Interim Management Discussion and Analysis. For the three and six months ended June 30, 2014

Transcription

1 Interim Management Discussion and Analysis For the three and six months ended June 30, 2014 Dated: August 14, 2014

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

3 1.0 Forward-Looking Statements Caution regarding forward-looking statements The terms, the Company, we, us and our in the following Management s Discussion & Analysis ( MD&A ) refer to Trez Capital Senior Mortgage Investment Corporation (the Company ) and its financial position and results of operations for the three and six months ended June 30, 2014 (the Period ). Financial data provided has been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). This MD&A should be read in conjunction with the Company s audited annual financial statements for the year ended December 31, 2013, and the Company s condensed interim financial statements for the three and six month periods ended June 30, 2014, which have been prepared in accordance with IFRS. Copies of these documentshave 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 contained in the Company s audited annual financial statements and MD&A related thereto, including trends that might appear, should not be taken as indicative of future operations. Forward-looking statement advisory This MD&A may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. These statements are typically identified by expressions like believe, expects, anticipates, would, will, intends, projected, in our opinion and other similar expressions. By their nature, forward-looking statements require us to make assumptions which include, among other things, that (i) the Company will have sufficient capital under management to effect its investment strategies and pay its targeted dividends to shareholders, (ii) the investment strategies will produce the results intended by the Manager, (iii) the markets will react and perform in a manner consistent with the investment strategies and (iv) the Company is able to invest in mortgages or loans of a quality that will generate returns that meet and or exceed the Company s targeted investment returns. Forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will prove not to be accurate. We caution readers of this MD&A not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to, general market conditions, interest rates, regulatory and statutory developments, the effects of competition in areas that the Company may invest in and the risks detailed from time to time in the Company s public disclosures. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Company, investors and others should carefully consider these factors, as well as other uncertainties and potential events and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Company and Trez Capital Fund Management LP (the Manager ) do not undertake, and specifically disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. The MD&A is dated August 14, Disclosure contained in this MD&A is current to that date, unless otherwise noted. Additional information on the Company, its dividend reinvestment plan and its mortgage and loan portfolio is available on the Trez Capital Fund Management LP website at Additional information 1

4 about the Company, including its Annual Information Form ( AIF ), can be found on the SEDAR website at Transition On November 30, 2013, the Company completed a reorganization pursuant to which the Company transitioned from the securities regulatory regime for investment funds to the public company regime. As part of such transition, the Company implemented a number of changes including the following: (a) the terms of the Class A Shares were amended to provide Class A Shareholders with rights equivalent to those typically found in common shares of public companies under the Public Company Regime. This included the elimination of monthly and annual redemption rights; (b) the authorized capital of the Company was changed to remove the previous class of voting shares and to add the Class B Shares; (c) the investment restrictions previously contained in the Company s articles were deleted in order that they could be replaced by the Investment Guidelines; (d) the Management Agreement was amended to change (among other matters) the basis on which the Management Fee is calculated; and (e) the Company ceased paying trailer fees to registered brokers and dealers. 3.0 Basis of Presentation Financial data provided in this interim MD&A, for the three and six months ended June 30, 2014, has been prepared in accordance with IFRS except as discussed below. Non-IFRS Measures The Company prepares and releases its audited financial statements and unaudited condensed interim financial statements in accordance with IFRS. In this MD&A, as a complement to results provided in accordance with IFRS, the Company discloses certain financial measures not recognized under IFRS which do not have standard meanings prescribed by IFRS. The non-ifrs measure the Company has used is weighted average loan-to-value ratio. The Company has presented this non-ifrs measure because the Manager believes it is a relevant measure to aid investors in evaluating the Company s performance. This non-ifrs measures should not be construed as an alternative to net income (loss) or comprehensive income (loss) or cash flows from operating activities determined in accordance with IFRS as indicators of the Company s performance. Weighted average loan-to-value ratio represents the weighted average loan-to-value of the investment portfolio at period end. The Company s reporting currency is the Canadian dollar. 4.0 Company and Industry Overview Company Overview The Company is a Mortgage Investment Corporation ( MIC ) as defined in Section 130.1(6) of the Income Tax Act (Canada). Accordingly, the Company is not taxed on the income produced each year, provided that all taxable income is paid to the shareholders as dividends within 90 days of the Company s year end, December 31. The dividends paid by the Company are generally treated as interest income, as if each shareholder had been investing directly in the mortgage investments made by the Company. 2

