a year in review - kvcapital.ca · shafin kanji macc, ca, cbv, icd.d mr. kanji is a chartered...

A YEAR IN REVIEW2018 ANNUAL REPORT

2 KV MORTGAGE FUND 2018 ANNUAL REPORT

PROTECTING OUR INVESTOR’S CAPITAL

KV MORTGAGE FUND 2018 ANNUAL REPORT 3

KV Mortgage Fund’s investments are secured on real estate that is underwritten by KV Capital in accordance with our asset based lending approach.

$10 PER SHARE NET ASSET VALUE

57 PORTFOLIO MORTGAGE INVESTMENTS

LESS THAN 0.01% LOSSES AS A PERCENTAGE OF TOTAL FUNDS ADVANCED


RETURNS TO INVESTORS


$24M IN DIVIDENDS DECLARED SINCE INCEPTION

0 MISSED DIVIDENDS SINCE INCEPTION

$0 CORPORATE TAX PAID SINCE INCEPTION

8.13% IRR SINCE INCEPTION

During Fiscal 2018 KV Mortgage Fund continued its track record of delivering consistent returns to its investors, declaring 12 consecutive monthly dividends totaling $5,175,057, which due to the Fund’s status as a Mortgage Investment Corporation, were paid to investors without being reduced by any corporate taxes. KV Mortgage Fund has never missed a dividend payment since inception in 2009.


THE FOUNDATIONS OF OUR SUCCESS: GOVERNANCE


4 OF 6 BOARD MEMBERS ARE INDEPENDENT

9 CONSECUTIVE YEARS OF KPMG AUDITED FINANCIAL STATEMENTS

3 OF 4 LENDING REVIEW COMMITTEE MEMBERS ARE INDEPENDENT

Strong corporate governance is foundational to KV Mortgage Fund’s success in delivering on its dual mandate of preserving investor capital and generating monthly income. We therefore strive to be a leader in our adoption of and adherence to corporate governance best practices. With a board and lending review committee comprised of an independent majority, the Fund and its investors benefit from a decision making process marked by professional rigour, and which balances independent oversight with the expertise of inside parties.


PORTFOLIO MANAGEMENT


60% WEIGHTED AVERAGE LOAN TO VALUE

98% OF DEPLOYED CAPITAL SECURED BY FIRST MORTGAGES

95% OF MORTGAGES ON TERMS OF 12 MONTHS OR LESS

The investments in KV Mortgage Fund’s portfolio are purposefully selected from the opportunities originated through, and underwritten by KV Capital’s in-house mortgage platform. Each opportunity is individually assessed by KV Capital’s professional staff based on the merits of protecting capital and maximizing the risk adjusted returns available in the market.

In Fiscal 2018 the Fund advanced monies for new investments in mortgages 264 times totalling $69,402,325 and received principal pay downs 134 times on previously advanced mortgage loan investments totalling $63,979,620.


Paul Allard, MBA Mr. Allard holds a Masters degree in Business Administration from the University of Alberta and he is the Vice President of Edmonton based Allard Developments. For the last 16 years Mr. Allard has been actively involved in the full cycle execution of residential and commercial real estate development projects within Alberta through Allard Developments and its partners. Mr. Allard currently focuses on the commercial leasing operations for both the private real estate holdings and new development sites that are managed within the portfolio of Allard Developments. Mr. Allard previously sat as a Director of Calgary based Vero Energy Inc. and he is concurrently serving as a Director of the Vancouver based Highbury Foundation.

INDEPENDENT DIRECTORS

Marc Prefontaine Mr. Prefontaine is a Senior Director with MCAP in the Edmonton Real Estate Finance Group, and a founding member of MCAP’s Edmonton office. Mr. Prefontaine has over 15 years of full cycle experience in the Canadian mortgage banking industry that has included first hand expertise in originating, underwriting, adjudicating, servicing, asset management and navigating default scenarios. Mr. Prefontaine’s production team achieves annual origination volumes of approximately $1B through a banking model that incorporates various debt and equity structures including syndicated pari-passu loans, A/B loans, club deals, and structured finance deals representing 100% of the capital stack.


Don Paulencu, CA, ICD.DMr. Paulencu is a Chartered Accountant and a member of the Institute of Corporate Directors holding the ICD.D designation. Mr. Paulencu retired from Deloitte LLP in 2015 where he served as a partner for 31 years having the position as managing partner of the Edmonton office for 10 years. Mr. Paulencu was an audit and advisory partner serving both publicly traded and private companies primarily in the financial institution and real estate industry sectors. Mr. Paulencu is currently chairman of the publicly traded company, Athabasca Minerals Inc., and serves as an advisory director on two large privately held companies in the real estate and manufacturing industry sectors. He is currently on the Board of Directors of Baseball Alberta as Past President having served as President for eight years and the Board of Directors of Baseball Canada as Vice President serving as chair of the strategy and planning committee and the umpire committee.

Guy Scott Mr. Scott holds a Masters of Science in Urban Planning. He is a founding partner of WAM Development Group. He is Past Chairman of the University Hospital Foundation and continues as an Emeritus member. He is co-chairman of the Brain Center Campaign for the same Foundation. He is a member of the Canadian Institute of Planners and various industry organizations. His business career has centered around real-estate development, mortgage investments in Western Canada and the United States. Through The Shelley and Guy Scott Family Foundation he is involved in philanthropic interests. He is President of Ventura Interests Inc. a family holding company involved in real estate and mortgage investments.


Shafin Kanji MAcc, CA, CBV, ICD.DMr. Kanji is a Chartered Accountant, Chartered Business Valuator, and is a founding principal of KV Capital Inc., the private mortgage brokerage, Exempt Market Dealer, Restricted Portfolio Manager, Investment Fund Manager and real estate investment company that provides service to KV Mortgage Fund Inc. Mr. Kanji previously served as the Chief Executive Officer of JER Envirotech Ltd., and as the Chief Operating Officer and Chief Financial Officer at Matrikon Inc. Mr. Kanji gained extensive experience while working with KPMG in the areas of fraud investigation and business valuations as well as in real estate development and construction through his current involvement as a founding principal of Edmonton based Kanvi Homes Inc.

MANAGEMENT

Aleem Virani CA, CBV, ICD.DMr. Virani is a Chartered Accountant, Chartered Business Valuator, and is a founding principal of KV Capital Inc., the private mortgage brokerage, Exempt Market Dealer, Restricted Portfolio Manager, Investment Fund Manager and real estate investment company that provides service to KV Mortgage Fund Inc. Mr. Virani previously served as the Controller for Trans Global Group of Companies (subsidiary of the Brick Group Income Fund), as a business valuations and litigation support expert with Kingston Ross Pasnak LLP, and as a public accountant at Deloitte LLP. Mr. Virani also has experience in real estate development and construction through his current involvement as a founding principal of Edmonton based Kanvi Homes Inc.


Curtis Power CA, CIMMr. Power is a Chartered Accountant and a Principal of KV Capital Inc., the private mortgage brokerage, Exempt Market Dealer, Restricted Portfolio Manager, Investment Fund Manager and real estate investment company that provides service to KV Mortgage Fund Inc. Mr. Power previously served as the Chief Financial Officer of a mortgage lending firm specializing in short term bridge financing, that grew from start up to $65 million of assets under management and as an auditor with Ernst & Young LLP. Mr. Power joined KV Capital Inc. in 2013 and has full responsibility for the firm’s mortgage operations including leading the origination, underwriting and servicing teams in Calgary and Edmonton.

Nicholas Jeanes JDMr. Jeanes is General Counsel and Corporate Secretary of KV Mortgage Fund Inc. and KV Capital Inc., the private mortgage brokerage, Exempt Market Dealer, Restricted Portfolio Manager, Investment Fund Manager and real estate investment company that provides services to KV Mortgage Fund Inc. Mr. Jeanes holds a law degree from the University of Alberta, is a member of the Law Society of Alberta and is a founding member of Young ACG Edmonton, a sub-chapter of the Association for Corporate Growth. Prior to joining KV Capital in 2017, Mr. Jeanes worked in the corporate and commercial practice groups of Bennett Jones LLP, an internationally recognized Canadian law firm.


KV MORTGAGE FUNDINDEPENDENT DIRECTORS

*Appointed to the Board of Directors on March 1, 2018

PAUL ALLARD

MARC PREFONTAINE

GUY SCOTT

DON PAULENCU*

Location Edmonton, AB Edmonton, AB Edmonton, AB Edmonton, AB

Board of Directors Chair Director Director Director

Lending Review Committee Member Chair Member Member

Executive n/a n/a n/a n/a

Relationship to KV Capital Independent Independent Independent Independent

Preferred Share Holdings at Year End 33,417 Class A 4,935 Class A 2,231 Class A Nil*

F2018 Compensation Paid by KV Mortgage Fund

Board: $7,500 $5,000 $5,000 $416

LRC: $9,250 $6,500 $3,750 $83

Total: $16,750 $11,500 $8,750 $500

F2018 Meeting Attendance

Board: 5/5 4/5 4/5 2/5

LRC: 12/12 11/12 10/12 1/12


MANAGEMENT TEAM

SHAFIN KANJI

ALEEM VIRANI

CURTIS POWER

NICHOLASJEANES

Location Edmonton, AB Edmonton, AB Edmonton, AB Edmonton, AB

Board of Directors Director Director n/a n/a

Lending Review Committee Member n/a n/a n/a

ExecutiveChief Executive Officer President Chief Financial Officer

Corporate Secretary and General Counsel

Relationship to KV CapitalChief Executive Officer President

Chief Operating Officer - Mortgages Chief Financial Officer

Corporate Secretary and General Counsel

Preferred Share Holdings at Year End 39,823 Class A 19,203 Class A 15,088 Class A Nil

F2018 Compensation Paid by KV Mortgage Fund Total: $0.00 $0.00 $0.00 $0.00

F2018 Meeting Attendance

Board: 5/5 5/5 5/5 4/5

LRC: 12/12 12/12 12/12 1/12

16 KV MORTGAGE FUND 2018 ANNUAL REPORT 16

LETTER FROM THE BOARD


Dear Investor:

KV Mortgage Fund Inc.’s (the “Fund”) success is measured by our ability to meet the dual mandates of protecting investor capital and producing investor income by maximizing market available risk adjusted returns and actively managing our loans over the course of their lifecycles. In this regard, I am very pleased to report that fiscal 2018 (“Fiscal 2018”) was another successful year, with the Fund generating an internal rate of return of 7.06%. Since inception, we have now paid dividends in 97 consecutive months and generated an internal rate of return of 8.13%.

While we are proud of our track record, we recognize long run success can only be maintained by remaining attuned and adaptive to changing market conditions and trends. Despite indications of recovery from the 2014/2015 recession, the Alberta economy continues to experience a large degree of uncertainty which has impacted the mortgage lending and real estate markets, creating both opportunities and challenges for the Fund. In Fiscal 2018, for instance, several of our competitors pulled back from the Alberta market thereby continuing a trend of reducing the capital supply available to borrowers in alternative mortgage lending transactions with Alberta real estate as security. This pull back was anticipated and has allowed the Fund to continue opportunistically deploying capital and negotiating more favourable terms for the mortgage transactions in which we participate. The end result is a portfolio well secured by real estate at year end and a positive outlook for fiscal 2019 as we enter a rising interest rate environment.

