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Real Est Crd Inv PCC (RECI)

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Tuesday 20 September, 2011

Real Est Crd Inv PCC

1st Quarter Results

RNS Number : 5304O
Real Estate Credit Inv. PCC Ltd
20 September 2011
 



 

Real Estate Credit Investments PCC Limited

Financial Results Announcement for the First Quarter Ended 30 June 2011

 

Real Estate Credit Investments PCC Limited reports €6.4 million first quarter profit

 

 

Financial Highlights

 

·     RECI recorded a Net Asset Value increase of 7.6% in the quarter.

·     Net profit of €6.4 million, up 24% from €5.2 million in the previous quarter. 

·     €31.0million of net purchases in real estate bonds in the quarter.

·     Material shift towards real estate debt, increasing exposure to €99.4 million (representing 75% of the investment portfolio at quarter end).

·     Sold 38% of legacy portfolio at value accretive to NAV.

·     Overall investment portfolio generated total cash flow of €5.5 million1.

 

Millions

31 March 2011

30 June 2011


Gross Assets

€134.9

€148.2


Real Estate Debt Portfolio

€72.0

€99.4


Operating Income

€4.3

€4.3


Fair Value Gains on investment portfolio

€3.1

€4.6


Net Profit

€5.2

€6.4


Net Asset Value per Share

€1.92    

€2.06    


Dividend per ordinary share

0.014

0.014


 

 

Material shift in exposure to Real Estate Debt Assets

 

RECI's Real Estate Debt Portfolio is now firmly established as the company's core investment strategy. The portfolio accounted for 75% of all RECI's assets as of June 30, a substantial increase from 57% as of March 31 2011. The Investment Manager believes that the shift to real estate debt has improved the risk profile of the Company's balance sheet whilst preserving the expected return of the portfolio.   Investments made during the quarter were biased towards defensive bonds as we maintain a cautious stance in light of continued market volatility.

 

Pure investment in real estate debt as RECI becomes a protected cell company

 

On 10th August 2011 Shareholders approved resolutions to convert the Company into a protected cell company. The Company's Real Estate Debt Instruments, are now held in the "Core", whose shares continue to trade on the main market of the London Stock Exchange (ticker RECI). The pro forma NAV of the Core at the time of Conversion was €1.54 per share. The remaining Residual Income Positions2 are now held within the "European Residual Income Investments" Cell, and these "Cell Shares" trade on the Specialist Funds Market of the London Stock Exchange (ticker ERII). The pro forma NAV of the Cell at the time of Conversion was €0.52 per share.

On 16th September 2011, Shareholders approved the redenomination of RECI to Sterling.

 

Chairman's Quote

Tom Chandos, Chairman of RECI PCC said: "By separating RECI's core portfolio we are offering investors a compelling pure investment in European real estate debt. RECI sees further attractive buying opportunities thanks to dislocations in the market and has already demonstrated it can generate attractive returns. The Cell portfolio of residual assets should continue to provide cashflow."

 

 

 

1 Investment Portfolio including hedges.
2 Amstel 2006-1 was held in the Core, but this redeemed on 25 August 2011

 

 

 

Conference Call & Further Information

 

10.30 am BST Tuesday 20 September 2011.

+ 44 (0)20 7153 8942. Please reference Real Estate Credit Investments.  A results presentation will be available on the Real Estate Credit Investment website:

www.recreditinvest.com/investmentmanager

 

A webcast of the conference call will also be available on a listen-only basis at:

www.recreditinvest.com/investmentmanager

 

For further information please contact:

Public Relations:                                 Kate Ruck Keene                  +44 (0)20 7920 2322

Investor Relations:                              Natalie Withers                   +44 (0)20 7968 7348

                                                                Nicole von Westenholtz     +44 (0)20 7968 7482

 

About the Company

 

Real Estate Credit Investments PCC Limited is a protected cell company ("RECI" or the "Company"), being a cellular company governed by the Companies (Guernsey) Law 2008, each cell has its own portfolio of assets, investment objective and sub-section of the Investment Policy. The RECI ordinary shares (ticker RECI) reflect the performance of the Company's Core real estate debt strategy.  RECI ordinary shares offer investors a levered exposure to a portfolio of real estate credit investments and pay a quarterly dividend. The Core strategy focuses on secured residential and commercial debt in the UK and Western Europe by exploiting opportunities in publicly traded securities and real estate loans.  In making these investments the Company uses the expertise and knowledge of its investment manager, Cheyne Capital Management (UK) LLP. The Company has adopted a long term strategic approach to investing and focuses on identifying value.  The RECI ordinary Shares continue to be listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange. The Cell within the Company is known as 'European Residual Income Investments Cell' (ticker ERII). The Cell Shares trade on the Specialist Fund Market of the London Stock Exchange. Eight Residual Income Positions are attributed to the Cell.  Dividends or distributions will only be payable from ERII to the extent that the Asset Cover Ratio for the Preference Shares at the company level is satisfied.  The Preference Shares (ticker RECP) confer the right to a preferential cumulative Preference Dividend (which is an amount in Sterling equal to 8 per cent per annum of the Preference Share Notional Value) payable quarterly on each Payment Date. The Preference Shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange.

 

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "forecasts", "estimates", "anticipates", "expects", "intends", "considers", "may", "will" or "should". By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).

