Frontenac Mortgage Investment Corporation...institutions or individuals investing in Frontenac MIC: 1. Mortgage Investment Corporations 2. Frontenac MIC Portfolio 3. Financial Performance

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Fostering a Culture of Transparency in the Exempt Market Industry

April 26, 2012

William McNarland, CFA Senior Analyst [email protected]

Barry MacIsaac Research Analyst [email protected]

Suite 1903, 246 Stewart Green SW Calgary, AB, Canada T3H 3C8

Frontenac Mortgage Investment Corporation

QUICK FACTS

Type Mortgage Investment Corporation

(“MIC”) Risk Rating M1 – ‘Low Risk’

Expected Internal

Rate of Return

Ideal Case – 9.00%

Optimistic Case – 7.25%

Base Case – 5.50%

Pessimistic Case – 3.50%

Unsatisfactory Case – 1.75%

Head Office

The Simonett Building,

208 – 14,216 Road #38

Sharbot Lake, Ontario K0H 2P0

Minimum Client

Purchase $5,000

Price Per

Unit/Share $30 per common share.

Deferred Plan

Eligibility Yes.

Expected Issue

Closing Date Continuous offering.

Reporting Issuer

Frontenac MIC issues reports for

investors via the Internet at

http://www.sedar.com/.

Approximate Time

to Exit Continuous offering.

Auditor Raymond Chabot Grant Thornton LLP

Legal Torkin Manes LLP

Jurisdiction BC, AB, SK, MB, ON

Website http://www.fmic.ca/

mailto:[email protected]

mailto:[email protected]

April 26, 2012

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REPORT

STRUCTURE

1. Introduction

2. Key People

3. Key Partners

4. Strategy

5. Key Due Diligence Considerations

6. Structure Costs

7. Investment Structure and Entities

8. Management Fees

9. Valuation Considerations

10. Liabilities

11. Redemption Options

12. Return Expectations

13. Exit Strategy

14. Key Risks

15. Voting Structure

16. Financial Safety Mechanisms

17. Investor Liability

18. Potential Conflicts or Concerns

19. Similarity Between Offering Documents and Marketing

Representations

20. Bankruptcy and Regulatory History

21. Historical Corporate Changes

22. Litigation

23. Securities Registration

24. Suitability

25. Rating

26. Disclaimers

April 26, 2012

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INTRODUCTION

Frontenac Mortgage Investment Corporation is a prospectus-offered

fund that qualifies as a Mortgage Investment Corporation (“MIC”) under the Canadian Tax Act. Through its predecessor trust,

Frontenac has been investing in mortgages in Ontario for over 22

years. Frontenac is managed by W.A. Robinson & Associates, an

investment fund management firm that has been operating for over

30 years. The objective of Frontenac MIC is to generate income by

investing in mortgages that large financial institutions typically do

not service. As a mortgage investment corporation, Frontenac

expects to derive its earnings principally from the receipt of

mortgage interest payments.

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KEY PEOPLE

Wayne Robinson, CFA – Chief Executive Officer

Wayne Robinson has been a director and the president of Pillar

Financial Services, Frontenac’s mortgage broker, since September 30, 1986. He has also been the secretary of Pillar Financial

Services since November 6, 2003. Wayne is the founder, director,

and president of W.A. Robinson & Associates, which serves as the

financial adviser, investment counsel, and portfolio manager of

Frontenac MIC. Wayne Robinson has an extensive financial

education, and is a Chartered Financial Analyst.

Kevin Cruickshank, CA – Chief Financial Officer

Kevin Cruickshank has been the chief financial officer of Pillar

Financial Services and W.A. Robinson & Associates since 2006.

Kevin has been a partner in public accounting firm Seeds &

Company LLP Chartered Accountants since 2008. Kevin is also a

partner in the Loon’s Call Campground & Cottage Resort, and was the chief financial officer of the Hanley Group of Companies from

2000 to 2004. Kevin Cruickshank has an extensive financial

education, and is a Chartered Accountant.

Frontenac Board Members

In addition to the management team, there are six independent

board members. The name, position, and a brief overview is

provided for each board member in the summaries below.

Colleen Allison – Chair

Colleen Allison is a retired teacher and has been a director of

Frontenac since 1996. Formerly, she was chair of Mortgage

Investment Corporation of Eastern Ontario (“MICEO”), which is another MIC operated and managed by W.A. Robinson &

Associates.

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Robert Barnes – Director

Robert Barnes is the general manager at Robinson Solutions Inc., a

buildings systems solution provider, since February 2008. He was

also the managing director of Axis Database Marketing Inc. from

1997 to 2008, and Compliance Marketing Services, Inc., an

integrated marketing and technology services company, since 1997.

William Calvert – Director

William Calvert is a retired senior municipal and provincial civil

servant, as well as a consultant to various municipalities and

provincial ministries.

Eric Dinelle – Director

Eric Dinelle is the owner of Environmental Contracting Services. He

has also been the senior project manager for the City of Kingston

since 2009, and was the senior project manager in the planning

department for the Kingston General Hospital from 2003 to 2009.

Margaret Kelk – Director

Margaret Kelk is a retired teacher and artist. She has owned and

managed various farming and real property rental operating

companies for over 40 years.

Rosemarie Bowick – Director

Rosemarie Bowick is retired from the corporate office at Nortel

Networks. She has also been the chair of the board of directors of

the Mortgage Investment Corporation of Eastern Ontario since

2006.

