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No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.
This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for
sale and therein only by persons permitted to sell these securities.
PROSPECTUS
Initial Public Offering
November 27, 2012
FIRST NATIONAL MORTGAGE INVESTMENT FUND
Maximum $100,000,000 (10,000,000 Units)
$10.00 per Unit
First National Mortgage Investment Fund (the “Fund”) is a non-redeemable investment fund established under the
laws of the Province of Ontario that proposes to issue units of the Fund (the “Units”) at a price of $10.00 per Unit
(the “Offering”).
The investment objectives of the Fund are to:
(i)
provide holders of the Units (“Unitholders”) with tax-advantaged monthly cash distributions; and
(ii)
preserve capital.
The Fund has been created to obtain exposure to a diversified portfolio (the “Portfolio”) of Mortgages (as defined
herein) originated by First National Financial LP (the “Mortgage Investment Advisor” or “First National”), a
wholly owned subsidiary of First National Financial Corporation. See “Investment Objectives”.
The Fund will obtain economic exposure to the Portfolio through a forward agreement (the “Forward
Agreement”). The return to the Fund will, by virtue of the Forward Agreement, be based on the performance of FN
Mortgage Investment Trust (the “Mortgage Trust”), a newly created investment trust, that will acquire the
Portfolio. As the Fund will partially settle the Forward Agreement to fund distributions, such distributions will be
comprised primarily of returns of capital and capital gains and accordingly, such distributions are described as taxadvantaged. See “Investment Strategies”.
First National Asset Management Inc. is the promoter of the Fund and the Mortgage Trust. Stone Asset
Management Limited (the “Manager”) will act as manager and portfolio manager of the Fund and the Mortgage
Trust. The Manager will provide management and portfolio advisory services to the Fund and the Mortgage Trust.
See “Organization and Management Details of the Fund”.
Price: $10.00 per Unit
Minimum Purchase: 200 Units
Price to the Public(1)
Per Unit
Total Minimum Offering(3)
(3)(4)
Total Maximum Offering
Agents’ Fees
Net Proceeds to the Fund(2)
$10
$0.525
$9.475
$25,000,000
$1,312,500
$23,687,500
$100,000,000
$5,250,000
$94,750,000
Notes:
(1)
The Offering price was established by negotiation between the Manager and the Agents (as defined herein).
(2)
Before deducting the expenses of the Offering, estimated to be $700,000 (and subject to a maximum of 1.5% of the gross proceeds of
the Offering), which, together with the Agents’ fees, will be paid by the Fund from the proceeds of the Offering.
(3)
There will be no Closing unless at least 2,500,000 Units are sold. If subscriptions for a minimum of 2,500,000 Units have not been
received within 90 days following the date of issuance of a receipt for this prospectus, this Offering may not continue without the
consent of the securities authorities and those who have subscribed for Units on or before such date.
(4)
The Fund has granted the Agents an option (the ”Over-Allotment Option”), exercisable for a period of 30 days following the closing
of the Offering (the ”Closing”), to purchase additional Units in an amount up to 15% of the aggregate number of Units issued at the
Closing on the same terms as set forth above. If the Over-Allotment Option is exercised in full, under the maximum Offering, the
price to the public, the Agents’ fees and the net proceeds to the Fund, before deducting the expenses of the Offering, will be
$115,000,000, $6,037,500 and $108,962,500, respectively. This prospectus also qualifies the grant of the Over-Allotment Option and
the distribution of the Units issuable on the exercise of the Over-Allotment Option. A purchaser who acquires Units forming part of
the over-allocation position acquires those Units under this prospectus, regardless of whether the over-allocation position is ultimately
filled through the exercise of the Over-Allotment Option or secondary market purchases. See “Plan of Distribution”.
There is no assurance that the Fund will meet its investment objectives. There may be limited or no liquidity
in the Mortgages that make up the Portfolio and, if no secondary market for such Mortgages exists, the value
of such Mortgages will be adversely affected if a resale is required. A return on your investment in the Fund
is not comparable to the return on an investment in a fixed income security. There is currently no market
through which the Units may be sold and purchasers may not be able to resell securities purchased under this
prospectus. This may affect the pricing of the Units in the secondary market, the transparency and
availability of trading prices, the liquidity of the securities, and the extent of issuer regulation. See “Risk
Factors” for a discussion of certain factors that should be considered by prospective investors in the Units
including with respect to the Mortgage Trust’s use of leverage. The Toronto Stock Exchange (the “TSX”) has
conditionally approved the listing of the Units. The listing is subject to the Fund fulfilling all of the TSX
requirements on or before February 25, 2013, including distribution of Units to a minimum number of public
holders.
In the opinion of Blake, Cassels & Graydon LLP, counsel to the Fund, and Osler, Hoskin & Harcourt LLP, counsel
to the Agents (as defined herein), provided that, at all relevant times, the Fund qualifies as a mutual fund trust within
the meaning of the Tax Act (as defined herein), Units will be qualified investments under the Tax Act for trusts
governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans,
registered disability savings plans, registered education savings plans and tax-free savings accounts. See “Income
Tax Considerations – Status of the Fund”.
The Fund is not a trust company and, accordingly, is not registered under the trust company legislation of
any jurisdiction. Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation
Act and are not insured under provisions of that Act or any other legislation.
RBC Dominion Securities Inc., CIBC World Markets Inc., TD Securities Inc., BMO Nesbitt Burns Inc., National
Bank Financial Inc., Scotia Capital Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd.,
Desjardins Securities Inc., Dundee Securities Ltd. and Macquarie Private Wealth Inc. (collectively, the “Agents”)
have agreed to conditionally offer the Units, subject to prior sale, on a best efforts basis, if, as and when issued by
the Fund and accepted by the Agents in accordance with the conditions contained in the agency agreement among
the Fund, the Manager, the Mortgage Investment Advisor and the Agents (the “Agency Agreement”) referred to
under “Plan of Distribution”, and subject to the approval of certain legal matters by Blake, Cassels & Graydon LLP
on behalf of the Fund and Osler, Hoskin & Harcourt LLP on behalf of the Agents. See “Plan of Distribution”.
Subscriptions will be received for the Units offered hereby, subject to rejection or allotment in whole or in part, and
the right is reserved to close the subscription books at any time without notice. Closing is expected to occur on or
about December 19, 2012 but not later than January 31, 2013. See “Attributes of the Units”.
The Fund will obtain a receipt for a prospectus of the Mortgage Trust from each of the Ontario Securities
Commission and Autorité des marches financiers in order to enable the Mortgage Trust to become a reporting issuer
under the Securities Act (Ontario) and Securities Act (Québec). The Fund will also deliver a copy of such
prospectus to purchasers of Units in the Province of Québec prior to the purchase of Units by any person in the
Province of Québec.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...................................1
Status of the Fund ................................................ 37
GLOSSARY OF TERMS........................................9
Taxation of the Fund ............................................ 38
FORWARD LOOKING STATEMENTS ........... 13
Taxation of Unitholders ....................................... 38
OVERVIEW OF THE LEGAL STRUCTURE OF
THE FUND............................................................. 14
Taxation of Registered Plans ............................... 39
Tax Implications of the Fund’s Distribution Policy
............................................................................. 40
INVESTMENT OBJECTIVES ............................ 14
INVESTMENT STRATEGIES ............................ 14
ORGANIZATION AND MANAGEMENT
DETAILS OF THE FUND AND THE
MORTGAGE TRUST ........................................... 40
Servicing of Mortgages........................................ 14
Mortgage Investment Process .............................. 15
The Manager ........................................................ 40
Leverage .............................................................. 16
The Portfolio Manager ......................................... 43
Securities Lending ............................................... 16
The Mortgage Investment Advisor ...................... 44
Mortgage Tranching ............................................ 16
Conflicts of Interest ............................................. 47
OVERVIEW OF THE INVESTMENT
STRUCTURE ........................................................ 17
Independent Review Committee.......................... 48
Trustee ................................................................. 49
Forward Agreement ............................................. 17
Custodian ............................................................. 49
OVERVIEW OF THE SECTOR THAT THE
PORTFOLIO INVESTS IN .................................. 19
Registrar and Transfer Agent ............................... 50
INVESTMENT RESTRICTIONS ....................... 21
Auditor ................................................................. 50
Investment Restrictions of the Fund .................... 21
Promoter .............................................................. 50
Investment Restrictions on the Mortgage Trust ... 22
CALCULATION OF NET ASSET VALUE ....... 50
FEES AND EXPENSES ........................................ 24
Valuation Policies and Procedures of the Fund and
the Mortgage Trust .............................................. 50
Offering Expenses ............................................... 24
Reporting of Net Asset Value .............................. 51
Management Fee.................................................. 24
ATTRIBUTES OF THE UNITS .......................... 51
Servicing Fee ....................................................... 24
Registration and Redemption of Units................. 52
Management Fee Distributions ............................ 24
Purchase for Cancellation or Resale .................... 53
Management Fee paid by the Mortgage Trust ..... 24
Non-Resident Unitholders ................................... 53
Operating Expenses of the Fund .......................... 24
UNITHOLDER MATTERS ................................. 53
Operating Expenses of the Mortgage Trust ......... 25
Meetings of Unitholders ...................................... 53
Counterparty Fee ................................................. 25
Matters Requiring Unitholder Approval .............. 53
Performance Fee paid by the Mortgage Trust...... 25
Amendments to the Declaration of Trust ............. 55
Additional Services.............................................. 26
Reporting to Unitholders ..................................... 55
RISK FACTORS ................................................... 26
Accounting and Reporting ................................... 55
DISTRIBUTION POLICY ................................... 34
REDEMPTION OF UNITS .................................. 34
TERMINATION OF THE FUND ........................ 56
Annual Redemption ............................................. 34
USE OF PROCEEDS ............................................ 56
Monthly Redemptions ......................................... 35
PLAN OF DISTRIBUTION ................................. 56
Allocations of Gains to Redeeming Unitholders . 35
INTEREST OF MANAGER AND OTHERS IN
MATERIAL TRANSACTIONS........................... 57
Exercise of Redemption Right ............................. 35
MATERIAL CONTRACTS ................................. 57
Limitation and Suspension of Redemptions ........ 36
EXPERTS ............................................................... 58
INCOME TAX CONSIDERATIONS .................. 36
i
TABLE OF CONTENTS
(continued)
PURCHASERS’ STATUTORY RIGHTS OF
WITHDRAWAL AND RESCISSION ................. 58
AUDITOR’S CONSENT..................................... F-1
INDEPENDENT AUDITOR’S REPORT ......... F-2
FIRST NATIONAL MORTGAGE
INVESTMENT FUND STATEMENT OF
FINANCIAL POSITION .................................... F-3
FIRST NATIONAL MORTGAGE
INVESTMENT FUND NOTES TO
STATEMENT OF FINANCIAL POSITION .... F-4
CERTIFICATE OF THE ISSUER, THE
MANAGER AND THE PROMOTER .............. C-1
CERTIFICATE OF THE AGENTS ................. C-2
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PROSPECTUS SUMMARY
The following is a summary of the principal features of this distribution and should be read together with the more
detailed information and financial data and statements contained elsewhere in this prospectus. Certain capitalized
terms used, but not defined in, this summary are defined in the “Glossary of Terms”. Unless otherwise indicated,
all references to dollar amounts in this prospectus are to Canadian dollars.
THE OFFERING
Issuer:
First National Mortgage Investment Fund (the “Fund”) is an investment fund established
under the laws of the Province of Ontario pursuant to a declaration of trust dated November
27, 2012 (the “Declaration of Trust”). See “Overview of the Legal Structure of the Fund”.
Offering:
The offering (the “Offering”) consists of transferable units of the Fund (the “Units”).
Maximum Issue:
$100,000,000 (10,000,000 Units)
Minimum Issue:
$25,000,000 (2,500,000 Units)
Subscription Price:
$10.00 per Unit
Minimum
Subscription:
$2,000 (200 Units)
Investment
Objectives:
The investment objectives of the Fund are to:
(i) provide holders of the Units (“Unitholders”) with tax-advantaged monthly cash
distributions; and
(ii) preserve capital.
The Fund has been created to obtain exposure to a diversified portfolio (the “Portfolio”) of
Mortgages (as defined herein) originated by First National Financial LP (the “Mortgage
Investment Advisor” or “First National”), a wholly owned subsidiary of First National
Financial Corporation.
The Fund will obtain economic exposure to the Portfolio through a forward agreement (the
“Forward Agreement”). The return of the Fund will, by virtue of the Forward Agreement,
be based on the performance of FN Mortgage Investment Trust (the “Mortgage Trust”), a
newly created investment trust, that will acquire the Portfolio. See “Investment Objectives”.
Investment
Strategies:
The Mortgage Trust will seek to accomplish its investment objectives through prudent
investments in short term Mortgages (typically 12-36 months) primarily on multi-unit
residential and commercial mortgages across Canada. Mortgages will be secured primarily by
income producing Real Property where the principal and interest can be serviced from cash
flow generated by the underlying Real Property.
In general, Mortgages will generate income through a rate of interest that is typically payable
periodically throughout the terms of the Mortgages, as well as Commitment Fees which
generally are paid at the time of initial funding. Commitment Fees received by the Mortgage
Trust will be net of amounts payable to the originator, who also may be the Mortgage
Investment Advisor, for sourcing a Mortgage. All Mortgages will be secured by Real Property
consisting primarily of multi-unit residential, office, retail, industrial or other commercial
property in Canada. Mortgages may be either first ranking, a junior position in a first ranking
Mortgage, or a second ranking Mortgage, and individual Mortgages may be secured by more
than one property owned by the same borrower. Investments in the Portfolio also will be made
in accordance with certain investment restrictions. The Mortgage Trust will rely on the
origination expertise of the Mortgage Investment Advisor to meet these objectives.
The Mortgage Investment Advisor believes that its principal advantages in this market include
its: (i) extensive and long standing relationships with multi-unit residential and commercial real
estate developers and investors, both private and public, across Canada which ensure a
1
continuing supply of high-quality lending opportunities; (ii) wide range of mortgage products
supported by a large and experienced group of mortgage underwriters exercising a disciplined
due diligence process ensuring mortgage creditworthiness is consistent; (iii) management team
which has extensive credit adjudication experience; (iv) large servicing operation which ensures
professional surveillance and management of mortgages under administration; (v) flexibility
and speed of credit approval; and (vii) certainty of execution for borrowers. The Mortgage
Investment Advisor believes that these advantages lead to high quality and ongoing lending
opportunities and the ability to build a diversified pool of Mortgages across industry sectors,
geography and term.
The business of the First National was founded in 1988. First National is a Canadian-based
originator, underwriter and servicer of multi-unit residential and commercial mortgages as
well as prime single-family residential mortgages. For the year ended December 31, 2011, the
Mortgage Investment Advisor originated $11.8 billion of mortgage assets, including $2.7
billion of multi-unit residential and commercial mortgages, and, as of June 30, 2012, had
mortgages under administration of $63.7 billion. The Mortgage Investment Advisor has
offices in Halifax, Montreal, Toronto (head office), Calgary and Vancouver, over 600
employees and an investment grade rating from the Dominion Bond Rating Service. The
Mortgage Investment Advisor believes it is the largest lender of single-family residential
mortgages in Canada outside of the five largest chartered banks and one of the largest multiunit residential and commercial mortgage lenders in Canada. First National Financial
Corporation, the parent of the Mortgage Investment Advisor, is listed on the Toronto Stock
Exchange (Symbol: FN), with a market capitalization of approximately $1 billion. See
“Investment Strategies”.
Distributions:
The Fund intends to make monthly cash distributions to Unitholders of record on the last
Business Day of each month. Distributions will be paid no later than the 15th Business Day
following the end of the month for which the distribution is payable. The Fund will not have
a fixed distribution, but distributions are initially targeted to be 6.0% per annum on the
subscription price of $10.00 per Unit ($0.05 per Unit per month or $0.60 per annum). The
first distribution will be paid on or before March 21, 2013 to Unitholders of record on
February 28, 2013. Commencing in December 2013, the Fund will announce, at least
annually, the expected distribution amount for the following 12 months based, in part, on the
Mortgage Investment Advisor’s and the Manager’s assessment of anticipated cash flow and
the anticipated expenses of the Fund and the Mortgage Trust, from time to time.
Distributions are intended to be tax-advantaged when compared to those made by a trust that
relies on interest, dividend or other investment income to pay distributions.
The amount of monthly distributions may fluctuate and there can be no assurance that
the Fund will make any distribution in any particular month or months.
Assuming gross proceeds of the Offering are $50 million and fees and expenses are as
described herein, the Portfolio, using leverage of 25% of the Total Assets of the Mortgage
Trust, would be required to generate an average annual total return of approximately 8.35%,
inclusive of interest and other income, in order generate an average annual total return of
approximately 6.0% per annum on the offering price of $10.00 per Unit while maintaining a
stable NAV of the Fund and funding distributions at the initial targeted level through partial
settlements of the Forward Agreement. Based on the anticipated composition of the Portfolio,
it is expected that interest and other income on the Mortgages included in the Portfolio would
be sufficient to maintain a stable NAV of the Fund and to fund distributions at the initially
targeted level through partial settlements of the Forward Agreement. No assurance can be
given with respect to future levels of interest and other income received on the Mortgages
included in the Portfolio from time to time. If the return on the Portfolio is less than the
amount necessary to fund monthly distributions at the then current targeted level and
the Manager nevertheless chooses to pay such distributions (through partial settlement
of the Forward Agreement), this will result in a portion of the capital of the Fund being
2
returned to Unitholders and NAV per Unit will be reduced.
If the Fund’s net income for tax purposes, including net realized taxable capital gains, for any
year, net of any available loss carryforwards from prior years, exceeds the aggregate amount
of the regular monthly distributions made in the year to Unitholders, the Fund will also be
required to pay one or more special distributions (in either cash or Units) in such year to
Unitholders as is necessary to ensure that the Fund will not be liable for income tax on such
amounts under the Tax Act (after taking into account all available deductions, credits and
refunds). See “Income Tax Considerations”.
There can be no assurance given as to the amount of targeted distributions, if any, in the
future. There is no assurance that the Fund will meet its investment objectives. See
“Distribution Policy” and “Risk Factors”.
Leverage:
The Mortgage Trust may utilize loan facilities to borrow up to 25% of the Total Assets of the
Mortgage Trust to fund working capital requirements and to fund the acquisition of Mortgages
from time to time. Accordingly, at the time such leverage is incurred, the maximum amount of
leverage that the Mortgage Trust could employ is 1.33:1 (total long positions (including
leveraged positions) divided by the net assets of the Mortgage Trust). It is expected that the
terms, conditions, interest rate, fees and expenses of and under the facility will be typical of
credit facilities of this nature and that the lender will require the Mortgage Trust to provide a
security interest in favour of the lender in the assets of the Mortgage Trust to secure such
borrowings. See “Investment Strategies”.
Redemptions:
Commencing in 2014, outstanding Units may be surrendered for redemption during the
applicable Annual Redemption Notice Period for a redemption price per Unit equal to the
NAV per Unit. Payment of the proceeds of redemption will be made on or before the Annual
Redemption Payment Date.
The Fund will not accept for redemption on an Annual Redemption Date, Units representing
more than 15% of the average number of Units outstanding during the 180-day period
immediately preceding the Annual Redemption Date. In the event that the number of Units
surrendered for redemption in respect of an Annual Redemption Date exceeds such limit, the
Fund shall redeem such Units surrendered for redemption and not withdrawn or revoked, on a
pro rata basis. See “Redemption of Units”.
Termination:
The Fund does not have a fixed termination date. Pursuant to the Declaration of Trust, the
Fund may be terminated at any time by the Trustee provided that prior approval of
Unitholders has been obtained by a majority vote at a meeting of Unitholders called for that
purpose; provided, however, that the Trustee may, in its discretion, terminate the Fund
without the approval of Unitholders if in the opinion of the Trustee, it is no longer
economically practical to continue the Fund or it would be in the best interests of the Fund.
Upon termination, the net assets of the Fund will be distributed on a pro rata basis. See
“Termination of the Fund”.
Maximum Offering(1)
Use of Proceeds:
Gross Proceeds to the Fund
Minimum Offering(2)
$100,000,000
$25,000,000
$5,250,000
$1,312,500
Expenses of the Offering
$700,000
$375,000
Net proceeds to the Fund
$94,050,000
$23,312,500
Agents’ fees
(3)
Notes:
(1)
The Fund has granted the Agents an option (the “Over-Allotment Option”), exercisable for a period of 30 days
following the closing of the Offering (the “Closing”), to purchase additional Units in an amount up to 15% of the
aggregate number of Units issued at Closing on the same terms as set forth above. If the Over-Allotment Option is
exercised in full, under the maximum Offering, the price to the public, the Agents’ fees and the net proceeds to the
Fund before deducting the expenses of the Offering will be $115,000,000, $6,037,500 and $108,962,500, respectively.
This prospectus also qualifies the grant of the Over-Allotment Option and the distribution of Units issuable on the
exercise of the Over-Allotment Option. A purchaser who acquires Units forming part of the over-allocation position
3
acquires those Units under this prospectus, regardless of whether the over-allocation position is ultimately filed
through the exercise of the Over-Allotment Option or secondary market purchases. See “Plan of Distribution”.
(2)
There will be no Closing unless a minimum of 2,500,000 Units are sold. If subscriptions for a minimum of
2,500,000 Units have not been received within 90 days following the date of issuance of a receipt for this prospectus,
this Offering may not continue unless an amendment to this prospectus has been filed and a receipt therefor has been
issued.
(3)
Subject to a maximum of 1.5% of the gross proceeds of the Offering.
The net proceeds from the Offering (including any net proceeds from the exercise of the
Over-Allotment Option), after payment of the Agents’ fees and the expenses, will be used by
the Fund to acquire the Common Share Portfolio. See “Use of Proceeds”.
Risk Factors:
An investment in Units is subject to certain risk factors, including:
(a)
no assurances that the Fund will be able to achieve its investment objectives;
(b)
fluctuations in the value of real estate and the effect of general economic
conditions thereon;
(c)
concentration of investments held in the Portfolio;
(d)
reliance on multi-residential and commercial mortgages;
(e)
subordinate financing, which may be carried on by the Fund, is generally
considered a higher risk than primary financing;
(f)
absence of insurance or return guarantees on Mortgages;
(g)
use of leverage;
(h)
liquidity of investments in the Portfolio;
(i)
impact of competition;
(j)
reliance on mortgage insurers;
(k)
sensitivity to interest rates;
(l)
fluctuations in NAV of the Fund, NAV per Unit and distributions;
(m)
the availability of Mortgage opportunities;
(n)
risks related to Mortgage defaults;
(o)
foreclosure and related costs;
(p)
litigation risks;
(q)
the redemption of a significant number of Units;
(r)
reliance on key personnel;
(s)
the Fund has no operating history;
(t)
the ability of the Fund to fund its investments in Mortgages;
(u)
forward counterparty risk;
(v)
Forward Agreement proceeds;
(w)
performance fees;
(x)
general economic conditions;
(y)
failure or unavailability of computer and data processing systems and
software;
(z)
changes in legislation
(aa) environmental matters that may affect properties securing Mortgages;
4
(bb) impact of natural disasters and other events;
(cc) status of the Fund;
(dd) taxation matters affecting the Fund;
(ee) Fund is not a trust company;
(ff)
nature of Units; and
(gg) liability of Unitholders.
See “Risk Factors”.
INCOME TAX CONSIDERATIONS
A Unitholder who is resident in Canada will generally be required to include in computing income for a taxation
year that part of the net income of the Fund, including net taxable capital gains, if any, that is paid or becomes
payable to the Unitholder by the Fund in the year (whether in cash or in Units). To the extent that amounts payable
to a Unitholder are designated by the Fund as taxable dividends from taxable Canadian corporations, or as the
taxable portion of net realized capital gains, those amounts will retain their character and be treated as such in the
hands of the Unitholder.
Amounts paid or payable by the Fund to a Unitholder in excess of the Unitholder’s share of the Fund’s net income
and net realized capital gains will generally not result in an income inclusion to the Unitholder, but will reduce the
adjusted cost base of the Unitholder’s Units. To the extent that the adjusted cost base of a Unit held as capital
property by a Unitholder would otherwise be less than zero, the Unitholder will be deemed to have realized a capital
gain equal to such negative amount. A Unitholder who disposes of Units held as capital property (on a redemption
or otherwise) will realize a capital gain (or capital loss) to the extent that the proceeds of disposition exceed (or are
less than) the aggregate adjusted cost base of the Units disposed of and any reasonable costs of disposition.
Each investor should satisfy himself or herself as to the tax consequences applicable in his or her jurisdiction
of an investment in Units by obtaining advice from his or her tax advisor. See “Income Tax Considerations”.
ELIGIBILITY FOR INVESTMENT
In the opinion of Blake, Cassels & Graydon LLP, counsel to the Fund, and Osler, Hoskin & Harcourt LLP, counsel
to the Agents, provided that, at all relevant times, the Fund qualifies as a mutual fund trust within the meaning of the
Tax Act, Units will be qualified investments under the Tax Act for trusts governed by registered retirement savings
plans, registered retirement income funds, registered disability savings plans, registered education savings plans,
deferred profit sharing plans and tax-free savings accounts. Unitholders planning to hold their Units in a tax-free
savings account, registered retirement savings plan or registered retirement income fund should consult their own
tax advisor whether the Units are “prohibited investments” for such accounts. See “Income Tax Considerations”.
ORGANIZATION AND MANAGEMENT OF THE FUND AND THE MORTGAGE TRUST
Management of the
Fund and
Mortgage Trust
Promoter
Services Provided to the Fund and/or Mortgage
Trust
First National Asset Management Inc. is the promoter of the
Fund and the Mortgage Trust.
See “Organization and Management Details of the Fund and
the Mortgage Trust”.
Trustee, Manager and
Portfolio Manager
Stone Asset Management Limited is the trustee, manager and
portfolio manager of the Fund and the Mortgage Trust. The
Manager will perform the management functions including
day-to-day management, and will provide investment advisory
and portfolio management services to the Fund and the
Mortgage Trust, including all investment decisions relating to
5
Municipality of
Residence
100 University Avenue,
Suite 700, North Tower
Toronto, Ontario
M5J 1V6
36 Toronto Street,
Suite 710
Toronto, Ontario
M5C 2C5
the Mortgages to be acquired by the Mortgage Trust.
See “Organization and Management Details of the Fund and
the Mortgage Trust – The Manager”.
Mortgage Investment
Advisor
First National Financial LP is the mortgage investment advisor
for the Mortgage Trust. The Mortgage Investment Advisor
will arrange for sourcing, structuring and management of
Mortgage investments by the Mortgage Trust.
Toronto, Ontario
See “Organization and Management Details of the Fund and
the Mortgage Trust – The Mortgage Investment Advisor”.
Custodian
CIBC Mellon Trust Company will be appointed as custodian
of the assets of the Fund and may employ sub-custodians as
considered appropriate in the circumstances.
Toronto, Ontario
See “Organization and Management Details of the Fund –
Custodian”.
Computershare Trust Company of Canada will be appointed as
custodian of the assets of the Mortgage Trust and may employ
sub-custodians as considered appropriate in the circumstances.
Registrar, Transfer and
Distribution Agent
Computershare Investor Services Inc. will be appointed the
registrar, transfer and distribution agent for the Units.
Toronto, Ontario
See “Organization and Management Details of the Fund and
the Mortgage Trust – Registrar and Transfer Agent”.
Auditor
The auditor of the Fund and the Mortgage Trust is Deloitte &
Touche LLP.
Toronto, Ontario
See “Organization and Management Details of the Fund and
the Mortgage Trust – Auditor”.
