Condensed Interim Financial Statements TREZ CAPITAL MORTGAGE INVESTMENT CORPORATION For the three and six months ended June 30, 2016 and 2015
Condensed Interim Statements of Financial Position Assets As at As at June 30, December 31, Notes 2016 2015 Investments in mortgages 4 $ 171,646,320 $ 198,282,837 Cash and cash equivalents 9,449,742 - Cash held in trust 110,024 - Total assets $ 181,206,086 $ 198,282,837 Liabilities and Shareholders Equity Bank indebtedness 3 $ - $ 4,253,455 Mortgage syndication liabilities 4 9,274,574 14,351,929 Dividends payable 5 1,101,042 1,121,479 Accounts payable and accrued liabilities 789,870 89,857 Performance fee payable 6, 8 187,464 442,891 Management fee payable 6, 8 582,479 209,752 Incentive fee provision 7, 8 2,143,428 - Total liabilities 14,078,857 20,469,363 Shareholders equity 167,127,229 177,813,474 Total liabilities and shareholders equity $ 181,206,086 $ 198,282,837 Subsequent events (note 11) The accompanying notes are an integral part of these condensed interim financial statements. 1
Condensed Interim Statements of Income and Comprehensive Income For the three months ended For the six months ended June 30, June 30, Notes 2016 2015 2016 2015 Revenue: Interest and fee income $ 3,573,155 $ 4,018,638 $ 7,639,220 $ 7,895,773 Interest expense on mortgage syndications (157,286) (69,188) (334,405) (138,375) 3,415,869 3,949,450 7,304,815 7,757,398 Expenses: Management fees 6, 8 582,479 687,348 1,189,576 1,337,917 Performance fees 6, 8 41,985 111,216 187,464 226,433 Incentive fees 7, 8 2,143,428-2,143,428 - Fair value adjustments on 4 investments in mortgages 2,994,500-2,914,500 - General and administrative expenses 1,447,120 147,035 1,794,874 313,493 7,209,512 945,599 8,229,842 1,877,843 Income (loss) from operations (3,793,643) 3,003,851 (925,027) 5,879,555 Financing costs: Interest on bank indebtedness 3 326 279,096 95,186 449,941 326 279,096 95,186 449,941 Net income (loss) and comprehensive income (loss) for the period $ (3,793,969) $ 2,724,755 $ (1,020,213) $ 5,429,614 Earnings (loss) per share: Basic and diluted 9 $ (0.20) $ 0.14 $ (0.05) $ 0.28 The accompanying notes are an integral part of these condensed interim financial statements. 2
Condensed Interim Statements of Changes in Shareholders Equity Six months ended June 30, 2016 Common Note shares Deficit Total Shareholders equity at December 31, 2015 $ 183,418,077 $ (5,604,603) $ 177,813,474 Net income (loss) and comprehensive income (loss) for the period - (1,020,213) (1,020,213) Dividends to shareholders - (6,707,073) (6,707,073) Repurchases of shares 5 (2,958,959) - (2,958,959) Shareholders equity at June 30, 2016 $ 180,459,118 $ (13,331,889) $ 167,127,229 Six months ended June 30, 2015 Common Note shares Deficit Total Shareholders equity at December 31, 2014 $ 185,512,229 $ (2,854,366) $ 182,657,863 Net income (loss) and comprehensive income (loss) for the period - 5,429,614 5,429,614 Dividends to shareholders - (6,823,719) (6,823,719) Repurchases of shares 5 (530,258) - (530,258) Shareholders equity at June 30, 2015 $ 184,981,971 $ (4,248,471) $ 180,733,500 The accompanying notes are an integral part of these condensed interim financial statements. 3
Condensed Interim Statements of Cash Flows Cash provided by (used in): For the three months ended For the six months ended June 30, June 30, 2016 2015 2016 2015 Operations: Net income (loss) and comprehensive income for the period $ (3,793,969) $ 2,724,755 $ (1,020,213) $ 5,429,614 Non-cash adjustments: Interest income (3,276,144) (3,730,402) (7,065,511) (7,321,113) Interest expense 326 279,096 95,186 449,941 Fair value adjustments on investments in mortgages 2,994,500-2,914,500 - Interest received 2,975,308 2,834,540 5,814,217 5,459,630 Changes in non-cash operating items: Fees receivable (139,725) (50,938) (239,304) (100,432) Management fees payable (234,371) (185,889) 372,726 464,679 Performance fees payable (400,906) (323,523) (255,427) (208,305) Incentive fees provision 2,143,428-2,143,428 - Accounts payable and accrued liabilities 757,692 (26,657) 725,782 14,927 1,026,139 1,520,982 3,485,384 4,188,941 Financing: Interest paid (23,805) (270,082) (120,955) (402,489) Cash held in trust (110,024) 705,547 (110,024) (68,628) Share buy-backs (2,958,959) (202,753) (2,958,959) (530,258) Dividends