 



 Financial Summary

 

Revenue

Fair value gains and losses

Total

Quarter ended 31 March  2011

Revenue

Fair value gains and losses

Total

Quarter ended 30 June  2011

Operating Income

4,282,429

           4,282,429

4,291,909

       4,291,909

Gains and losses on fair value through profit or loss financial instruments


1,247,500

1,247,500


3,246,118

3,246,118


4,282,429

1,247,500

5,529,929

4,291,909

3,246,118

7,538,027








Operating Expenses

(1,076,322)


(1,076,322)

(1,104,161)

 

(1,104,161)

Finance Costs1

709,676


709,676

(30,727)

 

(30,727)

Net profit / (loss)

3,915,783

1,247,500

5,163,283

3,157,021

3,246,118

6,403,139




Total Assets

134,905,167

148,193,886

Total Liabilities

58,311,462

65,756,580

Equity Capital

76,593,705

82,437,306

NAV per share

1.92

2.06

Shares Outstanding

39,966,985

39,966,985

1.        Net finance costs include FX movement on the preference shares.

 

 

Investment Portfolio

 

A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) as at 31 March 2011 and 30 June 2011 is set out below. Percentages for each asset type are in relation to the value of the Company's investment portfolio (excluding cash and hedges).

 

 

31 March 2011

Real Estate Debt

57.2%

European Mortgages

20.9%

SME

14.1%

UK Mortgages

7.8%

Total (€mm)

€125.9 mm

 

30 June 2011

Real Estate Debt

74.9%

European Mortgages

12.1%

SME

11.8%

UK Mortgages

1.1%

Total (€mm)

€132.7 mm

 

 

Values may not sum to 100% due to rounding differences

 

 

 

 

 

 

 

 

 

A breakdown of the Company's investment portfolio as at 31 March 2011 and 30 June 2011 by jurisdiction (by reference to underlying asset originator) is set out below.

 

31 March 2011

UK

42.4%

Germany

20.9%

Portugal

18.7%

Holland

12.3%

Italy

3.1%

Ireland

2.1%

France

0.4%

Switzerland

0.1%

Total (€mm)

€125.9 mm

 

30 June 2011

UK

48.2%

Germany

20.4%

Holland

13.0%

Portugal

10.3%

Ireland

3.6%

Italy

2.8%

Spain

1.1%

France

0.5%

Total (€mm)

€132.7 mm

 

 

Values may not sum to 100% due to rounding differences

 

Real Estate Debt Portfolio2

 

The Real Estate Debt Portfolio enjoyed its strongest quarter of growth to date while generating solid returns. By June quarter end the Real Estate Debt Portfolio represented a significant majority of RECI's assets under management. The portfolio accounted for 74.9% of all investment assets, up from 57.2% three months earlier. 

 

The Company recorded fair value gains on the portfolio of €1.6 million for the quarter ended 30 June 2011 and cash flows of €3.9 million in the quarter (versus €1.2 million in the previous quarter).

 

New bond purchases totalled €42.1 million in the first quarter, versus €18.8 million in the previous quarter and were biased towards defensive bonds.  The weighted average expected yield to maturity of new investments was 11.0% and an average price of 80 cents.  As at 30 June 2011, the portfolio of 90 bonds was valued at €99.4 million, with a nominal face value of €144.0 million.3  The average purchase price of the portfolio was 70 cents with a weighted average expected yield to maturity of 12.5%. 

 

The portfolio has grown further since the end of the first quarter. Between 1 July 2011 and 31 August 2011, the Company invested €6.7 million at an average price of 65 cents and a weighted average expected yield-to-maturity of 13.8%.  As at 31 August 2011, the portfolio consisted of 103 bonds with a fair value of €97.1 million and a nominal face value of €152.5 million4.

 

 

 

2 The Real Estate Debt portfolio includes two bonds collateralised by SME loans accounting for 1.1% of the portfolio at 30 June 2011.
3 Cost and nominal shown are calculated with original notional using pool factor and FX rate at 30 June 2011.
4 Cost and nominal shown are calculated with original notional using pool factor and FX rate at 31 August 2011.

 

 

 

 

Ratings Distribution by Fair Value (as at 31 August 2011)

 

Current Rating

UK CMBS

UK RMBS

Euro CMBS

Euro RMBS

SME

Total

Total as at 30 June 11

AAA

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

1.0%

AA

2.3%

12.4%

1.1%

0.0%

0.0%

15.8%

14.9%

A

5.2%

6.1%

11.6%

0.3%

0.0%

23.0%

22.2%

BBB

6.2%

5.6%

11.3%

0.0%

1.1%

24.2%

26.5%

BB and Below

12.4%

4.4%

12.9%

7.2%

0.0%

36.9%

35.5%

Total

26.0%

28.5%

36.9%

7.5%

1.1%

100.0%


Total as at

30 June 11

24.5%

30.5%

37.3%

6.6%

1.1%

100%


 

 

Values may not sum to 100% due to rounding differences

 

Residual Assets

 

European Mortgage Portfolio

 

The European Mortgage Portfolio generated cash flows of €1.2 million for the quarter ended 30 June 2011, compared to €2.3 million in the previous quarter and above forecasts of €0.8 million. Write-downs in the portfolio totalled -€0.2 million of which the Sestante mortgage portfolio accounted for -€0.2 million.

 

The Company sold its three Lusitano mortgage residual income positions at prices accretive to NAV.  RECI has one remaining Portuguese mortgage portfolio, the Magellan 1 portfolio, which it expects to perform satisfactorily despite continued pressures in Portugal.

