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Upcoming Event | Hardman & Co: Bank North management presentation and Q&A

RECI, in 2021, and beyond, has significant opportunities from new investments at materially wider spreads than have been seen in recent years. The commercial real estate lending market has been one of the slowest to recover, reflecting mainstream banks’ lack of appetite to lend. A specialist business like RECI can cherry-pick the best business opportunities, on improved security, and still earn higher gross returns than before. RECI has a proven track record in optimising returns from problem accounts, which should limit downside risk. RECI’s NAV includes the sentiment discount in the market prices of bonds – ones where RECI expects full interest and principal payments.

  • Why banks are unwilling to lend: Banks have historically seen large losses on commercial real estate (we explored, in detail, in our RECI initiation, why its model is fundamentally different). In periods of uncertainty (what will office demand be post-pandemic?), their first instinct is to withdraw, leading to wider spreads.
  • RECI’s skill in recoveries: Our initiation detailed how RECI accesses and monitors credit differently from banks. Over the next two years, managing problem accounts will also be a critical competency. RECI has a proven track record showing restructuring skill, flexibility and a focus on optimising return.
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 10% 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 nearly 9%, 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 67.7%, 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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