Tri City Mortgage Investment Fund - Residential and Commercial Mortgages in British Columbia and Alberta

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1 Siddharth Rajeev, B.Tech, MBA, CFA Analyst Daniel Iwata, BA Research Associate July 19, 2013 Tri City Mortgage Investment Fund - Residential and Commercial Mortgages in British Columbia and Alberta Sector/Industry: Real Estate Mortgages Issuer Offering Securities Offered Unit Price Tri City Mortgage Investment Fund $1 million min / $12 million max Trust Units $1,000 per unit Minimum Subscription 10 units ($10,000) Redemption fee applicable on a Redemption declining scale (5% in Year 1 declining to 0% for Year 5+) Selling Fee/Commissions Management Fees/Compensation Registered Plans 5% + 0.5% annual trailer fee Management fee of 1.85% Profit sharing over 8% RRSP, RRIF, RESP, DPSP, and TFSA Eligible Auditor Hay & Watson *Based on the offering memorandum ( OM ) dated April 6, 2012 FRC Rating Expected Annual Yield Rating Risk Summary of the Offering 7% - 8% p.a. * 3- (Good) 4 (Speculative) *Based on the current BoC overnight rate of 1% - see back of report for rating definitions Investment Highlights Tri City Mortgage Investment Fund ( TCMIF, trust, fund ) was started in 2010, and loans funds, secured by real property, to individuals and businesses. The trust is managed by the Tri City Group, which is based in Vancouver, BC, and is involved in real estate development, mortgage lending, and property management. Management currently also runs another mortgage investment fund (of approximately $13 million), which primarily manages Tri City Group President, Michael Goodman s capital. TCMIF targets lenders who do not qualify for traditional forms of lending. This is a growing segment among borrowers, due to strict guidelines imposed by traditional lenders. The current loans in the trust are secured primarily by properties in Vancouver, BC. There are also some mortgages secured by properties in the major metropolitan areas of Alberta. Investors are anticipated to receive distributions from net income of up to 8% p.a. of their invested capital. Any income over 8% will be split with management equally. The weighted average loan to value (LTV) of mortgages held in the portfolio averaged 58%, as of December 31, Mortgage terms are for 13 months or less, minimizing the risk associated with real estate price fluctuations and interest rates. Management has invested $3 million in the fund. Investors funds have priority over management s in the event of liquidation. This feature is only applicable for investors of the first $12 million. As of March 31, 2013, the trust had raised $10.6 million, which also includes management s $3 million investment. Including management s investment, the portfolio will reach $15 million if the maximum offering is raised. Risks Investors are not guaranteed minimum distributions or return of capital. Investments are exposed to credit risks. Investments are also exposed to interest rate risks, but they are minimal as most of the investments are short-term investments with fixed rates. Mortgage default rates could adversely interrupt investors income stream. The units are fully redeemable without penalty only after 5 years and are restricted to annual limits, which may not be paid in cash. There is no market for the units to be traded or sold. The fund may borrow up to 25% of its mortgage portfolio by using the portfolio as security. Loans are short term and must be constantly sourced and replaced. Timely deployment of capital is crucial. The fund has limited operating history, and management has not provided us any verifiable track record for the other private fund under management. TCMIF may purchase mortgages from the other fund run by management.

2 Page 2 Background Tri City Mortgage Investment Fund is an open-ended investment trust that extends loans to individuals and businesses secured by properties. The fund was created in 2010, but did not begin operations until late The current portfolio of loans are secured by properties primarily located in Vancouver, British Columbia, with a small portion in Edmonton and Calgary, Alberta. This is a continuous offering with a gross maximum of $12 million to investors. In addition, management has invested $3 million in the fund, or 20% of the portfolio if the maximum offering is raised ($15 million). Investors capital has priority over management s in the event of liquidation. This feature is only applicable for investors of the first $12 million. TCMIF will issue trust units that will be entitled to quarterly cash distributions from the profits of the fund up to 8% p.a. of the invested capital. Returns over 8% are split 50/50 with management. Management receives an annual management fee of 1.25% of the net asset value ( NAV ). Loans offered by TCMIF are short-term mortgages (13 month maximum) to borrowers that are unable to secure traditional sources of financing. The loans are secured against properties, with a total loan to value ( LTV ) below 75%. According to the offering memorandum ( OM ), the loans may have a first or subsequent position on the underlying property. The audited financial statements for year ended December 31, 2012, reported that all mortgages were first and second. The average portfolio LTV, as of December 31, 2012, was 58%. General Strategy TCMIF s primary focus is on loans secured by existing residential, multi-family and commercial properties. Their secondary focus will be on development and construction projects. Approximately 90% of the loans in the current portfolio are secured by residential properties. Loans made by TCMIF are usually to borrowers who are unable to secure loans from traditional lenders. Management states that, currently, 85% of their loans are to individuals, and 15% to businesses. Borrowers can use the funds for any purpose. The following are some examples of TCMIF borrowers: Asset rich, but no steady income. Unconventional property type that a bank or other traditional institution will not finance; for example, land. Individuals who need mortgages approved quickly. Non-residents or new immigrant with no credit history. A person with significant equity in a property, but needs cash to bring a building on a property to rentable condition. Residential construction / renovations. Borrower needs quick cash while home is up for sale. Private lenders generally have more flexibility in structuring mortgages to the borrower s needs. Due to the above conditions, private mortgage lenders can typically charge higher rates of interest. TCMIF s rates for its portfolio, as of December 31, 2012, ranged between 8

