Half-year Report

RNS Number : 4795Q

Real Estate Credit Investments Ltd

30 November 2016

This announcement contains inside information

Date and time of release: 30 November 2016, 7:00 am

Real Estate Credit Investments Limited ('RECI')

Financial Results Announcement for the Half Year Ended 30 September 2016

RECI records net profit of £4.3 million for the half year ended 30 September 2016, despite uncertainty and volatility following the UK's vote to leave the European Union. The Investment Manager is encouraged by an attractive deal pipeline

· The impact of the result of the referendum has been noticeable on the real estate lending markets, with a decrease in leverage being made available by senior debt lenders to the UK property sector. This further withdrawal of traditional bank lenders from real estate lending should improve the risk and return profile of investments available to RECI, be it in loans or in mortgage backed securities

· In August, RECI's largest loan position, a whole loan secured against German multi-family properties was substantially repaid, returning €21.3 million to RECI

· The fair value, excluding accrued interest, of the Company's loan portfolio at 30 September 2016 was £101 million, following repayment of several loan deals

· RECI's strong cash balance, as a result of timely repayments of both loans and bonds, positions the Company to take advantage of the attractive opportunities the Investment Manager is seeing in both the loan and structured credit markets. The Investment Manager's pipeline remains strong, more so since the referendum, with enquiries increasing substantially

· During the half year, RECI made two new loan commitments totalling £18 million

· The directors of the Company are pleased to declare a dividend of 2.7p per share in respect of RECI Ordinary Shares for the quarter ended 30 September 2016

RECI Key Financial Data	H/E 30 Sept 2015	Y/E 31 Mar 2016	H/E 30 Sept 2016
Gross Assets	£165.7m	£163.4m	£163.3m
Loan Portfolio (excludes accrued interest)	£108.3m	£113.2m	£101.4m
Bond Portfolio (excludes accrued interest)	£43.9m	£39.6m	£31.9m
Cash	£2.0m	£5.4m	£26.0m
Operating Income	£9.0m	£17.7m	£6.8m
Dividends declared/paid per Ordinary share	£0.054	£0.116	£0.054
Net Profit*	£4.1m	£8.6m	£4.3m
Net Asset Value per RECI Ordinary Share	£1.625	£1.632	£1.628

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

Over the half year RECI's flexible investment strategy continued to deliver positive shareholder returns with stable dividend yield

RECI continues to pursue a flexible investment strategy allocating its assets to both the loan and bond markets, so that the portfolio is balanced to capture the opportunities in higher-yielding loans whilst taking advantage of the liquidity and ability to mitigate cash drag offered by the bond markets.

The drawn fair value of the loan portfolio, excluding accrued interest, has decreased from £113 million at 31 March 2016 to £101 million as at 30 September 2016 following the repayment of several loans at values at or above the balance sheet value at the time of exit. During the half year, RECI made two new loan commitments totalling £18 million. In May 2016 a new loan commitment of £4.3 million was funded, secured by a 3.7 acre residential development site in Clapham Common, London. In September 2016, a new loan commitment was made on a development comprising a 40 storey residential tower, 10 storey office and a retail building near Old Street roundabout in Shoreditch, London. The residential element is substantially pre-sold, and the office element entirely pre-let. The initial funding for this deal was £9.1 million.

During the half year ended 30 September 2016, the Company benefitted from a number of repayments on both its loan and bond portfolios, which should allow the Company to take advantage of the opportunities the Investment Manager has identified in both the loan and structured credit markets.

The Investment Manager has undertaken a thorough review of all its investments in light of the outcome of the referendum. While the impact of Brexit has been noticeable on the real estate markets, the further withdrawal of traditional bank lenders from the sector should improve the risk and return profile of investments available to RECI. RECI's existing loan portfolio benefits from two key attributes:

· It is focused on debt, secured predominantly by UK and German real estate (with some exposure to Holland, France and Ireland). Being in this part of the capital structure, its investments have a natural protection against a drop in the value of the underlying assets.

· The underlying assets that secure its debt instruments are predominantly in core locations in the UK and Germany as opposed to assets located in secondary or tertiary cities and towns.

These strengths, combined with defensive capital characteristics and backed by well structured documentation, should ensure the portfolio remains well positioned against the further volatility in European real estate markets.