to holders (3,363,071) (3,409,913) (6,727,509) (6,828,238) (6,455,859) (3,177,201) (9,917,447) (7,829,613) Investing: Funding of investment in mortgages (2,201,404) (20,286,546) (25,784,370) (45,314,225) Principal repayments or sold investments in mortgages 11,276,517 19,980,993 45,919,630 31,051,294 9,075,113 (305,553) 20,135,260 (14,262,931) Increase (decrease) in cash during the period 3,645,392 (1,961,772) 13,703,197 (17,903,603) Cash (bank indebtedness), beginning of period 5,804,349 (22,136,845) (4,253,455) (6,195,014) Cash (bank indebtedness), end of period $ 9,449,742 $ (24,098,617) $ 9,449,742 $ 24,098,617 The accompanying notes are an integral part of these condensed interim financial statements 4
1. Operations: Trez Capital Mortgage Investment Corporation (the Company ) is a non -bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction and mezzanine mortgages. Trez Capital Mortgage Investment Corporation was incorporated on April 18, 2012 under the Canada Business Corporations Act. The Company is managed by Trez Capital Fund Management Limited Partnership (the Manager ). The Mortgage Broker for the Company is Trez Capital Limited Partnership. The shares of the Company are publicly listed on the Toronto Stock Exchange under the symbol TZZ. The Company is a Canadian mortgage investment corporation and the registered office of the Company is 1550-1185 West Georgia Street, Vancouver, BC, V6E 4C6. On May 9, 2016, the Special Committee of the Board of Directors announced the completion of its strategic review process and a plan for the orderly wind-up of the Company s assets and the return of capital to shareholders (the Orderly Wind-Up Plan ). The Orderly Wind-Up Plan in its entirety was approved by shareholders at the Company s annual and special meeting of shareholders held on June 16, 2016. Under the Orderly Wind-Up Plan, the Company will cease originating new loans and all mortgage renewal activity, subject to contractual rights, and its assets will be monetized over time. The Orderly Wind-Up Plan will be implemented and capital will be returned to shareholders under the supervision of the Board of Directors with the assistance of the Manager. In addition, the Manager and its affiliates will cease providing any financial support in respect to any of the mortgages held in the Company s portfolio, except for instances as disclosed in Note 8. The fees to the Manager have been restructured as outlined in note 7. In addition, a new Investment & Capital Management Committee has been formed and its mandate shall be: (i) the management of the normal course issuer bid ( NCIB ) ; and (ii) the management and oversight of the Orderly Wind-Up Plan. 2. Basis of presentation: (a) Statement of compliance: The condensed interim financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Statements. The accompanying condensed interim financial statements should be read in conjunction with the notes to the Company s audited financial statements for the year ended December 31, 2014 which have been prepared in accordance with International Financial Reporting Standards ( IFRS ), since they do not contain all disclosures required by IFRS for annual financial statements. These condensed interim financial statements reflect all normal and recurring adjustments which are in the opinion of the Manager, necessary for a fair presentation of the respective interim periods presented. These condensed interim financial statements were approved by the Board of Directors on August 11, 2016. 5
2. Basis of presentation (continued): (b) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the functional currency of the Company. (c) Basis of measurement: These condensed interim financial statements have been presented on a historical cost basis, except for investments in mortgages which are measured at fair value. 3. Credit facility: On August 8, 2012, (last amended on September 25, 2014), the Company entered into a credit facility (the Facility ) with the HSBC Bank Canada for an amount of up to $31,000,000. The Facility renewed annually and was subject to an interest rate equal to the banks prime rate of interest plus 1.3%. The Facility was secured by a general security agreement over the Company s assets. As a result of the Orderly Wind Up plan the credit facility was cancelled, effective June 23, 2016; therefore at June 30, 2016, $nil (December 31, 2015 - $4,253,455) was outstanding on the Facility. 6
