# Real Estate Credit Investments Getting a balanced view on outlook

- Link: https://www.directorstalkinterviews.com/real-estate-credit-investments-getting-a-balanced-view-on-outlook/412823665
- Published: 2020-05-21T07:44:47+01:00
- Author: Amilia Stone

We believe **[Real Estate Credit Investments Ltd](https://www.directorstalkinterviews.com/company/real-estate-credit-investments/reci.l)**(
[LON:RECI](https://www.directorstalkinterviews.com/company/real-estate-credit-investments/reci.l))
21% discount to NAV reflects a reduction in investors’ confidence, reflecting the
uncertain outlook, security values and potential impairments. When considering if
this discount is excessive, we note i) a relatively low-risk profile, ii) strong
liquidity means RECI can optimise recovery returns, iii) restructuring is a core
competency, iv) realised losses to date are just 2.1p, v) bond valuations are expected
by RECI to be repaid at par, but priced at 17% below par, and vi) borrowers have
been injecting equity into their deals. The stable 3p 4Q dividend and unchanged 
policy show confidence and re-investment returns rising.

 * **Relatively low-risk profile:** Like-for-like, senior secured lending (76% NAV),
   especially when backed by property, should be a lower-risk profile than most 
   lending. Borrowers have injected equity, and governments’ support for borrowers
   is unprecedented. RECI’s liquidity risk is low (net debt just 6% of NAV).
 * **Recovery potential:** Realised losses to date have been just 2.1p. RECI believes
   its bonds will be repaid at par over the next couple of years, and their discount
   is a temporary sentiment issue, unjustified by fundamentals. For loans, having
   expertise, and working over time with borrowers, significantly reduces final 
   losses.
 * **Valuation:** RECI trades at a large discount to NAV, in line with secured lending
   peers. Its yield, at 10.3%, is the highest of its immediate peers and above wider
   peer averages. RECI showed its confidence with an accelerated dividend declaration(
   3p unchanged on prior quarter) and “stable” dividends going forward.
 * **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 Ltd 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.

[DOWNLOAD THE FULL REPORT](https://www.hardmanandco.com/wp-content/uploads/2020/05/Hardman-Research-RECI-May-2020.pdf)

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