Half Yearly Report

RNS Number : 8479R

Real Estate Credit Inv. PCC Ltd

23 November 2012

 



Real Estate Credit Investments PCC Limited

Financial Results Announcement for the Second Quarter Ended 30 September 2012

and Interim Report and Accounts

RECI[1] Second Quarter and Half-Year Highlights

·      RECI reported a net profit of £9.4 million for the first half-year ended 30 September 2012, including a profit of £8.7 million for the second quarter

·      Total return in the first half of the financial year of 21.3% comprising of an increase in net asset value ("NAV") of 18.2% and 3.1% in Ordinary Share dividends

·      Bond repayments totalled £16.1 million in the quarter ended 30 September 2012 equal to 20.2% of the value of the bond portfolio

·      The real estate bond portfolio has embedded value of £119.8 million versus market value of £79.5[2] million as at 30 September 2012

·      RECI is declaring a 17.6% increased dividend of 2.0p per share (equating to a 6% annualised yield on NAV) in respect of RECI Ordinary Shares for the quarter ended 30 September 2012

RECI Key Quarter Financial Data*	Q/E 30 June 2012	Q/E 30 September 2012
Gross Assets	£92.0m	£100.2m
Investment Portfolio	£87.0m	£87.1m
Cash	£1.3m	£5.6m
Operating Income	£3.0m	£3.4m
Fair Value  (Losses) / Gains on Investment Portfolio	£(1.6)m	£6.7m
Net (Loss) / Profit**	£0.7m	£8.7m
Net Asset Value per RECI Ordinary Share	£1.12	£1.30

*Audited financial statements are not prepared for 30 June quarter end and numbers are pro forma based on management accounts.

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

RECI benefits from material repayments on bond portfolio; loans continue to offer attractive yields

RECI has recorded three consecutive quarters of profit and NAV growth, supported by significant bond repayments[3] of approximately 20% of the value of the bond portfolio. These principle repayments stemmed from bonds that RECI had purchased at a weighted average purchase price of 82% of par. The repayments, alongside broader mark to market gains, validate the Company's strategy of delivering value from the real estate debt markets. RECI's loan portfolio has continued to develop and is generating attractive risk adjusted returns. The Company sold a significant loan secured by UK residential properties and made two new loans secured by Dutch commercial property and a London office property.

With £17.0 million of cash available as at 31 October 2012 (£5.6 million as at 30 September 2012), the Company is focussed on identifying new investments in real estate loans and bonds, and has identified opportunities which it aims to complete before the end of December 2012.  All will be secured against UK real estate and will have expected yields in excess of 10%.

Tom Chandos, Chairman of RECI said: "Capital returns and fair value gains in the first half of the year underline how RECI's investment strategy continues to demonstrate significant potential for NAV growth. The Company will retain its focus on securing attractive real estate debt opportunities in Europe." 

Conference Call & Further Information

10.30 am BST Friday 23 November 2012.

+ 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 30 September 2012

Audited financial statements are not prepared for 30 June quarter end and numbers are pro forma based on management accounts.

		31/03/2012  (£ million)	30/06/2012 (£ million)	30/09/2012 (£ million)
Investment Portfolio		86.25	86.97	87.13
Cash and Cash Equivalents		2.85	1.31	5.62
Derivative Assets		3.01	3.21	3.60
Other Assets		0.56	0.56	3.88
		92.67	92.05	100.23
Other Liabilities Derivative Financial Liabilities		(1.28) (0.86)	(0.21) -	(0.93) (0.66)
Preference Share Liability		(46.55)	(47.14)	(46.61)
		(48.70)	(47.35)	(48.20)
Net Assets		43.97	44.70	52.03
Shares outstanding		39.97	39.97	39.97
Net Asset Value per Ordinary Share		1.10	1.12	1.30

Real Estate Bond Portfolio Review

RECI recorded mark to market ("MTM") gains of £9.1 million on the real estate bond portfolio for the quarter ended 30 September 2012.  The MTM gains are split, £2.4 million being attributed to operating income, and fair value gains of £6.7 million. This compared with MTM gains of £0.6 million for the quarter ended 30 June 2012.

RECI stepped up bond purchases during the quarter ended 30 September 2012, with net purchases of £7.1 million versus net sales of £2.1 million in the previous quarter. Class A and B bonds accounted for 58% of purchases in the quarter, reflecting expectation that prices would materially increase as policy makers sought to make stimulative interventions in global markets. 

The weighted average expected yield to maturity of new investments was 8.6% and RECI purchased the bonds at an average price of 78% of par. As at 31 October 2012, the weighted average price of these investments had increased to 81% of par.

As at 30 September 2012, the portfolio of 124 bonds was valued at £79.5 million, with a nominal face value of £119.8 million[4].  The average purchase price of the portfolio was 68% of par with a weighted average expected yield to maturity of 13.6%[5].  The weighted average effective yield of the portfolio is currently 13.7%.

In the half year ended 30 September 2012 the Company received bond repayments of approximately £16.7 million, or approximately 20% of the average bond portfolio value over the period.  Significant bond repayments are listed in table below.

