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RECI announced its full-year results to end-March 2021 on 24 June. The NAV had previously been announced (and updated to end-May since), but the report and accounts gives more details on profit and loss items, strategic objectives (including ESG) and the portfolio. The key message remained the same – a stable FY’21 12p annual dividend paid from a portfolio showing considerable resilience through COVID-19. We have introduced 2023 forecasts with further asset growth (assuming the shares revert to their pre-COVID-19 premium to NAV and there are equity placings), further modest recoveries of pandemic writedowns and a steady appreciation in the NAV per share.

  • End-May factsheet: In May, NAV was up 1.3p, with 1.1p of interest income and 0.2p of MTM gains. Cash was £39.8m, gross debt was £94.3m and net debt was 15% of NAV. RECI invested £2.4m in April. New term financing was agreed in May against a London property and a further term funding is expected in June.
  • Portfolio summary: At end-May 2021, the portfolio had 61 positions, with average loan to value (LTV) of 65%. The 29 loans (£314.5m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.5 years and LTV of 68.5%. The 32 market bonds’ levered yield was 9.8% (unlevered 4.3%), with WAL of 3.6 years and 51.3% LTV.
  • Valuation: Despite a strong share price recovery from mid-May 2020 lows, RECI still trades at a 5% 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 8.2%, which is expected to be covered by earnings.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. As noted, 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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