Financial Results Announcement

RNS Number : 4940G

Real Estate Credit Inv. PCC Ltd

07 June 2013

 



Real Estate Credit Investments PCC Limited

Financial Results Announcement for the Fourth Quarter and Year-Ended 31 March 2013,

Annual Report and Accounts

RECI[1] Fourth Quarter and Year-End Highlights

·      RECI reported a net profit of £19.0 million for the year ended 31 March 2013, including a profit of £5.9 million in the fourth quarter of the financial year

·      Total return of 43.2% with Net Asset Value ("NAV") increasing by 36.5% in the year and total RECI Ordinary Share dividends of 6.7%

·      Attractive investment opportunities in both loans and bonds; pipeline of real estate loans with yields in excess of 10%

·      RECI is declaring a dividend of 2.2p per share (equating to a 6% annualised yield on NAV) in respect of RECI Ordinary Shares for the quarter ended 31 March 2013

RECI Key Quarter Financial Data*	Q/E 31 December 2012	Q/E 31 March 2013
Gross Assets	£100.9m	£106.7m
Investment Portfolio	£94.9m	£94.6m
Cash	£3.5m	£8.5m
Operating Income	£3.2m	£3.2m
Fair Value  (Losses) / Gains on Investment Portfolio	£2.7m	£5.1m
Net / Profit**	£3.7m	£5.9m
Net Asset Value per RECI Ordinary Share	£1.39	£1.50

*Audited financial statements are not prepared for 31 December quarter end and numbers are pro forma based on management accounts.

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

RECI sees opportunities to deliver further NAV growth

RECI delivered a positive financial performance in the year ended 31 March 2013 with £19.0 million of profits, equating to a total return of 43.2%. The investment team sees opportunities across real estate loans and bonds that will enable it to continue this momentum. The Company's ability to move between bond and loan markets can lead to higher returns by capturing relative value shifts between these markets.

The real estate bond portfolio recorded mark-to-market ("MTM") profit of £5.1 million in the quarter ended 31 March 2013, and £12.9 million in the full financial year.  The portfolio generated an annual cash yield of 24.4%. Recently-announced refinancings should translate to further bond payments in the coming quarters and RECI expects average cash yields of approximately 10% in the coming year. The outlook for bonds remains positive as pricing inefficiencies in the market continue. Yields on European real estate bonds remain double those on European high-yield bonds.  The Investment Manager expects this yield differential to tighten in the medium term, resulting in substantial mark-to-market gains.

The average yield on the loan portfolio is currently 14.2%.  During the financial year, the Company concluded the sale of the OMNI loan portfolio and made three new loan commitments. The investment team sees scope to expand the loan portfolio as a percentage of assets under management. The loan pipeline includes several financing opportunities with yields in excess of 10%. The Company will seek to rotate out of lower yielding bonds and invest in loans as these opportunities materialise. Most recently, the Company provided a loan backed by German multi-family properties with a return in excess of 15%.

Tom Chandos, Chairman of RECI said: "RECI's investment team at the manager Cheyne Capital is determined to build on the positive performance of the past financial year and capitalise on the many opportunities it sees across real estate bonds and loans. The team is continuing to be deepened and strengthened and is well-placed to secure the targeted double-digit returns across real estate bond and loan markets, thereby both growing NAV and maintaining a solid dividend for shareholders."

Conference Call & Further Information

10.30 am BST Friday 07 June 2013.

+ 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). In this section, unless otherwise defined, capitalised terms have the meaning given to them in the Company's prospectus dated 11 July 2011.

Real Estate Credit Investments (RECI)

RECI Balance Sheet Summary as at 31 March 2013

Audited financial statements are not prepared for 31 December quarter end and numbers are pro forma based on management accounts.

		31/03/2012  (£ million)	31/12/2012 (£ million)	31/03/2013 (£ million)
Investment Portfolio		86.25	94.86	94.57
Cash and Cash Equivalents		2.85	3.54	8.50
Derivative Assets		3.01	2.01	2.76
Other Assets		0.56	0.51	0.85
		92.67	100.91	106.68
Other Liabilities Derivative Financial Liabilities		(1.28) (0.86)	(0.59) -	(1.00) (1.17)
Preference Share Liability		(46.55)	(44.96)	(44.49)
		(48.70)	(45.55)	(46.66)
Net Assets		43.97	55.36	60.03
Shares outstanding		39.97	39.97	39.97
Net Asset Value per Ordinary Share		1.10	1.39	1.50

Key events in the year-ended 31 March 2013

Growth of loan portfolio: Portfolio increased from 4.4% to 19.0% of gross assets. The team had made three new investments by 31 March 2013.

