Management Discussion and Analysis. For the three months ended March 31, 2014

Transcription

1 Management Discussion and Analysis For the three months ended March 31, 2014 Dated: May 2, 2014

2 Trez Capital Mortgage Investment Corporation Interim Management Discussion and Analysis Table of Contents 1.0 Forward Looking Statements 2.0 Transition 3.0 Basis of Presentation 4.0 Company and Industry Overview 5.0 Financial Performance 6.0 Liquidity 7.0 Capital Resources 8.0 Off-Balance Sheet Arrangements 9.0 Related Party Transactions 10.0 Proposed Transactions 11.0 Critical Accounting Estimates 12.0 Changes in Accounting Policies 13.0 Financial Instruments and Other Instruments 14.0 Outstanding Share Data 15.0 Outstanding Stock Option Data 16.0 Dividend Reinvestment Plan 17.0 Risks 18.0 Disclosure Controls and Procedures and Internal Control Over Financial Reporting 19.0 Additional Information

3 1.0 Forward-Looking Statements Caution regarding forward-looking statements The terms, the Company, we, us and our in the following Management s Discussion & Analysis ( MD&A ) refer to Trez Capital Mortgage Investment Corporation (the Company ) and its financial position and results of operations for the three months ended March 31, 2014 (the Period ). Financial data provided has been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). This MD&A should be read in conjunction with the Company s condensed interim financial statements for the period ended March 31, 2014 and the Company s audited annual financial statements for the year ended December 31, 2013, which have been prepared in accordance with IFRS. Copies of these documents will be filed electronically with securities regulators in Canada through the System for Electronic Document Analysis and Retrieval ( SEDAR ) and may be accessed through the SEDAR website at Historical results contained in the Company s condensed interim financial statements and the Company s audited annual financial statements and related MD&A s thereto, including trends that might appear, should not be taken as indicative of future operations. Forward-looking statement advisory 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 or loans 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 forwardlooking statements. Actual results may differ materially from management expectations as projected in such forwardlooking 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. 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 Trez Capital Fund Management LP (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. The MD&A is dated May 2, 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 and loan portfolio is available on the Trez Capital Fund Management LP website at 1

4 Additional information about the Company, including its Annual Information Form ( AIF ), can be found on the SEDAR website at Transition On November 30, 2013, the Company completed a reorganization pursuant to which the Company transitioned from the securities regulatory regime for investment funds to the public company regime. As part of such transition, the Company implemented a number of changes including the following: (a) the terms of the Class A Shares were amended to provide Class A Shareholders with rights equivalent to those typically found in common shares of public companies under the Public Company Regime. The included the elimination of monthly and annual redemption rights; (b) the authorized capital of the Company was changed to remove the previous class of voting shares and to add the Class B Shares; (c) the investment restrictions previously contained in the Company s articles were deleted in order that they could be replaced by the Investment Guidelines; (d) the Management Agreement was amended to change (among other matters) the basis on which the Management Fee and Performance Fee are calculated; and (e) the Company ceased paying trailer fees to registered brokers and dealers. 3.0 Basis of Presentation Financial data provided in this MD&A, for the three months ended March 31, 2014, has been prepared in accordance with IFRS except as discussed below. Non-IFRS Measures The Company prepares and releases its audited financial statements and unaudited condensed interim 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 which do not have standard meanings prescribed by IFRS. The non-ifrs measure the Company has used is weighted average loan-to-value ratio. The Company has presented this non-ifrs measure because the Manager believes it is a relevant measure to aid investors in evaluating the Company s performance. This non-ifrs measures should not be construed as an alternative to net income (loss) or comprehensive income (loss) or cash flows from operating activities determined in accordance with IFRS as indicators of the Company s performance. Weighted average loan-to-value ratio represents the weighted average loan-to-value of the investment portfolio at period end. The Company s reporting currency is the Canadian dollar. 2

