Brookfield Investment Management

Transcription

1 Brookfield Investment Management 2017 Brookfield Select Opportunities Income Fund BSO.UN Annual Financial Statements For the period from January 1, 2017 to December 31, 2017

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3 MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The accompanying financial statements of Brookfield Select Opportunities Income Fund (the Fund ) are the responsibility of the management of the Fund. Brookfield Investment Management (Canada) Inc., is the manager (the Manager ) of the Fund. To fulfill these responsibilities, the Manager maintains policies, procedures and systems of internal control to ensure that it s reporting practices and accounting and administrative procedures are appropriate. These policies and procedures are designed to provide a high degree of assurance that relevant and reliable financial information is produced. These financial statements have been prepared in accordance with International Financial Reporting Standards, and where appropriate, reflect the Manager s best estimates and judgments. The Manager is responsible for the information and representations contained in these Annual Financial Statements and the Annual Management Report of Fund Performance. The Manager is also responsible for the selection of the accounting principles that are most appropriate for the Fund s circumstances. The Manager, on behalf of the unitholders, has appointed the external firm Deloitte LLP as the independent auditor of the Fund. The auditors have examined the financial statements in accordance with auditing standards generally accepted in Canada to enable them to express to the unitholders their opinion on the financial statements. The auditor s report outlines the scope of their audit and their opinion of the financial statements. Gail Cecil President David Levi Director 2017 Annual Financial Statements 1

4 INDEPENDENT AUDITOR'S REPORT To the Unitholders of Brookfield Select Opportunities Income Fund We have audited the accompanying financial statements of Brookfield Select Opportunities Income Fund, which comprise the statements of financial position as at December 31, 2017 and 2016 and the statements of comprehensive income (loss), statements of changes in net assets attributable to holders of redeemable units and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the 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 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 financial statements present fairly, in all material respects, the financial position of Brookfield Select Opportunities Income Fund as at December 31, 2017 and 2016, and its financial performance, and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants Licensed Public Accountants March 28, 2018 Toronto, Canada 2017 Annual Financial Statements 2

5 STATEMENTS OF FINANCIAL POSITION As at December 31, 2017 and December 31, 2016 (Expressed in Canadian Dollars) As at As at December 31, 2017 December 31, 2016 Assets: Current assets Financial assets at fair value through profit or loss (Note 6) 48,420,172 77,854,187 Net unrealized appreciation on forward currency contracts 505,893 - Cash and cash equivalents 1,639, ,367 Collateral cash (Note 7) 4,736,151 3,231,931 Accrued investment income 611, ,239 Total assets 55,913,108 82,207,724 Liabilities: Current liabilities Net unrealized depreciation on forward currency contracts - 1,190,430 Net unrealized depreciation on swap contracts 1,196, ,319 Margin payable (Note 7) 3,309,455 5,970,886 Distributions payable (Note 12) 1,482,030 1,794,403 Accounts payable and accrued liabilities 194, ,486 Total liabilities (excluding net assets attributable to holders of redeemable units) 6,182,457 9,712,524 Net assets attributable to holders of redeemable units 49,730,651 72,495,200 Number of redeemable units outstanding (Note 11) 9,880,203 11,962,684 Net assets attributable to holders of redeemable units per unit See accompanying notes to financial statements. Approved on behalf of the Manager, Brookfield Investment Management (Canada) Inc. Gail Cecil President David Levi Director 2017 Annual Financial Statements 3

6 STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2017 and December 31, 2016 (Expressed in Canadian Dollars) Investment income (loss) Interest income for distribution purposes 3,024,630 4,870,284 Dividend income 1,004,117 1,196,504 Net realized gain (loss) on sale of investments 1,795,924 (24,916,585) Net realized gain (loss) on forward currency contracts 165,474 (4,938,193) Net realized loss on swaps (245,963) (1,851,802) Net realized foreign exchange loss (778,804) (2,774,665) Net change in unrealized appreciation on forward currency contracts 1,696,323 8,709,684 Net change in unrealized appreciation (depreciation) of investments (9,677,976) 41,764,254 Net change in unrealized appreciation (depreciation) on swaps (989,107) 2,324,207 Net change in unrealized appreciation (depreciation) on foreign exchange (280,131) 1,460,858 Total investment income (loss) (4,285,513) 25,844,546 Expenses (Note 9) Management fees 856,338 1,187,919 Interest expense 41,619 88,619 Brokerage commissions and other charges 60,523 79,662 Audit fees 30,066 25,821 Legal fees 5,630 5,651 Other expenses 44, ,347 Total expenses 1,038,504 1,518,019 Comprehensive income (loss) (5,324,017) 24,326,527 Withholding taxes (45,742) (76,783) Increase (decrease) in net assets attributable to holders of redeemable units (5,369,759) 24,249,744 Increase (decrease) in net assets attributable to holders of redeemable units per unit (0.48) 1.50 See accompanying notes to financial statements Annual Financial Statements 4

7 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS For the years ended December 31, 2017 and December 31, 2016 (Expressed in Canadian Dollars) Net assets attributable to holders of redeemable Units, beginning of year 72,495,200 97,168,449 Increase (decrease) in net assets attributable to holders of redeemable units (5,369,759) 24,249,744 Redeemable unit transactions Amounts received from reinvestment of distributions 86,937 90,871 Amounts paid for redemption of units (10,925,017) (39,665,689) Net decrease from redeemable unit transactions (10,838,080) (39,574,818) Distributions to holders of redeemable units Return of capital (6,556,710) (9,348,175) Total distributions to holders of redeemable units (6,556,710) (9,348,175) Net decrease in net assets attributable to holders of redeemable units (22,764,549) (24,673,249) Net assets attributable to holders of redeemable Units, end of year 49,730,651 72,495,200 See accompanying notes to financial statements Annual Financial Statements 5