AGENTS
RBC Dominion Securities Inc., CIBC World Markets Inc., TD Securities Inc., BMO Nesbitt Burns Inc., National
Bank Financial Inc., Scotia Capital Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd.,
Desjardins Securities Inc., Dundee Securities Ltd. and Macquarie Private Wealth Inc. (collectively, the “Agents”)
conditionally offer the Units, subject to prior sale, on a best efforts basis, if, as and when issued by the Fund and
accepted by the Agents in accordance with the conditions contained in the Agency Agreement, and subject to the
approval of certain legal matters by Blake, Cassels & Graydon LLP on behalf of the Fund and Osler, Hoskin &
Harcourt LLP on behalf of the Agents. See “Plan of Distribution”.
Agents’ Position
Maximum Size
Exercise Period
Exercise Price
Over-Allocation Position
1,500,000 Units
Within 30 days following
Closing
$10.00 per Unit
SUMMARY OF FEES AND EXPENSES
The following table contains a summary of the fees and expenses, payable by the Fund and the Mortgage Trust,
which will therefore reduce the value of an investment in the Fund. For further particulars, see “Fees and
Expenses”.
Type of Fee
Amount and Description
Fees payable to the Agents
$0.525 per Unit.
Expenses of the Offering
In addition to the Agents’ fees, the Fund will pay all of the expenses incurred in connection
with the Offering, which are estimated to be $700,000, subject to a maximum of 1.5% of the
gross proceeds of the Offering.
6
Type of Fee
Amount and Description
Management Fee paid
by the Fund
An annual management fee (the “Management Fee”) equal to 0.40% per annum of the NAV
of the Fund, calculated daily and payable monthly in arrears, plus an amount calculated
quarterly and paid as soon as practicable after the end of each calendar quarter equal to the
Servicing Fee, plus applicable taxes, will be paid to the Manager.
The Management Fee, which includes the Servicing Fee paid by the Manager to registered
dealers, when aggregated with the management fee paid to the Manager by the Mortgage Trust
equals approximately 1.75% per annum of the NAV.
Servicing Fee
The Manager will pay to registered dealers a servicing fee (the “Servicing Fee”) equal to
0.40% annually of the NAV per Unit for each Unit held by clients of the registered dealers,
calculated and paid at the end of each calendar quarter commencing on March 31, 2013, plus
applicable taxes.
Management Fee paid by
the Mortgage Trust
The Manager will also be paid an annual management fee of 0.95% per annum of the NAV of
the Mortgage Trust, calculated daily and payable monthly in arrears, plus applicable taxes.
The Manager will pay the fees of the Mortgage Investment Advisor out of its fees.
Operating Expenses
of the Fund
The Fund will pay for all ordinary expenses incurred in connection with its operation and
administration. In addition to the fees and expenses referenced elsewhere in this prospectus, it
is expected that the expenses for the Fund will include, without limitation: all costs of
Common Share Portfolio transactions, fees payable to the Manager, the Custodian and other
third party services providers, legal, accounting, audit and valuation fees and expenses, fees
and expenses of the members of the IRC, expenses related to compliance with NI 81-107, fees
and expenses relating to the voting of proxies by a third party, premiums for directors’ and
officers’ insurance coverage for the directors and officers of the Trustee and the Manager and
members of the IRC, costs of reporting to Unitholders, registrar, transfer and distribution
agency costs, printing and mailing costs, listing fees and expenses and other administrative
expenses and costs incurred in connection with the continuous public filing requirements and
investor relations, website maintenance costs, taxes, brokerage commissions, costs and
expenses relating to the issue of Units, costs and expenses of preparing financial and other
reports, costs and expenses arising as a result of complying with all applicable laws,
regulations and policies, extraordinary expenses that the Fund may incur and all amounts paid
on account of indebtedness. Such expenses will also include expenses of any action, suit or
other proceedings in which or in relation to which the Trustee, the Manager, the Custodian, the
IRC and/or any of their respective officers, directors, employees, consultants or agents is
entitled to indemnity by the Fund.
Operating Expenses of the
Mortgage Trust
The Mortgage Trust will pay for all ordinary expenses incurred in connection with its
operation and administration. In addition to the fees and expenses referenced elsewhere in this
prospectus, it is expected that expenses of the Mortgage Trust will include, without limitation,
all costs of Portfolio transactions, fees payable to the Manager, the custodian and other third
party service providers, custodial fees, legal, accounting, audit and valuation fees,
commissions, including brokerage commissions, other administrative expenses, all amounts
paid on account of indebtedness and any extraordinary expenses that the Mortgage Trust may
incur.
Counterparty Fee
The Fund will pay to the Counterparty a fee under the Forward Agreement of not greater than
0.45% per annum of the Total Assets plus a fee, which may vary, based on the value of the
Common Share Portfolio, calculated and payable monthly in arrears. This latter fee, which
may vary, is intended to compensate the Counterparty for the costs of hedging its exposure
under the Forward Agreement, if it chooses to do so, and will be approximately equal to the
fees that would be charged to, and costs that would be incurred by, the Counterparty for
borrowing securities matching the securities in the Common Share Portfolio or otherwise
hedging its exposure under the Forward Agreement and is initially anticipated to be no greater
than 0.30% per annum of the value of the Common Share Portfolio. The fee is payable
whether or not the Counterparty actually hedges its exposure.
Performance Fee Paid by the
Mortgage Trust
Beginning in 2013, the Manager will also be entitled to receive, if earned, for each fiscal year
of the Mortgage Trust, a performance fee (the “Performance Fee”). The Performance Fee
shall be calculated and accrued monthly and be paid annually. The amount of the
Performance Fee shall be determined as of December 31 of each year (the “Determination
Date”). The Performance Fee for a given year will be equal to 20% of the amount by which
7
Type of Fee
Amount and Description
the interest income, any realized and unrealized gains (net of any losses), commitment fees
and any other income of the Mortgage Trust during the period less the fees and expenses of the
Mortgage Trust (excluding for such purpose any accrual for the Performance Fee) during such
period exceeds the product of (i) the average of the NAV of the Mortgage Trust on the last
Business Day of each month during the period, and (ii) the average of the two-year
Government of Canada bond yield on the last Business Day of each calendar month during the
period plus 400 basis points (the “Hurdle Rate”).
Upon the redemption of units of the Mortgage Trust, the Manager will also receive, if earned,
a Performance Fee determined as though the redemption date of any units so redeemed was,
with respect to such units only, the Determination Date. Any Performance Fee so determined,
plus applicable taxes, shall be payable to the Manager on the applicable redemption date.
In respect of redemptions of units of the Mortgage Trust occurring during any year, the Hurdle
Rate will be reduced proportionately to reflect the number of days remaining in the year from
that date to December 31 of that year. In the event that after the Closing new units of the
Mortgage Trust are issued, the Hurdle Rate applicable to the Performance Fee payable with
respect to those units will be reduced proportionately to reflect the number of days remaining
in that year.
8
GLOSSARY OF TERMS
In this prospectus, the following terms shall have the meanings set forth below, unless otherwise indicated.
“affiliate” has the meaning ascribed thereto in the Business Corporations Act (Ontario).
“Agency Agreement” means the agency agreement dated as of November 27, 2012 among the Fund, the Manager,
the Promoter, the Mortgage Investment Advisor and the Agents.
“Agents” means, collectively, RBC Dominion Securities Inc., CIBC World Markets Inc., TD Securities Inc., BMO
Nesbitt Burns Inc., National Bank Financial Inc., Scotia Capital Inc., Canaccord Genuity Corp., GMP Securities
L.P., Raymond James Ltd., Desjardins Securities Inc., Dundee Securities Ltd. and Macquarie Private Wealth Inc.
“Annual Redemption Date” means the last Business Day of June for each year commencing in 2014.
“Annual Redemption Notice Period” means the period from the first Business Day in May (annually, starting in
2014) until 4:00 p.m. (Toronto time) on the 9th day of May, or the immediately preceding Business Day in the event
that the 9th day is not a Business Day.
“Annual Redemption Payment Date” means the 15th Business Day of July in each year, beginning in 2014.
“Business Day” means any day on which the TSX is open for business.
“Capital Gains Refund” has the meaning ascribed thereto under “Income Tax Considerations – Taxation of the
Fund”.
“CDS” means CDS Clearing and Depository Services Inc.
“CDS Participant” means a participant in CDS.
“Closing” means the closing of the Offering on the Closing Date.
“Closing Date” means the date of the Closing, which is expected to be on or about December 19, 2012, or such later
date as the Fund and the Agents may agree, but in any event not later January 31, 2013.
“Commitment Fee” means a one-time fee paid by a borrower to the Mortgage Trust in return for obtaining a
commitment for Mortgage financing, stated either as a fixed dollar amount or a percentage of the principal amount
of the Mortgage. The amount paid to the Mortgage Trust will be the net amount (on average, approximately 40% of the
gross Commitment Fee) after payment of a fee to the originator, who also may be the Mortgage Investment Advisor,
for sourcing the transaction.
“Common Share Portfolio” has the meaning ascribed thereto under “Overview of Investment Structure – Forward
Agreement”.
“Counterparty” has the meaning ascribed thereto under “Overview of Investment Structure – Forward Agreement”.
“CRA” means the Canada Revenue Agency.
“Custodian” means CIBC Mellon Trust Company, the custodian of the assets of the Fund and its successors or
assigns.
“Custodian Agreement” means the custodian agreement dated as of the Closing Date between the Fund and the
Custodian, as it may be amended from time to time.
“Declaration of Trust” means the declaration of trust of the Fund dated November 27, 2012 establishing the Fund
under the laws of the Province of Ontario.
“Determination Date” means December 31 of each year.
“Distribution Payment Date” means a Business Day designated by the Manager that will be no later than 15th
Business Day of the month following the relevant Distribution Record Date.
“Distribution Record Date” means the last Business Day of each of month.
“Extraordinary Resolution” means a resolution passed by the affirmative vote of at least 66 2/3% of the votes cast
either in person or by proxy, at a meeting of Unitholders called for the purpose of considering such resolution or in
writing pursuant to the Declaration of Trust.
9
“First National” means First National Financial LP.
“Forward Agreement” has the meaning ascribed thereto under “Overview of Investment Structure – Forward
Agreement”.
“Forward Termination Date” has the meaning ascribed thereto under “Overview of Investment Structure –
Forward Agreement”.
“Fund” means First National Mortgage Investment Fund, a trust established under the laws of the Province of
Ontario pursuant to the Declaration of Trust.
“Funds” means, collectively, the Fund and the Mortgage Trust.
“Hurdle Rate” has the meaning ascribed thereto under “Fees and Expenses – Performance Fee”.
“IRC” means the independent review committee of the Fund.
“Loan-to-Value” means the ratio, expressed as a percentage, determined by A/B x 100 where:
A = the principal amount of the Mortgage, together with all other equal and prior ranking mortgages on the
Real Property; and
B = the appraised market value of the Real Property securing the Mortgage at the time of funding the
Mortgage or its most recent renewal, whichever occurs later.
“Management Fee” has the meaning ascribed thereto under “Fees and Expenses – Management Fee”.
“Management Fee Distribution”, as described under “Fees and Expenses”, means an amount equal to the
difference between the Management Fee otherwise chargeable by the Manager and a reduced fee determined by the
Manager, at its discretion, from time to time, and that is distributed quarterly in cash by the Fund, at the discretion of
the Manager, to the applicable Unitholders who hold large investments in the Fund;
“Manager” means Stone Asset Management Limited, in its capacity as manager of the Fund and/or the Mortgage
Trust, as the context may require, and its successors and assigns.
“minimum distribution requirements” has the meaning ascribed thereto under “Income Tax Considerations –
Status of the Fund”.
“Market Price” means, on a particular date: (i) an amount equal to the closing price of the Units on the principal
exchange or market on which the Units are quoted for trading if there was a trade on such date and the exchange or
market provides a closing price; (ii) an amount equal to the weighted average of the highest and lowest prices of the
Units if there was trading on such date on the principal exchange or market on which Units are quoted for trading
and the exchange or market provides only the highest and lowest trading prices of the Units traded on such date; or
(iii) the weighted average of the last bid and last asking prices if there was no trading on that date.
“Monthly Redemption Date” means the second last Business Day of each month.
“Monthly Redemption Price” means the lesser of: (i) 95% of the Trading Price; and (ii) the Market Price.
“Mortgage” means an interest in a mortgage, a mortgage of a leasehold interest (or other like instrument, including
an assignment of or an acknowledgment of an interest in a mortgage), a hypothecation, a deed of trust, a charge or
other security interest of or in Real Property used to secure obligations to repay money by a charge upon the Real
Property and will generally include commercial mortgages, multi-unit residential and single family residential
mortgages.
“Mortgage Investment Advisor” means First National Financial LP, in its capacity as mortgage investment advisor
of the Mortgage Trust, and its successors and assigns.
“Mortgage Trust” means FN Mortgage Investment Trust, a trust established under the laws of the Province of
Ontario pursuant to the Mortgage Trust Declaration of Trust.
“Mortgage Trust Declaration of Trust” means the declaration of trust of the Mortgage Trust dated November 27,
2012 establishing the Mortgage Trust under the laws of the Province of Ontario.
10
“Mortgage Trust Portfolio Management Agreement” means the portfolio management agreement with respect to
the Mortgage Trust to be dated on or before the Closing Date between the Manager and the Portfolio Manager, as
portfolio manager of the Mortgage Trust, as it may be amended from time to time.
“National Housing Act” means the National Housing Act, R.S.C., 1985, c. N-11, as it may be amended from time
to time.
“NAV” means net asset value.
“Net Asset Value of the Fund” or “NAV of the Fund” on a particular date will be equal to (i) the aggregate fair
value of the assets of the Fund, less (ii) the aggregate fair value of the liabilities of the Fund.
“Net Asset Value of the Mortgage Trust” or “NAV of the Mortgage Trust” on a particular date will be equal to
(i) the aggregate fair value of the assets of the Mortgage Trust, less (ii) the aggregate fair value of the liabilities of
the Mortgage Trust.
“Net Asset Value per Unit” or “NAV per Unit” means the Net Asset Value of the Fund divided by the number of
Units then outstanding.
“NI 31-103” means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant
Obligations of the Canadian Securities Administrators, as it may be amended from time to time.
“NI 81-102” means National Instrument 81-102 Mutual Funds of the Canadian Securities Administrators, as it may
be amended from time to time.
“NI 81-106” means National Instrument 81-106 Investment Fund Continuous Disclosure of the Canadian Securities
Administrators, as it may be amended from time to time.
“NI 81-107” means National Instrument 81-107 Independent Review Committee for Investment Funds of the
Canadian Securities Administrators, as it may be amended from time to time.
“non-residents” has the meaning ascribed thereto under “Unitholder Matters”.
“Notional Portfolio” has the meaning ascribed thereto under “Overview of the Investment Structure – Forward
Agreement”.
“Offering” means the offering of a minimum of 2,500,000 Units and a maximum of 10,000,000 Units at a price of
$10.00 per Unit, as contemplated in this prospectus.
“Over-Allotment Option” has the meaning ascribed thereto on the face page of the prospectus.
“Performance Fee” has the meaning ascribed thereto under “Fees and Expenses – Performance Fee”.
“plan trust” has the meaning ascribed thereto under “Income Tax Considerations – Status of the Fund”.
“Portfolio” has the meaning ascribed thereto under “Investment Objectives”.
“Portfolio Management Agreement” means the portfolio management agreement with respect to the Fund to be
dated on or before the Closing Date between the Manager and the Portfolio Manager, as portfolio manager of the
Fund, as it may be amended from time to time.
“Portfolio Manager” means Stone Asset Management Limited, in its capacity as portfolio manager of the Fund
and/or the Mortgage Trust, as the context may require, and its successors and assigns.
“Promoter” means First National Asset Management Inc., in its capacity as promoter of the Fund and/or the
Mortgage Trust, as the context may require.
“Real Property” means land, rights or interest in land in Canada (including, without limitation, leaseholds, air
rights and rights in condominiums, but excluding Mortgages) and any buildings, structures, improvements and
fixtures located thereon.
“Redemption Notice” has the meaning ascribed thereto under “Attributes of the Securities – Registration and
Redemption of Units”.
“Redemption Payment Date” means the Business Day that is on or before the 15th Business Day in the month
following a Monthly Redemption Date or Annual Redemption Date.
11
“Securities Act” means Securities Act (Ontario), R.S.O. 1990, c. S.5, as it may be amended from time to time.
“Servicing Fee” has the meaning ascribed thereto under “Fees and Expenses – Servicing Fee”.
“Sub-Advisory Agreement” means the agreement with respect to the Mortgage Trust to be dated on or before the
Closing Date between the Portfolio Manager and the Mortgage Investment Advisor, as it may be amended from time
to time.
“taxable capital gain” has the meaning ascribed thereto under “Income Tax Considerations – Taxation of the
Fund”.
“Tax Act” means the Income Tax Act (Canada) and the regulations thereunder, as they may be amended from time
to time.
“Tax Proposals” has the meaning ascribed thereto under “Income Tax Considerations”.
“Total Assets” means the aggregate fair value of the assets of the Mortgage Trust as determined in accordance with
the terms of the Mortgage Trust Declaration of Trust.
“Trading Price” means the weighted average trading price of the Units on the principal exchange or market on
which the Units are quoted for trading for the 10 Business Days immediately preceding the applicable Monthly
Redemption Date.
“Trustee” means Stone Asset Management Limited, in its capacity as trustee of the Fund and/or the Mortgage Trust,
as the context may require, and its successors and assigns.
“TSX” means the Toronto Stock Exchange.
“Unit” means a transferrable trust unit of the Fund.
“Unitholder” means, unless the context requires otherwise, a holder of a Unit.
“Valuation Date” has the meaning ascribed thereto under “Calculation of Net Asset Value”.
“$” means Canadian dollars unless otherwise indicated.
12
FORWARD LOOKING STATEMENTS
Certain statements included in this prospectus constitute forward looking statements. Forward-looking statements
include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words
such as “expects”, “anticipates”, “plans”, “believes”, “estimates”, “intends”, “targets”, “projects”, “forecasts” or
negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”,
“should”, “would” and “could”, and similar expressions to the extent they relate to the Trustee, the Manager, the
Mortgage Investment Advisor, the Fund or the Mortgage Trust. The forward looking statements are not historical
facts but reflect the current expectations regarding future results or events. These forward looking statements are
subject to a number of risks and uncertainties that could cause actual results or events to differ materially from
current expectations, including but not limited to, the matters discussed under “Risk Factors” and in other sections of
this prospectus.
These and other factors should be considered carefully and readers should not place undue reliance on the Fund’s
forward-looking statements. The Fund, the Trustee, the Manager and the Mortgage Investment Advisor do not
undertake to update any forward-looking statement that is contained in this prospectus.
13
OVERVIEW OF THE LEGAL STRUCTURE OF THE FUND
First National Mortgage Investment Fund (the “Fund”) is an investment fund established under the laws of the
Province of Ontario pursuant to the Declaration of Trust dated November 27, 2012. The principal office of the Fund
is located at 36 Toronto Street, Suite 710, Toronto, Ontario, M5C 2C5.
The Fund is not a “mutual fund” as defined under Canadian securities laws and, accordingly, the Fund is not subject
to the Canadian policies and regulations that apply to mutual funds. As a result, some of the protections provided to
investors in mutual funds under such laws will not be available to investors in the Units.
INVESTMENT OBJECTIVES
The investment objectives of the Fund are to:
(i)
provide holders of units (“Units”) of the Fund (“Unitholders”) with tax-advantaged monthly cash
distributions; and
(ii)
preserve capital.
The Fund has been created to obtain exposure to a diversified portfolio (the “Portfolio”) of Mortgages originated by
First National Financial LP (the “Mortgage Investment Advisor” or “First National”), a wholly owned subsidiary
of First National Financial Corporation.
The Fund will obtain economic exposure to the Portfolio through a forward agreement (the “Forward
Agreement”). The return of the Fund will, by virtue of the Forward Agreement, be based on the performance of FN
Mortgage Investment Trust (the “Mortgage Trust”), a newly created investment trust, that will acquire the
Portfolio.
INVESTMENT STRATEGIES
The Mortgage Trust will seek to accomplish its investment objectives through prudent investments in short term
Mortgages (typically 12-36 months) primarily on multi-unit residential and commercial mortgages across Canada.
Mortgages will be secured primarily by income producing Real Property where the principal and interest can be
serviced from cash flow generated by the underlying Real Property.
In general, Mortgages will generate income through a rate of interest that is typically payable periodically throughout
the terms of the Mortgages, as well as Commitment Fees which generally are paid at the time of initial funding.
Commitment Fees received by the Mortgage Trust will be the net amount (on average, approximately 40% of the gross
Commitment Fee) after payment of a fee to the originator, who also may be the Mortgage Investment Advisor, for
sourcing a Mortgage. All Mortgages will be secured by Real Property consisting primarily of multi-unit residential,
office, retail, industrial or other commercial property in Canada. Mortgages may be either first ranking, a junior
position in a first ranking Mortgage, or a second ranking Mortgage, and individual Mortgages may be secured by more
than one property owned by the same borrower. Investments in the Portfolio also will be made in accordance with
certain investment restrictions. The Mortgage Trust will rely on the origination expertise of the Mortgage Investment
Advisor to meet these objectives.
Servicing of Mortgages
The Mortgage Investment Advisor services substantially all of the mortgages that it originates whether the mortgage
is placed with an institutional investor or through one of the Mortgage Investment Advisor’s securitization vehicles.
In addition, the Mortgage Investment Advisor services mortgages, which have not been originated by the Mortgage
Investment Advisor, on behalf of third-party institutional investors and securitization structures. Many institutions
and securitization structures do not have in-house mortgage servicing capabilities and require third-party providers
for this function. The Mortgage Investment Advisor is rated “above average” by Standard & Poor’s for commercial
master servicing, commercial special servicing and residential primary servicing. The Dominion Bond Rating
Service has rated the Mortgage Investment Advisor for commercial master servicing and residential primary
servicing.
The principal functions of mortgage servicing are: (i) the collection of mortgage payments from the borrower and
the remittance of these payments to the investor; (ii) accounting of the amounts due under the mortgage; (iii)
14
verifying that the borrower fulfills its obligations (such as maintaining property insurance and paying realty taxes)
under the mortgage; (iv) enforcing the mortgage security in the event of a borrower default; and (v) otherwise
administering the mortgage on behalf of the investor in accordance with the mortgage servicing agreement.
Mortgage Investment Process
The Mortgage Investment Advisor will utilize an investment process that has a proven track record of originating
high quality mortgage investments for over 20 years. The Mortgage Investment Advisor will rely on its experienced
mortgage originators and underwriters to seek high quality mortgage investment opportunities from its existing
customer base represented by 5,389 multi-unit residential and commercial mortgages under administration as at June
30, 2012. The identification of appropriate mortgage investment opportunities will be based on an assessment of risk
primarily related to property location, the borrower’s creditworthiness and the strength of the property cash flow
attributes. The Mortgage Investment Advisor believes that high quality mortgage investments appropriate for the
Mortgage Trust are those where: (i) the borrower has a clear exit strategy; (ii) the mortgage is secured by Real
Property that is reasonably liquid; and (iii) the borrower has both the required experience and equity invested in the
Real Property securing the loan.
Each mortgage loan is subject to a detailed credit adjudication process by the Mortgage Investment Advisor.
Mortgage loans that are determined to be satisfactory after this process will be presented to a committee consisting
of senior credit officers and managers (the “Mortgage Credit Committee”) together with a comprehensive due
diligence report. The Mortgage Credit Committee will consider each investment opportunity presented to it with a
view to assessing the strength of the security and covenants of the mortgage investment opportunity together with
the extent of any default risks associated with the mortgage. In considering the adequacy of the underlying real
estate that is offered as security on a proposed loan, the Mortgage Credit Committee will rely on, but not be limited
to, a review of the following factors:
•
•
•
•
•
•
•
•
covenants and experience of the borrower and/or guarantor;
assessment of cash flow stability;
exit strategy of the proposed loan;
real estate valuations – supported by third party appraisals;
environmental risks – supported by third party environmental reports;
default risk of the proposed loan;
structural integrity of the real estate that is offered as security for the proposed loan, supported by third
party structural/engineering reports (where necessary); and
other issues specific to each investment.
Following its review, the Mortgage Credit Committee will make a recommendation with respect to the mortgage
investment opportunity. Only with a positive recommendation from the Mortgage Credit Committee will the
Mortgage Investment Advisor consider recommending the investment opportunity to the Portfolio Manager.
Once funded, the Mortgage Investment Advisor will regularly monitor the status of each loan and the ongoing credit
of the borrower. Through the Mortgage Investment Advisor’s servicing platform, the Mortgage Investment Advisor
will monitor and ensure the adequacy of the loan’s performance by substantiating mortgage and realty tax payments;
confirming insurance coverage; reviewing financial and operating statements; and verifying the borrower’s
undertakings. In addition, the Mortgage Investment Advisor through its mortgage originators, will communicate
with the borrower to understand how the asset is performing and to discuss repayment strategies if required. The
Mortgage Investment Advisor believes that a strong relationship with the borrower is critical to the success of the
loan and to the development of a high quality repeat customer.
In the circumstance where a subject investment would constitute a “conflict of interest matter”, as defined in NI 81107, prior to the investment being approved, the Manager will also present the proposed investment to the IRC for
its review and consideration. Upon the IRC providing a positive recommendation, the Portfolio Manager could then
proceed with the proposed investment. In addition, the IRC may provide standing instructions to address conflicts
15
that may arise from time to time and for which the IRC has established a protocol or other procedures to ameliorate
such conflict. See “Conflicts of Interest”.
Leverage
The Mortgage Trust may utilize loan facilities to borrow up to 25% of the Total Assets of the Mortgage Trust to
fund working capital requirements and to fund the acquisition of Mortgages from time to time. Accordingly, at the
time such leverage is incurred, the maximum amount of leverage that the Mortgage Trust could employ is 1.33:1
(total long positions (including leveraged positions) divided by the net assets of the Mortgage Trust). It is expected
that the terms, conditions, interest rate, fees and expenses of and under the facility will be typical of credit facilities
of this nature and that the lender will require the Mortgage Trust to provide a security interest in favour of the lender
in the assets of the Mortgage Trust to secure such borrowings.
Securities Lending
In order to generate additional returns, the Fund may lend securities. Any securities lending must be pursuant to a
securities lending agreement to be entered into with a securities borrower acceptable to the Manager pursuant to
which securities will be loaned to the securities borrower on the terms contained therein, which terms shall include
that: (i) the borrower will pay to a negotiated securities lending fee and will make compensation payments equal to
any distributions received by the borrower on the securities borrowed; (ii) the securities loans must qualify as
“securities lending arrangements” for the purposes of the Tax Act; and (iii) collateral security will be provided by
the borrower of securities. The Manager will be responsible for setting and reviewing any securities lending
agreements. If a securities lending agent is appointed, such agent will be responsible for the ongoing administration
of the securities loans, including the obligation to mark-to-market the collateral on a daily basis. The Fund will not,
however, lend securities in the first six months following Closing.
Mortgage Tranching
The Mortgage Trust may hold interests in Mortgages in which the Portfolio Manager has permitted third parties
(typically Canadian chartered banks, trust companies and other mortgage investors) to participate in senior portions
at reduced interest rates. This enables the Portfolio to retain a disproportionately large amount of interest revenue
when compared to the portions of the Mortgages it retains. This practice - sometimes referred to as ‘‘tranching’’ enables the Portfolio to effectively increase its returns while using less capital for each Mortgage investment
(thereby facilitating greater diversification for the Portfolio) and, in all cases, retaining the Mortgage Investment
Advisor’s control over administering the entire Mortgage. The Mortgage Investment Advisor believes that tranching
enhances risk-adjusted returns as the interest rate received by the Mortgage Trust is significantly higher than the rate
it would have obtained under an equivalent non-tranched Mortgage. The senior portion of the Mortgage is referred
to as the tranche A portion and the junior portion is referred to as the tranche B portion.
The participation interests of the Mortgage Trust and third parties in Mortgages generally are represented through
participation agreements under which the Manager retains control over administering the entire Mortgage. The
standard participation agreement used with respect to the Mortgages provides for the respective ownership interests
of the parties, priority interest of the senior lender, share of interest to be received by each participant and the junior
lender’s right to purchase the senior lender’s position for the outstanding principal, interest and other amounts
outstanding at the time of the purchase.
