Fourth Quarter Financial Results

RNS Number : 5250I

Real Estate Credit Investments Ltd

16 June 2011

 



Real Estate Credit Investments Limited

Financial Results Announcement for the Fourth Quarter Ended 31 March 2011

Real Estate Credit Investments Limited reports €5.2 million fourth quarter profit; €15.6 million annual profit

Financial Highlights

·     Net profit of €5.2 million, up 11% from €4.6 million in the previous quarter. 

·     Net profit of €15.6 million for full year ending 31 March 2011, up from €2.3 million in the previous year.

·     €18.8million invested in new bonds.

·     Real Estate Debt Portfolio valued at €72 million (represented 57.2% of the investment portfolio at quarter end).

·     Real Estate Debt Portfolio returned €6.0 million fair value gains, an 8% gain in the quarter.

·     Overall investment portfolio generated total cash flow of €5.6 million[1].

·     €26.5 million has been raised through the disposal of legacy assets since 31 March 2011.

Millions	31 March 2011	31 December  2010
Gross Assets	€134.9	€131.3
Real Estate Debt Portfolio	€72.0	€59.2
Operating Income	€4.3	€3.6
Fair Value Gains on investment portfolio	€3.1	€4.7
Net Asset Value per Share	€1.92	€1.80
Dividend per ordinary share	0.014	0.016

Continued Profitability Supported by Real Estate Debt Portfolio

RECI has delivered a seventh consecutive quarter of growth in profit, with Net Asset Value (NAV) per share having increased to €1.92 as of 31 March 2011, compared with €1.80 at the end of the third quarter and €1.59[2] prior to the placing and open offer in September 2010. Supporting the NAV growth are, first, the strong performance of assets in the Real Estate Debt Portfolio and, second, the realisation of gains through asset sales. RECI has also been successful selling assets from its legacy portfolio at attractive valuations. Subsequent to the quarter end, the Company has sold its residual income positions in the three Lusitano Portuguese mortgage loan portfolios, and in the three RMAC UK mortgage loan portfolios.

Tom Chandos, Chairman of RECI, commented:

"The strategy RECI embarked on after the September capital raising is delivering solid growth in NAV. Our Real Estate Debt Portfolio is now a substantial proportion of the balance sheet reflecting the delivery of our core strategy, and delivering on expectations of growth and profitability."

Conference Call & Further Information

10.30 am BST Thursday 16 June 2011.

+ 44 (0)20 7153 8942. Please reference Real Estate Credit.  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:                 James Wallis                        [phone]
                                                Kate Ruck Keene                  [phone]

Investor Relations:              Natalie Withers                   [phone]

                                                Nicole von Westenholtz     [phone]

About the Company

Real Estate Credit Investments Limited (the "Company" or "RECI") is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company's investment objective is to provide ordinary shareholders with a levered exposure to a portfolio of real estate credit investments and a diversified and amortising portfolio of Residual Income Positions, and to provide preference shareholders with stable returns in the form of quarterly dividends. The Company intends to focus 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.

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 December  2010	Revenue	Fair value gains and losses	Total Quarter ended 31 March  2011
Operating Income	3,594,6991		3,594,699	4,282,430		4,282,430
Gains and losses on fair value through profit or loss financial instruments		3,976,1872	3,976,187		1,247,499	1,247,499
	3,594,699	3,976,187	7,570,886	4,282,430	1,247,499	5,529,929
Operating Expenses	(1,074,657)		(1,074,657)	(1,072,924)		(1,072,924)
Finance Costs	(1,864,126)		(1,864,126)	706,278		706,2783
Net profit / (loss)	655,916	3,976,187	4,632,103	3,915,784	1,247,499	5,163,283
Total Assets	131,263,163			134,905,167
Total Liabilities	59,193,269			58,311,462
Equity Capital	72,069,894			76,593,705
NAV per share	1.80			1.92
Shares Outstanding	39,966,985			39,966,985

1.        Operating Income re-stated for 31 December, adjustment vs FV gains and losses.

2.        FV gains and losses re-stated for 31 December, adjustment vs Operating Income.

3.        Includes 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 December 2010 and 31 March 2011 is set out below.  The exposure to the Real Estate Debt Portfolio now accounts for the majority of the investment portfolio. Percentages for each asset type are in relation to the value of the Company's investment portfolio (excluding cash and hedges).

31 December 2010
Real Estate Debt	48.8%
European Mortgages	23.8%
SME	16%
UK Mortgages	11.3%
Total (€mm)	€121.3 mm

Values may not sum to 100% due to rounding differences

31 March 2011
Real Estate Debt	57.2%
European Mortgages	20.9%
SME	14.1%
UK Mortgages	7.8%
Total (€mm)	€125.9 mm

Values may not sum to 100% due to rounding differences

A breakdown of the Company's investment portfolio as at 31 December 2010 and 31 March 2011 by jurisdiction (by reference to underlying asset originator) is set out below.

