Interim Management Statement

RNS Number : 1587M

Real Estate Credit Investments Ltd

11 August 2011

 



Real Estate Credit Investments Limited (the Company or "RECI")

This interim management statement relates to the period from 31 March 2011 to 11 August 2011 and has been prepared solely in order to comply with the requirement (pursuant to the EU Transparency Directive as implemented by the Disclosure and Transparency Rules) for an interim management statement to be made by the Company no earlier than 10 June 2011 and no later than 19 August 2011. The Company is currently in the process of preparing its quarterly report for the period ended 30 June 2011 which is expected to be released in September 2011.  Unless otherwise noted herein, the financial information provided in this interim management statement (and the asset valuations underlying that financial information) are as at 31 March 2011 and such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming quarterly report.  Terms set out in this interim management system but not defined are as defined in the Company's prospectus in relation to the conversion of the Company to a protected cell company dated 11 July 2011.

Financial Highlights

€ Millions	31 Mar 11	10 Aug 11*
Gross Assets1, 2	134.9	140.4
Real Estate Debt Portfolio	72.0	102.3
Net Asset Value per Share	1.92	2.063

* Source:  Cheyne Capital. Unaudited.  Valuations may change, possibly materially, on the next reporting date.  The NAV at the next reporting date may be   materially different from the valuations implied above.

Calculated by reference to published 31 March 2011 net asset value as adjusted to take account of (in so far as relevant):

1.                    Unaudited Real Estate Debt Investment valuation as at 31 July 2011;

2.                    Residual Income Position valuation as at 31 March 2011, taking into account sales and assuming an estimated amortisation up to 31 July 2011.

3.                    This figure is unaudited, the actual NAV may be materially different from estimates.

Except where noted, the figures in this IMS relate to the Company's results and figures prior to the conversion and admission of the Cell Shares (see further below).

Conversion of the Company into a protected cell company and the admission to trading of the Cell Shares on the Specialist Fund Market of the London Stock Exchange

The Company announced on 10 August 2011 that all of the resolutions proposed at the Extraordinary General Meeting and Class Meetings to give effect to the conversion of the Company into a protected cell company were duly passed. The majority of the Company's assets, including all of the Company's Real Estate Debt Instruments, will continue to be held by the Company in the "Core", whose shares will continue to be traded on the main market of the London Stock Exchange. Eight Residual Income Positions held within the Company's Investment Portfolio are now held within a cell (the "Cell"), whose shares (the "Cell Shares") were admitted to trading on the Specialist Funds Market of the London Stock Exchange at 8.00 a.m. today.

The Board of the Company has undertaken an internal valuation based on cash movements and changes in asset values since the date of issue of its Prospectus and estimates that, as at 31 July 2011, expected NAV per Existing Ordinary Share (in the Core) following Admission would be €1.54 and an expected NAV per Cell Share following Admission would be €0.52.

The Cell portfolio has begun trading under the name European Residual Income Investments and the ticker of "ERII", the Cell shares are denominated in Euros.  The Cell consists of three legacy assets with non-zero value, five assets with zero value (as at 31 March 2011) and €1.5 million in cash.  The non-zero legacy assets are cash flowing and the Investment Manager believes they offer good upside at this point for investors with sufficient risk appetite and investment horizon. Furthermore, there is the potential for two of the UK mortgage residuals which are currently marked at zero to begin to generate cash flows. To the extent that such UK assets do get marked up, it is not anticipated that this currency exposure will be hedged into Euros within the Cell. The Cell will also be continuing its litigation against Merrill Lynch in respect of the Newgate 2006-1 asset. 

The Cell is expected to realise a significant majority of its holdings over the next three to five years.  The Investment Manager will be actively managing this portfolio throughout and will also be pursuing asset disposals.  To the extent permitted, the Cell will distribute available cash via dividends in respect of the Cell Shares.

Continued profitability supported by Real Estate Debt Portfolio

In the quarter ended 31 March 2011 the Company delivered a seventh consecutive quarter of profit, with NAV per share increasing to €1.92 as of 31 March 2011, compared with €1.80 at the end of the third quarter. Supporting the continued NAV growth in the quarter were, first, the strong performance of assets in the Real Estate Debt Portfolio and, second, the realisation of gains through asset sales. RECI was also successful in selling assets from its legacy portfolio at attractive valuations. Subsequent to the quarter ended 31 March 2011, the Company also sold its residual income positions in the three Lusitano Portuguese mortgage loan portfolios, and in the three RMAC UK mortgage loan portfolios.

