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Hardman & Co

Real Estate Credit Investments Analyst Q&A (LON:RECI)

Real Estate Credit Investments (LON:RECI) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: You called your recent piece Delivering on its promises. What can you tell us about it?

RECI pays investors a high (7.1%) dividend yield, covered by predictable income streams generated by an increasingly diversified portfolio of real-estate-backed debt. Its credit record has been exemplary.

In our initiation report, published on 28 August 2019, we detailed how this was achieved. The report reminds investors of these competitive advantages, updates the portfolio and looks at why developments in the UK and France mean the pipeline is likely to see material completions over the next few months. RECI now trades on a small premium to NAV.

Q2: So remind me what the competitive advantages were

First, having Cheyne as the investment manager provides Real Estate Credit Investments with economies of scale, access to deal flow and market information, structuring and execution expertise, as well as experienced lenders with a strong network of contacts to improve credit risk. Culture is hugely important, and Cheyne staff are lenders to their fingertips; we believe the conservative approach also feeds through to the accounting adopted by the company.

Second, in terms of corporate governance, there is clear independence between the risk-sanctioning and the deal origination, and the board is strong, independent and experienced.

Third, the mix of bonds and loans is likely to provide much greater liquidity than a book of loans alone.  

Fourth, the portfolio is increasingly diversified. Finally, being a property-secured lender reduces both the probability of default and the loss in the event of default.

Q3: What has happened with the portfolio?

While the portfolio now has 50 positions (16 loans, 34 bonds), changes in three individual large exposures (one new, two repaid) have driven the modest portfolio mix changes. Overall, the key messages of good diversity, strong asset backing, a balanced geographical mix and robust yields remain unchanged.

Our note goes into the nitty-gritty and the largest exposure. Overall, I would characterise it as a few moving parts but fundamentally the same.

Q4: And why are you expecting more loans to complete over the next few months?

The gross cash at end-November was 18% of NAV vs. 12% at end-July, due partially to the October share placing. Having above-average cash reduces returns until it is deployed, and there are a number of factors that we believe will see rapid deployment from here.

First, in the UK, Brexit and political uncertainty have seen the closure of deals delayed. These were market-wide phenomena, with, for example, Arbuthnot Banking Group’s recent trading statement, which said “increasing uncertainty in the macro economic outlook led to a delay in the drawdown of these loans”. Given the election result, one may expect that the bottleneck should work its way through relatively quickly.

Second, Cheyne has, in recent months, significantly expanded its presence in France, and we detailed some of what it has done in our note.  There is always a lag between putting in the investment and seeing loans drawn down but, subject to major external events, we understand that a number of substantial loans are now close to completion. This is just payback for investment.

So, in summary, with less UK uncertainty and the natural maturing of the French investments, we believe Real Estate Credit Investments has multiple options to generate growth. We also believe it would take just three/four material deals to utilise all of RECI’s current cash. RECI’s Repos borrowings are structured around the bond portfolio and are likely to be increased in the near future, and, while there may be some opportunities for other debt financing, we would not be surprised if RECI were to come back to the market for a further equity raise in the near future.

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