MANAGEMENT DISCUSSION OF FUND PERFORMANCE
For the period from the Fund’s commencement of operations on March 26, 2013 to June 30, 2013, Brookfield Mortgage Opportunity Income Fund
Inc. (NYSE: BOI) had a total return based on net asset value of -2.72% and a total return based on market price of -6.44%, which assumes the reinvestment of dividends and is exclusive of brokerage commissions. Based on the NYSE closing price of
$18.46 on June 30, 2013, the Fund’s shares had a dividend yield of 8.26%. The dividend yield is calculated as the annualized amount of the reporting period’s most recent monthly dividend declared, divided by the stated stock price.
The Fund’s performance over the period was primarily driven by the widening risk premia. Increased rhetoric from the Federal Open Market
Committee (“FOMC”) about a reduction in Quantitative Easing (“QE”) led to an increase in volatility during the period. While the Fund had used only minimal leverage by the close of the period, the Fund’s capital was invested
in assets with credit risk, principally Mortgage-Backed Securities (“MBS”) without a government guarantee. While interest rates also increased significantly over the period, the Fund maintained a low sensitivity to rising interest rates.
The Fund’s duration, or the sensitivity of the net asset value to a 1% upward shift in interest rates, was less than 1 year as of June 30, 2013. Looking ahead, we believe the increased yields available on securities are an opportunity for
us to deploy some additional capital.
MARKET ENVIRONMENT
The Fund is focused on opportunities available in the residential and commercial mortgage markets. The current emphasis of the Fund is on non-Agency
mortgages, which we believe to be undervalued. The Fund seeks investments primarily in non-Agency MBS, Commercial Mortgage-Backed Securities and other mortgage-related investments to generate an attractive income, to maintain low duration, and to
position for the recovery in real estate that we believe continues to gain momentum. Over the period ended June 30, 2013, the residential real estate market and the commercial real estate market continued to demonstrate a better than expected
recovery. We also believe the recovery of the residential housing markets and commercial real estate markets will be additive to the U.S. economy.
2
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Many of the fundamental underpinnings for
housing showed marked improvement over the period, these include: demand, inventory, and delinquency rates. The most recent survey of bank lending officers, the Senior Loan Officer Survey, also showed a slight improvement in credit provision by
banks. To date, however, the constraint in the mortgage markets has been limited access to credit, especially for non-Agency borrowers with weaker credit or non-Agency borrowers with higher loan-to-value ratios. We believe that expansion in credit
could provide additional positive support to home prices and to the economy overall.
Within commercial real estate, top tier properties in major
markets have enjoyed a significant recovery and we believe a broader commercial real estate market recovery has begun to develop. As the availability of commercial mortgage credit has improved, investors are considering opportunities beyond those
major markets. Oversupply has not been an issue in this real estate cycle, as new construction virtually came to a halt during the financial crisis in 2008 and 2009 and, with the exception of the multi-family sector, remains extremely low. The lack
of new construction should also support further recovery in values as demand for space returns and the lead times required to deliver new space keeps supply in check.
In addition, there has been an increase in new issuance in both the CMBS and non-Agency MBS markets. In our view, the secondary markets for seasoned
securities continue to offer better opportunities to the Fund, than the new issue markets, given the discounted secondary securities benefit as the new issue market expands and provides additional opportunities for borrowers to refinance their
loans.
On a calendar year-to-date basis, non-Agency mortgage-related securitized products remained one of the better performing asset classes,
despite the pull-back in prices seen as volatility increased in May and June. In our view, the market reacted to a number of events in May. First, the market seized on increased rhetoric around “tapering” of the Fed’s asset purchase
programs, particularly comments made by Fed Chairman, Ben Bernanke in May 2013. As well, in a May 22nd release, the minutes of the May FOMC Meeting revealed that some members of the Federal Reserve Board of Governors would recommend reducing
the amount of bonds purchased through the monthly asset purchase program prior to year-end or, sooner than expected. Adding fuel to the fire, there was also a general lack of “bad” economic data, including a 28-week string of jobless
claims below the 400,000 level. The improved economic position and more limited tail risk point toward the potential for the FOMC revisiting its QE programs.
The market responded to the improved economic data by pricing in an earlier reduction in Fed asset purchases than was contemplated prior to May,
including the commensurate increase in rates. From the end of April through the end of June, the yield on the 10-Year U.S. Treasury note increased by approximately 85 basis points. Yield spreads for Agency MBS widened when compared to U.S. Treasury
notes. As interest rates rise, the duration of Agency MBS increases, or extends. This growing duration often needs to be hedged, typically through sales of Agency MBS. Both REITs and mortgage servicers were sellers of Agency MBS in the first quarter
of 2013. The Fund has no direct exposure to Agency MBS or securities guaranteed by the U.S. Government-Sponsored Enterprises (“GSEs”).
Since the end of May, yields for non-Agency MBS increased modestly. The increase in yields, in our view was related to an increase in volatility,
however, it was also due, in part, to the timing of several larger sales. We saw the beginning of a string of several “expected” sales from Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (“FHFA”) is targeting a 5%
reduction in the “less liquid” portion of the portfolios held by Fannie Mae and Freddie Mac. To this end, on May 15th, Freddie Mac sold $1 billion of non-Agency RMBS, followed by Fannie Mae, on May 23rd, selling $1.9 billion of
CMBS. The selling continued and on June 18th, Fannie Mae sold approximately $215 million of CMBS. The sales were primarily senior securities with investment grade ratings. Freddie Mac and Fannie Mae, in our view, are likely to have additional
sales throughout the year. Additionally, within the next few months, we expect to see Fannie Mae or Freddie Mac buy protection on newly guaranteed residential loans in a preliminary effort to shed credit risk.
While the GSE sales were somewhat anticipated, there were also several unanticipated portfolio sales. At the end of April, Royal Park, the so called
Fortis “Bad Bank” consisting of $14.9 billion in current face of Asset-Backed Securities and RMBS traded in a private transaction. On May 21st, a large auction of $8.7 billion was announced
2013 Annual
Report
3
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
for May 30th. This auction, the sale of the HBOS bad bank portfolio held by Lloyd’s, had
broker dealers taking down $8.7 billion in current face value of non-Agency RMBS. Initially, based on Fed data, it appeared only $5 billion was sold to end accounts, resulting in a considerable, $3.5 billion (25%) addition to broker dealer
balance sheets, at a time when new regulations have reduced available balance sheet substantially.
The impacts of sweeping bank regulation, in the
form of Basel II (Europe only), Basel III and Dodd-Frank Wall Street Reform and Solvency II (Europe), remains a key issue. These bills have had several significant effects, not the least of which is a shrinking of broker dealer balance sheets across
most products. The limits of these smaller balance sheets were tested in May and June as fund redemptions and selling increased. What we saw was much more limited liquidity across most credit-oriented products. We view this limited liquidity as an
issue that will likely impact all markets as volatility increases. That said, limited liquidity was less a surprise in sectors like non-Agency MBS, where a healthy premium is paid for more limited liquidity, than it was in other sectors where there
is a greater expectation of liquidity.
