) 923-9967 ext. 7266 (collect if long distance). Internet Visit SEDAR at www.sedar.com; or the Company’s website at www.timbercreekfinancial.com Mail Write to the Company at: Timbercreek Financial Attention: Corporate Communications 25 Price Street Toronto, Ontario M4W 1Z1 47 Timbercreek Financial INDEPENDENT AUDITORS’ REPORT To the Shareholders of Timbercreek Financial Corp. Opinion We have audited the consolidated financial statements of Timbercreek Financial Corp. (the Entity), which comprise: the consolidated statements of financial position as at December 31, 2018 and 2017 the consolidated statements of net income and comprehensive income for the years then ended the consolidated statements of changes in shareholders’ equity for the years then ended the consolidated statements of cash flows for the years then ended and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2018 and 2017, and its consolidated financial performance, and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). Basis of Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. Other information comprise: Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained the Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. 48 Timbercreek Financial Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. Auditors’ Responsibility for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 49 Timbercreek Financial Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditors’ report is Amit Shah. Toronto, Canada March 4, 2019 50 Timbercreek Financial CONSOLIDATED STATEMENT OF FINANCIAL POSITION (In thousands of Canadian dollars) Note December 31, 2018 December 31, 2017 Mortgage investments, including mortgage syndications 4(a)(b)(c)(d) As at ASSETS Cash and cash equivalents Other assets Other investments Investment properties Foreclosed properties held for sale Total assets LIABILITIES AND EQUITY Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility Convertible debentures Mortgage syndication liabilities Total liabilities Shareholders’ equity Total liabilities and equity $ 541 10,217 1,796,822 90,957 46,494 — 700 8,672 1,554,369 57,934 42,748 336 1,945,031 $ 1,664,759 $ $ $ 15(b) 4(e) 5 9(d) 15(a) 6 8 4(a)(c) 4,221 $ 4,694 1,493 657 2,425 508,939 131,597 575,040 1,229,066 9 $ 715,965 1,945,031 $ Commitments and contingencies Subsequent events 4, 6 and 21 9(d) See accompanying notes to the consolidated financial statements. 5,426 4,271 1,140 200 1,960 394,046 163,946 440,648 1,011,637 653,122 1,664,759 51 Timbercreek Financial CONSOLIDATED STATEMENT OF NET INCOME AND COMPREHENSIVE INCOME (In thousands of Canadian dollars, except per share amounts) Year ended December 31, Note 2018 2017 Investment income Gross interest and other income, including mortgage syndications $ 124,801 $ 4(b)(e) 7 11 11 4(d) 6 8 (29,843) 94,958 1,991 (1,170) 821 11,879 622 550 1,725 14,776 81,003 1,217 (39) (109) 18,376 10,628 29,004 $ 53,068 $ 115,535 (26,598) 88,937 569 (376) 193 10,649 580 800 1,727 13,756 75,374 — 70 (190) 13,074 9,976 23,050 52,204 12 $ 0.67 $ 0.70 Interest and other income on mortgage syndications Net investment income Net rental income Revenue from investment properties Property operating costs Net rental income Expenses Management fees Servicing fees Allowance for mortgage investments loss General and administrative Total expenses Income from operations Other income, net Net operating (loss) income from foreclosed properties held for sale Fair value loss on foreclosed properties held for sale Financing costs Interest on credit facility Interest on convertible debentures Total financing costs Net income and comprehensive income Earnings per share Basic and Diluted See accompanying notes to the consolidated financial statements. 52 Timbercreek Financial CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands of Canadian dollars) Total net income and comprehensive income — 53,068 Balance, December 31, 2018 $ 715,653 $ (1,626) $ 1,938 $ 715,965 Year ended December 31, 2018 Balance, December 31, 2017 Issuance of common shares, net of issue costs Dividends Issuance of common shares under dividend reinvestment plan Year ended December 31, 2017 Balance, December 31, 2016 Issuance of convertible debentures, net of issue costs Dividends Issuance of common shares under dividend reinvestment plan Repurchase of common shares Total net income and comprehensive income Common shares Retained earnings Equity component of convertible debentures Total $ 650,988 $ 196 $ 1,938 $ 653,122 60,314 — 4,351 — (54,890) — — — — — 60,314 (54,890) 4,351 53,068 Common shares Retained earnings Equity component of convertible debentures Total $ 647,173 $ (1,272) $ 771 $ 646,672 — 1,167 1,167 — — 4,146 (331) — (50,736) — — 52,204 — — — — Balance, December 31, 2017 $ 650,988 $ 196 $ 1,938 $ See accompanying notes to the consolidated financial statements. (50,736) 4,146 (331) 52,204 653,122 53 Timbercreek Financial CONSOLIDATED STATEMENT OF CASH FLOW (In thousands of Canadian dollars) OPERATING ACTIVITIES Total net income Amortization of lender fees Lender fees received Interest and income, net of syndications Interest and other income received, net of syndications Financing costs Net realized loss (gain) on disposal of marketable securities Net unrealized (gain) loss on investments measured at fair value through profit or loss Net realized and unrealized foreign exchange (gain) loss Fair value loss on foreclosed properties held for sale Allowance for mortgage investment loss Net change in non-cash operating items FINANCING ACTIVITIES Net credit facility advances – mortgage investments Net credit facility advances – investment properties Net proceeds from issuance of convertible debentures Redemption of convertible debenture Net proceeds from issuance of common shares Interest paid Dividends paid to shareholders Repurchase of common shares INVESTING ACTIVITIES Proceeds from disposition of foreclosed properties held for sale Acquisition of investment properties, net of debt assumed 5 Addition to investment properties Net payments on maturity of forward contracts Funding of other investments Proceeds of other investments Funding of mortgage investments, net of mortgage syndications Discharges of mortgage investments, net of mortgage syndications Net foreign exchange gain (loss) on cash accounts (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period See accompanying notes to the consolidated financial statements. 54 Year ended December 31, Note 2018 2017 $ 53,068 $ 52,204 13 (8,328) 11,342 (86,613) 78,238 29,004 70 (74) (9) 109 550 599 77,956 112,190 2,645 — (34,500) 60,314 (29,842) (50,117) — 60,690 227 — (3,557) (845) (51,944) 19,616 (792,705) 690,313 (138,895) 90 (249) 700 $ 541 $ (7,858) 6,802 (80,138) 76,423 23,050 (89) 41 158 190 800 (2,068) 69,515 65,334 30,175 86,437 — — (19,835) (46,531) (331) 115,249 951 (41,297) (1,451) 1,252 (53,970) 11,227 (474,810) 374,022 (184,076) (49) 688 61 700 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 1. CORPORATE INFORMATION Timbercreek Financial Corp. (the “Company”, “TF” or “Timbercreek Financial”) is a mortgage investment corporation domiciled in Canada. The Company is incorporated under the laws of the Province of Ontario. The registered office of the Company is 25 Price Street, Toronto, Ontario M4W 1Z1. The common shares of the Company are listed on the Toronto Stock Exchange (“TSX”) under the symbol “TF”. The investment objective of the Company is to secure and grow a diversified portfolio of high quality mortgage and other investments, generating an attractive risk adjusted return and monthly dividend payments to shareholders balanced by a strong focus on capital preservation. 2. BASIS OF PRESENTATION (a) Statement of compliance These consolidated financial statements of the Company have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The consolidated financial statements were approved by the Board of Directors on March 4, 2019. This is the first set of the Company’s annual financial statements in which IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have been applied. Changes to significant accounting policies are described in note 3. (b) Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including Timbercreek Mortgage Investment Fund. The financial statements of the subsidiaries included in these consolidated financial statements are from the date that control commences until the date that control ceases. All intercompany transactions and balances are eliminated upon consolidation. (c) Basis of measurement These consolidated financial statements have been prepared on both a going concern and the historical cost bases except for certain items which have been measured at fair value through profit or loss (“FVTPL”) at each reporting date and include: investment properties, foreclosed properties held for sale, marketable securities, debt investments not meeting the solely payments of principal and interest criterion, participating debentures, cross-currency swaps and foreign currency forward contracts. (d) Critical accounting estimates, assumptions and judgements In the preparation of these consolidated financial statements, Timbercreek Asset Management Inc. (the “Manager”) has made judgements, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized prospectively. In making estimates, the Manager relies on external information and observable conditions where possible, supplemented by internal analysis as required. Those estimates and judgements 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 judgements in these consolidated financial statements. The significant estimates and judgements used in determining the recorded amount for assets and liabilities in the consolidated financial statements are as follows: 55 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 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 4 – Mortgage and other investments, including mortgage syndications; Note 5 – Investment properties; and Note 19 – Fair value measurements. Syndication liabilities The Company applies judgement in assessing the relationship between parties with which it enters into participation agreements in order to assess the derecognition of transfers relating to mortgage and other investments. Classification of mortgage and other investments Mortgage investments and other loans are classified based on the business model for managing assets and the contractual cash flow characteristics of the asset. We exercise judgment in determining both the business model for managing the assets and whether cash flows of the financial asset comprise solely payments of principal and interest. Measurement of expected credit loss The determination of allowance for credit losses takes into account different factors and varies by nature of investment. These judgments include changes in circumstances that may cause future assessments of credit risk to be materially different form current assessments, which would require an increase or decrease in the allowance of credit risk. Refer to note 3(b). Convertible debentures The Manager exercises judgement in determining the allocation of the debt and equity components of convertible debentures. The liability allocation is based upon the fair value of a similar liability that does not have an equity conversion option and the residual value is allocated to the equity component. Accounting for acquisitions The Company excised judgement in determining whether the acquisition of a property should be accounted for as an asset purchase or business combination. This assessment impacts the treatment 56 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) of transaction costs, allocation of acquisition costs and whether or not goodwill is recognized. The Manager has determined the acquisitions to be asset purchases as the Company does not acquire an integrated set of processes as part of the transaction that is normally associated with a business combination. (e) Functional and Presentation Currency These consolidated financial statements are presented in Canadian dollar, which is the Company’s functional currency. All mount have been rounded to the nearest thousand, unless otherwise indicated. 