A``` Interim Financial Statements of. Timbercreek Global Real Estate Fund. Six months ended June 30, 2017 and 2016 (Unaudited)

Transcription

1 A``` Interim Financial Statements of Timbercreek Global Real Estate Fund

2 NOTICE TO UNITHOLDERS The Auditors of the Fund have not reviewed these interim financial statements. Timbercreek Asset Management Ltd., the Trustee of the Fund, appoints an independent auditor to audit the Fund s annual financial statements. Applicable securities laws require that if an auditor has not reviewed the Fund s interim financial statements, this must be disclosed in an accompanying notice. TIMBERCREEK GLOBAL REAL ESTATE FUND 1

3 INTERIM STATEMENTS OF FINANCIAL POSITION June 30, 2017 December 31, 2016 ASSETS Cash $ 1,678,728 $ 2,235,826 Receivable for portfolio assets sold (note 5) 96,997 Dividends and interest receivable 552, ,450 Margin deposited on equity swaps and forward contracts 18,300,000 23,300,000 Derivative assets - forward contracts (note 13) 802,175 Derivative assets - equity swaps (note 13) 772,816 1,822,386 Investments, at fair value through profit or loss (note 13) 81,780,310 86,706,946 LIABILITIES 103,181, ,222,783 Margin facility (note 9) 8,147,254 Management fees payable (note 7(a)(i)) 226,573 13,655 Accounts payable and accrued liabilities 567, ,867 Loan payable to a related party (note 7(c)) 2,000,000 2,000,000 Credit facility (note 10) 10,000,000 Payable for portfolio assets purchased (note 6) 290,546 Distributions payable (note 11(b)) 1,350,787 1,567,651 Derivative liabilities - forward contracts (note 13) 716, ,638 Derivative liabilities - equity swaps (note 13) 516,267 1,001,295 15,668,025 13,155,360 Net assets attributable to holders of redeemable units $ 87,513,389 $ 102,067,423 Net assets attributable to holders of redeemable units per Class: Class A units $ 73,571,504 $ 82,257,405 Class B units 13,941,885 19,810,018 Units outstanding (note 11): Class A units 5,479,706 6,110,557 Class B units 952,612 1,354,448 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 interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 2

4 INTERIM STATEMENTS OF COMPREHENSIVE INCOME Investment income: Dividend income $ 1,858,882 $ 2,042,946 Interest income for distribution purposes 850, ,231 Distributions from income trusts and partnerships 134, ,446 Net changes in fair value of investments and derivatives (note 14) 2,079,954 5,100,843 4,923,353 7,920,466 Expenses: Management fees (note 7(a)(i)) 756, ,976 Trailer fees (note 7(a)(ii)) 147, ,204 Commissions and other portfolio transaction costs 110, ,878 Other operating costs 83,548 76,083 Interest and borrowing fees 191,455 86,438 Audit fees 52,068 52,214 Independent review committee (note 7(h)) 27,120 13,560 Unitholder reporting 9,080 22,740 Custodian fees 16,029 30,037 Legal fees 127,282 19,891 Income taxes 186,430 Foreign dividend withholding tax 128,659 72,935 1,835,476 1,685,956 Increase in net assets attributable to holders of redeemable units $ 3,087,877 $ 6,234,510 Increase in net assets attributable to holders of redeemable units per class Class A units $ 2,534,168 $ 5,545,120 Class B units 553, ,390 Net assets attributable to holders of redeemable units per unit (note 16): Class A units $ 0.45 $ 0.82 Class B units The accompanying notes are an integral part of these interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 3

5 INTERIM STATEMENTS OF CHANGES IN NET ASSETS 2017 Class A units Class B units Total Net assets attributable to holders of redeemable units, beginning of period $ 82,257,405 $ 19,810,018 $ 102,067,423 Increase in net assets attributable to holders of redeemable units 2,534, ,709 3,087,877 Distributions to unitholders (note 11(b)) (2,607,394) (467,731) (3,075,125) Redemptions of units (8,556,227) (6,010,559) (14,566,786) Exchange of units (56,448) 56,448 Net assets attributable to holders of redeemable units, end of period $ 73,571,504 $ 13,941,885 $ 87,513, Class A units Class B units Total Net assets attributable to holders of redeemable units, beginning of period $ 88,922,769 $ 10,799,055 $ 99,721,824 Increase in net assets attributable to holders of redeemable units 5,545, ,390 6,234,510 Distributions to unitholders (note 11(b)) (2,838,549) (317,642) (3,156,191) Exchange of units 119,040 (119,040) Net assets attributable to holders of redeemable units, end of period $ 91,748,380 $ 11,051,763 $ 102,800,143 The accompanying notes are an integral part of these interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 4

