Half Year Results
Real Estate Credit Investments PCC Limited
Financial Results Announcement for the Half Year-Ended 30 September 2015
RECI1 records net profit of £4.1 million for the half year
· The Company's commercial and residential loan portfolio has continued to grow to £108 million drawn with £120 million committed as at 30 September 2015, which is a 20% increase from the £87 million of drawn loans as at 31 March 2015. This reflects the continuing attractive opportunities Cheyne Capital Management (UK) LLP (the "Investment Manager") is seeing in the loan markets
· The Company's weighting of its portfolio towards higher yielding loans rather than bonds has proved beneficial
· The loans also offer the superior characteristics of being comprehensively underwritten with focused primary due diligence, which allows the Investment Manager to use its ability and experience to structure them accordingly
· Suitable loans originated by the Investment Manager continue to feed the investment pipeline; the Company has completed increases in the commitments of two existing loans since 30 September 2015
· The directors of the Company are pleased to declare a dividend of 2.7p per share in respect of RECI Ordinary Shares for the quarter ended 30 September 2015
1 RECI refers to the core segment of Real Estate Credit Investments PCC Limited
|
RECI Key Financial Data |
H/E 30 Sept 2014 |
Y/E 31 Mar 2015 |
H/E 30 Sept 2015 |
|
Gross Assets |
£159.4m |
£162.9m |
£165.7m |
|
Loan Portfolio (excludes accrued interest) |
£66.8m |
£87.1m |
£108.3m |
|
Bond Portfolio (excludes accrued interest) |
£69.7m |
£59.4m |
£43.9m |
|
Cash |
£10.8m |
£8.1m |
£2.0m |
|
Operating Income |
£7.2m |
£15.8m |
£9.0m |
|
Dividends declared/paid per Ordinary share |
£0.054 |
£0.108 |
£0.054 |
|
Net / Profit* |
£7.5m |
£13.8m |
£4.1m |
|
Net Asset Value per RECI Ordinary Share |
£1.590 |
£1.623 |
£1.625 |
|
|
|
|
|
* Net profit takes hedging, operating and finance expenses into account.
Over the half year RECI's flexible investment strategy continued to deliver positive shareholder returns with stable dividend yield
RECI continues to pursue a flexible investment strategy allocating its assets to both the loan and bond markets, so that the portfolio is balanced to capture the opportunities in higher-yielding loans whilst taking advantage of the liquidity and ability to mitigate cash drag offered by the bond markets.
The drawn fair value of the loan portfolio has increased from £87 million at 31 March 2015 to £108 million as at 30 September 2015. During the half year, RECI made four new loans with commitments of £16 million. Since 30 September 2015 RECI has restructured its loans secured on UK logistics and industrial properties, and a German multi-family deal providing further net increases in its commitments of £12 million. The Investment Manager's new loan origination pipeline remains strong with further new loans in documentation.
While the Company had used its cash balances as at 30 September to fund increases in loans, it had simultaneously sold some bonds which settled just after the month end. It has also received further cash, as expected, from repayments on its bond and loan portfolios. At 31 October 2015, the Company has an available cash balance of £3.1m.
RECI delivered a positive financial performance in the half year ended 30 September 2015 with £9.0 million of operating income and £4.1 million of net profits. Bob Cowdell, Chairman of the Company said: "RECI continues to benefit from the ability, through Cheyne and its transaction pipeline, to participate in the structuring and underwriting of relatively complex and specialised loans, in order to maximise risk-adjusted returns for its investors. The expectation of supportive market conditions for high-yielding loans across our core geographical target areas, to support the generation of positive returns on the growing loans portfolio, is balanced by a cautious outlook on the asset backed bond market. Accordingly, the Company will maintain its disciplined investment process in selecting loans and bonds that will combine to continue to deliver attractive returns for investors."
Outlook
RECI's loan portfolio benefits from a number of attributes, with a focus on core Europe (UK and West Germany), combined with defensive capital characteristics and backed by well structured documentation. This has positioned the portfolio against recent volatility in European real estate markets, caused inter alia by the withdrawal, over the last few months, of monies from emerging economies and China, and as a result of growing concern on prime central London residential assets (where capital values have declined by around 15% or so and liquidity is thin) and the increasing concern expressed by some for yields in prime City office and retail assets in London.