4. Investments in mortgages: (a) Mortgages: June 30, Property type Number 2016 Residential 18 $ 81,814,678 Office 7 55,795,812 Industrial 4 15,194,455 Retail 1 11,586,277 Hotel 1 800,019 31 165,191,241 Accrued interest and fees receivable 2,015,005 Mortgage syndication liabilities 9,274,574 Fair value adjustments on investments in mortgages (4,834,500) $ 171,646,320 December 31, Property type Number 2015 Residential 21 $ 93,767,576 Office 7 58,300,648 Industrial 5 10,429,167 Retail 2 19,926,251 Hotel 2 1,300,000 37 183,723,642 Accrued interest and fees receivable 2,127,266 Mortgage syndication liabilities 14,351,929 Fair value adjustments on investments in mortgages (1,920,000) $ 198,282,837 7
4. Investments in mortgages (continued): (a) Mortgages (continued): June 30, Location Number 2016 Alberta 10 $ 44,320,311 Saskatchewan 1 3,106,743 New Brunswick 1 22,345,918 Nova Scotia 5 20,229,984 Ontario 14 75,188,285 31 $ 165,191,241 December 31, Location Number 2015 Alberta 12 $ 46,677,130 British Columbia 4 13,469,627 Saskatchewan 1 2,818,773 New Brunswick 1 22,345,918 Nova Scotia 5 20,123,447 Ontario 14 78,288,747 37 $ 183,723,642 The mortgages are secured by the real property to which they relate, bear interest at a weighted average interest rate of 7.3% (December 31, 2015-8.0%) and mature between 2016 and 2019. The mortgage agreements stipulate a minimum interest rate and a variable interest rate based on the Prime Rate for Canadian Dollar Loans established by HSBC ( Prime Rate ). Current premium to the Prime Rate ranges from no premium to plus 9.76% (December 31, 2015 - plus 2.30% to plus 20.89%), with the current minimum rates ranging from 0.00% to 12.46% (December 31, 2015-5.00% to 23.59%), excluding mortgages in default. 8
4. Investments in mortgages (continued): (a) Mortgages (continued): Principal repayments based on contractual maturity dates are as follows: June 30, Number 2016 Past due 4 $ 16,900,437 2016 5 9,790,222 2017 8 30,050,505 2018 11 73,216,480 2019 3 35,233,597 31 $ 165,191,241 December 31, Number 2015 Past due 2 $ 15,987,780 2016 22 87,074,986 2017 8 32,545,900 2018 and beyond 5 48,114,976 37 $ 183,723,642 All mortgages are conventional uninsured mortgages which contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity without penalty or yield maintenance, subject to minimum interest provisions. The Company has entered into certain mortgage participation agreements with third party lenders, whereby, the third party lenders take the senior position and the Company retains the subordinated position, all of which is secured by first mortgage positions. The Company retains an option, not the obligation, to repurchase the senior position at a price equal to the outstanding principal amount of the senior lenders share together with accrued interest. As a result, the senior lenders position is recorded as a mortgage syndication liability. The interest earned on the transferred participation interests and the related interest expenses are recognized in the statement of net income and comprehensive income. For those investments which have not met the de-recognition criteria, the participation transactions have resulted in the Company recognizing the participating mortgages and corresponding mortgage syndication liabilities on its statements of financial position. Included in investments in mortgages at June 30, 2016 are mortgage syndication liabilities of $9,274,574 (December 31, 2015 - $14,351,929). 9
4. Investments in mortgages (continued): (a) Mortgages (continued): As part of the assessment of fair value, the Manager routinely reviews each mortgage for changes in credit risk to determine whether or not fair value of a mortgage should be adjusted for the change in credit risk. As at June 30, 2016, the Manager estimated the changes in credit risk for its mortgages, including mortgages in default as explained below, and accrued an unrealized losses on its investment in fair value of mortgages totaling $4,834,500 (December 31, 2015 - $1,920,000). (b) Default or past due mortgages: A mortgage is considered in default when a payment has not been received