8 STATEMENTS OF CASH FLOWS For the years ended December 31, 2017 and December 31, 2016 (Expressed in Canadian Dollars) Cash flows provided by (used for): Cash flows from operating activities Increase (decrease) in net assets attributable to holders of redeemable units (5,369,759) 24,249,744 Adjustments for: Interest income for distribution purposes (3,024,630) (4,870,284) Dividend income, net of withholding taxes (958,375) (1,119,721) Net realized (gain) loss on investments (1,795,924) 24,916,585 Net realized loss on swaps 245,963 1,851,802 Net realized gain (loss) on foreign currency contracts (165,474) 4,938,193 Net change in unrealized (appreciation) depreciation of swaps 989,107 (2,324,207) Net change in unrealized (appreciation) depreciation on investments 9,677,976 (41,764,254) Net change in unrealized appreciation on forward currency contracts (1,696,323) (8,709,684) (Increase) decrease in collateral cash (1,504,220) 10,270,121 Increase (decrease) in accounts payable and accrued liabilities (354,940) 218,725 Receipts (payments) made on foreign currency contracts 165,474 (4,938,193) Interest received 3,406,720 5,925,073 Dividends received, net of witholding taxes 882,465 1,118,760 Payments made on swap contracts (245,963) (1,851,802) Proceeds from sale of investments 57,758, ,690,598 Amounts paid for purchase of investments (36,206,071) (47,719,325) Net cash provided by operating activities 21,804,060 62,882,131 Cash flows from financing activities Margin payable, net repayments and foreign exchange (2,661,431) (15,364,687) Distributions paid to unit holders (6,869,083) (10,433,457) Amounts paid for redemptions of units (10,925,017) (39,665,689) Amounts received from reinvestment of distributions of Units 86,937 90,871 Net cash used for financing activities (20,368,594) (65,372,962) Net increase (decrease) in cash and cash equivalents 1,435,466 (2,490,831) Cash and cash equivalents, beginning of year 204,367 2,695,198 Cash and cash equivalents, end of year 1,639, ,367 See accompanying notes to financial statements Annual Financial Statements 6

9 SCHEDULE OF INVESTMENTS As at December 31, 2017 (Expressed in Canadian Dollars) Quantity Security Average Cost Fair Value %ofnet Assets Equities Canadian Dollar Denominated 78,600 Kinder Morgan Canada Ltd. 1,237,416 1,336, ,240 Pembina Pipeline Corp. 2,239,183 2,468, ,585 TORC Oil & Gas Ltd. 3,982,522 3,879, ,500 TransCanada Corp. 1,879,877 1,865, ,500 Vermilion Energy Inc. 1,984,906 2,078, ,740 Whitecap Resources Inc. 3,284,270 3,031, ,608,174 14,661, United States Dollar Denominated 44,800 Pattern Energy Group Inc. 1,375,603 1,206, ,220 PNC Financial Services Group Inc. 2,001,006 2,390, ,280 Simon Property Group Inc. 1,325,410 1,351, ,800 Tanger Factory Outlet Centers Inc. 1,337,602 1,255, ,350 Verizon Communications Inc. 1,017,459 1,084, ,600 Williams Cos Inc. 1,835,422 1,780, ,892,502 9,067, British Pound Denominated 138,200 National Grid PLC 2,197,764 2,049, ,197,764 2,049, Euro Denominated 46,613 Ferrovial SA 1,377,344 1,327, ,377,344 1,327, Bonds United States Dollar Denominated 500,000 Alcoa Nederland Holding BV 09/30/ , , ,000 Antero Midstream Partners L.P. 09/15/ , , ,000 Baytex Energy Corp., 5.625% 06/01/ , , ,000 Blue Racer Midstream LLC, 6.125% 11/15/ , , ,000 Crestwood Midstream Partners L.P., 6.250% 607, , /01/2023 1,000,000 CSC Holdings LLC, 5.250% 06/01/2024 1,382,779 1,234, ,000 EP Energy LLC, 8.000% 11/29/ , , ,800,000 Frontier Communications Corp., % 2,418,279 1,657, /15/ ,000 GLP Capital L.P. 04/15/ , , ,000 Holly Energy Partners L.P. 08/01/ , , ,000 HudBay Minerals Inc., 7.625% 01/15/ , , ,000 Ineos Group Holdings SA, 5.625% 08/01/2024 1,096,951 1,110, ,385,000 Kindred Healthcare Inc., 6.375% 04/15/2022 1,601,836 1,761, ,600,000 MEG Energy Corp. 01/15/2025 1,939,146 1,979, ,041,000 New Albertson's Inc., 7.450% 08/01/2029 1,072,019 1,147, Annual Financial Statements 7