6 INTERIM STATEMENTS OF CASH FLOWS Six months ended June 30, 2016 and Cash provided by (used in): OPERATING ACTIVITIES Increase in net assets attributable to holders of redeemable units $ 3,087,877 $ 6,234,510 Adjustments for: Net changes in fair value of investments and derivatives (2,079,954) (5,100,843) Proceeds from sale of investments 31,435,994 39,110,532 Purchases of investments (25,598,077) (43,801,605) Net receipts (payments) on maturity of forward contracts 721,572 (1,242,226) Net receipts (payments) received from equity swaps 2,178,911 (389,858) Commissions and other portfolio transaction costs 110, ,878 Change in non-cash operating items: (Increase) decrease in receivable for portfolio assets sold (96,997) 204,608 (Increase) decrease in dividends and interest receivable (197,113) 105,117 Increase in management fees payable 212, ,239 Increase in accounts payable and accrued liabilities 400, ,221 Increase in payable for portfolio assets purchased 290,546 1,115,538 Increase in credit facility 10,000,000 Decrease in due from broker 567,564 20,466,460 (2,297,325) FINANCING ACTIVITIES Redemptions of units (14,566,786) Distributions to unitholders (3,291,989) (3,156,053) (17,858,775) (3,156,053) Net foreign exchange (loss) gain on cash accounts (17,529) 1,259,071 Change in cash and net margin facility 2,590,156 (4,194,307) Cash and net margin facility, beginning of period 17,388,572 6,555,475 Cash and net margin facility, end of period $ 19,978,728 $ 2,361,168 Cash and net margin facility is comprised of: Cash $ 1,678,728 $ Margin deposited on equity swaps and forward contracts 18,300,000 16,920,000 Margin facility (14,558,832) $ 19,978,728 $ 2,361,168 SUPPLEMENTAL INFORMATION Interest paid $ 7,180 $ 85,992 Interest received $ 693,826 $ 522,092 Dividends received $ 1,662,847 $ 2,092,782 The accompanying notes are an integral part of these interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 5

7 SCHEDULE OF INVESTMENTS June 30, 2017 Description Shares units Average cost Fair value % net assets COMMON EQUITIES Australia Charter Hall Retail REIT 381,257 $ 1,330,609 $ 1,546, Folkestone Education trust 390,648 1,002,768 1,085, Vicinity Centres 895,407 2,494,999 2,292, Canada 4,828,376 4,925, CHC Student Housing Corp. 38, ,558 71, Cominar REIT 117,298 1,786,875 1,490, Dream Global REIT 281,429 2,230,722 3,073, One REIT 726,524 2,591,278 2,717, RioCan REIT 52,573 1,264,898 1,265, Europe 8,234,331 8,618, Citycon OYJ 483,939 1,584,736 1,647, Eurocommercial Properties NV 68,115 3,223,845 3,530, Intervest Offices & Warehouses NV 62,396 1,886,978 2,070, Mercialys SA 62,696 1,662,119 1,591, Wereldhave NV 56,511 3,705,776 3,594, Hong Kong Japan 12,063,454 12,434, Fortune REIT 2,049,100 1,781,668 3,302, Sunlight REIT 2,903,000 1,692,682 2,472, ,474,350 5,774, Invesco Office J-Reit Inc. 1,851 2,276,749 2,245, Singapore 2,276,749 2,245, AIMS AMP Capital Industrial REIT 621, , , Cache Logistics Trust 1,601,000 1,435,364 1,381, CapitaLand Retail China Trust 1,789,063 2,562,138 2,767, Frasers Centrepoint Trust 832,400 1,567,625 1,679, Frasers Logistics & Industrial Trust 2,254,500 1,948,582 2,296, United States of America 8,374,187 8,992, CBL & Associates Properties Inc. 8, ,871 87, DDR Corp. 189,424 3,125,895 2,230, Kite Realty Group Trust 117,400 3,058,784 2,885, TIMBERCREEK GLOBAL REAL ESTATE FUND 6