There are many signs that are supportive for non-Agency mortgages and mortgage-related securities. Some are
highly visible, such as the increases seen in the home price index. Some are less visible, such as the recent increases in voluntary prepayment speeds seen across non-Agency mortgages, particularly within sectors that have seen far less opportunity
to refinance due to credit or loan-to-value constraints. Given the discount price of our non-Agency MBS portfolio, we believe even the small improvements seen in access to credit, can be a meaningful positive to the cash flow that the securities
receive. These are borrowers that have not, by and large, had access to low mortgage rates, or to the Home Affordable Refinance Program (“HARP”) programs, afforded to Agency borrowers. All of these facts can be supportive of our strategy.
In our view, the overall market performance is a manifestation of several concerns relating to the potential timing and magnitude of policy changes
by the Fed, and the corresponding increase in volatility resulting in a necessary reduction in leverage. We believe that Federal Reserve Policy is closely linked to the economy and a reduction in QE as being tied closely to improved economic
expectations. It is our view that the Fed has been protective of the economic climate that has been supported through stimulus over the past five years. While we think there is sufficient support within the economy generally, and within the housing
sector specifically, to reduce the asset purchase program, we believe the Fed will reduce stimulus to the extent the economy is faring well. Within the Fund’s portfolio, the exposure to non-Agency MBS and commercial mortgage assets represented
approximately 79.6% of gross assets as of June 30, 2013. We believe that to the extent the economy is on track and sufficient to reduce the asset purchase program, there are likely to be benefits to our non-Agency MBS and CMBS allocation, many
of which are at discount dollar prices. The current market price average was $92.40 for commercial mortgage assets and $72.63 for non-Agency MBS as of June 30, 2013.
We expect buying opportunities on the horizon as we receive economic news or more clarity on the QE policy. In particular, good news makes the tapering
of QE more likely and should be correlated with rising rates and additional selling in Agency MBS. We believe the effect of uncertainty here, coupled with the inventory level, can work to our advantage given the capital we have to deploy.
Forward-Looking Information
This management discussion
contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements that are based on
various assumptions (some of which are beyond our control) may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,”
“anticipate,” “continue,” “should,” “intend,” or similar terms or variations on those terms or the negative of those terms. Although we believe that the expectations contained in any forward-looking statement
are based on reasonable assumptions, we can give no assurance that our expectations will be attained. We do not undertake, and specifically disclaim any obligation, to publicly release any update or supplement to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
4
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Disclosure
The Fund’s portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for
any person to buy, sell or hold any particular security. There is no assurance that the Fund currently holds these securities.
The Fund may utilize
leverage to seek to enhance the yield and net asset value of its common stock, through bank borrowings, issuance of short-term debt securities or shares of preferred stock, or a combination thereof. However, these objectives cannot be achieved in
all interest rate environments. While leverage may result in a higher yield for the Fund, the use of leverage involves risk, including the potential for higher volatility of the NAV, fluctuations of dividends and other distributions paid by the Fund
and the market price of the Fund’s common stock, among others. The Fund may invest assets in securities of issuers domiciled outside the United States, including issuers from emerging markets. Foreign investing involves special risks, including
foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Performance data quoted represents past performance results and does not guarantee future results. Current performance may
be lower or higher than the performance data quoted.
These views represent the opinions of Brookfield Investment Management Inc. and are not
intended to predict or depict the performance of any investment. These views are as of the close of business on June 30, 2013 and subject to change based on subsequent developments.
2013 Annual
Report
5
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Portfolio Characteristics (Unaudited)
June 30,
2013
|
|
|
|
|
|
|
PORTFOLIO STATISTICS
|
|
|
|
|
|
Annualized dividend yield
1
|
|
|
8.26
|
%
|
|
Weighted average coupon
|
|
|
3.86
|
%
|
|
Weighted average life
|
|
|
3.75 years
|
|
|
Percentage of leveraged assets
|
|
|
1.03
|
%
|
|
Total number of holdings
|
|
|
138
|
|
|
ASSETS BY COUPON TYPE DISTRIBUTION
2
|
|
|
|
|
|
Residential Mortgage Related Holdings - Fixed Rate
|
|
|
6.6
|
%
|
|
Residential Mortgage Related Holdings - Floating Rate
|
|
|
34.7
|
%
|
|
Commercial Mortgage Related Holdings - Fixed Rate
|
|
|
26.5
|
%
|
|
Commercial Mortgage Related Holdings - Floating Rate
|
|
|
3.9
|
%
|
|
High Yield Corporate Bonds - Fixed Rate
|
|
|
14.3
|
%
|
|
Loans - Fixed Rate
|
|
|
2.5
|
%
|
|
Loans - Floating Rate
|
|
|
2.1
|
%
|
|
Leverage Loans
|
|
|
0.9
|
%
|
|
Equities
|
|
|
1.7
|
%
|
|
Cash and other assets
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
|
ASSET ALLOCATION
3
|
|
|
|
|
|
Residential Mortgage Related Holdings
|
|
|
44
|
%
|
|
Commercial Mortgage Related Holdings
|
|
|
38
|
%
|
|
High Yield Corporate Bonds
|
|
|
15
|
%
|
|
Term Loans
|
|
|
1
|
%
|
|
Common Stocks
|
|
|
2
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
|
1
|
Dividends may include net investment income, capital gains and/or return of capital. The dividend yield
referenced above is calculated as the annualized amount of the most recent monthly dividend declared divided by June 30, 2013 stock price.
|
|
2
|
Coupon type are expressed as a percentage of total investments (by market value) and will vary over time.
|
|
3
|
Percentages are based on total investments.
|
6
Brookfield
Investment Management Inc.