The performance of the Company's bond portfolio remains supported by the amortisation and high coupon receipts, despite the relatively disappointing performance of the wider markets in the half year ended 30 September 2015. Yield widening as a result of the wider pull back in global capital flows into the core European real estate markets has impacted the pricing and performance of the bond portfolio.
Ultimately, the long term performance of the bond portfolio will depend on the credit recovery from the underlying assets, and in this regard, the underlying asset performance backing the Company's bond portfolio remains resilient. The Investment Manager also remains well-placed to participate in new issue bonds at attractive yields, but will continue to rotate out of lower yielding liquid bonds to fund new loan opportunities where the risk/reward dynamics deem it appropriate.
The Investment Manager's real estate debt team remains well resourced across 13 professionals and plans to strengthen this further. Cheyne expects to continue to close more loan transactions in the coming months, following on from the growth in its overall loan book over the last 6 months, and based on the Investment Manager's strong reputation of delivering financial solutions across the capital stack in innovative structures at compelling pricing for both borrowers and investors.
Conference Call & Further Information
10.30 am BST 27 November 2015.
+ 44 (0)20 3059 8125. Please reference Real Estate Credit Investments PCC Limited.
A results presentation will be available on the Company's 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: James MacFarlane (CTF) +44 (0)20 3540 6455
Investor Relations: Nicole von Westenholz (Cheyne) +44 (0)20 7968 7482
Broker: Richard Crawley (Liberum Capital) +44 (0)20 3100 2222
About the Company
Real Estate Credit Investments PCC Limited is a protected cell company (the "Company"), being a cellular company governed by the Companies (Guernsey) Law 2008, comprising a core segment (the "Core" or "RECI") and a cell segment (the "Cell" or "ERII") each of which has its own portfolio of assets, investment objective and sub-section of the Company's Investment Policy.
The RECI Ordinary Shares (ticker RECI LN) reflect the performance of the Company's Core real estate debt strategy. The RECI Ordinary 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 plc. RECI Ordinary Shares offer investors a levered exposure to a portfolio of real estate credit investments and aim to pay a quarterly dividend. Such leverage is provided by the RECI Preference Shares (ticker RECP) which confer the right to a preferential cumulative 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 RECI (RECP) Preference Shares are listed on the standard segment of the Official List of the UK Listing Authority and trade on the Main Market of the London Stock Exchange plc.
The real estate debt strategy focuses on secured residential and commercial debt in the UK and Western Europe, seeking to exploit 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 Cell within the Company is known as 'European Residual Income Investments Cell' or 'ERII'. The trading of the Cell Shares on the Specialist Funds Market of the London Stock Exchange (ticker ERII LN) was cancelled at the end of 2014 following the realization of ERII's substantive assets. There is one Residual Income Position remaining as at 30 September 2015. That position has been held at zero value since ERII was created.
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). Past performance of the Company cannot be relied on as a guide to future performance . In this section, unless otherwise defined, capitalised terms have the meaning given to them in the Company's prospectus dated 16 October 2013.
Real Estate Credit Investments (RECI)
RECI Balance Sheet Summary as at 30 September 2015*
|
|
30/09/2014 (£ million) |
31/03/2015 (£ million) |
30/09/2015 (£ million) |
|
Loan Portfolio |
66.8 |
87.1 |
108.3 |
|
Bond Portfolio |
69.7 |
59.4 |
43.9 |
|
Cash and Cash Equivalents |
10.8 |
8.1 |
2.0 |
|
Derivative Assets |
3.1 |
4.8 |
4.3 |
|
Receivable For Investments Sold |
|
|
3.7 |
|
Other Assets (includes accrued interest) |
9.0 |
3.5 |
3.5 |
|
|
159.4 |
162.9 |
165.7 |
|
|
|
|
|
|
Other Liabilities |
(2.0) |
(2.6) |
(2.4) |
|
Derivative Financial Liabilities |
- |
(0.5) |
(0.3) |
|
Cash Collateral due to Broker |
|
|
(2.8) |
|
|
|
|
|
|
Preference Share Liability |
(41.6) |
(41.7) |
(41.9) |
|
|
(43.6) |
(44.8) |
(47.4) |
|
|
|
|
|
|
Net Assets |
115.8 |
118.1 |
118.3 |
|
|
|
|
|
|
Shares outstanding |
72,818,496 |
72,818,496 |
72,818,496 |
|
Net Asset Value per Ordinary Share |
1.590 |
1.623 |
1.625 |
*The values for each column may not sum to the total due to rounding differences
Loan Portfolio as at 30 September 2015
Significant loan portfolio growth
RECI increased its real estate loan portfolio to £108 million from £87 million in the financial half year ending 30 September 2015. During the half year, the Company made £16 million of new commitments over four new deals, taking total loan commitments to £120 million as at 30 September 2015 (being 73% of GAV). This has since increased to £112 million drawn and £125 million committed as at 31 October 2015.
