Interim Management Report on Fund Performance

Transcription

1 This interim management report of fund performance of (the Company ) contains financial highlights but does not contain the complete condensed interim financial statements of the Company. This report should be read in conjunction with the condensed interim financial statements and notes thereto for the six month ended June 15, You can get a copy of the condensed interim financial statements on request and at no cost by calling (416) , by writing to us at 1000 Yonge Street, Suite 500, Toronto, Ontario M4W 2K2 or by visiting our website located at or SEDAR at Security holders may also contact us using one of these methods to request a copy of the Company s proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure when that information becomes available. Investment Objective and Strategies The Company holds a portfolio (the Portfolio ) of publicly listed common shares (the Portfolio Shares ) of Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank (collectively the Banks ) in order to generate quarterly fixed cumulative preferential dividends of $ per share for the holders of the Company s Class C Preferred Shares while providing the holders of the Class B Capital Shares with a leveraged investment, the value of which is largely linked to the changes in the market price of the Portfolio Shares. Holders of the Class B Capital Shares will also receive, subject to the prior rights of Preferred Shareholders, excess distributions, if any, after payment of all the expenses of the Company and the dividends on the Class C Preferred Shares. The Company only trades the Portfolio Shares in limited circumstances as described in the Company s original prospectus. As such, the Portfolio Shares are not actively traded and the Company can be considered a passive investment vehicle. Risk Holders of the Class B Capital Shares are exposed to a leveraged return based on the performance of the underlying Portfolio. In the event of a decrease in the value of the Company s underlying investment in the Portfolio Shares, this leverage will work to the disadvantage of the holders of the Class B Capital Shares. The leverage on the Class B Capital Shares is approximately 1.45 at June 15, 2015 (based on a Net Asset Value per Unit of $32.73 as at June 15, 2015). The risk of the repayment of the original issue price for the Class C Preferred Shares is dependent on the value of the Portfolio Shares. Downside protection on the Class C Preferred Shares is the percentage by which the Net Asset Value per Unit can decline and still cover the $10.00 redemption price of a Class C Preferred Share. Downside protection on the Class C Preferred Shares is 69.45% as at June 15, 2015 as compared to 69.49% as at December 15, The Dominion Bond Rating Service assigned an initial rating of Pfd-2 (low) to the Class C Preferred shares and was subsequently changed to Pfd-2 on April 12, The rating remains at Pfd-2 as at June 15, 2015.

2 Results of Operations As a result of the Company s Special Annual Retraction on December 15, 2014 ( 2014 Retraction ), an assessment of the financial performance comparison on a Unit basis is considered to be more relevant than on a dollar basis which has been provided for informational purposes only. A unit consists of one Class C Preferred Share and one Class B Capital Share. Dividends per Unit, for the six months ended June 15, 2015 compared to the prior period increased by 7.66% reflecting a higher level of dividends received. Total operating expenses per Unit for the six month ended June 15, 2015 were $0.13 compared to $0.11 for the six months ended June 15, 2014, up $0.02 or 18.41%, primarily due to the lower Unit base. Class C Preferred Share dividend - Holders of Class C Preferred Shares are entitled to receive quarterly fixed cumulative dividends equal to $ per Class C Preferred Share. For the six months ended June 15, 2015, the Company declared and paid dividends of $312,025 or $ per Class C Preferred Share (six months ended June 15, $382,057 or $ per Class C Preferred Share). Class B Capital Share dividend - For the six months ended June 15, 2015, the Company declared and paid dividends of $371,145 or $ per Class B Capital Share (six months ended $418,251 or $ per Class B Capital Share). This is an increase of 8.7% compared to the same period a year ago, and mainly a result of higher dividends received per share from the Portfolio Shares. As at June 15, 2015, net assets attributable to holders of redeemable Class B Capital Share were $22.73 compared to $22.78 as at December 15, 2014, reflecting a decrease of 0.20% primarily due to a decline in the market value of the Company s investment in Portfolio Shares. The total fair value of the Company s investment portfolio as at June 15, 2015 was $42,964,219 (December 15, $43,037,077). Recent Developments Adoption of International Financial Reporting Standards These condensed interim financial statements for the six months ended June 15, 2015 have been prepared in accordance with International Financial Reporting Standards ( IFRS ) applicable to the preparation of financial statements, including IAS 34, Interim financial reporting, and IFRS 1, First-time Adoption of International Financial Reporting Standards. The Company adopted this basis of accounting effective December 16, 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Company prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined in Part V of the CPA Handbook ("Canadian GAAP"). The comparative information has been restated from Canadian GAAP to comply with IFRS. The Company has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at December 16, 2013 and throughout all periods presented, as if these policies had always been in effect. As a result of adoption of IFRS, there was an increase in the carrying amount of the Company's investments by $21,035 at December 15, 2014, $12,289 as at June 15, 2014 and $17,907 as at December 16, The impact of this adjustment was an increase in net assets attributable to holders of redeemable shares by $3,128 for the year ended December 31, 2014 and a decrease of $5,618 for the six months ended June 15, Note 12 of the condensed interim financial statements discloses in detail the impact of the transition to IFRS on the Company s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company s financial statements for the year ended December 15, 2014 prepared under Canadian GAAP. 2