The Mortgage Investment Advisor may also provide day-to-day administration of certain individual mortgages in
instances where those mortgages are structured on a tranche basis where the Mortgage Trust is a participant is the
tranche B portion of the mortgage and a third party is the investor in the tranche A portion of the mortgage. In these
instances the Mortgage Investment Advisor may receive a fee for (i) acting as the mortgage servicing agent for the
tranche A portion of the mortgage and (ii) originating the tranche A portion of the mortgage.
16
OVERVIEW OF THE INVESTMENT STRUCTURE
The investment structure of the Fund is illustrated below. This diagram is provided for illustration purposes only
and is qualified by the information set forth elsewhere in this prospectus.
Unitholders
First National Mortgage
Investment Fund
(the “Fund”)
Forward Agreement
Pledge by the Fund of Common
Share Portfolio to Counterparty
Common Share
Portfolio
FN Mortgage Investment
Trust
(“Mortgage Trust”)
Counterparty
Forward sale of Common
Share Portfolio to
Counterparty
Counterparty or an affiliate
The Counterparty may purchase
and hold units of Mortgage Trust
in order to hedge its exposure under the
terms of the Forward Agreement
Portfolio
Forward Agreement
The Fund will obtain exposure to the Portfolio through the Forward Agreement (as defined herein). The Fund will
invest the net proceeds of the Offering in a portfolio of common shares of Canadian public companies (the
“Common Share Portfolio”) acceptable to the Counterparty (as defined herein). The Fund will then enter into a
forward agreement (the “Forward Agreement”), the terms of which will be negotiated by the Manager on behalf of
the Fund, with a Canadian chartered bank or an affiliate of a Canadian chartered bank whose obligations are
guaranteed by a Canadian chartered bank (the “Counterparty”) pursuant to which the Counterparty will agree to
pay to the Fund on the scheduled settlement of the Forward Agreement (the “Forward Termination Date”), as the
purchase price for the Common Share Portfolio, an amount based on the value of the units of the Mortgage Trust.
On or about the completion of the Offering, the Mortgage Trust expects to issue units to the Counterparty for
aggregate subscription proceeds equal to the net proceeds of the Offering; however, there is no obligation on the
Counterparty to acquire units of the Mortgage Trust. Assuming that the Counterparty is the purchaser of the
Mortgage Trust’s units, the Mortgage Trust will use the proceeds of such issuance to acquire the Portfolio which
will have an initial value equal to the net proceeds of the corresponding issuance of Units by the Fund. If the
17
Counterparty does not acquire such units in the Mortgage Trust, the Manager will maintain a notional portfolio, on
behalf of the Mortgage Trust, with an initial invested amount equal to the amount of the net proceeds realized by the
Fund in connection with the issuances of Units (the “Notional Portfolio”) and apply the investment strategy
described herein to the assets notionally included in the Notional Portfolio. The return to the Fund will, by virtue of
the Forward Agreement, be based on the performance of the Mortgage Trust which, in turn, will be based on the
performance of the Portfolio.
The Fund will partially settle the Forward Agreement prior to the Forward Termination Date in order to fund
monthly distributions as well as redemptions of Units by Unitholders from time to time and for payment of expenses
of the Fund.
The Manager acts as manager and portfolio manager of the Fund and the Mortgage Trust and will provide
investment advisory and portfolio management services to the Mortgage Trust and the Fund as described elsewhere
herein. See “Organization and Management Details of the Fund and the Mortgage Trust”. The return to the
Unitholders will be dependent upon the return on the Mortgage Trust and the Portfolio by virtue of the Forward
Agreement. However, neither the Fund nor the Unitholders will have any ownership interest in the Mortgage Trust
or the Portfolio.
Under the Forward Agreement, the forward purchase price may be reduced for all dividends and distributions,
including extraordinary distributions, declared and paid on the Common Share Portfolio securities paid to the Fund
as owner of the Common Share Portfolio. In order to minimize the likelihood that such dividends or distributions
will be paid, the Fund intends to acquire non-dividend paying common shares of Canadian public companies for the
Common Share Portfolio. However, if any such dividends or distributions are to be received by the Fund, the
Forward Agreement will provide that replacement securities acceptable to the Counterparty may, at the Fund’s
option, be substituted for shares in respect of which the dividend or distribution has been declared prior to the record
date for such dividend or distribution to preserve the value of the forward transaction. In the event that such
replacement securities are not available, the Fund may consider contributing additional securities to the Common
Share Portfolio or entering into additional forward, derivative or other transactions. The Forward Agreement will
have similar provisions designed to avoid adjustments of the amount to be paid on or about the Forward Termination
Date which might otherwise be required if the Fund receives consideration as a consequence of a merger transaction
involving any of the securities in the Common Share Portfolio.
The Forward Agreement may be terminated prior to the Forward Termination Date in certain circumstances,
including: (i) in the event of a termination event under the Forward Agreement; or (ii) if an event of default or a
termination event occurs with respect to the Fund or the Counterparty under the Forward Agreement.
Termination events under the Forward Agreement will include the following: (i) it becomes unlawful for a party to
perform its obligations under or comply with any material provisions of the Forward Agreement; (ii) certain tax
events occur which require a party to indemnify the other party in respect of certain taxes or reduce the amount that
a party would otherwise have been entitled to receive under the Forward Agreement; (iii) failure of the Fund to
comply with its governing documents; (iv) certain regulatory, credit or legal events occur which affect a party
thereto, or the Manager; or (v) if the Counterparty determines in its sole discretion, acting reasonably and in good
faith, that it is unable to effectively hedge its position under the Forward Agreement or that the cost of hedging its
position under the Forward Agreement has increased, including, without limitation, as a result of the adoption of or
change in any applicable law or regulation and the Fund is unable or unwilling, in its sole discretion, to compensate
the Counterparty for such increased cost of hedging. The legitimate exercise of the Counterparty’s rights may be
contrary to the interests of the Fund or the holders of Units.
Events of default under the Forward Agreement include the following: (i) failure by a party to make a payment or
perform an obligation when due under the Forward Agreement which is not cured within any applicable grace
period; (ii) a party makes a representation which is incorrect or misleading in any material respect; (iii) a party
defaults in respect of a specified transaction which default is not cured within any applicable grace period; (iv)
certain events related to the bankruptcy or insolvency of a party; and (v) a party consolidates, amalgamates or
merges with or into, or transfers substantially all its assets to, another entity and the resulting, surviving or transferee
entity fails to assume the obligations of such party under the Forward Agreement.
The Counterparty may hedge its exposure under the Forward Agreement to the economic performance of the
Mortgage Trust. There is no assurance that the Counterparty will maintain a hedge or will do so with respect to the
18
full amount or term of the Forward Agreement. The Fund is fully exposed to the credit risk associated with the
Counterparty in respect of the Forward Agreement.
If the Forward Agreement is terminated prior to the Forward Termination Date for any reason, it is anticipated that
the Forward Agreement will be settled by physical delivery of the Common Share Portfolio by the Fund to the
Counterparty after payment of any amount owing to the Counterparty. In the event of an early termination, the
Manager may, in its discretion, enter into a replacement forward agreement on terms satisfactory to the Manager, in
its sole discretion, or the Manager may terminate the Fund and may take such other action as it considers necessary
under the circumstances.
In the event that a Notional Portfolio is maintained rather than an investment in the Mortgage Trust: the Manager
will provide the same continuous disclosure documentation regarding the Notional Portfolio as would be required
with respect to the Mortgage Trust (except with respect to the proxy voting record as the Mortgage Trust would not
actually own securities); the method used to determine the value of the Notional Portfolio would comply with NI 81106 and would be calculated based on the principles set forth under the heading “Calculation of Net Asset Value”; in
connection with their audit and periodic reviews, the auditors will have the same involvement with the review of the
value of the Notional Portfolio as they would otherwise have if the Counterparty were to invest in units of the
Mortgage Trust; and the Counterparty and the Manager will agree to the policies, procedures and mechanisms that
will need to be put in place in order to manage the Notional Portfolio.
The Counterparty is at arm’s length to each of the Fund, the Manager and the Trustee. One or more affiliates of the
Counterparty may be involved in the offering and sale, from time to time, of the Units, through the TSX, and may
invest as principal in these securities. The Counterparty and its affiliates may, at present or in the future, engage in
business with the Fund, the issuers of securities making up the investment portfolio of the Fund, or with the
Manager or any funds sponsored by the Manager or its affiliates, including by making loans, entering into derivative
transactions or providing advisory or agency services. In addition, the relationship between the Counterparty and its
affiliates, and the Manager and its affiliates may extend to other activities, such as being part of distribution
syndicate for other funds sponsored by the Manager or its affiliates.
As counterparty under the Forward Agreement, the interests of the Counterparty differ from those of the Fund and
the Counterparty can be expected to exercise its rights from time to time under the Forward Agreement in its own
best interests.
OVERVIEW OF THE SECTOR THAT THE PORTFOLIO INVESTS IN
The Mortgage Investment Advisor believes that the fundamentals for real estate investment and development remain
favourable in Canada as commercial real estate continues to be in high demand due to strong operating
fundamentals. The demand has been supported by public and private investors seeking hard assets that provide
stable cash flow. Real estate investment trusts (REITs) and pension funds have become more prominent investors
over the last several years and continue to raise capital to acquire new assets. Canadian real estate prices have
appreciated recently and are expected to remain stable due to a balance between supply and demand. This balance
has been driven by disciplined investors who have remained focused on risk management rather than speculation.
These valuations and fundamentals continue to provide an attractive market for Mortgage lending in quality real
estate assets across Canada.
The commercial mortgage market is large in Canada and independent originators are gaining market share.
According to the 2011 Canadian Institutional Commercial Mortgage Market Report, published by The Real Property
Association of Canada, the estimated total size of the disclosed institutional commercial mortgage market was
$110.9 billion as at May 2011. Since 2009, the amount of non-residential commercial mortgage loans originated by
non-traditional financial institutions has increased by a compound annual growth rate of 13%. In the same period,
the amount of non-residential commercial loans originated by traditional banks, mortgage loan companies and credit
unions have experienced a compound annual growth rate of 6%.
The global credit crisis in 2008 and early 2009 altered the Mortgage financing landscape in Canada and as such the
funds available from lenders for investment in real estate has contracted. Traditional financial institutions, pension
funds, insurance companies, and other institutional lenders have reduced their available credit for commercial
Mortgages for a variety of reasons, including: increasingly strict impositions by Canadian regulatory agencies on
lending practices, insufficient returns from debt products due to low Government of Canada bond yields and a
mandate to reduce real estate exposure on their balance sheets. Two other significant sources of funding disappeared
19
with the shutdown of the Canadian commercial mortgage-backed securities (CMBS) market in 2007 and the loss of
foreign lenders in the Canadian marketplace, primarily from the United States and Europe. The CMBS market in
particular was problematic given that it was a significant source of commercial real estate financing and had
represented approximately 25% of new commercial real estate term debt in Canada in 2006. With available
Mortgage capital declining, the remaining market participants have become more selective in underwriting higher
quality Mortgages. Due to the factors outlined above, the Mortgage Investment Advisor believes that there will be
opportunities for it to provide high quality commercial Mortgage lending in Canada.
Overall, the Mortgage Investment Advisor believes that the factors cited above have created an opportunity for
independent originators to charge premium interest rates for high quality Mortgage loans to seasoned and
experienced real estate investors. These investors are seeking lenders that can respond quickly and can execute a
loan structure that provides reasonable flexibility while still maintaining prudent underwriting criteria. The
Mortgage Investment Advisor believes that this reduction of available Mortgage capital has contributed to the
increased number of attractive investment opportunities available to the Mortgage Trust.
Overview of the Real Estate Sectors in Which the Mortgage Trust May Invest
Real estate investment within the Canadian market is comprised mainly of residential (including single family,
multi-family, student residences and retirement residences), office, retail and industrial buildings, self-storage, as
well as land for development. The owners of commercial real estate range widely from large institutional investors,
such as pension funds and public companies, to smaller entrepreneurial investors, such as privately managed and
commingled investment funds and individuals. It is very common for these investors to require some form of
mortgage financing (in combination with their equity) to acquire, develop or re-position real property.
Residential
Residential real estate is comprised of multi-family properties in the form of apartment buildings, retirement and
nursing residences, student residences, residential building lots and condominium inventory. Tenant demand for
these types of properties is driven by various community characteristics including location, security, access to
arterial roadways and public transportation, and proximity to educational facilities. Student housing in particular
captures a tenant base that values proximity to universities and colleges, and is primarily multi-residential.
Although this asset class is considered to have a low level of risk due to consistently high demand, the sector does
experience considerable tenant turnover. The impact felt from this turnover on investor’s profitability is often
limited because it is spread across a large tenant base.
Retail
Retail properties are leased to commercial businesses which sell products and services to the general public for their
consumption. Demand from tenants for these properties is driven by their location, curb appeal, traffic, and area
demographics including population density. Returns from investment in retail properties are generally stable due to
longer lease terms. Risk of return can also be diminished with a diversified group of tenants with staggered lease
maturities. In particular, large anchor tenants in retail plazas may pay lower rental rates, however they increase
traffic for smaller tenants which pay higher rental rates.
Industrial
Industrial properties are comprised of various buildings used for the purposes of warehousing or distribution,
manufacturing, research and development, and showrooms. In addition, these properties may be used as a low cost
alternative to office space for back office operations, call centers, or other general uses. For the most part these
properties are single story buildings, have either a single or multiple tenants, and range in size from 5,000 square
feet to 100,000+ square feet of gross leasable area. Typically these are located near major metropolitan regions and
are in close proximity to major thoroughfares. This asset class tends to operate close to its supply and demand
equilibrium due to a shorter development cycle, which leads to stable availability rates. Because of this, most
development is done on a built-to-suit basis, where tenants are determined before construction. There is limited
speculative development in this asset class. Given the homogeneous nature of these buildings, these are able to
accommodate a diverse tenant base. This further facilitates the supply/demand equilibrium, and makes for an asset
class that closely tracks the overall performance of the economy. Industrial leases tend to have mid-to-long term
leases, and rollover risk is mitigated by high relocation costs for the tenants. However, if a tenant does vacate,
securing a replacement tenant can take some time. As such, a thorough assessment of the tenant’s creditworthiness
is necessary when evaluating the feasibility of mortgage financing for an industrial property. Industrial properties
20
generally require lower average investment, minimal management, and have lower operating costs than office or
retail properties. Critical factors for evaluating an investment in an industrial property include proximity to major
thoroughfares, functionality, ceiling height, and the degree to which the property is specialized.
Office
Office properties are generally comprised of multi-tenant buildings located in downtown cores, suburban office
parks, or near airports. Leases are generally mid-to-long term and provide steady cash flow. In comparison to retail
or industrial properties, returns from office properties can be more variable as the market is more susceptible to
fluctuations in the overall economy. As with industrial properties, a thorough assessment of the tenant’s
creditworthiness, market rental rates and the lease rollover profile is necessary when evaluating the feasibility of
mortgage financing for an office property.
Types of Mortgages
The Mortgage Trust will focus on short-term bridge financing Mortgages to qualified real estate investors and
developers. Mortgages may be either first ranking, a junior position in a first ranking Mortgage, or a second ranking
Mortgage. Bridge mortgages are short-term loans, typically borrowed to bridge a short period of time, generally
ranging between 6 months and 3 years. Bridge loans are often used for capital repairs to a property, redevelopment
of a property, or the purchase of another investment. Bridge loans typically bear higher rates of interest than
traditional debt financing. A sale of the property or debt refinancing will often provide sufficient proceeds to repay
the bridge mortgage.
In some cases, Mortgages may finance Real Property development or construction. Development mortgages are
typically loans secured against development lands prior to development or with existing buildings that are slated for
redevelopment in short term. In either case, the majority of the value of the asset is in the underlying land.
Development mortgages are frequently used to assist in funding site acquisitions, predevelopment costs, and costs
associated with servicing sites with infrastructure. Construction loans are used to finance the construction of Real
Property. Often, construction loans contain features such as interest reserves where repayment ability may be based
on an event that can occur only once the project is built, and/or interest-only payments, and in either case often
become due upon completion of the project. Construction loans are variable-rate, and often require special
monitoring and guidelines to ensure that the project is completed and that repayment can begin to take place.
INVESTMENT RESTRICTIONS
Investment Restrictions of the Fund
The investment activities of the Fund are to be conducted in accordance with, among other things, the following
investment restrictions:
(i)
the Fund will ensure that all securities included in the Common Share Portfolio are “Canadian
securities” as defined in the Tax Act;
(ii)
the Fund will not purchase securities other than through normal market facilities unless the
purchase price approximates the prevailing market price or is negotiated or established on an
arm’s length basis;
(iii)
the Fund will not purchase securities of an issuer if, as a result of such purchase, the Fund would
be required to make a takeover bid that is a “formal bid” for the purposes of the Securities Act or
the equivalent provision of applicable securities laws of any other jurisdiction;
(iv)
the Fund will manage its investments and affairs to ensure that it will be a “mutual fund trust” for
purposes of the Tax Act and will not acquire any property that would be “taxable Canadian
property” of the Fund as such term is defined in the Tax Act (if the definition were read without
reference to paragraph (b) thereof) (or any amendment to such definition);
(v)
the Fund will manage its investments and affairs to ensure that it will not be subject to the tax for
SIFT trusts as provided for in section 122 of the Tax Act.
The Fund may lend up to 100% of the securities comprising the Common Share Portfolio. Any securities lending by
the Fund must be pursuant to a securities lending agreement to be entered into between the Fund and a securities
21
borrower acceptable to the Fund pursuant to which the Fund will loan the securities comprising the Common Share
Portfolio to the securities borrower on the basis set forth above under “Investment Strategies – Securities Lending”.
The Manager will be responsible for setting and reviewing any securities lending agreements. If a securities lending
agent is appointed for the Fund, such agent will be responsible for the ongoing administration of the securities loans,
including the obligation to mark-to-market the collateral on a daily basis. The Fund will not, however, lend
securities in the first six months following the closing of the Offering.
The Fund may also hold cash equivalents from time to time. In addition, but subject to these investment restrictions,
the Fund has adopted, in connection with the Common Share Portfolio, a restriction which limits the purchase of
securities of any one issuer to not more than 10% of the NAV of the Fund at the time of purchase. A copy of such
standard investment restrictions and practices will be provided by the Manager to any Unitholder on request.
Unitholder approval is required to change the investment restrictions and investment objectives of the Fund. See
“Unitholder Matters – Matters Requiring Unitholder Approval”.
Investment Restrictions on the Mortgage Trust
The investment activities of the Mortgage Trust are to be conducted in accordance with, among other things, the
following investment restrictions:
(i)
at the time of drawdown, not employ borrowings exceeding 25% of the Total Assets of the
Mortgage Trust;
(ii)
the Mortgage Trust will not invest in securities other than Mortgages secured by Real Property
situated in Canada except that, not more than 5% of the NAV of the Mortgage Trust, may be
invested in Mortgage-related investments;
(iii)
at the time of funding each Mortgage: (i) its Loan-to-Value will not exceed 85%; and (ii) weighted
average Loan-to-Value of the entire Portfolio will not exceed 75%;
(iv)
at the time of funding a Mortgage, not more than 20% of the NAV of the Mortgage Trust will be
invested in Mortgages of the same borrower;
(v)
at the time of funding a Mortgage, not more than 30% of the NAV of the Mortgage Trust will be
invested in Mortgages secured by non-income producing Real Property;
(vi)
at the time of funding a Mortgage, not more than 10% of the NAV of the Mortgage Trust will be
invested in Mortgages secured by the same property;
(vii)
at the time of funding a Mortgage, the average term to maturity of Mortgages in the Portfolio will
not exceed 36 months;
(viii)
at the time of funding a Mortgage, not more than 40% of the principal amount of the Portfolio will
be secured by second or lower ranking Mortgages (for greater certainty, a junior position in a first
ranking Mortgage is not considered a second Mortgage);
(ix)
the Mortgage Trust will not purchase securities from, sell securities to, or otherwise contract for
the acquisition or disposition of securities with the Manager or any of its affiliates, any officer,
director or shareholder of the Manager, any person, trust, firm or corporation managed by the
Manager or any of its affiliates or any firm or corporation in which any officer, director or
shareholder of the Manager may have a material interest (which, for these purposes, includes
beneficial ownership of more than 10% of the voting securities of such entity) unless, with respect
to any purchase or sale of securities, any such transaction is effected through normal market
facilities, pursuant to a non-pre-arranged trade, and the purchase price approximates the prevailing
market price or is approved by the Manager’s independent review committee or IRC;
(x)
the Mortgage Trust will not engage in securities lending that does not constitute a “securities
lending arrangement” for purposes of the Tax Act;
22
(xi)
the Mortgage Trust will not invest in or hold (i) securities of or an interest in any non-resident
entity, an interest in or a right or option to acquire such property, or an interest in a partnership
which holds any such property if the Mortgage Trust (or the partnership) would be required to
include any significant amounts in income pursuant to section 94.1 of the Tax Act, (ii) an interest
in a trust (or a partnership which holds such an interest) which would require the Mortgage Trust
(or the partnership) to report income in connection with such interest pursuant to the rules in
proposed section 94.2 of the Tax Act, or (iii) any interest in a non-resident trust (or a partnership
which holds such an interest) other than an “exempt foreign trust” for the purposes of proposed
section 94 of the Tax Act, each as set forth in the proposed amendments to the Tax Act dated
October 24, 2012 (or amendments to such proposals, provisions as enacted into law or successor
provisions thereto);
(xii)
the Mortgage Trust will not invest in any security that is a “tax shelter investment” within the
meaning of section 143.2 of the Tax Act;
(xiii)
the Mortgage Trust will not invest in any security of an issuer that would be a “foreign affiliate” of
the Mortgage Trust for purposes of the Tax Act;
(xiv)
the Mortgage Trust will not, unless it is an “excluded subsidiary entity” (as defined in subsection
122.1(1) of the Tax Act, including any proposed amendments to such definition), invest in: (A)
securities of a “subject entity” (as defined in the Tax Act) that have a total fair market value that
exceeds 10% of the “equity value” (as defined in the Tax Act) of such subject entity; or (B)
securities of a subject entity that, together with all securities of entities affiliated with the subject
entity owned by the Mortgage Trust, have a total fair market value that is greater than 50% of the
equity value of the Mortgage Trust for purposes of the Tax Act;
(xv)
the Mortgage Trust will not, unless it is an “excluded subsidiary entity” (as defined in subsection
122.1(1) of the Tax Act, including any proposed amendments to such definition), invest in
“Canadian real, immoveable or resource property” as that term is defined in the Tax Act, if, at any
time, the total fair market value of such properties is greater than 50% of the equity value of the
Mortgage Trust for purposes of the Tax Act; or
(xvi)
the Mortgage Trust will not, unless it is an “excluded subsidiary entity” (as defined in subsection
122.1(1) of the Tax Act, including any proposed amendments to such definition), invest in any
property that is used by the Mortgage Trust, or a person or partnership with whom the Mortgage
Trust does not deal at arm’s length, in the course of carrying on a business in Canada.
If a percentage restriction on investment or use of assets or borrowing or financing arrangements set forth above as
an investment restriction is adhered to at the time of the transaction, later changes to the market value of the
investment will not be considered a violation of the investment restrictions (except for the restrictions in paragraphs
(xiv) and (xv) above which must be complied with at all times and which may necessitate the selling of investments
from time to time). If the Mortgage Trust receives from an issuer subscription rights to purchase securities of that
issuer, and if the Mortgage Trust exercises those subscription rights at a time when the Mortgage Trust’s holdings of
securities of that issuer would otherwise exceed the limits set forth above, the exercise of those rights will not
constitute a violation of the investment restrictions if, prior to the receipt of securities of that issuer on exercise of
these rights, the Mortgage Trust has sold at least as many securities of the same class and value as would result in
the restriction being complied with.
Notwithstanding the foregoing, at the Manager’s discretion, the Portfolio may be invested entirely in cash or cash
equivalents.
23
FEES AND EXPENSES
Offering Expenses
In addition to the Agents’ fees in respect of the Offering, the Fund will pay the expenses incurred in connection with
the Offering, estimated to be $700,000, subject to a maximum of 1.5% of the gross proceeds of the Offering.
Management Fee
An annual management fee (the “Management Fee”) equal to 0.40% per annum of the NAV of the Fund, calculated
daily and payable monthly in arrears, plus an amount calculated quarterly and paid as soon as practicable after the
end of each calendar quarter equal to the Servicing Fee, plus applicable taxes, will be paid to the Manager.
The Management Fee, which includes the Servicing Fee paid by the Manager to registered dealers, when aggregated
with the management fee paid to the Manager by the Mortgage Trust equals approximately 1.75% per annum of the
NAV.
Servicing Fee
The Manager will pay to registered dealers a servicing fee (the “Servicing Fee”) equal to 0.40% annually of the
NAV per Unit for each Unit held by clients of the registered dealers, calculated and paid at the end of each calendar
quarter commencing on March 31, 2013, plus applicable taxes. The Manager may, from time to time, pay the
Servicing Fee more frequently than quarterly, in which event the Servicing Fee will be pro-rated for the period to
which it relates. The Servicing Fee payable in respect of the quarter in which Closing occurs will be pro-rated based
on the fraction that the number of days from and including the Closing Date to and including the last day of the
calendar quarter is to the number of days in such calendar quarter.
Management Fee Distributions
To encourage very large investments in the Fund and to ensure the Management Fee is competitive for these
investments, the Manager may at its discretion agree to charge a reduced Management Fee with respect to
investments in the Fund by Unitholders that hold, on average during any period specified by the Manager from time
to time, Units having a specified aggregate value. Such a reduction will be dependent upon a number of factors,
including an amount invested and the total assets of the Fund. An amount equal to the difference between the
Management Fee otherwise chargeable and the reduced fee will be distributed quarterly in cash by the Fund, at the
discretion of the Manager, to those Unitholders as Management Fee Distributions.
The availability and amount of Management Fee Distributions with respect to Units will be determined by the
Manager. Management Fee Distributions for the Fund will generally be calculated and applied based on a
Unitholder’s average holdings of Units over each applicable period as specified by the Manager from time to time.
Management Fee Distributions will be available only to beneficial owners of Units and not to the holdings of Units
by dealers, brokers or other CDS Participants that hold Units on behalf of beneficial owners. In order to receive a
Management Fee Distribution for any applicable period, a beneficial owner of Units must submit a claim for a
Management Fee Distribution that is verified by a CDS Participant on the beneficial owner’s behalf and provide the
Manager with such further information as the Manager may require in accordance with the terms and procedures
established by the Manager from time to time.
The Manager reserves the right to discontinue or change Management Fee Distributions at any time. The tax
consequences of Management Fee Distributions made by the Fund generally will be borne by the Unitholders
receiving these distributions from the Manager.
Management Fee paid by the Mortgage Trust
The Manager will also be paid an annual management fee of 0.95% per annum of the NAV of the Mortgage Trust,
calculated daily and payable monthly in arrears, plus applicable taxes. The Manager will pay the fees of the
Mortgage Investment Advisor out of its fees.
