Real Estate Credit Inves... Share Discussion Threads

[skinny] 21/6/2013 10:29

Thanks for the update(s).

[skyship] 21/6/2013 10:03

DB - thnx for that...

[davebowler] 21/6/2013 09:38

Liberum

Real Estate Credit Investments (RECI / BUY / 143.8p) – Significant portfolio recycling

Highlights:

n NAV unchanged: NAV per share at 15 June 2013 was 154p (31 May 2013: 154p). The bond portfolio produced marginal gains of 0.07% in the first half of June.

n Portfolio recycling: RECI completed bond sales in the period of £13.2m (equivalent to 17% of the bond portfolio value at 31 May) at a weighted average price of 0.99 (27% above acquisition price). €10.4m of the proceeds were reinvested of new issue Class D & E secured on German multi-family properties.

n Market volatility offers opportunity: The recent bond market pullback is offering attractive investment opportunities and RECI currently has £6.4m of dry powder (10.4% of NAV) to invest.

Liberum View:

n As we highlighted at the time of the recently published final results on 7th June, RECI delivered exceptional NAV growth in FY2013 (+37%) and this progression has continued with a 3% increase post period end. We forecast double-digit share price total return of 15% over year to March 2014 and expect shareholders to benefit from a combination of discount narrowing and NAV growth as MTM gains and yield differentials tighten.

n RECI trades on a 6.6% discount to NAV (c6% prospective dividend yield) which is 9.7 percentage points wider than the average 3.1% premium for the real estate and asset-backed debt funds. BUY.

[skyship] 21/6/2013 07:27

Manager Commentary
• The Company has purchased €10.4 million of Class D and E new issue bonds backed by German multi-family properties
• RECI has made sales in the period of £13.2 million, sold at a weighted average price of 99 percent of par versus a purchase price of 78 percent of par
• Greater volatility in the bond markets will be an opportunity to make new investments at attractive entry prices

P/F Monthly Core NAV (in £m)...31/05/2013.. 15/06/2013
Investment Portfolio............ 103.5... 100.7
Cash and Cash Equivalents....... 3.7..... 6.4
Derivative Assets............... 0.8..... 0.9
Other Assets................... -....... -
............................... 108.0... 108.1

Other Liabilities............... (1.0)... (1.0)
Preference Dividend............. (0.6)... (0.7)
Ordinary Dividend............... -....... -
Preference Share Liability...... (45.0).. (45.0)
............................... (46.6).. (46.7)

Net Assets (est.)............... 61.4.... 61.4
Shares outstanding.............. 39,966,985 39,966,985
NAV/Ord. Share (est.)........... 1.54.. 1.54

[skyship] 19/6/2013 08:58

XD 2.2p today...

[davebowler] 18/6/2013 09:19

Relevant news re LBOW;
Highlights:

n One loan completed: Since IPO in February, LBOW has completed one transaction – an £18m loan to the Mansion Student Accommodation Fund on assets in Birmingham and Glasgow.

n £51m pipeline: There are 5 additional transactions under consideration at the moment with total potential advancements of £51m.

n NAV -0.3%: NAV has declined marginally (0.3%) since IPO to 97.74p. A dividend of c6% is expected to be paid once the company is fully invested.

n Management departure: Graham Emmett (responsible for sourcing investments and implementing the company's investment strategy) has left the investment manager and will be replaced by Trevor Holmes. Property Week recently reported that Mr Emmett is joining Cheyne Capital (the investment manager of RECI).

Liberum View:

n The pace of investment has been disappointing from LBOW with only 18% of assets invested to date in one transaction. The company will be 67% invested if all of the pipeline transactions come through. Management acknowledge that investment has been slower than planned but expects to be "substantially" invested within 9 months from listing which is slightly less than the original target in of being fully invested within 6-9 months.

n We do not have an official recommendation on LBOW but the shares appear expensive at the current 7.3% premium to NAV (vs. 3.4% average premium for the asset-backed debt funds) and expected dividend yield of 3.8% - 4.8% in 2013 (and 5.8% thereafter) and we see better value elsewhere in the sector.

