due-diligence

DUE DILIGENCE PRESENTATIONMORTGAGE-BASED INVESTMENTS IN CANADA

JUNE 30, 2014

With investors balking at volatility, while at the same time looking for higher yield, it is time to look at mortgage-based funds as a low-risk investment that provides the return traditional fixed-income products cannot. They are an overlooked but important asset class for a well balanced-portfolio. Our fund was designed specifically to meet that need of our portfolio clients.

Frontenac Mortgage Investment Corporation (Frontenac) is a well-diversified mortgage pool that is professionally managed by our team of experts, with the mandate to provide capital preservation with a reasonable return. Those who invest in Frontenac gain access to a pool of well over 400 mortgages, primarily first charge position, without leverage, in the stable residential real estate market of Ontario. Our strategy for the fund consists of lending short-term mortgages and providing intelligent lending solutions to borrowers who do not qualify for traditional bank financing.

This Due Diligence Presentation is intended to demonstrate the following:1. With current stock market volatility and low interest rates, mortgage-based investments are

a particularly useful asset class for the times

2. Mortgage-based investments generate income and are both an alternative and complement to traditional fixed-income investments

3. Mortgage-based investments are an excellent way to generate income for almost any retail or institutional portfolio

4. Frontenac is a high-quality mortgage-investment vehicle managed and administered by two experienced firms with extremely high standards and track records to prove it – W.A. Robinson Asset Management Ltd. and Pillar Financial Services Inc. (Pillar)

This space has grown considerably as the Schedule A banks have dramatically changed their lending policies. Our purpose is to service this space and to find good quality mortgages that provide a return for our investors of between 5%–7% in the current environment. This fund provides a secure income-producing vehicle that is well-diversified with real asset security that is continually appraised back to market. Returns are not directly correlated to interest rate or equity volatility.

Frontenac Mortgage Investment Corporation has been designed for the conservative investor that understands the value of holding an income-producing vehicle for the long term. Our management team are real estate and credit experts with an outstanding track record of over 30 consecutive years of positive returns. We gained our reputation over this time by gaining the trust of our clients through competency, consistency and taking care in what we do. We would appreciate the opportunity to generate income for your clients through the Frontenac Mortgage Investment Corporation. If you do not find the answers to all of your questions in this presentation, please feel free at any time to pick up the phone and call us directly.

Tel: 613 279-2116

Due Diligence in Action

Sincerely,

Matthew Robinson, CIM

Mortgage-Based Investments in Canada FMIC.ca 3

Contents

Letter from Matthew Robinson ............................................ 1

Overview ............................................................................ 4

Frontenac Investment Strategy ........................................... 5

Why Mortgages Make Good Investments ............................ 6

Pooled Mortgages .............................................................. 7

How Risk is Mitigated ......................................................... 8

Mortgage Approval Process .............................................. 11

Frontenac – Pooled Mortgages in a Corporate Structure .... 12

Corporate Governance Checklist ....................................... 13

Board of Directors ............................................................ 14

Industry Partners and Affiliates ......................................... 15

Regulatory and Professional Organizations ........................ 16

http://www.robinsonsgroup.com/frontenac/

Frontenac Due Diligence Presentation 4

Frontenac Mortgage Investment CorporationINVESTMENT OBJECTIVE: To provide long-term, reasonable returns on real asset-based investments for the investor who values capital preservation through sustainable processes and decisions from competent management.

TARGET RETURN: Schedule A Bank 5-Year GIC interest rate + 3%

RESULTS: 30+ consecutive years of positive returns

OVERVIEW:3• Assets over $135 million

• Investment strategy – Mortgage Investment Corporation (MIC)

i. Earns income through interest and principal payments

ii. Primarily first mortgages on residential and commercial properties in Ontario with concentration in Eastern Ontario due to stable economy and real estate prices

iii. No derivatives or mortgage syndications

iv. Short-term mortgages (primarily 1-2-year terms)

v. Target cash (or near cash) position – 5% of total assets

• Offered as common shares of a corporation holding a pool of mortgages

• MIC pays out 100% of its net income (taxed as interest) to shareholders on a monthly basis

• Qualified for registered plans: RRSP, RRIF, RESP, TFSA and DPSPs

30+ Consecutive Years of Positive Returns as at December 31, 2013

Frontenac is a unique product in the MIC space:• Offered by prospectus

in ON, MB, SK, AB, BC

• Offered by OM elsewhere in Canada

• Offered through independent financial advisors

• Traded on FundSERV, not traded on TSX

• Registrar is SGGG

• No leveraging (line of credit is used for cash management purposes only)

• FundSERV code: WAR 110/WAR111 (F Class only)

Inception: 1983

“A great idea for the fixed-income portion of your portfolio.”

