# Real Estate Credit Investments: Experience shows resilience of the model

- Link: https://www.directorstalkinterviews.com/real-estate-credit-investments-experience-shows-resilience-of-the-model/412986097
- Published: 2021-05-07T07:11:44+01:00
- Author: Amilia Stone

The key messages we take from **Real Estate Credit Investments plc** ([LON:RECI](https://www.directorstalkinterviews.com/company/real-estate-credit-investments/reci.l))
April’s quarterly investor update and end-March 2021 factsheet are i) mark-to-market(
MTM) writedowns in March 2020 proved overly conservative, and RECI has been making
recoveries since, ii) with no defaults, RECI’s assets have proved highly resilient(
this is no accident, but reflects the different way in which the assets are managed
to other lenders, and iii) as expected, RECI’s bond portfolio provided significant
liquidity at only a modest cost. Despite the reasons driving the 2020 discount having
all been negated by experience, the shares still trade at a 6% discount to NAV, 
when, ahead of COVID-19, they were at premium.

 * **Why defensive:** Realised losses have been just 1% of NAV, reflecting Cheyne’s
   strong credit assessment and security. We understand that all borrowers are paying
   in full on current terms and bonds are expected to be repaid in full. The housebuilder
   mezzanine loan writedown may reverse further if current conditions continue.
 * **New business:** New business pricing has widened (still ca.2% above pre-crisis
   levels), and terms have improved. This is most visible in the market bond book,
   where yields have more than doubled since February and the LTV is nearly 10ppts
   lower. The dividend is now covered by stable interest income.
 * **Valuation:** RECI trades at a discount to a conservative NAV (historically,
   it has traded at a premium). Its 8.4% 2021E dividend yield is the highest of 
   its immediate peers, and especially valuable at a time when alternative investments
   offer little income. RECI’s defensive qualities mean the dividend has been held
   through the COVID-19 crisis.
 * **Risks:** Any lender is exposed to the credit cycle and individual loans going
   wrong. Security is currently hard to value and to crystallise. We believe RECI
   has appropriate policies to reduce the probability of default and the loss in
   the event of default. Some assets are illiquid, and Repos financing has a short
   duration.
 * **Investment summary:** Real Estate Credit Investments generates an above-average
   dividend yield from well-managed credit assets. Management has confirmed no change
   to dividend policy, showing its confidence in its [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news).
   Bond pricing includes a discount, reflecting uncertainty, which should unwind
   when conditions normalise. 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. Borrowers have, to date, injected further equity
   into deals.

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