Celernus Mortgage and Income Trust Fund Financial Statements For the period from inception, April 9, 2013, to December 31, 2013

Transcription

1 Financial Statements For the period from inception, April 9, 2013, to December 31, 2013

2 Financial Statements For the period from inception, April 9, 2013, to December 31,2013 Contents Independent Auditor's Report 2 Financial Statements Statement of Net Assets Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Statement of Investments

3 18DO Tel: Fax: Toll free: BOO Canada LLP 3115 Harvester Road, Suite 400 Burlington ON L7N 3N8 Canada Independent Auditor's Report To the Unitholders of Celernus Mortgage and Income Trust Fund We have audited the accompanying financial statements of Celernus Mortgage and Income Trust Fund (the "Fund"), which comprise the statements of net assets and investments as at December 31, 2013, and the statements of operations, changes in net assets and cash flows for the period from inception, April 9, 2013, to December 31, 2013, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with 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. Auditor's 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 the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Fund'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 Fund'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 financial position of the Fund as at December 31, 2013 and the results of its operations, changes in net assets and its cash flows for the period from inception, April 9, 2013, to December 31, 2013 in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Burlington, Ontario March 26, BOO Canada llp. a Canadian limited liability partnership. is a member of BOO International Limited, a UK company limited by guarantee, and forms part of the international BOO network of independent member flrms.

4 Statement of Net Assets December 31, 2013 Assets Cash Mortgage investments (Note 4) Accrued interest receivable Liabilities Accounts payable and accrued liabilities Net assets representing unitholders' equity Number of units outstanding Net asset value per unit (Note 3) $ 1,959,773 4,730,208 19,313 6,709,294 16,894 $ 6,692, ,838 $ On behalf of the Fund. by the manager, Celernus Investment Partners Inc. Director The accompanying notes are an integral part of these financial statements. 3

5 Statement of Operations For the period from inception, April 9, 2013, to December 31, 2013 Income Mortgage interest Lender fees $ 201,024 29, ,869 Expenses Administration fees Advisory fees Arrangement fees Bank charges Management fees (Note 5) 11,126 12,514 1,575 2,563 26,592 54,370 Net investment income and increase in net assets from operations for the period Increase in net assets from operations - per unit $ 176,499 $ 0.40 The accompanying notes are an integral part of these financial statements. 4

6 Statement of Changes in Net Assets For the period from inception, April 9, 2013, to December 31, 2013 Net assets, beginning of period Increase in net assets from investment operations Distributions to unitholders From net investment income Capital transactions Proceeds from sale of units Payments for units redeemed Net assets issued to unitholders on reinvestment of distributions Net capital unit transactions Increase in net assets during the period and net assets, end of period Capital units transactions: Units outstanding, beginning of peri od Units issued Units redeemed Reinvested distributions Units outstanding, end of period $ $ 176,499 (165,714) 6,758,136 (242,235) 165,714 6,681,615 6,692, ,399 (23,918) 16, ,838 The accompanying notes are an integral part of these financial statements. 5

7 Statement of Cash Flows For the period from inception, April 9, 2013, to December 31, 2013 Cash flows from operating activities Net investment income Adju stm ents to reconcile net investment income to net cash provided by operating activities Changes in non-cash working capital balances Accrued interest receivable Accounts payable and accrued liabilities $ 176,499 (19,313) 16, ,080 Cash flows from investing activities Funding of mortgages Discharge of mortgages (5,664,022) 933,814 (4,730,208) Cash flows from financing activities Proceeds from sale of units Repayments for units redeemed 6,758,136 (242,235) 6,515,901 Increase in cash during the period and cash, end of period $ 1,959,773 The accompanying notes are an integral part of these financial statements. 6

8 Statement of Investments December 31, 2013 Mortgages (Note 4) Amortized Cost Fai r value Residential Cash and other net assets Net assets $4,730,208 $4,730,208 1,962,192 $6,692,400 Schedule of Mortgages Total I nterest Rate % Number of Mortgages Amortized Cost Fair Value 1 $75,000 $75, , , , , , , , , ,706,208 2,706, , , , , ,000 30, , , $4,730,208 $4,730,208 Schedule of Maturity Maturity Nu mber Amortized Fair of Mortgages Cost Value 20 $3,941,208 $3,941, , , $4? $4? All mortgages have maturities of two years or less and none of the mortgages are insured under the National Housing Act. The accompanying notes are an integral part of these financia l statements. 7

