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In previous notes, we have outlined why we believe RECI shows resilience against inflation, interest rate increases and inflation risk (inter alia, see Experience shows resilience of the model (2) and Why rising rates should not hurt RECI). In our latest note, New faces, same resilience, and, as outlined in RECI’s recent quarterly presentation, we highlighted how the recent deals have confirmed this protection. The other key themes from these reports were the sector and geographical diversity (important when considering exposure to UK rate rises), strong loan to value (LTV) metrics, conservative leverage and good counterparty quality.

  • April factsheet: Recurring interest income added 1p to NAV. There was a modest 0.3p mark-to-market (MTM) loss on the bond portfolio, with the corporate yield widening. RECI had cash of £66m and gross leverage of £101m. The book has 63 positions (35 loans, 28 bonds), with a weighted average LTV of 62% and a yield of 9.9%.
  • Other quarterly update key themes: i) attractive returns from low LTV credit exposure to UK and European commercial real estate assets; ii) quarterly dividends delivering consistently since October 2013; iii) a highly granular book, iv) transparent and conservative leverage; and v) access to strong pipeline.
  • Valuation: In the five-year, pre-pandemic era, on average, RECI traded at a premium to NAV. In periods of market uncertainty, it has traded at a small discount. It now trades at a 0.3% premium. RECI paid its annualised 12p dividend through COVID-19, which now generates a yield of 7.9% ‒ expected to be covered by net interest income.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. Its average LTV is 62%, and most loans are senior-secured, providing a downside cushion. Some assets are illiquid. In the short term, investor sentiment could be an issue.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Management has confirmed no change to dividend policy, showing its confidence in its sustainability. Bond pricing includes a discount, reflecting uncertainty, which should unwind when conditions normalise. Market-wide credit risk is currently above-average, but RECI’s strong liquidity and debt restructuring expertise should allow it time to manage problem accounts. Borrowers, to date, have injected further equity into deals.
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