Timbercreek 2008 Annual Report

9,000 years ago this wasa simple and smart idea

TimbercreekMortgage Investment Corporation

Annual Report 2008

it still is

Remember when investing in real estate seemed like a good idea? Predictable return. Your capital wasn’t at risk of disappearing overnight. Then this: sub-prime mortgages. Credit crisis. Foreclosures. Job losses. Recession.

Turns out real estate investing is just like everythingelse. There is good real estate investing, and not-so-good real estate investing.

At Timbercreek Mortgage Investment Corporation, we make a living investing in real estate. To succeed at it, we have one core rule: keep it simple. We only invest in commercial mortgages. We only invest in companies that have the cash fl ow to pay us back. We only lend against security that can cover our principal. We diversify across Canada and actively manage our investments so that we can keep on keeping it simple.

We think this is smart.

of portfolio secured by income producing assets82%

annualized yield in 20089%

average loan-to-value66%

secured by multi-residential assets50%

impaired loans0

Introducing the capital stack, and where we fi t in

Preservation of capital, attractive stable returns. These are our objectives. We offer a real estate investment opportunity that generates attractive yields without the volatility and risk associated with equity. We combine the expertise and discipline of commercial lending with the insight to spot attractive investment opportunities in ineffi cient markets.

highest

risk / return

lowest

*based on an issue price per unit of $10.

Equity REITsDirect Ownership

This is where most people instinctivelythink of investing their real estate dollars; however, equity is effectively unhedged and therefore very volatile. Equity investors must accept downside risk in order to fully share in the upside potential.

Customized Mortgages

Timbercreek Mortgage Investment Corporation

These are relatively small short-term, customized loans. These loans warrant higher yields than bank mortgages, but not the risk and volatility associated with equity. Banks typically overlook these loans because they prefer to devote resources to larger loans that are outstanding for a longer duration.

Bank Mortgages BanksCredit UnionsTrust Companies

These are traditionally very safe and conservatively managed investment vehicles, and, accordingly, have lower rates of return. This is an institutionalized market place dominated by large, well capitalized fi nancial services fi rms looking for bond-like investments.

3

borrower opportunity lender

Borrower owns a 50-unit complex,with a strong 5-year track record for managing the complex.

Neighbouring property hascome for sale, however,

the deal must close in 2 weeks.

Bank

Timbercreek

Timbercreek customized lendingand why it is benefi cial to the borrower

Why do you pay more for a luxury vehicle than an entry level car? Features and benefi ts. It’s the same for mortgages. We provide loans to experienced real estate investors who are looking for deal terms that are tailored to their needs. We also have a reputation for delivering on our promises, which is critical in a time-sensitive real estate environment.

timing loan size term payment

8weeks+

Appraisal comesin at $1,000,000,prepared to lendup to $600,000

Typically 5–10 years fi xed loan

Interest of 7%,amortized over15 years, paymentof $5,392

2

weeks

Appraisal comesin at $1,000,000,prepared to lendup to $700,000

Up to a 3-year term with options for early repayments and substitution of real estate asset used as security

Interest of 9%,interest onlyloan, payment of $5,250

faster moresupport

morefl exible

cash fl owfriendly

5

referral analysis site visit

Deal fl ow sourced through:

Extensive network of investment banking professionals across Canada

Repeat borrowers

Referrals

Loan-to-value

Tenant quality

Local market

Vacancy rate

Cap rate

Sensitivity analysis

Visit every site prior to loan approval

Assess traffi c fl ow

Review building condition

Interview manager and owner

Step 1 Step 2 Step 3

The blueprint of a transaction

Every deal is subject to a rigorous review process and requires unanimous investment committee approval. Once funded, we actively manage every loan. This means communicating regularly with borrowers to understand their repayment strategies. Developing a strong relationships with the borrower is critical to the success of the loan and to becoming a borrower of choice in the future.

due diligence investment committee review ongoing / active management

Credit checks

Discounted cash fl ow analysis

Legal review

Environmental review

Independent appraisal report

Must comply with assetallocation model

Location / region is stable / growing

Exit strategy is strong and clear

Must be unanimously approved

Deal term meets the minimum yield requirements

Periodically visit sites

Closely monitor interest payments

Maintain constant communication with borrowers

Step 4 Step 5 Step 6

7

Portfolio allocation

To manage risk, our portfolio must adhere to a strict asset allocation model. The model we have adopted is designed to diversify the portfolio based on geographical, economic sector, term, borrower and loan-to-value criteria. This strategy has allowed us to preserve your capital while still generating an annualized 9% return in 2008. And, we believe this strategy will allow us to continue to meet or exceed our targeted yield of the Government of Canada 2-year bond yield plus 550 basis points.

Multi-residential

Retail

Other-residential

Offi ce buildings

Unimproved land

Industrial

Single residential

By Type

44%

27%

9%

9%

4%

4%

3%

By Region

71%–75%

61%–65%

76%–80%

66%–70%

55% or less

56%–60%

81%–85%

By Loan-to-value

Ontario

Alberta

Quebec

British Columbia

Saskatchewan

Manitoba

36%

23%

22%

16%

14%

12%

8%

4%

35%

25%

3%

1%

0%

9

Board of directors

Zelick L. Altman (Independent Director) is a Managing Director of LaSalle Investment Management responsible for its Canadian operations. In addition, Zelick is President of the LaSalle Canadian Income & Growth Funds, co-mingled funds with over $500 million of equity committed. As Managing Director for Canada, he is involved with all aspects of the business, with special emphasis on the company’s acquisition program. He has over 25 years of real estate experience in institutional, public and private sectors of the industry. Prior to joining LaSalle, he served as a Senior Vice President with Dundee Realty Corp., CREIT, and Counsel Property Corporation where he had responsibilities including acquisitions, asset management, and disposition of properties across Canada. He is a graduate of the Faculty of Applied Sciences at the University of Toronto and is registered as a Professional Engineer.

Edward W. Boomer (Independent Director) is the Managing Director, Canadian Operations for Kimco Realty Corporation and is responsible for all aspects of Kimco’s operations in Canada. Kimco is a self-administered real estate investment trust and believed to have the largest portfolio of neighbourhood and community shopping centres held by any publicly-traded real estate investment trust. He has over 18 years of real estate experience. Prior to joining Kimco, he was the Vice-President & Territory Risk Manager with GE Real Estate. He holds a Bachelor of Arts degree from York University’s (Economics), a law degree from Queen’s University.

Craig A. Geier (Independent Director) is Chief Financial Offi cer of Sulliden Exploration Inc. (TSX:SUE), a mineral exploration company focused on the development of its Shahuindo gold-silver project located in northern Peru. He also sits as Chairman of the Board of Microbonds Inc. and as a Board Member of DDC International Inc. Prior to joining Sulliden, he was Chief Executive Offi cer of Microbonds Inc. and remains a principal investor. From 2000–2001, he was founder and Chief Executive Offi cer of Sports Media Systems Inc. and in 1999 he held the position of Executive Vice President, Trust Development with Residential Equities REIT. He holds an Honours of Business Administration degree from the University of Western Ontario.

W. Glen Shyba (Independent Director) is Executive Vice President and Chief Operating Offi cer of Osmington Inc.(“Osmington”) Osmington is a privately held owner and developer of commercial real estate, with a national presence. He has held the same position with Osmington since its inception in 1995, where he has corporate responsibility for acquisitions and dispositions, fi nance and treasury, and the fi rm’s development initiatives. He has led negotiations on purchase and sale transactions in excess of $2 billion, and has structured fi nancing arrangements on various deals in excess of $700 billion. He has also executed numerous commercial development projects from initial design concept through to construction. Prior to Osmington, he was Vice President, Development for a major Canadian public company primarily engaged in large scale, mixed use and offi ce real property development. He holds a Bachelor of Commerce degree from the UBC.