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KEY PARTNERS

Raymond Chabot Grant Thornton LLP

Grant Thornton LLP and Raymond Chabot Grant Thornton LLP form

the Canadian member firms of Grant Thornton International. Grant

Thornton International is a global organization of accounting and

consulting firms that provide privately held business, assurance, tax,

and advisory services to private, public interest, and public

companies. Grant Thornton Ltd. is a non-profit, non-practicing,

international umbrella membership entity that was organized as a

private company with no share capital and is limited by guarantee.

There are over 2,600 member firm partners and more than 30,000

personnel operating in over 100 countries within Grant Thornton.

Although many of the firms carry the name, they are all not

members of one international partnership. Each member firm is a

separate national entity that independently governs itself and

manages its own administrative matters. Quebec-based Raymond

Chabot Grant Thornton LLP has been rated A+ with the Better

Business Bureau since 2002, and when combined with Grant

Thornton LLP, they have over 4,000 professionals in 110 offices

across Canada, and report over $450 million in revenue.

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STRATEGY

Frontenac’s business strategy consists of lending money to individuals for the purposes of acquiring real property, against the

security of a mortgage issued by the corporation. The purchase of

common shares allows an investor to participate with other investors

in a common fund holding a variety of mortgages.

Frontenac works closely with retail mortgage brokers throughout

Ontario in order to market itself as a lender of choice in the non-

prime mortgage market segment. Frontenac expects to be well

positioned to receive referrals on mortgage lending opportunities

that do not meet the criteria of major lending institutions in Canada.

Other lending opportunities involve borrowers in rural areas that

typically are not serviced by major lenders. As a result, Frontenac’s investments in mortgages are expected to earn a higher rate of

interest than what is generally obtainable through traditional

mortgage lending activities.

Frontenac MIC has adapted the following strategies for lending

mortgages:

- Frontenac will make loans of up to 80% of the fair market

value of the subject property for terms of up to five years, but

generally within two years.

- Frontenac may engage in bridge financing activities, albeit

rarely, including the financing of new home construction.

- Frontenac intends that at least 70% of the mortgages held

will be first mortgages, and no more than 30% of the

mortgages held will be second mortgages.

- Frontenac will allow for up to 49% of the mortgages to be for

commercial properties.

- Frontenac intends to generally invest in fixed-rate of interest

mortgages.

- Frontenac intends to hold a cash position equal to 5% of its

total assets.

- Frontenac will not buy or sell mortgages in the secondary

market, hold a fractional interest in a mortgage, or participate

in mortgage syndications other than those with Mortgage

Investment Corporation of Eastern Ontario (“MICEO”), which is another MIC with the same management team and

administrator as Frontenac.

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KEY DUE DILIGENCE

CONSIDERATIONS

The following topics are primary due diligence considerations for

institutions or individuals investing in Frontenac MIC:

1. Mortgage Investment Corporations

2. Frontenac MIC Portfolio

3. Financial Performance

4. Historic Returns and Return Stability

5. Frontenac MIC Lending Area

6. Mortgage Considerations

Mortgage Investment Corporations

Mortgage investment corporations were introduced in Canada in

1973 by the enactment of the Residential Mortgage Financing Act.

One of the stated objectives of this statute was the improvement of

the flow of mortgage funds for middle- and moderate-income home

buyers, a necessary step in order to reach national housing targets.

MICs were intended to encourage and facilitate the investment of

private capital into residential mortgages by providing a vehicle

through which smaller, non-institutional investors could place

investment funds into mortgages. Recognizing that mortgages are

not as liquid as other securities, such as stocks and bonds, and not

as easy to buy, sell or divide into fractional interests so as to

facilitate portfolio diversification, the government of the day elected

to allow for the creation of corporate entities permitting the pooling

of mortgages. The shareholder of these entities would, similarly to

mutual fund investors, own a part of the corporation's total portfolio

corresponding to his or her own investment and enjoy the benefits

of expert advice. The tax treatment of MICs would be comparable to

that of direct investments in mortgages.

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A Mortgage Investment Corporation or “MIC” is an investment and

lending company designed specifically for mortgage lending in

Canada. Owning shares in a MIC enables you to invest in a

company that manages a diversified and secured pool of

mortgages. Shares of a MIC are qualified as deferred plan

investments under the Canadian Income Tax Act. MICs are

generally provincially registered and licensed, with the management

of the mortgage fund under the direction of provincially licensed

mortgage brokers and real estate agents.

A MIC mortgage portfolio can include everything from small second

mortgages on residential property to commercial and development

mortgages on new projects. Every investment is typically based on

a thorough investigation of the property. A typical MIC loan should

never exceed a specified percentage of the current value of the

property. Compare this to a conventional bank’s willingness to routinely loan 80% of the value of the property and sometimes even

100%. MIC investment strategies vary considerably, as do the rates

of return on invested capital.

MICs are organized for investing in pools of mortgages. Profits

generated by MICs are distributed to its shareholders according to

their proportional interest. The mortgages are secured on real

property, often in conjunction with other forms of security, such as

personal and corporate guarantees, general security agreements,

and assignments of material contracts such as insurance policies.

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To qualify as a MIC, the following criteria must be met:

1. A MIC must have at least 20 shareholders.

2. A MIC is generally widely held. No shareholder may hold

more than 25% of the MIC’s total capital.

3. At least 50% of a MIC’s assets must be residential mortgages, or cash and insured deposits.

4. A MIC may invest up to 25% of its assets directly in real

estate, but may not develop land or engage in construction.

This ceiling on real estate holdings does not include real

estate acquired as a result of mortgage default.

5. A MIC is a flow-through investment vehicle, and distributes

100% of its net income to its shareholders.

6. All MIC investments must be in Canada, but a MIC may

accept investment capital from outside of Canada.

