Real Estate Credit Investments (LON:RECI) Chair Andreas Tautscher and the CIO of Cheyne Capital’s Real Estate strategy, Ravi Stickney discuss RECI’s continuation vote, resilience in volatile markets, discount management, and recovery strategies in real estate debt with Hardman & Co Analyst Mark Thomas.
Q1: Andreas, over the past few years, we’ve seen many debt investment companies go into wind down and yet in contrast, at RECI’s 2025 continuation vote, you got 95% approval to continue. What are you doing differently from the peers?
A1: I think I should start by saying I can’t really comment on why a number of debt companies have been wound up but perhaps I can give you some ideas on why our shareholders have shown such faith in us. I think there’s probably a number of key factors that contributed to our continuity vote being passed.
Firstly, I have to say we do have a great manager, Cheyne Capital, known for their private money funds as well as the listed fund that we are on. We also have a clearly defined market focus on where and to whom we lend and also, consistent delivery of a well-diversified yield. I’d also add that we do keep a good line of communication to our larger investors as well to ensure that we hear their feedback.
In working with Cheyne Capital, for Real Estate Credit Investments, we are actually working with one of the top-rated providers of development loans in the European market. This gives us access to premium deal flow, which is expertly managed by a group of talented and experienced professionals. Building on this, we’ve kept our focus in this sector, which allows investors to allocate to us knowing what we’re doing, what kind of risk appetite that we are taking and therefore what their risk is with investing in us.
For all those reasons, our shareholders are very happy to vote to continue the fund.
Q2: Ravi, In the recent past, it feels like there’s been a one in a hundred-year event nearly every year. From your perspective, what is your view on the current market, including perhaps the outlook for real estate, the interest rate environment and its impact, and on spreads?
A2: Once in a hundred-year event, yes. Every other year, I think if I look back through time, we’ve had European crisis, the Brexit, the pandemic, 2022, a war in Europe, the list goes on and who knows what next year may bring.
I think if I look back through time, there are many of those are just one-off events, for example, the pandemic was quite a discreet event. I think the real event that was a structural change for real assets globally has been 2022. I think in 2022, there’s a realisation now that look, inflation, and rates are permanently higher. They may not be as high as they were yesterday or today, certainly, trending down, but our belief and I think the market’s belief now is that rates are non-zero for the long term. If you think about real asset pricing, that poses a big challenge going forward.
Real assets priced off in a zero-interest rate environment with abundant capital at yields of 3% or less so of course, if risk free rates rise to 3%, as they are in the UK, terminal rates are about 3.5%, then, of course, the yields on real assets would move to 4.5 or 5%. That is a permanent dilution in the value of an asset that was valued before 2022. I think that presents the biggest challenge and it’s a structural challenge for all real assets, the world over. There are lots of assets that need to deal with it, lots of owners that need to deal with it through legacy evaluations. Of course, any new owner and this is the important bit, anyone buying an asset today needs to understand those assets need to be highly productive to beat the risk-free rates going forward.
That really is our view that assets will be more productive going forward but we are concerned about the big block jam of assets that need to be refinanced in this environment as well.
Q3: Andreas, discounts continue to persist across the listed investment trust world. How are you dealing with this and what do you think is driving it?
A3: Discounts are something that drives a lot of market commentary, it’s a lot of discussion that we have with investors and it’s also an area that the Board spends a lot of time discussing with our advisors and particularly our broker, Panmure Liberum.
I think it’s potentially a lot of factors that contribute to discounts in the wider market. I think for some people it might be valuation concerns, for others, might be a lack of risk appetite in that particular asset class. I think for us, it’s probably something slightly different to that, but also similar to some of the other investment trusts.
We have a small amount of trading liquidity, i.e. the number of shares that are traded on a daily basis. What that means is that when a holder decides to trim their holding, maybe only by a small amount, there is a shortfall of buyers against that. Therefore, the brokers tend to discount on the basis that they have to struggle, or they will struggle to fill that order to try and find people to take that placement.
