TIMBERCREEK GLOBAL REAL ESTATE FUND

Transcription

1 Financial Statements of TIMBERCREEK GLOBAL REAL ESTATE FUND Period from August 26, 2010 (commencement of operations) to December 31, 2010

2 KPMG LLP Telephone (416) Chartered Accountants Fax (416) Bay Adelaide Centre Internet Bay Street Suite 4600 Toronto ON M5H 2S5 Canada 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 net assets and investments as at December 31, 2010, the statements of operations, changes in net assets and cash flows for the period from August 26, 2010 (commencement of operations) to December 31, 2010, 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 Canadian generally accepted accounting principles, 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 audit. We conducted our audit 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 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 net assets and investments of Timbercreek Global Real Estate Fund as at December 31, 2010, and the results of its operations, changes in net assets and cash flows for the period then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants February 3, 2011 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.

3 Statement of Net Assets December 31, 2010 Assets Investments, at fair value (note 8) $ 73,193,030 Unrealized gain on forward contracts 566,872 Due from Timbercreek Asset Management Ltd. (note 3) 54,458 Dividends and interest receivable 465,616 74,279,976 Liabilities Margin facility (note 5) 8,504,164 Liabilities for portfolio assets purchased (note 2) 1,832,947 Management fee payable (note 3(a)) 7,031 Accounts payable and accrued liabilities 16,226 Distributions payable 1,143,884 11,504,252 Net assets, representing unitholders' equity $ 62,775,724 Net assets: Class A units $ 52,307,018 Class B units 10,468,706 Units outstanding (note 6): Class A units 4,521,300 Class B units 875,727 Net assets per unit: Class A units $ Class B units The accompanying notes are an integral part of these financial statements. 1

4 Statement of Operations Investment income: Dividends $ 1,626,660 Foreign dividend withholding tax (201,504) Distributions from income trusts 142,635 Interest 166,675 1,734,466 Expenses: Management fee (note 3(a)(i)) 448,718 Service fee (note 3(a)(ii)) 81,330 Audit fees 79,383 Legal fees 6,106 Unitholder reporting 65,540 Interest and borrowing fees 46,176 Other operating costs 75, ,005 Net investment income 931,461 Realized and unrealized gains on investments and transaction costs: Commissions and other portfolio transaction costs (226,466) Net realized gain on sale of investments, including foreign exchange adjustments, swaps and forward contracts 812,176 Unrealized gain on investments 1,951,014 Net gain on investments 2,536,724 Increase in net assets from operations $ 3,468,185 Increase in net assets from operations for each class: Class A units $ 2,842,225 Class B units 83,882 Class I units 542,078 Increase in net assets from operations per unit: Class A units 0.64 Class B units 0.42 Class I units 0.79 The accompanying notes are an integral part of these financial statements. 2

5 Statement of Changes in Net Assets Class A Class B Class I units units units Total Net assets, beginning of period $ $ $ $ Increase in net assets from operations 2,842,225 83, ,078 3,468,185 Distributions to unitholders (note 6(b)) (1,265,964) (204,995) (52,817) (1,523,776) Net proceeds from issuance of units 49,937,448 2,450,136 8,443,731 60,831,315 Net exchange of units 793,309 8,139,683 (8,932,992) Net assets, end of period $ 52,307,018 $ 10,468,706 $ $ 62,775,724 The accompanying notes are an integral part of these financial statements. 3

6 Statement of Cash Flows Cash provided by (used in): Operating activities: Increase in net assets from operations for the period $ 3,468,185 Net gain on investments, which does not involve cash (2,536,724) Change in non-cash operating items: Increase in interest and dividends receivable (465,616) Increase in accounts payable and accrued liabilities 16,226 Increase in management fees payable 7,031 Liabilities for portfolio assets purchased 1,832,947 Increase in due from Timbercreek Asset Management Ltd. (54,458) 2,267,591 Financing activities: Net proceeds from issue of units 59,663,459 Distributions to unitholders (379,892) 59,283,567 Investing activities: Proceeds from sale of investments 35,309,163 Purchase of investments (104,949,243) Net payments from maturity of forward contracts (143,795) (69,783,875) Net foreign exchange loss on cash accounts (271,447) Increase in margin facility, being margin facility, end of period $ (8,504,164) Non-cash item: Proceeds from issue of units in the form of securities $ 1,167,856 The accompanying notes are an integral part of these financial statements. 4

