Last checked at 
17 Jun 2016 07:00
Real Estate Credit Investments PCC Limited
Financial Results Announcement for the Year-Ended 31 March 2016
RECI records net profit of £8.5 million and NAV total return of 7.2% over the year
· Taking dividends into account, the NAV total return per share was 7.2% in the year ended 31 March 2016
· The Company's commercial and residential loan portfolio has continued to grow to £113 million drawn with £120 million committed as at 31 March 2016, which is a 32% increase from the £87 million of drawn loans as at 31 March 2015. This reflects the continuing attractive opportunities Cheyne Capital Management (UK) LLP (the "Investment Manager") continues to see in the loan markets
· The Company's weighting of its portfolio towards higher yielding loans rather than bonds has proved beneficial
· The directors of the Company are pleased to declare a dividend of 2.7p per share in respect of RECI Ordinary Shares for the quarter ended 31 March 2016, and a special dividend of 0.8p per share in respect of RECI Ordinary Shares for the year ended 31 March 2016
RECI Key Financial Data | Y/E 31 Mar 2015 | H/E 30 Sept 2015 | Y/E 31 Mar 2016 |
Gross Assets | £162.9m | £165.7m | £163.4m |
Loan Portfolio (excludes accrued interest) | £87.1m | £108.3m | £113.3m |
Bond Portfolio (excludes accrued interest) | £59.4m | £43.9m | £39.6m |
Cash | £8.1m | £2.0m | £5.4m |
Operating Income | £15.8m | £9.0m | £17.7m |
Dividends declared/paid per Ordinary share | £0.108 | £0.054 | £0.108 |
Net / Profit* | £13.8m | £4.1m | £8.6m |
Net Asset Value per RECI Ordinary Share | £1.623 | £1.625 | £1.632 |
* Net profit takes hedging, operating and finance expenses into account.
Over the year RECI's flexible investment strategy continued to deliver positive shareholder returns with stable dividend yield
RECI continues to pursue a flexible investment strategy allocating its assets to both the loan and bond markets, so that the portfolio is balanced to capture the opportunities in higher-yielding loans whilst taking advantage of the liquidity and ability to mitigate cash drag offered by the bond markets.
The drawn fair value of the loan portfolio has increased from £87 million at 31 March 2015 to £113 million as at 31 March 2016. During the year, RECI made four new loans with commitments of £17 million. Since 31 March 2016 RECI has invested a further £4.3m in loans. The Investment Manager's new loan origination pipeline remains strong with further new loans in documentation.
RECI delivered a positive financial performance in the year ended 31 March 2016 with £17.7 million of operating income and £8.6 million of net profits. Bob Cowdell, Chairman of the Company said: "The robust NAV performance over the last year, notwithstanding the uncertainty in World markets in the first quarter of 2016, and payment of an attractive dividend continue to reward our Shareholders. While the outlook for markets generally remains challenging, requiring a disciplined and flexible approach to securing appropriate investment opportunities, your Board remains confident that the Company can continue to deliver attractive returns for our investors."
Outlook
RECI's loan portfolio benefits from a number of attributes, with a focus on core Europe (UK and West Germany), combined with defensive capital characteristics and backed by well structured documentation. This has positioned the portfolio against recent volatility in European real estate markets.
The performance of the Company's bond portfolio remains supported by the amortisation and high coupon receipts, despite the relatively disappointing performance of the wider markets during the year ended 31 March 2016. Ultimately, the long term performance of the bond portfolio will depend on the credit recovery from the underlying assets, and in this regard, the underlying asset performance backing the Company's bond portfolio remains resilient. The Investment Manager also remains well-placed to participate in new issue bonds at attractive yields.
The first quarter of 2016 saw significant market volatility across most asset classes and geographies. March has seen some improvement in sentiment. However, given the continued significant number of events and uncertainties in the global economy (UK Referendum, US elections, China's credit bubble, emerging market growth, European banks etc.), the Manager's view is that volatility is unlikely to abate anytime soon. Volatility in liquid markets and uncertainty have helped keep global rates low for the last five years. It is difficult to see a sustained catalyst that will cause rates to be pushed up significantly in the immediate future. In this environment, the real estate credit markets (for core, defensive assets with long term income generation capability) continue to benefit from the search for defensive yield generating asset classes and persistently low rates.
The Investment Manager's real estate debt team remains well resourced across 13 professionals and has plans to strengthen this further. Cheyne expects to continue to close more loan transactions in the coming months, and based on the Investment Manager's strong reputation of delivering financial solutions across the capital stack in innovative structures, at compelling pricing for both borrowers and investors.