Historical performance data is for illustrative purposes.

30+ Consecutive Years of Positive ReturnsFrontenac vs. S&P 500, 1990–2013

($000)

91

Frontenac MIC S&P 500

93 95 97 98 01 03 05 07 09 11 13

70

60

50

40

30

20

10

0


Frontenac Investment StrategyLeadership of Fund:Matthew Robinson, B.Sc., is a Certified Investment Manager and holds the Advising Representative designation with the Ontario Securities Commission. Matthew is an expert on real estate in Ontario, obtaining his Real Estate Broker licence in 2000 and his mortgage broker designation in 2004. As Portfolio Manager and CEO of W.A. Robinson Asset Management Ltd. and Pillar Financial Services Inc., Matthew provides vision and leadership to his team to care for the operations of Frontenac Mortgage Investment Corporation.

Investment Fund ManagerFrontenac retains W.A. Robinson Asset Management Ltd. as its Portfolio Manager and Investment Fund Manager to manage the corporation for a 1% fee of Frontenac assets per annum. W.A. Robinson Asset Management Ltd. is responsible for managing the Frontenac portfolio of mortgages to deliver income for the shareholders of the corporation.

• Registered Portfolio Manager, Investment Fund Manager and Exempt Market Dealer

• Incorporated pursuant to the Ontario Business Corporations Act on September 29, 1980

• Regulated by OSC

Mortgage OperationsFrontenac engages Pillar to source, underwrite and administer a mortgage portfolio for a fee of 1% of Frontenac assets per annum. Pillar has developed a repeatable mortgage approval process to find high-potential mortgages. It is well positioned with mortgage brokerage firms and Schedule A banks to receive referrals.

• Pillar is a licensed mortgage brokerage (licence #10119) and mortgage administrator (licence #11209)

• Incorporated under the Ontario Business Corporations Act on September 17, 1986

• Regulated by the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA)

• Regulated by the FSCO

• Ensures proper registration of mortgage documents to support approved mortgages

• Collects regular mortgage repayments

• Ensures property taxes are paid and property insurance is maintained

• Actively manages mortgage default files

Repeatable Process for Investing in MortgagesW.A. Robinson Asset Management Ltd. and Pillar specialize in mortgages and have a particular expertise in open, short-term residential and commercial loans in central and eastern Ontario, including Ottawa, Kingston, Belleville and surrounding communities. An end-to-end process between Pillar and W.A. Robinson Asset Management Ltd. is designed to avoid mortgage defaults, which we have historically kept below 1% on average.



Why Mortgages Make Good InvestmentsMortgages – Known, Understood but OverlookedCanadians are familiar with mortgages because home ownership is a fundamental core value in the Canadian psyche. However, Canadians are less familiar with holding pooled mortgages in their individual or institutional investment portfolios.

Mortgage-Based Investments – A Useful Asset Class for the TimesMortgage-based investments can be a particularly useful asset class for investors. Pooled mortgages are not directly correlated to equity markets and, as a result, are not subjected to daily volatility. Pooled mortgages also command higher rates than traditional fixed income, so there is the potential for higher returns. With investors balking at volatility, but at the same time looking for higher yield, it’s time to look more closely at mortgages as a steady investment that delivers more than traditional fixed income.

Mortgages Complement Traditional Fixed IncomeTraditional fixed income is directly related to interest rates and money supply. Bonds, GICs and T-Bills are basic financial instruments with no additional value added. Mortgages are able to command higher interest rates than traditional fixed income because lenders are assuming some risk and adding value by assessing value and administrating the loan. Pooled mortgages can deliver higher returns than bonds and GICs and, therefore, can complement these traditional fixed-income instruments and boost overall return.

How Mortgage-Based Investments Fit in Portfolios as an Additional Source of Income

Dividend-PayingStocks

Mortgage-BasedInvestments

TraditionalFixed Income:GICs, Bonds

Equities

Mortgage-BasedInvestments

TraditionalFixed Income:GICs, Bonds

Income-Generating Portfolio Balanced Portfolio

Did you know?In a recent survey of mortgage brokers conducted by Pillar, brokers categorized 31% of their clients as being self-employed. Self-employed indidivuals are more likely to run into speed bumps when seeking a mortgage because they may have difficulty proving their income. Visit alternativemortgages.com to find out more.


