Timbercreek. Mortgage Investment Corporation

Transcription

1 Annual Report 2012 Timbercreek Mortgage Investment Corporation Timbercreek Asset Management

2 Solid loans secured by income producing properties The investment objective of the Timbercreek Mortgage Investment Corporation (the Company ) is to invest in a diversified portfolio of high quality mortgage loans secured primarily by income-producing real estate located in urban markets. The loans are provided to experienced real estate investors to enable them to renovate or enhance their properties, or add to their real estate portfolio. Income-producing real estate has the necessary cash flow to service the debt if the borrower is unable to refinance when the mortgage matures. Conventional lenders are generally not interested in the types of customized mortgages we provide because of their shorter duration and need for flexible payment terms. We provide a faster turnaround to the borrower than a conventional lender would typically be able to offer. The Company generates income from both the interest on the loans as well as fees that are paid by the borrower in return for customized terms, such as early repayment options or interest-only payments. These fees are put into the Company to supplement interest income and augment the cash flow available for distributions to investors. Since inception in 2008, the Company has exceeded its targeted yield and has not incurred any loan impairments. Timbercreek Mortgage Investment Corporation

3 The Portfolio Our portfolio has grown each year since inception allowing us to provide larger mortgages without exceeding the loan-to-value limits. As at December Total Net Assets $356 million $318 million $160 million $69 million $51 million Total Mortgages and Loans Outstanding Average Size of Mortgage and Loan Investment $4.8 million $3.9 million $3.1 million $1.3 million $1.2 million Average Loan-To-Value 69.5% 68.4% 71.0% 69.0% 66.0% Weighted Average Interest Rate On Portfolio 10.1% 10.1% 10.2% 11.5% 11.6% A growing portfolio of loans with a consistently healthy interest rate $356 Total Net Assets in Millions of Dollars as at December 31, 2012 Timbercreek Asset Management

4 The investment objective of the Timbercreek Mortgage Investment Corporation (TSX: TMC) is to: 1. Preserve Capital* Stock Price Class A Shares Net Redemption Value $ DEC 11 FEB 12 APR 12 JUN 12 AUG 12 OCT 12 DEC 12 Minimal volatility with monthly income 2 Timbercreek Mortgage Investment Corporation

5 The Company has exceeded its target yield every year since inception 2. Generate Attractive Stable Actual Returns Monthly Yield Annualized** To Pay Monthly TMC's Target Distributions Yield Government of Canada 2-Year Bond Yield*** Actual Monthly Yield Annualized** TMC s Target Yield*** Government of Canada 2-Year Bond Yield**** % JAN 12 MAR 12 MAY 12 JUL 12 SEP 12 DEC % 2012 Annualized Yield * Chart prices and values as at end of last trading day of each month ** Yield equal to monthly cash distributions for Class A shares based on $10 IPO price *** Government of Canada 2-year bond yield plus 550 basis points **** Average monthly yield Yield equal to aggregate 2012 cash distributions for Class A shares based on $10 issue price. Timbercreek Mortgage Investment Corporation 3

6 Competitive Advantages Timbercreek Mortgage Investment Corporation offers some compelling advantages over competing companies and products: 1. All Lender/Origination Fees are passed on to the Company We elect to stream ALL lender fees to the Company. These fees supplement interest income generated on the loan and increase the available cash flow for distributions to investors. Allocating a portion of the lender fee to the manager of a mortgage investment fund or employees of the manager as a form of compensation can create material conflict of interest between the Manager and the Company. By streaming this fee to the Company, we ensure alignment with shareholders. The amount of fees collected will typically fluctuate with the percentage of loan repayment (turnover) in the portfolio. 2. Independent Credit Committee Every mortgage loan owned by a Timbercreek fund has been approved by our independent Mortgage Advisory Committee. While few others do this, we feel this additional investment analysis ensures a portfolio of high quality loans. 3. Timbercreek has a track record of managing public funds Timbercreek has a proven track record of successfully managing alternative asset investment vehicles, and has met, or exceeded their investment targets since Timbercreek has almost five years of experience managing the Timbercreek Mortgage Investment Corporation (TSX: TMC), one of the first publicly traded MICs in Canada. The expertise Timbercreek has acquired managing its various publicly traded investment vehicles is significantly different than that required to manage private investment structures. Income Our income is generated from both interest on our loans as well as fees collected by the Manager that are passed on to the Company. The amount of fees collected will typically fluctuate with the percentage turnover in the portfolio. Income $ millions ** Interest Fees* * Does not include fees recorded as unearned income; fees are paid up front and amortized over the contractual term of the mortgage investment as required under Generally Accepted Accounting Principles Portfolio Turnover % ** 80.1% 100.9% 48.1% 24.6% 10.2% ** For the period from April 30, 2008 (date of incorporation) to December 31, Timbercreek Mortgage Investment Corporation

7 Risk Management A rigorous governance process ensures the Company is effectively managing risk from origination, through to loan repayment. In-Depth Analysis and Valuation Timbercreek evaluates each potential loan by: Assessing the quality of the property securing the loan, by visiting every site prior to loan approval and evaluating the traffic flow, inspecting the building condition, and interviewing the manager and the owner; Assessing the quality of the cash flow generated by the property securing the loan, including appraising the value of the property and determining the cap rate, examining tenant quality, forecasting the stability and growth potential for the local market/region, and conducting sensitivity and discounted cash flow analyses; Conducting third party verification, including credit checks, legal and environmental reviews, and an independent appraisal of the real property securing the loan. Conservative Selection Policy & Asset Allocation Model A strict asset allocation model ensures the portfolio is well diversified by geography, economic sector, term, borrower and loanto-value. The asset allocation model sets specific thresholds that ensure compliance of every commitment (subject to duly approved exceptions). Furthermore, the Company is focused on mortgages that are secured by incomeproducing investment grade real estate assets as opposed to unimproved land (including projects under development such as new condominiums). Therefore, if the borrowers are unable to refinance, the loans can be serviced from the cash flow generated by the underlying assets. Independent Review & Approval Process The Company adheres to high governance standards with both a majority independent Board of Directors and a fully independent Mortgage Advisory Committee. Each deal is subject to a rigorous review process and must be approved by the Company s Mortgage Advisory Committee. Prior to funding, the portfolio manager and Chief Compliance Officer ensure the loan meets the Company s investment restrictions and compliance guidelines. Ongoing Active Management of Investments Once funded, we regularly monitor interest payments and the status of each loan. We periodically visit sites, re-underwrite the portfolio, and maintain regular communication with the borrower to ensure they are executing on their exit strategy. Developing a strong relationship with the borrower is critical to the success of the loan and to becoming a lender of choice in the future. Asset Allocation* Significant investment in income-producing assets BY REGION BY TYPE 9.7% 13.3% 4.5% 4.1% 0.6% 6.3% 41.8% Ontario Quebec Alberta British Columbia Manitoba Other Saskatchewan New Brunswick 6.0% 4.2% 0.1% 7.3% 8.9% 15.9% 36.8% Multi-Residential Retail Retirement Office Other-Residential Industrial Unimproved Land Single-Residential 19.7% 20.8% * Based on Total Assets, as at December 31, 2012 Timbercreek Mortgage Investment Corporation 5

8 Canadian Offices Vancouver Calgary Winnipeg Halifax Ottawa Montreal/Longueuil Kitchener London Windsor Toronto/Mississauga Hamilton Timbercreek s Platform TIMBERCREEK ASSET MANAGEMENT The Company leverages Timbercreek s real estate management infrastructure and expertise. Founded in 1999, Timbercreek has been executing on real estate-based investment mandates for its partners and its own account for more than 13 years. As a result, it has extensive experience evaluating real estate investment opportunities from both an equity and debt perspective. During this period, an integrated domestic and international investment team has been carefully assembled, and is focused on the concepts of value investing and active management. Timbercreek currently manages approximately $3.2 billion in real estate-related assets through private and public investment vehicles focused on direct real estate, mortgage and loan investments, global real estate securities, and real estate private equity investments. These investment vehicles are operated by a team of over 500 employees in 18 offices in Canada, the United States, Europe, and Australia. Timbercreek s Canadian operations provide the Company with knowledge of local market and economic trends, dealflow, and if necessary, the ability to assist in managing the properties. Timbercreek s Canadian lending platform includes 20 people dedicated to originating, underwriting, and servicing mortgage investments. The Company sources dealflow from Timbercreek s mortgage origination team, who has a combined 70+ years of mortgage experience, an extensive network of mortgage brokers and investment banking professionals, as well as repeat borrowers and referrals. 6 Timbercreek Mortgage Investment Corporation

9 Where We Fit In Conventional lenders are generally not interested in the types of customized mortgages we provide because of their smaller dollar value and shorter duration. We are able to provide faster turnaround on the loans compared to what a conventional lender would be able to offer. Highest Equity REITS Direct Ownership This is where most people instinctively think of investing their real estate dollars; however, equity is effectively unhedged and therefore relatively volatile. Equity investors must accept downside risk in order to fully share in the upside potential. Risk/Return Customized Mortgages Timbercreek Mortgage Investment Corporation (TSX: TMC) These are relatively small, short-term mortgages secured by quality assets that involve customized features such as early repayment options. This customization warrants higher yields than standard bank mortgages, without the risk and volatility associated with equity. Customized Senior Mortgages Timbercreek Senior Mortgage Investment Corporation (TSX: MTG) These are customized first mortgages primarily secured by income-producing assets that typically involve slightly longer terms, lower loan-to-value characteristics and a higher debt service coverage ratio than the mortgage loans of TMC and therefore command a lower interest rate. Lowest Bank Mortgages Banks Credit Unions Trust Companies These are traditionally very safe and conservatively managed investment vehicles, and, accordingly, have lower rates of return. This is an institutionalized marketplace dominated by large, well capitalized financial services firms looking for bond-like investments. Timbercreek Mortgage Investment Corporation 7

10 Case Studies Mixed Use Portfolio Toronto, Ontario Great Location Downtown Toronto, mixed used portfolio, near the central business district Great Buildings Portfolio of office, retail and commercial buildings blocks from major subway/transit lines Loan Amount $4,000,000 Loan-To-Appraised Value 36% Loan Type First mortgage, junior position Term 36 Months Effective Interest Rate 12.63% Fee 1.90% 8 Timbercreek Mortgage Investment Corporation