7. A MIC is a tax-exempt corporation.

8. Dividends received with respect to directly held shares are

taxed as interest income in the shareholder’s hands. Dividends may be received in the form of cash, or additional

shares.

9. A MIC’s annual financial statements must be audited.

10. A MIC may employ financial leverage by using debt to

partially fund assets.

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Frontenac MIC Portfolio

Mortgages in Frontenac’s investment portfolio have maturity dates ranging from one to two years. The portfolio contains 203

mortgages that are mainly first and second mortgages secured by

residential and commercial real estate. Approximately 77% of

Frontenac’s mortgages are residential, 16% are commercial, 4% are vacant land, and 3% are cash or liquid assets.

The majority of mortgage investments made by Frontenac are in the

$200,000 to $250,000 range, on average, with interest rates

between 10% and 12%. Mortgages are issued with either one or

two-year terms, have fixed rates and can be paid in full before the

maturity date without being subject to an early redemption fee. The

weighted average interest rate of the mortgages at 2011 year-end

was 10.80%, compared to 10.82% at the end of 2010. If interest

rates rise or fall at any given time throughout the year, interest

income will not be affected due to Frontenac’s policy of issuing fixed rates.

Number of Mortgages

Interest Rate Fair Value Average

2 8% $95,417 $47,709

19 9% $6,620,662 $348,456

67 10% $16,325,914 $243,670

30 11% $5,481,856 $182,729

84 12% $16,353,882 $194,689

1 13% $48,178 $48,178

203 10.8% $44,925,909 $221,310

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Diversification

A larger amount of mortgages provides larger diversification.

Traditionally, many small MICs have fewer than twenty mortgages,

in which case a large terminal loss on a mortgage can become a

material event to a small fund. On December 31 2011, Frontenac

held 203 mortgages, which is over 25% higher than on December

31, 2010. The high number of mortgages in Frontenac’s portfolio provides significant diversification and lowers risk. In addition, it is

wise to consider whether a fund contains any large mortgages that

provide for a lack of diversification. The tables below show the

significance of the largest mortgages in relationship to the size of

Frontenac’s net asset value.

The largest mortgage in Frontenac’s portfolio is 6.1% of the net asset value, which is relatively unchanged from 2010. However, the

largest three mortgages and the largest five mortgages are 3%

lower than the ratio of net assets in 2010, and the largest ten

mortgages are 5% lower than the ratio of net assets in 2010. The

outcome of the analysis of the number and size of the mortgages

provides the comfort of diversification to investors.

Statistic Percentage of NAV

Largest Mortgage 6.1%

Largest Three Mortgages 13.2%

Largest Five Mortgages 18.2%

Largest Ten Mortgages 26.4%

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Loan to Value

The loan to value (LTV) is the mortgage amount divided by the

appraised value of the asset. A lower LTV provides incentive for

borrowers to not default on their loans. To get a sense of this, it is

wise to consider not only the average LTV of the portfolio, but also

the median LTV and the average LTV at mortgage origination. It is

possible that the average LTV could be artificially low. Consider an

MIC that has total assets of $15 million and has issued a first

mortgage of $100,000 on a property that has been appraised at

$400,000:

If the LTV of the first mortgage was calculated using the total value

of the asset, this low LTV mortgage could lower the MIC’s LTV by 25% in real terms. An MIC manager could manipulate the LTV by

soliciting this type of business. In this case, it would be more

appropriate to calculate an average mortgage LTV or median

mortgage LTV. The table below provides the median and average

LTV for Frontenac.

The Portfolio Average LTV being 8.58% lower than the Origination

LTV shows stability in the mortgagors’ paying their principal and interest obligations. The Median LTV is also in reasonable proximity

to the Average LTV. These three analyses of LTV demonstrate low

risk characteristics due to the amount of equity that the mortgagor

has in the properties.

First Mortgage $100,000

Appraised Value $400,000

LTV of First Mortgage 25%

Second Mortgage $200,000

LTV of Total Mortgages 75%

Real LTV of First Mortgage 50%

Statistic LTV

Average LTV of Portfolio 53.7% Median LTV of Portfolio 54.3% Average of LTV at Origination 60.68% (2010)

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Ratio of First to Second Mortgages

Traditionally, first mortgages are less risky than second mortgages

except in the rare circumstance that a second mortgage has an

extremely low LTV. The ratio of first mortgages to second

mortgages for Frontenac is below, and demonstrates low-risk

characteristics.

Appraisal Data

With the exception of cases in which the manager knows that a

property has increased in value and the mortgage balance has

declined, it is preferred to have recent appraisal data. Below is a

breakdown of the year the mortgages in the portfolio were last

appraised.

The majority of the mortgages have recent appraisal dates, which

creates fewer discrepancies between the book and fair market

values.

Mortgage Position Percentage

First Mortgages 96.8%

Second Mortgages 3.2%

Appraisal Year Number of Mortgages

2011 48

2010 56

2009 28

2008 17

2007 13

2006 10

2005 6

2004 2

2003 2

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Terminal Losses

There can be much discussion about mortgage defaults and losses.

The key consideration should be terminal losses and not default.

For example, if a mortgagor defaults on interest for four months and

a power of sale is exercised, fees and costs are often recoverable

from the borrower directly or through this process. The concern is

about the fees or costs that are not recovered and become terminal

losses. The terminal losses of the past are accounted for in the

audited historic return data. For example, in 2011 the write-offs in

the Fund were $271,336, compared with $326,199 in 2010, or

1.01% of the Fund’s assets and interest paid to investors in 2011 compared with 0.56% in 2010. Given the data from 2011, an annual

1% write-off would be considered conservative for Frontenac,

whereas many other MICs would consider 5% or higher a

conservative figure.

