Real Estate Credit Investments: New faces, same resilience

Hardman & Co

In previous notes, we have repeatedly outlined why we believe Real Estate Credit Investments Ltd (LON:RECI) shows resilience against inflation, interest rate increases and inflation risk (inter alia, see Experience shows resilience of the model, Experience shows resilience of the model (2) and Why rising rates should not hurt RECI). In this note, we highlight how the recent deals have added to the portfolio, and, as outlined in RECI’s recent quarterly presentation, how they have re-confirmed this protection. We also detail the other key themes from this report, noting the sector and geographical diversity (important when considering exposure to UK rate rises), strong loan to value (LTV) metric, conservative leverage and good counterparty quality.

  • Other 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 strong pipeline.
  • April Factsheet update: Recurring interest income added 1p to NAV. There was a modest 0.3p mark-to-market (MTM) loss on the bond portfolio, with the corporate yield widening. Real Estate Credit Investments had cash of £66m and gross leverage of £101m. The book has 63 positions (35 loans, 28 bonds), with a weighted average LTV of 62% and a yield of 9.9%.
  • Valuation: RECI trades at a small premium to NAV, a little below pre-pandemic, average levels. With a 2022E 12p dividend, the 7.9% dividend yield is the highest of its immediate peers, and is covered by income. RECI’s defensive qualities mean that the dividend has been held throughout 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 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. 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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