 

SME Portfolio

 

Cash flows in the quarter ended 30 June 2011 totalled €0.2 million, compared to €0.2 million the previous quarter.

 

The Company has increased the assumed loss rate of defaulted loans in the Smart 06-1 portfolio, resulting in a  €2.7 million decrease in the fair value.

 

The table below outlines actual default rates in the SME Portfolio and intra-period volatility of default rates.  The valuations of the SME Portfolio reflect a conservative forecast of future defaults relative to historical averages.

 

 

 

Dec 2010 Default Rate (annualised)

Mar 2011 Default Rate (annualised)

Jun 2011 Default Rate (annualised)

Amstel 06-1

0.0%

0.0%

0.0%

Smart 06-1

1.8%

1.2%

4.1%

Average

0.9%

0.6%

2.1%

 

On 25 August 2011 Amstel 06-1 redeemed. The proceeds received meant the redemption was accretive to NAV.

 

UK Mortgage Portfolio

 

The UK Mortgage Portfolio recorded cash flows of £0.2 million in the quarter ended 30 June 2011 compared to £1.2 million in the previous quarter. 

 

In June the Company sold the RMAC 2004 NSP4 plc, RMAC 2005 NS3 plc and RMAC 2005 NS4 plc UK mortgage residual income investments at prices accretive to NAV.

 

The Newgate Funding PLC series 2006-1 position was marked up to £1.1m, having been marked at zero since the end of 2008. It has returned cash in the quarter ended 30 September 2011.

 

 

 

Portfolio Valuation

 

In accordance with the Company's valuation procedures, the fair value of the Company's investments is calculated on the basis of observable market data, market discount rates and the Investment Manager's expectations regarding future trends.  The Company obtains independent prices for bonds in its Real Estate Debt Portfolio. However, there is a lack of reliable, independent broker marks for assets in the Residual Income Portfolio which represented approximately 25% of the investment portfolio as at 30 June 2011.  Therefore, the Company has elected to use a model-based approach to value its residual investments and employs an external valuation agent to review the underlying pricing assumptions.  The Company applies a discount rate to the loss-adjusted cash flows to calculate the fair value. 

 

Changes in the balance sheet value of the residual portfolio between 31 March 2011 and 30 June 2011 totalled -€20.7 million.  This comprised a reduction of -€19.5 million due to sales and principal amortisation and fair value losses of -€1.2 million.  In relation to the Real Estate Debt Portfolio, the balance sheet value increased by €27.4 million. There were €42.1 million new purchases, fair value gains of €1.6 million, principal amortisations of -€5.2 million and sales of -€11.1 million.  After giving effect to these balance sheet changes in the quarter ended 30 June 2011, the NAV of the Company was €2.06 per ordinary share as at 30 June 2011, versus €1.92 per ordinary share as at 31 March 2011.

 

The Company recorded total cash flows of €5.4 million in the quarter ended 30 June 2011, from the Investment Portfolio (excluding sales and hedges). The table below summarises changes in balance sheet values of the Company's Investment Portfolio by asset class:

 

 

1.        Balance sheet values as at 31 March 2011 are expressed using 30 June FX rates. 31 March 2011 values include RMAC and Lusitano residual positions.

2.        Balance sheet values include accrued interest. 30 June 2011 values do not include RMAC and Lusitano residual positions.

3.        Cash flows for 31 March 2011 are expressed using 30 June 2011 FX rates.

4.        Totals may not sum due to rounding

 

 

 

 



 

Company Outlook - European Real Estate offering fundamental value; retain defensive stance as volatility continues 

 

The Company retains a defensive approach towards managing the portfolio as it expects further market instability in coming months over concerns about global growth and sovereign debt.

 

Volatility in the capital markets has increased substantially since the end of June.  Between 1 July 2011 and 31 August 2011, the S&P 500 fell 8.4%, and the ITRAXX high-yield index fell by 9.8%.

 

The fall in asset prices is a result of lower expectations for global growth, the sclerotic budgetary process in the US, and the complexity of the Eurozone sovereign restructuring. We expect these headwinds to remain unabated for the remainder of the year. 

 

Current market volatility should provide attractive entry points for RECI to selectively increase the Company's exposure to defensive real estate securities with relatively low Loan to Values (LTVs) and attractive yields.  The Company remains focussed on purchasing discounted bonds that will return par.

 

In addition, the Company continues to look for opportunities to increase its exposure to real estate loan markets.   The Company will consider loan opportunities where the risk and reward balance offers attractive relative value versus securities.

 

 

 

  

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 
Unaudited Condensed Consolidated Statement of Financial Position
As at 30 June 2011

 

 


 

 

Note

 

Quarter ended

30 June 2011

 

 

 

 

Quarter ended

31 March 2011



Euro


Euro






Interest income


4,291,909


4,282,429

Net gains on financial assets and liabilities at fair value through profit or loss

3

3,246,118


1,247,500



7,538,027


5,529,929






Operating expenses

4

(1,104,161)


(1,076,322)






Profit before finance costs


6,433,866


4,453,607






Finance (costs) / income

5

(30,727)


709,676






Net profit


6,403,139


5,163,283






Profit per Ordinary Share





Basic and Diluted

7

Euro 0.16


Euro 0.13






Weighted average Ordinary Shares outstanding


 

Number

 

 

 

Number

Basic and Diluted

7

39,966,985


39,966,985

 

All items in the above statement are derived from continuing operations.