The following notes should be read in conjunction with the accompanying Schedule of Investments.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Statement of Assets and Liabilities
June 30,
2013
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments in securities, at value (Note 2)
|
|
$
|
398,942,321
|
|
|
Cash
|
|
|
29,227,353
|
|
|
Cash collateral for futures contracts
|
|
|
147,025
|
|
|
Interest and dividend receivable
|
|
|
2,220,810
|
|
|
Dividend reinvestment receivable
|
|
|
20,311
|
|
|
Variation margin receivable
|
|
|
5,312
|
|
|
Prepaid expenses
|
|
|
21,935
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
430,585,067
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Reverse repurchase agreements (Note 6)
|
|
|
4,438,000
|
|
|
Interest payable for reverse repurchase agreements (Note 6)
|
|
|
4,031
|
|
|
Payable for investments purchased
|
|
|
9,304,236
|
|
|
Payable for variation margin
|
|
|
2,508
|
|
|
Investment advisory fee payable (Note 4)
|
|
|
349,747
|
|
|
Administration fee payable (Note 4)
|
|
|
52,462
|
|
|
Directors fee payable
|
|
|
10,625
|
|
|
Accrued expenses
|
|
|
134,600
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,296,209
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
416,288,858
|
|
|
|
|
|
|
|
|
Composition of Net Assets:
|
|
|
|
|
|
Capital stock, at par value ($0.001 par value, 1,000,000,000 shares authorized) (Note 7)
|
|
$
|
22,714
|
|
|
Additional paid-in capital (Note 7)
|
|
|
431,440,937
|
|
|
Distributions in excess of net investment income
|
|
|
(238,652
|
)
|
|
Accumulated net realized loss on investment transactions and futures transactions
|
|
|
(289,042
|
)
|
|
Net unrealized depreciation on investments and futures
|
|
|
(14,647,099
|
)
|
|
|
|
|
|
|
|
Net assets applicable to capital stock outstanding
|
|
$
|
416,288,858
|
|
|
|
|
|
|
|
|
Total investments at cost
|
|
$
|
413,867,240
|
|
|
|
|
|
|
|
|
Shares Outstanding and Net Asset Value Per Share:
|
|
|
|
|
|
Common shares outstanding
|
|
|
22,713,931
|
|
|
Net asset value per share
|
|
$
|
18.33
|
|
See
Notes to Financial Statements.
2013 Annual
Report
13
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Statement of Operations
For the Period from
March 26, 2013
1
through June 30, 2013
|
|
|
|
|
|
|
Investment Income
|
|
|
|
|
|
Interest
|
|
$
|
5,192,573
|
|
|
Dividends
|
|
|
56,002
|
|
|
|
|
|
|
|
|
Total income
|
|
|
5,248,575
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment advisory fees (Note 4)
|
|
|
1,091,636
|
|
|
Administration fees (Note 4)
|
|
|
163,745
|
|
|
Organizational fees
|
|
|
77,050
|
|
|
Audit and tax services
|
|
|
62,000
|
|
|
Directors’ fees
|
|
|
42,500
|
|
|
Legal fees
|
|
|
30,266
|
|
|
Reports to stockholders
|
|
|
28,100
|
|
|
Fund accounting servicing fees
|
|
|
26,054
|
|
|
Registration fees
|
|
|
23,750
|
|
|
Custodian fees
|
|
|
9,354
|
|
|
Insurance
|
|
|
8,069
|
|
|
Transfer agent fees
|
|
|
3,598
|
|
|
Miscellaneous
|
|
|
2,897
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,569,019
|
|
|
Interest expense on reverse repurchase agreements (Note 6)
|
|
|
4,031
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,573,050
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,675,525
|
|
|
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments:
|
|
|
|
|
|
Net realized gain on:
|
|
|
|
|
|
Investment transactions
|
|
|
29,909
|
|
|
|
|
|
|
|
|
Net realized gain on investment transactions
|
|
|
29,909
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation (depreciation) on:
|
|
|
|
|
|
Investments
|
|
|
(14,924,919
|
)
|
|
Futures contracts
|
|
|
277,820
|
|
|
|
|
|
|
|
|
Net change in unrealized depreciation on investments and futures
|
|
|
(14,647,099
|
)
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(14,617,190
|
)
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(10,941,665
|
)
|
|
|
|
|
|
|
|
1
|
Commencement of operations.
|
See Notes to Financial Statements.
14
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Statement of Changes in Net Assets
|
|
|
|
|
|
|
|
|
For the period
March 26,
2013
1
through
June 30, 2013
|
|
|
Increase (Decrease) in Net Assets Resulting from Operations:
|
|
|
|
|
|
Net investment income
|
|
$
|
3,675,525
|
|
|
Net realized gain on investment transactions
|
|
|
29,909
|
|
|
Net change in unrealized depreciation on investments and futures
|
|
|
(14,647,099
|
)
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(10,941,665
|
)
|
|
|
|
|
|
|
|
Dividends and Distributions to Stockholders (Note 2):
|
|
|
|
|
|
Net investment income
|
|
|
(4,233,128
|
)
|
|
Return of capital
|
|
|
(1,540,340
|
)
|
|
|
|
|
|
|
|
Total dividends and distributions paid
|
|
|
(5,773,468
|
)
|
|
|
|
|
|
|
|
Capital Stock Transactions (Note 7):
|
|
|
|
|
|
Proceeds from shares sold
|
|
|
432,963,977
|
|
|
Reinvestment of dividends and distributions
|
|
|
40,014
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital stock transactions
|
|
|
433,003,991
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
416,288,858
|
|
|
Net Assets:
|
|
|
|
|
|
Beginning of period
|
|
|
—
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
416,288,858
|
|
|
|
|
|
|
|
|
Distributions in excess of net investment income
|
|
$
|
(238,652
|
)
|
|
|
|
|
|
|
|
Share Transactions:
|
|
|
|
|
|
Shares issued
|
|
|
22,711,790
|
|
|
Reinvested shares
|
|
|
2,141
|
|
|
|
|
|
|
|
|
Net increase in shares outstanding
|
|
|
22,713,931
|
|
|
|
|
|
|
|
|
1
|
Commencement of operations.
|
See Notes to Financial Statements.
2013 Annual
Report
15
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Statement of Cash Flows
For the Period from
March 26, 2013
1
through June 30, 2013
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
|
Cash flows provided by (used for) operating activities:
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(10,941,665
|
)
|
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used for operating activities:
|
|
|
|
|
|
Purchases of long-term portfolio investments
|
|
|
(406,592,998
|
)
|
|
Proceeds from disposition of long-term portfolio investments and principal paydowns
|
|
|
4,490,481
|
|
|
Sales of short-term portfolio investments, net
|
|
|
6,419
|
|
|
Cash collateral for futures contracts
|
|
|
(147,025
|
)
|
|
Interest and dividend receivable
|
|
|
(2,220,810
|
)
|
|
Dividend reinvestment receivable
|
|
|
(20,311
|
)
|
|
Variation margin receivable
|
|
|
(5,312
|
)
|
|
Prepaid expenses
|
|
|
(21,935
|
)
|
|
Payable for variation margin
|
|
|
2,508
|
|
|
Interest payable for reverse repurchase agreements
|
|
|
4,031
|
|
|
Investment advisory fee payable
|
|
|
349,747
|
|
|
Administration fee payable
|
|
|
52,462
|
|
|
Directors fee payable
|
|
|
10,625
|
|
|
Accrued expenses
|
|
|
134,600
|
|
|
Net amortization on investments and paydown gains on investments
|
|
|
(2,436,997
|
)
|
|
Unrealized depreciation on investments
|
|
|
14,924,919
|
|
|
Net realized gain on investment transactions
|
|
|
(29,909
|
)
|
|
|
|
|
|
|
|
Net cash used for operating activities
|
|
|
(402,441,170
|
)
|
|
|
|
|
|
|
|
Cash flows provided by (used for) financing activities:
|
|
|
|
|
|
Net cash provided by reverse repurchase agreements
|
|
|
4,438,000
|
|
|
Net cash received from initial public offering
|
|
|
432,963,977
|
|
|
Distributions paid to stockholders, net of reinvestments
|
|
|
(5,733,454
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
431,668,523
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
29,227,353
|
|
|
Cash at beginning of period
|
|
|
—
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
29,227,353
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
Interest payments on the reverse repurchase agreements for the period ended June 30, 2013, totaled $0.