New investment team hires in loan origination.

Significant purchases of new issue bonds totalling £24.0 million.

Material bond repayments of £18.3 million compared to an average bond portfolio value of £78.6 million.

Real estate bond portfolio recorded mark-to-market ("MTM") profit of £5.1 million in the quarter ended 31 March 2013, with £12.9million in the financial year.

Continued policy of active hedging: Hedging against significant market risks in a volatile market has not limited upside and the manager has kept hedging costs to £0.6 million in the year.

Narrowing of share price discount and increasing share volumes: Discount to NAV has narrowed from 23.0% to 5.3% as at 15 May 2013 with share volumes of 7.9 million in the March quarter.

Full year dividend declared at equivalent of 6% of annualised NAV.

Real Estate Bond Portfolio Review

RECI recorded mark to market ("MTM") gains of £5.1 million on the real estate bond portfolio for the quarter ended 31 March 2013.  This compared with MTM gains of £2.7 million for the quarter ended 31 December 2012. RECI recorded £12.9 million of MTM bond gains over the year ended 31 March 2013, offset only partially by £0.6 million in overall hedging costs.

In the past financial year the company has not incurred any credit losses on any of its bond investments.

Reinvesting bond sale proceeds

RECI was a net seller of bonds during the quarter ended 31 March 2013, with net sales of £5.4 million versus net sales of £9.4 million in the previous quarter.   Proceeds from sale investments were invested in a German multi-family loan that the Company completed in April 2013.

The weighted average expected yield to maturity of new investments in the quarter ended 31 March 2013 was 8.9% and RECI purchased the bonds at an average price of 91% of par. As at 15 May 2013, the weighted average price of these investments had increased to 95% of par.

Strong cash returns

The average cash return of the portfolio in the 2013 financial year (taking into account bond repayments and interest coupons) was approximately £22.1 million or an annual cash return of 24.4%.  The Company received bond repayments of approximately £18.3 million throughout the financial year, equal to approximately 23.3% of the average portfolio value over the period.  Significant bond repayments are listed in the table below.

Quarter Ending	Level of Bond Repayment (£mn)	Average Purchase Price of Bonds
30/06/2012	0.57	78.4
30/09/2012	15.28	82.0
31/12/2012	0.58	78.8
31/03/2013	1.88	48.5

Effective hedging

In a volatile market it remains necessary to hedge against key risks such as macro-economic and market risks. RECI's hedging strategy has protected the Company against these risks while avoiding limiting upside from gains in asset prices. The total cost of hedging activity for the financial year ended 31 March 2013 was £0.6 million.

Portfolio value

As at 31 March 2013, the portfolio of 87 bonds was valued at £75.4 million, with a nominal face value of £98.4 million^[2].  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% ^[3] .  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 2013 was 8.8% with a weighted average life of 4.5 years.

Real Estate Bond Portfolio Breakdown

Breakdown of RECI's bond portfolio as at 31 December 2012 and 31 March 2013 by jurisdiction (by reference to underlying assets)

31 December 2012

UK	68.1%
Germany	27.3%
Holland	3.1%
Italy	1.1%
Ireland	0.3%
Portugal	0.1%
Total (£mm)	£75.5mm

31 March 2013

UK	67.3%
Germany	28.2%
Holland	2.8%
Italy	1.2%
Ireland	0.3%
Portugal	0.2%
Total (£mm)	£75.4mm

Values may not sum to 100% due to rounding differences

Bond purchases and sales since 31 March 2013

Between 1 April 2013 and 15 May 2013, the Company invested £0.7 million at an average price of 48% of par and a weighted average expected yield-to-maturity of 12.6%. RECI also sold £0.9 million of bonds during this period at an average price of 97% of par versus an average purchase price of 75% of par.  As at 15 May 2013, the portfolio consisted of 87 bonds with a fair value of £76.9 million and a nominal face value of £100.9 million^[4]. 