3 Page 3-13% p.a (versus 3.1% on a 1 yr conventional mortgage). If payments become delinquent, TCMIF may begin the foreclosure process on the property. Management says this will usually happen after payments are 60 days delinquent. The foreclosure process is lengthy, but once started, management says owners are more willing to pay, instead of the risk of losing their property. To date, management says there have been no foreclosures; however, keep in mind that the fund has a limited operating history. We did not see any indication of any defaults in TCMIF s 2011, and 2012, audited financial statements. Management looks for a viable exit strategy when assessing a loan application. There is a wide variety of exit strategies, but the most common exits would be the sale of the property, or refinancing by a more traditional lender. Generally, for a refinancing, the borrower will borrow short term from TCMIF and use the money to increase the value of the property (renovations, complete construction of a building, property improvements, etc.). Once completed, the borrower tries to refinance from a traditional lender. Overview of the Manager TCMIF was created on November 2, 2010, and is headquartered in Vancouver, BC. TCMIF is managed by the Tri City Group, which was established in The Tri City Group is run by Michael Goodman and consists of 30 companies. The companies are broken up into four divisions : Tri City Investments Tri City Mortgages Tri City Land Development Tri City Property Management Management states that during , the Group developed 17 commercial and multifamily buildings in Toronto, Seattle, Calgary and Vancouver. They currently have four major development projects ongoing listed below: Okanagan Breeze: a $30-$50 million development located in Vernon, BC, that has started selling homes. In phase 1, they sold 65 units; phase 2 sold 35. Big Lake is a $100 million development in Edmonton Alberta. It consists of 77 acres of single family homes. They are currently in the planning stages. Sierra Ridge is a $50 - $100 million development in Gibbons, Alberta. Paradise Trails is an equestrian development in Squamish, B.C. that has recently been approved, but has yet to begin construction. Tri City also owns and operates commercial and multi-family residential buildings. The commercial properties owned include the Mucho Burrito Mall in Calgary, Alberta, and the Dickinsfield Mall in Edmonton, Alberta. Residential properties include Riversbend Marina - a float home marina in Richmond, BC, and E24 Apartments - a low rise rental building in Vancouver, BC. The mortgage unit consists of TCMIF and their private mortgage investment fund called Tri City Capital Corp ( TCCC ). TCCC was formed in TCCC is a private fund, and

4 Page 4 management states that the majority of the capital is from Michael Goodman. Since TCCC is not open to the public, they do not produce annual audited statements. Therefore, we were unable to verify TCCC s track record. According to management, TCCC s portfolio size is currently approximately $13 million. We have reviewed a summary of TCCC s portfolio (as of August 2012), provided by management, and it has a comparable loan to value (LTV) to the TCMIF portfolio. However, TCCC has a higher average loan size and a higher portion of loans in commercial properties. Management states the two funds (TCCC and TCMIF) focus on different category loans, allowing them to avoid preferential treatment for either fund. TCCC looks for higher value loans and has a greater focus on commercial loans compared to TCMIF. TCMIF also follows a stricter set of guideline for investments that we discuss later. The guidelines are intended to have TCMIF invest in lower value, more liquid loans, with a focus on residential property. The OM allows for TCMIF to purchase mortgages from TCCC that meets their guidelines. Management states the sale price between the funds would be at the fair market value, which for short-term loans, is usually the principal on the loan plus accrued interest. Management Bios The Tri City Group s key management team members are Michael Goodman (President), Ayaz Virani (CEO), and Winston Wong (Senior Advisor). Collectively, they have more than 100 years of experience in the real estate and lending industry. Ayaz Virani is the primary manager for both TCMIF and TCCC. Michael Goodman and Winston Wong devote a smaller percentage of their time to the mortgage funds. Generally, they are involved in the higher value loans. Mr. Goodman signs off on all the loans. Brief biographies of the senior management team, as provided by the trust, follow. Michael Goodman - President Mr. Goodman, President, Chief Executive Officer, and principal shareholder of the Tri City Group of Companies, has more than 40 years experience in the real estate industry. After graduating from UBC in 1972, Mr. Goodman joined the company his father had founded. Mr. Goodman continued to build and manage the Company s extensive portfolio in B.C. and Alberta. Under his guidance, the Company also expanded into other real estate services, including property management, brokering, and mortgage lending. Ayaz Virani - CEO Ayaz Virani manages the Tri City Group of Companies investments and mortgage portfolio. His keen financial analysis ensures that acquisition opportunities are profitable for the investor and the company. Over the past 24 years, Ayaz has raised more than $1 billion towards both residential and commercial project financings. In 1986 he co-founded the Home Mortgage Group Ltd. This experience has solidified his reputation within the industry as an expert in all aspects of commercial, construction and residential lending with special focus on private lending. Ayaz received a marketing-management diploma (with honors) from the British Columbia Institute of Technology.