R. Blair Tamblyn (Executive Director and Chairman) is Chief Executive Offi cer and a director of the Fund. He Is also a founder and the CEO and President of the Timbercreek Asset Management Inc. (the “Fund Manager”). He has over 10 years experience working with the public and private capital markets and has led the origination, structuring, capitalization and execution of four distinct Timbercreek funds that currently manage over $830 million in assets. He has also been responsible for raising over $200 million in capital through public and private channels and has an extensive network in both institutional and retail capital markets. Prior to founding Timbercreek in 1999, he worked at Connor, Clark & Company as a securities trader and investment representative. He is a graduate of the University of Western Ontario.

Investment committee

Ugo Bizzarri (Committee Member) is Chief Financial Offi cer (CFO) of the Fund as well as the registered Portfolio Manager of the Fund. Mr. Bizzarri is also a founder of the Fund Manager where he currently holds the title of CFO. Since the inception of the Timbercreek real estate funds in 1999, he has directed the acquisitions of greater than $700 million worth of Multi-Residential Real Estate for these funds. From 1994 to April 2000, he was in Portfolio Management at the Ontario Teachers’ Pension Plan Board (OTPPB) where he played a leadership role in the strategic planning, corporate transactions/restructuring and property acquisitions for the Real Estate Group of OTPPB. He has been involved as a negotiator and manager in approximately $20 billion worth of real estate transactions in the last ten years. He is a graduate of the Richard Ivey School of Business and is a Chartered Financial Analyst. He is a graduate of the Faculty of Applied Sciences at the University of Toronto and is registered as a Professional Engineer.

Chris Humeniuk (Committee Member) is a co-founder of Canadian Mortgage Strategies & Investments (“CMSI”) where he currently holds the title as Managing Director. Prior to co-founding CMSI, he was employed as a mortgage broker at Canada ICI Commercial Mortgages from 1999 through 2002. From 1997 to 1999, he was employed as a mortgage broker at ICI Mortgage Services Limited. From 1995 to 1996, he was employed as a mortgage broker at Dominion Mortgage Corporation and from 1990–1995 he was employed by Forsgate Funding Corporation Inc., a private real estate lending and development company. Overall, he has over 15 years of real estate and mortgage experience. Mr. Humeniuk is a graduate of the University of Western Ontario with a Degree in Economics.

Andrew Jones (Committee Member) is Chief Credit Offi cer of the Fund Manager. His primary responsibilities include originating and structuring debt and warehouse facilities for the Fund and the Fund Manager as well as directly administering the mortgage portfolio of the Fund from origination through to repayment. In 2002, he co-founded a commercial mortgage brokerage fi rm with offi ces in Toronto, Montreal, Edmonton and Vancouver. He has structured and been the lead originator of approximately $1.2 billion in mortgage loans over the last fi ve years. From 1997 through 1999, he held the positions of Vice-President, Finance at Residential Equities REIT and Vice-President, Finance at Dundee Realty Corporation. He is also a Trustee of Timbercreek REIT and a Member of the mortgage advisory committee for the Fund. He is a graduate of the University of British Columbia and has worked in the commercial real estate and mortgage business for over 15 years.

Pamela Spackman (Independent Committee Member) has been active in the commercial real estate fi nance industry since 1986. Most recently she spent 8 years as President and CEO of Column Canada Financial Corp. and as a Director at Credit Suisse. In this position she directed the group in Canada responsible for the origination, structuring and securitization of commercial mortgage loans for Credit Suisse CMBS program. Prior to joining Credit Suisse, she was Vice President, Mortgage Investments directly responsible for the creation and management of the commercial mortgage-lending program for British Columbia Investment Management Corporation (bcIMC).

11

Long-term views. Value investing. Focus on process. Research and analysis. An active management style. That sums up our investment philosophy. Let us explain in clear terms exactly what we mean by these words and, in doing so, capture why we’re confi dent in our future.

Letter to shareholders

While we were not immune to the challenges presented

by the global macroeconomic crisis in 2008, I believe that

the performance of Timbercreek Mortgage Investment

Corporation (the Fund) in its fi rst year as a public

entity underscores the soundness of our investment

thesis; to provide investors looking for alternative asset

class investments with a with a low-risk opportunity to

generate predictable cash fl ow.

We believe this opportunity is the result of an imbalance

between quality borrowers and lenders—one that was

exacerbated in 2008 by the tightening credit markets.

This underserved market, created by insuffi cient

competition among Canadian fi nancial institutions

and the small number of quality private lenders, has

presented an opportunity for Timbercreek to thrive.

Our Fund’s performance also reaffi rmed our most

strongly held fundamental belief: that real estate is still

an excellent place to invest and a sound investment

opportunity for investors seeking an alternative asset

class investment. In our opinion, the key is to fi nd a

vehicle that provides transparency down to the asset

level, strong independent governance, a fee structure

that aligns investors and management, and a manager

that takes a hands-on active approach to investing in

real estate.

Our Fund, while relatively new to the market, has a

strong foundation of experience behind it. Timbercreek

Asset Management has been successfully structuring,

capitalizing and subsequently managing assets for more

than 10 years, and now has over $830 million in assets

under management.

Furthermore, with over 65 years of cumulative

experience, our management team provides the Fund

with a true competitive advantage. Specifi cally, Andrew

Jones brings deep experience and a developed network

of long-term relationships in the commercial real estate

and mortgage lending community, which are invaluable to

the Fund. Andrew’s expertise and reputation, cultivated

over the past 15 years, is considered key to generating

a broad range of opportunities, ultimately facilitating

improved deal fl ow.

At Timbercreek, we start with a robust asset allocation

model. We believe that the reduction in systemic risk

that diversifi cation provides is more important to capital

preservation than any one loan could be. We’ve adopted

this model to ensure that capital preservation and the

achievement of our investment objectives remain at

the forefront of every decision. Specifi c thresholds

determined by this model are monitored regularly and

each new investment must comply with its restrictions.

Given our strong focus on reduced risk and capital

preservation, it should be noted that the fund has no

exposure to securitized pools of mortgage loans or other

sub-prime mortgage loans. It should also be noted that

we currently have no debt on our balance sheet. We feel

strongly that we can achieve our targeted returns without

the added risk that leverage provides.

Our rigorous investment process includes a regular

macro-level economic analysis of various geographic

locations and properties to determine potential

opportunities. Next, we evaluate the attributes of individual

mortgage investment opportunities within this universe.

Opportunities identifi ed during this initial review are then

13

Opportunities identifi ed during this initial review are then

subject to intense scrutiny to ensure they meet the

highest thresholds. In addition, our two-tiered advisory

structure enforces strong governance and compliance

with our internal standards, ensuring that only after

an investment opportunity has passed our rigorous

standards do we invest.

We are thrilled that Pamela Spackman is chairing

the Mortgage Advisory Committee—her decades of

experience in the lending community are an enormous

resource to the Fund.

We are also indebted to the independent Board of

Directors for the time and energy that they have allocated

to the Fund’s creation, and their help in generating the

momentum that the Fund now enjoys. I am thrilled to

be able to work with such a diverse group, and certainly

appreciate the extensive experience and integrity that

they bring to the Fund.

Lastly, I need to speak to current composition of our loan

portfolio. To ensure our loans, which are directly secured

by residential, offi ce, retail and industrial real property, will

remain in good standing we take a hands-on approach,

actively managing each investment. Currently, over 50%

of the Fund’s capital is invested in mortgages secured

by multi-residential properties—an asset class that has

proven to be a safe harbor in times of economic turmoil.

Further, given the health of our loan portfolio, and lack

of any impairments to date, we can focus on proactively

growing the Fund to its targeted size rather than reactively

working out loans that are no longer performing.

