In previous notes, we have reviewed why we believe Real Estate Credit Investments Limited (LON:RECI) has procedures and practices that limit downside losses to help ensure the resilience of the NAV. In this note, we explore further how portfolio management helps optimise risk/reward with a dynamic approach to bond portfolio allocation, leverage, top 10 concentrations, geographical sectors, and duration. RECI’s portfolio is not a static, long-duration, totally illiquid book. It is actively managed to the latest market opportunities, with an average loan life of 1.5 years, which is likely to be shortened further by early repayments. RECI’s NAV performance was recognised in the recent Citywire award.
- Citywire award: The fund won the best performance award for Specialist Debt at Citywire’s London-listed Investment Companies awards (November 2023). The award is given to the investment companies judged to have delivered the best underlying return, in terms of growth in NAV, in the three years to 31 August 2023.
- October 2023 factsheet: Underlying NAV rose 0.7p, due to recurring interest income (1.1p). Cash was £23m, and gross leverage £75m. The book has 36 positions (29 loans, gross drawn value £384m, and 7 bonds, fair value £9m – down from 26 and £90m, respectively, at end-March). The weighted average LTV is 61%, and the yield is 10.1%.
- Valuation: In the five-year, pre-pandemic era, on average, RECI traded at a premium to NAV. In periods of market uncertainty, it has traded at a discount. It now trades at a 11% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 9.1% ‒ expected to be covered by interest alone.
- Risks: Credit cycle and individual loan risk are intrinsic. All security values are currently under pressure. We believe they have appropriate policies to reduce the probability of default and has a good track record in choosing borrowers. Some assets are illiquid. Much of the book is development loans.
- Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Income from its positions covers the dividends. Sentiment to market-wide credit risk is difficult currently, but RECI’s strong liquidity and debt restructuring expertise provide extra reassurance. Where needed, to date, borrowers have injected further equity into deals.
Real Estate Credit Investments (LON:RECI) is a specialist investor in UK and European real estate credit markets with a focus on fundamental credit and value.
