3rd Quarter 2024 Report
STATE OF THE UNION
Good morning lenders and investors.
We hope that you enjoy reading our State of the Union report for the third quarter of 2024.
A. Economic Update - Canada
Given the economic data reports over the past several months, we expect the trend of rate cuts from the Bank of Canada to continue in the coming quarters. As of August 2024, Canada's national unemployment rate was 6.6%, marking an increase from 6.4% in July. The current rate is the highest since 2017, excluding the pandemic period. As of August 2024, Canada's inflation rate stands at 2.0%, a significant decrease from 2.5% in July and 2.7% in June 2024. This marks an improvement compared to August 2023, where the inflation rate was around 4.0%. Given that current interest rates are meaningfully higher than inflation, there is room for the Bank of Canada to continue reducing interest rates. For these reasons, we expect that the Bank of Canada will reduce rates again at their last two meetings this year - on October 25 and December 11, 2024. The key question will be whether each cut will be 0.25% or 0.50%.
We point out this data for a couple of reasons:
Lower interest rates typically stimulate the economy, increasing business activity and demand for lending.
Real estate prices tend to rise as lower rates improve affordability, which benefits lenders.
Lower fixed-income product rates make our loans (11% - 14% per annum) more attractive to investors.
In summary, we see lower interest rates as a positive trend for Union Lending Corporation.
B. Union Lending Corporation – Q3 2024 Loan Update
By the end of Q3 2024, Union Lending Corporation reviewed 249 loan opportunities. Due to our strict selection process, only 12 loans were considered investment quality and presented to lenders.
We continue to receive positive responses from lenders, and we anticipate greater lending opportunities in 2025.
If you have capital to invest but have not been able to participate in as many deals as you would like, we encourage you to explore other investment products and services discussed in this report.
C. Grow Capital One Inc. (“GC1”) – Mortgage Investment Corporation (“MIC”)
Our new Mortgage Investment Corporation, called Grow Capital One Inc. (“GC1”), will launch in November 2024. GC1 is wholly owned and managed by UWMC.
Private mortgage investing is available in two main forms in Canada: whole mortgage investing (such as that sourced and brought to market by Union Lending Corporation), or through a MIC. While whole mortgage investing involves funding individual loans, our MIC pools capital from multiple investors to invest in a diversified portfolio of mortgages. In the case of GC1, the MIC will invest in a diversified portfolio of residential mortgages. The collective investment model reduces the risk associated with any single loan defaulting as the impact of a default is spread across the entire portfolio of cross-collateralized mortgages.
MICs are especially attractive to investors who are looking for alternative investments (in particular, exposure to the real estate market), but without the more substantial resources required to invest in whole mortgages or do not have the time, interest, or comfort managing individual loans. By investing in MICs, investors can participate in real estate lending with lower entry barrier while receiving the benefit of diversification and professional management.
Investing in the MIC eliminates having to address what to do with invested funds when an individual loan comes up for maturity. The MIC is more of a “one and done” approach to decision making and investing. While whole mortgage investing typically involves loans that mature in a year, at which time the investor needs to figure out what to do next with their capital, money invested into a MIC can remain in place indefinitely until such time as the investor wishes to redeem part or all of their investment.
Investors can invest in GC1 with initial amounts as little as $25,000 and continue to invest as frequently thereafter as they wish. Investors can choose to receive their interest returns distributed to them monthly or automatically re-invested to buy more shares of GC1 to create returns on returns (and maximize the building of wealth). We anticipate that the fund will initially generate net annual returns to investors in the range of 8 to 9% per annum. We expect to maintain those rates of return even as bank mortgage rates drop in the coming months. Given the annual rate of return, and diversification created by the number of mortgages held by GC1, we believe GC1 offers a very attractive alternative to other fixed income products (e.g. GICs, term deposits, money market funds) and an easy “fund it and forget it” approach to investing.
Over the past several years, we have developed an outstanding relationship with the largest private residential mortgage broker in Canada. Through that relationship, as well as our established relationships with other private residential mortgage brokers, we will be receiving an excellent source of underwritten residential mortgage loan opportunities for investment in the MIC. In the event a borrower defaults, GC1 manages the enforcement process, including foreclosure proceedings and collection.