Yet such opportunities are paired with challenges. Throughout the latter half of Fiscal 2018 we saw an increase in enforcement remedy activity as certain of our borrowers felt the impact of economic challenges. This increase is neither unexpected nor unique and the Fund’s investment model is designed to continue to deliver results in such cycles. But we nevertheless continue to evaluate our model and adopt appropriate risk mitigation strategies. For instance, in Fiscal 2018 we implemented the revised fee structure with the Fund’s manager, KV Capital Inc. (the “Manager”) which was a recommendation from the 2017 internal review jointly undertaken by the Independent Board of Directors and the Manager. The Board believes this new structure better serves the long run interests of our investors by more appropriately aligning risk sharing: while the Manager is compensated for producing strong returns, it is now also responsible for returning fees to the Fund where the Fund has suffered a principal loss.

The Fund’s success and stability are a testament to the pillars we consider critical to our business: a disciplined application of an investment model designed to generate stable returns across all real-estate cycles; an expert management team; a commitment to high service levels for both investors and borrowers; and adherence to best practice corporate governance and transparency. As we look to the next year, the Board is confident these strengths will continue producing the stable and secure returns our investors have come to associate with the Fund.

I would like to extend my thanks to all members of the Board and lending review committee who have, once again, demonstrated their ongoing dedication and contribution to our mutual success during this last year. I would like to especially thank Mr. Ralph Young. Mr. Young, completed his term with the Board on March 20, 2018 and we will miss his experience, expertise and contributions to the Board. In his stead, we welcome Mr. Don Paulencu to the Board who joined us on March 1, 2018. Mr. Paulencu’s extensive corporate governance experience, business acumen and highly sought-after insight will be a valuable addition to our Board.

Respectfully submitted on behalf of the Board.

Paul Allard, BA, MBA


LETTER FROM THE MANAGER


We are very pleased with the operational and financial performance of KV Mortgage Fund Inc. (the “Fund”) during the twelve months ended February 28, 2018 (the “Year” or “Fiscal 2018”). As the Alberta economy continues to emerge from a challenging economic cycle, we are proud to report that over the course of the Year, the Fund continued its track record of strong and stable performance. Some specific highlights include:

y generated a 7.06% Internal Rate of Return (IRR);

y maintained net asset value at $10.00 per preferred share;

y finished the Year with record portfolio of $82M that had a weighted average loan to value ratio of 60%;

y increased the Fund’s line of credit with a Canadian chartered bank from $5M to $10M; and

y 98% secured by first position mortgages.

These results were achieved notwithstanding that in the latter half of the Year, certain of the Fund’s borrowers encountered economic difficulty, resulting in enforcement actions being taken on properties secured under our loans to these Borrowers. However, as in past years, these enforcement actions and management’s concurrent ability to successfully exit these loans demonstrate the underlying strength of the Fund’s business model which does not rely on rising real estate prices to execute on our dual mandates of protecting investor capital and generating income.

Looking ahead, we remain confident in the Fund’s ability to continue executing on our dual mandates. This assessment is based on our confidence in the professional rigour of the Fund’s mortgage platform, the ability and depth of our team of real estate and finance professionals, and our approach of strategically investing in mortgages characterized by short terms to maturity with financing terms which allow the Fund to pursue multiple exit strategies over the course of the projects being financed.

In closing, we would like to acknowledge the independent members of our board of directors and lending review committee. Strong independent governance is an important factor in the Fund’s success and we wish to extend our gratitude to these members for their ongoing contributions and engagement with our business. A special thank you is extended to Mr. Ralph Young for his service and exceptional contributions over the past three years. Similarly, we are very pleased to welcome Mr. Don Paulencu to the board of directors and look forward to obtaining the benefit of his foresight and experience.

Thank you for investing with us.

Shafin Kanji, MAcc, CA, CBV, ICD.D Chief Executive Officer KV Capital Inc.

Aleem Virani, CA, CBV, ICD.D President KV Capital Inc.

Curtis Power, CA, CIM Chief Operating Officer - Mortgages Chief Financial Officer KV Capital Inc.


CONTENTSAnnual Management Report of Fund Performance 21

Forward Looking Statements Advisory 22

Management Discussion of Fund Performance 24

Management and Service Fees 34

Financial Highlights 36

Past Performance 38

Summary of Investment Portfolio 40

Asset Allocations 44

Financials 48


ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE For the year ended February 28, 2018 This annual management report of fund performance contains financial highlights and accompanies the audited annual financial statements of KV Mortgage Fund Inc. (the “Fund”). The Fund will provide you with a copy of the annual financial statements, at no cost, upon request through any of the following means:

Phone: Calling the Fund at 1-888-933-1222 (toll free), Nicholas Jeanes, Corporate Secretary and General Counsel

Email: Emailing the Fund at [email protected]; or

Mail: Writing to the Fund at: KV Mortgage Fund Inc. 108, 2627 Ellwood Drive SW Edmonton, Alberta T6X 0P7


FORWARD LOOKING STATEMENTS ADVISORY


The terms, the “Fund”, “we”, “us” and “our” in the following annual management report of fund performance (the “MRFP”), refer to KV Mortgage Fund Inc. This MRFP may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. These statements are typically identified by expressions like “believe”, “expects”, “anticipates”, “would”, “will”, “intends”, “projected”, “in our opinion”, “plans”, “estimates” and other similar expressions. By their nature, forward-looking statements require us to make assumptions which include, among other things, that (i) the Fund will have sufficient capital under management to effect its investment strategies and pay its targeted distributions, (ii) the investment strategies will produce the results intended by KV Capital Inc. (the “Manager”), (iii) the markets will react and perform in a manner consistent with the investment strategies and (iv) the Fund is able to invest in mortgages of a quality that will generate returns that meet and/or exceed the Fund’s targeted investment returns.

Forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will prove not to be accurate. We caution readers of this MRFP not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to, general market conditions, interest rates, regulatory and statutory developments, the effects of competition in areas that the Fund may invest in and the risks as detailed from time to time in the Fund’s offering memorandum.

We caution the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Fund and the Manager do not undertake, and specifically disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

This MRFP is dated May 1, 2018. Disclosure contained in the MRFP is current to that date, unless otherwise noted. Additional information on the Fund is available at www.kvcapital.ca, as updated from time to time.


MANAGEMENT DISCUSSION OF FUND PERFORMANCE


INVESTMENT OBJECTIVES AND STRATEGIES

Since operations commenced in 2009 the Fund has provided investors indirect access to private mortgage investments that are selected and approved by the Manager. It is the intention of the Fund to qualify as a “mortgage investment corporation” as defined under Section 130.1(6) of the Income Tax Act (Canada).

The investment objectives of the Fund are to:1. Preserve capital; and 2. Generate monthly income.

To realize on its objectives, the Fund invests in a diversified portfolio of private mortgage investments that mature within two or less years and consist primarily of construction and development financing, equity take out and financial bridging transactions that are secured directly by land, multifamily residential, single family residential, office, retail, industrial and hospitality properties located primarily within western Canada.

RISK

The risks associated with investing in the Fund remain as disclosed in its offering memorandum. Changes to the Fund that occurred during the fiscal year ended February 28, 2018 (the “Year” and “Fiscal 2018”) have not affected the overall risk profile.

BASIS OF PRESENTATION

The financial statements of the Fund have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Accordingly, financial data provided in this MRFP has been prepared in accordance with IFRS.

The Fund’s reporting currency is the Canadian dollar.

NON-IFRS MEASURES

The Fund prepares and releases financial statements in accordance with IFRS. In this MRFP, as a complement to results provided in accordance with IFRS, the Fund discloses certain financial measures not recognized under IFRS and that do not have standard meanings prescribed by IFRS (collectively the “Non-IFRS Measures”). These Non-IFRS Measures are further described below. The Fund has presented such Non-IFRS Measures because the Manager believes they are relevant measures of the ability of the Fund to earn and distribute dividends to shareholders and to evaluate the Fund’s performance. These Non-IFRS Measures should not be construed as alternative indicators to net income and comprehensive income or cash flows from operating activities that were determined in accordance with IFRS as indicators of the Fund’s performance.


NON-IFRS MEASURES (CONTINUED):

y Management expense ratio – represents total expenses and amortized share issue costs for the stated period expressed as an annualized percentage of the daily weighted average redemption price of the share class presented.

y Weighted average interest rate – represents the blended interest rate of the mortgage loan investment portfolio at period end, as determined by the amount of dollars deployed at each interest rate relative to the total portfolio.

y Weighted average term to maturity – represents the blended mortgage term remaining for the mortgage loan investment portfolio at period end, as determined by the amount of dollars deployed at each maturity date relative to the total portfolio.

y Weighted average loan to value – represents the blended loan to value of the mortgage loan investment portfolio at period end, as determined by the amount of dollars deployed at each loan to value relative to the total portfolio. Loan to value for each mortgage loan investment is a measure of advanced mortgage commitment, including priority or pari-passu charges registered on the underlying real estate held as security, as a percentage of the most recently available third party determined fair value of the underlying real estate collateral. For construction and development mortgage loan investments value between “as is” and “as complete” is accreted under a percent complete methodology as described in the offering memorandum.

y Project phase – is a categorization of the primary real estate security for each mortgage loan investment in the portfolio according to stage of the real estate investment process that the underlying real estate collateral is best described by, as determined by the Manager, as of that date.

y Status – a categorization of mortgage loan investments according to timing differences between the receipt of interest payments and contractual due dates and any enforcement actions taken by the Manager.

y Portfolio turnover rate – represents mortgage loan investments made during the stated period expressed as a ratio of the daily weighted average size of the mortgage investment portfolio.

y Portfolio rate of deployment – represents principal investments made in mortgage loans during the stated period expressed as a ratio of the daily weighted average size of the mortgage investment portfolio.

y Payout ratio – represents total dividends declared to the holders of all classes of preferred shares divided by the net income and comprehensive income attributable to all classes of preferred shares for the period presented.

y Redemption price – represents the net asset value per preferred share calculated by the Fund for purposes of processing redemptions in accordance with the terms of the offering memorandum.


NON-IFRS MEASURES (CONTINUED):

y New originations – represents the cumulative principal balance in dollars, as of the reporting date, of all mortgage loan investments included in the portfolio dollar total as of the reporting date where the first advance occurred on or after the first day of the reporting period.

y Average investment – represents the total dollars advanced during the reporting period divided by the number of times advances occurred during the reporting period.

RESULTS OF OPERATIONS

The Fund generated an internal rate of return (IRR) of 7.06% (2017 - 8.01%) for the Year after the payment of all fees and expenses. In comparison, the Fund’s targeted annual return for the Year was 5.59% (2017 – 6.14%). The target return was originally established at inception of the Fund in 2009 and is calculated as the Government of Canada 2-year benchmark bond yield (series V122538) plus 550 basis points. Beginning March 1, 2017 the target return calculation was revised to the Government of Canada 2-year benchmark bond yield (series V122538) plus 450 basis points. The Manager is very pleased with the performance of the Fund over the Year and believes that the IRR of 8.13% (2017 – 8.42%) generated since inception demonstrates a strong track record of achieving the stated objectives, and balancing between the goals of capital preservation and income.

During the Year, the Fund grew its shareholders’ equity by $4,722,258 (2017 – $1,133,347) to $78,117,763 (2017 - $73,395,505) as at February 28, 2018 primarily by completing sales of its Class A and Class B preferred shares and additional shares earned under the dividend reinvestment plan (“DRIP”) available to Class A and Class B preferred shareholders. Under the DRIP, shareholders may enroll to have their dividends reinvested to purchase additional preferred shares of the same class. Overall, the Fund’s shareholders’ equity has grown during the Year by 6.43% since February 28, 2017. The Fund’s continued growth allows for both a greater number of mortgage securities to be in the portfolio, and larger individual mortgage investments. Having capacity to participate in larger individual mortgage investments increases the universe of potential investments for the Fund, and improves its ability to hold larger positions in any single mortgage in the interest of deploying capital efficiently. The Fund Manager has continued to be diligent and prudent in its investment decisions. During the Year, as a result of strong deal flow amid reduced capital supply, the Fund announced it was re-opening for additional capital investment. The Board of Directors and Fund Manager believe there is opportunity in the Alberta real estate market presently, and as such want to ensure the Fund is positioned to capitalized on the risk adjusted returns available in the market.


