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Timbercreek 2008 Annual Report
 

Timbercreek 2008 Annual Report

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2008 annual report for Timbercreek Mortgage Investment Corporation (TSX: TMC).

2008 annual report for Timbercreek Mortgage Investment Corporation (TSX: TMC).

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    Timbercreek 2008 Annual Report Timbercreek 2008 Annual Report Document Transcript

    • Timbercreek Mortgage Investment Corporation 9,000 years ago this was a simple and smart idea it still is Annual Report 2008
    • Remember when investing in real estate seemed like a good idea? Predictable return. Your capital wasn’t at risk of disappearing overnight. Then this: sub-prime mortgages. Credit crisis. Foreclosures. Job losses. Recession. Turns out real estate investing is just like everything else. There is good real estate investing, and not-so-good real estate investing. At Timbercreek Mortgage Investment Corporation, we make a living investing in real estate. To succeed at it, we have one core rule: keep it simple. We only invest in commercial mortgages. We only invest in companies that have the cash flow to pay us back. We only lend against security that can cover our principal. We diversify across Canada and actively manage our investments so that we can keep on keeping it simple. We think this is smart.
    • 0 impaired loans of portfolio secured by 82% income producing assets 66% average loan-to-value 9% annualized yield in 2008 secured by 50% multi-residential assets
    • Introducing the capital stack, and where we fit in Preservation of capital, attractive stable returns. These are our objectives. We offer a real estate investment opportunity that generates attractive yields without the volatility and risk associated with equity. We combine the expertise and discipline of commercial lending with the insight to spot attractive investment opportunities in inefficient markets. highest risk / return lowest *based on an issue price per unit of $10.
    • 3 Equity REITs This is where most people instinctively think of investing their real estate Direct Ownership dollars; however, equity is effectively unhedged and therefore very volatile. Equity investors must accept downside risk in order to fully share in the upside potential. Customized Timbercreek Mortgage These are relatively small short-term, customized loans. These loans warrant Mortgages Investment Corporation higher yields than bank mortgages, but not the risk and volatility associated with equity. Banks typically overlook these loans because they prefer to devote resources to larger loans that are outstanding for a longer duration. Bank Mortgages Banks These are traditionally very safe and conservatively managed Credit Unions investment vehicles, and, accordingly, Trust Companies have lower rates of return. This is an institutionalized market place dominated by large, well capitalized financial services firms looking for bond-like investments.
    • Timbercreek customized lending and why it is beneficial to the borrower Why do you pay more for a luxury vehicle than an entry level car? Features and benefits. It’s the same for mortgages. We provide loans to experienced real estate investors who are looking for deal terms that are tailored to their needs. We also have a reputation for delivering on our promises, which is critical in a time-sensitive real estate environment. borrower opportunity lender Bank Timbercreek Borrower owns a 50-unit complex, Neighbouring property has with a strong 5-year track record for come for sale, however, managing the complex. the deal must close in 2 weeks.
    • 5 timing loan size term payment 8 weeks+ Appraisal comes in at $1,000,000, prepared to lend up to $600,000 Typically 5–10 years fixed loan Interest of 7%, amortized over 15 years, payment of $5,392 2 Appraisal comes Up to a 3-year term Interest of 9%, in at $1,000,000, with options for interest only prepared to lend early repayments loan, payment up to $700,000 and substitution of of $5,250 real estate asset used as security weeks faster more more cash flow support flexible friendly
    • The blueprint of a transaction Every deal is subject to a rigorous review process and requires unanimous investment committee approval. Once funded, we actively manage every loan. This means communicating regularly with borrowers to understand their repayment strategies. Developing a strong relationships with the borrower is critical to the success of the loan and to becoming a borrower of choice in the future. referral analysis site visit Deal flow sourced through: Loan-to-value Visit every site prior to loan approval Extensive network of investment Tenant quality banking professionals across Canada Assess traffic flow Local market Repeat borrowers Review building condition Vacancy rate Referrals Interview manager Cap rate and owner Sensitivity analysis Step 1 Step 2 Step 3
    • 7 due diligence investment committee review ongoing / active management Credit checks Must comply with asset Periodically visit sites allocation model Discounted cash flow Closely monitor interest payments analysis Location / region is stable / growing Maintain constant communication Legal review Exit strategy is strong and clear with borrowers Environmental review Must be unanimously approved Independent Deal term meets the minimum appraisal report yield requirements Step 4 Step 5 Step 6
    • Portfolio allocation To manage risk, our portfolio must adhere to a strict asset allocation model. The model we have adopted is designed to diversify the portfolio based on geographical, economic sector, term, borrower and loan-to-value criteria. This strategy has allowed us to preserve your capital while still generating an annualized 9% return in 2008. And, we believe this strategy will allow us to continue to meet or exceed our targeted yield of the Government of Canada 2-year bond yield plus 550 basis points. By Type 44% Multi-residential 27% Retail 9% Other-residential 9% Office buildings 4% Unimproved land 4% Industrial 3% Single residential
    • 9 By Region 36% Ontario 35% Alberta 25% Quebec 3% British Columbia 1% Saskatchewan 0% Manitoba By Loan-to-value 23% 71%–75% 22% 61%–65% 16% 76%–80% 14% 55% or less 12% 66%–70% 8% 56%–60% 4% 81%–85%
    • Board of directors Zelick L. Altman (Independent Director) is a Managing Director of LaSalle Investment Management responsible for its Canadian operations. In addition, Zelick is President of the LaSalle Canadian Income & Growth Funds, co-mingled funds with over $500 million of equity committed. As Managing Director for Canada, he is involved with all aspects of the business, with special emphasis on the company’s acquisition program. He has over 25 years of real estate experience in institutional, public and private sectors of the industry. Prior to joining LaSalle, he served as a Senior Vice President with Dundee Realty Corp., CREIT, and Counsel Property Corporation where he had responsibilities including acquisitions, asset management, and disposition of properties across Canada. He is a graduate of the Faculty of Applied Sciences at the University of Toronto and is registered as a Professional Engineer. Edward W. Boomer (Independent Director) is the Managing Director, Canadian Operations for Kimco Realty Corporation and is responsible for all aspects of Kimco’s operations in Canada. Kimco is a self-administered real estate investment trust and believed to have the largest portfolio of neighbourhood and community shopping centres held by any publicly-traded real estate investment trust. He has over 18 years of real estate experience. Prior to joining Kimco, he was the Vice-President & Territory Risk Manager with GE Real Estate. He holds a Bachelor of Arts degree from York University’s (Economics), a law degree from Queen’s University. Craig A. Geier (Independent Director) is Chief Financial Officer of Sulliden Exploration Inc. (TSX:SUE), a mineral exploration company focused on the development of its Shahuindo gold-silver project located in northern Peru. He also sits as Chairman of the Board of Microbonds Inc. and as a Board Member of DDC International Inc. Prior to joining Sulliden, he was Chief Executive Officer of Microbonds Inc. and remains a principal investor. From 2000–2001, he was founder and Chief Executive Officer of Sports Media Systems Inc. and in 1999 he held the position of Executive Vice President, Trust Development with Residential Equities REIT. He holds an Honours of Business Administration degree from the University of Western Ontario. W. Glen Shyba (Independent Director) is Executive Vice President and Chief Operating Officer of Osmington Inc. (“Osmington”) Osmington is a privately held owner and developer of commercial real estate, with a national presence. He has held the same position with Osmington since its inception in 1995, where he has corporate responsibility for acquisitions and dispositions, finance and treasury, and the firm’s development initiatives. He has led negotiations on purchase and sale transactions in excess of $2 billion, and has structured financing arrangements on various deals in excess of $700 billion. He has also executed numerous commercial development projects from initial design concept through to construction. Prior to Osmington, he was Vice President, Development for a major Canadian public company primarily engaged in large scale, mixed use and office real property development. He holds a Bachelor of Commerce degree from the UBC. R. Blair Tamblyn (Executive Director and Chairman) is Chief Executive Officer and a director of the Fund. He Is also a founder and the CEO and President of the Timbercreek Asset Management Inc. (the “Fund Manager”). He has over 10 years experience working with the public and private capital markets and has led the origination, structuring, capitalization and execution of four distinct Timbercreek funds that currently manage over $830 million in assets. He has also been responsible for raising over $200 million in capital through public and private channels and has an extensive network in both institutional and retail capital markets. Prior to founding Timbercreek in 1999, he worked at Connor, Clark & Company as a securities trader and investment representative. He is a graduate of the University of Western Ontario.