31 December 2010
UK	42.2%
Portugal	21.0%
Germany	20.4%
Holland	12.1%
Italy	3.7%
France	0.3%
Ireland	0.2%
Switzerland	0.1%
Total (€mm)	€121.3 mm

Values may not sum to 100% due to rounding differences

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

Values may not sum to 100% due to rounding differences

Real Estate Debt Portfolio[3]

The Real Estate Debt Portfolio is continuing to grow while generating solid returns.

The Company recorded fair value gains on the portfolio of €6.0 million for the quarter ended 31 March 2011 and cash flows of €1.2 million in the quarter (versus €1.9 million in the previous quarter). As at 31 March 2011 the average purchase price of the portfolio was 64.4 cents with a weighted average expected yield to maturity of 13.3%. 

By the end of the quarter the Real Estate Debt Portfolio represented a growing majority of RECI's assets under management. The portfolio accounted for 57.2% of all investment assets, up from 48.8% three months earlier. 

New bond purchases totalled €18.8 million in the fourth quarter, versus €21.0 million in the third quarter.  As at 31 March 2011 the portfolio of 84 bonds was valued at €72.0 million, with a nominal value of €109.5 million.[4]

The portfolio has grown further since the end of the fourth quarter. Between 1 April 2011 and 31 May 2011, the Company invested €9.6 million at an average price of 81.1 cents and a weighted average expected yield-to-maturity of 10.3%.  As at 31 May 2011, the portfolio consisted of 83 bonds with a fair value of €77.4 million and a nominal market value of €113.7 million.

Ratings Distribution by Fair Value (as at 31 May 2011)

Current Rating	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total	Total at 31 Mar 11
AAA	0.0%	3.0%	0.0%	0.0%	0.0%	3.0%	7.9%
AA	1.2%	11.3%	3.2%	0.7%	0.0%	16.4%	10.8%
A	2.3%	6.0%	9.5%	0.0%	0.0%	17.8%	18.5%
BBB	7.2%	7.7%	8.9%	2.5%	1.3%	27.6%	26.9%
BB and Below	14.2%	6.2%	13.6%	1.1%	0.0%	35.1%	35.9%
Total	24.9%	34.2%	35.3%	4.4%	1.3%
Total at 31 Mar 11	22.3%	33.5%	39.1%	3.6%	1.5%	100%

Totals may not sum due to rounding differences

Seeking value in a risk-on/risk off environment

Heavy buying by tactical and technical investors led to a steady tightening of spreads in RMBS and CMBS markets from February to late May. RECI's investment approach is based on pursuing fundamental value in the real-estate backed debt markets, which distinguishes the Company from tactical or technical buyers.  Accordingly, RECI significantly slowed its investments in RMBS and CMBS as fundamental value diminished during this run up.

However, from late May the market sentiment has shifted and yields have widened creating attractive entry points for new investments. Tactical and technical investors cut their holdings on the back of recent weakness in US macro numbers, news of liquidation of the AIG ABS portfolio and the recent announcement of Dexia's ABS portfolio liquidation. Fundamental value-based buying opportunities have returned and since the end of May the Company has made net purchases of approximately €7.4 million of bonds at attractive values.

European Mortgage Portfolio

The European Mortgage Portfolio generated cash flows of €2.3 million for the quarter ended 31 March 2011, compared to €3.4 million in the previous quarter and ahead of forecasts of €0.6 million. Write-downs in the portfolio totalled €1.3 million of which the Sestante mortgage portfolio accounted for €1.0 million.

Subsequent to the quarter end, 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.  The loans in this portfolio were originated in 1997 have an average loan to value of 39% with mortgage payments linked to Euribor.  The Company expects this portfolio to perform reasonably well despite the continued domestic pressures in Portugal. The Company also has exposure to the Sestante mortgage portfolio.

SME Portfolio

Cash flows in the quarter ended 31 March 2011 totalled €0.2 million, compared to €0.3 million the previous quarter.

The Company expects default rates in this portfolio to remain volatile.  The SME Portfolio's average default rate decreased to 0.58%, from 0.94% in the previous quarter. The Smart 06-1 asset recorded a fall in default rates from 1.8% to 1.2%.   The default rate of the Amstel SME Portfolio was 0%.

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.

	Sept 2010 Default Rate (annualised)	Dec 2010 Default Rate (annualised)	Mar 2011 Default Rate (annualised)
Amstel 06-1	0.0%	0.0%	0.0%
Smart 06-1	0.5%	1.8%	1.2%
Average	0.2%	0.9%	0.6%

As highlighted previously, the Smart 06-1 portfolio has exposure to Spanish SMEs.   To reflect the weakening conditions in Spain, the Company has increased the assumed loss rate of defaulted loans in the portfolio.  This has resulted in a €2.4 million reduction in the fair value of this asset.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £1.2 million in the quarter ended 31 March 2011 compared to £1.9 million in the previous quarter. 