Bond	Date of principal repayment	Event
TITN 2006-4FS	July 2012	Full repayment of bond with PIK interest following refinancing of deal
ELOC 26	July 2012	Full repayment of loan backed by an office in the city of London
DECO 2007-E6	July 2012	Full repayment of loan backed by a shopping centre in Germany
INFIN SOPR	August 2012	Full repayment of loan backed by a shopping centre in Germany

Real Estate Bond Portfolio Breakdown

Breakdown of RECI's bond portfolio as at 31 March 2012 and 30 September 2012 by jurisdiction (by reference to underlying assets)

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

30 September 2012

UK	64.9%
Germany	30.7%
Holland	3.0%
Italy	1.0%
Ireland	0.3%
Portugal	0.1%
Total (£mm)	£79.5mm

Values may not sum to 100% due to rounding differences

Bond purchases and sales since 30 September 2012

Between 1 October 2012 and 31 October 2012, the Company invested £1.7 million at an average price of 84% of par and a weighted average expected yield-to-maturity of 15.3%. RECI also sold £4.5 million of bonds during this period at an average price of 93% of par versus an average purchase price of 81% of par.  As at 31 October 2012, the portfolio consisted of 122 bonds with a fair value of £79.2 million and a nominal face value of £117.3 million[6]. 

Monthly Bond Performance Summary as at 31 October 2012

	May	June	July	August	September	October
% Fair Value Change	-0.47%	0.62%	3.61%	4.72%	3.76%	3.13%
WA Purchase Price in month	0.82	0.95	0.69	0.86	0.78	0.84
WA Purchase Yield in month	8.82%	8.96%	9.94%	8.23%	8.39%	15.29%

Asset Class Distribution of Bond Portfolio by Fair Value as at 31 October 2012

Bond Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total	Total as at 31 March 12
A	19.4%	3.3%	5.5%	0.2%	0.0%	28.5%	18.3%
B	2.5%	6.5%	9.4%	0.0%	0.0%	18.4%	30.9%
C	6.2%	1.9%	4.7%	0.0%	0.0%	12.8%	17.2%
D	3.5%	4.1%	9.7%	0.2%	0.0%	17.5%	16.5%
E and Below	9.6%	9.3%	4.0%	0.0%	0.0%	22.8%	17.0%
Total	41.2%	25.1%	33.3%	0.4%	0.0%	100.0%
Total as at 31 March 12	39.2%	25.8%	33.3%	0.7%	1.0%

Values may not sum to 100% due to rounding differences

Loans - Progress with new investment opportunities

RECI's loan portfolio has continued to provide attractive risk adjusted returns. The Company has concluded the sale of the OMNI loan, has invested in new loans backed by Dutch commercial property and a London office property, and has identified new investment opportunities.

In August 2012, RECI purchased a €4.2m commercial loan in a deal called Utrecht, which is secured against a portfolio of commercial properties in the Netherlands. This loan has a yield of 17.6%, an LTV of 64.1% and a weighted average life of 3.5 years.

By 31 October 2012, the Company had sold the OMNI loan 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.

On 21 November 2012, the Company made a £10 million loan at a 65% LTV and a 12% yield backed by a London office property.   The loan ranks behind a senior loan which has a 50% LTV. 

The Company has also identified a £5 million loan that it expects to complete in December. This is a 65% LTV second lien loan backed by a commercial property in London with a yield in excess of 12%.

Top 10 Investment Portfolio Exposures[7] as at 31 October 2012

Market Value                                    £30.9 million
WA Original LTV[8]                           51.0%
WA Cheyne Current LTV⁸                58.3%
WA Effective Yield[9]                       10.9%   

Type	Class		Collateral Description
Commercial		A	Portfolio of nursing homes operated by Four Seasons Health Care Group
Commercial		Loans	Portfolio of commercial real estate loans in the Netherlands
Commercial		D	Portfolio of Karstadt retail stores in Germany
Commercial		E	Portfolio of commercial loans secured by property in London
Residential		E	Portfolio of residential housing in the UK
Commercial		E	Portfolio of commercial loans secured by properties in Germany
Commercial		D	Portfolio of commercial loans secured by properties in Germany
Commercial		A	Portfolio of commercial real estate loans in the Netherlands
Commercial		C	Portfolio of commercial loans secured by properties situated in the UK
Commercial		A	Portfolio of commercial loans secured by properties situated in the UK

Outlook for RECI 

RECI will continue pursuing NAV-accretive investment opportunities in real estate bonds and loans and will invest its increased cash holdings in the near term.

The market has shifted to a risk-on phase resulting in a tightening of credit spreads across fixed income.  Fears of a breakdown in Eurozone sovereign restructuring have eased, following substantial intervention from the US Federal Reserve and the European Central Bank.

Nonetheless, European CMBS and RMBS markets remain dislocated and the Company sees a continued attractive risk/reward profile in real estate bonds relative to other fixed-income asset classes.   For example, using prices as at 31 October 2012, the current portfolio has a yield of 8.6% compared to a yield of 6.5% for European high yield bonds.