5 Page 5 Winston Wong - Senior Advisor Mr. Wong has been a Senior Advisor to the Tri City Group for over 10 years, and has been involved with several companies within the group since He has an extensive background in the Chinese banking industry, having been the Marketing Manager of Standard Chartered Bank for 20 years prior to immigrating to Canada. Before joining the Tri City Group, Mr. Wong invested in and operated businesses in the real estate development, retail, and tourism industries. In 1989 Mr. Wong was requested by a prominent Hong Kong family to come to Vancouver and start Magusta Developments (BC) Ltd. - a major real estate development company - in order to diversify the family s holdings. Under Mr. Wong s direction, Magusta built high rises and large single family developments, and has gone on to become a very successful property development company in Canada. Mr. Wong has held board positions with several public companies, including Avcorp Industries Inc., the largest aerospace manufacturer in B.C. and Pyxis Capital Inc. Mr. Wong is a Director of New Business Development for Desjardins Financial Security Independent Network, for which he has been a member agent since He is also a Director of CUAM Greater China Opportunities Absolute Return Master Fund managed by China Universal Assets Management, a major fund manager in China. He currently sits on board of Richmond Hospital. Mortgage Lending Strategy The following section reviews the typical loan process of TCMIF. Get referrals from mortgage brokers, banks, or credit unions Through managements previous experience in the lending and mortgage industry, management states they have an extensive network to source prospective loans. In addition, the Tri City Group has a marketing team that actively canvases mortgage brokers and attends mortgage related conferences. Management estimates that, on average, they review ten loans a week, and approve one. TCMIF s 2012 audited financial statements indicate that the trust was able to deploy almost all of the capital raised a lack of deal flow would have resulted in the trust holding lot of cash on the balance sheet, which was not the case with TCMIF. We feel that management has the experience and relationships to maintain and manage deal flow. When originating a loan, TCMIF charges a mortgage fee upfront, which is usually around 1.5% 1.7% of the loan amount. If a mortgage broker refers the loan, TCMIF will add an additional fee, usually 1.5% to the loan to pay to the broker. TCMIF pays no fees to banks and credit unions for referrals. The mortgage fees collected goes to the trust, which is beneficial to investors as managers of some comparable mortgage investment trusts keep the upfront fees for themselves. Use internal market data and generate reports from the Land Title Office After a loan has been referred to TCMIF, they conduct due diligence on the property to confirm ownership, and to verify outstanding loans on the property. They will also go through their lending criteria and guidelines, discussed later, to ensure the loan meets their standards.

6 Page 6 Meet with the borrower Management meets with approximately 90% of buyers to assess the type of buyer and their needs. Generally, management does not meet with the borrowers based in Alberta, and relies on the mortgage brokers there. Decision on loan and rates Management will look at all the contributing factors such as LTV, borrower credit history, amount borrowed, and the quality of the property, to determine an appropriate interest rate. Management will also look for a verifiable exit strategy to ensure that the loan can be repaid when due. As mentioned earlier, common exits are sale of property and refinancing. Lending Criteria The key lending guidelines of the trust are listed below: The OM states the LTV will not exceed 75%. Management has set a maximum LTV of 75% for residential, and 65-75% for commercial. The maximum LTV will be lower for properties outside of major urban areas. We feel that the current LTV of the TCMIF portfolio is at a very conservative level, limiting the exposure of housing price fluctuations that may result in defaults. The maximum loan term is 13 months. The short term of the loans, we believe, allows TCMIF to re-price mortgages annually limiting interest rate risk. The maximum loan size is $1.50 million. This limit minimizes the impact of a single loan on the portfolio. Appraisals by an independent third party are mandatory. In certain circumstances, management may allow property assessments. Appraisals must be from an approved list of suppliers, which are independent. The appraisers on TCMIF s list, which we reviewed, are all established and independent. Commercial loans must have environmental reports, up to date appraisals, and financial statements. Borrowers must provide a recent notice of assessments and property tax assessments. This is a good step to compare and confirm the independent appraisal. The fund will not directly invest in real property, however, it may hold properties acquired as result of foreclosure. The OM states that the fund will not make unsecured loans to related parties or affiliates. However, they are not restricted from providing secured loans to related parties which we believe might create a conflict of interest. At the end of the maturity, management may renew the mortgage at their discretion. We feel that continued renewals may indicate a challenge to exiting loans. Management states, as of March 2013, six out of 45 loans are renewals, which we believe, is reasonable. Management stated that interest payments on all the six outstanding loans are on time. We have not been able to verify this. However, as mentioned earlier, the fund s 2012 audited financial statements do not indicate any delinquent payments. Management states that HSBC has extended TCMIF a $1.5 million line of credit ( LOC ) that will increase to $3 million if the fund is fully subscribed. The LOC is secured by