To conclude, we believe this approach to investing will

continue to mitigate risk while at the same time provide

very acceptable returns. Current turmoil in the Canadian

real estate market will continue to create opportunities,

as quality borrowers with quality real estate assets turn

to Timbercreek to meet their short-term credit needs.

A tightening of credit conditions within the Canadian

banking system should further support this business

model and bolster demand for our product.

As such, we believe the Fund is well positioned to

execute on the strategic initiatives that will build value:

to make smart investments in the Canadian real estate

market that provide ample risk-adjusted returns.

I look forward to reporting to you on our progress

during 2009.

R. Blair Tamblyn

CEO and President


Annual Management Report of Fund PerformanceFor the period from April 30, 2008 (date of incorporation) to December 31, 2008

This annual management report of fund performance contains fi nancial highlights but does not contain the complete

annual fi nancial statements of the Timbercreek Mortgage Investment Corporation (the “Fund”). You can get a copy of

the annual fi nancial statements at your request, at no cost, by any of the following:

Phone: Calling the Fund at (416) 306-9967 ext. 250 (collect if long distance), Carrie Morris, Investor Relations; or

Internet: visiting SEDAR at www.sedar.com; or

Mail: Writing to the Fund at:


25 Price Street

Toronto, Ontario

M4W-1Z1

Shareholders may also contact us using one of these methods to request a copy of the Fund’s proxy voting policies

and procedures, proxy voting disclosure record, or quarterly portfolio disclosure.

15

Timbercreek Annual Report 2008

Management’s Discussion and Analysis of Fund Performance This Management’s Discussion and Analysis of Timbercreek Mortgage Investment Corporation’s (the “Fund”) per-

formance is based on the views of the Fund’s management as of December 31, 2008 and is not intended to provide

legal, accounting, tax or investment advice.

Investment Objectives and Strategies

The Fund was incorporated on April 30, 2008 under the laws of the Province of Ontario and commenced operations on

July 7, 2008 when it completed an initial public offering (the “IPO”) of Class A shares and issued Class B shares through

a private placement in connection with the acquisition of the initial mortgage portfolio. It is the intention of the Fund to

qualify as a “mortgage investment corporation” as defi ned under Section 130.1(6) of the Income Tax Act (Canada).

The fundamental investment objectives of the Fund are to:

• Provide shareholders with a stable stream of monthly distributions targeting an annual yield of the 2-year

Government of Canada Bond plus 550 basis points by acquiring and maintaining a diversifi ed portfolio of

mortgage assets; and

• Preserve net asset value of the Fund.

The Fund intends on meeting its investment objectives by investing in a diversifi ed portfolio of mortgage loans secured

directly by residential (including multi-residential), offi ce, retail and industrial real property across Canada, primarily

located in large urban markets and surrounding areas.

Risk

There was no material change since November 27, 2008, which affected the overall level of risk associated with an

investment in the Fund.

The risks of investing in the Fund remain as discussed in its prospectus dated November 27, 2008 (the “Prospectus”).

There is no assurance that the Fund will be able to achieve its objectives or earn any return.

Results of Operations

Total revenue earned by the Fund for the period ended December 31, 2008 was $2,014,061, which is composed of

interest income of $1,888,810 and lender fees of $125,881.

During the period ended December 31, 2008, the Fund advanced $42,932,126 in mortgage loans (of which $13,993,376

was acquired in exchange for Class B shares of the Fund) and received repayment of $3,631,803, resulting in a total

mortgage investments at year-end of $39,300,323 with a weighted average interest rate of 11.61%. At year-end, the

Fund had cash and cash equivalents of $11,506,658 available to fund new mortgage investments.

As discussed below, as a result of the continued market volatility in the Canadian fi nancial and economic sectors,

Timbercreek Mortgage Strategies Inc. (the “Mortgage Manager”) remains cautious and, within the context of the Asset

Allocation Model, continues to almost exclusively pursue new mortgages secured by income-producing properties.

For the period from July 7, 2008 (the date the Fund commenced operations following the IPO) to December 31, 2008,

the Fund experienced an increase in net assets from operations of $1,494,809, or an increase per Class A share of

$0.35 and $0.39 per Class B share.

Based on a distribution of $0.44 and $0.48 per Class A and Class B share, respectively, this resulted in an annualized

return of 9.10% per Class A share and 9.89% per Class B share, based on an issue price per unit of $10.00, from

inception to year end. This is consistent with the targeted return provided by the Fund Manager of approximately 9%,

which was included in the IPO prospectus and the Prospectus. The average 2-year Government of Canada Bond rate

plus 550 basis points for the period ended December 31, 2008 was 7.84%.

Table 1: Reconciliation of Net Earnings Available for Distribution

For the period ended December 31, 2008Increase in net assets from operations $ 1,494,809

Adjustments:

Future tax expense, non-cash item 8,723

Lender fees received, but not earned under GAAP in the year1 333,172

$ 1,836,704

Dividends to Class A shareholders $ 1,145,706

Dividends per Class A share $ 0.44

Dividends to Class B shareholders $ 689,897

Dividends per Class B share $ 0.48

Payout ratio 99.9%

1 For Canadian Income Tax purposes lender fees are included in taxable income of the Fund for the year ended December 31, 2008. In accordance with Canadian GAAP and the accounting policy of the Fund, lender fees are amortized over the term of the loan.

17


The majority of the Fund’s expenses consist of management fees of $236,147 and performance fees, net of waivers

and absorptions, of $34,894. The remainder of operating expenses of $248,211 relate mainly to the operation of the

Fund and administration of the mortgage portfolio.

The Fund had no redemptions in 2008.

Recent Developments

As credit markets around the world contracted through the second half of 2008, traditional Canadian lending insti-

tutions dramatically reduced the amount of capital available for mortgage lending against investment real estate,

creating an opportunity for non-traditional lenders to grow. This has allowed the Fund to invest in mortgage loans with

lower overall risk while maintaining its targeted yield to investors.

Due to the continued expected volatility in the economy in 2009, in the last six months of 2008 the Mortgage Manager

and Mortgage Advisory Committee focused exclusively on mortgage loans which were secured by assets that are

generating cash fl ow. Until the economic environment improves, the Mortgage Manager has moved away from

fi nancing projects which require sales or a capital gain in order for the borrower to execute on its exit strategy — which

is imperative due to the short-term nature of the Fund’s mortgage investments.

The Fund continued to comply with the Asset Allocation Model adopted by Timbercreek Investments Management

Inc., (the “Fund Advisor”) for the Fund and has maintained a portfolio of mortgage investments which, amongst other

things, is well diversifi ed by the type of real estate, as well as by the geographic location of the real estate.

At December 31, 2008, the Mortgage Manager made the decision to forego a portion of its performance bonus.

While the performance fee of the Mortgage Manager is earned on net earnings available to distribute over the average

2-year Government of Canada Bond Yield plus 450 basis points, the Fund Manager had targeted an annualized

yield of approximately 9%, net of all fees and expenses of the Fund in the fi rst year of operation (based on an issue

price of $10 per share). As the costs associated with the launch of the Fund were greater than originally expected,

the Mortgage Manager felt it was appropriate to forego a suffi cient amount of the performance bonus such that the

targeted annualized yield was achieved for both Class A and Class B investors. As a result, the Mortgage Manager

waived $88,591 of performance fees earned during the period ended December 31, 2008.

Related Party Transactions

As disclosed in detail in the Prospectus, on July 7, 2008, the Fund acquired a portfolio of 12 mortgage assets of

Timbercreek Mortgage Investment Fund (“TMIF”) and the outstanding trust units of TMIF in exchange for 1,509,279

Class B shares of the Fund for a total consideration of $15,008,141. Before July 7, 2008, TMIF was a related party by

virtue of common management, and after July 7, 2008 became a wholly owned subsidiary of the Fund.

