Real Estate Credit Inves... Share Discussion Threads

[skinny] 22/5/2013 10:15

Thanks for the update.

[davebowler] 22/5/2013 10:10

Investec;
The manager reports continued strong performance in the bond portfolio with mark to market gains of 0.40% in the past two weeks, with May on track to become the 12th consecutive month of growth in the bond portfolio.

¢ Healthy pipeline of potential loan investments backed by German and UK property.

¢ The investment portfolio is now valued at £102.0m, with a further £4.9m in cash and derivatives.

¢ There was relatively little trading activity in the first two weeks of May, with bond purchases of just £40.2k and no sales made in the period. The purchases were made at a hefty 68% discount to par so that the average effective yield on bond purchases made between 1 May 2013 and 15 May 2013 was 20.0%.
¢ RECI has produced a NAV total return of 11.7% year to date and we see further value and capital upside available in the bond portfolio as bonds are marked to market and currently held at a 23.8% discount to par.

¢ The manager invests in property backed bonds with the expectation that RECI will get par back as and when bonds mature. A key member of RECI's investment management team at Cheyne Capital is a RICS qualified valuer and emphasis is put on doing their own valuation work to ensure real LTVs within the portfolio are not stretched and par may be achieved.

¢ We continue to like the real estate backed debt space and consider RECI shares attractive. RECI's manager opportunistically buys and sells property backed bonds in secondary markets and can apply portfolio protection through hedges. Direct real estate backed loans may also be made, an example of which was RECI's €5.8m loan investment made in April 2013, which is backed by German multi-family properties, with an expected return in excess of 15%.

¢ The shares currently offer a double discount opportunity as not only is the underlying bond portfolio held at a discount to par but the shares trade on a 6.6% discount to NAV

¢ RECI offers a 6.4% dividend yield (it pays out 6% of NAV per annum). We expect the shares to go ex-div the next quarterly dividend in the first week of Jun

[kenny] 21/5/2013 21:26

Zastas, sorry to hear that! I guess you have a valid reason to sell!!

[zastas] 21/5/2013 20:31

Kenny,

They may need to pay for divorce!

[kenny] 21/5/2013 16:58

I really do not understand why people are selling shares in RECI. It is trading below NAV of 151p and has a good track record. Funds that invest in similar bonds and have recently come to market - like TFIF, LBOW and SWEF - are all trading above NAV and have a track record of under 12 months.

RECI's potential dividend yield is now above RECP; the preference shares. Just wish I understood why people sell excellent investments like RECI - I guess I would be wealthy if I did!

[gary1966] 21/5/2013 11:38

Skyship,

No still 2 week cycles but not exactly two weeks. Not much happened over the last two weeks and NAV still 151p.

[skyship] 21/5/2013 08:07

Ah - have they decided to report monthly rather than fortnightly? Missed that...

[gary1966] 21/5/2013 07:48

So it was. Need to move my head away from two week cycles. Thanks Pejaten.

[pejaten] 20/5/2013 21:03

It was out on 22nd last month

[gary1966] 20/5/2013 12:10

Due another fund factsheet. Surprised it didn't come out on Friday and will be disappointed if we don't see it today.

Edit:Looks like I am disappointed then.

[pillion] 17/5/2013 12:11

Real Estate Credit Investments will be announcing its results for the year ended 31 March 2013 on Friday, 7 June 2013

[davebowler] 17/5/2013 11:42

The NAV of TFIF -a similar fund- as at 14 May has moved up quickly, by 2%, over less than a month.

[skyship] 17/5/2013 09:01

YS - both RECI & ACD were bizarre omissions from Leonora Walters' otherwise excellent IC article - excellent mainly because it dealt with such a relatively off-piste subject. I remonstrated with her in the comments section beneath the article - she ducked the issue...

[kenny] 17/5/2013 00:19

Yieldsearch – everything you say seems soundly based and logical.

Most journalists do not seem to understand RECI – it is too much hard work! My current view is that RECI will wind up because it is a very small fund compared to the other funds Cheyne are managing. There have also launched at least 3 new funds in the last 18 months which are all now a lot bigger.

I do think that eventually RECI will move to trade much closer or above its NAV. These things sometimes take a lot longer than would appear logical – especially when compared to new funds, which seem to have a big marketing machine to draw in new investors e.g. the investors chronicle article. If RECI keeps adding a penny or three to its NAV every month, then it will eventually be noticed and, perhaps, all of a sudden it will move up. You heard it here first!!