7 Page 7 mortgage receivables. The annual interest rate on the line of credit is 1.5% + prime. Management maintains the line of credit will serve two purposes: 1) They will use it to ease timing mismatches that occur from loans maturing and advancing approved funds, and 2) use as leverage to increase returns. LOCs are common in the mortgage lending industry, and we feel they are beneficial if the interest rate is reasonable and if debt levels are maintained at reasonable levels (less than a 25% debt to capital). Overall, we feel that TCMIF s lending process is standard for the industry. The limits set on LTV, loan size and time horizon, along with the independent appraisals, should keep the overall risk of the portfolio to moderate levels. A key benefit TCMIF has over other funds is the contribution of capital by management. This helps reduce the risk to investors because management funds are subordinate in liquidation, and strongly aligns the interests of management to investors. Note - management has the ability to begin redeeming funds once holders of the initial $12 million start redeeming funds this is discussed more in the redemption section later in this report. Current Portfolio As of December 31, 2012, TCMIF s portfolio consisted of $11 million in loans ($9.66 million outstanding + $1.55 million committed and approved but yet to be advanced) with 43 mortgages, with an average loan size of $260,819. The majority of loans (outstanding + committed) are residential loans from B.C., which comprise 85% of the portfolio. The remaining sectors were BC commercial, and Alberta commercial and residential, as shown in the chart below. The below table summarizes the loan portfolio (does not included committed loans) as of December 31, Keep in mind that the portfolio changes on a regular basis due to the high turnover of the loans.

8 Page 8 Portfolio as of December 31, 2012 *The above table includes only outstanding loans Source: 2012 Audited Financial Statements The average LTV of the portfolio was 58%, with residential B.C. properties having a LTV of 60%. Management has provided a more in depth breakdown of the portfolio (outstanding + committed) as of December 31, 2012, shown below. Avg Rate # Loans Avg Loan Size % of Portfolio Residential Loans B.C. 9.93% 37 $ 257, % Residential Loans AB 9.44% 2 $ 334, % Commercial Loans B.C. 9.50% 2 $ 168, % Commercial Loans AB 10.04% 2 $ 350, % Total 9.90% 43 $ 260, % Loan position - Management has provided a schedule of loan positions as of December 31, The fund s audited financial statements do not provide a break down, so we have not been able to verify this information. A majority of the loans are second position loans (68%) with an average LTV of 61%. First position loans make up approximately 26% of the portfolio, with an average LTV of 50%. There are a small percentage of third and fourth position loans (totaling 6%) with a total LTV below 75%. Interest rates average 9.5% p.a. for first position, 9.8% p.a. for the second, and % p.a. for third and fourth position loans. These rates are in line with comparable private lenders. For third and fourth mortgages, TCMIF will only lend if the mortgages are secured by a residential property in a major urban city. Management says this is because these properties are more liquid and prices are likely to be less volatile. Interest Rate - The majority of the loans are interest only loans, with interest paid monthly we believe, most of the comparable funds have a similar payment structure. TCMIF also allows some borrowers to pay the interest (accrued) at the end, instead of

9 Page 9 making monthly payments. An example would be someone needing funds while their house is up for sale. Although this is a riskier strategy, the interest on such loans will be higher. Management indicated that they will require a lower LTV for such loans. The average interest rate of the total portfolio is 9.9% p.a. In addition to interest, the trust receives an upfront net lending fee of % - which is also in line with the average rate charged by private lenders. The following will discuss key factors affecting TCMIF s ability to acquire new mortgages, as well as factors that impact the mortgage industry. Mortgage Industry Mortgage rules There have been several changes in mortgage rules in Canada over the past six years that have made attaining financing for homes more restrictive. The effect of these changes have negatively affected sales activity and housing prices in recent times. The changes have decreased amortization periods, and increased requirements for down payment, resulting in people being able to afford less than with previous mortgage rules. The timeline below shows the recent changes made to mortgage rules in Canada. Prior to 2005: Maximum allowable amortization for a mortgage was 25 years : The federal government introduced a maximum amortization of 40 years with 0% down payment (i.e. LTV of 100%). We believe this has been a major catalyst in the house price and sales volume increases seen over the period. October 2008: The government began to tighten the restrictions on mortgages in an effort to avoid a real estate bubble. The maximum amortization was reduced to 35 years, and the minimum down payment was increased to 5% (i.e. LTV 95%). April 2010: Minimum down payment increased to 20% (80% LTV) for non-owner occupied properties (investment/speculative properties). April 2011: Amortization was further reduced to a maximum of 30 years. Canada Mortgage Housing Corporation removed insurance for home equity loans (HEL). July 9, 2012: Maximum loan term for a government insured mortgage is reduced from 30 to 25 years. Homes valued at over $1 million must have 20% down to receive a government insured mortgage. The maximum loan to value of home equity loans changed to 80% from 85%. These changes further restricted traditional lender financing. Mortgage lending markets can be divided into two main segments: 1. Prime Segment and 2. Non-conforming Segment. The prime segment is composed of mortgage borrowers with an established credit history, strong asset to liability ratio, and a proven and stable income stream. These borrowers

