2016 Annual Report. Timbercreek Global Real Estate Fund

Transcription

1 2016 Annual Report Timbercreek Global Real Estate Fund

2 CORPORATE PROFILE The Fund aims to generate income for investors and preserve capital, while providing the opportunity for long-term capital appreciation. Managed by an experienced global team, Timbercreek Global Real Estate Fund (the Fund) is a closed-end fund established to provide investors with the opportunity to invest in a diversified portfolio of premier global real estate assets and securities that offer superior risk-adjusted returns while limiting volatility and preserving capital. The Fund invests in high-quality real estate opportunities across all major property types and major markets around the world.

3 2016 ANNUAL LETTER TO SHAREHOLDERS During the year, the Timbercreek Global Real Estate Fund generated a positive return, up 8.9% on a net basis. Since inception, the Fund has generated an annualized return of 10.0% on a net basis with volatility below that of the market: 8.2% for the Fund versus 9.9% for the market also marked the seventh straight calendar year in which the Fund distributed dividends of $0.84 per share, which were fully covered by the income generated from portfolio investments. In 2016, the yield averaged 6.3% while the since-inception yield has averaged 6.6%. In 2016, the Fund s performance was primarily driven by its common equity holdings, led by investments in Canada, the United States, Hong Kong and Australia. The portfolio also had positive contributions from its private real estate holdings, which provided a high income yield while dampening volatility. In Hong Kong, Sunlight REIT and Fortune REIT delivered strong returns. In Australia, Dexus Property Group benefited from a resurgence in office market fundamentals, particularly in Sydney. In contrast, the Fund s exposure to Belgium and the Netherlands detracted from performance, and U.S. REIT preferred share holdings generated a negative total return in Despite underperforming in 2016, we maintain that REIT preferred shares can nevertheless play a critical role in the Fund by helping reduce volatility and enhance yield. Looking forward, we believe that President Donald Trump s agenda of lower corporate and personal taxes, higher infrastructure spending and reduced financial regulation, should it materialize, has the potential to result in stronger economic growth in the years ahead. For 2017, our fundamental approach and valuation models suggest global REITs are priced to deliver a total return of between 8.5% and 10.5%, of which 6 to 7% is expected to come from income. Our total return projections are based on multiple dynamics, including the potential for improving global economic growth and inflation and steady demand for space, combined with modest new supply. Low leverage levels which allow REITs to be acquisitive, take advantage of off-market opportunities, and remain insulated from rising interest rates have the potential to lead to positive surprises in total return. Finally, we also believe upside to these expectations could come from mid-to-high single-digit dividend growth as a result of economic improvements; continued mergers and acquisitions volume led by unspent real estate private equity capital commitments; and new inflows from equity investors taking REITs to benchmark levels. We believe an environment of higher interest rates could be a net positive for global REITs, insofar as it signals a brighter outlook for economic growth and a return to moderate inflation after years of deflation fears. Our return forecast takes into account the increase in global rates since the U.S. presidential election and from the lows seen in the third quarter of 2016, as well as potential future rate increases. Despite this list of positive indicators, the future is not risk-free. The biggest hazards to achieving our forecasted total return for 2017 include an acute spike in interest rates, which would result in yield-oriented equities being temporarily out of favour; policy mishaps by newly elected political officials; slower-than-expected economic growth in China, which in turn could lead to a slowdown in global growth; and elections in Germany and France, which may negatively impact the viability of the European Union. In summary, on balance our view of the future remains optimistic. We believe global real estate demand trends are positive and valuations are attractive, with global REITs trading at discounts to NAV and providing an attractive dividend yield that is fully covered, stable and growing. As we bring an end to 2016 and build into 2017, I would like to express my continued appreciation to our unitholders for your confidence in our approach. We look forward to contributing to your success in Corrado Russo Senior Managing Director Investments & Global Head of Securities

4 This annual management report of fund performance contains financial highlights but does not contain the interim or annual financial statements of Timbercreek Global Real Estate Fund (the Fund ). You can obtain a copy of the interim or annual financial statements at your request, at no cost by any of the following: PHONE Carrie Morris, Managing Director, Capital Markets & Corporate Communications (416) (call collect if long distance) INTERNET Visiting SEDAR at or MAIL Timbercreek Global Real Estate Fund Attention: Corporate Communications 25 Price Street Toronto, Ontario M4W 1Z1 Unitholders may also contact us using one of these methods to request a copy of the Fund s interim or annual financial statements, proxy voting policies and procedures, proxy voting disclosure record, or quarterly portfolio disclosure. TIMBERCREEK GLOBAL REAL ESTATE FUND 2

5 Annual Management Report of Fund Performance As at December 31, 2016 FORWARD-LOOKING STATEMENTS Caution regarding forward-looking statements The terms the Fund, we, us and our in the following Management Report of Fund Performance ( MRFP ) refer to the Fund and its financial position and results of operations for the year ended December 31, 2016 (the year ). Financial data provided has been prepared in accordance with International Financial Reporting Standards ( IFRS ) as required by Canadian securities legislation and the Canadian Accounting Standards Board. This MRFP should be read in conjunction with the Fund s financial statements for the years ended December 31, 2016 and 2015, both of which have been prepared in accordance with IFRS. Copies of these documents have been filed electronically with securities regulators in Canada through the System for Electronic Document Analysis and Retrieval ( SEDAR ) and may be accessed through the SEDAR website at Historical results and percentage relationships contained in the Fund s financial statements and MRFP related thereto, including trends which might appear, should not be taken as indicative of future operations. Forward-looking statement advisory This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. These statements are typically identified by expressions like believe, expects, anticipates, would, will, intends, projected, in our opinion and similar expressions. By their nature, forward-looking statements require us to make assumptions which include, among other things, that (i) the Fund will have sufficient capital under management to effect its investment strategies and pay its targeted distributions, (ii) the Fund s investment strategies will produce the results intended by Timbercreek Asset Management Ltd. (the Manager ), (iii) markets will react and perform in a manner consistent with the investment strategies, and (iv) the Fund is able to acquire publicly traded real estate securities and invest in private direct real estate that will generate returns that meet and/or exceed the Fund s targeted investment returns. Forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that forecasts and other forward-looking statements will prove to not be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to, general global market conditions, general risks relating to real estate and the risks detailed from time to time in the Fund s prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties, potential events and the inherent uncertainty of forwardlooking statements. Due to the potential impact of these factors, the Fund and 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. TIMBERCREEK GLOBAL REAL ESTATE FUND 3

6 Annual Management Report of Fund Performance As at December 31, 2016 MANAGEMENT DISCUSSION OF FUND PERFORMANCE This Management Report of Fund Performance presents management s view of the significant factors and developments during the past twelve months that have affected the performance and outlook of the Fund and should be read in conjunction with the financial statements of the Fund for the years ended December 31, 2016 and 2015, together with the notes related thereto. This MRFP is not intended to provide legal, accounting, tax or investment advice. Investment Objectives and Strategies The Fund was created under the laws of the Province of Ontario pursuant to a Declaration of Trust dated August 5, 2010 and commenced operations on August 26, Timbercreek Asset Management Ltd. is the trustee, manager and portfolio advisor of the Fund (the Trustee or Manager ). The fundamental investment objectives of the Fund are to: Provide unitholders with quarterly cash distributions; and Preserve capital while providing the opportunity for long-term capital appreciation for unitholders. The Fund intends on meeting its investment objectives by investing in a globally diversified portfolio of securities issued in respect of real estate situated primarily in the world s industrialized economies. While the bulk of the portfolio consists of publicly traded real estate securities, the Fund intends to invest up to 20% of its total assets directly in real estate where the Manager believes this is the most efficient way to access the desired real estate. Further, the Fund invests across the capital structure including common equities, preferred shares and debt of both public and private real estate companies. Risk The risks associated with investing in the Fund were disclosed in the annual information form dated March 24, The changes in investments in the Fund during the fiscal year of 2016 does not have a significant effect on the overall risk of the Fund in comparison with the previous year, as the Fund continues to strive for lower beta than the overall investment universe in the real estate market. Results of Operations During the year, the Class A and Class B units of the Fund generated total returns of 8.8% and 9.1%, respectively ( % and 4.8%). The differences in total return amongst the two classes of units are as a result of operating expenses, mainly trailer fees that are applicable to a particular class. The Fund returns are reported net of all management fees and expenses for all classes, which should be considered when comparing the returns to indices, which do not pay fees or incur expenses. The Fund paid quarterly distributions to unitholders during the year of approximately $6.3 million (2015 $5.9 million), or $0.84 per Class A unit and Class B unit (2015 $0.84). The Fund generated a positive return in 2016, up 8.9% on a net basis, outperforming its customized benchmark by 507 basis points. Performance for the year was primarily driven by the Fund s common equity holdings, led by markets such as Canada, the United States, Hong Kong and Australia. Canadian REITs benefited from depressed valuations to start the year while U.S. REITs benefited from continued strength in economic conditions and real estate fundamentals. In Hong Kong, REITs owning middle-income, mass market shopping centers saw their shares outperform while in Australia REITs owning office properties in Sydney outperformed driven by resurgence in demand. The portfolio also had positive contributions from its private real estate TIMBERCREEK GLOBAL REAL ESTATE FUND 4

7 Annual Management Report of Fund Performance As at December 31, 2016 holdings, which provided the Fund with a high income yield while serving as an anchor for the portfolio by dampening volatility. The Fund s U.S. REIT preferred share holdings generated a negative total return in 2016 as higher interest rates negatively impacted U.S. fixed income markets. We decreased our exposure to REIT preferred shares throughout the year by approximately 360 bps, finding more attractive investment opportunities in common equities and direct real estate. The Fund continued to make investments across the capital stack including common equity, preferred shares and debt. During the year, the Fund increased its allocation as a percentage of gross assets to the United States, Germany, Canada, Singapore, Finland, the Netherlands, and France, while decreasing its exposure in Australia, Belgium, Hong Kong, New Zealand, and the United Kingdom. The Manager allocates the Fund s capital to the best risk-adjusted opportunities in its investable universe and the changes in country allocations are a reflection of this strategy. The Fund has continued to utilize total return equity swaps to gain exposure to preferred shares and common equities held in the United States. The Manager determined that these instruments allow the Fund to gain the same economic exposure to the underlying investments while also providing tax efficiencies. For the year, the Fund generated investment income of $11.8 million (December 31, 2015 $7.5 million), which consisted mainly of dividends of $4.2 million (December 31, 2015 $5.1 million), interest and distributions from income trusts and partnerships totaling $1.7 million (December 31, 2015 $0.9 million) and net change in fair value of investments and derivatives of $6.0 million (December 31, 2015 $1.5 million). The net change in fair value of investments and derivatives include realized gains of $6.9 million (December 31, 2015 $4.1 million) and the balance is an unrealized loss of $0.9 million (December 31, 2015 $2.5 million). Overall, investment income was higher in the year than in 2015 primarily as a result of the change in the fair value of investments and derivatives, which is a function of the overall market. Total operating expenses were $3.2 million (December 31, 2015 $3.2 million), of which $1.7 million (December 31, 2015 $1.3 million) was related to management fees. The increase in management fees is due to higher total return generated for the year in relation to 2015, which resulted in a higher graduated management fee. The expenses also include commissions and other portfolio transaction costs of $0.3 million (December 31, 2015 $0.2 million), which were dependent upon the trading activity in the year. The Fund s net assets were $102.1 million at December 31, 2016, an increase of $2.4 million from December 31, Income available for distribution The following is a reconciliation of income available for distribution to actual distributions paid to unitholders, generated on the investment portfolio. The increase in net assets from operations is adjusted for net changes in fair value of investments and derivatives and management fees in excess of 1.25%. For distribution purposes, the Fund includes dividends received on positions held through equity swaps and a portion of dividends received from real estate investment trusts as income available for distribution, which is included within the net changes in fair value of investments and derivatives in the statement of comprehensive income. The Fund has generated sufficient distributable income from its investment activities to pay out its targeted distribution. The nontaxable portion of certain capital gains was retained within the Fund to eliminate the surplus income. No tax was payable within the Fund. TIMBERCREEK GLOBAL REAL ESTATE FUND 5