The Fund, Timbercreek Asset Management Inc. (the “Fund Manager”) and the Mortgage Manager are related by virtue

of common management. All transactions between related parties were in the normal course of operations and were

measured at the exchange amount, which is the amount of consideration established and agreed upon by the related

parties. Related party transactions include the following transactions and balances:

During the period ended December 31, 2008, the Fund was charged fees by the Fund Manager of $236,147 for

general management and administration services. The Fund Manager is entitled to a fee of 1.2% per annum of the

gross assets of the Fund (the “Management Fees”), plus applicable taxes, calculated daily and paid monthly in arrears.

During the period ended December 31, 2008, the Mortgage Manager earned a performance fee of $123,485 for

management and administration of the Fund’s mortgage portfolio. As described above, the Mortgage Manager waived

$88,591 of the performance fee earned and charged the Fund $34,894. In any calendar year where the Fund has net

earnings available for distribution to shareholders in excess of the Hurdle Rate (Hurdle Rate is defi ned as the average

2-year Government of Canada Bond Yield for the 12 month period then ended plus 450 basis points), the Mortgage

Manager is entitled to receive from the Fund a performance fee equal to 20% of the net earnings of the Fund available

to distribute over the Hurdle Rate (the “Performance Fees”).

In determining the Performance Fee, on a monthly basis the Fund Manager will calculate the earnings available to dis-

tribute in that month that are required to achieve the Hurdle Rate, based on the outstanding Share capital of the Fund,

net of issue costs, calculated daily. An amount equal to 20% of any net earnings available to distribute in excess of the

Hurdle Rate in that month will be deducted from the Fund’s monthly distribution and retained by the Fund. The Fund

Manager will calculate the fi nal Performance Fee in respect of a completed calendar year based on the audited

fi nancial statements for that year. The Performance Fee in respect of a calendar year will be payable to the Mortgage

Manager within 15 days of the issuance of the Fund’s audited fi nancial statements for that year.

In the event of a redemption of shares by the Fund, any dividends declared by the Fund during the calendar year

in which the redemptions have taken place will be annualized and evaluated with respect to the Hurdle Rate.

Fees payable to the Mortgage Manager shall be, in any calendar year where the Fund has net earnings available

for distribution to shareholders in excess of the Hurdle Rate, 20% of such excess.

19


Financial Highlights

The following tables show selected key fi nancial information about the Fund and are intended to help you understand

the Fund’s fi nancial performance for the past year.

Period Ended December 31, 2008The Fund’s Net Assets per Class A Share (1)

Net Assets, beginning of period $ 9.33

Increase (decrease) from operations:

Total revenue 0.49

Total expenses (0.14)

Realized gains (losses) for the period –

Unrealized gains (losses) for the period –

Total increase (decrease) from operations (2) 0.35

Distributions:

From Income (excluding dividends) (see Table 1) (0.44)

From Dividends –

From Capital Gain –

Return of Capital –

Total Distributions for the period (3) (see Table 1) (0.44)

Net Assets, as at December 31, 2008 (GAAP) $ 9.21

Ratios And Supplemental Data

Total net asset value (000’s) (4) $ 36,502

Number of shares outstanding (4) 3,889,562

Management expense ratio* (5) 3.13%

Management expense ratio before waivers or absorptions* 3.67%

Trading expense ratio* (6) 0.07%

Portfolio turnover rate (7) 10.19%

Net asset value per share, as at December 31, 2008 (Net Redemption Value) $ 9.38

Closing market price $ 9.00

* annualized(1) This information is derived from the Fund’s audited annual fi nancial statements. The net assets per share presented in the fi nancial state-

ments differ from the net asset value calculated for fund pricing purposes. An explanation of these differences can be found in the notes to the fi nancial statements. This difference is due to including costs associated with establishment, structuring and periodic offering of securities of the Fund attributable to a particular class of shares being amortized monthly over a period of fi ve years.

(2) Net assets and distributions are based on the actual number of shares outstanding for the relevant class at the relevant time. The increase/decrease from operations is based on the weighted average number shares outstanding for the relevant class over the fi nancial period.

(3) Distributions were paid in cash.(4) This information is provided as at December 31, 2008.

Period Ended December 31, 2008The Fund’s Net Assets per Class B Share (1)

Net Assets, beginning of period $ 9.84

Increase (decrease) from operations:

Total revenue 0.50

Total expenses (0.11)

Realized gains (losses) for the period –

Unrealized gains (losses) for the period –

Total increase (decrease) from operations (2) 0.39

Distributions:

From Income (excluding dividends) (see Table 1) (0.48)

From Dividends –

From Capital Gain –

Return of Capital –

Total Distributions for the period (3) (see Table 1) (0.48)

Net Assets, as at December 31, 2008 (GAAP) $ 9.77

Ratios and Supplemental Data (4)

Total net asset value (000’s) (4) $ 14,796

Number of shares outstanding (4) 1,502,279

Management expense ratio* (5) 2.05%

Management expense ratio before waivers or absorptions* 2.41%

Trading expense ratio* (6) 0.07%

Portfolio turnover rate (7) 10.19%

Net asset value per share as at December 31, 2008 (redemption value) $ 9.85

Closing market price N/A

(5) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period.

(6) The trading expense ratio represents the mortgage transaction costs incurred on a particular mortgage investment as an annualized percentage of semi-monthly average net assets during the period. Typically, the borrower of a particular mortgage will reimburse the Fund for transaction costs, although situations may arise where the Fund may incur the costs.

(7) The Fund’s portfolio turnover rate indicates how actively the Fund Advisor managed the Portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund advancing and receiving repayment of all mortgage loan investments once in the course of the year. There is not necessarily a relationship between a high turnover rate and the performance of a fund.

21


Management Fees

A summary of management fees paid for the period ended December 31, 2008, including a breakdown of services

received by the Fund is included in “Related Party Transactions”.

Class A shares of the Fund pay each registered dealer a servicing fee equal to 0.75% per annum of the net redemption

value per Class A share of the Fund (the “Servicing Fee”). The fee is calculated and paid at the end of each calendar

quarter.

In addition to the management fees disclosed above, the Fund will pay for all expenses incurred by it in connection

with the operation and management, including but not limited to any additional fees payable to the Fund Manager for

performance of extraordinary services on behalf of the Fund for services outside the scope of the Fund Management

Agreement.

A summary of the management fees paid during the period ended December 31, 2008 includes:

$ %

Management Fees 236,147 65

Performance Fees* 34,894 10

Servicing Fees 91,484 25

362,525 100

* The Mortgage Manager earned performance fees for the period ending December 31, 2008 of $123,485, but waived $88,591 resulting in total fees of $34,894.

Summary of Investment Portfolio

Net Assets

($)%

of Net Assets

Mortgages 39,300,323 77.8

Cash and Cash Equivalents 11,506,658 22.8

Net Other Assets (297,308) -0.6

Summary of Top 25 Holdings Prov. Outstanding

Principal Loan-to-

value TermInterest

Rate PositionAllocation

Product Type% of NAV

Cash & Cash Equivalents N/A $ 11,506,658 N/A N/A N/A N/A N/A 22.8%

Summit Glen Portfolio, Toronto ON $ 3,318,000 74.3% 18 12.90% Second Multi-Residential 6.6%

Reneaude-Lapointe Recreation Centre, Montreal QC $ 3,200,000 67.5% 36 10.90% First Retail 6.3%

Dodson Plaza Shopping Centre, Drayon Valley AB $ 2,750,000 65.9% 36 12.09% First Retail 5.4%

Charest Boulevard Building, Quebec City QC $ 2,250,000 77.1% 12 11.80% First Offi ce Buildings 4.5%

Ascot Rental Townhomes, Edmonton AB $ 1,980,000 74.9% 36 11.82% First Multi-Residential 3.9%

CRG Offi ce, Toronto ON $ 1,800,000 79.4% 36 11.40% First Retail 3.6%

Lovinac Manor, Edmonton AB $ 1,790,000 61.7% 12 9.40% First Multi-Residential 3.5%

