Real Estate Credit Investments Limited (LON:RECI) is the topic of conversation when Hardman & Co’s Financial Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your recent report on Real Estate Credit Investments sits behind a disclaimer. Can you just remind us why that’s there?
A1: It’s a very 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’s not a simple asset class and the report should only be looked at by professional and qualified investors. But as I say, a very standard disclaimer and nothing to worry about.
Q2: Now, you’ve called your report ‘What RECI Brings to Investors’, what can you tell me about that report?
A2: In this note, what we did was review what RECI brings to investors.
Specifically noting, firstly, a near 10% dividend yield significantly covered by recurring interest income and which has been maintained through multiple macro crises. Secondly, a diversification of investors’ portfolios with an equity that has very low correlation to overall equity and debt markets. Thirdly, an experienced debt manager bringing competitive advantages in deal origination and in risk management. Fourth, a diversified portfolio within RECI with proven downside resilience created by the manager Cheyne’s actions. Finally, and very importantly, it gives liquid asset access to an attractive illiquid asset class. So, liquid access to an illiquid asset class.
There are risks, you know, we can’t ignore the French macro conditions at the moment, but RECI has a proven track record of resilience.
Q3: As a leading point on the front page of your report though, you also highlighted the stability of the company. What did you mean by that?
A3: What we did there, we just took a step back and looked at our 57-page initiation on RECI, which we wrote in August of 2019, so six years ago, in which we detailed all the investment positives, neutral and risk factors. Very little has changed over those past six years with the key drivers exactly as they were in that report.
Now, in our view, this stability is a further core attraction of the RECI model. Investors know what they are buying.
Q4: You highlighted the opportunities in difficult times. Why do challenging conditions make it easier for Cheyne, RECI, to increase new investment returns?
A4: The first thing to highlight is that for the reasons we outlined in our report, Cheyne’s risk control systems are very good and that obviously feeds through to the portfolio, and this limits losses.
When we see challenging conditions in the market as a whole, banks’ appetite to lend to commercial real estate wanes so Cheyne has more to cherry pick from. Cheyne has achieved not only better yields, but improved covenants at such times and let’s be honest, there will always be challenges. They may vary by country or sector, but their model allows it to invest where there are good risk-return opportunities, and the short duration of its lending means the book can be rapidly repositioned.
In the past five years, we’ve seen it double and then halve its French exposure and move from a position where nearly all of its new lending was development to one where there was very little new development finance. It has a flexible model, which means it can take the best risk-return opportunity at any given time.
Q5: Can you add colour to your comment about liquid access to attractive illiquid markets?
A5: This I think is actually really important. Private credit is one of the hot investment classes in recent times with new funds or new announcements seemingly launched pretty much daily.
However, accessing private credit can be very difficult for investors with most real estate lending being held by banks or traded in such very large value that only major institutions can be active in the market and achieve a well-balanced portfolio.
Now, RECI provides all of that with the expertise of the manager and with the liquidity that a stock market listing provides so you get liquid assets to an attractive illiquid asset class.
Q6: As with all stocks and shares, trading has its risks. What are the risks here?
A6: Yes, you’re absolutely right. There are always risks to the investment. The risks for Real Estate Credit Investments are from a recession, and that’s clear to be seen. Higher interest rates, lower disposable income, falling property prices, residential and commercial, potentially compounded by distressed sellers of assets. So, a recession obviously is important for credit. We’ve also obviously seen rising social tensions, governments facing large deficits, central banks and inflationary pressures. Most of those risks are big macro calls, whereas what RECI does is make micro investments. And as I say, it has shown proven resilience in the past