3 Related Party Transactions Management fees Effective September 19, 2014, Timbercreek assumed the role of Administrator of the Company and administers the ongoing operations pursuant to the original Administration Agreement with TD Sponsored Companies Inc. ( TDSCI ), which now applies to Timbercreek, dated December 15, The Administration Agreement has a term expiring upon the redemption of all Class C Preferred Shares and Class B Capital Shares. As part of the reorganization of the Company on December 15, 2011, the monthly fee payable to the administrator, beginning December 16, 2011, was amended to 1/12 of 0.25% of the market value of the Portfolio Shares. The total management fee paid to the Administrator for the six months ended June 15, 2015 was $60,957 (six months ended June 15, 2014 $71,614). For the six month ended June 15, 2015, an additional amount of $28,250 was paid to Timbercreek (for the six months ended June 15, $ 28,250 was paid to TDSCI) for the recovery of administration costs which have been recognized and included under shareholder reporting cost. As at June 15, 2015, accrued liabilities include an amount of $34,419 payable to the Administrator (December 15, 2014 $61,866; December 16, $50,917 due to TDSCI) for the management fee and recovery of administration costs. Independent Review Committee fees The total remuneration paid to members of the Independent Review Committee for the six months ended June 15, 2015 was $4,500 (six months ended June 15, 2014 $4,500). Director s fees The total Director s Fees paid for the six months ended June 15, 2015 were $17,250 (six months ended June 15, 2014 $15,750). 3

4 Financial Highlights The following table shows selected key financial information about the Company and is intended to help you understand the Company s financial performance for the past three years and for the six months ended June 15, For the six months ended June Net Assets per Unit, beginning of the period (1).. $32.78 $29.78 $26.23 $22.74 Increase (decrease) from operations: Total revenue Total expenses (excluding distribution). (0.13) (0.23) (0.18) (0.17) Realized gains for the period Unrealized gains (losses) for the period. (0.06) Total increase (decrease) from operations Distributions: For the Years Ended December 15, From dividends on Class C Preferred Shares (3). (0.24) (0.47) (0.47) (0.47) From dividends on Class B Capital Shares... (0.28) (0.54) (0.48) (0.43) Total Distributions (2) (3).... (0.52) (1.01) (0.95) (0.90) Capital Reorganization: Class C Preferred Share Issue costs (0.01) Total Reorganization (0.01) Net Assets per Unit, end of the period $32.73 $32.78 $29.76 $26.23 Redemption Value per Class C Preferred Share (10.00) (10.00) (10.00) (10.00) Net Assets per Class B Capital Share. $22.73 $22.78 $19.76 $16.23 (1) This information is derived from the Company s annual audited financial statements and unaudited condensed interim financial statements. For financial years beginning before December 16, 2013, the financial statements of the Company were prepared in accordance with Canadian GAAP, whereas for financial periods beginning December 16, 2013, the financial statements of the Company have been prepared in accordance with IFRS. The difference is due to valuation differences between the two sets of accounting principles for investments that trade in an active market. Canadian GAAP generally required the use of bid price to establish fair value, while IFRS requires fair value to be a price within the bidask spread. Further explanation can be found in the notes to the condensed interim financial statements. Net assets and distributions are based on the actual number of units outstanding at the relevant time. (2) All distributions were paid in cash. (3) Class C Preferred Share issue costs of $18,187 have been charged to Share Capital in Ratios and Supplemental Data Class B Capital Shares Ratios and Supplemental Data - Class B Capital Shares For the six months ended June 15 For the Years Ended December 15, Total net asset value (000s) (1)..... $29,869 $29,929 $31,812 $34,932 Number of shares outstanding ,313,789 1,313,789 1,608,659 2,142,985 Management Expense Ratio (excluding Preferred Dividends) (2) % 0.98% 1.01% 1.11% Management Expense Ratio (including Preferred Dividends) (2) % 3.04% 3.68% 4.30% Portfolio Turnover Rate (3).... n/a n/a n/a n/a Trading Expense Ratio (4)... nil nil nil nil Net asset value per Class B Capital Share (2) $19.77 $16.30 Closing Market Price per Class B Capital Share $22.60 $21.86 $18.60 $