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 subsequently measured at amortized cost and are carried at amortized cost. (b) Financial instruments Recognition and initial measurement All financial assets and financial liabilities are initially recognized when the Company becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Classification and subsequent measurement - financial assets On initial recognition, a financial asset is classified as measured at: amortized cost; fair value through other comprehensive income (“FVOCI”) - debt investment; or FVTPL. Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Company has no debt investments measured at FVOCI. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. 57 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Financial assets - Business model assessment: Policy applicable from January 1, 2018 The Company makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: the objectives for the portfolio and the operation of those policies in practice. These include whether management’s strategy focuses on earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the assets; how the performance of the portfolio is evaluated and reported to the Company’s management; the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; the frequency, volume and timing of sales of financial assets in prior periods. the reasons for such sales and expectation about future sales activity. Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not considered sales for this purpose, consistent with the Company’s continuing recognition of the syndicated assets. Financial assets that are held for trading or are managed and whose performance is evaluated on a fair value basis are measured at FVTPL. Financial assets - assessment whether contractual cash flows are solely payments of principal and interest: Policy applicable from January 1, 2018 For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Company considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making this assessment, the Company considers: contingent events that would change the amount or timing of cash flows; terms that may adjust the contractual coupon rate, including variable-rate features; prepayment and extension features; and terms that limit the Company’s claim to cash flows from specified assets. A prepayment feature is consistent with the solely payments of principal and interest criterion if the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable additional compensation for early termination of the contract. 58 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Subsequent measurement and gains and losses - financial assets Financial assets at FVTPL Measured at fair value. Net gains and losses, including any interest or dividend income, are recognized in profit or loss. Financial assets at amortized cost Measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. Debt investments at FVOCI Measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in Other Comprehensive Income (“OCI”). On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss. Financial assets - Policy applicable before January 1, 2018 The Company classified its financial assets into one of the following categories (note 19): Loans and Receivables - Measured at amortized cost using the effective interest method; and FVTPL - Measured at fair value. Net gains and losses, are recognized in profit or loss. Classification, subsequent measurement and gains and losses - financial liabilities Financial liabilities are classified as measured at amortized cost or FVTPL. A financial liability is classified as measured at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognized in profit or loss. Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognized in profit or loss. Any gain or loss on derecognition is also recognized in profit or loss. Impairment of financial assets Policy applicable from January 1, 2018 The Company recognizes loss allowances for expected credit loss (“ECL”) on financial assets measured at amortized cost, unfunded loan commitments and financial guarantee contracts. The Company applies a three-stage approach to measure allowance for credit losses. The Company measures loss allowance at an amount equal to 12 months of expected losses for performing loans if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1) and at an amount equal to lifetime expected losses on performing loans that have experienced a significant increase in credit risk since origination (Stage 2) and at an amount equal to lifetime expected losses which are credit impaired (Stage 3). The determination of a significant increase in credit risk takes into account different factors and varies by nature of investment. The Company assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due interest payment or maturity date, and borrower specific criteria as identified by the Manager. As is typical in shorter duration, structured financing, the Manager does not solely believe there has been a significant deterioration in credit risk or an asset to be credit impaired if mortgage and other investments to go into overhold position past the maturity date for a period greater than 30 days or 90 days, respectively. The Manager actively monitors these mortgage and other investments and applies judgement in determining whether there has been significant increase in credit risk. The Company considers a financial asset to be credit impaired when the borrower is more than 90 days past due and when there is objective evidence that there has been a deterioration of credit quality to the extent the Company no longer has reasonable assurance as to the timely collection of the full amount of principal and interest or/and when the Company has commenced enforcement remedies available to it under its contractual agreements. 59 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The assessment of significant increase in credit risk requires experienced credit judgment. In determining whether there has been a significant increase in credit risk and in calculating the amount of expected credit losses, we rely on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These judgments include changes in circumstances that may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for credit losses. In cases where a borrower experiences financial difficulties, the Company may grant certain concessionary modifications to the terms and conditions of a loan. Modifications may include payment deferrals, extension of amortization periods, debt consolidation, forbearance and other modifications intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. The Company determines the appropriate remediation strategy based on the individual borrower. If the Company determines that a modification results in expiry of cash flows, the original asset is derecognized while a new asset is recognized based on the new contractual terms. Significant increase in credit risk is assessed relative to the risk of default on the date of modification. If the Company determines that a modification does not result in derecognition, significant increase in credit risk is assessed based on the risk of default at initial recognition of the original asset. Expected cash flows arising from the modified contractual terms are considered when calculating the ECL for the modified asset. For loans that were modified while having a lifetime ECL, the loans can revert to having 12-month ECL after a period of performance and improvement in the borrower’s financial condition. Measurement of ECLs ECLs are probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Lifetime ECLs are the ECLs that result from all possible default event over the expected life of a financial instrument. 12-months ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is lass than 12 months. The maximum period considered when estimating ECLs is the maximum contractual period over which the Company is exposed to credit risk. When determining the expected credit loss provision, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. We consider past events, current market conditions and reasonable forward-looking supportable information about future economic conditions. In assessing information about possible future economic conditions, we utilized multiple economic scenarios including our base case, which represents the most probable outcome and is consistent with our view of the portfolio. In considering the lifetime of a loan, the contractual period of the loan, including prepayment, extension and other options is generally used. The calculation of expected credit losses includes the explicit incorporation of forecasts of future economic conditions. In determining expected credit losses, we have considered key macroeconomic variables that are relevant to each investment type. Key economic variables include unemployment rate, housing price index and interest rates. The estimation of future cash flows also includes assumptions about local real estate market conditions, 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 forecast is developed internally by the Manager. We exercise experienced credit judgment to incorporate multiple economic forecasts which are probability- weighted in the determination of the final expected credit loss. The allowance is sensitive to changes in both economic forecast and the probability-weight assigned to each forecast scenario. 