TREZ CAPITAL MORTGAGE INVESTMENT CORPORATION

Transcription

1 Condensed Interim Financial Statements TREZ CAPITAL MORTGAGE INVESTMENT CORPORATION For the three and nine months ended September 30, 2015 and 2014

2 Condensed Interim Statements of Financial Position Assets September 30, December 31, Note Investments in mortgages 4, 7 $ 212,527,707 $ 196,169,507 Cash held in trust 40,000 - Total assets $ 212,567,707 $ 196,169,507 Liabilities and Shareholders Equity Bank indebtedness 3 $ 26,674,788 $ 6,195,014 Syndicated loan liability 4 5,400,000 5,400,000 Dividends payable 5 1,121,479 1,139,838 Accounts payable and accrued liabilities 227, ,384 Performance fee payable 6, 7 355, ,739 Management fees payable 6, 7 222, ,669 Total liabilities 34,001,719 13,511,644 Shareholders equity 178,565, ,657,863 Total liabilities and shareholders equity $ 212,567,707 $ 196,169,507 The accompanying notes are an integral part of these condensed interim financial statements. 1

3 Condensed Interim Statements of Income and Comprehensive Income Three months ended Nine months ended September 30, September 30, September 30, September 30, Note Revenue: Interest and fee income $ 3,757,732 $ 3,794,534 $11,653,504 $14,037,065 Interest expense on non-recourse mortgage syndications (69,188) (117,285) (207,563) (515,951) 3,688,544 3,677,249 11,445,941 13,521,114 Expenses: Management fees 6, 7 687, ,210 2,025,438 1,993,342 Performance fees 6, 7 128,758 3, , ,134 Realized mortgage investment loss 4(c) 202, ,576 - Unrealized loss (gain) on fair value of investment in mortgages (450,000) 350,000 (450,000) 850,000 General and administrative expenses 78, , , , ,097 1,079,994 2,524,940 3,610,321 Income from operations 3,041,447 2,597,255 8,921,001 9,910,793 Financing costs: Interest on credit facility 3 262,989 9, , ,511 Net income and comprehensive income for the period $ 2,778,458 $ 2,587,498 $ 8,208,071 $ 9,444,282 Earnings per share: Basic and diluted $ 0.14 $ 0.13 $ 0.42 $ 0.48 Weighted average number of shares: Basic and diluted 19,401,302 19,551,254 19,476,124 19,551,254 The accompanying notes are an integral part of these condensed interim financial statements. 2

4 Condensed Interim Statements of Changes in Shareholders Equity Notes Shareholders equity at December 31, 2014 $ 182,657,863 Dividends to shareholders (10,205,794) Net income and comprehensive income for the period 8,208,071 Repurchase of shares 5 (2,094,152) Shareholders equity at September 30, 2015 $ 178,565,988 Shareholders equity at December 31, 2013 $ 184,351,985 Dividends to shareholders (10,258,543) Net income and comprehensive income for the period 9,444,282 Shareholders equity at September 30, 2014 $ 183,537,724 The accompanying notes are an integral part of these condensed interim financial statements. 3

5 Condensed Interim Statements of Cash Flows Cash provided by (used in): Three months ended Nine months ended September 30, September 30, September 30, September 30, Operations: Net income and comprehensive income for the period $ 2,778,458 $ 2,587,498 $ 8,208,071 $ 9,444,282 Non-cash adjustment: Interest income (3,611,356) (3,456,171) (10,932,469) (12,819,984) Interest expense 262,989 9, , ,511 Realized mortgage investment loss 202, ,576 - Unrealized loss (gain) on fair value of investment in mortgages (450,000) 350,000 (450,000) 850,000 Interest received 2,933,489 3,164,226 8,393,119 11,161,175 Changes in non-cash operating items: Fees receivable 425,669 (66,138) 325,237 (195,493) Management fees payable (464,406) 176, ,346 Performance fees payable 128,758 3,656 (79,548) (371,888) Accounts payable and accrued liabilities 61,072 23,434 76,000 (487,590) 2,267,249 2,793,099 6,456,189 8,400,359 Financing: Interest paid (278,506) (33,614) (680,996) (534,125) Cash held in trust 28,626 - (40,000) 3,192,500 Repurchase of Class A shares (1,563,894) - (2,094,152) (32,535,584) Dividends (3,395,914) (3,419,514) (10,224,152) (10,459,690) (5,209,688) (3,453,128) (13,039,300) (40,336,899) Investing: Funding of investment in mortgages (8,637,540) (22,107,168) (53,951,765) (46,198,570) Principal repayments on investment in mortgages 9,003,808 5,915,834 40,055,102 77,676, ,268 (16,191,334) (13,896,663) 31,477,888 Decrease in cash during the period (2,576,171) (16,851,363) (20,479,774) (458,652) Cash (bank indebtedness), beginning of period (24,098,617) 5,768,326 (6,195,014) (10,624,385) Bank indebtedness, end of period $ (26,674,788) $ (11,083,037) $ (26,674,788) $ (11,083,037) The accompanying notes are an integral part of these condensed interim financial statements. 4

