Real Estate Credit Inves... Share Discussion Threads

[skinny] 21/8/2012 07:14

Fact sheet 15 August 2012

Net Assets per Ordinary Share (estimate)31/07/2012 1.19 15/08/2012 1.22

[rogerbridge] 16/8/2012 23:18

I am invested here and also a small amount in in a Premier fund that I bought into a month ago. It is their European Optimum Income Fund that is yeilding just over 8%. An income fund. They target around 5% income plus they write options to obtain a further 3%. I thought that the large cap and good quality European shares had taken a pasting, so I have tucked a few away for a rainy day. The dividends should be safe and hoping for some capital appreciation in a few years time.
I also did the same with Schroder Asian Maximiser and Insight UK Income Booster

[kenny] 16/8/2012 22:48

I have this evening conducted some more research about Premier Fund Managers – who have just increased their holding in RECI to 14.39%, presumably spread between a number of their funds.

Interesting to learn that one of their funds - Premier Enterprise Fund - has in their list of top ten holdings both RECI and GLIF. I have no connection with Premier Fund Managers (honest!) but it is amazing that they are copying some of my ideas or vice versa.

The fund manager has not had a great 5 year record but I going to give him the benefit of the doubt – I guess even average investment managers pick some winners!

[zastas] 16/8/2012 14:58

Excellent Kenny, although perhaps and probably too much early optimism. I believe your calculations are broadly correct, and it indeed shows the potential, as many of us long-term holders have been aware of. Good luck.

[kenny] 16/8/2012 13:56

I think the positive attributes of RECI have been rightly described on this bulletin board as being a) the discount to NAV; at 88p RECI is trading at a discount of 26% to its last announced NAV of 119p, and b) the yield on the shares which is likely to be about 8% in the near future based on 119p.

However, I think there is now a new and important factor; which might explain why an investment fund purchased 5m shares at 86p yesterday (12.5% of the share capital; which is a big investment in a small company like RECI). If Mario Draghi's plan comes to fruition and government bond prices improve by virtue of massive intervention then, I believe, subsequently the price of the type of property backed bonds that RECI invests in will also recover. In short, the hunt for yield will continue and likely expand into bonds backed by mortgages. Such high yields can only adjust lower in the market if and when Mario Draghi's plan is implemented – a case cannot be made that yields will increase.

The effect upon RECI could be material. The latest valuation shows that the market price of the bonds is an average of 60.4% of face value. If over coming months the market price improves to, say, 70% of face value, I compute that adds 27p per share to NAV and takes it up to 146p per share.

If we speculate further that the market price in fact moves to 75% of face value that would add 40p per share to NAV and take it up to 159p per share. This latter scenario may prove too optimistic; however, if we are facing an extended number of years during which interest rates are minimal, then mortgage backed securities are certainly going to improve in value - so longer term they could get there.

Therefore, my view is that RECI should not be trading at the "double" discount its share price currently trades at. First, there is a discount in the market for the price of the bonds RECI invests in (40%) and, second there is a discount on the 119p that produces - of 26% down to 88p. It appears to me that the share price should be nearer to 119p because there is at least "hope" that the discount in its bond investments will narrow. I am not going to predict what RECI's share price should be on a "hope value" basis as I am useless at predicting share prices and in the short term the share price, as well as NAV, can fall as well as fall further!! Longer term I am fairly certain that mortgage backed securities will improve in value.

What is the "insurance" should Mario Draghi's plan not be implemented or be watered down. It is a fact that interest rates are going to remain low for many years, perhaps the next decade, so the hunt for yield is going to continue for some time. Also, if Mario Draghi's plan is not implemented in the near future, the common view seems to be it is almost certain that eventually a plan will be implemented to buy government bonds in order to reduce yield and stabilize that market. And if nothing at all happens, the bonds RECI owns will eventually mature at par with very few defaulting.

I started topping up my holding in RECI the day before the investment fund bought 5m shares and would speculate they would not take such a large and difficult to trade stake unless they were convinced of the longer term outlook for RECI.

[kenny] 16/8/2012 11:36

That is a rather BIG vote of confidence. Their website is here:

I knew I should have bought more! (will have to wait for more money to become available to consider a top up).

[skyship] 16/8/2012 10:53

Premier Fund Management bought those 5m @ 86p yesterday - (see RNS in Header) - that's a 12.5% top-up, taking them through 14%...

[zastas] 15/8/2012 20:01

Kenny,

I suspect too that it must be Cheyne then. I am not sure how large their holding still is, but they have obvously for some time tried to reduce their exposure, and to turn some into liquidity.

