Interim Management Report of Fund Performance

Transcription

1 Interim Management Report of Fund Performance S P L I T C O 20SEP R P. I I The following is an interim report on Allbanc Split Corp. II s (the Company ) performance and contains financial highlights but does not contain either the interim or annual financial statements of the Company. This report should be read in conjunction with the interim financial statements for the six months ended August 31, 2018 and the annual financial statements for the year ended February 28, You can get a copy of the interim or annual financial statements at your request and at no cost by calling (416) , by writing us at 40 King St. West, Scotia Plaza, 35th Floor, Box 4085, Station A, Toronto, Ontario M5W 2X6, Attention: Allbanc Split Corp. II Investor Relations or by visiting our website located at or SEDAR at You may also contact us using one of these methods to request a copy of the Company s proxy voting policies and procedures and quarterly portfolio disclosure. The Company s proxy voting disclosure record for the annual period ended June 30, 2018 is available on our website. Any references to net assets per Capital Share in this report are references to net assets attributable to holders of Capital Shares determined in accordance with IFRS as presented in the financial statements of the Company. Additionally, any references to net asset value per Capital Share are references to values determined for valuation and transactional purposes. There are no differences between net assets per Capital Share and net asset value per Capital Share. Investment Objective and Strategies The Company holds a portfolio (the Portfolio ) of common shares (the Portfolio Shares ) of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (collectively, the Banks ) in order to generate fixed cumulative preferential distributions for the holders of the Company s Class B preferred shares, Series 2 (the Preferred Shares ) while providing the holders of the Class A capital shares (the Capital Shares ) with a leveraged investment, the value of which is linked to the changes in the market price of the Portfolio Shares. Holders of the Capital Shares will also receive excess distributions, if any, after payment of the operating and administrative expenses of the Company and distributions on the Preferred Shares provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, is greater than the original issue price of the Preferred Shares or $ The Company only trades its Portfolio in limited circumstances as described in the Company s prospectus. As such, its Portfolio is not actively traded and the Company can be considered a passive investment vehicle. Results of Operations As at August 31, 2018, the net assets attributable to holders of Capital Shares were $28.96 per Capital Share as compared to $27.49 per Capital Share at February 28, 2018, representing a 5.3% increase over the six month period due to appreciation in the fair value of the Portfolio Shares. The total fair value of the Company s Portfolio at August 31, 2018 was $45.4 million (February 28, 2018 $43.8 million), reflecting unrealized appreciation of $21.6 million (February 28, 2018 $20.0 million). For the six months ended August 31, 2018, dividends and interest income less total operating expenses ( Net Investment Income ) was $0.6 million or $1.17 per Unit (2017 $0.6 million or $1.08 per Unit), with a Unit consisting of two Capital Shares and one Preferred Share. The increase of $0.09 per Unit, or 8.3%, is a result of increased dividend income of $0.12 per Unit offset by increased expenses of $0.03 per Unit mainly due to fixed operating expenses spread over fewer Units as a result of the February 28, 2018 annual retraction. The Company s Capital Share distribution policy is to pay holders of Capital Shares leveraged quarterly dividends in an amount equal to the Net Investment Income minus the fixed quarterly distribution payable on the Preferred Shares provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the original issue price of the Preferred Shares. Accordingly, for the six months ended August 31, 2018, the Company paid dividends of $0.30 million or $0.28 per Capital Share (2017 $0.27 million or $0.23 per Capital Share). Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $ per Preferred Share. For the six months ended August 31, 2018, the Company paid dividends of $0.33 million or $ per Preferred Share (2017 $0.36 million or $ per Preferred Share). allbanc Split Corp. II 1 Interim Management Report of Fund Performance

2 Related Party Transactions For its services to the Company, which includes the provision of key management personnel, Scotia Managed Companies Administration Inc. ( SMCAI ), a wholly-owned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, is entitled to receive an administration fee equal to 0.50% per annum of the market value of the Portfolio Shares. The total administrative fees paid to SMCAI for the six months ended August 31, 2018 were $124,013 (2017 $129,745). For the six month period ended August 31, 2018, administrative and operating expenses (excluding transaction costs) of $225,435 (2017 $228,654) were paid and satisfied by way of dividends on the Company s Class S shares. At August 31, 2018, the Company had cash on deposit with SCI and The Bank of Nova Scotia of $2,241 (February 28, 2018 $2,317). At August 31, 2018, the Company held investments in The Bank of Nova Scotia common shares with an aggregate fair value of $7,206,015 (February 28, 2018 $7,584,777). SMCAI owns all of the issued and outstanding Class S shares of the Company. AllBanc Split Holdings II Corp. owns all of the issued and outstanding Class J shares of the Company. Three independent directors of the Company each own % of the common shares of Allbanc Split Holdings II Corp. Recent Developments The Company adopted IFRS 9, Financial Instruments on March 1, 2018 and accordingly, certain accounting policies have changed in preparing the August 31, 2018 interim condensed financial statements from those used for the February 28, 2018 audited financial statements of the Company. There has been no impact to net assets attributable to shareholders on adoption of IFRS 9. Interim Management Report of Fund Performance 2 allbanc Split Corp. II