5 Investment Objectives and Strategies The Company s investment objectives are to acquire and maintain a diversified portfolio of mortgages on real property in Canada that preserves capital and generates attractive returns in order to permit the Company to continue paying stable monthly distributions to its Class A Shareholders. The Company seeks to accomplish its investment objectives through prudent investments in mortgages to qualified real estate investors and developers, focusing primarily on short-term bridge financing needs not currently serviced by traditional real estate lenders. Mortgages will be secured primarily by income producing real property where the principal and interest can be serviced from cash flow generated by the underlying real property. The Manager believes that its key lending practices and advantages in this market include the following: (i) flexible structuring capability, (ii) speed of approval and funding, and (iii) certainty of execution, all of which lead to repeat business opportunities. In general, the mortgages generate income through a rate of interest, which is typically payable periodically throughout the terms of the mortgages, as well as Commitment Fees which generally are paid at the time of initial funding. All mortgages will be secured by real property consisting primarily of residential, office, retail, industrial or other commercial property anywhere in Canada. Mortgages may be either first ranking or junior positions in first ranking mortgages and individual mortgages may be secured by more than one property owned by the same mortgagor. Due to the short-term nature of the mortgages, the Manager expects the Company s portfolio to turnover approximately every 18 months. The Manager believes that the limited number of mortgage financing options available to owners of real estate continue to allow the Company to earn above-average returns for a given risk profile and be selective in its mortgage investments. The Company has implemented the following investment guidelines which are intended to guide the Company s investments in mortgages: 1. the Company will not make any investment or conduct any activity that would result in the Company failing to qualify as a mortgage investment corporation within the meaning of the Tax Act; 2. the Company will not invest in securities other than: (i) Mortgages secured by Real Property, and (ii) Authorized Interim Investments; 3. the Company will invest only in first ranking Mortgages (for greater certainty, a junior position in a first ranking Mortgage is not considered a second Mortgage); 4. not more than 40% of the Company s total assets will be invested in junior positions in first ranking Mortgages at the time of funding the Mortgages; 5. the Company will invest only in Mortgages on the security of Real Property situated within Canada and no more than 10% of the Company s total assets will be invested in Mortgages on the same Real Property at the time of funding the Mortgages; 6. at the time of funding each Mortgage, its Loan-to-Value will not exceed 75%, and the weighted average Loan-to-Vale of the entire Mortgage portfolio will not exceed 70%; 7. not more than 25% of the Company s total assets will be invested in Mortgages of the same borrower at the time of funding the Mortgages; 8. the aggregate principal amount of the Portfolio invested in Mortgages secured by non-income producing Real Property will not exceed 30% of the Company s total assets at the time of funding the Mortgages. For these purposes, non-income producing Real Property means Real Property where no income is being generated therefrom and the borrower and the Company have not established a cash reserve sufficient to fund the payment of all future principal and interest payments prior to maturity under the Mortgage secured by such Real Property; 9. the average term to maturity of Mortgages in the Portfolio will not exceed 36 months at the time of funding the Mortgages; 3

