Romspen Is Withholding Partial Redemption Payments In August. They Cite Poor Loan Performance. Or Is It Just Cover For A Shell Game?
Romspen is withholding partial redemption payouts to investor for the fourth time in under a year.
The Canadian lender is citing weak loan repayments and non-performance. They also point the finger at a traumatic real estate market.
Yet, they don’t mention their questionable underwriting that got them into this mess in the first place.
Two weeks ago, Romspen informed investors that their monthly distribution was going to be cut again. The payments would be two-thirds less compared to July, 2022.
Romspen investors are hopping mad and are running far away from Rompsen and their questionable underwriting practices.
Romspen raises cash from individual investors. They then offer short-term construction loans to real estate companies. The company has $2.7-billion in assets under management. Traditionally, Romspen has delivered an average annual yield of 7.3% over the past 10 years. Of course, that came to screeching halt after the COVID-19 pandemic.
Romspen’s assets swelled since the 2008 financial crisis. Investors searched for yield when benchmark interest rates were close to zero. However, all good things must come to an end. The real estate industry is now adjusting to aggressive rate hike campaigns across the globe. They are also struggling with plummeting occupancy rates in this post-pandemic era.
With troubles mounting, Romspen froze redemptions from its fund in November. They did this in a desperate gambit to conserve cash. But it wasn’t enough. As a result, the company also made multiple distribution cuts. The fund now yields less than 2.5% annually. This roughly half of what investors can earn from ultrasafe guaranteed investment certificates.
Romspen management cited trouble with loan repayments when they froze redemptions. Yet, those issues persist.
Is Romspen On The Verge Of Insolvency?
Romspen also told investors that 2023 is proving to be “one of the most challenging for the fund since the mid-90s.”
This isn’t exactly what investors and potential investors want to hear. Things like this chase away savvy new investors especially from the U.S. and Asia.
Romspen’s portfolio is largely comprised of high risk development loans in the US and Canada.
Romspen would normally sell the properties to recoup the cash it is owed. However, commercial real estate transactions have slowed considerably.
Yet, even when buyers emerge, banks are much less likely to extend the financing to complete the purchase.
To this end, Romspen has been locked in a court battle with its largest borrower this year. after multiple loan defaults allegedly totaling $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.
Romspen is also attempting to foreclose on another dozen or more borrowers in the US and Canada.
Romspen management could not put a timeline on plans to lift the redemption freeze. Management also said monthly payouts would likely remain subdued for the remainder of 2023. Additionally, corporate leadership says any money recouped from selling properties or received from existing loan interest, must be directed to these commitments before paying out investor distributions.
Romspen also says reduced or nonpayment of investor redemptions is a better scenario than liquidating the fund. Liquidating the fund would allow the company to pay out redemption requests. However, Romspen says the properties would have to be sold at cut-rate prices. As of June 30, redemption requests totaled $352-million.
This Article Originally Appeared On MFI-Miami.
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