Performance Summary

As at 31 July 2011, the Real Estate Debt Portfolio consisted of 103 bonds with a nominal value of €151.2 million.  61.8% of the portfolio was Commercial Mortgage Backed Securities ("CMBS") bonds and 37.1% were Residential Mortgage Backed Securities ("RMBS") bonds (1.0% were SME loans).  Cash flows from the bond portfolio totalled €3.9 million in the quarter ended 31 March 2011 up from the €1.2 million in the quarter ended 31 December 2010.

Investment Portfolio

The two tables below summarise the Company's investment portfolio encompassing both the Real Estate Debt Portfolio and Residual Income Investment Portfolio as at 31 July 2011.

Portfolio composition by asset type as at 31 July 2011*

*by reference to underlying asset collateral.  Percentages are in relation to the fair value of the Company's investment portfolio including accrued interest (excluding cash and hedges). Figures stated use Real Estate Debt Portfolio Fair Values as at 31 July 2011 and the remaining Residual Income positions at Fair Value as at 31 March 2011.

Portfolio Composition	%
Real Estate Debt	75.2%
European Mortgages	11.7%
SME loans	13.1%
UK Mortgages	0.0%

Portfolio composition by jurisdiction as at 31 July 2011*

* by reference to underlying asset originator.  Percentages are in relation to the fair value of the Company's investment portfolio including accrued interest (excluding cash and hedges). Figures stated use Real Estate Debt Portfolio Fair Values as at 31 July 2011 and the remaining Residual Income positions at Fair Value as at 31 March 2011.

Jurisdiction	%
UK	45.0%
Germany	24.1%
Netherlands	12.5%
Portugal	10.9%
Italy	2.7%
Ireland	4.2%
France	0.5%
Switzerland	0.1%

 Real Estate Debt Portfolio as at 31 July 2011 

Current Rating1	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total3
AAA	0.0%	0.0%	0.0%	0.0%	0.0%	0.0% (1.0%)
AA	1.2%	12.8%	1.1%	0.0%	0.0%	15.1% (14.9%)
A	5.0%	5.8%	11.5%	0.3%	0.0%	22.5% (22.2%)
BBB	6.4%	6.7%	12.3%	0.0%	1.0%	26.4% (26.5%)
BB and Below	12.3%	4.7%	12.0%	6.9%	0.0%	36.0% (35.5%)
Grand Total2	25.0%	29.9%	36.9%	7.2%	1.0%	100.0%

1.                    Ratings sourced from S&P or Fitch

2.                    Totals may not sum due to rounding differences

3.                    Figures in brackets as at 30 June 2011

 Residual Income Investment Portfolio at 31 July 2011

Issuer	Description of underlying assets
Amstel Corporate Loan Offering BV 2006-1	Middle market corporate loans
Eirles Three Limited Series 236 Tranche B (SMART 06-1)	SME loans
Magellan Mortgages No.1 Plc Class D Notes	First ranking, fully amortising Portuguese residential mortgages
Sestante Finance S.R.L. Junior Notes.	First-ranking prime Italian residential mortgages
ALBA 2005-1 Plc Mortgage Early Repayment Certificates, Subordinated Notes and R Certificates	UK non-conforming* and buy-to-let residential mortgages (valued at zero as at 31 March 2011)
ALBA 2006-1 Plc Mortgage Early Repayment Certificates, Subordinated Notes and R Certificates	UK non-conforming* residential mortgages, primarily first-ranking (valued at zero as at 31 March 2011)
Cheyne High Grade CDO Ltd Class F Notes	CDO (valued at zero as at 31 March 2011)
Newgate Funding Plc Series 2006-1, Mortgage Early Repayment Certificates and Series Residuals	UK non-conforming* residential mortgages, primarily first-ranking (valued at zero as at 31 March 2011)
RASC Series 2006-KS2 Trust Home Equity Mortgage-Backed Pass-Through Certificates	US residential mortgages (valued at zero as at 31 March 2011)

*Non-conforming relates to subprime and near prime residential mortgages.

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

The Company's bond portfolio fell by 1.7% in market value during the month of July.  The ongoing volatility in the markets should create attractive entry points to increase the Company's exposure to real estate securities.  The Company has some cash available for asset purchases and there is a reasonable probability that the Amstel 2006-1 asset will be redeemed by the sponsor before the maturity date.  Our approach to new investments will be to identify strong credit quality bonds that are trading at dislocated prices.     

In addition to growing the securities portfolio, RECI, will also consider investments in real estate loans.  Loan market prices are currently less volatile and over the past few months yields in the commercial and residential loan markets have remained attractive. The Investment Manager 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 well positioned to take advantage of these opportunities with access to both market intelligence on loan refinancing opportunities and strong relationships with loan market participants. The Investment Manager 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, the Investment Manager 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.

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).

 

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