Final Results

RNS Number : 4230J

Real Estate Credit Inv. PCC Ltd

12 June 2014

 



Real Estate Credit Investments PCC Limited

Financial Results Announcement for the Year-Ended 31 March 2014

RECI records full year profit of £8.1 million; Real Estate Loan Portfolio sees rapid growth

·    RECI reported operating income of £13.7 million in the financial year ended 31 March 2014, up from £12.9 million in the previous year.

·    RECI raised £50 million, before expenses, through a placing on 12 November 2013. The Company has successfully invested this additional capital in a combination of bonds and loans

·    Net profits of £8.1 million included £1.0 million of gains on the financial assets through profit and loss, building on the exceptional gains of £12.3m reported in the prior year as a result of the significant rally in the CMBS and RMBS markets.

·    The Company's commercial and residential loan portfolio grew to £51.0 million as at 31 March 2014, which is a 155% increase from the £20.0 million loan portfolio held a year previously

·    Suitable loans originated by Cheyne continue to feed the investment pipeline; RECI has committed to make a further £14.8 million in loans post financial year end

·    RECI declared a dividend of 2.7 p per share (equating to a 7% annualised yield) in respect of RECI Ordinary Shares for the period ending 31 March 2014

RECI Key Financial Data	Y/E 31 Mar 2014	H/E 30 Sept 2013	Y/E 31 Mar 2013
Gross Assets	£157.0m	£108.5m	£106.7m
Investment Portfolio	£136.8m	£101.3m	£95.4m
Cash	£18.3m	£5.4m	£8.5m
Operating Income	£13.7m	£6.8m	£12.9m
Fair Value  (Losses) / Gains on Investment Portfolio	£1.0m	£0.5m	£12.3m
Net / Profit*	£8.1m	£3.9m	£19.0m
Net Asset Value per RECI Ordinary Share	£1.54	£1.56	£1.50

* Net profit takes hedging, operating and finance expenses into account.

Over the financial year RECI's investment strategy delivered on NAV growth and increased dividend yield

RECI delivered a positive financial performance in the year ended 31 March 2014 with £8.1 million of profits. The Company increased its dividend target to 7% of the placing price as outlined six months ago, reflecting confidence in RECI's balanced portfolio strategy and its ability to continue delivering strong returns.

Tom Chandos, Chairman of RECI said: "The past financial year has seen continuing good returns from RECI's investment portfolio allied to clear progress in developing the scale and cost effectiveness of the Company. The successful fund raising in November 2013 has increased capacity for new investment in real estate loans and bonds and contributed towards the significant reduction in costs as a percentage of net asset value. New loans have been committed to give double digit expected returns and there continues to be a promising pipeline of new loan opportunities."

With the £50 million raised, before expenses, in November's equity placing and RECI's relationship with Investment Manager Cheyne Capital ("the Manager"), the Company has been successful in substantially investing the new capital raised into real estate loans.

The Loan Portfolio has increased from £20.0m at 31 Mar 2013 to £51.0m at 31 March 2014. During the financial year, the Company made 6 new loans and since year-end has completed a further 2 loans. The Manager's new loan origination pipeline is strong and RECI has the opportunity to continue to commit funds from the capital raise to upcoming new loans.

RECI's bond portfolio made a strong contribution to the Company's financial performance, with a total gross return during the period of 11%. The Company recorded mark-to-market ("MTM") profit on the bond portfolio, in excess of operating income, of £1.0 million in the year, including £0.5 million in the half-year ended 31 March 2014.

The overall portfolio strategy led to an increase in NAV per share in the financial year end to £1.54 as at 31 March 2014, up from £1.50 one year previously.

Conference Call & Further Information

10.30 am BST Thursday 12 June 2014.

+ 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:                              Henrietta Dehn                                                [phone]

Investor Relations:                          Nicole von Westenholz                                   [phone]

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 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 RECP Preference Shares are currently 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' (ticker ERII LN). The Cell Shares trade on the Specialist Fund Market of the London Stock Exchange plc. Seven Residual Income Positions are attributed to ERII. Dividends or distributions will only be payable from ERII to the extent that the asset cover ratio (the Preference Share Cover Test) for the RECI Preference Shares is satisfied at the Company level. 