RESULTS OF OPERATIONS (CONTINUED):

The Fund advanced monies for new investment in mortgages 264 times (2017 – 174 times) totalling $69,402,326 (2017 - $72,127,943) over the Year, and received principal pay downs 134 times (2017 – 139 times) on previously advanced mortgage loan investments totalling $63,979,620 (2017 - $66,840,815). During the Year, the Fund reversed the impairment provision recorded at February 28, 2017 of $150,000. In the current Year the Fund recorded a loss provision of $342,650 (2017 – $150,000). The Fund’s realized loss on mortgage loan investments was $56,193 (2017 – $108,324). The net result of these transactions are total portfolio investments at February 28, 2018 of $81,855,237 (2017 - $76,625,181). Further, new originations from the Year represent approximately 27.08% (2017 – 50.06%) of the Fund’s outstanding mortgage investments at year end. In addition to other techniques, the Manager actively manages risks within the Fund’s portfolio associated with changes to real estate prices by maintaining short terms to maturity on the mortgage loan investments and redeploying capital throughout real estate cycles.

The weighted average interest rate on the portfolio at February 28, 2018 was 9.42% (2017 – 9.67%). Consistent with the approach taken in fiscal 2017, in Fiscal 2018 the Manager continued to strategically select and allocate the Fund’s available capital to mortgage opportunities from borrowers with increased strength and capacity on projects that it believes represent a better risk adjusted return. For the Year, the average mortgage loan advance decreased from $412,160 in fiscal 2017 to $370,775.

The Fund continues to strategically maintain a diversified portfolio of mortgage investments located primarily on real estate located in Alberta; as at February 28, 2018, 90.8% of mortgage loan investments are secured by real property located within Alberta, 5.3% of mortgage loan investments are secured by property located in British Columbia, 3.9% of mortgage loan investments are secured by property located in Saskatchewan (2017 – 90.6% of mortgage loan investments were secured by real property located within Alberta, 6.5% of mortgage loan investments were secured by property located in British Columbia, and 2.9% of mortgage loan investments were secured by property located in Saskatchewan). The Fund has continued to maintain significant exposure to Alberta as it benefits directly from the local expertise of the Manager in originating, underwriting and servicing these mortgage investments. In addition, the capital supply for alternative mortgage lending has declined in the Alberta market relative to prior years. This decline in capital supply has presented an opportunity for the Fund to deploy its capital at more favourable terms. The Fund was again able to operate opportunistically, and secure attractive risk adjusted returns during Fiscal 2018.


February 28, 2018 February 28, 2017

Not past due $658,073 $593,490

Past due 0-30 days 178,803 104,316

Past due 31-90 days 228,098 36,068

Past due more than 90 days 16,398 122,637

1,081,372 856,511

Allowance for non-collectable interest (29,791) (62,708)

$1,051,581 $793,803


The Manager places a high degree of emphasis on closely monitoring the mortgage loan investments included in the Fund’s portfolio, and accordingly it is actively engaged in managing, servicing and enforcement of mortgages the Fund has invested in. The Manager adjusts the fair value of the Fund’s mortgage investments when it determines that the full value of the investment and accrued interest is unlikely to be recovered from the underlying real estate held as security. During the Year, the Fund adjusted the fair value of mortgage loan investments by recording a $29,791 (2017 - $62,708) allowance for non-collectable interest in respect of the associated accrued and unpaid interest, and $342,650 (2017 - $150,000) for an impairment loss provision on mortgage loan investments. Any realized impairment loss represents the difference between the respective mortgage’s carrying balance and the amount recovered upon the monetization of the underlying real estate. Any impairment loss provision represents the difference between the respective mortgage’s carrying balance and management’s estimate of the recoverable amount from the monetization of the underlying real estate at February 28, 2018.

At February 28, 2018, the Fund, through the Fund Manager, was engaged in enforcement remedies against three (2017 – three) mortgage loan investments, including the mortgage loan investment for which the impairment loss provision was recorded. At February 28, 2018, mortgage loan investments engaged in enforcement remedies totaled $11,540,970 (2017 - $1,711,260) in gross principal and $419,326 (2017 - $177,770) in gross accrued interest receivable. At Year end, the Fund recognized an impairment loss and provision for non-collectable interest in the amounts of $342,650 and $29,791 (2017 - $150,000 and $62,708), respectively.

The Year end aging of accrued interest receivables within the portfolio are provided below:



The Fund generated net income and comprehensive income of $5,186,705 (2017 - $5,628,321) for the Year, representing basic and diluted earnings per share of $0.69 (2017 – $0.77). Consistent with the mandate to satisfy the requirements of a mortgage investment corporation, the Fund also declared distributions of $5,175,057 (2017 - $5,619,579) or $0.69 (2017 - $0.77) per share for the year ended February 28, 2018. The retained earnings relates to a difference in treatment between tax and IFRS for share issue costs. The retained earnings amount will increase by approximately $8,000 each year for the next three years until the share issue costs are amortized for tax purposes. The Fund either pays declared distributions in cash to preferred shareholders, or automatically reinvests these amounts into additional preferred shares of the same Class, as directed by each shareholder under the dividend reinvestment program. Per share redemption price after distributions of both Class A and Class B preferred shares at February 28, 2018 was $10.00 (2017 - $10.00).

Total revenue earned by the Fund for Fiscal 2018 increased to $8,006,935 from $7,375,406 from the year ended February 28, 2017. The 8.56% year over year increase in revenue was primarily due to the Fund increasing its portfolio of mortgage investments by $5,230,056 during the year, or 6.83%, from February 28, 2017 commensurate with the increase to the Fund’s bank indebtedness and capital pool during the Year.

Total expenses for the Year increased to $2,820,230 from $1,747,085 for the fiscal year ended February 28, 2017. The year over year increase is primarily due to increases in the interest on loan payable and bank indebtedness of $501,453 (2017 - $110,869), and the Fund’s management fee of $1,079,023 (2017 - $392,245).

RECENT DEVELOPMENTS AND OUTLOOK

The mortgage portfolio has provided capital preservation and consistent income to holders of preferred shares during the Year as intended. The Fund’s ongoing focus to closely monitor all mortgage investments, maintain short terms to maturity and invest in mortgages with meaningful equity buffers has strongly positioned it at February 28, 2018 despite the continued persistence of economic uncertainty within Alberta. As highlighted by the results achieved during Fiscal 2018, the Fund’s business model is able to operate successfully across real estate cycles because it is premised on activity occurring within the real estate market, and not rising real estate prices. As of the date of this MRFP, the Manager has continued to originate deal flow that is consistent with the Fund’s mandate and sufficient to sustain high utilization of the Fund’s capital. Once again, managing risk will remain the top priority for the Fund in the coming 12 months.

The increased alignment has created a healthier incentive for capital preservation during challenging economic cycles but also allows the Fund the opportunity to maximize risk adjusted returns available in the market as interest rates rise.


RECENT DEVELOPMENTS AND OUTLOOK (CONTINUED):

The Manager does not expect to vary its approach or the Fund’s asset allocation model over the course of fiscal 2019. Building on the sentiment of Fiscal 2018, the Manager and Fund expect to continue benefitting from the reduction in available capital in Alberta and demand of sophisticated borrowers that value the quality, local expertise, high service level, demonstrated ability to fund and permanency within the market as they look to build confidence into their transactions. The Fund and Manager remain well regarded in the mortgage market and the Manager expects to remain in active pursuit of mortgage lending opportunities that have become available from borrowers who previously accessed lower cost financing over the next 12 months.

On November 15, 2018, the Fund successfully increased its existing $5 million line of credit from a chartered Canadian bank to $10 million (the “Bank Facility”). The additional funds available under the Bank Facility were used to pay down in full a credit facility that was provided by a private arm’s length party (the “Second Credit Facility”). The Second Credit Facility was fully paid out as at February 28, 2018, but remains available to be drawn upon by the Fund. The primary purpose of both the Bank Facility and Second Facility is to bridge the timing difference between the Fund’s cash flows in the interest of maintaining efficient capital deployment through new capital raises, borrower repayments, redemptions and new mortgage investments as applicable. The Bank Facility is a testament to the quality of the Fund’s portfolio as the amount of credit available (which is capped at $10 million presently) is based on margined amounts from the underlying investments in the Fund’s portfolio.

Over the course of fiscal 2019 the Fund, via the Manager, expects to continue providing returns to investors in excess of its target return (average Government of Canada 2 year benchmark bond yield (series V122538) plus 450 basis points, building flexibility into the portfolio and participating in real estate secured lending transactions that provide meaningful capital protection characteristics and consistent income.

INDEPENDENT BOARD OF DIRECTORS AND INDEPENDENT LENDING REVIEW COMMITTEE

There were no changes to the board of directors and lending review committee during the Year. Subsequent to the Year, Mr. Don Paulencu joined the board of directors on March 1, 2018 while Mr. Ralph Young completed his term on the board of directors and has stepped down effective March 20, 2018. The Fund continues to utilize the extensive real estate experience the independent members have gained as prominent members of the Alberta business community across multiple economic cycles to meet the Fund’s mandates of preserving capital and generating income.


INDEPENDENT BOARD OF DIRECTORS AND INDEPENDENT LENDING REVIEW COMMITTEE (CONTINUED):

Future Accounting Changes IFRS 9 Financial Instruments

In July 2014, the International Accounting Standards Board (“IASB”) issued IFRS 9 Financial Instruments to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on classification and measurement of financial instruments. In addition, IFRS 9 includes a single expected-loss impairment model and a reformed approach to hedge accounting. This standard is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Fund intends to adopt IFRS 9 in its financial statement for the annual period beginning March 1, 2018. The extent of the impact of adoption of the standard has not yet been determined.

RELATED PARTY TRANSACTIONS

Fund’s Manager

The Manager is related to the Fund because Aleem Virani and Shafin Kanji are officers and the beneficial owners of voting shares of both KV Capital Inc. and the Fund. In addition, Aleem Virani, Shafin Kanji and Curtis Power (an officer of the Fund) are each a director of KV Capital Inc. (effective April 2, 2018 in the case of Curtis Power), while Aleem Virani and Shafin Kanji are also directors of the Fund. In addition, Mr. Nicholas Jeanes is an officer of the Fund and KV Capital Inc.

The Manager is responsible for the day-to-day operations, including administration of the Fund’s mortgage loan investments. In respect of these services, the Fund pays to the Manager a management fee (see discussion in “Management and Service fees” for a summary of the services provided by the Manager). For the year ended February 28, 2018, the Fund incurred management fees of $1,079,023 (2017 - $392,245), of which $463,142 (2017 - $140,832) remains payable at year end. In fiscal 2017 the management fee was calculated as 7.50% of the Fund’s monthly revenue and paid quarterly. The Manager’s eligibility to receive the management fee for any month during fiscal 2017 was subject to the Fund providing distributions sufficient for a minimum 8.00% annualized return on the opening monthly capital of the Fund during that month. This fee structure was revised for Fiscal 2018 based on the outcome of the completed 2017 internal review jointly undertaken by the Independent Board of Directors and management which sought to implement a fee structure which better aligned the incentives between the Fund and the Manager. During the Year, the management fee was calculated as the sum of (i) 1.00% of the Fund’s weighted average assets per year (calculated and paid monthly), plus (ii) 20% of the portion of monthly distributions that exceed the Fund’s Target Return (annualized calculation subject to a cumulative annual adjustment on the Fund’s fiscal year end). The Fund’s Target Return is established as the 2 year Government of Canada Benchmark Bond Yield (series V122538) plus 4.5%. The Manager is required to reimburse the Fund for any unrecoverable principal on an investment, up to 2 times the lender fee that the Manager received from the borrower in arranging the Fund’s investment in the mortgage. During the Year the Manager was not required to reimburse the Fund for any unrecoverable principal.