7 Statement of Investments December 31, 2010 Number of Average Fair % of net Description shares/units cost value assets Common equities: Australia: Charter Hall Retail REIT 1,085,000 $ 3,108,859 $ 3,225, Canada: Artis Real Estate Investment Trust 241,500 2,910,967 3,190, Dundee Real Estate Investment Trust 76,900 1,922,648 2,320, Innvest Real Estate Investment Trust 251,000 1,645,781 1,679, Leisureworld Senior Care Corp. 232,400 2,373,526 2,484, Transglobe Apartment Real Estate Investment Trust 230,887 2,323,213 2,396, ,176,135 12,070, France: Societe de La Tour Eiffel SA 5, , , Hong Kong: Fortune Real Estate Investment Trust 1,600, , , Japan: Fukuoka REIT Corp ,333,630 1,360, Netherlands: VastNed Offices/Industrial 146,959 2,288,653 2,456, New Zealand: Amp Nz Office Ltd. 6,271,408 3,568,972 3,738, Kiwi Income Property Trust 3,583,648 2,651,600 2,774, ,220,572 6,513, Singapore: Alms Amp Cap Industrial REIT 6,050, ,757 1,008, Suntec Real Estate Trust 1,634,300 1,800,035 1,887, Cache Logistics Trust 2,770,000 2,126,194 2,061, ,915,986 4,956, South Africa: Redfine Properties Ltd. 1,669,000 1,822,609 2,003, United States of America: Apollo Commercial Real Estate Finance Inc. 186,000 3,195,292 3,024, Medical Properties Trust Inc. 170,000 1,781,061 1,832, Starwood Property Trust Inc. 201,324 4,064,945 4,299, ,041,298 9,156, Total common equities 41,129,298 43,016,

8 Statement of Investments (continued) December 31, 2010 Number of Average Fair % of net Description shares/units cost value assets Preferred shares: United States of America: Apartment Investment and Management Co. Preferred Series U 7.75% 40,000 1,043,780 1,000, Apartment Investment and Management Co. Preferred Series V 8% 14, , , Ashford Hospitality Trust, Inc. Preferred Series D 8.45% 60,000 1,429,897 1,394, CBL & Associates Properties, Inc. Preferred Series C 7.75% 31, , , CBL & Associates Properties, Inc. Preferred Series D 7.375% 102,500 2,385,466 2,403, Cedar Shopping Centres Preferred Series A 8.875% 65,400 1,743,461 1,633, Corporate Office Properties Trust Preferred Series G 8% 9, , , Developers Diversified Realty Corp. Preferred Series G 8% 31, , , DuPont Fabros Technology, Inc. Preferred Series A % 85,000 2,148,375 2,110, Entertainment Properties Trust Preferred Series B 7.75% 59,635 1,529,567 1,443, Glimcher Realty Trust Preferred Series G 8.125% 33, , , HCP Inc. Preferred Series F 7.1% 14, , , Hudson Pacific Properties 35, , , Kite Realty Group Trust Preferred Series A 8.25% 40,000 1,026, , LaSalle Hotel Properties Preferred Series E 8% 24, , , Omega Healthcare Investors, Inc. Preferred Series D % 44,600 1,182,602 1,142, SL Green Realty Corp. Preferred Series D 7.875% 23, , , Taubman Centers, Inc. Preferred Series G 8% 48,744 1,270,734 1,228, Total preferred shares 19,269,787 18,653, Total equities 60,399,085 61,670,

