Financial Results Announcement

RNS Number : 8511E

Real Estate Credit Inv. PCC Ltd

07 June 2012

 



Real Estate Credit Investments PCC Limited

Financial Results Announcement for the Fourth Quarter and Year-Ended 31 March 2012,

Annual Report and Accounts

RECI Fourth Quarter and Year-End Highlights

·     RECI reported a profit of £4.5 million and increase in net asset value ("NAV") of 10% to £1.10 per share for the quarter ended 31 March 2012, and a further increase to £1.12 per share as at 15 May 2012

·     Real Estate Bond portfolio has embedded value of £136.8 million versus market value of £82.8 million as at 31 March 2012

·     Repayment of Titan 2006 bonds (backed by Four Seasons nursing home portfolio) will result in material bond repayments in second half of 2012

·     Portfolio of residential real estate loans increased to 5% of investment portfolio

·     RECI is declaring a dividend of 1.7p per share (equating to a 6% yield on NAV) in respect of RECI Ordinary Shares

RECI Key Quarter Financial Data*	Q/E 31 December 2011	Q/E 31 March 2012
Gross Assets	£88.0m	£92.7m
Real Estate Bond Portfolio	£77.1m	£82.8m
Residential Loan Portfolio	£1.9m	£4.0m
Cash	£6.3m	£2.8m
Operating Income	£2.7m	£2.7m
Fair Value  (Losses) / Gains on Investment Portfolio	£(3.7)m	£3.4m
Net (Loss) / Profit**	£(3.2)m	£4.5m
Net Asset Value per RECI Ordinary Share	£1.00	£1.10

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

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

RECI benefits from gains on investments and realignment of portfolio; significant bond repayments expected

RECI experienced a positive fourth quarter with an increase in profits and NAV. The quarter saw a significant rally in the price of the Company's bond portfolio.  Bond markets were buoyed by the Long Term Refinancing Operations ("LTRO") liquidity injections announced in December 2011. The Company has actively managed risk throughout the financial year, scaling back exposure to bonds in the first and second quarters but increasing its bond exposure in the fourth quarter to derive maximum benefit from the market rally.

As at 15 May, RECI had increased its investment in UK residential real estate loans to £6.5 million. The loans offer a 16% gross margin and an average low loan-to-value ratio of less than 65%.

Confidence in investment strategy

Tom Chandos, Chairman of the Company said: "RECI ends this financial year on a firm financial footing and with scope to grow. The Company has realigned itself to focus on real estate debt markets, a strategy that is delivering positive results for shareholders.  RECI sees further attractive buying opportunities as banks reduce lending and sell off real estate debt assets and the price dislocation in European real estate securities continues."

Conference Call & Further Information

10.30 am BST Thursday 07 June 2012.

+ 44 (0)20 3059 8125. Please reference Real Estate Credit Investments PCC Limited.  

A results presentation will be available on the Real Estate Credit Investments PCC Limited'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) 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). 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 LN)

RECI Financial Summary as at 31 March 2012

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

£mm	Total Quarter ended 31 December 2011	Total Quarter ended 31 March 2012
Operating Income	2.7	2.7
Gains and losses on fair value through profit or loss financial instruments*	(4.1)	3.3
	(1.4)	6.0
Operating Expenses	(0.8)	(0.7)
Finance Costs**	(1.0)	(0.8)
Net profit / (loss)	(3.2)	4.5
Total Assets	88.0	92.7
Total Liabilities	48.1	48.7
Equity Capital	39.8	44.0
NAV per share	1.00	1.10
Shares Outstanding	39,966,985	39,966,985

*Includes FV movements on hedges

**For the periods shown, net finance costs include amortisation of preference share issuance costs, and profit on the buyback of preference shares.

Key steps in shaping RECI's focus on real estate securities

Grown Real Estate Debt Portfolio

Over the course of the financial year-ending 31 March 2012 RECI increased its exposure to real estate loans and bonds to £86.8 million from £62.8 million.