Further Information
A results presentation will be available on the Company's website:
www.recreditinvest.com/investmentmanager
For further information please contact:
Investor Relations: Nicole von Westenholz (Cheyne) +44 (0)20 7968 7482
Broker: Richard Crawley (Liberum Capital) +44 (0)20 3100 2222
About the Company
Real Estate Credit Investments PCC Limited is a protected cell company (the "Company"), being a cellular company governed by the Companies (Guernsey) Law 2008, comprising a core segment (the "Core" or "RECI"). The Company had a cell segment, known as 'European Residual Income Investments Cell' or "ERII". The final Residual Income Position which remained in the Cell was realised in January 2016, and the remaining cash distributed in March 2016. As at 31 March 2016 the Cell has no assets and a zero trial balance and therefore only the information of the Core is displayed in these financial statements.
The Core real estate debt strategy focuses on secured residential and commercial debt in the UK and Western Europe, seeking
to exploit opportunities in publicly traded securities and real estate loans. In making these investments the Company uses the
expertise and knowledge of its Alternative Investment Fund Manager ("AIFM") or ("Investment Manager"), Cheyne Capital
Management (UK) LLP ("Cheyne"). The Company has adopted a long term strategic approach to investing and focuses on
identifying value.
The RECI Ordinary Shares (ticker RECI) reflect the performance of the Company's Core real estate debt strategy. The RECI
Ordinary Shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc. RECI Ordinary Shares offer investors a levered exposure to a portfolio of real estate credit investments and aim to pay a quarterly dividend. Such leverage is provided by the RECI Preference Shares (ticker RECP) which confer the right to a preferential cumulative preference dividend (which is an amount in Sterling equal to 8 per cent per annum of the Preference Share Notional Value) payable quarterly on each Payment Date. The RECP Preference Shares are
currently listed on the standard segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc.
This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "forecasts", "estimates", "anticipates", "expects", "intends", "considers", "may", "will" or "should". By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules). Past performance of the Company cannot be relied on as a guide to future performance . In this section, unless otherwise defined, capitalised terms have the meaning given to them in the Company's prospectus dated 16 October 2013.
Real Estate Credit Investments (RECI)
RECI Balance Sheet Summary as at 31 March 2016*
31/03/2015 (£ million) | 30/09/2015 (£ million) | 31/03/2016 (£ million) | |||
Loan Portfolio | 87.1 | 108.3 | 113.2 | ||
Bond Portfolio | 59.4 | 43.9 | 39.6 | ||
Cash and Cash Equivalents | 8.1 | 2.0 | 5.3 | ||
Derivative Assets | 4.8 | 4.3 | 3.2 | ||
Receivable For Investments Sold | - | 3.7 | - | ||
Other Assets (includes accrued interest) | 3.5 | 3.5 | 2.5 | ||
162.9 | 165.7 | 163.8 | |||
Other Liabilities Derivative Financial Liabilities | (2.6) (0.5) | (2.4) (0.3) | (2.7) (0.5) | ||
Cash Collateral due to Broker | - | (2.8) | - | ||
Preference Share Liability | (41.7) | (41.9) | (41.8) | ||
(44.8) | (47.4) | (45.0) | |||
Net Assets | 118.1 | 118.3 | 118.8 | ||
Shares outstanding | 72,818,496 | 72,818,496 | 72,818,496 | ||
Net Asset Value per Ordinary Share | 1.623 | 1.625 | 1.632 | ||
\* The values for each column may not sum to the total due to rounding differences | |||||
Loan Portfolio as at 31 March 2016
Significant loan portfolio growth
RECI increased its drawn real estate loan portfolio to £113 million from £87 million in the financial year ended 31 March 2016. During the year, the Company made £17 million of new commitments over four new deals, taking total loan commitments to £120 million as at 31 March 2016 (being 73% of GAV).
The average loan portfolio LTV exposure as at 31 March 2016 was 72% and the portfolio continues to provide attractive risk-adjusted returns with a weighted average yield of 12% per annum, before any back end fees or profit share contributions are taken into account.
Since 31 March 2016, the Company has funded a new commitment of £4.3m to a loan secured against a residential development in Clapham, London.
Expected loan investment repayments
The Company is expecting several loan repayments from its portfolio, with potential cash inflows in excess of £20m in the coming months.
Continued focus on Europe's strongest markets
The Investment Manager's strong position in originating attractive new loans enables the Company's investments to be focussed on Europe's strongest markets - the UK and Germany. These markets offer both strong deal flows and, crucially, a lender-friendly legal framework. The Company intends to continue to avoid lending in less borrower-friendly jurisdictions such as Italy, Spain and Portugal.