Interest Rate Risk

Traditionally, with fixed income investments, there is concern that

increases in interest rates can cause capital losses. Frontenac’s returns are positively correlated to Bank of Canada interest rate

increases due to Frontenac charging higher interest rates in rate-

increasing environments.

Repeatable Returns

Traditionally, the first mortgage needs of Canadians have been

provided for by Canadian banks. However, Canadian banks are

restricted by lending criteria that will not allow them to lend to clients

who have a rural property, are self-employed, earn commission

income, are business owners, have distant credit problems, or need

short-term construction financing. Frontenac has been filling this

niche, which has allowed it to earn high interest rates with low levels

of terminal loss. The opportunity has increased in the last few years

as lenders have left the Canadian market and more individuals

require non-traditional mortgages. It is the opinion of the EA Analyst

team that returns in the future will be similar to those of the past.

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Duration

The shorter the duration of the mortgages in an MIC, the lower the

risk is. The duration of the mortgages held by Frontenac is very

short, as shown by the year of maturity of the mortgages in the table

below.

2011 Financial Performance

The following financial statement summaries reflect the performance

of Frontenac in 2011 and compare the results with 2010.

Statement of Operations

.

Maturity Date Number of Mortgages

2012 73

2013 48

2014 4

2015 0

Operating Year 2011 2010

Interest Income $3,771,220 $2,851,989

Expenses

Administration fees $800,627 $639,149

Audit fees $39,180 $26,943

Director fees $36,417 $40,567

General and operating expenses $239,863 $212,508

Interest and bank charges $39,361 $3,788

Legal fees $32,077 $48,249

Custodian fees $11,300 $10,500

Trustee account fees $63,896 $88,904

Total Expenses $1,262,721 $1,070,608

Net Investment Income $2,508,499 $1,781,381

Loss on mortgage investments ($271,336) ($326,119) Unrealized change in value of mortgage investments

$151,000 $15,000

Increase in Net Assets from Operations

$2,388,163 $1,470,262

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In 2011, Frontenac had a substantial increase in interest income.

Management had issued new shares for nearly $14 million and were

able to place capital by finding appropriate borrowers. This resulted

in a 32.2% increase in revenue, a 40.8% increase in income, and a

gross profit margin increase from 62.5% in 2010 to 66.5% in 2011

Changes in Net Assets

In 2010, shareholders reinvested 80.1% of their income back into

common shares. In 2011, shareholders reinvested 86.5% back into

common shares, and Frontenac issued nearly 467,000 shares.

Operating Year 2011 2010

Share Capital Transactions Cash proceeds from issuing common shares

$13,997,592 $2,929,163

Reinvested dividends $2,170,541 $1,425,783

Redeemed common shares ($1,093,192) ($1,534,416)

Common share dividends ($2,388,163) ($1,470,262) Net Assets, Beginning of the Year:

$30,973,376 $28,152,846

Increase in net assets from operations

$2,388,163 $1,470,262

Net Assets, End of the Year: $46,048,317 $30,973,376

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Net Asset Value

Mortgages reflect 97.6% of the net asset value. The remaining 2.4%

is cash and prepaid expenses.

Frontenac increased in size by over 30% in 2011 and increased its

percentage of reinvested dividends, which is a strong indicator that

investor confidence is growing for the Fund.

Shareholder’s Equity

Operating Year 2011 2010 Assets Cash and cash equivalents $1,254,128 $1,279,227 Mortgage investments $44,925,909 $31,067,014 Prepaid expenses $8,517 $8,517 Total Assets $46,188,554 $32,354,758 Liabilities Bank line of credit $0 $1,300,000 Dividends payable $50,189 $7,364 Accounts payable and accrued expenses

$56,238 $62,351

Prepaid mortgage payments $33,810 $11,667

Net Assets, End of the Year: $46,048,317 $30,973,376

Year 2011 2010

Shares Amount Shares Amount Balance, beginning

1,032,446 $30,973,376 938,428 $28,152,846

Shares issued for

cash 466,586 $13,997,592 97,639 $2,929,163

Dividend reinvestment

72,351 $2,170,541 47,526 $1,425,783

Redeemed for cash

(36,440) ($1,093,192) (51,147) ($1,534,416)

Balance, end of year

1,534,943 $46,048,317 1,032,466 $30,973,376

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Historic Returns and Return Stability

The return stability of Frontenac has been very consistent. Since the

duration or length of mortgages in Frontenac is very short, the

expected return will be highly correlated to the Canadian Bank Rate.

The expected return will be the Canadian Bank Rate plus the added

return provided through management skill. Management skill is net

of terminal losses, which is a large factor in determining the

managers’ skill. The table below summarizes the returns.

This analysis demonstrates that the returns are very stable, and

there is strong correlation to the Canadian Bank Rate and manager

skill in determining overall return. The returns have been quite

impressive compared to publicly available mortgage-based mutual

funds.

