Interim Management Statement

RNS Number : 1630X

Real Estate Credit Inv. PCC Ltd

10 February 2012

 



 

10 February 2012

Real Estate Credit Investments PCC Limited

Interim Management Statement for the Second Half of Financial Year Ended 31 March 2012

RECI[1] Third Quarter Highlights

·     RECI recorded a net loss of £3.2 million in the third quarter ended 31 December 2011, compared with a net loss of £9.3 million in the second quarter

·     Bond portfolio had nominal value of £133.4 million and a market value of £77.1 million as of 31 December 2011

·     Company purchased £10.1 million of bonds in the third quarter at an average price of 68 pence

·     ECB announcement of the LTRO facility in December leading to improvements in bond prices

·     2.8 million preference shares repurchased in December 2011 at an average price of 92.5 pence

·     Declaring a dividend of 0.86p per share in respect of RECI Ordinary Shares for quarter ended 31 December 2011

RECI's loss for the third quarter was due to mark-to-market losses on the investment portfolio, reflecting volatility surrounding the Eurozone debt crisis. The loss was considerably less than that sustained in the second quarter reflecting, in part, the strategic decision RECI made in June 2011 to reinforce its defensive positioning across the bond portfolio.  RECI made new bond purchases of £10.1 million, broadly in line with second quarter levels, and markedly lower than the £37.4 million of new investments in the first quarter.  Cash levels stood at £10.8 million as at 31 January 2012.

The company retains full confidence in the fundamental investment case of the real estate debt markets and in its ability to generate strong returns in the medium term.

RECI Key Second and Third Quarter Financial Data*	30 September 2011	31 December 2011
Gross Assets	£94.9mm	£87.8mm
Investment Portfolio	£77.7mm	£79.0mm
Operating Income	£1.8mm	£2.7mm
Fair Value Losses on Investment Portfolio	£-9.3mm	£-3.7mm
Net Loss**	£-9.3mm	£-3.2mm
Net Asset Value per Share	£1.09	£1.00

*Numbers differ from financial statements: The 30 September 2011 P&L figures are pro-forma, as in the financial statements the Core figures reported include the P&L on the residual income positions up to the 11 August 2011 conversion. The 30 September 2011 figures released previously have been re-stated using the FX rate as at 30 September 2011. The 31 December 2011 figures are pro-forma, as the Company will not produce it's next audited financial statements until the year end.** Net profit takes operating and finance expenses into account.

This interim management statement relates to the period from 30 September 2011 to 10 February 2012 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 December 2011 and no later than 17 February 2012. Unless otherwise noted herein, the financial information provided in this interim management statement (and the asset valuations underlying that financial information) are as at 30 September 2011 and such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming annual 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.

Pro - forma Balance Sheet¹

Figures for RECI Core  for 31 December 2011 and 31 January 2012 (in £ million)

	31/12/20117	31/01/20127
Investment Portfolio	79.03	76.43
Cash and Cash Equivalents	6.32	10.81
Derivative Assets	1.92	2.08
Other Assets 2,3	0.54	0.62
	87.81	89.95
Other Liabilities4	(0.87)	(0.93)
Preference Dividend5	-	(0.31)
Ordinary Dividend6	-	-
Preference Share Liability	(47.14)	(47.14)
	(48.01)	(48.38)
Net Assets (estimate)	39.81	41.57
Shares outstanding	39,966,985	39,966,985
Net Assets per Ordinary Share (estimate)	1.00	1.04

Pro Forma NAV Assumptions

1.        Unaudited figures produced by Cheyne Capital for Investment Portfolio, Cash and Cash Equivalents and Derivative Assets, otherwise uses latest public financial statement figures.  Figures are estimates, and actual audited values may be materially different from the numbers shown.  2.        Other Assets excludes accrued interest on the Investment Portfolio as Investment Portfolio figure includes accrued interest. 3.        Other than above, the Other Assets figure for 31 December 2011 is same as latest public financial statement figures as at 30 September 2011, while the 31 January 2012 figure is the pro-forma figure as at 31 December 2011. 4.        Other Liabilities (predominantly prepaid expenses) for 31 December 2011 is same as latest public financial statement figures as at 30 September 2011, while the 31 January 2012 figure is the pro-forma figure as at 31 December 2011. 5.        Preference Dividend liability accrues monthly over the quarter and is paid on each quarter end. 6.        Ordinary Dividend liability is either ex  or cum the dividend at the valuation date 7.        31 December figures use EURGBP FX rates at 31 December 2011 and 31 January figures use EURGBP FX rates as at 31 January 2012.

Source:  Cheyne Capital. Unaudited. The NAV at the next reporting date may be materially different from the valuations implied above.