I suspect that that's why there is so little upward movement; there's always Cheyne as a willing seller of smaller or large portions. Same with RECP. We will have to remain patient I believe; much of the intrinsic value may not become available to us till several years later.

[kenny] 15/8/2012 17:27

Looks like a block of 2.6525m shares changed hands today. Would be interesting to learn who were the buyer and seller of those shares which represent 6.5% of the issued share capital. Any ideas as the only large holding I am aware of is Cheyne's 39% holding?

[jonwig] 14/8/2012 12:00

The dividend of 1.7p annualises to 6.8p which is (as per policy) 6% of the June NAV of 112p. The yield is 7.9% at the current share price

However, if the latest NAV of 119p is sustainable the annual dividend would rebase to 7.14p and the yield would become 8.4%.

To me, that just looks a mispricing of the risks. (DREF, which actually makes loans in this market, will pay 7% of NAV once fully-invested. There are no prior charges.)

[eeza] 14/8/2012 09:54

Thank you, Dave.

[davebowler] 14/8/2012 09:47

Liberum;

n During Q1'13 RECI made a profit of £0.7m [Q4'12: £4.5m], reflecting net gains in the bond portfolio of £1.4m (being £0.8m interest income received and £0.6m in mark to market gains). Post quarter end, the NAV per share increased by 6.3% to 119 pence as at 30 July 2012, with the positive performance having been driven by significant bond repayments and fair value gains. In particular this is attributable to the Titan 2006-4FS bond (which repaid earlier than expected) and a 50% repayment of principal at par of a bond backed by London commercial property.



n The board has also declared a quarterly dividend of 1.7 pence per share, which is consistent with the previous quarter and the dividend target of paying an annualised 6% of NAV. This equates to a 7.9% forward dividend yield.



n The NAV attributable to the ERII Cell is €24.32m, which is equivalent to €0.608 per share against which the shares trade at a 68% discount. This includes €4.74m of cash (€0.119 per share) although €1.0m of this is required to be held in reserve for expenses associated with litigation and €2.4m relates to payment received on the NGATE asset which needs to be retained.



n At 31 July 2012, the UK and Germany accounted for 65.9% and 29.9% of the bond portfolio respectively, whilst investment grade bonds accounted for 44.4% of the bond portfolio. The Fund's top 10 bonds accounted for 47% of total assets and these same investments had a weighted average yield to maturity of 11.8%. The average LTV on these top ten bonds was 58.4% (as calculated by the manager).



n Whilst cognisant of risks associated with Europe, RECI retains full confidence in the fundamental investment case of real estate debt markets and in the funds' ability to generate strong returns over the medium term. They have also retained their active hedging strategy to offset mark to market losses and have been rotating the portfolio towards more liquid names so as to reduce the impact of downwards price pressure caused by continued stress in credit markets.



n The manager cites ongoing pressure on banks to reduce leverage as creating opportunities to buy high quality bonds that are mispriced by the market and in future the manager will also look to increase exposure to real estate loans, and in particular believes that returns on commercial real estate loans are looking increasingly attractive.





Liberum View:



n Today's Q1 IMS has been largely superseded by the recently released 31 July 2012 fact sheet which saw NAV per share increase by 6.3% to 119p during the second half of July. However, with the manager having generated a year to date NAV per share total return of 21.6%, but with the shares trading on a 27.2% discount and offering a 7.9% dividend yield we continue to think that RECI offers compelling value.



n The bond portfolio is currently priced at only 60% of par and consequently with the manager highlighting further scope for refinancing of underlying properties, which would see bond principal retained at par we believe that there is still significant NAV and share price upside.



n At 31 July 2012 the manager already had c.£7m invested directly in residential real estate loans and consequently we think that direct investment in loans backed by commercial real estate represents a natural progression and is consistent with their flexible approach to identifying attractive investment opportunities.

[eeza] 14/8/2012 09:39

The Divi is 1.7p - which is roughly 6% of 112p (Nav @ 30/6).

[jonwig] 14/8/2012 09:34

But NAV of 112p was at 30/06. It's now 119p (31/07) with a good chance of rising from there.

[deadly] 14/8/2012 09:24

Results look good and divi announced: £1.12 NAV and 1.7p XD 29th Aug.

[jaws6] 09/8/2012 10:34

dave
tks

[davebowler] 09/8/2012 10:32

Investec comment on similar Trust;
¢ We continue to like the loans and specialist debt theme and see this part of the market continuing to deliver strong levels of returns with lower levels of volatility compared with equities over the medium term. This will be particularly attractive in what will likely be a low to no growth environment and as senior secured loans rank higher than equity in the capital structure the risk profile also looks more attractive.