5 4.0 Company and Industry Overview Company Overview The Company is a Mortgage Investment Corporation ( MIC ) as defined in Section 130.1(6) of the Income Tax Act (Canada). Accordingly, the Company is not taxed on the income produced each year, provided that all taxable income is paid to the shareholders as dividends within 90 days of the Company s year end, December 31. The dividends paid by the Company are generally treated as interest income, as if each shareholder had been investing directly in the mortgage investments made by the Company. Investment Objectives and Strategies The Company s investment objectives are to acquire and maintain a diversified portfolio of mortgages on real property in Canada that preserve capital and generate attractive returns in order to permit the Company to continue paying stable monthly distributions to its Class A Shareholders. The Company seeks to accomplish its investment objectives through prudent investments in mortgages to qualified real estate investors and developers, focusing primarily on short-term bridge financing needs not currently serviced by traditional real estate lenders. Mortgages will be secured primarily by income producing real property where the principal and interest can be serviced from cash flow generated by the underlying real property. The Manager believes that its key lending practices and advantages in this market include the following: (i) flexible structuring capability, (ii) speed of approval and funding, and (iii) certainty of execution, all of which lead to repeat business opportunities. In general, the mortgages generate income through a rate of interest, which is typically payable periodically throughout the terms of the mortgages, as well as Commitment Fees which generally are paid at the time of initial funding. All mortgages will be secured by real property consisting primarily of residential, office, retail, industrial or other commercial property anywhere in Canada. Mortgages may be either first ranking, a junior position in a first ranking mortgage, or a second ranking mortgage, and individual mortgages may be secured by more than one property owned by the same mortgagor. Due to the short-term nature of the mortgages, the Manager expects the Company s portfolio to turnover approximately every 18 months. The Manager believes that the number of mortgage financing options available to owners of real estate continue to allow the Company to earn above-average returns for its given risk profile, while being selective in its investments. The Company has implemented the following investment guidelines which are intended to guide the Company s investments in mortgages: 1. the Company will not make any investment or conduct any activity that would result in the Company failing to qualify as a mortgage investment corporation within the meaning of the Tax Act; 2. the Company will not invest in securities other than: (i) Mortgages secured by Real Property, and (ii) Authorized Interim Investments; 3. the Company will invest only in Mortgages on the security of Real Property situated within Canada and no more than 10% of the Company s total assets will be invested in Mortgages on the same Real Property at the time of funding the Mortgages; 4. at the time of funding each Mortgage: (i) its Loan-to-Value will not exceed 85%, and (ii) the weighted average Loan-to-Vale of the entire Mortgage portfolio will not exceed 75%; 5. not more than 25% of the Company s assets will be invested in Mortgages of the same borrower at the time of funding the Mortgages; 3

6 6. the aggregate principal amount of the Portfolio invested in Mortgages secured by non-income producing Real Property will not exceed 30% of the Company s total assets at the time of funding the Mortgages. For these purposes, non-income producing Real Property means Real Property where no income is being generated therefrom and the borrower and the Company have not established a cash reserve sufficient to fund the payment of all future principal and interest payments prior to maturity under the Mortgage secured by such Real Property; 7. the average term to maturity of Mortgages in the Portfolio will not exceed 36 months at the time of funding the Mortgages; 8. not more than 50% of the principal amount of the Portfolio will be secured by second Mortgages at the time of funding the Mortgages (for greater certainty, a junior position in a first ranking Mortgage is not considered a second Mortgage) 9. the Company will not directly invest in Real Property; however the Company may hold Real Property acquired as a result of foreclosure where such foreclosure is necessary to protect the Mortgage investment of the Company as a result of a default by the mortgagor. The Company will use its commercially reasonable best efforts to dispose of any such Real Property acquired on foreclosure; 10. the Company will not invest in asset backed commercial paper ( ABCP ) or in securitized pools of Mortgage loans, including securitized pools of sub-prime Mortgage loans (being loans to borrowers with bad or no credit history); 11. the Company will not guarantee securities or obligations of any person or company; 12. the Company will not engage in securities lending; and 13. the Company will not engage in derivative transactions, other than derivative transactions to hedge interest rate risk and not for speculative purposes. The Company may, from time to time, exceed the limits prescribed in paragraphs 4, 5, 7, 8 and 9 above on an exceptional basis provided that (i) each such exception is remedied by the Manager within 120 days from the date of funding of the relevant Mortgage, and (ii) in the aggregate at any given time, the assets of the Company invested in excess of such prescribed limits are not more than 15% of the total assets of the Company. Recent Developments and Outlook The Canadian Real Estate Association ( CREA ) forecasts a steady stable commercial real estate market in 2014 with most markets and property types responding to healthy demand by building a significant amount of new commercial real estate. In addition, the CREA see a lack of volatility in the Canadian economy coupled with steady job growth continuing to keep Canada on the international radar for new capital investment. It is expected that in 2014 there will be increased demand for both retail and office space. Retail space in Canada is highly sought after as an increasing number of U.S. and European retailers are looking at Canada as their next go-to destination. The expansion of existing shopping centres and a number of new projects will result in strong leasing activity throughout The industrial sector is expected to stay strong through at least The lack of modern, high efficiency space will continue to support new construction, however, prohibitive development fees in some municipalities will continue to prompt developers to invest in old buildings rather than build new. The Company remains opportunistic, focusing its lending operations in core markets. Given a strong forecast for residential, retail, office, industrial, and other commercial development in 2014 the Company s strategy will be to continue focusing on those areas of mortgage lending that provide for the most favourable risk-adjusted returns. 4