 

All income is attributable to the Ordinary Shareholders of the Company.

 

         REAL ESTATE CREDIT INVESTMENTS PCC LIMITED
 
         Unaudited Condensed Consolidated Statement of Financial Position
           As at 30 June 2011


Note

30 June 2011


31 March 2011



Euro


Euro

Non-current assets





Investments at fair value through profit or loss

9

131,435,226


124,154,185



131,435,226


124,154,185

Current assets





Cash and cash equivalents


11,697,005


6,681,974

Derivative financial assets - options held for trading

11

2,669,450


1,307,708

Derivative financial assets - unrealised gain on interest rate swap agreements


140,062


184,968

Other assets


2,252,143


2,576,332



16,758,660


10,750,982






Total assets


148,193,886


134,905,167






Equity and liabilities










Equity





Reserves


82,437,306


76,593,705



82,437,306


76,593,705

Current liabilities





Ordinary dividend payable

6

559,538


639,472

Derivative financial liabilities - options held for trading


1,601,158


237,249

Derivative financial liabilities - unrealised loss on forward foreign exchange contracts


-


92,684

Payable for investments purchased


7,170,033


8,450

Other liabilities


1,902,427


2,168,959



11,233,156


3,146,814






Non-current liabilities





Preference Shares

8

54,523,424


55,164,648






Total liabilities


65,756,580


58,311,462






Total equity and liabilities


148,193,886


134,905,167











Shares outstanding


39,966,985


39,966,985

Net asset value per share


Euro 2.06


Euro 1.92
















         REAL ESTATE CREDIT INVESTMENTS PCC LIMITED
 
         Unaudited Condensed Consolidated Statement of Changes in Equity
           For the quarter ended 30 June 2011 and the quarter ended 31 March 2011



 

Ordinary

Share Capital

 

Reserves

 

TOTAL


Note

Euro

Euro

Euro






Balance at 31 December 2010


-

72,069,894

72,069,894






Net profit for the quarter


-

5,163,283

5,163,283

Dividends to the Ordinary Shareholders of the Company

6

-

(639,472)

(639,472)






Balance at 31 March 2011

-

76,593,705

76,593,705






Net profit for the quarter


-

6,403,139

6,403,139

Dividends to the Ordinary Shareholders of the Company

6

-

(559,538)

(559,538)






Balance at 30 June 2011

-

82,437,306

82,437,306

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED
 
Unaudited Condensed Consolidated Statement of Cash Flows
For the quarter ended 30 June 2011 and quarter ended 31 March 2011


Note

 


Quarter ended

30 June 2011


Quarter ended

31 March 2011




Euro


Euro







Net cash provided by  / (used in) operating activities

10


5,639,145


(972,221)







Financing activities






Dividends paid to Ordinary Shareholders

6


(639,472)


-

Cash used in financing activities



(639,472)


    -







Net increase / (decrease) in cash and cash equivalents



4,999,673


(972,221)







Reconciliation of net cash flow to movement in net cash






Net increase / (decrease) in cash and cash equivalents



4,999,673


(972,221)

Cash and cash equivalents at start of period



6,681,974


7,711,073

Effect of exchange rate fluctuations on cash and cash

equivalents



15,358


(56,878)

Cash and cash equivalents at end of period


         

11,697,005


6,681,974

 

 

         REAL ESTATE CREDIT INVESTMENTS PCC LIMITED
 
         Notes to the Unaudited Condensed Consolidated Financial Statements 

1.    General information

 

Real Estate Credit Investments PCC Limited (the "Company") was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is an authorised closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 2008. Its Ordinary Shares have a premium listing on the London Stock Exchange and its Preference Shares have a standard listing.  The registered office of the Company is First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 6HJ, Channel Islands. "Group" is defined as the Company and its subsidiary. At 30 June 2011, the Company's only subsidiary is Trebuchet Finance Limited.

 

On 10 August 2011, following an extraordinary meeting of the Company, the Board of Directors announced the conversion of the Company to a protected cell company ("PCC") under Guernsey Law and the creation of one cell known as European Residual Income Investments Cell (the "Cell").  The majority of the Residual Income Positions, together with cash amounting to Euro 1.5 million, were transferred to the Cell whose Shares have a separate listing on the Specialist Funds Market of the London Stock Exchange.  The existing Ordinary Shareholders of the Company at the date of conversion were given shares in the Cell on a pro-rata one for one basis.  The Company's Real Estate Debt Investments continue to be held by the non-cellular remainder of the Company (the "Core") and the Company's Ordinary Shares continue to have a premium listing on the London Stock Exchange.  The Residual Income Position retained in the Core on conversion was subsequently redeemed. Following from this conversion, the name of the Company was changed to Real Estate Credit Investments PCC Limited on 15 August 2011.

 

Prior to the conversion, the Group's investment objective was to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. The Group sought to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments").

 

Following conversion, the Investment Policy of the Company was sub-divided into an Investment Policy for the Core and an Investment Policy for the Cell. This was to reflect the fact that the Investment Manager is responsible for managing two discrete pools of assets, one, represented by the Core, into which Existing Ordinary Shareholders are invested and one, represented by the Cell, into which Cell Shareholders are invested.