6 1. Operations: Trez Capital Mortgage Investment Corporation (the Company ) is a non-bank lender providing residential and commercial short-term bridge and conventional real estate financing, including construction and mezzanine mortgages. Trez Capital Mortgage Investment Corporation was incorporated on April 18, 2012 under the Canada Business Corporations Act. The Company is managed by Trez Capital Fund Management Limited Partnership (the Manager ). The Mortgage Broker for the Company is Trez Capital Limited Partnership. The shares of the Company are publicly listed on the Toronto Stock Exchange under the symbol TZZ. The Company is a Canadian mortgage investment corporation and the registered office of the Company is West Georgia Street, Vancouver, BC, V6E 4C6. 2. Basis of presentation: (a) Statement of compliance: The condensed interim financial statements have been prepared in compliance with International Accounting Standard 34, Interim Financial Statements. The accompanying condensed interim financial statements should be read in conjunction with the notes to the Company s audited financial statements for the year ended December 31, 2014 which have been prepared in accordance with International Financial Reporting Standards ( IFRS ), since they do not contain all disclosures required by IFRS for annual financial statements. These condensed interim financial statements reflect all normal and recurring adjustments which are in the opinion of the Manager, necessary for a fair presentation of the respective interim periods presented. These condensed interim financial statements were approved by the Board of Directors on October 30, (b) Functional and presentation currency: These condensed interim financial statements are presented in Canadian dollars, which is the functional currency of the Company. (c) Basis of measurement: These condensed interim financial statements have been presented on a historical cost basis, except for investments in mortgages which are measured at fair value. 3. Credit facility: On August 8, 2012, (amended on August 14, 2013), the Company entered into a credit facility (the Facility ) with the HSBC Bank Canada for an amount of up to $31,000,000. The Facility renews annually and is subject to an interest rate equal to the bank s prime rate of interest plus 1.3%. The Facility is secured by a general security agreement over the Company s assets. At September 30, 2015, $26,674,788 (December 31, $6,195,014) was outstanding on the Facility, and the Company was in compliance with all covenants. 5

7 4. Investments in mortgages: (a) Mortgages: September 30, December 31, Number 2015 Number 2014 Residential 24 $ 107,597, $ 111,194,398 Office 6 54,251, ,922,808 Industrial 9 20,754, ,473,301 Retail 2 19,871, Hotel 2 4,300, ,500, ,775, ,090,507 Accrued interest and fees receivable 1,752,235 2,529,000 Mortgage syndications 5,400,000 5,400,000 Unrealized loss on fair value of investments in mortgages (1,400,000) (1,850,000) $ 212,527,707 $ 196,169,507 September 30, Location Number 2015 Alberta 16 $ 56,132,418 British Columbia 5 23,116,977 Saskatchewan 1 2,262,339 New Brunswick 1 22,345,917 Nova Scotia 5 20,125,520 Ontario 15 82,792, $ 206,775,472 December 31, Location Number 2014 Alberta 12 $ 59,396,506 British Columbia 5 23,027,722 New Brunswick 1 22,327,485 Nova Scotia 5 20,109,516 Ontario 11 65,229, $ 190,090,507 6