9 December 31, The Fund Celernus Mortgage and Income Trust Fund (the "Fund") is a unit trust which was established on April 9, 2013 by a Supplemental Trust Indenture under the laws of the Province of Ontario. The principal address of the Fund is 10 Four Seasons Place, Suite 1027, Toronto, Ontario M9B 6H7. The Fund is offered pursuant to prospectus exemptions to qualified investors in Canada and off-shore. In Canada, investors must be "accredited investors", or purchase a sufficient amount of the Funds to qualify for a prospectus exemption. The minimum purchase amount for accredited investors or other exempt investors is $25,000. The Fund aims to provide investors consistent monthly income while simultaneously protecting capital. The fund seeks to obtain this objective primarily through investments in mortgages with a loan to value measu re that provides a desirable degree of security of capital. In addition to first and second mortgages, the Fund may also invest in other asset backed debt, government and corporate bonds and debentures, convertible debt, common equities, warrants, preferred shares, trusts units, REITs, derivative instruments and other securities. The Fund may utilize leverage from time to time for the purposes of increasing returns or funding investor redemptions. The leverage will be variable not to exceed 140% net long. Celernus Investment Partners Inc. (the "Manager") is the manager and portfolio adviser of the Fund. The Fund is not a reporting issuer under securities legislation and therefore is relying on Part 2.11 of National Instrument ("NI ") for exemption from the requirement to file financial statements with the applicable securities regulatory authorities. 2. Significant Accounting Policies Basis of Presentation These financial statements, prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and the significant accounting policies are summarized below: Net asset value ("NAV") is the value of the total assets of a Fund less the value of its total liabilities at a Valuation Date (as defined below) determined in accordance with Part 14 of National Instrument Investment Fund Continuous Disclosure ("NI ") for the purpose of processing Unitholder transactions. Net assets ("net assets") are determined in accordance with CICA Handbook Section 3855, "Financial Instruments - Recognition and Measurement" ("Section 3855"). Section 3855 requires the use of bid prices for long positions and ask prices for short positions in the fair valuation of investments, rather than the use of closing prices currently used for the purpose of determining NAV. For investments that are not traded in an active market, Section 3855 requires the use of specific valuation techniques, rather than use of valuation techniques by virtue of general practice in the investment funds industry. Refer to Note 7 for details of the comparison between net assets per unit and NAV per unit. 8

10 December 31, Significant Accounting Policies (Continued) Valuation of Investments Investments are deemed to be categorized as held-far-trading and recorded at fair value in accordance with the CICA Accounting Handbook Section 3855: Financial Instruments - Recognition and Measurement ("Section 3855"). Investments in mortgages are valued at their fair value using the prevailing rate of return on new mortgages of similar type and term. As a result the mortgages are recorded at outstanding principal and accrued interest which approximates fair value. Certain of the Fund's mortgages are in arrears and realization by the Fund may result in a shortfall. In determining fair value of individual mortgages, management considers the length of time the mortgage has been in arrears, the overall financial strength of the borrowers and the residual value of the security pledged. Any unrealized changes in the fair value of mortgage investments are recorded in the statement of operations as an unrealized fair value adjustment. A realized change in the fair value of a mortgage as a result of a disposition or repayment is recorded as a realized fair value adjustment. Investment transactions are accounted for on the date that an order is executed. All transaction costs relating to the purchases and sales of investments are charged to net income in the period. Transaction costs related to the purchases and sales of investments are included in the cost of purchases of investments or treated as a reduction of the proceeds from investments sold. Revenue Recognition Mortgage interest is recorded for accounting purposes on an accrual basis. Recording of interest earned ceases on mortgages impaired or in default if the Manager determines there is reasonable doubt as to the ultimate collectibility of principal and interesl. Lender fees are recognized as they are earned. Other Assets and Liabilities Other assets and liabilities recorded at cost are short term in nature; therefore carrying value approximates fair value. Valuation of Transactions in Fund Units The Fund's units are issued and redeemed at a defined net asset value per unit, which is determined as of the close of business on a weekly basis. The net asset value per unit is determined by dividing the total of the current outstanding principal amounts, less liabilities, by the number of units outstanding. For each unit sold, the Fund receives an amount equal to the net asset value per unit on the date of sale, which is included in unitholders' equity. Units are redeemable at the option of the unitholders at their net asset value on the redemption date. For each unit redeemed, the number of issued and outstanding units is reduced and the equity in the Fund is reduced by the related net asset value on the date of redemption. 9