6 10. the Company will not directly invest in Real Property; however the Company may hold Real Property acquired as a result of foreclosure where such foreclosure is necessary to protect the Mortgage investment of the Company as a result of a default by the mortgagor. The Company will use its commercially reasonable best efforts to dispose of any such Real Property acquired on foreclosure; 11. the Company will not invest in asset backed commercial paper ( ABCP ) or in securitized pools of Mortgage loans, including securitized pools of sub-prime Mortgage loans (being loans to borrowers with bad or no credit history); 12. the Company will not guarantee securities or obligations of any person or company; 13. the Company will not engage in securities lending; and 14. the Company will not engage in derivative transactions, other than derivative transactions to hedge interest rate risk and not for speculative purposes. The Company may, from time to time, exceed the limits prescribed in paragraphs 4, 5, 7, 8 and 9 above on an exceptional basis provided that (i) each such exception is remedied by the Manager within 120 days from the date of funding of the relevant Mortgage, and (ii) in the aggregate at any given time, the assets of the Company invested in excess of such prescribed limits are not more than 15% of the total assets of the Company. Recent Developments and Outlook During the second quarter of 2014, Trez Capital continued to see sufficient deal flow to meet the Company s investment objectives. Capitalization rates are expected to remain stable and real estate fundamentals should continue to be strong. The total volume of real estate activity is expected to remain robust with demand coming primarily from pension funds and private investors. The Canadian Real Estate Association reported that compared to 2013, national residential sales activity is projected to increase by 1.2% and the national average home price is projected to rise by 5.7%. The Canadian national office vacancy rate reached 10.3% in Q1 2014, a 60 bps increase quarter-over-quarter driven by slow tenant demand. However, developers have remained active because many companies are choosing to vacate older buildings for newer ones, which tend to be more energy efficient, and are able to fit more workers in less space. Downtown properties have been able to sustain a higher level of occupancy than their suburban counterparts. (CBRE, Canada Office Occupier View, Q1 2014) Canada s industrial market recorded 5.1 million sq. ft. of positive net absorption in Q1 2014, down from the 5.6 million sq. ft. recorded in Q4 2013, but well above the 10-year quarterly average of 3.6 million square feet. Montreal, Edmonton and Toronto each experienced approximately 1.5 million square feet of positive net absorption in Q1 2014, followed by Calgary with 752,462 square feet of positive net absorption. All other markets experienced minimal or slightly negative net absorption this quarter (CBRE, Canada Industrial Market View, Q1 2014) While competition from other lending institutions has increased, the Manager continues to successfully find a sufficient volume of high quality mortgage investments. Due to the increased competition, there is some downward pressure on rates. However, preservation of capital remains a primary objective and the Manager focuses on mortgage investments secured by high quality cash-flowing real estate assets in urban centres. It is and will continue to be the Company s approach to ensure that capital is preserved and that mortgage investments exhibit a favourable risk/reward ratio. In summary, the Company continues to be successful as an alternative lender due to the Manager s wellestablished lending strategies and competitive advantages stemming from flexible loan structuring, terms, speed, and certainty of execution. 4