In respect of capital raised, the Fund incurred $526,615 (2017 - $498,060) in service fees to the Manager during the Year, of which $134,785 (2017 - $126,481) remains payable at year end.


Other Related Party Transactions

As at February 28, 2018, the Fund was co-invested as a syndicate with one (2017 – two) related party in one (2017 – four) separate mortgage loan investments secured by real estate that was owned by third parties and serviced by KV Capital Inc. on behalf of all members of the syndicate. The Fund’s share in the mortgage investments was $2,198,153 (2017 - $7,078,884).

In respect of the services provided by the Fund’s independent directors during the Year, the Fund incurred $24,094 (2017 - $22,901) in remuneration expenses.

In respect of the services provided by the Fund’s members of the independent lending review committee (LRC) during the Year, the Fund incurred $21,521 (2017 - $25,991) in remuneration expenses.

As at year end, related parties hold preferred shares of the Fund as follows:


Class A preferred shares

Other key management and related corporations $357,079 $964,977

Independent directors and LRC members 426,751 571,913

Class B preferred shares

Other key management and related corporations 33,155 21,088

Non-independent directors 50,293 50,343

Total shares held by related parties $867,278 $1,608,321

The above related party transactions are completed in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.


MANAGEMENT AND SERVICE FEES


The Manager is responsible for the Fund’s day-to-day operations, including administration of the Fund’s mortgage loan investments. The Manager monitors and evaluates the Fund’s performance, pays for the investment advice provided by the Fund’s portfolio manager and provides certain administrative services required by the Fund including record keeping and reporting. In respect of these services, the Fund pays to the Manager a management fee calculated as: (i) On a monthly basis, 0.083% of the total assets of the Fund; and (ii) On an annual basis, 20% of any portion of the Fund’s net income that exceeds the level of net income required to provide the Fund with an Internal Rate of Return (“IRR”) equal to the average of the 2 year Government of Canada benchmark bond yield (series V122538), plus 450 basis points (the “Performance Fee”).

Further, in the event all of the real estate security of an investment has been monetized and the nominal aggregate cash flows of such investment to the Fund are negative, the Fund Manager will pay to the Fund a reimbursement (the “Reimbursement”) that is calculated as the lesser of: i) the amount required to bring the Funds’ nominal aggregate cash flows of such investment to zero; and ii) two times that portion of the associated fees paid to the Fund Manager by the applicable borrower in respect of such investment by the Fund. Any amounts recovered from an investment on which the Fund has received payment of a Reimbursement will first be paid to the Fund until such time as its nominal aggregate cash flows, calculated inclusive of the Reimbursement, are zero, then paid to the Fund Manager in an amount equal to the Reimbursement, with any residual amounts paid to the Fund.

Class A preferred shares pay each registered dealer that introduced the Fund to purchasers of these securities a fee equal to 1.00% per annum of the subscription proceeds received by the Fund that are attributable to the efforts of these distributors (the “Class A Service Fees”). The Class A Service Fees are calculated and paid at the end of each fiscal quarter.

Class B preferred shares pay the Manager a service fee equal to 1.00% per annum of the subscription proceeds received by the Fund from all outstanding Class B preferred shares (the “Class B Service Fees”). The Class B Service Fees are calculated and paid at the end of each fiscal quarter. The Manager pays commissions and fees equal to 5.00% of the subscription proceeds to registered dealers for Class B preferred share sales that are attributable to their efforts. After 5 years from the date of such Class B preferred share sales, the Manager will also pay a 1.00% annual trailing fee, calculated and paid at the end of each fiscal quarter, to registered dealers that are attributable to the efforts of these distributors.

In addition to the management fees disclosed above, the Fund is responsible to pay for all expenses incurred by it in connection with the operation and management of its business.

For the Year, total expenses of the Fund were $2,820,230 (2017 – $1,747,085) resulting in a management expense ratio inclusive of the effects of amortizing share issue costs (“MER ratio”) of 3.73% (2017 – 2.41%). The total expenses of the Fund include management Fees of $1,079,023 (2017 - $392,245).


FINANCIAL HIGHLIGHTS

Class A preferred share 2018 2017 2016 2015 2014

Per share equity, beginning of period $10.00 $10.00 $10.00 $10.00 $10.00

Increase (decrease) from operations:

Total income 1.06 1.01 1.00 1.05 1.07

Total expenses (0.37) (0.24) (0.21) (0.21) (0.22)

Basic and diluted profit per share: 0.69 0.77 0.79 0.84 0.85

Total Distributions for the period (0.68) (0.77) (0.79) (0.84) (0.85)

Recovery of previously paid share issue costs - - - - -

Per share equity, end of period $10.00 $10.00 $10.00 $10.00 $10.00

Ratios and supplemental data: 2018 2017 2016 2015 2014

Total share equity(1) $54,193,806 $50,156,020 $47,240,436 $40,111,495 $25,363,855

Number of shares outstanding(1) 5,419,381 5,015,602 4,724,044 4,011,150 2,536,385

Management expense ratio(2) 3.73% 2.41% 2.09% 2.10% 2.21%

Portfolio turnover rate(3) 0.71 0.93 0.91 0.80 0.61

Payout ratio (4) 99.80% 99.84% 100.00% 100.00% 100.00%

Redemption price $10.00 $10.00 $10.00 $10.00 $10.00

The following tables show selected key financial information about the Fund and are intended to help you understand the Fund’s financial performance for the past five fiscal years, as applicable. This information is derived from the Fund’s audited annual financial statements.

For the fiscal year ended the last day of February


Class B preferred share 2018 2017 2016 2015 2014

Per share equity, beginning of period $10.00 $10.00 $10.00 $10.00 $10.00

Increase (decrease) from operations:

Total income 1.06 1.01 1.00 1.05 1.07

Total expenses(0.37) (0.24) (0.21) (0.21) (0.22)

Basic and diluted profit per share: 0.69 0.77 0.79 0.84 0.85

Distributions from Income (0.68) (0.77) (0.79) (0.84) (0.85)

Per share equity, end of period $10.00 $10.00 $10.00 $10.00 $10.00

Ratios and supplemental data: 2018 2017 2016 2015 2014

Total share equity(1) $23,902,567 $23,229,743 $25,020,722 $20,098,298 $12,847,921

Number of shares outstanding(1) 2,390,257 2,322,974 2,502,072 2,009,830 1,284,792

Management expense ratio(2) 3.73% 2.41% 2.09% 2.10% 2.21%

Portfolio turnover rate(3) 0.71 0.93 0.91 0.80 0.61

Payout ratio (4) 99.80% 99.84% 100.00% 100.00% 100.00%

Redemption price $10.00 $10.00 $10.00 $10.00 $10.00

(1) This information is at the period end of the year shown.

(2) Management expense ratio is based on total expenses and amortized share issue costs attributable to the share class presented for the stated period and is expressed as an annualized percentage of the daily weighted average redemption value of the share class presented.

(3) The Fund’s portfolio turnover rate is calculated according to the following formula: [mortgage loan principal repayments received] / [daily weighted average size of the mortgage portfolio] The portfolio turnover rate indicates how quickly the portfolio’s mortgage principal is being repaid. A portfolio turnover rate of 1.00 is equivalent to the Fund receiving repayments of all mortgage investments once in the course of the year. There is not necessarily a relationship between a high turn over rate and the performance of the Fund.

(4) Payout ratio is calculated according to the following formula: [dividends declared to holders of all classes of preferred shares] / [net income and comprehensive income attributable to all classes of preferred shares].

For the fiscal year ended the last day of February


PAST PERFORMANCE

Fiscal 2014 Fiscal 2015 Fiscal 2016 Fiscal 2017 Fiscal 2018

10

15

20

40

35

30

25

60

55

50

75

70

65

45

$100.0

$80.0

$60.0

$40.0

$20.0

$-

Mill

ions

The performance information does not take into account early redemption fees on Class B preferred shares, expenses that you may be charged outside of the Fund by a trustee for investing through a registered account or the effect of any income tax you may have to pay as a result of your investment in the Fund. The performance information presented is net of all management fees, commissions and operating expenses of the Fund. Returns of the Fund are not guaranteed; how the Fund has performed in the past does not necessarily indicate how it will perform in the future.

OPERATIONAL SUMMARY

The following chart documents the key monthly activity in the Fund’s portfolio for the last five years with respect to principle cash flows of mortgage investments, size of mortgage, cash positions and the number of deals comprising the mortgage portfolio.

Mortgage Portfolio

Cash in portfolio

Fundings

Repayments

Deal Counts


YEAR-BY-YEAR RETURNS & TARGET YIELD

The following chart documents the Fund’s performance for the period shown as an IRR against the Fund’s target yield, and illustrates how the Fund’s performance changed from year to year.

In percentage terms, the total of each column shows how much an investment made on the first day of the financial period would have grown or decreased by the last day of the financial period assuming that all distributions made by the Fund in the period shown were reinvested in additional securities of the Fund. The chart further documents the composition of each period’s return between the target yield and the actual return.

Class A and Class B preferred shares participate equally in the earnings and distributions of the Fund.

The Fund’s target yield is a proxy that was established at the Fund’s outset for the expected market rate of return on an investment with a similar risk profile to that of the Fund. From inception until the period ending February 28, 2017 (“Fiscal 2017”), the target yield was calculated by adding the average Government of Canada 2 year benchmark bond yield (series VI22538) and a premium of 550 basis points. Subsequent to Fiscal 2017 the target yield was adjusted and is now calculated by adding the average Government of Canada 2 year benchmark bond yield (series VI22538) and premium of 450 basis points.

Fiscal

2018

Fiscal

2017

Fiscal

2016

Fiscal

2015

Fiscal

2014

Since In

ceptio

n

1.47%1.87% 2.22% 2.27% 2.29%

1.57%7.06%8.01% 8.25%

8.73% 8.88% 8.13%

5.59% 6.14% 6.03% 6.49% 6.59% 6.56%

12%

10%

8%

6%

4%

2%

0%

IRR

Target YieldPerformance over Target


Description of project (1) Project Phase (2) Status (3) Zoning (1)