9 Statement of Investments (continued) December 31, 2010 Number of Average Fair % of net Description shares/units cost value assets Private direct real estate: Canada: TC Core 2 LP (note 3(c)) 2,400,000 2,400,000 2,397, Timbercreek Canadian Direct LP (note 3(d)) 571,500 5,715,000 5,715, Mortgage investments: Canada: Multi-Family Loan Portfolio (note 3(b)) N/A 3,410,000 3,410, Total direct real estate 11,525,000 11,522, Total investments 71,924,085 73,193,030 Commissions and other portfolio transactions costs (115,197) Total net investments $ 71,808,888 73,193, Foreign exchange forward contracts*: Unrealized gain 566, Other liabilities, net (10,984,178) (17.51) Net assets $ 62,775, *Foreign Exchange Forward Contracts Notional Fair Unrealized Settlement date Counterparty value value gain (loss) U.S. Dollar contracts: January 28, 2011 CIBC World Markets $ (4,087,280) $ (3,978,400) $ 108,880 February 28, 2011 CIBC World Markets (7,148,260) (6,962,200) 186,060 March 21, 2011 CIBC World Markets (8,160,160) (7,956,800) 203,360 March 31, 2011 CIBC World Markets (6,414,080) (6,365,440) 48, ,940 Euro contracts: February 28, 2011 CIBC World Markets (3,616,164) (3,596,130) 20,034 February 28, 2011 CIBC World Markets 799, ,140 (102) 19,932 Total unrealized gains on forward contracts $ 566,872 Notes: U.S. Dollar spot rate = Euro spot rate = The accompanying notes are an integral part of these financial statements. 7

10 Notes to Financial Statements 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"). Timbercreek Asset Management Ltd. (the "Trustee" or "Manager") is the trustee, 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"). FSX Securities Canada Inc. (the "Global Investment Advisor"), is the global investment advisor which has been engaged to provide portfolio and investment services in respect of global real estate investments pursuant to an investment management agreement dated August 26, 2010 (the "Investment Management Agreement"). The Fund commenced active operations on August 26, The investment objectives of the Fund are to (i) provide holders of units ("Unitholders") with quarterly cash distributions initially targeted to be $0.21 per unit ($0.84 per annum representing an annual cash distribution of 7.0% based on the $12.00 per unit issue price); and (ii) preserve capital while providing the opportunity for long-term capital appreciation for Unitholders. In order to achieve its objective, 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 will consist of publicly traded real estate securities, the Fund is able to invest up to 20% of its total assets directly in real estate where the Global Investment Advisor believes it is the most efficient way to access desired real estate. Further, the Fund is able to invest across the capital structure including corporate debt, preferred shares, public or private equity, as well as direct ownership of assets. 1. Significant accounting policies: These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). In applying Canadian GAAP, the Manager may make estimates and assumptions that affect the reported amounts of assets, liabilities, investment income and expenses reported during the period. Actual results could differ from those estimates. Those estimates are reviewed periodically by the Manager and as adjustments become necessary, they are reported in the statement of operations in the period in which they become known. The key area of estimation where management has made a difficult or subjective judgement, often as a result of matters that are inherently uncertain, is the valuation of private direct real estate investments. Significant changes in assumptions could materially change the recorded carrying value. The Fund's financial statements are presented in Canadian dollars. 8

11 1. Significant accounting policies (continued): A net asset value is calculated daily for each class of units. The net asset value of a particular class of units is computed by calculating the value of that class' proportionate share of the assets and liabilities of the Fund common to all classes less the assets and liabilities of the Fund attributable only to that class. Expenses directly attributable to a class are charged directly to that class. Income, realized and unrealized gains and losses from investment transactions and other expenses are allocated proportionately to each class based upon the relative net asset value of each class. (a) Financial instruments - disclosure and presentation: In accordance with The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 3862, Financial Instruments - Disclosures, the Fund is required to classify its financial instruments using a fair value hierarchy that reflects the significance of the inputs used to measure fair value into three broad levels. Investments 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 8 for fair value measurements analysis. 9