7 5.0 Financial Performance For the thee months ended March 31, 2014, the Company earned 3,877,905 (0.20 per share, basic and diluted) which is an increase of 443,440 from the adjusted net earnings of 3,434,464 (0.15 per share, basic and diluted) for the three months ended March 31, Increased earnings are attributed to the Company being fully invested, including the utilization of 28,434,443 of its line of credit at March 31, 2014, this has been offset by the reduced assets available to the Company following the redemption of Class A shares in January The Company declared dividends of per shares for the three month period ended March 31, 2014 (Three months ended March 31, ). The Company s General and Administrative expenses totalled 128,895 ( ,415) and included bank charges - 5,907 ( ,167), professional fees for auditing and legal advice - 22,705 ( ,318), the Company s independent review committee and board of directors fees - 11,392 ( ,535), and administration, custodian, filing fees, and transfer agent expenses -88,891 ( ,394). In addition, from the utilization of the Company s credit line, the Company incurred interest expenses of 264,019 (2013 Nil). The Company s Investments in mortgages at March 31, 2014 totalled 230,901,263 (December 31, ,734,754). This allowed the Company to generate interest and fee income (net of syndication interest expense) of 5,197,983 (March 31, ,730,875). The average interest rate of the portfolio at March 31, The Company had the following defaulted mortgages at March 31, 2014: (a) Five mortgages with a cumulative carrying value of 37,252,295, remained in default as the borrower filed for protection under the Business Insolvency Act in the provinces of New Brunswick and Nova Scotia. The Company holds first mortgages totaling 33,371,197 and a subordinate participation in a first mortgage of 3,881,098. In January 2014, the Company and the courts agreed to allow a subordinate third party lender to operate a group of these mortgaged properties. The carrying value of this mortgage is 22,238,617. This subordinated party agreed to fund the interest due to the Company on its loan and to repay the Company the full face value and all interest accrued in June In March 2014, the Company and an arms length party signed a letter of intent whereby that party intends to purchase the four remaining mortgages, with a carrying value of 15,013,678, for their full face value and all interest accrued to that date. (b) Two mortgages with a cumulative carrying value of 23,569,332 remained in technical default due to a shareholder dispute of the borrower which resulted in the appointment of a court appointed manager for the borrowers properties. The court appointed manager is managing all the borrower s properties, making mortgage payments to all the mortgagees, including the Company, and selling the properties through listing agents. At March 31, 2014, all interest payments were current. (c) A mortgage with a carrying value of is 2,930,000 was not repaid at maturity in February In April 2014, the mortgage was refinanced with a third party with the proceeds of the re-financing repaying the Company s mortgage and accrued interest in full. 5

8 (d) Two mortgages of 4,286,744 and 10,785,886 respectively, remained in receivership. The properties are currently being marketed for sale by the receivers. The Company continues to accrue interest on these properties at their original mortgage interest rates. As at March 31, 2014, the estimated realizable value of collateral and other security enhancements held against all of the default mortgages is greater than the principal balance of the mortgages, interest accrued to date and estimates of associated costs. As at December 31, 2013, the Manager estimated the changes in credit risk for its mortgages, including mortgages in default as explained below, and accrued an unrealized loss on its investment in fair value of mortgages totaling 300,000. There has been no additional change in the estimated credit risk for the mortgages as at March 31, 2014 Summary of Investment Portfolio The mortgage portfolio by category, accrued interest and fees and mortgage syndications at March 31, 2014 in comparison to December 31, 2013 is as follows: March 31, 2014 December 31, 2013 Number () % of Portfolio Number () % of Portfolio Residential ,355, % ,859, % Office 9 74,177, % 10 84,873, % Industrial 4 22,943, % 5 24,783, % ,476, % ,517, % Accrued Interest and fees receivable - 2,381, ,130,543 - Mortgage syndications - 15,343,391-15,386,828 Unrealized loss on fair value of investments in mortgages - (300,000) - - (300,000) ,901, ,734,754 - Analysis of the mortgage portfolio by type of mortgage, location of the property, and by Loan-to-Value is as follows: By Type of Mortgage: Number March 31, 2014 December 31, 2013 () % of Number Portfolio () % of Portfolio First ,814, % ,205, % Second 5 22,432, % 8 43,164, % Blanket 8 37,229, % 8 22,147, % ,476, % ,517, % 6