Commercial Construction (office/retail) Completed Foreclosure Commercial

Industrial Purchase/Refinance Completed Current Industrial

Duplex/Townhouse Construction Construction Current Residential

Commercial Construction (office/retail) Completed Current Commercial

Land Purchase Land Current Residential

Single Family Construction Construction Current Residential

Commercial Construction (office/retail) Completed Current Mixed Use


Duplex/Townhouse Construction Servicing Current Residential



Land Purchase Land Foreclosure Residential



Land Development Servicing Current Residential


Land Development Servicing Current Residential



Commercial Purchase/Refinance (office/retail) Construction Current Commercial

Commercial Purchase/Refinance (office/retail) Completed Current Commercial


Land Purchase Land Current Commercial




Industrial Purchase/Refinance Completed Current Commercial





Industrial Construction Land Current Industrial

SUMMARY OF INVESTMENT PORTFOLIO


Region (4)Invested

principal (5)Loan-to-Value (6) Term (7) % Rate

Mortgage Position

% of NetAssets

Calgary $9,264,808.32 92% Matured 9.50% 1st 11.14%

Greater Edmonton $7,637,299.43 65% 2 8.50% 1st 9.19%

Edmonton $5,124,946.99 60% 5 8.50% 1st 6.16%

Edmonton $4,920,000.00 46% 2 8.00% 1st (8) 5.92%

British Columbia $4,351,222.83 24% 5 10.50% 1st 5.23%

Edmonton $4,235,638.80 68% 9 9.50% 1st 5.09%

Edmonton $3,747,717.00 71% 5 10.50% 1st 4.51%

Edmonton $3,024,519.37 60% 6 9.50% 1st 3.64%

Edmonton $2,400,000.00 57% Matured 9.50% 1st 2.89%

Calgary $2,332,400.55 42% 7 9.75% 1st 2.81%

Edmonton $2,331,084.50 69% 13 9.50% 1st 2.80%

Calgary $2,276,161.66 50% 1 9.50% 1st(8) 2.74%

Saskatchewan $2,000,000.00 49% 3 9.50% 1st 2.41%

Greater Calgary $1,968,078.00 61% 3 9.50% 1st 2.37%

Edmonton $1,804,589.00 64% 6 10.00% 1st 2.17%


Greater Edmonton $1,384,676.83 43% 7 11.00% 1st 1.67%

Edmonton $1,328,086.01 68% 4 9.75% 1st 1.60%

Edmonton $1,272,850.18 59% Matured 9.50% 1st 1.53%

Edmonton $1,200,000.00 51% 10 9.95% 1st 1.44%

Calgary $1,125,000.00 66% 3 8.75% 1st 1.35%


Calgary $860,000.00 32% 3 11.00% 1st 1.03%

Calgary $830,000.00 43% 7 9.50% 1st 1.00%

Greater Edmonton $802,550.26 41% 5 10.75% 1st 0.97%

Saskatchewan $789,930.00 53% 12 9.75% 1st 0.95%

Edmonton $750,000.00 48% 2 9.50% 1st 0.90%

Calgary $708,750.00 68% 7 9.50% 1st 0.85%

Edmonton $707,504.59 60% 9 9.95% 1st 0.85%

Edmonton $690,000.00 57% 8 9.75% 2nd (10) 0.83%

Edmonton $666,563.00 31% 8 9.75% 1st 0.80%


As at February 28, 2018 Net assets % of Net assets

Mortgage loan investments $81,855,237 98.50%

Cash 138,996 0.17%

Other net assets 1,106,930 1.33%

Net assets $83,101,163 100.00%


FINANCIAL Description of project Project Phase Status Zoning


Multi-Family Construction (apartment) Land Current Commercial




Residential Refinance Completed Current Residential











Single Family Construction Land Current Residential



Land Purchase Completed Current Residential



Duplex/Townhouse Construction Land Current Residential



(1) Excludes collateral real-estate security.

(2) Current project phase of the primary real estate security as at February 28, 2018.

(3) Mortgages are classified as “current” at February 28, 2018 when interest are not more than 1 calendar month overdue as at February 28, 2018. Mortgages are classified in “arrears” when interest payments are more than 1 calendar month overdue as at February 28, 2018 Mortgages are classified as “foreclosure” at February 28, 2018 when a demand for repayment is outstanding as at February 28, 2018.

(4) “Greater” denotes a location within 50km of the center of the referenced municipality.

(5) Invested principal represents the amount invested by the Fund in a mortgage. If syndicated, the actual amounts advanced under the mortgage may exceed the Fund’s investment.

(6) Loan to value is calculated according to the following formula: [total mortgage principal outstanding including the principal of a first mortgage if applicable] / [value of land determined by a third party + value of completed improvements (A)]*

(A) value of completed improvements is accreted for purposes of calculating loan-to-value as follows: - Servicing without a third party determined “as serviced” value: $1.00 of value for each $1.00 of verifiable cost incurred.

TotalsLess: impairment loss on mortgage loan investmentsNet value of portfolioWeighted Averages


Region Invested principal Loan-to-Value Term % RateMortgage

Position% of Net

Assets

Edmonton $581,000.00 57% 2 17.33% 2nd (9) 0.70%

Calgary $575,000.00 48% 13 9.75% 1st 0.69%

Edmonton $538,554.00 59% 2 9.50% 1st 0.65%

Edmonton $512,631.22 60% 7 10.00% 1st 0.62%

Edmonton $512,080.00 59% 3 8.75% 1st 0.62%

Other Alberta $450,000.00 40% 5 10.25% 1st 0.54%

Other Alberta $450,000.00 31% 6 10.50% 1st 0.54%

Edmonton $428,465.35 64% 10 9.85% 1st 0.52%

Other Alberta $375,000.00 63% 5 9.75% 1st 0.45%

Edmonton $372,057.00 61% 2 10.00% 1st 0.45%

Edmonton $355,852.44 48% 5 9.75% 1st 0.43%

Edmonton $351,500.00 47% 10 9.75% 1st 0.42%

Edmonton $335,000.00 73% 7 9.75% 1st 0.40%


Other Alberta $300,000.00 96% 2 0.00% 1st 0.36%

Other Alberta $275,000.00 54% 12 10.00% 1st 0.33%

Edmonton $271,250.00 70% 5 9.75% 1st 0.33%

Edmonton $248,500.00 70% 6 9.00% 1st 0.30%

Edmonton $212,500.00 57% 9 9.50% 1st 0.26%

Edmonton $191,750.00 65% 6 9.75% 1st 0.23%

Edmonton $169,000.00 65% 8 10.00% 1st 0.20%

Edmonton $150,000.00 48% 7 11.00% 1st 0.18%

Other Alberta $150,000.00 28% 9 10.00% 1st 0.18%

Edmonton $145,454.20 25% 7 9.75% 1st 0.17%

Edmonton $139,285.72 43% 5 10.00% 1st 0.17%

- Servicing when a third party determined “as serviced” value is available: The difference between the third party determination of “land only” and “as serviced” values using the percentage of completion method**

- Construction: The difference between a third party determination of “land only” and “as complete” values using the percentage of completion method***

* Inclusive of cross collateralized real estate security with an equal position charge on title to the primary security.

** Quantity surveyor reports to determine the percent of the project that is complete may be performed on or before February 28, 2018.

*** Site inspections to determine the percent of the project that is complete may be performed by third parties, or staff of the Fund Manager on or before February 28, 2018.

(7) Number of months remaining at February 28, 2018 until the contractual maturity date of the mortgage.

(8) The Fund also holds an interest in a second mortgage that is secured on this property.

(9) The Fund also holds an interest in a first mortgage that is secured on this property.

(10) A third party that is not related to the Fund holds an interest in a first mortgage that is secured on this property.

$82,197,887 98.91%

$342,650 0.41%

$81,855,237 98.50%

60% 4.53 9.42%


ASSET ALLOCATIONS


MORTGAGE POSITION

First mortgage 97.33%

Second mortgages, behind KV 0.70%

Second mortgages, behind Non-KV 0.83%

Cash 0.17%

Other Net Assets 0.97%

100.00%

INTEREST RATE

8.99% or Less 23.60%

9.00% to 9.99% 54.66%

10.00% to 10.99% 17.02%

11.00% or greater 3.58%

Cash 0.17%


100.00%

MATURITY

Matured 15.56%

Within 3 months 29.07%

Between 4 and 6 months 27.98%

Between 7 and 9 months 17.86%

10 months and beyond 8.40%

Cash 0.17%


100.00%


REGION

Edmonton 47.76%

Greater Edmonton 12.93%

Calgary 21.62%

Greater Calgary 5.55%

Other Alberta 2.41%

British Columbia 5.23%

Saskatchewan 3.36%

Cash 0.17%


100.00%

ZONING

Mixed Use 4.51%

Residential 57.13%

Commercial 27.31%

Industrial 9.91%

Cash 0.17%


100.00%

PROJECT PHASE

Land 16.10%

Construction 38.02%

Completed 38.02%

Servicing 6.72%

Cash 0.17%


100.00%


STATUS

Current 84.98%

Arrears 0.00%

Enforcement 13.88%

Cash 0.17%


100.00%

LOAN-TO-VALUE

less than 40% 8.51%

40% - 49% 17.55%

50% - 59% 24.30%

60% - 69% 29.52%

70% - 79% 7.48%

greater than 80% 11.50%

Cash 0.17%


100.00%


FINANCIALS


MANAGEMENT’S RESPONSIBILITYThe accompanying financial statements for KV Mortgage Fund Inc. (the “Fund”) are the responsibility of management and have been approved by the Board of Directors. In management’s opinion, these financial statements have been prepared within reasonable limits of materiality in accordance with International Financial Reporting Standards.

Management is responsible for ensuring that these financial statements, which include amounts based on estimates and judgments, are complete and reliable in all material respects. These financial statements reflect all information available to May 1, 2018.

In addition, management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. The integrity and reliability of the Fund’s reporting systems are achieved through the use of policies and procedures, and the appropriate delegation of authority and division of responsibilities. Management maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that reliable financial records are maintained.

The independent auditors, KPMG LLP, whose report on their examination follows, have audited the financial statements in accordance with Canadian generally accepted auditing standards. The auditors’ report outlines the nature of their examination, and their opinion on the Fund’s financial statements.

The directors of the Fund are responsible for review and final approval of the financial statements, and for ensuring that management fulfills its responsibilities for financial reporting and internal controls.

Aleem Virani, CA, CBV, ICD.D President

Curtis Power, CA, CIM Chief Financial Officer

May 1, 2018


INDEPENDENT AUDITORS’ REPORTTO THE SHAREHOLDERS OF KV MORTGAGE FUND INC. We have audited the accompanying financial statements of KV Mortgage Fund Inc., which comprise the statements of financial position as at February 28, 2018 and February 28, 2017, the statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information

MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

AUDITORS’ RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

OPINION In our opinion, the financial statements present fairly, in all material respects, the financial position of KV Mortgage Fund Inc. as at February 28, 2018 and February 28, 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Chartered Professional Accountants May 1, 2018 Edmonton, Canada

KPMG LLP 2200, 10175 - 101 Street edMonton aB t5J 0H3 Canada teLePHone (780) 429-7300 Fax (780) 429-7379 KPMG LLP iS a Canadian LiMited LiaBiLity PartnerSHiP and a MeMBer FirM oF tHe KPMG networK oF indePendent MeMBer FirMS aFFiLiated witH KPMG internationaL CooPerative (“KPMG internationaL”), a SwiSS entity. KPMG Canada ProvideS ServiCeS to KPMG LLP.


As at February 28, 2018 February 28, 2017

ASSETSCash and cash equivalents $138,996 $119,587

Accrued interest receivable Note 4 1,051,581 793,803

Mortgage loan investments Note 4 81,855,237 76,625,181

Prepaid expenses 55,349 29,025

Total assets $83,101,163 $77,567,596

LIABILITIES AND EQUITYBank indebtedness Note 6 $3,972,959 $3,492,848

Due to Fund Manager Note 9 653,736 268,728

Accounts payable and accrued expenses 65,525 89,744

Dividends payable Note 7 291,180 320,771

Total liabilities $4,983,400 $4,172,091

SHAREHOLDERS’ EQUITYClass A preferred shares Note 7 $54,193,806 $50,156,020

Class B preferred shares Note 7 23,902,567 23,229,743

Common shares Note 7 1,000 1,000

Retained earnings 20,390 8,742

Total Shareholders' equity 78,117,763 73,395,505

Total liabilities and Shareholders’ equity $83,101,163 $77,567,596

STATEMENTS OF FINANCIAL POSITION

See accompanying notes to financial statements.

Approved by the board of directors:

Paul Allard, Director Aleem Virani, Director

KV MORTGAGE FUND INC.