    • 11 Investment committee Ugo Bizzarri (Committee Member) is Chief Financial Officer (CFO) of the Fund as well as the registered Portfolio Manager of the Fund. Mr. Bizzarri is also a founder of the Fund Manager where he currently holds the title of CFO. Since the inception of the Timbercreek real estate funds in 1999, he has directed the acquisitions of greater than $700 million worth of Multi-Residential Real Estate for these funds. From 1994 to April 2000, he was in Portfolio Management at the Ontario Teachers’ Pension Plan Board (OTPPB) where he played a leadership role in the strategic planning, corporate transactions/restructuring and property acquisitions for the Real Estate Group of OTPPB. He has been involved as a negotiator and manager in approximately $20 billion worth of real estate transactions in the last ten years. He is a graduate of the Richard Ivey School of Business and is a Chartered Financial Analyst. He is a graduate of the Faculty of Applied Sciences at the University of Toronto and is registered as a Professional Engineer. Chris Humeniuk (Committee Member) is a co-founder of Canadian Mortgage Strategies & Investments (“CMSI”) where he currently holds the title as Managing Director. Prior to co-founding CMSI, he was employed as a mortgage broker at Canada ICI Commercial Mortgages from 1999 through 2002. From 1997 to 1999, he was employed as a mortgage broker at ICI Mortgage Services Limited. From 1995 to 1996, he was employed as a mortgage broker at Dominion Mortgage Corporation and from 1990–1995 he was employed by Forsgate Funding Corporation Inc., a private real estate lending and development company. Overall, he has over 15 years of real estate and mortgage experience. Mr. Humeniuk is a graduate of the University of Western Ontario with a Degree in Economics. Andrew Jones (Committee Member) is Chief Credit Officer of the Fund Manager. His primary responsibilities include originating and structuring debt and warehouse facilities for the Fund and the Fund Manager as well as directly administering the mortgage portfolio of the Fund from origination through to repayment. In 2002, he co-founded a commercial mortgage brokerage firm with offices in Toronto, Montreal, Edmonton and Vancouver. He has structured and been the lead originator of approximately $1.2 billion in mortgage loans over the last five years. From 1997 through 1999, he held the positions of Vice-President, Finance at Residential Equities REIT and Vice-President, Finance at Dundee Realty Corporation. He is also a Trustee of Timbercreek REIT and a Member of the mortgage advisory committee for the Fund. He is a graduate of the University of British Columbia and has worked in the commercial real estate and mortgage business for over 15 years. Pamela Spackman (Independent Committee Member) has been active in the commercial real estate finance industry since 1986. Most recently she spent 8 years as President and CEO of Column Canada Financial Corp. and as a Director at Credit Suisse. In this position she directed the group in Canada responsible for the origination, structuring and securitization of commercial mortgage loans for Credit Suisse CMBS program. Prior to joining Credit Suisse, she was Vice President, Mortgage Investments directly responsible for the creation and management of the commercial mortgage-lending program for British Columbia Investment Management Corporation (bcIMC).
    • Long-term views. Value investing. Focus on process. Research and analysis. An active management style. That sums up our investment philosophy. Let us explain in clear terms exactly what we mean by these words and, in doing so, capture why we’re confident in our future.
    • 13 Letter to shareholders While we were not immune to the challenges presented Furthermore, with over 65 years of cumulative by the global macroeconomic crisis in 2008, I believe that experience, our management team provides the Fund the performance of Timbercreek Mortgage Investment with a true competitive advantage. Specifically, Andrew Corporation (the Fund) in its first year as a public Jones brings deep experience and a developed network entity underscores the soundness of our investment of long-term relationships in the commercial real estate thesis; to provide investors looking for alternative asset and mortgage lending community, which are invaluable to class investments with a with a low-risk opportunity to the Fund. Andrew’s expertise and reputation, cultivated generate predictable cash flow. over the past 15 years, is considered key to generating a broad range of opportunities, ultimately facilitating We believe this opportunity is the result of an imbalance improved deal flow. between quality borrowers and lenders—one that was exacerbated in 2008 by the tightening credit markets. At Timbercreek, we start with a robust asset allocation This underserved market, created by insufficient model. We believe that the reduction in systemic risk competition among Canadian financial institutions that diversification provides is more important to capital and the small number of quality private lenders, has preservation than any one loan could be. We’ve adopted presented an opportunity for Timbercreek to thrive. this model to ensure that capital preservation and the achievement of our investment objectives remain at Our Fund’s performance also reaffirmed our most the forefront of every decision. Specific thresholds strongly held fundamental belief: that real estate is still determined by this model are monitored regularly and an excellent place to invest and a sound investment each new investment must comply with its restrictions. opportunity for investors seeking an alternative asset class investment. In our opinion, the key is to find a Given our strong focus on reduced risk and capital vehicle that provides transparency down to the asset preservation, it should be noted that the fund has no level, strong independent governance, a fee structure exposure to securitized pools of mortgage loans or other that aligns investors and management, and a manager sub-prime mortgage loans. It should also be noted that that takes a hands-on active approach to investing in we currently have no debt on our balance sheet. We feel real estate. strongly that we can achieve our targeted returns without the added risk that leverage provides. Our Fund, while relatively new to the market, has a strong foundation of experience behind it. Timbercreek Our rigorous investment process includes a regular Asset Management has been successfully structuring, macro-level economic analysis of various geographic capitalizing and subsequently managing assets for more locations and properties to determine potential than 10 years, and now has over $830 million in assets opportunities. Next, we evaluate the attributes of individual under management. mortgage investment opportunities within this universe. Opportunities identified during this initial review are then
    • Opportunities identified during this initial review are then To conclude, we believe this approach to investing will subject to intense scrutiny to ensure they meet the continue to mitigate risk while at the same time provide highest thresholds. In addition, our two-tiered advisory very acceptable returns. Current turmoil in the Canadian structure enforces strong governance and compliance real estate market will continue to create opportunities, with our internal standards, ensuring that only after as quality borrowers with quality real estate assets turn an investment opportunity has passed our rigorous to Timbercreek to meet their short-term credit needs. standards do we invest. A tightening of credit conditions within the Canadian banking system should further support this business We are thrilled that Pamela Spackman is chairing model and bolster demand for our product. the Mortgage Advisory Committee—her decades of experience in the lending community are an enormous As such, we believe the Fund is well positioned to resource to the Fund. execute on the strategic initiatives that will build value: to make smart investments in the Canadian real estate We are also indebted to the independent Board of market that provide ample risk-adjusted returns. Directors for the time and energy that they have allocated to the Fund’s creation, and their help in generating the I look forward to reporting to you on our progress momentum that the Fund now enjoys. I am thrilled to during 2009. be able to work with such a diverse group, and certainly appreciate the extensive experience and integrity that they bring to the Fund. Lastly, I need to speak to current composition of our loan portfolio. To ensure our loans, which are directly secured R. Blair Tamblyn by residential, office, retail and industrial real property, will CEO and President remain in good standing we take a hands-on approach, Timbercreek Mortgage Investment Corporation actively managing each investment. Currently, over 50% of the Fund’s capital is invested in mortgages secured by multi-residential properties—an asset class that has proven to be a safe harbor in times of economic turmoil. Further, given the health of our loan portfolio, and lack of any impairments to date, we can focus on proactively growing the Fund to its targeted size rather than reactively working out loans that are no longer performing.