60 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Credit-impaired financial assets Allowances for Stage 3 are recorded for individually identified impaired loans to reduce their carrying value to the expected recoverable amount. We review our loans on an ongoing basis to assess whether any loans carried at amortized cost should be classified as credit impaired and whether an allowance or write-off should be recorded. The review of individually significant problem loans is conducted at least quarterly by the Manager, who assesses the ultimate collectability and estimated recoveries for a specific loan based on all events and conditions that are relevant to the loan. To determine the amount we expect to recover from an individually significant impaired loan, we use the value of the estimated future cash flows discounted at the loan’s original effective interest rate. The determination of estimated future cash flows of a collateralized impaired loan reflects the expected realization of the underlying security, net of expected costs and any amounts legally required to be paid to the borrower. Presentation of allowance for ECL in the statement of financial position Loss allowances for financial asset measured at amortized cost are deducted from the gross carrying amount of the asset. Write-offs The gross carrying amount of a financial asset is written off when the Company has no reasonable expectation of recovering a financial asset in its entirely or a portion thereof. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Company’s procedures for recovery of amounts due. Policy prior to January 1, 2018 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 estimation of future cash flows includes assumptions about local real estate market conditions, market interest rates, availability and terms of financing, underlying value of the security and various other factors. These assumptions are limited by the availability of reliable comparable market data, economic uncertainty and the uncertainty of future events. Accordingly, by their nature, estimates of impairment are subjective and may not necessarily be comparable to the actual outcome. Should the underlying assumptions change, the estimated future cash flows could vary materially. The Company 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. 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. 61 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) (c) Investment properties Income properties The Company has elected to account for its investment properties using the fair value method. A property is determined to be an investment property when it is principally held to earn rental income and/or capital appreciation. Investment properties are initially measured at cost including transaction costs associated with acquiring the properties. Subsequent to initial recognition, the investment properties are carried at fair value. Gains or losses arising from changes in fair value are recognized in profit or loss during the period in which they arise. The investment properties are measured at fair value based on available market evidence, which may be obtained from external appraisals. The Company may also use alternative valuation methods such as discounted cash flow projections or income capitalization methods where appropriate. The fair value of the investment properties reflects, among other things, rental income from current leases and assumptions about rental income from future leases in light of current market conditions. It also reflects any cash outflows (excluding those relating to future capital expenditures) that could be expected in respect of the investment properties. Subsequent capital expenditures are charged to the investment property only when it is probable that future economic benefits of the expenditure will flow to the Company and the cost can be measured reliably. Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount and are recognized in the consolidated statement of net income and comprehensive income at the end of each reporting period of disposal. Property under development Property under development for future use as investment property are accounted for as investment property under International Accounting Standard 40, Investment Property. Costs eligible for capitalization to property under development are initially recorded at cost, and subsequent to initial recognition are accounted for using the fair value method. At each reporting date, the property under development is recorded at fair value based on available market evidence. The related gain or loss in fair value is recognized in net income in the year which it arises. The cost of property under development includes direct development costs, realty taxes and borrowing costs that are directly attributable to the development. Borrowing costs associated with direct expenditures on property under development are capitalized. The amount of borrowing costs capitalized is determined by reference to specific to the project. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. Upon practical completion of a development, the development property is transferred to investment properties at the fair value on the date of practical completion. The Company considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally, this occurs when completion of construction and receipt of all necessary occupancy and other material permits. (d) Joint arrangements The Company is a co-owner of a portfolio of investment properties that are subject to joint control and has determined that all current joint arrangements are joint operations as the Company, through its subsidiaries, is the direct beneficial owner of the Company’s interest in the investment properties. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to assets and obligations for the liabilities, relating to the arrangement. The Company recognizes its share of the assets, liabilities, revenue and expenses generated from the assets in proportion to its rights (note 5). 62 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) (e) 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 principal, costs incurred, accrued interest and the related allowance 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 income/(loss) from FPHFS, while fair value adjustments on FPHFS are recorded separately. (f) Convertible debentures The convertible debentures are a compound financial instrument as they contain both a liability and an equity component. At the date of issuance, the liability component of the convertible debentures is recognized at its estimated fair value of a similar liability that does not have an equity conversion option and the residual is allocated to the equity component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a convertible debenture is measured at amortized cost using the effective interest rate method. The equity component is not re-measured subsequent to initial recognition and will be transferred to share capital when the conversion option is exercised, or, if unexercised at maturity. Interest, losses and gains relating to the financial liability are recognized in profit or loss. (g) Gross interest and other income Gross interest and other income includes interest earned on the Company’s mortgage and other investments, lender fees and interest earned on cash and cash equivalents. Interest income earned on mortgage and other investments is accounted for using the effective interest rate method. Lender fees, an integral part of the yield on mortgage and other investments, are amortized to profit and loss over the expected life of the specific mortgage and other 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. (h) Leases Leases are classified as finance leases if all the risks and rewards incidental to ownership of the leased asset are substantially transferred to the lessee. Otherwise they are classified as operating leases. As lessor in a financing lease, a loan is recognized equal to the investment in the lease, which is calculated as the present value of the minimum payments to be received from the lessee, discounted at the interest rate implicit in the lease, plus any unguaranteed residual value the Company expects to recover at the end of the lease. Finance lease income is recognized in gross interest and other income, including mortgage syndications in the consolidated statement of net income and comprehensive Income. As a lessor in an operating lease, payments received are recognized in profit or loss on a straight- line basis over the lease term. Revenue from operating leases include rent, parking and other sundry revenue from investment properties. 63 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) (i) Derecognition of financial assets and liabilities Financial assets The Company derecognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or in which the Company neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in such transferred financial assets that does not qualify for derecognition that is created or retained by the Company is recognized as a separate asset or liability. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognized in other comprehensive income is recognized in profit or loss. The Company enters into transactions whereby it transfers mortgage investments recognized on its statement of financial position, but retains either all, substantially all, or a portion of the risks and rewards of the transferred mortgage investments. If all or substantially all risks and rewards are retained, then the transferred mortgage or loan investments are not derecognized. In transactions in which the Company neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Company continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. Financial liabilities The Company derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires. (j) Foreign currency forward contract The Company may enter into foreign currency forward contracts to economically hedge its foreign currency risk exposure of its mortgage and other investments that are denominated in foreign currencies. The value of forward currency contracts entered into by the Company is recorded as the difference between the value of the contract on the reporting period and the value on the date the contract originated. Any resulting gain or loss is recognized in the statement of net income and comprehensive income unless the foreign currency contract is designated and effective as a hedging instrument under IFRS. The Company has elected to not account for the foreign currency contracts as an accounting hedge. (k) 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. (l) Changes in accounting policies The Company has adopted IFRS 9 and IFRS 15 effective January 1, 2018 without restatement of comparative periods. 