8 4. Investments in mortgages (continued): (a) Mortgages (continued): The mortgages are secured by the real property to which they relate, bear interest at a weighted average interest rate of 7.55% (December 31, %) and mature between 2015 and The mortgage agreements stipulate a minimum interest rate and a variable interest rate based on the Prime Rate for Canadian Dollar Loans established by HSBC ( Prime Rate ). Current premiums to the Prime Rate range from plus 0% to plus 9.30%, with the current minimum rates ranging from 0% to 12.0%. Principal repayments based on contractual maturity dates are as follows: September 30, December 31, Number 2015 Number 2014 Past due 3 $ 17,025,651 4 $ 46,158, ,600, ,008, ,301, ,309, and beyond 11 73,847, ,613, $ 206,775, $ 190,090,507 All mortgages are conventional uninsured mortgages which contain a prepayment option, whereby the borrower may repay the principal, subject to the payment of minimum interest, at any time prior to maturity. The Company has entered into certain mortgage participation agreements with third party and related party lenders, whereby, the lenders take the senior position and the Company retains the subordinated position, all of which is secured by first mortgage positions. The Company retains an option, not the obligation, to repurchase the senior position at a price equal to the outstanding principal amount of the senior lenders share together with accrued interest. As a result, the senior lenders position is recorded as a non-recourse mortgage syndication liability. The interest earned on the transferred participation interests and the related interest expense are recognized in the condensed interim statement of income and comprehensive income. For those investments which have not met the derecognition criteria, the participation transactions have resulted in the Company recognizing the participating mortgages and corresponding non-recourse mortgage syndication liabilities on its statements of financial position. The carrying value of the transferred assets and corresponding non-recourse liabilities is $5,400,000 (December 31, $5,400,000). As part of the assessment of fair value, the Manager routinely reviews each mortgage for changes in credit risk to determine whether or not fair value of a mortgage should be adjusted for the change in credit risk. 7

9 4. Investments in mortgages (continued): (a) Mortgages (continued): As at September 30, 2015, the Manager estimated the changes in credit risk for its mortgages, including mortgages in default as explained below, and has recognized an unrealized loss on its investment in fair value of mortgages totaling $1,400,000 (December 31, $1,850,000). (b) Default mortgages: A mortgage is considered in default when a payment has not been received by the contractual due date, or a term in the mortgage agreement has been breached. Mortgages that are in default are not classified as impaired if they are fully secured and collection efforts are reasonably expected to result in repayment of principal plus all associated costs and accrued interest. The following mortgages were in default at September 30, 2015: (i) A borrower in respect of a mortgage with a carrying amount of $10,809,992 breached the mortgage terms. An affiliate of the Manager commenced legal procedures to secure the collection of its outstanding balance by appointing a receiver. The receiver has accepted an offer on the property at a price of $12,100,000, which is only conditional upon court approval that the Manager expects to receive. A deposit for the purchase was made by the buyer and a vendor take back mortgage was requested. (ii) A borrower in respect of a mortgage with a carrying amount of $1,148,729 with accrued interest of $50,390 breached the mortgage terms. Company commenced legal procedures to secure the collection of the outstanding balances. An affiliate of the Manager will take an assignment of the mortgage security with consideration of the amount of the debt outstanding and the affiliate will assume the obligation to repay the Company at the same interest rate. The affiliate will obtain a court appointed receiver to list and market the properties. The Manager estimates that the value of the properties is sufficient to cover the outstanding principal and accrued interest. (iii) A borrower in respect of a mortgage with a carrying amount of $5,066,930 with accrued interest of $475,751 was in breach of the mortgage terms and the Company commenced legal procedures to secure the collection of the outstanding balances. The Company appointed a receiver to market and sell the properties. The property is currently listed for sale. The Manager estimates that the ultimate proceeds will be sufficient to cover the outstanding principal and accrued interest. 8

10 4. Investments in mortgages (continued): (c) Resolution of previous mortgages in default (i) A mortgage with a carrying value of $23,028,101 with accrued interest of $95,336 was in default due to a shareholder dispute. This resulted in the appointment of a court appointed receiver for the borrowers property. An affiliate of the Manager of the Company purchased the property at a price of $23,030,559 and assumed the debt obligation. The affiliate of the Manager who assumed the property commenced the monthly interest payments, operating costs, and realty taxes as of April 15, 2015 in accordance with the new agreement, as discussed in note 7(d). The mortgage was performing since April 15, (ii) A mortgage with a carrying amount of $8,953,000 related to a mixed use retail and commercial development that matured on November 1, 2014 was not renewed nor extended as at December 31, The Company along with other junior non-related 2nd and 3rd party mortgagees appointed a receiver to sell the property. During the three months ended September 30, 2015, the property was sold to a third party and the transaction closed on September 25, The sale was partly financed by a vendortake back mortgage and as a result, the Company recognized a realized loss in the amount of $202,576 on the settlement of the previous mortgage in default. The carrying amount of the new vendor take back mortgage is $8,220,000. (iii) As at June 30, 2015, the Company had three mortgages with an aggregate carrying amount of $7,300,000 that were past due as the Company and the borrowers were unable to refinance the mortgages by their maturity date. All three mortgages have since been refinanced and are all considered current as at September 30, Class A shares: As at September 30, 2015 and December 31, 2014, there were an unlimited number of Class A common shares and an unlimited number of Class B common shares authorized. Class A shares outstanding amount to 19,236,354 and 19,551,254 on September 30, 2015 and December 31, 2014, respectively. There are no Class B shares outstanding. 9