10 Page 10 generally attain mortgages from banks and other traditional lenders. The non-conforming segment includes borrowers who do not meet the requirements above. This segment is the target market for TCMIF and most private lenders. The Canadian Association of Accredited Mortgage Professionals (CAAMP) estimated that private mortgage companies, and other private lenders, accounted for less than 3% of mortgage funding in Below we look at the size of the mortgage industry and factors that may impact TCMIF. CAAMP estimated that, in 2012, 8% of homeowners used their home equity to borrow money, with a total borrowed amount of $39 billion. The top five uses of funds were: Renovations: $17.5 billion Purchases (including education): $8.6 billion Investments: $5.6 billion Debt consolidation and repayment: $4.7 billion Others: $2.5 billion Source: CAAMP The following chart shows the Canadian residential mortgage market size from 2000 to Source: CAAMP The chart below displays the annual YOY growth in the mortgage market.

11 Page 11 Source: CAAMP In 2012, the mortgage market expanded by just under 6.0%. The forecast is that the market will continue to expand, but at a decreasing rate. The anticipated growth in 2013 is 4.5-5%, followed by 3% in 2014 (Source: CAAMP). In 2011, the total dollar volume of real estate sales in BC was $43.1 billion. The total sales in 2012 were $34.8 billion, with 2013, and 2014, forecasted to be $36.5 billion and $38.9 billion, respectively (Source: BCREA). Even though private mortgages make up a small portion of the mortgage market, the above estimates give an indication of the opportunities in the market. The following looks at key economic indicators to assess economic growth. GDP Unemployment Gross domestic product (GDP) is a general indicator of the strength of an economy. The GDP of Greater Vancouver is forecasted to grow at 3% annually over the next 4 years (Source: Conference Board of Canada). The unemployment rate in areas that TCMIF operates is lower than the national average. The unemployment rate for the month ended April 2013, was 6.8% for the Vancouver metropolitan area, and 6.4% for BC, compared to the national rate of 7.2%. We are expecting the unemployment rate to decrease in 2013, and 2014, as the economy strengthens.

12 Page 12 Population Source: Statistics Canada One of the main drivers of housing demand is population growth; the higher the population growth, the more the demand for housing units and mortgages. Over the period , the population of Greater Vancouver increased by 9.3%; outpacing the national growth rate of 5.9%. Interprovincial migration and immigration are fueling the higher population growth as compared to the Canadian average. With the forecasted population increasing in TCMIF s key operating areas, real estate demand should be stable. The following shows YOY growth in the population from 2008, along with forecasts through Percent population change P e r c e n t B.C Alberta Canada 0.5 Immigration Source: Statistics Canada Net international migration to both Alberta and British Columbia is set to be on the rise over the next few years. BC is third, and Alberta is fourth in Canada for international migration,

13 Page 13 behind Quebec and Ontario. International net migration totaled 39,023 in BC in A stable immigrant stream should have a positive impact on TCIMF due to the limited credit and income history newly arriving immigrants have. The below shows the immigration trend in BC. Thousands 5,000 4,500 4,000 3,500 3,000 2,500 BC Population and Immigrants Trend E 2013E 2014E 2015E Population (LHS) Number of Immigrants per Year (RHS) Source: Statistics Canada Thousands Delinquency As can been seen in the graphs below, since 2002, mortgage delinquency has been highly linked to the unemployment rate across BC. With the decreasing unemployment rates, defaults are likely to decrease due to the strong correlation between the two % 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% British Columbia Delinquency vs. Unemployment E 2013E 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Delinquency (RHS) Unemployment (LHS) Source: Statistics Canada and BC Statistics Mortgages in arrears are also highly correlated to the unemployment rate. Currently, TCMIF management maintains that all mortgages are current and there have been no defaults. We have reviewed the audited financial statements for 2011, and 2012, and could not find any

14 Page 14 line items for delinquent loans or doubtful accounts. Given the forecasts for the unemployment rate discussed above, we feel that mortgage defaults and arrears for TCMIF should trend in line with the decreasing unemployment. BC Housing Activities Although the economic indicators point to a recovering economy, there has been much concern over the Vancouver housing market recently. Sales activity has slowed in BC over the last two years, but is forecasted to recover in the short term. Vancouver experienced a substantial sales activity decline of 22.7% in 2012, but is expected to increase by 4.5% in 2013, and 10.5% in 2014 (Source: BCREA). Housing prices in Vancouver decreased in 2012, and are estimated to remain around current levels.