Operating Expenses of the Fund
The Fund will pay for all ordinary expenses incurred in connection with its operation and administration. In addition
to the fees and expenses referenced elsewhere in this prospectus, it is expected that the expenses for the Fund will
include, without limitation: all costs of Common Share Portfolio transactions, fees payable to the Manager, the
Custodian and other third party services providers, legal, accounting, audit and valuation fees and expenses, fees and
24
expenses of the members of the IRC, expenses related to compliance with NI 81-107, fees and expenses relating to
the voting of proxies by a third party, premiums for directors’ and officers’ insurance coverage for the directors and
officers of the Trustee and the Manager and members of the IRC, costs of reporting to Unitholders, registrar, transfer
and distribution agency costs, printing and mailing costs, listing fees and expenses and other administrative expenses
and costs incurred in connection with the continuous public filing requirements and investor relations, website
maintenance costs, taxes, brokerage commissions, costs and expenses relating to the issue of Units, costs and
expenses of preparing financial and other reports, costs and expenses arising as a result of complying with all
applicable laws, regulations and policies, extraordinary expenses that the Fund may incur and all amounts paid on
account of indebtedness. Such expenses will also include expenses of any action, suit or other proceedings in which
or in relation to which the Trustee, the Manager, the Custodian, the IRC and/or any of their respective officers,
directors, employees, consultants or agents is entitled to indemnity by the Fund.
The Manager estimates that operational expenses of the Fund, exclusive of management fees, performance fees, debt
service and other costs and brokerage expenses related to portfolio transactions, will be approximately $185,000 per
year.
Operating Expenses of the Mortgage Trust
The Mortgage Trust will pay for all ordinary expenses incurred in connection with its operation and administration.
In addition to the fees and expenses referenced elsewhere in this prospectus, it is expected that expenses of the
Mortgage Trust will include, without limitation, all costs of Portfolio transactions, fees payable to the Manager, the
custodian and other third party service providers, custodial fees, legal, accounting, audit and valuation fees,
commissions, including brokerage commissions, other administrative expenses, all amounts paid on account of
indebtedness and any extraordinary expenses that the Mortgage Trust may incur. The Mortgage Investment Advisor
in the course of servicing a Mortgage on behalf of the Mortgage Trust may charge the borrower certain
administration fees including but not limited to mortgage discharge and NSF fees. These administration fees will be
commensurate with those generally charged in the industry and will be for the account of the Mortgage Investment
Advisor.
The Manager estimates that operational expenses of the Mortgage Trust, exclusive of management fees, debt service
and other costs and brokerage expenses related to Portfolio transactions, will be approximately $140,000 per year.
Counterparty Fee
The Fund will pay to the Counterparty a fee under the Forward Agreement of not greater than 0.45% per annum of
the Total Assets plus a fee, which may vary, based on the value of the Common Share Portfolio, calculated and
payable monthly in arrears. This latter fee, which may vary, is intended to compensate the Counterparty for the costs
of hedging its exposure under the Forward Agreement, if it chooses to do so, and will be approximately equal to the
fees that would be charged to, and costs that would be incurred by, the Counterparty for borrowing securities
matching the securities in the Common Share Portfolio or otherwise hedging its exposure under the Forward
Agreement and is initially anticipated to be no greater than 0.30% per annum of the value of the Common Share
Portfolio. The fee is payable whether or not the Counterparty actually hedges its exposure.
Performance Fee paid by the Mortgage Trust
Beginning in 2013, the Manager will also be entitled to receive, if earned, for each fiscal year of the Mortgage Trust,
a performance fee (the “Performance Fee”). The Performance Fee shall be calculated and accrued monthly and be
paid annually. The amount of the Performance Fee shall be determined as of December 31 of each year (the
“Determination Date”). The Performance Fee for a given year will be equal to 20% of the amount by which the
interest income, any realized and unrealized gains (net of any losses), commitment fees and any other income of the
Mortgage Trust during the period less the fees and expenses of the Mortgage Trust (excluding for such purpose any
accrual for the Performance Fee) during such period exceeds the product of (i) the average of the NAV of the
Mortgage Trust on the last Business Day of each month during the period, and (ii) the average of the two-year
Government of Canada bond yield on the last Business Day of each calendar month during the period plus 400 basis
points (the “Hurdle Rate”).
Upon the redemption of units of the Mortgage Trust, the Manager will also receive, if earned, a Performance Fee
determined as though the redemption date of any units so redeemed was, with respect to such units only, the
Determination Date. Any Performance Fee so determined, plus applicable taxes, shall be payable to the Manager on
the applicable redemption date.
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In respect of redemptions of units of the Mortgage Trust occurring during any year, the Hurdle Rate will be reduced
proportionately to reflect the number of days remaining in the year from that date to December 31 of that year. In
the event that after the Closing new units of the Mortgage Trust are issued, the Hurdle Rate applicable to the
Performance Fee payable with respect to those units will be reduced proportionately to reflect the number of days
remaining in that year.
Additional Services
Any arrangements for additional services between the Fund and the Manager, or any affiliate thereof, that have not
been described in this prospectus shall be on terms that are no less favourable to the Fund than those available from
arm’s length persons (within the meaning of the Tax Act) for comparable services and the Fund shall pay all
expenses associated with such additional services. Any such arrangements would require the prior approval of the
Fund’s independent review committee.
RISK FACTORS
There are certain risks inherent in an investment in the Units, including the following factors, which investors should
carefully consider before investing. Some of the following factors are interrelated and, consequently, investors
should treat such risk factors as a whole. The following information is a summary only of certain risk factors and is
qualified in its entirety by reference to, and must be read in conjunction with, the detailed information appearing
elsewhere in this prospectus. These risks and uncertainties are not the only ones that could affect the Fund and
additional risks and uncertainties not currently known to the Fund or the Manager, or that they currently deem
immaterial, may also impair the returns, NAV of the Fund, NAV per Unit, financial condition and results of
operations of the Fund. If any such risks actually occur, the returns, NAV of the Fund, NAV per Unit, financial
condition and results of operations of the Fund could be materially adversely affected and the financial performance
of the Fund and the ability of the Fund to make cash distributions or satisfy requests for redemptions of Units could
be materially adversely affected.
No Assurance of Achieving Investment Objectives
There is no assurance that the Fund will be able to achieve its investment objectives or be able to pay distributions at
the targeted levels or preserve capital. The funds available for distribution to Unitholders will vary according to,
among other things, the interest and principal payments received in respect of the Mortgage loans comprising the
Portfolio. There is no assurance that the Portfolio will earn any return. The Manager, on behalf of the Fund, may
periodically re-evaluate the Fund’s targeted level of distributions and adjust it higher or lower, which may have a
material effect on the price or value of the Units. An investment in the Fund is appropriate only for investors who
have the capacity to absorb a loss on their investment and who can withstand the effect of distributions not being
paid in any period or at all.
Changes in Real Estate Values
The Mortgage Trust’s investments in Mortgage loans will be secured by real estate, the value of which can fluctuate.
The value of real estate is affected by general economic conditions, local real estate markets, the attractiveness of
the property to tenants where applicable, competition from other available properties, fluctuations in occupancy
rates, operating expenses and other factors. The value of income-producing real property may also depend on the
credit worthiness and financial stability of the borrowers and/or the tenants. Changes in market conditions may
decrease the value of the secured property and reduce the cash flow from the property, thereby impacting the ability
of the borrower to service the debt and/or repay the loan based on the property income. In particular, recent
disruptions to the credit and financial markets in Europe and worldwide and local economic disruptions in areas
where the borrowers of the Mortgage loans are located may adversely affect the value of the real estate on which the
Mortgage loans are secured and the ability of the borrowers to repay the Mortgage loans and thereby negatively
impact on the value of the Units.
A substantial decline in value of Real Property provided as security for a Mortgage may cause the value of the
property to be less than the outstanding principal amount of the Mortgage loan. Foreclosure by the Mortgage Trust
on any such Mortgage loan might not provide the Mortgage Trust with proceeds sufficient to satisfy the outstanding
principal amount of the Mortgage loan.
While independent appraisals are required before the Mortgage Trust may make any Mortgage investments, the
appraised values provided, even where reported on an ‘‘as is’’ basis, are not necessarily reflective of the market
26
value of the underlying real property, which may fluctuate. In addition, the appraised values reported in independent
appraisals may be subject to certain conditions, including the completion of construction, rehabilitation, remediation
or leasehold improvements on the real property providing security for the loan. There can be no assurance that these
conditions will be satisfied and if, and to the extent that they are not satisfied, the appraised value may not be
achieved. Even if such conditions are satisfied, the appraised value may not necessarily reflect the market value of
the real property at the time the conditions are satisfied.
Concentration and Composition of the Portfolio
The Portfolio will be invested in Mortgages, although the Mortgage Trust may also hold other Mortgage-related
investments and some cash and cash equivalents. Given the concentration of the Portfolio’s exposure to Mortgages,
the Fund will be more susceptible to adverse economic or regulatory occurrences affecting Real Property than an
investment fund that holds a diversified portfolio of securities. Investments in Mortgages are relatively illiquid. Such
illiquidity will tend to limit the Mortgage Trust’s ability to vary its Portfolio promptly in response to changing
economic or investment conditions.
The investment objectives and investment restrictions of the Mortgage Trust permit the assets of the Portfolio to be
invested in a broad spectrum of Mortgages. Therefore, the composition of the Portfolio may vary widely from time
to time, subject to the investment objectives and investment restrictions of the Mortgage Trust. The Portfolio will be
invested and may from time to time be concentrated by location of the properties, type of property, or other factors
resulting in the Portfolio being less diversified than at other times. As a result, the returns generated by the Portfolio
may change as its composition changes.
Reliance on Multi-Unit Residential and Commercial Mortgages
The number of multi-unit residential and commercial properties developed or resold each year tends to be cyclical,
and depends on a number of factors, including overall economic growth, interest rates and business and population
growth. For the last several years, the Mortgage Investment Advisor has benefited from low interest rates, and a lack
of competition. There is no guarantee that these trends will continue or that the Mortgage Investment Advisor will
be able to originate the same volume of multi-unit residential and commercial mortgages it has in the past.
Subordinate and Non-Conventional Financing
Subordinate financing (such as a second ranking Mortgage), which will be carried on by the Mortgage Trust, is
generally considered a higher risk than first ranking financing. Mortgages will be secured by a charge, which may be
in a first, but also a subsequent ranking position upon or in the underlying Real Property. When a charge on Real
Property is in a position other than first ranking, it is possible for the holder of a prior charge on the Real Property, if
the borrower is in default under the terms of its obligations to such holder, to take a number of actions against the
borrower and ultimately against the Real Property in order to realize the security given for such loan. Such actions
may include a foreclosure action, or an action forcing the Real Property to be sold. A foreclosure action may have
the ultimate effect of depriving any person having other than a first ranking charge on the Real Property of the value
of their security of the Real Property. If an action is taken to sell the Real Property and sufficient proceeds are not
realized from such sale to pay off all creditors who have prior charges on the Real Property, the holder of a
subsequent charge will lose their investment or part thereof to the extent of such deficiency unless they can
otherwise recover such deficiency from other property, if any, owned by the debtor.
No Guarantees or Insurance
There can be no assurance that Mortgages held by the Mortgage Trust will result in a guaranteed rate of return or
any return to Unitholders or that losses will not be suffered on one or more Mortgage loans. Moreover, at any point
in time, the interest rates being charged for Mortgages are reflective of the general level of interest rates and, as
interest rates fluctuate, it is expected that the aggregate yield on Mortgage investments will also change.
A Mortgage borrower’s obligations to the Mortgage Trust or any other person are not guaranteed by the Government
of Canada, the government of any province or any agency thereof nor are they insured under the National Housing
Act (Canada). In the event that additional security is given by the borrower or a third party or that a private guarantor
guarantees the Mortgage borrower’s obligations, there is no assurance that such additional security or guarantee will
be sufficient to make the Mortgage Trust whole if and when resort is to be had thereto.
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Use of Leverage
It is anticipated that the Mortgage Trust may at times utilize loan facilities to borrow up to 25% of the Total Assets
of the Mortgage Trust to fund working capital requirements and to fund the acquisition of Mortgages from time to
time. There can be no assurance that such strategy will enhance returns and in fact, the strategy may reduce returns
(both distributions and capital).
If the Mortgages or other securities in the Portfolio suffer a decrease in value, the leverage component will cause a
decrease in the NAV of the Mortgage Trust in excess of that which would otherwise be experienced.
Liquidity of the Investments in the Portfolio
Investments in Mortgages are relatively illiquid. Such illiquidity will limit the Mortgage Trust’s ability to vary its
Portfolio promptly in response to changing economic or investment conditions.
Competition
The Mortgage Investment Advisor’s products compete with those offered by banks, insurance companies, trust
companies and other financial services companies. Certain of these competitors are better capitalized, hold a larger
percentage of the Canadian mortgage market, may have greater financial, technical and marketing resources than the
Mortgage Investment Advisor and have greater name recognition than the Mortgage Investment Advisor. The
Mortgage Investment Advisor will experience competition in all aspects of its business, including price competition.
If price competition increases, the Mortgage Trust may not be able to raise the interest rates it charges in response to
a rising cost of funds or may be forced to lower the interest rates that it is able to charge borrowers, which has the
potential to reduce the value of the mortgages will place the Mortgage Trust with institutional mortgage purchasers
or securitization vehicles. Price-cutting or discounting may reduce profits. This could have a material adverse effect
on the Mortgage Trust’s business, financial condition and results of operations and on the amount of cash available
for distributions to Unitholders.
Sensitivity to Interest Rates
It is anticipated that the market price for the Units and the value of the Portfolio at any given time may be affected
by the level of interest rates prevailing at such time. The Mortgage Trust’s income will consist primarily of interest
payments on the Mortgages comprising the Portfolio. If there is a decline in interest rates (as measured by the
indices upon which the interest rates of the Mortgage Trust’s Mortgages are based), the Mortgage Trust may find it
difficult to purchase additional Mortgages bearing rates sufficient to achieve the targeted payment of distributions on
the Units. There can be no assurance that an interest rate environment in which there is a significant decline in
interest rates would not adversely affect the Fund’s ability to maintain distributions on the Units at a consistent level.
As well, if interest rates increase, the value of the Portfolio may be negatively impacted.
Fluctuations in NAV of the Fund, NAV per Unit and Distributions
The NAV of the Fund and NAV per Unit and the funds available for distributions will vary according to, among
other things, the value of the Portfolio and the interest earned thereon. Fluctuations in the market value of the
Portfolio may occur for a number of reasons beyond the control of the Trustee, the Manager or the Mortgage
Investment Advisor.
The Fund will depend by virtue of the Forward Agreement on revenue generated from the Portfolio. There can be no
assurance regarding the amount of revenue that will be generated by the Mortgages comprising the Portfolio. The
amount of distributions will depend upon numerous factors, including the ability of borrowers to make applicable
payments under Mortgages, interest rates, unexpected costs, and other factors which may not now be known by or
which may be beyond the control of the Trustee, the Manager or the Mortgage Investment Advisor. If the Trustee
determines that it would be in the best interests of the Fund, it may reduce or suspend for any period, or altogether
cease indefinitely, the distributions to be made on the Units.
Availability of Investments
As the Mortgage Trust relies on the Mortgage Investment Advisor to source the Mortgages it invests in, the
Mortgage Trust is exposed to adverse developments in the business and affairs of the Mortgage Investment Advisor,
to its management and financial strength and to its ability to operate its businesses profitably. The ability of the
Mortgage Trust to make investments in accordance with its investment objectives and investment strategies depends
upon the availability of suitable investments and the amount of funds available to make such investments.
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Additionally, the Mortgage Trust may occasionally hold excess funds to be invested in additional Mortgages, which
may negatively impact returns.
Risks Related to Mortgage Extensions and Mortgage Defaults
The Mortgage Investment Advisor may from time to time deem it appropriate to extend or renew the term of a
Mortgage loan past its maturity, or to accrue the interest on a Mortgage loan, in order to provide the borrower with
increased repayment flexibility. The Mortgage Investment Advisor generally will do so if it believes that there is a
very low risk to the Mortgage Trust of not being repaid the full principal and interest owing on the Mortgage loan.
In these circumstances, however, the Mortgage Trust is subject to the risk that the principal and/or accrued interest
of such Mortgage loan may not be repaid in a timely manner or at all, which could impact the cash flows of the
Mortgage Trust during the period in which it is granting this accommodation. Further, in the event that the valuation
of the asset has fluctuated substantially due to market conditions, there is a risk that the Mortgage Trust may not
recover all or substantially all of the principal and interest owed to the Mortgage Trust in respect of such Mortgage
loan.
When a Mortgage loan is extended past its maturity, the loan can either be held over on a month-to-month basis, or
renewed for an additional term at the time of its maturity. Notwithstanding any such extension or renewal, if the
borrower subsequently defaults under any terms of the loan, the Trustee has the ability to exercise its Mortgage
enforcement remedies in respect of the extended or renewed Mortgage. Exercising Mortgage enforcement remedies
is a process that requires a significant amount of time to complete, which could adversely impact the cash flows of
the Mortgage Trust during the period of enforcement. In addition, as a result of potential declines in real estate
values, there is no assurance that the Mortgage Trust will be able to recover all or substantially all of the outstanding
principal and interest owed to the Mortgage Trust in respect of such Mortgages by exercising its Mortgage
enforcement remedies. Should the Mortgage Trust be unable to recover all or substantially all of the principal and
interest owed to the Mortgage Trust in respect of such Mortgage loans, the NAV of the Mortgage Trust would be
reduced, and the returns, financial condition and results of operations of the Mortgage Trust could be adversely
impacted.
Foreclosure and Related Costs
One or more borrowers could fail to make payments according to the terms of their loan, and the Mortgage
Investment Advisor could therefore be forced to exercise the rights of the mortgagee. The recovery of a portion of
the Mortgage Trust’s assets may not be possible for an extended period of time during this process and there are
circumstances where there may be complications in the enforcement of the Mortgage Trust’s rights as mortgagee.
Legal fees and expenses and other costs incurred by the Mortgage Trust in enforcing its rights as mortgagee against
a defaulting borrower are usually recoverable from the borrower directly or through the sale of the mortgaged
property by power of sale or otherwise, although there is no assurance that they will actually be recovered. In the
event that these expenses are not recoverable they will be borne by the Mortgage Trust.
Furthermore, certain significant expenditures, including property taxes, capital repair and replacement costs,
maintenance costs, Mortgage payments, insurance costs and related charges must be made through the period of
ownership of real property regardless of whether the property is producing income or whether Mortgage payments
are being made. The Mortgage Trust may therefore be required to incur such expenditures to protect its investment,
even if the borrower is not honouring its contractual obligations.
Litigation Risks
The Mortgage Trust may, from time to time, become involved in legal proceedings in the course of its business. The
costs of litigation and settlement can be substantial and there is no assurance that such costs will be recovered in
whole or at all. During litigation, the Mortgage Trust is not receiving payments of interest on a Mortgage loan that is
the subject of litigation, thereby impacting cash flows. The unfavourable resolution of any legal proceedings could
have an adverse effect on the Mortgage Trust and its financial position and results of operations that could be
material.
Redemption Risks
Units are redeemable (i) annually (commencing in June 2014) at NAV per Unit, and (ii) monthly at the Monthly
Redemption Price, as described under ‘‘Redemption of Units’’. The purpose of the annual redemption is to reduce
the likelihood of the Units trading at a substantial discount to the NAV per Unit and to provide Unitholders with an
opportunity liquidate their investment once per year without any trading discount to the NAV per Unit or incurring
29
selling commission. While annual redemptions provide holders of Units with the option of annual liquidity based on
the NAV per Unit, there can be no assurance that it will reduce trading discounts or allow a holder to redeem all of
the Units sought to be redeemed. If a significant number of Units are redeemed, the trading liquidity of the Units
could be significantly reduced. In addition, if a significant number of Units are redeemed, (i) the Fund may be
required to partially settle the Forward Agreement, (ii) the expenses of the Fund would be spread among fewer Units
resulting in a higher management expense ratio per Unit, and (iii) Units submitted for redemption in excess of the
redemption limits described under ‘‘Redemption of Units — Limitation and Suspension of Redemptions’’ may not
be redeemed or, in the case of monthly redemptions, may be obligated to accept an in specie distribution of property
and/or unsecured subordinated promissory notes of the Fund. If, as a result of significant redemptions, the Trustee
determines that it is in the best interests of Unitholders to terminate the Fund, the Trustee could, subject to
applicable law, terminate the Fund.
Reliance on Key Personnel
The Mortgage Investment Advisor’s operations are dependent on the abilities, experience and efforts of its
management and other key employees including Stephen Smith, the President and Moray Tawse, Vice-President,
Mortgage Investments and their senior management team. Should any of these persons be unable or unwilling to
continue in their employment, this could have a material adverse effect on the Mortgage Investment Advisor’s
business, financial condition and results of operation.
Operating History of the Fund
The Fund is a newly organized entity with no previous operating history. There currently is no public market for the
Units and there can be no assurance that an active public market will develop or be sustained after completion of the
Offering.
The Mortgage Trust May Be Unable to Fund Investments
The Mortgage Trust may commit to making future Mortgage investments in anticipation of repayment of principal
outstanding and/or the payment of interest under existing Mortgage investments. In the event that such repayments
of principal or payments of interest are not made, the Mortgage Trust may be unable to advance some or all of the
funds required to be advanced pursuant to the terms of its commitments and may be required to obtain interim
financing and to fund such commitments or face liability in connection with its failure to make such advances.
Forward Counterparty Risk
The Fund will enter into the Forward Agreement with the Counterparty pursuant to which the Fund will be required
on the Forward Termination Date to physically deliver the Common Share Portfolio to the Counterparty in exchange
for a cash payment in an amount determined with reference to the value of the units of the Mortgage Trust, or at the
election of the Fund, to make a net cash payment to the appropriate party in an amount which may be more or less
than the original subscription price of the Units. In entering into the Forward Agreement, the Fund will be exposed
to the credit risk associated with the Counterparty and the possibility exists that the Counterparty will default on its
payment obligations under the Forward Agreement. Depending on the value of the Common Share Portfolio, the
Fund’s exposure to the credit risk of the Counterparty may be significant.
Forward Agreement Proceeds
The possibility exists that the Counterparty pursuant to the Forward Agreement will default on its payment
obligations under the Forward Agreement or that the proceeds of the Forward Agreement will be used to satisfy
other liabilities of the Fund, which liabilities could include obligations to third-party creditors if the Fund has
insufficient assets, excluding the proceeds of the Forward Agreement, to pay its liabilities. Unitholders will have no
recourse or rights against the assets of the Portfolio, the Trustee, the Manager or the Counterparty in respect of the
Forward Agreement or arising out of the Forward Agreement.
Performance Fees
The redemption price received by investors whose Units are redeemed during a calendar year will reflect an accrual
for the Performance Fee. No adjustment will be made to the redemption price or to the amount payable to the
Manager for the Performance Fee if the Mortgage Trust’s performance subsequently declines.
30
Performance based payments to the Manager, such as the Performance Fee, may create an incentive for the Manager
to engage in investment strategies and make investments that are more speculative than would be the case in the
absence of such payments.
General Economic Conditions
The mortgage financing industry in Canada continues to benefit from historically low and stable interest rates. There
is a risk that an increase in interest rates could slow the pace of property sales and adversely affect growth in the
mortgage market, which could adversely affect the Mortgage Trust’s operations and stated growth initiatives.
Decline in general economic conditions could also cause default rates to increase as creditworthiness decreases for
borrowers. This could have a material adverse effect on the Mortgage Trust’s operating results.
In addition, a significant decline in real estate values could negatively affect the Mortgage Trust’s operating results
and growth prospects as this would result in a decrease in the value of mortgage transactions. As property values
decline, security on mortgages could also be adversely affected, thereby reducing the ability to liquidate properties
held by defaulting borrowers at favourable prices.
The profits earned on mortgage sales depend, in part, on the spread between mortgage rates and capital market
funding rates and any fee income derived therefrom. The Mortgage Trust’s mortgage portfolios may include assets
whose value can fluctuate because of changing interest rates and economic and market conditions. In addition, some
of these assets could be difficult to sell at any given time. Changes in interest rates and other market factors such as
stock market prices and demographics could affect the preferences of its customers for different types of products
and adversely impact the Mortgage Trust’s profitability. A reduction in positive spreads between mortgage rates and
capital market funding rates could have a material adverse effect on the Mortgage Trust’s operating results.
In addition, there are economic trends and factors that are beyond the Mortgage Trust’s control and which may
affect its operations and business. Such trends and factors include adverse changes in the conditions in the specific
markets for the Mortgage Trust’s products and services, the conditions in the broader market for residential and
commercial mortgages and the conditions in the domestic or global economy generally. Although the Mortgage
Trust’s performance is affected by the general condition of the economy, not all of its service areas are affected
equally. It is not possible for the Mortgage Advisor’s management to accurately predict economic fluctuations and
the impact of such fluctuations on performance.
Failure or Unavailability of Computer and Data Processing Systems and Software
The Mortgage Investment Advisor is dependent upon the successful and uninterrupted functioning of its computer
and data processing systems and software. The failure or unavailability of these systems could interrupt operations
or materially impact the Mortgage Investment Advisor’s ability to originate, monitor or service customer accounts.
If sustained or repeated, a system failure or loss of data could negatively affect the ability of the Mortgage
Investment Advisor to discharge its duties to the Mortgage Trust. In addition, the Mortgage Investment Advisor
depends on automated software to match the terms of its liabilities and asset maturities. If such software fails or is
unavailable on a prolonged basis, the Mortgage Investment Advisor could be required to manually complete such
activities, which could have a material adverse effect on the Mortgage Investment Advisor’s ability to discharge its
duties to the Mortgage Trust.
Changes in Legislation
There can be no assurance that certain laws applicable to the Fund and the Mortgage Trust, including Canadian
federal and provincial tax laws, tax proposals, securities laws, other governmental policies or regulations and
governmental, administrative or judicial interpretation thereof, will not change in a manner that will adversely affect
the Fund or the Mortgage Trust or fundamentally alter the tax consequences to Unitholders acquiring, holding or
disposing of Units or adversely affecting the distributions received by the Fund or by the Unitholders.
Environmental Matters
The Mortgage Trust may in the future take possession, through enforcement proceedings, of properties that secured
defaulted Mortgage loans to recover its investment in such Mortgage loans. Prior to taking possession of properties
which secure a Mortgage investment, the Mortgage Investment Advisor will assess the potential environmental
liability associated with such enforcement and determine whether it is significant, having regard to the value of the
property. If the Mortgage Investment Advisor subsequently determines to take possession of the property, the
Mortgage Trust could be subject to environmental liabilities in connection with such real property, which could
31
exceed the value of the property. As part of the due diligence performed in respect of the Mortgage Trust’s proposed
Mortgage investments, the Mortgage Investment Advisor may obtain a Phase I Environmental Audit on the
underlying real property provided as security for a Mortgage, when the Mortgage Investment Advisor has
determined that a Phase I Environmental Audit is appropriate. However, there can be no assurance that any such
Phase I Environmental Audit will reveal any or all existing or potential environmental liabilities necessary to
effectively insulate the Mortgage Trust from potential liability for a materially adverse environmental condition at
any mortgaged property. If hazardous substances are discovered on a property of which the Mortgage Trust has
taken possession, the Mortgage Trust may be required to remove such substances and clean up the property. The
Mortgage Trust may also be liable to tenants and other users of neighbouring properties and may find it difficult or
not possible to resell the property prior to or following such remediation.
Impact of Natural Disasters and Other Events
Various events, including natural disasters, extreme weather conditions, war and terrorism may cause a significant
decline in the value of the properties underlying the Mortgage Trust’s mortgages under administration and/or
adversely affect the capacity of borrowers to repay mortgages, capital resources of borrowers that can be used to
cover any shortfalls, collateral in support of mortgages and conditions of mortgages. Deterioration in these factors
could lead to difficulties in repayment of mortgages or a decline in the performance of mortgage portfolios or of
assets in securitization structures, possibly resulting in higher loan losses and a decline in the return of the Mortgage
Trust’s securitization vehicles, thereby having a material adverse effect on the Mortgage Trust’s business, financial
condition and results of operations and on the amount of cash available for distributions to Unitholders.
Status of the Fund for Securities Law Purposes
The Fund is not a “mutual fund” for securities law purposes. As a result, some of the protections provided to
investors in mutual funds under such laws will not be available to investors in the Units and restrictions imposed on
mutual funds under Canadian securities laws, including NI 81-102, will not apply to the Fund.