The average loan portfolio LTV exposure as at 30 September 2015 was 73% and the portfolio continues to provide attractive risk-adjusted returns with a weighted average yield of 13% per annum, before any back end fees or profit share contributions are taken into account.
Since the 30 September 2015, the Company has funded increases in its commitments to a loan secured against German multi-family properties, and its priority ranking shareholder loan against a portfolio of UK logistics and industrial properties; both these loans have been performing well and will contribute to increased operating income performance.
Expected loan investment repayments
The Company is expecting several loan repayments from its portfolio, with potential cash inflows in excess of £13m in the coming months. As part of this, the Investment Manager is working with the borrower on one of its mezzanine loans to refinance the current position in the coming months.
Continued focus on Europe's strongest markets
The Investment Manager's strong position in originating attractive new loans enables the Company's investments to be focussed on Europe's strongest markets - the UK and Germany. These markets offer both strong deal flows and, crucially, a lender-friendly legal framework. The Company intends to continue to avoid lending in less borrower-friendly jurisdictions such as Italy, Spain and Portugal.
Loan Portfolio Summary as at 30 September 2015
|
Number of loans |
19 |
|
Drawn Dirty* Fair Value (£ millions) Total Loan Commitments (£ millions) |
111.2 120.3 |
|
Loans as % of GAV (drawn loan balance) |
67.1% |
|
Loans as a % of GAV (committed loan balance) Weighted average yield of loan portfolio |
72.6% 13.0% |
|
Weighted average LTV of portfolio |
73.0% |
|
Weighted average life of portfolio (years) |
2.1 |
* Dirty Fair Value includes accrued interest
Top 10 Investment Portfolio Exposures1 as at 30 September 2015
Market Value £89.4 million
WA Original LTV2 66.5%
WA Cheyne Current LTV2 73.3%
WA Effective Yield3 11.3%
|
Type |
Class |
Collateral Description |
|
|
Residential |
Loan |
Whole Loan secured against German multi-family properties |
|
|
Commercial |
B |
Bond secured against government housing portfolio in the UK |
|
|
Commercial |
Loan |
Mezz loan secured on a fully let retail park in Essex |
|
|
Commercial |
Loan |
Mezz loan secured against two mixed use estates in Central London |
|
|
Residential |
Loan |
Mezz loan secured by residential land & homes under development in South East UK |
|
|
Commercial |
Loan |
Senior loan secured on a dominant shopping centre in a residential suburb of Berlin |
|
|
Commercial |
Loan |
Subordinate loan secured against retirement villages in London and South-East |
|
|
Commercial |
Loan |
Mezz loan to assist in the acquisition of major German residential development company |
|
|
Commercial |
Loan |
Mezz loan secured against a branded London hotel development in Shoreditch |
|
|
Commercial |
B |
Portfolio of commercial loans secured by properties in Germany |
|
1Based on fair value of bonds and loans.
2The weighted average original loan to value has been calculated by reference to the original acquisition value of the relevant collateral as disclosed at the time of issue of the relevant bond or loan. The original LTV is weighted by the market value of the bonds and loans. The weighted average Cheyne current LTV has been calculated by the Investment Manager by reference to the current value ascribed to the collateral by the Investment Manager. In determining these values, the Investment Manager has undertaken its own internal valuation of the underlying collateral. Such valuations have not been subject to independent verification or review. WA LTV figures are calculated with original notional using pool factor and FX rate as at 30 September 2015.
3WA effective yield is based on the effective yield as at most recent purchase and is based on the Investment Manager's pricing assumptions and actual returns may differ materially from those expressed or implied herein. WA effective yield figures are calculated with original notional using pool factor and FX rate as at 30 September 2015.