8 SCHEDULE OF INVESTMENTS June 30, 2017 Description Shares units Average cost Fair value % net assets COMMON EQUITIES (continued) Sabra Health Care REIT Inc. 8,406 $ 259,348 $ 263, Starwood Property Trust Inc. 11, , , STORE Capital Corp. 55,181 1,518,497 1,608, ,423,593 7,412, Total common equities $ 47,675,040 $ 50,402, PREFERRED SHARES United States of America Cedar Realty Trust Inc. - Series B 7.25% 50,625 1,664,196 1,668, GGP Inc. - Series A 6.375% 38,973 1,332,463 1,288, Pebblebrook Hotel Trust Series D 6.375% 16, , , Pennsylvania Real Estate Investment Trust Series C 7.20% 47,284 1,686,672 1,648, Total preferred shares $ 5,200,262 $ 5,139, Total equities $ 52,875,302 $ 55,541, WARRANTS Canada WTS CHC Student Housing Corp 60,962 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 9,276, United States of America Private debt 7,249,831 9,276, Portland Hotel 2,318,478 2,236, Private common equity 2,318,478 2,236, Adventus Capital Partners Ltd 12, , , Adventus Realty Trust 236,388 3,980,592 4,526, Adventus Realty LP 12, ,190,063 4,737, TIMBERCREEK GLOBAL REAL ESTATE FUND 7

9 SCHEDULE OF INVESTMENTS June 30, 2017 Description Shares units Average cost Fair value % net assets Private convertible debt Adventus Capital Partners Ltd. Convertible Debt 87,724 $ 118,147 $ 113, Adventus Realty LP Convertible Debt Adventus Realty Trust Convertible Debt 1,670,100 2,249,291 2,168, United Kingdom Private debt Timbercreek Westcott Limited Partnership (note 7 (g)) 2,367,675 2,282, ,464,964 1,206, ,464,964 1,206, Total private investments $ 24,091,011 $ 26,238, Total investments $ 76,966,313 $ 81,780, Commissions and other portfolio transaction costs (167,362) Total net investments $ 76,798,951 $ 81,780, Foreign exchange forward contracts (Schedule 1): Unrealized gain, net (716,420) (0.82) Equity swaps (Schedule 2): Unrealized gain, net 256, Other assets, net 6,192, NET ASSETS ATTRITUBUTABLE TO HOLDERS OF REEDEMABLE UNITS $ 87,513, The accompanying notes are an integral part of these interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 8

10 SCHEDULE OF INVESTMENTS June 30, 2017 SCHEDULE 1 FOREIGN EXCHANGE FORWARD CONTRACTS Settlement date Currency Counterparty Forward rates Contract price Fair value Unrealized gain (loss) July 10, 2017 Euro CIBC World Markets July 10, 2017 Euro CIBC World Markets July 10, 2017 GBP CIBC World Markets $ (13,196,895) $ (13,870,171) $ (673,276) ,062,180 1,037,354 (24,826) (1,188,044) (1,206,362) (18,318) Derivative liabilities (716,420) Total net unrealized loss on foreign exchange forward contracts $ (716,420) The accompanying notes are an integral part of these interim financial statements. TIMBERCREEK GLOBAL REAL ESTATE FUND 9