    • 15 Annual Management Report of Fund Performance For the period from April 30, 2008 (date of incorporation) to December 31, 2008 This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the Timbercreek Mortgage Investment Corporation (the “Fund”). You can get a copy of the annual financial statements at your request, at no cost, by any of the following: Phone: Calling the Fund at (416) 306-9967 ext. 250 (collect if long distance), Carrie Morris, Investor Relations; or Internet: visiting SEDAR at www.sedar.com; or Mail: Writing to the Fund at: Timbercreek Mortgage Investment Corporation 25 Price Street Toronto, Ontario M4W-1Z1 Shareholders may also contact us using one of these methods to request a copy of the Fund’s proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. Timbercreek Annual Report 2008
    • Management’s Discussion and Analysis of Fund Performance This Management’s Discussion and Analysis of Timbercreek Mortgage Investment Corporation’s (the “Fund”) per- formance is based on the views of the Fund’s management as of December 31, 2008 and is not intended to provide legal, accounting, tax or investment advice. Investment Objectives and Strategies The Fund was incorporated on April 30, 2008 under the laws of the Province of Ontario and commenced operations on July 7, 2008 when it completed an initial public offering (the “IPO”) of Class A shares and issued Class B shares through a private placement in connection with the acquisition of the initial mortgage portfolio. It is the intention of the Fund to qualify as a “mortgage investment corporation” as defined under Section 130.1(6) of the Income Tax Act (Canada). The fundamental investment objectives of the Fund are to: • Provide shareholders with a stable stream of monthly distributions targeting an annual yield of the 2-year Government of Canada Bond plus 550 basis points by acquiring and maintaining a diversified portfolio of mortgage assets; and • Preserve net asset value of the Fund. The Fund intends on meeting its investment objectives by investing in a diversified portfolio of mortgage loans secured directly by residential (including multi-residential), office, retail and industrial real property across Canada, primarily located in large urban markets and surrounding areas. Risk There was no material change since November 27, 2008, which affected the overall level of risk associated with an investment in the Fund. The risks of investing in the Fund remain as discussed in its prospectus dated November 27, 2008 (the “Prospectus”). There is no assurance that the Fund will be able to achieve its objectives or earn any return. Results of Operations Total revenue earned by the Fund for the period ended December 31, 2008 was $2,014,061, which is composed of interest income of $1,888,810 and lender fees of $125,881. During the period ended December 31, 2008, the Fund advanced $42,932,126 in mortgage loans (of which $13,993,376 was acquired in exchange for Class B shares of the Fund) and received repayment of $3,631,803, resulting in a total mortgage investments at year-end of $39,300,323 with a weighted average interest rate of 11.61%. At year-end, the Fund had cash and cash equivalents of $11,506,658 available to fund new mortgage investments.
    • 17 As discussed below, as a result of the continued market volatility in the Canadian financial and economic sectors, Timbercreek Mortgage Strategies Inc. (the “Mortgage Manager”) remains cautious and, within the context of the Asset Allocation Model, continues to almost exclusively pursue new mortgages secured by income-producing properties. For the period from July 7, 2008 (the date the Fund commenced operations following the IPO) to December 31, 2008, the Fund experienced an increase in net assets from operations of $1,494,809, or an increase per Class A share of $0.35 and $0.39 per Class B share. Based on a distribution of $0.44 and $0.48 per Class A and Class B share, respectively, this resulted in an annualized return of 9.10% per Class A share and 9.89% per Class B share, based on an issue price per unit of $10.00, from inception to year end. This is consistent with the targeted return provided by the Fund Manager of approximately 9%, which was included in the IPO prospectus and the Prospectus. The average 2-year Government of Canada Bond rate plus 550 basis points for the period ended December 31, 2008 was 7.84%. Table 1: Reconciliation of Net Earnings Available for Distribution For the period ended December 31, 2008 Increase in net assets from operations $ 1,494,809 Adjustments: Future tax expense, non-cash item 8,723 Lender fees received, but not earned under GAAP in the year1 333,172 $ 1,836,704 Dividends to Class A shareholders $ 1,145,706 Dividends per Class A share $ 0.44 Dividends to Class B shareholders $ 689,897 Dividends per Class B share $ 0.48 Payout ratio 99.9% 1 For Canadian Income Tax purposes lender fees are included in taxable income of the Fund for the year ended December 31, 2008. In accordance with Canadian GAAP and the accounting policy of the Fund, lender fees are amortized over the term of the loan. Timbercreek Annual Report 2008
    • The majority of the Fund’s expenses consist of management fees of $236,147 and performance fees, net of waivers and absorptions, of $34,894. The remainder of operating expenses of $248,211 relate mainly to the operation of the Fund and administration of the mortgage portfolio. The Fund had no redemptions in 2008. Recent Developments As credit markets around the world contracted through the second half of 2008, traditional Canadian lending insti- tutions dramatically reduced the amount of capital available for mortgage lending against investment real estate, creating an opportunity for non-traditional lenders to grow. This has allowed the Fund to invest in mortgage loans with lower overall risk while maintaining its targeted yield to investors. Due to the continued expected volatility in the economy in 2009, in the last six months of 2008 the Mortgage Manager and Mortgage Advisory Committee focused exclusively on mortgage loans which were secured by assets that are generating cash flow. Until the economic environment improves, the Mortgage Manager has moved away from financing projects which require sales or a capital gain in order for the borrower to execute on its exit strategy — which is imperative due to the short-term nature of the Fund’s mortgage investments. The Fund continued to comply with the Asset Allocation Model adopted by Timbercreek Investments Management Inc., (the “Fund Advisor”) for the Fund and has maintained a portfolio of mortgage investments which, amongst other things, is well diversified by the type of real estate, as well as by the geographic location of the real estate. At December 31, 2008, the Mortgage Manager made the decision to forego a portion of its performance bonus. While the performance fee of the Mortgage Manager is earned on net earnings available to distribute over the average 2-year Government of Canada Bond Yield plus 450 basis points, the Fund Manager had targeted an annualized yield of approximately 9%, net of all fees and expenses of the Fund in the first year of operation (based on an issue price of $10 per share). As the costs associated with the launch of the Fund were greater than originally expected, the Mortgage Manager felt it was appropriate to forego a sufficient amount of the performance bonus such that the targeted annualized yield was achieved for both Class A and Class B investors. As a result, the Mortgage Manager waived $88,591 of performance fees earned during the period ended December 31, 2008. Related Party Transactions As disclosed in detail in the Prospectus, on July 7, 2008, the Fund acquired a portfolio of 12 mortgage assets of Timbercreek Mortgage Investment Fund (“TMIF”) and the outstanding trust units of TMIF in exchange for 1,509,279 Class B shares of the Fund for a total consideration of $15,008,141. Before July 7, 2008, TMIF was a related party by virtue of common management, and after July 7, 2008 became a wholly owned subsidiary of the Fund.