Gateway Mobile Home Park, Ft. McMurray AB $ 1,780,000 42.6% 24 13.19% First Other-Residential 3.5%

Grand Design Homes Residential Lots, Edmonton AB $ 1,675,197 46.0% 12 10.90% Second Unimproved Land 3.3%

Rock Grove / Westview Manor, Hinton & Red Deer AB $ 1,600,000 61.8% 12 12.38% First Multi-Residential 3.2%

The Mark on Jasper, Edmonton AB $ 1,500,000 44.4% 12 11.90% First Multi-Residential 3.0%

Augusta Apartments, Ottawa ON $ 1,400,000 72.1% 16 11.90% Second Multi-Residential 2.8%

Starwood Manufacturing, Mississauga ON $ 1,300,000 61.0% 12 11.90% Second Industrial 2.6%

Van Horne & Linton Apartments, Montreal QC $ 1,250,000 79.8% 12 8.90% First Multi-Residential 2.5%

Honey Harbour Mobile Home Park, Georgian Bay ON $ 1,050,000 71.1% 24 11.31% First Other-Residential 2.1%

Walmer and Spadina Apartments, Toronto ON $ 1,000,000 57.6% 24 11.50% Second Multi-Residential 2.0%

Bois de Boulogne Apartments #2, Montreal QC $ 1,000,000 56.5% 13 11.40% Third Multi-Residential 2.0%

Gateway Village Residential, Pemberton BC $ 995,661 60.4% 6 13.12% First Multi-Residential 2.0%

Queen East Mixed Use Building, Toronto ON $ 855,784 70.2% 12 12.00% Second Retail 1.7%

Queen Mary, Montreal QC $ 825,000 84.0% 12 11.90% Second Offi ce Buildings 1.6%

Crawford Court, Oakville ON $ 787,500 65.6% 12 6.40% First Multi-Residential 1.6%

Western Square Plaza, London ON $ 700,000 82.7% 12 11.90% Second Retail 1.4%

Lake Rosseau Residential, Muskoka ON $ 675,000 74.2% 12 14.25% First Single-Residential 1.3%

Mirror Lake Retail Complex, Camrose AB $ 547,931 72.0% 24 10.25% First Retail 1.1%

95.0%

23


11.50%–11.99%

12%–12.49%10% or lower

10.50%–10.99%

11%–11.49%

12.50%–12.99%

13%–13.49%

14% or greater

10%–10.49%

13.50%–13.99%

By Interest Rate (excluding fees earned by the Fund)31%

14%12%

12%

11%

9%

7%

2%

1%

1%

Asset Allocation

Multi-residential

Retail

Other-Residential

Offi ce buildings

Unimproved land

Industrial

Single Residential

By Type44%

27%

9%

9%

4%

4%

3%

By Region Ontario

Alberta

Quebec

British Columbia

Saskatchewan

Manitoba

36%

35%

25%

3%

1%

0%

By MaturityMaturing in 2009

Maturing in 2010

Maturing in 2011

53%

35%

25%

By Loan-to-value

By Term

81%–85%

56%–60%

55% or less

66%–70%

76%–80%

61%–65%

71%–75%23%

22%

16%

14%

12%

8%

4%

19–24 months

0–6 months

13–18 months

25–30 months

7–12 months42%

26%

17%

12%

3%

25


Management’s Responsibility for Financial Statements

To the shareholders of Timbercreek Mortgage Investment Corporation

The accompanying consolidated fi nancial statements of Timbercreek Mortgage Investment Corporation (the “Fund”)

were prepared by management, which is responsible for the integrity and fairness of the information presented,

including the amounts that are based on estimates and judgments. Management is also responsible for ensuring

that these consolidated fi nancial statements are prepared and presented in accordance with generally accepted

accounting principles in Canada. Financial information appearing throughout this annual report is consistent with

these consolidated fi nancial statements.

In discharging its responsibility for the integrity and fairness of the consolidated fi nancial statements and for the

accounting systems from which they are derived, management maintains the necessary system of internal controls

designed to ensure that transactions are authorized, assets are safe-guarded and proper records are maintained.

PricewaterhouseCoopers LLP, the independent auditors, have performed an independent audit in accordance with

generally accepted auditing standards in Canada, of the consolidated fi nancial statements and their report follows.

The shareholders’ auditors have full and unrestricted access to the Audit Committee to discuss their audit and

related fi ndings.

The Board of Director’s is responsible for ensuring that management fulfi lls its responsibilities for fi nancial reporting

and internal controls and engaging the independent auditors. The Board of Director’s carries out this responsibility

through its Audit Committee, which is composed entirely of independent Director’s. The consolidated fi nancial

statements have been reviewed and approved by the Board of Director’s and it’s Audit Committee. The independent

auditors have direct and full access to the Audit Committee and Board of Director’s.

R. Blair Tamblyn Ugo Bizzarri

President and Chief Executive Offi cer Chief Financial Offi cer

Toronto, Ontario, Canada Toronto, Ontario, Canada

February 23, 2009 February 23, 2009

Auditors’ Report

February 23, 2009

To the Shareholders of Timbercreek Mortgage Investment Corporation

We have audited the consolidated statements of net assets and investment portfolio of Timbercreek Mortgage

Investment Corporation (the Fund) as at December 31, 2008 and the consolidated statements of operations, changes

in net assets and cash fl ows for the period from April 30, 2008 (date of incorporation) to December 31, 2008. These

consolidated fi nancial statements are the responsibility of the Fund’s management. Our responsibility is to express an

opinion on these consolidated fi nancial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require

that we plan and perform an audit to obtain reasonable assurance whether the fi nancial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made

by management, as well as evaluating the overall fi nancial statement presentation.

In our opinion, these consolidated fi nancial statements present fairly, in all material respects, the fi nancial posi-

tion of the Fund as at December 31, 2008 and the results of its operations and its cash fl ows for the period from

April 30, 2008 (date of incorporation) to December 31, 2008 in accordance with Canadian generally accepted

accounting principles.

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

27


December 31, 2008Assets

Cash and cash equivalents $ 11,506,658

Mortgages (note 4) 39,300,323

Accrued interest receivable 339,484

Other amounts receivable and prepaids 456,427

Future income tax asset (note 1) 34,890

$ 51,637,782

Liabilities

Accounts payable and accrued expenses $ 355,553

Prepaid mortgage interest 17,252

Dividends payable to shareholders (note 5) 344,458

Due to Fund Manager (note 6) 42,780

Due to Mortgage Manager (note 6) 34,894

Unearned income 333,172

1,128,109

Net assets representing Shareholders’ Equity $ 50,509,673

Net assets, Class A $ 35,832,049

Net assets, Class B $ 14,677,524

Net assets, Voting shares $ 100

Shares outstanding (note 5)

Class A 3,889,562

Class B 1,502,279

Voting shares 100

Net assets per share (note 7)

Class A $ 9.21

Class B $ 9.77

Voting shares $ 1.00

The accompanying notes are an integral part of these consolidated fi nancial statements.