 

Monthly Bond Performance Summary as at 15 May 2013

	December	January	February	March	April	May
% Fair Value Change	1.12%	3.43%	2.65%	1.12%	1.75%	0.40%
WA Purchase Price	0.81	0.97	0.84	0.66	0.48	0.32
WA Purchase Yield	7.37%	8.54%	8.66%	11.70%	12.11%	20.00%

Asset Class Distribution of Bond Portfolio by Fair Value as at 15 May 2013

Bond Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	Total	Total as at 31 March 13
A	16.6%	0.0%	2.2%	0.2%	19.0%	18.6%
B	21.9%	0.0%	8.7%	0.0%	30.5%	29.0%
C	4.0%	0.5%	6.1%	0.0%	10.7%	11.1%
D	2.8%	2.7%	11.0%	0.2%	16.7%	17.2%
E and Below	10.6%	7.9%	4.6%	0.0%	23.1%	24.0%
Total	55.8%	11.1%	32.6%	0.5%	100.0%
Total as at 31 March 13	56.9%	10.5%	32.2%	0.4%

Values may not sum to 100% due to rounding differences

Loans - Progress with new investment opportunities

The Company's loan portfolio has continued to provide attractive risk adjusted returns.  The average yield on the loan portfolio is currently 14.2%. In the past financial year the Company has concluded the sale of the OMNI loan portfolio. It has invested in new loans backed by Dutch commercial property, a London hotel and a London office property, and has identified new investment opportunities in the UK and Germany.

Dutch Commercial property loan

In August 2012, the Company made a €4.2million commercial loan which is secured against a portfolio of commercial properties in the Netherlands. This loan has a yield in excess of 15%, an LTV of 64% and a weighted average life of 3.5 years.

OMNI sale

By 31 October 2012, the Company had sold the OMNI assets secured by residential properties in London and the South East. The Company exited its position at par and recorded a return of 12.6% on its investment.

London office property loan

On 21 November 2012, the Company made a £10 million second lien loan at a 65% LTV and a yield in excess of 10% secured by a London office property.   The loan ranks behind a senior loan which has a 50% LTV. 

London hotel property loan

On 17 December 2012, the Company made a £5.7 million loan. This is a 65% LTV second lien loan backed by a hotel property in London with a yield in excess of 10%.

Post quarter-end investment

Subsequent to the quarter end the Company has made a further loan investment. In April 2013 the Company completed a €5.8 million loan backed by German multi-family properties with an expected return in excess of 15%.

Pipeline

Looking ahead, the Company has a strong pipeline of real estate loans in the UK and Germany with high visibility on new loans with yields in excess of 10%.  Asset classes that RECI is focussing on include German multi-family, UK offices, UK shopping centres, and UK hotels.  

Loan Portfolio Summary as at 15 May 2013

Number of loans	4
Dirty Fair Value (£ millions) Loans as % of GAV	25.1 23.5%
Weighted average yield of loan portfolio[5]	14.2%
Weighted average LTV of portfolio[6]	65.5%

Top 10 Investment Portfolio Exposures[7] as at 15 May 2013

Market Value                                    £58.3 million
WA Original LTV[8]                            58.4%
WA Cheyne Current LTV ^[8]           61.3%
WA Effective Yield[9]                       12.0%   

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

Outlook for RECI 

 The Company's management team is confident it will continue to generate growth through both significant embedded value in the Core portfolio and new investment opportunities.

Embedded value in existing bonds

The Core portfolio's real estate debt holdings are trading at attractive discounted valuations and the Investment Manager expects them to repay at par in the medium term. However yields on real estate bonds remain considerably wider than in other credit markets. As investors broaden their search for yield, the Investment Manager expect appetite for RMBS and CMBS bonds to increase further. RECI's existing bond portfolio remains, therefore, well-positioned to benefit from continued mark to market gains as well as bond redemptions. The Investment Manager expects bond prices to rise at a rate faster than the yield implied by current prices.    

Market environment creating attractive investment conditions

Opportunities for new lenders with real estate debt expertise are highly attractive. A substantial volume of outstanding real estate loans come due for repayment in the next three years, but the withdrawal of banks, mezzanine funds and securitisation markets has left a large gap in available funding. The Investment Manager anticipates that competition will remain weak for some time, especially for smaller ticket deals.