    • 19 The Fund, Timbercreek Asset Management Inc. (the “Fund Manager”) and the Mortgage Manager are related by virtue of common management. All transactions between related parties were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed upon by the related parties. Related party transactions include the following transactions and balances: During the period ended December 31, 2008, the Fund was charged fees by the Fund Manager of $236,147 for general management and administration services. The Fund Manager is entitled to a fee of 1.2% per annum of the gross assets of the Fund (the “Management Fees”), plus applicable taxes, calculated daily and paid monthly in arrears. During the period ended December 31, 2008, the Mortgage Manager earned a performance fee of $123,485 for management and administration of the Fund’s mortgage portfolio. As described above, the Mortgage Manager waived $88,591 of the performance fee earned and charged the Fund $34,894. In any calendar year where the Fund has net earnings available for distribution to shareholders in excess of the Hurdle Rate (Hurdle Rate is defined as the average 2-year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Mortgage Manager is entitled to receive from the Fund a performance fee equal to 20% of the net earnings of the Fund available to distribute over the Hurdle Rate (the “Performance Fees”). In determining the Performance Fee, on a monthly basis the Fund Manager will calculate the earnings available to dis- tribute in that month that are required to achieve the Hurdle Rate, based on the outstanding Share capital of the Fund, net of issue costs, calculated daily. An amount equal to 20% of any net earnings available to distribute in excess of the Hurdle Rate in that month will be deducted from the Fund’s monthly distribution and retained by the Fund. The Fund Manager will calculate the final Performance Fee in respect of a completed calendar year based on the audited financial statements for that year. The Performance Fee in respect of a calendar year will be payable to the Mortgage Manager within 15 days of the issuance of the Fund’s audited financial statements for that year. In the event of a redemption of shares by the Fund, any dividends declared by the Fund during the calendar year in which the redemptions have taken place will be annualized and evaluated with respect to the Hurdle Rate. Fees payable to the Mortgage Manager shall be, in any calendar year where the Fund has net earnings available for distribution to shareholders in excess of the Hurdle Rate, 20% of such excess. Timbercreek Annual Report 2008
    • Financial Highlights The following tables show selected key financial information about the Fund and are intended to help you understand the Fund’s financial performance for the past year. Period Ended December 31, 2008 The Fund’s Net Assets per Class A Share (1) Net Assets, beginning of period $ 9.33 Increase (decrease) from operations: Total revenue 0.49 Total expenses (0.14) Realized gains (losses) for the period – Unrealized gains (losses) for the period – Total increase (decrease) from operations (2) 0.35 Distributions: From Income (excluding dividends) (see Table 1) (0.44) From Dividends – From Capital Gain – Return of Capital – Total Distributions for the period (3) (see Table 1) (0.44) Net Assets, as at December 31, 2008 (GAAP) $ 9.21 Ratios And Supplemental Data Total net asset value (000’s) (4) $ 36,502 (4) Number of shares outstanding 3,889,562 Management expense ratio* (5) 3.13% * Management expense ratio before waivers or absorptions 3.67% * (6) Trading expense ratio 0.07% Portfolio turnover rate (7) 10.19% Net asset value per share, as at December 31, 2008 (Net Redemption Value) $ 9.38 Closing market price $ 9.00 * annualized (1) This information is derived from the Fund’s audited annual financial statements. The net assets per share presented in the financial state- ments differ from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the financial statements. This difference is due to including costs associated with establishment, structuring and periodic offering of securities of the Fund attributable to a particular class of shares being amortized monthly over a period of five years. (2) Net assets and distributions are based on the actual number of shares outstanding for the relevant class at the relevant time. The increase/ decrease from operations is based on the weighted average number shares outstanding for the relevant class over the financial period. (3) Distributions were paid in cash. (4) This information is provided as at December 31, 2008.
    • 21 Period Ended December 31, 2008 The Fund’s Net Assets per Class B Share (1) Net Assets, beginning of period $ 9.84 Increase (decrease) from operations: Total revenue 0.50 Total expenses (0.11) Realized gains (losses) for the period – Unrealized gains (losses) for the period – (2) Total increase (decrease) from operations 0.39 Distributions: From Income (excluding dividends) (see Table 1) (0.48) From Dividends – From Capital Gain – Return of Capital – (3) Total Distributions for the period (see Table 1) (0.48) Net Assets, as at December 31, 2008 (GAAP) $ 9.77 Ratios and Supplemental Data (4) Total net asset value (000’s) (4) $ 14,796 Number of shares outstanding (4) 1,502,279 Management expense ratio* (5) 2.05% * Management expense ratio before waivers or absorptions 2.41% Trading expense ratio* (6) 0.07% (7) Portfolio turnover rate 10.19% Net asset value per share as at December 31, 2008 (redemption value) $ 9.85 Closing market price N/A (5) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (6) The trading expense ratio represents the mortgage transaction costs incurred on a particular mortgage investment as an annualized percentage of semi-monthly average net assets during the period. Typically, the borrower of a particular mortgage will reimburse the Fund for transaction costs, although situations may arise where the Fund may incur the costs. (7) The Fund’s portfolio turnover rate indicates how actively the Fund Advisor managed the Portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund advancing and receiving repayment of all mortgage loan investments once in the course of the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund. Timbercreek Annual Report 2008
    • Management Fees A summary of management fees paid for the period ended December 31, 2008, including a breakdown of services received by the Fund is included in “Related Party Transactions”. Class A shares of the Fund pay each registered dealer a servicing fee equal to 0.75% per annum of the net redemption value per Class A share of the Fund (the “Servicing Fee”). The fee is calculated and paid at the end of each calendar quarter. In addition to the management fees disclosed above, the Fund will pay for all expenses incurred by it in connection with the operation and management, including but not limited to any additional fees payable to the Fund Manager for performance of extraordinary services on behalf of the Fund for services outside the scope of the Fund Management Agreement. A summary of the management fees paid during the period ended December 31, 2008 includes: $ % Management Fees 236,147 65 Performance Fees* 34,894 10 Servicing Fees 91,484 25 362,525 100 * The Mortgage Manager earned performance fees for the period ending December 31, 2008 of $123,485, but waived $88,591 resulting in total fees of $34,894.
