Real Estate Credit Investments: Vive la difference

Hardman & Co

In this note, we analysis Real Estate Credit Investments Ltd (LON:RECI) French exposures, which now account for 37% of commitments and three of the top-10 commitments. In particular, we review the geographical and sector risk diversification, and growth opportunity benefits that this brings to RECI investors. We review the competitive advantages of Cheyne, the manager, in this area, noting particularly its structuring of complex deals, certainty of finance and relative simplicity compared with syndicate providers. We use case studies from its €1bn+ cumulative lending to illustrate these advantages. RECI’s recent quarterly update highlighted its usual, overall strategic theme of consistency.

  • Quarterly update key themes: 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, and iv) transparent and conservative leverage.
  • Quarterly update other themes: i) access to an established real estate investment team at Cheyne, which manages over $4bn AUM and a strong pipeline of investment opportunities (11 new deals totalling £152m of commitments since 31 March 2021), and ii) robust mitigation against an environment of rising rates.
  • Valuation: Real Estate Credit Investments trades at a 3% premium to a conservative NAV, in line with pre-pandemic average levels. With a 2022E 12p dividend, the 7.8% dividend yield is the highest of its immediate peers and 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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