¢ We have provided much comment on the opportunity for specialist investors to take advantage of the deleveraging of bank balance sheets and the continued selling down of loan portfolios in the secondary markets by motivated sellers.

¢ One of the benefits of senior secured loans is the LIBOR linked nature of the paper, offering investors inflation protection. We are not concerned with a spike in inflation in the short-term as we expect LIBOR and EURIBOR to remain low, however this protection will be important in the medium to long-term and once LIBOR does start to pop, senior secured loan funds and LIBOR linked infrastructure contracts will become even more attractive.

¢ In the meantime, new senior loan issuance is increasingly coming to market with LIBOR floors so that coupons remain attractive in this low-LIBOR environment. In its portfolio update, AEFS comments on primary loan issuance: BSN Medical priced at E+500bp with a 100bp LIBOR floor, and Wood Mackenzie priced at L+575bp with a 100bp LIBOR floor. These higher yields reflect a smaller demand base as the traditional buyers of loans – banks and CLOs – are unable to commit as much capital as previously.

¢ We see the trend for opportunities in both secondary and primary specialist debt markets continuing which provides funds such as AEFS, which trades on a 0.15% discount with a 5.2% dividend yield, opportunities to pick up quality senior secured loan paper at discounts to par in secondary markets as well participating in new loan issuance, offering attractive risk adjusted yields to maturity.

¢ Other funds in this space include Henderson Diversified Income Fund (HDIV – currently trading at a 1.3% premium to NAV and providing a 6.2% dividend yield), HarbourVest Senior Loans Europe (HSLE – at an 8.4% discount with a 3.3% div yield), NB Global Floating Rate Income Fund (NBLS – currently at a 1.6% premium and paying a 5.3% div yield)

¢ There are also more niche parts of the specialist debt markets which investors should consider in addition to the mainstream senior secured loans, which tend to be secured on private equity owned corporates. These include real estate debt: Real Estate Credit Investments (RECI – trading at a 28.1% discount to NAV providing a 8.4% dividend yield) and Duet Real Estate Fund (DREF – on a 7.4% discount with a 4.4% div yield).

[jaws6] 07/8/2012 14:34

DB
on same email there is HPEQ note too with RECI .only if possible can you put here or on HPEQ from Lib

[jonwig] 07/8/2012 10:57

Yes, so did I. Slack of them, but it's quite common.

I see the prefs liability was mis-stated originally, but there were other errors.

To just maintain the discount, the shares should have been marked up by 4p to 5p first thing.

[oniabsta] 07/8/2012 10:19

e-mailed them about the discrepancy on the fact sht.
Have now corrected it.

[skyship] 07/8/2012 09:56

likewise - thnx as ever DB...

[cwa1] 07/8/2012 09:45

Cheers db, thanks for that.

[davebowler] 07/8/2012 09:30

Liberum;



This morning, RECI have announced an NAV per share of 119p as at 31 July (15 July: 112p), which represents an extremely impressive 6.3% increase over the second half of the month.



n The gains in the bond portfolio are attributed to holdings in the Titan 2006-4FS nursing home bonds which were repaid in full along with accrued interest. The manager also highlights gains attributable to a bond backed by commercial properties in the City of London, which saw a material repayment of principal as one of the underlying properties was sold.



n The manager highlights that real estate debt markets have a firm tone, following announcements of recent re-payments and refinancing and that he expects to see more opportunities to buy CMBS / RMBS bonds or invest in real estate loans directly with the £15.5m of cash held on balance sheet at 31 July.





Liberum View:



n In our view this represents an incredibly impressive NAV performance that brings RECI's year to date NAV total return to 21.6% and serves to underline the attraction of the asset class. We also think it reflects the managers' asset selection ability and stands as testament to the very detailed analysis of the underlying properties and the CMBS / RMBS structures and financing conditions that the manager and his team carry out.



n With the bond portfolio trading at only 60% of its face value and focused almost exclusively on the safer havens of the UK and Germany we believe there is significant potential for further NAV accretive repayments at par as underlying properties are sold and loans are refinanced.



n The shares are now trading on a 29% discount to the July NAV and offer a prospective 8% dividend yield. Whilst we would expect the shares to react positively to today's update, longer term we believe that this discount will narrow significantly as an increasing number of investors begin to appreciate the potential returns that the fund offers.

[jaws6] 07/8/2012 09:09

GOOD SPOT.Tks
RECP some one on bid at 96 ?