Non-cash financing activities included reinvestment of distributions of $40,014.
|
1
|
Commencement of operations.
|
See Notes to Financial Statements.
16
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Financial Highlights
|
|
|
|
|
|
|
|
|
Period from
March 26, 2013
1
through June
30,
2013
|
|
|
Per Share Operating Performance:
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
19.10
|
2
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.17
|
|
|
Net realized and unrealized gain (loss) on investment transactions and futures
|
|
|
(0.69
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in net asset value resulting from operations
|
|
|
(0.52
|
)
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.18
|
)
|
|
Return of capital distributions
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
Total dividends and distributions paid
|
|
|
(0.25
|
)
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
18.33
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
18.46
|
|
|
|
|
|
|
|
|
Total Investment Return
†
|
|
|
-6.44
|
%
3
|
|
Ratios to Average Net Assets/Supplementary Data:
|
|
|
|
|
|
Net assets, end of period (000s)
|
|
$
|
416,289
|
|
|
Gross operating expenses
|
|
|
1.44
|
%
4
|
|
Interest expense
|
|
|
0.00
|
%
4,5
|
|
Total expenses
|
|
|
1.44
|
%
4
|
|
Net investment income
|
|
|
3.36
|
%
4
|
|
Portfolio turnover rate
|
|
|
2
|
%
3
|
|
†
|
Total investment return is computed based upon the New York Stock Exchange market price of the Fund’s shares and excludes the effect of broker
commissions. Dividends and distributions are assumed to be reinvested at the prices obtained under the Fund’s dividend reinvestment plan.
|
|
1
|
Commencement of operations.
|
|
2
|
Net asset value, beginning of period, reflects a deduction of $0.90 per share sales charge from the initial public offering price of $20.00 per share.
|
|
5
|
Interest expense ratio was less than 0.01%.
|
See Notes to Financial Statements.
2013 Annual
Report
17
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
1. The Fund
Brookfield Mortgage Opportunity Income Fund Inc. (the “Fund”) was incorporated under the laws of the State of Maryland on November 26,
2012. The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a diversified, closed-end management investment company which will invest primarily in mortgage-related securities. The Fund commenced
operations on March 26, 2013.
Brookfield Investment Management Inc. (“BIM” or “Adviser”), a wholly-owned subsidiary of
Brookfield Asset Management Inc., is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and serves as investment adviser to the Fund.
The investment objective of the Fund is to provide a high total investment return by providing a high level of current income and the potential for
capital appreciation. No assurances can be given that the Fund’s investment objective will be achieved.
2. Significant Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Valuation of Investments:
Debt securities, including U.S. government securities, listed corporate bonds, other fixed income and asset-backed securities, and unlisted securities and private placement securities, are generally valued at the bid prices furnished by an
independent pricing service or, if not valued by an independent pricing service, using bid prices obtained from at least two active and reliable market makers in any such security or a broker-dealer. Short-term debt securities with remaining
maturities of sixty days or less are held at fair value which is equal to cost with interest accrued or discount accreted to the date of maturity, unless such valuation, in the judgment of the Adviser’s Valuation Committee, does not represent
market value.
Investments in equity securities listed or traded on any securities exchange or traded in the over-the-counter market are valued at
the last trade price as of the close of business on the valuation date. Equity securities for which no sales were reported for that date are valued at “fair value” as determined in good faith by the Adviser’s Valuation Committee.
Investments in open-end registered investment companies, if any, are valued at the net asset value (“NAV”) as reported by those investment companies.
The Board of Directors (the “Board”) has adopted procedures for the valuation of the Fund’s securities and has designated the day to day
responsibilities for valuation determinations under these procedures to the Adviser. The Board has reviewed and approved the valuation procedures utilized by the Adviser and regularly reviews the application of the procedures to the securities in
the Fund’s portfolio. Securities are valued using unadjusted quoted market prices, when available, as supplied primarily by third party pricing services or dealers. When price quotations for certain securities are not readily available or
cannot be determined, a significant event has occurred that would materially affect the value of the security, or if the available quotations are not believed to be reflective of the market value by the Adviser, those securities will be valued at
“fair value” as determined in good faith by the Adviser’s Valuation Committee using procedures adopted by and under the supervision of the Fund’s Board. The Valuation Committee is comprised of senior members of the Adviser’s
management team. There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s NAV.
Fair valuation procedures may be used to value a substantial portion of the assets of the Fund. The Fund may use the fair value of a security to
calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the
normal market close, (3) a portfolio security is not traded in significant volume for a
18
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
substantial period, or (4) the Adviser determines that the quotation or price for a portfolio security provided by a broker-dealer or an independent pricing service is inaccurate.
The “fair value” of securities may be difficult to determine and thus judgment plays a greater role in the valuation process. The fair
valuation methodology may include or consider the following guidelines, as appropriate: (1) evaluation of all relevant factors, including but not limited to, pricing history, current market level, supply and demand of the respective security;
(2) comparison to the values and current pricing of securities that have comparable characteristics; (3) knowledge of historical market information with respect to the security; (4) other factors relevant to the security which would
include, but not be limited to, duration, yield, fundamental analytical data, the Treasury yield curve, and credit quality.
The values assigned to
fair valued investments are based on available information and do not necessarily represent amounts that might ultimately be realized, since such amounts depend on future developments inherent in long-term investments. Changes in the fair valuation
of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued at their last sale price, by an independent pricing service, or based on market quotations. Imprecision in estimating fair
value can also impact the amount of unrealized appreciation or depreciation recorded for a particular portfolio security and differences in the assumptions used could result in a different determination of fair value, and those differences could be
material.
The Fund has established methods of fair value measurements in accordance with GAAP. Fair value denotes the price that the Fund would
receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market of the investment. A three-tier hierarchy has been established to maximize the use of observable market data and minimize
the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions
about risk, for example, the risk inherent in a particular valuation technique used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that
reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is
summarized in the three broad levels listed below.
|
|
• Level 1 -
|
quoted prices in active markets for identical assets or liabilities
|
|
|
• Level 2 -
|
quoted prices in markets that are not active or other significant observable inputs (including, but not limited to: quoted prices for similar assets or
liabilities, quoted prices based on recently executed transactions, interest rates, prepayment speeds, credit risk, etc.)
|
|
|
• Level 3 -
|
significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of assets or liabilities)
|
The Adviser’s valuation policy, as previously stated, establishes parameters for the sources and types of valuation analysis, as well as, the
methodologies and inputs the Adviser uses in determining fair value, including the use of the Adviser’s Valuation Committee. If the Valuation Committee determines that additional techniques, sources or inputs are appropriate or necessary in a
given situation, such additional work will be undertaken.