 

The investment objective for the Core is to invest primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments"). The Real Estate Debt Investments may take different forms but will be likely to be: (i) securitised tranches of secured real estate related debt securities, for example, RMBS and CMBS (together "MBS"); and (ii) secured real estate loans, debentures or any other form of debt instrument.

 

The investment objective of the Cell is to hold the Cell Assets until maturity of the assets unless opportunities for the sale of the Cell Assets arise prior to maturity. The Directors may, at their discretion, return cash to Cell Shareholders by dividends or other distribution. The Directors may also, at their discretion, effect a mandatory redemption of Cell Shares as a means of returning capital to the Cell Shareholders.

 

The liabilities in relation to the Preference Shares, being both quarterly Preference Dividends and the repayment of the final capital entitlement of the Preference Shares (the "Final Capital Entitlement"), are borne by the Company. The Company has amended the Articles of Incorporation to protect its ability to meet the Final Capital Entitlement through the introduction of a cover test (the "Preference Share Cover Test"). The Preference Share Cover Test is intended to prevent the erosion of the Company's asset base through the payment of dividends or other distributions out of the Cell. Prior to the Company declaring a dividend or making a distribution (including a redemption) to holders of Cell Shares, the Preference Share Cover Test will need to be satisfied.

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED
 
Notes to the Unaudited Condensed Consolidated Financial Statements  

1.    General information (continued)

 

The Preference Share Cover Ratio is the ratio that the Company, in consultation with the Investment Manager, has determined is sufficient to meet the Final Capital Entitlement. The Preference Share Cover Ratio is calculated based on the ratio of total company assets (i.e. Total Core Assets plus Cell Assets) to the Final Capital Entitlement. The Preference Share Cover Test has been set at 2.39.

 

Notwithstanding the Company's ability to satisfy the Preference Share Cover Test, the Company will continue to fulfil its obligations towards the Preference Shareholders with respect to the distribution of Preference Dividends. Such obligations are met using the income available in the Core and, if necessary, the Core Assets themselves. Following Conversion, should Core Assets be insufficient to meet the Company's liabilities in respect of Preference Dividends and/or the Final Capital Entitlement when they fall due, it is intended that the Directors will call upon the income and, where such income is insufficient to satisfy such liabilities, the assets of the Cell to satisfy the liabilities (the "Inter-Cellular Arrangement").

 

The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), an investment management firm authorised and regulated by the Financial Services Authority. The Group has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Company and the Investment Manager have agreed that, following Conversion, an Incentive Fee will not be charged on the Cell Assets and will only be payable on the Core Assets.  The Group has no ownership interest in the Investment Manager. State Street (Guernsey) Limited is the Administrator and provides all administration and secretarial services to the Group in this capacity. 

 

2.    Significant accounting policies

 

Statement of compliance

These condensed consolidated financial statements for the quarter ended 30 June 2011 have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34"). The same accounting policies, presentation and methods of computation have been followed in these financial statements as were applied in the preparation of the Groups's audited financial statements for the year ended 31 March 2011. The condensed consolidated quarterly financial statements do not contain all of the information and disclosures required in a full set of annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 March 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS).

 

This quarterly report does not comply fully with the requirements of IAS 34.  Under IAS 34 the financial information is required to provide i) a statement of financial position as of the end of the current interim period and a comparative statement of financial position as of the end of the immediately preceding financial year; (ii) a statement of comprehensive income for the period and cumulatively for the period to date and the comparable period in the prior year; (iii) a statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year; and (iv) a statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year. The Group has complied with some of the requirements by providing the comparative statement of financial position as at 31 March 2011, being the statement of financial position of the immediately preceding financial year, and the current quarter information being the cumulative for the quarter ended 30 June 2011. 

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

2.    Significant accounting policies (continued)

 

Statement of compliance (continued)

The Group has only shown the current quarter information with comparative information for the previous financial quarter and hence not complied with the requirements to provide financial information for the comparable period of the immediately preceding financial year as the previous financial quarter is considered by the Directors to be a more appropriate comparative period for the activities of the Group.

 

Basis of Preparation

The condensed financial statements of the Group are prepared on the historical cost basis as modified by the following assets and liabilities which are stated at their fair value: financial instruments held for trading and financial instruments classified or designated as at fair value through profit or loss.

 

This condensed consolidated quarterly report is presented in Euro. The functional currency of the Group is also considered to be Euro because that is the currency of the primary economic environment in which the Group operates.

 

3.    Gains and losses on financial instruments

 

       The following table details the gains and losses, excluding interest income and finance costs, earned by the Group from financial assets and liabilities during the year:



Quarter ended

30 June 2011


Quarter ended

31 March 2011



Euro


Euro

Net realised gains





Net realised gains on investments at fair value through profit or loss


3,847,854


4,230,774

Net realised (losses)/gains on expired options


 (590,097)


3,399

Net realised gains/(losses) on foreign exchange instruments


 77,681


(398,520)

Net realised gains


3,335,438


3,835,653






Net movement in unrealised gains/(losses)





Net movement in unrealised losses on investments at fair value through profit or loss 


(452,980)


(1,764,562)

Net movement in unrealised losses on interest rate swaps


 (44,906)


(553,346)

Net movement in unrealised gains / (losses) on options


300,524


(267,196)

Net movement in unrealised gains / (losses) on foreign exchange bank balances

15,358


(56,878)