Reduced Non-Core Portfolio

In the first quarter of the financial year, the Company sold £22 million, across 6 positions, of its residual income investments at prices accretive to NAV, re-investing the cash proceeds into RECI's real estate bond portfolio.

Separated Core and Non-Core Assets

On 11 August 2011 Real Estate Credit Investments Ltd converted into a protected cell company, and consequently changed its name to "Real Estate Credit Investments PCC Ltd". The real estate bond portfolio was retained in the Core ("RECI") and the residual income assets were moved into the Cell ("ERII").

Aligned currency with investor demand

Effective 1 October 2011 RECI changed its trading denomination from Euro to Sterling. From this date RECI hedged its non-Sterling currency exposure. The change aligns the Company to broader investor demand. ERII denomination remained Euro.

Returned cash to shareholders through buy-back

At the EGM on 21 October 2011, investors approved a resolution allowing the Company to buy back preference, cell and ordinary shares for the subsequent twelve month period. The Company bought back 2.8 million preference shares at a discount.

Real Estate Bond Portfolio Review

RECI recorded fair value gains of £3.4 million on the real estate bond portfolio for the quarter ended 31 March 2012.  This compared with fair value losses of £3.7 million for the quarter ended 31 December 2012.

RECI stepped up bond purchases during the fourth quarter, with £12.6 million in new investments versus £10.1 million in the previous quarter.  The weighted average expected yield to maturity of new investments was 11.0% and RECI purchased the bonds at an average price of 73 pence. The Company sold £9.0 million of bonds in the quarter. 

As at 31 March 2012, the portfolio of 124 bonds was valued at £82.8 million, with a nominal face value of £136.8 million.  The average purchase price of the portfolio was 68 pence with a weighted average expected yield to maturity of 14.1%. 

In the financial year ended 31 March 2012 the Company has benefited from bond repayments of approximately £9.5 million, or approximately 12.2% of the average bond portfolio value over the year.  Significant bond repayments are listed in table below.

Bond	Date of principal repayment	Event
PPCRE 2006-1	April 2011	Full repayment of bond.  Sale of property in Paris
Fltst 2	October 2011, January 2012, April 2012	Continued sale of German Karstadt retail portfolio
Eclipse 2007-2	November 2011, February 2012	Partial repayment following sale of Swedish Keops office portfolio
Euro 26	October 2011	Partial repayment following sale of Sanctuary Building in London

Real Estate Bond Portfolio Breakdown

Breakdown of RECI's bond portfolio as at 31 December 2011 and 31 March 2012 by jurisdiction (by reference to underlying asset originator)

31 December 2011

UK	62.4%
Germany	31.5%
Holland	3.5%
Ireland	1.2%
Italy	1.1%
Portugal	0.3%
Switzerland	0.1%
Total (£mm)	£77.1mm

31 March 2012

UK	65.2%
Germany	29.9%
Holland	3.2%
Italy	1.0%
Ireland	0.4%
Portugal	0.3%
Total (£mm)	£82.8mm

Values may not sum to 100% due to rounding differences

Bond purchases and sales since 31 March 2012

Between 1 April 2012 and 15 May 2012, the Company invested £1.8 million at an average price of 74 pence and a weighted average expected yield-to-maturity of 9.8%.   RECI also sold £8.0 million of bonds during this period.  As at 15 May 2012, the portfolio consisted of 117 bonds with a fair value of £75.5 million and a nominal face value of £122.2 million. 

Actively managing risk

The Company has managed its exposure to real estate bond markets throughout the financial year and has balanced the opportunities to buy attractive bonds against mark-to-market volatility created by the Eurozone crisis.  In the second financial quarter, July to September 2011, the Company significantly reduced its bond exposure in response to increasing concerns over European bank liquidity.  Following a stabilisation in prices, the Company has increased its bond exposure from a low of £69.6 million as at 31 October 2011 to £75.5 million as at 15 May 2012.

A table showing RECI's Real Estate Debt and Residential Loan exposures since 31 March 2011 is set out below.

