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October Investor Forum: Shareholder value in ESG investing

In our note, Marks taken in uncertainty, released thereafter, published on 5 August, we reviewed RECI’s track record of taking MTM hits on its bond portfolio in periods of uncertainty, followed by then releasing them 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 summarised again in this note. We have outlined in previous reports, and again in this note, why we believe RECI shows superior resilience against inflation, interest-rate increases and inflation risks.

  • 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.
  • July factsheet update: Recurring interest income added 1p to NAV. RECI had cash of £33m and gross leverage of £106m. The book has 62 positions (35 loans with drawn value £324m and undrawn commitments of £195m, and 27 bonds). The weighted average LTV is 60% and yield is 10.6%. A senior loan of £19m was refinanced in July.
  • 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 3.9% discount, a level not seen since May 2021. RECI paid its annualised 12p dividend, which generates a yield of 8.3% ‒ 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. As noted, its average LTV is 60%, 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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