TREZ CAPITAL MORTGAGE INVESTMENT CORPORATION

Transcription

1 Condensed Interim Financial Statements TREZ CAPITAL MORTGAGE INVESTMENT CORPORATION For the three and nine months ended September 30, 2016 and 2015

2 Condensed Interim Statements of Financial Position Assets September 30, December 31, Notes Investments in mortgages 4 $ 137,537,799 $ 198,282,837 Cash and cash equivalents 17,299,867 - Total assets $ 154,837,666 $ 198,282,837 Liabilities and Shareholders Equity Bank indebtedness 3 $ - $ 4,253,455 Mortgage syndication liabilities 4 5,400,000 14,351,929 Dividends payable 5 977,401 1,121,479 Accounts payable and accrued liabilities 127,587 89,857 Performance fee payable 6, 8 187, ,891 Management fees payable 6, 8 171, ,752 Incentive fee provision 7, 8 1,645,290 - Total liabilities 8,509,438 20,469,363 Shareholders equity 146,328, ,813,474 Total liabilities and shareholders equity $ 154,837,666 $ 198,282,837 Subsequent events (note 11) The accompanying notes are an integral part of these condensed interim financial statements. 1

3 Condensed Interim Statements of Income and Comprehensive Income Three months ended Nine months ended September 30, September 30, September 30, September 30, Notes Revenue: Interest and fee income $ 2,743,057 $ 3,757,732 $ 10,382,277 $ 11,653,504 Interest expense on mortgage syndications (97,402) (69,188) (431,807) (207,563) 2,645,655 3,688,544 9,950,470 11,445,941 Expenses: Management fees 6, 8 550, ,522 1,740,217 2,025,438 Performance fees 6, 8-128, , ,191 Incentive fees 7, 8 (324,026) - 1,819,401 - Realized mortgage investment loss - 202, ,576 Fair value adjustments on investment in mortgages 4 1,915,000 (450,000) 4,829,500 (450,000) General and administrative expenses 114,768 78,241 1,909, ,735 2,256, ,097 10,486,224 2,524,940 Income (loss) from operations 389,271 3,041,447 (535,754) 8,921,001 Financing costs: Interest on credit facility 3-262,989 95, ,930 Net income (loss) and comprehensive income (loss) for the period $ 389,271 $ 2,778,458 $ (630,940) $ 8,208,071 Earnings (loss) per share: Basic and diluted 9 $ 0.02 $ 0.14 $ (0.03) $ 0.42 The accompanying notes are an integral part of these condensed interim financial statements. 2

4 Condensed Interim Statements of Changes in Shareholders Equity Nine months ended September 30, 2016: Common Surplus Note shares / deficit Total Shareholders equity, December 31, 2015 $ 183,418,077 $ (5,604,603) $ 177,813,474 Net income (loss) and comprehensive income (loss) for the period - (630,940) (630,940) Dividends to shareholders 5 - (9,872,474) (9,872,474) Repurchases of shares 5 (20,981,832) - (20,981,832) Shareholders equity, September 30, 2016 $ 162,436,245 $ (16,108,017) $ 146,328,228 Nine months ended September 30, 2015: Common Surplus Note shares / deficit Total Shareholders equity, December 31, 2014 $ 185,512,229 $ (2,854,366) $ 182,657,863 Net income and comprehensive income for the period - 8,208,071 8,208,071 Dividends to shareholders - (10,205,794) (10,205,794) Repurchases of shares 5 (2,094,152) - (2,094,152) Shareholders equity, September 30, 2015 $ 183,418,077 $ (4,852,089) $ 178,565,988 The accompanying notes are an integral part of these condensed interim financial statements. 3