To assess the continuing appropriateness of security valuations, the Adviser (or its
third party service provider who is subject to oversight by the Adviser), compares daily its prior day prices, prices on comparable securities and sales prices and challenges those prices that either remain unchanged or exceeds certain tolerance
levels with the third party pricing service or broker source. For those securities valued by fair valuations, the Valuation Committee reviews and affirms the reasonableness of the valuations based on such methodologies and fair valuation
determinations on a regular basis after considering all relevant information that is reasonably available.
2013 Annual
Report
19
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
The inputs or methodology used for valuing investments are not necessarily an indication of the risk
associated with investing in those securities.
The following table summarizes the Fund’s investments categorized in the disclosure hierarchy
as of June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Inputs
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Residential Mortgage Related Holdings
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
177,335,807
|
|
|
$
|
177,335,807
|
|
|
Commercial Mortgage Related Holdings
|
|
|
—
|
|
|
|
—
|
|
|
|
150,261,162
|
|
|
|
150,261,162
|
|
|
High Yield Corporate Bonds
|
|
|
—
|
|
|
|
60,487,512
|
|
|
|
—
|
|
|
|
60,487,512
|
|
|
Term Loans
|
|
|
—
|
|
|
|
4,002,840
|
|
|
|
—
|
|
|
|
4,002,840
|
|
|
Common Stocks
|
|
|
6,855,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,855,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,855,000
|
|
|
$
|
64,490,352
|
|
|
$
|
327,596,969
|
|
|
$
|
398,942,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial
|
|
|
Valuation Inputs
|
|
Instruments*
|
|
|
Level 1 — Quoted Prices
|
|
$
|
277,820
|
|
|
Level 2 — Quoted Prices in Inactive Markets or Other Significant Observable Inputs
|
|
|
—
|
|
|
Level 3 — Significant Unobservable Inputs
|
|
|
—
|
|
|
|
|
|
|
|
|
Total.
|
|
$
|
277,820
|
|
|
|
|
|
|
|
|
*
|
Other financial instruments include futures contracts.
|
The following table provides quantitative information about the Fund’s Level 3 values, as well as their inputs, as of June 30, 2013. The table
is not all-inclusive, but provides information on the significant Level 3 inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Assets
|
|
Fair Value as of
June 30, 2013
|
|
|
Valuation
Methodology
|
|
Significant
Unobservable
Input
|
|
Range
|
|
|
Residential Mortgage Related Holdings
|
|
$
|
177,335,807
|
|
|
Evaluated bid
prices
|
|
(1)
|
|
|
32.06 - 161.97
|
|
|
Commerical Mortgage Related Holdings
|
|
|
150,261,162
|
|
|
Evaluated bid
prices
|
|
(1)
|
|
|
68.65 - 105.00
|
|
|
(1)
|
The Fund generally uses evaluated bid prices provided by an independent pricing service on the valuation date as the primary basis for the fair value
determinations. These evaluated bid prices are based on unobservable inputs. A significant change in the third party information inputs could result in a significantly lower or higher value of such Level 3 investments.
|
The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
20
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Commercial
|
|
|
|
|
|
|
|
Mortgage
|
|
|
Mortgage
|
|
|
|
|
|
|
|
Related
|
|
|
Related
|
|
|
|
|
|
Investments in Securities
|
|
Holdings
|
|
|
Holdings
|
|
|
Total
|
|
|
Balance as of March 26, 2013
(a)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued Discounts (Premiums)
|
|
|
1,686,046
|
|
|
|
38,534
|
|
|
|
1,724,580
|
|
|
Realized Gain (Loss)
|
|
|
735,262
|
|
|
|
(503
|
)
|
|
|
734,759
|
|
|
Change in Unrealized Appreciation (Depreciation)
|
|
|
(6,867,269
|
)
|
|
|
(6,295,306
|
)
|
|
|
(13,162,575
|
)
|
|
Purchases at cost
|
|
|
184,908,868
|
|
|
|
156,559,637
|
|
|
|
341,468,505
|
|
|
Sales proceeds
|
|
|
(3,127,100
|
)
|
|
|
(41,200
|
)
|
|
|
(3,168,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2013
|
|
$
|
177,335,807
|
|
|
$
|
150,261,162
|
|
|
$
|
327,596,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses relating to assets still held at the reporting date
|
|
$
|
(6,867,269
|
)
|
|
$
|
(6,295,306
|
)
|
|
$
|
(13,162,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Commencement of Operations.
|
The fair
value of the Fund’s reverse repurchase agreements, which qualify as financial instruments under FASB Accounting Standards Codification (“ASC”) 820 “Disclosures about Fair Values of Financial Instruments”, approximates the
carrying amounts presented in the Statement of Assets and Liabilities. As of June 30, 2013, this financial instrument is categorized as a Level 2 within the disclosure hierarchy.
For the period ended June 30, 2013, there was no security transfer activity between Level 1 and Level 2. The basis for recognizing and valuing
transfers is as of the end of the period in which the transfers occur.
Investment Transactions and Investment Income:
Securities
transactions are recorded on the trade date. Realized gains and losses from securities transactions are calculated on the identified cost basis. Interest income is recorded on the accrual basis. Discounts and premiums on securities are accreted and
amortized, respectively on a daily basis, using the effective yield method. Dividend income is recorded on the ex-dividend date.
Taxes:
The
Fund intends to continue to meet the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its stockholders. Therefore, no federal
income or excise tax provision is required. The Fund may incur an excise tax to the extent it has not distributed all of its taxable income on a calendar year basis.
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. An
evaluation of tax positions taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the taxing authority is required. Tax benefits of positions
not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of a deferred tax
asset; an increase in deferred tax liability; or a combination thereof. As of June 30, 2013, the Fund has determined that there are no uncertain tax positions or tax liabilities required to be accrued.
The Fund has reviewed all taxable years that are open for examination (i.
e.,
not barred by the applicable statute of limitations) by taxing
authorities of all major jurisdictions, including the Internal Revenue Service. As of June 30, 2013, open taxable years consisted of the taxable period ended June 30, 2013. No examination of the Fund’s tax returns is currently in
progress.
Expenses:
Expenses directly attributable to the Fund are charged directly to the Fund, while expenses which are attributable to
the Fund and other investment companies advised by the Adviser are allocated among the respective investment companies, including the Fund, based upon relative net assets.
Dividends and Distributions:
The Fund declares and pays dividends monthly from net investment income. To the
2013 Annual
Report
21
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
extent these distributions exceed net investment income, they may be classified as return of capital.
