Real Estate Credit Investments Ltd (LON:RECI) discount has halved over the past six months. We believe this is due to both actions taken by the trust (with an active buyback programme, changing asset mix and enhanced disclosure of highest-risk positions) and more favourable markets. Interestingly, not all debt investment companies have benefitted from the more favourable markets. By historical standards, the current level of RECI’s discount is very high, ca.10% above the 10-year average. RECI was at an average 2% premium in 2015-19, and traded at premium again in 2021-22, leaving room for investor concerns to moderate considerably by just reverting to historical average levels.
- Why discount has closed: Management has been proactive in changing the asset mix (into lower-risk senior loans, away from development loans, reducing bond holdings), commencing an active share buyback programme and improving disclosure. Some real-estate market concerns have also moderated.
- Outlook: The benefits from RECI’s risk reduction should improve the balance of investors’ risk/reward. The share buyback has recently been renewed at the higher (up to £10m) level. The initial programme was just £5m. Deal activity in the property sector shows participants’ confidence in that market.
- Valuation: Real Estate Credit Investments traded at premiums to NAV in the five-year, pre-pandemic era. The current discount to NAV is 12%. The dividend has been a consistent 3p per quarter for many years and generates a 9.4% yield. RECI is moving to lower-risk, but higher-margin, exposures, which should improve dividend cover.
- Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce default probability. Positions are illiquid. Its average entry LTV is 59.7%, and most loans (all of the top 10) are senior-secured, providing a downside cushion. In the short term, investor sentiment remains an issue.
- Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Directors and management have demonstrated their confidence in its sustainability through share purchases. Market wide, credit risk is currently above average, but RECI’s strong liquidity and debt restructuring expertise should allow it time to manage problem accounts. To date, £9.1m buybacks have been completed since August 2023. A new £10m programme was announced on 27 September.
241015-Hardman-Real-Estate-Credit-Investments-RECI-Why-the-discount-has-been-closing-and-its-outlookDownload