64 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) IFRS 15, Revenue from contracts with customers (“IFRS 15”) The Company adopted the standard on January 1, 2018 and applied the requirements of the standards retrospectively. IFRS 15 permits the use of exemptions and practical expedients. The Company applied the practical expedient in which contracts that began and were completed within the same annual reporting period before December 31, 2017 or are completed on January 2017 do not require restatement. The implementation of IFRS 15 did not have a significant impact on the Company’s revenue streams from its investment properties. IFRS 9, Financial Instruments (“IFRS 9”) IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. Classification and measurement of financial assets and financial liabilities IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivables and available for sale. The adoption of IFRS 9 has not had a significant effect on the Company’s accounting policies related to financial liabilities and derivative financial instruments. The impact of IFRS 9 on the classification and measurement of financial assets is set out below. Under IFRS 9, on initial recognition, a financial asset is classified as measured at: amortized cost; FVOCI - debt investment; FVOCI - equity investment; or FVTPL. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt investment is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL: it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Equity investments are measured at fair value through profit or loss. However, on initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment’s fair value in other comprehensive income. This election is made on an investment-by-investment basis. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets. On initial recognition, the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition. 65 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The following table and the accompanying notes below explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets as at January 1, 2018. Original Classification Loans and Receivables Loans and Receivables New Classification under IFRS 9 Amortized Cost Amortized Cost Held-for- trading Mandatorily at FVTPL Held to maturity Amortized Cost2 Original carrying amount under IAS 39 Reclassification New carrying amount under IFRS 9 700 8,606 66 — (890) — 700 7,716 66 1,554,369 (78,123) 1,476,246 Cash and cash equivalents Other assets Derivative Mortgage investments, including mortgage syndications Mortgage investments, including mortgage syndications1 Held to maturity FVTPL — 79,013 79,013 Other investments - collateralized loans Loans and receivables Amortized Cost2 44,883 Other investments - participating loans and marketable securities FVTPL FVTPL 4,847 — — 44,883 4,847 1 $55,198 of syndication balance is measured at amortized cost. 2 Mortgage investments and collateralized loans within other investments, that were previously classified as held-to-maturity are now classified at amortized cost. The Company intends to hold the assets to maturity to collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding. Upon adoption of IFRS 9, the Company identified one mortgage investment with a gross carrying value of $79,013. The Company’s portion of this mortgage investment with carrying value of $23,815 includes a profit participation feature, which does not meet the SPPI criterion. Accordingly, the entire gross carrying value, including the profit participation receivable of $890, previously recorded in other assets, has been reclassified at FVTPL. Impairment of financial assets IFRS 9 replaces the “incurred loss” model in IAS 39 with an ECL model. The new impairment model applies for all financial assets measured at amortized cost, contract assets, debt investments at FVOCI and certain off-balance sheet loan commitments and guarantees. The ECL model will result in an allowance for credit losses being recorded on financial assets regardless of whether there has been an actual loss event. Under IFRS 9, credit losses are recognized earlier that under IAS 39 - see note 3(b). For assets in the scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more volatile. The Company has determined that the application of IFRS 9’s impairment requirements at January 1, 2018 has not resulted in significant changes to loss allowance previously recognized. This differs from the Company’s previous approach where the allowance recorded on performing loans was designed to capture only incurred losses whether or not they have been specifically identified. 66 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. The Company has used an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in retained earnings and reserves as at January 1, 2018. Accordingly, the information presented for 2017 does not generally reflect the requirements of IFRS 9, but rather those of IAS 39. The determination of the business model within which a financial asset is held have been made on the basis of the facts and circumstances that existed at the date of initial application, (m) 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. IFRS 16, Leases (“IFRS 16”) On January 13, 2016, the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard is not expected to have a significant impact. 67 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 4. MORTGAGE AND OTHER INVESTMENTS, INCLUDING MORTGAGE SYNDICATIONS (a) Mortgage investments As at December 31, 2018 Mortgage investments, including mortgage syndications - at amortized cost Interest receivable Gross mortgage investments Mortgage syndication liabilities Note Net 4(b)(c) $ 1,674,812 $ (518,560) $ 1,156,252 15,355 1,690,167 (9,270) (1,417) (2,180) (520,740) 898 — 13,175 1,169,427 (8,372) (1,417) Unamortized lender fees Allowance for mortgage investments loss 4(d) Mortgage investments at amortized cost 1,679,480 (519,842) 1,159,638 Mortgage investments, including mortgage syndications - at fair value through profit or loss1 Interest receivable Mortgage investments at FVTPL Mortgage investments, including mortgage syndications 1 Syndication balance is measured at amortized cost As at December 31, 20172 Mortgage investments, including mortgage syndications Interest receivable Unamortized lender fees Allowance for mortgage investments loss Mortgage investments, including mortgage syndications 2 Presented under IAS 39 109,741 7,601 117,342 (55,000) (198) (55,198) 54,741 7,403 62,144 $ 1,796,822 $ (575,040) $ 1,221,782 Gross mortgage investments Mortgage syndication liabilities Net $ 1,543,589 $ (439,945) $ 1,103,644 18,326 1,561,915 (6,465) (1,081) (1,584) 16,742 (441,529) 1,120,386 881 — (5,584) (1,081) $ 1,554,369 $ (440,648) $ 1,113,721 As at December 31, 2018, unadvanced mortgage commitments under the existing gross mortgage investments amounted to $184,265 (December 31, 2017 – $154,945) of which $57,951 (December 31, 2017 – $60,755) belongs to the Company’s syndicated partners. Mortgages measured at FVTPL The Company establishes fair value for investments that are measured at FVTPL using an appropriate valuation technique. These valuation techniques include internal valuation models and/or independent appraisals that employ significant inputs such as direct comparison, cash flow projection, stabilized net operating income generated from the property to estimate fair value, and capitalization rate that reflects the investment characteristics of the asset. 68 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) (b) Net mortgage investments As at Interest in first mortgages Interest in non-first mortgages December 31, 2018 December 31, 2017 93.2% $ 6.8% 100.0% $ 1,128,366 93.0% $ 82,627 7.0% 1,210,993 100.0% $ 1,026,395 77,249 1,103,644 The mortgage investments are secured by real property and will mature between 2019 and 2022 (December 31, 2017 – 2018 and 2022). During the year ended December 31, 2018, the Company generated net interest income and other income excluding lender fee income of $79,899 (2017 – $76,706). During the year ended December 31, 2018, the weighted average interest rate earned on net mortgage investments was 7.2% (2017 – 7.0%). 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, 2018, the Company earned lender fee income on net mortgage investments, net of fees relating to mortgage syndication liabilities of $7,840 (2017 - $7,598). For the year ended December 31, 2018, the Company received lender fees on net mortgage investments, net of fees relating to mortgage syndication liabilities, of $10,659 (2017 - $6,802), which are amortized to interest income over the term of the related mortgage investments using the effective interest rate method. Principal repayments, net of mortgage syndications, by contractual maturity dates are as follows: 2019 2020 2021 2022 2023 and thereafter Total $ $ 463,777 495,498 235,465 16,253 — 1,210,993 (c) 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. As a result, the lender’s portion of these mortgages 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 and accordingly, only the Company’s portion of the mortgage is recorded as mortgage investment. The fair value of the transferred assets and mortgage syndication liabilities approximate their carrying values (see note 19). (d) Allowance for Credit Losses (“ACL”) The allowance for credit losses is maintained at a level that we consider adequate to absorb credit-related losses on our mortgage and other investments. The allowance for credit losses amounted to $1,632 as at December 31, 2018 (December 31, 2017 - $1,081, under IAS 39), of which $1,417 (December 31, 2017 - $1,081, under IAS 39) was recorded in mortgage investments and $215 (December 31, 2017 - $nil, under IAS 39) recorded in other investments in our Consolidated Statement of Financial Position. 