The Fund also pays distributions at least annually from its net realized capital gains, if any. Dividends and distributions are recorded on the ex-dividend date. All common shares have equal dividend and other distribution rights. A notice
disclosing the source(s) of a distribution will be provided if payment is made from any source other than net investment income. Any such notice would be provided only for informational purposes in order to comply with the requirements of Section
19(a) of the 1940 Act and not for tax reporting purposes. The tax composition of the Fund’s distributions for each calendar year is reported on IRS Form 1099-DIV.
Dividends from net investment income and distributions from realized gains from investment transactions have been determined in accordance with Federal
income tax regulations and may differ from net investment income and realized gains recorded by the Fund for financial reporting purposes. These differences, which could be temporary or permanent in nature, may result in reclassification of
distributions; however, net investment income, net realized gains and losses and net assets are not affected.
When-Issued Purchases and Forward
Commitments:
The Fund may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment” basis in order to hedge against anticipated changes in interest rates and prices and secure
a favorable rate of return. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date, which
can be a month or more after the date of the transaction. At the time the Fund makes the commitment to purchase securities on a when-issued or forward commitment basis, the Fund will record the transactions and thereafter reflect the values of such
securities in determining its net asset value. At the time the Fund enters into a transaction on a when-issued or forward commitment basis, the Adviser will identify collateral consisting of cash or liquid securities equal to the value of the
when-issued or forward commitment securities and will monitor the adequacy of such collateral on a daily basis. On the delivery date, the Fund will meet its obligations from securities that are then maturing or sales of the securities identified as
collateral by the Adviser and/or from then available cash flow. When-issued securities and forward commitments may be sold prior to the settlement date. If the Fund disposes of the right to acquire a when-issued security prior to its acquisition or
disposes of the right to deliver or receive against a forward commitment, it can incur a gain or loss due to market fluctuation. There is always a risk that the securities may not be delivered and that the Fund may incur a loss. Settlements in the
ordinary course are not treated by the Fund as when-issued or forward commitment transactions and, accordingly, are not subject to the foregoing limitations even though some of the risks described above may be present in such transactions.
TBA Transactions:
The Fund may enter into to-be-announced (“TBA”) transactions to hedge its portfolio positions or to sell
mortgage-backed securities it owns under delayed delivery arrangements. A TBA transaction is a purchase or sale of a U.S. government agency mortgage pass-through security for future settlement at an agreed upon date. The term “U.S. government
agency mortgage pass-through security” refers to a category of pass-through securities backed by pools of mortgages and issued by one of several U.S. government-sponsored enterprises: the Government National Mortgage Association (Ginnie Mae),
Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac). In the basic pass-through structure, mortgages with similar issuer, term and coupon characteristics are collected and aggregated into a
pool. The pool is assigned a CUSIP number and undivided interests in the pool are traded and sold as pass-through securities. The holder of the security is entitled to a pro rata share of principal and interest payments (including unscheduled
prepayments) from the pool of mortgage loans. TBA transactions increase the liquidity and pricing efficiency of transactions in such mortgage-backed securities since they permit similar mortgage-backed securities to be traded interchangeably
pursuant to commonly observed settlement and delivery requirements. Proceeds of TBA transactions are not received until the contractual settlement date. The Fund may use TBA transactions to acquire and maintain exposure to mortgage-backed securities
in either of two ways. Typically, the Fund will enter into TBA agreements and “roll over” such agreements prior to the settlement date stipulated in such agreements. This type of TBA transaction is commonly known as a “TBA roll.”
In a “TBA roll,” the Fund generally will sell the obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and will enter into a new TBA agreement for future delivery of pools of mortgage
pass-through securities. Alternatively, the Fund will
22
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
enter into TBA agreements and settle such transactions on the stipulated settlement date by actual receipt or delivery of the pools of mortgage pass-through securities stipulated in the TBA
agreement. Unsettled TBA agreements are valued at the current market value of the underlying securities, according to the procedures described above under “Valuation of Investments.” Each TBA position is marked-to-market daily and the
change in market value is recorded by the Fund as an unrealized gain or loss.
Cash Flow Information:
The Fund invests in securities and
distributes dividends and distributions which are paid in cash or are reinvested at the discretion of stockholders. These activities are reported in the Statement of Changes in Net Assets. Additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows.
Financial Futures Contracts:
A futures contract is an agreement between two parties to buy and
sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the
contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received, depending upon
whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract.
The Fund invests in financial futures contracts to hedge against fluctuations in the value of portfolio securities caused by changes in prevailing
market interest rates. Should interest rates move unexpectedly, a Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying hedged assets. The Fund is at risk that it may not be able to close out a transaction because of an illiquid market.
The following table sets forth the fair value of the Fund’s derivative instruments:
|
|
|
|
|
|
|
|
|
Derivatives Not Accounted for
as Hedging Instruments
|
|
Statement of Assets and Liabilities
|
|
Fair Value as of June 30,
2013
|
|
|
Futures contracts
|
|
Variation margin receivable (asset)
|
|
$
|
5,312
|
|
|
Futures contracts
|
|
Variation margin payable (liability)
|
|
|
(2,508
|
)
|
|
|
|
|
|
|
|
|
The
Fund began utilizing futures contracts on June 13, 2013 with a notional amount of $8,750,000 which remained unchanged through the end of the fiscal year.
The following tables set forth the effect of derivative instruments on the Statement of Operations for the fiscal period ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Accounted for
as Hedging Instruments
|
|
Location of Gains (Losses) on
Derivatives Recognized in Income
|
|
Net Realized Gains on
Futures Transactions
|
|
|
Change in Unrealized
Appreciation on Futures
|
|
|
Futures contracts
|
|
Futures transactions
|
|
$
|
0
|
|
|
$
|
277,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is the gross and net information about instruments and transactions eligible for offset in the Statement of Assets
and Liabilities as well as instruments and transactions subject to an agreement similar to a master netting arrangement:
2013 Annual
Report
23
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not offset in the
Statement of Assets and Liabilities
|
|
|
|
|
|
|
|
Gross
Amounts of
Recognized
Assets
(Liabilities)
|
|
|
Gross
Amounts
Offset in the
Statement of
Assets and
Liabilities
|
|
|
Net Amounts
Presented in
the Statement
of Assets and
Liabilities
|
|
|
Financial
Instruments
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net Amount
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts*
|
|
$
|
5,312
|
|
|
$
|
—
|
|
|
$
|
5,312
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,312
|
|
|
Futures Contracts*
|
|
|
(2,508
|
)
|
|
|
—
|
|
|
|
(2,508
|
)
|
|
|
—
|
|
|
|
2,508
|
|
|
|
—
|
|
|
*
|
Only the current day’s variation margin is reported in the Statement of Assets and Liabilities.
|
The Fund has elected to not offset derivative assets and liabilities or financial assets, including cash, that may be received or paid as part of
collateral arrangements, even when an enforceable master netting agreement is in place that provides the Fund, in the event of counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and
obligations.
