E-Delivery

(b) Credit risk: e Fund's maximum exposure to credit risk is represented by the fair values of subscription proceeds receivable, accrued interest receivable, and mortgage loan investments. Credit risk primarily relates to the possibility that counterparties to mortgage investments may be unable to honour their debt commitments. Any instability in the real estate sector and an adverse change in economic conditions in Canada or other conditions impacting specific mortgage borrowers could result in financial difficulty for mortgage borrowers. Financial difficulty experienced by these borrowers could leave them unable to fulfill their obligations. e Fund has recourse under its mortgage loan investments in the event of default by a borrower, in which case, the Fund would have a claim against the underlying property and security. e following is a breakdown of the Fund's investment in mortgage loans engaged in enforcement remedies, through the Fund Manager, as at February 28, 2015, February 28, 2014 and March 1, 2013: Feb 28, 2015 Feb 28, 2014 Mar 1, 2013 Principal outstanding $ 1,050,000 $ 1,853,548 $ - Accrued interest past due 10,500 50,092 - $ 1,060,500 $ 1,903,640 $ - As of February 28, 2015 the Fund, through the Fund Manager, was engaged in enforcement remedies against one mortgage loan investment. Enforcement actions have been stayed due to cooperation received from the borrower and the ongoing receipt of payments in accordance with a revised schedule. Subsequent to year end, the past due interest on this mortgage has been collected in full by the Fund. Management believes the Fund will fully recover the principal on the mortgage loan for which enforcement actions have been stayed as at February 28, 2015, although there is no assurance that it will be able to do so. As of February 28, 2014 the Fund, through the Fund Manager, was engaged in enforcement remedies against three (March 1, 2013 - nil) mortgage loan investments. During the year ended February 28, 2015, the Fund was able to discontinue the enforcement actions underway on all three of these mortgage loan investments. Enforcement actions on one mortgage loan investment was discontinued by allowing the title of the mortgage to transfer to the second position mortgage holder while the Fund Manager retained the first charge position. Further, on the remaining two mortgage loans with enforcement actions underway as at February 28, 2014, the Fund was able to fully recover the principal and interest accrued during the year ended February 28, 2015. e Fund, through the Fund Manager, mitigates credit 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 LRC in accordance with the Fund's operating policies; and (iv) actively monitoring the mortgage portfolio and initiating recovery procedures in a timely manner where required. e Fund's internally imposed investment criteria only permits the Fund to invest in mortgage loan investments with a Loan-to-Value ("LTV") ratio of 80% or less, calculated at the date the investment is made. e LTV ratio is calculated as of a particular calendar date by dividing the outstanding principal of the mortgage loan by the fair value of the underlying property and security. 55

• Cover