7 5.0 Financial Performance For the three months ended June 30, 2014 For the thee months ended June 30, 2014, the Company s net income of $1,304,169 ($0.17 per share, basic and diluted) is an increase of $1,433,999 from the net loss of $129,830 for the three months ended June 30, Increased net income is attributed to the dividends to the Class A shareholders being deducted from net income prior to the transition. After the transition, dividends are recorded as a reduction to shareholders equity. Income from operations increased from $1,159,967 for the three months ended June 30, 2013 to $1,600,176 for the three months ended June 30, The increased earnings are attributed to an increased number of mortgage investements made. The Company declared dividends of $997,264 ($0.132 per share) for the three month period ended June 30, 2014 (Three months ended June 30, 2013 $1,112,604, $0.125 per share). The Company increased its dividends to Class A shareholders from $0.50 to $0.54 per share per annum beginning with the dividend declared May 31, The Company s General and Administrative expenses totalled $88,406 ( $488,570) and included bank charges - $341 ( $200,294), professional fees for auditing and legal advice - $52,212 ( $203,591), the Company s independent review committee and board of directors fees - $14,917 ( $11,392), and administration, custodian, and filing fees and transfer agent expenses -$20,936 (2013- $73,293). The decrease in the Company s professional fees resulted from the Company having accrued the full cost of the 2013 financial statement audit during the previous year. The decrease in the bank charges from 2013 is a result of the Company paying the commitment fee for the setup of the line of credit in the prior year. For the six months ended June 30, 2014 For the six months ended June 30, 2014, the Company s net income of $2,496,170 ($0.33 per share, basic and diluted) is an increase of $3,113,791 from the net loss of $617,621 for the six months ended June 30, Increased net income is attributed to the dividends to the Class A shareholders being deducted from net income prior to the transition. After the transition, dividends are recorded as a reduction to shareholders equity. Income from Operations for the six months end June 30, increased from $1,597,096 in 2013 to $3,095,579 in The Increased earnings are attributed to the Company being fully invested, including the utilization of $30,354,708 of its line of credit at June 30, The Company declared dividends of $1,942,995 ($0.256 per share) for the six month period ended June 30, 2014 (Three months ended June 30, 2013 $1,854,332, $0.208 per share). After dividends, the Company s undistributed earnings for the six months ended June 30, 2014 total $553,175 (2013 over distribution of $617,621). The Company s General and Administrative expenses totalled $184,749 ( $626,206) and included bank charges - $724 ( $200,400), professional fees for auditing and legal advice - $74,745 ( $287,296), the Company s independent review committee and board of directors fees - $26,447 ( $22,927), and administration, custodian, and filing fees and transfer agent expenses - $82,836 (2013- $115,583). The decrease in the Company s professional fees and the reduced bank charges are the result of the Company having incurred the costs of the set up of the line of credit in the second quarter of The Company s Investments in mortgages at June 30, 2014 totalled $107,759,106 (December 31, 2013 $120,335,555). This allowed the Company to generate interest and fee income (net of syndication interest expense) of $3,752,958 for the six months ended June 30, 2014 ( $2,784,297). The average interest rate of the portfolio at June 30, 2014 decreased to 6.38% from the 6.52% the portfolio was earning at December 31,

8 At June 30, 2014, the Company continued its efforts to resolve one defaulted mortgage. A subordinated first mortgage with a carrying value of $985,000 remained in technical default from December 31, 2013, due to a shareholder dispute of the borrower resulting in the appointment of a court appointed manager for the borrower s properties. The court appointed manager continues to manage all the borrower s properties, making mortgage payments to all the mortgagees and selling the properties through listing agents. At June 30, 2014, all interest payments were current and the shareholder dispute remains with the courts. The Manager estimated the credit risk on the loan to have increased, however due to the expected short-term the loan will remain outstanding, no adjustment in value was necessary. Summary of Mortgage Portfolio The mortgage portfolio by category, accrued interest and fees and mortgage syndications at June 30, 2014 in comparison to December 31, 2013 is as follows: June 30, 2014 December 31, 2013 Fair Value Fair Value Number ($) % of Portfolio Number ($) % of Portfolio Residential 17 55,156, % 21 70,186, % Office 3 5,153, % 4 8,526, % Hotel 1 4,000, % Industrial 2 5,500, % 1 4,000, % Retail 4 28,167, % 3 22,504, % Mixed Use 1 3,000, % 1 3,000, % ,977, % ,217, % Accrued Interest and fees receivable - 871, ,104 - Mortgage syndications - 5,910, ,430, ,759, ,335,555 - Analysis of the mortgage portfolio by location of the property and by Loan-to-Value is as follows: By Location: June 30, 2014 December 31, 2013 Fair Value Fair Value Number ($) % of Portfolio Number ($) % of Portfolio Alberta 7 32,509, % 4 24,374, % British Columbia 6 19,484, % 7 17,693, % Nova Scotia 1 1,313, % 1 1,280, % Ontario 14 47,670, % 18 64,868, % ,977, % ,217, % By Loan-to- Value: June 30, 2014 December 31, 2013 Fair Value Fair Value Number ($) % of Portfolio Number ($) % of Portfolio 34% or Less 14 51,073, % 13 45,208, % 35%-44% 4 8,795, % 6 21,594, % 45%-54% 5 15,343, % 5 12,777, % 55%-64% 1 10,270, % 4 22,763, % 65%-70% 3 12,970, % 2 5,873, % 6

