Real Estate Credit Investments Ltd (LON:RECI) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report on Real Estate Credit Investments sits behind a disclaimer, what can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. It is not a simple asset class, and the report should only be looked at by professional/qualified investors.
Q2: Your recent report was called ‘Portfolio management to optimise risk/reward’, what can you tell us about it?
A2: In previous notes, we have reviewed why we believe the fund has procedures and practices in place 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.
Their portfolio is not a static, long-duration, totally illiquid book. The key message that we believe investors should take away is that they are an actively managed portfolio where Cheyne’s footprint and average loan life of just 1.5 years allows them to rapidly take advantage of opportunities as they arise.
It is a balanced management with, for example, the overall level, and mix, of leverage reflecting Cheyne’s view of the risk/reward at any time.
In terms of what this brings to investors, we highlight that Company’s NAV performance was recognised in the recent Citywire award.
Q3: So, tell us a bit more about what has changed in the asset mix of portfolio?
A3: Since 2016, the book has been migrating towards an all-senior loan book. The move to senior debt has involved not only a shift from mezzanine and other loans but also, in 2023, a re-allocation away from bonds.
The chart in our report shows how this has progressed through the year with the gross value of bonds just over a tenth of that at the start of the year. The advantages of being senior debt include being repaid earlier in the event of customer difficulties, and retaining absolute governance, covenants and control from its bilateral singular lending relationships. The Cheyne-controlled weighted average LTV on total portfolio by commitment value is around 60%. These three factors mean that the loss in the event of default is reduced.
Our note also examines how Cheyne has changed the sector, geographical, and duration mix, as well as how the top exposures have changed over time.
Q4: And leverage in portfolio has changed too, what has happened there?
A4: The fund has used different types of leverage for different assets, with the market bond portfolio significantly funded by REPOS and the use of asset-specific finance with some loans.
There has been a sharp reduction in overall leverage throughout 2023, from 36.2% NAV in January to 20.9% in October. They have chosen to reduce leverage during more uncertain times, bearing in mind the pressure from the rise in cost of funds (balance sheet leverage average cost up 2.7% on January 2023). Lower leverage in uncertain times is not a one-off and has been seen before (end-2018 balance sheet leverage 38.1% NAV reduced to 21.6% end-2020).
Secondly, the mix has changed with the increasing prevalence of asset-specific finance, which, typically, is longer term but whose cost has increased less than short-term REPOS.
Q5: What was the award it recently won?
A5: Real Estate Credit Investments won the best performance award for Specialist Debt at Citywire’s London-listed Investment Companies awards in 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.
Q6: And the risks?
A6: The risks of a recession are clear to see, with higher interest rates, lower disposable income, falling property prices (both residential and commercial, compounded by distressed sellers of assets), rising social tensions, governments facing large fiscal deficits and central banks’ inflationary pressures.