5 Condensed Interim Statements of Cash Flows Cash provided by (used in): Three months ended Nine months ended September 30, September 30, September 30, September 30, Operations: Net income and comprehensive income for the period $ 389,271 $ 2,778,458 $ (630,940) $ 8,208,071 Non-cash adjustment: Interest income (2,627,464) (3,611,356) (9,692,974) (10,932,469) Interest expense - 262,989 95, ,930 Realized mortgage investment loss - 202, ,576 Fair value adjustments on investments in mortgages 1,915,000 (450,000) 4,829,500 (450,000) Interest received 2,159,534 2,933,489 7,973,751 8,393,119 Changes in non-cash operating items: Fees receivable 234, ,669 (4,952) 325,237 Management fees payable (410,782) (464,406) (38,056) 273 Performance fees payable - 128,758 (255,427) (79,548) Incentive fee provision (498,137) - 1,645,290 - Accounts payable and accrued liabilities (662,282) 61,072 63,499 76, ,492 2,267,249 3,984,877 6,456,189 Financing: Interest paid - (278,506) (120,954) (680,996) Cash held in trust 110,024 28,626 - (40,000) Share buy-backs (18,022,872) (1,563,894) (20,981,832) (2,094,152) Dividends to holders (3,289,044) (3,395,914) (10,016,553) (10,224,152) (21,201,892) (5,209,688) (31,119,339) (13,039,300) Investing: Funding of investment in mortgages (293,382) (8,637,540) (26,077,752) (53,951,765) Principal repayments or sold investments in mortgages 28,845,907 9,003,808 74,765,536 40,055,102 28,552, ,268 48,687,784 (13,896,663) Increase (decrease) in cash during the period 7,850,125 (2,576,171) 21,553,322 (20,479,774) Cash (bank indebtedness), beginning of period 9,449,742 (24,098,617) (4,253,455) (6,195,014) Cash (bank indebtedness), end of period $ 17,299,867 $ (26,674,788) $ 17,299,867 $ (26,674,788) The accompanying notes are an integral part of these condensed interim financial statements. 4

6 1. Operations: Trez Capital Mortgage Investment Corporation (the Company ) is a non -bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction and mezzanine mortgages. Trez Capital Mortgage Investment Corporation was incorporated on April 18, 2012 under the Canada Business Corporations Act. The Company is managed by Trez Capital Fund Management Limited Partnership (the Manager ). The Mortgage Broker for the Company is Trez Capital Limited Partnership. The shares of the Company are publicly listed on the Toronto Stock Exchange under the symbol TZZ. The Company is a Canadian mortgage investment corporation and the registered office of the Company is West Georgia Street, Vancouver, BC, V6E 4C6. On May 9, 2016, the Special Committee of the Board of Directors announced the completion of its strategic review process and a plan for the orderly wind-up of the Company s assets and the return of capital to shareholders (the Orderly Wind-Up Plan ). The Orderly Wind-Up Plan in its entirety was approved by shareholders at the Company s annual and special meeting of shareholders held on June 16, Under the Orderly Wind-Up Plan, the Company has ceased originating new loans and all mortgage renewal activity, subject to contractual rights, and its assets are being monetized over time. The Orderly Wind-Up Plan has been implemented and capital is being returned to shareholders under the supervision of the Board of Directors with the assistance of the Manager. In addition, the Manager and its affiliates has ceased providing any financial support in respect to any of the mortgages held in the Company s portfolio, except for instances as disclosed in note 8. The fees to the Manager have been restructured as outlined in note 7. In addition, a new Investment & Capital Management Committee has been formed and its mandate shall be: (i) the management of the normal course issuer bid ( NCIB ) ; and (ii) the management and oversight of the Orderly Wind-Up Plan. 2. Basis of presentation: (a) Statement of compliance: The condensed interim financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Statements. The accompanying condensed interim financial statements should be read in conjunction with the notes to the Company s audited financial statements for the year ended December 31, 2015 which have been prepared in accordance with International Financial Reporting Standards ( IFRS ), since they do not contain all disclosures required by IFRS for annual financial statements. These condensed interim financial statements reflect all normal and recurring adjustments which are in the opinion of the Manager, necessary for a fair presentation of the respective interim periods presented. These condensed interim financial statements were approved by the Board of Directors on November 10,

