Real Estate Credit Investments Limited (LON:RECI) has announced the release of the Company’s Annual Report and Audited Financial Statements for the year ended 31 March 2024.
OVERVIEW
Chairman’s Statement
RECI continues to deliver a robust NAV and attractive quarterly dividends of 3 pence per share.
RECI Chairman Bob Cowdell states: I am pleased to report that for the year ended 31 March 2024, RECI delivered a total net profit of £21.9 million and maintained an unchanged dividend of 3 pence per quarter, despite challenging times for the listed investment company sector.
The last financial year saw the war in Ukraine continuing and the events of 7 October 2023 and Israel’s response in Gaza, have seen heightened tensions in the Middle East. Elsewhere, geopolitical tensions and concerns remain, in a year of record numbers of government elections worldwide.
While the rate of inflation has been reducing from its peak, strong labour markets and energy prices have caused Central Banks to delay in cutting interest rates for longer than was expected. The Bank of Canada and the European Central Bank have recently announced rate reductions and consensus remains that interest rates will reduce over the rest of 2024 and 2025 bringing benefits to households and corporate borrowers. The return to long-term lower interest rates, albeit not to the lows of the last decade, will see income seekers move away from cash and government bonds as they seek higher returns on their investment. A reduction in interest rates should also benefit and allay investor concerns about the credit and real estate markets.
The economic and geopolitical challenges of the last year, combined with discount, liquidity and some governance issues, have seen investor sentiment negatively impacted across the whole listed investment company sector. Concerns over credit and UK equity markets and real estate and private equity valuations have driven significant investor selling, allied to the need to sell investment company shares to provide liquidity to satisfy significant levels of redemptions in investors’ underlying funds. This combination has seen investment companies’ share price discounts widen to near record levels.
Against this challenging backdrop, the Board and Cheyne have continued to focus on RECI’s core strengths and seek to deliver for our Shareholders. The Company’s shares traded at an average discount to NAV of 14.7% during the financial year ended 31 March 2024. Reflecting market sentiment, the Real Estate Debt Sector traded at an average discount of 26.3% (excluding RECI) over the same 12 months1.
During the last financial year, the Company received interest and repayments on its portfolio to fund its existing investment commitments. Since the year end, the Company has received two further repayments totalling £16.7 million. The Board continues its practice of considering all options when assessing the levels of excess cash to be retained or deployed by the Company from time to time and how any such cash available for deployment should be allocated. Excess cash is regarded as the cash available following recognition of the obligation to ensure sufficient cash resources to pay, inter alia, the Company’s expenses, borrowings, dividends, and fund its ongoing contractual loan commitments, from time to time (“Available Cash”).
Mindful of the Company’s prevailing discount and Available Cash, the Board launched an initial buyback programme in August 2023 and a successor buyback programme in March 2024.
The Directors and Cheyne remain committed to providing detail and transparency regarding the Company’s portfolio and investment strategy, allowing all investors to focus on RECI and its merits and opportunities, notwithstanding the challenging broader market environment.
I am pleased to report that RECI won the Best Performance Award as the top performer over three years in the Specialist Debt Category at Citywire’s annual awards ceremony in November 2023.
Reflecting your Board’s and our Investment Manager’s confidence in RECI and its future, the Directors and employees of Cheyne have purchased an aggregate of 1.24 million shares in the Company since the start of the financial year on 1 April 2023.
1 Source: Liberum, company data
Financial Performance
RECI reported a total net profit for the financial year ended 31 March 2024 of £21.9 million on year-end total assets of £352.3 million, compared with a £20.6 million net profit in the year ended 31 March 2023, on year-end total assets of £419.0 million.
The NAV as at 31 March 2024 was £1.45 per share (£1.47 per share as at 31 March 2023) which, combined with the 12 pence per share of dividends payable in respect of the year ended 31 March 2024, represents an annualised total return for Shareholders of 7.0%.
During the financial year ended 31 March 2024, the Company’s shares traded at an average discount to NAV of 14.7%, (6.1% discount for the year ended 31 March 2023).