12 1. Significant accounting policies (continued): (b) Valuation of investments: In accordance with Accounting Guideline 18, Investment Companies, the Fund's investments are required to be recorded at fair value as defined by CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855"). The net assets of the Fund for financial reporting purposes ("Net Assets") are calculated in accordance with Section (i) Public securities: Investments in securities listed on a public securities exchange or traded on an overthe-counter market are valued at the closing bid price. Securities with no available closing bid price are valued at the last sale or close price. Securities for which a closing bid price or last sale or close price are unavailable or securities for which market quotations are unreliable or not reflective of all material information are valued at their fair values as determined by the Manager using available sources of information and commonly accepted industry valuation techniques including valuation models. Short-term investments, including short-term debt instruments maturing within less than 90 days from the date of acquisition are stated at fair value, using amortized costs which approximate fair value. (ii) Private direct real estate: The Fund invests in private direct real estate investments through equity interests held in limited partnerships. These investments are recorded at net asset value per unit of the limited partnership. The real estate investments underlying the limited partnerships 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 the real estate investments are obtained from qualified independent appraisers twice per year for each property following the year of acquisition. Other real estate investments including private mortgage investments held by these limited partnerships are recorded at fair value as outlined in (iii). 10

13 1. Significant accounting policies (continued): (iii) Private mortgage investments: As there are no quoted prices in an active market for these mortgage investments, the Manager makes its determination of fair value based on its assessment of the current mortgage market for mortgage investments of same or similar terms. Typically, these mortgage investments approximate their carrying values given the mortgage 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 is no longer reasonably assured, the fair value of the mortgage is reduced to the estimated net realizable value of the underlying security. Any unrealized change in the fair value of a mortgage investment is recorded in the statement of operations as an unrealized gain (loss) in value of investments. A realized change in the fair value of a mortgage as a result of a disposition or repayment is recorded as a net realized gain (loss) on sale of investments. (c) 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. Upon closing of a contract, the gain or loss is included in net realized gain (loss) on sale of investments. Outstanding settlement amounts on the close out of foreign exchange forward contracts are included in receivable for foreign exchange forward contracts or payable for foreign exchange forward contracts in the statement of net assets. (d) Other assets and liabilities: Dividends and interest receivable and due from Timbercreek Asset Management Ltd. are recorded at amortized cost which approximates their fair value. Liabilities for portfolio assets purchased, management fee payable, accounts payable, accrued liabilities and distributions payable are designated as financial liabilities and reported at amortized cost, which approximates their fair value. 11

14 1. Significant accounting policies (continued): (e) 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 are expensed and included in commissions and other portfolio transaction costs in the statement of operations. (f) 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. Interest income is accrued daily and dividend income is recognized on the ex-dividend date along with withholding taxes on foreign dividends, if any. Distributions received from investment trusts are recorded when declared. 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. (g) Translation of foreign currencies: The fair values of investments and other assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing on each business day, except for the historical costs of investments, which are translated at the rate of the exchange prevailing on the date of purchase. The proceeds from the sale of investments, dividends and interest income in foreign currencies are translated into Canadian dollars at the approximate rate of exchange prevailing on the dates of such transactions. Gains and losses from transactions, and the translation of foreign currencies are considered to be investment transactions and, accordingly, are included in the net realized gain or loss on sale of investments or in the net change in unrealized gain on investments. (h) Capital management: The Manager manages the capital of the Fund, which consists of the Net Assets of the Fund, in accordance with the investment objectives set out in the Fund's prospectus. The Fund is not subject to externally imposed capital requirements. 12

15 1. Significant accounting policies (continued): (i) Net assets per unit: The net assets per unit is calculated by dividing the net assets of a particular class of units by the total number of units of that particular class outstanding at the end of the period. (j) Increase in net assets from operations per unit: Increase in net assets from operations per unit is based on the increase in net assets from operations attributed to each class of units, divided by the weighted average number of units outstanding of that class during the period. (k) Derivative transactions: The Fund may use derivative contracts to enhance returns of the Fund and to manage risks associated with its investments. The value of the contracts are marked to market on the valuation date and the resultant gains and losses, both realized and unrealized, are recognized in the statement of operations. (l) Future accounting standards issued and not yet adopted: International Financial Reporting Standards: The Canadian Accounting Standards Board ("AcSB") has extended the deferral of mandatory adoption of International Financial Reporting Standards ("IFRS") to fiscal periods beginning on or after January 1, 2013 for entities applying Accounting Guidelines 18, Investment Companies. The Manager intends to have the Fund adopt IFRS on January 1, The Manager has developed an IFRS changeover plan, which addresses key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and Canadian GAAP that are expected to impact financial reporting. 13

