E-Delivery

Annual report 2013 Letter to Shareholders As a result of our past success, KV Mortgage Fund Inc. (the "Fund") is entering its 2014 fiscal year in a position of financial and operational strength. While we are very proud of the Fund's performance over the past four years, we remain focused on continuing to execute the mandate of preserving capital and generating monthly income. During fiscal 2013, the Fund successfully navigated the challenges posed from historically low Canadian interest rates by leveraging the expertise and mortgage platform of its manager and advisor – KV Capital Inc. Most indications point to a similar environment for the next 12 months, and we are confident in the Fund's ability to sustain investor returns because of our focus on mortgage securities that include short duration opportunities, customized financing arrangements and development projects. To summarize the results achieved during 2013, we highlight the following four metrics as key performance indicators: 1. Security The Fund ended its year with a portfolio that has a weighted average loan-to-value ratio of 51%, a weighted average term to maturity of 5.80 months and is comprised of 23 distinct securities. Taken together, we believe the value of real property behind our investments, the short terms to maturity of these securities and the portfolio diversification provides significant protection for the Fund against the risk of real estate value declines. 2. Returns In each fiscal quarter of 2013 the fund again demonstrated remarkable consistency with internal rates of return ("IRR") that varied by less than 0.5%. Over the course of the fiscal 2013 year, the fund generated an 8.91% IRR, which represents performance that exceeds the Fund's targeted return1 by approximately 2.3%. Average monthly 2 year Government of Canada bond yield (series V122538), plus 5.5%. 1 10 3. Growth of Assets Net assets increased by approximately 64% to $13,205,555 during the year. In addition to in-year asset growth, the Fund also revised its share structure and engaged professional third party distribution partners to facilitate the process of accumulating assets going forward. 4. Track Record Since inception, the Fund has invested $27,663,401 into mortgage securities, received principal repayments of $14,644,231, written off $0.00 of accrued interest, and has never incurred any loan impairments or missed a dividend payment. The Fund also made significant changes to its corporate governance during the last year that included appointing a majority of independent members to the board of directors and lending review committee, and further structuring these governance bodies such that each is chaired by a director that is independent of both management and all related parties – including KV Capital Inc. As a result, our investors now have the full benefits of best practices that are required for publicly accountable entities. We believe the Fund continues to offer investors a very compelling opportunity and we look forward to realizing continued success together. Thank you for investing with us. Aleem Virani, CA, CBV Jonathan Herman, CA PresidentCFO

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