Q1: Your recent report on Real Estate Credit Investments sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. It is not a simple asset class, and the report should only be looked at by professional/qualified investors.
Q2: Your recent report was called New faces, same resilience. What can you tell us about it?
A2: In previous notes, we have repeatedly outlined why we believe RECI shows resilience against inflation, interest rate increases and inflation risk (inter alia, see Experience shows resilience of the model, Experience shows resilience of the model (2) and Why rising rates should not hurt RECI)). In this note, we highlight how the recent deals have added to the portfolio and, as outlined in RECI’s recent quarterly presentation, how they have re-confirmed this protection.
We also detail the other key themes from this report, noting the sector and geographical diversity (important when considering exposure to UK rate rises), strong loan to value (LTV) metric, conservative leverage and good counterparty quality.
Q3: Why is it important to look at the most recent deals?
A3: New borrowers, as a general rule, are riskier than old ones because, on the specific deal, they have yet to establish a track record of cashflow and security cover. The LTV on the specific deal would automatically reduce on a specific deal and would, ceteris paribus, automatically fall if you had a period of rising property prices and if a loan had been on the books for a period of time. RECI was thus in danger of being a victim of one’s own success by having successful borrowers who were more likely to repay quickly, and thus having a portfolio that was more likely to churn and to have a higher proportion of new lending.
Q4: What did your analysis show?
A4: As the title of our note would suggest, the quality of new lending is extremely high and entirely consistent with the existing book. In particular, we note that there is good diversity by geography and sector. This is important, from a credit risk concentration point of view, but also when considering exposure to rising interest rates. It also means that exposure to inflation pressures is diversified. Additionally, low LTVs offer good security cover.
Looking at the six most recent deals, the highest was just 64%, and four of the six were at 50% LTV, or lower. There is a strong bias to senior loans, again providing good security cover. The underlying assets are high-quality, and prime, in good locations. The deals are non-standard, where value is created in deal structuring skills, not just in the commodity of providing finance itself.
We have, in our previous notes, highlighted the high-quality nature of the borrowers, who are highly experienced and have substantial asset-backing beyond the deals themselves. The bottom line is that, through COVID-19, actual losses were minimal.
Q5: Real Estate Credit Investments has also put out its quarterly investor presentation and latest monthly factsheet. What did you learn from them?
A5: The Cheyne quarterly updates show remarkable consistency in their messaging. Pretty much every quarter, the key takeaways 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 a strong pipeline.
In some ways, the consistency of the messaging from pre- COVID-19, through COVID-19, post-pandemic, and now through the latest crisis, is actually the most interesting thing about it. In terms of the latest 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%.