7 2. Basis of Presentation (continued): (b) Functional and presentation currency: These condensed interim financial statements are presented in Canadian dollars, which is the functional currency of the Company. (c) Basis of measurement: These condensed interim financial statements have been presented on a historical cost basis, except for investments in mortgages which are measured at fair value. 3. Credit facility: On August 8, 2012, (last amended on September 25, 2014), the Company entered into a credit facility (the Facility ) with the HSBC Bank Canada for an amount of up to $31,000,000. The Facility renewed annually and was subject to an interest rate equal to the banks prime rate of interest plus 1.3%. The Facility was secured by a general security agreement over the Company s assets. As a result of the Orderly Wind-Up plan the credit facility was cancelled, effective June 23, 2016; therefore at September 30, 2016, nil (December 31, $4,253,455) was outstanding on the Facility. 4. Investments in mortgages: (a) Mortgages: September 30, Property type Number 2016 Residential 14 $ 64,933,145 Office 5 50,773,316 Industrial 1 9,875,329 Retail 1 11,564, ,146,602 Accrued interest and fees receivable 1,740,697 Mortgage syndications 5,400,000 Fair value adjustments on investments in mortgages (6,749,500) $ 137,537,799 6

8 4. Investments in mortgages (continued): (a) Mortgages (continued): December 31, Property type Number 2015 Residential 21 $ 93,767,576 Office 7 58,300,648 Industrial 5 10,429,167 Retail 2 19,926,251 Hotel 2 1,300, ,723,642 Accrued interest and fees receivable 2,127,266 Mortgage syndications 14,351,929 Fair value adjustments on investments in mortgages (1,920,000) $ 198,282,837 September 30, Location Number 2016 Alberta 5 $ 30,494,149 Saskatchewan 1 3,258,651 New Brunswick 1 22,345,917 Nova Scotia 5 20,250,763 Ontario 9 60,797, $ 137,146,602 December 31, Location Number 2015 Alberta 12 $ 46,677,130 British Columbia 4 13,469,627 Saskatchewan 14 2,818,773 New Brunswick 1 22,345,918 Nova Scotia 5 20,123,447 Ontario 1 78,288, $ 183,723,642 7

9 4. Investments in mortgages (continued): (a) Mortgages (continued): The mortgages are secured by the real property to which they relate, bear interest at a weighted average interest rate of 6.45% (December 31, %) and mature between 2015 and The mortgage agreements stipulate a minimum interest rate and a variable interest rate based on the Prime Rate for Canadian Dollar Loans established by HSBC ( Prime Rate ). Current premiums to the Prime Rate range from plus 1.80% to plus 7.62% (December 31, 2015 plus 2.30% to plus 20.89%), with the current minimum rates ranging from 4.50% to 10.32% (December 31, % to 23.59%), excluding mortgages in default. Principal repayments based on contractual maturity dates are as follows: September 30, Number 2016 Past due 3 $ 11,343, ,477, ,647, ,417, and beyond 2 31,260, $ 137,146,602 8 December 31, Number 2015 Past due 2 $ 15,987, ,074, ,545, and beyond 5 48,114, $ 183,723,642 All mortgages are conventional uninsured mortgages which contain a prepayment option, whereby the borrower may repay the principal, subject to the payment of minimum interest, at any time prior to maturity. The Company has entered into certain mortgage participation agreements with third party lenders, whereby, the third party lenders take the senior position and the Company retains the subordinated position, all of which is secured by first mortgage positions. The Company retains an option, not the obligation, to repurchase the senior position at a price equal to the outstanding principal amount of the senior lenders share together with accrued interest. As a result, the senior lenders position is recorded as a mortgage syndication liability. The interest earned on the transferred participation interests and the related interest expenses are recognized in the statement of net income and comprehensive income.