15 Page 15 Vancouver Interest Rates Another factor that has significant impact on TCMIF is interest rates. Interest rates influence the rate charged by private mortgage lenders. Currently, TCMIF is lending at a rate of 8-13% p.a., with an average interest rate of 10% p.a. This is a spread of 9% over the Bank of Canada overnight rate, and 7% higher than a 1-year conventional mortgage rate of 3.1% p.a. (Source: Bank of Canada). Since 2008, interest rates have been historically low, which has aided the ability of Canadians to finance and purchase homes. The bank of Canada has stated they intend to increase interest rates in the coming years. The rising interest rates should negatively affect the sales volume of the residential market, due to higher rates limiting the amount of financing people can attain. We anticipate that interest rates over the short to medium term will not rise to a level where they will negatively affect TCMIF. The below charts shows some key interest rates. Source: Bank of Canada Overall, with a growing GDP, population, and employment, we believe there will be enough growth to maintain the current level of MLS activity in Tri City s key focus areas.

16 Page 16 Structure TCMIF is a quasi mutual fund trust with the intention of qualifying as a mutual fund trust. The fund currently qualifies and intends to remain qualified as a registered investment, and eligible for deferred plans, such as LIF, RRSP, TFSA, RESP, etc. To qualify as a mutual fund trust, TCMIF will need to have 150 holders of series A units, which management states they are approximately 30 investors short of. TCMIF s structure is very similar to a mortgage investment corporation ( MIC ). MICs and TCMIF s structure allow investors to invest in a pool of diversified mortgages and receive income from them. The major differences between the two structures are - a MIC is required to hold at least 50% of its holdings in residential mortgages and cash, whereas a mutual fund trust does not have such a restriction. TCMIF s structure in comparison to a MIC gives the managers more flexibility to deploy loans in either residential or commercial property. Both structures distribute net income to investors. The offering is for a maximum of $12 million of series A trust units. The subscription price per series A unit is $1,000. Management has invested $3 million in the trust, which consists of series B units, which are not available for public sale. The series B units are similar to series A in all respects except investors receive their funds back before management, if the fund is liquidated. This clause puts investor s interests above management, and is very beneficial for investors. The table below is from the December 31, 2012, audited financial statements, and shows the trust s structure. The fund started raising capital in Source: OM Management Fee 1.25% p.a. of the NAV, which will be calculated monthly by the manager, and paid quarterly. Incentive fee of 50% of income above the 8% p.a. preferred return to investors. The fees charged by the management of 1.25% p.a. are low in comparison to the industry standard of 1% - 2% p.a. However, the trust s General & Administrative ( G&A ) expenses,

17 Page 17 which are charged on top of the management fees, are higher than comparable offerings. Details of the trust s G&A expenses are presented later in this report. The industry standard performance fee (or incentive fee) is only 20%, compared to TCMIF s 50%, but keep in mind that TCMIF has a relatively high, 8% p.a., hurdle rate. Although, like TCMIF, a lot of comparable funds set a fixed preferred return (or priority dividends), we believe a floating structure better aligns management and investors incentives, as it prevents management from taking additional risk in a low-interest rate environment. However, we feel that TCMIF managers have significant investment in the trust, which more than compensates for the structure, and nicely aligns management and investors interests. Selling and Commission Sales agents will be paid a 5% commission with a trailer fee of 0.5% p.a. which is in line with industry averages. Distributions The fund intends to distribute net income quarterly to investors. Redemptions Annual redemptions are limited to 5% of the aggregate invested capital; this limit may be waived at management s discretion. Units will be redeemed at a price equal to 95% of the subscription price in the first year of investment. This penalty will be reduced by 1% for each year the unit is held. After 5 years, investors can redeem their funds with no penalty. In 2012, management paid out $85,000 in redemptions. To meet redemptions, management will use cash on hand if available. We do not, however, expect management to keep a lot of cash on its balance sheet. They also have the option of using funds from the line of credit. If funds are not immediately available, the OM allows management to issue promissory notes. The promissory note will have a term of five years and pay interest at a rate of the preceding 12 months of TCMIF s portfolio. Management will have the option to prepay the note. As a last resort, management may assign an investor interest or interests in a mortgage. To redeem their units, investors need to give 60 days notice. We feel that redemptions can be paid out either through retaining the cash of maturing loans in the 60 day period, or through the LOC. The risk to investors for redemptions are that annual redemption are limited to only 5% of the aggregate invested capital, and that redemptions might not be paid in cash. However, this is a common risk for most comparable offerings. As per the OM, management cannot redeem their units if it would bring their percentage of invested capital to below 25% of the initial unitholders capital, or 20% of the total capital raised ($12 million from investors + $3 million from management). Note that this condition is applicable only for investors of the first $12 million raised. There is no market to sell the units. The units are transferable with the approval of the manager.

