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In our 18 January 2021 note, Portfolio repayments fund enhanced return pipeline, we noted the key considerations were i) RECI’s asset selection and management make it defensive to recessionary risks, ii) its customer base is robust, with £100m+ interest and principal repayments since March, and iii) lower-risk, higher-margin new business is available, as mainstream banks remain cautious. This has led to stable dividends, with a yield of 8.4%. If investors anticipated the recovery in bond MTM or a housebuilder writeup, it would be a trigger for the discount to close further, or the shares to go to a premium to NAV, in line with RECI’s January 2020 rating.

  • End Dec quarterly update: On 27 January, RECI published its quarterly update, noting i) low LTV credit exposure, ii) stable dividends in income-starved world, iii) highly granular book, iv) transparent and conservative leverage, and v) access to established real estate investment team and substantial pipeline at Cheyne.
  • Portfolio summary: At end-December 2020, the portfolio had 59 positions, with an average LTV of 65%. The 29 loans (£311m fair value) had an unlevered yield of 9.1%, a weighted average life (WAL) of 1.9 years and LTV of 68%. The market bond book had a yield of 7%, WAL of 3.5 years and a lower LTV (51.9%).
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 4% discount to NAV, when it has regularly traded at a modest premium. RECI has continued to pay its annualised 12p dividend, generating a dividend yield of 8.4%, which is expected to be 1.14x covered by earnings.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. Its average LTV is 65%, and most loans are senior-secured, providing a downside cushion. Some assets are illiquid. In the short term, investor sentiment could be an issue.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Management has confirmed no change to dividend policy, showing its confidence in its sustainability. Bond pricing includes a discount, reflecting uncertainty, which should unwind when conditions normalise. Market-wide credit risk is currently above-average, but RECI’s strong liquidity and debt restructuring expertise should allow it time to manage problem accounts. Borrowers, to date, have injected further equity into deals.
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