Approved on behalf of the Board of Directors

Consolidated Statement of Net Assets

“R. Blair Tamblyn” “Craig A. Geier”

R. Blair Tamblyn Craig A. Geier

Consolidated Statement of Operations

For the period from April 30, 2008 (date of incorporation) to December 31, 2008Revenue

Interest income $ 1,888,180

Fee income 125,881

2,014,061

Expenses

Management fees (note 3) $ 236,147

Performance fees (note 3) 123,485

Transfer agent fees 9,672

Directors’ fees 17,500

Custodian fees 5,250

Servicing fees (note 3) 91,484

Audit fees 61,950

Legal fees 6,319

Other operating expenses 47,313

Future tax expense 8,723

607,843

Expenses waived (note 3) (88,591)

Net expenses 519,252

Net investment income $ 1,494,809

Fair value adjustment –

Increase in net assets from operations $ 1,494,809

Other information

Increase in net assets from operations

Class A $ 930,521

Class B $ 564,288

Increase in net assets from operations per share

Class A $ 0.3474

Class B $ 0.3931


29


For the period from April 30, 2008 (date of incorporation) to December 31, 2008 Class A Class B Voting shares Fund

Net assets —

Beginning of period $ – $ – $ – $ –

Increase in net assets from operations 930,521 564,288 – 1,494,809

Dividends to shareholders (1,145,706) (689,897) – (1,835,603)

Net proceeds from issuance of shares 36,047,234 14,803,133 100 50,850,467

Total increase in net assets 35,832,049 14,677,524 100 50,509,673

Net assets — End of period $ 35,832,049 $ 14,677,524 $ 100 $ 50,509,673


Consolidated Statement of Changes in Net Assets

Consolidated Statement of Cash Flows

For the period from April 30, 2008 (date of incorporation) to December 31, 2008Cash provided by (used in)

Operating activities

Net investment income $ 1,494,809

Change in non-cash balances related to operations

Increase in accrued interest income receivable (123,521)

Increase in other amounts receivable and prepaids (456,427)

Decrease in future tax asset 8,723

Increase in accounts payable and accrued expenses 323,484

Decrease in due to Mortgage Manager (18,550)

Increase in due to Fund Manager 42,780

Increase in unearned income 294,527

1,565,825

Investing activities

Funding of mortgages (28,938,750)

Discharge of mortgages 3,631,803

(25,306,947)

Financing activities

Proceeds from issuance of voting shares 100

Proceeds from issuance of Class A shares, net of costs incurred 31,812,234

Proceeds from issuance of Class B shares, net of costs incurred 4,926,591

Dividends paid (1,491,145)

35,247,780

Increase in cash and cash equivalents during the period $ 11,506,658

Cash and cash equivalents — Beginning of period –

Cash and cash equivalents — End of period $ 11,506,658

Supplementary information

Supplemental cash fl ow on non-cash investing and fi nancing activities

Class B shares issued in exchange for trust units (note 2) $ 3,838,796

Class B shares issued in exchange for mortgages (note 2) 11,169,345


31


December 31, 2008 Amortized cost Fair value

Mortgages (77.80%) $ 39,300,323 $ 39,300,323

Cash and other net assets (22.20%) 11,209,350

Net assets (100%) $ 50,509,673

Mortgage Portfolio Summary

Interest rateNumber ofmortgages Amortized cost Fair value

Less than or equal to 10% 5 $ 4,590,500 $ 4,590,500

10.00% – 10.24% – – –

10.25% – 10.49% 1 547,931 547,931

10.50% – 10.74% – – –

10.75% – 10.99% 2 4,875,197 4,875,197

11.00% – 11.24% 1 378,000 378,000

11.25% – 11.49% 3 3,850,000 3,850,000

11.50% – 11.74% 2 1,400,000 1,400,000

11.75% – 11.99% 10 10,746,250 10,746,250

12.00% – 12.24% 2 3,605,784 3,605,784

12.25% – 12.49% 2 1,958,000 1,958,000

12.50% – 12.74% – – –

12.75% – 12.99% 2 3,648,000 3,648,000

13.00% – 13.24% 1 1,780,000 1,780,000

13.25% – 13.49% – – –

13.50% – 13.74% 1 250,000 250,000

13.75% – 13.99% – – –

Greater than or equal to 14% 2 1,670,661 1,670,661

34 39,300,323 39,300,323

Note: All mortgages are conventional uninsured mortgages, of which 26 mortgages totalling $31,684,323 are repayable at any time by the borrower without penalty or yield maintenance.

Consolidated Statement of Investment Portfolio

Notes to Consolidated Financial StatementsPeriod from April 30, 2008 (date of incorporation) to December 31, 2008

Formation of the FundTimbercreek Mortgage Investment Corporation (the Fund) was incorporated under the laws of the Province of Ontario

by articles of incorporation dated April 30, 2008 and is authorized to issue an unlimited number of Class A, Class B

and voting shares. The investment objective of the Fund is, with a primary focus on capital preservation, to acquire

and maintain a diversifi ed portfolio of mortgage loan investments which generate income allowing the Fund to pay

monthly distributions to shareholders. Timbercreek Asset Management Inc. (the Fund Manager), as manager of the

Fund, is responsible for the day-to-day operations and providing all general management and administrative services.

Timbercreek Mortgage Strategies Inc. (the Mortgage Manager), a 50% owned subsidiary of the Fund Manager, is

responsible for the management and administration of the Fund’s mortgage loan portfolio.

Class A shares are available to all investors and were issued upon the conversion of subscription receipts issued

under the initial public offering (IPO) and may be issued under other offerings that may be completed in the future.

Class B shares were issued to the Timbercreek Mortgage Investment Fund unitholders in connection with the acqui-

sition of the initial mortgage portfolio by the Fund (note 2) and may also be offered in the future under available

prospectus exemptions.

The voting shares have a nominal value and are owned by certain shareholders of the Fund Manager. Accordingly,

these shareholders, as holders of all of the issued and outstanding voting shares will have the power to vote on all

matters to be considered by the holders of voting shares.

The Fund commenced operations on July 7, 2008 when it completed the IPO of subscription receipts that were

subsequently converted into Class A shares and issued Class B shares in connection with the acquisition of the initial

mortgage portfolio.

1. Summary of signifi cant accounting policies

Basis of presentation

These consolidated fi nancial statements have been prepared in accordance with Canadian generally accepted

accounting principles (Canadian GAAP) and include the accounts of the Fund and Timbercreek Mortgage

Investment Fund (the Trust), in which the Fund is the holder of all trust units and the sole benefi ciary.

Cash and cash equivalents

The Fund considers highly liquid investments with an original maturity of three months or less to be

cash equivalents.

33


1. Summary of signifi cant accounting policies (continued)

Mortgages

The Fund measures its investment in mortgages at fair value in accordance with Canadian GAAP Accounting

Guideline 18 Investment Companies, with any changes in the fair value of a mortgage recorded in the con-

solidated statement of operations. Fair value is the amount of consideration that would be agreed upon in an

arm’s-length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair

value of the mortgages approximate their carrying value given the mortgage loan portfolio consists of short-term

loans (typically maturing within 24 months or less) that are repayable at the option of the borrower without penalty

or yield maintenance, and any renewal of the existing portfolio of mortgages would be made at the same or similar

terms based on the Fund Manager’s assessment of the current mortgage market. When collection of the principal

on 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.

Interest and fee income

Interest income is accounted for on an accrual basis. Lender fees received are amortized to income over the

contractual terms of the mortgages. Forfeited lender fees are recognized at the time a borrower has not fulfi lled

the terms and conditions of a mortgage commitment and payment has been received.

Unearned income

Unearned income includes lender fees received from borrowers, which are amortized over the contractual terms

of the mortgage to fee income.

Income taxes

The Fund qualifi es as a mortgage investment corporation (MIC) for Canadian income tax purposes. A MIC is a

special purpose corporation defi ned under section 130.1 of the Income Tax Act (Canada) and is generally able to

deduct in computing its income for a taxation year, the amount of income for that year and within 90 days of year

end that is distributed to its shareholders. Shareholders who receive any amounts as, or on account of, a taxable

dividend, other than a capital gains dividend, will be subject to Canadian income or withholding tax accordingly.

The Fund intends to make distributions to the extent necessary to reduce its taxable income each year to $nil so

that it has no income taxes payable under Part I of the Income Tax Act (Canada) and to elect to have dividends be

capital gains dividends to the maximum extent allowable.

