Our recent notes have, in the main, 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. In this note, we explore the upside opportunities such conditions present. In particular, we note i) improving yields on new business, helped by the relatively short contractual (and even shorter actual) duration of the loan book, and ii) improving covenants. As competitors with weaker balance sheets, less focused business models, higher capital requirements and worse historical loss experiences withdraw, so Real Estate Credit Investments can cherry-pick higher risk-return opportunities.
- January quarterly update: Key themes are i) attractive returns from low LTV credit exposure to UK and European commercial real estate assets, ii) quarterly dividends delivering consistently since October 2013, iii) a highly granular book, iv) transparent and conservative leverage, and v) access to a strong pipeline.
- Dec’22 factsheet: The NAV rose 1p, due to recurring interest income (reported NAV down 2p, due to 3p dividend). Cash was £24m, and gross leverage £108m. The book has 60 positions (34 loans, drawn value £348m, undrawn commitments of £200m, and 26 bonds, fair value £90m). The weighted average LTV is 56%, and the yield is 11.3%.
- Valuation: In the five-year, pre-pandemic era, on average, RECI traded at a premium to NAV. In periods of market uncertainty, it has traded at a discount. It now trades at a 6% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 8.5% ‒ expected to be covered by interest alone.
- Risks: Any lender is exposed to the credit cycle and individual loans going wrong. Security is currently hard to value and to crystallise. We believe RECI has appropriate policies to reduce the probability of default, and loss in the event of default. Some assets are illiquid, and repo financing has a short duration.
- Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Bond pricing includes a slight discount, reflecting uncertainty, which should unwind when conditions normalise. Sentiment to market-wide credit risk is currently above-average, but RECI’s strong liquidity and debt restructuring expertise should allow it time to manage problem accounts. Borrowers, to date, have injected further equity into deals.