9 By Location: Number March 31, 2014 December 31, 2013 () % of Number Portfolio () % of Portfolio Alberta 13 73,284, % 14 85,806, % British Columbia 2 1,273, % 5 5,885, % Saskatchewan 2 6,970, % 2 6,941, % New Brunswick 1 22,238, % 1 22,333, % Nova Scotia 6 21,113, % 5 15,856, % Ontario 17 82,595, % 19 82,693, % Quebec 1 6,000, % 1 6,000, % ,476, % ,517, % By Loan-to-Value: Number March 31, 2014 December 31, 2013 () % of Number Portfolio () % of Portfolio 55% or Less 10 34,945, % 14 38,570, % 56%-60% 5 9,875, % 2 3,021, % 61%-65% 4 32,483, % 6 45,957, % 66%-70% 3 25,550, % 3 22,580, % 71%-75% 6 52,171, % 8 62,235, % 76%-80% 3 11,252, % 7 31,344, % 81%-85% 11 47,197, % 7 21,808, % ,476, % ,517, % The weighted average loan to value of the mortgages at March 31, 2014 is 68.1% (December 31, %) The weighted average interest rate of the mortgage portfolio as at March 31, 2014 is 8.89% (December 31, %). Management Fees and Trailer Fees A summary of management fees paid to the Manager for the period, including a breakdown of services received by the Company is included in Related Party Transactions. To November 30, 2013, for the redeemable Class A Shares of the Company, the Company through the Manager, paid each registered dealer a trailer fee equal to 0.40% per annum of the net asset value per redeemable Class A share of the Company (the Trailer Fee ). The Trailer Fee was calculated and paid at the end of each calendar quarter commencing in March 2013 and ending with the final payment on November 30, As a result of the transition (see section 2.0) no accruals for trailer fees were made to March 31, 2014 (March 31, ,277). In addition to the management fees disclosed above, the Company 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 Manager for performance of extraordinary services on behalf of the Company for services outside the scope of the Management Agreement. During the three month period ended March 31, 2014 and 2013, no additional fees were accrued or paid to the Manager. 7

10 Commitments and Contingencies In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgages and loans. Where required, management will record an adequate provision in the accounts. Annual Financial Information The following table summarizes selected financial data reported by the Issuer for the year ended December 31, 2013 and the period from incorporation on April 18, 2012 to December 31, December 31, 2013 December 31, 2012 Revenues, net 21,817,766 8,765,622 Income from operations 14,931,244 6,272,668 Financing costs 14,750,502 18,238,838 Net income (loss) and comprehensive income (loss) 180,742 (11,966,170) Total Assets 245,927, ,128,916 Shareholders Equity 184,351, Cash dividends declared Class A shares 16,091,488 6,034,050 Cash dividends declared per Class A share Quarterly Financial Information The following table summarizes selected financial data reported by the Issuer for the period from incorporation on April 18, 2012 to December 31, March 31, 2014 December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 Revenues, net 5,197,983 5,886,939 5,486,089 5,713,863 4,730,875 5,257,211 3,338, ,385 Income from operations 4,141,924 3,671,040 3,933,705 4,192,034 3,434,464 3,828,543 2,419,885 24,240 Financing costs 264,019 4,022,700 4,022,958 4,022,872 4,022,700 4,022,700 7,278,638 6,937,500 Net Income 3,877, ,442 (224,157) 168,692 (588,236) (224,157) (4,858,753) (6,913,260) Total Assets 230,901, ,927, ,812, ,609, ,626, ,128, ,987, ,967,490 Shareholders Equity 184,810, ,351, Net assets attributable to holders of redeemable shares Nil Nil 217,539, ,628, ,033, ,033, ,100, ,086,840 Cash dividends declared Class A shares 3,419,514 4,022,872 4,022,872 4,022,872 4,022,700 4,022,700 2,011,350 Nil Cash dividends declared per Class A share Nil The variations in net income (loss) by quarter are attributable to the following: (i) (ii) The Company completed its initial public offering in June 2012 and its second offering in September The proceeds of these offerings have been utilized to fund investments in mortgages. The costs associated with these offerings have been expensed in the quarters in which the funds were received. The dividends to holders of redeemable Class A shares were presented in the statement of income (loss) and comprehensive income (loss) through to the date of transition, November 30, Subsequently, the dividends to the Class A shareholders are presented in the statement of changes in shareholders equity. 8

