Real Estate Credit Investments: Double tangible security

Our recent notes, in the main, have focused on why Real Estate Credit Investments Ltd (LON:RECI) should prove resilient in uncertain times, given its credit processes, high-quality security, low exposure to high-risk sectors, diversity and management of problem accounts. Market turbulence has reduced competition, and there is distinct upside, particularly in moderate-risk development loan positions. In this note, our property analyst considers the underlying real estate security, and concludes that i) potentially more difficult asset-classes are well underpinned by appropriate loan-to-value (LTV) ratios, ii) the geography and asset-class profile is good, and iii) there is strong evidence of RECI’s value-add, for example, but not exclusively, with its developer loans.

  • May Fact Sheet: For the third month in a row, the NAV rose 1.1p, owing to recurring interest income. Cash was £29m, gross leverage £88m, and cost of finance 6.1% The book has 47 positions (32 loans, drawn value £298m, and 15 bonds, fair value £34m, unchanged on the month). The weighted average LTV is 60%, and the yield is 10.7%, unchanged.
  • May Investor presentation: Key themes include i) attractive returns from low LTV credit, backed by UK and European commercial real estate assets, ii) consistent quarterly dividends since October 2013, iii) transparent and conservative leverage, iv) access to a strong pipeline, and v) rotation of market bonds into senior loans.
  • Valuation: In the five-year, pre-pandemic era, on average, Real Estate Credit Investments traded at a premium to NAV. In periods of market uncertainty, it has traded at a discount. It now trades at a 15% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 9.4% ‒ expected to be covered by interest alone.
  • Risks: Credit cycle and individual loan risk are intrinsic. All security values are currently under pressure. We believe Real Estate Credit Investments has appropriate policies to reduce the probability of default, and has a good track record in choosing borrowers. Some assets are illiquid. Much of the book is development loans. Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Income from its positions covers the dividends. Sentiment to market-wide credit risk is currently difficult, but RECI’s strong liquidity and debt restructuring expertise provide extra reassurance. Where needed, to date, borrowers have injected further equity into deals.
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