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 31 March 2014

		31/03/2014 (£ million)	30/09/2013 (£ million)	31/03/2013 (£ million)
Bond Portfolio		85.8	58.3	75.4
Loan Portfolio		51.0	43.1	20.0
Cash and Cash Equivalents		18.3	5.4	8.5
Derivative Assets		1.9	1.8	2.8
Other Assets		-	-	-
		157.0	108.5	106.7
Other Liabilities Derivative Financial Liabilities		(2.7) (0.5)	(1.2) (0.6)	(1.0) (1.2)
Dividend Payable		-	-	-
Preference Share Liability		(41.6)	(44.5)	(44.5)
		(44.8)	(46.3)	(46.7)
Net Assets		112.2	62.2	60.0
Shares outstanding		72,818,496	39,966,985	39,966,985
Net Asset Value per Ordinary Share		1.54	1.56	1.50

Portfolio Overview: Balancing liquidity and returns across bonds and loans

RECI's portfolio strategy is to maintain a balance between loans and bonds, taking into consideration liquidity and market opportunities. RECI is aware of the need to maintain sufficient liquidity to cover the redemption of its preference shares in September 2017, as well as investing in a portfolio which provides cover for ongoing dividend payments.

As previously stated, the Company is continuing to pursue its aim of investing approximately 75% of the new capital raised into loans.

Loan Portfolio as at 31 March 2014

Significant portfolio growth

RECI significantly expanded its real estate loan portfolio to £51.0 million from £20.0 million in the financial year ending 31 March 2014.  It made a total of £40 million of new commitments within six deals whose aggregate total commitments exceeded £120 million. During the year one of the loans was successfully restructured, syndicating the senior tranche and retaining an enhanced Mezzanine loan.

RECI's deal participations ranged between £3mn and £10mn in lot size with 2 loans being whole loans and 4 loans being Mezzanine loans. In the UK the loans were secured on a well let retail park in the South East of England, an office to student accommodation refurbishment scheme in Bristol, a high quality Central London office portfolio and a multi-let central London office building.  One deal was completed in Germany secured against a multifamily residential portfolio across North Rhine Westphalia.  As an update on the latest figures, the average loan portfolio LTV exposure as at 31 May 2014 is 72% and the portfolio continues to provide attractive risk-adjusted returns with a weighted average yield of 13.7% pa.

RECI continues to benefit from Manager's position as one of Europe's largest real estate platforms. Furthermore, the Manager enables RECI to participate in whole loans, which puts RECI at the front of the queue with borrowers who prefer that structuring methodology.

Events after the year ended 31 March 2014

Subsequent to the year end two of the loans repaid at levels accretive to NAV, and another loan received an in specie distribution of shares in a limited partnership.

Pipeline value upwards of £30 million

As previously stated RECI's strong pipeline indicates that the loan portfolio could grow to approximately £80 million within the next three months.  Since the end of the financial year RECI has participated with a £5.0 million commitment within a £15 million loan secured on high profile new build Central London hotel, and a £1.9 million investment in a Dutch mixed use portfolio.

The company has allocated £7.9 million for an additional loan, where legal documentation is agreed and conditions precedent are in the process of being met. Final due diligence is being undertaken on a further 4 loans where termsheets are agreed, with RECI commitments and participations totalling circa £22 million

Focus on Europe's strongest markets

RECI's strong position in originating attractive new loans enables the Company to focus investments on Europe's most interesting markets - the UK, Germany and also, potentially, Ireland. These markets offer both strong deal flows and, crucially, a lender-friendly legal framework. The Company will avoid lending in more borrower-friendly jurisdictions such as Italy, Spain and Portugal.

