G.I. CAPITAL CORP.

PORTFOLIO REPORT FOR MAY 2012

WWW.GICAPITAL.CA

G.I. Capital Corp. May 31, 2012 Report Summary

Feed the Birds, Tuppence a Bag
If you invest your tuppence Wisely in the bank Safe and sound Soon that tuppence, Safely invested in the bank, Will compound And you'll achieve that sense of conquest As your affluence expands In the hands of the directors Who invest as propriety demands?

Asset Allocation for Portfolio by Strategy

If these lyrics sound familiar, they were written by Sherman and Sherman and featured in the 1964 Walt Disney feature, Mary Poppins. The song represents the sales pitch that young Michael Banks is confronted with by his father and the Dawes, Tomes Mousely, Grubbs Fidelity Fiduciary Bank. In the movie Michael rejected the pitch, preferring to use his tuppence to feed the birds. When the bankers seize his money and he demands his tuppence back, chaos sets in. The clients of the bank overhear the argument and they also demand the return of their savings and deposits. Panic turns to fear and an old fashioned run on the bank ensues. Trust and Confidence: To a Bank, your liability (debt) is their Asset. This is why the situation in Europe is so problematic. As Willie Sutton so remarked on his reason for robbing banks, thats where they keep the money. The banking system in Europe has a disproportionate share of those bank assets. Or, thought of in reverse, a disproportion share of global debt. Europe on its own only represents 14.3% of the worlds economic output. However, the problem is not the size of the economy; its the size of their banks. The imbalances may have started in Southern Europe, but the disease has the ability to spread across the world. Consider that according to the IMF, the broader European Union Banks (including the UK) hold 41.6% of the worlds total bank assets. Greece, Italy, Ireland, Portugal and Spain make up 8.2% on their own. By comparison, Canada holds 3.1%, the United States 14.3%, Japan 11.3% and Developing Asia 12.0%. As you guessed it, these assets are in fact someone elses debt. Therefore what we have is the majority of global debt being concentrated in a region that makes up 14.3% of the

Portfolio Performance for Accredited Clients

cont

G.I. Capital Corp. is a wealth management firm specializing in developing customized investment solutions for its clients. We are a boutique firm focused on managing our clients portfolios, offering a high level of research and service to a limited number of clients. Our client base consists of professionals, executives and business owners.

worlds economy. Think of a European bank as a skyscraper of debt built upon a tiny teeter totter of deposits and ownership. When the United States and Japan bailed out their banks, they were able to use public funds by issuing sovereign debt. Europe does not have the economic size and more importantly, who will buy the bonds. To date, the main purchaser of European government bonds has been European Banks. This brings us back to square one. When the loop ends and the music stops, will there be any other alternative than to sell assets? And more importantly, who has the liquidity and resources to buy? The game of extend and pretend is wearing thin. While the governments of Europe might be committed to not defaulting on their debts, they have certainly defaulted on their citizens. This is not a made in the movies Mary Poppins bank run; it is a button pushing vaporization of the deposits in Spain, Greece and Italy. Last month alone saw $82 billion transferred out of Spanish banks and the Greeks are withdrawing as much as $700 million per week. It all comes down to the depositors trust and confidence in these institutions. Judging by the pace of withdrawals, it is pretty clear that there is none. Is anyone willing to invest their tuppence in Spain or Greece? Like Michael Banks, it seems that their citizens would rather feed the birds.

Market Review
Yet again, Greece problems derailed global markets in May and pushed them lower. We saw the S&P TSX drop 6.34% to 11,513 while the S&P 500 was down 6.27% to 1,310. However, North American markets performed better that the rest of the word, as the MSCI World was down 8.99% to 1,178. The markets were concerned that Greece would have to exit the European Union after a problematic election and would default on the bail out loans causing large losses for the European banks.

Benchmark represented by: 40% i-Shares Scotia Capital Universe Bond Index, 20% TSX Composite Index, 40% MSCI World Index, in CDN$. Note: The composite portfolio includes all relevant medium risk portfolios that meet the composite guidelines. Composite returns include dividends and are net of all fees. Past performance is not indicative of future returns.