16 1. Significant accounting policies (continued): Based on the Manager's current evaluation of the differences between Canadian GAAP and IFRS, the adoption of IFRS is not expected to have a significant impact on the calculation of net asset value per unit. IFRS is expected to have an impact on the presentation of unitholders' equity and result in additional disclosure in the accompanying notes. The Manager continues to monitor changes to IFRS. The current assessment and IFRS changeover plans may change if new standards are issued or if interpretations of existing standards are revised. 2. Liabilities for portfolio assets purchased: Liabilities for portfolio assets purchased represent amounts owed for unsettled trades. 3. 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%. 14

17 3. Related party transactions (continued): 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 period, 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 that they would have received had the Total Return of the Fund implied a lower percentage Management Fee. In consideration for the portfolio advisory services received from the Manager, the Fund incurred a management fee of $448,718. (ii) Service fee: The Fund pays the Manager who will pay to each registered dealer a service fee (the "Service 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 Service Fee is calculated and payable at the end of each calendar quarter, commencing on September 30, There is no service fee applicable to the Class B units or Class I units. During the period ended December 31, 2010, the Fund incurred service fees of $81,330 pertaining to Class A units. 15

18 3. Related party transactions (continued): (b) Timbercreek Mortgage Investment Corporation: The Fund and Timbercreek Mortgage Investment Corporation ("TMIC") are related by virtue of common management. As at December 31, 2010, the Fund and TMIC have co-invested in a private direct mortgage investment secured by a portfolio of multi-family and commercial properties. The Fund has co-invested in private direct mortgages through the Fund directly totaling $3.4 million and through Timbercreek Canadian Direct LP totaling $3.6 million. The Manager is responsible for the day-to-day operations, providing all general management and administration services and management and administration of the TMIC's mortgage loan portfolio. During the period ended December 31, 2010, the Fund received interest income on this investment of $17,836. (c) TC Core 2 LP: In August 2010, 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, multi-family 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. During the period ended December 31, 2010, the Fund received partnership distributions from TC Core 2 LP of $25,496. (d) Timbercreek Canadian Direct LP: In December 2010, the Fund invested $5,715,000 in Timbercreek Canadian Direct LP ("TCD LP"), a limited partnership formed for the purpose of co-investing in direct multifamily real estate and private mortgage investments. TCD LP has retained the Manager to provide fund management and investment advisory services. TCD LP and the Fund are related parties by virtue of common management. All transactions with related parties have occurred in the normal course of operations and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 16

19 4. Operating expenses: The Fund is responsible for its operating expenses relating to the carrying on of its business, including legal, audit, unitholder reporting, transfer agency services 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 series. The Manager pays for such expenses on behalf of the Fund, except for certain expenses such as interest and taxes, and is then reimbursed by the Fund. As at December 31, 2010, $54,458 is payable by the Manager to the Fund for reimbursement of certain expenses no longer required to be borne by the Fund. 5. Margin facility: The Fund may utilize various forms of leverage including a margin facility that will allow the Fund to borrow funds from time to time that the Manager determines 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 of the leverage. In the event that the leverage exceeds 25% of Total Assets, the Manager will take reasonable measures to reduce the total borrowings such that it is below 25% of the Total Assets of the Fund. The Fund has provided the prime broker interest in all of the assets of the Fund as collateral for leverage purposes. For the period ended December 31, 2010, the Fund's highest and lowest borrowings were approximately $13.8 million and nil, respectively (21% and 0%, respectively of Total Assets). 6. Units of the Fund: The Fund is authorized to issue an unlimited number of redeemable units of three classes, Class A units, Class B units and Class I units, each of which represents an equal, undivided, beneficial interest in the Net Assets of the Fund. 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. The Class I units automatically convert into Class B units on the first business day after four months from the date of issuance. 17