Taxation Matters Affecting the Fund
The Fund intends to make the election under the Tax Act to treat each of its “Canadian securities” as defined in
subsection 39(6) of the Tax Act as capital property. In determining its income for tax purposes, the Fund will treat
gains or losses on any disposition of securities in the Common Share Portfolio under the Forward Agreement as
capital gains and losses. No advance income tax ruling has been requested or obtained from CRA regarding the
timing or characterization of the Fund’s gains or losses.
If, contrary to advice of counsel for the Fund and the Agents, whether through the application of the general antiavoidance rule or otherwise, or as a result of a change of law, the entering into the Forward Agreement were a
taxable event or if gains realized on the sale of the Common Share Portfolio under the Forward Agreement were
treated other than as capital gains, after-tax returns to Unitholders would be reduced.
If the Fund fails to or ceases to qualify as a mutual fund trust under the Tax Act, the income tax considerations
described under the heading “Income Tax Considerations” would be materially and adversely different in certain
respects. There can be no assurance that Canadian federal income tax laws and the administrative policies and
assessing practices of the CRA (as defined herein) respecting the treatment of mutual fund trusts will not be changed
in a manner which adversely affects the Unitholders.
The Foreign Account Tax Compliance provisions of the US Hiring Incentives to Restore Employment Act of 2010
(“FATCA”) generally impose a reporting and 30% US withholding tax regime with respect to (a) certain US source
income (including interest and dividends) and gross proceeds from the sale or other disposition of property that can
produce US source interest or dividends (“withholdable payments”) and (b) “passthru payments” (generally,
withholdable payments and payments that are attributable to withholdable payments made by certain non-US
financial institutions). For purposes of the FATCA rules the Fund is expected to be treated as a non-US financial
institution. Under FATCA, unless the Fund enters into an agreement (a “FATCA Agreement”) with the US
Internal Revenue Service (the “IRS”) pursuant to which it agrees to report to the IRS information regarding the US
holders of, and certain US persons that indirectly hold, interests in the Fund (other than equity and debt interests that
are regularly traded on an established securities market), and to comply with other reporting, verification, due
diligence and other procedures established by the IRS, the Fund will be subject to 30% US withholding tax on (a)
withholdable payments made to it after December 31, 2013 (provided that gross proceeds that are withholdable
payments will not be subject to FATCA withholding until after December 31, 2016) and (b) foreign passthru
32
payments (generally, passthru payments that are not withholdable payments) made to it after December 31, 2016 by
non-US financial institutions that have entered into a FATCA Agreement. It is not expected that the Fund will
receive withholdable payments but under current FATCA guidance provided by the IRS, a portion of any payments
made by the Counterparty to the Fund pursuant to the Forward Agreement may constitute a passthru payment. If the
Fund enters into a FATCA Agreement with the IRS and the Units are not regularly traded on an established
securities market, the Fund generally will be required to withhold 30% US tax after December 31, 2016 on a portion
of the distributions that it makes to Unitholders that fail to provide information requested by the Fund to comply
with FATCA. It is expected, however, that Units will be regularly traded on an established securities market within
the meaning of the FATCA rules and withholding will not be required. Additionally, under current guidance, the
portion of the distributions that would be subject to FATCA withholding would be based on the percentage of US
assets held by the Fund. If the Fund does not hold any US assets, it is not expected that the Fund will be required to
withhold under FATCA. The Fund has not yet determined if it will enter into a FATCA Agreement.
This description is based on guidance issued by the IRS, including recently issued proposed regulations and a
recently issued administrative announcement. Future guidance may affect the application of FATCA to the Units
and the Portfolio. Therefore, the application of FATCA to the Units and the Portfolio is uncertain. Because the
application of FATCA withholding tax could materially affect an investment in the Fund under certain
circumstances, prospective investors are advised to consult their own tax advisors as to the application of FATCA to
an investment in the Units.
CIRCULAR 230 NOTICE
PURSUANT TO US TREASURY DEPARTMENT CIRCULAR 230, THE FUND INFORMS PROSPECTIVE
INVESTORS THAT (A) THE SUMMARIES OF US FEDERAL INCOME TAX MATTERS AND
CONSIDERATIONS SET FORTH IN THIS PROSPECTUS ARE NOT INTENDED AND WERE NOT
WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF
AVOIDING PENALTIES UNDER THE US FEDERAL TAX LAWS THAT MAY BE IMPOSED ON THE
TAXPAYER, (B) THE SUMMARIES OF US FEDERAL INCOME TAX MATTERS AND CONSIDERATIONS
SET FORTH IN THIS PROSPECTUS WERE WRITTEN IN CONNECTION WITH THE PROMOTION OR
MARKETING BY THE FUND OF THE UNITS, AND (C) EACH TAXPAYER SHOULD SEEK ADVICE
BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
Not a Trust Company
The Fund is not a trust company and, accordingly, is not registered under the trust company legislation of any
jurisdiction. Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act
(Canada) and are not insured under provisions of that Act or any other legislation.
Nature of Units
The Units are neither fixed income nor equity securities. The Units represent a fractional interest in the net assets of
the Fund. Units are dissimilar to debt instruments in that there is no principal amount owing to Unitholders.
Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation
including, for example, the right to bring “oppression” or “derivative” actions.
Liability of Unitholders
The Fund is a unit trust and as such its Unitholders do not receive the protection of statutorily mandated limited
liability in some provinces and territories as in the case of shareholders of most Canadian corporations. There is no
guarantee, therefore, that Unitholders could not be made party to legal action in connection with the Fund.
However, the Declaration of Trust provides that no Unitholder, in its capacity as such, will be subject to any liability
whatsoever, in tort, contract or otherwise, to any person in connection with the Fund’s property or the obligations or
the affairs of the Fund and all such persons are to look solely to the Fund’s property for satisfaction of claims of any
nature arising out of or in connection therewith and only the Fund’s property will be subject to levy or execution.
Pursuant to the Declaration of Trust, the Fund will indemnify and hold harmless each Unitholder from any costs,
damages, liabilities, expenses, charges and losses suffered by a Unitholder resulting from or arising out of such
Unitholder not having limited liability. The Declaration of Trust also provides that the Trustee and the Manager
shall use reasonable efforts to cause to be inserted in each material written agreement, undertaking and obligation
signed by or on behalf of the Fund a provision to the effect that such agreement, undertaking or obligation will not
be binding upon Unitholders personally.
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As a result of the foregoing, it is considered that the risk of any personal liability of Unitholders is minimal in view
of the nature of its activities. In the event that a Unitholder should be required to satisfy any obligation of the Fund,
such Unitholder will be entitled to reimbursement from any available assets of the Fund.
DISTRIBUTION POLICY
In accordance with the Fund’s investment objectives to provide Unitholders with monthly cash distributions, the
Fund intends to make monthly cash distributions to Unitholders of record on the last Business Day of each month.
Distributions will be paid no later than the 15th Business Day following the end of the month for which the
distribution is payable. The Fund will not have a fixed distribution, but distributions are initially targeted to be 6.0%
per annum on the subscription price of $10.00 per Unit ($0.05 per Unit per month or $0.60 per annum). The first
distribution will be paid on or before March 21, 2013 to Unitholders of record on February 28, 2013. Commencing
in December 2013, the Fund will announce, at least annually, the expected distribution amount for the following 12
months based, in part, on the Mortgage Investment Advisor’s and the Manager’s assessment of anticipated cash flow
and the anticipated expenses of the Fund and the Mortgage Trust, from time to time.
Distributions are intended to be tax-advantaged when compared to those made by a trust that relies on interest,
dividend or other investment income to pay distributions.
The amount of monthly distributions may fluctuate and there can be no assurance that the Fund will make
any distribution in any particular month or months.
Assuming gross proceeds of the Offering are $50 million and fees and expenses are as described herein, the
Portfolio, using leverage of 25% of the Total Assets of the Mortgage Trust, would be required to generate an
average annual total return of approximately 8.35%, inclusive of interest and other income, in order generate an
average annual total return of approximately 6.0% per annum on the offering price of $10.00 per Unit while
maintaining a stable NAV of the Fund and funding distributions at the initial targeted level through partial
settlements of the Forward Agreement. Based on the anticipated composition of the Portfolio, it is expected that
interest and other income on the Mortgages included in the Portfolio would be sufficient to maintain a stable NAV
of the Fund and to fund distributions at the initially targeted level through partial settlements of the Forward
Agreement. No assurance can be given with respect to future levels of interest and other income received on the
Mortgages included in the Portfolio from time to time. If the return on the Portfolio is less than the amount
necessary to fund monthly distributions at the then current targeted level and the Manager nevertheless
chooses to pay such distributions (through partial settlement of the Forward Agreement), this will result in a
portion of the capital of the Fund being returned to Unitholders and NAV per Unit will be reduced.
If the Fund’s net income for tax purposes, including net realized taxable capital gains, for any year, net of any
available loss carry forwards from prior years, exceeds the aggregate amount of the regular monthly distributions
made in the year to Unitholders, the Fund will also be required to pay one or more special distributions (in either
cash or Units) in such year to Unitholders as is necessary to ensure that the Fund will not be liable for income tax on
such amounts under the Tax Act (after taking into account all available deductions, credits and refunds). See
“Income Tax Considerations”.
There can be no assurance given as to the amount of targeted distributions, if any, in the future. There is no
assurance that the Fund will meet its investment objectives. See “Distribution Policy” and “Risk Factors.
REDEMPTION OF UNITS
Annual Redemption
Commencing in 2014, outstanding Units may be surrendered for redemption during the period from the first
Business Day in May until 4:00 p.m. (Toronto time) on the 9th day of May, or the immediately preceding Business
Day in the event that the 9th day is not a Business Day (the “Annual Redemption Notice Period”). Payment of the
proceeds of redemption will be made on or before the 15th Business Day of July each year, beginning in 2014 (the
“Annual Redemption Payment Date”). Unitholders whose Units are so surrendered for redemption will be
entitled to receive a redemption price per Unit equal to the NAV per Unit on the applicable Annual Redemption
Date, less any costs associated with such redemption. See “Calculation of Net Asset Value”.
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Monthly Redemptions
Units may be surrendered at any time to the Fund’s registrar and transfer agent for redemption. Units surrendered
for redemption before 4:00 p.m. (Toronto time) on the 15th day of each month, or the immediately preceding
Business Day in the event that the 15th day is not a Business Day (the “Monthly Redemption Notice Period”), will
be redeemed on the second last Business Day of such month (a “Monthly Redemption Date”). Units surrendered
for redemption after 4:00 p.m. (Toronto time) on the 15th day of a month, or the immediately preceding Business
Day in the event that the 15th day is not a Business Day, will be redeemed on the next Monthly Redemption Date.
Payment of the proceeds of redemption will be made on or before the 15th day of the month following the
applicable Monthly Redemption Date. Unitholders whose Units are so surrendered for redemption will be entitled
to receive a redemption price per Unit (the “Monthly Redemption Price”) equal to the lesser of: (i) 95% of the
Trading Price; and (ii) the Market Price. Any distributions declared and unpaid on or before a Monthly Redemption
Date in respect of Units surrendered for redemption on such Monthly Redemption Date will also be paid.
Allocations of Gains to Redeeming Unitholders
Pursuant to the Declaration of Trust, the Fund may allocate and designate as payable any capital gains realized by
the Fund as a result of any disposition of property of the Fund undertaken to permit or facilitate the redemption of
Units to a Unitholder whose Units are being redeemed. Any such allocations will reduce the redeeming
Unitholder’s proceeds of disposition.
Exercise of Redemption Right
A Unitholder who desires to exercise redemption privileges thereunder must do so by causing a CDS Participant
through which he or she holds his or her Units to deliver to CDS at its office in the City of Toronto on behalf of the
holder, a written notice of the Unitholder’s intention to redeem Units by no later than 5:00 p.m. (Toronto time) on
the applicable notice date described above. A Unitholder who desires to redeem Units should ensure that the CDS
Participant is provided with notice of his or her intention to exercise his or her redemption right sufficiently in
advance of the redemption deadline so as to permit the CDS Participant to deliver a notice to CDS by 5:00 p.m.
(Toronto time) on the notice date described above. A Unitholder not holding their Units through a CDS Participant
who desires to exercise redemption privileges thereunder must deliver to the Manager at its office in the City of
Toronto a written notice of such Unitholder’s intention to redeem Units by no later than 5:00 p.m. (Toronto time) on
the applicable notice date described above.
By causing a CDS Participant to deliver to CDS a notice of the Unitholder’s intention to redeem Units or a
registered holder of Units delivering such notice to the Manager, as the case may be, such Unitholder will be
deemed to have irrevocably surrendered his or her Units for redemption and appointed such CDS Participant or
Manager, as the case may be, to act as his or her exclusive settlement agent with respect to the exercise of the
redemption privilege and the receipt of payment in connection with the settlement of obligations arising from such
exercise, provided that the Manager may from time to time prior to the redemption date permit the withdrawal of a
redemption notice on such terms and conditions as the Manager may determine, in its sole discretion, provided that
such withdrawal will not adversely affect the Fund. Any expenses associated with the preparation and delivery of
the redemption notice will be for the account of the Unitholder exercising the redemption privilege.
Any redemption notice that CDS or the Manager, as the case may be, determines to be incomplete, not in proper
form or not duly executed will, for all purposes, be void and of no effect and the redemption privilege to which it
relates shall be considered, for all purposes, not to have been exercised thereby. A failure by a CDS Participant to
exercise redemption privileges or to give effect to the settlement thereof in accordance with the owner’s instructions
will not give rise to any obligations or liability on the part of the Fund or the Manager to the CDS Participant or to
the holder of the Units.
The Manager may, without the approval of Unitholders, change the redemption rights attached to the Units on not
less than 30 days’ notice to Unitholders by increasing the number of times in each year that Units may be redeemed
by Unitholders (at a redemption price per Unit to be determined by the Manager), so long as such change does not
result in the Fund being a mutual fund for securities law purposes and provided that no such change may be made
without Unitholder approval if it would eliminate the rights of Unitholders to redeem their Units on a Monthly
Redemption Date.
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Limitation and Suspension of Redemptions
The Fund will not accept for redemption, in respect of any Annual Redemption Date, Units representing more than
15% of the average number of Units outstanding during the 180-day period immediately preceding the Annual
Redemption Date. In the event that the number of Units surrendered for redemption in respect of an Annual
Redemption Date exceeds the limit set forth above, the Fund will redeem Units surrendered for such redemption and
not withdrawn or revoked, on a pro rata basis and the balance of the Units will be redeemed as if surrendered for
redemption during the Monthly Redemption Notice Period during that month.
Notwithstanding the foregoing limitation on redemption, the Trustee may, in its sole discretion, waive the above
limitation in respect of all Units surrendered for redemption in respect of any Annual Redemption Date.
The entitlement of Unitholders to receive cash upon the redemption of their Units in respect of monthly redemptions
is subject to the following limitations: (i) the total amount payable by the Fund by cash payment in respect of the
redemption of Units for any month shall not exceed $100,000; and (ii) the total amount payable by the Fund by cash
payment in respect of the redemptions of Units in any 12 month period ending at the end of that month shall not
exceed 1% of the aggregate gross proceeds realized by the Fund in connection with the issuance of all Units that
were issued and outstanding at the start of such 12 month period.
If redemption in excess of these cash limits occurs, the Fund may satisfy the redemption of Units by way of an in
specie distribution of property of the Fund from the Common Share Portfolio and/or unsecured subordinated
promissory notes of the Fund, which property may not be liquid. The property from the Common Share Portfolio
and the unsecured subordinated promissory notes of the Fund received in satisfaction of such redemption will be a
qualified investment for trusts governed by registered retirement savings plans, registered retirement income funds,
deferred profit sharing plans (except, in the case of unsecured subordinated promissory notes of the Fund, a deferred
profit sharing plan for which any employer is the Fund), registered disability savings plans, registered education
savings plans and tax-free savings accounts provided, in the case of property from the Common Share Portfolio,
such property is securities listed on a designated stock exchange for purposes of the Tax Act and, in the case of the
unsecured subordinated promissory notes of the Fund, the Fund qualifies as a mutual fund trust for purposes of the
Tax Act and the Units are listed on a designated stock exchange in Canada for purposes of the Tax Act. Unitholders
should consult their own tax advisors to determine whether such property received in satisfaction of such
redemption would be a prohibited investment for trusts governed by registered retirement savings plans, registered
retirement income funds and tax-free savings accounts. The monthly redemption right is not intended to be the
primary mechanism for Unitholders to liquidate their investment.
In addition, for any period not exceeding 120 days during which the Trustee determines that conditions exist which
render impractical the sale of Mortgages comprising 50% or more (by outstanding principal amount) of the Portfolio
or which impair the ability of the Trustee to determine the value of the assets of the Mortgage Trust or the Portfolio,
the Fund may suspend redemptions of its Units. The suspension may apply to all requests for redemption received
prior to the suspension but as to which payment has not been made, as well as to all requests received while the
suspension is in effect. All Unitholders making such requests shall be advised by the Trustee of the suspension and
that the redemption will be effected at a price determined on the next Monthly Redemption Date or Annual
Redemption Date, as applicable, following the termination of the suspension or such other date as the Trustee may
determine upon the conditions giving rise to such suspension having ceased to exist or no longer being applicable.
All such Unitholders shall have and shall be advised that they have the right to withdraw their requests for
redemption. The suspension shall terminate in any event on the first day on which the condition giving rise to the
suspension has ceased to exist provided that no other condition under which a suspension is authorized then exists.
To the extent not inconsistent with the rules and regulations promulgated by any governmental body having
jurisdiction over the Fund, any declaration of suspension made by the Trustee shall be conclusive.
INCOME TAX CONSIDERATIONS
In the opinion of Blake, Cassels & Graydon LLP, counsel to the Fund and Osler, Hoskin & Harcourt LLP, counsel
to the Agents, the following is, as of the date hereof, a summary of the principal Canadian federal income tax
considerations generally applicable to the acquisition, holding and disposition of Units by a Unitholder who acquires
Units pursuant to this prospectus. This summary is applicable to a Unitholder who is an individual (other than a
trust) and who, for the purposes of the Tax Act and at all relevant times, is resident in Canada, deals at arm’s length
with and is not affiliated with the Fund and holds Units as capital property. Generally, the Units will be considered
36
to be capital property to a purchaser provided that the purchaser does not hold such Units in the course of carrying
on a business or as part of an adventure in the nature of trade. On the assumption that the Fund will qualify at all
times as a “mutual fund trust” within the meaning of the Tax Act, certain Unitholders who might not otherwise be
considered to hold Units as capital property may, in certain circumstances, make the irrevocable election permitted
by subsection 39(4) of the Tax Act the effect of which would be to deem such Units and all other “Canadian
securities”, as defined in the Tax Act, owned by them in the taxation year in which the election is made and in all
subsequent taxation years to be capital property.
This summary is based on the current provisions of the Tax Act, counsel’s understanding of the current
administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) published by it prior to
the date hereof and all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister
of Finance (Canada) prior to the date hereof (such proposals referred to hereafter as the “Tax Proposals”) and relies
upon advice from the Manager and the Agents as to certain factual matters. This summary does not otherwise take
into account or anticipate any changes in law or in administrative policy and assessing practice, whether by
legislative, governmental or judicial action, nor does it take into account other federal or any provincial, territorial or
foreign income tax legislation or considerations. There can be no assurance that the Tax Proposals will be enacted in
the form publicly announced or at all.
This summary assumes that the Fund will at all times comply with its investment restrictions.
This summary is also based on the assumption that the Fund will at no time be subject to the tax for “SIFT trusts”
for purposes of the Tax Act.
This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to an
investment in Units and does not describe the income tax considerations relating to the deductibility of
interest on money borrowed to acquire Units. Moreover, the income and other tax consequences of acquiring,
holding or disposing of Units will vary depending on an investor’s particular circumstances including the
province or territory in which the investor resides or carries on business. Accordingly, this summary is of a
general nature only and is not intended to be legal or tax advice to any investor. Investors should consult their
own tax advisors for advice with respect to the income tax consequences of an investment in Units, based on
their particular circumstances.
Status of the Fund
This summary is based on the assumptions that the Fund will qualify at all times as a “mutual fund trust” within the
meaning of the Tax Act, that the Fund will validly elect under the Tax Act to be a mutual fund trust from the date it
was established, that the Fund has not been established and will not be maintained primarily for the benefit of nonresidents and that not more than 50% (based on fair market value) of the Units will be held by persons who are nonresidents of Canada for purposes of the Tax Act, partnerships that are not “Canadian partnerships” as defined in the
Tax Act, or any combination thereof.
To qualify as a mutual fund trust (i) the Fund must be a “unit trust” resident in Canada for purposes of the Tax Act,
(ii) the only undertaking of the Fund must be (a) the investing of its funds in property (other than real property or
interests in real property or an immovable or a real right in an immovable), (b) the acquiring, holding, maintaining,
improving, leasing or managing of any real property (or interest in real property) or of any immovable (or real right
in immovables) that is capital property of the Fund, or (c) any combination of the activities described in (a) and (b),
and (iii) the Fund must comply with certain minimum requirements respecting the ownership and dispersal of Units
(the “minimum distribution requirements”). In this regard, the Manager intends to: (i) cause the Fund to qualify as a
unit trust throughout the existence of the Fund; and (ii) ensure that the Fund’s undertaking conforms at all times with
the above-mentioned restrictions for mutual fund trusts. The Manager has advised counsel that it intends (i) to
ensure that the Fund will meet the requirements necessary for it to qualify as a mutual fund trust commencing no
later than the Closing Date and at all times thereafter and (ii) to file the necessary election so that the Fund will be
deemed to have been a mutual fund trust from its inception in 2012.
If the Fund were not to qualify as a mutual fund trust at all times, the income tax considerations described below
would, in some respects, be materially and adversely different.
Provided that the Fund qualifies, or is deemed from its inception to qualify, and continues at all times to qualify as a
“mutual fund trust” within the meaning of the Tax Act, the Units will be qualified investments for trusts governed
by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered
37
disability savings plans, registered education savings plans and tax-free savings accounts (each a “plan trust”). For
certain consequences of holding Units in a plan trust, see “Income Tax Considerations – Taxation of Registered
Plans”.
Taxation of the Fund
The Fund will be subject to tax in each taxation year under Part I of the Tax Act on the amount of its income for the
year, including dividends and net realized taxable capital gains, less the portion thereof that it claims in respect of
the amount paid or payable to Unitholders in the year. The Manager has advised counsel that the Fund intends to
make distributions to Unitholders and to deduct, in computing its income in each taxation year, such amount as will
be sufficient to ensure that the Fund will not be liable for income tax under Part I of the Tax Act for each year other
than such tax on net realized capital gains that will be recoverable by the Fund in respect of such year by reason of
the capital gains refund mechanism. The Manager has advised counsel that the Fund intends to make an election
under subsection 39(4) of the Tax Act so that all securities included in the Common Share Portfolio that are
“Canadian securities” (as defined in the Tax Act) will be deemed to be capital property to the Fund.
The Fund will not realize any income, gain or loss as a result of entering into the Forward Agreement. Provided the
Fund elects to have each of its Canadian securities treated as capital property, gains (or losses) realized by the Fund
on the sale of Canadian securities will be taxed as capital gains (or capital losses). If the obligations of the Fund
under the Forward Agreement are settled by making net cash payments, rather than the delivery of securities in the
Common Share Portfolio, a payment made or received by the Fund may be treated as an income outlay or receipt, as
applicable. If the Fund delivers securities in the Common Share Portfolio to the Counterparty in satisfaction of its
obligations under the Forward Agreement, the Fund will realize capital gains (or capital losses) equal to the amount
by which the purchase price under the Forward Agreement (less reasonable costs of disposition) exceeds (or is less
than) the aggregate adjusted cost base of such securities.
One-half of the amount of any capital gain (a “taxable capital gain”) realized by the Fund in a taxation year on the
delivery of securities in the Common Share Portfolio to the Counterparty in satisfaction of its obligations under the
Forward Agreement must be included in computing the Fund’s income for the year, and one-half of the amount of
any capital loss (an “allowable capital loss”) realized by the Fund in a taxation year is required to be deducted
against any taxable capital gains realized by the Fund in the year. Any excess of allowable capital losses over
taxable capital gains for a taxation year may be deducted against taxable capital gains realized by the Fund in any of
the three preceding taxation years or in any subsequent taxation year to the extent and under the circumstances
described in the Tax Act.
In computing its income for tax purposes, the Fund may deduct reasonable administrative and other expenses
incurred to earn income. The Fund may generally deduct the costs and expenses of the Offering paid by the Fund
and not reimbursed at a rate of 20% per year, pro-rated where the Fund’s taxation year is less than 365 days. Any
losses incurred by the Fund may not be allocated to Unitholders but may generally be carried forward and back and
deducted in computing the taxable income of the Fund in accordance with the detailed rules and limitations in the
Tax Act.
The Fund will be entitled for each taxation year throughout which it is a mutual fund trust for purposes of the Tax
Act to reduce (or receive a refund in respect of) its liability, if any, for tax on its net realized capital gains by an
amount determined under the Tax Act based on the redemptions of Units during the year (the “Capital Gains
Refund”). The Capital Gains Refund in a particular taxation year may not completely offset the tax liability of the
Fund for such taxation year which may arise upon the sale or other disposition of securities included in the Common
Share Portfolio under the Forward Agreement in connection with the redemption of Units.
Taxation of Unitholders
A Unitholder will generally be required to include in computing income for a taxation year the amount of the Fund’s
net income for the taxation year, including the taxable portion of its net realized capital gains, paid or payable to the
Unitholder, and including any Management Fee Distributions, (whether in cash or in Units) in the taxation year. The
non-taxable portion of the Fund’s net realized capital gains for a taxation year, the taxable portion of which was
designated in respect of a Unitholder in the year, that is paid or payable to the Unitholder in that taxation year will
not be included in the Unitholder’s income for the year and will not reduce the adjusted cost base of the Unitholder’s
Units. Any other amount in excess of the Unitholder’s share of the Fund’s net income for a taxation year paid or
payable to the Unitholder in the year will not generally be included in the Unitholder’s income, but will generally
reduce the adjusted cost base of the Unitholder’s Units. To the extent that the adjusted cost base of a Unit would
38
otherwise be less than zero, the negative amount will be deemed to be a capital gain realized by the Unitholder from
the disposition of the Unit and the Unitholder’s adjusted cost base will be increased by the amount of such deemed
capital gain to zero. Any losses of the Fund for purposes of the Tax Act cannot be allocated to, and cannot be treated
as a loss of, a Unitholder.
Provided that appropriate designations are made by the Fund, such portion of (i) the net realized taxable capital
gains of the Fund and (ii) the taxable dividends, if any, received or deemed to be received by the Fund on shares of
taxable Canadian corporations, as is paid or becomes payable to a Unitholder will effectively retain its character and
be treated as such in the hands of the Unitholder for purposes of the Tax Act. To the extent that amounts are
designated as taxable dividends from taxable Canadian corporations, the gross-up and dividend tax credit rules will
apply, including the enhanced gross-up and dividend tax credit rules in respect of eligible dividends paid by taxable
Canadian corporations.
Under the Tax Act, the Fund is permitted to deduct in computing its income for a taxation year an amount that is less
than the amount of its distributions for the year. This will enable the Fund to utilize, in a taxation year, losses from
prior years without affecting the ability of the Fund to distribute its income annually. The amount distributed to a
Unitholder but not deducted by the Fund will not be included in the Unitholder’s income. However, the adjusted
cost base of the Unitholder’s Units will be reduced by such amount. To the extent that the adjusted cost base of a
Unit would otherwise be less than zero, the negative amount will be deemed to be a capital gain realized by the
Unitholder from the disposition of the Unit and the Unitholder’s adjusted cost base will be increased by the amount
of such deemed capital gain.
