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

The future of Real Estate technology

Forward-thinking proptech companies are tackling challenges in asset classes, investment processes, housing quality, and landlord-renter relationships. Despite this, a significant knowledge gap persists among investors, landlords, and tenants regarding the benefits of technology. Investors struggle to

European real estate market Sees growth in living sector

Interest rates in Europe have started to decline from their peaks, providing a firmer foundation for property prices. This shift presents a renewed opportunity for investors to consider the real estate market’s “living” sector, which encompasses

Private clients in UK real estate more optimistic

Investec Real Estate has released its second Future Property report, revealing that private clients with UK real estate are now more optimistic than they were two years ago. This report, which includes data from 110 high-net-worth

UK commercial real estate market in transition

The UK commercial real estate market is currently experiencing a transitional phase. As the Bank of England hints at potential rate cuts, investor confidence is likely to strengthen. Lower debt costs will make commercial investments more

European property market showing signs of stabilisation

Latest data reveals that European residential properties have retained nearly all their value, while the overall decline in commercial property prices has significantly slowed after nearly two years of continuous drops. There is a glimmer of

Optimism fuels investment surge in commercial property

Last year’s slowdown in activity frustrated the investment market, but with diminished competition as funds and property companies cut back their ambitions, cash-rich family offices are seizing prime assets they might normally struggle to secure. Nationwide,

Key Commercial Real Estate trends to watch in 2024

The industrial sector is experiencing significant growth driven by the rise in e-commerce and online sales. This surge is creating increased demand for warehouse and manufacturing properties, as well as facilities like refueling and rest stops

UK commercial property market improves in Q1 2024

The latest RICS Commercial Property Monitor has revealed that whilst the market in the UK showed some improvements in Q1 2024, certain areas of the market continue to struggle against structural headwinds. Tenant demand rose in

Real Estate Credit Investments Investor Day at Cheyne Capital

Real Estate Credit Investments Ltd (LON:RECI), a non-cellular company incorporated in Guernsey, has announced that its Investment Manager Cheyne Capital LLP will hold a RECI investor day at their offices on Thursday 27th June 2024. The day will

Understanding Real Estate asset management in the European market

The European real estate landscape is undergoing significant changes: heightened market fluctuations, surging inflation, and escalating interest rates. This landscape makes it complex for investors to find secure, diversified, and stable investment avenues. The emergence of ESG and sustainability-related topics

Commercial Real Estate: Brighter days ahead

Brighter days could be coming for the commercial real estate industry after a cooldown in recent years. Private real estate investment funds remain highly attractive to investors globally, with 39% of them intending to put more