11 Montreal, Quebec Residential Great Location Located in the Golden Square Mile district of downtown Montreal, two minutes from the Metro Great Building More than 300 luxury apartments with amenities and services geared for people in the business world Loan Amount $15,000,000 Loan-To-Appraised Value 78% Loan Type First mortgage, junior position Term 36 Months Effective Interest Rate 9.17% Fee 2.33% Timbercreek Mortgage Investment Corporation 9

12 Andrew Jones Paul Jones Q&A A discussion with Andrew Jones, Managing Director, Debt Investments, and Paul Jones, Executive Director, Portfolio Management Debt, of Timbercreek Asset Management The Timbercreek Mortgage Investment Corporation is almost five years old and has not incurred any loan losses or impairments. How are you able to manage this risk? Paul: There are a number of ways we manage risk. Primarily we mitigate risk with our conservative selection policy. We focus on having the vast majority of our portfolio of mortgage and loan investments secured by income-producing properties rather than raw land slated for development, or projects under construction such as new condominiums. Properties with rental or lease income have the cash flow to service our loans if borrowers are unable to refinance when their loan matures. There is lower volatility in the valuation of cash flowing properties. Mortgages secured by non-income-producing assets, on the other hand, generally rely on a development or construction project moving forward which requires sales of the end product to be in place. Such sales can be heavily dependent on market conditions, which would in turn expose us to fluctuations in market conditions. In addition to this, we employ a rigorous analytical review of the loan investment opportunities. This includes visits to the underlying real estate assets that will secure the loan, an assessment of the quality of the cash flow generated from the property, and independent verification of structural integrity of the assets. It is important we understand the local markets in which the properties are located as well as have a good knowledge of the product types securing the loans apartment buildings, retail outlets or retirement homes. We also ensure the portfolio is diversified by product type, borrower, and province, and we set maximum thresholds on individual loans. All of our deals are subject to approval by the Company s fully independent Mortgage Advisory Committee, and approval is required by this committee before the loan is funded. Finally, we monitor the status of each loan once it s funded and maintain regular communication with borrowers. We develop customized strategies to address issues that arise with any mortgage loans. 10 Timbercreek Mortgage Investment Corporation

13 How have you managed to exceed the Company s target yield each of the first five calendar years? Andrew: We ve exceeded it because our performance has been strong and we ve received a lot of lender fee income due to the speed of loan repayment in the Company s portfolio of loan investments. I ll explain the latter. When we provide a loan, the borrower typically pays a fee in return for the flexibility to repay the loan early without penalty. So, when a borrower repays a loan early and we redeploy that money into another loan, we generate an additional fee. The portfolio has had high turnover due to early repayments in the last couple of years, therefore generating more fee income. These lender fees go to the Company as income, which along with the interest on the loans is used to pay out distributions to investors in the Company. This has helped enhance the yield for investors as well as allowed us to exceed the target. Paul: It s important to note that the lender fees are not retained by Timbercreek Asset Management. It s normal in the industry for lenders to generate these fees, but we believe we re unique as a Manager in that we do not retain any percentage of those fees. This ensures there isn t conflict of interest between the Manager and investors; there isn t a financial incentive to Timbercreek to focus on very short-term loans, to achieve a high rate of portfolio turnover in order to generate more fees for our own benefit. Also, because we manage a smaller portfolio of loans relative to institutional lenders, we are nimble enough to take advantage of loan opportunities that institutional investors don t go after due to timing and size requirements. Despite exceeding the target yield again, there was a slight cut in the distribution in Why? Paul: The Company only pays out income that has been generated. We don t want to reduce, or grind down, the net asset value of the Company s units by paying distributions to unitholders that partially consist of their own money. Therefore, the reason for the distribution cut was twofold. The first was the continued low interest rate environment, which mitigates the percentage interest we re able to charge on our loans. Secondly, now that the Company s portfolio of assets has stabilized at its existing size and we don t foresee the need to raise additional capital, we have a commitment to retain some of the earnings and slowly build up the net asset value of the units over the next few years was an interesting year for the Company, as a number of new publicly traded funds and companies that invest in mortgages emerged. What would you say makes this Company different than these new competitors? Andrew: From an investor s point of view, our track record sets us apart. In addition to surpassing our targeted distribution levels since inception, Timbercreek Asset Management also has the longest track record for managing a publicly traded, as opposed to private, mortgage investment corporation (MIC). We grew the size of this Company slowly over time, working out some of the initial challenges along the way. That s experience that some of the other new fund managers don t have. And of course, as Paul noted, we think we re unique among public MICs in that we redirect all lender fees back into the Company for the benefit of investors. From a borrower s standpoint, they see Timbercreek as a reasonable, stable, long-term source of capital. We are a lender of preference for a lot of borrowers. We re competitive on rates, we provide very good service to the borrowers, and we have sufficient funds to meet all their needs. Since we launched our second MIC, the Timbercreek Senior Mortgage Investment Corporation, we re a bigger, more full-service firm, and that s generated momentum. Has the commercial real estate market changed much over the past five years? Andrew: Yes, it has. The market adjusted itself with a bit of a reset in 2009, and since then some asset classes in certain locations have seen a material compression of capitalization rates as a result of growth in valuations. But we still feel good about the fundamentals. For the most part, in many of the asset classes, buyers are still buying, assets are still trading below replacement cost, and renting still makes economic sense for tenants. There has not been a material addition to supply in any of the major asset classes across Canada, so we re not worried about a flood of new supply which would cause rents to sink. As a lender that s focused on making sure there s sufficient cash flow from the properties to service the debt, we re using that as our defensive strategy. Paul: Over the past five to eight years, pension funds have increased their allocation to real estate. Ten years ago, they didn t want a heavy weighting of real estate in their portfolio. Now they ve increased their allocations which in turn have increased demand for real estate contributing to the smoothing of cap rates across the asset classes that Andrew noted. That likely won t change going forward; it s more akin to international standards. Has there been any evolution in the types of borrowers Timbercreek is working with? Andrew: Yes, as we re able to syndicate loans between this Company and our Senior Mortgage Investment Corporation, we re now a larger lender who is able to write larger cheques. This allows for us to deal with more institutional-like clients, sophisticated borrowers with deeper pockets that can sustain a downturn in the real estate markets and the economy. These types of borrowers have higher quality assets, which provide excellent security for the Company s loans. Timbercreek Mortgage Investment Corporation 11

14 R. Blair Tamblyn Letter to Shareholders 12 Timbercreek Mortgage Investment Corporation

15 We were extremely pleased with the performance of the Timbercreek Mortgage Investment Corporation in The returns from our Portfolio, both from interest on the loans and origination fees paid by the borrowers, allowed us to again make steady monthly distributions to investors that exceeded our target yield*. We have been able to do this every year since our inception in The total return for the Company s Class A shares during the year was 8.7%**. When evaluating actual distributions, we are very pleased to note that since our inception we have distributed an annualized yield of 8.53%*** to shareholders. The Company s net assets grew by $37 million or 12% in 2012, primarily due to a successful private placement. The growing stature of Timbercreek s lending platform among real estate investors as well as demand for the customized mortgage loans ensured the capital raised was invested quickly. In 2012, we advanced 51 new investments totaling $295 million, and had additional advances on existing mortgage and loan investments of $32 million. We received repayments and partial pay-downs on 60 mortgage and loan investments totalling $263 million. This reflected the quality of the borrowers and the underlying real estate that was the Company s primary security. The redeployment of this principal continued to generate significant fee revenue which is used to enhance yield for our investors. We also incurred no loan impairments in 2012, and have not since inception. We believe this is a result of our prudent risk management and conservative selection policy, specifically our focus on securing loans by incomeproducing assets rather than development projects or undeveloped land. As of December 31, 2012, our total net assets stood at $356 million. As noted in last year s report, we believe this to be close to the optimal portfolio size for long-term success in the current market; total assets of $400 million would represent approximately 10% market share of the universe of mortgages that the Company is focused on, which Timbercreek and the Company s independent Board of Directors feels is an appropriate size from a risk-mitigation perspective. In light of nearing our targeted Portfolio size, we believe there is now an opportunity to also focus on building the net asset value of our shares while still providing investors with strong, steady monthly income. We continue to ensure our Portfolio is well diversified by the type of property securing the mortgages, loan maturity dates, length of term, loan-to-value, and region. As at the end of 2012, approximately 85% of our Portfolio was allocated across Ontario, Quebec, Alberta and B.C. This allocation reflects our focus on sourcing mortgages secured by high quality, cash flowing properties in large urban markets as well as their surrounding areas. A notable development in 2012 was the increase in the universe of public non-bank lenders. This included the launch of the Timbercreek Senior Mortgage Investment Corporation, with which the Company is related to by virtue of its relationship to Timbercreek. The increase in number of nonbank lenders is indicative of three things. One, there is healthy demand for transitional loans with customized terms; transactional activity is strong because real estate investors see good economic fundamentals with potential long term upside. Two, these same investors continue to face a lack of available capital either from institutions or through the commercial securitization (CMBS) market. Three, borrowers increasingly view mortgage investment corporations as a stable and flexible financing alternative to more traditional sources of debt capital. We anticipate 2013 will be another solid year for the Company. Timbercreek s lending platform is attracting deal flow from increasingly sophisticated borrowers with high quality assets, and it continues to benefit from repeat borrowers and referrals. Most indications point to Canadian interest rates remaining low through 2013 (a view to which we subscribe). This will continue to make us work hard to maintain the lending rates that we have achieved in the past, but we are confident that we can execute; a sustained focus on shorter-term mortgages and a portfolio that turns over regularly will mean that the Company will continue to receive a steady stream of additional cash flow from origination fees. In closing, I would like to thank our Board of Directors for their support and counsel in helping the Company successfully navigate another year. I would also like to express my appreciation to the members of our fully independent Mortgage Advisory Committee, who review and approve all of the Manager s proposed loans. Finally, to our shareholders, thank you for your support. I will look forward to reporting on our progress in the future. Blair Tamblyn CEO Timbercreek Mortgage Investment Corporation * 550 basis points above the Government of Canada 2-year bond yield ** Based on net asset value per share, net of all fees and expenses and assuming the reinvestment of dividends *** Annualized dividend yield based on a $10 issue price Timbercreek Mortgage Investment Corporation 13