Year Bank of

Canada Rate Annual Return

Management Skill

1990 13.90% 11.40% -2.50% 1991 8.91% 12.00% 3.09% 1992 5.91% 12.66% 6.75% 1993 4.79% 14.24% 9.45% 1994 6.92% 12.58% 5.66% 1995 6.97% 12.87% 5.90% 1996 5.00% 9.12% 4.12% 1997 3.25% 8.47% 5.22% 1998 5.00% 7.00% 2.00% 1999 4.75% 7.45% 2.70% 2000 6.00% 7.90% 1.90% 2001 4.75% 5.40% 0.65% 2002 2.75% 6.50% 3.75% 2003 3.25% 7.60% 4.35% 2004 2.25% 6.30% 4.05% 2005 2.50% 5.70% 3.20% 2006 4.25% 5.78% 1.53% 2007 4.50% 7.20% 2.70% 2008 3.25% 6.36% 3.11% 2009 0.50% 5.88% 5.38% 2010 0.50% 5.01% 4.51% 2011 1.00% 6.67% 5.67%

Average 4.59% 8.37% 3.78%

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Large Mortgage Funds’ Best Years from 2004 to 2011

The Globe and Mail

Large Mortgage Funds’ Worst Years from 2004 to 2011

The Globe and Mail

One-year Annualized Returns

The Globe and Mail

Fund Best Year

BMO Mortgage and Short-term Income 5.85%

CI Signature Mortgage 4.59%

Investors Mortgage and Short-term 6.02%

Frontenac MIC 7.20%

National Bank Mortgage 5.50%

Scotia Mortgage Income 5.89%

TD Mortgage 7.36%

Fund Worst Year




Frontenac MIC 5.01%



TD Mortgage 1.63%

Fund Return




Frontenac MIC 6.67%



TD Mortgage 2.27%

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Three-year Annualized Returns

Five-year Annualized Returns

Ten-year Annualized Returns

Fund Return




Frontenac MIC 5.85%



TD Mortgage 2.05%

Fund Return




Frontenac MIC 6.20%



TD Mortgage 3.44%

Fund Return




Frontenac MIC 6.29%



TD Mortgage 3.65%

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Frontenac MIC Lending Area

The best areas for mortgage lending have low unemployment, high

family incomes, and reasonable real estate prices. Below is a

comparison of Ottawa with other Canadian major cities.

Overview of Ottawa

Ottawa is the capital of Canada, the second largest city in the

Province of Ontario, and the fourth largest city in Canada. The city is

located on the south bank of the Ottawa River in the eastern portion

of Southern Ontario. Ottawa borders Gatineau, Quebec, located on

the north bank of the Ottawa River; together they form the “National Capital Region.” The 2011 census identified the city’s population as 883,391, and the metropolitan area’s population as 1,236,324. From

1990 to 2000, Ottawa experienced significant population growth that

has continued through today.

Ottawa Dominion Bureau of Statistics

Mercer ranks Ottawa among the top cities for quality of living among

the worlds’ large cities and second in North America. In addition, it

was rated the second cleanest city in Canada and the third cleanest

city in the world. In 2012, for the third consecutive year,

MoneySense ranked Ottawa as the best community in Canada to

live in.

Year Population YOY Change Canada

1950 202,045 - - 1960 268,206 32.7% 30.2% 1970 302,341 12.7% 20.4% 1980 295,163 (2.4%) 13.0% 1990 313,987 6.4% 12.9% 2000 774,072 146.5% 10.7% 2010 883,391 14.1% 7.9%

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Economic Overview

Ottawa’s primary employers are the Government of Canada and the high-tech industry. The city has a high standard of living and a low

unemployment rate. In 2007, Ottawa had the fourth highest growth

rate among major Canadian cities with a 2.7% GDP growth rate,

which exceeded the Canadian average of 2.4%. It is estimated that

the National Capital Region attracts around seven million tourists

annually who spend about $1.3 billion.

Conference Board of Canada

From 2001 to 2006, Ottawa experienced an increase of 40,000 jobs.

While the number of employees in the federal government

stagnated, the high-technology industry grew by 2.4%. The overall

growth of jobs in Ottawa was 1.3% compared with the previous

year, down to sixth place among Canada's largest cities.

The unemployment rate in Ottawa was 5.1% in 2006, which was

below the national average of 6.0%. The economic downturn

resulted in an increase in the unemployment rate in 2009. The table

below compares the unemployment rate among Canadian provinces

in 2012.

Year GDP per Capita

YOY Change

National GDP

YOY Change

2003 35,700 - 37,124 - 2004 36,412 2.0% 37,922 2.1% 2005 37,121 1.9% 38,697 2.0% 2006 38,023 2.4% 39,386 1.8% 2007 38,649 1.6% 39,820 1.1% 2008 38,570 (0.2%) 39,629 (0.5%) 2009 37,550 (2.6%) 38,070 (3.9%) 2010 38,052 1.3% 38,846 2.0% 2011 38,433 1.0% 39,370 1.3%

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The Canadian Press

Among the provinces above, Ontario has a fairly average

unemployment rate. Compared with cities in Ontario, Ottawa has

one of the lowest unemployment rates, which is an indicator that the

city is poised for strong population growth.

The Canadian Press

Canadian Province Unemployment Rate

Newfoundland and Labrador 12.9% Prince Edward Island 10.8% New Brunswick 10.1% Quebec 8.4% Nova Scotia 8.2% Ontario 7.6% British Columbia 6.9% Manitoba 5.6% Saskatchewan 5.0% Alberta 5.0%

National Average 7.4%

Canadian City Unemployment Rate

Windsor 10.7% Peterborough 9.6% Barrie 9.2% Brantford 8.8% Toronto 8.6% London 8.5% Oshawa 7.8% Niagara 7.5% Kingston 7.4% Sudbury 7.2% Kitchener 6.7% Ottawa 6.2% Hamilton 6.0% Guelph 5.4% Thunder Bay 5.3%

Ontario Average 7.6%

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Ottawa has the second highest family income of all major Canadian

cities. The median family income was $90,990 in 2008, which was

much higher than the Ontario and Canada average..

