Real Estate Credit Investments: Why CRE equity worries should not apply to RECI

Real Estate Credit Investments Ltd (LON:RECI) current discount to NAV (15%) suggests to us that some investors could be concerned that potential issues with commercial real estate (CRE) will dramatically affect the trust’s assets. In our view, the key reasons why they should not lie in RECI’s management of its position as a debt provider and in its asset selection. We note i) CRE equity holders take first losses (with a 60% LTV, RECI has a big cushion), ii) when accounts have got into difficulties, RECI has typically seen more funds injected by the equity backers, iii) CRE equity holders suffer from rising rates, as value transfers from equity holders to debt providers, and iv) Real Estate Credit Investments has limited office exposure (none in the US) – the sector most exposed to working from home.

  • CRE equity holders vs. debt: CRE equity holders are affected directly by falling CRE prices, rents and rising borrowing costs. The risks to a debt provider to CRE (like RECI) arise from the probability of a borrower defaulting and loss in the event of default, not CRE prices alone. We detail below how RECI materially reduces both of these factors.
  • July 2023 factsheet: The underlying NAV rose 1.5p, due to recurring interest income (1.0p). Cash was £17m, and gross leverage £90m. The book has 45 positions (30 loans, gross drawn value £371m, and 15 bonds, fair value £35m – down from 26 and £90m, respectively, at end-March). The weighted average LTV is 60%, and the yield is 10.8%.
  • 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 15% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 9.5% ‒ 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 RECI 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: Real Estate Credit Investments generates an above-average dividend yield from well-managed credit assets. Income from its positions covers the dividends. Sentiment to marketwide 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.
Click to view all articles for the EPIC:
Or click to view the full company profile:
Facebook
X
LinkedIn
Hardman & Co

More articles like this

European commercial real estate surges

Discover the flourishing European commercial real estate market at MIPIM 2025. Investment volumes set to exceed €50 billion with lucrative opportunities ahead.

Commercial Real Estate lending surges

Commercial real estate lending surged in the final quarter of 2024, driven by a substantial influx of capital and robust market fundamentals. With a wave of maturing debt on the horizon, 2025 is poised for even

Investing in a changing landscape

Discover unparalleled opportunities in Europe’s distressed debt landscape with Real Estate Credit Investments Ltd. (LON:RECI) as they navigate changing economic sectors.

Driving growth and sustainability

The real estate credit sector continues to play a pivotal role in the global economy, acting as a cornerstone for property acquisition, development, and investment. By providing individuals and organisations with access to financing, real estate

The evolving landscape of Real Estate Credit

The real estate credit sector has been a cornerstone of financial growth and stability, bridging the gap between property investment and accessible financing. In recent years, this segment of the market has evolved significantly, driven by

Positive outlook for European Real Estate financing

European commercial real estate issuers, particularly those on the brink of investment grade or in high-yield categories, continue to face obstacles in securing financing. While debt markets are gradually reopening, investor confidence remains subdued compared to