8 Annual Management Report of Fund Performance As at December 31, 2016 December 31, 2016 December 31, 2015 Increase in net assets attributable to holders of redeemable units $ 8,642,846 $ 4,320,113 Less: Net changes in fair value of investments and derivatives, net of commission and transaction costs (5,698,527) (1,288,200) Add: Portion of dividends earned from REITs, included in net changes in fair value of investments and derivatives 618, ,889 Add: Management fees in excess of 1.25% 284,518 Add: Dividends received on positions held through equity swaps, net of financing costs 2,521,988 2,068,644 Add: Realized income from private investments 254,658 Distributable income 6,369,025 6,193,104 Actual distributions 6,297,247 5,906,040 Surplus income $ 71,778 $ 287,064 Borrowing The Fund may utilize various forms of leverage, including a margin facility that will allow the Fund to borrow funds from time to time when the Manager determines this to be appropriate. The aggregate amount of leverage by the Fund may not exceed 25% of the aggregate value of the assets of the Fund (the Total Assets ) at the time of use. In the event that the leverage exceeds 25% of Total Assets, the Manager will take reasonable measures to reduce the total borrowings. For the year, the Fund s highest and lowest borrowings were approximately $18.2 million and $3.8 million, respectively (or 19.2% and 3.7%, respectively, of Total Assets). For the year ended December 31, 2015, the Fund s highest and lowest borrowings were approximately $18.4 million and $7.2 million, respectively (15.5% and 6.0%, respectively, of Total Assets). Related Party Transactions Management Fees The Fund pays the Manager a management fee for providing all general management and administration services, including management of the Fund s assets, bookkeeping, coordinating capital markets activities and other administrative services of the Fund. This fee also includes acting as the Trustee of the Fund. During the year, the Manager earned management fees of $1.7 million (2015 $1.3 million). See management fees below for additional explanation. Trailer Fees The Fund also pays a fee to the Manager equal to 0.40% annually of the net asset value per Class A unit. The Manager will in turn pay to each registered dealer a service fee (the Trailer Fee ) equal to 0.40% annually of the net asset value per Class A unit for each Class A unit held by clients of such registered dealer (calculated and paid at the end of each calendar quarter). This Trailer Fee is reflected in the calculation of the net asset value for the Class A units. There is no Trailer Fee applicable to Class B units. During the year, the Fund paid Trailer Fees on Class A units of $0.4 million (2015 $0.4 million). TIMBERCREEK GLOBAL REAL ESTATE FUND 6

9 Annual Management Report of Fund Performance As at December 31, 2016 Investments The Fund co-invests in private debt investments secured by multi-family and/or commercial properties alongside the entities that are managed by the Manager or its affiliates. As at December 31, 2016, the Fund has co-invested directly in four private debt investments of $9.4 million (December 31, 2015 $6.1 million) and has co-invested in one private debt investments totaling $0.5 million (December 31, 2015 two debt investments, $2.0 million) through Timbercreek Canadian Direct LP ( TCD ), a limited partnership formed for the purpose of co-investing in direct real estate and private debt investments. The debt investments are secured by the properties to which they relate and bear interest at rates ranging between 8.5% and 20% ( % and 10%). During the year, the Fund earned income on these investments of $1.4 million (2015 $0.6 million). The Fund has invested in TCD at a fair value of $9.6 million (December 31, $9.2 million) and the Fund is the sole limited partner of TCD. The Fund has retained the Manager to provide fund management and investment advisory services to TCD. During the year, the Fund received distributions of $0.6 million (2015 $2.3 million) from TCD (2015 $1.5 million). On October 11, 2016, TCD advanced $2 million as a demand loan to the Fund at the fixed interest rate of 6% and due on demand. Independent review committee During the year ended December 31, 2016, fees totaling $35,000 ( $30,000) were paid to the members of the independent review committee. TIMBERCREEK GLOBAL REAL ESTATE FUND 7

10 Annual Management Report of Fund Performance As at December 31, 2016 MANAGEMENT FEES The Fund has entered into a management agreement, whereby the Fund pays the Manager a management fee in years where the Fund earns a positive Total Return (as defined below) for that year. The Manager will charge a fee, plus applicable taxes (the Management Fee ), of: 0% of net asset value per annum in years in which the Total Return is negative; 1.25% of net asset value per annum in years in which the Total Return is between 0% and 7.99%; 1.5% of net asset value per annum in years in which the Total Return is between 8% and 11.99%; and 1.8% of net asset value per annum in years in which the Total Return is in excess of 12%. Total Return means the return generated on the units, including income from distributions declared, as well as the appreciation or depreciation in the net asset value per unit, over the calendar year, calculated on December 31 of each year. The Management Fee shall not be paid in respect of the net asset value of the Fund invested in assets or securities for which the Manager and/or its affiliates is paid an investment management fee. The Management Fee is calculated and accrued daily based on the year-to-date annualized Total Return, paid monthly in arrears. In circumstances where the application of this graduated Management Fee applied to the Total Return would result in returns to investors being lower than they would have been under a lower Management Fee, the Management Fee shall be reduced until investors would receive a return at least equal to what they would have received had the Total Return of the Fund implied a lower percentage Management Fee. A summary of the Management Fees paid and a breakdown of the services received in consideration of the Management Fees, as a percentage of Management Fees during the year includes: December 31, 2016 December 31, 2015 $ % $ % Management fees 1,663, ,335, Trailer fees 366, , ,030, ,722, For the year, the Fund paid Management Fees of 1.5% for a Total Return between 8.00% and 11.99% of net asset value of Class A and Class B units ( % for a Total Return between 0.00% and 7.99%). As at December 31, 2016, $13,655 (2015 $7,802) was payable to the Manager. TIMBERCREEK GLOBAL REAL ESTATE FUND 8

11 Annual Management Report of Fund Performance As at December 31, 2016 FINANCIAL HIGHLIGHTS The following tables show selected key financial information about the Fund and are intended to help you understand the Fund s financial performance for the periods shown. The Fund s Net Assets per Unit (1) CLASS A Net assets, beginning of year $ $ $ $ $ Increase (decrease) from operations: Total revenue Total expenses (0.43) (0.46) (0.45) (0.36) (0.38) Realized gains for the year Unrealized gains (losses) for the year (0.24) (0.39) 1.14 (0.73) 0.97 Total increase from operations (2) Distributions 9 : From income (excluding dividends) From dividends From capital gains Return of capital Total distributions for the year (3) Net assets, at end of year $ $ $ $ $ Ratios and supplemental data Total net asset value (000s) (4) $ 82,258 $ 88,922 $ 78,540 $ 73,526 $ 88,772 Number of units outstanding (4) 6,110,557 6,752,920 5,852,374 5,966,278 7,031,089 Management expense ratio (base) (5) 2.33% 2.49% 2.59% 2.46% 2.36% Management expense ratio (5) 2.61% 2.49% 3.20% 2.46% 2.98% Management expense ratio before waivers or absorptions 2.61% 2.49% 3.20% 2.46% 2.98% Trading expense ratio (6) 0.25% 0.24% 0.29% 0.35% 0.23% Portfolio turnover rate (7) 63.27% 42.89% 69.27% 94.67% % Net asset value per unit $ $ $ $ $ Closing market price $ $ $ $ $ (1) This information is derived from the Fund s annual audited financial statements. For financial years beginning before January 1, 2013, the financial statements of the Fund were prepared in accordance with Canadian GAAP, whereas for financial periods beginning January 1, 2013, the financial statements of the Fund have been prepared in accordance with IFRS. The difference between Canadian GAAP and IFRS is due to valuation differences between the two sets of accounting principles for investments that trade in an active market. Canadian GAAP generally required the use of bid price to establish fair value, while IFRS requires fair value to be a price within the bid-ask spread. (2) Net assets and distributions are based on the actual number of units outstanding for the relevant class at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding for the relevant class over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (3) Distributions were paid in cash. (4) This information is provided at period end of the period shown. TIMBERCREEK GLOBAL REAL ESTATE FUND 9

12 Annual Management Report of Fund Performance As at December 31, 2016.The Fund s Net Assets per Unit (1)(8) CLASS B Net assets, beginning of year $ $ $ $ $ Increase (decrease) from operations: Total revenue Total expenses (0.35) (0.52) (0.50) (0.38) (0.42) Realized gains for the year Unrealized gains (losses) for the year (0.20) (0.45) 1.25 (0.77) 1.08 Total increase from operations (2) Distributions 9 : From income (excluding dividends) From dividends From capital gains Return of capital Total distributions for the year (3) Net assets, at end of year $ $ $ $ $ Ratios and supplemental data Total net asset value (000s) (4) $ 19,810 $ 10,799 $ 11,292 $ 10,962 $ 13,580 Number of units outstanding (4) 1,354, , , ,085 1,025,494 Management expense ratio (base) (5) 1.95% 2.01% 2.09% 2.00% 1.88% Management expense ratio (5) 2.24% 2.01% 2.73% 2.00% 2.50% Management expense ratio before waivers or absorptions 2.24% 2.01% 2.73% 2.00% 2.50% Trading expense ratio (6) 0.25% 0.24% 0.29% 0.35% 0.24% Portfolio turnover rate (7) 63.27% 42.89% 69.27% 94.67% % Net asset value per unit $ $ $ $ $ Closing market price N/A N/A N/A N/A N/A (5) Management expense ratio is based on total expenses (excluding foreign dividend withholding taxes and commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of the daily average net asset value during the stated period. Management expense ratio (base) is based on base management fees of 1.25% of net asset value. (6) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of the daily average net asset value during the stated period. (7) The Fund s portfolio turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund buying and selling all of the securities in its portfolio once in the course of the year. The higher the Fund s portfolio turnover rate in a year, the greater the trading costs payable by the Fund in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of the Fund. (8) The expenses of the Fund are offset against income and dividends. (9) Refer to Income available for distribution section for details. TIMBERCREEK GLOBAL REAL ESTATE FUND 10