16 Timbercreek Asset Management Timbercreek Asset Management is an active investor, owner, and manager of global real estate and related assets focused on delivering sustainable and growing returns to our investors. We maximize value by employing a value-oriented investment philosophy with an active, hands-on management style to identify opportunities that will generate predictable and sustainable long-term cash flow. We have earned a reputation for providing conservatively managed, risk-adverse investment opportunities for both retail and institutional investors. Timbercreek manages approximately $3.2 billion in assets through multiple private and public investment vehicles focused on direct real estate, mortgage debt, and global real estate securities. Our public funds include: Timbercreek Global Real Estate Fund (TSX: TGF.UN) Invests in a diversified portfolio of prime real estate securities including common equity, preferred shares and debt of both private and public real estate investment trusts and real estate companies around the world. The Fund s investment objectives are to generate stable cash flow to provide distributions to unitholders (currently targeted at $0.84/unit/year) and preserve capital while providing the opportunity for long term capital appreciation. Timbercreek Mortgage Investment Corporation (TSX: TMC) Invests in customized mortgages secured by high quality commercial real estate that is typically income-producing and located in urban markets. The Corporation s investment objective is to preserve unitholders capital while generating stable cash flow to provide distributions to unitholders. Its targeted aggregate annualized yield is 550 basis points above the average two-year Government of Canada bond yield. Timbercreek Senior Mortgage Investment Corporation (TSX: MTG) Invests in customized first mortgages that generally involve slightly longer terms and a higher debt service coverage ratio than TMC s mortgage loans. These loans are secured by high quality commercial real estate that is typically income producing and located in urban markets. Its long term target yield is 350 basis points above the average two-year Government of Canada bond yield. Timbercreek U.S. Multi-Residential Opportunity Fund #1 Invests in multi-residential real estate assets in the southeastern United States that are mispriced and/or undermanaged and enhances the value of the assets through active management and a stabilization and improvement program, with the goal of ultimately disposing of the assets to generate significant gains. The total return objective is a 15% IRR (or average annualized total rate of return), inclusive of an annual distribution yield of 4% to 5% (which includes the allocation to Unitholders of U.S. taxes paid by the Fund) paid quarterly. 14 Timbercreek Mortgage Investment Corporation

17 Annual Management Report Of Fund Performance As at December 31, 2012 This annual management report of fund performance contains financial highlights and accompanies the audited annual financial statements of 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) ext (collect if long distance), Carrie Morris, Managing Director Capital Markets & Corporate Communications Internet: Visiting SEDAR at or Mail: Writing to the Fund at: Timbercreek Mortgage Investment Corporation Attention: Corporate Communications 1000 Yonge Street, Suite 500 Toronto, Ontario M4W 2K2 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. Forward-Looking Statements Caution regarding forward-looking statements The terms, the Fund, we, us and our in the following Management Report of Fund Performance ( MRFP ) refer to Timbercreek Mortgage Investment Corporation and its consolidated financial position and results of operations for the year ended December 31, Financial data provided has been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ) as issued by the Accounting Standards Board ( AcSB ) of the Canadian Institute of Chartered Accountants ( CICA ). This MRFP should be read in conjunction with the Fund s audited annual consolidated financial statements for the year ended December 31, 2012, which have been prepared in accordance with Canadian GAAP. Copies of these documents have been 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 and percentage relationships contained in the Fund s audited financial statements and MRFP related thereto, including trends, which might appear, should not be taken as indicative of future operations. Forward-looking statement advisory This document 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 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 Fund will have sufficient capital under management to effect its investment strategies and pay its targeted distributions, (ii) the investment strategies will produce the results intended by the Fund Manager, (iii) the markets will react and perform in a manner consistent with the investment strategies and (iv) the Fund is able to invest in mortgages or loans of a quality that will generate returns that meet and or exceed the Fund 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 document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such 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 Fund may invest in and the risks detailed from time to time in the Fund s prospectus. 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 Fund, 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 Fund and Timbercreek Asset Management Ltd. (the Timbercreek Mortgage Investment Corporation 15

18 Fund 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. MANAGEMENT DISCUSSION OF FUND PERFORMANCE This management discussion of the Fund s performance is based on the views of the Fund s management as at December 31, 2012 and is not intended to provide legal, accounting, tax or investment advice. Investment Objectives and Strategies The Fund was launched in July 2008 to provide investors with an opportunity to invest indirectly, by holding shares of the Fund, in mortgage and loan investments selected and determined to be high quality by Timbercreek Asset Management Ltd. (the Fund Manager ). 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: Preserve the net asset value of the Fund; and Provide shareholders with a stable stream of monthly distributions. The Fund intends on meeting its investment objectives by investing in a diversified portfolio of mortgage and loan investments, consisting primarily of conventional mortgage loans secured directly by residential (including multi-residential and retirement homes), office, retail and industrial real property across Canada, primarily located in large urban markets and surrounding areas. Risk The risks associated with investing in the Fund remain as disclosed in its prospectus dated December 30, 2009, as amended on August 19, 2011 and its most recent prospectus supplement dated August 29, Any changes to the Fund over the year ended December 31, 2012 (the Year ) have not affected the overall risk of the Fund. Results of Operations The Fund returned 8.7% on Class A shares and 9.7% on Class B shares for the Year, after management fees and expenses, based on net asset value. The difference in the returns for each class of shares mainly relates to differences in expense structures in each class, namely the service fees and additional issuance costs attributable to Class A shares. In comparison, the Fund s targeted aggregate annual yield (net of all fees and expenses of the Fund) of the Government of Canada 2-year bond yield plus 450 basis points for the Year was 5.6%. The Manager is very pleased with the performance of the Fund, which has now returned 7.5% on Class A shares and 9.7% on Class B shares since inception in July 2008, demonstrating a strong track record of achieving its stated objectives. We are pleased to note that the Fund grew its net assets by $37.3 million to $355.5 million as at December 31, 2012 mainly as a result of a successful Class B private placement in April 2012, raising net proceeds of $34.0 million. Overall, the Fund s net assets have grown by approximately 12% since December 31, The Fund s continued growth has meant that larger individual mortgage and loan investments are compatible with the Fund s investment strategy and Asset Allocation Model ( AAM ), thus increasing the universe of potential investments. The Fund Manager continues to be selective and has focused predominantly on mortgage and loan investments that are secured by cash-flowing assets, while still exceeding its targeted distributions to shareholders. In addition, with the launch of Timbercreek Senior Mortgage Investment Corporation ( TSMIC ) in January, 2012, focusing on senior position mortgage investments, the Fund has benefited from sharing larger, high quality mortgage investments, while increasing the Fund s average interest rate. During the Year, the Fund advanced 51 new mortgage investments ( ) totaling $295.4 million (2011 $334.0 million), had additional advances on existing mortgage and loan investments totaling $32.4 million (2011 $12.7 million) and received repayments and partial pay downs on 60 mortgage and loan investments ( ) totaling $262.9 million (2011 $216.0 million), resulting in total mortgage and loan investments of $368.3 million as at December 31, 2012 (2011 $303.4 million), or a portfolio turnover rate of 80.1% ( %). Further, the new mortgage investments from the Year equate to approximately 80.2% of the Fund s mortgage and loan investments at Year end. The weighted average interest rate on the portfolio at December 31, 2012 was 10.14% ( %). The weighted average interest rate has increased over the Year, mainly as a result of the Fund syndicating loans 16 Timbercreek Mortgage Investment Corporation

19 with TSMIC and reducing its exposure to larger, first mortgage investments that typically attract lower yields relative to the Fund s weighted average interest rate. For the new loans advanced during the Year, the average mortgage investment was approximately $5.8 million (2011 $8.6 million) a reduction from the prior year as the Fund continues to share mortgage investments with TSMIC. The Fund continues to maintain a diversified portfolio of mortgage and loan investments primarily across Canada, with its greatest concentration in Canada s largest provinces. At December 31, 2012, 84.5% of the mortgage portfolio was allocated across Canada s four largest provinces (Ontario 41.8%; Alberta 13.3%; B.C. 9.7%; Quebec 19.7%) with a decrease in Ontario over the Year, creating greater balance in the portfolio. This is in comparison to December 31, 2011 where 79.4% of the mortgage portfolio was allocated between four provinces (Ontario 48.5%; Alberta 5.1%; B.C. 11.9%, Quebec 13.9%). The Fund has continued to maintain significant exposure to Ontario as it has benefited from sourcing mortgages secured by high-quality, cash flowing multi-family and office assets in good markets, enhanced by its ability to share mortgage investments with TSMIC. Of note, the Fund also reduced its exposure to mortgage investments secured by land, from 10.6% at December 31, 2011 to 4.2% at December 31, The Fund Manager places a high degree of emphasis on closely monitoring the portfolio and, where appropriate, will adjust the fair value of a mortgage or loan investment if it determines that it is unlikely to recover the full value of its investment and accrued interest. At December 31, 2012, one mortgage investment totaling approximately $3.6 million, with accrued interest of $1.4 million, was past due and for which the Fund has undertaken enforcement remedies. In addition, the Fund is continuing enforcement proceedings on one other mortgage investment totaling approximately $4.1 million. The Fund has obtained a judgment against the mortgage s guarantors and borrowers and successfully registered a writ of seizure and sale against the guarantors, which constitutes a lien on all of their real property. As a part of this process, the remaining lien property is now listed for sale and net proceeds after discharge of first mortgage to be applied against the mortgage investment of the Fund. The Fund believes it will recover the full principal and accrued interest on the loan upon sale of the properties and, as such, no fair value adjustment has been recorded in these consolidated financial statements. Overall at December 31, 2012 these past due mortgage investments represent only approximately 2.1% (December 31, %) of the total assets of the Fund. In September, 2012 the Fund amended the terms of its credit facility to reduce the maximum to $25 million (approximately 7% of total assets) from $45 million in the prior year while also removing defined limits to the borrowing capabilities of the Fund. The Fund continues to avoid using consistent leverage as a means to enhance dividends, but is authorized to borrow to maintain liquidity for general working capital purposes and to bridge the timing gap between mortgage advances and repayments. At December 31, 2012, the Fund had drawn $8.8 million on the credit facility (2011 nil). The maximum and minimum amounts borrowed on the credit facility during the Year were $20.8 million and nil, respectively. During the Year the Fund experienced an increase in net assets from operations of $28.8 million (2011 $18.0 million) or an increase per Class A and Class B share of $0.77 (2011 $0.72) and $0.83 (2011 $0.75), respectively. The Fund was able to distribute $29.2 million (2011 $21.2 million) or $0.78 (2011 $0.82) per share for Class A and $0.83 (2011 $0.86) per share for Class B. The Fund achieved its targeted payouts mainly as a result of not having significant idle cash following its equity offering and from significant lender fees received resulting from mortgage investment turnover. Overall, net asset value per Class A share increased by $0.01 to $9.35 at December 31, 2012 (2011 $9.34) and net assets per Class B share increased by $0.09 to $9.94 at December 31, 2012 (2011 $9.85) after distributions. Total revenue earned by the Fund for the Year increased to $38.7 million from $24.6 million, or an increase of 57.3% from the year ended December 31, The increase in revenue was due to the Fund increasing its portfolio of mortgage and loan investments by approximately $64.9 million, or 21.4%, from December 31, 2011 to December 31, During the Year, the Fund also received non-refundable lender fees of $5.1 million (2011 $3.8 million) or 1.7% ( %) of new mortgage investments. These lender fees are amortized over the contractual terms of the of mortgage investment to fee income. The fees generated by the Fund continue to be a significant component of revenue resulting from mortgage investment turnover. The Fund Manager does not retain any portion of the lender fees, unlike other competing mortgage investment funds, ensuring management interests are aligned with the Fund. Timbercreek Mortgage Investment Corporation 17

