Real Estate Credit Inves... Share Discussion Threads

[skyship] 09/3/2018 11:46

Kenny - hope you didn't seek income shelter in the insurance and bank prefs!

[kenny] 09/3/2018 11:08

As I posted a couple of months ago, RECI may struggle to earn the 1p per month, net of operating expenses, they need to pay the dividend. For February, that has proved to be the case.

I sold a few months ago to invest elsewhere but I do not necessarily think current holders should sell RECI. I only caution that the road ahead may not be so smooth if capital needs to be used to cover the dividend.

[wllmherk] 09/3/2018 07:45

Thanks Sky, nice and steady income payer,

wllm

[skyship] 09/3/2018 07:33

MONTHLY UPDATE:

• The investment portfolio has grown to £267.4m , with £11.8m of its existing loan commitments funded during the month, and a further £13.2m invested across three new issue bonds.
• NAV increase of 0.3p in the month, with strong interest returns being partially offset by a fall in unrealised / mark to market values on the bond portfolio due to wider market volatility.
• The Investment Manager expects to close on a number of new deals in the coming weeks.

[holts] 02/3/2018 09:19

No reaction to xd yesterday

[skyship] 08/2/2018 07:59

Good performance - NAV back up to 165.2p again:

MONTHLY UPDATE
• RECI NAV increase of 1.9p per share in January, taking NAV to £1.652 per share
• During the month, the Company committed £36.7m to two new loans, and funded £11.4m of its existing loan commitments
• A further £2.0m was invested in a new EUR CMBS bond
• RECI had a cash balance of £14.4m (representing 6.2% of NAV) at the month end, and had only utilised 16% of its 40% NAV limit in leverage
• This positions the Company well to continue to participate in the Investment Manager’s pipeline of deals in Q1 2018.

[skyship] 08/1/2018 07:58

Further growth of 0.66% in December:
===================================

Manager Commentary

# NAV as at 31 December 2017 was £1.633. After taking into account the 3.0p per share dividend declared on 1 December (which was paid on 5 January 2018), this represents an increase in NAV of 1.1p over the month

#RECI’s combined loan and bond portfolio has grown to £241.5m as at 31 December. During the month, the Company invested:
- £9m in a new senior loan to fund a mid-market residential development in Chatham, Kent, with an IRR of c14% and a day 1 LTV of c65%. The leverage ratio is expected to reduce significantly as the development progresses
- £6m in a new listed bond backed by a fully operational French hotel. The bond has an LTV of 50% and a yield of 6.25%.
- A further £4m drawn under existing loan commitments and the purchase of another new bond

# Taking the above into account, RECI has successfully invested over £46m in the quarter ended 31 December 2017

# Two loans fully repaid in December, returning over £7m to the Company. Both repayments were above the November carrying values and were accretive to NAV

# On 15 December 2017, RECI closed its fourth placing under its placing programme, raising gross proceeds of a further £20.5m for the Company. RECI has issued the full 65 million shares available to be issued under the placing programme and raised gross proceeds of £110m since February 2017

# Following receipt of the placing proceeds, RECI has a healthy cash balance of £34.8m (representing 15% of the increased NAV), which positions the Company well to participate in the Investment Manager’s pipeline of deals in Q1 2018.

[badtime] 18/12/2017 09:54

Having bought lower down my capital gain on paper is lower...but I'm getting the income I wanted and management don't seem that bad...it's a hold for me

[my retirement fund] 16/12/2017 18:20

I suppose theres room for the shareprice to rise a little brining the yield closer to 6% but it may take another 12 months of published results

[skyship] 16/12/2017 17:03

“Since redemption, RECI has replaced some of this Preference Share leverage, which carried a coupon of 8% per annum, with short term leverage at a significantly lower cost of borrowing (the weighted average cost being 1.35% per annum as at 30 September 2017). The Board believes that this, combined with the reduction in the Management Fee (which is only payable on net assets post the Preference Shares’ redemption), should enhance the risk adjusted returns and the overall yield of the Company. The Company continues to evaluate a range and combination of potential leverage options.”

The EPS for the 6months to 30/09/17 was 6.05p. The dividends were 6.0p. So effectively RECI paid out 100% of earnings. Going forward borrowing costs and management fees are lower; so the cover will be slightly improved.

The success of recent placings @ 166p & 167p suggest that the new shareholders will have been reassured on the earnings front during the roadshows.

So though I wouldn’t expect any near-term improvement on the improved 12p/annum running rate; nevertheless that 12p does look secure. The yield @ 170p = 7.06%. Happy with that.

[my retirement fund] 16/12/2017 11:36

I dont think there is need for panicky selling on the back of recent events although I can understand why some people feel unsettled including moi

[skyship] 16/12/2017 09:20

Kenny - will take a look; though initially I would make just two comments:

# The bonds bought at par just parks cash - effectively on deposit, but earning a good return

# You perhaps haven't allowed for the small element of gearing, which though at only 17.7% of NAV, nevertheless adds a meaningful revenue surplus when borrowed at 2% and lent @ 8%+. Remember the Weighted average yield of the loan portfolio is 11.2%; and the WA Effective Yield of the top bond holdings is 8.6% - all as per the monthly fact sheets:

[kenny] 15/12/2017 21:42

Skyship - that looks like a very convincing write-up but it is incomplete and has a very big factor missing in the analysis.