Total quarterly dividends declared in respect of the financial year ended 31 March 2024 were an unchanged 12 pence per share, returning £27.4 million to our Shareholders.
In the course of the last financial year, the Company utilised short-term leverage at an average cost of borrowing of 6.8%, with average gross leverage of £73.9 million or 0.22x NAV. RECI also had asset level structured leverage, totalling £33.9 million at year end, at an average borrowing cost of 7.5%.
When the financial year began on 1 April 2023, RECI had gross balance sheet leverage of £80.4 million (0.24x NAV) and leverage net of cash of £64.0 million (0.19x NAV). As at 31 March 2024, the Company’s gross balance sheet leverage was £23.8 million (0.07x NAV); its leverage net of cash was £1.0 million (0.00x NAV); and its net effective leverage, including contingent liabilities of £3.9 million (being the partial recourse commitment, representing 25% of asset level borrowings provided to certain asset level
structured finance counterparties), was 0.02x NAV.
During the financial year to 31 March 2024, the Company funded £95.2 million into existing investments, compared with £158.6 million in the previous financial year. RECI received cash repayments and interest of £134.2 million in this year, compared with £159.0 million in the year ended 31 March 2023. The Company also received £9.3 million (net of repo financing) via the sale of market bonds in the year.
Financial Year Review
Despite the challenging real estate and credit markets, the Company’s robust portfolio ensured the NAV remained stable at an average of £1.47 per share during the financial year, notwithstanding the payment to Shareholders of four unchanged dividends, totalling 12 pence per share, during the period.
Cheyne maintained the strategy of focusing portfolio exposure upon lower risk senior loans, with 86% of the Company’s positions comprised of senior assets by the financial year end. RECI’s holding of market bonds had reduced to 2.2% of the portfolio by 31 March 2024. The weighted average life of the whole portfolio was 1.4 years for the financial year ended 31 March 2024; and the
weighted average LTV of the Company’s portfolio was 64.9% (59.2% at 31 March 2023), maintaining significant defensive equity headroom.
The Board and Cheyne have continued to monitor RECI’s cash resources and repayments and to consider the appropriate level and blend of gearing for the Company, which saw a reduction in gross and net balance sheet leverage over the year to 31 March 2024.
The negative market sentiment during our last financial year inevitably impacted RECI’s share price and saw material discount widening across the investment company sector generally and the credit and real estate sectors, in particular. The Company’s shares traded at an average discount to NAV of 14.7% for the financial year ended 31 March 2024.
On 31 August 2023, the Company announced a share buyback programme (the “Initial Programme”), with a maximum aggregate purchase price of £5.0 million. Pursuant to that programme, a total of 4,095,000 shares were purchased for treasury for an aggregate amount of £5.0 million. Shares were repurchased under the Initial Programme at an average discount to net asset value per share of 16.6%, with the Company’s shares trading at an average discount of 14.2% from 31 August 2023 to 25 March 2024 (the date of the last share repurchase under the Initial Programme).
On 28 March 2024, the Company announced that it intended to undertake a further buyback programme (the “Successor Programme”) which will run to 30 September 2024. The maximum aggregate purchase price of all shares acquired under the Successor Programme will be £10.0 million and 1,812,643 shares have been repurchased to date.
The Company’s shares closed at £1.22 on 18 June 2024 (a discount of 16.38%), which would provide a yield of 9.84% on the basis of continuing to pay a quarterly 3 pence dividend per share for the rest of the current financial year.
The merits of RECI’s offering and, in particular, the yield at current share price levels, appear to have been overlooked amid the broader volatile market and negative sector background. Your Board continues to believe that RECI provides investors with a highly attractive and sustainable long-term income stream.
RECI is well positioned to deliver this attractive dividend stream alongside a robust NAV and provide investors with a substantial and liquid company (with total assets of £352.3 million and market capitalisation of £262.6 million at 31 March 2024) with the potential for the shares to re-rate and the Company to grow over time.