Years ended February 28, 2018 February 28, 2017

Income:

Interest $8,006,935 $7,375,406

Expenses:

Management fees Note 9 1,079,023 392,245

Service fees Note 9 758,800 736,826

Interest expense Notes 5, 6 501,453 110,869

Impairment loss on mortgage loan investments Note 4 248,843 108,324

Insurance expense 59,012 71,043

Provision for non-collectible interest Note 4 48,443 192,734

Other operating 42,649 23,548

Audit fees 31,262 27,455

Lending review committee fees Note 9 21,521 25,991

Director fees Note 9 24,094 22,901

Legal fees 5,130 35,149

$2,820,230 $1,747,085

Net income and comprehensive income $5,186,705 $5,628,321

Earnings per share - basic and diluted

Class A and Class B preferred shares Note 8 $0.69 $0.77


STATEMENTS OF COMPREHENSIVE INCOME



STATEMENTS OF CHANGES IN EQUITY


February 28, 2018

Class A preferred

shares

Class B preferred

shares

Class A common

sharesRetainedearnings Total

Shareholders’ equity, beginning of year

$50,156,020 $23,229,743 $1,000 $8,742 $73,395,505

Net income and comprehensive income for the year

- - - 5,186,705 5,186,705

Dividends to shareholders - - - (5,175,057) (5,175,057)

Net proceeds from issuance of shares

5,745,311 1,492,948 - - 7,238,259

Issued under share based compensation plan

21,948 - - - 21,948

Issuance of shares from dividend reinvestment plan

1,152,208 738,298 - - 1,890,506

Share issuance costs (9,799) (4,535) - - (14,334)

Redemption of shares (2,871,882) (1,553,887) - - (4,425,769)

Shareholders’ equity, end of year $54,193,806 $23,902,567 $1,000 $20,390 $78,117,763

February 28, 2017

Class A preferred

shares

Class B preferred

shares

Class A common

sharesRetainedearnings Total

Shareholders’ equity, beginning of year

$47,240,436 $25,020,722 $1,000 $ - $72,262,158

Net income and comprehensive income for the year

- - - 5,628,321 5,628,321

Dividends to shareholders - - - (5,619,579) (5,619,579)

Net proceeds from issuance of shares

4,404,328 1,076,400 - - 5,480,728

Issued under share based compensation plan

29,642 - - - 29,642

Issuance of shares from dividend reinvestment plan

1,127,107 804,698 - - 1,931,805

Share issuance costs (29,851) (13,856) - - (43,707)

Redemption of shares (2,615,642) (3,658,221) - - (6,273,863)

Shareholders’ equity, end of year

$50,156,020 $23,229,743 $1,000 $8,742 $73,395,505



Years ended February 28, 2018 February 28, 2017Cash provided by (used in):Operating activities:

Net income and comprehensive income $5,186,705 $5,628,321

Change in non-cash operating items:

Accrued interest receivable (257,778) 21,338

Prepaid expenses (26,324) 538

Due to Fund Manager 385,008 76,385

Accounts payable and accrued expenses (24,219) 25,229

Share based compensation 21,948 29,642

Impairment loss on mortgage loan investments, net 192,650 108,324

Funding of mortgage loan investments (69,402,326) (72,127,943)

Discharge of mortgage loan investments 63,979,620 66,840,815

55,284 602,649

Financing activities:

Proceeds from issuance of Class A preferred shares 5,745,311 4,404,328

Proceeds from issuance of Class B preferred shares 1,492,948 1,076,400

Share issuance costs paid on Class A preferred shares (9,799) (29,851)

Share issuance costs paid on Class B preferred shares (4,535) (13,856)

Redemption of Class A preferred shares (2,871,882) (2,615,642)

Redemption of Class B preferred shares (1,553,887) (3,658,221)

Proceeds from loan payable 10,000,000 8,000,000

Repayment of loan payable (10,000,000) (8,000,000)

Net proceeds from bank indebtedness 480,111 3,492,848

Cash dividends paid (3,314,142) (3,633,581)

(35,875) (977,575)

Increase (Decrease) in cash and cash equivalents 19,409 (374,926)

Cash and cash equivalents, beginning of year 119,587 494,513

Cash and cash equivalents, end of year $138,996 $119,587

Supplemental cash flow information on non-cash financing activities:

Class A preferred shares issued under dividend reinvestment plan Note 7 $1,152,208 $1,127,107

Class B preferred shares issued under dividend reinvestment plan Note 7 $738,298 $804,698

Cash flows from operating activities:

Interest received $7,749,157 $7,396,755

Interest paid $486,337 $110,869

STATEMENTS OF CASH FLOWS




NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2018 AND FEBRUARY 28, 2017


1. Nature of operations:

KV Mortgage Fund Inc. (the “Fund”) was incorporated under the laws of the Province of Alberta by articles of incorporation on January 8, 2009.

The investment objective of the Fund is to provide its preferred shareholders with income generated from a diversified portfolio of mortgage loan investments (also referred to as “mortgages”), while preserving the Fund’s capital. KV Capital Inc., as manager of the Fund (the “Fund Manager”), is responsible for the day-to-day operations and providing all general management and administrative services of the Fund’s mortgage loan portfolio. The Fund Manager is related to the Fund because of the management arrangement, certain common directors and officers, and certain directors and officers of the Fund and the Fund Manager whom also control voting shares in both entities.

The Fund and Fund Manager are domiciled in Canada, with head offices at #108, 2627 Ellwood Drive SW, Edmonton, Alberta.

2. Basis of presentation:

(a) Statement of compliance:

The financial statements of the Fund have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The financial statements are presented in Canadian dollars, which is the Fund’s functional currency.

These financial statements were approved by the Board of Directors on May 1, 2018.

(b) Use of estimates and judgments:

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. The Fund used estimates in its preparation of these financial statements that include valuation of the mortgage loan investments and accrued interest receivable.

These assumptions are limited by the availability of reliable comparable data, economic uncertainty, and the uncertainty of predictions concerning future events. Accordingly, by their nature, estimates are subjective and do not necessarily result in precise determinations. Should the underlying assumptions change, the estimated value could vary by a material amount.


3. Significant accounting policies:

(a) Cash and cash equivalents:

Cash and cash equivalents of the Fund comprise cash in hand, deposits held in banks, and highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(b) Mortgage loan investments:

Mortgage loan investments, classified as loans and receivable investments, are recognized initially at fair value. Subsequent to initial recognition, the mortgage loan investments are measured at amortized cost using the effective interest method, less impairment losses, if any.

The mortgage loan investments are assessed at each reporting date to determine whether there is objective evidence of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of an asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

An impairment loss in respect of a mortgage loan investment measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the mortgage’s original effective interest rate. Losses are recognized in the statements of comprehensive income and reflected in an allowance account against the investments. Interest on the impaired asset continues to be recognized through the unwinding of the discount if it is considered collectable. Impairment losses can be reversed provided there is an indication that previously recognized impairment losses no longer exist or have decreased.

(c) Revenue recognition:

Interest income earned on mortgage loan investments is accounted for using the effective interest method or on the accrual basis once receipt of such amounts by the Fund are certain.

(d) Income taxes:

It is the intention of the Fund to qualify as a mortgage investment corporation (“MIC”) for Canadian income tax purposes. As such, the Fund is able to deduct, in computing its income for the taxation year, dividends paid to its shareholders during the year or within 90 days of the end of the year. The Fund intends to maintain its status as a MIC and pay dividends to its shareholders in the year and in future years to ensure that it will not be subject to income taxes. Accordingly, for financial statement reporting purposes, no provision for current or deferred income taxes has been recorded given the Fund has distributed all taxable income as dividends. As of February 28, 2018, and February 28, 2017, the Fund does not have any significant temporary differences between the tax and accounting bases of assets and liabilities.




3. Significant accounting policies (Continued):

(e) Preferred share compensation plan:

The Fund has an equity-settled preferred share compensation (the “PSC”) plan for independent directors and members of the independent lending review committee (“LRC”) in respect of their service to the Fund.

Under the terms of the plan, preferred shares were awarded as follows to each qualifying participant (awards are cumulative where an individual holds multiple positions):

Positions Held

Independent Chair Independent Director

Board of Directors 250 Class A preferred shares 500 Class A preferred shares

LRC 200 Class A preferred shares 100 Class A preferred shares

The fair value of the PSC plan is determined by the issue price at the grant date of $10 multiplied by the number of preferred shares issued. The expense is recognized into income over the same period that the preferred shares vest.

(f) Financial assets and liabilities:

Financial assets include the Fund’s cash and cash equivalents, accrued interest receivable, and mortgage loan investments. Financial liabilities include amounts due to Fund Manager, accounts payable and accrued expenses, dividends payable and bank indebtedness.

Recognition and measurement of financial instruments

The Fund determines the classification of its financial assets and liabilities at initial recognition. Financial instruments are recognized initially at fair value and in the case of financial assets and liabilities carried at amortized costs, adjusted for directly attributable transaction costs. The Fund has designated its accrued interest receivable and mortgage loan investments as loans and receivables, which are measured at amortized cost. Cash and cash equivalents are recorded at fair value.

Amounts due to Fund Manager, accounts payable and accrued expenses, dividends payable and bank indebtedness are classified as other financial liabilities, which are measured at amortized cost.

The Fund had neither available-for-sale, nor held-to-maturity instruments as at or during the years ended February 28, 2018 and February 28, 2017.

(g) Share capital:

Common shares and Class A and B preferred shares are classified as equity. Incremental costs directly attributable to the issue of common shares and Class A and B preferred shares are recognized as a deduction from equity.




3. Significant accounting policies (Continued):

(h) New standards and interpretations not yet adopted:

In July 2014, the International Accounting Standards Board (“IASB”) issued IFRS 9, Financial Instruments, to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on classification and measurement of financial instruments. In addition, IFRS 9 includes a single expected-loss impairment model and a reformed approach to hedge accounting. This standard is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. The Fund intends to adopt IFRS 9 in its financial statement for the annual period beginning March 1, 2018. IFRS 9 is required to be applied on a retrospective basis, with certain exceptions. The Fund does not plan to retrospectively re-state prior period comparative figures upon transition to IFRS 9. The Fund will recognize an adjustment to opening retained earnings to reflect the new requirements at the adoption date.

IFRS 9 introduces the expected credit loss model for calculating impairment on financial assets classified at amortized cost or fair value through profit or loss, which significantly impacts loans. IFRS 9 requires entities to recognize 12 month expected credit losses from the date a financial asset is first recognized and if there is a significant increase in credit risk since inception, to recognize expected credit loss over the lifetime of the expected credit loss. The extent of the impact of adoption of the standard has not yet been determined.

4. Mortgage loan investments:

The following is a breakdown of the mortgage loan investments held by the Fund as at February 28, 2018 and February 28, 2017 by mortgage position:

Interest in: February 28, 2018 February 28, 2017

First mortgages 97.5% $80,176,887 95.4% $73,205,004

KV second mortgages 1.6% 1,331,000 2.0% 1,570,177

Non-KV second mortgages 0.9% 690,000 2.6% 2,000,000

100.0% $82,197,887 100.0% $76,775,181

Impairment loss provision (342,650) (150,000)

$81,855,237 $76,625,181

Interest in KV second mortgages refers to the Fund’s interest in second mortgages behind first position mortgages that are originated and serviced by the Fund Manager. Interest in Non-KV second mortgages refers to the Fund’s interest in second mortgages behind first position mortgages that are not originated and serviced by the Fund Manager.