Net movement in unrealised gains on foreign exchange instruments


 92,684


53,829

Net movement in unrealised gains/(losses)


(89,320)


(2,588,153)






Net realised and movement in unrealised gains/(losses)


3,246,118


1,247,500

 

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

4. Operating expenses

 


Note

Quarter ended

30 June 2011


Quarter ended

31 March 2011



Euro


Euro

Investment management, custodian and administration fees





Investment management fee


598,168


576,734

Administration fee


50,473


49,149

Custodian fee


9,110


9,010



657,751


634,893

Other operating expenses





Audit fees


42,383


41,919

Directors' fees payable to Directors of Real Estate Credit Investments PCC Limited


65,480


61,067

Directors' fees payable to Directors of Trebuchet Finance Limited


6,821


4,278

Legal fees


174,520


172,602

Pricing expenses


23,996


23,732

Other expenses


133,210


137,831



446,410


441,429






Total operating expenses


1,104,161


1,076,322

 

The Group has no employees.

 

5. Finance costs / (income):

 



Quarter ended

30 June 2011


Quarter ended

31 March 2011






Net unrealised foreign exchange gain on preference shares


(1,110,622)


(1,873,050)

Preference Shares issuance expense amortised


34,941


33,992

Dividend paid to Preference Shareholders (Note 6)


1,106,408


1,129,382

Total finance costs / (income)


30,727


(709,676)

 

6. Dividends

 

The second interim dividend for the year ended 31 March 2011 of Euro 0.016 per ordinary share was declared on 15 March 2011 and an amount of Euro 639,472 was paid on 26 April 2011.

 

The final interim dividend for the year ended 31 March 2011 of Euro 0.014 per ordinary share was declared on 16 June 2011 and an amount of Euro 559,538 was paid on 20 July 2011.

 

A dividend of Euro 0.014 per share has been declared by the Directors for the quarter ended 30 June 2011 on 16 September 2011.

 

Preference Share Dividends

The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value of 49,958,704 £1 shares converted to the functional currency of the Group at the reporting date.  The Preference Dividend will be accrued and paid at each quarter end.

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

6. Dividends (continued)

 

Preference Share Dividends (continued)

The Preference Dividend in respect of the period from 1 January 2011 to 31 March 2011 amounting to Euro 1,129,382 was paid on 31 March 2011.

 

The Preference Dividend in respect of the period from 1 April 2011 to 30 June 2011 amounting to Euro 1,106,408 was paid on 30 June 2011.

 

7. Profit per Ordinary Share

 



Quarter ended

30 June 2011


Quarter ended

31 March 2011



Euro


Euro

The calculation of the basic and diluted profit per ordinary share is based on the following data:





Profit for the purposes of basic profit per ordinary share being net profit attributable to equity holders


6,403,139


5,163,283






Weighted average number of Ordinary Shares for the purposes of basic profit per share


39,966,985


39,966,985






There is no dilution as at 30 June 2011 or 31 March 2011, as the share price was below the option price for the period.

 

8.    Share capital

 

The capital structure of the Company consists of preference shares and equity attributable to equity holders, comprising issued share capital and reserves, as disclosed on the Consolidated Statement of Financial Position. Following conversion to a protected cell company, the issued share capital of the Company consists of Existing Ordinary Shares, Preference Shares and Cell Shares. The Company's capital managed as at the period end is represented by the value of the shares issued to date.

 

The Company does not have any externally imposed capital requirements.  At 30 June 2011 the Company had capital of Euro 82,437,306 (31 March 2011: Euro 76,593,705).

 

Authorised Share Capital

30 June 2011


31 March 2011


Number of Shares


Number of Shares

Ordinary shares of no par value each

Unlimited


Unlimited

Preference shares at par

 49,958,731


49,958,731

The par value of the preference shares is £1 per share.

 

Existing Ordinary Shares Issued and fully paid

 


30 June 2011


31 March 2011

Balance at beginning of period

39,966,985


39,966,985

Balance at end of period

39,966,985


39,966,985

 

No ordinary shares were issued or bought back or cancelled during the quarter ended 30 June 2011 or 31 March 2011.

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

8.    Share capital (continued)

 

Preference Shares Issued and fully paid


Quarter ended

30 June 2011

Quarter ended

30 June 2011


Quarter ended

31 March 2011

Quarter ended

31 March 2011


Number of Preference Shares

Euro


Number of Preference Shares

Euro

Preference shares at start of quarter

                           49,958,704  

55,164,648


49,958,704

57,003,706

Amortised issue costs allocated to Preference Shares

-

34,941


-

33,992

Write down of unamortised issue costs*

-

434,457


-

-

Net unrealised gains due to foreign exchange fluctuations

-

(1,110,622)


-

(1,873,050)

Balance at end of quarter

49,958,704

54,523,424


49,958,704

55,164,648

 

* The actual issuance costs with respect to the preference shares were lower than originally anticipated and this gave rise to the reversal of Euro 434,457 of the original accrual.

 

9.    Segmental Reporting

 

The Group has adopted IFRS 8 'Operating Segments'. The standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes.

 

The Board of Directors is charged with setting the Group's investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Manager but retain responsibility to ensure that adequate resources of the Group are directed in accordance with their decisions. The investment decisions of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.

 

The Investment Manager has been given full authority to act on behalf of the Group, including the authority to purchase and sell securities and other investments on behalf of the Group and to carry out other actions as appropriate to give effect thereto.

