# Real Estate Credit Investments: Looking at the current opportunities

- Link: https://www.directorstalkinterviews.com/real-estate-credit-investments-looking-at-the-current-opportunities/4121105129
- Published: 2023-02-10T08:15:15+00:00
- Author: Amilia Stone

Our recent notes have, in the main, focused on why **[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))
should prove resilient in uncertain times, given its credit processes, high-quality
security, low exposure to high-risk sectors, diversity and management of problem
accounts. In this note, we explore the upside opportunities such conditions present.
In particular, we note i) improving yields on new business, helped by the relatively
short contractual (and even shorter actual) duration of the loan book, and ii) improving
covenants. As competitors with weaker balance sheets, less focused business models,
higher capital requirements and worse historical loss experiences withdraw, so Real
Estate Credit Investments can cherry-pick higher risk-return opportunities.

 * **January quarterly update:** Key themes are i) attractive returns from low LTV
   credit exposure to UK and European commercial real estate assets, ii) quarterly
   dividends delivering consistently since October 2013, iii) a highly granular 
   book, iv) transparent and conservative leverage, and v) access to a strong pipeline.
 * **Dec’22 factsheet:** The NAV rose 1p, due to recurring interest income (reported
   NAV down 2p, due to 3p dividend). Cash was £24m, and gross leverage £108m. The
   book has 60 positions (34 loans, drawn value £348m, undrawn commitments of £200m,
   and 26 bonds, fair value £90m). The weighted average LTV is 56%, and the yield
   is 11.3%.
 * **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 6% discount, a level not seen since late 2020. RECI paid its
   annualised 12p dividend in 2022, which generated a yield of 8.5% ‒ expected to
   be covered by interest alone.
 * **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 loss in the
   event of default. Some assets are illiquid, and repo financing has a short duration.
 * **Investment summary:** Real Estate Credit Investments generates an above-average
   dividend yield from well-managed credit assets. Bond pricing includes a slight
   discount, reflecting uncertainty, which should unwind when conditions normalise.
   Sentiment to 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, to date, have injected further equity into deals.

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