Loan Portfolio Summary as at 31 March 2016
Number of loans | 17 |
Drawn Dirty* Fair Value (£ millions) Total Loan Commitments (£ millions) | 115.3 119.6 |
Loans as % of GAV (drawn loan balance) | 70.6% |
Loans as a % of GAV (committed loan balance) Weighted average yield of loan portfolio | 73.2% 12.4% |
Weighted average LTV of portfolio | 71.5% |
Weighted average life of portfolio (years) | 1.8 |
* Dirty Fair Value includes accrued interest
Top 10 Investment Portfolio Exposures as at 31 March 2016
Market Value £100.0 millionWA Original LTV 65.2%WA Cheyne Current LTV2 74.4%WA Effective Yield 12.0%
Type | Class | Collateral Description | |
Residential | Loan | Whole Loan secured against German multi-family properties | |
Commercial | Loan | Priority ranking shareholder loan against a portfolio of UK logistics and industrial properties | |
Commercial | Loan | Mezz loan secured on a fully let retail park in Essex | |
Commercial | Loan | Mezz loan secured against two mixed use estates in Central London | |
Residential | Loan | Mezz loan secured by residential land & homes under development in South East UK | |
Commercial | Loan | Subordinate loan secured against retirement villages in London and South-East | |
Commercial | Loan | Senior loan secured on a dominant shopping centre in a residential suburb of Berlin | |
Commercial | Loan | Mezz loan to assist in the acquisition of major German residential development company | |
Commercial | B | Bond secured against government housing portfolio in the UK | |
Commercial | Loan | Mezz loan secured against a branded London hotel development in Shoreditch | |
Real estate bond portfolio
As at 31 March 2016, the bond portfolio of 34 bonds was valued at £40.0 million, with a nominal face value of £48.4 million. Taking both the positive recorded interest income (using effective yield accounting) and the fair value losses on the bonds in the half year, the total gross return of the bond portfolio (reportable segment profit) in the year ended 31 March 2016 was £2.1m (or approximately 4.4%). It is this lower than expected performance on the bond portfolio that contributed to the Company's overall net profit for the year ended 31 March 2016 being £8.5 million, compared with £13.8 million in the previous year ended 31 March 2015.
March marked the rebound for risk assets after a volatile February and one of the worst Januarys in history. The positive momentum which started around mid-February and continued through much of March resulted in a recovery of prices and activity. The ECB package announced in March exceeded expectations, helping to boost risk appetite and reinforce market sentiment. Whilst we consider the package to be very positive for European credit in general and for real estate in particular, the first quarter of 2016 will be categorised by turbulence, volatility and huge swings in asset prices that swathed the markets.
As at 31 May 2016, the portfolio consisted of 34 bonds with a fair value of £39.3 million and a nominal face value of £47.3 million.
Bond Portfolio Summary as at 31 March 2016 | |
Number of bonds | 34 |
Fair Value of Bond Portfolio as at 31 March 2016 (£ millions) Nominal Face Value of Bond Portfolio as at 31 March 2016 (£ millions) | 40.0 48.4 |
Real Estate Bond Portfolio Breakdown
Breakdown of RECI's bond portfolio as at 31 March 2015 and 31 March 2016 by jurisdiction (by reference to underlying assets)
31 March 2015
UK | 72.8% |
Germany | 25.7% |
France | 0.7% |
Holland | 0.6% |
Ireland | 0.2% |
Total (£mm) | £59.8mm |
31 March 2016
UK | 67.7% |
Germany | 27.0% |
Ireland | 5.3% |
Total (£mm) | £39.6mm |
Monthly Bond Performance Summary as at 31 March 2016
October | November | December | January | February | March | |
% Fair Value Change | -0.10% | -0.17% | 0.06% | -1.35% | -0.73% | 0.07% |
WA Purchase Price | - | - | - | - | - | 97.9 |
WA Purchase Yield | - | - | - | - | - | 4.4 |
Asset Class Distribution of Bond Portfolio by Fair Value as at 31 March 2016
Bond Class | UK CMBS | UK RMBS | Euro CMBS | Euro RMBS | Total | Total as at 31 March 2015 |
A | 11.3% | 0.0% | 0.0% | 0.0% | 11.3% | 10.4% |
B | 38.3% | 0.0% | 4.6% | 0.0% | 42.9% | 44.8% |
C | 0.7% | 0.0% | 2.7% | 0.0% | 3.4% | 7.4% |
D | 0.0% | 1.0% | 12.2% | 0.3% | 13.5% | 11.7% |
E and Below | 8.3% | 6.8% | 13.8% | 0.0% | 28.9% | 26.1% |
Total | 58.6% | 7.8% | 33.3% | 0.3% | 100.0% | 100% |
Total as at 31 March 2015 | 61.0% | 11.5% | 26.6% | 0.9% | ||
Values may not sum to 100% due to rounding differences