    • 23 Summary of Investment Portfolio Net Assets % ($) of Net Assets Mortgages 39,300,323 77.8 Cash and Cash Equivalents 11,506,658 22.8 Net Other Assets (297,308) -0.6 Outstanding Loan-to- Interest Allocation % of Summary of Top 25 Holdings Prov. Principal value Term Rate Position Product Type NAV Cash & Cash Equivalents N/A $ 11,506,658 N/A N/A N/A N/A N/A 22.8% Summit Glen Portfolio, Toronto ON $ 3,318,000 74.3% 18 12.90% Second Multi-Residential 6.6% Reneaude-Lapointe Recreation Centre, Montreal QC $ 3,200,000 67.5% 36 10.90% First Retail 6.3% Dodson Plaza Shopping Centre, Drayon Valley AB $ 2,750,000 65.9% 36 12.09% First Retail 5.4% Charest Boulevard Building, Quebec City QC $ 2,250,000 77.1% 12 11.80% First Office Buildings 4.5% Ascot Rental Townhomes, Edmonton AB $ 1,980,000 74.9% 36 11.82% First Multi-Residential 3.9% CRG Office, Toronto ON $ 1,800,000 79.4% 36 11.40% First Retail 3.6% Lovinac Manor, Edmonton AB $ 1,790,000 61.7% 12 9.40% First Multi-Residential 3.5% Gateway Mobile Home Park, Ft. McMurray AB $ 1,780,000 42.6% 24 13.19% First Other-Residential 3.5% Grand Design Homes Residential Lots, Edmonton AB $ 1,675,197 46.0% 12 10.90% Second Unimproved Land 3.3% Rock Grove / Westview Manor, Hinton & Red Deer AB $ 1,600,000 61.8% 12 12.38% First Multi-Residential 3.2% The Mark on Jasper, Edmonton AB $ 1,500,000 44.4% 12 11.90% First Multi-Residential 3.0% Augusta Apartments, Ottawa ON $ 1,400,000 72.1% 16 11.90% Second Multi-Residential 2.8% Starwood Manufacturing, Mississauga ON $ 1,300,000 61.0% 12 11.90% Second Industrial 2.6% Van Horne & Linton Apartments, Montreal QC $ 1,250,000 79.8% 12 8.90% First Multi-Residential 2.5% Honey Harbour Mobile Home Park, Georgian Bay ON $ 1,050,000 71.1% 24 11.31% First Other-Residential 2.1% Walmer and Spadina Apartments, Toronto ON $ 1,000,000 57.6% 24 11.50% Second Multi-Residential 2.0% Bois de Boulogne Apartments #2, Montreal QC $ 1,000,000 56.5% 13 11.40% Third Multi-Residential 2.0% Gateway Village Residential, Pemberton BC $ 995,661 60.4% 6 13.12% First Multi-Residential 2.0% Queen East Mixed Use Building, Toronto ON $ 855,784 70.2% 12 12.00% Second Retail 1.7% Queen Mary, Montreal QC $ 825,000 84.0% 12 11.90% Second Office Buildings 1.6% Crawford Court, Oakville ON $ 787,500 65.6% 12 6.40% First Multi-Residential 1.6% Western Square Plaza, London ON $ 700,000 82.7% 12 11.90% Second Retail 1.4% Lake Rosseau Residential, Muskoka ON $ 675,000 74.2% 12 14.25% First Single-Residential 1.3% Mirror Lake Retail Complex, Camrose AB $ 547,931 72.0% 24 10.25% First Retail 1.1% 95.0% Timbercreek Annual Report 2008
    • Asset Allocation By Type 44% Multi-residential 27% Retail 9% Other-Residential 9% Office buildings 4% Unimproved land 4% Industrial 3% Single Residential By Region 36% Ontario 35% Alberta 25% Quebec 3% British Columbia 1% Saskatchewan 0% Manitoba By Interest Rate (excluding fees earned by the Fund) 31% 11.50%–11.99% 14% 12%–12.49% 12% 10% or lower 12% 10.50%–10.99% 11% 11%–11.49% 9% 12.50%–12.99% 7% 13%–13.49% 2% 14% or greater 1% 10%–10.49% 1% 13.50%–13.99%
    • 25 By Maturity 53% Maturing in 2009 35% Maturing in 2010 25% Maturing in 2011 By Loan-to-value 23% 71%–75% 22% 61%–65% 16% 76%–80% 14% 55% or less 12% 66%–70% 8% 56%–60% 4% 81%–85% By Term 42% 7–12 months 26% 25–30 months 17% 13–18 months 12% 19–24 months 3% 0–6 months Timbercreek Annual Report 2008
    • Management’s Responsibility for Financial Statements To the shareholders of Timbercreek Mortgage Investment Corporation The accompanying consolidated financial statements of Timbercreek Mortgage Investment Corporation (the “Fund”) were prepared by management, which is responsible for the integrity and fairness of the information presented, including the amounts that are based on estimates and judgments. Management is also responsible for ensuring that these consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in Canada. Financial information appearing throughout this annual report is consistent with these consolidated financial statements. In discharging its responsibility for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, management maintains the necessary system of internal controls designed to ensure that transactions are authorized, assets are safe-guarded and proper records are maintained. PricewaterhouseCoopers LLP, the independent auditors, have performed an independent audit in accordance with generally accepted auditing standards in Canada, of the consolidated financial statements and their report follows. The shareholders’ auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings. The Board of Director’s is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal controls and engaging the independent auditors. The Board of Director’s carries out this responsibility through its Audit Committee, which is composed entirely of independent Director’s. The consolidated financial statements have been reviewed and approved by the Board of Director’s and it’s Audit Committee. The independent auditors have direct and full access to the Audit Committee and Board of Director’s. R. Blair Tamblyn Ugo Bizzarri President and Chief Executive Officer Chief Financial Officer Toronto, Ontario, Canada Toronto, Ontario, Canada February 23, 2009 February 23, 2009
    • 27 Auditors’ Report February 23, 2009 To the Shareholders of Timbercreek Mortgage Investment Corporation We have audited the consolidated statements of net assets and investment portfolio of Timbercreek Mortgage Investment Corporation (the Fund) as at December 31, 2008 and the consolidated statements of operations, changes in net assets and cash flows for the period from April 30, 2008 (date of incorporation) to December 31, 2008. These consolidated financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial posi- tion of the Fund as at December 31, 2008 and the results of its operations and its cash flows for the period from April 30, 2008 (date of incorporation) to December 31, 2008 in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Toronto, Canada Timbercreek Annual Report 2008
    • Consolidated Statement of Net Assets December 31, 2008 Assets Cash and cash equivalents $ 11,506,658 Mortgages (note 4) 39,300,323 Accrued interest receivable 339,484 Other amounts receivable and prepaids 456,427 Future income tax asset (note 1) 34,890 $ 51,637,782 Liabilities Accounts payable and accrued expenses $ 355,553 Prepaid mortgage interest 17,252 Dividends payable to shareholders (note 5) 344,458 Due to Fund Manager (note 6) 42,780 Due to Mortgage Manager (note 6) 34,894 Unearned income 333,172 1,128,109 Net assets representing Shareholders’ Equity $ 50,509,673 Net assets, Class A $ 35,832,049 Net assets, Class B $ 14,677,524 Net assets, Voting shares $ 100 Shares outstanding (note 5) Class A 3,889,562 Class B 1,502,279 Voting shares 100 Net assets per share (note 7) Class A $ 9.21 Class B $ 9.77 Voting shares $ 1.00 The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of the Board of Directors “R. Blair Tamblyn” “Craig A. Geier” R. Blair Tamblyn Craig A. Geier
    • 29 Consolidated Statement of Operations For the period from April 30, 2008 (date of incorporation) to December 31, 2008 Revenue Interest income $ 1,888,180 Fee income 125,881 2,014,061 Expenses Management fees (note 3) $ 236,147 Performance fees (note 3) 123,485 Transfer agent fees 9,672 Directors’ fees 17,500 Custodian fees 5,250 Servicing fees (note 3) 91,484 Audit fees 61,950 Legal fees 6,319 Other operating expenses 47,313 Future tax expense 8,723 607,843 Expenses waived (note 3) (88,591) Net expenses 519,252 Net investment income $ 1,494,809 Fair value adjustment – Increase in net assets from operations $ 1,494,809 Other information Increase in net assets from operations Class A $ 930,521 Class B $ 564,288 Increase in net assets from operations per share Class A $ 0.3474 Class B $ 0.3931 The accompanying notes are an integral part of these consolidated financial statements. Timbercreek Annual Report 2008
    • Consolidated Statement of Changes in Net Assets For the period from April 30, 2008 (date of incorporation) to December 31, 2008 Class A Class B Voting shares Fund Net assets — Beginning of period $ – $ – $ – $ – Increase in net assets from operations 930,521 564,288 – 1,494,809 Dividends to shareholders (1,145,706) (689,897) – (1,835,603) Net proceeds from issuance of shares 36,047,234 14,803,133 100 50,850,467 Total increase in net assets 35,832,049 14,677,524 100 50,509,673 Net assets — End of period $ 35,832,049 $ 14,677,524 $ 100 $ 50,509,673 The accompanying notes are an integral part of these consolidated financial statements.