 

Whilst the Investment Manager may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager. The Board retains full responsibility for the major allocation decisions made on an ongoing basis and are therefore considered the "Chief Operating Decision Maker" under the standard.  

 

The Group has two reportable segments, being the Real Estate Debt Investments Portfolio and the Residuals Income Positions Portfolio. For each of the segments, the Board of Directors reviews internal management reports prepared by the Investment Manager on a quarterly basis. Each residual income position is also individually monitored by the Investment Manager and performance analysed separately.

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

9.    Segmental Reporting (continued)

 

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit/loss, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit/loss is used to measure performance as management believes that such information is the most relevant in evaluating the results.  Segment information is measured on the same basis as that used in the preparation of the Group's financial statements.

 

30 June 2011

Real Estate Debt Investment Portfolio

Residual Income  Positions Portfolio

Total


Euro

Euro

Euro

Reportable segment (loss) / profit

(514,906)

8,192,820

7,677,914





Reportable segment assets

99,569,898

33,281,684

132,851,582

 

31 March 2011

Real Estate Debt Investment Portfolio

Residual Income  Positions Portfolio

Total


Euro

Euro

Euro

Reportable segment profit / (loss)

7,996,474

(1,803,140)

6,193,334





Reportable segment assets

72,149,748

53,955,239

126,104,987

 

There have been no changes to the basis of segmentation or the measurement basis for the segment profit or loss since 31 March 2011.

 

All segment revenues are from external sources.  There are no inter-segment transactions between the reportable segments during the year.

 

Certain income and expenditure is not considered part of the performance of an individual segment.  This includes net foreign exchange gains/loss, expenses and interest on borrowings. The following table provides a reconciliation between net reportable income and operating profits.

 


Period Ended

30 June 2011


Period Ended

31 March 2011



Euro


Euro

Reportable segment profit


7,677,914


6,193,334

Interest income from cash and cash equivalents


(36,037)


1,961

Net foreign exchange gains / (losses)


185,723


(401,569)

Net losses on options


(289,573)


(263,797)



7,538,027


5,529,929






Expenses


(1,104,161)


(1,076,322)

Finance costs


(30,727)


709,676

Net profit


6,403,139


5,163,283

 

Certain assets and liabilities are not considered to be attributable to a particular segment, these include, other receivables and prepayments, cash and cash equivalents, and derivative financial assets - options held for trading.

 

The following table provides a reconciliation between net total segment assets and total assets.

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

9.    Segmental Reporting (continued)

 



30 June 2011


31 March 2011



Euro


Euro

Total segment assets


132,851,582


126,104,987

Other receivables and prepayments


975,849


810,498

Cash and cash equivalents


11,697,005


6,681,974

Derivative financial assets - options held for trading


2,669,450


1,307,708



148,193,886


134,905,167

 

The following is a summary of the movement in the Group's investments analysed by the Residual Income Portfolio and the Real Estate Debt Bonds:

 

Period Ended

30 June 2011


Real Estate

Debt Bonds

 Euro


Residual Income

Portfolio

Euro


 

Total

Euro

Investments at fair value through profit or loss












Opening fair value


70,693,798


53,460,387


124,154,185

Purchases


41,681,117


-


41,681,117

Sales proceeds


(14,256,770)


(26,429,836)


(40,686,606)

Realised gain on sales


1,412,989


2,434,865


3,847,854

Net movement in unrealised losses on investments at fair value through profit or loss 


(3,894,483)


3,441,503


(452,980)

Principal payups


3,023,937


(132,281)


2,891,656

Closing fair value


98,660,588


32,774,638


131,435,226

 

Period Ended

31 March 2011


Real Estate

Debt Bonds

 Euro


Residual Income

Portfolio

Euro


 

Total

Euro

Investments at fair value through profit or loss












Opening fair value


58,136,765


61,455,016


119,591,781

Purchases


19,023,826


-


19,023,826

Sales proceeds


(12,152,621)


(3,167,489)


(15,320,110)

Realised gain on sales


1,817,878


2,412,896


4,230,774

Net movement in unrealised losses on investments at fair value through profit or loss 


5,048,973


(6,813,535)


(1,764,562)

Principal paydowns


(1,181,023)


(426,501)


(1,607,524)

Closing fair value


70,693,798


53,460,387


124,154,185

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

9.    Segmental Reporting (continued)

 

In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the countries of the underlying collateral. The SMEs and ABS Bonds included in the Residual Income Positions and Real Estate Debt Investment Portfolios respectively have cross border exposures and so these have been grouped into a combined 'Europe' segment; exposures in this segment include Germany, Spain, and Switzerland.

 

Following the post period conversion to a PCC and the issue of cellular shares, the majority of the Residual Income Positions were transferred to the Cell.  Note 1 provides further details of this transfer.

 

It is not possible to split the reporting further without significant cost with limited benefit to the user of the financial statements. As a result of the change in investment policy during the year, the significant segments for year ended 31 March 2011 differ from the segments reported for the previous year.