On the disposition or deemed disposition of a Unit (whether on a sale, redemption or otherwise), the Unitholder will
realize a capital gain (or a capital loss) to the extent that the Unitholder’s proceeds of disposition (which do not
include any amount of capital gains payable by the Fund to the Unitholder which represents capital gains realized by
the Fund in connection with dispositions to fund the redemption) exceed (or are less than) the aggregate of the
adjusted cost base of the Unit to the Unitholder immediately before the disposition and any reasonable costs of
disposition.
For the purpose of determining the adjusted cost base of Units to a Unitholder, when Units are acquired, the cost of
the newly acquired Units will be averaged with the adjusted cost base of all Units owned by the Unitholder as
capital property immediately before that time. The cost of Units acquired as a distribution of income or capital gains
from the Fund will generally be equal to the amount of the distribution. A consolidation of Units following a
distribution paid in the form of additional Units will not be regarded as a disposition of Units. See “Attributes of the
Units”.
Pursuant to the Declaration of Trust, the Fund may allocate and designate as payable any capital gains realized by
the Fund as a result of any disposition of property of the Fund undertaken to permit or facilitate the redemption of
Units to a Unitholder whose Units are being redeemed. Any such allocations will reduce the redeeming
Unitholder’s proceeds of disposition.
One-half of any capital gain (a “taxable capital gain”) realized on the disposition of Units in a taxation year will be
included in the Unitholder’s income and one-half of any capital loss (an “allowable capital loss”) realized is
required to be deducted from taxable capital gains of the Unitholder for that year. Allowable capital losses for a
taxation year in excess of taxable capital gains for that year may be carried back and deducted in any of the three
preceding taxation years or carried forward and deducted in any subsequent taxation year against taxable capital
gains in accordance with the provisions of the Tax Act.
In general terms, net income of the Fund paid or payable to a Unitholder that is designated as taxable dividends from
taxable Canadian corporations or as net realized taxable capital gains as well as taxable capital gains realized by the
Unitholders on the disposition of Units may increase the Unitholder’s liability for alternative minimum tax.
Taxation of Registered Plans
Amounts of income and capital gains included in a plan trust’s income are generally not taxable under Part I of the
Tax Act, provided that the Units are qualified investments for the plan trust. See “Income Tax Considerations –
Status of the Fund”. Unitholders should consult their own advisors regarding the tax implications of establishing,
amending, terminating or withdrawing amounts from a plan trust.
Provided that the holder of a tax-free savings account or the annuitant under a registered retirement savings plan or
registered retirement income fund does not hold a significant interest (as defined in the Tax Act) in the Fund or any
39
person or partnership that does not deal at arm’s length with the Fund within the meaning of the Tax Act, and
provided that such holder or annuitant deals at arm’s length with the Fund within the meaning of the Tax Act, the
Units will not be prohibited investments for a trust governed by such tax-free savings account, registered retirement
savings plan or registered retirement income fund. A significant interest generally means the ownership of 10% or
more of the fair market value of the interests of all beneficiaries under the Fund, either alone or together with
persons and partnerships with whom the holder or annuitant, as the case may be, does not deal at arm’s length. Such
holders or annuitants to whom Units otherwise would be prohibited investments as described above should consult
their own tax advisors, including with respect to any potential relief from the application of the prohibited
investment rules under an undated “comfort letter” of the Department of Finance (Canada) provided in 2012 by it to
the Joint Committee on Taxation of the Canadian Bar Association and Canadian Institute of Chartered Accountants.
Tax Implications of the Fund’s Distribution Policy
The NAV per Unit will reflect any income and gains of the Fund that have accrued or have been realized but have
not been made payable at the time Units are acquired. A Unitholder who acquires Units may become taxable on the
Unitholder’s share of such income and gains of the Fund notwithstanding that such amounts may have been
reflected in the price paid by the Unitholder for the Units. Since the Fund intends to make monthly distributions as
described under “Distribution Policy”, the consequences of acquiring Units late in a calendar year will generally
depend on the amount of monthly distributions throughout the year and whether one or more special distributions to
Unitholders are necessary late in the calendar year to ensure that the Fund will not be liable for non-refundable
income tax on such amounts under the Tax Act.
ORGANIZATION AND MANAGEMENT DETAILS OF THE FUND AND THE MORTGAGE TRUST
The Manager
Stone Asset Management Limited (the “Manager”) will act as the manager of the Fund and the Mortgage Trust
(together, the “Funds”). The Manager was incorporated under the laws of Ontario in 1999. The principal office of
the Manager is located at Suite 710, 36 Toronto Street, Toronto, Ontario, M5C 2C5.
Duties and Services to be provided by the Manager
The Manager will be appointed to act as the manager of the Funds pursuant to the Declaration of Trust and the
Mortgage Trust Declaration of Trust, respectively, and will be given the authority to manage the activities and day
to day operations of the Funds, including providing and arranging for the provision of administrative and operational
services required by the Funds. The Manager may delegate certain of its duties to third parties. The Manager’s
duties will include: maintaining accounting records for the Funds; authorizing the payment of operating expenses
incurred on behalf of the Funds; preparing financial statements, income tax forms and financial and accounting
information as required by the Funds; calculating the net asset value of the Funds; ensuring that unitholders are
provided with financial statements and other reports as are required by applicable law from time to time; monitoring
the Funds’ compliance with regulatory requirements; preparing the Funds’ reports to unitholders; and negotiating
contractual agreements with third party providers of services, including auditors and printers.
The Manager shall exercise its powers and discharge its duties as manager honestly, in good faith and in the best
interests of the Fund or the Mortgage Trust, as applicable, and to exercise the care, diligence and skill of a
reasonably prudent person in similar circumstances. The Manager will not be liable for any default, failure or defect
in any of the securities comprising the Common Share Portfolio or the Portfolio, as applicable, or any losses in the
NAV of the Fund or the Mortgage Trust, as applicable, if it has satisfied the duties and the standard of care,
diligence and skill set forth above. The Manager will incur liability, however, in cases of willful misconduct, bad
faith, gross negligence, disregard of the Manager’s standard of care or by any material breach or default by it of its
obligations.
Unless the Manager resigns or is removed as described below, the Manager will continue as manager until the
termination of the Fund or the Mortgage Trust, as applicable. The Manager may be removed as the manager of the
Fund or the Mortgage Trust, as applicable, without payment of any penalty upon 15 days’ written notice to the
Manager by the promoter, provided that the promoter or an affiliate of the promoter becomes registered as a
manager under NI 31-103 and internalizes the management services required by the Fund or the Mortgage Trust, as
applicable. The Manager may resign as the manager of the Fund and/or the Mortgage Trust, if the Fund or the
Mortgage Trust, as applicable, is in breach or default of the provisions of the Declaration of Trust or the Mortgage
Trust Declaration of Trust, as applicable, and, if capable of being cured, any such breach or default has not been
40
cured within 30 days’ notice of such breach or default to the Fund or the Mortgage Trust, as applicable, and the
Manager is deemed to have resigned if the Manager becomes bankrupt, insolvent or makes a general assignment for
the benefit of its creditors or in the event the Manager ceases to be resident in Canada for the purposes of the Tax
Act or carry out its functions of managing the Fund or the Mortgage Trust, as applicable, in Canada. In the event
that the Manager is in material breach or default of the provisions of the Declaration of Trust or the Mortgage Trust
Declaration of Trust, as applicable, and, if capable of being cured, any such breach or default has not been cured
within 30 days’ notice of such breach or default to the Manager, the Trustee shall give notice thereof to unitholders
of the Fund or the Mortgage Trust and such unitholders, upon approval by way of Extraordinary Resolution (as
defined herein), may direct the Trustee to remove the Manager and appoint a successor manager.
The Manager is entitled to fees for its services as manager under the Declaration of Trust and the Mortgage Trust
Declaration of Trust, as applicable, as described under “Fees and Expenses” and will be reimbursed for all
reasonable costs and expenses incurred by the Manager on behalf of the Funds. In addition, the Manager and each of
its directors, officers, employees and agents will be indemnified by the Fund or the Mortgage Trust, as applicable,
for all liabilities, costs and expenses incurred in connection with any action, suit or proceeding that is proposed or
commenced, or other claim that is made against, the Manager, or any of its officers, directors, employees or agents,
in the exercise of its duties as manager, except those resulting from the Manager’s willful misconduct, bad faith,
negligence, disregard of the Manager’s standard of care or material breach or default by the Manager of its
obligations.
The management services to be provided by the Manager are not exclusive to the Funds and nothing in the
Declaration of Trust and the Mortgage Trust Declaration of Trust prevents the Manager from providing similar
management services to other investment funds and other clients (whether or not their investment objectives and
policies are similar to those of the Fund and the Mortgage Trust) or from engaging in other activities.
Officers and Directors of the Manager
The name and municipality of residence of each of the directors and executive officers of the Manager and their
principal occupation are as follows:
Name and Municipality of
Residence
Position with the Manager
Principal Occupation
RICHARD G. STONE
Toronto, Ontario
President, CEO, Chairman and President, CEO and director of Stone Investment
director
Group Limited and Stone & Co. Limited and
President, CEO, CIO, Chairman and a director of
the Manager.
JAMES A. ELLIOTT
Toronto, Ontario
CFO and director
CFO and director of Stone Investment Group
Limited, Stone & Co. Limited and the Manager.
MARTIN ANSTEE
Toronto, Ontario
Vice President Investments
and director
Portfolio Advisor for Stone & Co. Flagship Growth
& Income Fund Canada, Stone & Co. Dividend
Growth Class Canada, Stone & Co. Resources Plus
Class, Stone 2011 FTLP and Stone 2012 FTLP.
SUZANNE GRIMBLE
Toronto, Ontario
Secretary
Vice President, Corporate Developments, Corporate
Secretary and director of Stone & Co. Limited.
The following is a brief description of the background of the directors and officers of the Manager.
Richard G. Stone has experience involving the creation, promotion, operation and management of a wide variety of
investment funds and tax-deferred limited partnerships. He is the President, CEO and a director of Stone
Investment Group Limited which owns all of the issued and outstanding shares the Manager. Mr. Stone founded
Stone & Co. Limited in 1994 and continues to serve as its President, CEO and as a director. Mr. Stone is also the
President, CEO, CIO, Chairman and a director of the Manager.
James A. Elliott is the CFO and a director of Stone Investment Group Limited, the Manager and Stone & Co.
Limited. Mr. Elliott joined Stone & Co. Limited in 1995. He has also been the CFO and a director of the Manager
since November 2004 and prior thereto from September 1999 until June 2003. Mr. Elliott has more than 20 years
41
of financial experience, including corporate finance, lending and asset management.
designation of Chartered Accountant.
Mr. Elliott holds the
Martin Anstee has been a portfolio advisor for over 30 years, and is currently a Vice President and Director of the
Manager, having joined the Manager in September 2002. Mr. Anstee obtained his Chartered Financial Analyst
designation in 1978. Mr. Anstee is currently lead portfolio advisor for the Stone & Co. Flagship Growth & Income
Fund Canada, Stone & Co. Flagship Money Market Fund, Stone & Co. Resource Plus Class and Stone & Co.
Dividend Growth Class Canada.
Suzanne Grimble is currently the Vice President, Corporate Development, Corporate Secretary and Director of
Stone & Co. Limited. Ms. Grimble has been with Stone & Co. Limited since January, 2007 and prior thereto she as
Vice President and Corporate Secretary of Clarington Funds Inc. from 1996. Ms. Grimble holds the designation of
Chartered Accountant.
Portfolio Advisors of the Manager
The name and municipality of residence of each of the portfolio advisors of the Manager and their principal
occupation are as follows:
Name and Municipality of
Residence
Position with the Manager
Principal Occupation
CHYANNE FICKES
Toronto, Ontario
Vice President Investments
Portfolio Advisor for Stone & Co. Flagship Stock
Fund Canada, Stone & Co. Growth Industries Fund
and Stone Agribusiness Fund.
MICHAEL GIORDANO
Toronto, Ontario
Vice President Investments
Portfolio Advisor for Stone & Co. Flagship Growth
& Income Fund Canada, Stone & Co. Dividend
Growth Class Canada, Stone & Co. Flagship Money
Market Fund, Stone & Co. Resources Plus, Stone
2011 FTLP and Stone 2012 FTLP.
BRIAN LAVERY
Toronto, Ontario
Vice President Investments
Portfolio Advisor for Stone & Co. Flagship Stock
Fund Canada, Stone & Co. Growth Industries Fund
and Stone Agribusiness Fund.
MOHSIN BASHIR
Toronto, Ontario
Portfolio Manager
Portfolio Advisor for Stone & Co. Flagship Stock
Fund Canada and Stone & Co. Dividend Growth
Class Canada.
The following is a brief description of the background of the portfolio advisors of the Manager.
Chyanne Fickes joined the Manager in November 2002 as Vice President and portfolio advisor, having been a
portfolio advisor and analyst for over 30 years. Previously, Ms. Fickes was Vice President and portfolio advisor for
Canadian Equities at Canadian Pacific Investment Management Limited. Ms. Fickes obtained a Master of Business
Administration degree from the University of Western Ontario in 1978 and obtained her Chartered Financial Analyst
designation in 1982. Ms. Fickes is lead portfolio advisor for the Stone & Co. Flagship Stock Fund Canada, Stone &
Co. Growth Industries Fund and Stone Agribusiness Fund.
Michael Giordano joined the Manager in 2005. Mr. Giordano is Vice President and portfolio advisor of
Stone & Co. Flagship Growth & Income Fund Canada, Stone & Co. Dividend Growth Class Canada, Stone & Co.
Flagship Money Market Fund, Stone & Co. Resource Plus Class and Stone 2010 FTLP. Prior to joining the
Manager, Mr. Giordano spent 10 years in portfolio management with Pinetree Capital Corp. and Lawrence and
Company Inc. Mr. Giordano is a chartered accountant and managed internal audit at Gordon Capital Corporation
from 1992 to 1996. Mr. Giordano received his Master of Business Administration degree from York University in
1995 and obtained his Chartered Accountant designation in 1992.
Brian Lavery joined the Manager in November 2010 as Vice President and portfolio advisor, having been a
portfolio advisor and analyst for 15 years. Previously, Mr. Lavery was with BMO Harris Investment Management
Inc. from 1997 to 2009, most recently in the capacity of portfolio manager. Mr. Lavery obtained his Chartered
42
Financial Analyst designation in 1996. Mr. Lavery is portfolio advisor for the Stone & Co. Flagship Stock Fund
Canada, Stone & Co. Growth Industries Fund and Stone Agribusiness Fund.
Mohsin Bashir joined the Manager in 2012. Mr. Bashir is a portfolio manager and is a member of the Canadian
Equity (all cap) Group. Prior to joining the Manager, Mr. Bashir accumulated seven years of investment experience
and spent 10 years in positions of increasing responsibility with Highwater Capital Management, TD Bank Financial
Group, Sentry Select Capital and RBC Royal Bank of Canada. Mr. Bashir received his Chartered Financial Analyst
designation in 2008 and graduated from the University of Waterloo in 2003 with a joint Honours Bachelor of Arts in
Economics and Applied Studies. Mr. Bashir also sits on the Faculty of the University of Waterloo as an Adjunct
Lecturer. Mr. Bashir is the portfolio manager to the Dividend Growth and Stock Funds.
The Portfolio Manager
The Portfolio Manager is incorporated under the Business Corporation Act (Ontario) and is located in Toronto,
Ontario. Mohsin Bashir will be principally responsible for the investment decisions made by the Portfolio Manager.
These decisions are not subject to oversight, approval or ratification of a committee.
Details of the Portfolio Management Agreements
The Portfolio Manager will provide investment advisory and portfolio management services to the Fund with respect
to the Common Share Portfolio pursuant to the Portfolio Management Agreement. In addition, the Portfolio
Manager will provide investment advisory and portfolio management services to the Mortgage Trust with respect to
the Portfolio pursuant to the Mortgage Trust Portfolio Management Agreement (together with the Portfolio
Management Agreement, the “Portfolio Management Agreements”) including all investment decisions relating to
Mortgages to be acquired by the Mortgage Trust. Subject to the terms of the Portfolio Management Agreement and
the Mortgage Trust Portfolio Management Agreement, as applicable, the Portfolio Manager will implement the
investments strategies of the Fund and the Mortgage Trust on an ongoing basis.
Under the Portfolio Management Agreements, the Portfolio Manager will covenant to act at all times on a basis
which is fair and reasonable to the Manager and the Fund or the Mortgage Trust, as applicable, to act honestly and in
good faith with a view to the best interests of the Fund or the Mortgage Trust, as applicable and, in connection
therewith, to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the
circumstances. The Portfolio Management Agreements will provide that the Portfolio Manager will not be liable in
any way to the parties indemnified under the Portfolio Management Agreements for any default, failure or defect in
any of the securities comprising the Common Share Portfolio or the Portfolio, as applicable, if it has satisfied the
duties and the standard of care, diligence and skill set forth above. The Portfolio Management Agreement will
further provide that the Portfolio Manager will not be liable for any losses in the NAV of the Fund or the NAV of
the Mortgage Trust, as applicable, if it has satisfied the duties and the standard of care, diligence and skill set forth
above. Pursuant to the Portfolio Management Agreements, the Portfolio Manager and its officers, directors and
employees shall be indemnified, from the assets of the Fund or the Mortgage Trust, as applicable, against all losses
(other than loss of profits), expenses and liabilities incurred by any of them in connection with any matter relating to
their respective duties under the Portfolio Management Agreements except those resulting from the Portfolio
Manager’s material breach or default of its obligations under the Portfolio Management Agreement or the Mortgage
Trust Portfolio Management Agreement, as applicable, or an act or omission involving willful misconduct, bad faith,
negligence or reckless disregard of such person’s duties under the Portfolio Management Agreements.
The Portfolio Management Agreements, unless terminated as described below, will continue until the date of
termination of the Fund or the Mortgage Trust, as applicable. The Portfolio Manager may be removed as the
portfolio manager of the Fund or the Mortgage Trust, as applicable, without payment of any penalty upon 15 days’
written notice to the Portfolio Manager by the promoter, provided that the promoter or an affiliate of the promoter
becomes registered as a portfolio manager under NI 31-103 and internalizes the portfolio management services
required by the Fund or the Mortgage Trust, as applicable. The Portfolio Manager may terminate the Portfolio
Management Agreements without payment of any penalty, including in the following circumstances: (i) upon 90
days’ notice; (ii) in the event that the Manager is in material breach of the Portfolio Management Agreement or the
Mortgage Trust Portfolio Management Agreement, as applicable, and the material breach has not been cured within
20 Business Days’ notice thereof to the Manager; (iii) if there is a material change in the investment objectives,
strategy and/or restrictions of the Fund or the Mortgage Trust, as applicable, to which the Portfolio Manager has not
previously agreed; (iv) if there is a dissolution and commencement of winding-up of the Fund or the Mortgage
Trust, as applicable; (v) if the Fund or the Mortgage Trust becomes bankrupt or insolvent or makes a general
43
assignment for the benefit of its creditors or a receiver is appointed in respect of the Fund or the Mortgage Trust or a
substantial portion of its assets; or (vi) if the assets of the Fund or the Mortgage Trust become subject to seizure or
confiscation by any public or governmental organization.
The Manager may terminate the Portfolio Management Agreement or the Mortgage Trust Portfolio Management
Agreement, without payment of any penalty, including in the following circumstances: (i) in the event that the
Portfolio Manager is in material breach of the Portfolio Management Agreement or the Mortgage Trust Portfolio
Management Agreement, as applicable, and the material breach has not been cured within 20 Business Days’ notice
thereof to the Portfolio Manager; (ii) if there is a dissolution and commencement of winding-up of the Portfolio
Manager; (iii) if the Portfolio Manager becomes bankrupt or insolvent or makes a general assignment for the benefit
of its creditors or a receiver is appointed in respect of the Portfolio Manager or a substantial portion of the assets of
the Portfolio Manager; (iv) if the assets of the Portfolio Manager become subject to seizure or confiscation by any
public or governmental organization; (v) if the Portfolio Manager has lost any necessary registration, license or other
authorization or cannot rely on an exemption therefrom required by the Portfolio Manager for it to perform the
services delegated to it thereunder; or (vi) if the Portfolio Manager has breached its standard of care or acted with
willful misconduct, fraud or negligence.
The Portfolio Management Agreements will not be subject to termination under clause (i) in the preceding
paragraph if a material breach by the Portfolio Manager cannot be cured within 20 Business Days’ notice thereof but
the Portfolio Manager commences the cure within the 20 Business Day period and completes the cure within 45
Business Days of such notice.
The Mortgage Investment Advisor
The Portfolio Manager will engage First National to act as the mortgage advisor for the Mortgage Trust. The
Mortgage Investment Advisor will arrange for sourcing, structuring and management of Mortgage investments by
the Mortgage Trust. The principal office of the Mortgage Investment Advisor is 100 University Avenue, Suite 700,
North Tower, Toronto, Ontario, M5J 1V5.
The Mortgage Investment Advisor believes that its principal advantages in this market include its: (i) extensive and
long standing relationships with multi-unit residential and commercial real estate developers and investors, both private
and public, across Canada which ensure a continuing supply of high-quality lending opportunities; (ii) wide range of
mortgage products supported by a large and experienced group of mortgage underwriters exercising a disciplined due
diligence process ensuring mortgage creditworthiness is consistent; (iii) management team which has extensive credit
adjudication experience; (iv) large servicing operation which ensures professional surveillance and management of
mortgages under administration; (v) flexibility and speed of credit approval; and (vii) certainty of execution for
borrowers. The Mortgage Investment Advisor believes that these advantages lead to high quality and ongoing lending
opportunities and the ability to build a diversified pool of Mortgages across industry sectors, geography and term.
The business of First National was founded in 1988. First National is a Canadian-based originator, underwriter and
servicer of multi-unit residential and commercial mortgages as well as prime single-family residential mortgages.
For the year ended December 31, 2011, the Mortgage Investment Advisor originated $11.8 billion of mortgage
assets and, as of June 30, 2012, had mortgages under administration of $63.7 billion. The Mortgage Investment
Advisor has offices in Halifax, Montreal, Toronto (head office), Calgary and Vancouver, over 600 employees and an
investment grade rating from the Dominion Bond Rating Service. The Mortgage Investment Advisor believes it is
the largest lender of single-family residential mortgages in Canada outside of the five largest chartered banks and
one of the largest multi-unit residential and commercial mortgage lenders in Canada. First National Financial
Corporation, the parent of the Mortgage Investment Advisor, is listed on the Toronto Stock Exchange (Symbol: FN),
with a market capitalization of approximately $1 billion.
More extensive information on the Mortgage Investment Advisor is available at www.firstnational.ca and on the
System for Electronic Delivery and Retrieval. This information is not part of this prospectus and is not incorporated
herein by reference.
The Mortgage Investment Advisor has historically funded the mortgages it originates through institutional
placements and a diversified range of securitization alternatives including CMB (Canada Mortgage Bonds), CMBS
(Commercial Mortgage Backed Securities) and NHA-MBS (National Housing Act - Mortgage Backed Securities),
as well as its own balance sheet. The Mortgage Investment Advisor services virtually all mortgages generated
44
through its mortgage origination activities and its management believes that the Mortgage Investment Advisor is the
largest third party servicer of multi-unit residential and commercial mortgages in Canada.
Mortgage Origination
The Mortgage Investment Advisor originates a range of multi-unit residential mortgages and commercial mortgages,
including industrial, retail, office and other commercial properties. The Mortgage Investment Advisor relies on its
experienced in-house commercial mortgage underwriters, who are employees of the Mortgage Investment Advisor,
to source and underwrite these mortgages. The Mortgage Investment Advisor has a national brand supported by
offices in Vancouver, Calgary, Toronto, Montreal and Halifax giving the Mortgage Investment Advisor an in-depth
understanding of the various real estate markets across the country. The Mortgage Investment Advisor has extensive
and longstanding relationships with a large number of real estate developers and investors, both public and private,
across a range of mortgage products. This existing customer base is represented by 5,389 multi-unit residential and
commercial mortgages under administration as at June 30, 2012. The Mortgage Investment Advisor is often the first
choice for many borrowers to meet their mortgage requirements. For the year ended December 31, 2011, the
Mortgage Investment Advisor originated approximately $2.7 billion of multi-unit residential and commercial
mortgages and as at December 31, 2011 had approximately $17.3 billion of multi-unit residential and commercial
mortgages under administration.
The Mortgage Investment Advisor offers a wide range of products in the single-family residential and multi-unit
residential and commercial mortgage markets. This permits the Mortgage Investment Advisor to take advantage of the
cross-referral opportunities between the various markets and to leverage operational synergies, such as shared
management, risk analysis, information technology, accounting and finance, capital markets and servicing and
administration.
Since its inception, management of First National has sought to make the Mortgage Investment Advisor a leader in the
Canadian mortgage industry in the development and utilization of proprietary software to enhance its operations both
during the origination process and then subsequently during the servicing and administration phase. The Mortgage
Investment Advisor has invested significant resources in business processes and technology, resulting in lower costs of
origination, servicing and administration, providing the Mortgage Investment Advisor with an operational cost
advantage. The Mortgage Investment Advisor expects continued productivity improvements and decreasing per unit
costs as the Mortgage Investment Advisor’s mortgage origination volume and mortgages under administration grow.
The mortgage originations and mortgages under administration by the Mortgage Investment Advisor as at and for
each of the four years ended December 31, 2011 and the 6 months ended June 30, 2012 are set out below.
Mortgage Originations
($ billions)1
11.9
8.8
11.8
8.5
10.5
8.3
2
Mortgages Under Administration
($ billions)
11.8
40.6
6.9
9.1
3.1
3.3
2.2
2.7
2008
2009
2010
2011
1.1
YTD 2012³
Single Family Residential
Multi-Unit Residential & Commercial
1
2
3
53.3
63.7
42.3
46.2
16.3
17.3
17.5
2010
2011
YTD 2012³
31.9
37.0
14.3
15.9
2008
2009
26.3
5.8
47.8
59.6
Single Family Residential
Multi-Unit Residential & Commercial
For year ended December 31 of the respective year.
As at December 31 of the respective year.
Year to date 2012 as at June 30, 2012.
45
Duties and Services to be Provided by the Mortgage Investment Advisor
The Mortgage Investment Advisor will be appointed to act as the mortgage advisor for the Mortgage Trust pursuant
to a sub-advisory agreement (the “Sub-Advisory Agreement”) to be entered into on or prior to the Closing Date
between the Portfolio Manager and the Mortgage Investment Advisor.
Under the Sub-Advisory Agreement, the Mortgage Investment Advisor will covenant to act at all times on a basis
which is fair and reasonable to the Portfolio Manager and the Mortgage Trust, to act honestly and in good faith with
a view to the best interests of the Mortgage Trust and, in connection therewith, to exercise the degree of care,
diligence and skill that a reasonably prudent person would exercise in the circumstances. The Sub-Advisory
Agreement will provide that the Mortgage Investment Advisor will not be liable in any way to the parties
indemnified under the Sub-Advisory Agreement for any default, failure or defect in any of the securities comprising
the Portfolio if it has satisfied the duties and the standard of care, diligence and skill set forth above. The SubAdvisory Agreement will further provide that the Mortgage Investment Advisor will not be liable for any losses in
the NAV of the Mortgage Trust if it has satisfied the duties and the standard of care, diligence and skill set forth
above. Pursuant to the Sub-Advisory Agreement, the Mortgage Investment Advisor and its officers, directors and
employees shall be indemnified, from the assets of the Mortgage Trust against all losses (other than loss of profits),
expenses and liabilities incurred by any of them in connection with any matter relating to their respective duties
under the Sub-Advisory Agreement except those resulting from the Mortgage Investment Advisor’s material breach
or default of its obligations under the Sub-Advisory Agreement or an act or omission involving willful misconduct,
bad faith, negligence or reckless disregard of such person’s duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement, unless terminated as described below, will continue until the date of termination of
the Mortgage Trust. The Mortgage Investment Advisor is able to terminate the Sub-Advisory Agreement without
payment of any penalty, including in the following circumstances: (i) upon 90 days’ notice; (ii) in the event that the
Portfolio Manager is in material breach of the Sub-Advisory Agreement or and the material breach has not been
cured within 20 Business Days’ notice thereof to the Portfolio Manager; (iii) if there is a material change in the
investment objectives, strategy and/or restrictions of the Mortgage Trust to which the Mortgage Investment Advisor
has not previously agreed; (iv) if there is a dissolution and commencement of winding-up of the Mortgage Trust; (v)
if the Mortgage Trust becomes bankrupt or insolvent or makes a general assignment for the benefit of its creditors or
a receiver is appointed in respect of the Mortgage Trust or a substantial portion of its assets; or (vi) if the assets of
the Mortgage Trust become subject to seizure or confiscation by any public or governmental organization.