10 930,000 New Albertson's Inc., 8.700% 05/01/2030 1,001,524 1,089, ,000 NRG Yield Operating LLC, 5.375% 08/15/ , , ,000 Pattern Energy Group Inc., 5.880% 02/01/ , , ,000 PulteGroup Inc., 6.375% 05/15/ , , ,000 Puma International Financing SA 10/06/ , , ,000,000 Sanchez Energy Corp., 6.125% 01/15/2023 1,366,975 2,117, ,000 United Rentals North America Inc. 05/15/ , , ,250,000 Windstream Corp., 7.750% 10/15/2020 1,700,146 1,323, ,471,492 21,313, Transaction costs (44,570) Total investments 48,502,706 48,420, Accrued investment income 611, Cash and cash equivalents 1,639, Collateral cash 4,736, Derivative instruments (690,533) (1.39) Liabilities, net of other assets (4,986,031) (10.02) Total net assets attributable to holders of redeemable units 49,730, See accompanying notes to financial statements Annual Financial Statements 8

11 SCHEDULE OF DERIVATIVE INSTRUMENTS As at December 31, 2017 (Expressed in Canadian Dollars) Swap Contracts Underlying Asset Counterparty Number of Shares Settlement Date Notional Value Unrealized Appreciation / (Depreciation) Energy Transfer Partners LP J.P. Morgan 77,610 January 5, ,249,023 (383,871) Enterprise Products Partners LP J.P. Morgan 57,450 November 6, ,825, ,265 Plains All American Pipeline LP J.P. Morgan 31,760 January 8, ,368,973 (517,334) MPLX LP J.P. Morgan 29,600 February 28, ,436,876 (89,588) Buckeye Partners LP J.P. Morgan 16,340 April 30, ,412,988 (376,951) Phillips 66 Partners LP J.P. Morgan 9,650 August 13, ,098 51,053 Total swap contracts (1,196,426) Forward Currency Contracts Amount Bought Amount Sold Maturity Date Unrealized Appreciation CAD 22,422,881 USD 17,500,000 January 31, ,893 Total 505,893 See accompanying notes to financial statements Annual Financial Statements 9

12 NOTES TO THE THE ANNUAL FINANCIAL STATEMENTS 1. THE FUND Brookfield Select Opportunities Income Fund (the Fund ) is an investment fund established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated April 24, The Fund effectively began operations on May 23, 2014 when it completed an initial public offering of 19,200,000 units of the Fund (the Units ) at per Unit (the Offering ), for gross proceeds of million and net proceeds of million after deducting issuance costs of approximately 10.9 million. The Fund was created with objectives to (i) provide holders of units ( Unitholders ) with quarterly cash distributions; (ii) maximize total return for Unitholders through distributions and capital appreciation; and (iii) preserve capital. The Fund was created to invest in a portfolio comprised primarily of fixed income and equity securities on a global basis (the Portfolio ). Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ) and the trustee of the Fund. Effective July 6, 2017 Brookfield Investment Management Inc. ("BIM") became the investment manager (the Investment Manager ), replacing BIM Canada. The Investment Manager makes all of the investment and trading decisions on behalf of the Fund. The Fund s registered office is Brookfield Place, 181 Bay Street, Suite 300 Toronto, Ontario Canada M5J 2T3. These financial statements were authorized for issue by the Manager on March 28, BASIS OF PRESENTATION These financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"). The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. In applying IFRS, management makes estimates and assumptions that may affect the amounts of assets, liabilities, income and expenses reported in these financial statements. The most significant estimates relate to the valuation of investments. Actual results may differ from the estimates. 3. SIGNIFICANT ACCOUNTING POLICIES Financial Instruments The Fund's investments in equity and fixed income securities are designated at fair value through profit or loss ( FVTPL ) at inception. The Fund's derivatives are categorized as held for trading. As a result of such designation and categorization, the Fund's investments and derivatives are measured at FVTPL. Offsetting Financial assets and liabilities are offset and the net amount presented in the Statements of Financial Position only when the Fund has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In the normal course of business, the Fund enters into various master netting agreements or similar agreements that do not meet the criteria for offsetting in the Statements of Financial Position but still allow for the related amounts to be offset in certain circumstances, such as bankruptcy or termination of contracts Annual Financial Statements 10

13 Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded marketable securities) are based on quoted market prices at the close of trading on the reporting date. However, if (i) a fair value or price is not readily available, (ii) the available quotations are not believed to be reflective of fair value by the Investment Manager, or (iii) a significant event has occurred that would materially affect the value of the security, the security is fair valued, as determined in good faith, by the Fund s Valuation Committee. The Fund s Valuation Committee is comprised of senior members of Brookfield Investment Management Inc. s management team. The price determined by the Valuation Committee is an estimate and may differ from the actual price used in a purchase or sale transaction. The Fund s policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the reporting year-end date. The fair value of financial assets and liabilities that are not traded in an active market, including over-the-counter derivatives, is determined using established valuation procedures. The Fund uses a variety of valuation methods and makes assumptions that are based on market conditions existing at each measurement date. Valuation techniques include the use of comparable recent arm s length transactions, reference to other instruments that are substantially the same and others commonly used by market participants and which make the maximum use of observable inputs. Refer to Note 6 for further information about the Fund s fair value measurements. All investment transactions are accounted for on the trade date. Realized gains and losses from investment transactions and unrealized appreciation or depreciation in the value of investments are calculated on an average cost basis, excluding transaction costs and the effect of foreign exchange fluctuations, which are disclosed separately. Other assets and liabilities For the purpose of categorization, accrued investment income is recorded at amortized cost. Similarly, margin payable, payable for due to broker, distributions payable and accounts payable and accrued liabilities are deemed to be other financial liabilities and reported at amortized cost. All other financial assets and liabilities are measured for at amortized cost. Under this method, financial assets and liabilities reflect the amounts required to be received or paid, discounted when appropriate, at the financial instrument s effective interest rate. The fair values of the Fund's financial assets and liabilities that are not carried at FVTPL approximate their carrying amounts due to their short-term nature. Revenue recognition Dividend income is recognized on the ex-dividend date and the interest for distribution purposes shown on the Statements of Comprehensive Income (Loss) represents the coupon interest received by the Fund accounted for on an accrual basis. The Fund does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds which are amortized on a straight line basis. Transaction costs Transaction costs, such as brokerage commissions incurred in the purchase and sale of securities by the Fund, are expensed and are included in operating expenses in the Statements of Comprehensive Income (Loss). Transaction costs are incremental costs that are directly attributable to an acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties Annual Financial Statements 11

