Condo and office towers in downtown Vancouver on April 25, 2023.DARRYL DYCK/The Canadian Press
Romspen Investment Corp., one of Canada’s largest private mortgage lenders, is cutting its monthly payout for the fourth time in little more than a year, citing weak loan repayments and a real estate market that hasn’t faced this much trauma since the 1990s.
On Tuesday, Romspen informed investors in its flagship Mortgage Investment Fund that their monthly distribution was cut to two cents a unit, down two-thirds from July, 2022.
As a private mortgage lender, Romspen raises cash from individual investors, then lends the money out to real estate companies, often in the form of short-term construction loans. The company has $2.7-billion in assets under management and has delivered an average annual yield of 7.3 per cent in its Mortgage Investment Fund over the past 10 years.
Because of its high payout, Romspen’s assets swelled over the past two decades as investors searched for yield when benchmark interest rates were close to zero. Yet the real estate industry is now adjusting to central banks’ aggressive rate hike campaigns, and the development sector that Romspen specializes in is one of the most hobbled.
With troubles mounting, Romspen froze redemptions from its fund in November, an act known as “gating” in the investment industry, to conserve cash. But it wasn’t enough, and multiple distribution cuts have also been necessary. The fund now yields 2.5 per cent annually, roughly half of what investors can earn from ultrasafe guaranteed investment certificates.
When Romspen froze redemptions, management cited trouble with loan repayments. Those issues persist, and in a letter to investors justifying the latest distribution cut, Romspen said, “July’s repayment activity was particularly disappointing.”
Romspen also told investors in a quarterly report earlier this month that 2023 is proving to be “one of the most challenging for the fund since the mid-90s.”
Romspen’s portfolio is largely comprised of construction and predevelopment loans across the United States and Canada. Because the borrowers are often higher-risk development companies, Romspen occasionally has to take control of some properties when their associated loans aren’t repaid.
In a normal market, Romspen would sell the properties to recoup the cash it is owed, but commercial real estate transactions have slowed considerably. “The challenge these days is not so much signing a purchase agreement, but finding the funds to close,” Romspen explained in its quarterly commentary.
Even when buyers emerge, banks are much less likely to extend the financing to complete the purchase. “We have already seen two anticipated unconditional sale transactions fall through this year, each with seven figure deposits forfeited,” Romspen explained.
To this end, Romspen has been locked in a court battle with its largest borrower this year after multiple loan defaults allegedly totalling $333-million. To recoup the money, Romspen asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans, and then sell them. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.
In an interview, Romspen managing partner Derek Jenkins could not put a timeline on plans to lift the redemption freeze, and also said monthly payouts would likely remain subdued for the remainder of 2023, because Romspen had unfunded construction loan commitments worth US$411-million and $245-million as of June 30. Any money recouped from selling properties, or received from existing loan interest, must be directed to these commitments before paying out investor distributions.
“It’s probably going to be slow for the rest of the year in the way of distributions,” he said.
Mr. Jenkins also said that Romspen appreciates the situation is frustrating for investors, but it is a better scenario than liquidating the fund to be able to pay out redemption requests, because the properties would have to be sold at cut-rate prices in the current environment. As of June 30, redemption requests totalled $352-million.
Romspen isn’t the only real estate fund with elevated redemptions. Toronto-based Hazelview Investments, a private money manager, recently told investors it experienced a surge in requests to cash out of its $1.2-billion Four Quadrant fund.