The Portfolio Manager may terminate the Sub-Advisory Agreement, without payment of any penalty, including in
the following circumstances: (i) in the event that the Mortgage Investment Advisor is in material breach of the SubAdvisory Agreement and the material breach has not been cured within 20 Business Days’ notice thereof to the
Mortgage Investment Advisor; (ii) if there is a dissolution and commencement of winding-up of the Mortgage
Investment Advisor; (iii) if the Mortgage Investment Advisor becomes bankrupt or insolvent or makes a general
assignment for the benefit of its creditors or a receiver is appointed in respect of the Mortgage Investment Advisor
or a substantial portion of the assets of the Mortgage Investment Advisor; (iv) if the assets of the Mortgage
Investment Advisor become subject to seizure or confiscation by any public or governmental organization; (v) if the
Mortgage Investment Advisor has lost any necessary registration, license or other authorization or cannot rely on an
exemption therefrom required by the Mortgage Investment Advisor for it to perform the services delegated to it
thereunder; or (vi) if the Mortgage Investment Advisor has breached its standard of care or acted with willful
misconduct, fraud or negligence.
The Sub-Advisory Agreement will not be subject to termination under clause (i) in the preceding paragraph if a
material breach by the Mortgage Investment Advisor cannot be cured within 20 Business Days’ notice thereof but
the Mortgage Investment Advisor commences the cure within the 20 Business Day period and completes the cure
within 45 Business Days of such notice.
The Portfolio Manager is responsible for payment of the any fees to the Mortgage Investment Advisor. See “Fees
and Expenses – Management Fee”.
Biographies of Executive Officers
The biographical information of the executive officers of the Mortgage Investment Advisor is set forth below:
Stephen Smith is Chairman, President and co-founder of First National Financial Corporation and President of the
Mortgage Investment Advisor and co-founder of the Mortgage Investment Advisor. One of Canada’s leading
46
financial services entrepreneurs, Mr. Smith has been an innovator in the development and utilization of various
securitization techniques to finance mortgage assets and has been a regular speaker at securitization conferences. He
is Chairman of the Canada Guaranty Mortgage Insurance Company as well as a director of The Dominion of Canada
General Insurance Company and The Empire Life Insurance Company. He is also on the board of Metrolinx Inc.
(GO Transit). In addition, Mr. Smith is on the Advisory Council of the Royal Conservatory of Music and the Chair
of The Historica-Dominion Institute. Mr. Smith has a Master of Science (Economics) from the London School of
Economics and Political Science, a Bachelor of Science (Honours) in Electrical Engineering, Queen’s University,
and is a member of the Association of Professional Engineers of Ontario. Mr. Smith is a graduate of the Directors
Education Program at the University of Toronto, Rotman School of Management. Mr. Smith is a recipient of the
Queen Elizabeth II Diamond Jubilee Medal for contribution to Canada.
Moray Tawse is Vice President, Mortgage Investments and co-founder of First National Financial Corporation and
Vice President, Mortgage Investments of the Mortgage Investment Advisor. In addition to directing the operations
of all of the Mortgage Investment Advisor’s commercial mortgage origination activities he is one of Canada’s
leading experts on commercial real estate and is often called upon to deliver keynote addresses at national real estate
symposiums. Mr. Tawse is also an independent director of C2C Industrial Properties Inc., a TSX Venture listed
company that owns and operates industrial properties across Canada and an independent director of Regal Lifestyles
Communities Inc., a TSX listed company which owns and operates retirement communities across Canada.
Robert Inglis is the Chief Financial Officer of both First National Financial Corporation and of the Mortgage
Investment Advisor. Mr.Inglis is responsible for all financial reporting and mortgage accounting systems for the
administration of First National’s portfolio of mortgages under administration. He is the functional head of Finance
and Accounting, Investor Compliance, Residential Mortgage Accounting and Human Resources. Mr. Inglis joined
First National in 1997 from Price Waterhouse (now PricewaterhouseCoopers) and was the Director, Finance and
Accounting for seven years prior to becoming Vice President, Finance in 2004. Mr. Inglis was appointed Chief
Financial Officer of First National on December 12, 2008. Mr. Inglis obtained his Chartered Accountant designation
in 1991 and received a Bachelor of Commerce (Honours) from Queen’s University in 1988.
Scott C. McKenzie is the Vice President, Residential Mortgages for the Mortgage Investment Advisor. Mr.
McKenzie is responsible for the origination and underwriting of all residential mortgage business across Canada.
Prior to joining First National in 1989, Mr. McKenzie was Branch Manager with Guaranty Trust Company of
Canada where he was responsible for the ongoing operation of a full service branch of First National. Mr. McKenzie
has a Bachelor of Arts (Economics) from the University of Guelph.
Jeremy Wedgbury is the Managing Director, Commercial Mortgage Origination for the Mortgage Investment
Advisor and is responsible for the sales and marketing of the Mortgage Investment Advisor’s commercial mortgage
products. This role includes the management of approximately 25 mortgage originators located in offices nationally
and the credit review of the commercial loan products, including CMHC-insured loans, small commercial loans and
interim/construction loans. Prior to joining First National in 2004, Mr. Wedgbury worked with other leading
commercial mortgage lenders for 14 years, including Manulife Financial and Merrill Lynch Financial. Mr.
Wedgbury’s educational background includes a Bachelor of Arts from Wilfrid Laurier University and the Urban
Land Economics Diploma (Real Estate) from the University of British Columbia.
Lisa White is the Vice President, Mortgage Administration for the Mortgage Investment Advisor. She manages all
aspects of residential loan servicing including regulatory and contractual requirements and the commercial
administration team. Prior to joining First National in 2001, Ms. White was a Controller at a public real estate
investment company and a Financial Analyst within the Corporate Real Estate division of The Toronto-Dominion
Bank. Ms. White holds a Bachelor of Economics and a Diploma in Accounting both from McMaster University.
Jason Ellis is Managing Director, Capital Markets for the Mortgage Investment Advisor and is responsible for
interest rate risk management, funding, and securitization for all commercial and residential mortgage origination.
Prior to joining First National in 2004, Mr. Ellis was with the Asset/Liability Management group at Manulife
Financial and with RBC Dominion Securities in Toronto and New York where he traded fixed income and interest
rate derivatives. Mr. Ellis holds a BA degree from the University of Western Ontario, a MBA degree from
McMaster University and is a CFA charter holder.
Conflicts of Interest
The Manager, the Portfolio Manager and the Mortgage Investment Advisor and their respective affiliates are
engaged in a wide range of investment management, investment advisory and other business activities. The services
47
provided by the Manager, the Portfolio Manager and the Mortgage Investment Advisor under the Declaration of
Trust, the Mortgage Trust Declaration of Trust, the Portfolio Management Agreement, the Mortgage Trust Portfolio
Management Agreement and the Sub-Advisory Agreement are not exclusive and nothing therein prevents the
Manager, the Portfolio Manager or the Mortgage Investment Advisor or any of their respective affiliates from
providing similar services to other investment funds or clients (whether or not their investment objectives, strategies
and policies are similar to those of the Fund or the Mortgage Trust), investing in Mortgages for their own account or
from engaging in other activities. The Manager’s, the Portfolio Manager’s and the Mortgage Investment Advisor’s
investment decisions for the Fund and the Mortgage Trust will be made independently of those made on behalf of its
other clients or for its own investments. On occasion, however, the Manager, the Portfolio Manager and the
Mortgage Investment Advisor will make the same investment for the Fund or the Mortgage Trust and for one or
more of its other clients or itself. If the Fund or the Mortgage Trust and one or more of the other clients of the
Manager, the Portfolio Manager or the Mortgage Investment Advisor, or any of its affiliates, are engaged in the
purchase or sale of the same security, the transactions will be effected with appropriate regard for the best interests
of the Fund or the Mortgage Trust, as applicable. Each of the Manager, Portfolio Manager and the Mortgage
Investment Advisor has adopted a conflict of interest policy that requires among other things the referral of conflict
of interests matters to the IRC.
Where the Manager or its affiliates otherwise perceive, in the course of their businesses, that they are or may be in a
material conflict of interest position, the matter will be referred to the IRC. The IRC will consider all matters
referred to it and provide its recommendations to the Manager as soon as possible.
Independent Review Committee
NI 81-107 requires all publicly offered investment funds, such as the Fund, to establish an independent review
committee (“IRC”) to whom the Manager must refer conflict of interest matters for review or approval. NI 81-107
also imposes obligations upon the Manager to establish written policies and procedures for dealing with conflict of
interest matters, maintain records in respect of these matters and provide assistance to the IRC in carrying out its
functions. The IRC will be required to conduct regular assessments and provide reports to the Manager and to
Unitholders in respect of its functions.
The members of the IRC are:
Richard N. Matheson is currently a director of Regal Lifestyle Communities Inc. and a member of the Rosedale
Finance Committee. Mr. Matheson retired from RBC Capital Markets in July 2012 after a 27-year investment
banking career. While at RBC Capital Markets, Mr. Matheson held the positions of Managing Director, CoHead of the Real Estate Group, and served as a member of the Real Estate Industry Operating Committee
and the RBC Capital Markets Real Estate Loan Committee. Mr. Matheson holds a Chartered Accountant
designation, a Bachelor of Commerce Degree from McMaster University, and has successfully completed the
Canadian Securities Course and the Canadian Institute of Chartered Accountants in-depth tax course.
Kevin W. Dalton was the Vice Chairman, Head of Investment Banking at Desjardins Securities Inc. from January to
November 2009. Previously, Mr. Dalton held the positions of President and Managing Director, Head of Investment
Banking at Blackmont Capital, from 2007 to 2008. From 1993 to 2007, Mr. Dalton worked at CIBC World Markets,
holding a number of senior positions including Managing Director, Head of Canadian Diversified Investment
Banking, Head of Canadian TMT Investment Banking and Head of Canadian Technology Investment Banking. Mr.
Dalton holds a Bachelor of Arts in Honors Business Administration from The University of Western Ontario.
Terry M. Whalen was the Chief Investment Officer with Chartwell Seniors Housing REIT from 2008 to 2011. From
2006 to 2008, Mr. Whalen held the position of Managing Director, Capital Markets at CB Richard Ellis Limited.
Prior to that, Mr. Whalen was the Vice President and Director of TD Securities Inc., from 1999 to 2006. Mr. Whalen
holds a Masters of Business Administration from York University and a Bachelor of Arts in Honors Economics
from Loyola of Montreal (Concordia).
The IRC will prepare a report, at least annually, of its activities for Unitholders which will be available to
Unitholders at no cost on the Manager’s website at www.stoneco.com.
The annual fee payable to each member is anticipated to be $12,000. Expenses incurred by the members of the IRC
in connection with performing their duties are also the responsibility of the investment funds, including the Fund.
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Trustee
Stone Asset Management Limited (the “Trustee”) will act as trustee of the Fund pursuant to the provisions of the
Declaration of Trust. The address of the Trustee is 36 Toronto Street, Suite 710, Toronto, Ontario, M5C 2C5.
Pursuant to the Declaration of Trust, the Trustee is required to exercise its powers and discharge its duties honestly,
in good faith and in the best interests of the Unitholders and to exercise the degree of care, diligence and skill that a
reasonably prudent trustee would exercise in comparable circumstances. The Declaration of Trust provides that the
Trustee will not be liable in carrying out its duties under the Declaration of Trust except in cases of willful
misconduct, bad faith, negligence or the disregard of its obligations or duties or breach of its standard of care and
duty. The Trustee and each of its directors, officers, and employees will be indemnified by the Fund for all
liabilities and expenses reasonably incurred in connection with any action, suit or proceeding that is proposed or
commenced or other claim that is made against the Trustee or any of its officers, directors or employees in the
exercise of its duties under the Declaration of Trust, except those resulting from such person’s willful misconduct,
bad faith, negligence, disregard of such person’s obligations or duties or breach of their standard of care in relation
to the matter in respect of which indemnification is claimed.
Unless the Trustee resigns or is removed as described below, the Trustee will continue as trustee until the
termination of the Fund. The Trustee may be removed as the trustee of the Fund without payment of any penalty
upon 15 days’ written notice to the Trustee by the promoter, provided that the promoter or an affiliate of the
promoter may act as trustee of the Fund under applicable legislation.
The Trustee or any successor trustee may resign upon 60 days’ written notice to Unitholders, and the Trustee is
deemed to have resigned in certain circumstances, including if the Trustee becomes bankrupt or insolvent or in the
event the Trustee (i) ceases to be resident in Canada for the purposes of the Tax Act, (ii) ceases to carry out its
functions of managing the Fund in Canada, or (iii) ceases to exercise the main powers and discretions of the trustee
in respect of the Fund in Canada. The Trustee may not be removed other than by an Extraordinary Resolution in the
event the Trustee is in material breach or default of the provisions of the Declaration of Trust and, if capable of
being cured, such breach or default had not been cured within 20 Business Days’ notice of such breach or default;
provided that an affiliate of the Trustee may be appointed as trustee at any time. Any such resignation or removal
shall become effective only upon the appointment of a successor trustee. If the Trustee resigns or is removed by
Unitholders, its successor must be approved by Unitholders. If, after the resignation or removal of the Trustee, no
successor has been appointed within 90 days, the Trustee or any Unitholder may apply to a court of competent
jurisdiction for the appointment of a successor trustee. If a successor trustee is not appointed, the Fund shall be
terminated.
The Trustee may be entitled to fees for its services under the Declaration of Trust as described under “Fees and
Expenses” and will be reimbursed by the Fund for all reasonable costs and expenses incurred by the Trustee on
behalf of the Fund. In the event the trustee is an affiliate of the Manager, no fees will be payable to the trustee for its
services as trustee under the Declaration of Trust.
The services to be provided by the Trustee under the Declaration of Trust are not exclusive to the Fund and nothing
in the Declaration of Trust prevents the Trustee from providing similar services to other investment funds and other
clients (whether or not their activities are similar to those of the Fund) or from engaging in other activities.
Custodian
CIBC Mellon Trust Company (the “Custodian”) will be appointed custodian of the Fund pursuant to a custodian
agreement (the “Custodian Agreement”). The Custodian’s principal place of business in respect of the Fund and
the Mortgage Trust will be Toronto, Ontario.
In the Custodian Agreement, the Custodian will covenant, when carrying out its duties in respect of the safekeeping
of and dealing with the assets of the Fund to exercise, at a minimum, the degree of care, diligence and skill that a
reasonably prudent person would exercise in the circumstances. The Custodian will agree to hold, or direct its subcustodians to hold, for the account of the Fund, all non-cash property (other than securities which are held in a bookbased system). The Fund may employ sub-custodians as considered appropriate in the circumstances.
Pursuant to the Custodian Agreement, the Custodian will be indemnified out of the Fund’s assets in certain
circumstances, including from and against any direct loss, liability, claim or expense (including reasonable legal
counsel fees and disbursements) suffered or incurred by the Custodian arising from or in connection with the
performance of its duties under the agreement except with respect to any costs, expenses, damages, liabilities and
49
losses resulting primarily from breach of its standard of care, bad faith, willful default, fraud or negligence of the
Custodian or any of its employees, directors or officers.
Registrar and Transfer Agent
Computershare Investor Services Inc. (the “Registrar and Transfer Agent”) will be appointed the registrar,
transfer and distribution agent for the Units. The Registrar and Transfer Agent is located in, and the register of
Units is kept by the Registrar and Transfer Agent in, Toronto, Ontario.
Auditor
The auditor of the Funds is Deloitte & Touche LLP at its principal office located at Suite 1400, Brookfield Place,
181 Bay Street, Toronto, Ontario.
Promoter
First National Asset Management Inc. has taken the initiative in organizing the Fund and the Mortgage Trust and
accordingly may be considered to be a “promoter” of the Funds within the meaning of the securities legislation of
certain provinces and territories of Canada.
CALCULATION OF NET ASSET VALUE
The NAV of the Fund or the Mortgage Trust, as applicable, on a particular date will be equal to the aggregate fair
value of the assets of the Fund or the Mortgage Trust, as applicable, less the aggregate fair value of the liabilities of
the Fund or the Mortgage Trust, as applicable, expressed in Canadian dollars. The NAV per Unit on any day will be
obtained by dividing the NAV of the Fund on such day by the number of Units then outstanding.
The NAV per Unit will be calculated as of 4:00 p.m. (Toronto time), or such other time as the Manager deems
appropriate (the “Valuation Time”), on each Business Day and any other day on which the Manager elects, in its
discretion, to calculate the NAV per Unit (each, a “Valuation Date”).
Valuation Policies and Procedures of the Fund and the Mortgage Trust
In determining the NAV of the Fund or the NAV of the Mortgage Trust at any time:
(i)
the recorded value of any cash on hand, on deposit or on call, and prepaid expenses will be the
amount thereof unless the Manager, or its delegate, deems otherwise;
(ii)
the value of any security or interest in a security listed on a stock exchange will be determined by:
(A) in the case of a security which was traded on the day the net asset value is being determined,
the closing sale price on the principal exchange on which it is traded; (B) in the case of a security
which was not traded on the day the net asset value is being determined because such exchange is
closed for business, the most recent closing sale price; (C) in the case of a security which was not
traded on the day the net asset value is being determined, a price which is the average of the bid
and asked prices;
(iii)
Mortgages will be stated at fair value, determined by using the effective interest rate method based
on a discounted cash flow analysis of the future expected cash flows from the period end to the
maturity of the mortgage. The discount rate used to discount the future expected cash flows of
each mortgage is the aggregate rate produced by taking an appropriate Bank of Canada treasury
bill rate at the period end and applying the inherent credit spread of the mortgage at the time of
investing in the mortgage. Interest income is recorded on the accrual basis provided that the
Mortgage loan is not impaired. An impaired Mortgage loan is any loan where, in the Manager’s
opinion, there has been a deterioration of credit quality to the extent that the Fund or the Mortgage
Trust, as applicable, no longer has a reasonable assurance as to the timely collection of the full
amount of principal and interest. As the Mortgage loans comprising the Portfolio do not trade in
actively quoted markets, the Manager will estimate fair value based upon: (i) market interest rates;
(ii) credit spreads for similar loans; and (iii) the specific creditworthiness and status of an existing
borrower. The Manager will consider, but not be limited in considering, the following as part of
the creditworthiness and status of a borrower: (i) payment history; (ii) value of underlying
property securing the loan or Mortgage; (iii) overall economic conditions; (iv) status of
50
construction or property development (if applicable); and (v) other conditions specific to the
underlying property or building;
(iv)
the value of short-term investments (treasury bills, money market instruments or similar) will be
cost of such instrument plus accrued interest up to and including the date of calculation;
(v)
the value of any other property or of securities and assets for which market quotations are, in the
Manager’s opinion, inaccurate or unreliable, not reflective of all available material information, or
not readily available will be the value determined by the Manager, or its delegate, which most
accurately reflects its fair value; and
(vi)
all expenses or liabilities will be recorded on an accrual basis.
The Canadian Institute of Chartered Accountants released Accounting Guideline 18, Investment Companies, which
requires that investments held by the Fund or the Mortgage Trust, as applicable, be measured and reported in the
financial statements at their fair values. Investments in Mortgages are recorded at fair value and any differences
between the fair value and the carrying value of individual investments in Mortgages will be recorded as investment
gains or losses, as appropriate, in the statement of operations in the period the difference arises. The actual value of
the Mortgage will be determined at its maturity. The accounting policy requires the disclosure of unrealized gains
and losses. Significant unrealized losses may be indicative of a higher risk of loss in the Portfolio. The Manager will
determine the need for adjustments to the recorded amounts of investments in Mortgages based on changes in
circumstances relating to the mortgagor and to market conditions.
If an investment cannot be valued under the foregoing principles or if the foregoing principles are at any time
considered by the Manager to be inappropriate under the circumstances for any reason, then notwithstanding such
principles, the Manager, as the case may be, may make such valuation as it considers fair and reasonable
The NAV of the Fund and NAV per Unit will be calculated in accordance with the rules and policies of the
Canadian Securities Administrators or in accordance with any exemption therefrom that the Fund may obtain. The
NAV per Unit determined in accordance with the principles set out above may differ from net assets per Unit
determined under Canadian generally accepted accounting principles.
For financial statement reporting purposes, the fair value of the Fund’s investments are measured in accordance with
CICA Handbook Section 3855: Financial Instruments – Recognition and Measurement, which for publicly listed
securities is based on the closing bid price for securities held long and closing ask price for securities held short on
the recognized stock exchange on which the investments are listed or principally traded. Pursuant to NI 81-106, the
net asset value of investment funds is calculated based on the fair value of investments using the closing or last trade
price. The net assets per Unit for financial reporting purposes and NAV per Unit for redemption purposes could be
different due to the use of different valuation techniques.
Reporting of Net Asset Value
The NAV of the Fund and the NAV per Unit will be calculated as of the Valuation Time on each Valuation Date.
Such information will be provided by the Manager to Unitholders at no cost via the Internet at www.stoneco.com.
ATTRIBUTES OF THE UNITS
Description of the Units Distributed
The Fund is authorized to issue an unlimited number of Units. Except as provided under “Non-Resident
Unitholders” below, all Units have equal rights and privileges. Each Unit is entitled to one vote at all meetings of
Unitholders and is entitled to participate equally with respect to any and all distributions, other than Management
Fee Distributions, made by the Fund, including distributions of net income and net realized capital gains, and
distributions upon the termination of the Fund. Units are issued only as fully paid and are non-assessable.
The Declaration of Trust provides that the Fund may not issue additional Units following the issuance of Units on
the Closing Date except: (i) at a price that yields net proceeds of not less than 100% of the NAV per Unit calculated
as of the close of business on the Business Day immediately prior to the pricing of such offering; (ii) by way of Unit
distributions; or (iii) with the approval of Unitholders. Subject to the foregoing, following completion of the
Offering, the Fund may allot and issue Units or units of another class at such time or times and in such manner as
the Manager may in its sole discretion determine.
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Immediately after a pro rata distribution of Units to all Unitholders in satisfaction of any non-cash distribution, the
number of outstanding Units will be automatically consolidated such that each Unitholder will hold, after the
consolidation, the same number of Units as the Unitholder held before the non-cash distributions, except in the case
of a non-resident Unitholder to the extent tax was required to be withheld in respect of the distribution. Subject to
the foregoing, the Fund may also allot and issue Units or other securities at such time or times and in such manner as
the Manager in its sole discretion shall determine.
Registration and Redemption of Units
Registration of interests in, and transfers of, the Units will be made only through the book-entry only system of
CDS. On the Closing Date, the Fund will deliver to CDS a certificate evidencing the aggregate number of Units
subscribed for under the Offering. Units must be purchased, transferred and surrendered for redemption only
through a CDS Participant. All rights of an owner of Units must be exercised through, and all payments or other
property to which such owner is entitled will be made or delivered by, CDS or the CDS Participant through which
the owner holds such Units. Upon purchase of any Units, the owner will receive only the customary confirmation.
References in this prospectus to a holder of Units means, unless the context otherwise requires, the owner of the
beneficial interest in such Units.
The Fund, the Manager, the Mortgage Investment Advisor and the Agents will not have any liability for (i) records
maintained by CDS relating to the beneficial interests in the Units or the book-based entry accounts maintained by
CDS; (ii) maintaining, supervising or reviewing any records relating to such beneficial ownership interests; or
(iii) any advice or representation made or given by CDS and made or given with respect to the rules and regulations
of CDS or any action taken by CDS or at the direction of the CDS Participants.
The ability of a beneficial owner of Units to pledge such Units or otherwise take action with respect to such owner’s
interest in such Units (other than through a CDS Participant) may be limited due to the lack of a physical certificate.
A holder of Units who desires to exercise redemption privileges must do so by causing the CDS Participant through
which he or she holds his or her Units to deliver to CDS at its office in the City of Toronto on behalf of the holder, a
written notice of the holder’s intention to redeem Units by no later than 5:00 p.m. (Toronto time) on the applicable
notice date described above. A holder of Units who desires to redeem Units should ensure that the CDS Participant
is provided with notice of his or her intention to exercise his or her redemption right sufficiently in advance of the
deadline so as to permit the CDS Participant to deliver a notice to CDS by 5:00 p.m. (Toronto time) on the notice
date described above.
By causing a CDS Participant to deliver to CDS a notice of the holder’s intention to redeem Units, the holder of
Units will be deemed to have irrevocably surrendered his or her Units for redemption and appointed such CDS
Participant to act as his or her exclusive settlement agent with respect to the exercise of such redemption privilege
and the receipt of payment in connection with the settlement of obligations arising from such exercise, provided that
the Manager may from time to time permit the withdrawal of a redemption notice on such terms and conditions as
the Manager may determine, in its sole discretion, provided that such withdrawal will not adversely affect the Fund.
Any expense associated with the preparation and delivery of the redemption notice will be for the account of the
holder of Units exercising the redemption privilege.
Any redemption notice that CDS determines to be incomplete, not in proper form or not duly executed will, for all
purposes, be void and of no effect and the redemption privilege to which it relates will be considered, for all
purposes, not to have been exercised thereby. A failure by a CDS Participant to exercise redemption privileges or to
give effect to the settlement thereof in accordance with a holder’s instructions will not give rise to any obligations or
liability on the part of the Fund or the Manager to the CDS Participant or the Unitholder.
The Manager may, without the approval of Unitholders, change the redemption rights attached to the Units on not
less than 30 days’ notice to Unitholders by increasing the number of times in each year that Units may be redeemed
by Unitholders (at a redemption price per Units to be determined by the Manager), so long as such change does not
result in the Fund being a mutual fund for securities law purposes and provided that no such change may be made
without Unitholder approval if it would eliminate the rights of Unitholders to redeem their Units on a Monthly
Redemption Date.
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Purchase for Cancellation or Resale
Subject to applicable law, the Fund may at any time or times purchase Units for cancellation at prices per Unit not
exceeding the NAV per Unit on the Business Day immediately prior to such purchase up to a maximum in any 12
month period of 10% of the outstanding public float of Units.
Non-Resident Unitholders
At no time may persons who are non-residents of Canada for purposes of the Tax Act and/or partnerships that are
not Canadian partnerships within the meaning of the Tax Act (or any combination thereof) (collectively, “nonresidents”) be the beneficial owners of a majority of the Units. The Manager may require declarations as to the
jurisdictions in which a beneficial owner of Units is resident and, if a partnership, its status as a Canadian
partnership. If the Manager becomes aware, as a result of requiring such declarations as to beneficial ownership or
otherwise, that the beneficial owners of 40% of the Units then outstanding are, or may be, non-residents, or that such
a situation is imminent, the Manager may make a public announcement thereof. If the Manager determines that
more than 40% of the Units are beneficially held by non-residents, or that such a situation is imminent, the Manager
may send a notice to such non-resident Unitholders, chosen in inverse order to the order of acquisition or in such
manner as the Manager may consider equitable and practicable, requiring them to dispose of their Units or a portion
thereof within a specified period of not less than thirty (30) days. If the Unitholders receiving such notice have not
disposed of the specified number of Units or provided the Manager with satisfactory evidence that they are not nonresidents within such period, the Manager may, on behalf of such Unitholders, dispose of such Units and, in the
interim, shall suspend the voting and distribution rights attached to such Units. Upon such disposition, the affected
Unitholders shall cease to be beneficial holders of Units and their rights shall be limited to receiving the net
proceeds of disposition of such Units.