The performance of the Company's bond portfolio remains supported by the amortisation and high coupon receipts, despite the relatively disappointing performance of the wider markets during the half year ended 30 September 2016. Ultimately, the long term performance of any bond portfolio will depend on the credit recovery from the underlying assets, and in this regard, the underlying asset performance backing the Company's bond portfolio remains resilient.

Outlook

The UK Government's plan to trigger Article 50 of the EU Act, to be reviewed in light of the High Court ruling that has increased uncertainty, will start the two year period for the official withdrawal of the UK from the European Union. The Prime Minister has outlined a hard stance on the withdrawal process. As a result, Sterling has seen a sharp sell off and gilt rates have moved upwards. A "worst case" exit scenario is beginning to be priced into UK real estate assets. Whilst long term cash-flowing and non-cyclical assets continue (with good reason) to perform well, in terms of cap rates and rents, cyclical assets have seen a material downward readjustment. An acrimonious divorce will add another dimension to the pull back of traditional lenders from the corporate and real estate lending universe in the UK. This comes on the back of increased regulation, weak European bank balance sheets, increased oversight of investment banks, and the bad debt and balance sheet issues at many European lenders. Lending markets in continental Europe, though, have not moved much following the referendum and are still relatively healthy.

Cheyne expects to close more loan transactions in the coming months, based on the Investment Manager's strong reputation of delivering financial solutions across the capital stack in innovative structures, with compelling pricing for both borrowers and investors. The Investment Manager's new loan origination pipeline is strong, and the Company also remains well-placed to participate in new issue bonds at attractive yields.

RECI delivered a positive financial performance in the half year ended 30 September 2016 with £4.3 million of net profits. Bob Cowdell, Chairman of the Company, said: "The Company and its Manager continue to operate against a background of political, economic and market uncertainty. Nevertheless, the impact upon the real estate sector of the withdrawal of banks and other lenders is providing attractive opportunities for RECI and our Manager's flexible investment approach. The Board is encouraged by the pipeline of investment opportunities that Cheyne is currently considering and will continue to ensure that a disciplined approach is maintained in securing appropriate investment opportunities."

Further Information

A results presentation will be available on the Company's website:

www.recreditinvest.com/investmentmanager

For further information, please contact:

Broker:	Richard Bootle / Richard Crawley (Liberum Capital)	+44 (0)20 3100 2222
Investor Relations:	Nicole Von Westenholz (Cheyne)	+44 (0)20 7968 7482

About the Company

Real Estate Credit Investments Limited is a non-cellular company incorporated in Guernsey, having converted from a protected cell company called Real Estate Credit Investments PCC Limited on 25 October 2016. The Company is regulated as an authorised, closed-ended investment scheme by the Guernsey Financial Services Commission.

The Company's 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. The Company has adopted a long term strategic approach to investing and focuses on identifying value in real estate debt.

In making these investments the Company uses the expertise and knowledge of its Alternative Investment Fund Manager ("AIFM") or ("Investment Manager"), Cheyne Capital Management (UK) LLP ("Cheyne").

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 of 8 per cent per annum 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.

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 30 September 2016*

	31/03/2016 (£ million)	30/09/2016 (£ million)
Loan Portfolio	113.2	101.4
Bond Portfolio	39.6	31.9
Cash and Cash Equivalents	5.3	26.0
Derivative Assets	3.2	1.0
Receivable For Investments Sold	-	0.3
Other Assets (includes accrued interest)	2.5	2.6
	163.8	163.3

Other Liabilities Derivative Financial Liabilities	(2.7) (0.5)	(2.7) (0.1)
Cash Collateral due to Broker	-	-

Preference Share Liability	(41.8)	(41.9)
	(45.0)	(44.7)

Net Assets	118.8	118.6

Shares outstanding	72,818,496	72,818,496
Net Asset Value per Ordinary Share	1.632	1.628
*The values for each column may not sum to the total due to rounding differences

Top 10 Investment Portfolio Exposures¹ as at 30 September 2016

Market Value                                    £83.3 million
WA Original LTV²                             65.0%
WA Cheyne Current LTV               71.0%
WA Effective Yield³                       11.7%