by the contractual due date, or a term in the mortgage agreement has been breached. Mortgages that are in default are not classified as impaired if they are fully secured and collection efforts are reasonably expected to result in repayment of principal plus all associated costs and accrued interest. The following mortgages were in default or past due as at June 30, 2016: (i) A borrower in respect of a mortgage with a carrying amount of $4,896,029 (December 31, 2015 - $5,177,187) plus accrued interest of $598,038 ( December 31, 2015 - $598,038) was in breach of its mortgage terms. A court appointed receiver has listed the collateral property securing the loan for sale. The second mortgage also had collateral against a first mortgage held by a related entity under common management with the Manager. On March 22, 2016, the property under first mortgage was sold and part of these proceeds reduced the outstanding balance of the mortgage by $423,616. The Manager estimates that the ultimate proceeds will not be sufficient to cover the outstanding principal and accrued interest. (ii) Two mortgages with the same borrower with an aggregate carrying amount of $6,350,754 (December 31, 2015 - $6,209,476) were performing but were past due as of their maturity dates as at June 30, 2016. The Manager has issued a letter to the borrower demanding repayment. The Manager estimates that the fair value of the proceeds recoverable from the underlying securities is sufficient to support their carrying values. (iii) A mortgage with an entity related to the Manager by common control (note 8(e)) with a carrying amount of $5,653,653 matured on June 1, 2016 and is past due. The mortgage is performing and is currently in process of being renewed. 10
4. Investments in mortgages (continued): (c) Resolved or restructured default mortgages: Since January 1, 2016 the following default mortgages have been resolved or restructured: (i) Subsequent to December 31, 2015, a borrower defaulted on a blanket second mortgage secured by three properties with a carrying amount of $5,433,318 (December 31, 2015 - $5,406,287) plus accrued interest of $27,614 ( December 31, 2015 - $48,769). The mortgage was renewed in March 2016 with a maturity date of September 1, 2016 and a rate concession was provided on the mortgage decreasing the rate from 10.825% to 6%. On renewal, the Company recognized a fair value adjustment reflecting the increased risk adjusted discount rate used in determining the fair value of the expected cash flows. The mortgage was paid down in full by the borrower on May 2, 2016 and the fair value adjustment was reversed at that time. (ii) During the six months ended June 30, 2016, the Company resolved a mortgage with a carrying amount of $10,809,992 that was previously in default where the Company put the property into receivership. The total outstanding principal amount of the mortgage including other Trez-affiliated participants co-invested in the mortgage was $11,513,077. On February 3, 2016, the property was sold to the third party at a price of $12,100,000, which was partly financed by vendor take back mortgage ( VTB ) provided to the Company in the amount of $11,400,000. In addition, an affiliate of the Manager had agreed to supplement the interest rate on the VTB at 5% for the first six months, where otherwise it was interest free. As a result of the Orderly Wind-Up Plan, the affiliate of the Manager will no longer supplement the interest rate on the VTB. Subsequent to June 30, 2016 it was brought to the Managers attention that the borrower failed to meet certain conditions required under the loan agreement. The Company has recorded a fair value adjustment as at June 30, 2016 to consider the resulting increased credit risk. 11