20 Total expenses for the Year increased to $9.8 million from $6.6 million for the year ended December 31, This increase is primarily due to management and servicing fees which increase in proportion to the growth in the Fund s net assets available for investment. The majority of the Fund s expenses consist of management and accrued performance fees of $7.3 million (2011 $4.5 million) and servicing fees attributable to Class A shares of $1.4 million (2011 $1.1 million). The remaining operating expenses of $1.1 million (2011 $0.9 million) consist mainly of audit fees, interest expense, director fees and other operating costs associated with operating the Fund and administration of the mortgage portfolio. As the Fund achieves its target size, operating expenses continue to decrease relative to income, equating to 2.9% of income at December 31, 2012 ( %). During the Year, the Fund completed a private placement of 3,400,573 Class B shares for net proceeds of approximately $34.0 million. The Fund also exchanged 3,382,323 Class B shares during the Year for 3,569,453 Class A shares. The Fund also had redemptions of 15,522 Class A shares ( ,350) for a total of $0.1 million (2011 $1.8 million) during the Year. Recent Developments Throughout 2012 the Fund Manager continued to see increased demand from borrowers, with transactional activity strong as real estate investors see good economic fundamentals with potential long-term up-side. However, these real estate professionals and sponsors continue to be faced with a lack of flexible, available capital from institutions and securitization market, all of which is providing non-bank lenders like the Fund the opportunity to fill this capital void. Mortgage investment corporations ( MIC s ) like the Fund continue to grow and are becoming perceived in the marketplace as a stable, flexible financing alternative, providing borrowers with an additional partner to grow their business. Each of the various MIC s in the Canadian marketplace continue to develop an area of specialty within the lending marketplace. The Fund is focused on identifying lending opportunities that are secured by cash-flowing real estate, rather than land, or development projects that are not yet producing cash flow. Since the Fund was launched in 2008, it has developed a professional reputation resulting in numerous repeat borrowers and a growing network of referrals. As a result, the Fund has been competitive and successful, while remaining conservative and selective, in making investments that meet the Fund s investment objectives. Given the current availability of high quality loans and general market trends, there has been no need to modify the Fund s AAM during the Year. The Fund Manager and the Mortgage Advisory Committee ( MAC ) continue to place emphasis on investments secured by cash-flowing real estate assets, a geographically diversified portfolio and larger, individual mortgage investments secured by high quality, institutional quality real estate assets. Specifically, the Fund has kept its allocation to development and land at less than 10% of the portfolio. This strategy is expected to continue through 2013 and beyond. Independent Review Committee In August 2011, the Manager merged the independent review committee (the IRC ) for both the Fund and a related party, Timbercreek Global Real Estate Fund into one IRC. In 2012, Timbercreek Senior Mortgage Investment Corp. was added to the mandate of the IRC. In October, 2011 the IRC added Michele McCarthy, LLM, ICD.D and subsequently appointed her as Chair. Ms. McCarthy is a bilingual lawyer who has been in the legal field for 26 years, and is President of McCarthy Law, where she employs her expertise in corporate law and strategic regulatory restructuring to work with clients in banking, securities and hedge funds. Future Accounting Change Effective January 1, 2011, Canadian GAAP for publicly accountable enterprises converged with International Financial Reporting Standards ( IFRS ). In December 2011, the Accounting Standards Board of The Canadian Institute of Chartered Accountants required investment companies applying Accounting Guidelines 18, Investment Companies, to further defer adoption of IFRS for fiscal years beginning on or after January 1, 2014 by extending the mandatory requirement for all Canadian publically accountable enterprises to prepare their financial statements in accordance with IFRS as issued by the International Accounting Standards Board ( IASB ). As a result of the amendments, the Company will adopt IFRS at the earliest beginning January 1, 2014, and will issue its first consolidated financial statements in accordance with IFRS, including comparative IFRS information for the previous fiscal period, for the year ending December 31, Timbercreek Mortgage Investment Corporation

21 The Fund Manager has developed an IFRS changeover plan, which addresses the key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and Canadian GAAP that are expected to impact financial reporting. As the Fund industry continues to get closer to the January 1, 2014, transition date, various accounting issues are gaining more clarity. Based on the Fund Manager s current evaluation of the significant differences between Canadian GAAP and IFRS, the adoption of IFRS is expected to have the following impact: measurement and presentation of shareholders equity - the Fund s shares will be classified as debt with changes in the net redemption value being reflected in the statement of operations each reporting period and result in additional disclosures in the accompanying notes. measurement of mortgage investments at amortized cost or fair value through profit or loss FVTPL ) - measurement at FVTPL, if the Fund qualifies under IFRS, would result in lender fees received from borrowers being taken into income at the time the borrower enters into the mortgage investment rather than being amortized over the contractual terms of the mortgage and loan investment. This income impact may be offset by changes in the fair values of the related mortgages. Measurement at amortized cost would result in initial recognition of the mortgage and loan investments at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, mortgage and loan investments will be measured at amortized cost using the effective interest method, less any impairment losses. Both of these options will not result in any impact to the net redemption value for Class A and Class B for fund pricing purposes. derecognition of mortgage investment interest sold to third party - in situations where the Fund sells interests in mortgage investments to third parties, the current treatment under Canadian GAAP allows for derecognition on transfer of such interest; this treatment may be different under IFRS depending on the facts and circumstances of each transaction including the risks and rewards retained by the Fund in the transfer in which the Fund does not retain a pari passu interest. Whereas the Canadian GAAP derecognition assessment is focused on control, the IFRS derecognition model is primarily based on extent of the risks and rewards transferred. The Fund Manager continues to monitor changes to IFRS and is assessing the impact on the Company. The current assessment and IFRS changeover plans may change if new standards are issued or if interpretations of existing standards are revised. Related Party Transactions Fund Manager The Fund Manager is a related party by virtue of common management. Pursuant to the Fund Management Agreement, the Fund Manager is entitled to a fee of 1.2% per annum of the gross assets of the Fund (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. During the Year, the Fund Manager earned compensation of $4.8 million (2011 $3.4 million) for general management and administration services. The Fund Manager is responsible for the management and administration of the Fund s mortgage and loan investment 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 two-year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Fund Manager is entitled to receive from the Fund a performance fee equal to 20% of net earnings of the Fund available to distribute over the Hurdle Rate (the Performance Fee ). During the Year, the Fund Manager accrued a performance fee of $2.5 million (2011 $1.1 million). Timbercreek Mortgage Investment Corporation 19

22 In determining the Performance Fee, on a monthly basis the Fund Manager will calculate the earnings available to distribute 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 Fund Manager within 15 days of the issuance of the Fund s audited financial statements for that year. In the event of 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 Fund 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. Other Related Party Transactions As at December 31, 2012, the Fund, Timbercreek Global Real Estate Fund ( TGREF ) and Timbercreek Four Quadrant Global Real Estate Partners ( T4Q ), related parties by virtue of common management, have co-invested in a loan investment secured primarily by a portfolio of mobile home communities. The Fund s share in the loan investment is $16.5 million (2011 $9.1 million). The Fund has also co-invested in two ( one) mortgage investments with these related parties amounting to $29.8 million ( $4.0 million). As at December 31, 2012, $0.2 million is receivable from T4Q and $0.04 million is payable to TGREF. The Fund Manager has been retained by TGREF and T4Q to provide fund management and portfolio advisory services. As at December 31, 2012, the Fund and TSMIC, a related party by virtue of common management, have co-invested in 29 mortgage investments, totalling $373.9 million, which are secured primarily by multi-residential, office, retirement and other commercial properties. The Fund holds junior 1st mortgage positions in these co-investments in relation to TSMIC. The Fund s share in these investments is $83.9 million (2011 nil), which included in this amount is a mortgage investment of $0.9 million (2011 Nil) to a limited partnership, which is co-owned by T4Q. In addition, $4,462 (2011 nil) is payable from the Fund to TSMIC relating to costs paid on behalf of the Fund in relation to the mortgage investments as at December 31, 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. 20 Timbercreek Mortgage Investment Corporation

23 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 year ended December 31 The Fund s Net Assets per Class A Share Net Assets, beginning of period $ 9.23 $ 9.15 $ 9.24 $ 9.21 $ 9.33 Increase (decrease) from operations: Total revenue Total expenses (0.28) (0.27) (0.30) (0.31) (0.14) Realized gains (losses) for the period 0.02 Unrealized gains (losses) for the period Total increase (decrease) from operations Distributions: From Income (excluding dividends) (0.78) (0.82) (0.82) (0.81) (0.44) From Dividends From Capital Gains (0.02) Return of Capital Total Distributions for the period 3 (0.78) (0.82) (0.82) (0.83) (0.44) Net Assets, at end of period $ 9.25 $ 9.23 $ 9.15 $ 9.24 $ 9.21 Ratios and Supplemental Data Total net asset value (000 s) 4 $ 323,075 $ 286,008 $ 125,753 $ 52,183 $ 36,502 Number of shares outstanding 4 34,561,122 30,618,903 13,390,011 5,533,616 3,889,562 Management expense ratio *5 2.87% 2.77% 3.23% 3.37% 3.13% Management expense ratio before waivers or absorptions * 2.87% 2.77% 3.23% 3.85% 3.67% Trading expense ratio *6 0.02% 0.05% 0.04% 0.05% 0.07% Portfolio turnover rate % % 48.05% 24.55% 10.19% Net asset value per share $ 9.35 $ 9.34 $ 9.39 $ 9.43 $ 9.38 Closing market price $ $ $ $ 9.95 $ This information is derived from the Fund s annual audited financial statements. The net assets per share presented in the financial statements 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. 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 of shares outstanding for the relevant class over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per share. 3 Distributions were paid in cash / reinvested in additional shares of the Fund, or both. Timbercreek Mortgage Investment Corporation 21