3. Risks of Investing in Asset-Backed Securities and Below-Investment Grade Securities
The value of asset-backed securities may be affected by, among other factors, changes in: interest rates, the market’s assessment of the quality of
the underlying assets, the creditworthiness of the servicer for the underlying assets, information concerning the originator of the underlying assets, or the creditworthiness or rating of the entities that provide any supporting letters of credit,
surety bonds, derivative instruments or other credit enhancement.
The value of asset-backed securities also will be affected by the exhaustion,
termination or expiration of any credit enhancement. The Fund has investments in below-investment grade debt securities, including mortgage-backed and asset-backed securities. Below-investment grade securities involve a higher degree of credit risk
than investment grade debt securities. In the event of an unanticipated default, the Fund would experience a reduction in its income, a decline in the market value of the securities so affected and a decline in the NAV of its shares. During an
economic downturn or period of rising interest rates, highly leveraged and other below-investment grade issuers frequently experience financial stress that could adversely affect its ability to service principal and interest payment obligations, to
meet projected business goals and to obtain additional financing.
The market prices of below-investment grade debt securities are generally less
sensitive to interest rate changes than higher-rated investments but are more sensitive to adverse economic or political changes or individual developments specific to the issuer than higher-rated investments. Periods of economic or political
uncertainty and change can be expected to result in significant volatility of prices for these securities. Rating services consider these securities to be speculative in nature.
Below-investment grade securities may be subject to market conditions, events of default or other circumstances which cause them to be considered
“distressed securities.” Distressed securities frequently do not produce income while they are outstanding. The Fund may be required to bear certain extraordinary expenses in order to protect and recover its investments in certain
distressed securities. Therefore, to the extent the Fund seeks capital growth through investment in such securities, the Fund’s ability to achieve current income for its stockholders may be diminished. The Fund is also subject to significant
uncertainty as to when and in what manner and for what value the obligations evidenced by distressed securities will eventually be satisfied (e.
g.
, through a liquidation of the obligor’s assets, an exchange offer or plan of
reorganization involving the securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or a plan of reorganization is adopted with respect to distressed securities held by the Fund,
there can be no assurance that the securities or other assets received by the Fund in connection with such exchange offer or plan of reorganization will not have a
24
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by the Fund upon completion of an exchange offer or plan of
reorganization may be restricted as to resale. As a result of the Fund’s participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of such securities, the Fund may be restricted from
disposing of distressed securities.
4. Investment Advisory Agreement and Related Party Transactions
The Fund has entered into an Investment Advisory Agreement (the “Advisory Agreement”) with the Adviser under which the Adviser is responsible
for the management of the Fund’s portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. The Advisory Agreement provides, among other things, that the Adviser
will bear all expenses of its employees and overhead incurred in connection with the performance of its duties under the Advisory Agreement, and will pay all salaries of the Fund’s directors and officers who are affiliated persons (as such term
is defined in the 1940 Act) of the Adviser. The Advisory Agreement provides that the Fund shall pay the Adviser a monthly fee for its services at an annual rate of 1.00% of the Fund’s average daily net assets (plus the amount of borrowing for
investment purposes) (“Managed Assets”). During the period ended June 30, 2013, the Adviser earned $1,091,636 in investment advisory fees from the Fund.
The Fund has entered into an Administration Agreement with the Adviser. The Adviser has also entered into a sub-administration agreement with U.S.
Bancorp Fund Services, LLC (“Sub-Administrator”). The Adviser and Sub-Administrator perform administrative services necessary for the operation of the Fund, including maintaining certain books and records of the Fund and preparing reports
and other documents required by federal, state, and other applicable laws and regulations, and providing the Fund with administrative office facilities. For these services, the Fund shall pay to the Adviser a monthly fee at an annual rate of 0.15%
of the Fund’s average daily Managed Assets. During the period ended June 30, 2013, the Adviser earned $163,745 in administration fees from the Fund. The Adviser is responsible for any fees due to the Sub-Administrator.
5. Purchases and Sales of Investments
For the period ended
June 30, 2013, purchases and sales of investments, excluding short-term securities, reverse repurchase agreements, and U.S. Government securities were $415,897,234 and $4,490,481, respectively.
6. Borrowings
The Fund may enter into reverse repurchase
agreements. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a mutually agreed upon date and price. Under the 1940 Act, reverse repurchase agreements will be regarded as a form of borrowing by the Fund
unless, at the time it enters into a reverse repurchase agreement, it establishes and maintains a segregated account with its custodian containing securities from its portfolios having a value not less than the repurchase price (including accrued
interest). The Fund has established and maintained such accounts for its reverse repurchase agreements.
Reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the
proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreements.
At June 30, 2013, the Fund had the following reverse repurchase agreements outstanding:
2013 Annual
Report
25
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
|
Description
|
|
Maturity Amount
|
|
|
|
$4,438,000
|
|
|
Goldman Sachs, 1.92%, dated 06/14/13, maturity 09/13/13
|
|
$
|
4,459,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4,438,000
|
|
|
Maturity Amount, Including Interest Payable
|
|
$
|
4,459,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Assets Sold Under Agreements
|
|
$
|
5,708,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
The Fund began using leverage on June 17, 2013 when it entered into a reverse repurchase agreement in the amount of
$4,438,000 which remained unchanged through the end of the fiscal year. The weighted average interest rate for this period was 1.92%.
The maximum
amount of reverse repurchase agreements outstanding at any time during the period was $4,438,000, which was 1.04% of total assets for the Fund.
Below is the gross and net information about instruments and transactions eligible for offset in the Statement of Assets and Liabilities as well as
instruments and transactions subject to an agreement similar to a master netting arrangement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not offset in the
Statement of Assets and Liabilities
|
|
|
|
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Gross
Amounts
Offset in the
Statement of
Assets and
Liabilities
|
|
|
Net Amounts
Presented in
the Statement
of Assets and
Liabilities
|
|
|
Financial
Instruments
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net Amount
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
|
|
$
|
4,438,000
|
|
|
$
|
—
|
|
|
$
|
4,438,000
|
|
|
$
|
4,438,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,438,000
|
|
|
$
|
—
|
|
|
$
|
4,438,000
|
|
|
$
|
4,438,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse repurchase transactions are entered into by the Fund under Master Repurchase Agreements (“MRA”) which
permit the Fund, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables under the MRA with collateral held with the counterparty and create one single net payment from the Fund. Upon a
bankruptcy or insolvency of the MRA counterparty, the Fund is considered an unsecured creditor with respect to excess collateral and, as such, the return of excess collateral may be delayed. In the event the buyer of securities under a MRA files for
bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted while the other party, or its trustee or receiver, determines whether or not to enforce the Fund’s obligation to repurchase the securities.
