Real Estate Credit Investments RECI share price, company news, analysis and interviews

Real Estate Credit Investments Ltd (LON:RECI) benefits from deep expertise, not only in selecting assets but in having the capability to protect assets where positions need attention. As part of the larger Cheyne debt investor specialist – with over $11bn assets under management – RECI has top-tier expertise. The CM Day presentation, on 27 June, highlighted the scope for a modest progressive rise in loan returns, an already-anticipated move out of development loans into loans for yielding assets where their owners seek finance to improve them. RECI’s portfolio is largely senior debt and it has almost entirely exited its market-traded bonds. Dividend payout seems secure.

• An under-supplied market: Supply of funds for senior debt continues to run well behind demand, which is driven by the plethora of ongoing projects, market conditions with rising cost of money, banks’ preferences, and regulatory issues concerning capital adequacy requirements. This is reflected in attractive returns.
• May Factsheet: NAV rose in the month, although it is still 1.3% below the level 12 months ago. The prior fall principally reflected the now small exposure to market bonds – as opposed to loans – and a small December 2023 writedown of a Parisian prime office development, completed in 2023 and slow in letting.
• Valuation: Real Estate Credit Investments traded at premiums to NAV in the five-year, pre-pandemic era. The average discount to NAV in 2023/24 was 14.7%. The real estate debt sector traded at an average discount of 26.3% (ex-RECI) over those 12 months (source: Liberum). Higher rates should, in our view, be seen as positive.
• Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce default probability. Positions are illiquid. Its average entry LTV is 61%, and most loans (e.g. nine of the top 10) are senior-secured, providing a downside cushion. In the short term, investor sentiment remains an issue.
• Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Directors and management have demonstrated their confidence in its sustainability through share purchases. 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. The initial £5m share buyback programme has now been completed. A new £10m one was announced on 28 March.

Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.

In previous notes, we have reviewed why we believe Real Estate Credit Investments Limited (LON:RECI) has procedures and practices that limit downside losses to help ensure the resilience of the NAV. In this note, we explore further how portfolio management helps optimise risk/reward with a dynamic approach to bond portfolio allocation, leverage, top 10 concentrations, geographical sectors, and duration. RECI’s portfolio is not a static, long-duration, totally illiquid book. It is actively managed to the latest market opportunities, with an average loan life of 1.5 years, which is likely to be shortened further by early repayments. RECI’s NAV performance was recognised in the recent Citywire award.

• Citywire award: The fund won the best performance award for Specialist Debt at Citywire’s London-listed Investment Companies awards (November 2023). The award is given to the investment companies judged to have delivered the best underlying return, in terms of growth in NAV, in the three years to 31 August 2023.
• October 2023 factsheet: Underlying NAV rose 0.7p, due to recurring interest income (1.1p). Cash was £23m, and gross leverage £75m. The book has 36 positions (29 loans, gross drawn value £384m, and 7 bonds, fair value £9m – down from 26 and £90m, respectively, at end-March). The weighted average LTV is 61%, and the yield is 10.1%.
• 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 discount. It now trades at a 11% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 9.1% ‒ expected to be covered by interest alone.
• Risks: Credit cycle and individual loan risk are intrinsic. All security values are currently under pressure. We believe they have appropriate policies to reduce the probability of default and has a good track record in choosing borrowers. Some assets are illiquid. Much of the book is development loans.
• Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Income from its positions covers the dividends. Sentiment to market-wide credit risk is difficult currently, but RECI’s strong liquidity and debt restructuring expertise provide extra reassurance. Where needed, to date, borrowers have injected further equity into deals.

Real Estate Credit Investments (LON:RECI) is a specialist investor in UK and European real estate credit markets with a focus on fundamental credit and value.