G.I. CAPITAL CORP. PORTFOLIO REPORT FOR MAY 2012

WWW.GICAPITAL.CA
Market Performance

Benchmark Month End 1-m onth YTD 2011 1,031,853 -2.06% -0.07% -0.53%

S&P TSX 11,513 -6.34% -3.70% -11.07%

S&P 500* 1,310 -6.27% 4.19% 0.00%

MSCI World 1,178 -8.99% -0.42% -7.61%

Gold 1,516 -6.34% -0.24% 9.57%

Oil-WTI 86.6 -17.47% -12.75% 8.49%

USD/CAD Cdn Bond Dedicated Convertible Exchange Rate** ishare (XBB) Distressed Short Arbitrage 0.972 -4.49% -0.73% -2.38% 31.53 1.89% 1.58% 9.12% 611 -1.20% -4.19% -4.24% 47 -0.17% 2.17% 3.85% 384 -0.60% 0.50% 1.13%

* The returns are calculated in the currency of the holding; **Monthly average exchange rate of USD to CAD; Source: Globefund, CSFB/Tremont

There were very few places to hide in the Canadian markets. Energy and materials led the decline, falling 9.1% and 6.7% respectively. The only positive sector remained telecom up 0.7% for the month. Global markets saw a major drop in May as Europe and Asia were in a free fall. The German Dax and FTSE 100 were both down 7.3% while the Hong Kong Hang Seng and Nikkei 225 were down 11.7% and 10.3% respectively. Investors continued to prefer bonds over equity as the XBB was up 1.89%. The bond markets are indicating that the world is coming to an end. The US 10 year Treasury yield at 1.56% is at a 200 year low set in 1945. The Dutch 10 year government bond yield of 1.61% is the lowest in past 500 years. And finally, the German 10 year bund yield (1.2%) is the lowest in the past 200 years since the hyperinflation period of 1923/1924. We do not think the world is coming to an end, but we do think the market is pricing that event. Spain was back in the headlines, as the yield on Spain's 10-year government bonds pushed past 7% yesterday. That is relevant as it's just about the level that scared the European Union into bailing out Greece, Ireland, and Portugal over the last two years. Spanish banks have already received a 100 billion-euro bailout, widely viewed as not nearly enough to get the job done. Possibly the 7% bond yields will stir up some more bailout money. The deterioration of European equity is visible everywhere. Here are a few examples: the market capitalization of all the European financial institutions is smaller than the market capitalization of Canadian financial institutions; the market capitalization of Spain and Italy combined is the same as market capitalization of Taiwan. The bond markets are indicating that there is more damage to come to the equity markets and we tend to agree, this summer could be volatile. We look for the volatility gage, the VIX, to move higher before the markets could signal the bottom. As we write this report the VIX is trading at 20, whereas last summer it went to 40. The housing industry in the US has historically been a major macroeconomic driver though employment, and through endless retail and consumer spending channels. This sector is a small fraction of its former self. What used to comprise over 5 percent of GDP now lingers at an all-time low 2.3 percent. The housing market in the US is basing, but it is unclear if the market can have a sustainable price appreciation given the inventory remaining. On the positive side, fundamentally speaking, it looks like the Uranium market after the Japanese disaster is stabilizing. For the first time, the Japanese government approved the re-start of the two reactors that were shut down over a year ago. The reactors were required to prevent power shortages this summer. Without nuclear power, Japan is expected to face a 12% electricity shortage this summer despite the significant importing of fossil fuel. These are the first signs that Japan will be restarting more than 50 reactors and will be back to a fully fledged nuclear energy program. For the first time in 18 months, the long-term price for Uranium increased by 2.5% to USD 61.5/lb.

In additional positive news, Chinas cabinet has approved the countrys 2020 nuclear safety strategy after completing inspections on its 15 existing nuclear reactors. With the safety strategy gaining approval, it is widely expected that the Chinese will restart the approval process for new nuclear reactors. Since the events of Fukushima last year, China has suspended the new nuclear reactor approval process but has forged ahead with projects that already obtained approval. China currently has 26 reactors under construction, 51 planned, and 120 proposed according to the World Nuclear Association. A Chinese official has stated that the country is now targeting 60Gw of nuclear capacity by 2020, a number that would put the Chinese reactor fleet on par with that of France. This is an increase from the initial 40Gw target set in 2006. We believe this approval is positive news for the nuclear industry, as it puts Chinese plans ahead of where they were prior to Fukushima disaster. This coincides with our view of nuclear energy being a key component of the global energy solution.

Portfolio Changes
We continue to be patient in terms of adding new positions, given the current turmoil in the markets. As a result we have built up cash at the managed account level as well as the pool level. Having said that, we continue to find attractive new opportunities to deploy cash, and expect to do so at some point over the summer, as the risk of further market declines diminish, either through improved economic conditions, or by virtue of the economic state simply being priced into the market. We added one Subordinated First Mortgage to our Alternative Income Fund pool. The mortgage was advanced to provide financing of the purchase of a condo based resort property at Mount St Anne, Quebec. The yield is 14% and the loan to value ratio is 46.3%. We are secured by 53 condos, along with a 9000 square foot commercial building. Although the loan is for 24 months, we expect to be taken out much sooner than that.