14 Functional and presentation currency The performance of the Fund is measured and reported to the investors in Canadian dollars. The Manager considers the Canadian dollar as the currency that most faithfully represents the economic effects of the underlying transactions, event and conditions. These financial statements are presented in Canadian dollars, which is the Fund s functional currency. Foreign currency translation Investments and other assets denominated in foreign currencies are translated into Canadian dollars using the rate of exchange prevailing on the trade date. Investment transactions and income and expenses are translated at the rate of exchange on the date of such transactions. The fair values of investments, other assets and liabilities, and any adjustments included in the Statements of Comprehensive Income (Loss) in foreign currencies are translated at the year-end exchange rates. Forward currency contracts Forward currency contracts, if applicable, are valued at current market value on each valuation date. The value is determined as the gain or loss that would be realized, if on the valuation date, the position of the forward currency contracts were closed out. Redeemable Units The Fund's redeemable Units are classified as financial liabilities and are measured at redemption amounts. Distributions to holders of redeemable Units are recognized in Statements of Changes in Net Assets Attributable to Holders of Redeemable Units when they are authorized. The characteristics of the units are not identical and therefore do not meet the criteria in IAS 32 - Financial Instruments - Presentation, for classification as equity. New standards and interpretations not yet adopted: In July 2014, the IASB finalized the reform of financial instruments accounting and issued IFRS 9 Financial Instruments ( IFRS 9 ) (as revised in 2014), which contains the requirements for a) the classification and measurement of financial assets and financial liabilities, b) impairment methodology and c) general hedge accounting. IFRS 9 (as revised in 2014) will supersede IAS 39 Financial Instruments: Recognition and Measurement in its entirety upon its effective date. The new standard becomes effective for annual periods beginning on or after January 1, IFRS 9 is not expected to have a significant impact on the Fund's measurement basis, financial position or performance, as it is expected that the Fund will continue to classify its financial assets and financial liabilities as being at fair value through profit or loss. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements in conformity with IFRS 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. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized in the year in which the estimates are revised and in any future year affected. Fair Value Measurement of Derivatives and Securities Not Quoted in an Active Market The Fund may hold financial instruments that are not quoted in active markets. Fair values of such instruments are determined using valuation techniques and may be determined using reputable pricing sources (such as pricing agencies) or indicative prices from market makers. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding Annual Financial Statements 12

15 5. MANAGEMENT OF FINANCIAL RISKS The Fund is exposed to various financial risks, including market risk (consisting of currency risk, interest rate risk, and other price risk), and liquidity risk. The Trust is also indirectly exposed to the financial risks of the Fund. The Fund's overall risk management programme seeks to minimize potentially adverse effects of those risks on the Fund's financial performance by employing experienced portfolio managers and by continuous monitoring of the Fund's securities positions and markets. The Manager maintains a corporate governance structure that oversees the Fund's investment activities. The Fund may use derivative financial instruments to mitigate certain risk exposures and is currently engaged in a series of foreign exchange contracts as described below. Currency Risk Currency risk is the risk that the value of an investment will change due to fluctuations in foreign exchange rates. The Fund's net assets attributable to holders of redeemable Units are measured in Canadian dollars and payments to Unitholders are made in Canadian dollars. The Fund is exposed to currency risks as it may hold assets or have liabilities denominated in currencies other than in Canadian dollars. As at December 31, 2017 and December 31, 2016, the Fund was exposed to currency risk as the value of any assets or liabilities denominated in currencies other than the Canadian dollar will vary due to changes in foreign exchange rates. The following tables summarize the Fund's net exposure to foreign currency as at December 31, 2017 and December 31, 2016: Other Net Assets/ Derivative December 31, 2017 Investments Cash (Liabilities)* Instruments** Total Net Assets % U.S. Dollar 30,381,540 1,582,394 5,226,927 (23,113,414) 14,077, British Pound 2,049,826 - (1,227,320) - 822, Euro 1,327,234 13,144 (1,356,343) - (15,965) (0.03) Total 33,758,600 1,595,538 2,643,264 (23,113,414) 14,883, *Other Net Assets/(Liabilities) includes borrowings of 2,638,601. **Includes notional exposure from derivative positions. Other Net Assets/ Derivative December 31, 2016 Investments Cash (Liabilities)* Instruments** Total Net Assets % U.S. Dollar 62,345, ,977 2,431,590 (40,895,174) 23,993, Euro 1,461,475 - (1,690,929) - (229,454) (0.32) British Pound 418, , Total 64,225, , ,661 (40,895,174) 24,182, *Other Net Assets/(Liabilities) includes borrowings of 3,389,819. **Includes notional exposure from derivative positions. As at December 31, 2017, had the Canadian dollar strengthened or weakened by 1% against each of the other currencies with all other variables remaining constant, the net assets of the Fund would have decreased or increased by 148,840 (December 31, ,823) Annual Financial Statements 13