Pooled Mortgages – The Underlying InvestmentA mortgage is one step removed from owning land. A mortgage is a legal claim on a piece of property in return for a loan. Historically, mortgages have provided steady returns because earnings are based on interest payments and principal repayments over a specific period outlined in a schedule. In Canada, mortgages have been particularly steady because:

• Land ownership has traditionally been a method to increase wealth

• Home ownership is coveted and Canadians will go to great lengths to keep their homes and property

• Historically, land has retained its value in difficult times and has increased in value over time

• Land value and mortgages are not directly correlated to public equity markets and can run counter to macro events

Mortgage funds or MICs earn return by holding a pool of mortgages that deliver interest payments and principal repayments on specific schedules. This investment strategy responds to key investor needs:

• Regular and predictable income

• Capital preservation with potential for higher returns than traditional fixed income

• Low volatility and less anxiety – mortgages are not directly correlated to stock markets

• Risk vs. Reward

Mortgage Funds’ Risk/Return

Specialty Funds

Real Estate Funds

Equity Funds

Dividend Funds

Balanced Funds

Bond Funds

Mortgage Funds

Money Market Funds

Low RISK

RETU

RN

High

High

Source: Canadian Securities Course, Chapter 18.10, CSI Global Education Inc. (2008)

Low Risk - Land Value is Not Directly Correlated to Public Equity MarketsLand value has always been considered a way to store value and create wealth in spite of other economic factors that affect public markets. By contrast, public markets (equities and bonds) have inherent short-term volatility due to a wide array of uncontrollable risk factors:

• Macroeconomics

• Global trends

• Speed of buy/sell transactions

• Speculative trading and short-selling

• Sector issues

• Company performance

• Irrational investor behaviour (e.g., herd mentality, overestimating and underestimating risk)

• Poor decisions at the investment manager level

• Leverage



How Risk is MitigatedRisks Associated with MICsFrontenac is suitable for investors who are aware of the risks inherent in the real estate industry, who have the ability and willingness to accept the risk of loss of their investment capital and who have no immediate need for liquidity. There is no assurance of any return on an investment; however, W.A. Robinson Asset Management Ltd., the manager, has a 30-year track record of positive returns in the mortgage business.

Investing in mortgages is less risky than equities; however, there are risks that are specific to both mortgages and pooled mortgages as well as those specific to the types of mortgages Frontenac holds.

1) Risk Associated with Open and Fixed-Rate MortgagesPillar and W.A. Robinson Asset Management Ltd. have developed a particular expertise in open and fixed-rate mortgages, which include loans that generally do not meet the underwriting criteria of the large Canadian banks. The large banks are very restrictive in the types of mortgages they offer and have abandoned certain mortgages that they deem to be of higher risk. Pillar has found success in this niche because the banks tend to avoid properties in rural areas with septic tanks and those housing individuals who are self-employed, which is often a great majority of the people in rural areas. Pillar, on the other hand, is very comfortable assessing these types of factors.

Management mitigates risks by:

• Concentrating on specific geographic regions

• Concentrating on short-term mortgage durations

• Commanding a higher interest rate

• Continuing to cultivate relations with mortgage brokers and banks for referrals

• Maintaining dedicated underwriting staff

• Ensuring hands-on involvement by management

• Using real-time tracking of percentage of MIC investments

• First mortgage position on nearly entire portfolio

2) Sensitivity to Interest Rate RiskIf interest rates rise, a concern might be that a due mortgage may need to be re-priced at an interest rate lower than the original.

Management mitigates interest rate risk in two ways:

• No specific market exists for mortgages of a similar type, term and credit risk so Pillar and W.A. Robinson Asset Management Ltd. maintain pricing flexibility

• All loans are short term; the term duration for Frontenac’s mortgages is 1-2-years – this constant turnover and adjustment eliminates most of the interest rate risk


3) Risk of DefaultManagement has a stringent approval process to mitigate default risk by keeping poor-quality mortgages out of the corporation. Averaged over the past 10 years, the track record for mortgage writeoffs as a percentage of fund assets has been below 1%.