If you would like to invest with GC1, please contact our office at (780) 244-4769 or email Andrew Hunka at ahunka@unionfinancialcorp.com.
D. Cash Today Inc. (“Cash Today”) and Grow Capital Two Inc. (“GC2”)
In mid-2023, Cash Today approached us to initially raise $12 million, with a maximum raise under our current Financing Agreement to $50 million. We have now raised over $40 million for Cash Today. The funds are used by Cash Today for organic growth in their business, to finance acquisitions of smaller competitors, and to fund their lending with Canadian Tire.
Cash Today is an Edmonton-based asset lender that lends to people requiring smaller amounts of money (averaging approximately $6,000). As security for the loan, Cash Today obtains a first charge on a car, truck, boat, or recreational vehicle. Cash Today will only loan up to 50% of wholesale value of the asset and will only accept the asset as security if there is no existing financing or other charge registered against it. If money is loaned against a recreational vehicle, Cash Today maintains possession of the asset in their warehouse or yard. If money is loaned against a vehicle, Cash Today installs a GPS module that tracks the location of the vehicle (in the event it needs to be seized) and has the ability to remotely disable the ignition.
In November 2023, Cash Today launched a new lending program with Canadian Tire that provides financing for automotive repairs. When a debt arises as a result of work performed on a vehicle, the lender is entitled to a lien pursuant to the Garage Keepers Lien Act, which provides a first- place payout over any existing financing lien registered against the vehicle.
In structuring the loan for Cash Today, we incorporated GC2. All lenders loan their money to GC2, which then loans the money to Cash Today. GC2 acts as an administrator for the loans, collects the monthly interest payments from Cash Today, and distributes the interest payments each month to the lenders via EFT.
As at June 30, 2024, Cash Today’s loan receivables were over $150 million. This represents the amount of money loaned by Cash Today and owing to Cash Today by its borrowers. As against the $150 million of loan receivables (secured by over $300 million in assets), GC2 has the only general security against the receivables, including an assignment of the receivables in the event of default. In other words, GC2’s loans totalling $40 million are secured in first place by loan receivables totaling over $150 million, which is further secured by $300 million in assets. We believe this provides excellent security for our lenders.
The GC2 loan pays our lenders 18% per annum, on a monthly basis. To date, all payments by Cash Today to GC2, and GC2 to the lenders, have been made on time and in accordance with the Financing Agreement. No lenders have requested any redemptions to date and no amounts have otherwise been redeemed.
As we anticipate completing the $50 million financing for Cash Today by year-end, we are going to commence discussions with Cash Today to determine if the $50 million threshold should be increased. If you would like to invest, or increase your current investment, we would recommend that you do so now given the limited room available on the $50 million cap in the Financing Agreement.
If you would like to become a lender with GC2, please contact our office at (780) 244-4769 or email Andrew Hunka at ahunka@unionfinancialcorp.com.
E. Sandfield Capital Limited (“Sandfield” and Grow Capital Three Inc. (“GC3”))
Sandfield is a capital lender to law firms in the United Kingdom. Our team traveled to London in December 2023 and February 2024 to perform due diligence on this lending opportunity.