Another important point to bear in mind is that RECI has a pool of potential pull to par money of 64p per share – new entrants do not have this potential. That combined with the fact Cheyne seem to be able to source higher yield investments should ensure that, over the long term, RECI out performs the newer funds.

Perhaps the RECI share price has to first consolidate its move up over the last 9 months, with all short termers being flushed out, before it makes its next move up. The US MBS market and US based MBS funds appear to have closed the gap to a much greater extent, so perhaps we will eventually follow the US market.

[yieldsearch] 16/5/2013 22:48

Kenny /Sky
Given that now a larger portion of the pool is par assets (loans), the nav potential for increase will be reduced. also fair to say that bond cash price has increased and therefore pull to par is limited.. Any bond currently at large discount is either very long dated (pull to par over a long time) or at risk of principal loss (unlikely here).


RECP refinancing: I dont have any concern with the recp repayment. Most likely issuance of new one ( would love the same coupon!) and at worst the vehicle could sell liquid assets (abs / bonds) to repay the recp. Bearing in mind the corporate "high yield" market is now below 5% and recp is equivalent to a senior debt on a portfolio of assets, people should be queuing to provide refinancing of the prefs!


NAV: it doesnt make sense to me to see reci with a excellent track record trading at a discount when lbow swef and others new entrants with limited track record in the uk market are trading above nav (and currently some of them struggling to actually source assets and sitting on pile of cash)

Most likely reci will become overtime a good mix of real estate loans, some abs/cmbs and high yield bonds like annington. I would say an hybrid between SWEF and TFIF, with the benefit of investing in multiple market (abs and loan and bond) when others can only invest in a single sector.

I saw recently an investors chronicle article on the benefit of debt funds, floating rate interest likely increasing overtime etc etc.. all the companies were quoted except reci/recp... I guess not only Mr Market but also journalists are also reluctant to recognise historical performance it seems

[skyship] 16/5/2013 07:36

Kenny - the share price is likely to stay at a discount rather than moving to a premium unless or until the Company clarifies the future position post repayment of RECP.

If liquidation is confirmed, then I for one would be back in...

[kenny] 16/5/2013 01:19

I am hoping that in the annual results for the year to 31.03.13, RECI will highlight the exceptional gains in NAV that it has achieved. In that year, NAV has increased from 110p to 149p per share after paying a total of 5.7p in dividends.

That is an aggregate increase of 44.7p in 12 months, or a 40.6% increase in NAV in percentage terms based upon a starting value of 110p. An absolutely stunning performance and the returns over the next 12-24 month are likely to continue to be outstanding albeit at less than 40% per annum.

The broker Liberum is predicting a total return of 17.4p over the 12 months to 31.03.14, comprising 8.4p of dividends and 9p of NAV gains after taking account of those dividends. That is a 12% return in a year, which would be a very good outcome, not least when compared to other loan funds that have launched recently which are projecting 7-8% of annual earnings.

There is also the possibility that the 'pull to par' will produce higher returns – currently, there is 64p per share of potential value that could be realised; being the difference between current market value and nominal face value of the bond portfolio.

In summary, there is lots of inherent value in the existing portfolio that may be partially realised over the next two years or so - as well as any "new" value management can add through judicious "churn" of the portfolio. For longer term holders, like me, there is also the potential of a wind-up in late 2017 to ponder; such a transaction potentially crystallising the inherent value that Mr Market currently seems reluctant to recognise in the share price.

[kenny] 13/5/2013 18:44

Late reported purchase of 62,000 shares. Interesting!

[davebowler] 13/5/2013 15:13

Here is TFIF's up to date portfolio breakdown;

[skyship] 07/5/2013 09:48

May also be further upside from the Annington bond:

[davebowler] 07/5/2013 09:13

Investec;
The bond portfolio represents 76% of the investment portfolio and has been delivering consistent portfolio performance through regular coupon payments as well as the spread tightening resulting in capital value increases over the last year.



We see further capital upside available for RECI's bond portfolio as its bond portfolio pulls to par. The bonds purchased during April at a 48% discount to par are a stark example of the value still available in real estate asset backed markets. As previously mentioned Cheyne takes positions in bonds with the expectation of being paid back at par as and when the bonds mature or repay. A key member of RECI's investment management team at Cheyne Capital is a RICS qualified valuer and emphasis is put on doing their own valuation work to ensure real LTVs within the portfolio are not stretched and par may be achieved. The weighted average LTV on the top 10 portfolio positions is 60.5% with an effective yield of 12.4%.



