Romspen is pleased to announce the Romspen Mortgage Investment Fund results for the quarter ended September 30, 2022. The 3rd quarter report can be viewed online or can be mailed to you upon request, by contacting investor relations.

Dear Fellow Investors:

The financial headlines these days can unnerve even the most seasoned investor. Romspen has weathered many similar economic disruptions over its 57-year history. We have learned from them and continue with our strategy that allows our funds and their unitholders to manage through this one as well. We continue to provide stable long-term returns while preserving our investors’ capital. In contrast to most asset classes and investments which are showing negative YTD returns, the Fund is actually ahead 6%.

As you are seeing, the current macro-economic climate is extraordinary. We are experiencing inflation, a rapid reversal of central bank monetary policy on a global synchronized basis, with unprecedented interest rate hikes and quantitative tightening, and the expectations of a recession are on the horizon.  Almost every investment asset class and market has been affected. Real estate and real estate credit are no exceptions, and it would be unreasonable to think that the Fund is immune. However, these conditions will not persist indefinitely. The Fund’s assets are sound and will continue to provide superior returns. Patience and perseverance are always important bulwarks against market turmoil.  

Today, we published the Fund’s third-quarter results, which you can access by clicking the link below. We have published these reports since inception, and they give very fulsome and detailed disclosure of the Fund’s operations. Despite being a 48-page document with many facts and figures, we encourage you to take the time to read it. With these quarterly reports, together with our monthly newsletter and audited annual reports, we strive to provide robust and transparent disclosure. These reports present the data and information which are often unreported in the financial media. At times like these, when investor concerns are top of mind, it is important to make the extra effort to inform yourself. Tweets, online posts, unsubstantiated rumours, news articles and the rest of this digital age’s information space are challenging to interpret without putting in this effort. Collectively, as the largest investors in the Fund, we take comfort in our knowledge of our assets and their prospects.

A few items are noteworthy this past quarter. First, because the Fund is a Canadian dollar vehicle and we hedge our U.S. dollar mortgage exposure, the recent dramatic rally in the greenback has constrained our ability to draw on our credit facility to manage short-term cash flows. Even though our forward contracts are backed by US dollar mortgages, they still need to be settled through our revolving loan facility, which affects liquidity. Second, as we’ve highlighted before, the muted level of real estate market and refinancing activity (due in part to the reversal in the decade-long era of low interest rates) led to a dramatic drop in loan repayments during the quarter. Third, redemption requests remain historically elevated. Taken together, these factors impact the Fund’s ability to simultaneously make accretive new loans, honour existing loan commitments, and fully meet redemption requests.

We’ve written to you several times in the past couple of months to give guidance on the Fund’s direction, and to explain our approach to managing liquidity.  As you know, we’ve had to make some tradeoffs regarding investor redemptions, which we realize can be disruptive. The reality, however, is that the Fund must balance the interests of many constituencies at once – unitholders seeking liquidity, unitholders expecting the Fund to continue making fresh investments, and borrowers and project sponsors who rely on the Fund to make committed future advances. The balancing is a challenge, and we are limited by the somewhat illiquid nature of the Fund’s underlying assets, especially in times of economic stress like we’re experiencing now. This is neither unusual, nor should it be unexpected during such periods. The Fund is designed to provide strong absolute returns over the long term, with the tradeoff being the potential for limited liquidity in the short term.

We know from a long history of economic cycles that our greatest allies in these kinds of turbulent environments are time and patience. We’re not a leveraged fund, and our mortgages are almost exclusively in first position and underwritten with a margin of safety on a solid portfolio of assets diversified by type and geography. That doesn’t mean our strategy is without its share of headaches, but we are able, with resolve and hard work, to wait for economic conditions to moderate, for markets to stabilize, for already-planned but delayed transactions to bear fruit, and for borrowers’ projects to be completed.

We have seen some signs conditions may be abating. We saw more typical levels of mortgage repayments in October, but one month does not a trend make. Caution continues to be warranted given the historic nature of these recent rate hikes.

We respectfully ask for your patience as well. Given some time, we believe it will be rewarded.

Sincerely,

The trustees of the Romspen Mortgage Investment Fund