Real estate bond portfolio
As at 30 September 2015, the bond portfolio of 32 bonds was valued at £43.9 million, with a nominal face value of £53.5 million1. Taking both the positive recorded interest income (using effective yield accounting) and the fair value losses on the bonds in the half year, the total gross return of the bond portfolio (reportable segment profit) in the half year ended 30 September 2015 was £1.5m (or approximately 3%). It is this lower than expected performance on the bond portfolio that contributed to the Company's overall net profit for the half-year ended 30 September 2015 being £4.1 million, compared with £7.4 million in the half year ended 30 September 2014.
While the markets in general experienced yield widening, two of RECI's bond positions notably contributed to the relatively disappointing performance of the bond portfolio in the half year ended 30 September 2015.
A bond secured against a government housing portfolio in the UK experienced some mark to market volatility as a result of an increasing portion of interest in the underlying assets being paid in cash (as opposed to PIK). However this bond pays a high coupon of 13%, which offsets the slow decline in the price.
Another bond, secured against a portfolio of nursing homes, suffered some mark to market losses, caused by strong headwinds in the sector from a number of macro factors (including decreasing fees as result of UK Government austerity, increases in the minimum wage, shortage of nurses and the lack of professional management in the sector) combined with an underperformance of this asset compared to other operators in the sector. The Investment Manager's view is that the value of the underlying portfolio should result in a recovery of the bond price, despite the potential for further volatility in the near term.
Despite the decrease in bond performance in the period, the Manager remains well-placed to participate in new issue bonds at attractive yields, and will continue to rotate out of lower yielding liquid bonds to fund new loan opportunities where the risk/reward dynamics deem it appropriate.
Looking forward, there are some initial signals that market sentiment may be slowly improving. Continued intervention by several Federal Reserve governors has helped to clarify communication in regards to US rate rises. This, and the ECB's recent announcements on QE initiatives, have contributed to decreasing volatility in the equity, rates and currency markets and consequent improving prices. European MBS should follow the wider markets and recover. The bond portfolio also remains supported by amortisation and high coupon receipts.
As at 31 October 2015, the portfolio consisted of 32 bonds with a fair value of £42.6 million and a nominal face value of £51.6 million2.
1Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 30 September 2015.
2Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 31 October 2015.
|
Bond Portfolio Summary as at 30 September 2015 |
|
|
Number of bonds |
32 |
|
Fair Value of Bond Portfolio as at 30 September 2015 (£ millions) Nominal Face Value of Bond Portfolio as at 30 September 2015 (£ millions) |
43.9 53.5 |
Real Estate Bond Portfolio Breakdown
Breakdown of RECI's bond portfolio as at 31 March 2015 and 30 September 2015 by jurisdiction (by reference to underlying assets)
|
|
31 March 2015 |
30 September 2015 |
|
UK |
72.8% |
72.6% |
|
Germany |
25.7% |
27.1% |
|
France |
0.7% |
0% |
|
Holland |
0.6% |
0% |
|
Ireland |
0.2% |
0.2% |
|
|
£59.8mm |
£43.9mm |
Monthly Bond Performance Summary as at 30 September 2015
|
|
May |
June |
July |
August |
September |
|
% Fair Value Change |
0.44% |
-0.44% |
0.61% |
-0.25% |
-0.78% |
|
WA Purchase Price |
- |
- |
- |
- |
- |
|
WA Purchase Yield |
- |
- |
- |
- |
- |
No bonds purchased in the period
Asset Class Distribution of Bond Portfolio by Fair Value as at 30 September 2015
|
Bond Class |
UK CMBS |
UK RMBS |
Euro CMBS |
Euro RMBS |
Total |
Total as 31 March 2015 |
|
A |
10.5% |
0.0% |
0.0% |
0.0% |
10.5% |
10.4% |
|
B |
45.2% |
0.0% |
3.8% |
0.0% |
49.0% |
44.8% |
|
C |
0.7% |
0.0% |
1.7% |
0.0% |
2.4% |
7.4% |
|
D |
0.0% |
1.0% |
8.6% |
0.2% |
9.8% |
11.7% |
|
E and Below |
7.8% |
7.0% |
13.5% |
0.0% |
28.3% |
26.1% |
|
Total |
64.2% |
8.0% |
27.6% |
0.2% |
100.0% |
100% |
|
Total as at 31 March 2015 |
61.0% |
11.5% |
26.6% |
0.9% |
|
|
Values may not sum to 100% due to rounding differences
This information is provided by RNS
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