11 5. Class A shares (continued): The holders of the Class A shares are entitled to receive dividends as and when declared by the Board of Directors of the Company. (a) Dividends: The Company made dividend payments at an annual rate of $0.70 per share to Class A shareholders on a monthly basis on or about the 15th day of each month. The Company intends to pay dividends to Class A shareholders, within 90 days after the year end, for an amount equal to at least 100% of the income from operations of the Company determined in accordance with the Income Tax Act (Canada), subject to certain adjustments. For the nine months ended September 30, 2015, the Company had declared dividends totaling $10,205,794 or $0.52 per share (September 30, $10,258,542 or $0.52 per share). (b) Normal course issuer bid: On December 17, 2014 the Company announced the application for approval of a normal course issuer bid ( NCIB ), which was approved by the Toronto Stock Exchange ( TSX ) on January 7, The Company intends to consider purchasing, from time to time over a period of 12 months up to an aggregate maximum of 1,952,321 Class A Shares, representing approximately 10% of its issued and outstanding Class A shares. All purchases are being made through the facilities of the TSX at market prices and in accordance with the rules of the TSX. The Company believes that currently the market price of the Company s Class A shares do not adequately reflect the Company s underlying value and future prospects and that a NCIB represents the appropriate use of the Company s financial resources as it would be accretive to the Company s shareholders. During the nine months ended September 30, 2015 the Company purchased 314,900 Class A shares on the TSX for the amount of $2,094, Management fees: The Manager is responsible for the day-to-day operations, including administration of the Company's mortgage portfolio. Pursuant to the Management Agreement dated May 25, 2012, (amended November 30, 2013), the Manager is entitled to a fee of 1.25% per annum of the gross assets of the Company (prior to November 30, % per annum of net assets of the Company) (the Management Fee ), plus applicable taxes, calculated daily and paid monthly in arrears. 10

12 6. Management fees: (continued) The Manager is also entitled to a performance fee. In any calendar year where the Company has a net return in excess of the Hurdle Rate (Hurdle Rate is defined as the average two year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Manager is entitled to receive from the Company a performance fee equal to 20% of the net return of the Company over the Hurdle Rate (the Performance Fee ). The Manager calculates the final Performance Fee in respect of a completed calendar year based on the audited financial statements for that year. The Performance Fee in respect of a calendar year will be payable to the Manager within 15 days of the issuance of the Company s audited financial statements for that year. 7. Related party transactions and balances: (a) The Company is managed by the Manager, a related party by virtue of common management. Pursuant to the Management Agreement referred to in note 6, during the nine months ended September 30, 2015 the Company incurred management fees in the amount of $2,025,438 and performance fees in the amount of $355,191 (nine months ended September 30, management fees of $1,993,342 and performance fees of $441,134). At September 30, 2015, $222,943 (December 31, $222,669) in management fees and $355,191 (December 31, $434,739) in performance fees were owing to the Manager. (b) As at September 30, 2015, the Company has co-invested in 32 mortgage investments (December 31, mortgage investments) with other funds managed by the Manager. The total amount of the mortgage investment is $414,424,370 of which the Company s share is $135,653,427 (December 31, $262,520,199, of which the Company s share was 112,511,901). During the nine months ended September 30, 2015, the Company purchased investments in mortgages from entities under common management of $18,620,216 (December 31, nil) and sold investments in mortgages of $19,435,681 (December 31, $9,000,000) to entities under common management. (c) As at September 30, 2015, the Company had a receivable of $47,092 (December 31, $372,329) from the Manager for commitment fees for funded mortgages during the period, which is included within investments in mortgages. 11