One of the ways that that would be eased in our case, I think, would be if we were a bigger company, had a higher market capitalisation but as a Board, we continue to provide the capital to our broker to execute buybacks where this makes sense. We know that for many of our investors, it is a matter of concern that they highlight.
However, I have to say that given the choice, we would always rather deploy funds back into new loans than spending it on buybacks.
Q4: Ravi, in my view, recoveries made from problem situations are a key driver to ultimate loss and you appear to develop significant skills in this area. Can you give some more colour on how you get your money back when borrowers are behind with their plans?
A4: I think it’s probably quite timely. As you look across into the corporate loan world, there are quite a number of difficulties in that world; First Brands and Tricolour, etc, and the recoveries on those are not great.
I think if you look at real estate lending or senior lending, firstly, you need to understand why a borrower might go into default. That’s the obvious ones; macro changes, rates go up, value comes down, that’s a default, a thematic change, for example, COVID and offices was a big thematic drag from work from home and that still persists today or quite simply, the business plan has failed as well.
Then what drives recoveries if any one of those situations leads to a material default?
It is this, it’s the ability to establish full security on your assets. If you look across at what’s happening with First Brands and the corporate loans in the United States, there is no security, and security is absolutely paramount. When you do make a senior loan in the real assets world, real estate world, having a mortgage security is not enough, there’s a first share pledge, first debenture, first lien over everything that the borrower has.
Second, governance and control. We would stay clear from things like loans with no governance whatsoever, you want to stay away from that, you want to ensure that there’s always a huge degree of governance and control if the borrower is unable to perform. That’s the base of making a good recovery.
The next layer is then understanding why the borrower has gone into default, what the borrower intends to do next. Now, 95 times out of 100, the borrower will be seeking for help or a constructive and consensual way out. Now, with the degree of control and security you have, you’re in a very good place to negotiate and help and that is what we do. 95 out of 100 times, that is exactly what happens. We negotiate that the loan is de-risked in exchange for time, and if you look back at COVID, that’s exactly what we did. To give borrowers time in exchange for some element of de-risking of Real Estate Credit Investments’ book.
In extremely rare circumstance where a borrower cannot or will not make good his default or work with the lender, that is when the security may be enforced and the asset taken over and sold. Or the final leg to a good recovery and workout is the asset is taken over and brought in-house, to be completed, even a development or an asset management plan, executed over time and then sold.
On that last leg, Cheyne Real Estate maintains nearly 80 people now on its team and a good number of them are actually developers and asset owners and asset managers that, if I look back through the last difficult few years, any defaults that have happened, we’ve been able to take those back, work them out and sell the assets as well.
So, that’s the tree of how defaults are worked out, and I think it goes without saying establishing security and having the team able to take assets on is of paramount importance.
Q5: Andreas, finally, what would the Board see as its main risks and how are these risks managed?
A5: The Board has defined in our annual financial report our key risks and those are portfolio returns, dividend risk, valuation risk, and credit risk.
I have to say that to make the returns that we generate, there’s always going to be risk. It’s just how we measure them and then how we manage them. The measuring comes from the transparency in reporting what is happening in the underlying portfolio and that is through combination of regular meetings, analysis that’s provided by the Cheyne team, and then us as a Board challenging and asking questions to ensure that we have a good understanding of the risks that are being taken.
I think I can also say that over the last few years, the level of transparency and granularity that we provide in the reporting has been improved and that also helps our investors to be able to look through and see what we’re investing in.
The final thing is that we also have our annual external audit by the external auditors who provide further challenge and scrutiny, looking through the loan book, loan by loan, and challenging both Cheyne and ourselves.
I think that through all of those, we can achieve enough comfort that we’re happy that we’re providing the level of detail that our investors need, but also that the risks that we have identified are being well managed.
Real Estate Credit Investments provides shareholders with income from a portfolio of senior secured real estate loans, managed by Cheyne Capital, focusing on capital preservation, disciplined credit risk management, and consistent dividend delivery across markets.