13 Annual Management Report of Fund Performance As at December 31, 2016 PAST PERFORMANCE The performance information shown assumes that all distributions made by the Fund in the period shown were reinvested in additional securities of the Fund. The performance information does not take into account sales, redemptions, distribution or other optional charges that would have reduced returns or performance. How the Fund has performed in the past does not necessarily indicate how it will perform in the future. Year-by-Year Returns The following bar chart shows the Fund s performance for the period shown. In percentage terms, the bar chart shows how much an investment made on the first day of the financial year would have grown or decreased by the last day of the financial year. CLASS A CLASS B 25.0% 22.4% 25.0% 23.1% 20.0% 16.1% 20.0% 16.8% 15.0% 15.0% 10.0% 5.0% 4.2% 4.3% 8.8% 10.0% 5.0% 4.8% 4.8% 9.1% 0.0% % TIMBERCREEK GLOBAL REAL ESTATE FUND 11

14 Annual Management Report of Fund Performance As at December 31, 2016 ANNUAL COMPOUND RETURNS The following table shows the Fund s historical annual compound total returns for the periods indicated ending on December 31, 2016, compared with the Fund s Blended Benchmarks (hedged and unhedged), as described below: 1 year 3 years 5 years Since inception Class A 8.8% 9.6% 10.9% 9.9% Class B 9.1% 10.1% 11.5% 10.4% Product benchmarks: Blended benchmark (hedged) 1,2,3 3.8% 11.3% 11.8% 10.4% Blended benchmark (unhedged) 1,2,3 1.85% 16.6% 15.7% 13.2% Notes on the Blended Benchmark 1. The Fund s Blended Benchmark comprises of a customized index composed as to 70% by the FTSE EPRA NAREIT Developed World Index and as to 30% by the Wells Fargo Hybrid & Preferred Securities REIT Index. The FTSE EPRA NAREIT Developed World Index represents the universe of real estate companies listed in developed countries while the Wells Fargo Hybrid and Preferred Securities REIT Index represents the universe of REIT preferred stock listed in the United States. The underlying securities of these two indices represent the bulk of the Fund s investable universe and the aforementioned weightings closely reflect the Fund s allocation to each security type. 2. Blended Benchmark (hedged). The customized index is further adjusted to remove 90% of the impact of movements in the major currency exchange rates. This currency adjustment reflects the Fund s target strategy of hedging up to 90% of its exposure to movements in the major currency exchange rates. The Fund is not always 90% hedged, but the adjustment in the customized index is fixed at 90% each month. 3. The Fund returns are reported net of all management fees and expenses for all classes (including the costs of currency hedging), which should be considered when comparing the Fund s returns to the Blended Benchmarks, which do not pay fees or incur expenses. TIMBERCREEK GLOBAL REAL ESTATE FUND 12

15 Annual Management Report of Fund Performance As at December 31, 2016 SUMMARY OF INVESTMENT PORTFOLIO The Summary of Investment Portfolio may change due to ongoing portfolio transactions. Updates are available quarterly on our website at Summary of Top 25 Holdings** Asset Class % of NAV* Adventus Realty Trust Private Real Estate 4.6% Miracle Mile Shopping Center^ Private Real Estate 4.2% Dream Global REIT Common Equity 4.0% Mercialys Sa Common Equity 3.7% Wereldhave NV Common Equity 3.6% Dream Office REIT Common Equity 3.5% Calgary Apartment Private Debt 3.4% Blackstone Mortgage Trust Inc Common Equity 3.1% Fortune REIT Common Equity 3.1% CBL & Associates Properties Inc Common Equity 3.0% US Apartment - Carrick Bend Private Debt 2.9% LaSalle Hotel Properties Common Equity 2.9% STAG Industrial Inc Common Equity 2.9% Eurocommercial Properties NV Common Equity 2.9% Starwood Property Trust Inc Common Equity 2.8% Spirit Realty Capital Inc Common Equity 2.8% Care Capital Properties Common Equity 2.7% Citycon OYJ Common Equity 2.6% Pennsylvania REIT Series A Preferred Preferred Shares 2.6% Cache Logistics Trust Common Equity 2.6% CapitaRetail China Trust Common Equity 2.5% OneREIT Common Equity 2.5% Frasers Logistics & Industrial Common Equity 2.4% Sunstone Hotel Investors Inc Series E Preferred Shares Preferred 2.4% Bromley^ Private Real Estate 2.4% * The weightings presented in the Statement of Investments will differ from the ones disclosed above due to positions held through equity swaps. Percentage may sum in excess of 100% due to leverage. There is no difference in the computational method for arriving at net asset value as per IFRS and net asset value for unit transactions. **The Summary of Top 25 Holdings includes notional value of positions held through equity swaps. ^This investment is held in TCD LP. By Asset Type % of NAV* Investments 85.0% Margin deposit, net 22.8% Other assets/liabilities, net (7.8)% Total 100.0% By Country % of NAV* United States 64.3% Canada 20.2% Singapore 9.5% Hong Kong 7.4% Australia 6.8% Netherlands 6.5% France 3.7% Belgium 3.4% Finland 2.6% New Zealand 1.8% Germany 1.5% United Kingdom 1.2% By Sector % of NAV* Office 20.2% Diversified 18.8% Shopping Centre 16.0% Mortgage REITs 14.4% Regional Mall 13.0% Industrial 10.9% Hotel 9.8% Multi-family 8.8% Healthcare 6.4% Triple Net Lease 5.9% Residential 2.6% Data Centre 1.8% Student Housing 0.3% By Asset Class % of NAV* Common Equity 89.8% Private Real Estate 23.5% Preferred Shares 15.5% TIMBERCREEK GLOBAL REAL ESTATE FUND 13

16 INDEPENDENT AUDITORS REPORT To the Unitholders of Timbercreek Global Real Estate Fund We have audited the accompanying financial statements of Timbercreek Global Real Estate Fund, which comprise the statements of financial position as at December 31, 2016 and 2015, the statements of comprehensive income, changes in net assets and cash flows for the years then ended, and notes, comprising 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. Auditors' 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 our 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, we consider 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 Timbercreek Global Real Estate Fund as at December 31, 2016 and 2015, 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 27, 2017 Toronto, Canada KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP. TIMBERCREEK GLOBAL REAL ESTATE FUND 14

17 STATEMENTS OF FINANCIAL POSITION December 31, 2016 and 2015 December 31, 2016 December 31, 2015 ASSETS Cash $ 2,235,826 $ 4,134,319 Receivable for portfolio assets sold (note 5) - 358,802 Dividends and interest receivable 355, ,903 Margin deposited on equity swaps and forward contracts 23,300,000 20,314,425 Derivative assets - forward contracts (note 12) 802,175 23,140 Derivative assets - equity swaps (note 12) 1,822, ,613 Investments, at fair value through profit or loss (note 12) 86,706,946 92,695,092 LIABILITIES 115,222, ,446,294 Margin facility (note 9) 8,147,254 13,758,950 Management fees payable (note 7(a)(i)) 13,655 7,802 Accounts payable and accrued liabilities 166,867 53,371 Loan payable to a related party (note 7(c)) 2,000,000 - Payable for portfolio assets purchased (note 6) - 45,002 Distributions payable (note 10(b)) 1,567,651 1,578,010 Derivative liabilities - forward contracts (note 12) 258,638 1,878,419 Derivative liabilities - equity swaps (note 12) 1,001,295 1,402,916 13,155,360 18,724,470 Net assets attributable to holders of redeemable units $ 102,067,423 $ 99,721,824 Net assets attributable to holders of redeemable units per Class: Class A units $ 82,257,405 $ 88,922,769 Class B units 19,810,018 10,799,055 Units outstanding (note 10): Class A units 6,110,557 6,752,920 Class B units 1,354, ,414 Net assets attributable to holders of redeemable units per unit: Class A units $ $ Class B units The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 15

18 STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2016 and Investment income: Dividend income $ 4,170,302 $ 5,055,571 Interest income for distribution purposes 1,378, ,692 Distributions from income trusts and partnerships 333, ,313 Net changes in fair value of investments and derivatives (note 13) 5,950,842 1,514,513 11,833,092 7,492,089 Expenses: Management fees (note 7(a)(i)) 1,663,822 1,335,350 Trailer fees (note 7(a)(ii)) 366, ,011 Commissions and other portfolio transaction costs 252, ,313 Other operating costs 216, ,999 Interest and borrowing fees 155, ,635 Audit fees 105, ,370 Independent review committee (note 7(h)) 35,000 30,000 Unitholder reporting 37,999 26,100 Custodian fees 51,798 27,045 Legal fees 40,000 56,900 Foreign dividend withholding tax 265, ,253 3,190,246 3,171,976 Increase in net assets attributable to holders of redeemable units $ 8,642,846 $ 4,320,113 Increase in net assets attributable to holders of redeemable units per class Class A units $ 7,734,593 $ 3,766,955 Class B units 908, ,158 Net assets attributable to holders of redeemable units per unit (note 15): Class A units $ 1.18 $ 0.62 Class B units The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 16

19 STATEMENTS OF CHANGES IN NET ASSETS Years ended December 31, 2016 and Class A units Class B units Total Net assets attributable to holders of redeemable units, beginning of year $ 88,922,769 $ 10,799,055 $ 99,721,824 Increase in net assets attributable to holders of redeemable units 7,734, ,253 8,642,846 Distributions to unitholders (note 10(b)) (5,479,339) (817,908) (6,297,247) Exchange of units (8,920,618) 8,920,618 Net assets attributable to holders of redeemable units, end of year $ 82,257,405 $ 19,810,018 $ 102,067, Class A units Class B units Total Net assets attributable to holders of redeemable units, beginning of year $ 78,539,122 $ 11,292,734 $ 89,831,856 Increase in net assets attributable to holders of redeemable units 3,766, ,158 4,320,113 Issuance of units (note 10) 13,591,620 13,591,620 Issuance costs (note 10) (753,480) (753,480) Distributions to unitholders (note 10(b)) (5,262,540) (643,500) (5,906,040) Redemptions of units (1,333,271) (28,974) (1,362,245) Exchange of units 374,363 (374,363) Net assets attributable to holders of redeemable units, end of year $ 88,922,769 $ 10,799,055 $ 99,721,824 The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 17