    • 31 Consolidated Statement of Cash Flows For the period from April 30, 2008 (date of incorporation) to December 31, 2008 Cash provided by (used in) Operating activities Net investment income $ 1,494,809 Change in non-cash balances related to operations Increase in accrued interest income receivable (123,521) Increase in other amounts receivable and prepaids (456,427) Decrease in future tax asset 8,723 Increase in accounts payable and accrued expenses 323,484 Decrease in due to Mortgage Manager (18,550) Increase in due to Fund Manager 42,780 Increase in unearned income 294,527 1,565,825 Investing activities Funding of mortgages (28,938,750) Discharge of mortgages 3,631,803 (25,306,947) Financing activities Proceeds from issuance of voting shares 100 Proceeds from issuance of Class A shares, net of costs incurred 31,812,234 Proceeds from issuance of Class B shares, net of costs incurred 4,926,591 Dividends paid (1,491,145) 35,247,780 Increase in cash and cash equivalents during the period $ 11,506,658 Cash and cash equivalents — Beginning of period – Cash and cash equivalents — End of period $ 11,506,658 Supplementary information Supplemental cash flow on non-cash investing and financing activities Class B shares issued in exchange for trust units (note 2) $ 3,838,796 Class B shares issued in exchange for mortgages (note 2) 11,169,345 The accompanying notes are an integral part of these consolidated financial statements. Timbercreek Annual Report 2008
    • Consolidated Statement of Investment Portfolio December 31, 2008 Amortized cost Fair value Mortgages (77.80%) $ 39,300,323 $ 39,300,323 Cash and other net assets (22.20%) 11,209,350 Net assets (100%) $ 50,509,673 Mortgage Portfolio Summary Number of Interest rate mortgages Amortized cost Fair value Less than or equal to 10% 5 $ 4,590,500 $ 4,590,500 10.00% – 10.24% – – – 10.25% – 10.49% 1 547,931 547,931 10.50% – 10.74% – – – 10.75% – 10.99% 2 4,875,197 4,875,197 11.00% – 11.24% 1 378,000 378,000 11.25% – 11.49% 3 3,850,000 3,850,000 11.50% – 11.74% 2 1,400,000 1,400,000 11.75% – 11.99% 10 10,746,250 10,746,250 12.00% – 12.24% 2 3,605,784 3,605,784 12.25% – 12.49% 2 1,958,000 1,958,000 12.50% – 12.74% – – – 12.75% – 12.99% 2 3,648,000 3,648,000 13.00% – 13.24% 1 1,780,000 1,780,000 13.25% – 13.49% – – – 13.50% – 13.74% 1 250,000 250,000 13.75% – 13.99% – – – Greater than or equal to 14% 2 1,670,661 1,670,661 34 39,300,323 39,300,323 Note: All mortgages are conventional uninsured mortgages, of which 26 mortgages totalling $31,684,323 are repayable at any time by the borrower without penalty or yield maintenance.
    • 33 Notes to Consolidated Financial Statements Period from April 30, 2008 (date of incorporation) to December 31, 2008 Formation of the Fund Timbercreek Mortgage Investment Corporation (the Fund) was incorporated under the laws of the Province of Ontario by articles of incorporation dated April 30, 2008 and is authorized to issue an unlimited number of Class A, Class B and voting shares. The investment objective of the Fund is, with a primary focus on capital preservation, to acquire and maintain a diversified portfolio of mortgage loan investments which generate income allowing the Fund to pay monthly distributions to shareholders. Timbercreek Asset Management Inc. (the Fund Manager), as manager of the Fund, is responsible for the day-to-day operations and providing all general management and administrative services. Timbercreek Mortgage Strategies Inc. (the Mortgage Manager), a 50% owned subsidiary of the Fund Manager, is responsible for the management and administration of the Fund’s mortgage loan portfolio. Class A shares are available to all investors and were issued upon the conversion of subscription receipts issued under the initial public offering (IPO) and may be issued under other offerings that may be completed in the future. Class B shares were issued to the Timbercreek Mortgage Investment Fund unitholders in connection with the acqui- sition of the initial mortgage portfolio by the Fund (note 2) and may also be offered in the future under available prospectus exemptions. The voting shares have a nominal value and are owned by certain shareholders of the Fund Manager. Accordingly, these shareholders, as holders of all of the issued and outstanding voting shares will have the power to vote on all matters to be considered by the holders of voting shares. The Fund commenced operations on July 7, 2008 when it completed the IPO of subscription receipts that were subsequently converted into Class A shares and issued Class B shares in connection with the acquisition of the initial mortgage portfolio. 1. Summary of significant accounting policies Basis of presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) and include the accounts of the Fund and Timbercreek Mortgage Investment Fund (the Trust), in which the Fund is the holder of all trust units and the sole beneficiary. Cash and cash equivalents The Fund considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Timbercreek Annual Report 2008
    • 1. Summary of significant accounting policies (continued) Mortgages The Fund measures its investment in mortgages at fair value in accordance with Canadian GAAP Accounting Guideline 18 Investment Companies, with any changes in the fair value of a mortgage recorded in the con- solidated statement of operations. Fair value is the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of the mortgages approximate their carrying value given the mortgage loan portfolio consists of short-term loans (typically maturing within 24 months or less) that are repayable at the option of the borrower without penalty or yield maintenance, and any renewal of the existing portfolio of mortgages would be made at the same or similar terms based on the Fund Manager’s assessment of the current mortgage market. When collection of the principal on a mortgage is no longer reasonably assured, the fair value of the mortgage is reduced to the estimated net realizable value of the underlying security. Interest and fee income Interest income is accounted for on an accrual basis. Lender fees received are amortized to income over the contractual terms of the mortgages. Forfeited lender fees are recognized at the time a borrower has not fulfilled the terms and conditions of a mortgage commitment and payment has been received. Unearned income Unearned income includes lender fees received from borrowers, which are amortized over the contractual terms of the mortgage to fee income. Income taxes The Fund qualifies as a mortgage investment corporation (MIC) for Canadian income tax purposes. A MIC is a special purpose corporation defined under section 130.1 of the Income Tax Act (Canada) and is generally able to deduct in computing its income for a taxation year, the amount of income for that year and within 90 days of year end that is distributed to its shareholders. Shareholders who receive any amounts as, or on account of, a taxable dividend, other than a capital gains dividend, will be subject to Canadian income or withholding tax accordingly. The Fund intends to make distributions to the extent necessary to reduce its taxable income each year to $nil so that it has no income taxes payable under Part I of the Income Tax Act (Canada) and to elect to have dividends be capital gains dividends to the maximum extent allowable.