Statistics Canada 2008

The Federal government is Ottawa’s largest employer, employing

over 110,000 individuals from the National Capital Region. In

addition, Ottawa is an important technology center; its 1,800

companies employ approximately 80,000 people. Most of these

companies specialize in telecommunications, software

development, and environmental technology. Large technology

companies such as Nortel, Corel, Mitel, Cognos, and JDS Uniphase

were founded in Ottawa. Ottawa also has regional locations for 3M,

Adobe Systems, Bell Canada, IBM, Alcatel-Lucent, and Hewlett-

Packard. Many of Ottawa’s telecommunications and new technology companies are located in the western part of the city.

Location Median Family Income

Calgary $91,570 Ottawa $90,990 Edmonton $88,190 Oshawa $83,220 Guelph $81,910 Regina $81,480 Sudbury $79,570 Victoria $77,810 Saskatoon $77,740 Alberta $86,080 Ontario $70,910

Saskatchewan $69,800 British Columbia $67,890 Manitoba $64,530 Quebec $63,830

Canada $68,860

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Another major employer is the health sector, which employs over

18,000 people. Nordion and i-Stat, as well as the National Research

Council of Canada and OHRI, are part of a growing life sciences

sector. Business, finance, administration, and sales and service

occupations rank high among types of occupations. Approximately

10% of Ottawa's GDP is derived from the financial services,

insurance, and real estate sectors, whereas employment in goods-

producing industries is only half the national average. The City of

Ottawa is the area’s second largest employer with over 15,000 employees.

Cost of Living

The cost of living in Ottawa is considerably cheaper than most major

Canadian cities. MoneySense evaluated 179 Canadian cities and

Ottawa was ranked in first place due to its low cost of living, strong

economy, low crime rate, and steady population growth. The table

below compares average annual household expenditures by city

based on tax rates, living costs, transportation, food, recreation,

insurance costs, healthcare, entertainment, and education.

Statistics Canada 2011

Among the major Canadian cities listed, Ottawa is the cheapest are

in which to live. Combined with its high median family income,

Ottawa likely experiences more savings, which allows for more

accessible housing. The table below compares the average home

prices of standard two-story houses, single detached houses, and

condominiums.

City Average Household Expenditures

Calgary $82,722 Toronto $73,407 Edmonton $70,216 Vancouver $67,967 Saskatoon $66,584 Halifax $60,636 Winnipeg $58,074 Montreal $56,053

Ottawa $52,796

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RBC 2012

The price for a single detached home in Ottawa is approximately 4.1

times the average family income. Housing in Ottawa is very

affordable when compared to Vancouver, which is at over 10 times

family income and Toronto, which is at over 7 times

CMHC 2012

Newly completed housing in Ottawa is stable compared to

Vancouver and Toronto. In 2009, rapid growth, low interest rates,

and accessible mortgages led to a sharp decline in home prices.

With steady population growth, a low unemployment rate, high

wages, and steady GDP growth, Ottawa is in a position that enables

it to be one of the major cities least affected by a housing downturn.

City Standard 2-

Story Single

Detached Condominium

Vancouver $845,000 $790,000 $403,200 Toronto $602,000 $515,100 $326,400 Calgary $414,700 $423,600 $254,500 Ottawa $379,800 $371,900 $257,000

Edmonton $372,900 $322,900 $199,500 Montreal $365,300 $281,300 $227,200 Saskatoon $344,800 $326,800 $218,500 Winnipeg $282,000 $263,700 $157,700 Halifax $234,300 $209,800 $176,900

City Newly-Completed Single Detached (Average)

Year 2010 2011 Change Vancouver $1,074,943 $1,372,889 27.7% Toronto $667,361 $836,042 25.3% Calgary $534,172 $563,904 5.6% Edmonton $484,937 $480,283 -1.0% Ottawa $416,358 $444,450 6.7%

Winnipeg $427,767 $429,519 0.4% Saskatoon $420,079 $408,326 -2.8% Halifax $358,919 $354,385 -1.3% Montreal $338,097 $327,206 -3.2%

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MLS 2011

The average home in Ottawa sold for $339,041 in 2010 compared

to $304,801 in 2009. This represents an 11.2% increase, the

highest of all major Canadian cities.

City Average Home Sale Price

Year 2009 2010 Change Vancouver $592,441 $653,499 10.3% Toronto $396,154 $435,277 9.9% Calgary $385,882 $399,332 3.5% Montreal $330,056 $355,109 7.6% Ottawa $304,801 $339,041 11.2% Edmonton $320,378 $323,488 1.0% Saskatoon $280,784 $291,056 3.7% Halifax $239,784 $254,949 6.3% Winnipeg $216,012 $227,370 5.3%

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STRUCTURE COSTS

INVESTMENT

STRUCTURE & ENTITIES

Indicated returns are net of management fee, which is 1.0% plus

expenses, and net of mortgage administration fee of 1.0%. Investors

will pay management fees and operating expenses.

The investment structure is a “Mortgage Investment Corporation” as described in the “Key Due Diligence Considerations” sub-heading.

The following entities are associated with Frontenac MIC:

W.A. Robinson & Associates Ltd.

W.A. Robinson & Associates is Frontenac MIC’s manager, portfolio advisor, registrar of common shares, and transfer agent. W.A.

Robinson & Associates is a registered portfolio manager and

investment fund manager retained by Frontenac to manage the

overall business and operations of the corporation and to provide it

with investment advice and portfolio management services in

respect of its investment portfolio. W.A. Robinson & Associates is

majority-owned by Wayne Robinson. Frontenac will pay W.A.