The missing important fact is that while expenses have reduced, the yields available on new loans have moved down because the historical good yield deals no longer seem to be available.

For example, in November RECI bought a number of bonds at par which yield an average of 5.8% - investing a total of £19.9m which is a not insubstantial sum of their total invested funds, about 8.6% of the company’s total interest earning funds.

The yield on the shares, for comparison purposes with earnings, is 7.26% being 12p divided by the latest NAV of 165.2p.

Therefore, even ignoring expenses, that is a chunk of their invested funds which is not earning its keep. It is bringing in 5.8% - before expenses - but the shares are paying out 7.26%.

Please do run the total fund net income after total expenses because there are loans earning a much higher yield (albeit expiring in 2 years, average) so one does need to consider the position for the whole company taking account of not only lower expenses but lower income.

Last time I ran the total calculation was some time ago and the position has changed. Look forward to seeing your figures.

[skyship] 15/12/2017 17:15

Kenny - I'll check that re uncovered dividend. In the meantime holders should be reassured by this extract from October's piece in the DTel.

As for RUSP - holders have done well thus far; but I wouldn't sleep well at night holding stock in Putin's kleptocracy. Certainly NOT one for me!

==============================================================

“We believe that the opportunity set available to RECI today, for the UK market, may be as compelling as that present in 2008 and 2009 in the immediate aftermath of the global financial crisis.”

The fund manager gave the example of one £20m loan in April. It was for just 40pc of the property value, with the owner and other lenders ranking behind RECI in the event of default – but the return is expected to be 8pc a year. This kind of figure is normally associated with highly risky assets, not secured lending on London property when other parties have to lose 60pc of the asset’s value before any impact is felt.

Across the £113m loan portfolio as a whole, RECI has lent about 69pc of the value of the properties concerned. The trust also owns about £50m in bonds backed by residential or commercial property. Some were bought below par value, which offers some limited scope for capital growth.

The trust currently yields a highly attractive 6.8pc but there are good reasons to expect that figure to rise to about 8pc or perhaps even more, said James Burns, who holds it in multi-manager portfolios he runs for Smith & Williamson.

“The trust used to have some expensive preference shares in issue, but they were redeemed last month,” he said. “These prefs cost 8pc a year but the fund manager expects to refinance at less than 2pc.

“The other change is that the management fee will in future be calculated as a percentage of net assets, not the higher gross assets figure. Taken together, these two developments could see the yield rise by between 1.5 and two percentage points, so it could reach 8pc or more at the current share price.”

[nerja] 15/12/2017 16:47

That large UT trade at the end at 167p may well mean a drift down below the issue price like last time , Kenny Russians dropped interest rates today so should help RUSP

[badtime] 15/12/2017 16:23

I'll carry on holding for now

[kenny] 15/12/2017 16:09

More important than the constant issue of shares, I am beginning to wonder if RECI are going to continue to struggle to earn an average of 3p per quarter net; to meet the quarterly dividend. Averaging the last 3 months, they just about made 3p in those 3 months but, importantly, those earnings include the effect of issuing shares at above NAV. Therefore in the last 3 months, in reality, they have not earned an average of 1p per month.

You cannot keep issuing new shares at above NAV so your earnings are flattered. Essentially, if you look at the yield on recent loans, those investments have not been at a high enough yield to produce earnings after costs averaging 1p per month. Nothing to say the yield on new investments will improve even if interest rates nudge upwards because their loan rates are not really related to base rate.

In essence, if future earnings are only just going to cover the dividend yield and for some periods not cover the dividends, there is no reason for the shares to trade at much over NAV. I appreciate people are desperate for yield – that might support the share price at a premium to NAV - but there are more risks below the surface with RECI than perhaps most investors appreciate.

After careful consideration of the longer term outlook I sold some weeks ago and reinvested in RUSP. I appreciate that RUSP invests in Russian warehouses but this class is preference so the yield is fixed, higher and very well covered by earnings. I think all the political and other risks, if any transpire, will be borne by the ordinary class: RUS and not the preference I am invested in.

I had held RECI for some years so it is sad selling the last of my holding of a share that had served me well for so long. However, I believe I have much less risk in RUSP (strange as that might sound!), my yield is higher, very well covered and, importantly to me, much more secure when comparing risks between the two investments.

[grahamburn] 15/12/2017 15:55

Well, for any doubters, they've met their target for both the Placing and the Tap Issue and have now confirmed that that is the end of dipping into the well.... for the time being, I guess.

[skyship] 15/12/2017 14:41

They risk taking the pitcher to the well a little too often - and why this:

"The Tap Issue does not form part of the Placing Programme. The new Ordinary Shares being issued pursuant to the Tap Issue are being issued under the Company's general authority to allot and issue equity securities contained in Article 5 of the Company's articles of incorporation."

Seems to be part of the Placing Programme as far as I'm concerned. Just what is the difference?

[nk104] 15/12/2017 13:15

Proposed placing of min £15m worth of shares at 167p

[grahamburn] 14/12/2017 10:20

And, so far, the share price has held up well.

[holts] 08/12/2017 17:47

However given the possibly very uncertain outlook perhaps extreme caution should prevail.