5. Class A shares: As at June 30, 2016 and December 31, 2015, there were an unlimited number of Class A common shares and an unlimited number of Class B common shares authorized. As at June 30, 2016, there were 18,885,806 Class A shares outstanding (December 31, 2015 - $19,236,354). The holders of the Class A shares are entitled to receive dividends as and when declared by the Board of Directors of the Company. (a) Dividends: The Company makes dividend payments to Class A shareholders on a monthly basis on or about the 15 th day of each month. The Company intends to pay dividends to Class A shareholders, within 90 days after the year end, for an amount equal to at least 100% of the taxable income from operations of the Company determined in accordance with the Income Tax Act (Canada), subject to c ertain adjustments. For the six-month period ended June 30, 2016, the Company had declared dividends totaling $6,707,073 ($0.35 per share) (June 30, 2015 - $6,823,719 and $0.35 per share) of which $1,101,042 is payable at June 30, 2016 (December 31, 2015 - $1,121,479). (b) Normal course issuer bid: On May 17, 2016 the Company announced the approval of a normal course issuer bid ( NCIB ) by the Toronto Stock Exchange ( TSX ) on May 16, 2016. The Company intends to consider purchasing, from time to time over a period of 12 months up to an aggregate maximum of 1,808,610 Class A Shares, representing approximately 10% of its issued and outstanding Class A shares. All purchases are being made through the facilities of the TSX at market prices and in accordance with the rules of the TSX. The Company s previous NCIB expired on January 11, 2016. Pursuant to that bid, the Company acquired a total of 314,900 shares at a weighted average price of $6.65 per share. In aggregate, under both NCIB agreements, the Company purchased 350,548 Class A shares during the six months ended June 30, 2016 (June 30, 2015-77,500). 6. Management fees: The Manager is responsible for the day-to-day operations, including administration of the Company's mortgage portfolio. Pursuant to the Management Agreement dated May 25, 2012, (amended November 30, 2013) the Manager is entitled to a fee of 1.25% per annum of the gross assets of the Company (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. 12
6. Management fees (continued): Prior to approval on June 16, 2016 of the Orderly Wind-Up Plan by the shareholders (see Note 7), the Manager was also entitled to a performance fee. In any calendar year where the Company had a net return in excess of the Hurdle Rate (Hurdle Rate is defined as the average two year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Manager was entitled to receive from the Company a performance fee equal to 20% of the net return of the Company over the Hurdle Rate (the Performance Fee ). The Manager calculated the final Performance Fee in respect of a completed calendar year based on the audited financial statements for that year. The Performance Fee in respect of a calendar year was payable to the Manager within 15 days of the issuance of the Company s audited financial statements for that year. At June 30, 2016 the amount payable related to the performance fee was $187,464 (June 30, 2015- $226,433). As part of the Orderly Wind-Up Plan, the Manager had agreed to waive the performance fee beginning May 1, 2016. 7. Incentive fees: The Manager has agreed, to assist in the Orderly Wind-Up Plan and to certain amendments to the Company s management agreement to facilitate the Orderly Wind-Up Plan. Pursuant to those amendments, the Manager has agreed to provide the full asset management services necessary to support the Orderly Wind-Up Plan. In addition to waiving the Performance Fee, the Manager will also waive its rights, if any, to early termination fees in exchange for an incentive fee calculated as the greater of the following: (i) 20% of the amount by which the sum of: (A) The aggregate realized proceeds: and (B) The Company s unrestricted cash as at April 30, 2016 Exceeds $163,509,009; and (ii) $1,000,000. The detailed definition of realized proceeds and unrestricted cash associated with the calculation is disclosed in the Company s Management Information Circular dated May 17, 2016. At June 30, 2016 the estimated amount of the future incentive fee obligation is $2,143,428. The provision has been calculated using the projected realized proceeds of investments in mortgages at their fair value at June 30, 2016. The amount of the provision is subject to change with any changes to realized proceeds as a result of timing or fair value adjustments of the mortgage portfolio. The reasonability of the provision will be assessed each quarter and the amount of the provision adjusted accordingly. The current realized portion of the obligation payable to the manager at June 30, 2016 is $86,971. This amount is a percentage of the lower threshold level, determined by adding the sum of total realized proceeds received to the period end, plus the unrestricted cash as at April 30, 2016, divided by the upper threshold level. 13