24 For the year ended December 31 The Fund s Net Assets per Class B Share Net Assets, beginning of period $ 9.58 $ 9.71 $ 9.70 $ 9.77 $ 9.84 Increase (decrease) from operations: Total revenue Total expenses (0.22) (0.20) (0.26) (0.24) (0.11) Realized gains (losses) for the period 0.02 Unrealized gains (losses) for the period Total increase (decrease) from operations Distributions: From Income (excluding dividends) (0.83) (0.86) (0.90) (0.92) (0.48) From Dividends From Capital Gains (0.02) Return of Capital Total Distributions for the period 3 (0.83) (0.86) (0.90) (0.94) (0.48) Net Assets, at end of period $ 9.60 $ 9.58 $ 9.71 $ 9.70 $ 9.77 Ratios and Supplemental Data Total net asset value (000 s) 4 $ 37,193 $ 36,669 $ 38,354 $ 17,889 $ 14,796 Number of shares outstanding 4 3,742,597 3,724,347 3,868,832 1,820,239 1,502,279 Management expense ratio *5 2.25% 2.01% 2.68% 2.51% 2.05% Management expense ratio before waivers or absorptions * 2.25% 2.01% 2.68% 3.00% 2.41% Trading expense ratio *6 0.02% 0.05% 0.04% 0.05% 0.07% Portfolio turnover rate % % 48.05% 24.55% 10.19% Net asset value per share $ 9.94 $ 9.85 $ 9.91 $ 9.83 $ 9.85 Closing market price 9 N/A N/A N/A N/A N/A * Amounts have been annualized in 2008 as a result of the Fund commencing operations on July 7, This information is provided at period end of the year shown. 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 the semi-monthly 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 these costs. 7 The Fund s portfolio turnover rate indicates how actively the Fund Manager 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 the Fund. 8 The Fund commenced operations on July 7, 2008 when it completed the initial public offering 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. 9 Class B share of the Fund are privately held and there is no market through which these shares may be sold. 22 Timbercreek Mortgage Investment Corporation

25 MANAGEMENT FEES A summary of management fees earned by the Fund Manager for the Year, 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 0.50% per annum of the net redemption value per Class A share of the Fund (the Servicing Fee ). The Servicing 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. During the Year, no additional fees were paid to the Fund Manager (2011 nil). For the Year, total expenses of the Fund were $9.8 million (2011 $6.6 million) resulting in a management expense ratio ( MER ratio ) of 2.80% ( %). The total expenses of the Fund include performance fee of $2.5 million (2011 $1.1 million), which are only payable to the Fund Manager, once the Fund s net earnings available for distribution to shareholders are in excess of the Hurdle Rate. The MER ratio of the Fund, excluding performance fees is 2.10% ( %). A summary of the management fees earned by the Fund Manager during the years ended December 31, 2012 and 2011 include: $ % $ % Management Fees 4,812, ,394, Performance Fees 2,460, ,140, ,273, ,535, Timbercreek Mortgage Investment Corporation 23

26 PAST PERFORMANCE The performance information shown assumes that all distributions made by the Fund in the period shown were reinvested in additional securities of the Fund. The performance information does not take into account sales, redemptions, distribution or other optional charges that would have reduced returns or performance. How the Fund has performed in the past does not necessarily indicate how it will perform in the future. Year-by-Year Returns The following bar chart shows the Fund s performance for the period shown. In percentage terms, the bar chart shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period. 12.0% Year-by-Year Returns Class A Shares 1 9.8% 9.0% 8.6% 8.6% 8.7% 7.5% 6.0% 3.0% 0.0% Since Inception Year-by-Year Returns Class B Shares % 9.0% 9.8% 10.4% 8.5% 9.7% 9.3% 6.0% 3.0% 0.0% Since Inception 1 In accordance with NI , no performance data has been shown for the period from July 8, 2008 to December 31, 2008 as the Fund was not a reporting issuer at all times during the year. 24 Timbercreek Mortgage Investment Corporation

27 SUMMARY OF INVESTMENT PORTFOLIO As at December 31, 2012 Net Assets ($) % of Net Assets Mortgage and loan investments 368,253, Credit facility, net of cash and cash equivalents (7,448,666) Net Liabilities (1,265,288) Total 359,539, Summary of Top 25 Holdings Prov. Outstanding Principal Loan-tovalue 1 Term Interest Rate Positions Allocation Product Type Canadian Retail REIT Portfolio 2 Various $ 26,914,580 71% % Second Retail 7.48% ASC Portfolio 3 Various $ 25,850,000 72% % Second Retirement 7.19% Montreal Apartments QC $ 25,000,000 78% % First Multi-Residential 6.95% MF Acquisition Facility ll 4 ON $ 23,429,752 84% % Second Multi-Residential 6.51% National Retirement Portfolio 5 Various $ 17,000,000 71% % Second Retirement 4.73% AMC OT $ 16,520,826 46% % First Other-Residential 4.59% MF Acquisition Facility 6 ON $ 11,317,492 83% % Second Multi-Residential 3.15% T.R. Retail Mall QC $ 10,000,000 80% % Second Retail 2.78% Quebec City Development QC $ 10,000,000 69% % First Unimproved Land 2.78% Pickering Retail ON $ 9,837,035 67% % Second Retail 2.73% Lethbridge Apartment Portfolio AB $ 9,816,572 85% % Second Multi-Residential 2.73% CRG Office Portfolio II ON $ 9,080,684 80% % % of NAV First/ Second Office 2.52% AB Apartment Portfolio 7 Various $ 8,062,000 85% % First Multi-Residential 2.24% Kings Development BC $ 8,000,000 82% % Second Retail 2.22% Ontario Apartments ON $ 7,292,845 85% % Second Multi-Residential 2.03% Notre-Dame Residence QC $ 6,500,000 71% % First Other-Residential 1.81% Cote Vertu Apartments QC $ 6,058,000 80% % First Multi-Residential 1.68% Toronto-Waterloo Portfolio 6 ON $ 6,015,000 61% % First/ Second Office 1.67% EM Portfolio ON $ 5,719,654 58% % First Multi-Residential 1.59% Portage Apartments MB $ 5,470,364 85% % First Multi-Residential 1.52% Charest Building QC $ 5,400,000 77% % First Office 1.50% Westfield Portfolio 8 ON $ 5,400,000 74% % First/ Second Industrial 1.50% Island Highway Retail BC $ 5,250,000 64% % First Retail 1.46% Eastern Ontario Retirement ON $ 5,040,000 73% % First Retirement 1.40% Ottawa Industrial Portfolio ON $ 4,750,000 76% % Second Industrial 1.32% 1 Based on appraisals performed by arms length, third party at time of funding 2 Comprised of 18 properties, cross collateralized 3 Comprised of 7 properties, cross collateralized 4 Comprised of 21 properties, cross collateralized 5 Comprised of 13 properties, cross collateralized 6 Comprised of 2 properties, cross collateralized 7 Comprised of 5 properties, cross collateralized 8 Comprised of 3 properties, cross collateralized Timbercreek Mortgage Investment Corporation 25

28 ASSET ALLOCATION By Product By Asset Type % of NAV Multi-Residential 37.66% Retail 21.33% Retirement 16.28% Office 9.09% Other-Residential 7.57% Industrial 6.11% Unimproved Land 4.26% Single-Residential 0.12% Credit facility (2.07%) Other assets (liabilities) (0.35%) By interest rate (excluding fees earned by the Fund) By Interest Rate % of NAV 10% or Lower 49.16% 10.01% % 2.61% 10.25% % 0.63% 10.50% % 24.20% 10.75% % 6.73% 11.00% % 7.93% 11.25% % 0.29% 11.50% % 1.33% 11.75% % 4.32% 12.00% % 0.18% 12.25% % 0.00% 12.50% % 1.11% 12.75% % 2.65% 13.00% % 0.64% 13.25% % 0.26% 13.50% % 0.00% 13.75% % 0.00% 14% or Greater 0.38% Credit facility (2.07%) Other assets (liabilities) (0.35%) By Province By Region % of NAV Ontario 42.77% Quebec 20.17% Alberta 13.59% British Columbia 9.94% Manitoba 6.49% Other 4.60% Saskatchewan 4.23% New Brunswick 0.63% Credit facility (2.07%) Other assets (liabilities) (0.35%) By term By Term % of NAV 0-6 Months 6.95% 7-12 Months 2.30% Months 17.43% Months 9.96% Months 29.40% Months 36.38% Credit facility (2.07%) Other assets (liabilities) (0.35%) by Loan-to-value By Loan-to-value % of NAV 55% or less 10.86% 56% - 60% 2.69% 61% - 65% 2.71% 66% - 70% 29.42% 71% - 75% 9.80% 76% - 80% 23.13% 81% - 85% 22.67% 86% - 90% 1.14% Credit facility (2.07%) Other assets (liabilities) (0.35%) by maturity By Maturity % of NAV Maturing % Maturing % Maturing % Maturing % Credit facility (2.07%) Other assets (liabilities) (0.35%) 26 Timbercreek Mortgage Investment Corporation

29 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. KPMG 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 Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal controls and engaging the independent auditors. The Board of Directors carries out this responsibility through its Audit Committee, which is composed entirely of independent Directors. The consolidated financial statements have been reviewed and approved by the Board of Directors and its Audit Committee. The independent auditors have direct and full access to the Audit Committee and Board of Directors. R. Blair Tamblyn Ugo Bizzarri President and Chief Executive Officer Chief Financial Officer Toronto, Ontario, Canada Toronto, Ontario, Canada February 21, 2013 February 21, 2013 Timbercreek Mortgage Investment Corporation 27