	31 Mar 2011	30 Jun 2011	30 Sep 2011	31 Dec 2011	31 Mar 2012	15 May 2012
Real Estate Debt Portfolio	£62.8m	£89.7m	£77.7m	£77.1m	£82.8m	£75.5m
Residential Loan Portfolio	-	-	-	£1.9m	£4.0m	£6.5m

RECI has also used hedging tools to mitigate risks in the commercial property and bond markets. On 4 October 2011, the Company purchased a £16.0 million short forward position on the IPD index.  The Company will receive the difference between the value of the IPD index between 31 December 2011 and 31 December 2012.  This hedge will have positive returns should capital values of UK commercial property, as measured by the IPD index, fall by approximately 5.5%.  This hedge provides some protection to RECI's portfolio of Class D and below bonds.

At the end of March, the Company entered into a €50 million short position on the iTraxx Main index to hedge against a widening of credit spreads. Credit spreads of real estate bonds have historically been correlated with spreads on the main index during periods of market stress. This position should offset some of the mark to market volatility in the bond portfolio.

Monthly Bond Performance Summary as at 15 May 2012

	December	January	February	March	April	May
% Fair Value Change	-0.62%	2.73%	1.49%	3.08%	0.55%	0.47%
WA Purchase Price	0.48	0.71	0.75	0.66	0.74	-
WA Purchase Yield	28.75%	12.14%	9.63%	13.48%	9.82%	-

Asset Class Distribution of Bond Portfolio by Fair Value as at 15 May 2012

Bond Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total	Total as at 31 March 12
A	8.6%	2.0%	7.3%	0.2%	0.0%	18.0%	18.3%
B	11.8%	10.6%	9.4%	0.0%	0.0%	31.8%	30.9%
C	8.3%	3.8%	3.7%	0.0%	0.0%	15.8%	17.2%
D	4.8%	2.9%	8.3%	0.2%	1.0%	17.2%	16.5%
E and Below	11.0%	3.0%	3.2%	0.0%	0.0%	17.2%	17.0%
Total	44.4%	22.3%	31.9%	0.4%	1.0%	100.0%
Total as at 31 Mar 12	39.2%	25.8%	33.3%	0.7%	1.0%

Ratings Distribution of Bond Portfolio by Fair Value as at 15 May 2012

Current Rating	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total	Total as at 31 March 12
AAA	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
AA	1.2%	5.1%	1.3%	0.0%	0.0%	7.5%	8.4%
A	10.7%	6.6%	10.3%	0.0%	1.0%	28.6%	28.4%
BBB	7.0%	5.6%	3.4%	0.0%	0.0%	15.9%	19.3%
BB and Below	25.6%	5.1%	16.9%	0.4%	0.0%	47.9%	43.9%
Total	44.4%	22.3%	31.9%	0.4%	1.0%	100.0%
Total as at 31 Mar 12	39.2%	25.8%	33.3%	0.7%	1.0%

Values may not sum to 100% due to rounding differences

Residential Loan Portfolio

The Company increased its exposure to UK residential loans in the fourth quarter to £4.0 million.  As at 15 May 2012, the residential loan portfolio had grown to £6.5 million, had a weighted average LTV of less than 65% and weighted average yield of 16%.  The loan portfolio comprises short-term bridge loans fully secured against properties predominantly in London and the south east of England.  Most (64%) of the loans are second-lien loans with a weighted average LTV of 59.3%.  The remaining loans are first-lien loans with a weighted average LTV of 65.5%.  The Company intends to limit its exposure to residential real estate bridge loans to 15% of gross assets. 