11 SCHEDULE OF INVESTMENTS June 30, 2017 SCHEDULE 2 EQUITY SWAPS* Security name Maturity date Counterparty U.S. Dollar Swaps: American Homes 4 Rent Preferred Series E 6.35% Blackstone Mortgage Trust Inc. Colony Northstar Inc. - Class A Contract price Fair value Unrealized gain (loss) December 28, 2018 J.P. Morgan 1,417,333 1,420,476 $ 3,143 December 28, 2018 J.P. Morgan 2,743,536 2,818,428 74,892 January 16, 2019 J.P. Morgan 1,235,576 1,352, ,696 Lasalle Hotel Properties December 28, 2018 J.P. Morgan 2,586,812 2,695, ,268 MFA Mortgage Investments Inc. MGM Growth Properties LLC Pebblebrook Hotel Trust Preferred Series D 6.375% Rexford Industrial Realty Inc. Preferred Series A 5.875% December 28, 2018 J.P. Morgan 1,661,350 1,775, ,199 December 28, 2018 J.P. Morgan 1,821,677 1,900,197 78,520 December 28, 2018 J.P. Morgan 849, ,270 15,814 December 28, 2018 J.P. Morgan 1,395,815 1,442,422 46,607 STAG Industrial, Inc. December 28, 2018 J.P. Morgan 11,116 11,116 STAG Industrial, Inc. Preferred Series C 6.875% Sunstone Hotel Investors Preferred Series E 6.95% Two Harbors Investment Corp. Western Asset Mortgage Capital Corp. December 28, 2018 J.P. Morgan 1,355,234 1,386,623 31,389 December 28, 2018 J.P. Morgan 2,286,803 2,331,846 45,043 December 28, 2018 J.P. Morgan 1,166,259 1,214,919 48,660 December 28, 2018 J.P. Morgan 1,352,637 1,431,106 78,469 Total unrealized gain on equity swaps $ 772,816 Apollo Commercial Real Estate Finance, Inc. December 28, 2018 J.P. Morgan 1,713,742 1,711,850 $ (1,892) Care Capital Properties, Inc. December 28, 2018 J.P. Morgan 2,356,829 2,312,200 (44,629) CBL & Associates Properties Inc. Lasalle Hotel Properties Series I 6.375% December 28, 2018 J.P Morgan 2,459,319 2,244,904 (214,415) December 28, 2018 J.P. Morgan 1,204,362 1,203,847 (515) Sabra Healthcare REIT Inc. December 28, 2018 J.P. Morgan 1,684,284 1,451,075 (233,209) Sabra Healthcare REIT Inc. Preferred Series A 7.125% December 28, 2018 J.P. Morgan (2,408) (2,408) Starwood Property Trust Inc. December 28, 2018 J.P. Morgan 2,472,240 2,453,041 (19,199) Total unrealized loss on equity swaps $ (516,267) Total net unrealized gain on equity swaps $ 256,549 *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 10

12 1. 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 interim financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), including International Accounting Standards ( IAS ) 34 interim financial reporting. The accompanying interim financial statements should be read in conjunction with the notes to the Fund s financial statements for the year ended December 31, 2016, since these financial statements do not contain all disclosures required by IFRS for annual financial statements. These interim financial statements reflect all normal and recurring adjustments which are in the opinion of management, necessary for a fair presentation of the respective interim periods presented. The interim financial statements were approved by the Board of Directors of the Manager on August 24, (b) Basis of measurement These interim 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 interim financial statements are presented in Canadian dollars, which is the functional currency of the Fund. TIMBERCREEK GLOBAL REAL ESTATE FUND 11

13 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies applied by the Fund in these interim financial statements are the same as those applied by the Fund in its financial statements for the year ended December 31, 2016, which were prepared in accordance with IFRS. 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 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 interim 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 interim 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 TIMBERCREEK GLOBAL REAL ESTATE FUND 12

14 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. (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 TIMBERCREEK GLOBAL REAL ESTATE FUND 13

15 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 six months ended June 30, 2017, the Fund incurred a Management Fee of $756,563 based on 1.5% of net asset value for Class A and Class B (June 30, $967,976; 1.80% of net asset value for Class A and Class B). As at June 30, 2017, $226,573 (December 31, $13,655) was payable to the Manager. (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 six months ended June 30, 2017, the Fund incurred Trailer Fees of $147,024 (June 30, $178,204). As at June 30, 2017, $77,670 in Trailer Fees (December 31, $2,691) 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 June 30, 2017, the Fund has co-invested in four private debt investments at a total fair value of $9,942,419 (December 31, 2016 four debt investments totaling $9,443,549). The debt investments are secured by the properties to which they relate and bear interest at rates ranging between 8.47% and 20.00% ( % and 20.00%). The parent company of the Manager is responsible for the day-to-day operations and providing all general management and administration services. During the six months ended June 30, 2017, the Fund earned income on these investments of $766,309 (June 30, $489,571). (c) Timbercreek Canadian Direct LP ( TCD LP ) As at June 30, 2017, the Fund has invested in TCD LP at a fair value of $9,276,881 (December 31, $9,556,070), 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 six months ended June 30, 2017, the Fund received distributions of $201,340 (June 30, 2016 $242,219) from TCD LP. 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. TIMBERCREEK GLOBAL REAL ESTATE FUND 14