30 Consolidated Financial Statements of Timbercreek Mortgage Investment Corporation Years ended December 31, 2012 and 2011 Independent Auditors Report To the Shareholders of Timbercreek Mortgage Investment Corporation We have audited the accompanying consolidated financial statements of Timbercreek Mortgage Investment Corporation, which comprise the consolidated statements of net assets as at December 31, 2012 and 2011, the consolidated statement of investment portfolio as at December 31, 2012, the consolidated statements of operations, changes in net assets and cash flows for the years ended December 31, 2012 and 2011, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Timbercreek Mortgage Investment Corporation as at December 31, 2012 and 2011, its consolidated investment portfolio as at December 31, 2012, and its consolidated results of operations and its consolidated cash flows for the years ended December 31, 2012 and 2011 in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants February 21, 2013 Toronto, Canada 28 Timbercreek Mortgage Investment Corporation

31 Consolidated Statements of Net Assets December 31, 2012 and Assets Mortgage and loan investments (note 2) $ 368,253,037 $ 303,356,645 Cash and cash equivalents 992,671 16,142,987 Restricted cash (note 3) 395,088 5,907,947 Accrued interest receivable 4,620,491 6,470,134 Financing costs (note 4) 130, ,428 Other assets 366, , ,757, ,344,968 Liabilities Credit facility (note 4) 8,836,425 Accounts payable and accrued expenses 868, ,301 Prepaid mortgage and loan interest 357,235 5,900,415 Mortgage funding holdback 129, ,173 Dividends payable (note 5) 2,428,105 2,350,238 Due to Fund Manager (note 7) 2,469,511 1,140,471 Unearned income 4,141,055 3,611,351 19,229,893 14,133,949 Commitments and contingencies (notes 2 and 12) Subsequent event (note 2) Net assets, representing shareholders equity $ 355,528,070 $ 318,211,019 Net assets: Class A shares $ 319,585,511 $ 282,536,697 Class B shares 35,942,459 35,674,222 Voting shares Shares outstanding (note 5): Class A shares 34,561,122 30,618,903 Class B shares 3,742,597 3,724,347 Voting shares Net assets per share (note 9): Class A shares $ 9.25 $ 9.23 Class B shares Voting shares See accompanying notes to consolidated financial statements. Approved on behalf of the Directors: R. Blair Tamblyn Craig Geier R. Blair Tamblyn Craig Geier Director Director Timbercreek Mortgage Investment Corporation 29

32 Consolidated Statements of Operations Years ended December 31, 2012 and Income: Interest $ 33,218,807 $ 21,178,642 Fees 5,436,148 3,420,078 38,654,955 24,598,720 Expenses: Management fees (note 6) 4,812,148 3,394,823 Performance fees (note 6) 2,460,947 1,140,471 Financing costs 351, ,935 Transfer agent fees 37,931 27,461 Directors fees 104, ,052 Custodian fees 25,085 23,889 Independent review committee fees 35,719 14,831 Servicing fees (note 6) 1,432,823 1,114,284 Audit fees 121, ,873 Legal fees 42,630 78,834 Other operating 403, ,093 9,829,054 6,564,546 Increase in net assets from operations $ 28,825,901 $ 18,034,174 Increase in net assets from operations: Class A shares $ 25,305,348 $ 14,919,532 Class B shares 3,520,553 3,114,642 Increase in net assets from operations per share: Class A shares $ $ Class B shares See accompanying notes to consolidated financial statements. 30 Timbercreek Mortgage Investment Corporation

33 Consolidated Statements of Changes in Net Assets Years ended December 31, 2012 and Class A shares Class B shares Voting shares Total Net assets, beginning of year $ 282,536,697 $ 35,674,222 $ 100 $ 318,211,019 Increase in net assets from operations 25,305,348 3,520,553 28,825,901 Dividends to shareholders (25,793,050) (3,407,965) (29,201,015) Net proceeds from issuance of shares 33,978,879 33,978,879 Issuance of shares under dividend reinvestment plan 3,859,179 3,859,179 Redemption of shares (145,893) (145,893) Exchange of shares 33,823,230 (33,823,230) Net assets, end of year $ 319,585,511 $ 35,942,459 $ 100 $ 355,528, Class A shares Class B shares Voting shares Total Net assets, beginning of year $ 122,552,054 $ 37,564,596 $ 100 $ 160,116,750 Increase in net assets from operations 14,919,532 3,114,642 18,034,174 Dividends to shareholders (17,639,991) (3,541,821) (21,181,812) Net proceeds from issuance of shares 141,504,252 19,667, ,171,777 Issuance of shares under dividend reinvestment plan 1,900,820 1,900,820 Redemption of shares (1,779,970) (50,720) (1,830,690) Exchange of shares 21,080,000 (21,080,000) Net assets, end of year $ 282,536,697 $ 35,674,222 $ 100 $ 318,211,019 See accompanying notes to consolidated financial statements. Timbercreek Mortgage Investment Corporation 31

34 Consolidated Statements of Cash Flows Years ended December 31, 2012 and Cash provided by (used in): Operating activities: Increase in net assets from operations $ 28,825,901 $ 18,034,174 Restricted cash 5,512,859 (3,781,671) Change in non-cash operating items: Accrued interest receivable 1,849,643 (3,285,612) Other assets (170,807) 13,540 Accounts payable and accrued expenses 394, ,813 Due to Fund Manager 1,329, ,067 Prepaid mortgage and loan interest (5,543,180) 3,779,730 Mortgage funding holdback (528,911) 158,173 Amortization of financing costs 149, ,607 Unearned income 529, ,302 32,348,367 16,526,123 Financing activities: Proceeds from issuance of Class A shares, net of costs incurred 141,504,252 Redemption of Class A shares (145,893) (1,779,970) Proceeds from issuance of Class B shares, net of costs incurred 33,978,879 19,667,525 Redemption of Class B shares (50,720) Proceeds from (repayments of) credit facility 8,836,425 (10,677,017) Financing costs (7,733) (195,413) Dividends paid (25,263,969) (18,131,625) 17,397, ,337,032 Investing activities: Funding of mortgages and loan investments (327,810,084) (346,750,238) Discharge of mortgages 262,913, ,017,241 (64,896,392) (130,732,997) Increase (decrease) in cash and cash equivalents (15,150,316) 16,130,158 Cash and cash equivalents, beginning of year 16,142,987 12,829 Cash and cash equivalents, end of year $ 992,671 $ 16,142,987 Supplemental cash flow information: Interest paid $ 203,415 $ 125,271 Supplemental cash flow on non-cash financing activities: Class A shares issued under dividend reinvestment plan (note 5(b)) 3,859,179 1,900,820 See accompanying notes to consolidated financial statements. 32 Timbercreek Mortgage Investment Corporation

35 Consolidated Statement of Investment Portfolio December 31, 2012 % Amortized cost Fair value Carrying value Mortgage and loan investments $ 368,253,037 $ 368,253,037 $ 368,253,037 Cash and cash equivalents and other net liabilities (3.58) (12,724,967) Net assets $ 355,528,070 Mortgage and loan portfolio summary: Interest rate Number of mortgage and loan investments Amortized cost and fair value Less than or equal to 8.99% 10 $ 55,140, % to 9.24% 9.25% to 9.49% 3 34,984, % to 9.74% 2 9,204, % to 9.99% 9 60,074, % to 10.24% 5 26,703, % to 10.49% 3 2,247, % to 10.74% 11 87,003, % to 10.99% 6 24,205, % to 11.24% 8 28,523, % to 11.49% 1 1,029, % to 11.74% 2 4,776, % to 11.99% 5 15,548, % to 12.24% 2 660, % to 12.49% 12.50% to 12.74% 1 4,000, % to 12.99% 3 9,528,905 Greater than or equal to 13.00% 6 4,622, $ 368,253,037 Note: All mortgages are conventional uninsured mortgages, of which 60 mortgages totalling $259,706,967 are repayable at any time by the borrower without penalty or yield maintenance. See accompanying notes to consolidated financial statements. Timbercreek Mortgage Investment Corporation 33

36 Notes to Consolidated Financial Statements Years ended December 31, 2012 and 2011 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 that generate income allowing the Fund to pay monthly distributions to shareholders. Timbercreek Asset Management Ltd., as manager of the Fund (the Fund Manager ), is responsible for the day-to-day operations and providing all general management and administrative services of the Fund s mortgage loan portfolio. The Fund Manager is a wholly owned subsidiary of Timbercreek Asset Management Inc. 1. Significant accounting policies (a) Basis of presentation These consolidated financial statements have been prepared in accordance with Part V of 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. The Fund is an investment company, as defined in Canadian GAAP Accounting Guideline 18, Investment Companies. As a result, mortgage and loan investments are recorded at fair value, with any changes in the fair value recorded in the consolidated statements of operations. (b) Cash and cash equivalents The Fund considers highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value to be cash equivalents. (c) Mortgage and loan investments Mortgage and loan investments are recorded at fair value. Any unrealized change in the fair value of a mortgage or loan investment is recorded in the consolidated statements of operations as an unrealized fair value adjustment. A realized change in the fair value of a mortgage or loan investment as a result of a disposition or repayment is recorded as a realized fair value adjustment. (d) Interest and fee income Interest income is accounted for using the effective interest method. Lender fees received are amortized to income over the contractual terms of the specific mortgage or loan investment. Forfeited lender fees are taken to income at the time a borrower has not fulfilled the terms and conditions of a lending commitment and payment has been received. (e) Unearned income Unearned income includes lender fees received from borrowers, which are amortized over the contractual terms of the mortgage and loan investments to fee income. (f) Income taxes It is the intention of the Fund to qualify as a mortgage investment corporation ( MIC ) for Canadian income tax purposes. As such, the Fund is able to deduct, in computing its income for a taxation year, dividends paid to its shareholders during the year or within 90 days of the end of the year. The Fund intends to maintain its status as a MIC and pay dividends to its shareholders in the year and in future years to ensure that it will not be subject to income taxes. Accordingly, for financial statement reporting purposes, the tax deductibility of the Fund s distribution results in the Fund being effectively exempt from taxation and no provision for current or future income taxes is required for the Fund and its subsidiary Trust. 34 Timbercreek Mortgage Investment Corporation

37 (g) Financial instruments The Fund has designated its financial assets as follows: Financial assets Classification Measurement Mortgage and loan investments Held-for-trading Fair value Cash and cash equivalents Held-for-trading Fair value Accrued interest receivable Loans and receivables Amortized cost The Fund has designated its financial liabilities as follows: Financial liabilities Classification Measurement Credit facility Other financial liabilities Amortized cost Accounts payable and accrued expenses Other financial liabilities Amortized cost Prepaid mortgage and loan interest Other financial liabilities Amortized cost Mortgage funding holdback Other financial liabilities Amortized cost Dividends payable Other financial liabilities Amortized cost Due to Fund Manager Other financial liabilities Amortized cost (h) Increase in net assets from operations per share Increase in net assets from operations 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 year. (i) Net assets per share The net assets per share are calculated by dividing the net assets of a class of shares by the total number of outstanding shares of the Class at the end of the year. (j) 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 dates of the consolidated financial statements and the reported amounts of income and expenses during the years. Actual results could differ from those estimates. The key area of estimation where management has made a difficult or subjective judgment, often as a result of matters that are inherently uncertain, is valuation of the mortgage and loan investments and accrued interest receivable. Significant changes in assumptions could materially change the recorded carrying value. Timbercreek Mortgage Investment Corporation 35

