E-Delivery

As at February 28, 2013, the GAAP NAV differed from the PUC NAV used for Fund redemption. e adjustment was due to the inclusion of unamortized costs associated with the establishment and structuring of the Fund attributable to the preferred shares being included in the GAAP NAV (see note 7). Costs that are amortized over 5 years for the purpose of calculating GAAP NAV were fully amortized as at February 28, 2014. 9. Capital risk management: e Fund manages its capital structure in order to support ongoing operations while focusing on its primary objectives of preserving shareholder capital and generating a cash dividend to preferred shareholders. e Fund defines its current capital structure to include common shares, Class A preferred shares and Class B preferred shares. e Fund reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage loan investment opportunities, the availability of capital, and anticipated changes in general economic conditions. e Fund's internally imposed investment restrictions and asset allocation model incorporate various restrictions and investment parameters to manage the risk profile of the mortgage loan investments. e investment restrictions permit the Fund to use leverage to maintain liquidity, for general working capital purposes, and to bridge the timing differences between loan advances, maturities and equity offerings. e aggregate amount of borrowing by the Fund may not exceed 20% of the book value of the Fund's mortgage investment portfolio, without the approval of the independent lending review committee. In addition, the asset allocation model dictates the allocation of the mortgage investments based upon geographical, borrower, zoning, term, security position and loan-to-appraised value criteria. At February 28, 2014 the Fund did not employ leverage and was in compliance with its investment restrictions and the asset allocation model parameters. e Fund is not subject to externally imposed capital requirements. 10. Financial instruments: (a) Interest rate risk: Interest rate risk is the risk that the fair value or future cash flows of the mortgage loan investments will fluctuate because of changes in market interest rates. As of February 28, 2014, no mortgage investments (2013 - nil) bear interest at variable rates, therefore, as at February 28, 2014 the Fund is not exposed to cash flow risk as a result of interest rate fluctuations. Further, the Fund does not have material fair value risk on its mortgage investment portfolio primarily as a result of the short term nature of the maturity dates of the mortgage loan investments. e Fund does not have material interest rate risk on any of its other financial instruments. (b) Credit risk: Credit risk primarily relates to the possibility that counterparties to mortgage investments may be unable to honour their debt commitments as a result of a negative change in market conditions that could result in a loss to the Fund. e Fund, through the Fund Manager, mitigates this risk by the following: (i) adhering to the investment restrictions and operating policies included in the asset allocation model; (ii) performing a due diligence process on each mortgage loan investment prior to funding. is generally includes, but is not limited to engaging professional independent consultants, lawyers and appraisers and performing credit checks and financial statement review on prospective borrowers; (iii) having mortgage investments approved by the independent lending review committee in accordance with the Fund's operating policies; and 49

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