4. Mortgage loan investments (continued):

The following is a breakdown of the mortgage loan investments held by the Fund as at February 28, 2018 and February 28, 2017 by zoning of the mortgaged property:


Interest in mortgages secured against:

Residential zoned property 57.8% $47,502,876 55.7% $42,739,746

Commercial zoned property 27.6% 22,709,995 33.6% 25,800,526

Mixed use property 4.6% 3,747,717 9.9% 7,637,299

Industrial zoned property 10.0% 8,237,299 0.8% 597,610

100.0% 82,197,887 100.0% 76,775,181

Impairment loss provision (342,650) (150,000)

$81,855,237 $76,625,181

Mortgage loan investments are secured on the real property located within Canada to which they relate and bear interest at a weighted average interest rate of 9.42% (February 28, 2017 – 9.67%). As at February 28, 2018 and February 28, 2017, loan investments were secured by real property within the following provinces:


Alberta 90.8% 90.6%

British Columbia 5.3% 6.5%

Saskatchewan 3.9% 2.9%

100.0% 100.0%

The Fund has recognized an impairment loss provision in the amount of $342,650 (February 28, 2017 - $150,000) representing management’s estimated impairment on mortgage loan investments as at February 28, 2018. Changes in impairment loss provision on mortgage loan investments during the years ended February 28, 2018 and February 28, 2017 were as follows:


Balance, beginning of year $150,000 $150,000

Prior year provisions recognized in net income (150,000) (150,000)

Current year provision 342,650 150,000

Balance, end of year $342,650 $150,000





During the year ending February 28, 2018, net realized loss on mortgage loan investments was $56,193 (February 28, 2017 - $108,324). Changes in impairment loss on mortgage loan investments during the years ending February 28, 2018 and February 28, 2017 were as follows:


Current year provision $342,650 $150,000

Prior year provisions recognized in net income (150,000) (150,000)

Realized loss in the year 56,193 108,324

Impairment loss on mortgage loan investments $248,843 $108,324

Principal repayments based on contractual maturity dates were as follows:


Matured and/or under enforcement $11,869,808 $2,346,437

Within one year 65,327,772 69,002,863

After one year but less than two years 5,000,307 5,425,881

$82,197,887 $76,775,181

All of the un-matured mortgage loan investments contain a prepayment option, whereby the borrower may repay the principal at any time prior to maturity, subject to payment of an interest penalty that is specific to each mortgage.

As at February 28, 2018, the Fund had three (February 28, 2017 – three) mortgage loan investments outstanding with a contractual maturity date past due and/or under enforcement.

As at February 28, 2018, the Fund, through the Fund Manager, was engaged in enforcement remedies against three (February 27, 2017 – three) mortgage loan investments as described in Note 11.





The aging of accrued interest receivables was as follows:


Not past due $658,073 $593,490

Past due 0-30 days 178,803 104,316

Past due 31-90 days 228,098 36,068

Past due more than 90 days 16,398 122,637

1,081,372 856,511

Allowance for non-collectable interest (29,791) (62,708)

$1,051,581 $793,803

Changes in the allowance for non-collectable interest on mortgage loan investments during the years ended February 28, 2018 and February 28, 2017 were as follows:


Balance, beginning of year $62,708 $21,000

Prior year provisions recognized in net income - (21,000)

Realized loss during the year (81,362) (118,560)

Current year provision 48,445 181,268

Balance, end of year $29,791 $62,708

Changes in the provision for non-collectable interest on mortgage loan investments during the years ending February 28, 2018 and February 28, 2017 were as follows:


Current year provision $48,445 $181,268

Prior year provisions recognized in net income - (21,000)

Net unrealized loss in the year (81,364) (86,094)

Realized loss in the year 81,362 118,560

Provision for non-collectible interest $48,443 $192,734




5. Loan payable:

During the year ended February 28, 2017, the Fund secured a $5,000,000 revolving line of credit agreement with an arm’s length party which it used to manage cash flows from time to time. The line of credit required payments of interest only on any outstanding principal balance. The agreement allowed for principal repayments on the line of credit at any time without penalty and matures on June 30, 2018. The Fund made seven draws on the line of credit and the line of credit was repaid in full during the year ended February 28, 2018.

Interest on the line of credit varied with the prime interest rate of a Chartered Canadian Bank plus a fixed interest rate component of 5.50% per annum until November 30, 2017; effective December 1, 2017, the interest rate was calculated at a fixed 8% per annum.

6. Bank indebtedness:

On February 28, 2017, the Fund entered into a $5,000,000 revolving operating line of credit facility agreement with a Chartered Canadian Bank. On November 15, 2017, the Fund increased the operating line of credit to $10,000,000. Bank indebtedness is used to manage cash flows when timing differences arise between mortgage loan investment advances, borrower repayments, and issuance and redemption of preferred shares.

The credit agreement requires monthly payments of interest only and a minimum of at least 25% repayment on a quarterly basis of all funds either (i) outstanding at the beginning of a quarter, plus (ii) any funds drawn in the quarter. Amounts borrowed under the credit facility are due on demand and bear interest at a variable rate per annum of 1.50% above the bank’s prime interest rate. Bank indebtedness is secured by a general security agreement.




7. Shareholders’ equity:

The Fund is authorized to issue an unlimited number of Class A voting common shares, an unlimited number of Class B non-voting common shares, an unlimited number of Class A preferred shares and an unlimited number of Class B preferred shares.

All the classes of preferred shares and preferred shares within a class rank equally with respect to dividends, rank senior to the common shares of the Fund and are redeemable at the option of the Fund’s board of directors. Class A and Class B preferred shares are privately held and there is no market through which these shares may be sold. The Fund may issue Class A and Class B preferred shares in the future in accordance with securities legislation.

The Class A common shares have a nominal value and are owned by certain shareholders and officers of the Fund Manager. The number of preferred and common shares issued and outstanding changed as follows:

Year ended February 28, 2018 Class Apreferred shares

Class Bpreferred shares

Class Acommon shares

Shares outstanding, March 1, 2017 5,018,588 2,324,360 400

Issued for cash 574,531 149,295 -

Issued under share based compensation plan 2,195 - -

Redeemed (287,188) (155,389) -

Issued under dividend reinvestment plan 115,221 73,830 -

Shares outstanding, February 28, 2018 5,423,347 2,392,096 400

Year ended February 28, 2017 Class Apreferred shares

Class Bpreferred shares

Class Acommon shares

Shares outstanding, March 1, 2016 4,724,044 2,502,072 400

Issued for cash 440,433 107,640 -

Issued under share based compensation plan 2,964 - -

Redeemed (261,564) (365,822) -

Issued under dividend reinvestment plan 112,711 80,470 -

Shares outstanding, February 28, 2017 5,018,588 2,324,360 400




7. Shareholders’ equity (continued):

(a) Redemptions:

Preferred shareholders may on a monthly basis request redemption of any or all of their outstanding shares by providing 30 days advance notice to the Fund. Redemption of the Fund’s preferred shares is at the option of the Fund, in its absolute discretion. The board of directors of the Fund may elect, in their discretion, to redeem preferred shares from particular holders to the exclusion of other holders of preferred shares.

Redemptions of Class A preferred shares are completed without any fees. Class B preferred shares are subject to early redemption fees payable to the Fund Manager in the first five years from the date of subscription. Redemption of Class B preferred shares requested after five years from the date of subscription are completed without any early redemption fees.

The Fund shall not accept redemption requests for preferred shares in the same calendar month where they represent more than 5% of the total number of preferred shares outstanding on the redemption date. Should the amount of preferred shares tendered for redemption exceed the limit, the Fund may, at its discretion redeem all tendered preferred shares, redeem the preferred shares tendered on a pro rata basis, or suspend redemptions. Holders of the Fund’s preferred shares have no right to require the Fund to redeem their preferred shares. When preferred shares are redeemed at the option of the Fund, the redemption amount is equal to the net asset value of each particular preferred share plus any declared and unpaid dividends at the redemption date

(b) Dividends:

The Fund intends to pay dividends to shareholders on a monthly basis, on or about the 15th day following the end of each month.

For the year ended February 28, 2018, the Fund declared dividends on Class A preferred shares of $3,556,780 (February 28, 2017 - $3,727,996) on the issued and outstanding preferred shares. As at February 28, 2018, $215,480 (February 28, 2017 - $232,971) was payable to the Class A preferred shareholders.

For the year ended February 28, 2018, the Fund declared dividends on Class B preferred shares of $1,618,277 (February 28, 2017 - $1,891,583) on the issued and outstanding preferred shares. As at February 28, 2018, $75,700 (February 28, 2017 - $87,800) was payable to the Class B preferred shareholders.




7. Shareholders’ equity (continued):

(c) Dividend reinvestment plan:

The Fund has a dividend reinvestment plan (“DRIP”) available to Class A and Class B preferred shareholders. Under the DRIP, shareholders may enroll to have their dividends reinvested to purchase additional preferred shares of the same class. The preferred shares are issued from treasury at an amount of $10.00 per share. For the year ended February 28, 2018, 115,221 (February 28, 2017 – 112,711) Class A preferred shares were issued under the DRIP, resulting in reinvested dividends of $1,152,208 (February 28, 2017 - $1,127,107). For the year ended February 28, 2018, 73,830 (February 28, 2017 – 80,470) Class B preferred shares were issued under the DRIP, resulting in reinvested dividends of $738,298 (February 28, 2017 - $804,698). Dividend reinvestments are recorded on a monthly basis.

8. Earnings per share:

The following table reconciles the numerators and denominators of the basic and diluted earnings per share for the years ended February 28, 2018 and February 28, 2017.

February 28, 2018 Class Apreferred shares

Class Bpreferred shares Total

Net income and comprehensive income $3,566,688 $1,620,017 $5,186,705

Basic weighted average number of shares 5,202,870 2,363,183 7,566,053

Dilutive effect of potential shares - - -

Diluted weighted average number of shares 5,202,870 2,363,183 7,566,053

Earnings per share - basic and diluted $0.69 $0.69 $0.69

February 28, 2017 Class Apreferred shares

Class Bpreferred shares Total

Net income and comprehensive income $3,741,100 $1,887,221 $5,628,321

Basic weighted average number of shares 4,828,402 2,435,716 7,264,118

Dilutive effect of potential shares - - -

Diluted weighted average number of shares 4,828,402 2,435,716 7,264,118

Earnings per share - basic and diluted $0.77 $0.77 $0.77

For the years ended February 28, 2018 and February 28, 2017, the Fund had no outstanding convertible instruments that would trigger conversation of potential preferred shares to preferred shares.




9. Related party balances and transactions:

Transactions with related parties are in the normal course of business and are recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

(a) Syndicate mortgage loan investments:

As at February 28, 2018, the Fund was co-invested as a syndicate with one (February 28, 2017 – two) related party (the “Fund Manager”) in one (February 28, 2017– four) separate mortgage loan investment secured by real estate that was owned by a third party. As at February 28, 2018, the Fund’s share in the mortgage loan investments totaled $2,198,153 (February 28, 2017 - $7,078,884)

(b) Preferred shareholders:

The following is a breakdown of Class A and B preferred shares held by related parties as at February 28, 2018 and February 28, 2017:


Class A preferred shares

Other key management and related corporations $357,079 $964,977

Independent directors and LRC members 426,751 571,913

Class B preferred shares

Other key management and related corporations 33,155 21,088

Non-independent directors 50,293 50,343

Total shares held by related parties $867,278 $1,608,321

(c) Transactions during the period:

(i) Service fees:

Service fees equal to 1% per annum of the paid-up capital for outstanding preferred shares are paid by the Fund as compensation for capital raised. The Fund pays each registered dealer, including the Fund Manager, service fees in respect of outstanding Class A preferred shares that are held by clients of that registered dealer. In respect of outstanding Class B preferred shares, the Fund pays service fees to the Fund Manager. Service fees are calculated and paid at the end of each fiscal quarter. For the year ended February 28, 2018, the Fund incurred service fees to the Fund Manager of $526,615 (February 28, 2017– $498,060) with $134,785 (February 28, 2017 - $126,481) of this amount included in accounts payable at February 28, 2018.