69 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Allowance for credit losses: Multi-residential Stage 1 Stage 2 Stage 3 Total Gross mortgage investments, including interest receivable $ 851,402 $ — $ 2,790 $ 854,192 Mortgage syndication liabilities, including interest receivable Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other Mortgage Investments Gross mortgage investments, including interest receivable Mortgage syndication liabilities, including interest receivable Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other loan Investments Gross loan investments, including interest receivable Other loan syndication liabilities, including interest receivable Net Allowance for loan losses Other loan Investments, net of allowance and mortgage syndications 322,244 529,158 627 528,531 Stage 1 853,383 253,694 599,689 200 599,489 Stage 1 66,483 — 66,483 212 66,271 — — — — Stage 2 — — — — — — 2,790 3 322,244 531,948 630 2,787 531,318 Stage 3 37,790 — 37,790 587 Total 891,173 253,694 637,479 787 37,203 636,692 Stage 2 Stage 3 — — — — — 7,014 — 7,014 3 Total 73,497 — 73,497 215 7,011 73,282 As at December 31, 2018, finance lease receivable (note 4(e)) and unadvanced commitments (note 4(a)) are all considered to be in Stage 1 with minimal ECL. 70 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The changes in the allowance for credit losses are shown in the following tables. Multi-residential Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period Other Mortgage Investments Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period Other loan Investments Balance at beginning of period Allowance for credit losses Remeasurement Transfer to/(from) Stage 1 Stage 2 Stage 3 Total allowance for credit losses Fundings Repayments Balance at end of period Stage 1 Stage 2 Stage 3 $ 603 $ 26 $ — $ Total 629 — (23) 1 24 — — — 627 340 (340) 627 (26) — — — — — — — 26 3 — — 3 Stage 1 Stage 2 Stage 3 $ 1 $ 209 $ — $ 252 — — — 253 88 (141) 200 — — (209) — — — — — 378 — — 209 587 — — 587 Stage 1 Stage 2 Stage 3 $ 232 — $ — $ (16) (3) — — 213 65 (66) 212 — — — — — — — — — — — 3 3 — — 3 — (26) 26 630 340 (340) 630 Total 210 630 — (209) 209 840 88 (141) 787 Total 232 (16) (3) — 3 216 65 (66) 215 71 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The following table presents the gross carrying amounts of mortgage and other loan investments, net of syndication liabilities, subject to IFRS 9 impairment requirements by internal risk ratings used by the Company for credit risk management purposes. The internal risk ratings presented in the table below are defined as follows: Low Risk: Mortgage and loan investments that exceed the credit risk profile standard of the Company with a below average probability of default. Yields on these investments are expected to trend lower than the Company’s average portfolio. Medium-Low: Mortgage and loan investments that are typical for the Company’s risk appetite, credit standards and retain a below average probability of default. These mortgage and loan investments are expected to have average yields and would represent a significant percentage of the overall portfolio. Medium-High: Mortgage and loan investments within the Company’s risk appetite and credit standards with an average probability of default. These investments typically carry attractive risk-return yield premiums. High Risk: Mortgage and loan investments within the Company’s risk appetite and credit standards that have an additional element of credit risk that could result in an above average probability of default. These mortgage and loan investments carry a yield premium in return for their incremental credit risk. These mortgage and loan investments are expected to represent a small percentage of the overall portfolio. Default: Mortgage and loan investments that are 90 days past due and when there is objective evidence that there has been a deterioration of credit quality to the extent the Company no longer has reasonable assurance as to the timely collection of the full amount of principal and interest and/or when the Company has commenced enforcement remedies available to it under its contractual agreements. 72 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Multi-residential Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Other Mortgage Investments Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Mortgage investments, net of allowance and mortgage syndications Stage 1 Stage 2 Stage 3 Total $ 221,309 $ — $ — $ 221,309 289,144 18,705 — — 529,158 627 528,531 Stage 1 177,567 341,418 66,644 14,060 — 599,689 200 599,489 — — — — — — — — — — 2,790 2,790 3 289,144 18,705 — 2,790 531,948 630 2,787 531,318 Stage 2 Stage 3 — — — — — — — — — — — — 37,790 37,790 587 Total 177,567 341,418 66,644 14,060 37,790 637,479 787 37,203 636,692 Other loan Investments Stage 1 Stage 2 Stage 3 Total Low risk Medium-Low risk Medium-High risk High risk Default Net Allowance for loan losses Other loan Investments, net of allowance and mortgage syndications (e) Other investments — — — 66,483 — 66,483 212 — — — — — — — — — — — 7,014 7,014 3 — — — 66,483 7,014 73,497 215 $ 66,271 $ — $ 7,011 $ 73,282 As at December 31, 2018, the Company held $78,860 (December 31, 2017 - $50,873) in collateralized loans and finance lease receivable measured at amortized cost, net of allowance for credit loss of $215 (December 31, 2017 - nil), $4,605 (December 31, 2017 - $4,847) in investments that are measured at FVPTL and $2,225 and $5,267 (December 31, 2017 - $2,214 and $nil) in indirect real estate developments through joint venture and associate, respectively, using the equity method. As at December 31, 2018, investments that are measured at FVPTL, after fair value adjustment and net foreign exchange loss of $139, was $4,605. During 2018, the Company acquired $2,790 worth of participating loans and disposed of $3,039 worth of marketable securities investments. For the year ended December 31, 2018, loan investments generated net interest income of $6,502 (2017 - $4,368), earned a weighted average yield of 11.4% (2017 - 11.5%), dividend income of $24 (2017 - $131) and net lender fee income of $488 (2017 - $260). For the year ended December 31, 2018, the 73 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) Company received net lender fees from loan investments of $683 (2017 - $357), which are amortized over the term of the related other loan investments using the effective interest rate method. In October, 2017, the Company entered into an 20-year emphyteutic lease on a foreclosed property held for sale in Quebec, which had a fair value of $5,400 at the time of the transaction. According to the terms of the lease, the lessee has the obligation to purchase the property at $9,934 at the end of the lease term on September 2038 and the option to purchase the property earlier at a prescribed purchase price schedule. The Company has classified the lease as a finance lease and the lease receivable balance of $6,020 (December 31, 2017 - 5,964) is included in other investments. Concurrently, the Company entered into a $3,300 construction loan on the leased property with the lessee which is included in other loan investments. The lease payment began in the third quarter of 2018. The lease receivable payments are due as follows: Future minimum lease payments Present value of minimum lease payments Less than one year Between one and five years More than five years 5. INVESTMENT PROPERTIES $ $ 12 $ 267 13,311 13,590 $ 11 221 5,788 6,020 The Saskatchewan Portfolio, which comprises of 14 investment properties totaling 1,079 units that are located in Saskatoon and Regina, Saskatchewan, is subject to joint control based on the Company’s decision-making authority with regards to the operating, financing and investing activities of the investment properties. This co-ownership has been classified as a joint operation and, accordingly, the Company recognizes its share of the assets, liabilities, revenue and expenses generated from the assets in proportion to its rights (see note 15(g)). Jointly Controlled Assets Location Property Type December 31, 2018 December 31, 2017 Saskatchewan Portfolio Saskatoon & Regina, SK Income Properties & Development Property 20.46% 20.46% Ownership Interest Balance, beginning of year Acquisition of income properties Acquisition of property under development Additions – development expenditures Additions – capital expenditures Balance, end of year $ $ 42,748 $ — — 2,046 1,700 — 35,636 5,655 696 761 46,494 $ 42,748 As at December 31, 2018, the investment properties are pledged as security for the credit facility (note 6(b)). Investment property has been categorized as a Level 3 fair value based on the inputs to the valuation technique used. Subsequent to initial recognition, the investment properties are measured at fair value based on available market evidence. The fair values of the Company’s investment properties are sensitive to changes in the key valuation assumptions. As at December 31, 2018, the weighted average capitalization rate for the Company’s investment properties is 5.30% (December 31, 2017 - 5.34%). The estimated fair value would decrease by $2,161 if overall capitalization rates were higher by 25 bps; whereas estimated fair value would increase by $2,202 if overall capitalization rates were lower by 25 bps. In addition, the estimated fair value would increase by $379 if stabilized net operating income were higher by 1%; whereas estimated fair value would decrease by $544 if stabilized net operating income were lower by 1%. 74 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 6. CREDIT FACILITY As at Credit facility (mortgage investments) Credit facility (investment properties) Unamortized financing costs Total credit facility (a) Credit facility (mortgage investments) December 31, 2018 December 31, 2017 $ $ 478,104 $ 32,820 (1,985) 508,939 $ 365,914 30,175 (2,043) 394,046 Currently, the Company has $500,000 in credit facility with 10 Canadian banks and the facility is secured by a general security agreement over the Company’s assets and its subsidiaries. Originally, the Company entered into a credit facility agreement with a credit limit of $350,000 and a maturity date of May 2018. On June 20, 2017, the Company increased the credit limit by $50,000 to $400,000, through the utilization of the accordion feature. On December 21, 2017, the Company further amended the credit facility agreement (the “Amended Credit Agreement”) for a credit limit of $400,000, and extended the maturity date to December 20, 2019, which may be increased by $100,000 through an accordion feature, subject to certain conditions. On February 13, 2018, the Company completed the exercise of a portion of the accordion feature, which increased the credit limit by $40,000 to $440,000. On November 16, 2018, the Company exercised remainder portion of the accordion feature which increased the credit limit by $60,000 to $500,000, the Company further amended the credit facility agreement (the “Second Amending Agreement to Credit Agreement”) and extended the maturity date to December 20, 2020. The rates of interest and fees of the Amended Credit Agreement and previous credit agreements remain unchanged which are either at the prime rate of interest plus 1.25% per annum (December 31, 2017 – prime rate of interest plus 1.25% per annum) or bankers’ acceptances with a stamping fee of 2.25% (December 31, 2017 – 2.25%) and standby fee of 0.5625% per annum (December 31, 2017 – 0.5625%) on the unutilized credit facility balance. As at December 31, 2018, the Company’s qualified credit facility limit is $476,630 and is subject to a borrowing base as defined in the new amended and restated credit agreement. As at December 31, 2018, the Company has incurred inception to date financing costs of $4,937 relating to the credit facility, which includes upfront fees, legal and other costs. During the year ended December 31, 2018, the Company incurred financing costs of $1,189, the majority of which relates to the exercise of the accordion feature. The financing costs are netted against the outstanding balance of the credit facility and are amortized over the term of the new credit facility agreement. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For the year ended December 31, 2018, included in financing costs is interest on the credit facility of $16,003 (2017 – $11,376) and financing costs amortization of $1,196 (2017 – $1,243). (b) Credit facility (investment properties) Concurrently with the Saskatchewan Portfolio acquisition, the Company and the co-owners entered into a credit facility agreement with a Schedule 1 Bank. Under the terms of the agreement, the co-ownership has a maximum available credit of $162,644. The gross initial advance on the credit facility was $144,644. The Company’s share of the initial advance was $29,594 plus $109 of unamortized financing costs. This credit facility will mature on August 10, 2019 with an option to extend the credit facility by one year. The credit facility provides the co-owners with the option to borrow at either the prime rate of interest plus 1.50% or at the bankers’ acceptances with a stamping fee of 2.50% (“Canadian Dollar Loans”), or at LIBOR plus 2.50%. The credit facility is secured by a first charge on specific assets with a gross carrying value of $227,241. The Company’s share of the carrying value is $46,494. The co-owners of the Saskatchewan Portfolio (note 5) are each individually subject to financial covenants outlined in the investment properties credit facility agreement. Notwithstanding, the lender’s recourse is limited to each co-owner’s proportionate interest in the investment properties credit facility. 75 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) During the year ended December 31, 2018, the co-owners borrowed to LIBOR and prime rate loans from the credit facility. At the time of borrowing LIBOR loans, which are denominated in U.S. dollars, the co-owners concurrently entered into cross-currency swaps to effectively convert the LIBOR loans into Canadian Dollar Loans, which were unwound in December 2018. As at December 31, 2018, $160,411 of Canadian Dollar Loans were outstanding on the credit facility. The Company’s share of the outstanding amount is $32,820. Interest on the credit facility is recorded in financing costs using the effective interest rate method. For the year ended December 31, 2018, included in financing costs is interest on the credit facility of $1,125 (2017 - $432) and financing costs amortization of $52 (2017 - $23). 7. REVENUE FROM PROPERTY OPERATIONS As part of the joint arrangement of the Saskatchewan Portfolio, the Company leases residential properties under operating leases generally with a term of not more than one year and, in many cases, tenants lease rental space on a month-to-month basis. The operating leases mature between the 2019 and 2020, except for one lease maturing in 2033. Rental revenue from operating leases was $1,991 during the year ended December 31, 2018 (2017 - $569). Aggregate minimum lease payments under its non-cancellable operating leases by each of the following periods are as follows: Within 1 year 2 to 5 years Over 5 years 8. CONVERTIBLE DEBENTURES The debentures are comprised of as follows: Issued Issue costs, net of amortization Equity component Issue costs attributed to equity component Cumulative accretion Debentures, end of year December 31, 2018 December 31, 2017 1,789 $ 64 93 769 55 110 Year ended December 31, 2018 136,800 $ (4,307) (2,043) 105 1,042 2017 171,300 (6,074) (2,043) 105 658 131,597 $ 163,946 $ $ $ On July 3, 2018, the Company completed payment of $35,064 for redemption of 6.35% Convertible Unsecured Debentures. Interest costs related to the convertible 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 Amortization of issue costs Accretion of the convertible debentures Total 76 Year ended December 31, $ $ 2018 8,477 $ 1,767 384 10,628 $ 2017 8,224 1,438 314 9,976 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 9. 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 as well as to receive dividends as 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. The changes in the number of common shares were as follows: Balance, beginning of period Issuance of common shares Converted under Convertible Debentures Common shares repurchased Issued under dividend reinvestment plan Balance, end of period (a) Share offerings Year ended December 31, 2018 2017 74,277,356 $ 73,858,499 6,866,731 5,422 — 483,335 — — (37,603) 456,460 81,632,844 $ 74,277,356 $ $ On February 7, 2018 and February 16, 2018, the Company completed a public offering of 4,302,000 plus an over-allotment option of 545,300 common shares, respectively, at $9.30 per common share for total net proceeds of $42,383. On June 21, 2018, the Company entered into an equity distribution agreement with a Canadian financial institution to offer common shares, having an aggregate offering amount of up to $70 million (“Maximum Amount”) for sale to the public. On October 19, 2018, the Company completed a private placement offering of 1,561,331 common shares at $9.22 per common share for total net proceeds of $13,937. (b) At-the-market equity program (the”ATM Program”) Sales of the common shares under the equity distribution agreement will be made through “at-the- market distributions” as defined in National Instrument 44-102 - Shelf Distributions, including sales made directly on the Toronto Stock Exchange. The common shares will be distributed under the ATM Program at the market prices prevailing at the time of sale, and therefore prices may vary as between purchasers and over time. The ATM Program will be activated at the Company’s discretion and will end on the earlier of the date of distribution of the Maximum Amount and January 11, 2020. The Company currently intends to use the net proceeds of the ATM Program to repay amounts owing under its secured revolving credit facility, and will subsequently draw on the credit facility for purposes of funding the purchase of new investments in accordance with the strategies, investment objectives and investment guidelines of the Company. During the year ended 2018, the Company issued 458,100 of common shares for gross proceeds of $4,275 at an average price of $9.33 per common share and paid $87 in commission to the agent, pursuant to the ATM Program’s equity distribution agreement. (c) Dividend reinvestment plan (“DRIP”) The DRIP provided eligible beneficial and registered holders of common shares with a means to reinvest dividends declared and payable on such common shares into additional common shares. Under the DRIP, shareholders could enroll to have their cash dividends reinvested to purchase additional common shares. The common shares can be purchased from the open market based 77 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) upon the prevailing market rates or from treasury at a price of 98% of the average of the daily volume weighted average closing price on the TSX for the 5 trading days preceding payment, the price of which will not be less than the book value per common share. For the year ended December 31, 2018, no common shares were purchased on the open market (2017 – 37,603) and 483,335 common shares were issued from treasury (2017 – 456,460). (d) Dividends to holders of common shares The Company intends to pay dividends to holders of common shares monthly within 15 days following the end of each month. For the year ended December 31, 2018, the Company declared dividends of $54,890, or $0.69 per common share (2017 – $50,736, $0.69 per share). As at December 31, 2018, $4,694 in aggregate dividends (December 31, 2017 – $4,271) was payable to the holders of common shares by the Company. Subsequent to December 31, 2018, the Board of Directors of the Company declared dividends of $0.0575 per common share to be paid on February 15, 2019 to the common shareholders of record on January 31, 2019. 10. NON-EXECUTIVE DIRECTOR DEFERRED SHARE UNIT PLAN (“DSU”) Commencing June 30, 2016, the Company instituted a non-executive director deferred share unit plan, whereby a director can elect up to 100% of the compensation be paid in the form of DSUs, credited quarterly in arrears. 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 of the DSU 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”). The directors are entitled to also accumulate additional DSUs equal to the monthly cash dividends, on the DSUs already held by that director determined based on 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. Until June 30, 2018, each director was also entitled to an additional 25% of DSUs that are issued in the quarter 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 as of the 24th business day after publication of the Company’s financial statements following a director’s departure from the Board of Directors. For the year ended December 31, 2018, 23,848 units were issued (2017 - 22,308) and as at December 31, 2018, 51,891 units were outstanding. (December 31, 2017 – 28,043). No DSUs were exercised or canceled, resulting in a DSU expense of $240 (2017 – $205). As at December 31, 2018, $71 in quarterly compensation was granted in DSUs, which will be issued subsequent to December 31, 2018. 11. MANAGEMENT AND SERVICING FEES The management agreement has a term of 10 years and is automatically renewed for successive five year terms at the expiration of the initial term and pays (i) management fee equals to 0.85% per annum of the gross assets of the Company, calculated and paid monthly in arrears, plus applicable taxes, and (ii) servicing fee equals to 0.10% of the amount of any senior tranche of a mortgage that is syndicated by the Manager to a third party investor on behalf of the Company, where the Company retains the corresponding subordinated portion. Gross assets are defined as the total assets of the Company less unearned revenue before deducting any liabilities, less any amounts that are reflected as mortgage syndication liabilities. For the year ended December 31, 2018, the Company incurred management fees plus applicable taxes of $11,879 (2017– $10,649) and servicing fees including applicable taxes of $622 (2017 – $580). 