Type	Class		Collateral Description
Commercial		Loan	Priority ranking shareholder loan against a portfolio of UK logistics and industrial properties
Commercial		Loan	Mezz loan secured on a fully let retail park in Essex
Residential		Loan	Mezz loan secured by residential land & homes under development in South East UK
Commercial		Loan	Senior loan secured on a dominant shopping centre in a residential suburb of Berlin
Residential		Loan	Mezz loan made on a 40 storey residential tower, 10 storey pre-let office and a retail building in Shoreditch, London
Commercial		Loan	Mezz loan to assist in the acquisition of major German residential development company
Commercial		Loan	Mezz loan secured against a branded London hotel development in Shoreditch
Commercial		Bond	Bond secured against government housing portfolio in the UK
Commercial		Loan	Subordinate loan secured against retirement villages in London and South-East
Residential		Loan	Whole loan secured on a 233 unit pre sold residential development in East London

1 Based on fair value of bonds and loans.

2 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 31 March 2016.

3 WA effective yield is based on the effective yield as at most recent purchase and is based on the 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 March 2016.

Investment Portfolio Geographical Analysis

31 March 2016

UK - 62.3%

Germany - 30.8%

Holland - 3.2%

Ireland - 2.6%

France - 1.1%
£152.8mm

30 September 2016
UK - 72.7%
Germany - 19.6%
Ireland - 3.3%
Holland - 2.6%
France - 1.8%
£133.3mm

Loan Portfolio as at 30 September 2016

Portfolio activity

The average loan portfolio LTV exposure as at 30 September 2016 was 70%. The portfolio continues to provide attractive risk-adjusted returns with a weighted average yield of 12% per annum, before any back end fees, profit share or equity element contributions are taken into account.

The Investment Manager's new loan origination pipeline remains strong, more so since the referendum, with further new loans under consideration.

Continued focus on Europe's strongest markets

The Investment Manager's expertise in originating attractive new loans enables the Company's investments to be focussed on Europe's strongest markets - the UK and Germany. These markets offer both strong deal flows and, crucially, a lender-friendly legal framework. The Company intends to continue to avoid lending in less borrower-friendly jurisdictions such as Italy, Spain and Portugal.

Loan Portfolio Summary as at 30 September 2016

Number of loans	17
Fair Value (£ millions) Total Loan Commitments (£ millions)	101.4 111.4
Loans as % of GAV (drawn loan balance)	63.4%
Loans as a % of GAV (committed loan balance) Weighted average yield of loan portfolio	68.2% 12.3%
Weighted average LTV of portfolio	70.4%
Weighted average life of portfolio (years)	1.8

Bond portfolio

As at 30 September 2016, the bond portfolio of 28 bonds was valued at £31.9 million, with a nominal face value of £40.5 million⁴. Taking both the positive recorded interest income and the fair value losses on the bonds in the half year, the total gross return of the bond portfolio (reportable segment profit) in the half year ended 30 September 2016 was £1.9m compared to £1.5m in the half year ended 30 September 2015.

Per the latest released Fact Sheet, as at 31 October 2016, the portfolio consisted of 26 bonds with a fair value of £32.4 million and a nominal face value of £40.5 million⁵.

Bond Portfolio Summary as at 30 September 2016

Number of bonds

Fair Value of Bond Portfolio as at 31 March 2016 (£ millions)

Nominal Face Value of Bond Portfolio as at 31 March 2016 (£ millions)

31.9

40.5

Monthly Bond Performance Summary as at 30 September 2016

	April	May	June	July	August	September
% Fair Value Change	-0.12%	-0.16%	-0.17%	-0.05%	0.58%	-0.67%
WA Purchase Price	-	-	-	-	-	0.92
WA Purchase Yield	-	-	-	-	-	6.4

Asset Class Distribution of Bond Portfolio by Fair Value as at 30 September 2016

Bond Class⁶	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	Total⁷	Total as at 31 March 2016
A	13.9%	0.0%	0.0%	0.0%	13.9%	11.3%
B	33.8%	0.0%	8.6%	0.0%	42.4%	42.9%
C	12.9%	0.0%	3.3%	0.0%	16.2%	3.4%
D	0.0%	0.7%	5.9%	0.0%	6.6%	13.5%
E and Below	9.7%	8.3%	2.8%	0.0%	20.9%	28.9%
Total	70.4%	9.0%	20.6%	0.0%	100.0%	100%
Total as at 31 March 2015	58.6%	7.8%	33.3%	0.3%