10 4. Investments in mortgages (continued): (a) Mortgages (continued): For those investments which have not met the de-recognition criteria, the participation transactions have resulted in the Company recognizing the participating mortgages and corresponding mortgage syndication liabilities on its statements of financial position. Included in investments in mortgages at September 30, 2016 are mortgage syndication liabilities of $5,400,000 (December 31, $14,351,929). As part of the assessment of fair value, the Manager routinely reviews each mortgage for changes in credit risk to determine whether or not fair value of a mortgage should be adjusted for the change in credit risk. As at September 30, 2016, the Manager estimated the changes in credit risk for its mortgages, including mortgages in default as explained below, and accrued an unrealized losses on its investment in fair value of mortgages totaling $6,749,500 (December 31, $1,920,000). (b) Default or past due mortgages: A mortgage is considered in default when a payment has not been received by the contractual due date, or a term in the mortgage agreement has been breached. Mortgages that are in default are not subject to a fair value adjustment if they are fully secured and collection efforts are reasonably expected to result in repayment of principal plus all associated costs and accrued interest. The following mortgages were in default or past due as at September 30, 2016: (i) A borrower in respect of a mortgage with a carrying amount of $4,971,582 (December 31, $5,177,787) plus accrued interest of $598,038 (December 31, $598,038) was in breach of its mortgage terms. A court appointed receiver has listed the collateral property securing the loan for sale. The second mortgage also had collateral against a first mortgage held by a related entity under common management with the Manager. On March 22, 2016, the property under first mortgage was sold and part of these proceeds reduced the outstanding balance of the mortgage by $423,616. The Manager estimates that the ultimate proceeds will not be sufficient to cover the outstanding principal and accrued interest; therefore a fair market value adjustment of $165,000 was recorded for the quarter bringing the total fair value adjustment to $650,000. (ii) Two mortgages with the same borrower with an aggregate carrying amount of $6,371,533 (December 31, $6,209,476) were not performing and were past due on their maturity dates. Subsequent to quarter end, the Manager has appointed a receiver. Currently the Manager estimates that the fair value of the proceeds recoverable from the underlying securities is sufficient to cover the outstanding principal and accrued interest. 9

11 4. Investments in mortgages (continued): (b) Default or past due mortgages (continued): (iii) In early 2016, the Company resolved a mortgage with a carrying amount of $10,809,992 that was previously in default where the Company put the property into receivership. The total outstanding principal amount of the mortgage including other Trez-affiliated participants co-invested in the mortgage was $11,513,077. On February 3, 2016, the property was sold to the third party at a price of $12,100,000, which was partly financed by vendor take back mortgage ( VTB ) provided to the Company in the amount of $11,400,000. In addition, an affiliate of the Manager had agreed to supplement the interest rate on the VTB at 5% for the first six months, where otherwise it was interest free. As a result of the Orderly Wind-Up Plan, the affiliate of the Manager no longer supplemented the interest rate on the VTB. At June 30, 2016, the Company recorded a fair value adjustment due to increased credit risk relating to the loss of support from the Manager and a missed property tax payment. During the quarter ended September 30, 2016, the Company issued a demand for payment of the property tax arrears and other amounts. The borrower subsequently failed to make their interest payments for September and October. The Company now classifies the mortgage as being in default and has recognized an additional fair value adjustment of $600,000 due to increased risk, bringing the total fair value adjustment recognized on the loan to $2,999,500. (iv) A borrower in respect of a mortgage with a carrying amount of $1,106,110 (December 31, $2,979,122) plus accrued interest of $18,435 (December 31, $21,678) was in default. In September 2016, the Manager issued a letter of demand and intends to appoint a receiver if borrower is not successful in selling the homes underlying the mortgage. The borrower is currently marketing the homes for sale. (v) During the first quarter of 2015, a loan previously classified as in default was resolved through acquisition of the property by an affiliate of the MIC for the total consideration of $23,030,559. On February 5, 2016, the affiliate of the Manager sold the property to a third party for $24,490,000 which was partially financed by a VTB in the amount of $23,400,000. At the time, an affiliate of the Manager also agreed to supplement the interest rate to be 6.5% for the first three years. As a result of the Orderly Wind-Up, the affiliate of the Manager has now ceased to supplement interest on the VTB. On September 1, 2016, the manager issued a demand on the loan due to unpaid legal fees and property taxes. Subsequent to quarter end, the Manager has entered into a Forbearance Agreement with the borrower on the basis that all payments and taxes due are brought up to date. As a result of an increase in risk caused by missed payments and taxes, a further fair value adjustment of $1,500,000 has been recorded bringing the total fair market adjustment recognized on the loan to $3,100,