16 As at December 31, 2017, the Fund had entered into forward currency contracts with a net unrealized gain of 505,893 (December 31, 2016 net unrealized loss of 1,190,430) to deliver currencies at specified future dates. For further information regarding forward currency contracts, see the Schedule of Derivative Instruments. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Fund is exposed to interest rate risk from its holdings of fixed-rate debt instruments, the values of which fluctuate due to changes in prevailing levels of market interest rates. As at December 31, 2017, the Fund's debt instruments remaining terms to maturity were as follows: Debt Instruments %of Net Assets Less than 1 year to 3 years 1,323, to 5 years 2,087, Greater than 5 years 17,902, Total 21,313, As at December 31, 2016, the Fund's debt instruments remaining terms to maturity were as follows: Debt Instruments %of Net Assets Less than 1 year to 3 years 7,412, to 5 years 7,408, Greater than 5 years 29,255, Total 44,076, Interest rate risk of the Fund is currently mitigated by the relatively short duration and high credit spread of the high yield bonds in the Portfolio. These characteristics make the Portfolio s sensitivity to interest rate risk relatively less than what would be experienced by a portfolio with longer duration investments that trade at tighter spreads to government-backed fixed income securities. It would also be possible to hedge interest rate risk by short selling government-backed fixed income securities or engaging in various interest rate derivatives. As at December 31, 2017 and December 31, 2016, the Fund had no such hedges in place. At December 31, 2017, if the prevailing interest rates had risen or declined by 0.25%, assuming a parallel shift in the yield curve, with all other variables held constant, the Fund's net assets would have decreased or increased, respectively, by approximately 278,193 (December 31, ,008). The Fund's sensitivity to interest rate changes was estimated using the weighted average duration of the bonds. In practice, the actual results may differ from this sensitivity analysis and the differences could be material Annual Financial Statements 14

17 Other price risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). Such changes may be the result of factors affecting multiple instruments traded in a market, market segment or asset class. The Fund is exposed to other price risk of securities held in the Portfolio. The Fund may take outright long or short positions in any of its investments, which may include derivative instruments for purposes consistent with its investment objectives and investment strategy and subject to its investment restrictions. As at December 31, 2017 and December 31, 2016, the Fund had direct exposure to derivatives through its holdings in equity total return swaps and forward currency contracts. Please refer to Schedule of Derivative Instruments which shows the underlying notional equity exposure. All investments present a risk of loss of capital. The Manager seeks to mitigate this risk through careful selection of securities and other financial instruments. As at December 31, 2017, had the investments in the portfolio increased or decreased by 5% with all other variables remaining constant, the net assets of the Fund would have increased or decreased by 2,421,009 (December 31, ,892,709). As at December 31, 2017 and December 31, 2016, the Fund had no securities sold short. Credit risk Credit risk is the risk of non-payment of scheduled interest and/or principal payments. The Fund is exposed to several types of credit risks including the risk that one or more investments in the Portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the security experiences a decline in its financial status. As at December 31, 2017, the maximum exposure to any one debt issuer in the Portfolio was 2,237,305 (December 31, ,969,785) representing 4.50% (December 31, %) of net assets attributable to redeemable units. The performance of the Fund is also subject to general economic and specific industry conditions that could impact the fair value of one or more debt securities in the Portfolio. Securities with lower ratings tend to be more sensitive to these kinds of risks. As at December 31, 2017 and December 31, 2016 the Fund was invested in debt securities with the following credit ratings. Debt Instruments by S&P Rating* December 31, 2017 December 31, 2016 %ofnet Assets Total %ofnet Assets Total BBB , BB ,089, ,153,777 B ,686, ,631,693 CCC+ or lower ,852,814 Not Rated ** ,437,994 Total ,313, ,076,278 *Or if not rated by Standard & Poor's, the most closely comparable rating from Moody's Investor Service **Not rated by Standard & Poor's or Moody's Investors Service The Investment Manager seeks to mitigate the above credit risk through the careful selection of investments, through the employment of experienced portfolio managers and through continuous monitoring of the Fund's investments Annual Financial Statements 15

