Interim Management Statement

RNS Number : 4356X

Real Estate Credit Inv. PCC Ltd

08 February 2013

 



 

8 February 2013

Real Estate Credit Investments PCC Limited

Interim Management Statement for the Second Half of Financial Year Ending 31 March 2013

RECI¹ Highlights

·     RECI made a profit of £4.1 million in the quarter ended 31 December 2012, compared with £8.7 million in the previous quarter.

·     From 30 September 2012 to 31 January 2013, RECI NAV increased 11.5% from £1.30 per share to £1.45 per share²

·     In the quarter ending 31 December 2012, RECI made £28.1 million of new investments at an average yield of 12.6%

·     RECI's loan portfolio accounted for 20% of the investment portfolio as at 31 December 2012 following £15.7 million of investment during the quarter

·     The bond portfolio had nominal value of £107.4 million and a market value of £75.5 million as at 31 December 2012

·     The Board has declared a dividend of 2.0p per share in respect of RECI Ordinary Shares for the quarter ended 31 December 2012

[1] Real Estate Credit Investment PCC Limited is a protected cell company, consisting of a Core and a Cell. RECI refers to the

Company's Core segment. Figures for quarter ended 31 December 2012 are pro forma, as the Company will next produce financial  statements for year ended 31 March 2013.

2 Based on 31 December pro forma figures

Progress sourcing new investment opportunities

RECI has enjoyed a strong third quarter of its financial year, buoyed by gains across the bond portfolio. The investment team has been successful in identifying compelling investment opportunities in the bond markets, despite the backdrop of falling yields. RECI has also made significant progress with new investments in real estate loans.

The Company recorded gains in the investment portfolio of £6.1 million for the December quarter. Most gains stemmed from the bond portfolio thanks to spread compression as credit markets tightened. Many bonds in the portfolio have also benefited from positive re-rating having de-risked following announced re-financings.

Among the strongest performers was the Eloc 26 bond which is secured against commercial properties in London.  The bond's price rose substantially following the sale of the Devonshire Square office building located in the City of London and the subsequent de-risking.

RECI's investment team has continued to source new investments offering double-digit returns. New investments made in the quarter ended 31 December 2012 totalled £28.1 million and yielded an average of 12.6%. This compares with £17.8 million and 10.2% in the previous quarter. The company secured an allocation of the highly sought-after new bond issue from Annington Finance. This bond has strong defensive credit characteristics (62% Loan to Value ("LTV") and a portfolio leased to the UK government on a 184 year lease) and carries a 13% coupon. It is already yielding mark-to-market gains of 12%. This performance mirrors the gains RECI made from participating in the primary issuance, in the summer of 2012, of the Elli Finance bond that was backed by the Four Seasons nursing home portfolio.

RECI has been able to source highly attractive investment opportunities in the loan market over the past quarter. As a result the company has already reached the lower end of the target range it set three months ago to increase loan investments to comprise 20%-25% of the investment portfolio. The Company added two loan investments in the quarter ending 31 December. The first was a four-year term loan backed by a London office property with a 66% LTV and the second loan was backed by a London hotel property with a loan to value of 68%.  The loans carry an average interest yield of 13.5%. The Company also sold £21.8 million of bonds in the period of which £14.9 million was related to Class A and B bonds.  Bonds sales were predominantly motivated by rotation out of lower yielding bonds into higher yielding bonds.  For example, the average price of the Class A CMBS bonds sold was 90.1.  

With a strengthening pipeline of new investment opportunities, and a sound fundamental investment case behind real estate debt, RECI is fully confident in its ability to generate strong returns in the medium term.

RECI Key Quarter Financial Data3	30 September 2012	31 December 2012
Gross Assets	£100.2m	£100.9m
Investment Portfolio	£87.1m	£94.9m
Operating Income	£3.4m	£3.4m
Fair Value Gains / (Losses) on Investment Portfolio	£6.7m	£2.7m
Net Profit4	£8.7m	£4.1m
Net Asset Value per ordinary share	£1.30	£1.39

3. The 31 December 2012 P&L figures are pro-forma, as next financial statements will be released for year ended 31 March 2013.

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

This interim management statement relates to the period from 30 September 2012 to 8 February 2013 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 2012 and no later than 15 February 2013. 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 2012 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 statement but not defined are as defined in the Company's most recent prospectus dated 11 July 2011.