Sandfield lends money to law firms in the UK to pay for legal disbursements (e.g. costs incurred to pay for expert reports, investigators, filing fees, photocopying, etc.) to pursue certain litigation matters. This deal is particularly interesting to us (and we think to our lenders) for several reasons:
The vast majority of the cases (tens of thousands in number) relate to social housing disrepair claims. Approximately 17% of the population in the UK live in social housing. Over the years, these houses have fallen into various states of disrepair resulting in tenants bringing claims against government housing authorities. To date, thousands of cases have been filed, with a +/- 95% success rate and average settlement times of approximately 9 months. These cases are essentially “processed” with almost none of them proceeding to trial. A second category of cases is against financial institutions for failing to disclose commissions paid to brokers, as is required by law in the UK. This was a practice that was followed by a number of financial institutions a few years ago and has now resulted in thousands of cases (not as many as the housing disrepair claims) with similar rates of success, but with average settlement timelines of approximately 24 months;
There are several law firms in the UK that handle these claims (we met and currently deal with a law firm called Claimsmiths). As the law firms have a high degree of confidence with respect to the likelihood of success, they take all cases on a contingency basis (i.e. they are not paid their fees unless they are successful). The law firms, however, require capital to pay for the disbursements incurred to pursue the cases (e.g. experts, investigation reports, etc). The lending provided by Sandfield to the law firms is only to pay for the disbursements;
The law firms pay Sandfield interest at 25% to 30% per annum. Sandfield pays our lenders 14% per annum. Payments are made monthly to the lenders by EFT. The lenders have redemption rights;
Sandfield has virtually unlimited need for funds. It is challenging for Sandfield to raise capital in the UK capital market as part of the litigation funding is to pursue cases against financial institutions;
Any foreign currency exchange risk (between the Canadian dollar and the pound) is borne by Sandfield. Our lenders loan in Canadian dollars and are paid in Canadian dollars;
There are various layers of security available to our lenders including:
a.the payments are owed and paid by the law firms;
b. the lenders receive security and an assignment against the receivables created against all of the legal cases for which loans are made to pay the disbursements. These cases are specifically segregated out for our lenders;
c. the lenders are first loss payees on all cases as against the full recovery of the legal fees, damage awards, and disbursements (even though they are lending only against the disbursements);
d. most importantly, the collection of the disbursements are fully insured by an insurance company called Accelerant, an A- rated insurer in the UK. In addition to an insurance policy, Accelerant has also provided a Deed of Indemnity which requires them to pay out the disbursement claim on a case regardless of the event that causes the disbursement not to be collectable (e.g. the case is unsuccessful, the Plaintiff does not want to pursue the claim, etc.);
e. all security documents were prepared for us by Druces LLP in London;
f. GC3 administers this loan in a similar manner as GC2 does for Cash Today.
This deal closed on April 29, 2024. The funds are being deployed to Sandfield approximately every 2 weeks and are being used by Claimsmiths to fund new cases. To date, all payments by Sandfield to GC3, and GC3 to the lenders, have been made on time and in strict accordance with the Financing Agreement. We anticipate that Sandfield will be in a position to accept new funds from investors in early 2025.
If you would like to become a lender with GC3, or increase your current position, please contact our office at (780) 244-4769 or email Andrew Hunka at ahunka@unionfinancialcorp.com.
F. Union Wealth Management Corporation
As reported to you in July, we now offer portfolio management services. Since then, our portfolio manager, Michael Bishop, and his team have been working on transitioning his existing client relationships and onboarding numerous new clients.
In addition to being a fund manager and Exempt Market Dealer, UWMC is licensed to provide discretionary portfolio management. Through collaboration with investors (like you), UWMC collects comprehensive personal and financial information from each investor, listens and learns about each investor’s unique objectives, and creates bespoke portfolio solutions that address each investor’s financial goals across registered (i.e. RRSP, TFSA, RESP, etc.) and non-registered accounts.
UWMC focuses on investing in high quality companies that possess a combination of durable top- line growth, barriers to competition, high internal rates of return, and/or very strong balance sheets. After identifying these businesses, UWMC assesses whether the investment is suitable for the individual investor based on all collected information.
As a client of UWMC, you are also in the best position to incorporate the private lending deals offered by Union Lending Corporation and UWMC into your portfolio, margin against your portfolio to invest in lending deals (if you wish), move money more seamlessly between financial opportunities, reduce or eliminate the drag of idle cash, obtain monthly statements that summarize your entire investment portfolio, incorporate investments into your whole life insurance planning, and obtain a much more wholistic wealth plan for you and your family.
If you would like to become a portfolio management client of UWMC, please contact Michael Bishop at (587) 635-5572 or by email at mbishop@unionfinancialcorp.com.
G. Union Insurance Brokerage Corporation
As part of our full compliment of wealth management products and strategies, we are now also offer life insurance.
Term and Whole Life Insurance
In addition to offering term insurance, one of our most important offerings is whole life insurance.
As you know, there is a risk that term insurance will expire before you die, or you may suffer from a health issue that prohibits your ability to obtain a new term policy when the policy expires, and/or the cost of the annual premium will become prohibitively expensive as you get older (when you become most likely to need it). Whole life insurance, on the other hand, will remain in place until you die, at whatever age, and you will never need to requalify once the policy is in place. The other advantage to whole life is that it accumulates a “cash value” that you can use as security to borrow against. The disadvantage of permanent insurance is the cost of the premiums compared to term insurance, particularly at any early age. However, there are some very creative ways to pay the premiums and unlock significant financial opportunities while you are alive.