Maximising relative value in loans and bonds

RECI is also well-positioned to take advantage of weakened demand and dislocations in the European real estate finance markets. Our ability to shift between loan and bond markets will help to optimise returns. Over the past year the team has identified better risk-adjusted investment opportunities in loans and shifted from a strong bond bias into a more balanced weighting between bonds and loans. The loan pipeline should enable this trend to continue.

Based on the current balance sheet size, the Company will limit its exposure to real estate loans in order to maintain liquidity on the asset side of the balance sheet. The Investment Manager expects yields in the real estate loan markets to remain in double digits with average LTVs of between 70-75%. The downside for these loans is expected to be limited even in stressed scenarios.

RECI benefits from the strength and size of the Investment Manager's real estate finance business which exceeds $1.6 billion. This allows RECI to be involved in financing opportunities that would not be otherwise available.  For example, RECI has secured full participation in a number of new CMBS deals that the Investment Manager helped structure and anchor in 2012 and 2013.

Given the strong pipeline of investments and the strength of the bond and loan investments made to date RECI remains confident of the portfolio's ability to continue to generate NAV growth. 

European Residual Income Investments (ERII)

It is the Company's objective, to the extent practicable, to liquidate 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. For the period ended 31 March 2013 the Preference Share Cover Test was 2.66, above the threshold of 2.39. As a result, the company is declaring a dividend of 3.0 cents per ERII Ordinary Share, returning €0.6 million to investors. In February 2013 ERII returned €17.2 million to investors in return for 21.4 million shares via a mandatory redemption. The table below shows figures as at 31 March 2013 compared to 31 December 2012.

ERII Key Quarter Financial Data	Q/E 31 December 2012	Q/E 31 March 2013
Cash balance	€17.7m	€1.1m
Residual Total Dirty Fair Value	€15.8m	€14.3m
Cash Flows in periods	€1.8m	€1.0m
Asset Coverage Ratio	2.81	2.66
Dividend Declared	43.0c	3.0c
Net Asset Value per ERII Share	0.84	0.83
ERII Shares Outstanding	39.97m	18.54m

Investment Portfolio

Overview

ERII reported cash flows for the quarter ended 31 March 2013 of €1.0 million, compared to €1.8 million in the previous quarter and net write ups of €0.3 million. Write downs in the European mortgage portfolio were offset in part by gains in the UK mortgage and SME portfolios.

European Mortgage Portfolio

The European Mortgage Portfolio generated €0.3 million of cash flows for the quarter ended 31 March 2013, compared to €0.2 million in the previous quarter. Net write-downs in the portfolio totalled €0.4 million and included a €0.5 million write down in the Sestante mortgage portfolio. 

SME Portfolio

The Company has increased the fair value of Smart 06-1 to €2.2 million, versus €1.7 million in the previous quarter. Cash flows for Smart 06-1 in the quarter ended 31 March 2013 totalled €0.1 million, unchanged from the previous quarter.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £0.5 million in the quarter ended 31 March 2013 compared to £1.2 million in the previous quarter.  Gains in the portfolio totalled £0.2 million with all investments recording a gain in their market value. The NGATE litigation claim was settled during the year, and following this the assets were sold at a price accretive to NAV.

Magellan 1	53.8%	European Mortgage Portfolio
Sestante 1	12.3%	European Mortgage Portfolio
Smart 2006-1	14.3%	SME Portfolio
Alba 06-1	8.1%	UK Mortgage Portfolio
Alba 05-1	4.3%	UK Mortgage Portfolio
Cash	7.2%
TOTAL	100.0%

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[1] RECI refers to the core segment of Real Estate Credit Investments PCC Limited.

[2] Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 31 March 2013

[3] Average expected yield to maturity based on cost price

[4] Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 15 May 2013

[5] WA effective yield is based on the effective yield using prices as at 15 May 2013 and is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein.

[6] The Weighted Average LTV has been calculated by Cheyne by reference to the current value ascribed to the collateral by Cheyne.  In determining these values, Cheyne has undertaken its own internal valuation of the underlying collateral.  Such valuations have not been subject to independent verification or review.  

[7]  Based on fair value of bonds and loans.

[8]  The 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 15 May 2013.

[9] WA 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 15 May  2013.

 

END

 

 

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