At the aggregate bond portfolio level, RECI has positions in 88 bonds with a total nominal face value at par of £102.3m. The fund marks all bonds to market and the current market price of the bond portfolio is £76.6m so there is potential for 33.5% capital upside if the all the bonds repay in due course at par.



Real estate backed loans

RECI has been growing its loan portfolio over the last six months, with direct property loans now accounting for 24% of the investment portfolio. RECI now has four loan positions, with a total fair value of £25m. The weighted average yield of the loan portfolio is an attractive 14.1% and the underlying properties are not overly geared, with a weighted average loan to value of 65.5%, ensuring an attractive risk/reward profile.



Much of the loan exposure was increased in the final quarter of 2012 when RECI added two loan investments. The first was a four-year term loan backed by a London office property with a 66% LTV and the second loan was backed by a London prime hotel property with a loan to value of 68%. In April, RECI made a €5.8m loan backed by German multi-family properties with an expected return in excess of 15%. The other loan in the portfolio is backed by a portfolio of commercial properties in the Netherlands.



The manager comments that it is seeing a healthy pipeline of potential new loan investments and we would expect this part of the portfolio to grow over time.



In conclusion

We like the real estate and asset backed debt space and continue to consider RECI shares as highly attractive with good yield credentials as well potential for further NAV upside. RECI provides a differentiated investment approach to recently launched pure real estate loan funds as the managers opportunistically buy and sell property backed bonds in the secondary markets and apply portfolio protection through hedges, as well as providing direct real estate backed loans.



RECI ordinary shares have a dividend policy to pay out 6% of NAV per annum. On that basis the shares currently yield 6.3%. The shares currently trade on a 4.3% discount to NAV. We view RECI shares as attractive and would be unsurprised to see the shares trade up to a premium to NAV considering the quality of the portfolio and income stream as well as the future capital growth potential.

[kenny] 03/5/2013 11:24

Today's announcement shows, once again, that Cheyne really seem to be able to access very good deals as well as make well timed sales of bonds.

I am guessing that the next quarterly dividend will be raised to 2.25p, putting the shares on a 6.25% yield - which is not available on loads of other investments.

With NAV at 151p and likely to continue to increase (by an average of 2p per month?), I am at a loss to understand why people are selling their shares at 143.5p. There is a large buyer(s) who has been soaking up all the sales over the last few weeks. I am sure they cannot believe their luck in being able to buy a 6.25% yield on a 5% NAV discount - with the added bonus that the discount to NAV is only likely to increase over time and, longer term, with the possibility of a wind up in late 2017.

[rogerbridge] 03/5/2013 10:02

Still holding RECI

[wirralowl] 03/5/2013 09:58

Thanks DB, skyship/Gary1966 - makes for good reading.

[davebowler] 03/5/2013 09:33

Liberum
Highlights:

n 0.8% NAV uplift: RECI's NAV per share at the end of April was 151p (+0.8% in the month) with growth driven by m-t-m gains in the bond portfolio.

n 1.75% bond portfolio growth: The bond portfolio benefitted from strong m-t-m gains in the Annington UK Housing bond and the Four Seasons Health Care bond.

Figure 1: Monthly bond portfolio performance (Jan-12 to date)

Source: Company data

n Loan investments to increase: Loans now account for 24% of GAV after a €5.8m loan investment backed by German multi-family properties. Further loan investments are expected in the short term.

n Capital rotation: Management continue to crystallise gains in the portfolio with €0.85m of sales (at 0.97 vs. a purchase price of 0.75) and €0.68m of acquisitions (at 0.48).

Liberum View:

n RECI's consistent NAV growth continues with the bond portfolio driving gains. The bond portfolio has delivered positive m-t-m performance in 15 of the last 16 months (see figure 1).

n We like the portfolio's growing exposure to loan investments and we believe RECI is benefitting from the manager's differentiated origination through their position as the largest dedicated manager of mortgage backed securities in Europe. The 4 loans now offer an average yield of 14.1% and the average LTV is 65.5% on high quality assets.

n We conservatively forecast 15% total shareholder return over the period to March 2014 and there is significant upside risk to our numbers from further spread compression.