    • 35 MIC eligibility criteria To qualify as a MIC for Canadian income tax purposes, the Fund must comply with the following: i) At least 50% of the Fund’s assets must consist of residentially orientated mortgages and/or cash; ii) The Fund’s only business activity is investing funds of the corporation and not managing or developing any real property; iii) The Fund must not hold any investments secured by real property situated outside Canada or have debts owing to the Fund by non-resident individuals, other than debts secured by real property situated in Canada; and iv) No shareholder may own more than 25% of the issued shares of any class. The Fund has recognized the benefit of tax-effected future deductible temporary differences of $34,890. These dif- ferences arise primarily because of differences between the tax basis of certain financing costs and their carrying value on the consolidated balance sheet. As of December 31, 2008, the Fund has non-capital losses carried forward for income tax purposes of $367,000, which will expire in 2028 if not used. The company also has future deductible share issuance and financing costs for income tax purposes of $2,388,000 which are deductible over 5 years. The potential benefit of these tax pools has not been recognized in these financial statements. Financial instruments — recognition and measurement In accordance with CICA Section 3855 “Financial Instruments—Recognition and Measurement”, TMIC is required to classify its financial assets as one of the following: (i) held to maturity, (ii) loan and receivables, (iii) held for trading and (iv) available for sale. Financial liabilities must be classified as: (i) held for trading or (ii) other liabilities. The Fund has designated its financial assets and financial liabilities as follows: Financial assets: Cash and cash equivalents and mortgages are classified as held for trading and recorded at fair value. Accrued interest receivable, other amounts receivable and prepaids are classified as loans and receivables and recorded at amortized cost. Financial liabilities: Accounts payable and accrued expenses, dividends payable to shareholders, prepaid mortgage interest, due to Fund Manager and Mortgage Manager are classified as other liabilities and recorded at amortized cost. Timbercreek Annual Report 2008
    • 1. Summary of significant accounting policies (continued) Increase in net assets per share from operations Increase in net assets per share is based on the increase in net assets from operations attributable to each class of shares divided by the weighted average number of shares for that class during the period. Net assets per share The net assets per share is calculated by dividing the net assets of a class of shares by the total number of out- standing shares of the class at the end of the period. Use of estimates The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. The key area of estimation where management has made a difficult or subjective judgement, often as a result of matters that are inherently uncertain, is valuation of the mortgage portfolio. Significant changes in assumptions could materially change the recorded carrying value. Recent Canadian accounting pronouncements issued and not yet adopted International Financial Reporting Standards (“IFRS”) The Accounting Standards Board (“AcSB”) of the CICA confirmed that Canadian GAAP for publicly accountable enterprises will be converged with IFRS effective in the calendar year 2011. IFRS will replace current Canadian GAAP for these enterprises. The conversion to IFRS will be required for the Fund for interim and annual financial statements beginning on January 1, 2011. Enterprises will also be required to provide comparative IFRS informa- tion for the previous fiscal year. The Fund will implement these standards in its first quarter of the fiscal year ending December 31, 2011 and is currently evaluating the impact of adoption on its consolidated financial statements.
    • 37 2. Acquisitions Following the closing of the IPO on July 7, 2008, the Fund completed the acquisition of a portfolio of mortgage investments from the Trust and acquired all of the outstanding units of the Trust. As a result of acquiring all of the outstanding units of the Trust, the Fund became its sole beneficiary. Pursuant to the approval by the unitholders of the Trust, the Fund acquired a portfolio of 12 mortgage invest- ments in exchange for 1,116,934 Class B shares issued at $10 per share, for total consideration of $11,169,345. Subsequent to the transaction, the trustees declared an in specie distribution to the Trust unitholders of record of all Class B shares received, pursuant to this exchange. As a result of the in specie distribution, the Trust unitholders became Class B shareholders of the Fund. Immediately following the acquisition of the mortgage portfolio, the Fund issued 392,345 Class B shares at $10 per share in exchange for all of the outstanding units of the Trust, for total net proceeds of $3,838,796. As a result of this transaction, the Fund holds all outstanding units of the Trust and is the sole beneficiary. The acquisition of the mortgage portfolio and outstanding units of the Trust has been recorded using the purchase method. The following table summarizes the preliminary fair values of the net assets acquired by the Fund. Assets Mortgages $ 13,993,376 Cash and cash equivalents 896,599 Future income tax asset 43,613 Interest receivable 215,963 15,149,551 Liabilities Accounts payable and accrued expenses $ 49,321 Unearned income 38,645 Due to Mortgage Manager 53,444 141,410 Net assets acquired $ 15,008,141 Net assets acquired in exchange for: Class B shares $ 15,008,141 Timbercreek Annual Report 2008
    • 3. Expenses Management and performance fees The Fund Manager is responsible for the day-to-day operations and providing all general management and administration services to the Fund. The Fund pays the Fund Manager a monthly management fee of 1.2% for its services, based on the gross assets of the Fund, calculated daily and payable monthly. For the period ended December 31, 2008, the Fund incurred management fees of $236,147. The Mortgage Manager is responsible for the management and administration of the Fund’s mortgage portfolio. In any calendar year where the Fund has net earnings available for distribution to shareholders in excess of the Hurdle Rate (Hurdle Rate is defined as the average 2-year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Mortgage Manager will be entitled to receive from the Fund a performance fee equal to 20% of the net earnings of the Fund available to distribute over the Hurdle Rate. The per- formance fee is payable to the Mortgage Manager within 15 days of the issuance of the Fund’s audited financial statements for that calendar year. For the period ended December 31, 2008, the Fund has accrued $34,894 in performance fees. The performance fees, net of fees waived for Class A and Class B shares, were as follows: Class A $ 24,736 Class B 10,158 $ 34,894 Servicing fees The Fund will pay each registered dealer a servicing fee equal to 0.75% annually of the net redemption value per Class A share for each Class A share held by clients of the registered dealer, calculated and paid at the end of each calendar quarter. For the period ended December 31, 2008, the Fund incurred servicing fees of $91,484. Fund operating expenses Each class of shares is responsible for the payment of its proportionate share of common operating expenses, such as director’s fees, independent review committee fees, custodian fees, transfer agent fees, audit fees, filing fees, legal fees, and other administrative expenses, in addition to the expenses that are attributable to a particular class of shares. The common operating expenses are allocated on a proportionate basis to each class of shares based on the net redemption value of each class to the total net redemption value of the Fund.