 


Segmental Profit

Segmental Assets


Quarter ended

Quarter ended

As at

As at


30 June 2011

31 March 2011

30 June 2011

31 March 2011

Ireland

2,348,286

2,942,720

55,573,729

59,479,203

Italy

(87,289)

(1,565,319)

3,816,440

2,871,195

Netherlands

636,782

1,078,590

18,957,814

17,238,452

United Kingdom

4,945,257

2,976,080

50,990,790

43,032,910

Europe

(165,122)

761,263

3,512,809

3,483,227


7,677,914

6,193,334

132,851,582

126,104,987

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

 

 

10.    Notes to Statement of Cash Flows

 


Quarter ended

30 June 2011


Quarter ended

31 March 2011


Euro


Euro

Reconciliation of net profit to net cash inflow from operating activities



Net profit

6,403,139


5,163,283

Adjustments for:




Amortised issue costs allocated to Preference Shares

34,941


33,992

Net realised gains on investments at fair value through profit or loss

(3,847,854)


(4,230,774)

Net realised losses / (gains) on expired options

590,097


(3,399)

Net unrealised foreign exchange gain on preference shares

(1,110,622)


(1,873,050)

Net movement in unrealised losses on investments at fair value through profit or loss

452,980


1,764,562

Net movement in unrealised losses on interest rate swaps

44,906


553,346

Net movement in unrealised (gains)/losses on options

(300,524)


267,196

Net movement in unrealised (gains)/losses on foreign bank balances

(15,358)


56,878

Net movement in unrealised gains on forward foreign exchange contracts

(92,684)


(53,829)


2,159,021


1,678,205





Purchases of investments at fair value through profit or loss

(34,519,534)


(19,015,376)

Sales proceeds from investments at fair value through profit or loss

40,686,606


15,320,110

Premiums paid on purchase of options

(2,632,635)


(390,000)

Sale of options

1,195,608


-

Premiums received on options written

1,149,621


384,948

Principal (payups) / paydowns

(2,891,656)


1,607,524


2,988,010


(2,092,794)





Decrease/(increase) in other assets

324,189


(691,991)

(Decrease)/increase in other liabilities

(266,532)


134,359

Write down of unamortised issue costs

434,457


-


492,114


(557,632)

Net cash provided by / (used in) operating activities

5,639,145


(972,221)

 

Purchases and sales of investments are considered to be operating activities of the Group, given its purpose, rather than investing activities. Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.

 

 

 

 

REAL ESTATE CREDIT INVESTMENTS PCC LIMITED

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

11.    Collateral

 

The Group held Euro 830,000 as cash collateral for financial derivative instruments transactions undertaken with Goldman Sachs. This collateral also represents an obligation on the Group to repay to Goldman Sachs on settlement of the financial derivative instruments and does not have any impact on the financial position of the Group.  As this amount is the minimum deemed by the brokers for collateral requirements the cash is restricted and is reported separately by means of this note only.

 

12.    Material agreements and related party transactions

 

Investment Manager

 

The Group pays the Cheyne Capital Management (UK) LLP (the "Investment Manager") a Management Fee and Incentive Fee (see Note 3). During the quarter ended 30 June 2011, the Management Fee totalled Euro 598,168 (31 March 2011: Euro 576,734), of which Euro 198,430 (31 March 2011: Euro 198,009) was outstanding at the period end. There was no Incentive Fee charged during the quarter ended 30 June 2011 or the quarter ended 31 March 2011.

 

Significant Shareholder

 

Cheyne ABS Opportunities Fund, a Company that is also managed by the Investment Manager, held 15,773,804 shares in the Company, amounting to 39.47% of the issued share capital of the Company, at 30 June 2011.

 

13.  Significant Events during the period

 

In May 2011 the Company reduced its exposure to Portuguese mortgage residual income investments by selling the Lusitano Mortgages No. 1 plc, Lusitano Mortgages No. 2 plc and Lusitano Mortgages No. 3 plc Portuguese mortgage residual income investments, and in June 2011, the Company further reduced its exposure to UK mortgage residual income investments by selling the RMAC 2004 NSP4 plc, RMAC 2005 NS3 plc and RMAC 2005 NS4 plc UK mortgage residual income investments. The sale of these residual income positions raised EUR 26,429,836. 

 

14.  Events after the Reporting Period

 

On 10 August 2011, following an extraordinary meeting of the Company, the Board of Directors announced the conversion of the Company to a protected cell company under Guernsey Law and the creation of one cell known as European Residual Income Investments Cell (the "Cell").  The majority of the Residual Income Positions, together with cash amounting to Euro 1.5 million, were transferred to the Cell whose Shares have a separate listing on the Specialist Funds Market of the London Stock Exchange.  The existing Ordinary Shareholders of the Company at the date of conversion were given shares in the Cell on a pro-rata one for one basis.  The Company's Real Estate Debt Investments continue to be held by the non-cellular remainder of the Company (the "Core") and the Company's Ordinary Shares continue to have a premium listing on the London Stock Exchange.  The Residual Income Position retained in the Core on conversion was subsequently redeemed. Following from this conversion, the name of the Company was changed to Real Estate Credit Investments PCC Limited on 15 August 2011.  Note 1 provides further details of the major changes that occurred as a result of this conversion.

 

The value of the Residual Income Positions transferred was Euro 19,992,253.  Following the transfer, the net asset value of the Core was Euro 1.54 per share and the net asset value of the Cell was Euro 0.52 per share as of 10 August 2011.

 

In August 2011, the Company's position in Amstel CLO matured and was redeemed in full. The proceeds of this redemption amounted to Euro 14,490,087.

 

15.Approval of the Consolidated Condensed Financial Statements

 

The financial statements were approved by the Directors on 16 September 2011.


 

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