Darren Turgel, MD of DirectorsTalk, caught up with Ravi Stickney, Managing Partner and CIO, Cheyne Capital Real Estate to discuss the highlights, the impact of the current interest rate environment and Cheyne’s real estate pipeline.
Q1: What are the highlights in the fourth quarter?
A1: The company, in the last 12 months, has completed roughly £172 million of commitments since 31st March 2021. In the last quarter alone, it has completed two new loans sum totalling about £46 million of new commitments.
There are no defaults in the portfolio today, indeed in the last quarter, there was one repayment of a £10.5 million exposure with a net IRR of 8.2% for that senior position that repaid.
The hotel portfolio which did pose a challenge during the COVID pandemic period has been fully restructured, favourably for RECI with all of the hotel exposures performing well to date.
The cash position in the company remains robust at roughly £52 million of cash held to date albeit a large amount of that is spoken for in terms of new deals that are being funded.
The company has been successful in progressing with its term matched financing programme, both on the balance sheet as well as on an off-balance sheet basis as well.
The opportunities for the company remain robust – banks are still constrained in lending plus also, unsurprisingly, the present crisis does present interesting opportunities for the company in terms of lower leverage or lower risk positions that are coming on to the pipeline with a higher rate of return.
Q2: How do you see the interest rate environment as it pertains to RECI’s book?
A2: To summarise their current book of bonds as well as loans: the public market bonds are more exposed from a mark-to-market perspective in regard to a rising interest rate environment. Having said that, the overall book currently has roughly 80% of its book being fixed rate in nature, of which a significant amount of that is the private loans.
The rated average modified duration of the fixed rate book is roughly 1.65 years which is very short and that simply means that as these loans repay, there is the opportunity to reset the loans onto either a floating rate or a higher rate to compensate for the rate environment that we’re in.
The private market loans do not suffer from mark-to-market volatility for rate movements though the fixed rate public market bonds will. Turning to the fixed rate market bonds, they represent roughly 12% of the NAV of the company and a duration of roughly 1.25 years which again, is very short. Therefore, whilst there has been some mark-to-market impact on those bonds, that should be ameliorated by the very short duration in the fast amortising nature of those bonds.
Finally, to say, as these loans repay, and also pointing to the pipeline of loans that we have for the company to date, unsurprisingly we have moved to floating rate loans or indeed to increase the rate on the fixed rate loans to compensate for the rate environment that we see ourselves in, for the foreseeable future.
Q3: Are there any updates to mention within the key sectors?
A3: In terms of RECI’s exposure to mixed-use assets, position number 1 on page 18 of the Q4 presentation is a large exposure for the company and performs very well, it continues to deliver quickly with a combination of a diversified portfolio across the UK; residential, office, light industrials, and logistics as well.
Position number 2 on page 18 has been in the book for quite some time and it is a luxury retail and residential building in one of the best streets in Paris. Again, it performs very well to date.
In terms of hotels, an update on page 19. The largest position there was, as you may recall, one of the positions we had to deal with intensively during the COVID pandemic. There’s an update on that position since the successful restructuring especially in the last quarter.
The performance of the hotel portfolio both in terms of occupational levels as well as ADR has surpassed our expectations and that has led to a material revision in terms of the valuation of the portfolio. So, our hotel exposure to date does not give us any concern going forward.
Housebuilders on page 21 provides an update on the UK housebuilding position. We mentioned at the last quarterly update that given the positive performance on the housebuilder itself, in addition to the revision of some of the fair value write-downs that have been taken, the position would’ve been put up for sale. Indeed, a preferred bidder has been selected for the asset to go through and complete the final due diligence and we’re hopeful of a transaction in short order.
Q4: What’s the current Cheyne real estate pipeline that RECI can participate in?
A4: The pipeline today is represented by 14 deals in total and this is across the Cheyne real estate business of which Real Estate Credit Investments participate as it has the cash available to do so.
There are 14 deals with a sum total of roughly £950 million of total commitments across those 14 deals that are at various stages of closing. Most imminent, 3 deals with a sum total of £173 million are in the closing phase that we are hopeful that RECI will participate in as well.