Loan Portfolio Summary as at 31 March 2014

Number of loans	9
Drawn Dirty Fair Value (£ millions) Total Loan Commitments (£ millions)	51.0 63.1
Loans as % of GAV (drawn loan balance)	33.0%
Weighted average yield of loan portfolio	12.9%
Weighted average LTV of portfolio	64.9%

Top 10 Investment Portfolio Exposures¹ as at 31 March 2014

Market Value                                   £74.6 million
WA Original LTV²                             60.0%
WA Cheyne Current LTV²               64.8%
WA Effective Yield³                         9.8%     

Type	Class		Collateral Description
Commercial		B	Bond  - secured against government housing portfolio in the UK
Commercial		Loan	Loan secured against retail park near London
Commercial		Loan	Loan secured against commercial office property in London
Commercial		E	Bond  - Portfolio of commercial loans secured by properties in Germany
Commercial		A	Bond  - Portfolio of nursing homes operated by Four Seasons Health Care Group
Commercial		Loan	Loan secured against German multi-family properties
Commercial		Loan	Loan secured against a London Hotel
Commercial		Loan	Loan secured against German multi-family properties
Commercial		A	Bond - Portfolio of UK commercial loans secured against office and retail properties
Commercial		B	Bond - UK commercial loan secured against a property in London

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 31 May 2014.

³WA effective yield is based on the effective yield as at most recent purchase and is based on 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 31 May 2014.

Real estate bond portfolio records solid gains

RECI recorded mark-to-market ("MTM") gains of £0.5 million on the real estate bond portfolio for the second half of the financial year ended 31 March 2014, in excess of the bond portfolio's strong contribution to overall operating income.  This compared with MTM gains of £0.5 million for the half ended 30 September 2013. In the past financial year the Company has not incurred any credit losses on any of its bond investments.

Balancing towards loans - reinvesting bond sale proceeds

As it continues its strategic shift towards loans, RECI continues to use proceeds from the capital raise as well as from amortisations and sales of bonds to increase allocations to its loan portfolio.

Positive returns from new investments

RECI also continues to make new bond investments. The weighted average expected yield to maturity of new bonds purchased in the second half of the financial year ended 31 March 2014 was 4.6% and RECI purchased the bonds at an average price of 91% of par. The majority of these bond purchases were made with cash raised from the new share issue, pending rotation into higher yielding loans.

Portfolio value

As at 31 March 2014, the portfolio of 79 bonds was valued at £85.8 million, with a nominal face value of £108.3 million[1]. The total gross return of the bond portfolio in the year ended 31 March 2014 was 11%. Due to the increase in bond prices over the past year, the weighted average effective yield to maturity of the portfolio at market prices as at 31 March 2014 was 6.2%, with a weighted average life of 6.8 years (the weighted average effective yield to maturity of the portfolio as at 31 March 2013, using market prices as at 31 March 2013, was 8.8%, with a weighted average life of 4.5 years). As at 31 March 2014, the average purchase price across the portfolio was 81% of par and assets were purchased with a weighted average expected yield to maturity of 9.9% (as at 31 March 2013, the average purchase price across the portfolio was 72% of par and assets were purchased with a weighted average expected yield to maturity of 14.9%).

As at 31 May 2014, the portfolio consisted of 78 bonds with a fair value of £86.1 million and a nominal face value of £105.6 million⁴. 

⁴Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 31 May 2014

Real Estate Bond Portfolio Breakdown

Breakdown of RECI's bond portfolio as at 30 September 2013 and 31 March 2014 by jurisdiction (by reference to underlying assets)

30 September 2013

UK	65.5%
Germany	31.7%
Italy	1.6%
Holland	0.5%
Ireland	0.4%
Portugal	0.2%
Total (£mm)	£58.3mm

31 March 2014

UK	69.8%
Germany	28.1%
Italy	1.3%
Holland	0.4%
Ireland	0.3%
Portugal	0.1%
Total (£mm)	£85.8mm

Monthly Bond Performance Summary as at 31 March 2014

	November	December	January	February	March
% Fair Value Change	-0.71%	0.57%	1.11%	1.27%	0.73%
WA Purchase Price	0.94	0.86	0.93	0.87	0.93
WA Purchase Yield	4.46%	5.23%	4.37%	4.60%	8.67%