MIC eligibility criteria

To qualify as a MIC for Canadian income tax purposes, the Fund must comply with the following:

i) At least 50% of the Fund’s assets must consist of residentially orientated mortgages and/or cash;

ii) The Fund’s only business activity is investing funds of the corporation and not managing or developing any real

property;

iii) The Fund must not hold any investments secured by real property situated outside Canada or have debts

owing to the Fund by non-resident individuals, other than debts secured by real property situated in Canada;

and

iv) No shareholder may own more than 25% of the issued shares of any class.

The Fund has recognized the benefi t of tax-effected future deductible temporary differences of $34,890. These dif-

ferences arise primarily because of differences between the tax basis of certain fi nancing costs and their carrying

value on the consolidated balance sheet.

As of December 31, 2008, the Fund has non-capital losses carried forward for income tax purposes of $367,000,

which will expire in 2028 if not used. The company also has future deductible share issuance and fi nancing costs

for income tax purposes of $2,388,000 which are deductible over 5 years. The potential benefi t of these tax pools

has not been recognized in these fi nancial statements.

Financial instruments — recognition and measurement

In accordance with CICA Section 3855 “Financial Instruments—Recognition and Measurement”, TMIC is required

to classify its fi nancial assets as one of the following: (i) held to maturity, (ii) loan and receivables, (iii) held for

trading and (iv) available for sale. Financial liabilities must be classifi ed as: (i) held for trading or (ii) other liabilities.

The Fund has designated its fi nancial assets and fi nancial liabilities as follows:

Financial assets:

Cash and cash equivalents and mortgages are classifi ed as held for trading and recorded at fair value.

Accrued interest receivable, other amounts receivable and prepaids are classifi ed as loans and receivables and

recorded at amortized cost.

Financial liabilities:

Accounts payable and accrued expenses, dividends payable to shareholders, prepaid mortgage interest, due to

Fund Manager and Mortgage Manager are classifi ed as other liabilities and recorded at amortized cost.

35


1. Summary of signifi cant accounting policies (continued)

Increase in net assets per share from operations

Increase in net assets per share is based on the increase in net assets from operations attributable to each class

of shares divided by the weighted average number of shares for that class during the period.

Net assets per share

The net assets per share is calculated by dividing the net assets of a class of shares by the total number of out-

standing shares of the class at the end of the period.

Use of estimates

The preparation of consolidated fi nancial statements requires management to make estimates and assumptions

that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at

the date of the consolidated fi nancial statements and the reported amounts of revenue and expenses during the

period. Actual results could differ from those estimates. The key area of estimation where management has made

a diffi cult or subjective judgement, often as a result of matters that are inherently uncertain, is valuation of the

mortgage portfolio. Signifi cant changes in assumptions could materially change the recorded carrying value.

Recent Canadian accounting pronouncements issued and not yet adopted

International Financial Reporting Standards (“IFRS”)

The Accounting Standards Board (“AcSB”) of the CICA confi rmed that Canadian GAAP for publicly accountable

enterprises will be converged with IFRS effective in the calendar year 2011. IFRS will replace current Canadian

GAAP for these enterprises. The conversion to IFRS will be required for the Fund for interim and annual fi nancial

statements beginning on January 1, 2011. Enterprises will also be required to provide comparative IFRS informa-

tion for the previous fi scal year. The Fund will implement these standards in its fi rst quarter of the fi scal year ending

December 31, 2011 and is currently evaluating the impact of adoption on its consolidated fi nancial statements.

2. Acquisitions Following the closing of the IPO on July 7, 2008, the Fund completed the acquisition of a portfolio of mortgage

investments from the Trust and acquired all of the outstanding units of the Trust. As a result of acquiring all of the

outstanding units of the Trust, the Fund became its sole benefi ciary.

Pursuant to the approval by the unitholders of the Trust, the Fund acquired a portfolio of 12 mortgage invest-

ments in exchange for 1,116,934 Class B shares issued at $10 per share, for total consideration of $11,169,345.

Subsequent to the transaction, the trustees declared an in specie distribution to the Trust unitholders of record

of all Class B shares received, pursuant to this exchange. As a result of the in specie distribution, the Trust

unitholders became Class B shareholders of the Fund.

Immediately following the acquisition of the mortgage portfolio, the Fund issued 392,345 Class B shares at $10

per share in exchange for all of the outstanding units of the Trust, for total net proceeds of $3,838,796. As a result

of this transaction, the Fund holds all outstanding units of the Trust and is the sole benefi ciary.

The acquisition of the mortgage portfolio and outstanding units of the Trust has been recorded using the purchase

method. The following table summarizes the preliminary fair values of the net assets acquired by the Fund.

Assets

Mortgages $ 13,993,376

Cash and cash equivalents 896,599

Future income tax asset 43,613

Interest receivable 215,963

15,149,551

Liabilities

Accounts payable and accrued expenses $ 49,321

Unearned income 38,645

Due to Mortgage Manager 53,444

141,410

Net assets acquired $ 15,008,141

Net assets acquired in exchange for: Class B shares $ 15,008,141

37


3. Expenses

Management and performance fees

The Fund Manager is responsible for the day-to-day operations and providing all general management and

administration services to the Fund. The Fund pays the Fund Manager a monthly management fee of 1.2% for

its services, based on the gross assets of the Fund, calculated daily and payable monthly. For the period ended

December 31, 2008, the Fund incurred management fees of $236,147.

The Mortgage Manager is responsible for the management and administration of the Fund’s mortgage portfolio.

In any calendar year where the Fund has net earnings available for distribution to shareholders in excess of the

Hurdle Rate (Hurdle Rate is defi ned as the average 2-year Government of Canada Bond Yield for the 12 month

period then ended plus 450 basis points), the Mortgage Manager will be entitled to receive from the Fund a

performance fee equal to 20% of the net earnings of the Fund available to distribute over the Hurdle Rate. The per-

formance fee is payable to the Mortgage Manager within 15 days of the issuance of the Fund’s audited fi nancial

statements for that calendar year. For the period ended December 31, 2008, the Fund has accrued $34,894 in

performance fees. The performance fees, net of fees waived for Class A and Class B shares, were as follows:

Class A $ 24,736

Class B 10,158

$ 34,894

Servicing fees

The Fund will pay each registered dealer a servicing fee equal to 0.75% annually of the net redemption value per

Class A share for each Class A share held by clients of the registered dealer, calculated and paid at the end of

each calendar quarter. For the period ended December 31, 2008, the Fund incurred servicing fees of $91,484.

Fund operating expenses

Each class of shares is responsible for the payment of its proportionate share of common operating expenses,

such as director’s fees, independent review committee fees, custodian fees, transfer agent fees, audit fees, fi ling

fees, legal fees, and other administrative expenses, in addition to the expenses that are attributable to a particular

class of shares. The common operating expenses are allocated on a proportionate basis to each class of shares

based on the net redemption value of each class to the total net redemption value of the Fund.

4. MortgagesThe following is a summary of the mortgage portfolio as at December 31, 2008:

Interest in fi rst mortgages 65% $ 25,585,092

Interest in non-fi rst mortgages 35% 13,715,231

100% 39,300,323

As part of the assessment of fair value, management of the Fund routinely reviews each mortgage for impairment

to determine whether or not a loan should be recorded at its estimated realizable value.

As at December 31, 2008, management does not believe an impairment exists on any mortgages, as such, no

adjustment to the fair value of the mortgages has been recorded.

The mortgages are secured by the real property to which they relate, bear interest at a weighted average interest

rate of 11.61% and mature between 2009 and 2011.

The unadvanced mortgage commitments under the existing mortgage portfolio amounted to $120,624 as at

December 31, 2008.

Principal repayments based on contractual maturity dates are as follows:

2009 $ 20,850,323

2010 10,700,000

2011 7,750,000

39,300,323

A majority of the mortgages contain a prepayment option, whereby the borrower may repay the principal at any

time prior to maturity without penalty or yield maintenance.