Portfolio Summary (as at 31 January 2012)
Number of bonds	116
Nominal Face Value of Portfolio	127,407,609
Weighted Average Market Price of Portfolio1	0.67
Weighted Average Purchase Price of Portfolio1	0.67
Asset Purchases 1 to 31 January (cost)	4,553,568
Average Purchase Price 1 to 31 January	0.71
Average Effective Yield of Purchases 1 to 31 January2	12.14
Asset Sales 1 to 31 January (cost)	6,542,730
Average Sale Price 1 to 31 January	0.70

1.        The Weighted Average Market & Purchase Price are weighted by the cash spend on purchases which make up the position.

2.        The weighted average effective yield is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein. Figures quoted include accrued interest.

Monthly Performance Summary

	August	September	October	November	December	January
% Fair Value Change3	-4.27%	-4.67%	-1.37%	-0.60%	-0.62%	2.73%
WA Purchase Price4	0.73	0.61	-	0.71	0.48	0.71
WA Purchase Yield4	13.00%	22.27%	-	13.15%	28.75%	12.14%

3.        % Fair Value change is based on MTM P&L for the month.

4.        WA Purchase Price and WA Purchase Yield are based on purchases in the period. 

Portfolio Breakdown as at 31 January 2012

Current Rating5	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total (31 Dec)
AAA	0.0%	0.0%	0.0%	0.0%	0.0%	0.0% (2.6%)
AA	4.9%	11.6%	1.1%	0.0%	0.0%	17.6% (15.1%)
A	5.2%	4.9%	11.5%	0.2%	1.1%	22.7% (21.2%)
BBB	5.4%	5.0%	6.3%	0.5%	0.1%	17.3% (17.9%)
BB and Below	21.3%	5.3%	15.2%	0.4%	0.0%	42.3% (43.1%)
Grand Total	36.8%	26.8%	34.1%	1.2%	1.2%	100.0%

Source:  Cheyne Capital. Unaudited.  N.B. Column totals may not sum due to rounding.  5. Ratings sourced from S&P or Fitch

Asset Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total (31 Dec)
CLASS A	7.1%	2.2%	10.4%	0.2%	0.0%	19.9% (20.5%)
CLASS B	10.7%	12.3%	8.4%	0.2%	0.0%	31.7% (31.5%)
CLASS C	4.4%	5.7%	3.2%	0.5%	0.0%	13.8% (12.5%)
CLASS D	4.8%	2.9%	9.1%	0.2%	1.2%	18.2% (18.1%)
CLASS E and below	9.8%	3.7%	2.9%	0.0%	0.0%	16.4% (17.4%)
Grand Total	36.8%	26.8%	34.1%	1.2%	1.2%	100.0%

Top 10 Bonds⁶ as at 31 January 2012
Market Value                                    £26.9 million
WA Original LTV⁷                             49.1%
WA Cheyne Current LTV⁷             64.2%
WA Effective Yield⁸                       16.2%   

Type	Class		Collateral Description
Commercial		A2	Portfolio of nursing homes operated by Four Seasons Health Care Group
Commercial		A	Portfolio of commercial loans secured by properties in the UK
Commercial		A	Senior most bond in a portfolio of 13 loans in Germany & Sweden
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	Senior most bond in a portfolio of Karstadt retail stores in Germany
Commercial		D	Portfolio of Karstadt retail stores in Germany
Residential		B	Portfolio of UK buy-to-let mortgages
Commercial		E	Portfolio of commercial loans secured by properties in Germany

Source:  Cheyne Capital. Unaudited. 6. Based on fair value of bonds.  7. 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. The Original LTV is weighted by the market value of the bonds.   The Weighted Average Cheyne Current LTV has been calculated by Cheyne by reference to the current value ascribed to the collateral by Cheyne.  In determining these values, Cheyne has undertaken its own internal valuation of the underlying collateral.  Such valuations have not been subject to independent verification or review.   8.  WA effective yield is based on the effective yield using prices as at 31 January 2012 and is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein.

A breakdown of RECI's bond investment portfolio as at 30 September 2011 and 31 January 2012 by jurisdiction (by reference to underlying asset originator) is set out below.

30 September 2011

UK	57.8%
Germany	33.9%
Holland	3.8%
Portugal	1.9%
Ireland	1.3%
Italy	1.1%
Switzerland	0.1%
Total (£mm)	£77.7mm

31 January 2012

UK	64.1%
Germany	30.7%
Holland	3.4%
Italy	1.1%
Portugal	0.3%
Ireland	0.3%
Switzerland	0.1%
Total (£mm)	£74.5mm

Values may not sum to 100% due to rounding differences

RECI Cell Position Summary
Number of Positions		7
Residual Income Portfolio Valuation (31 December 2011)9	€20,173,711

RECI Cell Cash Summary
Cash as at 31 January 2012	€2,603,947

Source:  Cheyne Capital. Unaudited.  Valuation of the Residual Income Portfolio may change, possibly materially, on the next reporting date.  The NAV at the next reporting date may be materially different from the valuation implied above.