Asset Class Distribution of Bond Portfolio by Fair Value as at 31 March 2014

Bond Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	Total	Total as at 30 September 2013
A	15.2%	0.4%	4.9%	0.2%	20.7%	16.6%
B	23.9%	7.6%	2.5%	0.0%	33.9%	32.2%
C	2.1%	5.8%	4.9%	0.0%	12.8%	14.3%
D	1.0%	3.0%	7.2%	0.2%	11.4%	13.9%
E and Below	2.3%	9.3%	9.6%	0.0%	21.2%	23.0%
Total	44.5%	26.0%	29.1%	0.4%	100.0%	100%
Total as at 30 September 2013	58.5%	7.4%	33.5%	0.6%

Values may not sum to 100% due to rounding differences

 
Outlook - Investment of new capital

At a time of improving economic growth, RECI believes that the fundamentals of Western European real estate are strong as a result of improving tenant demand, improving liquidity, greater transaction volumes and a shortage of flexible debt capital.

With a sizable pipeline and access to loans originated by the Manager, RECI is ideally positioned to continue building its real estate loan portfolio, while continuing to generate strong net total returns from continued bond opportunities.

The investment team expects to close several loan transactions in the coming months and has allocated upward of £30 million to these deals, all of which are in advanced stages. The Company expects the pipeline to continue growing, given the sector's strength, juxtaposed with reduced Commercial bank lending capacity.

RECI has seen competition among senior lenders for loan assets increasing, leading to a significant tightening of interest margins at low LTV's. However, RECI's reach into the market through the Manager's platform, alongside its ability to provide flexible loans, will enable it to pick the deals that it wants to pursue and often sell senior tranches down into a competitive market. These deals are being undertaken with experienced sponsors, in lender-friendly legal jurisdictions which offer a greater likelihood of achieving our risk / reward objectives.

The bond portfolio had a total gross return of approx 11% in the financial year ended 31 March 2014. Looking forward into the next financial year, the Investment Manager is confident of the potential for continued strong returns on the bonds as yield-hungry fixed income investors move towards the riskier parts of the credit stack or move further out in duration.

 Strong bond portfolio performance is expected throughout 2014.  The manager remains well-placed to participate in new issue bonds at attractive yields. We will rotate out of low yielding liquid bonds to fund new loan opportunities where the risk/reward dynamics deem it appropriate.

European Residual Income Investments (ERII)

It is the Company's objective, to the extent practicable, to realise the ERII portfolio and return cash to shareholders.  Dividends from ERII will be payable to ERII's shareholders when the asset coverage ratio (the Preference Share Cover Test) is satisfied. As at 31 March 2014 the Preference Share Cover Test was well above the threshold of 2.39. As a result, the Company is declaring a dividend of 3.2 cents per ERII Ordinary Share, returning €0.5 million to investors. The table below shows figures as at 31 March 2014 compared to 31 March 2014.

ERII Key Quarter Financial Data	Q/E 31 March 2013	Q/E 31 March 2014
Cash balance	€1.1m	€1.1m
Residual Total Dirty Fair Value	€14.3m	€9.4m
Asset Coverage Ratio	2.66	3.95
Distribution/Dividend Declared	3.0c	3.2c
Net Asset Value per ERII Share	0.83	0.68
ERII Shares Outstanding	18.54m	15.4m

Investment Portfolio

Overview

ERII reported cash flows from investments for the year ended 31 March 2014 of €3.1 million, compared to €3.7 million in the previous year. The majority of write downs in the quarter ended 31 March 2014 were in the SME Portfolio.

Name	% of ERII Portfolio	Sector
Magellan 1	67.9%	European Mortgage Portfolio
Smart 2006-1	4.6%	SME Portfolio
Alba 05-1	5.8%	UK Mortgage Portfolio
Alba 06-1	10.9%	UK Mortgage Portfolio
Cash	10.8%
TOTAL	100.0%

 

END

 

 

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