13 7. Related party transactions and balances: (continued) (d) As discussed in the note 4(c), an affiliate of the Manager of the Company became the new owner of the underlying property securing the defaulted loan in the amount of $23,028,101. Based on the legal remedies available in the mortgage agreement, the property (through a court appointed receiver) was purchased by an affiliate wholly owned by Trez Capital Group LP, the ultimate parent of the Manager. The purchase price for the property was $23,030,559 and will be financed through a vendor take-back ( VTB ) mortgage with a term of four years from the date of closing. The VTB bears interest at 5% per annum and is fully and unconditionally guaranteed by Trez Capital Group LP. The transaction described above has been approved by the Company s Board of Directors and the Ontario Supreme Court of Justice. For the nine months ended September 30, 2015, the Company recognized $530,763 in interest income from the affiliate of the Manager and has accrued interest receivable of $95,337 as at September 30, (e) The Company has one mortgage, in the amount of $5,244,890 with an entity related to the Manager by common control bearing interest of 10.09% per annum. The property securing the mortgage was acquired by the related entity after the previous owner defaulted on the mortgage. As at September 30, 2015, the loan was performing. For the nine months ended September 30, 2015, the Company recognized $450,943 in interest income from the affiliate of the Manager and has accrued interest receivable of $43,503 as at September 30, (f) All related party transactions are in the normal course of operations and are transacted at the amount of consideration established and agreed to by the related parties. The Company invests in mortgages on a participation basis with parties related to the Manager. Title to mortgages is held by Computer Share Company of Canada, (the Custodian ), on behalf of the beneficial owners of the mortgages. In addition, certain Mortgage Broker duties are performed by the Mortgage Broker. The Manager and the Mortgage Broker are related to the Company through common management. 8. Fair value of financial instruments: The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation or sale. All of the Company s assets and liabilities are financial instruments. The Company s investments in mortgages are carried at fair value in the financial statements. The carrying value of the Company s other financial instruments approximate fair value due to their short term to maturity. The following table shows a hierarchy for disclosing fair value based on inputs used to value the Company s investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). 12

14 8. Fair value of financial instruments (continued): The three levels of the fair value hierarchy are as follows: Quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); Inputs other than quoted prices in active markets included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2); and Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The Company s assets recorded at fair value have been categorised as follows: September 30, 2015 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 212,527,707 $ 212,527,707 December 31, 2014 Level 1 Level 2 Level 3 Total Investments in mortgages $ - $ - $ 196,169,507 $ 196,169,507 There were no transfers between Level 1 and Level 2 during the period. A reconciliation of Level 3 assets at September 30, 2015 is as follows: Opening balance $ 196,169,507 Funding of investment in mortgages 53,951,765 Interest capitalized to investment in mortgages 2,990,877 Accrued interest and fees receivable (776,764) Principal repayments on investment in mortgages (40,055,102) Mortgage investment loss (202,576) Unrealized loss on fair value of investment in mortgages 450,000 Investment in mortgages, September 30, 2015 $ 212,527,707 A reconciliation of Level 3 assets at December 31, 2014 is as follows: Opening balance $ 242,734,754 Funding of investment in mortgages 70,307,008 Interest capitalized to investment in mortgages 1,998,229 Accrued interest and fees receivable 398,457 Principal repayments on investment in mortgages (107,732,113) Repayment of syndicated mortgages (9,986,828) Unrealized loss fair value of investment in mortgages (1,550,000) Investment in mortgages, December 31, 2014 $ 196,169, Fair value of financial instruments (continued): 13

15 The key valuation techniques used in measuring the fair values of default mortgages include: Inter-relationship between significant unobservable Valuation Significant inputs and fair value technique unobservable inputs measurement Discounted The adjusted credit risk The estimate of fair value would cash flow model premium based on the increase (decrease) if: change in the borrower s - The term of the mortgage credit risk utilizing was shortened (or the knowledge gained extended) since the loan was - The adjusted risk premium originated rate was lower (higher) Assessment of fair value of collateral of mortgages in default where payments expected from sale of property. - Estimated fair value of collateral was (lower) higher The projected length of time the mortgage will remain in default without the underlying property being liquidated or foreclosed upon. 14