11 December 31, Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. The most significant estimates that the Fund is required to make relate to the fair value of the mortgage investments. The estimates may include: assumptions regarding local real estate market conditions; interest rates and the availability of credit; cost and terms of financing; the impact of present or future legislation or regulation; prior encumbrances and other factors affecting the mortgage and underlying security of the mortgage investments. These assumptions are limited by the availability of reliable comparable data, economic uncertainty, ongoing geopolitical concerns and the uncertainty of predictions concerning the future events. Credit markets, equity markets, and consumer spending are factors in the uncertainty inherent in such estimates and assumptions. Accordingly, by their nature, estimates of fair value are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimate fair value could change by a material amount. 3. Unitholders' Equity The Fund may issue an unlimited number of units of a single class. The units of the Fund shall be issued without nominal or par value and shall be issued as fully paid and non-assessable and voting. Each unit of the Fund shall represent an undivided beneficial interest in the assets of the Fund, units are non- transferable, no unit shall have any conversion, exchange or preemptive right. Each unit shall entitle the holder thereof to participate equally with respect to all payments made to Unitholders of the Fund whether by way of interest, dividend or capital and, on liquidation, to participate equally in the net assets of the Fund remaining after satisfaction of all outstanding liabilities. Each Unitholder of the Fund shall be entitled at any time and from time to time, to require the Fund to redeem all or any of his or her units by giving written notice to the Manager. Such notice shall contain a clear request that a specified number or dollar amount of Units be redeemed, shall be irrevocable and the signature thereon shall be guaranteed by a Canadian chartered bank, a trust company or an investment dealer if required by the Manager. The redemption of units in respect of which a duly completed redemption request has been received by the Manager at least five (5) days prior to a Valuation Day will be redeemed on such Valuation Day and, in all other cases, will be redeemed on the second Valuation Day following the day on which such redemption request was received by the Manager. The Manager may, in its sole discretion, waive the foregoing five (5) day notice requirement in respect of any redem ption request. 10

12 December 31, Unitholders' Equity (Continued) The Manager may instruct the Trustee to suspend the right of Unitholders to require the Fund to redeem units and the obligation of the Trustee to make payment therefore during a designated period in which normal trading is suspended on any exchange on which any security owned or held by the Fund is traded, provided that such right shall not be suspended unless securities owned by the Fund and representing, in the aggregate, more than 50% by value of the total assets of the Fund without allowance for liabilities are listed or traded on any such exchange and are not traded on any exchange on which normal trading is not suspended, or during any period in which the Manager determines that conditions exist which render impractical the sale of the assets of the Fund or impair the ability of the Manager to determine the value of the assets held by the Fund. The Manager has a general discretion to instruct the Trustee to suspend the right of Unitholders to require the Fund to redeem units and the obligation of the Trustee to make payment therefore in any event where the Manager determines that processing such redemption(s) will have a material negative effect on the Fund. The Trustee shall, at the direction of the Manager, apply the suspension to all requests for redem ption received prior to the suspension but as to which payment has not been made, as well as to all requests received while the suspension is in effect. All Unitholders making such requests shall (unless the suspension lasts for less than 48 hours) be given notice by the Manager advising of the suspension, that redem ptions will be effected on the basis of the Net Asset Value Per Unit determined on the first Valuation Day following the termination of the suspension and that they have the right to withdraw their requests for redemption prior to the termination of the suspension. Any declaration of suspension or termination of suspension made by the Manager shall be final and conclusive. Notwithstanding the foregoing, the suspension shall terminate in any event on the first business day after the circumstances which gave rise to the suspension cease to exist. The Manager reserves the right to instruct the Trustee to withhold the amount of four per cent (4%) from redemption proceeds payable to a Unitholder in the event the redemption request is made during the first 12 months after acquisition of the Units being redeemed. 11

13 December 31, Investments The balance of mortgage investments as at Celernus Mortgage and Income Trust Fund is as follows: Intere st in first mortgages Interest in non-first mortgages 80% $ 3,801,208 20% 929, % $ 4,730,208 The mortgage investments are secured by the real property to which they relate, bear interest at a weighted average interest rate of 9.46% and mature between 2014 and The Fund ensures that it has a loan to value ratio of no more than 80%. There were no mortgage commitments as at December 31, Management Fees and Expenses The Fund pays the Manager an annual management fee of 0.85% of the NAV of the Fund, which is calculated and charged to the Fund monthly. The Fund is responsible for the payment of all fees and expenses relating to its operations, including record keeping, audit, accounting and administrative costs, legal fees, custody and safekeeping charges, bank charges and interest expenses, brokerage commissions and other fees relating to the purchase and sale of assets of the Fund. The Manager is also entitled to receive a performance fee of 20% of the change in NAV of the Fund between a new high-water mark and the previous high-water mark for which a performance fee was earned by the Manager and charged to the Fund. A performance fee will only be earned at such time as the annual return of the Fund is greater or equal to 4%. No performance fees were earned during the period. 6. Tax Status The Fund qualifies as a "unit trust" for income tax purposes. All or substantially all of the net income for tax purposes and net taxable capital gains realized, after utilization of loss carry forwards, in any year are distributed to Unitholders such that no income taxes are payable by the Fund. 12