12 4. Investments in mortgages (continued): (c) Resolution of previous mortgages in default: Since January 1, 2016 the following default mortgages have been resolved or restructured: (i) Subsequent to December 31, 2015, a borrower defaulted on a blanket second mortgage secured by three properties with a carrying amount of $5,433,318 (December 31, $5,406,287) plus accrued interest of $27,614 (December 31, $48,769). The mortgage was renewed in March 2016 with a maturity date of September 1, 2016 and a rate concession was provided on the mortgage decreasing the rate from % to 6%. On renewal, the Company recognized a fair value adjustment reflecting the increased risk adjusted discount rate used in determining the fair value of the expected cash flows. The mortgage was paid off in full by the borrower on May 2, 2016 and the fair value adjustment was reversed at that time. (ii) A mortgage with an entity related to the Manager by common control (note 8(e)) with a carrying amount of $5,796,255 (December 31, $5,378,203) matured on June 1, 2016 and was past due but performing. It was renewed on September 30, Class A shares: As at September 30, 2016 and December 31, 2015, there were an unlimited number of Class A common shares and an unlimited number of Class B common shares authorized. As at September 30, 2016, there were 16,765,018 Class A shares outstanding (December 31, ,236,354). The holders of the Class A shares are entitled to receive dividends as and when declared by the Board of Directors of the Company. (a) Dividends: Prior to July 20, 2016, the Company made dividend payments to Class A shareholders on a monthly basis on or about the 15 th day of each month. The Company paid dividends to Class A shareholders, within 90 days after the year end, for an amount equal to at least 100% of the taxable income from operations of the Company determined in accordance with the Income Tax Act (Canada), subject to certain adjustments. The monthly distributions have constituted a return of capital since the distribution of August 15, For the nine months ended September 30, 2016, the Company declared dividends totaling $9,872,474 ($0.53 per share) (September 30, $10,205,794 and $0.52 per share) of which 3,165,402 constituted a return of capital (September 30, $nil). As at September 30, 2016, distribution payable was $977,401 (December 31, $1,121,479). Effective August 30, 2016, the Company s shareholder distribution reinvestment plan (t he DRIP ) was terminated. As a result, the DRIP will not be available in connection with monthly distributions beginning with the distribution paid on September 15, Shareholders, including those who had previously participated in the DRIP, will continue to be entitled to monthly cash distributions as and when declared by the board of directors of the Company. 11

13 5. Class A shares (continued): (b) Normal course issuer bid: On May 17, 2016, the Company announced the approval of a normal course issuer bid ( NCIB ) by the Toronto Stock Exchange ( TSX ) on May 16, The Company has the ability to consider purchasing, from time to time over a period of 12 months up to an aggregate maximum of 1,808,610 Class A Shares, representing approximately 10% of its issued and outstanding Class A shares. All purchases are being made through the facilities of the TSX at market prices and in accordance with the rules of the TSX. The Company s previous NCIB expired on January 11, Pursuant to that bid, the Company acquired a total of 314,900 shares at a weighted average price of $6.65 per share. In aggregate, under both NCIB agreements, the Company purchased 471,336 Class A shares at a value of $3,981,831 during the nine months ended September 30, 2016 (September 30, $314,900). In connection with the substantial issuer bid discussed below, the Company temporarily suspended its NCIB during the period from July 21, 2016 to September 30, (c) Substantial issuer bid: On July 21, 2016, the Company announced that its Board of Directors had authorized a substantial issuer bid ( SIB ) to purchase for cancellation Class A shares ( Shares ) for an aggregate purchase price not to exceed $20 million (the Offer ). On August 15, 2016, the Company announced the commencement of the Offer with revised terms. Specifically, the Company announced that pursuant to the Offer, the Company would offer to purchase up to $17 million of its Shares by way of a modified Dutch auction whereby shareholders may tender all or a portion of their Shares (i) at a price not more than $8.70 and not less than $8.50 per Share, in increments of $0.05 per Share; or (ii) without specifying a purchase price, in which case their Shares will be purchased at the purchase price to be determined by the Board in accordance with the terms of the Offer. On September 20, 2016, the Company repurchased 2,000,000 shares at a price of $8.50 per share under SIB for a total consideration of $17,000,000. The shares purchased under the bid represented 10.7% of the shares outstanding as at August 15, Management fees: The Manager is responsible for the day-to-day operations, including administration of the Company's mortgage portfolio. 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 (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. Prior to approval on June 16, 2016 of the Orderly Wind-Up Plan by the shareholders (see note 7), the Manager was also entitled to a performance fee. 12