G.I. ALTERNATIVE INCOME STRATEGY MAY 2012

GI CAPITAL

G.I. Alternative Income Strategy

The Alternative Income Strategy is an alternative to traditional bond funds, which although carry very low credit risk, currently have minimal return; and to equity funds that exhibit high volatility. The Alternative Income Strategy seeks to invest in alternative income strategies like private mortgages and asset backed loans that offer higher returns, while still providing reasonable security to cover the loans. The strategys objectives are to preserve capital, minimize volatility, have a low or zero correlation with stock and bond markets, and achieve an annualized return of 8-10% net of all fees.

PORTFOLIO PERFORMANCE FOR ALTERNATIVE INCOME STRATEGY

Ye a r 2010 2011 2012 0.63% 0.81% 0.68% 0.53% 1.33% 0.68% 0.91% 2.43% 0.72% 2.95% 1.91% Jan Fe b Mar A pr May J un J ul 0.84% 1.26% A ug 0.78% 0.93% Sep 0.87% 0.90% Oc t 0.80% 1.11% N ov 0.83% 0.83% Dec 0.54% 2.50% Tot a l 4.75% 14 . 5 9 % 7.44%

PROPERTY BY CLASSIFICATION 2% 15% 37% 37% 8% Residential Hospitality Retail Mixed Use Self Storage
*Note: The property classifications only apply to real estate holdings.

PORTFOLIO BREAKDOWN BY ALLOCATION

Loan To Value Ratio 66% 62% 72% N/A 50% N/A 0% 64% Average Expected Maturity (Months) 25 32 17 27 7 5 0 22 Average Expected Yield 14% 12% 11% 4% 8% 12% 0% 8.5%

Security Type First Mortgage Subordinated First Second Mortgage Real Estate Equity Asset Backed Loans Distressed Debt Cash

Percentage Weighting 2% 29% 18% 32% 5% 11% 4% 100%

PROPERTY BY LOCATION 4% 23% 25% AB 19% 22% 7% BC ON QC MB USA

*Note: The property locations only apply to real estate holdings.

Total/Weighted AVG

FEATURE INVESTMENT
Subordinated First Mortgage: Hotels, Western Canada
This is a pool of first mortgages purchased at a discount to par value, on a group of hotel properties owned by a publically traded REIT. The mortgages were previously owned by a US based investment bank, that for strategic reasons had decided to wind down its Canadian operations. The mortgages were purchased at ~70% of par value, which resulted in a ~60% loan to value ratio. This purchase was financed with a senior debt tranche up to ~31% loan to value, which resulted in the subordinated tranche that we own, having a projected IRR of between 14-25% depending on how quickly the loans were paid off (i.e. if held to maturity, the IRR would be 14%). The hotel properties had suffered from declining performance after the financial crisis of 2008, and the resulting slow down in the oil patch in Western Canada. However, at the time of our investment, there was reasonable evidence that the decline was bottoming out, and economic activity was picking up. The exit strategy is to either hold to maturity (2017) or arrange to have the mortgages refinanced at slightly less than par (eg 90%) at an earlier date, which would result in an increased IRR.

SERVICE PROVIDERS
Custodian (for Fund) Administrator Legal Auditor Custodian (for Managed Accounts)

G.I. CAPITAL CORP.

240 Duncan Mill Rd Suite 806 Toronto, Ontario M3B 3S6

Mark Irwin, CFA 647-260-3388*223

[email protected]

Jim Goren, CFA

647-260-3388*222

Bill Hallman, CFA

905-510-0963

Gino Scialdone

647-260-3388*229

[email protected]

[email protected]

[email protected]

G.I. Capital Corp. (GI) is a wealth management firm specializing in developing customized investment solutions for its clients. We are a boutique firm focused on managing our clients portfolios, offering a high level of research and service to a limited number of clients. Our client base consists of professionals, executives and business owners. Visit us at www.gicapital.ca This monthly update does not constitute or purport to constitute a complete description of the G.I. Capital Corp. Alternative Investment Strategy and is in all respects subject to the more detailed provisions found in the fund's declaration of trust. The Alternative Income Strategy is only available to GI clients who have engaged GI to manage their account under the alternative income mandate as outlined in their investment policy statement. The returns above are net of all fees, other than management fees. The references to the target rates of return are provided for illustrative purposes only and there can be no assurance that the fund will be able to achieve the targeted rates of return.