16 (d) Timbercreek UK VTEC LP ( VTEC ) As at June 30, 2017, the Fund has no investment in VTEC (December 31, $Nil). 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 six months ended June 30, 2017, the Fund received distributions of $Nil (December 31, 2016 $3,764,414) from VTEC which included a return of capital of $Nil (December 31, 2016 $3,649,161). (e) Timbercreek Global AMC Holdings Partnership ( Global AMC ) As at June 30, 2017, the Fund has no investment in Global AMC (December 31, $Nil). During 2016, the Fund received a final payment of $104,882 from Global AMC relating to the sale of its assets. (f) Timbercreek Westcott Limited Partnership ( Westcott ) The Fund invested in Westcott at a fair value of $1,206,205 (December 31, $1,184,326). During the six months ended June 30, 2017, the Fund received $60,307 in interest income from Westcott (June 30, $64,067). (g) Independent review committee During the six months ended June 30, 2017, fees totaling $27,120 (June 30, $15,255) 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. As at June 30, 2017, the margin facility balance is nil (December 31, $8,147). TIMBERCREEK GLOBAL REAL ESTATE FUND 15

17 10. CREDIT FACILITY The Fund entered into a credit facility agreement on March 8, The credit facility has an available credit limit of $20,000,000 with an option to borrow by way of prime rate loan with an interest rate of prime plus 1.0%, banker s acceptances with a stamping fee of 0.65%, US base rate loans at the US base rate plus 1.0% or LIBOR loans based upon the LIBOR01 page. As at June 30, 2017, $10,000,000 (December 31, $nil) was outstanding on the credit facility. For the six months ended June 30, 2017, the Fund s highest and lowest borrowings were approximately $15.0 million and $10.0 million, respectively (or 14.5% and 9.7%, respectively, of Total Assets). For the six months ended June 30, 2016, the Fund s highest and lowest borrowings were approximately $18.1 million and $9.1 million, respectively (or 14.9% and 7.5%, respectively, of Total Assets). 11. 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 June 30, 2017, 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. During the six months ended June 30, 2017, 626,749 units of Class A and 405,614 units of Class B were redeemed. During the six months ended June 30, 2016, the unitholders did not redeem any Class A units and Class B units. During the six months ended June 30, 2017 and 2016, the Class A and Class B units issued and outstanding changed as follows: Class A units Class B units Redeemable units outstanding, January 1, ,110,557 1,354,448 Redeemed (626,749) (405,614) Exchanged (4,102) 3,778 Redeemable units outstanding, June 30, ,479, ,612 Class A units Class B units Redeemable units outstanding, January 1, ,752, ,414 Exchanged 8,904 (8,248) Redeemable units outstanding, June 30, ,761, ,166 TIMBERCREEK GLOBAL REAL ESTATE FUND 16

18 (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 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. Six months ended June 30, 2017 Six months ended June 30, 2016 Per unit Total Per unit Total Class A $ 0.42 $ 2,607,394 $ 0.42 $ 2,838,549 Class B , ,642 Total $ 3,075,125 $ 3,156,191 As at June 30, 2017, $1,350,787 (December 31, $1,567,651) was payable to the unitholders. TIMBERCREEK GLOBAL REAL ESTATE FUND 17

19 12. 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 six months ended June 30, 2017, 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. (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 Rating 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. TIMBERCREEK GLOBAL REAL ESTATE FUND 18

20 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 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 June 30, 2017 and December 31, 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 June 30, 2017 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 $2.8 million or 3.2% of net assets (December 31, $5.5 million or 5.4% 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 TIMBERCREEK GLOBAL REAL ESTATE FUND 19

21 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 June 30, 2017, 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 $436,228 or 0.5% of net assets (December 31, $410,790 or 0.4% of net assets). In practice, actual results may differ from this sensitivity analysis and the differences could be material. Fair value of Currency investments and other assets Notional forward contracts Equity swaps Net foreign currency exposure Percentage of net assets June 30, 2017 United States Dollar $ 21,824,305 $ $ 256,549 $ 22,080, % Euro 12,339,257 (12,832,817) (493,560) (0.6%) Australian Dollar 4,925,113 4,925, % Hong Kong Dollar 5,774,948 5,774, % Japanese Yen 2,245,073 22,245, % New Zealand Dollar % Singapore Dollar 9,090,346 9,090, % British Pound 1,206,350 (1,206,362) (12) 0.0% 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) % TIMBERCREEK GLOBAL REAL ESTATE FUND 20