[skyship] 16/6/2013 15:38

Zastas - might I ask you where you have allocated your RECP cash?

Being in SIPP drawdown mode I perhaps adopt a more cautious stance, so still hold my RECP. My highest allocations are to two liquidating stocks - ACD (hedge fund) & NRI (Private Equity Trust). They offer GRYs of c14% & 19% respectively. They have their own threads and I also include them on the SL thread.

[kenny] 16/6/2013 12:42

Tipped as a buy in Investors Chronicle - here's an extract:

RECI RECOVERY - WITH MORE TO COME
Tip Update Real Estate Credit Investments PCC Ltd

This was the year Real Estate Credit Investments (RECI), a portfolio of mortgage-backed securities (MBS) leveraged by preference shares, turned the corner. After a tough 2011, resurgent risk appetite towards high-yield debt boosted its net asset value (NAV) up by 36.5 per cent over the year to 31 March. Add in dividend payments - the company is committed to paying out 6 per cent of NAV - and the total return was an astonishing 43.2 per cent.
RECI's strategy is to buy MBS from deleveraging banks at a discount to their face value. It then waits for their market value to rise or, failing that, holds them to maturity, when they can be redeemed at par. The discounts now on offer are not as generous as a year ago, but remain substantial for lower-grade bonds, reports fund manager Shamez Alibhai. At the end of May, the MBS portfolio had a trading value of £78.2m - 21 per cent below face value of £99.4m.
The fund also issues its own mortgages - a business it has been expanding as MBS discounts have diminished. The most recent deal was a €5.8m loan backed by German apartment blocks that is expected to return more than 15 per cent.

Ex-div: 19 Jun
Payment: 12 Jul

SHARE TIP UPDATE

RECI's shares trade at an 8 per cent discount to the end-May NAV figure of 154p. Given the generous and growing income stream, the inherent value in its portfolio and the potential for a further share price re-rating - other mortgage funds trade at a premium - we reiterate our prescient buy tip (88p, 9 May 2012). Buy.

[zastas] 13/6/2013 11:08

RECI holding up well. I have still all shares I have owned since 2008/9.

But I have sold recently all my RECPs. Nothing wrong with them, but I am not yet in annuity mode. And I sensed that sooner or later, maybe still much later, we are going to have higher yields/interest.

Too still have ERII, which is the star of the trio. Just another 3 cent divi announced.

[valhamos] 12/6/2013 16:09

Kenny

Catching up on the last few days posts - thanks for the Tweedy report on high yields and the Liberum note on RECI. The conclusions of the Tweedy report were interesting - suggesting a high yield strategy is better with investments that also have good asset backing and low payout (which equals good dividend cover, in other words low PE (or high earnings yield)). So companies like CLLN (which has the 'double 7's - 7% div and PE of 7) rather than the old favourite high yielders such as the utilities which have high payout and little opportunity for reinvestment growth.

RECI still on a discount, has both asset backing and good dividend cover. The bear case is valid only if there is to be a serious reduction in the performance of underlying properties and further reduction in property prices. LTV still look reasonable and as pointed out in the Liberum note lower than pre-2008.

[kenny] 12/6/2013 00:39

This paragraph states the position on MBS compared to high yield:

"The outlook for bonds remains positive as pricing inefficiencies in the market continue. Yields on European real estate bonds remain double those on European high-yield bonds. The investment manager expects this yield differential to tighten in the medium term, resulting in substantial mark-to-market gains."

hxxp://www.propertyfundsworld.com/2013/06/07/185505/reci-reports-profit-gbp19m

[yieldsearch] 11/6/2013 21:05

Also to mitigate market risk reci used to have credit protection by buying itraxx main contracts (i wrote used to, need to check if they still hold and size). If credit markets are down, these contracts will increase in value and would mitigate to some extent decline in nav. To my knowledge none of the others ( tfif, lbow , dref, starwod debt fund etc) have done this risk management , and those will take a larger decline in nav as they also trading above nav....

