Real Estate Credit Investments Limited (LON:RECI) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your report sits behind a disclaimer. Can you just remind us why that’s there?
A1: Yes, it’s a very 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’s not seen as a simple asset class in the UK and the report should be looked at by professional and qualified investors, but a very standard disclaimer and nothing to worry about.
Q2: Now, as I mentioned, your recent report was called ‘Investor Day: Opportunities aplenty’, what can you tell me about that report?
A2: In previous reports, what we’ve done is highlighted RECI’s downside resilience. The key takeaway for us from the November Investor Day was the scale of RECI’s upside current opportunities.
Now, the key driver to this is the strong pipeline the manager has, using its expertise and scale to access the least competitive sectors of real estate lending. By doing so, it can earn good returns, typically 8–10% unleveraged and see only a modest impact from the market dynamics, overall market dynamics. Regular repayments, both contractual and customers refinancing early, means that there’s flexibility to take these opportunities as they emerge.
We also sense, at the minute, an increased appetite for development finance compared to, say, a year ago, given the risk–reward characteristics at the current time.
Q3: What can you tell us about that access to the least competitive sub-sectors in real estate finance?
A3: Some people think of real estate finance as one market, but it’s not, it’s not one huge, homogeneous market. It’s more a series of smaller sub-sectors, the quirks of each of which needs to be deeply understood if a lender is to be profitable.
In our view, this requires an on-the-ground presence, which is only available to a large-scale financier like Cheyne, the manager of Real Estate Credit Investments. It also requires expertise, which, again, needs significant resource to develop.
Importantly, competition between these sub-sectors varies enormously. Banks, for example, have very little appetite for development finance because it carries very heavy regulatory capital penalties. And the competition changes over time.
Now, what RECI’s portfolio has proven to be is dynamically managed, taking advantage of specific sub-sector opportunities as they emerge. Importantly, it’s been very willing to shrink one business line when better opportunities emerge elsewhere.
Q4: Now, capital allocation is an important issue for all investment trusts at the minute. What can you tell me about RECI’s approach?
A4: In our view, investors should really marry the positive investment-driven opportunities from the large Cheyne-sourced pipeline with RECI’s buyback programme, which is a rolling £10 million, which in recent past has been renewed every six months. For many years, what we’ve also seen is a maintained dividend payout.
Now, in our view, this evidences RECI’s commitment to optimising immediate and long-term shareholder returns.
Q5: What about the risks here, Mark?
A5: As you say, all investments carry risks. The risks of a recession are clear to see, with higher interest rates, low disposable income, falling property prices, both residential and commercial, often compounded by having distressed sellers of assets. We’ve seen rising social tensions and government-facing large deficits and central banks’ inflationary pressures. Those are all really macro pressures.
As I mentioned at the start, we’ve done multiple notes looking at Real Estate Credit Investments’ specific risks and how they are very carefully managed, and in particular, how they’ve recovered situations where, for whatever reason, the borrower has got into difficulties.