18 Another type of credit risk is exposure to the creditworthiness of the Fund's trading counterparties. All securities transactions executed by the Fund are settled upon delivery using approved brokers. The risk of payment default is considered negligible, as delivery of securities sold is only made once the broker has received payment on behalf of the Fund. Payment is not made on a purchase until the securities have been received by the broker on behalf of the Fund. The trade will fail if either party fails to meet its obligation. The Fund may enter into derivative contracts for a variety of purposes, including but not limited to, (i) for the purposes of hedging as defined in NI and (ii) as a substitute for purchasing or selling securities. Derivative contracts involve risks arising from the possible inability of counterparties to meet the terms of their contracts due to movement in currency, security values and interest rates. The Fund seeks to mitigate this risk through the careful selection of its derivative counterparties. Liquidity risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations on time or at a reasonable price. The Fund has current financial liabilities outstanding, including but not limited to, margin loans and interest payable on its margin loans, accounts payable and accrued liabilities. The Investment Manager seeks to mitigate this liquidity risk by ensuring that a reasonable portion of the Fund's investments trade in active markets and can be sold readily. There can be no assurance that an adequate market for the investments will exist at all times, or that the prices at which the investments trade, accurately reflect their fair value. Low trading volumes of the investments could also make it difficult to liquidate holdings quickly. As required by IFRS 7 Financial Instruments, the Fund s financial liabilities should be categorized into relevant maturity groupings based on the remaining year as at December 31, 2017, to the contractual maturity date. However, as all liabilities, including liabilities for redeemable units tendered for redemption as of the applicable balance sheet date (of which there were none as at December 31, 2017 and December 31, 2016), are due in less than one year, this analysis is not required in this instance. In accordance with the Fund s policy, the Investment Manager monitors the Fund s overall liquidity risk on a continuous basis. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Fund uses a three-tier hierarchy as a framework for disclosing fair value which reflects the significance of the inputs used in making the measurements. The hierarchy has the following levels: Level 1 - quoted prices in an active market (Level 1 unadjusted inputs); Level 2 - inputs other than quoted prices (Level 2 directly or indirectly derived from observational market data); and Level 3 - inputs not based on observable market data (Level 3 unobservable inputs). In addition to the above disclosure requirements, IFRS 13 - Fair Value Measurement, requires disclosure of significant transfers between Levels 1 and 2 since the prior reporting period, as well as reconciliation of Level 3 assets, disclosing separately changes during the reporting period attributable to: (i) total gains or losses recognized in net income, and a description of where they are presented in the income statement; (ii) purchases, sales, issues and settlements; and (iii) transfers into or out of Level 3 and the reasons for those transfers. Any significant transfers between Level 1 and Level 2 are disclosed. Further, for fair value measurements in Level 3, 2017 Annual Financial Statements 16

19 if changing one or more type of the inputs to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose both the effect of those changes and how the effect was calculated. The following tables provide a summary of the inputs used as at December 31, 2017 and December 31, 2016, respectively, in valuing the Fund's investments carried at fair value: As at December 31, 2017 Level 1 Level 2 Level 3 Investments, at fair value: Equities 27,106, ,106,370 Bonds - 21,313,802-21,313,802 Total Investments, at fair value 27,106,370 21,313,802-48,420,172 Net derivative liabilities - (690,533) - (690,533) Total Investments, at fair value 27,106,370 20,623,269-47,729,639 Total As at December 31, 2016 Level 1 Level 2 Level 3 Investments, at fair value: Equities 33,777, ,777,909 Bonds - 44,076,278-44,076,278 Total Investments, at fair value 33,777,909 44,076,278-77,854,187 Net derivative liabilities - (1,397,749) - (1,397,749) Total Investments, at fair value 33,777,909 42,678,529-76,456,438 Total The carrying values of cash, accrued investment income, due to and due from broker, distributions payable, accounts payable and accrued liabilities and the Fund s obligations for Net Assets attributable to holders of redeemable units approximates their fair values due to their short-term nature. During the year ended December 31, 2017, there were no Level 3 assets held by the Fund, nor were there significant transfers between levels. The following provides details of the categorization in the fair value hierarchy by asset classes: a) Equities The Fund's equity positions are classified as Level 1 when the security is actively traded and a reliable price is observable. b) Fixed income Fixed income includes primarily corporate bonds which are valued at the bid price provided by recognized investment dealers or fair value inputs determined by the Fund's Valuation Committee. These prices and inputs are observable and therefore the Fund's corporate bonds and term loans have been classified as Level 2. c) Derivative assets and liabilities Derivative assets and liabilities consist of forward currency contracts and total return equity swaps. Forward currency contracts are valued based primarily on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Forward currency contracts for which counterparty credit spreads are observable and 2017 Annual Financial Statements 17

20 reliable, or for which credit-related inputs are determined not to be significant to fair value are classified as Level 2. Equity total return swaps are valued by comparing the fair value of the underlying equity security to the notional amount of the swap. As the value of equity total return swaps are derived from the observable market price of the underlying equity security, the equity total return swaps are classified as Level BORROWINGS Leverage is restricted to 25% of the total assets for the Fund. Accordingly, at the time of borrowing, the maximum amount of leverage that the Fund could employ is 1.33:1 (total long positions (including leveraged positions) divided by net assets of the Fund). As at December 31, 2017, the Fund had employed leverage equal to 11.7% (12.0% - December 31, 2016) of net assets, equating to 5.8 million (8.7 million - December 31, 2016) which includes both margin payable and leverage obtained through derivatives. This minimum and maximum amount of borrowings outstanding during the year ended December 31, 2017 was 0.0 and 13.5 million, respectively. The minimum and maximum amount of borrowings outstanding during the year ended December 31, 2016 was 0.0 and 26.1 million, respectively. The Fund has certain securities pledged as collateral against the margin payable balance. At December 31, 2017, the Fund held 4.7 million in cash (December 31, million) as collateral with a counterparty in connection with the derivative positions. As at December 31, 2017, the total fair value of securities pledged as collateral was 9.4 million (As at December 31, million). The borrowings may be used to grow the Fund's investments and for working capital needs. Adding a controlled amount of leverage to the Fund is consistent with the Fund's objectives. 8. INCOME TAXES The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada) and, accordingly, is not subject to tax on the portion of its income, including net realized capital gains for its taxation year that is paid or payable to Unitholders. Income tax on net realized capital gains not paid or payable will be generally recoverable by virtue of refunding provisions contained in the Income Tax Act (Canada) and provincial income tax legislation, as redemptions occur. It is the intention of the Fund to pay all net taxable income and sufficient net taxable gains so that the Fund will not be subject to income taxes. The Fund may distribute more than it earns, in which case the excess distribution is a return of capital and is not taxable to Unitholders. No provision for income taxes has been recorded in the accompanying financial statements as all income and net realized capital gains are to be distributed to the Unitholders. Capital losses realized in excess of those utilized to offset realized capital gains in the current taxation year can be carried forward indefinitely and may be applied against future years capital gains. Non-capital losses may be carried forward for a period of 20 years and applied against future years taxable income. As at December 31, 2017 the Fund had 42,601,611 in capital losses and 16,972,157 in non-capital losses. The non capital losses as at December 31, 2017 and their year of expiration are detailed in the table below: Year Of Expiration ,501, ,470,426 Total 16,972, Annual Financial Statements 18