3 Financial Highlights The following tables show selected key financial information about the Company and are intended to help the reader understand the Company s financial performance for the past 5 years, including the six months ended August 31, The interim information is derived from the Company s unaudited financial statements while annual information is derived from the Company s audited financial statements. For the Six Months Ended For the Years Ended February 28 August 31, Net assets per Unit, beginning of period/year... $ $ $ $ $ $ Increase (decrease) from operations: Total income Total expenses (1)... (0.40) (0.78) (0.62) (1.70) (0.37) (0.30) Realized gains for the period/year Unrealized gains (losses) for the period/year (4) (8.44) Total increase (decrease) from operations (5.72) Distributions: From dividends... (1.17) (2.19) (2.13) (2.06) (1.93) (1.86) Total distributions (2)... (1.17) (2.19) (2.13) (2.06) (1.93) (1.86) Capital Reorganization (3) Redemption of Class B Preferred Shares, Series 1... (21.80) Proceeds on issuance of Class B Preferred Shares, Series Total Reorganization Net assets per Unit, end of period/year... $ $ $ $ $ $ Redemption value per Preferred Share (3)... (25.67) (25.67) (25.67) (25.67) (21.80) (21.80) Net assets per two Capital Shares, end of period/year... $ $ $ $ $ $ Net assets per Capital Share, end of period/year... $ $ $ $ $ $ Based on the weighted average number of Units for the period/year except for the net assets, dividends and reorganization costs wherein the actual number of Units outstanding at the relevant time are used. (1) Issue and reorganization expenses of $1.05 million ($1.29 per Unit) incurred in connection with the 2016 Reorganization are included in total expenses for the year ended February 28, issue and reorganization costs/recoveries totaling $44,674 ($0.06 per Unit) have reduced 2017 total expenses. Recoveries relating to HST on 2018 and 2016 issue costs totaling $2,633 and $6,263 have reduced 2018 and 2016 total expenses. (2) All distributions were paid in cash and include distributions on Preferred Shares and Capital Shares. (3) As part of the reorganization finalized on February 26, 2016, the Class B Preferred Shares, Series 1 were redeemed and Class B Preferred Shares, Series 2 were issued. (4) Includes adjustment to reconcile the basis of calculation of per Unit amounts between the weighted average and the end of year number of Units. allbanc Split Corp. II 3 Interim Management Report of Fund Performance