20 STATEMENTS OF CASH FLOWS Years ended December 31, 2016 and Cash provided by (used in): OPERATING ACTIVITIES Increase in net assets attributable to holders of redeemable units $ 8,642,846 $ 4,320,113 Adjustments for: Net changes in fair value of investments and derivatives (5,950,842) (1,514,513) Proceeds from sale of investments 59,115,998 44,725,822 Purchases of investments (52,995,054) (39,063,362) Net payments on maturity of forward contracts (1,159,835) (3,253,945) Net payments received from equity swaps 1,696, ,669 Commissions and other portfolio transaction costs 252, ,313 Change in non-cash operating items: Decrease (increase) in receivable for portfolio assets sold 358,802 (358,802) Decrease in dividends and interest receivable 115,453 31,803 Increase (decrease) in management fees payable 5,853 (15,363) Increase in accounts payable and accrued liabilities 113,496 32,866 (Decrease) increase in payable for portfolio assets purchased (45,002) 45,002 10,150,475 6,036,603 FINANCING ACTIVITIES Loan advance received from a related party 2,000,000 Proceeds from issuance of redeemable units, net 12,838,140 Redemptions of units (1,367,860) Distributions to unitholders (6,307,606) (5,722,536) (4,307,606) 5,747,744 Net foreign exchange gain on cash accounts 855, ,675 Change in cash and net margin facility 6,698,778 11,973,022 Cash and net margin facility, beginning of year 10,689,794 (1,283,228) Cash and net margin facility, end of year $ 17,388,572 $ 10,689,794 Cash and net margin facility is comprised of: Cash $ 2,235,826 $ 4,134,319 Margin deposited on equity swaps and forward contracts 23,300,000 20,314,425 Margin facility (8,147,254) (13,758,950) $ 17,388,572 $ 10,689,794 SUPPLEMENTAL INFORMATION Interest paid $ 159,725 $ 187,130 Interest received $ 1,574,339 $ 788,071 Dividends received $ 4,075,940 $ 4,592,739 The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 18

21 SCHEDULE OF INVESTMENTS December 31, 2016 Description Shares units Average cost Fair value % net assets COMMON EQUITIES Australia Charter Hall Retail REIT 521,634 $ 1,820,533 $ 2,141, Dexus Property Group 142,700 1,036,977 1,332, Folkestone Education trust 498,448 1,279,484 1,228, Vicinity Centres 765,100 2,121,821 2,220, Canada Europe 6,258,815 6,923, CHC Student Housing Corp. 60, , , Cominar REIT 127,548 1,951,779 1,877, Dream Global REIT 430,957 3,393,702 4,072, Dream Office REIT 181,090 3,924,483 3,540, One REIT 718,318 2,524,804 2,571, RioCan REIT 67,631 1,626,774 1,801, ,991,542 14,122, Befimmo SCA Sicafi 25,410 1,853,775 1,921, Citycon OYJ 815,439 2,657,427 2,701, Eurocommercial Properties NV 56,504 2,486,238 2,929, Intervest Offices & Warehouses NV 47,064 1,347,589 1,593, Mercialys SA 137,928 3,645,673 3,761, TLG Immobilien AG 59,300 1,391,743 1,503, Wereldhave NV 60,972 4,067,053 3,694, Hong Kong 17,449,498 18,104, Champion REIT 3,049,200 2,051,733 2,217, Fortune REIT 2,050,000 1,536,761 3,162, Sunlight REIT 2,740,000 1,452,732 2,120, New Zealand 5,041,226 7,501, Kiwi Property Group Limited 1,420,400 1,479,917 1,837, Singapore 1,479,917 1,837, Cache Logistics Trust 3,470,000 3,111,001 2,608, CapitaLand Retail China Trust 2,030,617 2,876,267 2,581, Frasers Centrepoint Trust 1,145,900 2,158,027 2,020, Frasers Logistics & Industrial Trust 2,900,700 2,507,097 2,490, ,652,392 9,701, TIMBERCREEK GLOBAL REAL ESTATE FUND 19

22 SCHEDULE OF INVESTMENTS December 31, 2016 Description Shares units Average cost Fair value % net assets COMMON EQUITIES (continued) Total common equities $ 54,873,390 $ 58,190, PREFERRED SHARES United States of America Pebblebrook Hotel Trust Series D 6.375% 23, , , Pennsylvania Real Estate Investment Trust Series A 8.25% 44,452 1,184,150 1,509, Total preferred shares $ 1,934,768 $ 2,254, Total equities $ 56,808,158 $ 60,444, WARRANTS Canada WTS CHC Student Housing Corp 60,692 Total warrants PRIVATE INVESTMENTS Canada Private debt US Apartment Carrick Bend Pfd 3,000,000 3,000, The Metropolitan 3,500,000 3,500, Private real estate fund 6,500,000 6,500, Timbercreek Canadian Direct LP (note 7 (c)) 581,500 7,249,831 9,556, United States of America Private debt 7,249,831 9,556, Portland Hotel 1,773,554 1,759, Private common equity 1,773,554 1,759, Adventus Capital Partners Ltd 12, , , Adventus Realty Trust 236,388 3,980,592 4,681, Adventus Realty LP 12, Private convertible debt 4,190,063 4,899, Adventus Capital Partners Ltd. 10.5% 22DEC , , , Adventus Realty LP 10.5% 22DEC Adventus Realty Trust 10.5% 22DEC2018 1,670,100 2,249,291 2,242, ,367,675 2,360, TIMBERCREEK GLOBAL REAL ESTATE FUND 20

23 SCHEDULE OF INVESTMENTS December 31, 2016 Description Shares units Average cost Fair value United Kingdom Private debt % net assets Timbercreek Westcott Limited Partnership (note 7 (g)) 1,464,964 1,184, Total private investments $ 23,546,087 $ 26,259, OPTIONS United States of America ishares U.S. Real Estate ETF Put $76 16DEC 150, ,394 3, Total Options $ 359,394 $ 3, Total investments $ 80,713,639 $ 86,706, Commissions and other portfolio transaction costs (199,149) Total net investments $ 80,514,490 $ 86,706, Foreign exchange forward contracts (Schedule 1): Unrealized gain, net 543, Equity swaps (Schedule 2): Unrealized gain, net 821, Other assets, net 13,995, NET ASSETS ATTRITUBUTABLE TO HOLDERS OF REEDEMABLE UNITS $ 102,067, The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 21

24 SCHEDULE OF INVESTMENTS December 31, 2016 SCHEDULE 1 FOREIGN EXCHANGE FORWARD CONTRACTS Settlement date Currency Counterparty Forward rates Contract price Fair value Unrealized gain (loss) January 10, 2017 Euro CIBC World Markets January 10, 2017 USD CIBC World Markets January 10, 2017 GBP CIBC World Markets $(17,716,941) $(16,954,597) $762, ,557,700 4,564,740 7, (1,217,287) (1,184,496) 32,791 Derivative assets 802,175 January 10, 2017 Euro CIBC World Markets January 10, 2017 Euro CIBC World Markets January 10, 2017 USD CIBC World Markets ,324,144 3,204,255 (119,889) (1,815,840) (1,842,829) (26,989) (4,452,980) (4,564,740) (111,760) Derivative liabilities (258,638) Total net unrealized gain on foreign exchange forward contracts $543,537 The accompanying notes are an integral part of these financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 22

25 SCHEDULE OF INVESTMENTS December 31, 2016 SCHEDULE 2 EQUITY SWAPS* Security name Maturity date Counterparty U.S. Dollar Swaps: American Home 4 Rent Preferred Series E 6.35% Apollo Commercial Real Estate Finance, Inc. Blackstone Mortgage Trust Inc. CBL & Associates Properties Inc. Digital Realty Trust Inc. Preferred Series H 7.375% December 28, 2018 December 28, 2018 December 28, 2018 December 28, 2018 December 28, 2018 Lasalle Hotel Properties December 28, 2018 MFA Mortgage Investments Inc. MGM Growth Properties LLC Northstar Realty Finance Corp. Pennsylvania Real Estate Investment Preferred Series A 8.25% December 28, 2018 December 28, 2018 January 19, 2019 December 28, 2018 Sabra Healthcare REIT Inc. December 28, 2018 STAG Industrial, Inc. December 28, 2018 Starwood Property Trust Inc. Two Harbors Investment Corp. Western Asset Mortgage Capital Corp. December 28, 2018 December 28, 2018 December 28, 2018 Contract price Fair value Unrealized gain (loss) J.P. Morgan $ 1,436,578 $ 1,471,968 $ 35,390 J.P. Morgan 1,877,107 1,954,246 77,139 J.P. Morgan 3,115,674 3,245, ,835 J.P. Morgan 3,102,459 3,144,407 41,948 J.P. Morgan 1,754,118 1,790,585 36,467 J.P. Morgan 2,700,878 3,025, ,342 J.P. Morgan 1,924,923 2,138, ,568 J.P. Morgan 1,925,510 2,025, ,241 J.P. Morgan 1,563,171 1,781, ,598 J.P. Morgan 1,107,805 1,109,575 1,770 J.P. Morgan 2,153,610 2,293, ,684 J.P. Morgan 2,823,159 2,955, ,237 J.P. Morgan 2,864,691 2,925,445 60,754 J.P. Morgan 1,294,004 1,441, ,448 J.P. Morgan 1,486,319 1,649, ,965 Total unrealized gain on equity swaps $ 1,822,386 Care Capital Properties, Inc. Cedar Realty Trust Inc. Preferred Series B 7.25% December 28, 2018 December 28, 2018 HCP, Inc. December 28, 2018 Lasalle Hotel Properties Series I 6.375% Pebblebrook Hotel Trust Preferred Series D 6.375% December 28, 2018 December 28, 2018 J.P. Morgan 2,815,234 2,764,183 $ (51,051) J.P Morgan 4,077 1,052 (3,025) J.P. Morgan 143,781 14,024 (129,757) J.P. Morgan 1,327,829 1,259,486 (68,343) J.P. Morgan 844, ,039 (12,719) TIMBERCREEK GLOBAL REAL ESTATE FUND 23

26 SCHEDULE OF INVESTMENTS December 31, 2016 SCHEDULE 2 EQUITY SWAPS* Security name Maturity date Counterparty Retail Properties of America Preferred Series A 7% Rexford Industrial Realty Inc. Preferred Series A 5.875% Sabra Healthcare REIT Inc. Preferred Series A 7.125% December 28, 2018 December 28, 2018 December 28, 2018 Spirit Realty Capital Inc. December 28, 2018 STAG Industrial, Inc. Preferred Series C 6.875% Sun Communities Inc. Preferred Series A 7.125% Sunstone Hotel Investors Preferred Series E 6.95% December 28, 2018 December 28, 2018 December 28, 2018 Contract price Fair value Unrealized gain (loss) J.P. Morgan 146,790 30,418 (116,372) J.P. Morgan 1,599,534 1,577,474 (22,060) J.P. Morgan 1,569,863 1,538,777 (31,086) J.P. Morgan 3,234,750 2,875,696 (359,054) J.P. Morgan 1,551,039 1,537,507 (13,532) J.P. Morgan 65,393 (4,677) (70,070) J.P. Morgan 2,592,082 2,467,856 (124,226) Total unrealized loss on equity swaps $ (1,001,295) Total net unrealized gain on equity swaps $ 821,091 *The Fund has the ability to extend these contracts beyond their maturity date, thereby maintaining the underlying economic exposure of the position. TIMBERCREEK GLOBAL REAL ESTATE FUND 24

