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 10^th 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 16^th 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                  [phone]

Investor Relations:                              Natalie Withers                   [phone]

                                                                Nicole von Westenholtz     [phone]

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:

Asset Class	31 Mar 2011  B/S Value1    (€mm)	30 Jun 2011  B/S Value2    (€mm)	Change to B/S Value Since 31 Mar 2011 (€mm)	Cash Flows Received in the Quarter Ended 30 Jun 2011 (€mm)	Cash Flows Received in the Quarter Ended 31 Mar 20113 (€mm)
Real Estate Bonds	72.0	99.4	27.4	3.9	1.2
Euro Mortgages	26.3	16.0	-10.3	1.2	2.3
SME	17.8	15.7	-2.1	0.2	0.2
UK Mortgages	9.9	1.5	-8.3	0.2	1.3
TOTAL4	125.9	132.7	6.7	5.4	5.0

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.

 

 

END

 

 

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