4 Ratios and Supplemental Data (based on net asset value) Capital Shares August Net asset value (000 s) (1)(2)... $ 31,455 $ 29,871 $ 30,572 $ 21,464 $ 31,549 $ 32,204 Number of shares outstanding (1)... 1,086,538 1,086,538 1,171,872 1,375,134 1,618,156 1,839,754 Management expense ratio (3) % 3.87% 4.38% 7.25% 3.31% 4.05% Portfolio turnover rate (4)... n/a n/a n/a n/a n/a n/a Trading expense ratio (5)... nil nil nil nil nil nil Net asset value per Capital Share... $ $ $ $ $ $ Closing market price per Capital Share. $ $ $ $ $ $ Ratios and Supplemental Data (based on net asset value) Preferred Shares August Net asset value (000 s) (1)(2)... $ 13,946 $ 13,946 $ 15,041 $ 17,650 $ 17,638 $ 20,053 Number of shares outstanding (1) , , , , , ,877 Management expense ratio (3)... Portfolio turnover rate (4)... n/a n/a n/a n/a n/a n/a Trading expense ratio (5)... nil nil nil nil nil nil Net asset value per Preferred Share (6). $ $ $ $ $ $ Closing market price per Preferred Share (6)... $ $ $ $ $ $ (1) This information is provided as at August 31, 2018 and February 28 of the years shown. (2) Net asset value is equal to net asset value per share multiplied by the number of shares outstanding. (3) Management expense ratio ( MER ) is based on the requirement of NI and includes total expenses, including Preferred Share distributions and issuance and reorganization costs, but excluding transaction costs, and is expressed as an annualized percentage of the average net asset value of the Capital Shares over the period/year. The MER should not be interpreted as the return required for the Capital Shares to cover operating expenses of the Company. This calculation is based on a portion of the Company s assets whereas the Company uses its entire assets to generate investment returns in funding expenses and distributions. As long as the net asset value per Unit is greater than the redemption value of Preferred Share, then the income and expenses of the Company are borne by the Capital Shares. If the net asset value per Unit falls to or below the redemption value of a Preferred Share, then the income and expenses of the Company are borne by the Preferred Shares until such time as the net asset value per Unit returns to the redemption value of a Preferred Share or greater. The Company realized/adjusted costs in connection with the reorganization and issuance of 687,567 Series 2 Preferred Shares in 2017 and Without these costs, the MER would have been 4.5% in 2017 and 3.7% in The following expense ratio is presented to reflect total operating expenses of the Company (excluding Preferred Share distributions and issuance and reorganization costs) divided by the average total assets, which includes the outstanding Preferred Shares. The Administrator believes that this expense ratio is a more representative measure of the Company s operating efficiencies and is more useful in making comparisons to the expense ratios of single unit investment funds. August Expense ratio % 1.01% 1.01% 0.70% 0.61% 0.58% (4) The Company was created to acquire and hold its Portfolio Shares and only trades its Portfolio Shares in limited circumstances as described in its prospectus. The Portfolio Shares are not actively traded and the Company can be considered to be a passive investment vehicle. At or around each year-end, the Portfolio Shares were disposed of on a pro-rata basis to facilitate the Company s special annual retraction. As a result, the turnover rate can be considered not applicable for these purposes. (5) Transaction costs were paid to fund the special annual retractions and were deducted from the proceeds paid to the retracting shareholders. Transaction costs on all other transactions were nil. The trading expense ratio represents commissions on trades exclusive of the retraction process. (6) This information refers to the Series 1 Preferred Shares from 2014 to 2015 and the Series 2 Preferred Shares for 2016 onward. Interim Management Report of Fund Performance 4 allbanc Split Corp. II

5 Past Performance Year by Year Returns The following charts show the performance of the Company s Capital Shares based on net asset value for the past ten years and the Preferred Shares based on the net asset value since the reorganization in 2016 indicating, in percentage terms, how much an investment made on the first day of each financial period/year would have increased or decreased by the last day of each financial period/year. This performance reflects the payment of costs related to the establishment and reorganizations of the Company and assumes that all dividends are reinvested in additional Capital Shares or Preferred Shares at net asset value. Past performance is not an indication of how the shares will perform in the future. The calculation of the returns based on net asset value follows the requirements of NI As an investor cannot purchase or sell the shares at net asset value except on an annual retraction, the following is an indication of the performance of the assets of the Company rather than returns available to shareholders. Returns based on market value are also presented in narrative form below as an indication of returns actually available to shareholders. 1,800% 1,600% 1,607.9% Capital Shares 10% Preferred Shares 1,400% 800% 600% 5% 4.8% 4.8% 2.4% 100% 50% 0% -50% 66.3% 28.5% 23.2% 24.2% 14.2% 8.1% 6.4% -5.7% -17.4% 0% -5% -100% -91.8% 26SEP % 26SEP For the years ended February 28, and For the year ended February 28, and for the six months ended August 31, 2018 for the six months ended August 31, 2018 The market value return assuming reinvestment of dividends in additional shares at the then market price on the Toronto Stock Exchange for the Capital Shares was 66.8%, 244.4%, 26.9%, 6.4%, 22.4%, 25.8%, 17.5%, 16.9%, 71.0%, and 3.0% for the years ended February 28, 2009 through 2018, respectively and was 11.0% for the six month period ended August 31, The market value return for the Preferred Shares was 5.2% and 3.4% for the years ended February 28, 2017 through 2018 and 3.9% for the six month period ended August 31, Summary of Investment Portfolio Below is a summary of the Company s investment Portfolio, based on closing sale prices, as at August 31, This summary of investment Portfolio may change due to ongoing portfolio transactions of the Company. Weekly updates are available on the internet at or by contacting investor relations at Net Asset Value... $45.6 million Name of Security % of Net Asset Value The Toronto-Dominion Bank % Royal Bank of Canada % The Bank of Nova Scotia % Canadian Imperial Bank of Commerce % Bank of Montreal % National Bank of Canada % 100.0% allbanc Split Corp. II 5 Interim Management Report of Fund Performance

6 Notes Interim Management Report of Fund Performance 6 allbanc Split Corp. II

7 Notes allbanc Split Corp. II 7 Interim Management Report of Fund Performance