22 13. FAIR VALUE MEASUREMENTS The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at June 30, 2017: Level 1 Level 2 Level 3 Total Financial assets: Equities $ 55,541,498 $ $ $ 55,541,498 Equity swaps 772, ,816 Private debt 9,942,419 9,942,419 Private direct real estate 9,276,881 9,276,881 Private convertible debt 2,282,411 2,282,411 Private common equity 4,737,101 4,737,101 Financial liabilities: Forward contracts (716,420) (716,420) Equity swaps (516,267) (516,267) $ 55,541,498 $ (459,871) $ 26,238,812 $ 81,320,439 During the six months ended June 30, 2017, 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 six months ended June 30, 2017: As at January 1, 2017 Realized fair value gain (loss) Unrealized fair value (loss) Purchases/ (Dispositions) As at June 30, 2017 Financial assets: Private debt $ 9,443,549 $ $ (46,053) $ 544,923 $ 9,942,419 Private direct real estate 9,556,070 (279,189) 9,276,881 Private common equity 4,899,104 (162,003) 4,737,101 Private convertible debt 2,360,466 (78,055) 2,282,411 $ 26,259,189 $ $ (565,300) $ 544,923 $ 26,238,812 TIMBERCREEK GLOBAL REAL ESTATE FUND 21

23 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 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 TIMBERCREEK GLOBAL REAL ESTATE FUND 22

24 Significant unobservable inputs used in measuring fair value The table below sets out information about significant unobservable inputs used at June 30, 2017 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 June 30, December 31, Valuation Unobservable (weighted unobservable Description technique input average) inputs Unlisted private equity investments and private direct real estate Private convertible debt $ 14,013,982 $ 14,455,174 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 period. $ 2,282,411 $ 2,360,466 Recent market transaction, representing fair value at period end. n/a n/a n/a n/a n/a n/a Private debt $ 9,942,419 $ 9,443,549 Carrying value. These are shortterm loans repayable at the option of the borrower. n/a n/a n/a 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. TIMBERCREEK GLOBAL REAL ESTATE FUND 23

25 14. NET CHANGES IN FAIR VALUE OF INVESTMENTS AND DERIVATIVES Net change from financial assets and liabilities held for trading: Net realized gain (loss) on equity swaps and forward contracts Unrealized (depreciation) appreciation 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 depreciation in value of investments, including foreign exchange adjustments Six months ended June 30, 2017 Six months ended June 30, 2016 $ 2,541,089 $ (1,934,169) (1,468,124) 4,739,401 2,574,460 4,705,238 (1,567,471) (2,409,627) $ 2,079,954 $ 5,100, 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. 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 June 30, 2017 Derivative assets equity swaps $ 772,816 $ $ 772,816 $ (516,267) $ $ 256,549 Derivative assets forward contracts Total 772, ,816 (516,267) $256,549 Derivative liabilities equity swaps 516, ,267 (516,267) Derivative liabilities forward contracts 716, , ,420 Total 1,232,687 1,232,687 (516,267) 716,420 TIMBERCREEK GLOBAL REAL ESTATE FUND 24

26 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) 16. 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 period. The increase in net assets attributable to holders of redeemable units per unit for the periods ended June 30, 2017 and 2016 is calculated as follows: June 30, 2017 Class A units Class B units Increase in net assets attributable to holders of redeemable units $ 2,534,168 $ 553,709 Weighted average of redeemable units outstanding during the period 5,682,343 1,086,785 Increase in net assets attributable to holders of redeemable units per unit $ 0.45 $ 0.51 June 30, 2016 Class A units Class B units Increase in net assets attributable to holders of redeemable units $ 5,545,120 $ 689,390 Weighted average of redeemable units outstanding during the period 6,755, ,760 Increase in net assets attributable to holders of redeemable units per unit $ 0.82 $ 0.91 TIMBERCREEK GLOBAL REAL ESTATE FUND 25