78 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 12. EARNINGS PER SHARE Basic earnings per share are calculated by dividing total net income and comprehensive income by the weighted average number of common shares during the year. In accordance with IFRS, convertible debentures are considered for potential dilution in the calculation of the diluted earnings per share. Each series of convertible debentures is considered individually and only those with dilutive effect on earnings are included in the diluted earnings per share calculation. Convertible debentures that are considered dilutive are required by IFRS to be included in the diluted earnings per share calculation notwithstanding that the conversion price of such convertible debentures may exceed the market price and book value of the Company’s common shares. Diluted earnings per share are calculated by adding back the interest expense relating to the dilutive convertible debentures to total net income and comprehensive income and increasing the weighted average number of common shares by treating the dilutive convertible debentures as if they had been converted on the later of the beginning of the reporting period or issuance date. The following table shows the computation of per share amounts: Total net income and comprehensive income Adjustment for dilutive effect of convertible debentures Total net income and comprehensive income (diluted) Weighted average number of common shares (basic) Convertible debentures Weighted average number of common shares (diluted) Earnings per share – basic Earnings per share – diluted 13. CHANGE IN NON-CASH OPERATING ITEMS Change in non-cash operating items: Other assets Accounts payable and accrued expenses Due to Manager Prepaid mortgage interest Mortgage funding holdbacks $ $ $ $ $ $ Year ended December 31, 2018 53,068 $ 6,026 59,094 $ 79,344,276 9,134,328 88,478,604 0.67 $ 0.67 $ 2017 52,204 7,262 59,466 74,054,541 10,871,603 84,926,144 0.70 0.70 Year ended December 31, 2018 (1,699) $ 1,004 372 465 457 599 $ 2017 (5,204) 1,473 321 1,278 64 (2,068) 79 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 14. CASH FLOWS ARISING FROM FINANCING ACTIVITIES Debentures Balance, beginning of period Debenture Issuance Capitalized issue cost Debenture repayments Total financing cash flow activities Capitalized financing cost, net of amortization Accretion expense Equity component, net of issue costs attributed to equity component Total financing non-cash flow activities Balance, end of period Credit Facilities Balance, beginning of period Capitalized financing cost1 Net credit facility advances – mortgage investments Net credit facility advances – investment properties Total financing cash flow activities Amortization of financing costs Balance, end of period Year ended December 31, 2018 $ 163,946 $ — — (34,500) (34,500) 1,767 384 — 2,151 2017 76,757 91,000 (4,563) — 86,437 1,608 314 (1,170) 752 $ $ $ 131,597 $ 163,946 Year ended December 31, 2018 394,046 $ (1,189) 112,190 2,645 113,646 1,247 2017 299,000 (1,728) 65,334 30,175 93,780 1,266 508,939 $ 394,046 1 Capitalized financing cost is included in interest paid section in the annual statement of cash flow 15. RELATED PARTY TRANSACTIONS (a) As at December 31, 2018, Due to Manager includes mainly management and servicing fees payable of $1,493 (December 31, 2017 – $1,140). (b) As at December 31, 2018, included in other assets is $3,083 (December 31, 2017 – $2,407) of cash held in trust by Timbercreek Mortgage Servicing Inc. (“TMSI”), the Company’s mortgage servicing and administration provider, a company controlled by the Manager. The balance relates to mortgage funding holdbacks and prepaid mortgage interest received from various borrowers. (c) As at December 31, 2018, the Company has the following mortgage investments which an independent director of the Company is also an officer and/or part-owner of the borrowers of these mortgages: A mortgage investment with a total gross commitment of $84,108 (December 31, 2017 – $84,108). The Company’s share of the commitment is $29,108 (December 31, 2017 – $29,108). During Q2 2018, the mortgage investment was fully repaid (December 31, 2017 – $15,066). For the year ended December 31, 2018, the Company has recognized net interest income of $460 (2017 – $922) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $9,500 (December 31, 2017 – $15,600). The Company’s share of the commitment is $3,636 (December 31, 2017 – $5,970), of which $3,636 (December 31, 2017 – $3,634) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $344 (2017 – $341) from this mortgage investment during the year. 80 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) A mortgage investment with a total gross commitment of $4,264 (December 31, 2017 – $4,264). The Company’s share of the commitment is $4,264 (December 31, 2017 – $4,264), During Q4 2018, the mortgage investment was fully repaid (December 31, 2017 – $1,992). For the year ended December 31, 2018, the Company has recognized net interest income of $153 (2017 – $156) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $1,920 (December 31, 2017 – $1,920). The Company’s share of the commitment is $1,920 (December 31, 2017 – $1,920), of which $1,920 (December 31, 2017 – $1,920) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $115 (2017 – $115) from this mortgage investment during the year. A mortgage investment with a total gross commitment of $16,500 (December 31, 2017 – $16,500). The Company’s share of the commitment is $2,500 (December 31, 2017 – $2,500), of which $2,481 (December 31, 2017 – $2,403) has been funded as at December 31, 2018. For the year ended December 31, 2018, the Company has recognized net interest income of $238 (2017 – $84) from this mortgage investment during the year. (d) As at December 31, 2018, the Company and Timbercreek Four Quadrant Global Real Estate Partners (“T4Q”) and Timbercreek Real Estate Financing U.S. Holding LP (“TREF”, Timbercreek U.S. Short Term Debt (Founder) L.P. was rolled-over to TREF in September 2018) are related parties as they are managed by wholly owned subsidiary of the Manager, and they have co-invested in 18 (December 31, 2017 – 19) gross mortgage and other investments totaling $258,818 (December 31, 2017 – $358,027). The Company’s share in these gross mortgage investments is $178,412 (December 31, 2017 – $172,153). Additionally, two net mortgage investments (December 31, 2017 – one) totaling $22,972 (December 31, 2017 – $5,700) are loaned to limited partnerships in which T4Q is invested. (e) As at December 31, 2018, the Company and T4Q invested in two indirect real estate developments through two investees, totaling $7,492 (December 31, 2017 – $2,214). (f) As at December 31, 2018, the Company is invested in junior debentures of Timbercreek Ireland Private Debt Designated Activity Company totaling $4,605 or €2,923 (December 31, 2017 – $1,710 or €1,144), which is included in loan investments within other investments. Timbercreek Ireland Private Debt Designated Activity Company is managed by a wholly owned subsidiary of the Manager. (g) As part of the Saskatchewan Portfolio co-ownership, the Company, T4Q and a third-party co- owner have entered into property management agreements with the Manager. The Manager provides property and leasing services to each of the properties and is entitled to receive property management and capital improvements service fees (the “Property Management Fees”) at the disclosed rates in the agreements. During Q4 2018 and 2018, Property Management Fees of $31.9 and $129.9 were charged by the Manager to the Company (Q4 2017 and 2017 – $52). As at December 31, 2018, $18 was payable to the Manager (December 31, 2017 – $20). 16. INCOME TAXES As of December 31, 2018, the Company has non-capital losses carried forward for income tax purposes of $30,060 (December 31, 2017 - $31,450), which will expire between 2028 and 2037 if not used. The Company also has future deductible temporary differences resulting from allowance for impairment, prepaid mortgage interest, and unearned income for income tax purposes of $13,729 (December 31, 2017 - $8,144). These temporary differences vary from year to year depending on the current year business activity and lender fee income amounts. 81 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 17. 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, 2018, the Company was in compliance with its investment restrictions. Pursuant to the terms of the credit facilities, the Company is required to meet certain financial covenants, including a minimum interest coverage ratio, minimum adjusted shareholders’ equity, maximum non-debenture indebtedness to adjusted shareholders’ equity and maximum consolidated debt to total assets. 18 RISK MANAGEMENT The Company is exposed to the symptoms and effects of global economic conditions and other factors that could adversely affect its business, financial condition and operating results. Many of these risk factors are beyond the Company’s direct control. The Manager and Board of Directors play an active role in monitoring the Company’s key risks and in determining the policies that are best suited to manage these risks. There has been no change in the process since the previous year. The Company’s business activities, including its use of financial instruments, exposes the Company to various risks, the most significant of which are market rate risk (interest rate risk and currency 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, 2018, $717,509 of net mortgage investments and $21,806 of other investments bear interest at variable rates. (December 31, 2017 - $130,716 and $8,058, respectively). $626,021 of net mortgage investments have a “floor rate” (December 31, 2017 - $109,340). If there were a decrease or increase of 0.50% in interest rates, with all other variables constant, the impact from variable rate mortgage investments and other investments would be a decrease in net income of $2,457 or an increase in net income of $3,731, respectively (2017 - $115 and $694, respectively). The Company manages its sensitivity to interest rate fluctuations by managing the fixed/floating ratio in its investment portfolio. The Company is also exposed to interest rate risk on the credit facilities, which has a balance of $510,924 as at December 31, 2018. (December 31, 2017 - $396,089) Based on the outstanding credit facility balance as at December 31, 2018, and assuming it was outstanding for the entire period a 0.50% decrease or increase in interest rates, with all other variables constant, will increase or decrease net income by $2,555 (2017 - $1,980) annually. The Company’s other assets, 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. 