27 Notes to Financial Statements Years ended December 31, 2016 and FUND INFORMATION Timbercreek Global Real Estate Fund (the Fund ) is an investment fund which was created under the laws of the Province of Ontario pursuant to a Declaration of Trust dated August 5, 2010 (the Declaration of Trust ). The Fund s registered office is at 25 Price Street, Toronto, Ontario, Canada M4W 1Z1. The Fund is authorized to issue an unlimited number of redeemable units of three classes, including Class A units and Class B units. The Class A units are publicly listed on the Toronto Stock Exchange (the TSX or Exchange ) under the symbol TGF.UN. Class B Units are designed for fee-based and/or institutional accounts and are not listed on a stock exchange. The investment objectives of the Fund are to: (i) provide unitholders with quarterly cash distributions; and (ii) preserve capital while providing the opportunity for long-term capital appreciation for unitholders. In order to achieve its objectives, the Fund invests in a globally diversified portfolio of securities issued in respect of real estate situated primarily in the world s industrialized economies. While the bulk of the portfolio consists of publicly traded real estate securities, the Fund is able to invest up to 20% of its total assets directly in real estate. Further, the Fund is able to invest across the capital structure, including common equities, preferred shares and private direct investments. Timbercreek Asset Management Ltd. is the trustee, manager (the Trustee or Manager ) and portfolio advisor of the Fund. The Manager has been retained to provide fund management and portfolio advisory services pursuant to a management agreement dated August 5, 2010 (the Management Agreement ). 2. BASIS OF PRESENTATION (a) Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The financial statements were approved by the Board of Directors of the Manager on March 27, (b) Basis of measurement These financial statements have been prepared on a historical cost basis, except for financial assets and financial liabilities at fair value through profit or loss, which are presented at fair value. (c) Functional and presentation currency The Fund s financial statements are presented in Canadian dollars, which is the functional currency of the Fund. 3. SIGNIFICANT ACCOUNTING POLICIES (a) Financial assets and financial liabilities (i) Classification The Fund classifies its financial assets and financial liabilities on initial recognition into the following categories: TIMBERCREEK GLOBAL REAL ESTATE FUND 25

28 Notes to Financial Statements Years ended December 31, 2016 and 2015 Financial instruments measured at fair value (i) Financial assets and financial liabilities held for trading: A financial asset or financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if on initial recognition is part of a portfolio of identifiable financial investments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. These include options, foreign exchange forward contracts and equity swaps. The Fund s policy is not to apply hedge accounting. (ii) Financial assets and financial liabilities designated at fair value through profit or loss at inception: Financial assets and financial liabilities designated at fair value through profit or loss at inception are financial instruments that are not classified as held for trading but are managed, and their performance is evaluated on a fair value basis in accordance with the Fund s documented investment strategy. These include common equities, preferred shares and private investments. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This category includes margin deposited on equity swaps and forward contracts, due from broker and dividends and interest receivable. Other financial liabilities This category includes all financial liabilities, other than those classified as fair value through profit or loss. These include the margin facility, management fee payable, accounts payable and accrued liabilities, liabilities for portfolio assets purchased and distributions payable. (ii) Recognition and initial measurement Financial assets and financial liabilities at fair value through profit or loss are initially recognized on the trade date, which is the date on which the Fund becomes a party to the contractual provisions of the instrument. Other financial assets and financial liabilities are recognized on the date on which they are originated. Financial assets and financial liabilities at fair value through profit or loss are initially measured at fair value, with transaction costs recognized in profit or loss. Financial assets and financial liabilities not at fair value through profit or loss are initially measured at fair value plus transaction costs that are directly attributable to their acquisition or issue. (iii) Subsequent measurement After initial measurement, the Fund measures financial instruments which are classified at fair value through profit or loss, at fair value. Subsequent changes in the fair value of these financial instruments are recorded in net changes in fair value of investments and derivatives. Interest and dividends earned or paid on these instruments are recorded separately in interest income and dividend income. The Fund's obligation for net assets attributable to holders of redeemable units is presented at the redemption amount which is the residual interest in the Fund. Loans and receivables and other financial liabilities are measured at amortized cost. TIMBERCREEK GLOBAL REAL ESTATE FUND 26

29 Notes to Financial Statements Years ended December 31, 2016 and 2015 (iv) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. (v) Derecognition The Fund derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial assets are transferred, or in which the Fund neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset that is derecognized) and the consideration received (including any new asset obtained less any new liability assumed) is recognized in profit or loss. Any interest in such transferred financial assets that is created or retained by the Fund is recognized as a separate asset or liability. The Fund derecognizes a financial liability when its contractual obligations are discharged, are cancelled or expire. (b) Fair value measurements Financial instruments measured at fair value are classified into one of three fair value hierarchy levels, based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three fair value hierarchy levels are as follows: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs other than quoted prices 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); and Level 3 inputs for the asset or liability that are not based on observable market data (unobservable inputs). Refer to note 12 for fair value measurements analysis. (i) Valuation framework The Manager has established a Valuation Committee that has responsibility for overseeing fair value measurement and reports to the Board of Directors of the Manager. The Valuation Committee regularly reviews significant unobservable inputs and valuation adjustments. Where third party information such as appraisal services are used to measure fair values, the Valuation Committee assesses the evidence obtained by these third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which valuations should be classified. (ii) Valuation of investments 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 in the principal, or in its absence, the most advantageous market to which the Fund has access to at that date. TIMBERCREEK GLOBAL REAL ESTATE FUND 27

30 Notes to Financial Statements Years ended December 31, 2016 and 2015 When available, the Fund measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and securities) is based on quoted market prices at the close of trading on the reporting date. The Fund uses the last traded market price for financial assets and financial liabilities where the last traded price falls within that day s bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. When the Fund holds derivatives with offsetting market risks, it uses mid-market prices as a basis for establishing fair values for the offsetting risk positions and applies the bid or asking price to the net open position, as appropriate. Private real estate The Fund invests in private direct real estate investments through equity interests held in limited partnerships or trusts, which are recorded at net asset value per unit of the respective entity. In other cases, fair value may be determined based on the recent market transactions. The Fund also invests in private direct real estate by way of investing in debt instruments or debentures of limited partnerships or trusts. The real estate investments underlying the entity s units are recorded at cost from the date of acquisition until receipt of the first appraisal; thereafter, they are valued at fair value based on appraisals. Appraisals for real estate investments are obtained from qualified independent appraisers at least twice per year for each property following the period of acquisition. Other real estate investments, including private debt investments, may be held by these entities and are recorded at fair value, as outlined below. Private debt investments As there are no quoted prices in an active market for these mortgage or loan investments, the Manager makes its determination of fair value based on its assessment of the current lending market for mortgage or loan investments of same or similar terms. Typically, the fair values of these investments approximate their carrying values given the investments consist of short-term loans that are repayable at the option of the borrower without yield maintenance or penalties. When collection of the principal amount of a mortgage or loan is no longer reasonably assured, the fair value of the investment is reduced to the estimated net realizable value of the underlying security. Any unrealized change in the fair value of a mortgage or loan investment is recorded as change in the fair value of investments and derivatives. A realized change in the fair value of a mortgage or loan as a result of a disposition or repayment is recorded as change in the fair value of investments and derivatives. Foreign exchange forward contracts The Fund may enter into foreign exchange contracts for hedging purposes or to establish an exposure to a particular currency. Foreign exchange contracts are valued based on the difference between the contract forward rate and the forward bid rate (for currency held) and the forward ask rate (for currency sold short), on the valuation date. The fair value of foreign exchange forward contract is included in the statements of financial position as derivative assets or derivative liabilities and the change in fair value of a foreign exchange forward contract is included in net changes in fair value of investments and derivatives in the statement of comprehensive income. TIMBERCREEK GLOBAL REAL ESTATE FUND 28

31 Notes to Financial Statements Years ended December 31, 2016 and 2015 Equity swaps An equity swap contract is an agreement between two parties to exchange periodic payments based upon a notional principal amount, with one party paying a financing fee and the other party paying the actual return of a stock, a basket of stocks or a stock index. The Fund as a buyer of an equity swap would receive the total return of the underlying stocks or stock index. In return, the Fund would be required to pay a financing fee amount on the agreed settlement dates. The value of an equity swap contract is included in the statements of financial position as derivative assets or derivative liabilities and the change in fair value of an equity swap is included in net changes in fair value of investments and derivatives in the statement of comprehensive income. Margin deposited on equity swaps and forward contracts These amounts relate to cash collateral held by the counterparties on foreign exchange forward contracts and equity swap contracts. (c) Transaction costs Commissions and other portfolio transaction costs, which are incurred on the purchase and sale of an investment, such as fees and commissions paid to agents, advisors, brokers and dealers and exchange fees that are expensed and included in commissions and other portfolio transaction costs in the statements of comprehensive income. (d) Investment transactions and income recognition Investment transactions are accounted for on a trade-date basis; that is, on the day that a buy or sell order is executed. Dividend income is recognized on the ex-dividend date along with withholding taxes on foreign dividends, if any. Distributions from investment trusts are recorded when declared. Interest income shown on the statements of comprehensive income represents the coupon interest received by the Fund accounted for on an accrual basis. Realized gains and losses from investment transactions are calculated as proceeds of disposition less their average cost. The cost of investments represents the amount paid for each security and is determined on an average-cost basis, excluding transaction costs. (e) Translation of foreign currencies Foreign currency transactions during the period, including purchases and sales of securities, income and expenses, are translated at the exchange rate prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated at the functional currency rate of exchange at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the exchange rate at the date on which the fair value was determined. Foreign currency transaction gains and losses on financial instruments classified as fair value through profit and loss (FVTPL) are included in profit or loss in the statements of comprehensive income as part of the net changes in fair value of investments and derivatives. TIMBERCREEK GLOBAL REAL ESTATE FUND 29

32 Notes to Financial Statements Years ended December 31, 2016 and 2015 (f) Withholding tax expense The Fund generally incurs withholding taxes imposed by certain countries on investment income and capital gains. Such income and gains are recorded on a gross basis and the related withholding taxes are shown as a separate expense in the statements of comprehensive income. (g) Income taxes The Fund has qualified and is expected to continue to qualify as a mutual fund trust under the Income Tax Act (Canada) and, accordingly, is not taxed on the portion of taxable income that is paid or made payable to unitholders. Income tax on net realized capital gains not paid or made payable to unitholders may be recoverable by the Fund in future periods. It is the intention of the Fund to distribute all of its future income and sufficient net realized capital gains so that the Fund will not be subject to income tax. (h) Redeemable units and net assets attributable to holders of redeemable units The Fund issues Class A and Class B units, which are redeemable at the holder s option at the redemption date and do not have identical rights. As a result, redeemable units are classified as liabilities in the statements of financial position. For each Fund unit sold, the Fund receives an amount equal to the net asset value per unit at the date of sale, which is included in net assets attributable to holders of redeemable units. For each unit redeemed, net assets attributable to holders of redeemable units is reduced by the net asset value of the unit at the date of redemption. The redeemable shares are measured at the redemption amount and are considered a residual interest in the Fund. The Fund incurs issuance costs relating to the offerings of redeemable shares. These issuance costs are offset against the gross proceeds received from the redeemable share offerings in the statement of changes in net assets. The Fund s net assets value ( NAV ) is determined by subtracting the aggregate amount of liabilities of the Fund from the total assets of the Fund. The NAV per unit is calculated by dividing the NAV attributable to each class of redeemable units by the total number of outstanding redeemable units for each respective class. There is no difference between the Fund s NAV per unit and net assets attributable to holders of redeemable units per unit. The increase (decrease) in net assets attributable to holders of redeemable units per unit by class in the statements of comprehensive income represents the change in net assets attributable to holders of redeemable units attributable to each class divided by the weighted average number of units of that class outstanding during the reporting period. Income, expenses other than trailer fees, and realized and unrealized capital gains (losses) are distributed amongst the different classes of units in proportion to the amount invested in them. (i) Future accounting changes The final version of IFRS 9, Financial Instruments, was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle-based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in TIMBERCREEK GLOBAL REAL ESTATE FUND 30