RECI's investment management team continues to see attractive value in Class B and Class C bonds.  In addition, the Investment Manager has been using its significant status in the RMBS and CMBS markets to act as a cornerstone investor on new issuances. This strategy allows RECI to benefit from both advantageous allocations and favourable investment terms in new loans.

Dislocation in European real estate loan markets will continue as traditional bank lenders reduce supply of credit to the sector.  The Investment Manager has identified a number of loan opportunities offering attractive risk/return profiles and expects to identify more.  The Company has access to a strong pipeline of loans, and plans to allocate approximately 20% to 25% of its gross asset value to real estate loans over the next two quarters.  This should leave the Company close to fully invested.

The Investment Manager will continue to make investments on a measured basis, judging their ability to support the Company's dividend yield and continued 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 30 September 2012 the Preference Share Cover Test was 2.53, above the threshold of 2.39. Due to the Newgate litigation, ERII is segregating €3.0 million in relation to Newgate 2006-1 residual cash flows received, and holding a further €1.0 million for the ongoing litigation costs. As a result, the company is declaring a dividend of 3.2 cents per ERII Ordinary Share, returning €1.3 million to investors. The table below shows figures as at 30 September 2012 compared to 31 March 2012.

ERII Key Quarter Financial Data	Q/E 31 March 2012	Q/E 30 September 2012
Cash balance	€3.7mm	€5.6mm
Residual Total Dirty Fair Value	€19.2mm	€18.5mm
Cash Flows in periods	€1.2mm	€1.2mm
Asset Coverage Ratio	2.37	2.53
Dividend Declared	N/A	3.2c
Net Asset Value per ERII Share	0.56	0.60
ERII Shares Outstanding	39.97mm	39.97mm

Investment Portfolio

Overview

ERII reported cash flows for the quarter ended 30 September 2012 of €1.2 million, compared to €1.9 million in the previous quarter and net write downs of €1.1 million. Write downs in the European mortgage portfolio were offset in part by gains in the UK mortgage portfolio.

European Mortgage Portfolio

The European Mortgage Portfolio generated less than €0.1 million of cash flows for the quarter ended 30 September 2012, compared to €0.4 million in the previous quarter. Write-downs in the portfolio totalled €5.4 million and included a €4.7 million write down in the Magellan 1 mortgage portfolio.  Write-downs were a result of delaying the repayment of the investment from December 2014 to December 2019. 

SME Portfolio

The Company has increased the fair value of Smart 06-1 to €1.6 million versus a fair value of €0.6 million in the previous quarter following a decrease in the default rate. Cash flows for Smart 06-1 in the quarter ended 30 September 2012 totalled €0.1 million, unchanged from the previous quarter.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £0.9 million in the quarter ended 30 September 2012 compared to £1.1 million in the previous quarter.  Gains in the portfolio totalled £2.6 million with all investments recording a gain in their market value.   Cash flow of £0.5 million was received from the Newgate 2006-1 residual. Cash flows from the Newgate 2006-1 residual totalling £2.4 million have been segregated and will be held pending the outcome of the litigation. 

Name	% of ERII Portfolio	Sector
Magellan 1	39.6%	European Mortgage Portfolio
Sestante 1	8.6%	European Mortgage Portfolio
Newgate 06-1	11.1%	UK Mortgage Portfolio
Smart 2006-1	6.5%	SME Portfolio
Alba 06-1	7.2%	UK Mortgage Portfolio
Alba 05-1	3.7%	UK Mortgage Portfolio
Cash	23.3%
TOTAL	100.0%

Other Company Information

Principal risks and uncertainties

Details of the principal risks and uncertainties facing the Company were set out in the 2012 Annual Report on pages 50 to 67, a copy of which is available on the Company's website(www.recreditinv.com).

The principal risks and uncertainties, being market risk, credit risk, liquidity risk, valuation of financial instruments, prepayment and re-investment risk, default and severity rates, residual interest risk and country risk, and the policies and procedures for minimising these risks and uncertainties remain unchanged and each of them has the potential to affect the Company's results during the remaining six months of the financial year.

Related party transactions

Related party transactions are disclosed in note 14 to the condensed set of financial statements. There have been no material changes in the related party transactions described in the last annual report, except for the change in holding pertaining to Cheyne ABS Opportunities Fund L.P. and RECI's £10 million mezzanine loan investment to finance the purchase of an office property in London, as another Cheyne managed fund, Cheyne Real Estate Credit Holdings Fund L.P. has also invested in the deal via a subordinated loan and equity both of which are subordinated to RECI's investment.

Going concern

As stated in note 2 to the condensed financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

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

[2] Value of bond portfolio including accrued interest

[3] Repayments include both full and partial bond repayments

[4] Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 30 September 2012

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

[6] Cost and nominal shown are calculated with original notional using pool factor and FX rate as at 31 October 2012

[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 31 October 2012.

[9] WA effective yield is based on the effective yield as at most recent purchase and is based on Cheyne'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 October 2012.

 

END

 

 

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