[kenny] 11/6/2013 19:53

Erstwhile2 – I appreciate, from your previous postings, you are not a fan of RECI. You make a valid point about what happens if the company's bonds "crash" in value. I guess the answer depends on whether you are an investor or not.

A negative movement, a correction, in bond prices could lead to RECI's share price going down. However, because RECI's historic bond portfolio is on a 21.3% discount to par, I would question how far the bonds will fall.

Alternatively, let us assume a more serious "crash" occurs then I agree that RECI's share price will go down but so will all other shares. Unless one is an expert in market timing and happy to sit in cash for long periods, I guess one has to expect market crashes from time to time as a part of investing. Some experts say that over a lifetime of investing one should expect 3 market crashes (than means I have had my full quota!).

In either of the above scenarios, bear in mind that RECI still maintains EPS of 17p per annum so the dividends of 2.2p per quarter are secure. Also, what about the resulting opportunity for the company to invest buying cheaper bonds or are you anticipating never-ending gloom? Also, bear in mind RECI only buy bonds/loans they anticipate will eventually redeem at par; having made their own valuation of the underlying property.

In relation to CMBS and RMBS pricing, I found it useful to listen to the company's recent results presentation (available on the company's website). That highlights that although UK/European MBS has re-priced upwards since 2008, it has not done so nearly as much as high yield and other bonds. My research confirms this – a lot of high yield has re-priced to above par albeit for MBS it is a lot more difficult to research market pricing. It is for every investor in RECI to judge whether that provides an extra layer of protection in a crash type of event. I am comforted by the fact that high yield is above par - and currently going down from there - whereas RECI's bonds, whatever their future movement, are not starting from a position of being valued at par or above.

Your posting also hints at an important issue which I would describe as "what is your plan in the event of a market crash". I have learn it is vital to have a plan, at all times, for a market crash even though they seem impossible to predict. My plan in a market crash is to sit it out with RECI and my other dividend paying investments and add to them when new funds are available. I am certainly not clever enough to use market timing to avoid a crash – as I have demonstrated by being "caught" in the 1987 crash, the 2000/01 crash and the 2007/08 crash.

Experience (which has been expensive) has taught me not to use gearing in making investments and not to panic and sell. What is your plan for a market crash? I have no idea when the next market crash will occur, but if you are convinced a market crash will occur in the next 6-12 months, how are you positioning your portfolio?

[drewz] 11/6/2013 18:51

Thanks, got it.

It looks like they have a 12 month target price of around 170p then.

I am looking for somewhere relatively safe for some SIPP money if, as reported in certain quarters, the general market may be due a serious correction sometime over the next 6 months.

[kenny] 11/6/2013 18:28

drewz - I should have made it clearer above - via RECI's website at hxxp://www.recreditinvest.com/

[drewz] 11/6/2013 18:09

- doesn't have any section for 'investors' or 'analyst coverage'.

So where should one look???

[kenny] 11/6/2013 17:29

My mistake - it is a report by Liberum on 28 February 2013. Go to the company website. Then 'analyst coverage' under 'investors' in the drop down menu. On that page go to 28 Feburary and under that there is a link to the full report by Liberum - 15 pages.

[grahamburn] 11/6/2013 17:14

Kenny. You mention an Edison Research Note. Can't find it instantly on their website (by going to "R" section of their company section). Any clues, please?

[kenny] 11/6/2013 17:00

A rather muted response in the share price since the annual results were announced. For the year to 31.03.13, EPS excluding gains on bonds were 16.85p. Therefore Edison's projection of EPS of 17.4p for the current year is not excessive. If the dividend is maintained at 2.2p per quarter, rather than being increased further, the dividend will be twice covered.

All of the above figures assume no gains on bonds and if those bonds ended the year to 31.03.14 at the same value as the beginning of the year, at a current share price of 147p, RECI would be trading on a p/e ratio of 8.45 (with a net asset value of 157p). The combination of RECI trading on a p/e of less than 12 and below NAV suggests a compelling value situation.