9 70%-75% 1 2,525, % ,977, % ,217, % The weighted average loan to value of the mortgages at June 30, 2014 is 36.2% (December 31, %) 100% of the mortgages are first mortgages. The weighted average interest rate of the mortgage portfolio as at June 30, 2014 is 6.38% (December 31, %). Management Fees and Trailer Fees A summary of management fees paid to the Manager for the period, including a breakdown of services received by the Company is included in Related Party Transactions. To November 30, 2013, for the redeemable Class A Shares of the Company, the Company through the Manager, paid each registered dealer a trailer fee equal to 0.40% per annum of the net asset value per redeemable Class A share of the Company (the Trailer Fee ). The Trailer Fee was calculated and paid at the end of each calendar quarter commencing in March 2013 and ending with the final payment on November 30, As a result of the transition (see section 2.0) no accruals for trailer fees were made to June 30, 2014 (June 30, 2013 $111,621). In addition to the management fees disclosed above, the Company will pay for all expenses incurred by it in connection with the operation and management, including but not limited to any additional fees payable to the Manager for performance of extraordinary services on behalf of the Company for services outside the scope of the Management Agreement. During the six month period ended June 30, 2014 and 2013, no additional fees were accrued or paid to the Manager. Commitments and Contingencies In the ordinary course of business activities, the Company may be contingently liable for litigation and claims arising from investing in mortgages and loans. Where required, management will record an adequate provision in the accounts. Annual Financial Information The following table summarizes selected financial data reported by the Issuer for the year ended December 31, 2013 and the period from incorporation on October 18, 2012 to December 31, December 31, 2013 December 31, 2012 Revenues, net $6,639,673 $152,606 Income from operations $4,237,501 $45,299 Financing costs $4,683,551 $5,262,500 Total loss and comprehensive Loss $(446,050) $(5,217,201) Total Assets $125,754,682 $80,554,435 Shareholders Equity $70,681,678 $100 Cash dividends declared Class A shares $4,079,597 Nil Cash dividends declared per Class A share $0.46 Nil 7

10 Quarterly Financial Information The following table summarizes selected financial data reported by the Issuer for the period ended December 31, 2012 and each subsequent quarter. June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 December 31, 2012 Revenues, net $1,923,000 $1,829,958 $2,069,320 $1,786,056 $1,950,119 $834,178 $152,606 Income from operations $1,600,176 $1,495,403 $1,256,331 $1,384,074 $1,159,967 $437,129 $45,299 Financing costs $296,007 $303,402 $1,053,542 $1,415,292 $1,289,797 $924,920 $5,262,500 Total income (loss) and comprehensive income (loss) $1,304,169 $1,192,001 $202,789 $(31,218) $(129,830) $(487,791) $(5,217,201) Total Assets $108,123,543 $116,052,799 $125,754,682 $130,907,704 $122,186,900 $84,118,713 $80,554,435 Shareholders Equity $71,234,853 $70,927,948 $70,681,678 $100 $100 $100 $100 Cash dividends declared Class A shares $997,264 $945,731 $1,112,627 $1,112,638 $1,112,604 $741,728 Nil Cash dividends declared per Class A share $0.132 $0.125 $0.125 $0.125 $0.125 $0.083 Nil The variations in net income (loss) by quarter are attributable to the following: (i) (ii) The Company completed its initial public offering in December 2012 and closed the overallotment in January The proceeds of this offering have been utilized to fund investments in mortgages. The costs associated with the offering have been expensed in the quarters in which the funds were received. The dividends to holders of redeemable Class A shares were presented in the statement of income (loss) and comprehensive income (loss) through to the date of transition, November 30, Subsequently, the dividends to the Class A shareholders are presented in the statement of changes in shareholders equity. 6.0 Liquidity and Capital Structure Capital structure The Company manages its capital structure in order to support ongoing operations while focusing on its primary objectives of preserving shareholder capital and generating a stable monthly cash dividend to holders of redeemable shares. The Company defines its capital structure to include Class A shares and the Credit Facility. The Company reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage and loan investment opportunities, the availability of capital and anticipated changes in general economic conditions. Liquidity Access to liquidity is an important element of the Company as it allows the Company to implement its investment strategy. However, the Company intends to continue to qualify as a MIC and as a result is required to distribute 100% of the taxable income of the Company to its shareholders to avoid being subject to corporate income taxes. Therefore, growth in the mortgage and loan investments will be managed through additional equity and/or debt offerings and the utiliziation of the Company s Credit Facility. 8