A mortgage holder may default by failing to adhere to the interest and principal repayment schedule. Management mitigates the risk of default by:

• Cultivating relationships with mortgage brokers and known sources

• Using Davis + Henderson’s electronic mortgage-application process – Filogix

• Evaluating mortgages based on the four Cs criteria

• Taking action on missed payment

• Working with borrowers to help them keep their homes

4 Cs Criteria

1 Credit based on applicant’s credit rating

2 Collateral readily marketable real estate & other assets pledged by borrower to

secure the mortgage

3 Character based on history, work tenure and employments

4 Cash flow based on the applicant’s ability to make monthly interest and

principal repayments

4) Risk of Investment and Completion LossRisk of investment loss refers to financial loss to Frontenac. Terms of the mortgages are calculated based on the value of the land and/or building being sufficient to repay the loan in full. Real estate can fluctuate and can be affected by general economic conditions and local real estate markets. There can be completion risk for development projects: uncertain construction costs, development and financing uncertainty as well as difficulty obtaining required licenses, permits and approvals.

Management mitigates the risk of investment and completion loss for Frontenac by:

• Following the stringent mortgage approval process

• Requiring independent land/property appraisals prior to lending

• Requiring environmental appraisals on commercial properties



Management mitigates risk of investment loss by:

• Laddering maturity dates

• Monthly cash payments

• Maintaining financial provisions for losses (percentage)

• Maintaining high-quality construction expertise that enables it to move in and complete or make required improvements so a property can be sold

• Maintaining property management expertise so it can manage a property if it cannot be sold or it is financially advantageous to manage it temporarily

• Maintaining relations with real estate experts who have ready access to buyers

5) Other Risks Associated with Real Estate Industry/Competition Risk

Theoretically, Frontenac might compete with many third parties, including mortgage brokers and financial institutions seeking similar investment opportunities; but, upon deeper consideration, this threat may not be so critical. While the Schedule A banks have retreated from lending in general due to global credit issues, bank lending in rural areas and for specific types of mortgages has been in decline for many years. Mortgage brokers have filled the bank void, and this has served to feed independent mortgage business to Frontenac.

Still, W.A. Robinson Asset Management Ltd. and Pillar are alert to potential competition risks and they avoid these risks by specializing in specific types of mortgages, in specific geographic areas, where they have long-term expertise.

6) Environmental RisksUnder various laws, Frontenac could become liable for the costs of remedial work necessitated by the release, deposit or presence of certain materials, including hazardous waste or toxic substances. As administrator, Pillar does not systematically obtain environmental audits on all properties subject to mortgages. Pillar mitigates environmental liability by requiring environmental audits on commercial properties and those which, in its opinion, may carry some environmental liability.

Further, Pillar has specialized in a specific geographic area for more than 24 years and the company remains alert to environmental problem areas.

Frontenac’s 30-year track record of positive performance is long-term proof that both manager and administrator execute the investment strategy with great competency.


Deal approved by management and, if required, the board

Mortgage Approval Process



Frontenac – Pooled Mortgages in a Corporate StructureFrontenac is a Mortgage Investment Corporation, which is a pooling vehicle for retail and institutional investors.

• Corporation registered under the Business Corporations Act (Canada)

Investors as Shareholders of Common SharesInvestors buy shares and become shareholders in Frontenac. The proceeds from the shares are pooled together to become the funds available for mortgages. Frontenac has hired W.A. Robinson Asset Management Ltd. as Portfolio Manager and Investment Fund Manager and Pillar to manage the mortgage approval process and administer the mortgages. Frontenac is a MIC and should be considered a long-term investment that delivers income.

Common shareholders are entitled to:

• One vote per share on all matters to be voted on at shareholder meetings

• Dividends if declared in cash or DRIP

• Share equally in remaining property if the corporation dissolves

Frontenac Share Price – $30 per share

Historically, Frontenac has maintained a constant book value per share and distributes 100% of its net income to shareholders.

What is a Mortgage Investment Corporation?A Mortgage Investment Corporation is defined under the Income Tax Act (Section 130.1) as:

• A Canadian corporation

• A corporation that does not manage or develop property

• A corporation whose property does not consist of:

• Debts owing to the corporation that were secured on real property outside Canada

• Debts owing to the corporation by non-resident persons

• Shares of capital stock of a corporation not resident in Canada

• Real property situated outside Canada

• A corporation with 20 or more shareholders

• A corporation that flows through its net income to shareholders each year

The MIC concept was defined in 1971 by the federal government in order to provide more funds to the mortgage marketplace than the banks were willing to risk. The Income Tax Act considers MICs a qualified investment for RRIFs, RESPs, TFSAs, RRSPs and locked-in retirement income funds.

As a corporation, Frontenac carries risks that are specific to holding common shares. Investors need to be aware that there is no public market for Frontenac common shares and they are not listed on a stock market in Canada or elsewhere.