In January of this year, the Company sold the Eurosail 2006-1 mortgage residual income position.  The sale was accretive to NAV.  Subsequent to the quarter end, the Company also sold its three RMAC residual income positions at a price that was accretive to NAV. Following these sales, the Company's UK Mortgage Portfolio consists of the two Alba assets and the Newgate 2006-1 asset which have been valued at zero.

The Company continues to work with mortgage originators and its advisors to identify loans that do not satisfy the representations and warranties provided at the time of the securitisation.  

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.  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 December 2010 and 31 March 2011 totalled -€8.0 million.  This comprised -€2.0 million of principal amortisation, sales of -€3.1 million and fair value losses of -€2.9 million.  In relation to the Real Estate Debt Portfolio, the balance sheet value increased by €12.8 million. There were €18.8 million new purchases, fair value gains of €6.0 million, principal amortisations of -€0.5 million and sales of -€11.5 million.  After giving effect to these balance sheet changes in the quarter ended 31 March 2011, the NAV of the Company was €1.92 per ordinary share as at 31 March 2011, versus €1.80 per ordinary share as at 31 December 2010.[5]

The Company recorded total cash flows of €5.1 million in the quarter ended 31 March 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 Dec 2010  B/S Value1    (€mm)	31 Mar 2011  B/S Value2    (€mm)	Change to B/S Value Since 31 Dec 2010 (€mm)	Cash Flows Received in the Quarter Ended 31 Mar 2011 (€mm)	Cash Flows Received in the Quarter Ended 31 Dec 20103 (€mm)
UK Mortgages	13.7	9.9	-3.8	1.3	2.2
Euro Mortgages	28.8	26.3	-2.5	2.3	3.4
SME	19.5	17.8	-1.7	0.2	0.3
Real Estate Bonds	59.2	72.0	12.8	1.2	1.9
TOTAL4	121.3	125.9	4.7	5.1	7.7

1.        Balance sheet values as at 31 December 2010 are expressed using 31 March 2011 FX rates. 31 December 2010 value includes Eurosail 2006-1

2.        The balance sheet value figures and include accrued interest. 31 March 2011 value does not include Eurosail 2006-1.

3.        Cash flows for 31 December 2010 are expressed using 31 March 2011 FX rates.

4.        The values for each column may not sum to the total due to rounding differences.

Company Outlook - Ideally positioned to take advantage of opportunities in European Real Estate Debt 

RECI is committed to building on the profitability of the past seven quarters, by continuing to invest in undervalued assets capable of generating strong risk-adjusted returns in its Real Estate Debt Portfolio. While the Company continues to identify attractive investments in the bond markets, we also anticipate an increase in opportunities to deploy capital in the loan markets.

Rising values in real estate bonds have boosted returns for our Real Estate Debt Portfolio, but have also resulted in higher cash prices for bonds generally. The Company has therefore been selective in identifying bonds that meet our risk and return objectives. RECI's portfolio management team is committed to fundamental value-based investing and accordingly scaled back its bond investment activity from April as more speculative investors entered the CMBS and RMBS markets and drove down yields. Many of these speculative investors reduced their exposures in late May and fundamental value has started to return. Accordingly RECI has once again increased its buying activity. We expect volatility in the securities markets to continue throughout 2011 which should provide attractive entry points for new bond investments. 

Loan market prices are currently less volatile and over the past few months yields in the commercial and residential loan markets have remained attractive. RECI believes this will remain the case in the medium term.  Demand from borrowers to refinance is rising, while appetite to lend in the mezzanine loan market is constrained. For example, some institutional investors are constrained from investing in mezzanine loans because of high capital requirements demanded by new regulation.

RECI is ideally-positioned to take advantage of these opportunities. RECI has access to both market intelligence on loan refinancing opportunities and strong relationships with loan market participants. In the medium term, we will balance investments between loans and securities and between residential and commercial exposure, based on the relative values offered across these four categories.

With respect to the Company's legacy portfolio, RECI will continue to manage the legacy SME, European Mortgage and UK Mortgage Portfolios with a high degree of diligence. The priority remains to identify opportunities to sell these assets at attractive prices.

---

[1] Investment Portfolio including hedges.

[2] The initial adjusted NAV per new ordinary share following the completion of the Placing and Open Offer in September 2010.

[3] The Real Estate Debt portfolio includes two bonds collateralised by SME loans accounting for 1.3% of the portfolio at 31 May 2011.

[4] Cost and nominal shown are calculated with original notional using pool factor and FX rate at 31 Mar 2011.

[5] Totals may not sum due to rounding differences

 

END

 

 

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