11 The Company routinely forecasts cash flow sources and requirements to ensure cash is efficiently utilized. In addition, the Company has the borrowing ability of $40 million through the Credit Facility to manage fluctuations in cash flows as a result of the timing of mortgage and loan investment fundings and repayments, dividend payments and on January 15, 2014, the payment for the one time redemption of Class A Shares. All financial liabilities at June 30, 2014, are expected to mature within one year. 7.0 Capital Resources As at June 30, 2014, the Company s cash position was $364,437 with bank indebtedness of $30,354,708. The Company is confident that it will be able to finance its operations using its existing cash position, the cash flow generated from operations, the existing credit facility and proceeds raised in subsequent offerings. During the period, the Company s investing activites included repayments and refinancing of mortgages which increased the Company s cash by $7,239,796 (2013 decrease by $107,479,206). The Company s financing activities which included the one-time repurchase of Class A shares for cancelation of $12,436,816 decreased the Company s cash by $14,509,678 (2013 increased by $41,185,961), and the Company s operations increased the Company s cash by $2,215,192 ( decrease by $35,660). Overall the Company s cash was decreased by $5,054,690 (2013 decreased by $66,328,905). 8.0 Off Balance Sheet Arrangements The Company does not utilize off balance sheet arrangements. 9.0 Related Party Transactions Manager The Company is managed by Trez Capital Fund Management LP (the Manager ), a related party by virtue of common management. Pursuant to the Amended Management Agreement, the Manager is entitled to a fee of 0.85% per annum of the gross assets of the Company (prior to November 30, 2013, 1.0% per annum of net assets of the Company) (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. During the six month period, the Manager earned management fees of $472,630 ( $449,374). The Manager is responsible for the management and administration of the Company s mortgage investment portfolio. Other Related Party Transactions As at June 30, 2014, the Company has co-invested in mortgage investments with other Trez managed funds, related parties by virtue of common management. The total amount of the co-invested mortgages is $236,333,509 (December 31, $229,958,647), of which the Company s share is $63,523,275 (December 31, $73,530,249). The above related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Title to mortgages is held by Computershare Trust Company of Canada ( the Custodian ) on behalf of the beneficial owners of the mortgages. In addition, certain duties are performed by the Manager. 9