20 6. Units of the Fund (continued): During the period, the Class A units, Class B units and Class I units issued and outstanding changed as follows: Class A Class B Class I units units units Units issued on commencement of operations, August 26, ,452, , ,517 Exchanged 68, ,950 (723,517) Redeemed Units outstanding, December 31, ,521, ,727 (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: Commencing in 2012, 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 such year. 18

21 6. Units of the Fund (continued): (ii) Monthly: Class A units may be surrendered for redemption on the last business day of any month, other than February (the "Redemption Date"), by the 15 th day of such month. 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 (the "Class A Monthly Redemption Price") equal to the lesser of: (i) 95% of the Trading Price (as defined below) of the Class A units; and (ii) 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 TSX or such other exchange on which the Class A units may be listed (the "Exchanges") for the ten trading days immediately preceding the relevant Redemption Date. Market Price means the closing price of the Class A units on the Exchanges 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: (i) 95% of the Trading Price of the Class A units multiplied by the Class B Exchange Ratio; and (ii) 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. For the period ended December 31, 2010, the Fund declared distributions of $0.280 per Class A unit for a total of $1,265,964 and $0.295 per Class B unit for a total of $204,995 and $0.073 per Class I unit for a total of $52,817. As at December 31, 2010, $1,143,884 was payable to the Unitholders. 19

22 7. Financial instrument risks: 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, economic conditions and the market 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. (a) 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 situated around the world, monitoring the Fund's positions and market events, and diversifying the investment portfolio within the parameters of the investment objective. To assist in managing risk, the Manager and Global Investment Advisor use 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. (b) Credit risk: Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Fund. The maximum exposure to credit risk is represented by the total assets of the Fund. For publically traded securities, the Fund minimizes the concentration of risk by trading with a large number of brokers and counterparties recognized on the Exchanges. The risk of default is considered minimal as all transactions are settled and paid for upon delivery using approved brokers. Credit risk may arise on private direct mortgage investments where there is a possibility that a borrower may be unable to honour its mortgage 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 on each mortgage prior to funding. This generally includes, but is not limited to, (a) engaging professional independent consultants, lawyers and appraisers, and (b) performing credit checks on prospective borrowers; and (iii) actively monitoring the mortgage portfolio and initiating recovery procedures where required. 20

23 7. Financial instrument risks (continued): The Fund currently uses only one counterparty. Therefore, the credit risk related to the forward agreement is concentrated in that one counterparty. The Fund is exposed to credit risk in preferred share securities which are disclosed in the Fund's statement of investments. The Fund's credit risk exposure by credit ratings of the invested portfolio is listed as follows: Percentage of net assets P Best credit 8.95% P Second best credit 3.36% P Third best credit 1.27% Unrated 16.14% Total 29.72% Certain preferred share securities are unrated. 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. For those companies which do not have public debt securities, they are typically not rated by the rating agencies. As such, to minimize the risk associated with a fixed return, preferred share investment, the Global Investment Advisor conducts a thorough analysis of the issuer to determine their creditworthiness. (c) 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. 21

24 7. Financial instrument risks (continued): 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 Exchanges may impose limits on trading of derivatives. The Fund may invest in illiquid private direct real estate investments, including real property and mortgage 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 seeks to acquire stabilized, income-producing, multi-family properties in primary and secondary markets across Canada. In addition, the Fund is restricted to 20% of the Fund's total assets in private direct ownership investments. In addition, the Fund has the ability to borrow up to 25% of the net asset value of the Fund to enhance investment returns and maintain liquidity. (d) Market risk: (i) 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. There is minimal sensitivity to interest rate fluctuations on any cash and cash equivalents invested at short-term market interest rates. In addition, all of the mortgage investments of the Fund bear interest at fixed rates. (ii) 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 loss of capital. The most significant exposure to other price risk for the Fund arises from its investment in public securities. 22