33 Notes to Financial Statements Years ended December 31, 2016 and 2015 measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, but is available for early adoption. In addition, the own credit risk changes can be applied early in isolation without otherwise changing the accounting for financial instruments. The extent of the impact of adoption of the standard has not yet been determined. 4. CRITICAL JUDGMENTS AND ESTIMATES In the preparation of these financial statements, the Manager has made judgments, estimates and assumptions that affect the application of the Fund s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In making estimates and judgments, the Manager relies on external information and observable conditions where possible, supplemented by internal analysis as required. There are no known trends, commitments, events or uncertainties that the Manager believes will materially affect the methodology or assumptions utilized in making those estimates and judgments in these financial statements. (a) Judgments (i) Assessment of investment entities Entities that meet the definition of an investment entity within IFRS 10 are required to measure their subsidiaries at fair value through profit or loss rather than consolidate them. The criteria that define an investment entity are as follows: An entity that obtains funds from one or more investors for the purpose of providing those investors with investment services; An entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and An entity that measures and evaluates the performance of substantially all of its investments on a fair value basis. The Fund s prospectus details its objective of providing returns in the form of investment income and capital appreciation, through investing in a globally diversified portfolio of securities issued in respect of real estate situated primarily in the world s industrialized economies. All investments are reported at fair value to the extent allowed by IFRS. The Manager has concluded that the Fund meets the definition of an investment entity. These conclusions will be reassessed on an annual basis to determine if any of these criteria or characteristics have changed. (ii) Involvement with unconsolidated structured entities The Fund has concluded that the unlisted investment entities, in which it invests, but that it does not consolidate, meet the definition of structured entities because: The voting rights in the entities are not dominant rights in deciding who controls them as they relate to administrative tasks only; Each entity s activities are restricted by its prospectus and/or governing agreements; and The funds have narrow and well-defined objectives to provide investment opportunities to investors. TIMBERCREEK GLOBAL REAL ESTATE FUND 31

34 Notes to Financial Statements Years ended December 31, 2016 and 2015 (b) Assumptions and estimates (i) Measurement of fair value The Fund measures financial instruments at fair value at each reporting date. The information about assumptions and estimates involved in the determination of fair value with significant unobservable inputs is included in note RECEIVABLE FOR PORTFOLIO ASSETS SOLD Receivable for portfolio assets sold represent amounts receivable for unsettled trades. 6. PAYABLE FOR PORTFOLIO ASSETS PURCHASED Payable for portfolio assets purchased represent amounts payable for unsettled trades. 7. RELATED PARTY TRANSACTIONS (a) Timbercreek Asset Management Ltd. (i) Management fee The Fund has entered into a Management Agreement, whereby the Fund pays the Manager a management fee in years where the Fund earns a positive Total Return (as defined below) for that year. The Manager will charge a fee, plus applicable taxes (the Management Fee ), of: 0% of net asset value per annum in years in which the Total Return is negative; 1.25% of net asset value per annum in years in which the Total Return is between 0% and 7.99%; 1.5% of net asset value per annum in years in which the Total Return is between 8% and 11.99%; and 1.8% of net asset value per annum in years in which the Total Return is in excess of 12%. Total Return means the return generated on the units, including income from distributions declared, as well as the appreciation or depreciation in the net asset value per unit, over the calendar year, calculated on December 31 of each year. The Management Fee shall not be paid in respect of the net asset value of the Fund invested in assets or securities for which the Manager and/or its affiliates is paid an investment management fee. The Management Fee is calculated and accrued daily based on the year-to-date annualized Total Return, paid monthly in arrears. In circumstances where the application of this graduated Management Fee applied to the Total Return would result in returns to investors being lower than they would have been under a lower Management Fee, the Management Fee shall be reduced until investors would receive a return at least equal to what they would have received had the Total Return of the Fund implied a lower percentage Management Fee. In consideration for the services received from the Manager for the year ended December 31, 2016, the Fund incurred a Management Fee of $1,663,822 based on 1.5% of net asset value for Class A and Class B (December 31, $1,335,350; 1.25% of net asset value for Class A and Class B). As at December 31, 2016, $13,655 (December 31, $7,802) was payable to the Manager. TIMBERCREEK GLOBAL REAL ESTATE FUND 32

35 Notes to Financial Statements Years ended December 31, 2016 and 2015 (ii) Trailer fee The Fund pays the Manager, who will pay to each registered dealer, a trailer fee (the Trailer Fee ) equal to 0.40% annually of the net asset value per Class A unit for each unit held by clients of such registered dealer, plus applicable taxes. The Trailer Fee is calculated at quarter-end and is payable 15 days after the end of each calendar quarter. There is no Trailer Fee applicable to the Class B units. During the year ended December 31, 2016, the Fund incurred Trailer Fees of $366,524 (December 31, $387,011). As at December 31, 2016 $2,691 in Trailer Fees (December 31, $1,961) is included in accounts payable and accrued liabilities. (b) Timbercreek Financial Corporation The Fund co-invests in private debt investments secured by multi-family and/or commercial properties alongside the entities that are managed by the Manager or its affiliates. As at December 31, 2016, the Fund has co-invested in four private debt investments at a total fair value of $9,443,549 (December 31, 2015 four debt investments totaling $6,073,101) and has co-invested in one private debt investment through Timbercreek Canadian Direct LP ( TCD LP ) at a fair value of $537,232 (December 31, two private debt investments, $2,047,521). The debt investments are secured by the properties to which they relate and bear interest at rates ranging between 8.50% and 20.00% ( % and 10.00%). The parent company of the Manager is responsible for the day-to-day operations and providing all general management and administration services. During the year ended December 31, 2016, the Fund earned income on these investments of $1,357,994 (December 31, $608,825). (c) Timbercreek Canadian Direct LP ( TCD LP ) As at December 31, 2016, the Fund has invested in TCD LP at a fair value of $9,556,070 (December 31, $9,273,122), a limited partnership formed for the purpose of co-investing in direct real estate and private debt investments. The Fund is the sole limited partner of TCD LP and has retained the Manager to provide fund management and investment advisory services. During the year ended December 31, 2016, the Fund received distributions of $602,413 (2015 $2,270,000) from TCD LP which included a return of capital of $26,687 (2015 $1,524,019). On October 11, 2016, Timbercreek Canadian Direct LP advanced $2,000,000 as a loan to the Fund at a fixed interest rate of 6% and due on demand. (d) Timbercreek UK VTEC LP ( VTEC ) As at December 31, 2016, the Fund has no investment in VTEC (December 31, $4,352,615). The partnership was formed for the purpose of indirectly holding UK loans, which included private debt investments secured by real estate in the United Kingdom. The entity was wound up during the fiscal year During the year ended December 31, 2016, the Fund received distributions of $3,764,414 (2015 $1,222,592) from VTEC which included a return of capital of $3,649,161 (2015 $Nil). (e) TC Core 2 LP The Fund invested $2,400,000 in TC Core 2 LP, a limited partnership formed for the purpose of acquiring an 11.22% interest in Restier LP ( Restier ). Restier is a limited partnership formed for the purpose of acquiring core, multifamily real estate located throughout Canada. The Manager is the general partner of TC Core 2 LP and is the asset manager, property manager and general partner of Restier, all related parties by virtue of common management. In March 2015, the Fund sold its pro-rata interest in Restier to an unrelated entity for $3,289,560. There is no remaining investment in TC Core 2 LP as at December 31, TIMBERCREEK GLOBAL REAL ESTATE FUND 33

36 Notes to Financial Statements Years ended December 31, 2016 and 2015 (f) Timbercreek Global AMC Holdings Partnership ( Global AMC ) During 2016, the Fund received a final payment of $104,882 relating to its investment. During 2015, the Fund received proceeds of $733,749 from Global AMC relating to the sale of its assets. (h) Timbercreek Westcott Limited Partnership ( Westcott ) The Fund invested in Westcott at a fair value of $1,184,326 (December 31, $1,459,101). During the year ended December 31, 2016, the Fund received $124,235 in interest income from Westcott ( $30,803). (h) Independent review committee During the year ended December 31, 2016, fees totaling $35,000 (December 31, $30,000) were paid to the members of the independent review committee. 8. OPERATING EXPENSES The Fund is responsible for its operating expenses, including legal, audit, unitholder reporting, transfer agency services, independent review committee fees and the cost of financial and other reports in compliance with all applicable laws, regulations and policies. Such expenses are calculated and accrued daily based on the average net asset value of each class. The Manager pays for such expenses on behalf of the Fund, except for certain expenses, such as interest and taxes, which are reimbursed by the Fund on a monthly basis. 9. MARGIN FACILITY The Fund may utilize various forms of leverage, including its margin facility that allows the Fund to borrow funds from time to time when the Manager determines this to be appropriate. The aggregate amount of leverage by the Fund may not exceed 25% of the aggregate value of the assets of the Fund (the Total Assets ) at the time of use. In the event that the leverage exceeds 25% of Total Assets, the Manager will take reasonable measures to reduce the total borrowings. The Fund has provided its prime broker an interest in certain assets of the Fund as collateral for leverage purposes. For the year ended December 31, 2016, the Fund s highest and lowest borrowings were approximately $18.2 million and $3.8 million, respectively (or 19.3% and 3.7%, respectively, of Total Assets). For the year ended December 31, 2015, the Fund s highest and lowest borrowings were approximately $18.4 million and $7.2 million, respectively (or 15.5% and 6.0%, respectively, of Total Assets). 10. REDEEMABLE UNITS OF THE FUND The Fund is authorized to issue an unlimited number of redeemable units of three classes, including Class A units, Class B units and Class I units, each of which represents an equal, undivided, beneficial interest in the net assets attributable to holders of redeemable units of the Fund. Class B units are privately held and there is no market through which these units may be sold. The Class I units are privately held and automatically convert into Class B units on the first business day after four months from the date of issuance. As at December 31, 2016, there are no Class I units outstanding (December 31, nil). Each unit of each class entitles the holder to one vote and to participate equally with respect to any and all distributions made by the Fund. TIMBERCREEK GLOBAL REAL ESTATE FUND 34