11 (iii) The revenues, net income, total assets and cash dividends declared on Class A shares are reduced in March 31, 2014 from the previous quarter as a result of the redemption of Class A shares in January Liquidity and Capital Structure 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 holders of redeemable shares. The Company defines its capital structure to include Class A shares and the Credit Facility. The Company reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage and loan investment opportunities, the availability of capital, and anticipated changes in general economic conditions. Liquidity Access to liquidity is an important element of the Company as it allows the Company to implement its investment strategy. However, the Company intends to continue to qualify as a MIC and as a result is required to distribute not less than 100% of the taxable income of the Company to its shareholders without being subject to corporate income taxes. Therefore, growth in the mortgage and loan investments will be managed through additional equity and/or debt offerings and the utiliziation of the Company s Credit Facility. The Company routinely forecasts cash flow sources and requirements to ensure cash is efficiently utilized. In addition, the Company has the borrowing ability of 31 million through the Credit Facility to manage fluctuations in cash flows as a result of the timing of mortgage and loan investment fundings and repayments, dividend payments and on January 15, 2014, the payment for the one time redemption of Class A Shares. All financial liabilities at March 31, 2014, are expected to mature within one year. 7.0 Capital Resources As at March 31, 2014, the Company had bank indebtedness of 28,434,443. The Company is confident that it will be able to finance its operations using the cash flow generated from operations, the existing credit facility and proceeds raised in subsequent offerings. During the period, the Company s investing activites consisted of proceeds from the net repayment of investments in mortgages totalling 12,964,015 (March 31, 2013 net repayment of 1,113,532) The Company s financing activities consisted of distributions to Class A shareholders of 3,620,662 (2013-4,022,700), the repurchase and cancelation of Class A shares 32,535,584 (2013 Nil), and the utilization of cash held in trust of 3,192,500 (2013 Nil). 8.0 Off Balance Sheet Arrangements The Company does not utilize off balance sheet arrangements. 9

12 9.0 Related Party Transactions Manager The Company is managed by Trez Capital Fund Management LP (the Manager ), a related party by virtue of common management. Pursuant to the Management Agreement dated May 25, 2012, (amended November 30, 2013) the Manager is entitled to a fee of 1.25% per annum of the gross assets of the Company (prior to November 30, % per annum of net assets of the Company) (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. During the three month period ended March 31, 2014, the Manager earned management fees of 703,963 ( ,294). The Manager is responsible for the management and administration of the Company s mortgage investment portfolio. In any calendar year where the Company has a net return in excess of the Hurdle Rate (Hurdle Rate is defined as the average two year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Manager is entitled to receive from the Company a performance fee equal to 20% of the net return of the Company over the Hurdle Rate (the Performance Fee ). The Manager calculates 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 Manager within 15 days of the issuance of the Company s audited financial statements for that year. The performance fee accrued for the three month period ended March 31, 2014 totals 223,201 ( ,425). Other Related Party Transactions As at March 31, 2014, the Company has co-invested in 26 mortgage investments (December 31, mortgage investments) with related parties by virtue of common management. The total amount of the mortgage investments is 313,537,153, of which the Company s share is 136,277,837 (December 31, ,515,889, of which the Company s share was 131,310,722). The above related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Title to mortgages is held by Computershare Trust Company of Canada ( the Custodian ), on behalf of the beneficial owners of the mortgages. In addition, certain duties are performed by the Manager. In cases where mortgages are held on a participation basis: The Company s rights are as outlined in the Company Agreement and in a Mortgage Participation and Servicing Agreement with the Manager. The Custodian will hold the Company s interest in the mortgage and underlying security. Pursuant to these agreements, the Manager agrees to administer and service the mortgage loan on behalf of the Company and other investees. The Manager acts as the Company s loan originator, underwriter, servicer, and syndicator. The Manager performs certain duties including registering the mortgage, arranging for title searches, and holding all title papers and other security documentation related to the mortgage loan. The Manager agrees to deliver cash payments received for interest and principal to the Company. 10