    • 39 4. Mortgages The following is a summary of the mortgage portfolio as at December 31, 2008: Interest in first mortgages 65% $ 25,585,092 Interest in non-first mortgages 35% 13,715,231 100% 39,300,323 As part of the assessment of fair value, management of the Fund routinely reviews each mortgage for impairment to determine whether or not a loan should be recorded at its estimated realizable value. As at December 31, 2008, management does not believe an impairment exists on any mortgages, as such, no adjustment to the fair value of the mortgages has been recorded. The mortgages are secured by the real property to which they relate, bear interest at a weighted average interest rate of 11.61% and mature between 2009 and 2011. The unadvanced mortgage commitments under the existing mortgage portfolio amounted to $120,624 as at December 31, 2008. Principal repayments based on contractual maturity dates are as follows: 2009 $ 20,850,323 2010 10,700,000 2011 7,750,000 39,300,323 A majority of the mortgages contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance. Timbercreek Annual Report 2008
    • 5. Shareholders’ equity The Fund is available in two classes of shares: Class A and Class B. All shares in a class rank equally with respect to dividends. Each Class A and Class B shareholder is entitled to one vote for each share owned at all meetings of shareholders at which the particular class of shares is entitled to attend and vote. During the period ended December 31, 2008, Class A, Class B and Voting shares issued and outstanding changed as follows: Shares Shares outstanding — outstanding — Authorized beginning of period Issued Exchanged Redeemed end of period Class A unlimited – 3,436,666 452,896 – 3,889,562 Class B unlimited – 1,932,279 (430,000) – 1,502,279 Voting shares unlimited – 100 – – 100 On completion of the IPO on July 7, 2008, the Fund issued 2,433,186 Class A shares for net proceeds of $22,688,015 and 1,509,279 Class B shares in exchange for net assets acquired less issuance costs of $14,858,133. In December 2008, the Fund issued 1,003,480 Class A shares for net proceeds of $9,124,219 and 423,000 Class B shares for net proceeds of $4,180,000. Redemptions Monthly redemptions Subject to certain restrictions, a Class A share may be surrendered for redemption and transacted on the last business day of any month. Shareholders whose Class A shares are surrendered for redemption in any month (other than October) will be entitled to receive a price per Class A share equal to the lesser of (i) 95% of the trading price, defined as the weighted average trading price on the Toronto Stock Exchange (TSX) for a period of ten trading days immediately preceding the relevant redemption date (the Trading Price) or (ii) the market price, being the closing price of the Class A shares on the TSX on the redemption date (the Market Price). Class B shares are redeemable monthly on the same terms and conditions as the Class A shares equal to the lesser of (i) 95% of the Trading Price of the Class A shares multiplied by the Class B exchange ratio; and (ii) the Market Price multiplied by the Class B exchange ratio. The exchange ratio is defined as the net redemption value per Class B share divided by the net redemption value per Class A share on the relevant exchange date.
    • 41 There is no market through which Class B shares may be sold. Subject to certain restrictions, holders of Class B shares may exchange their shares for Class A shares on the last business day of each month. Annual redemptions Class A and Class B shares may be redeemed on the last business day of October of each year at a price per share equal to the net redemption value per Class A share and Class B share, respectively. Dividends The Fund intends to pay dividends to shareholders on a monthly basis within 15 days following the end of each month. For the period ended December 31, 2008, the Fund declared dividends of $0.4425 per Class A share for a total of $1,145,706 and $0.4811 per Class B share for a total of $689,897. As at December 31, 2008, $344,458 was payable to the shareholders. 6. Due to related parties As at December 31, 2008, $42,780 remains payable by the Fund to the Fund Manager for management fees. In addition, $34,894 remains payable to the Mortgage Manager relating to performance fees earned for the period ended December 31, 2008. Timbercreek Annual Report 2008
    • 7. Reconciliation of net asset value A reconciliation between the redemption net asset value (Redemption NAV) and net assets calculated using Canadian GAAP (GAAP NAV) is as follows: Redemption GAAP NAV Adjustment NAV Net asset value as at December 31, 2008 Class A $ 36,501,706 $ (669,657) $ 35,832,049 Class B $ 14,796,318 $ (118,794) $ 14,677,524 Redemption GAAP NAV per share Adjustment NAV per share Net asset value per share as at December 31, 2008 Class A $ 9.38 $ (0.17) $ 9.21 Class B $ 9.85 $ (0.08) $ 9.77 The GAAP NAV differs from the Redemption NAV calculated for fund pricing purposes. This adjustment is due to including costs associated with the establishment, structuring and periodic offering of shares of the Fund attributable to a specific class, being amortized monthly over a period of five years in determining the Redemption NAV. 8. Capital risk management The Fund manages its capital structure in order to support ongoing operations while focusing on its primary objec- tives of preserving shareholder capital and generating a stable monthly cash dividend to shareholders. The Fund defines its capital structure to include Class A and Class B shares. The Fund reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mort- gage investment opportunities, the availability of capital, and anticipated changes in general economic conditions. As at December 31, 2008, the Fund has no externally imposed capital requirements.
    • 43 9. Financial instruments Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial assets or financial liabilities will fluc- tuate because of changes in market interest rates. For the period ended December 31, 2008, if interest rates had been 50 basis points lower, with all other variables held constant, net assets from operations for the period then ended would have been $18,750 lower, arising mainly as a result of lower interest income generated on variable rate mortgage investments. If interest rates had been 50 basis points higher, with all other variables held constant, net assets from operations for the period then ended would have been $18,750 higher, arising mainly as a result of higher interest income generated on variable rate mortgage investments. The Fund’s accrued interest receivable, other amounts receivable and prepaids, amounts payable and accrued expenses, dividends payable to shareholders, prepaid mortgage interest, due to Fund Manager and due to Mortgage Manager have no exposure to interest rate risk. Cash and cash equivalents carry a variable rate of interest and are subject to interest rate risk. Credit risk Credit risk is the possibility that a borrower may be unable to honour its mortgage commitments as a result of a negative change in market conditions that could result in a loss to the Fund. The Fund mitigates this risk by the following: • Adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); • Ensuring a comprehensive due diligence process is conducted on each mortgage investment prior to funding. This generally includes, but is not limited to (1) engaging professional independent consultants, lawyers and appraisers, and (2) performing credit checks on prospective borrowers; • All mortgage investments are approved by the mortgage advisory committee before funding; and • Actively monitoring the mortgage portfolio and initiating recovery procedures where required. The maximum exposure to credit risk at December 31, 2008 is the fair values of its amounts receivable and mortgages which total $40,096,234. Timbercreek Annual Report 2008
    • 9. Financial instruments (continued) Liquidity risk Liquidity risk is the risk that the Fund 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 fundings and repayments and redemptions of shares. Management routinely forecasts future cash flow sources and requirements to ensure cash is efficiently utilized. Fair value The fair value of cash and cash equivalents, accrued interest receivable, other amounts receivable and prepaids, amounts payable and accrued expenses, prepaid mortgage interest, dividends payable to shareholders, due to Fund Manager and due to Mortgage Manager approximate their carrying value due to their short-term nature. Refer to note 1 regarding the fair value of mortgages. Although the Fund’s management believes that the esti- mated fair values of its mortgages are appropriate as at December 31, 2008 based on its assessment of current market conditions for mortgages with similar terms and risks, those fair values may differ if other reasonably possible alternative assumptions are used. 10. Commitments and contingencies In the ordinary course of business activities, the Fund may be contingently liable for litigation and claims arising from investing in mortgages. Where required, management records adequate provisions in the accounts. Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the Fund’s financial position.
    • Head Office: 25 Price Street Toronto, Ontario M4W 1Z1 (t) 416.306.9967 (e) inquiries@timbercreekfunds.com Website: www.timbercreekfunds.com Transfer Agent & Registrar: CIBC Mellon Trust Company 320 Bay Street Toronto, Ontario M5H 4A6 Auditors: PricewaterhouseCoopers LLP Legal Counsel McCarthy Tétrault LLP Designed and Produced by Equicom, a TMX Group Company. Stock Exchange Listing: TSX: TMC
    • Timbercreek Mortgage Investment Corporation www.timbercreekfunds.com