Top 10 Investment Portfolio Exposures as at 15 May 2012

Market Value                                    £31.5 million
WA Original LTV                               52.9%
WA Cheyne Current LTV⁸             66.0%
WA Effective Yield                         13.8%   

Type	Class		Collateral Description
Commercial		A2	Portfolio of nursing homes operated by Four Seasons Health Care Group
Residential		Loans	Portfolio of residential real estate bridge loans in the UK
Commercial		E	Portfolio of commercial loans secured by property in London
Commercial		A1	Portfolio of nursing homes operated by Four Seasons Health Care Group
Residential		B	Portfolio of UK non-conforming mortgages
Commercial		A	Portfolio of commercial loans secured by properties in the UK
Commercial		D	Portfolio of Karstadt retail stores in Germany
Residential		B	Portfolio of UK buy-to-let mortgages
Commercial		C	Single commercial loan secured by office property in London
Commercial		E	Portfolio of commercial loans secured by properties in Germany

Outlook for RECI 

Attractive investment opportunities

RECI has confidence that its focus on real estate debt will continue to produce attractive investment opportunities that generate strong returns. We will maintain the Company's strategy of taking advantage of market dislocations to buy high credit quality bonds at a discount and which we expect to redeem at par.  With many banks under pressure to de-lever and reduce their risk-weighted assets, we expect more buying opportunities to materialise.

The Company will also seek to increase its exposure to commercial real estate loans.  The reduced availability of bank credit in these markets provides an opportunity for RECI to offer investors real estate financing. 

The investment team will closely monitor which segment of the market offers the best relative value. To date, relative value has been the most compelling in real estate bonds, but the Company has detected increasing opportunities in loan markets, which offer strong yields and low LTV ratios. 

Mitigating price volatility

RECI is aware that concerns about the Eurozone sovereign and banking crisis will weigh heavily on markets in the near to medium term, introducing greater mark to market volatility in the bond portfolio.  The Company has already taken action to mitigate some of these pressures in the past year by hedging against the Itraxx Main credit index. 

Significant bond repayments

We expect to receive significant levels of bond repayments in the second half of 2012.  For example, the repayment of the Titan 2006 Four Seasons bonds backed by the Four Seasons nursing home portfolio will result in an uplift in NAV in excess of £1.3 million (relative to the March 2012 bond prices).  These gains should help to offset mark-to-market volatility in the portfolio.

European Residual Income Investments (ERII)

The ERII Cell was created on 11 August 2011, and contains the Company's residual income investments.  It is the Company's objective, to the extent practicable, to liquidate this portfolio and return cash to shareholders.  Dividends from ERII will be payable to shareholders as and when the asset coverage test is satisfied. For the period ended 31 March 2012 the Preference Share Cover Test was 2.37, below the threshold of 2.39, and subsequently no dividend will be declared. The table below shows figures as at 31 March 2012.

ERII Key Quarter Financial Data*	Q/E 31 December 2011	Q/E 31 March 2012
Cash balance	€2.6mm	€3.7mm
Residual Total Fair Value	€20.2mm	€19.1mm
Cash Flows in periods	€1.5mm	€1.1mm
Asset Coverage Ratio	2.27	2.37
Dividend Declared	N/A	N/A

Investment Portfolio

European Mortgage Portfolio

The European Mortgage Portfolio generated cash flows of €0.4 million for the quarter ended 31 March 2012, compared to €0.4 million in the previous quarter, and above forecasts of €0.2 million. Write-ups in the portfolio totalled €0.3 million and included a €0.1 million write up in the Sestante mortgage portfolio. 

The expected default rate of the Sestante mortgage portfolio has remained unchanged.  We maintain a conservative stance on the valuation given it is transferring to a different mortgage servicer.  ERII has one remaining Portuguese mortgage portfolio, the Magellan 1 portfolio, which we expect to perform satisfactorily despite continued pressures in Portugal.

SME Portfolio

The Company has increased the assumed loss rate of defaulted loans in the Smart 06-1 portfolio, resulting in a €0.1 million decrease in the fair value. Cash flows for Smart 06-1 in the quarter ended 31 March 2012 totalled €0.1 million, compared to €0.1 million the previous quarter.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £0.5 million in the quarter ended 31 March 2012 compared to £0.8 million in the previous quarter.  There have been no material developments in relation to the Newgate 2006-1 litigation. 

 

END

 

 

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