21 9. EXPENSES OF THE FUND An annual management fee equal to 1.25% per annum of the net asset value of the Fund, calculated daily and payable monthly in arrears plus applicable taxes, is paid to the Manager. The management fee totalled 856,338 and 1,187,919 for the years ended December 31, 2017 and December 31, 2016, respectively. The Fund pays for all ordinary expenses incurred in connection with its operation and administration, including, but not limited to, all costs of Portfolio transactions, fees payable to the Manager, administrator and other third party service providers, custodial fees, legal, accounting, audit and valuation fees, other administrative expenses and extraordinary expenses that the Fund may incur. The Manager is also eligible in each fiscal year to receive from the Fund a performance fee (the "Performance Fee") that shall be calculated and accrued monthly and be paid annually, if applicable. The Performance Fee for a given year will, subject to some exceptions regarding redemptions and issuances of Units, be equal to 20% of the amount by which the sum of the net asset value per Unit (calculated without taking into account any Performance Fee) plus distributions paid on such Units during the year exceeds 106.0% of the Threshold Amount plus applicable taxes. The Threshold Amount will be the greater of: (i) 10.00; and (ii) the net asset value per Unit at the end of the last fiscal year in which a Performance Fee was paid (after payment of such Performance Fee). Please refer to the Fund's Prospectus for additional information on the Performance Fee. The Performance Fee accrual totalled 0 and 0 for the years ended December 31, 2017 and December 31, 2016, respectively. 10. RELATED PARTY DISCLOSURE The Manager and the Investment Manager are wholly-owned subsidiaries of Brookfield Asset Management Inc. ( Brookfield ). The Investment Manager manages the investment and trading activities of the Fund pursuant to a portfolio management agreement. Prior to July 6, 2017, the Manager managed the investment trading activities of the Fund. Due to Brookfield s ability to control the Fund, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to Note 9, which outlines the fees paid to the Manager by the Fund. During the year ended December 31, 2017, BIM Canada decreased its ownership by 227,676 units of the Fund. During the year ended December 31, 2016, BIM Canada increased its ownership by 87,186 units of the Fund. As at December 31, 2017, Brookfield and its affiliates owned a 6.7% (December 31, %) interest in the Fund. 11. REDEEMABLE UNITS AND NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS The Fund is authorized to issue an unlimited number of redeemable and transferable Units of a single class, each of which represents an equal, undivided interest in the net assets of the Fund Annual Financial Statements 19

22 The Declaration of Trust provides that the Fund may not issue additional Units except: (i) for net proceeds not less than 100% of the net asset value per Unit calculated as of the close of business on the business day immediately prior to the pricing of such offering; (ii) by way of Unit distributions; or (iii) with the approval of Unitholders. Commencing in July 2016 to and including July 2018, Units may be surrendered annually prior to 5:00 p.m (Toronto time) on the 15th business days prior to the annual redemption date, if and only if the annual redemption condition (the Annual Redemption Condition ), described below, has been met in such year. Units properly surrendered for redemption during the Notice Period will be redeemed on the last business day in July of each year and the Unitholder will receive a redemption price per Unit equal to 100% of the net asset value per Unit as determined on the Annual Redemption Date on or before the 15th business day of the month following the Annual Redemption date, less any costs associated with the redemption. The Annual Redemption Condition states that Units may only be redeemed on an Annual Redemption Date if the simple average of the Net Asset Values of the Units on each business day occurring in the month of June preceding the Annual Redemption Date is less than Notwithstanding the Annual Redemption Condition, Units may be redeemed at the option of Unitholders on the last business day of July 2019 and on the last business day of July each year thereafter. Changes in the number of issued redeemable Units outstanding for the Fund for the year ended December 31, 2017 and the year ended December 31, 2016 consisted of the following: For the year ended December 31, 2017 For the year ended December 31, 2016 Beginning Units 11,962,684 19,197,900 Subscription of Units - - Reinvestment of distributions 14,362 16,281 Redemption of Units (2,096,843) (7,251,497) Number of Units outstanding, end of year 9,880,203 11,962,684 The average number of units outstanding during the year ended December 31, 2017 was 11,096,730 (December 31, ,134,429). This number was used to calculate the increase (decrease) in net assets attributed to holders of redeemable units per unit on the Statements of Comprehensive Income. Capital management Units issued and outstanding represent the capital for the Fund. The Fund has no restrictions or specific capital requirements and is authorized to issue an unlimited number of transferable Units. Restrictions and specific requirements on the redemption of Units are described above. The Statements of Changes in Net Assets Attributable to Holders of Redeemable Units and the above table outline the relevant changes of the Units for the year. The Fund manages its capital in accordance with its investment objectives and strategies and the risk management practices outlined in Note 5 while maintaining sufficient liquidity to meet Unitholder redemptions. 12. DISTRIBUTIONS In accordance with the Fund's investment objective to provide Unitholders with quarterly cash distributions, the Fund intends to make quarterly distributions to Unitholders of record on the last business day of March, June, September and December (each, a Distribution Record Date ) Annual Financial Statements 20