Robinson & Associates an annual fee of 1% of the value of

Frontenac’s total assets, calculated and payable at the end of every month.

Pillar Financial Services Inc.

Pillar Financial Services is a licensed mortgage broker and

mortgage administrator retained by Frontenac to service the

mortgage portfolio, including the sourcing and administration of

mortgages. The Pillar Financial Services is also responsible for the

underwriting and approval of prospective mortgage applications,

collection of payments and, where necessary, commencing

enforcement proceedings against delinquent mortgagors. Pillar

Financial Services is wholly-owned by Wayne Robinson and is an

affiliate of W.A. Robinson & Associates. Frontenac pays Pillar

Financial Services an annual fee of 1% of the total asset value in

consideration for the mortgage brokering and administration

services they provide.

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MANAGEMENT FEE

VALUATION

CONSIDERATIONS

LIABILITIES

REDEMPTION OPTIONS

Pillar Financial Services is the administrator and W.A. Robinson &

Associates is the manager for the Company. Frontenac signed new

contracts for these services in 2008 under which Pillar and W.A.

each charge an annual fee of 1% of the total asset value calculated

on a monthly basis.

Administration and management fees paid under these agreements

were $800,627 for 2011 compared to $639,149 for 2010. The

increase in the dollar value of the administration and management

fees from 2010 is a reflection of the increase in the total net assets

of Frontenac.

The fund values its common shares on a monthly basis. The net

asset value is confirmed by an independent account audit once a

year. Since there has not been a year with a loss, the net asset

value has been constant.

In July 2007, the Board of Directors approved a $3,000,000 line of

credit with the Royal Bank of Canada. The purpose of the line of

credit is to provide liquidity, not to provide leverage. On December

31, 2011, there was no outstanding balance on the line of credit.

Due to the regulatory restrictions placed on an MIC offered by a

prospectus, liquidity is only available each year on November 30.

There is no charge for investors to redeem from FMIC. In the case

of extreme redemptions that cause a liquidity concern for other

investors, the board may restrict redemptions to 25% of the

common shares.

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RETURN

EXPECTATIONS

The base case return for 2011 is based on the following formula:

Expected Canada Bank Rate + Manager Skill = Investors’ Return

The current Bank of Canada rate is 1.00%, and the average historic

management skill has been 3.78%. The Bank of Canada rate is

defined as the upper limit of the Bank of Canada’s operating band. Canadian interest rates are expected to stay low until at least 2014.

This would provide an expected return for FMIC in 2012 of 4.78%.

With Bank of Canada rates at 1.00% and a manager skill rate of

4.50%, the internal rate of return would be 5.50% for the year

ending December 31, 2012.

Scenario Bank of

Canada Rate Manager

Skill Return

Ideal 3.00% 6.00% 9.00%

Optimistic 1.75% 5.50% 7.25%

Base-case 1.00% 4.50% 5.50%

Pessimistic 0.50% 3.00% 3.50%

Unsatisfactory 0.25% 1.50% 1.75%

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EXIT STRATEGY

KEY RISKS

Frontenac is an on-going investment fund. Investors may redeem

their common shares at their discretion, subject to timing and

liquidity restrictions.

Falling Property Values

If real estate properties fall in value, less equity cushion is provided

by the current LTV.

Increase in Terminal Losses

It is possible that terminal losses could increase, which would

reduce income to the point that investors could potentially lose

capital.

Interest Rates

A fall in interest rates would reduce the amounts that FMIC could

charge mortgage holders, which would lower the portfolio’s return.

Manager Skill

If management cannot find mortgage holders to pay higher than

conventional rates of interest, the Fund’s returns would suffer.

Investors receive one vote per shared owned. A quorum for a

meeting of shareholders shall be the holders of at least 25% of the

shares entitled to vote at a meeting of shareholders, whether

present in person or represented by proxy.

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FINANCIAL SAFETY MECHANISMS

INVESTOR LIABILITY

POTENTIAL CONFLICTS OR CONCERNS

SIMILARITY BETWEEN OFFERING DOCUMENTS & MARKETING REPRESENTATIONS

Frontenac MIC has the following financial safety mechanisms in

place:

1. Clients will often use an intimidator like TD Waterhouse or

RBC Dominion Securities.

2. The custodian of the Fund is Computershare.

3. Frontenac is a public security, so all information is available

independently on SEDAR.

4. Clients receive annual audited financials.

5. In order to provide liquidity to its shareholders, Frontenac is

required to maintain approximately 5% of its net assets in

cash throughout the year. Management regularly monitors its

available cash and credit line facility to ensure that a 5% cash

reserve is maintained.

If the investor remains at arm’s length, and is not involved in any management of the corporation’s operations, there should be no concerns regarding liability.

No potential conflicts or concerns were identified.

There are no discrepancies between the Frontenac MIC offering

documents and its marketing materials.

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BANKRUPTCY & REGULATORY HISTORY

HISTORIC CORPORATE

CHANGES

LITIGATION

SECURITIES REGISTRATION

SUITABILITY

EA analysts have confirmed that no director or member of

management of Frontenac MIC, W. A. Robinson & Associates or

any related parties of the above corporations have been subject to

bankruptcy within the past 10 years. In addition, there have been no

regulatory issues with the Canadian Securities Commission or any

other regulatory committees.

EA analysts are unaware of any historic corporate changes

regarding Frontenac MIC or any of the corporation’s affiliates.

EA analysts are unaware of any acts of litigation against Frontenac

MIC, W.A. Robinson & Associates, any related parties, or any

members of management or directors of the above-mentioned

corporations.