8. Related party transactions and balances: The following are related party transactions not disclosed elsewhere in statements: these financial (a) The Company is managed by the Manager, a related party by virtue of common management. Pursuant to the Management Agreement referred to in note 6, during the six months ended June 30, 2016 the Company incurred management fees in the amount of $1,189,576 (June 30, 2015 $1,337,917), and performance fees in the amount of $187,464 (June 30, 2015 - $226,433). At June 30, 2016, $582,478 (December 31, 2015 - $209,752) in management fees, $187,464 (December 31, 2015 - $442,891) in performance fees were outstanding. Pursuant to the Orderly Wind-Up Plan referred to in note 7, the Company has an estimated incentive fee obligation to the Manager in the amount of $2,143,428 (June 30, 2015 - $nil). The current realized portion of the incentive fee obligation payable to the Manager is $86,971 (2015-$nil). At June 30, 2016, $86,971 of these fees were outstanding. (b) As at June 30, 2016, the Company has co-invested in 22 (December 31, 2015-27) mortgage investments with entities related by virtue of common management. The total amount of the mortgage investment is $302,648,676 (December 31, 2015 - $387,763,663) of which the Company s share is $119,730,813 (December 31, 2015 - $115,286,850). During the six months ended June 30, 2016, the Company purchased investments in mortgages from entities under common management of $nil (June 30, 2015 - $6,500,000) and sold investments in mortgages of $133,716 (June 30, 2015 - $7,282,397) to entities under common management. (c) As at June 30, 2016, the Company has a receivable of $436,154 (December 31, 2015 - $196,850) from the Manager for commitment fees for funded mortgages during the period, which is included within investments in mortgages. (d) As discussed in the note 4(c)(ii), an affiliate of the Manager of the Company agreed to supplement the interest for the first six months at 5% on the VTB for property sold to the third party. For the six months ended June 30, 2016, the Company recognized $137,404 (June 30, 2015 - $nil) in income from the affiliate of the Manager. As a result of the Orderly Wind-Up Plan, the affiliate of the Manager has ceased to provide any interest supplement. 14
8. Related party transactions and balances (continued): (e) The Company has one mortgage, in the amount of $5,513,720, with an entity related to the Manager by common control bearing interest of 9.90% per annum. The property securing the mortgage was acquired by the related entity after the previous owner defaulted on the mortgage in October 2015. As at June 30, 2016, the loan was performing (December 31, 2015 performing) but past due of its maturity date and in process of being renewed. For the six months ended June 30, 2016, the Company recognized $274,999 (June 30, 2015 - $nil) in interest income from the affiliate of the Manager and has accrued interest receivable of $45,876 as at June 30, 2016 (December 31, 2015 - $46,326). (f) Included in investments in mortgages as at June 30, 2016 is a mortgage in the amount of $1,292,849 (December 31, 2015 - $1,152,165) and accrued interest on $10,467 (December 31, 2015 - $78,045) which were previously in default and subsequently the mortgage was assigned to an affiliate of the Manager of the Company on October 1, 2015. The affiliate of the Manager assumed the obligation to pay the Company interest at the original interest rate. The affiliate of the Manager obtained a court appointed received to list and market the properties. As at June 30, 2016 and December 31, 2015, the mortgage was performing. For the six months ended June 30, 2016, the Company recognized $73,107 (June 30, 2015 - $nil) in interest income from the affiliate of the Manager and has accrued interest receivable of $10,467 (December 31, 2015 - $27,655). (g) During the year ended December 31, 2015, the security on a previously defaulted mortgage was sold to a third party and the sale was financed by cash and a four year