Notwithstanding the foregoing, the Manager may determine not to take any of the actions described above if the
Manager has been advised by legal counsel that the failure to take any of such actions would not adversely impact
the status of the Fund as a mutual fund trust for purposes of the Tax Act or, alternatively, may take such other action
or actions as may be necessary to maintain the status of the Fund as a mutual fund trust for purposes of the Tax Act.
UNITHOLDER MATTERS
Meetings of Unitholders
A meeting of Unitholders may be convened by the Manager by a written requisition specifying the purpose of the
meeting and must be convened if requisitioned by Unitholders holding not less than 10% of the Units then
outstanding by a written requisition specifying the purpose of the meeting. Not less than 21 days’ and not more than
50 days’ notice will be given of any meeting of Unitholders. The quorum at any meeting of all Unitholders is one
Unitholder present in person or represented by proxy holding 10% of the Units except for the purpose of any
meeting called to consider item (d) below under “Matters Requiring Unitholder Approval” in which case the quorum
shall be Unitholder(s) holding 15% of the outstanding Units. If no quorum is present at such meeting when called,
the meeting, if called on the requisition of Unitholders, will be terminated and otherwise will be adjourned for not
less than 10 days and at the adjourned meeting the Unitholders then present in person or represented by proxy will
form the necessary quorum. At any meeting of Unitholders, each Unitholder will be entitled to one vote for each
Unit registered in the Unitholder’s name.
The Fund will not hold annual meetings of Unitholders.
Matters Requiring Unitholder Approval
Pursuant to the Declaration of Trust, the following matters require the approval of Unitholders by resolution passed
by at least 662/3% of the votes cast at a meeting called and held for such purpose (an ”Extraordinary Resolution”),
other than item (f), which requires approval of Unitholders by a simple majority vote at a meeting called and held
for such purpose (an “Ordinary Resolution”):
(a)
a change in the investment objectives of the Fund as described under “Investment Objectives”;
(b)
a change in the investment restrictions of the Fund as described under “Investment Restrictions”;
(c)
any change in the basis of calculating fees or other expenses that are charged to the Fund which
could result in an increase in charges to the Fund other than a fee or expense charged by a person
or company that is at arm’s length to the Fund;
53
(d)
a change in the manager of the Fund, other than a change resulting in the promoter of the Fund or
an affiliate of the promoter of the Fund assuming such position;
(e)
a change in the trustee of the Fund other than a change resulting in the promoter of the Fund or an
affiliate of the promoter of the Fund being appointed as trustee of the Fund;
(f)
a change in the auditors of the Fund;
(g)
a reorganization (other than a Permitted Merger (as defined herein)) with, or transfer of assets to, a
mutual fund trust, if
(h)
(i)
the Fund ceases to continue after the reorganization or transfer of assets; and
(ii)
the transaction results in Unitholders becoming securityholders in the mutual fund trust;
a reorganization (other than a Permitted Merger) with, or acquisition of assets of, a mutual fund
trust, if
(i)
the Fund continues after the reorganization or acquisition of assets;
(ii)
the transaction results in the securityholders of the mutual fund trust becoming
Unitholders of the Fund; and
(iii)
the transaction would be a significant change to the Fund;
(i)
a termination of the Fund, other than as described under “Termination of the Fund” or in
connection with a Permitted Merger;
(j)
an amendment, modification or variation in the provisions or rights attaching to the Units;
(k)
the issuance of additional Units following the issuance of Units on the Closing Date, other than:
(i) for net proceeds not less than 100% of the NAV per Unit calculated as of the close of business
on the Business Day immediately prior to the pricing of such offering; or (ii) by way of Unit
distribution; and
(l)
a reduction in the frequency of calculating the NAV per Unit.
In addition, the Manager may, without obtaining Unitholder approval, merge the Fund (a “Permitted Merger”)
with another fund or funds, provided that:
(a)
the fund(s) with which the Fund is merged must be managed by the Manager or an affiliate of the
Manager;
(b)
Unitholders are permitted to redeem their Units at a redemption price equal to 100% of the NAV
per Unit, less any costs of funding the redemption, including commissions prior to the effective
date of the merger;
(c)
the funds being merged have similar investment objectives as set forth in their respective
declarations of trust, as determined in good faith by the Manager in its sole discretion;
(d)
the Manager must have determined in good faith that there will be no increase in the management
expense ratio borne by the Unitholders as a result of the merger;
(e)
the merger of the funds is completed on the basis of an exchange ratio determined with reference
to the net asset value per unit of each fund; and
(f)
the merger of the funds must be capable of being accomplished on a tax-deferred rollover basis for
Unitholders of the Fund.
If the Manager determines that a merger is a Permitted Merger, the Manager can effect the merger, including any
required changes to the Declaration of Trust, without seeking Unitholder approval for the merger or such
amendments. If a decision is made to merge, the Manager will issue a press release at least 30 Business Days prior
to the proposed effective date thereof disclosing details of the proposed merger and will comply with all applicable
laws including the requirements of the TSX concerning mergers involving listed investment funds. While the funds
to be merged will have similar investment objectives, the funds may have different investment strategies, guidelines
and restrictions and, accordingly, the units of the merged funds will be subject to different risk factors.
54
The Unitholders will also be permitted to vote on any modification, amendment, alteration or deletion of rights,
privileges or restrictions attaching to the Units which would have a material adverse effect on the interest of the
Unitholders. No amendment may be made to the Declaration of Trust which would have the effect of reducing the
expenses reimbursable to the Manager.
Amendments to the Declaration of Trust
Pursuant to the Declaration of Trust, the Manager is entitled, without the consent of the Unitholders, to make all
such amendments to the Declaration of Trust as the Manager believes are necessary or desirable for the purpose of:
(i) making any change or correction which is of a typographical nature or is required to cure or correct a clerical
omission, mistake or manifest error contained therein, (ii) amending the existing provisions or adding any provisions
which are for the protection or benefit of the Unitholders, (iii) curing an ambiguity or correcting any administrative
difficulty in the Declaration of Trust, (iv) supplementing any provision which may be defective or inconsistent with
another provision, (v) maintaining the status of the Fund as a “unit trust” and a “mutual fund trust” for the purposes
of the Tax Act or to respond to amendments to the Tax Act or to the interpretation thereof, (vi) complying with
applicable law including the rules and policies of Canadian securities regulatory authorities, (vii) conforming the
Declaration of Trust with current market practice within the securities or investment funds industries, (viii) changing
the name of the Fund, (ix) adding additional redemption rights; and (x) removing any conflict or any inconsistencies
which may exist between any of the terms of the Declaration of Trust and any provisions of any applicable law,
subject to the restriction set forth under “Redemption of Units – Exercise of Redemption Rights”.
The Manager may also amend the Declaration of Trust without the consent of the Unitholders for the purpose of
removing any conflicts or other inconsistencies which may exist between the Declaration of Trust and applicable
law, changing the Fund’s taxation year-end as permitted under the Tax Act or providing the Fund with the right to
acquire Units from any Unitholder for the purpose of maintaining the status of the Fund as a “mutual fund trust” for
purposes of the Tax Act.
Any amendments made by the Manager without the consent of Unitholders must be disclosed in the next regularly
scheduled report to Unitholders. Such amendments may be made only if they will not materially adversely affect the
interest of any Unitholder.
Reporting to Unitholders
The Fund will furnish to Unitholders such financial statements of the Fund and the Mortgage Trust (including
interim unaudited and annual audited financial statements, accompanied by management reports of fund
performance) and other reports as are from time to time required by applicable law, including prescribed forms
needed for the completion of Unitholders’ tax returns under the Tax Act and equivalent provincial legislation.
The Fund will comply with all of the continuous disclosure requirements applicable to it as a reporting issuer under
applicable securities laws. Prior to any meeting of Unitholders, the Fund will provide to Unitholders (along with
notice of such meeting) all such information as is required by applicable law to be provided to Unitholders.
Accounting and Reporting
The fiscal year of the Fund will be the calendar year. The annual financial statements of the Fund which shall be
audited by the auditors of the Fund will be prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”), however, the Fund may be required to or may choose to adopt International Financial
Reporting Standards, in which case GAAP will be deemed to be the International Financial Reporting Standards as
published by the International Accounting Standards Board, or any successor accounting standards board, in each
case, applicable as at the date on which such calculation is made or required to be made in accordance with such
generally accepted accounting principles. The auditors will be asked to report on the fair presentation of the annual
financial statements in accordance with GAAP. The Manager will ensure that the Fund complies with all applicable
reporting and administrative requirements, including preparing and issuing unaudited interim financial statements.
The Manager will keep adequate books and records reflecting the activities of the Fund. A Unitholder or his or her
duly authorized representative will have the right to examine the books and records of the Fund during normal
business hours at the offices of the Manager. Notwithstanding the foregoing, a Unitholder shall not have access to
any information that, in the opinion of the Manager, should be kept confidential in the interests of the Fund.
55
TERMINATION OF THE FUND
The Fund does not have a fixed termination date. The Fund may be terminated at any time by the Trustee provided
that the prior approval of Unitholder has been obtained by a majority vote at a meeting of Unitholders called for that
purpose; provided, however, that the Trustee may, in its discretion, terminate the Fund without the approval of
Unitholders if, in the opinion of the Trustee, it is no longer economically practical to continue the Fund or it would
be in the best interests of the Fund. Upon termination, the net assets of the Fund will be distributed to Unitholders on
a pro rata basis.
Upon termination, the Fund will settle the Forward Agreement and the net assets of the Fund will be distributed to
Unitholders on a pro rata basis. Immediately prior to the termination of the Fund, including on the termination date,
the Manager will, to the extent possible, convert the assets of the Fund to cash and after paying or making adequate
provision for all of the Fund’s liabilities, distribute the net assets of the Fund to the Unitholders as soon as
practicable after the date of termination. Any unliquidated assets may be distributed in specie rather than in cash,
subject to compliance with any securities or other laws applicable to such distributions.
USE OF PROCEEDS
The Fund will use the net proceeds from the sale of Units as follows:
Maximum Offering(1)
Minimum Offering(2)
$100,000,000
$25,000,000
$5,250,000
$1,312,500
Expenses of the Offering
$700,000
$375,000
Net proceeds to the Fund
$94,050,000
$23,312,500
Gross Proceeds to the Fund
Agents’ fees
(3)
Notes:
(1)
The Fund has granted the Agents an Over-Allotment Option, exercisable for a period of 30 days following the Closing, to
purchase additional Units in an amount up to 15% of the aggregate number of Units issued at the Closing on the same terms as set
forth above. If the Over-Allotment is exercised in full, under the maximum Offering, the price to the public, the Agents’ fees and
the net proceeds to the Fund before deducting the expenses of the Offering will be $115,000,000, $6,037,500 and $108,962,500, on
the exercise of the Over-Allotment Option. A purchaser who acquires Units forming part of the over-allocation position acquires
those Units under this prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the
Over-Allotment Option or secondary market purchases. See “Plan of Distribution”.
(2)
There will be no Closing unless a minimum of 2,500,000 Units are sold. If subscriptions for a minimum of 2,500,000 Units
have not been received within 90 days following the date of issuance of a receipt for this prospectus, this Offering may not
continue without the consent of the securities authorities and those who have subscribed on or before such date.
(3)
Subject to a maximum of 1.5% of the gross proceeds of the Offering.
The net proceeds from the Offering, after payment of the Agents’ fees and the Offering expenses, will be used by
the Fund to acquire the Common Share Portfolio.
PLAN OF DISTRIBUTION
Pursuant to the Agency Agreement, the Agents have agreed to conditionally offer the Units for sale, as agents of the
Fund, on a best efforts basis, if, as and when issued by the Fund. The Agents will receive a fee equal to $0.525 per
Unit sold and will be reimbursed for reasonable out-of-pocket expenses incurred by them. The Agents may form a
sub-agency group including other qualified investment dealers and determine the fee payable to the members of
such group, which fee will be paid by the Agents out of their fees. While the Agents have agreed to use their best
efforts to sell the Units offered hereby, the Agents will not be obligated to purchase Units that are not sold.
The Offering price of $10.00 per Unit was established by negotiation between the Agents and the Manager.
The Fund has granted the Agents an option (the “Over-Allotment Option”), exercisable for a period of 30 days
following the Closing, to purchase additional Units in an amount up to 15% of the aggregate number of Units issued
at the Closing on the same terms set forth above. If the Over-Allotment Option is exercised in full, under the
maximum Offering, the price to the public, the Agents’ fees and the net proceeds to the Fund before deducting the
56
expenses of the Offering, will be $115,000,000, $6,037,500 and $108,962,500, respectively, in respect of the Units.
This prospectus also qualifies the grant of the Over-Allotment Option and the distribution of the Units issuable on
the exercise of the Over-Allotment Option. A purchaser who acquires Units forming part of the Over-Allotment
Option acquires those Units under this prospectus, regardless of whether the over-allocation position is ultimately
filled through the exercise of the Over-Allotment Option or secondary market purchases.
If subscriptions for a minimum of 2,500,000 Units have not been received within 90 days following the date of
issuance of a final receipt for this prospectus, the Offering may not continue without the consent of the securities
authorities and those who have subscribed for Units on or before such date. Under the terms of the Agency
Agreement, the Agents may, at their discretion on the basis of their assessment of the state of the financial markets
and upon the occurrence of certain stated events, terminate the Agency Agreement. Proceeds from subscriptions will
be held by the Agents until Closing. If the minimum Offering is not achieved and the necessary consents are not
obtained or if the Closing does not occur for any reason, subscription proceeds received from prospective purchasers
will be held in trust by the applicable Agent and will be returned to such purchasers promptly without interest or
deduction. Subscriptions for Units will be received subject to rejection or allotment in whole or in part. The right is
reserved to close the subscription books at any time without notice. Closing is expected to take place on or about
December 19, 2012, or such later date that is on or before January 31, 2013, as may be agreed upon by the Fund and
the Agents. The Agents may over-allot and effect transactions to cover their over-allotted position. The TSX has
conditionally approved the listing of the Units. The listing is subject to the Fund fulfilling all of the TSX
requirements on or before February 25, 2013, including distribution of Units to a minimum number of public
holders.
Registration of interests in and transfers of Units will only be made through book-entry only system administered by
CDS. At Closing, only a book-entry global certificate representing the Units will be issued in registered form to
CDS or its nominee and will be deposited with CDS on the Closing Date.
Any purchase or transfer of Units must be made through CDS Participants. Indirect access to the CDS book-entry
only system is also available to other institutions that maintain custodial relationships with a CDS Participant, either
directly or indirectly. Each purchaser of a Unit will receive a customer confirmation of purchase from the CDS
Participant from whom such Unit is purchased in accordance with the practices and procedures of such CDS
Participant.
This prospectus qualifies the distribution by the Fund of the Units. Purchases of Units are subject to certain
ownership restrictions as set out in the Declaration of Trust. See “Attributes of Unit – Non-Resident Unitholders”.
On closing, the Fund will enter into the Forward Agreement with the Counterparty, which will be a Canadian
chartered bank or an affiliate of a Canadian chartered bank and may be an affiliate of one of the Agents. See
“Overview of Investment Structure”.
Pursuant to policy statements of certain Canadian securities regulators, the Agents may not, throughout the period of
distribution, bid for or purchase Units. The foregoing restriction is subject to certain exceptions, on the conditions
that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in, or raising
the price of Units. Such exceptions include a bid or purchase permitted under applicable by-laws and rules of the
relevant self-regulatory authorities relating to market stabilization and passive market making activities and a bid or
purchase made for and on behalf of a customer where the order was not solicited during the period of distribution.
Pursuant to the first mentioned exception, in connection with the Offering, the Agents may over-allot and may effect
transactions to cover their over-allotted position. Such transactions, if commenced, may be discontinued at any time.
Pursuant to the Agency Agreement, the Fund and the Manager have agreed to indemnify the Agents and their
controlling persons, directors, officers and employees against certain liabilities.
INTEREST OF MANAGER AND OTHERS IN MATERIAL TRANSACTIONS
The Manager will receive the fees described under “Fees and Expenses” for its services to the Fund and will be
reimbursed by the Fund for all expenses incurred in connection with the operation and administration of the Fund.
MATERIAL CONTRACTS
The following contracts can reasonably be regarded as material to purchasers of Units:
57
(i)
the Declaration of Trust;
(ii)
the Forward Agreement;
(iii)
the Agency Agreement;
(iv)
the Portfolio Management Agreement;
(v)
the Sub-Advisory Agreement; and
(iv)
the Custodian Agreement.
Copies of the foregoing documents, after the execution thereof, may be inspected during business hours at the
principal office of the Fund during the course of distribution of the Units offered hereby. Any of the foregoing
contracts that are not executed prior to the filing of this prospectus will be filed with the securities regulatory
authorities forthwith after such contract is entered into.
EXPERTS
The matters referred to under “Income Tax Considerations” and certain other legal matters relating to the securities
offered hereby will be passed upon by Blake, Cassels & Graydon LLP, on behalf of the Fund and Osler, Hoskin &
Harcourt LLP, on behalf of the Agents.
The Fund’s auditors, Deloitte & Touche LLP, have audited the statement of financial position contained herein.
Deloitte & Touche LLP has advised that they are independent with respect to the Fund within the meaning of the
Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario.
PURCHASERS’ STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to
withdraw from an agreement to purchase securities. This right may be exercised within two business days after
receipt or deemed receipt of a prospectus and any amendment. In several of the provinces and territories, the
securities legislation further provides a purchaser with remedies for rescission, or in some jurisdictions revisions of
the price or damages if the prospectus and any amendment contains a misrepresentation or is not delivered to the
purchaser, provided that the remedies for rescission, revisions of the price or damages are exercised by the purchaser
within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser
should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for the
particulars of these rights or consult with a legal adviser.
58
AUDITOR’S CONSENT
We have read the prospectus of First National Mortgage Investment Fund (the “Fund”) dated November 27, 2012
relating to an offer of up to 10,000,000 units of the Fund. We have complied with Canadian generally accepted
standards for an auditor’s involvement with offering documents.
We consent to the use in the above-mentioned prospectus of our report to the Trustee of the Fund on the statement of
financial position of the Fund as at November 27, 2012. Our report is dated November 27, 2012.
Toronto, Canada
November 27, 2012
(signed) Deloitte & Touche LLP
Chartered Accountants
Licensed Public Accountants
F-1
INDEPENDENT AUDITOR’S REPORT
To the Trustee of
First National Mortgage Investment Fund
We have audited the accompanying financial statement of First National Mortgage Investment Fund, which
comprises the statement of financial position as at November 27, 2012 and 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 this financial statement in accordance with
Canadian generally accepted accounting principles, 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.
Auditor’s Responsibility
Our responsibility is to express an opinion on this financial statement based on our audit. 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
statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statement 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 statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, this financial statement presents fairly, in all material respects, the financial position of the First
National Mortgage Investment Fund as at November 27, 2012 in accordance with Canadian generally accepted
accounting principles.
Toronto, Canada
November 27, 2012
(signed) Deloitte & Touche LLP
Chartered Accountants
Licensed Public Accountants
F-2
FIRST NATIONAL MORTGAGE INVESTMENT FUND
STATEMENT OF FINANCIAL POSITION
As at November 27, 2012
Actual
ASSETS
Cash
$10.00
Investment in portfolio securities
$10.00
TOTAL
UNITHOLDER’S EQUITY
Unitholder’s Equity (1 Unit) (Note 1)
$10.00
NET ASSET VALUE PER UNIT
$10.00
Approved by the Manager:
STONE ASSET MANAGEMENT LIMITED
(SIGNED) RICHARD G. STONE
Chief Executive Officer
(SIGNED) JAMES A. ELLIOTT
Chief Financial Officer
F-3
FIRST NATIONAL MORTGAGE INVESTMENT FUND
NOTES TO STATEMENT OF FINANCIAL POSITION
November 27, 2012
1.
ORGANIZATION AND UNITHOLDER’S EQUITY
First National Mortgage Investment Fund (the “Fund”) was established under the laws of the Province of Ontario by
a declaration of trust made as of November 27, 2012. The Fund will obtain exposure to a portfolio comprised
primarily of mortgages (the “Portfolio”). The trustee and manager of the Fund is Stone Asset Management Limited
(the “Trustee” or the “Manager”). The Fund is authorized to issue an unlimited number of transferable units of the
Fund (the “Units”). On November 27, 2012, the Fund issued one Unit to the Trustee for $10.00 cash. The
statement of financial position has been prepared in accordance with Canadian generally accepted accounting
principles.
2.
MANAGEMENT FEES AND OTHER EXPENSES
The Manager is entitled to receive an annual management fee equal to 0.40% per annum of the net asset value of the
Fund, calculated daily and payable monthly in arrears plus an amount calculated quarterly and paid as soon as
practicable after the end of each quarter equal to 0.40% annually of the net asset value for each Unit held by clients
of the registered dealers, plus applicable taxes.
The Manager will be paid an annual management fee of 0.95% per annum of the net asset value of FN Mortgage
Investment Trust (the “Mortgage Trust”), calculated daily and payable in monthly arrears, plus applicable taxes.
Beginning in 2013, the Manager will also be entitled to receive, if earned, for each fiscal year of the Mortgage Trust,
a performance fee (the “Performance Fee”). The Performance Fee shall be calculated and accrued monthly and be
paid annually. The amount of the Performance Fee shall be determined as of December 31 of each year (the
“Determination Date”). The Performance Fee for a given year will be equal to 20% of the amount by which the
interest income, any realized and unrealized gains (net of any losses), commitment fees and any other income of the
Mortgage Trust during the period less the fees and expenses of the Mortgage Trust (excluding for such purpose any
accrual for the Performance Fee) during such period exceeds the product of (i) the average of the net asset value of
the Mortgage Trust on the last business day of each month during the period, and (ii) the average of the two-year
Government of Canada bond yield on the last business day of each calendar month during the period plus 400 basis
points (the “Hurdle Rate”).
Upon the redemption of units of the Mortgage Trust, the Manager will also receive, if earned, a Performance Fee
determined as though the redemption date of any units so redeemed was, with respect to such units only, the
Determination Date. Any Performance Fee so determined, plus applicable taxes, shall be payable to the Manager on
the applicable redemption date.
In respect of redemptions of units of the Mortgage Trust occurring during any year, the Hurdle Rate will be reduced
proportionately to reflect the number of days remaining in the year from that date to December 31 of that year. In
the event that after the closing of the Offering (as defined below), new units of the Mortgage Trust are issued, the
Hurdle Rate applicable to the Performance Fee payable with respect to those units will be reduced proportionately to
reflect the number of days remaining in that year.
The Fund will pay to the counterparty a fee under the Forward Agreement (as defined below) of no greater than
0.45% per annum of the total assets of the Mortgage Trust plus a fee, which may vary, based on the value of the
Common Share Portfolio (as defined below), calculated and payable monthly in arrears.
The Fund will pay for all expenses incurred in connection with its operation and administration including
commissions and other costs of portfolio transactions and any extraordinary expenses which it may incur from time
to time.
3.
SUBSEQUENT EVENT NOTE
The Fund, the Manager and the mortgage advisor of the Mortgage Trust have entered into an agency agreement with
RBC Dominion Securities Inc., CIBC World Markets Inc., TD Securities Inc., BMO Nesbitt Burns Inc., National
Bank Financial Inc., Scotia Capital Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd.,
Desjardins Securities Inc., Dundee Securities Ltd. and Macquarie Private Wealth Inc. (collectively, the “Agents”)
dated as of November 27, 2012 pursuant to which the Fund has agreed to create, issue and sell, and the Agents have
F-4
agreed to offer for sale to the public, a minimum of 2,500,000 Units and a maximum of 10,000,000 Units at $10.00
per Unit (the “Offering”). In consideration for their services in connection with the Offering, the Agents will be
paid a fee of $0.525 per Unit.
The Fund has granted to the Agents an option exercisable for a period of 30 days following the closing of the
Offering to purchase additional Units in an amount up to 15% of the aggregate number of Units issued at the closing
of the Offering on the same terms as the Offering to cover over-allotments, if any.
The Fund will obtain economic exposure to the Portfolio through the Forward Agreement (as defined below). The
Fund will invest the net proceeds of the Offering in a portfolio of common shares of Canadian public companies (the
“Common Share Portfolio”) acceptable to the Counterparty (as defined below). The Fund will then enter into a
forward agreement (the “Forward Agreement”), the terms of which will be negotiated by the Manager on behalf of
the Fund, with a Canadian chartered bank or an affiliate of a Canadian chartered bank whose obligations are
guaranteed by a Canadian chartered bank (the “Counterparty”) pursuant to which the Counterparty will agree to
pay to the Fund on the scheduled settlement date of the Forward Agreement (the “Forward Termination Date”), as
the purchase price for the Common Share Portfolio, an amount based on the value of the Mortgage Trust. The
Mortgage Trust will acquire the Portfolio on or about the completion of the Offering. The Mortgage Trust expects
to issue units to the Counterparty with an aggregate value approximately equal to the net proceeds of the Offering,
which proceeds the Mortgage Trust will use to acquire the Portfolio. The initial value of the Portfolio anticipated to
be acquired by the Mortgage Trust will be approximately equal to the net proceeds of the Offering. There is no
obligation on the Counterparty or an affiliate of the Counterparty to acquire units of the Mortgage Trust. The return
to the Fund will, by virtue of the Forward Agreement, be based on the performance of the Mortgage Trust which, in
turn, will be based on the performance of the Portfolio. The Fund will partially settle the Forward Agreement prior
to the Forward Termination Date in order to fund monthly distributions as well as redemptions of Units by
Unitholders from time to time and for payment of expenses of the Fund. The Counterparty may be an affiliate of
one of the Agents.
F-5
CERTIFICATE OF THE ISSUER, THE MANAGER AND THE PROMOTER
Dated: November 27, 2012
This prospectus constitutes full, true and plain disclosure of all material facts relating to the securities offered by this
prospectus as required by the securities legislation of each of the provinces and territories of Canada.
STONE ASSET MANAGEMENT LIMITED
(as Manager and on behalf of the Fund)
(SIGNED) RICHARD G. STONE
Chief Executive Officer
(SIGNED) JAMES A. ELLIOTT
Chief Financial Officer
On behalf of the Board of Directors of
Stone Asset Management Limited
(SIGNED) RICHARD G. STONE
Director
(SIGNED) JAMES A. ELLIOTT
Director
(SIGNED) MARTIN ANSTEE
Director
FIRST NATIONAL ASSET MANAGEMENT INC.
(as Promoter)
(SIGNED) STEPHEN SMITH
President
C-1
CERTIFICATE OF THE AGENTS
Dated: November 27, 2012
To the best of our knowledge, information and belief, this prospectus constitutes full, true and plain disclosure of all
material facts relating to the securities offered by this prospectus as required by the securities legislation of each of
the provinces and territories of Canada.
RBC DOMINION SECURITIES INC.
CIBC WORLD MARKETS INC.
TD SECURITIES INC.
(SIGNED) EDWARD V. JACKSON
(SIGNED) MICHAEL D. SHUH
(SIGNED) CAMERON GOODNOUGH
BMO NESBITT BURNS INC.
NATIONAL BANK FINANCIAL INC.
SCOTIA CAPITAL INC.
(SIGNED) ROBIN TESSIER
(SIGNED) TIMOTHY EVANS
(SIGNED) BRIAN D. MCCHESNEY
CANACCORD GENUITY CORP.
GMP SECURITIES L.P.
RAYMOND JAMES LTD.
(SIGNED) RON SEDRAN
(SIGNED) NEIL SELFE
(SIGNED) J. GRAHAM FELL
DESJARDINS SECURITIES INC.
DUNDEE SECURITIES LTD.
MACQUARIE PRIVATE
WEALTH INC.
(SIGNED) BETH SHAW
(SIGNED) AARON UNGER
(SIGNED) BRENT LARKAN
12605687.7
C-2