5 Ratios and Supplemental Data Class C Preferred Shares Ratios and Supplemental Data - Class C Preferred Shares For the six months ended June 15 For the Years Ended December 15, Total net asset value (000s) (1) $13,138 $13,138 $16,087 $21,430 Number of shares outstanding ,313,789 1,313,789 1,608,659 2,142,985 Management Expense Ratio (2).... n/a n/a n/a n/a Portfolio Turnover Rate (3)... n/a n/a n/a n/a Trading Expense Ratio (4).... nil nil nil nil Net asset value per Class C Preferred Share (2)... $10.00 $10.00 $10.00 $10.00 Closing Market Price per Class C Preferred Share $10.13 $10.18 $10.26 $10.80 (1) Net Asset Value per Capital Share is equal to Net Asset Value attributable to Capital Shares divided by the number of Capital Shares outstanding. Net Asset Value per Preferred Share is represented by its redemption value of $ Net Asset Value is calculated using the closing price. (2) Management expense ratio for Capital Shares is based on the requirements of National Instrument This instrument requires that all split share companies produce an expense ratio which allocates all operating expenses of the Company and all issuance costs to the Capital Shares and expresses this as an annualized percentage of net assets applicable only to the Capital Shares during the period. The management expense ratio per Capital Share should not be interpreted as the required return necessary for the Company or the Capital Share to cover the operating expenses of the Company. This calculation is based only on a portion of the Company s assets whereas the Company utilizes its entire assets to generate investment returns. Management believes that the base management expense ratio per Unit disclosed in the table above is the most representative ratio in assessing the ongoing efficiency of the administration of the Company, making comparisons to the expense ratios of single unit mutual funds or determining the minimum investment returns necessary by the Company to achieve growth in Net Asset Value per Unit. (3) The Company was created to acquire and hold the Portfolio Shares and only trades the Portfolio Shares in limited circumstances as described in the prospectus. The Portfolio Shares are not actively traded and the Company can be considered to be a passive investment vehicle. At or shortly before year-end, Portfolio Shares are disposed of on a prorata basis to facilitate the Company s special annual retraction, if necessary. As a result the turnover rate is considered not applicable for these purposes. (4) Trading commissions were paid to fund the special annual retraction and were deducted from the proceeds paid to the retracting shareholders. Trading commissions charged on all other assets were immaterial. 5

6 Past Performance Year by Year Returns The following chart shows the total return to shareholders and net asset value of the Company s Class B Capital Shares for the past three years, since the reorganization on December 15, 2011, indicating, in percentage terms, how much an investment made on the first day of each financial year would have grown or decreased by the last day of each financial year based on the market value including dividends received during the year. Past performance is not an indication of how the Capital Shares will perform in the future. Total Return to Shareholders (1) Net Asset Value Dividend Reinvestment (2) (1) Total Return to Shareholders is the annual change in the market value of capital shares and includes dividends received. (2) Includes Return to shareholders and assumes all dividends received are reinvested in Capital Shares. This may not be relevant as the Company is not an open-ended investment fund. 6

7 Summary of Investment Portfolio Below is a summary of the Company s investment portfolio as at June 15, This summary of investment portfolio is unlikely to change significantly due to the investment objectives of the Company. Weekly updates are available on the internet at or by contacting the investor relations at (416) Summary of Investment Portfolio As at June 15, 2015 Percentage of Net Net Assets Assets Bank of Montreal.. $ 8,273, % The Bank of Nova Scotia. 8,161, % Canadian Imperial Bank of Commerce 8,519, % Royal Bank of Canada.. 9,657, % Toronto Dominion Bank.. 8,352, % $ 42,964, % Cash , % Less: Accrued Liabilities (92,691) (0.2% ) Total Net Assets $ 43,006, % 7