RECI pays investors a high dividend yield (7.3%), covered by predictable income streams generated by an increasingly diversified portfolio of real-estate-backed debt. Its credit record has been exemplary. In this report, we detail the procedures that have delivered this performance, in addition to the benefits from the security taken. Much of the superior revenue yield is generated from service and structuring skills – among the many synergies obtained from having Cheyne Capital (Cheyne) as the manager. Corporate governance appears robust, with a strong board. 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.
- Credit management: Credit is key to any lender. We believe RECI’s detailed cashflow analyses (with appropriate stress tests), close borrower relationships and experienced staff will lower the probability of default. In addition, close ongoing monitoring and property security should reduce the loss in the event of default.
- Cheyne’s competitive advantages: Having Cheyne as the investment manager provides RECI with economies of scale, access to deal flow and market information, structuring and execution expertise, as well as experienced lenders with a strong network of contacts to improve credit risk.
- Valuation: RECI trades at a 0.4% discount to NAV, in line with secured lending peers. Its yield, at 7.3%, is the highest of its immediate 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 of default. 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 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 company.