For instance:
Assume you are a male, age 45, with no insurance rating (i.e. you are healthy). A whole life policy with an annual premium of $250,000 would have a starting death benefit in the range of approximately $12,250,000. In the event the annual premium was $500,000, the starting death benefit would be in the range of approximately $22,500,000.
Here are some strategies to pay for and to profit from your whole life policy during your lifetime:
Option 1: It is possible to borrow the entire premium. In this scenario, instead of paying either $250,000 or $500,000 each year, you can borrow the money to pay for the premium and only pay the interest on the loan. The loan would be secured by the cash value created in the policy. If you have a corporation, we can also structure the borrowing so that the interest is a tax deductible expense. In other words, instead of paying $500,000 each year, you would pay only $25,000 in interest (assuming a 5% per annum interest rate), which could also be tax deductible expense.
At the time of death:
the death benefit would first pay out the loan to the bank;
part of the remainder of the death benefit would go to your company to pay for taxes and/or various other expenses that will be incurred; and
any balance of the death benefit can be provided to your family members or used for charitable purposes.
Option 2: Each year, your company could pay the insurance premium. Cash value would be created in the policy, which your company can borrow against. The borrowed funds could be used to invest, re-invest the money right back into the company, or do a combination of investment and re-investment. As the money borrowed is for business/investment purposes, the interest on the loan is tax deductive. If the money is borrowed at, let’s say 5%, and invested at 13%, your company could make 8% net return on the investment using borrowed funds to do so.
3. Option 3: A variation on Option 2 involves purchasing whole life policy but splitting the ownership of the policy between the company (which owns the death benefit) and you or a trust (which owns the cash value). With this structure (often referred to as “split dollar”), you could personally borrow money from the company each year as opposed to paying yourself a salary. By having the company pay the premium for the death benefit portion, you can draw down, and unlock, retained earnings. If you do not personally use all of the money that you borrowed, you can inject it back into the company and create a shareholder loan, which you can draw out later tax free. The shareholder loan can increase each year that you make a premium payment and could become quite substantial over time.
The key is for you to:
obtain as much insurance as possible, as early as possible, to reflect the growth of your wealth that will occur over the remainder of your life;
ensure that you will have insurance even if you later become uninsurable at some point in your life;
ensure that you will have sufficient insurance to pay for the things that you will need to pay for in the event of death (including taxes, expenses, and gifting to your family members and/or charity); and
pay for the insurance premiums in the most creative way possible to maximize your death benefit and, if desired, in a way where you can make a return on the money borrowed that will exceed your borrowing interest costs.
2. Shareholders in Private Companies
Most business in Canada are owned by a single person or a small group of shareholders. Shareholders in private companies are usually carefully chosen. Most often they are either the original founders of the company or otherwise provide significant value to the business. In the event a shareholder dies, the shares of the deceased shareholder are often left to the deceased shareholder’s spouse or children. That is usually not what the remaining shareholders in the business want and that outcome can have a very distracting impact on the business. Ideally, shareholders have a shareholder agreement which stipulates that the corporation or the remaining shareholders are entitled to purchase the shares from the deceased shareholder’s estate. That helps protect the integrity of the company and also provides often needed money for the deceased’s spouse and children. But how can the corporation or the remaining shareholders afford to pay for the shares? The best way is with life insurance.
In the event you find yourself in this situation and want to explore your options, both with respect a new or revised shareholder agreement and with respect to life insurance to create a plan to deal with the possibility of a deceased shareholder, please contact us. Our experienced legal and insurance team can advise you and serve your needs.
3. Dependent Adult Children
A sensitive and important issue raised by some of our clients has to do with caring for dependent adult children. Some clients have adult children, or who will become adults, that will require partial or complete financial support for the rest of their lives. This leaves clients in the position of having to be very careful with their finances and worried that if they take risk with their money or spend too much of it enjoying their later years, it may compromise how much will be left on their death to support their child.