9. Related party balances and transactions (continued):

(ii) Management fees paid to Fund Manager:

The Fund Manager is responsible for the day-to-day operations, including administration of the Fund’s mortgage loan investments. In respect of these services, the Fund pays to the Fund Manager a management fee. For the year ended February 28, 2018 the Fund incurred management fees of $1,079,023 (February 28, 2017 - $392,245) with $463,142 (February 28, 2017 - $140,832) of this amount included in accounts payable at February 28, 2018.

Under the terms of the Management Agreement between the Fund and the Fund Manager, for the year ended February 28, 2017, the management fee paid by the Fund is equal to 7.5% of the Fund’s revenue and is calculated monthly and paid quarterly. The Fund Manager’s eligibility to receive the management fee for any month is subject to the Fund generating an increase in net income and comprehensive income that is sufficient to provide a minimum 8% annualized return (the “Hurdle Rate”) on the opening monthly capital of the Fund.

Effective March 1, 2017 the Fund entered into a new Management Agreement with the Fund Manager. Under the new agreement, the Fund Manager will be paid as follows: (i) On a monthly basis, 0.083% of the total assets of the Fund (the “Base Fee”); and (ii) on an annual basis, 20% of any portion of the Fund’s net income that exceeds the level of net income required to provide the Fund with an internal rate of return (“IRR”) equal to the average of the 2 year Government of Canada benchmark bond yield (series V122538), plus 450 basis points (the “Performance Fee”).

For purposes of calculating the Base Fee, a simple average of the Fund’s opening and closing total assets is calculated using the un-audited monthly statements of financial position. Base Fees include applicable taxes and are disbursed to the Fund Manager on a monthly basis. The Performance Fee will be calculated using the Fund’s annual audited statement of comprehensive income, including the Base Fee as an expense in such calculation. Performance Fees include applicable taxes and will be disbursed to the Fund Manager on an annual basis.

Further, in the event all of the real estate security of a mortgage loan investment has been monetized and the nominal aggregate cash flows of such investment to the Fund are negative, the Fund Manager will pay to the Fund a reimbursement that is calculated as the lesser of: i) the amount required to bring the Fund’s nominal aggregate cash flows of such mortgage loan investment to zero; and ii) two times that portion of the associated fees paid to the Fund Manager by the applicable borrower in respect of such mortgage loan investment by the Fund. Any amounts recovered from a mortgage loan investment on which the Fund has received payment of a reimbursement will first be paid to the Fund until such time as its nominal aggregate cash flows, calculated inclusive of the reimbursement, are zero, then paid to the Fund Manager in an amount equal to the reimbursement, with any residual amounts paid to the Fund.





(iii) Compensation to directors:

As at February 28, 2018, the Fund has four directors that are independent of the Fund Manager on its board of directors. In respect of their services during the year, independent directors were provided compensation under the PSC plan as described in Note 3, or alternatively elected to receive annual cash compensation in the form of a $5,000 and $2,500 retainer for director and chair officers, respectively. For directors whose appointments were less than a full year, the cash retainer was prorated based on the number of months served.

The following is a breakdown of cash and share compensation paid to the Board of Directors for the years ending February 28, 2018 and February 28, 2017:

February 28, 2018 Cashcompensation

Sharecompensation Total

Chair remuneration $7,500 $ - $7,500

Independent director remuneration - 16,594 16,594

Remuneration paid to Board of Directors $7,500 $16,594 $24,094



Chair remuneration $7,500 $ - $7,500

Independent director remuneration - 15,401 15,401

Remuneration paid to Board of Directors $7,500 $15,401 $22,901

Directors that are not independent of the Fund Manager do not receive any cash or share compensation.






(iv) Compensation to LRC members:

As at February 28, 2018, the Fund has three independent members of the LRC. In respect of their services during the year, independent LRC members were provided compensation under the PSC plan as described in Note 3, or alternatively elected to receive annual cash compensation in the form of a $2,000 and $1,000 retainer for independent LRC member and chair offices, respectively. In addition to annual compensation amounts, members of the LRC that were independent of the Fund Manager were provided compensation of $250 for each meeting they attended during the year.

The following is a breakdown of cash and share compensation paid to the LRC for the years ending February 28, 2018 and February 28, 2017:



Chair remuneration $3,250 $3,284 $6,534

Independent director remuneration 9,750 5,237 14,987

Remuneration paid to LRC $13,000 $8,521 $21,521



Chair remuneration $ - $7,991 $7,991

Independent director remuneration 7,000 11,000 18,000

Remuneration paid to LRC $7,000 $18,991 $25,991

(d) Due to/due from related party balances:

(i) Due to Fund Manager:

Amounts due to the Fund Manager by the Fund were comprised of $463,142 (February 28, 2017 - $140,832) of management fees, $134,785 (February 28, 2017 - $126,481) of service fees and $55,809 (February 28, 2017 - $1,415) for the reimbursement of Fund operating expenses paid by the Fund Manager for the fiscal quarter ended February 28, 2018.

Amounts due to the Fund Manager are governed by the Fund’s normal payment terms of net 30 days. Subsequent to the reporting date, the Fund paid these amounts to the Fund Manager.




10. Fair value of financial instruments:

Financial instruments measured at fair value are categorized by the Fund into one of three hierarchy levels for disclosure purposes. Each level is based on the transparency of the inputs to measure fair value of assets and liabilities.

y Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.

y Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

y Level 3 – inputs used in a valuation technique are not based on observable market data in determining fair values of these instruments.

Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. If different levels of inputs are used to measure a financial instrument’s fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement.

(a) Mortgage loan investments:

Fair value is the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable, willing parties under no compulsion to act. The Fund Manager acts as market maker for these transactions, and there is no quoted price in an active market for these investments. The Fund makes its determination of fair value based on its assessment of the current lending market for mortgage loan investments of same or similar terms. The carrying values of mortgage loan investments approximate their fair values due to the relatively short periods to maturity and terms (level 3 of the fair value hierarchy).

(b) Bank indebtedness:

The fair value of bank indebtedness approximates its carrying value as the facility is due on demand (level 2 of the fair value hierarchy).

(c) Other financial assets and liabilities:

The fair value of cash and cash equivalents are determined on level 1 inputs.

The fair value of accrued interest receivable, amounts due to Fund Manager, accounts payable and accrued expenses, and dividends payable approximate their carrying values due to their short-term maturities (level 3 of the fair value hierarchy).

During the year ended February 28, 2018, there were no transfers between levels 1, 2 and 3 inputs (February 28, 2017 – none).




11. Risk management:

(a) Interest rate risk:

Interest rate risk is the risk that the fair value or future cash flows of the financial assets or liabilities will fluctuate because of changes in market interest rates. At February 28, 2018, no mortgage loan investments (February 28, 2017 - nil) bear interest at variable rates. Further, the Fund does not have material fair value risk on its mortgage loan investment portfolio primarily as a result of the short-term nature of the maturity dates of the mortgage loan investments.

At February 28, 2018 and February 28, 2017, the Fund’s bank indebtedness bears interest at a variable rate which creates cash flow risk as changes in the bank’s prime interest rate will cause fluctuations in interest payments. Based on the Fund’s average debt level during the year, the sensitivity of 100 basis increase in interest rates would result in an approximate decrease of $4,300 in net income and comprehensive income.

The Fund does not have material interest rate risk on any of its other financial instruments.

(b) Credit risk:

The Fund’s maximum exposure to credit risk is represented by the recorded values of mortgage loan investments and the accrued interest receivable on mortgage loan investments.

Counterparties to mortgage loan investments may be unable to honour their debt commitments. Any instability in the real estate sector and/or an adverse change in economic conditions in Canada or other conditions impacting specific mortgage borrowers could result in financial difficulty for borrowers. Financial difficulty experienced by these borrowers could leave them unable to fulfill their obligations.

The 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.

As of February 28, 2018, the Fund, through the Fund Manager, was engaged in enforcement remedies in relation to three (February 28, 2017 – three) mortgage loan investments. As of February 28, 2018, mortgage loan investments engaged in enforcement remedies totaled $11,540,970 (February 28, 2017 - $1,711,260) in gross principal and $419,326 (February 28, 2017 - $177,770) in gross accrued interest receivable. As at February 28, 2018, the Fund recognized an impairment loss and provision for non-collectable interest in the amounts of $342,650 and $29,791 (February 28, 2017 - $150,000 and $62,708), respectively.

The 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. This 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;



11. Risk Management (continued):

(b) Credit risk (continued)

(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.

The 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. The 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.

(c) Liquidity risk:

Liquidity risk is the risk that the Fund will encounter difficulty in meeting its financial obligations as they become due. This risk arises in the normal course of operations from fluctuations in cash flows as a result of the timing of mortgage loan investment funding and repayments, the possible redemptions of shares and payment obligations under the bank indebtedness credit facility. The Fund Manager routinely forecasts future cash flow sources and requirements of the Fund to help mitigate this risk and help ensure cash is efficiently utilized.

Contractual obligations as of February 28, 2018 and February 28, 2017 were due as follows:

February 28, 2018 Total Less than1 year

Greater than1 year

Due to Fund Manager $653,736 $653,736 $ -

Accounts payable and accrued expenses 65,525 65,525 -

Dividends payable 291,180 291,180 -

Bank indebtedness 3,972,959 3,972,959 -

Liabilities and obligations $4,983,400 $4,983,400 $ -

February 28, 2017 Total Less than1 year

Greater than1 year

Due to Fund Manager $268,728 $268,728 $ -

Accounts payable and accrued expenses 89,744 89,744 -

Dividends payable 320,771 320,771 -

Bank indebtedness 3,492,848 3,492,848 -

Liabilities and obligations $4,172,091 $4,172,091 $ -





(d) Capital risk management:

The Fund defines its current capital structure to include common shares, Class A preferred shares Class B preferred shares and retained earnings.

The calculation of total capital was as follows:


Class A preferred shares $54,193,806 $50,156,020

Class B preferred shares 23,902,567 23,229,743

Class A common shares 1,000 1,000

Retained earnings 20,390 8,742

Total capital $78,117,763 $73,395,505

The 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.

The Fund reviews its capital structure on an ongoing basis and adjusts its capital structure in response to mortgage loan investment opportunities, capital and borrowing facility availability, and anticipated changes in economic conditions.

The 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. The 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. The aggregate amount of borrowing by the Fund may not exceed 20% of the book value of the Fund’s mortgage loan investment portfolio.

In addition, the asset allocation model dictates the allocation of the mortgage loan investments based upon geographical, borrower, zoning, term, security position and loan-to-value criteria.

Bank indebtedness covenants require that certain thresholds are not violated for cash flow coverage ratio, indebtedness to tangible net worth ratio, and current ratio. Further, bank indebtedness covenants require that the Fund maintain a minimum tangible net worth.

As at February 28, 2018, the Fund was in compliance with its investment restrictions, the allocation model parameters and bank indebtedness covenants.



Executive: Shafin Kanji, MAcc, CA, CBV, ICD.D – CEO Aleem Virani, CA, CBV, ICD.D – President Curtis Power, CA, CIM – CFO

Independent Directors: Paul Allard, MBA Marc Prefontaine Guy Scott Don Paulencu, CA, ICD.D

Office Address: Suite 108, 2627 Ellwood Drive SW Edmonton, Alberta, T6X 0P7

Contact: Nicholas Jeanes, Corporate Secretary and General Counsel

Telephone: 780-433-1222 Toll Free: 1-888-933-1222 Facsimile (toll free): 1-866-229-1295 Email: [email protected]

Website: www.kvcapital.ca

Auditors: KPMG LLP

Legal Counsel: McLeod Law LLP

Restricted Portfolio Manager & Investment Fund Manager: KV Capital Inc.

a year in review - kvcapital.ca · shafin kanji macc, ca, cbv, icd.d mr. kanji is a chartered...

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