vendor take back ( VTB ) provided by the Company. An affiliate of the Manager has also agreed to supplement the interest rate to be 6.5% for the entire term of the VTB. In March 2016, the full amount of the VTB was paid out in full less a discount of $750,000 which was supplemented by the affiliate of the Manager to the Company. The Company recognized interest income of $42,514 relating to the affiliate of the Manager s supplemental interest on the VTB during the six months ended June 30, 2016. (h) On February 5, 2016, the security on a mortgage in the amount held by an affiliate of the Manager was sold to a third party for $24,900,000 which was partially financed by a 42 month VTB in the amount of $23,400,000. The affiliate of the Manager agreed to supplement the interest rate on the VTB to be 6.5% during the term. The Company recognized $156,358 in interest income from the affiliate of the Manager for the six months ended June 30, 2016 which includes $102,865 in supplemental interest on the VTB subsequent to the sale to the third party. As a result of the Orderly Wind-Up Plan, the affiliate of the Manager has ceased to provide any interest supplement. (i) All related party transactions are measured at the amount of consideration established and agreed to by the related parties. The Company invests in mortgages on a participation basis with parties related to the Manager. Title to mortgages are held by Computershare Canada, (the Custodian ), on behalf of the beneficial owners of the mortgages. In addition, certain Mortgage Broker duties are performed by the Mortgage Broker. The Manager and the Mortgage Broker are related to the Company through common management. 15
9. Earnings per share: (a) Basic and diluted earnings per share: Basic and diluted earnings per share are calculated by dividing net income attributable to common shares by the weighted average number of common shares during the three and six month period ended June 30, 2016 and 2015: Three months ended June 30, 2016: Total income (loss) and comprehensive income for the period $ (3,793,969) Earnings attributable to common shares $ (3,793,969) Weighted average number of common shares (basic and diluted) 19,111,686 Earnings per share (basic and diluted) $ (0.20) Three months ended June 30, 2015: Total income and comprehensive income for the period $ 2,724,755 Earnings attributable to common shares $ 2,724,755 Weighted average number of common shares (basic and diluted) 19,480,252 Earnings per share (basic and diluted) $ 0.14 16
9. Earnings per share (continued): (a) Basic and diluted earnings per share (continued): Six months ended June 30, 2016: Total income (loss) and comprehensive income for the period $ (1,020,213) Earnings attributable to common shares $ (1,020,213) Weighted average number of common shares (basic and diluted) 19,174,020 Earnings per share (basic and diluted) $ (0.05) Six months ended June 30, 2015: Total income and comprehensive income for the period $ 5,429,614 Earnings attributable to common shares $ 5,429,614 Weighted average number of common shares (basic and diluted) 19,480,252 Earnings per share (basic and diluted) $ 0.28 10. Fair value of financial instruments and risk management: (a) Fair value of financial instruments: The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale. The Company s investments in mortgages and mortgage syndication liabilities are carried at fair value in the financial statements. The following table shows a hierarchy for disclosing fair value based on inputs used to value the Company s investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); Inputs other than quoted prices in active markets included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). 17
