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Hardman & Co November Investor Forum – Registration open now

We gave a detailed review of RECI in our initiation, 7%+ yield from well-secured property debt portfolio, published on 28 August. In summary, RECI pays investors a high dividend yield covered by predictable income streams, generated by a diversified portfolio of real-estate-backed debt. Its credit record has been exemplary. In the report, we detailed the procedures that delivered this performance. The superior revenue yield is generated, inter alia, from service skills, one of many synergies obtained from having Cheyne Capital as the manager. Corporate governance appears robust. RECI is exposed to the credit cycle, some of its loan assets may prove illiquid, and the (modest) gearing is low-cost but short-term.

  • RECI news flow: On 1 October , RECI announced that it had placed 10.2m shares at 167p. The rise in NAV in September (£1.652 vs. £1.640) was due partly to a restructuring of one of RECI’s loans to a UK regional housebuilder, which enhanced RECI’s return. There are now 50 positions with an average 9.1% yield.
  • Peer news flow: ICG Longbow gave a portfolio update on 9 September noting that, when the latest expected loans complete, dividend cover will be restored. SWEF’s September NAV was 102.85p (August 102.18p), with £397m loans and £32m cash.
  • Valuation: RECI trades at a 0.8% premium to NAV, broadly in line with its secured lending peers, while its yield, at 7.2%, is the highest of its peers and above-average compared with debt investment companies. As we outline below, it is covered by predictable income streams and below-average downside risk from credit losses.
  • 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 re-investment risk. Some assets are illiquid, and Repos financing has a short duration.
  • Investment summary:  RECI generates an above-average, but sustainable, 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 controls) makes RECI lower-risk than the average debt investment
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