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RECI’s March Factsheet saw a 16.8p, 10%, fall in NAV to 147p per share, 10.1p of which was marked-to-market losses on the bond portfolio, which includes sentiment- driven sensitivity. The bond portfolio includes Italian exposure (primarily malls and cinemas in the North), which were valued well below par. Two loan exposures were written down – a UK housebuilder (effect £12.4m, -5.4p per share) and a retail park (£1.8m, -0.8p per share). Again, these losses have not been realised (yet). RECI announced a detailed review, assuming an extended recession. Net gearing is 13.3% NAV (cash £37m). Multiple directors have bought shares.

  • Liquidity: RECI has £37m of cash after paying its most recent dividend (£7m) and continuing FX hedging (£8.9m). The fact it did both is evidence of the confidence it has in its balance sheet strength. Repos funding is £81.7m (against bonds valued in the market at £86.5m), with net leverage of £45m, 13.3% NAV.
  • RECI can hold assets until markets improve: LTVs may currently be less robust than normal, as there is no certainty of buyers (RECI did not complete several deals itself). However, it is highly unlikely to be a forced seller, and can take time to re-structure deals and wait for more normal conditions to sell assets, if repossessed.
  • Valuation: RECI trades at a 24% discount to NAV, when normally it has traded at a modest premium. The discount reflects investors’ concerns (further losses may be incurred, whether pre-sold or pre-let development assets will complete), although it is worth noting that no senior positions have required any writedown.
  • Risks: Any lender is exposed to credit risks 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. Short term, investor sentiment may be an issue.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. In the medium term, 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 the ability to take time to realise assets make RECI lower-risk than the average debt investment.
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