12 In cases where mortgages are held on a participation basis: The Company s rights are as outlined in the Company Agreement and in a Mortgage Participation and Servicing Agreement with the Manager. The Custodian will hold the Company s interest in the mortgage and underlying security. Pursuant to these agreements, the Manager agrees to administer and service the mortgage loan on behalf of the Company and other investees. The Manager acts as the Company s loan originator, underwriter, servicer, and syndicator. The Manager performs certain duties including registering the mortgage, arranging for title searches, and holding all title papers and other security documentation related to the mortgage loan. The Manager agrees to deliver cash payments received for interest and principal to the Company Proposed Transactions At the present time, there are no proposed transactions that should be disclosed Critical Accounting Estimates The preparation of financial statements requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The most significant estimates that the Manager is required to make relate to the fair value of the investments in mortgages. These estimates may include assumptions regarding local real estate market conditions, interest rates and the availability of credit, cost and terms of financing, the impact of present or future legislation or regulation, prior encumbrances and other factors affecting the investments in mortgages and underlying security of the mortgages. These assumptions are limited by the availability of reliable comparable data, economic uncertainty, ongoing geopolitical concerns and the uncertainty of predictions concerning future events. Liquid credit markets and volatile equity markets have combined to increase the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of impairment are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated fair value could vary by a material amount Changes in Accounting Policies Except as described below, the accounting policies applied by the Company in these condensed interim financial statements are the same as those applied by the Company in its audited financial statements for the year ended December 31, 2013, prepared in accordance with IFRS. Changes in accounting policies: The Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, The changes were made in accordance with the applicable transitional provisions. (i) IAS 32, Financial Instruments: Presentation ( IAS 32 ): The Company adopted IAS 32, Offsetting Financial Assets and Financial Liabilities. The implementation of the new standard had no impact on these financial statements. 10

13 13.0 Financial Instruments The Company has classified its financial instruments as follows: Classification Measurement Financial assets Mortgage and loan investments Fair Value Through Profit and Loss Fair value Cash and cash equivalents Loans and receivables Amortized cost Financial liabilities Accounts payable and accrued expenses Other financial liabilities Amortized cost Management fees payable Other financial liabilities Amortized cost Net assets attributable to holders of redeemable shares are carried on the statement of financial position at net asset value. This presentation of net assets attributable to shareholders reflects that, in total, the interests of the holders is limited to the net assets of the Company Share Capital As at August 14, 2014, June 30, 2014 and December 31, 2013, the Company s authorized capital consists of an unlimited number of Class A shares and an unlimited number of Class B shares, of which 7,577,988 Class A shares are issued and outstanding Stock Options As at August 14, 2014, June 30, 2014 and December 31, 2013, there were no options issued and outstanding Dividend Reinvestment Plan The Company has a Dividend Reinvestment Plan ( DRIP ) available to its shareholders. The DRIP allows participants to have their monthly cash dividends reinvested in additional common shares of the Company, Shareholders who wish to enroll or who would like further information about the Company s DRIP should contact their investment advisor Risks The risks associated with investing in the Company are as disclosed in the Company s Annual Information Form dated March 27, 2014 and filed on SEDAR at Any changes to the Company over the period from December 31, 2013 have not affected the overall risk of the Company Disclosure Controls and Procedures and Internal Control Over Financial Reporting Our CEO and CFO are responsible for establishing and maintaining disclosure controls and procedures ( DC&P ) and internal control over financial reporting ( ICFR ), as those terms are defined in National Instrument ( NI ) Certification of Disclosure in Issuers Annual and Interim Filings. We designed the DC&P and ICFR, the latter of which was using the framework in Internal Control Integrated Framework (as published in 1992) to provide reasonable assurance that material information relating to us is made known to our CEO and CFO during the reporting period; and information required to be disclosed by us in our filings under securities legislation is recorded, processed, summarized and reported within the required time periods; and provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with Canadian GAAP. 11

14 Our CEO and CFO evaluated the design effectiveness of the DC&P and ICFR, as defined by NI , as of June 30, Based on this evaluation, they concluded that the designs of the DC&P and ICFR were effective as of June 30, NI also requires Canadian public companies to disclose in their MD&A any change in ICFR during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ICFR. No such change to ICFR has occurred during most recently completed quarter Additional Information Phone: Calling the Company at (416) , Michael J.R. Nisker, President and CEO Internet: Visiting SEDAR at or Mail: Writing to the Company at: Trez Capital Senior Mortgage Investment Corporation Attention: Investor Services West Georgia St. Vancouver, BC V6E 4E6 12