14 6. Management fees (continued): In any calendar year where the Company had 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 was 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 calculated 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 was payable to the Manager within 15 days of the issuance of the Company s audited financial statements for that year. At September 30, 2016, the amount payable related to the performance fee was $187,464 (December 31, $442,891). As part of the Orderly Wind-Up Plan, the Manager agreed to waive the performance fee beginning May 1, Incentive fees: The Manager has agreed, to assist in the Orderly Wind-Up Plan and to certain amendments to the Company s management agreement to facilitate the Orderly Wind-Up Plan. Pursuant to those amendments, the Manager is currently providing the full asset management services necessary to support the Orderly Wind-Up Plan. In addition to waiving the Performance Fee, the Manager has also waived its rights, if any, to early termination fees in exchange for the incentive fee calculated as the greater of the following: (i) 20% of the amount by which the sum of: (A) The aggregate realized proceeds; and (B) The Company s unrestricted cash as at April 30, 2016 exceeds $163,509,009; and (ii) $1,000,000. Aggregate realized proceeds are defined as the amount of proceeds on the sale, repayment or maturity of mortgages or any other transaction resulting in the monetization of the mortgages under the Orderly Wind Up Plan. Unrestricted cash is defined as the amount of Company s cash derived from the proceeds on the sale, repayment or maturity of mortgages or any other transaction resulting in the monetization of the mortgages on or prior to April 30, At September 30, 2016, the estimated amount of the future incentive fee obligation is $1,645,290. The provision has been calculated using the projected realized proceeds of investments in mortgages at their fair value at September 30, The amount of the provision is subject to change with any changes to realized proceeds as a result of timing or fair value adjustments of the mortgage portfolio. The provision will be assessed each quarter and the amount of the provision adjusted accordingly. The total realized incentive fee to the manager at September 30, 2016 is $259,150. This amount is a percentage of the lower threshold level, determined by adding the sum of total realized 13

15 7. Incentive fees (continued): proceeds received to the period end, plus the unrestricted cash as at April 30, 2016, divided by the upper threshold. As at September 30, 2016, realized proceeds totaled $37,487, Related party transactions and balances: (a) The Company is managed by the Manager, a related party by virtue of common management. Pursuant to the Management Agreement referred to in note 6, during the nine months ended September 30, 2016 the Company incurred management fees in the amount of $1,740,217 (September 30, $2,025,438), and performance fees in the amount of $187,464 (Septembe r 30, $355,191). At September 30, 2016, $171,696 (December 31, $209,752) in management fees, $187,464 (December 31, $442,891) in performance fees were outstanding. (b) As at September 30, 2016, the Company has co-invested in 13 mortgage investments (December 31, mortgage investments) with other funds managed by the Manager. The total amount of the mortgage investment is $208,169,402 of which the Company s share is $96,554,391 (December 31, $387,763,663, of which the Company s share was $115,286,850). During the nine months ended September 30, 2016, the Company purchased investments in mortgages from entities under common management of $nil (September 30, $18,620,216) and sold investments in mortgages of $26,929,866 (September 30, $19,435,681) to entities under common management. (c) As at September 30, 2016, the Company had a receivable of $201,802 (December 31, $196,850) from the Manager for commitment fees for previously funded mortgages up to the first quarter of 2016, which is included within investments in mortgages. (d) As discussed in the note 4(c)(ii), an affiliate of the Manager of the Company agreed to supplement the interest for the first six months at 5% on the VTB for property sold to the third party. For the nine months ended September 30, 2016, the Company recognized $137,404 (September 30, nil) in income from the affiliate of the Manager. As a result of the Orderly Wind-Up Plan, the affiliate of the Manager has ceased to provide any interest supplement. (e) The Company has one mortgage, in the amount of $5,796,255, with an entity related to the Manager by common control bearing interest of 9.52% per annum. The property securing the mortgage was acquired by the related entity after the previous owner defaulted on the mortgage in October For the nine months ended September 30, 2016, the Company recognized $418,486 (September 30, nil) in interest income from the affiliate of the Manager and has accrued interest receivable of $46,761 as at September 30, 2016 (December 31, $46,326). 14