Board Update
Colleen McHugh was appointed on 15 September 2023 as Chair of the Board’s Management Engagement Committee, succeeding Susie Farnon who remains Chair of the Company’s Audit and Risk Committee.
In line with the Board’s succession planning and following the appointment of an independent recruitment firm and a comprehensive search process, the Company announced on 8 May 2024 that Andreas Tautscher had been appointed as an independent non-executive director of the Company. He will also serve as a member of the Company’s Audit and Risk, Nomination, Remuneration and Management Engagement Committees and will stand for election at the Annual General Meeting to be held in September 2024.
Andreas has over 30 years’ experience in the banking and financial services industry, including as CEO of Deutsche Bank International, and I am looking forward to the Company benefiting from the experience and complementary skills he will bring.
Having joined RECI and become Chair in 2015, in accordance with good governance practice I had agreed with the Board that it would not be appropriate for me to stand for re-election at the September 2024 AGM and that I should retire from the Board at the conclusion of that meeting. Accordingly, led by our senior independent director (“SID”), the Board carried out a process to recruit a successor Chair candidate earlier this year and a candidate was identified to join the Board and succeed me after a suitable handover period. Unfortunately, the candidate has now withdrawn due to a perceived conflict of interest that had arisen.
As announced on 12 June 2024, John Hallam, the SID and Chair of the Remuneration Committee, has advised the Board that reluctantly he wishes to retire from the Board at the September AGM for personal reasons. As a consequence of John stepping down, the Board has requested that I stand for re-election and continue as Chair beyond the September 2024 AGM for the requisite period needed to complete the process to identify a successor as Chair and achieve a smooth and successful handover. As announced, Susie Farnon was appointed as the new SID with immediate effect and will lead the process of recruiting my successor. I would like to record the Board’s appreciation of John’s highly valued contribution to RECI as a non-executive director, SID and committee chair during the course of his tenure.
Environmental, Social and Governance Matters (“ESG”)
Your Board continues to recognise and support the growing focus on ESG considerations and the importance of ethical factors, including climate change, when pursuing the Company’s investment objective and in the selection of service providers and advisers to the Company.
In her role as “ESG Lead”, Colleen McHugh is working closely with Cheyne in developing and implementing RECI’s ESG approach.
Page 26 of the Stakeholder Engagement section and pages 28 to 33 of the Sustainability Report provide further information about the Company’s and the Investment Manager’s approach to ESG matters.
Outlook
The UK general election will be held on Thursday 4 July, with a change of government widely anticipated. 2024 will also see the greatest ever number of elections around the globe, with eyes focused on the outcome of November’s US elections as potentially being the most destabilising. A resolution to the conflicts in Ukraine and the Middle East appears as challenging as ever.
The reduction of inflation should allow Central Banks to move to reduce interest rates over time, albeit perhaps slower than anticipated. A return to a lower long-term interest rate environment, even if not returning to the recently experienced low levels, should benefit RECI as it continues to provide investors with a highly attractive and sustainable yield.
In considering all options when deciding on the appropriate allocation of the Company’s Available Cash resources, the Board is mindful of when opportunities present themselves to achieve attractive repeatable returns from new investments and thereby enhance the “investment case” for RECI. Encouragingly, Cheyne and its new deal pipeline ensure that RECI will continue to benefit from the opportunities to lend at attractive returns of over 10% to enhance portfolio returns and dividend cover. Scheduled portfolio repayments over the rest of the year will boost Available Cash to be deployed into new higher yielding opportunities alongside funding the current and potential future buyback programmes.
Notwithstanding the challenging market and sector background, the Directors believe that RECI remains soundly positioned to continue to deliver an attractive and stable dividend to investors seeking a reliable long-term income stream from a listed and liquid investment company, with a highly regarded specialist Investment Manager.
Bob Cowdell, Chairman
19 June 2024
Real Estate Credit Investments is a specialist investor in the United Kingdom and Western European real estate markets with a focus on fundamental credit and value.