18 Page 18 Financials TCMIF was audited by Hay and Watson, a medium sized accounting firm located in Vancouver, BC. The following summarizes TCMIF s income statement since inception. TCMIF started operations in late Management absorbed the trust s operating expenses in 2011 and They also waived 100% of the management fees for 2011 and Net income in both years were distributed to investors. We feel that management s decision to waive the trust s operating expenses is a sign that management is acting for investors benefit. However, keep in mind that the fund is still in early stages. In 2012, TCMIF had $0.57 million in net income. The company s revenues are from interest income, which includes upfront mortgage lending fees, and the interest received from outstanding mortgages. TCMIF typically charges a lending fee of around 1.5%. If a broker refers the loan, they may add an additional fee, on top of the 1.5%, to the borrower. The additional fee will be passed on to the broker, as referral fees. In the Income Statement below, the referral fees are reported in G&A expenses. Income Statement YE - December 31 Revenue Interest Income $66,839 $996,951 Revenue $66,839 $996,951 Expenses General & Administrative ($134,802) ($413,837) Expenses absorbed by the Manager $131,678 Manager's fee ($14,007) ($108,455) Manager's fee waived $14,007 $95,991 ($3,124) ($426,301) Net income $63,715 $570,650 Distributions to holders of redeemable units ($63,715) ($570,650) Net Income $60,591 $570,650 *The income statement above does not show that operating expenses were absorbed by management in The Cash Flow and Balance Sheets, however, indicate that the fees were actually absorbed by management. The table below shows a breakdown of 2012 expenses.

19 Page 19 G&A Expense Breakdown Administrative support $ (58,672) Consulting fees $ (138,646) Insurance $ (2,716) Interest and bank charges $ (47,687) Marketing $ (48,532) Membership and licenses $ (21,805) Office expenses $ (9,566) Professional Fees $ (56,421) Rent $ (29,792) Total $ (413,837) The OM states that the manager will cover the management fee and operating expenses until the fund reached a sustainable level of assets. Management states a sustainable level would be around $10-$15 million of mortgage receivables. With the current portfolio of mortgages in this range, we feel that the manager will no longer cover management fees and expenses. In 2012, TCMIF started the year with $2.5 million in mortgage receivables and ended with $9.7 million. TCMIF s balance sheets for 2011 and 2012 are shown below. Balance Sheet YE - December 31 Assets Cash & equivalents $ 1,938,587 $ 73,169 Funds held in trust $ 3,000 $ 25,264 Interest receivable $ 23,894 $ 177,306 Receivable from the Manager $ 97,302 $ 28,569 Prepaid Insurance $ 7,188 Mortgage loan investments $ 2,522,500 $ 9,664,602 Total Assets $ 4,585,283 $ 9,976,098 Liabilities Bank Indebtedness $ - $ 573,720 Accounts Payable and accrued liabilities $ 2,600 $ 14,073 Trust liabilities $ 3,000 $ 25,264 Commission loan payable $ 412,130 Payable to the manager $ 417,730 Prepaid mortgage payments $ 9,558 Distributions payable $ 63,715 $ 174,098 $ 76,273 $ 787,155 Equity Settlor's contribution $ 10 $ 10 Net assets attributable to holders of redeemable units $ 4,509,000 $ 9,188,933 Total Liabilities + Equity $ 4,585,283 $ 9,976,098 Based on the revenues reported by the trust, we estimate the portfolio generated 11.52% on the weighted average mortgage receivables outstanding in This figure

20 Page 20 is in line with the average interest rate of the portfolio (approximately 10%) + the typical lending fee of 1.5%. % of Mortgage Receivable FY FY Revenue 2.65% 11.52% Income and expenses as a percent of the weighted average invested capital are shown below. Revenues as a percent of invested capital in 2012 were 12.67%. The company used debt in 2012, which is why revenues as a percent of invested capital were higher than revenues as a percent of outstanding mortgages. The trust paid out 7.25% to investors. Keep in mind there was a 1.25% management fee that was mostly waived in If the fee was not waived, TCMIF would have paid out 6.16%. As % of NAV of Unit Holders 2012 Mortgage Interest Income 12.67% Less: Management Fee -0.16% G&A Expenses -5.26% Net 7.25% We feel that G&A expense is slightly high compared to other offerings. When management fees are included in G&A, the range we found for comparable funds were 1.5% - 3% of invested capital. Since TCMIF is a new fund, G&A expenses were understandably higher than normal. We expect the normalized G&A expense + management fee to be 3.33% going forward, which is still slightly higher than similar offerings. In the table below, we show the expected yields, assuming the maximum offering is raised (as per the current OM). Existing * Max Invested Capital $9,188,933 $15,000,000 Revenues $1,056,727 $1,725,000 Management Fee -$114,862 -$187,500 G&A Expenses -$191,130 -$312,000 Interest on LOC -$13,075 Net Income $750,736 $1,212,425 Yield 8.17% 8.08% Portfolio NAV $14,709,447 NAV per Unit $ *assumes the existing LOC is paid out