82 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) (b) Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company is exposed to currency risk primarily from other investments that are denominated in a currency other than the Canadian dollar. The Company uses foreign currency forwards to approximately hedge the principal balance of future earnings and cash flows caused by movements in foreign exchange rates. Under the terms of the foreign currency forward contracts, the Company buys or sells a currency against another currency at a set price on a future date. As at December 31, 2018, the Company has US$5,000 in net mortgages, US$5,050 and €2,945 in other investments denominated in foreign currencies (December 31, 2017 – US$15,656, US$5,050 and €1,144). The Company has entered into a series of foreign currency contracts to reduce the its exposure to foreign currency risk. As at December 31, 2018, the Company has four U.S. dollars currency contracts with an aggregate notional value of US$10,050, at a weighted average forward contract rate of 1.3416 and maturity dates between January and May 2019, and one Euro currency contracts with an aggregate notional value of €2,923 at a weighted average contract rate of 1.5282, maturing in January 2019. As at December 31, 2018, the Company unwound all outstanding cross- currency swap (December 31, 2017 - nil). As a result, the Company is not exposed to any significant foreign currency risk. The fair value of the foreign currency forward contract as at December 31, 2018 is a liability of $328 which is included in accounts payable. The valuation of the foreign currency forward contracts was computed using Level 2 inputs which include spot and forward foreign exchange rates. (c) 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 new mortgage investments are approved by the investment committee before funding; and iii. actively monitoring the mortgage investments and initiating recovery procedures, in a timely manner, where required. The exposure to credit risk at December 31, 2018 relating to net mortgages and other investments amount to $1,320,011 (December 31, 2017 – $1,150,241). The Company has recourse under these mortgage and the majority of other investments in the event of default by the borrower; in which case, the Company would have a claim against the underlying collateral. Management believes that the potential loss from credit risk with respect to cash that is held in trust at a Schedule I bank by the Company’s transfer agent and operating cash held also at a Schedule 1 bank, to be minimal. The Company is exposed to credit risk from the collection of accounts receivable from tenants. The Manager routinely obtains credit history reports on prospective tenants before entering into a tenancy agreement. (d) 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. 83 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The following are the contractual maturities of financial liabilities as at December 31, 2018, including expected interest payments: — — — — — — — — — — — Carrying value Contractual cash flow Within a year Following year 3–5 years December 31, 2018 Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility (mortgage investments)1 Credit facility (investment properties)2 Convertible debentures3 $ 4,221 $ 4,221 $ 4,221 $ — $ 4,694 1,493 657 2,425 476,166 32,773 131,597 4,694 1,493 657 2,425 520,818 33,804 144,954 4,694 1,493 657 2,425 21,658 33,804 52,135 — — — — 499,160 — 92,819 Unadvanced mortgage commitments4 Total contractual liabilities $ $ 654,026 $ 713,066 $ 121,087 $ 591,979 $ — 184,265 184,265 — 654,026 $ 897,331 $ 305,352 $ 591,979 $ 1. Credit facility (mortgage investments) includes interest based upon December 2018 weighted average interest rate on the credit facility assuming the outstanding balance is not repaid until its maturity on December 20, 2020. 2. Credit facility (investment properties) includes interest based upon December 2018 weighted average interest rate on the credit facility assuming the outstanding balance is not repaid until its maturity on August 10, 2019. 3. The 2016 debentures are assumed to be redeemed on July 31, 2019 as they are redeemable on and after July 31, 2019, the February 2017 debentures are assumed to be redeemed on March 30, 2020 as they are redeemable on and after March 30, 2020 and the June 2017 debentures are assumed to be redeemed on June 30, 2020 as they are redeemable on and after June 30, 2020. 4. Unadvanced mortgage commitments include syndication commitments of which $57,951 belongs to the Company’s syndicated partners. As at December 31, 2018, the Company had a cash position of $541 (December 31, 2017 – $700), an unutilized credit facility (mortgage investments) balance of $21,896 (December 31, 2017 – $34,086) and an unutilized credit facility (investment properties) balance of $457 (December 31, 2017 – $3,102). 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 $57,951 (December 31, 2017 – $60,755) is to the Company’s syndication partners. The Company expects the syndication partners to fund this amount. 84 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) 19. FAIR VALUE MEASUREMENTS The following table shows the carrying amounts and fair values of assets and liabilities: As at December 31, 2018 Assets measured at fair value Foreclosed properties held for sale Investment properties Financial assets Cash and cash equivalents Other assets Carrying value Note Amortized cost Fair value through profit or loss Fair value 5 — $ — — $ — 46,494 46,494 541 10,217 — — 541 10,217 Mortgage investments, including mortgage syndications 1,679,480 117,342 1,796,822 4(e) 78,860 4,605 83,465 Other investments Financial liabilities Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility Convertible debentures Mortgage syndication liabilities 3,893 4,694 1,493 657 2,425 508,939 131,597 575,040 328 — — — — — — — As at December 31, 2017 Note Carrying value Loans and receivable Fair value through profit or loss Other financial liabilities Assets measured at fair value Foreclosed properties held for sale Investment properties Financial assets Cash and cash equivalents Other assets Mortgage investments, including mortgage syndications Other investments Financial liabilities Accounts payable and accrued expenses Dividends payable Due to Manager Mortgage funding holdbacks Prepaid mortgage interest Credit facility Convertible debentures Mortgage syndication liabilities $ 5 — $ — 700 8,606 1,554,369 50,873 4(e) — — — — — — — — — — 336 $ — $ 42,748 — 66 — 4,847 — — — — — — — — — — — — — 5,426 4,271 1,140 200 1,960 394,046 163,946 440,648 4,221 4,694 1,493 657 2,425 510,924 131,554 575,040 Fair value 336 42,748 700 8,672 1,554,369 55,720 5,426 4,271 1,140 200 1,960 396,089 172,957 440,648 85 Timbercreek Financial Notes to the Consolidated Financial Statements In thousands of Canadian dollars) The valuation techniques and the inputs used for the Company’s financial instruments are as follows: (a) Mortgage investments, other investments, and mortgage syndication liabilities There is no quoted price in an active market for the mortgage investments, other investments, excluding marketable securities or mortgage syndication liabilities. The Manager makes its determination of fair value based on its assessment of the current lending market for mortgage and other investments excluding marketable securities of same or similar terms. Typically, the fair value of these mortgage investments, other investments, debentures excluding marketable securities 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 and other investments excluding marketable securities is based on level 3 inputs. The fair value of the marketable securities is based on a level 1 input, which is the market closing price of the marketable securities at the reporting date. (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 or bear interest at variable rates. (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 three months ended December 31, 2018. 20. COMPENSATION OF KEY MANAGEMENT PERSONNEL During 2018, the compensation expense of the members of the Board of Directors amounts to $240 (2017 – $205), 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 11). 21. COMMITMENTS AND CONTINGENCIES In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgage investments and other 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. 86 Timbercreek Financial Board of Directors The directors of Timbercreek Financial have deep experience, established reputations and extensive contacts in the commercial real estate mortgage lending community, as well as in the capital markets and asset management sectors in Canada. Zelick L. Altman Independent Director, Timbercreek Financial Executive Chairman, LaSalle Investment Management (Canada) Ugo Bizzarri Director, Timbercreek Financial CIO & Global Head of Real Estate Investment Management, Timbercreek Asset Management Cameron Goodnough Director, Chief Executive Officer, Timbercreek Financial Steven R. Scott Independent Director and Audit Committee Chair, Timbercreek Financial Managing Director, Corporate Development, Timbercreek Asset Management Chairman & CEO, StorageVault Canada Inc. and The Access Group of Companies W. Glenn Shyba Lead Independent Director Timbercreek Financial Founder & Principal, Origin Merchant Partners Pamela Spackman Independent Director, Timbercreek Financial Blair Tamblyn Chairman, Timbercreek Financial Derek J. Watchorn, LL.B. Independent Director, Timbercreek Financial Board member of Slate Office REIT and WPT Industrial REIT Senior Managing Director & CEO, Timbercreek Asset Management Consultant Officers Cameron Goodnough Chief Executive Officer Managing Director, Corporate Development, TAMI Brad Trotter Vice President, Origination & Asset Management Global Head of Debt, TAMI Head Office 25 Price Street Toronto, ON M4W 1Z1 T 844.304.9967 E info@timbercreek.com timbercreekfinancial.com Gigi Wong, CPA, CA, CFA Chief Financial Officer CFO, TAMI Ugo Bizzarri Vice President, Investments CIO & Global Head of Real Estate Investment Management, TAMI Stock Exchange Listing TSX: TF, TF.DB.A, TF.DB.B, T.F.DB.C Auditors KPMG LLP Legal Counsel McCarthy Tétrault LLP Transfer Agent & Registrar CST Trust Company 320 Bay Street Toronto, ON M5H 4A6 87 timbercreekfinancial.com