9. This figure contains the Residual Income Positions remaining as at 31 January 2012, but at the value per 31 December 2011, unaudited.

Outlook for RECI

RECI retains confidence in its investment portfolio, the ultimate recovery value of the bonds and the ability of the investments to deliver strong returns in the medium term.

Mark-to-market losses reflected extreme uncertainty across global security markets over the possible resolution of the Eurozone crisis and liquidity pressures at European banks.  Widening in credit spreads in the second half of 2011 had a negative impact on the market prices of the Company's real estate bond portfolio.  In contrast, investor interest in property markets increased with prime London and German commercial real estate continuing to attract capital. 

As a consequence, the mark-to-market losses recorded in the second half reflected broader financial market concerns rather than a fundamental change in the perception of real estate credit risk relative to our assumptions. For example, principal repayments continue to outpace our assumptions with receipts of £1.7 million in January 2012.

RECI's portfolio has shown early signs of benefiting from the ECB's December announcement of the three-year LTRO programme. The LTRO programme has, for the time being, reduced concerns around the liquidity of European banks and has indirectly provided a buyer of last resort for European sovereign debt. The resultant improved market sentiment has underpinned a strong rally in both credit and equity markets. This has allowed the Company to re-balance its portfolio towards more liquid names.    

RECI appreciates that unresolved stresses in the EU could return and partly or wholly mitigate some of the positive impacts of the LTRO Programme. However, the rotation by RECI towards more liquid names should ease downward price pressures in the event that credit markets return to stressed conditions.  The Company will continue to increase its exposures to European real estate bonds as they continue to offer attractive returns. 

Disclaimer:

This document is issued by Cheyne Capital Management (UK) LLP ("Cheyne Capital").  Cheyne is authorised and regulated by the Financial Services Authority of the United Kingdom (the "FSA").

This document is being issued inside and outside the United Kingdom by Cheyne only to and/or is directed only at persons who are professional clients or eligible counterparties for the purposes of the FSA's Conduct of Business Sourcebook.  This document must not be relied or acted upon by any other persons. Cheyne neither provides investment advice to, nor receives and transmits orders from, investors in Real Estate Credit Investments PCC Limited ("RECI") nor does it carry on any other activities with or for such investors that constitute "MiFID or equivalent third country business" for the purposes of the FSA Rules.

The information contained herein is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any dissemination or other unauthorised use of this information by any person or entity is strictly prohibited. The distribution of this document may be further restricted by law. No action has been or will be taken by either of Cheyne or RECI, to permit the possession or distribution of this document in any jurisdiction (other than as expressly described herein) where action for that purpose may be required. Accordingly, this document may not be given or used in any jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons to whom this document is communicated should inform themselves about and observe any such restrictions.

This document is not intended to constitute, and should not be construed as, investment advice. Potential investors in RECI should seek their own independent financial advice. This document has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein. This document is not intended as and is not to be taken as an offer or solicitation with respect to the purchase or sale of any security or interest, nor does it constitute an offer or solicitation in any jurisdiction, including those in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such a solicitation or offer. Any person subscribing for an investment must be able to bear the risks involved and must meet the suitability requirements relating to such investments. Some or all alternative investment programs may not be suitable for certain investors.

Although the information in this document is believed to be materially correct, no representation or warranty is given as to the accuracy of any of the information provided. Certain information included in this document is based on information obtained from sources considered to be reliable.  We have not verified any such information and assume no responsibility for the accuracy or completeness thereof.  Any projections or analysis provided to assist the recipient of this document in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any projections or analysis are subject to change without prior notification and should not be viewed as factual and should not be relied upon as an accurate prediction of future results. Furthermore, to the extent permitted by law, neither RECI nor Cheyne nor any of their respective directors, agents, service providers or professional advisers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this document or for any decision based on it.

Past performance is not a reliable indicator of future results.

Among the risks we wish to call to the particular attention of recipients are the following: (1) RECI's investment programme is speculative in nature and entails substantial risks; (2) the investments of RECI may be subject to sudden and large falls in price or value and there could be a large loss upon realisation of a holder's investment, which could equal the total amount invested; (3) as there is no recognised market for many of the investments of RECI, it may be difficult or impossible for RECI to obtain complete and/or reliable information about the value of such investments or the extent of the risks to which such investments are exposed; (4) the use of a single investment manager could mean a lack of diversification and, consequently, higher risk, and may depend upon the services of key personnel, and if certain or all of them become unavailable, RECI may suffer losses; (5) Cheyne will receive performance-based remuneration; (6) the market price of shares in RECI does not necessarily reflect its underlying net asset value; and (7) the price of shares (and the income from them) can go down as well as up and may be affected by changes in rates of exchange.

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[1] RECI refers to the Real Estate Credit Investments Core. Figures are pro forma, as the Company will not produce its next audited financial statements until the year end.

 

END

 

 

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