21 Page 21 For our estimates, we assumed that TCMIF lends at their current average rate of 10%, and receives a 1.5% lender fee. We have also estimated a normalized G&A expense of $0.31 million. We assumed no debt in the above estimates. We believe that management can achieve a distribution to investors of 8% of invested capital. This is in-line with expectations by management in the current low interest rate environment. NAV per unit is lower than $1,000 due to the sales commission (5%) on new capital raised. Previous investors, on average, paid a lower sales commission, which is why our NAV estimate, at the maximum raise, is higher than 95% of $1,000, or $950 per unit. Line of Credit In the 2012 financial statements, TCMIF had bank debt of $0.57 million, but there was no reference to the line of credit in the footnotes. According to management, a $1.5 million line of credit is available to them, with the possibility to expand it to $3 million. We anticipate that management will use the line of credit primarily to avoid the timing mismatches between new loans and maturing loans. With the increased use of the line of credit, we feel management can further increase returns. We have also analyzed different scenarios, discussed below, that may affect TCMIF: Defaults In the event of a default, TCMIF will have the ability to seek principal and accrued interest by foreclosing on the property. Foreclosure is a lengthy process and may tie up the capital and decrease annual yields. As mentioned earlier, management funds are subordinate to the initial investors capital, providing added security for investors principal in the event of defaults. Rising interest rates We feel that interest rates will not decrease below the historic lows that we are currently experiencing. We anticipate rates will rise, and expect TCMIF to raise rates also. We estimate that in the current environment, TCMIF will be able to pay out around 8% p.a. to investors. If rates rise, investors yields will increase, but they have to split increased returns with management. Housing price decline Although we anticipate a stable housing market over the short term, we have looked at how a severe drop in housing prices would affect TCMIF. In such a case, we anticipate the current portfolio to remain largely unaffected due to the low LTV s of the properties. However, we think that deal flow would decline in subsequent years due to volatility in housing prices and lower housing prices leading to decreased borrowing. The sensitivity of expected yields to various factors is shown below.

22 Page 22 Sensitivity G&A Expenses (% of Invested Capital) 1.50% 2.08% 2.50% 3.00% Investors' Yield 8.33% 8.04% 7.66% 7.16% % of Capital Deployed Annually 60.00% 70.00% 80.00% 90.00% % Investors' Yield 3.48% 4.63% 5.78% 6.93% 8.02% Lending Rate + Fee 9.50% 10.50% 11.50% 13.00% 14.50% Investors' Yield 6.08% 7.08% 8.04% 8.79% 9.52% Risks As management intends to use its LOC to fund loans, we believe our assumption of 100% capital deployed capital is reasonable. Investors are exposed to the following key risks: Loans are short term and need to be sourced and replaced quickly. Delays in capital being deployed will negatively affect investor returns. Returns are highly sensitive to the % of capital deployed. Unit holders principal is not guaranteed, as the NAV per unit could decrease from current levels (as a result of loan losses). Unit holders are also not guaranteed minimum distributions. There are restrictions on the transfer of units. The units can only be redeemed at full NAV after five years. A penalty would be applied to the NAV if unit holders redeem in the first five years of subscription. Management splits income with investors, over 8%. This gives management an incentive to lend mortgages with high interest rates; however, mortgages with higher interest rates can carry higher default risk. The fund has the ability to use leverage, which would increase the exposure of the fund to negative events. TCMIF can invest in loans with a position subsequent to first, which carry more risk than a first position loan. G&A expenses can be higher than our estimates. The fund has a very limited operational history. Tri City was unable to provide track record information of their other fund. Annual redemptions are limited to 5% of the total invested capital, and may not be paid in cash. Like most MICs/MIFs, TCMIF s loans are primarily interest only loans (majority paid monthly), which has higher risk than a principal + interest payment structure. In addition, some loans do not pay monthly interest, they accrue interest until the total loan is repaid, which increases the risk. Management has the ability to accept mortgages secured by a wide range of properties. Some of the property classes such as commercial properties carry higher risk. TCMIF may purchase loans from TCCC, which may create conflict of interest.

23 Page 23 Rating Overall, we feel that TCMIF offers returns comparable to those in the industry. We feel management has addressed the major risks with mortgage investment such as, interest rate fluctuation and time horizon through their lending guidelines. We anticipate a stable housing market and growing private mortgage industry, which we feel will benefit TCMIF. In our opinion, the most outstanding quality of the offering is management s significant investment in the fund, and it being subordinate to investors. We feel this strongly aligns the interests of management and investors. As with all MIC/MIF investments, we think the major risks are originating loans and timely exits of loan. Due to the limited operating history of TCMIF we are unable to assess their impact, and therefore, our risk rating is 4 (Speculative). We have assigned an overall rating of 3- (Good). FRC Rating Expected Annual Yield Rating Risk 7% - 8% p.a. * 3- (Good) 4 (Speculative) *Based on the current BoC overnight rate of 1%

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