Real Estate Credit Investments (RECI)

Marks taken in uncertainty, released thereafter

05 Aug 2022 / Corporate research

In this note, we review RECI’s track record of taking MTM hits on its bond portfolio in periods of uncertainty, followed by releases in the subsequent periods. We believe this reflects the market applying a broad-brush approach to risk, and giving insufficient credit to RECI’s superior control assessment, monitoring and restructuring systems, which we summarise again in this note. We have outlined in previous reports why we believe RECI shows resilience against inflation, interest-rate increases and inflation risks (inter alia, see New faces, same resilience, Vive la difference, Experience shows resilience of the model, Experience shows resilience of the model (2) and Why rising rates should not hurt RECI).

  • July quarterly update: Key themes are 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.
  • June Factsheet update: Recurring interest income added 1p to NAV. There was a negative 1.3p mark-to-market (MTM) on the bond portfolio; with the corporate yield widening. RECI had cash of £38m and gross leverage of £99m. The book has 62 positions (35 loans, 27 bonds), with a weighted average LTV of 60% and a yield of 10%.
  • 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 3.6% discount, a level not seen since May 2021. RECI paid its annualised 12p dividend, which generates a yield of 8.2% ‒ expected to be covered by interest.
  • Risks: Any lender is exposed to the credit cycle and individual loans going wrong. Security is currently hard to value and to crystallise. We believe RECI has appropriate policies to reduce the probability of default, and loss in the event of default. Some assets are illiquid, and repo financing has a short duration.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Bond pricing includes a slight 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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