38 (k) Future accounting standards International Financial Reporting Standards ( IFRS ) Effective January 1, 2011, Canadian GAAP for publicly accountable enterprises converged with IFRS. In December 2011, the Accounting Standards Board of The Canadian Institute of Chartered Accountants required investment companies applying Accounting Guideline 18, Investment Companies, to further defer adoption of IFRS for fiscal years beginning on or after January 1, 2014 by extending the mandatory requirement for all Canadian publicly accountable enterprises to prepare their financial statements in accordance with IFRS as issued by the International Accounting Standards Board. As a result of the amendments, the Fund will adopt IFRS at the earliest beginning January 1, 2014, and will issue its first consolidated financial statements in accordance with IFRS, including comparative IFRS information for the previous fiscal period, for the year ending December 31, The Fund Manager has developed an IFRS changeover plan, which addresses the key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and Canadian GAAP that are expected to impact financial reporting. Based on the Fund Manager s current evaluation of the significant differences between Canadian GAAP and IFRS, the adoption of IFRS is expected to have the following impact: (i) Measurement and presentation of shareholders equity The Fund s shares will be classified as debt with changes in the net redemption value being reflected in the statement of operations each reporting period and result in additional disclosures in the accompanying notes. (ii) Measurement of mortgage and loan investments at amortized cost or fair value through profit or loss ( FVTPL ) Measurement at FVTPL, if the Fund qualifies under IFRS, would result in lender fees received from borrowers being taken into income at the time the borrower enters into the mortgage and loan investment rather than being amortized over the contractual terms of the mortgage and loan investment. This income impact may be offset by changes in the fair values of the related mortgages. Measurement at amortized cost would result in initial recognition of the mortgage and loan investments at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, mortgage and loan investments will be measured at amortized cost using the effective interest method, less any impairment losses. Both of these options will not result in any impact to the net redemption value for Class A and Class B for fund pricing purposes. (iii) Derecognition of mortgage or loan investment interest sold to third party In situations where the Fund may sell interests in mortgage investments to third parties, the current treatment under Canadian GAAP allows for derecognition on transfer of such interest; this treatment may be different under IFRS, depending on the facts and circumstances of each transaction, including the risks and rewards retained by the Fund in the transfer in which the Fund does not retain a pari passu interest. Whereas, under Canadian GAAP derecognition assessment is focused on control, the IFRS derecognition model is primarily based on the extent of risks and rewards transferred. The Fund Manager continues to monitor changes to IFRS and is assessing the impact on the Fund. The current assessment and IFRS changeover plans may change if new standards are issued or if interpretations of existing standards are revised. 36 Timbercreek Mortgage Investment Corporation

39 2. Mortgage and loan investments The balance of mortgage and loan investments as at December 31 is as follows: % 2012 % 2011 Mortgage investments (a) 96 $ 351,732, $ 294,280,782 Loan investments (b) 4 16,520, ,075, $ 368,253, $ 303,356,645 (a) Mortgage investments % 2012 % 2011 Interest in first mortgages 45 $ 159,136, $ 200,809,667 Interest in non-first mortgages ,595, ,471, $ 351,732, $ 294,280,782 The mortgage investments are secured by the real property to which they relate, bear interest at a weighted average interest rate of 10.14% ( %) and mature between 2013 and The unadvanced mortgage commitments under the existing mortgage portfolio amounted to $26,452,925 (2011 $49,583,688) as at December 31, Subsequent to year end, none of the commitments have expired. Principal repayments based on contractual maturity dates are as follows: 2013 $ 118,654, ,715, ,362, ,000,000 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. (b) Loan investment The loan investment is secured by a note portfolio secured against individually manufactured housing communities, an inventory of manufactured homes in the United States and first charges on two manufactured housing communities. The loan bears interest at 10.0% ( %) and matures in 2014 ( ) (note 7(b)). The unadvanced loan commitment under the loan investment amounted to $11,837,553 ( $4,924,138) as at December 31, As part of the assessment of fair value, management of the Fund routinely reviews each mortgage or loan investment for changes in the credit quality of the mortgage and underlying real estate assets and determines whether such changes result in changes in the fair value of the mortgage or loan investment. As at December 31, 2012, management does not believe any fair value adjustment is required for any mortgage or loan investments. As such, no adjustment to the fair value of the investments has been recorded. Timbercreek Mortgage Investment Corporation 37

40 3. Restricted cash Restricted cash consists of cash received from borrowers in connection with the interest reserve on mortgage and loan investments. 4. Credit facility In September 2012, the Fund amended the terms of its revolving credit facility (the Facility ) with its bank. Under the amended terms, the Fund can now borrow up to $25,000,000 ( $45,000,000). The Facility is primarily used to bridge timing differences between new loan originations and loan maturities or follow-on equity offerings. The Facility expires in October 2014 and is subject to an interest rate equal to the bank s prime rate of interest plus 1.50% (2011 bank s prime rate of interest plus 1.50%). The Facility is secured by a general security agreement over the Fund s assets. At December 31, 2012, $8,836,425 was outstanding on the Facility (2011- nil). Financing costs related to the Facility are amortized to interest expense using the effective interest rate over the term of the Facility. 5. Shareholders equity The Fund s equity 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. The voting shares have a nominal value and are owned by certain shareholders of Timbercreek Asset Management Inc. 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. Class A shares are publicly listed on the Toronto Stock Exchange ( TSX ) under the symbol TMC and may be issued under offerings that may be completed in the future. Class B shares are privately held and there is no market through which these shares may be sold. The Fund may issue Class B shares in the future under available prospectus exemptions. During the year ended December 31, 2012, the Fund completed a non-brokered private placement of 3,400,573 Class B shares for net proceeds of $33.9 million. Class A, Class B and voting shares issued and outstanding changed as follows: 2012 Class A shares Class B shares Voting shares Shares outstanding, January 1, ,618,903 3,724, Issued 3,400,573 Exchanged 3,569,453 (3,382,323) Redeemed (15,522) Dividend reinvestment plan 388,288 Shares outstanding, December 31, ,561,122 3,742, Class A shares Class B shares Voting shares Shares outstanding, January 1, ,390,011 3,868, Issued 15,007,500 1,968,500 Exchanged 2,213,400 (2,108,000) Redeemed (183,350) (4,985) Dividend reinvestment plan 191,342 Shares outstanding, December 31, ,618,903 3,724, Timbercreek Mortgage Investment Corporation

41 (a) Redemptions and exchanges (i) Monthly redemptions Subject to certain restrictions, Class A shares 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, are entitled to receive a price per Class A share equal to the lesser of: (a) 95% of the trading price, defined as the weighted average trading price on the TSX for a period of 10 trading days immediately preceding the relevant redemption date (the Trading Price ) or (b) the market price, being the closing price of the Class A shares on the TSX on the redemption date (the Market Price ). The Fund shall not accept for redemption in the same calendar month shares representing more than 5% of the average number of shares outstanding for the 90-day period immediately preceding the applicable redemption date. Should the amount of shares tendered for redemption exceed the limit, the Fund will redeem the shares tendered on a pro rata basis. Class B shares are redeemable monthly on the same terms and conditions as the Class A shares equal to the lesser of: (a) 95% of the Trading Price of the Class A shares multiplied by the Class B exchange ratio; and (b) 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. (ii) Annual redemptions Class A shares and Class B shares may be redeemed on the last business day of October each year at a price per share equal to the net redemption value per Class A share and Class B share, respectively. The Fund shall not accept for redemption in the same calendar year shares representing more than 15% of the average number of shares outstanding for the 180-day period immediately preceding the applicable redemption date. Should the amount of shares tendered for annual redemption exceed the limit, the Fund will redeem the shares tendered on a pro rata basis. (iii) Monthly exchanges Subject to certain restrictions, Class B shares may be exchanged into Class A shares on the last business day of each month. The ratio upon which Class B shares will be exchanged into Class A shares is determined by dividing the net redemption value per Class B share by the net redemption value per Class A share on the relevant exchange date. (b) Dividend reinvestment plan The Fund has instituted a dividend reinvestment plan ( DRIP ) available to Class A shareholders. Under the DRIP, shareholders may enrol to have their cash dividends reinvested to purchase additional Class A shares. The Class A shares are issued from treasury at a price of 95% of the daily volume weighted average closing price on the TSX for the 10 trading days preceding payment, which price will not be less than the net redemption value per Class A share. For the year ended December 31, 2012, 388,288 ( ,342) Class A shares were issued under the DRIP, using reinvested dividends of $3,859,179 (2011 $1,900,820). (c) Dividends The Fund intends to pay dividends to shareholders on a monthly basis within 15 days following the end of each month. For the year ended December 31, 2012, the Fund declared dividends of $ ( $0.8160) per Class A share for a total of $25,793,050 (2011 $17,639,991) and $ ( $0.8640) per Class B share for a total of $3,407,965 (2011 $3,541,821). As at December 31, 2012, $2,428,105 (2011 $2,350,238) was payable to the shareholders. Timbercreek Mortgage Investment Corporation 39