W.A. Robinson & Associates is a registered exempt market dealer

and portfolio manager in British Columbia, Alberta, Saskatchewan,

and Manitoba, a registered portfolio manager in Quebec, and a

registered limited market dealer in Ontario.

An investment in Frontenac MIC common shares is considered risky

and should be undertaken only by sophisticated investors of

adequate financial means who can bear the risks associated with

the offering. Individuals who are eligible or accredited investors and

who reside in British Columbia, Alberta, Saskatchewan, Manitoba,

or Ontario may participate in the offering.

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RATING

The EA Analyst team has rated Frontenac “M-1” on the MIC risk

rating schedule of M-1 to M-7. M-1 is the lowest risk rating, which is

reserved for MICs with long track records of consistent positive

returns. Other factors that lead to this rating are:

1. Frontenac has a high level of diversification.

2. Frontenac has a low Loan-to-value ratio.

3. In the analyst’s opinion, areas in Eastern Ontario, notably Ottawa, are considered to be desirable economic lending

areas for MICs.

4. The ratio of first to second mortgages is favourably high in

Frontenac’s investment portfolio. 5. Mortgages in Frontenac’s portfolio have recent appraisal

data.

6. Frontenac has experienced minimal terminal losses.

7. There is low interest rate risk due to fixed rate mortgages.

8. Returns have been steady over a substantial amount of time,

demonstrating management’s ability to weather economic storms.

9. Mortgages in Frontenac’s portfolio have short maturity dates. This policy management has enacted is key to preventing

terminal losses.

Rating Definition

M-1 Very Low Risk M-2 Low Risk M-3 Low-to-Average Risk M-4 Average Risk M-5 Average-to-High Risk M-6 High Risk M-7 Very High Risk

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Rating Definition

M-1

Mortgage Investment Corporations rated M-1 have the highest level

of stability and sustainability of distributions per unit. Corporations

with this rating have a superior combination of the following factors:

good history of operating performance, outstanding financial

flexibility, high quality assets, good diversification, large size in

terms of breadth and scale of operations, and a strong industry

structure. The corporation is likely to have strong sponsors or

owners or specific structural or contractual elements that eliminate

or mitigate risks or other potentially negative factors.

M-2

Mortgage Investment Corporations rated M-2 have very good

distributions per unit stability and sustainability. The corporation

exhibits performance that is only slightly below the M-1 level,

typically shows above-average strength in areas of consideration,

and possesses levels of distributable income per unit that are not

likely to be significantly negatively affected by foreseeable events.

The corporation’s performance is above average in many, if not most, areas of consideration.

M-3

Mortgage Investment Corporations rated at M-3 have good

distributions per unit stability and sustainability, but performance

may be more sensitive to economic factors, have greater cyclical

tendencies, and may not be as well diversified as an M-2 firm,

resulting in some potential for distributions per unit to fluctuate. The

corporation will not be above average in all areas of consideration,

but will tend to outperform in many areas. M-3 is usually the highest

rating category for a new and smaller corporation and often

represents a ceiling for some of the better commodity-oriented

corporations.

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M-4

Mortgage Investment Corporations rated at M-4 have adequate

distributions per unit stability and sustainability, but distributions per

unit are affected by one or more factors such as cyclicality,

seasonality, and commodity price fluctuations, and economic cycles

have a comparatively greater influence over performance compared

to first in the higher rating categories. Concentration and lack of

diversity may affect stability.

M-5

Mortgage Investment Corporations rated at M-5 have weak

distributions per unit stability and sustainability. The corporation is

subject to many of the same cyclical, seasonal, and economic

factors as those in the M-4 rating category, but the lack of

diversification is generally more pronounced, and the corporation’s performance will tend to fall below average in several areas.

M-6

Mortgage Investment Corporations rated at M-6 have very weak

distributions per unit stability and sustainability. The corporation will

tend toward below average performance in many areas of

consideration. There may be a high degree of volatility associated

with current levels of distributions per unit, and the ongoing

operational performance and financial flexibility of the corporation

are weak. The corporation may also be relatively new and small,

and have limited sponsor support.

M-7

Mortgage Investment Corporations rated at M-7 have poor

distributions per unit in terms of stability and sustainability. The

corporation performs below average in most areas of consideration.

There is a high degree of volatility associated with current levels of

distributions per unit. In addition, depending upon the specific

circumstances, this category may also contain those Mortgage

Investment Corporations that have ceased distributions.

April 26, 2012

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DISCLAIMERS

General

ExemptAnalyst is a fully-owned trademark of Mount Fortress Capital

Inc., which is registered in the Province of Alberta. The particulars

contained in this report were obtained from sources we believe to be

reliable, but they are not guaranteed and may be incomplete. The

opinions found in this report are the analysts’ and are not to be construed as a solicitation or offer to buy the securities analyzed in

the report.

Research Analysts

The research analysts who prepared the report certify that it

accurately reflects their opinions and that their compensation is not

directly or indirectly derived from the rating assigned in the report.

Compensation

Fees have been paid to the analysts to write this report, which help

to offset the high cost of research. ExemptAnalyst must abide by the

CFA Institute Code of Ethics and Standards of Professional

Conduct.

Liability

Mount Fortress Capital Inc. and ExemptAnalyst do not make any

warranties, expressed or implied, as to the risk or results from

investing in any exempt market security. Anyone reading this report

assumes full responsibility for the outcome of investing in any

exempt market security. Only your financial advisor can recommend

whether this investment is suitable for your particular situation. It is

vital that investors study the Offering Memorandum to review the

risk of the exempt market securities.