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:
Share on facebook
Share on twitter
Share on linkedin
Hardman & Co

More articles like this

Emerging trends from Europe’s real estate market

Real estate encompasses physical assets that include buildings, land, and natural resources such as crops, minerals, and water. Engaging in real estate transactions often incurs substantial expenses and fees, subject to oversight from a multitude of local, state,

Real estate income opportunity: 9.3% dividend fund (LON:RECI)

Real Estate Credit Investments Ltd (LON:RECI), a non-cellular company incorporated in Guernsey, has announced that its Investment Manager’s monthly Fact Sheet as at 31 August 2023: As at 31 August 2023, the Company was exposed to a diversified,

What real estate finance trends are we seeing in 2023?

The first half of 2023 undoubtedly saw fewer real estate finance transactions compared to the previous year. In the US, it is estimated that commercial real estate investment volume has fallen by as much as 57% year over

Five key trends in commercial property

Sales activity in the commercial property market has declined, but demand for quality space is high, and sectors are evolving to meet new trends, experts say. High interest rates and economic uncertainty has impacted on activity across the market,

Proptech trends that could disrupt the real estate industry

The real estate sector has seen tremendous change in recent years, owing to the rapid progress of technology. Proptech, or property technology, refers to the creative application of technology in the real estate business. Proptech is altering the

What makes the European retail market appealing to investors?

Inflation has cast its shadow over the global economy, affecting individuals and businesses alike. Yet one sector in Europe has remained remarkably resilient: retail investment reached a total of €6 billion and accounted for 20 per cent of total

Key trends in the UK commercial property market

The UK commercial property market is a dynamic and ever-evolving sector, with many businesses significantly changing their approach to the working environment they provide for their employees. In recent years, several notable trends have emerged, influencing businesses real

Emerging trends in real estate in Europe

While the industry leaders canvassed report little direct impact on their property portfolios from Russia’s invasion of Ukraine, the war’s consequences are seen in surging energy costs, above-average inflation and, latterly, rising interest rates. Real estate business confidence and

Sector review: Real Estate

What is the real estate sector?  The real estate sector covers lots of businesses involved in developing, maintaining, selling, or letting land or property. The residential subsector focuses on buying and selling properties for housing. The commercial subsector

UK property market now comes with a green premium

In London, climate change is increasingly reflected in how much it costs to buy or rent real estate. Office space in the UK capital that’s classified as “green” by virtue of a sustainability certification commands a 20% premium

No more posts to show