Once again, this issue can be addressed with insurance. Here is a suggested approach:
Union Financial works together with the client to determine what the adult child’s financial needs will be, both in terms of monthly expenses and periodic lump sum amounts;
Once the costs are known, Union Financial will determine the approximate cost of an annuity that will fund the monthly and lump sum payments;
Once the cost of the annuity is known, the client applies for a whole life policy that has a death benefit no less than the cost of the annuity. If necessary, the client could finance the cost of the premiums in the manner described above;
In the Will, the client will instruct his/her executor/trustee that on death, the proceeds from the whole life insurance policy will be used to purchase an annuity from an insurance company that will provide for the monthly and lump sum payments for the rest of the adult child’s life.
With that plan in place, the client:
could take greater risks with their business or personal investments, if they wish;
could spend more of their savings and enjoy their later years knowing that they have securely provided for their child; and
will know with certainty that their child will receive guaranteed and specific monthly and lump sum payments for the rest of the child’s life without the need for professional money management.
4. Generational Wealth Using Whole Life Insurance
Here is another idea for someone who wants to create generational wealth.
Let’s say you are a 47 year old, healthy male, with 3 children, and wish to create a multi- generational family legacy. You decide to purchase a whole life insurance policy, the premium for which is $3 million per year. In year one, the cash value for the policy would be approximately $2.7 million and the initial death benefit would be over $60 million. The insurance policy is placed into a trust, the beneficiaries of which are you and your children. In year one, you borrow $2.7 million from the bank, using the cash value from the insurance policy as collateral, and you purchase real estate and/or other investment assets (making the interest on the loan tax deductible). The income from the assets is used to pay the interest on the loan and the balance of the income is distributed to you and your children as you wish.
Let’s say you continue to do this for 10 years and then die at year 10. By that time, the cash value of the insurance policy has grown to $34 million (which you continued to borrow against and invest in real estate and other investments), and the death benefit has grown to $110 million. At death, the trust would pay off the $34 million loan (now all of the investments are owned free and clear), and would have $66 million in additional insurance proceeds, part of which are used by the trust to fund whole life policies for each of your three children, and the process then continues down the line with them and their children.
This process of taking some of your income to purchase whole life insurance and utilizing both the cash value and death benefits as part of an overall legacy estate and investment plan, controlled by the trust, can be very powerful.
5. Segregated Funds
As an alternative investment, you may also consider Segregated Funds.
Segregated Funds are an insurance product. They are very similar to Mutual Funds, but offer significant benefits including:
Guarantees: Segregated Funds guarantee a return of at least 75% of the invested capital (clients have the flexibility choose a 100% guarantee option) upon death or maturity. This guarantee limits or eliminates the risk of capital loss;
Estate Planning: Segregated Funds allows the private transfer of the money to a designated beneficiary outside of the deceased’s estate. That means that investments into a Segregated Fund will not trigger tax consequences on death;
Creditor Protection: Assets held in a Segregated Fund, registered or unregistered, can protected from creditors when an appropriate designated beneficiary is named; and
Reset Option: Some Segregated Funds provide the option of locking in investment gains by resetting the contract’s guarantee value to the current market value.
If you would like to learn more about these and other life insurance structures and planning ideas, please contact Daniel Roberts at droberts@unionfinancialcorp.com or David Hawreluk at (780) 902-6169 or dhawreluk@unionfinancialcorp.com.
H. Businesses Under Development
We continue our quest to create and develop our business to provide a full spectrum of financial solutions and products for our lenders and investors.
In Q4, we will be launching our foreign currency trading platform, powered by Shift. You will find the following icon on our website landing page:
With UnionFX, our goal is to offer our customers foreign currency trading in a more convenient format and at superior rates than their current financial institution.
In the event that you are needing auto or property insurance, seeking better pricing on your auto or property insurance, or looking to switch from your current broker, we have partnered with Acera Insurance Services Ltd. to provide auto and property insurance. In the event that you are looking for a new auto or property insurance policy, please contact Jay Mondor in our office at (587) 635-5573, and he will refer you to the correct department.
Finally, we are in the process of expanding to the Kelowna market and are in the process of purchasing commercial space in the Caban condominium building located on Lakeshore Road across the street from Gyro Beach:
From all of us at Union Lending Corporation, Union Wealth Management Corporation, Union Insurance Brokerage Corporation, UnionFX, Grow Capital One Inc., Grow Capital Two Inc., and Grow Capital Three Inc., thank you for your continued support and trust.
We hope you have a great fall.
Per Unitatem, Prosperita
Through Unity, Prosperity