23 Distributions will be paid on a business day designated by the Manager that will be no later than the 15th business day of the month following the Distribution Record Date. The Fund has adopted a distribution reinvestment plan which shall provide that all quarterly cash distributions made by the Fund shall, at the election of each Unitholder, be automatically reinvested in additional Units on each Unitholder s behalf in accordance with the terms of the plan. The quarterly distributions are currently targeted to be 0.15 per Unit (0.60 per annum representing an annual cash distribution of 6.0% based on the per Unit issue price). During the year ended December 31, 2017, the Fund declared four quarterly cash distributions of 0.15 per Unit each. Distributions payable as at December 31, 2017 totalled 1,482,030 (December 31, ,794,403). The distribution was subsequently paid to Unitholders in early January The Fund does not have a fixed quarterly distribution. In any year after such distributions, there would otherwise remain in the Fund additional operating profit or net realized capital gains, the Fund intends to make, on or before December 31 of that year, a special distribution of such portion of the remaining net income and net realized capital gains as is necessary to ensure the Fund will not be liable for income tax under the Income Tax Act (Canada). 13. FINANCIAL INSTRUMENTS BY CATEGORY The following table presents the carrying amounts of the Fund's financial assets and liabilities by category as at December 31, 2017 and December 31, 2016, respectively. At FVTPL At Amortized Cost Financial Assets as at December 31, 2017 Held for Trading Designated at Inception Total Total Financial assets at fair value through profit or loss - 48,420,172 48,420,172 - Net unrealized appreciation on forward currency contracts 505, ,893 - Cash and cash equivalents ,639,833 Collateral cash ,736,151 Accrued investment income ,059 Total 505,893 48,420,172 48,926,065 6,987,043 Financial Liabilities as at December 31, 2017 Held for Trading Designated at Inception Total Total Swap contracts 1,196,426-1,196,426 - Distributions payable ,482,030 Margin payable ,309,455 Accounts payable and accrued liabilities ,546 Total 1,196,426-1,196,426 4,986, Annual Financial Statements 21

24 At FVTPL At Amortized Cost Financial Assets as at December 31, 2016 Held for Trading Designated at Inception Total Total Financial assets at fair value through profit or loss - 77,854,187 77,854,187 - Cash and cash equivalents ,367 Collateral cash ,231,931 Accrued investment income ,239 Total - 77,854,187 77,854,187 4,353,537 Financial Liabilities as at December 31, 2016 Held for Trading Designated at Inception Total Total Net unrealized depreciation on forward currency contracts 1,190,430-1,190,430 - Swap contracts 207, ,319 - Distributions payable ,794,403 Margin payable ,970,886 Accounts payable and accrued liabilities ,486 Total 1,397,749-1,397,749 8,314,775 The following table presents the net gains(losses) on financial instruments at FVTPL by category for the year ended December 31, 2017 and December 31, 2016: Category Net losses 2017 Net gains Net gains (losses) on financial instruments at FVTPL Held for Trading 626,727 4,243,896 Designated at Inception (7,882,052) 16,847,669 Total net gains (losses) on financial instruments at FVTPL (7,255,325) 21,091, The Fund entered into various master netting arrangements in connection with its forward currency and swap derivative contracts. These agreements, such as the International Swaps and Derivatives Association agreements, do meet the criteria for offsetting in the Statements of Financial Position and allow for the related amounts to be settled on a net basis Annual Financial Statements 22

25 Other financial assets and financial liabilities do not meet the criteria for offsetting but may be set off under certain circumstances, such as bankruptcy or termination of the contracts. The following table presents the recognized financial instruments that are offset, or subject to enforceable master netting agreements or other similar agreements, as at December 31, 2017 and December 31, The "Net amount presented" column represents the amount after offsetting, as stated in the Fund's Statements of Financial Position. The "Net" column represents what the impact on the Fund's Statements of Financial Position would be if all set-off rights were exercised. Financial assets and liabilities Amounts offset Amounts not offset Gross Net Gross assets/liabilities amounts Financial Cash collateral assets/liabilities offset presented Instruments received Net December 31, 2017 Net unrealized appreciation on forward contracts 505, , ,893 Swap Contracts (1,367,744) 171,318 (1,196,426) - - (1,196,426) (861,851) 171,318 (690,533) - - (690,533) December 31, 2016 Net unrealized depreciation on forward currency contracts (1,250,370) 59,940 (1,190,430) - - (1,190,430) Swap Contracts (207,319) - (207,319) - - (207,319) (1,457,689) 59,940 (1,397,749) - - (1,397,749) 14. EVENTS AFTER STATEMENT OF FINANCIAL POSITION DATE Management has evaluated subsequent events in the preparation of the Fund's financial statements and has determined that other than the items listed herein, there are no events that require recognition or disclosure in the interim financial statements Annual Financial Statements 23

26 FUND INFORMATION MANAGER AND TRUSTEE Brookfield Investment Management (Canada) Inc. Gail Cecil Director, President & Chief Executive Officer David Levi Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION Brookfield Select Opportunities Income Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Investment Manager Brookfield Investment Management Inc. Brookfield Place 250 Vesey Street, 15th Floor New York, New York t w. Transfer Agent and Registrar Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Computershare Trust Company of Canada 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1, Canada t (U.S. & Canada) t (International) f w Annual Financial Statements 24

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