10. Fair value of financial instruments and risk management (continued): (a) Fair value of financial instruments (continued): The Company s assets recorded at fair value have been categorised as follows: June 30, 2016 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 171,646,320 $ 171,646,320 Mortgage syndication liabilities - - 9,274,574 9,274,574 December 31, 2015 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 198,282,837 $ 198,282,837 Mortgage syndication liabilities - - 14,351,929 14,351,929 There were no transfers between Level 1 and Level 2 during the period. A reconciliation of Level 3 assets at June 30, 2016 is as follows: Opening balance $ 198,282,837 Funding of investment in mortgages 25,784,371 Change in mortgage syndication liabilities (5,077,355) Interest capitalized to investment in mortgages 1,602,858 Accrued interest and fees receivable (112,261) Principal repayments or sold investments in mortgages (45,919,630) Fair value adjustments on investments in mortgages (2,914,500) Investment in mortgages, June 30, 2016 $ 171,646,320 A reconciliation of Level 3 assets at December 31, 2015 is as follows: Opening balance $ 196,169,507 Funding of investment in mortgages 92,735,374 Change in mortgage syndication liabilities 8,951,930 Interest capitalized to investment in mortgages 3,807,717 Accrued interest and fees receivable (401,733) Principal repayments or sold investments in mortgages (102,785,948) Realized mortgage investment loss (124,010) Fair value adjustments on investments in mortgages (70,000) Investment in mortgages, December 31, 2015 $ 198,282,837 18
10. Fair value of financial instruments and risk management (continued): (a) Fair value of financial instruments (continued): The key valuation techniques used in measuring the fair values of default mortgages include: Inter-relationship between significant unobservable Valuation Significant inputs and fair technique unobservable inputs value measurement Discounted The adjusted credit risk The estimate of fair value would cash flow model premium based on the increase (decrease) if: change in the borrower s - The term of the mortgage credit risk utilizing was shortened (or the knowledge gained extended) since the loan was - The adjusted risk premium originated rate was lower (higher) Assessment of fair value of collateral of mortgages in default where payments expected from sale of property. - Estimated fair value of collateral was (lower) higher The projected length of time the mortgage will remain in default without the underlying property being liquidated or foreclosed upon. 11. Subsequent events: (a) Orderly Wind Up: As part of the Orderly Wind-Up Plan, on July 14, 2016, independent directors of the Board approved the sale of approximately $13.3 million principal amount of mortgages in the Company s portfolio at their carrying value prior to their schedule maturities to a private fund managed by the Manager. (b) Substantial Issuer Bid: On July 21, 2016 the Company announced that its Board of Directors had authorized a substantial issuer bid to purchase for cancellation Class A shares ( Shares ) for an aggregate purchase price not to exceed $20 million (the Offer ). On August 15, 2016, the Company announced the commencement of the Offer with revised terms. Specifically, the Company announced that pursuant to the Offer, the Company will offer to purchase up to $17 million of its Shares by way of a modified Dutch auction whereby shareholders may tender all or a portion of their Shares (i) at a price not more than $8.70 and not less than $8.50 per Share, in increments of $0.05 per Share, or (ii) without specifying a purchase price, in which case their 19
11. Subsequent events (continued): Shares will be purchased at the purchase price to be determined by the Board in accordance with the terms of the Offer. As a result of the substantial Issuer bid the Company temporarily suspended its normal course issuer bid on July 21, 2016 (c) Distribution Subsequent to period end on July 20, 2016 the Company declared a distribution of $0.0583 per Class A shares. Going forward the distributions will constitute a return of capital pursuant to the winding-up of the Company s business as approved by Shareholders on June 16, 2016 and will be paid on August 15, 2016 to holders of Class A shares of record on July 31, 2016. (d) Dividend Reinvestment Plan: Effective August 30, 2016 the Company s shareholder distribution reinvestment plan (the DRIP ) will be terminated. As a result the DRIP will not be available in connection with the distribution that is payable on September 15, 2016, or any subsequent monthly distributions. Shareholders, including those who had previously participated in the DRIP, will continue to be entitled to monthly cash distributions as and when declared by the board of directors of the Company. 20