7. Capital Stock
The Fund has 1,000,000,000 shares of
$0.001 par value common stock authorized. Of the 22,713,931 shares outstanding at June 30, 2013 for the Fund, The Adviser owns 5,240 shares. The Fund’s Board of Directors is authorized to classify and reclassify any unissued shares of
capital stock. The common shares have no preemptive, conversion, exchange or redemption rights. All common shares have equal voting, dividend, distribution and liquidation rights. The common shares, when issued, will be fully paid and
non-assessable. Common stockholders are entitled to one vote per share and all voting rights for the election of directors are non-cumulative.
The
Fund commenced operation on March 26, 2013 selling 21,000,000 shares and receiving $401,000,000. On January 30, 2013, the Fund had initially sold 5,240 shares to the Adviser, which represented the initial capital at
26
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
$19.10 per share. On May 13, 2013 pursuant to the overallotment option, an additional 1,706,550 shares were issued for $32,595,105.
8. Financial Instruments
The Fund regularly trades in
financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include futures contracts and may involve, to a varying degree,
elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. During the period ended June 30, 2013,
the Fund had segregated sufficient cash and/or securities to cover any commitments under these contracts.
As of June 30, 2013, the following
futures contracts were outstanding.
Short:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
Type
|
|
Expiration Date
|
|
|
Value at June 30,
2013
|
|
|
Unrealized
Appreciation/
(Depreciation)
|
|
|
107
|
|
5 Year U.S. Treasury Note
|
|
|
September 2013
|
|
|
$
|
13,068,612
|
|
|
$
|
116,597
|
|
|
68
|
|
10 Year U.S. Treasury Note
|
|
|
September 2013
|
|
|
|
8,767,474
|
|
|
|
161,223
|
|
9. Federal Income Tax Information
Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from GAAP.
The tax character of distributions paid for the period ended June 30, 2013 was as follows:
|
|
|
|
|
|
|
Ordinary income (including short-term capital gains)
|
|
$
|
4,233,128
|
|
|
Return of capital
|
|
|
1,540,340
|
|
|
|
|
|
|
|
|
Total distributions
|
|
$
|
5,773,468
|
|
|
|
|
|
|
|
At June 30, 2012, the Fund’s most recently completed tax year-end, the components of distributable earnings on
a tax basis were as follows:
|
|
|
|
|
|
|
Other accumulated losses
|
|
$
|
(75,766
|
)
|
|
Capital loss carryforward
(1)
|
|
|
(11,222
|
)
|
|
Tax basis unrealized depreciation on investments
|
|
|
(15,087,805
|
)
|
|
|
|
|
|
|
|
Total tax basis net accumulated losses
|
|
$
|
(15,174,793
|
)
|
|
|
|
|
|
|
|
(1)
|
To the extent that future capital gains are offset by capital loss carryforwards, such gains will not be distributed.
|
As of June 30, 2013, the Fund’s capital loss carryforward was $11,222 which will not expire.
Federal Income Tax Basis:
The federal income tax basis of the Fund’s investments at June 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Investments
|
|
|
Gross Unrealized Appreciation
|
|
|
Gross Unrealized Depreciation
|
|
|
Net Unrealized Depreciation
|
|
|
|
$ 414,030,126
|
|
|
$
|
1,531,353
|
|
|
$
|
(16,619,158
|
)
|
|
$
|
(15,087,805
|
)
|
2013 Annual
Report
27
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Notes to Financial Statements
June 30, 2013
Capital Account Reclassifications:
Because federal income tax regulations differ in certain
respects from GAAP, income and capital gain distributions, if any, determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. These differences are primarily
due to differing treatments for gains/losses on principal payments of mortgage-backed and asset-backed securities, distribution reclassifications, and return of capital. Permanent book and tax differences, if any, relating to stockholder
distributions will result in reclassifications to paid-in-capital or to undistributed capital gains. These reclassifications have no effect on net assets or NAV per share. Any undistributed net income and realized gain remaining at fiscal year-end
is distributed in the following year.
GAAP requires that certain components of net assets relating to permanent differences be reclassifed between
financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the fiscal period ended June 30, 2013, the following table shows the reclassifications made:
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital
|
|
Distributions in Excess of Net Investment Income
|
|
|
Accumulated Net Realized Loss
|
|
|
$ (1,540,340)
|
|
$
|
1,859,291
|
|
|
$
|
(318,951
|
)
|
10. Indemnification
Under
the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into
contracts with its vendors and others that provide for indemnification. The Fund’s maximum exposure under these arrangements is unknown, since this would involve the resolution of certain claims, as well as future claims that may be made,
against the Fund. Thus, an estimate of the financial impact, if any, of these arrangements cannot be made at this time. However, based on experience, the Fund expects the risk of loss due to these warranties and indemnities to be unlikely.
11. Subsequent Events
GAAP requires recognition in the
financial statements of the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed to keep
the financial statements from being misleading, the Fund is required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made.
Dividends:
The Fund’s Board of Directors declared the following monthly dividends:
|
|
|
|
|
|
|
|
|
Dividend Per Share
|
|
|
Record Date
|
|
Payable Date
|
|
$
|
0.1271
|
|
|
July 18, 2013
|
|
July 26, 2013
|
|
$
|
0.1271
|
|
|
August 15, 2013
|
|
August 30, 2013
|
Management has evaluated subsequent events in the preparation of the Fund’s financial statements and has determined
that other than the items listed herein, there are no events that require recognition or disclosure in the financial statements.
28
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Report of Independent Registered Public Accounting Firm
June 30, 2013
To the Board of Directors and Stockholders of
Brookfield Mortgage
Opportunity Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of Brookfield Mortgage Opportunity Income Fund
Inc. (the “Fund”), including the schedule of investments, as of June 30, 2013, and the related statements of operations, changes in net assets, cash flows, and the financial highlights for the period March 26, 2013 (commencement
of operations) through June 30, 2013. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of
June 30, 2013, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Brookfield Mortgage Opportunity Income Fund Inc. as of June 30, 2013, the results of its
operations, the changes in its net assets, its cash flows and the financial highlights for the period March 26, 2013 (commencement of operations) through June 30, 2013, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Philadelphia,
Pennsylvania
August 28, 2013
2013 Annual
Report
29
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
Tax Information (Unaudited)
June 30, 2013
The Fund is required by subchapter M of the
Internal Revenue Code of 1986, as amended, to advise you within 60 days of the Fund’s period end (June 30, 2013) as to the federal tax status of distributions received by stockholders during such fiscal period. Accordingly, we are advising you
that 26.70% of the distributions paid from net investment income for the Fund was reclassified as return of capital and are reflected as such in the Fund’s Statement of Changes in Net Assets and Financial Highlights.
Because the Fund’s period is not a calendar year, another notification will be sent with respect to calendar 2013. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their federal, state and local income tax returns, will be made in conjunction with Form 1099-DIV and will be mailed in January 2014. Stockholders are advised to consult their own tax
advisors with respect to the tax consequences of their investments in the Fund.
30
Brookfield
Investment Management Inc.
BROOKFIELD MORTGAGE OPPORTUNITY INCOME FUND INC.
