Update on Romspen Investment Mortgage Fund

The following update has been prepared on May 11, 2023 by the Western Investment Team on behalf of the Joint Pension Board. There is no action required of plan members. 

Romspen Investment Mortgage Fund has been a mandate within Western’s Diversified Bond Fund since 2012. They are one of three investment managers managing one of the four underlying strategies for Western’s Diversified Bond Fund. The Diversified Bond Fund also represents 70% of the Balanced Income Fund and 30% of the Balanced Growth Fund. They currently manage 17.1% of the Diversified Bond Fund (approximately $48 million). They have achieved an average return of 8.4% per year for the 10 years ending December 31, 2022 (gross of fees). Romspen invests primarily in short-term commercial mortgages throughout North America. Its lending is at higher interest rates and non-performing loans are anticipated with the strategy. Investors should expect higher returns over time. In 2022 Romspen restricted redemptions to help protected against volatility in the market. There have been no changes to the liquidity of Western’s Diversified Bond Fund, Balanced Growth Fund, or Balanced Income Fund. The Joint Pension Board receives regular updates on Romspen.

Background

In the April 17, 2023 edition of The Globe & Mail it was reported that Romspen has asked the Ontario Superior Court to appoint a receiver to take control over three Toronto properties and one property in B.C. This is not a new development as the firm has to go to court every time they try to foreclose on a property. According to the statement filed in court by Romspen, it is actually three properties in Toronto, one in Oshawa and one in B.C. The total principal plus accrued interest on the Toronto (GTA) properties is $333 million and $191 million for the B.C. property. The principal on those two loans combined represents about 13% of the Romspen Investment Mortgage Fund.

On May 11, 2023, the court granted Romspen’s application and ordered the appointment of Ernst & Young Inc. as receiver and manager over the various properties listed above. While there is still work to be done to finalize an exit transaction with respect to those properties, it is a step in the right direction.

Romspen has a limit of 10% per loan or borrower as a percentage of the total portfolio. As such, these loans were compliant with the guidelines at the time they were made. Romspen provides Western with a portfolio listing on a quarterly basis. Romspen accrues interest at 15% on non-performing loans.

Redemption Freeze

In the fall of 2022 Romspen announced a redemption deferral on their fund, in which Western is an investor. Deferring redemptions is done to protect existing investors by preventing a run on the bank and allowing Romspen to continue to execute its strategy, which involves repossessing properties backing non-performing loans, refurbishing them, and selling them to recuperate their investment. Western is fully supportive of this strategy as it maximizes the return on our investment. There is no change to the risk profile of the Diversified Bond Fund and no change to the redemption process. Romspen will have to make a decision in late May. As per the fund documents, the Trustees may call a special meeting of the Unitholders to approve an extension of the suspension period. The Trustees may also give notice to the Unitholders that they want to impose discounted redemptions or give notice that they want to invoke the provision allowing them to create a run-off pool.

Romspen management indicated that they will provide more details at the AGM (scheduled for June 6).

Conclusion

In summary, going to court to deal with non-performing loans is part of the normal course of business for Romspen. Although most of their loans are short-term (less than two year terms), they can afford to be patient with their non-performing loans in order to recoup their money. While it is frustrating to receive a reduced distribution and to be unable to redeem, that is the only way to protect the portfolio, which unitholders ultimately benefit from.

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