25 7. Financial instrument risks (continued): If equity prices on the respective stock exchanges for these securities have increased or decreased by 5% at December 31, 2010 with all other variables held constant, the net assets of the Fund would have increased or decreased, respectively, by approximately $3.1 million (approximately 4.9% of total net assets). In practice, the 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. (iii) 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 foreign exchange forward contracts for hedging purposes to reduce its foreign currency exposure or to establish exposure to foreign currencies. The Fund's investments in private direct real estate are all situated within Canada and transacted in Canadian dollars and, therefore, not subject to currency risk. 23

26 7. Financial instrument risks (continued): The table below indicates the currencies (excluding Canadian dollars) to which the Fund had exposure as at the period end in Canadian dollar terms, including the underlying principal forward exchange contracts, if any: Foreign Foreign currency exchange Net foreign Percentage financial forward currency of instruments contracts exposure net assets United States Dollar $ 30,249,732 $ (25,262,840) $ 4,986, % Euro 2,909,616 (2,796,990) 112, % Australian Dollar 3,225,228 3,225, % Hong Kong Dollar 820, , % Japanese Yen 1,360,247 1,360, % New Zealand Dollar 6,513,060 6,513, % Singapore Dollar 4,971,615 4,971, % South African Rand 2,003,551 2,003, % As at December 31, 2010, if the Canadian dollar had strengthened or weakened by 1.0% in relation to the foreign currencies listed above with all other variables being held constant, the Fund's Net Assets would have increased or decreased, respectively, by approximately $239,942 (approximately 0.38% of total Net Assets). In practice, the actual results may differ from this sensitivity analysis and the differences could be material. 8. Classification of financial instruments - 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, 2010: Level 1 Level 2 Level 3 Total Financial assets: Equities $ 61,670,523 $ $ $ 61,670,523 Forward contracts 566, ,872 Mortgage investments 3,410,000 3,410,000 Private direct real estate 8,112,507 8,112,507 $ 61,670,523 $ 566,872 $ 11,522,507 $ 73,759,902 24

27 8. Classification of financial instruments - fair value measurements (continued): During the period ended December 31, 2010, 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: Beginning End of of period, Realized Unrealized Net advances period, August 26, fair value fair value and December 31, 2010 gain/loss gain/loss repayments 2010 Financial assets: Mortgage investments $ $ $ $ 3,410,000 $ 3,410,000 Direct real estate private equity (2,493) 8,115,000 8,112,507 Total $ $ $ (2,493) $ 11,525,000 $ 11,522, Comparison of net asset value and net assets: In accordance with National Instrument , the net asset value per unit compared to the net assets per unit and an explanation of the differences between such amounts are required in the notes to the financial statements. The difference between the net asset value per unit and the net assets per unit in the statement of net assets is due to different pricing methodologies used to calculate the net assets for financial reporting purposes and the net asset value for fund pricing purposes. Specifically, for investments that are traded in an active market where quoted prices are readily and regularly available, Section 3855 requires bid prices (for investments held) and ask prices (for investments sold short) to be used in the fair valuation of investments, rather than the use of closing sale prices currently used for the purpose of determining net asset value. For investments that are not traded in an active market, Section 3855 requires the use of specific valuation techniques, rather than the use of valuation techniques by virtue of general practice in the investment funds industry. Additional information on net asset value is described in note 1. 25

28 9. Comparison of net asset value and net assets (continued): These changes account for the difference between net asset value and net assets. The impact of Section 3855 on the Fund is as follows: Net asset value per unit Net assets per unit December 31, 2010: Class A $ $ Class B Income taxes: The Fund has qualified and is expected to continue to qualify as a mutual fund trust under the Income Tax Act (Canada) (the "Act") 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 to the Fund in future periods. It is the intention of the Fund to distribute all of its income and sufficient net realized capital gains so that the Fund will not be subject to income tax. If the Fund acquires non-portfolio property, as defined in the Act, it will be subject to tax at a rate similar to the corporate tax rate on the taxable income earned from and net realized capital gains from the disposition of the property. At December 31, 2010, the Fund does not hold any non-portfolio property. Non-capital losses are available to be carried forward for 20 years and applied against future years' taxable income. Capital losses for income tax purposes may be carried forward indefinitely and applied against future capital gains. As of December 31, 2010, there were no non-capital losses and no capital losses. 26