Material Agreements• Investment Advisory

and Fund Management Agreement

• Amended and Restated Administration Agreement

• Amended and Restated Distribution Agreement

Frontenac does not have any long-term debtShareholders may redeem Frontenac shares once per year on November 30.

Did you know?Income from a MIC is taxed as interest income which makes it a great investment for registered accounts.


1. Number of board of directors members 7

2. Number of independent directors 7

3. Separate Chairman & Chief Executive Officer Yes

4. Terms of reference for board committees Yes

5. Independent Governance & Nominating Committee Yes

6. All policies are approved by the board Yes

7. Number of board meetings in year 2013 7

8. Board orientation/education program in place Yes

9. Date the last annual self-evaluation of 12/13/13 board/company completed

10. Date of last self-evaluation discussion of individual directors 12/13/13

11. Estimated hours of director involvement in 2013 400

Corporate Governance Checklist



Board of DirectorsFrontenac has a seven-member board of directors.

William Calvert, Chair

• Retired senior municipal and provincial civil servant

• Director of the Pre-Amalgamation Fund since 2007

• Consultant to various municipalities and provincial ministries

Robert Barnes, Director and Chair of the Audit Committee

Brad Ross, Director and Chair of the Nominating/Governance Committee*

Eric Dinelle, Director

Margaret Kelk, Director*

Sheldon Jacobs, Director

Steve Tarasick, Director*

*Member of the Nominating/Governance Committee

Directors’ Code of EthicsI will:

• Act with integrity, competence, dignity and in an ethical manner when dealing with the public, fellow shareholders, fellow directors and employees

• Participate in a professional and ethical manner in the activities of the board of directors that will reflect positively on the other members of the board of directors

• Strive to maintain and improve my competence and the competence of others in the corporation

• Use reasonable care and exercise independent, professional judgment while carrying out my duties as a director

Member, Board of Directors


Industry Partners and AffiliatesSecurities LawyerTorkin Manes Barristers and Solicitors

151 Yonge Street, Suite 1500

Toronto ON M5C 2W7

416 777-5431

AuditorRaymond Chabot Grant Thornton LLP

2505 Saint Laurent Boulevard

Ottawa ON K1H 1E4

613 236-2211

BankingRBC Financial Group

31 Beckwith Street North

Smith Falls ON K7A 2B4

613 284-1128

• Frontenac maintains a revolving credit facility (line of credit) in the amount of $23 million

InsuranceChubb Insurance Company of Canada (through HUB Insurance Brokers & Consultants)

595 Bay Street, Suite 900

Toronto ON M5G 2E3

416 597-0008

• Frontenac carries $2 million directors’ and officers’ liability insurance

• W.A. Robinson Asset Management Ltd. carries $2 million errors and omissions insurance

• Pillar has $5 million errors and omissions insurance

• W.A. Robinson Asset Management Ltd. has a $250,000 Financial Institution Bond Form 14

• These policies are underwritten by Chubb Insurance Company of Canada

CustodianComputershare Trust Company of Canada

100 University Avenue, 8th Floor

Toronto ON M5J 2Y1

416 263-9200



Regulatory and Professional OrganizationsThe management companies and corporation are in good standing with the following regulatory and professional organizations:

1. Ontario Securities Commission, osc.gov.on.ca Portfolio Managers, Exempt Market Dealers and Investment Fund Managers

2. L’Autorité des marchés financiers, lautorite.qc.ca, Portfolio Managers (also registered in Manitoba, Saskatchewan and Alberta as Portfolio Managers)

3. CFA Institute – Toronto Society, cfainstitute.org

4. The Institute of Advanced Financial Planners, iafp.ca

5. Financial Planning Standards Council of Canada, fpsccanada.org

6. The Real Estate Institute of Canada, reic.ca

7. Canadian Association of Accredited Mortgage Professionals, caamp.org

8. The Society of Trust and Estate Practitioners, step.ca

9. Member of the Canadian Association of Accredited Mortgage Professionals (CAAMP)

10. Registered with the Financial Services Commission of Ontario (FSCO)

11. Member of the Independent Mortgage Brokers Association of Ontario (IMBA)

12. Regulated by the Mortgage Brokerages, Lenders and Administrators Act, 2006

Financial ServicesCommissionof Ontario

Mortgage Broker Licence #10119

Mortgage Administrator Licence #11209

Tel: 1 877 279-2116 Fax: 613 279-3130The Simonett Building, 14216 Road #38, PO Box 208, Sharbot Lake ON K0H 2P0

FMIC.ca

WAR/DD/9/2014

Documents

due-diligence