42 6. Expenses (a) Management and performance fees The Fund Manager is responsible for the day-to-day operations of the Fund, including administration of the Fund s mortgage and loan investments. The Fund pays the Fund Manager an annual management fee of 1.2% plus applicable taxes for its services, based on the gross assets of the Fund, calculated daily and payable monthly in arrears. For the year ended December 31, 2012, the Fund incurred management fees of $4,812,148 ( $3,394,823). The Fund Manager is also entitled to a performance fee. In any calendar year where the Fund has net earnings available for distribution to shareholders in excess of the hurdle rate (the Hurdle Rate ), which is defined as the average two-year Government of Canada Bond Yield for the 12-month period then ended plus 450 basis points, the Fund 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 fee is payable to the Fund Manager within 15 days of the issuance of the Fund s audited financial statements for that calendar year. For the year ended December 31, 2012, the Fund has accrued $2,460,947 ( $1,140,471) in performance fees. The performance fees for Class A shares and Class B shares were as follows: Class A shares $ 2,208,909 $ 1,010,686 Class B shares 252, ,785 $ 2,460,947 $ 1,140,471 (b) Servicing fees The Fund pays each registered dealer a servicing fee equal to 0.50% 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 year ended December 31, 2012, the Fund incurred servicing fees of $1,432,823 ( $1,114,284). (c) Fund operating expenses Each class of shares is responsible for the payment of its proportionate share of common operating expenses, such as directors 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. 7. Related party transactions (a) As at December 31, 2012, no amount (2011 nil) is payable by the Fund to the Fund Manager for management fees. In addition, $2,469,511 (2011 $1,140,471) remains payable to the Fund Manager relating to performance fees and other costs for the year ended December 31, (b) As at December 31, 2012, the Fund, Timbercreek Global Real Estate Fund ( TGREF ) and Timbercreek Four Quadrant Global Real Estate Partners ( T4Q ), related parties by virtue of common management, have coinvested in a loan investment secured primarily by a portfolio of mobile home communities. The Fund s share in the loan investment is $16,520,826 (2011 $9,075,863) (note 2(b)). The Fund has also co-invested in two ( one) mortgage investments with these related parties amounting to $29,850,000 ( $4,000,000). As at December 31, 2012, $213,254 is receivable from T4Q and $43,640 is payable to TGREF in relation to these investments. The Fund Manager has been retained by TGREF and T4Q to provide fund management and portfolio advisory services. 40 Timbercreek Mortgage Investment Corporation

43 (c) As at December 31, 2012, the Fund and Timbercreek Senior Mortgage Investment Corporation ( TSMIC ), a related party by virtue of common management, have co-invested in 29 mortgage investments, totalling $373,969,519, which are secured primarily by multi-residential, office, retirement and other commercial properties. The Fund holds junior first mortgage positions in these co-investments in relation to TSMIC. The Fund s share in these investments is $83,902,042 (2011 nil), and included in this amount is a mortgage investment of $886,186 to a limited partnership, which is co-owned by T4Q. In addition, $4,462 (2011 nil) is payable from the Fund to TSMIC relating to costs paid on behalf of the Fund in relation to the mortgage investments as at December 31, Incomes taxes As of December 31, 2012, the Fund has non-capital losses carried forward for income tax purposes of $12,064,216 (2011 $3,310,887), which will expire between 2029 and 2032 if not used. The Fund also has future deductible temporary differences resulting from share issuances, prepaid mortgage and loan interest, unearned income and financing costs for income tax purposes of $12,340,075 (2011 $20,832,824). 9. 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 NAV Adjustment GAAP NAV Redemption NAV Adjustment GAAP NAV Net asset value as at December 31: Class A shares $323,074,599 $ (3,489,088) $ 319,585,511 $ 286,008,292 $ (3,471,595) $ 282,536,697 Class B shares 37,192,751 (1,250,292) 35,942,459 36,668,886 (994,664) 35,674,222 Net asset value per share as at December 31: Class A shares $ 9.35 $ (0.10) $ 9.25 $ 9.34 $ (0.11) $ 9.23 Class B shares 9.94 (0.34) (0.27) 9.58 The GAAP NAV differs from the Redemption NAV calculated for fund pricing purposes. The adjustment is due to fair value differences between GAAP NAV and Redemption NAV and for the inclusion of costs associated with the establishment, structuring and 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. 10. Capital risk management The Fund manages its capital structure in order to support ongoing operations while focusing on its primary objectives of preserving shareholder capital and generating a stable monthly cash dividend to shareholders. The Fund defines its capital structure to include Class A and Class B shares and the Facility. The Fund 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. Timbercreek Mortgage Investment Corporation 41

44 The Fund s investment restrictions and asset allocation model incorporate various restrictions and investment parameters to manage the risk profile of the mortgage and loan investments. The investment restrictions permit the Fund to use leverage to maintain liquidity, for general working capital purposes, and to bridge the timing differences between loan advances, maturities and equity offerings. The aggregate amount of borrowing by the Fund may not exceed 25% of the net asset value of the Fund. In addition, the asset allocation model dictates the allocation of the mortgage and loan investments based upon geographical, economic sector, term, borrower and loan-to-appraised value criteria. At December 31, 2012, the Fund was in compliance with its investment restrictions and the asset allocation model parameters. Pursuant to the terms of the Facility, the Fund is required to meet certain financial covenants, including a minimum interest coverage ratio, minimum total equity and maximum indebtedness of the Fund. For the year ended December 31, 2012, the Fund was in compliance with all financial covenants. 11. Financial instruments and risk management (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of financial assets or financial liabilities will fluctuate because of changes in market interest rates. As of December 31, 2012, no mortgage investments (2011 $13,730,830) bear interest at variable rates; therefore, as at December 31, 2012, the Fund is not exposed to interest rate risk on its investment portfolio. The Fund is, however, exposed to interest rate risk on the Facility, which has a balance of $8,836,425 as at December 31, 2012 ( nil). The Fund s accrued interest receivable, other assets, accounts payable and accrued expenses, prepaid mortgage and loan interest, mortgage funding holdback, dividends payable and due to Fund 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. A 50-basis-point decrease in interest rates, with all other variables held constant, will increase net assets from operations by $44,182 annually, arising mainly as a result of lower interest expense payable on the Facility. A 50-basis-point increase in interest rates, with all other variables held constant, will reduce net assets from operations by $44,182 annually, arising mainly as a result of higher interest expense due to the variable interest rate of the Facility. (b) Credit risk Credit risk is the possibility that a borrower may be unable to honour its debt commitments as a result of a negative change in market conditions that could result in a loss to the Fund. The Fund mitigates this risk by the following (i) adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); (ii) ensuring a comprehensive due diligence process is conducted on each mortgage and loan investment prior to funding. This generally includes, but is not limited to engaging professional independent consultants, lawyers and appraisers and performing credit checks and financial statement reviews on prospective borrowers; (iii) all mortgage and loan investments are approved by the independent mortgage advisory committee before funding; and (iv) actively monitoring the mortgage and loan investments and initiating recovery procedures, in a timely manner, where required. The maximum exposure to credit risk at December 31, 2012 is the fair values of its accrued interest receivable and mortgage and loan investments, which total $372,873,528 (2011 $309,826,779). The Fund has 42 Timbercreek Mortgage Investment Corporation

45 recourse under these investments in the event of default by the borrower; in which case, the Fund would have a claim against the underlying property and security. The Fund is undertaking enforcement remedies against the following two mortgage investments: (i) As at December 31, 2012, one mortgage investment representing $3,591,852 has accrued interest of $1,430,584 that is past due and for which the Fund has undertaken enforcement remedies. Management believes the Fund will fully recover the principal and interest accrued to date on the mortgage loans, although there is no assurance that it will be able to do so. (ii) As at December 31, 2012, another of the Fund s mortgage investments with a balance of $4,095,405 ( $5,185,366) is past due. The Fund has obtained a judgment against the guarantors and borrowers and has successfully registered a writ of seizure and sale against the guarantors, which constitutes a lien on all of their real property. As a part of this process, the remaining lien property is now listed for sale with the net proceeds after discharge of first mortgage to be applied against the mortgage investment of the Fund. The Fund believes it will recover the full principal and accrued interest on the loan upon sale of the properties and, as such, no fair value adjustment has been recorded in these consolidated financial statements. (c) 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 and loan investment fundings and repayments and redemptions of shares. Management routinely forecasts future cash flow sources and requirements to ensure cash is efficiently utilized. (d) Fair values In accordance with Canadian GAAP, the Fund must classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making its fair value measurements. The following hierarchy has been used in determining and disclosing fair value of financial instruments: Level 1 quoted prices in active markets for the same instrument (i.e., without modification or repackaging); Level 2 quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based on observable market data; and Level 3 valuation techniques for which any significant input is not based on observable market data. The following tables show an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at December 31: 2012 Level 1 Level 2 Level 3 Total Financial assets: Mortgage and loan investments $ $ $ 368,253,037 $ 368,253, Level 1 Level 2 Level 3 Total Financial assets: Mortgage and loan investments $ $ $ 303,356,645 $ 303,356,645 The Fund s maximum exposure in respect of all its financial assets is their carrying value as reflected on the consolidated statements of net assets. Timbercreek Mortgage Investment Corporation 43

46 (i) Mortgage and loan investments Fair value is the amount of consideration that would be agreed upon in an arm s-length transaction between knowledgeable, willing parties under no compulsion to act. As there is no quoted price in an active market for these mortgage and loan investments, the Fund Manager makes its determination of fair value based on its assessment of the current lending market for mortgage and loan investments of same or similar terms. Typically, these mortgage and loan investments approximate their carrying values given the mortgage and loan investments consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. When collection of the principal amount of a mortgage or loan is no longer reasonably assured, the fair value of the mortgage or loan is adjusted to the fair value of the underlying security. (ii) Other financial assets The fair values of cash and cash equivalents approximate their carrying amounts due to their short term maturities. Changes in Level 3 financial instruments recorded at fair value: The following table shows a reconciliation of the opening and closing balance of mortgage and loan investments: As at December 31, 2011 Realized fair value gain Unrealized fair value gain Net advances and repayments As at December 31, 2012 Financial assets: Mortgage and loan investments $ 303,356,645 $ $ $ 64,896,392 $ 368,253, 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 and loans. 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. 13. Comparative figures Certain 2011 figures have been reclassified to conform with the financial statement presentation adopted in Timbercreek Mortgage Investment Corporation

47 Corporate Information HEAD OFFICE 1000 Yonge Street, Suite 500 Toronto, Ontario M4W 2K2 (t) (e) Website: Transfer Agent & Registrar CIBC Mellon Trust Company 320 Bay Street Toronto, Ontario M5H 4A6 Auditors KPMG LLP Legal Counsel McCarthy Tétrault LLP Stock Exchange Listing TSX: TMC Board Of Directors R. Blair Tamblyn, Chairman and CEO Zelick L. Altman, Independent Director Edward W. Boomer, Independent Director Craig A. Geier, Independent Director W. Glenn Shyba, Independent Director Derek J. Watchorn, Independent Director Independent Mortgage Advisory Committee Pamela Spackman, Chairman Ken Lipson Chris Humeniuk

48 Timbercreek Asset Management Timbercreek.com