Mortgages of Canada CEO sees more bankruptcies as interest rates continue to climb
Lender Romspen Investment Corp. needs more time to assess the state of the real estate market before it resumes letting investors withdraw money from its flagship mortgage fund, an executive said.
“You have to take prudent action to protect the fund,” Managing Partner Derek Jenkin said in an interview. The Toronto-based firm told investors this week it will temporarily defer redemptions in the Romspen Mortgage Investment Fund until there’s “more clarity” about when borrowers will be able to repay loans or assets can be sold to free up cash. Romspen’s business is secured lending against real estate, including construction.
The payout freeze means investors in the $2.8 billion (US$2.1 billion) fund who recently asked to redeem units won’t get paid out on Nov. 15 as scheduled.
The halt is simply a matter of short-term liquidity, Jenkin said. There’s mismatch in cash flows because Romspen has obligations to its borrowers, as well as a queue of investors who are looking to pull money out of the fund. In addition, some borrowers have halted interest or principal repayments, as rising interest rates create uncertainty about the viability of certain residential and commercial projects.
So Romspen needs a “moment’s pause” to evaluate things, said Jenkin, who wouldn’t give an estimated date for when the fund may resume redemptions. The firm also restricted redemptions after the Covid-19 shock hit, but was operating normally again within about six months, he said.
HALIFAX TO HONOLULU
“Our investors aren’t at risk of a loss,” Jenkin said. “It would require a dramatic shift in real estate valuations from Halifax to Honolulu for us to see a material decrease in investor capital. If that was ever going to happen, it would have happened during the pandemic.” The firm lends at 65 per cent loan-to-value, so prices have to fall a long way before its money is at risk.
Private lending funds gained popularity among investors searching for yield during the era of ultra-low interest rates. But mortgage finance vehicles have had a difficult year, as the sharp increase in rates causes disruption in property markets.
In September, Romspen announced the creation of a “runoff pool” for investors who want to get money out as fund assets are sold. Investors with about $115 million took up that offer, Jenkin said, and they’ll start to receive some cash back early next year.
But the existence of the pool didn’t dampen regular redemption requests -- forcing Romspen to act this week to shut off payouts, for now.
Jenkin said he’s growing optimistic the market is turning: In the last few weeks, Romspen started “to see significant increases in deals being closed, whether in real estate being sold or repayment from borrowers,” he said.
Romspen’s smaller US mortgage fund “has been an absolute gem” during this period, Jenkin said. That product is focused on delivering short-term loans to real estate developers, with about of half the fund lent to projects in Florida and Texas.