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From RECI’s 20 March market update and its end-February Factsheet, we note the following: i) the 53-position investment portfolio is focused on senior lending, with a weighted average loan-to-value of 65% and a short duration (1.3 years); ii) cash of £60m, 16% NAV, nearly covers total debt financing £97m.; iii) higher-risk (Italian and hotel) exposures have been reducing; and iv) a wide diversification by geography and sector. We expect the book to be managed in conjunction with borrowers and over the long term. Even if security is enforced, RECI’s permanent capital structure means it can take time to sell assets and is not forced into disposal at sub-optimal prices.

  • COVID portfolio exposure: The end-February factsheet provides a detailed breakdown of the portfolio. The key messages are as above. In terms of risk, Italian exposure has fallen (now exposure 5%, one seventh of the discount to NAV and nearly all in bonds), and we understand some hotel exposures have been sold.
  • COVID – liquidity: The Repos facility is secured by bonds and this has seen some margin calls as the value of bonds offered as security fell and so more bonds had to be offered. However, the scale is modest in relation to cash holdings, the current bond liquidity and the relatively defensive nature of the portfolio.
  • Valuation: RECI trades at a huge 30% discount to NAV, when normally it has traded at a modest premium. Given the cash holdings/short duration of lending relative to borrowings, the reduction in higher risk assets, the nature of security and the fact RECI is a long-term investor, such a discount appears anomalous.
  • Risks: Any lender is exposed to the credit cycle and individual loans going wrong. We believe RECI has appropriate policies to reduce the probability of default and the loss in the event thereof. The book is relatively short, creating reinvestment risk. Some assets are illiquid, and Repos financing has a short duration.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. It should deliver this return with a relatively modest correlation to equity and bond markets. For property investors, there is less downside risk than in direct real estate exposure. To debt/fixed-income investors, the presence of physical security (and excellent management control) makes RECI lower-risk than the average debt investment.
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