14 December 31, Net Assets Per Unit and NAV Per Unit NI requires all investment funds, including the Fund, to calculate NAV for purposes other than financial statements without giving effect to Section 3855 referred to in Note 2. Section 3855 requires the use of bid prices for long positions and ask prices for short positions in the fair valuation of investments, rather than the use of closing prices currently used for the purpose of determining NAV. 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. This may result in a difference between the net assets per unit and NAV per unit. At December 31,2013, there were no material differences between the net assets per unit and NAV per unit. 8. Financial Instruments and Risk Management Financial Risk Factors The Fund may be exposed to a variety of financial ris ks: credit risk, liquidity risk and market risk (including interest rate risk, currency risk, and other price risk). The level of risk depends on the Fund's investment objectives and the type of mortgages it invests in. The Statement of Investment Portfolio presents the mortgages held by the Fund as at December 31, The following is a summary of the Fund's main risks: Credit Risk Credit risk is the possibility that a borrower may be unable to honour its debt commitments as a result of a negative change in market conditions that could result in a loss to the Fund. The Fund mitigates this risk by the following: (i) adhering to the investment restrictions and operating policies included in the asset allocation model (subject to certain duly approved exceptions); (ii) ensuring a comprehensive due diligence process is conducted on each mortgage investment prior to funding. This generally included, but is not limited to engaging professional independent consultants, lawyers and appraisers and performing credit checks and financial statements reviews on prospective borrowers; (iii) actively monitoring the mortgage investments and initiating recovery procedures, in a timely manner, where required. The maximum exposure to credit risk at December 31, 2013 is the fair values of its accrued interest receivable and mortgage investments, which total $4,749,521. The Fund has recourse under these investments in the event of a default by the borrower; in which case, the Fund would have a claim against the underlying property and security. The Fund is undertaking enforcement remed ies against the following two mortgages: (i) As at December 31, 2013, one mortgage representing $375,000 is past due and the Fund has undertaken enforcement remedies. Subsequent to year end, the full principal, along with accrued interest was received by the Fund. (ii) Subsequent to year end, one mortgage representing $205,000 with accrued interest of $987 became past due, and the Fund has undertaken enforcement remedies. Management believes the Fund wi ll fully recover the principal and interest accrued to date on the mortgage loan, although there is no assurance that it wi ll be able to do so. 13

15 December 31, Financial Instruments and Risk Management (Continued) Liquidity Risk Liquidity risk is the risk of the Fund not being able to meet its obligations with respect to unit redemptions on time or at a reasonable price. The Fund is exposed to weekly cash redemptions of the Units of the Fund as detailed in Note 3. The Fund retains sufficient cash to maintain liquidity. Interest Rate Risk Interest rate risk arises from the possibility that changes in market interest rates will affect future cash fiows or fair values of financial instruments. Mortgage interest rates are at fixed rates that are not directly impacted by changes in prevailing rates, thereby reducing the Fund's exposure to interest rate risk. Generally, the fair value of mortgages is impacted by changes in interest rates, however, given the short duration of the mortgages held by the Fund, their fair value approximates carrying values and any changes in prevailing interest rates would not have a significant impact on their fair value. Financial Instruments Fair Value Hierarchy The CICA's Handbook Section 3862 Financial Instruments - Disclosures, establishes a threetier hierarchy as a framework for disclosing fair value based on inputs used to value the Fund 's investments. Level 1 Quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices); and Level 3 Inputs that are not based on observable market data (that is, unobservable inputs). The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy at Decem ber 31 : Level 1 Level 2 Level 3 Total Cash $ 1,959,773 $ $ $ 1,959,773 Mortgage investments 4,730,208 4,730,208 There were no transfers between levels during the period. $ 1,959,773 $ $ 4,730,208 $ 6,689, Capital Management The capital of the Fund is represented by issued redeemable units with no par value. The Unitholders are entitled to distributions, if any, and to payment of a proportionate unit of the Fund 's net asset value per unit upon redemption. The relevant movements of Fund units are shown on the Statement of Changes in Net Assets. In accordance with its investment objectives and strategies and the risk management practices outlines in Note 8, the Fund endeavours to invest the subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions, such liquidity being augmented by disposal of investments where necessary. 14

16 December 31, International Financial Reporting Standards In December 2011, the Canadian Accounting Standard s Board ("AcSB") extended the deferral of the mandatory International Financial Reporting Standards ("IFRS") changeover date for investment entities to fiscal years begi nning on or after January 1, Consequently, the Fund will adopt IFRS beginning January 1, 2014 and will publish the first financial statements, prepared in accordance wi th IFRS, for the year ending December 31, The December 31, 2014 annual financial statements will include an opening Statement of Net Assets as at January 1, 2013 ("the transition date"), and comparative financial information prepared in accordance with IFRS. 15