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Hardman & Co

Real Estate Credit Investments Delivering on its promises

Real Estate Credit Investments (LON: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 and titled 7%+ yield from well-secured property debt portfolio, we detailed how this was achieved. This note 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.

  • Pipeline conversion: Following its October equity raise, RECI is holding above-average cash (18% NAV). With reduced UK uncertainty post the election and over Brexit, more UK deals may close. We understand Cheyne’s growing presence in France is also likely to see completions. A further equity issue should be expected.
  • Cheyne’s competitive advantages: Having Cheyne as the investment manager provides RECI 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.
  • Valuation: RECI trades at a small premium to NAV, slightly above secured lending peers. Its yield, at 7.1%, is the highest of its immediate peers and above average compared with debt investment companies. It is covered by predictable income streams and below-average downside risk from credit losses.
  • Risks: Any lender is exposed to the credit cycle and individual loans going wrong. We believe RECI has appropriate policies to reduce the probability of default and the loss in the event of default. The book is relatively short, creating re-investment risk. Some assets are illiquid, and Repos financing has a short duration.
  • Investment summary: RECI generates an above-average, but sustainable, dividend yield from well-managed credit assets. It should deliver this return with a relatively modest correlation to equity and bond markets. For property investors, the downside risk is lower than direct real-estate exposure. To debt/fixed-income investors, the presence of physical security (and management controls) makes RECI a lower-risk option than the average debt investment company.

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