13 10.0 Proposed Transactions At the present time, there are no proposed transactions that should be disclosed Critical Accounting Estimates The preparation of financial statements requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The most significant estimates that the Manager is required to make relate to the fair value of the investments in mortgages. These estimates may include assumptions regarding local real estate market conditions, interest rates and the availability of credit, the adjusted credit risk premium based on the change in the borrower s credit risk, cost and terms of financing, the impact of present or future legislation or regulation, prior encumbrances and other factors affecting the investments in mortgages and underlying security of the mortgages. These assumptions are limited by the availability of reliable comparable data, economic uncertainty, ongoing geopolitical concerns and the uncertainty of predictions concerning future events. Liquid credit markets and volatile equity markets have combined to increase the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of impairment are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated fair value could vary by a material amount Changes in Accounting Policies Except as described below, the accounting policies applied by the Company in these condensed interim financial statements are the same as those applied by the Company in its audited financial statements for the year ended December 31, 2013, prepared in accordance with IFRS. Changes in accounting policies: The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, The changes were made in accordance with the applicable transitional provisions. (i) IAS 32, Financial Instruments: Presentation ( IAS 32 ): The Company adopted IAS 32, Offsetting Financial Assets and Financial Liabilities. implementation of the new standard had no impact on these financial statements. The 11

14 13.0 Financial Instruments The Company has classified its financial instruments as follows: Classification Measurement Financial assets Mortgage and loan investments, including mortgage syndications Through Profit and Loss Fair value Cash and cash equivalents Loans and receivables Amortized cost Financial liabilities Non-recourse mortgage syndication liabilities Other financial liabilities Fair value Accounts payable and accrued expenses Other financial liabilities Amortized cost Dividends payable Other financial liabilities Amortized cost Management fees payable Other financial liabilities Amortized cost Trailer fees payable Other financial liabilities Amortized cost Performance fee payable Other financial liabilities Amortized cost Net assets attributable to holders of redeemable shares are carried on the statement of financial position at net asset value. This presentation of net assets attributable to shareholders reflects that, in total, the interests of the holders is limited to the net assets of the Company Share Capital As at May 2, 2014, March 31, 2014 and December 31, 2013, the Company s authorized capital consists of an unlimited number of Class A shares, of which 19,551,254 are issued and outstanding respectively (December 31, ,000,000 Class A shares and 100 voting shares) Stock Options As at May 2, 2014, March 31, 2014 and December 31, 2013, there were no options issued and outstanding Dividend Reinvestment Plan The Company has a Dividend Reinvestment Plan ( DRIP ) available to its shareholders. The DRIP allows participants to have their monthly cash dividends reinvested in additional common shares of the Company, Shareholders who wish to enroll or who would like further information about the Company s DRIP should contact their investment advisor or the Company s agent for the DRIP, Computershare Trust Company of Canada, at 1 (800) or Risks The risks associated with investing in the Company are as disclosed in the Company s Annual Information Form dated March 27, 2014 and filed on SEDAR at Any changes to the Company over the period from December 31, 2013 have not affected the overall risk of the Company. 12

15 18.0 Disclosure Controls and Procedures and Internal Control Over Financial Reporting Our CEO and CFO are responsible for establishing and maintaining disclosure controls and procedures ( DC&P ) and internal control over financial reporting ( ICFR ), as those terms are defined in National Instrument ( NI ) Certification of Disclosure in Issuers Annual and Interim Filings. We designed the DC&P and ICFR, the latter of which was using the framework in Internal Control Integrated Framework (as published in 1992) to provide reasonable assurance that material information relating to us is made known to our CEO and CFO during the reporting period; and information required to be disclosed by us in our filings under securities legislation is recorded, processed, summarized and reported within the required time periods; and provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with Canadian GAAP. Our CEO and CFO evaluated the design effectiveness of the DC&P and ICFR, as defined by NI , as of March 31, Based on this evaluation, they concluded that the designs of the DC&P and ICFR were effective as of March 31, NI also requires Canadian public companies to disclose in their MD&A any change in ICFR during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ICFR. No such change to ICFR has occurred during most recently completed quarter Additional Information Phone: Calling the Company at (416) 350,1299, Michael J.R. Nisker, President and CEO Internet: Visiting SEDAR at or Mail: Writing to the Company at: Trez Capital Mortgage Investment Corporation Attention: Investor Services West Georgia St. Vancouver, BC V6E 4E6 13