37 Notes to Financial Statements Years ended December 31, 2016 and 2015 On September 28, 2015, the Fund issued 966,000 Class A units with gross proceeds of $13,591,620. In connection with the offering, the Fund incurred issuance costs of $753,480, which includes agent s commissions, issue and structuring costs. The Manager absorbed issuance costs of $255,117. During the year ended December 31, 2016, the unitholders did not redeem any Class A units and Class B units (December 31, ,906 Class A units for $1,333,271 and 2,000 Class B units for $28,974). During the year ended December 31, 2016 and 2015, the Class A and Class B units issued and outstanding changed as follows: Class A units Class B units Redeemable units outstanding, January 1, ,752, ,414 Exchanged (642,363) 593,034 Redeemable units outstanding, December 31, ,110,557 1,354,448 Class A units Class B units Redeemable units outstanding, January 1, ,852, ,133 Issued 966,000 - Redeemed (91,906) (2,000) Exchanged 26,452 (24,719) Redeemable units outstanding, December 31, ,752, ,414 (a) Redemptions Subject to suspension of redemptions by the Trustee in certain circumstances as outlined in the Declaration of Trust, a unitholder is entitled to require payment of the redemption price of all or any of their units by giving written notice to the registrar and transfer agent as follows: (i) Annual Class A units and Class B units may be redeemed on the last business day in February of each year at a redemption price per Class A unit equal to the net asset value per Class A unit and a redemption price per Class B unit equal to the net asset value per Class B unit. Units must be surrendered for annual redemption by February 1 of each year. (ii) Monthly Class A units may be surrendered for redemption on the last business day of any month, other than February, by the 15th day of such month (the Redemption Date ). Payment of the proceeds of redemption will be made on or before the last business day of the following month (the Redemption Payment Date ). Unitholders whose Class A units are surrendered for redemption will be entitled to receive a redemption price per Class A unit equal to the lesser of: (a) 95% of the Trading Price (as defined below) of the Class A units; and (b) the Market Price (as defined below). Any declared and unpaid distributions payable on or before a Redemption Date in respect of Class A units tendered for redemption on such Redemption Date will also be paid on the Redemption Payment Date. Trading Price means the weighted average trading price on the Exchange for the 10 trading days immediately preceding TIMBERCREEK GLOBAL REAL ESTATE FUND 35

38 Notes to Financial Statements Years ended December 31, 2016 and 2015 the relevant Redemption Date. Market Price means the closing price of the Class A units on the Exchange on the Redemption Date or, if there was no trade during the relevant period preceding a monthly Redemption Date, the average of the last bid and the last ask price of the Class A units on the Exchange for each day during the relevant period. The Class B units are redeemable monthly on the same terms as the Class A units, provided that the redemption price per Class B unit will be equal to the lesser of: (a) 95% of the Trading Price of the Class A units multiplied by the Class B Exchange Ratio (as defined below); and (b) the Market Price multiplied by the Class B Exchange Ratio. The Class B Exchange Ratio is determined by dividing the net asset value per Class B unit by the net asset value per Class A unit on such date. (b) Distributions The Fund intends to pay distributions to unitholders on a quarterly basis within 15 days following the end of each calendar quarter end. Year ended December 31, 2016 Year ended December 31, 2015 Per unit Total Per unit Total Class A $ 0.84 $ 5,479,339 $ 0.84 $ 5,262,540 Class B , ,500 Total $ 6,297,247 $ 5,906,040 As at December 31, 2016, $1,567,651 (December 31, $1,578,010) was payable to the unitholders. 11. CAPITAL AND FINANCIAL RISK MANAGEMENT (a) Capital management The Manager manages the capital of the Fund, which consists of the net assets attributable to holders of redeemable units of the Fund, in accordance with the investment objectives set out in the Fund s prospectus. For the year ended December 31, 2016, the Fund was in compliance with all financial covenants. In the normal course of business, the Fund is exposed to a variety of financial risks: credit risk, liquidity risk and market risk (including interest rate risk, market price risk and currency risk). The value of investments within the Fund s portfolio can fluctuate on a daily basis as a result of changes in interest rates, general economic conditions and company news related to specific securities within the Fund. The level of risk depends on the Fund s investment objective and the type of securities in which it invests. (b) Risk management The Manager seeks to minimize the potential adverse effects of risk on the Fund s performance by retaining professional, experienced portfolio advisors and analysts, monitoring the Fund s positions and market events and diversifying the investment portfolio within the parameters of the investment objectives. To assist in managing risk, the Manager uses internal guidelines that identify the target exposures for each type of security and private real estate investments, while adhering to the investment restrictions of the Fund. TIMBERCREEK GLOBAL REAL ESTATE FUND 36

39 Notes to Financial Statements Years ended December 31, 2016 and 2015 (i) Credit risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment to the Fund. The maximum exposure to credit risk is represented by the total assets of the Fund. The concentration of credit risk is included in the schedule of investments. For publicly traded securities, the Fund minimizes concentration of risk by trading with a large number of brokers and counterparties recognized on the Exchange. The risk of default is considered minimal as all transactions are settled and paid for upon delivery using reputable brokers. Credit risk may arise on private direct debt investments or convertible debt investments where there is a possibility that a borrower may be unable to honour its mortgage or loan commitments that could result in a loss to the Fund. The Fund mitigates this risk by: (i) adhering to the investment restrictions and investment objectives of the Fund; (ii) ensuring a comprehensive due diligence process is conducted by Timbercreek Asset Management Inc. on each mortgage or loan prior to funding, which generally includes, but is not limited to, engaging professional independent consultants, lawyers and appraisers, and performing credit checks on prospective borrowers; and (iii) actively monitoring the debt portfolio and initiating recovery procedures, in a timely manner, where required. Exposure to credit risk relating to the forward contracts and equity swaps is concentrated to two counterparties, both of which have a S&P Global s credit rating of A or higher. The Fund also gives collateral with these counterparties. The notional and fair value of the forward contracts and equity swaps are disclosed in the schedule of investments. The Fund is exposed to credit risk on preferred share securities and convertible debt securities, which are disclosed in the Fund s schedule of investments. The credit rating of preferred share securities and convertible debt securities is not available. Given the nature of the real estate industry, many companies traditionally obtain debt financing through mortgages secured by real property and in certain circumstances will issue publicly listed debentures. Those companies that do not have public debt securities are typically not rated by the rating agencies. As such, to minimize the risk associated with a fixed-return, the Manager conducts a thorough analysis of the issuer to determine their creditworthiness. Specifically, the Manager will conduct an analysis of each company analyzing the loan-to-value ratios, debt-service coverage ratio and the quality of the company s real estate holdings. (ii) Liquidity risk Liquidity risk is defined as the risk that the Fund may not be able to settle or meet its obligation associated with financial liabilities. The Fund s exposure to liquidity risk is concentrated in the periodic cash redemptions of units. The Fund primarily invests in securities that are traded in active markets and can be readily disposed of to pay for redemptions. The Fund may employ the use of derivatives to moderate certain risk exposures. There is no guarantee that a market will exist for some derivatives and it is possible that the Exchange may impose limits on the trading of derivatives. The Fund may invest in illiquid private direct real estate investments, including real property and debt investments, and it is possible that it may not be able to sell such positions without facing adverse pricing. To minimize this risk, the Manager primarily seeks to acquire stabilized, income-producing real estate properties in primary and secondary markets across Canada and the U.S. and only invest in mortgages or loans secured by cash-flowing security. In addition, the Fund is restricted to 20% of the Fund s total assets in private direct real TIMBERCREEK GLOBAL REAL ESTATE FUND 37

40 Notes to Financial Statements Years ended December 31, 2016 and 2015 estate and/or illiquid assets. Further, the Fund has the ability to borrow up to 25% of the total assets of the Fund to enhance investment returns and maintain liquidity. All financial liabilities with the exception of derivative liabilities and loan payable to a related party are due within three months. (iii) Market risk 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. Interest rate risk arises when the Fund invests in interest-bearing financial instruments. The Fund is exposed to the risk that the value of such financial instruments will fluctuate due to changes in the prevailing levels of market interest rates. The Fund s private debt investments held by the Fund and through TCD LP bear interest at fixed rates. There is no exposure to interest rate risk as at December 31, As at December 31, 2015, the underlying debt investment in Timbercreek UK VTEC LP of $4,352,615 had interest at a variable rate. As at December 31, 2015, if there were a decrease of 0.50% in interest rates, with all other variables constant, the impact from variable rate debt investment would have been a decrease in net income of $21,763. However, if there were a 0.50% increase in interest rates, with all other variables constant, that would have resulted in increase in net income of $21,763. There is minimal sensitivity to interest rate fluctuations on any cash and cash equivalents invested at short-term market interest rates. Market price risk Market price risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). All investments present a risk of capital loss. The most significant exposure to market price risk for the Fund arises from its investment in public securities. If equity prices on the respective stock exchanges for these securities had increased or decreased by 5% at December 31, 2016 with all other variables held constant, the net assets attributable to holders of redeemable units of the Fund would have increased or decreased, respectively, by approximately $5.5 million or 5.4% of net assets (December 31, $4.8 million or 4.8% of net assets). In practice, actual results may differ from this sensitivity analysis and the difference could be material. The Manager aims to moderate this risk through careful selection and diversification of securities and other financial instruments in accordance with the Fund s investment objective and strategy. The Fund s overall market positions are monitored on a regular basis by the Manager. Financial instruments held by the Fund are susceptible to market price risk arising from uncertainties about future prices of the instruments. Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Fund. The Fund may enter into forward contracts for hedging purposes to reduce its foreign currency exposure or to establish exposure to foreign currencies. As at December 31, 2016, if the Canadian dollar had strengthened or weakened by 1% in relation to the foreign currencies listed below with all other variables being held constant, the Fund s net assets attributable to holders of redeemable units would have decreased or increased, respectively, by approximately $410,790 or 0.4% of net assets (December 31, $272,394 or 0.3% of net assets). In practice, actual results may differ from this sensitivity analysis and the differences could be material. TIMBERCREEK GLOBAL REAL ESTATE FUND 38

41 Notes to Financial Statements Years ended December 31, 2016 and 2015 Currency Fair value of investments and other assets Notional forward contracts Equity swaps Net foreign currency exposure Percentage of net assets December 31, 2016 United States Dollar $ 11,646,427 $ $ 821,091 $ 12,467, % Euro 18,195,033 (15,593,171) 2,601, % Australian Dollar 6,923,996 6,923, % Hong Kong Dollar 7,501,580 7,501, % New Zealand Dollar 1,882,190 1,882, % Singapore Dollar 9,701,432 9,701, % British Pound 1,184,895 (1,184,496) % December 31, 2015 United States Dollar $ 18,668,192 $ (17,506,323) $ (953,303) $ 208, % Euro 18,785,299 (17,738,891) 1,046, % Australian Dollar 8,002,471 8,002, % Hong Kong Dollar 7,444,973 7,444, % New Zealand Dollar 2,125,406 2,125, % Singapore Dollar 8,110,240 8,110, % British Pound 5,811,716 (5,510,356) 301, % 12. FAIR VALUE MEASUREMENTS The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at December 31, 2016: Level 1 Level 2 Level 3 Total Financial assets: Equities $ 60,444,736 $ $ $ 60,444,736 Forward contracts 802, ,175 Equity swaps 1,822,386 1,822,386 Options 3,021 3,021 Private debt 9,443,549 9,443,549 Private direct real estate 9,556,070 9,556,070 Private convertible debt 2,360,466 2,360,466 Private common equity 4,899,104 4,899,104 Financial liabilities: Forward contracts (258,638) (258,638) Equity swaps (1,001,295) (1,001,295) $ 60,447,757 $ 1,364,628 $ 26,259,189 $ 88,071,574 TIMBERCREEK GLOBAL REAL ESTATE FUND 39