16 8. Related party transactions and balances (continued): (f) All related party transactions are measured at the amount of consideration established and agreed to by the related parties. The Company invests in mortgages on a participation basis with parties related to the Manager. Title to mortgages are held by Computershare Canada, (the Custodian ), on behalf of the beneficial owners of the mortgages. In addition, certain Mortgage Broker duties are performed by the Mortgage Broker. The Manager and the Mortgage Broker are related to the Company through common management. 9. Earnings per share: (a) Basic and diluted earnings per share: Basic and diluted earnings per share are calculated by dividing net income attributable to common shares by the weighted average number of common shares during the three and six month period ended September 30, 2016 and 2015: Three months ended September 30, 2016: Total income and comprehensive income for the period $ 389,271 Earnings attributable to common shares $ 389,271 Weighted average number of common shares (basic and diluted) 18,098,351 Earnings per share (basic and diluted) $ 0.02 Three months ended September 30, 2015: Total income and comprehensive income for the period $ 2,778,458 Earnings attributable to common shares $ 2,778,458 Weighted average number of common shares (basic and diluted) 19,401,302 Earnings per share (basic and diluted) $

17 9. Earnings per share (continued): (a) Basic and diluted loss and earnings per share (continued): Nine months ended September 30, 2016: Total loss and comprehensive loss for the period $ (630,940) Loss attributable to common shares $ (630,940) Weighted average number of common shares (basic and diluted) 18,815,464 Loss per share (basic and diluted) $ (0.03) Nine months ended September 30, 2015: Total income and comprehensive income for the period $ 8,208,071 Earnings attributable to common shares $ 8,208,071 Weighted average number of common shares (basic and diluted) 19,476,124 Earnings per share (basic and diluted) $ Fair value of financial instruments: (a) Fair value of financial instruments: The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale. The Company s investments in mortgages and mortgage syndication liabilities are carried at fair value in the financial statements. The following table shows a hierarchy for disclosing fair value based on inputs used to value the Company s investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); Inputs other than quoted prices in active markets included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). 16

18 10. Fair value of financial instruments and risk management (continued): (a) Fair value of financial instruments (continued): The Company s assets recorded at fair value have been categorised as follows: September 30, 2016 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 137,537,799 $ 137,537,799 Mortgage syndication liabilities - - 5,400,000 5,400,000 December 31, 2015 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 198,282,837 $ 198,282,837 Mortgage syndication liabilities ,351,929 14,351,929 There were no transfers between Level 1 and Level 2 during the period. A reconciliation of Level 3 assets at September 30, 2016 is as follows: Opening balance $ 198,282,837 Funding of investment in mortgages 26,077,752 Change in mortgage syndication liabilities (8,951,930) Interest capitalized to investment in mortgages 2,110,745 Accrued interest and fees receivable (386,569) Principal repayments or sold investments in mortgages (74,765,536) Fair value adjustments on investments in mortgages (4,829,500) Investment in mortgages, September 30, 2016 $ 137,537,799 A reconciliation of Level 3 assets at December 31, 2015 is as follows: Opening balance $ 196,169,507 Funding of investment in mortgages 92,735,374 Change in syndicated mortgages 8,951,930 Interest capitalized to investment in mortgages 3,807,717 Accrued interest and fees receivable (401,733) Principal repayments on investment in mortgages (102,785,948) Realized mortgage investment loss (124,010) Fair value adjustments on investments in mortgages (70,000) Investment in mortgages, December 31, 2015 $ 198,282,837 17

19 10. Fair value of financial instruments and risk management (continued): (a) Fair value of financial instruments (continued): The key valuation techniques used in measuring the fair values of default mortgages include: Inter-relationship between significant unobservable Valuation Significant inputs and fair value technique unobservable inputs measurement Discounted The adjusted credit risk The estimate of fair value would cash flow model premium based on the increase (decrease) if: change in the borrower s - The term of the mortgage credit risk utilizing was shortened (or extended) the knowledge gained - The adjusted risk premium since the loan was rate was lower (higher) originated Assessment of fair value of - Estimated fair value of collateral collateral of mortgages in default was (lower) higher where payments expected from sale of property. The projected length of time the mortgage will remain in default without the underlying property being liquidated or foreclosed upon. 11. Subsequent events: Subsequent to period end on October 19, 2016, the Company declared a distribution of $ per Class A shares. The distribution constitutes a return of capital. 18