One of the key trends in global financing markets has been the rise of private credit. In this report, we consider the implications for Real Estate Credit Investments Ltd (LON:RECI). On the upside, we note i) the disintermediation of banks reconfirms the drivers to its business model, ii) this should be positive for sentiment, and iii) most of RECI’s competitive advantages relative to banks also apply to private credit funds. On the downside, we note i) competition will increase, especially for higher-end loans and staff, although RECI is in a niche position where the biggest funds are unlikely to be active, and ii) credit losses in large private credit funds are likely to adversely affect sentiment.
- Why private credit is growing: Private credit gives borrowers an alternative and guaranteed source of funding. Investors get an illiquidity (and often intellectual capital) premium, floating rate instruments, and a targeted but diversified portfolio with specialist expertise managing risks. All these factors apply to RECI.
- Read across: RECI should benefit from positive sentiment to private credit. However, it is in a niche sub-set of direct lending, which currently accounts for just half of private credit outstandings. Its performance will be driven by trust-specific factors rather than whole private credit market macro factors.
- Valuation: Real Estate Credit Investments traded at premiums to NAV in the five-year, pre-pandemic era. The current discount to NAV is 15%. The dividend has been a consistent 3p per quarter for many years and generates a 9.7% yield. RECI is moving to lower-risk, but higher-margin, exposures, which should improve dividend cover.
- Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce default probability. Positions are illiquid. Its average total commitment to expected value LTV is 65%, and most loans (all of the top 10) are senior-secured, providing a downside cushion.
- Investment summary: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Directors and management have demonstrated their confidence in its sustainability through share purchases. 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. To date, £9.1m buybacks have been completed since August 2023. A new £10m programme was announced on 27 September 2024.