Of course, if the bonds continue to improve in value then who knows what total earnings for the year will be. Bond gains are unlikely to match the 31p of gains in the previous accounting period but even if they were 12p over the year, we are still looking at a NAV of 169p at 31.03.14 after deducting 8.8p of dividends. I would be quite content with that outcome!

What is important and perhaps not fully appreciated by Mr Market is that EPS of about 17p are more or less baked in for this year, same again the following year and the year after that and so on. To the extent that market yields reduce, bond prices will rise. So RECI - with its historic portfolio accumulated at well below par (unlike new funds recently launched) - is compensated by realising higher gains on sale of it's existing portfolio. That larger capital sum is then reinvested into lower yielding bonds. This, in theory, should mean that EPS are more or less baked in (they will actually rise slightly every year because of the effect of retained earnings but I have ignored this for the purposes of demonstrating the point).

Edison has issued a short term price target of 157p at March 2014. I think that is far too conservative, my target over the same short period is 170p, which is based upon a p/e ratio of 10.

All of the above is my personal opinion, please DYOR and do not rely solely on my views.

[kenny] 09/6/2013 13:43

Here's some research on high dividend yield advantage which is an interesting read:
hxxp://w.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf

[valhamos] 09/6/2013 10:41

Hi jonwig

"not so much dividends as dividends re-invested. Hence compounding"

Thought that would be the case - my own experience 20% allows for a rough calculation of the effect of compounding (dividends for a number of years barely covered transaction costs, over half of all dividends received in the period have come in the last 4 years, so the compounding effect so far has been small).

[jonwig] 08/6/2013 08:11

Valhamos - possible source is from the annual Barclays gilt-equity studies. The point, though, is not so much dividends as dividends re-invested. Hence compounding.

[valhamos] 07/6/2013 20:18

Kenny

"After all, long term records show that 70% of the return from investing in stock markets comes from dividends."

That's an interesting statistic. For me over the past 17 years dividends have been less than 20% of total return. Inevitably in the early years I was concentrating on capital gains (to build the pot as well as to take advantage of the more favourable tax treatment at the time), but I'm also thinking that this period may not have been typical (too many asset/debt bubbles) and that we are likely to revert to the long-term trend with an increased focus on dividends.

I'm also trying to create space for a few higher yielding investments in the portfolio. So this and GLIF at the moment, having sold GACA and PCTN in April and May.

A while back I read the recent months' posts on this thread; many thanks for the informed comments from you and others. These sort of stocks can take some grappling with to understand - always good when others have done a lot of the hard work.

[kenny] 07/6/2013 16:42

Valhamos;

Advice from the experts over the last few weeks - following the Fed's indication that QE may be scaled back - was to dump your high yield stocks and buy growth stocks. And a surprising number of people, including fund managers, followed this advice selling off dividend paying stocks. My question is; where is the growth, because cyclical stocks are not increasing their top line only their bottom line; and that by cutting costs.

I am totally wedded to my dividend stocks - RECI is my biggest holding - and even when the Fed does start cutting back on QE, followed by raising interest rates, I am staying put for the dividends. Fortunately, I have chosen stocks that are on modest p/e's so there is protection in that when we have a booming economy. Whatever the "noise", I think it is going to be another 5 years, maybe 10 years, before interest rates are back to normal. It seems silly to be "scared" out of a dividend yield of 6% when that would be no less than the interest rate in normal times.

My prediction - note that I am hopeless at prediction - is that all the "experts" will rotate back into dividend stocks over the next few weeks or months - great money for the market makers and fees for clever fund managers but it would be totally daft (and expensive) for an ordinary investor like me to get involved in chasing the latest trend - not least a trend based upon a few words from the Fed Chairman which indicate a policy change that must occur albeit at some future unspecified date. When it occurs, I am quite content to hold a share like RECI in the period of adjustment into and in a normal economy. After all, long term records show that 70% of the return from investing in stock markets comes from dividends.