39


5. Shareholders’ equityThe Fund is available in two classes of shares: Class A and Class B. All shares in a class rank equally with respect

to dividends. Each Class A and Class B shareholder is entitled to one vote for each share owned at all meetings

of shareholders at which the particular class of shares is entitled to attend and vote. During the period ended

December 31, 2008, Class A, Class B and Voting shares issued and outstanding changed as follows:

Authorized

Shares outstanding —

beginning of period Issued Exchanged Redeemed

Shares outstanding —

end of period

Class A unlimited – 3,436,666 452,896 – 3,889,562

Class B unlimited – 1,932,279 (430,000) – 1,502,279

Voting shares unlimited – 100 – – 100

On completion of the IPO on July 7, 2008, the Fund issued 2,433,186 Class A shares for net proceeds of

$22,688,015 and 1,509,279 Class B shares in exchange for net assets acquired less issuance costs of

$14,858,133.

In December 2008, the Fund issued 1,003,480 Class A shares for net proceeds of $9,124,219 and 423,000

Class B shares for net proceeds of $4,180,000.

Redemptions

Monthly redemptions

Subject to certain restrictions, a Class A share may be surrendered for redemption and transacted on the last

business day of any month. Shareholders whose Class A shares are surrendered for redemption in any month

(other than October) will be entitled to receive a price per Class A share equal to the lesser of (i) 95% of the trading

price, defi ned as the weighted average trading price on the Toronto Stock Exchange (TSX) for a period of ten

trading days immediately preceding the relevant redemption date (the Trading Price) or (ii) the market price, being

the closing price of the Class A shares on the TSX on the redemption date (the Market Price).

Class B shares are redeemable monthly on the same terms and conditions as the Class A shares equal to the

lesser of (i) 95% of the Trading Price of the Class A shares multiplied by the Class B exchange ratio; and (ii) the

Market Price multiplied by the Class B exchange ratio. The exchange ratio is defi ned as the net redemption value

per Class B share divided by the net redemption value per Class A share on the relevant exchange date.

There is no market through which Class B shares may be sold. Subject to certain restrictions, holders of Class B

shares may exchange their shares for Class A shares on the last business day of each month.

Annual redemptions

Class A and Class B shares may be redeemed on the last business day of October of each year at a price per

share equal to the net redemption value per Class A share and Class B share, respectively.

Dividends

The Fund intends to pay dividends to shareholders on a monthly basis within 15 days following the end of

each month.

For the period ended December 31, 2008, the Fund declared dividends of $0.4425 per Class A share for a total

of $1,145,706 and $0.4811 per Class B share for a total of $689,897. As at December 31, 2008, $344,458 was

payable to the shareholders.

6. Due to related partiesAs at December 31, 2008, $42,780 remains payable by the Fund to the Fund Manager for management fees.

In addition, $34,894 remains payable to the Mortgage Manager relating to performance fees earned for the period

ended December 31, 2008.

41


7. Reconciliation of net asset valueA reconciliation between the redemption net asset value (Redemption NAV) and net assets calculated using

Canadian GAAP (GAAP NAV) is as follows:

Redemption

NAV AdjustmentGAAP

NAV

Net asset value as at December 31, 2008

Class A $ 36,501,706 $ (669,657) $ 35,832,049

Class B $ 14,796,318 $ (118,794) $ 14,677,524

Redemption

NAV per share AdjustmentGAAP

NAV per share

Net asset value per share as at December 31, 2008

Class A $ 9.38 $ (0.17) $ 9.21

Class B $ 9.85 $ (0.08) $ 9.77

The GAAP NAV differs from the Redemption NAV calculated for fund pricing purposes. This adjustment is

due to including costs associated with the establishment, structuring and periodic offering of shares of the

Fund attributable to a specifi c class, being amortized monthly over a period of fi ve years in determining the

Redemption NAV.

8. Capital risk managementThe Fund manages its capital structure in order to support ongoing operations while focusing on its primary objec-

tives of preserving shareholder capital and generating a stable monthly cash dividend to shareholders. The Fund

defi nes its capital structure to include Class A and Class B shares.

The Fund reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mort-

gage investment opportunities, the availability of capital, and anticipated changes in general economic conditions.

As at December 31, 2008, the Fund has no externally imposed capital requirements.

9. Financial instruments

Interest rate risk

Interest rate risk is the risk that the fair value or future cash fl ows of fi nancial assets or fi nancial liabilities will fl uc-

tuate because of changes in market interest rates. For the period ended December 31, 2008, if interest rates had

been 50 basis points lower, with all other variables held constant, net assets from operations for the period then

ended would have been $18,750 lower, arising mainly as a result of lower interest income generated on variable

rate mortgage investments. If interest rates had been 50 basis points higher, with all other variables held constant,

net assets from operations for the period then ended would have been $18,750 higher, arising mainly as a result of

higher interest income generated on variable rate mortgage investments.

The Fund’s accrued interest receivable, other amounts receivable and prepaids, amounts payable and accrued

expenses, dividends payable to shareholders, prepaid mortgage interest, due to Fund Manager and due to

Mortgage Manager have no exposure to interest rate risk. Cash and cash equivalents carry a variable rate of

interest and are subject to interest rate risk.

Credit risk

Credit risk is the possibility that a borrower may be unable to honour its mortgage 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:

• Adhering to the investment restrictions and operating policies included in the asset allocation model

(subject to certain duly approved exceptions);

• Ensuring a comprehensive due diligence process is conducted on each mortgage investment prior to

funding. This generally includes, but is not limited to (1) engaging professional independent consultants,

lawyers and appraisers, and (2) performing credit checks on prospective borrowers;

• All mortgage investments are approved by the mortgage advisory committee before funding; and

• Actively monitoring the mortgage portfolio and initiating recovery procedures where required.

The maximum exposure to credit risk at December 31, 2008 is the fair values of its amounts receivable and

mortgages which total $40,096,234.

43


9. Financial instruments (continued)

Liquidity risk

Liquidity risk is the risk that the Fund will encounter diffi culty in meeting its fi nancial obligations as they become

due. This risk arises in normal operations from fl uctuations in cash fl ow as a result of the timing of mortgage

investment fundings and repayments and redemptions of shares. Management routinely forecasts future cash fl ow

sources and requirements to ensure cash is effi ciently utilized.

Fair value

The fair value of cash and cash equivalents, accrued interest receivable, other amounts receivable and prepaids,

amounts payable and accrued expenses, prepaid mortgage interest, dividends payable to shareholders, due to

Fund Manager and due to Mortgage Manager approximate their carrying value due to their short-term nature.

Refer to note 1 regarding the fair value of mortgages. Although the Fund’s management believes that the esti-

mated fair values of its mortgages are appropriate as at December 31, 2008 based on its assessment of current

market conditions for mortgages with similar terms and risks, those fair values may differ if other reasonably

possible alternative assumptions are used.

10. Commitments and contingenciesIn the ordinary course of business activities, the Fund may be contingently liable for litigation and claims arising

from investing in mortgages. Where required, management records adequate provisions in the accounts.

Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management

believes that the ultimate resolution of such contingencies would not have a material adverse effect on the Fund’s

fi nancial position.

Head Offi ce:

25 Price Street

Toronto, Ontario M4W 1Z1

(t) 416.306.9967

(e) [email protected]

Website: www.timbercreekfunds.com

Transfer Agent & Registrar:

CIBC Mellon Trust Company

320 Bay Street

Toronto, Ontario M5H 4A6

Auditors:

PricewaterhouseCoopers LLP

Legal Counsel

McCarthy Tétrault LLP

Stock Exchange Listing:

TSX: TMCDe

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TimbercreekMortgage Investment Corporation

www.timbercreekfunds.com

Date post:	12-Jan-2015
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