42 Notes to Financial Statements Years ended December 31, 2016 and 2015 During the year ended December 31, 2016, no financial instruments were transferred between any levels. The following table shows a reconciliation of the opening and closing balance of financial instruments recorded in Level 3 for the year ended December 31, 2016: As at January 1, 2016 Realized fair value gain (loss) Unrealized fair value gain (loss) Purchases/ (Dispositions) As at December 31, 2016 Financial assets: Private debt $ 6,073,101 $ 298,956 $ (294,969) $ 3,366,461 $ 9,443,549 Private direct real estate 9,273,122 2,306,239 (2,023,291) 9,556,070 Private common equity 4,352,615 (166,623) 701,832 11,280 4,899,104 Private convertible debt 2,360,466 2,360,466 $ 19,698,838 $ 132,333 $ 2,713,102 $ 3,714,916 $ 26,259,189 The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at December 31, 2015: Level 1 Level 2 Level 3 Total Financial assets: Equities $ 72,996,254 $ $ $ 72,996,254 Forward contracts 23,140 23,140 Equity swaps 449, ,613 Private debt 6,073,101 6,073,101 Private direct real estate 9,273,122 9,273,122 Private common equity 4,352,615 4,352,615 Financial liabilities: Forward contracts (1,878,419) (1,878,419) Equity swaps (1,402,916) (1,402,916) $ 72,996,254 $ (2,808,582) $ 19,698,838 $ 89,886,510 During the year ended December 31, 2015, no financial instruments were transferred between any levels. The following table shows a reconciliation of the opening and closing balance of financial instruments recorded in Level 3 for the year ended December 31, 2015: TIMBERCREEK GLOBAL REAL ESTATE FUND 40

43 Notes to Financial Statements Years ended December 31, 2016 and 2015 As at January 1, 2015 Realized fair value gain Unrealized fair value gain (loss) Purchases/ (Dispositions) As at December 31, 2015 Financial assets: Private debt $ 975,000 $ $ 330,287 $ 4,767,814 $ 6,073,101 Private direct real estate 13,075,160 1,074,704 (63,162) (4,813,580) 9,273,122 Private common equity 5,674, , ,267 (1,957,549) 4,352,615 $ 19,724,856 $ 1,494,905 $ 482,392 $ (2,003,315) $ 19,698,838 Significant unobservable inputs used in measuring fair value The table below sets out information about significant unobservable inputs used at December 31, 2016 in measuring financial instruments categorized as Level 3 in the fair value hierarchy. Sensitivity to changes in Fair value at Fair value at Range significant December 31, December 31, Valuation Unobservable (weighted unobservable Description technique input average) inputs Unlisted private equity investments and private direct real estate Private convertible debt $ 14,455,174 $ 13,625,737 Net asset value or recent market transactions. The Fund has determined that the reported net asset value and recent market transactions represent fair value at the end of the reporting year. $ 2,360,466 $ Recent market transaction, representing fair value at year end. n/a n/a n/a n/a n/a n/a Private debt $ 9,443,549 $ 6,073,101 Carrying value. These are shortterm loans repayable at the option of the borrower. n/a n/a n/a TIMBERCREEK GLOBAL REAL ESTATE FUND 41

44 Notes to Financial Statements Years ended December 31, 2016 and 2015 Financial instruments not measured at fair value The financial instruments not measured at fair value through profit or loss are short-term financial assets and financial liabilities whose carrying amounts approximate fair value, including margin deposited on equity swaps and forward contracts, receivable for portfolio assets sold, dividends and interest receivable, margin facility, management fees payable, accounts payable and accrued liabilities, payable for portfolio assets purchased and distributions payable. Amounts due from brokers and other receivables include the contractual amounts for settlement of trades and other obligations due to the Fund. 13. NET CHANGES IN FAIR VALUE OF INVESTMENTS AND DERIVATIVES Year ended December 31, 2016 Year ended December 31, 2015 Net change from financial assets and liabilities held for trading: Net realized gain (loss) on equity swaps and forward contracts Unrealized appreciation (depreciation) in equity swaps and forward contracts Net change from financial assets designated as fair value through profit or loss: Net realized gain on sale of investments, including foreign exchange adjustments Unrealized appreciation (depreciation) in value of investments, including foreign exchange adjustments $ 234,525 $ (3,524,433) 3,816,836 (2,865,144) 6,617,640 7,580,173 (4,718,159) 323,917 $ 5,950,842 $ 1,514, OFFSETTING FINANCIAL INSTRUMENTS The Fund has not offset any financial assets and financial liabilities in the statement of financial position. The disclosures set out in the tables below include financial assets and financial liabilities that are subject to enforceable master netting arrangements in the form of International Swaps and Derivatives Association (ISDA) agreements the Fund has with the counterparties to its derivatives contracts. Under the terms of certain agreements, offsetting of derivatives contracts is permitted for same-day settlements when contracts with the same counterparty mature simultaneously, and in other cases only in the event of the bankruptcy or default of either party to the agreement. TIMBERCREEK GLOBAL REAL ESTATE FUND 42

45 Notes to Financial Statements Years ended December 31, 2016 and 2015 Financial assets and liabilities Gross assets / liabilities Gross assets / liabilities offset December 31, 2016 Derivative assets equity swaps $ 1,822,386 $ $ Net amount presented Related amounts not offset in the Statements of Financial Position Financial instruments Cash collateral pledged Net Amount. 1,822,386 $ (1,001,295) $ $ 821,091 Derivative assets forward contracts 802, ,175 (258,638) 543,537 Total 2,624,561 2,624,561 (1,259,933) 1,364,628 Derivative liabilities equity swaps 1,001,295 1,001,295 (1,001,295) Derivative liabilities forward contracts 258, ,638 (258,638) Total 1,259,933 1,259,933 (1,259,933) Gross assets / liabilities offset Related amounts not offset in the Statements of Financial Position Cash collateral pledged Financial assets and liabilities Gross assets / liabilities Net amount presented Financial instruments Net Amount December 31, 2015 Derivative assets equity swaps $ 449,613 $ $..449,613 $ (449,613) $ $ Derivative assets forward contracts 23,140 23,140 (23,140) Total 472, ,753 (472,753) Derivative liability equity swaps 1,402,916 1,402,916 (449,613) 953,303 Derivative liabilities forward contracts 1,878,419 1,878,419 (23,140) 1,855,279 Total 3,281,335 3,281,335 (472,753) 2,808, INCREASE IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS PER UNIT Increase in net assets attributable to holders of redeemable units per unit is based on the increase in net assets attributable to holders of redeemable units attributed to each class of units, divided by the weighted average number of units outstanding of that class during the year. The increase in net assets attributable to holders of redeemable units per unit for the years ended December 31, 2016 and 2015 is calculated as follows: TIMBERCREEK GLOBAL REAL ESTATE FUND 43

46 Notes to Financial Statements Years ended December 31, 2016 and 2015 December 31, 2016 Class A units Class B units Increase in net assets attributable to holders of redeemable units $ 7,734,593 $ 908,253 Weighted average of redeemable units outstanding during the year 6,568, ,287 Increase in net assets attributable to holders of redeemable units per unit $ 1.18 $ 0.98 December 31, 2015 Class A units Class B units Increase in net assets attributable to holders of redeemable units $ 3,766,955 $ 553,158 Weighted average of redeemable units outstanding during the year 6,041, ,424 Increase in net assets attributable to holders of redeemable units per unit $ 0.62 $ NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS PER UNIT The net assets attributable to holders of redeemable units per unit is calculated by dividing the net assets attributable to holders of redeemable units of a particular class of units by the total number of units of that particular class outstanding at the end of the year. 17. INVOLVEMENT WITH UNCONSOLIDATED STRUCTURED ENTITIES The Fund qualifies as an investment entity under IFRS 10 Consolidated Financial Statements, and therefore accounts for investments it controls at fair value through profit and loss. The Fund s primary purpose is to obtain funds from investors and to provide these investors with investment management services, with the objective of obtaining a return primarily from capital appreciation and/or investment income. The Fund also measures and evaluates the performance of its investments on a fair value basis. In determining whether the Fund had control over an investee, the Fund assessed its power over relevant activities including voting rights and non-voting rights, the exposure to variable returns and, where applicable, substantive kick-out rights. The table below describes the types of structured entities that the Fund does not consolidate but in which it holds an interest. Type of structured entity Nature and purpose Interest held by the Fund Limited Partnership To manage assets on behalf of a third-party investor. These vehicles are financed through the issuance of units to investors Ownership of units issued by the limited partnership TIMBERCREEK GLOBAL REAL ESTATE FUND 44

47 Notes to Financial Statements Years ended December 31, 2016 and 2015 The Fund has assessed whether it has control or significant influence over the following investments based on the aforementioned factors in accordance with IFRS 10. The table below sets out interests held by the Fund in these unconsolidated structured entities. The maximum exposure to loss is the carrying amount of the financial assets held. Name of Fund Timbercreek UK VTEC LP Timbercreek Canadian Direct LP Principal place of business Proportion of ownership and voting rights Canada 0.00% ( %) Canada 99.99% ( %) Control/ Significant influence Significant influence December 31, 2016 December 31, 2015 Liquidity restrictions $ - $ 4,352,615 Only upon dissolution and winding up of the partnership Control 9,556,070 9,273,122 No restrictions During the year ended December 31, 2016 and 2015, the Fund did not provide financial support to the unconsolidated structured entities and has no intention of providing financial or other support. The Fund receives income in the form of distributions from its investments in these structured entities. Other that the above, the Fund has no significant influence or control over subsidiaries, associates or unconsolidated structured entities. 18. COMPARATIVE INFORMATION Certain prior year financial statement line items have been renamed to comply with the current year presentation of the financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 45

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51 Head Office 25 Price Street Toronto, ON M4W 1Z1 T E info@timbercreek.com timbercreek.com Stock Exchange Listing TSX: TGF.UN Transfer Agent & Registrar CST Trust Company 320 Bay Street Toronto, ON M5H 4A6 Auditors KPMG LLP Legal Counsel McCarthy Tétrault LLP Photography courtesy of the following companies in which the Fund has an investment: Dream Global REIT, MGM Growth Properties, Timbercreek Asset Management Inc., Vicinity Centres, Fortune REIT and Sunlight REIT.

52 timbercreek.com