Pro - forma Balance Sheet⁵

Figures for RECI for 31 December 2012 and 31 January 2013 (in £ million)

	31/12/201212	31/01/201312
Investment Portfolio6	95.41	97.06
Cash and Cash Equivalents	3.54	6.18
Derivative Assets	2.00	0.62
Other Assets 7,8	-	-
	100.95	103.86
Other Liabilities9	(0.63)	(0.63)
Preference Dividend10	-	(0.30)
Ordinary Dividend11	-	-
Preference Share Liability	(44.96)	(44.96)
	(45.59)	(45.89)
Net Assets (estimate)	55.36	57.97
Shares outstanding	39,966,985	39,966,985
Net Assets per Ordinary Share (estimate)	1.39	1.45

Pro Forma NAV Assumptions

5.        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.  6.        Investment portfolio includes bond portfolio and residential real estate loans. 7.        Other Assets excludes accrued interest on the Investment Portfolio as Investment Portfolio figure includes accrued interest. 8.        Other than above, the Other Assets figure is the figure used in the financial statements for 30 September 2012. 9.        Other Liabilities is the figure used in the financial statements for 30 September 2012, adjusted for management fees paid and excluding the amount 'payable for investments purchased' as this was due to timing of pending trades as at 30 September 2012. 10.     Preference Dividend liability accrues over the quarter and is paid on each quarter end. 11.     Ordinary Dividend liability is either ex or cum the dividend at the valuation date. 12.     31 December figures use EURGBP FX rates at 31 December 2012 and 31 January figures use EURGBP FX rates as at 31 January 2013.

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

Top 10 Exposures¹³ as at 31 January 2013
Market Value                                    £53.2 million
WA Original LTV¹⁴                            57.7%
WA Cheyne Current LTV¹⁴            60.2%
WA Effective Yield¹⁵                      12.4%   

Type	Class		Collateral Description
Commercial		B	Bond secured against government housing portfolio in the UK
Commercial		Loan	Loan secured against commercial office property in London
Commercial		A	Portfolio of nursing homes operated by Four Seasons Health Care Group
Commercial		Loan	Loan secured against a London Hotel
Commercial		Loan	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
Commercial		E	Portfolio of commercial loans secured by properties in Germany
Commercial		A	Portfolio of commercial real estate loans in the Netherlands
Commercial		D	Portfolio of commercial loans secured by properties in Germany

Source:  Cheyne Capital. Unaudited. 13. Based on fair value of bonds and loans.  14. 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 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.   15.  WA effective yield is based on the effective yield using prices as at 31 January 2013 and is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein.

RECI Investment Portfolio Activity in 2012

	Q1	Q2	Q3	Q4
Purchases (£mm)	14.7	18.3	17.8	28.1
WA Purchase Yield15	11.5%	10.0%	10.2%	12.6%

15.  WA effective yield is based on the effective yield using purchase price and is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein.

Bond Portfolio Summary (as at 31 January 2013)
Number of bonds	92
Dirty Fair Value of Bond Portfolio as at 31 January Nominal Face Value of Bond Portfolio as at 31 January	77,459,255 108,086,682
Bond Purchases 1 January to 31 January 2013 (cost)	4,348,620
Average Purchase Price between 1 January and 31 January 2013	0.97
Average Effective Yield of Purchases between 1 January and 31 January16	8.54%
Bond Sales 1 January to 31 January 2013 (cost)	4,767,402
Average Sale Price between 1 January and 31 January 2013	0.94
Average Purchase Price of Bonds Sold Between 1 January and 31 January 2013	0.91

16.     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 Bond Performance Summary

	August	September	October	November	December	January
% Fair Value Change17	4.72%	3.76%	3.13%	2.81%	1.12%	3.43%
WA Purchase Price18	0.86	0.78	0.84	0.99	0.81	0.97
WA Purchase Yield18	8.23%	8.39%	15.29%	12.70%	7.37%	8.54%

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

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

Bond Breakdown as at 31 January 2013

Asset Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total (31 Dec)
CLASS A	17.4%	0.0%	3.4%	0.2%	0.0%	20.9% (22.4%)
CLASS B	18.5%	1.5%	9.5%	0.0%	0.0%	29.5% (26.8%)
CLASS C	6.1%	0.5%	3.9%	0.0%	0.0%	10.5% (11.6%)
CLASS D	2.3%	2.1%	11.0%	0.2%	0.0%	15.5% (16.1%)
CLASS E and below	10.2%	8.8%	4.5%	0.0%	0.0%	23.5% (23.1%)
Grand Total	54.5%	12.8%	32.2%	0.4%	0.0%	100.0%

A breakdown of RECI's bond investment portfolio as at 30 September 2012 and 31 January 2013 by jurisdiction (by reference to underlying asset originator) is set out below.

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

31 January 2013

UK	67.3%
Germany	27.1%
Holland	4.0%
Italy	1.1%
Ireland	0.3%
Portugal	0.1%
Total (£mm)	£77.5mm

Values may not sum to 100% due to rounding differences

Loan Portfolio Summary

(as at 31 January 2013)

Number of loans	3
Notional Loans as % of GAV	19,215,235 18.9%
Weighted average yield of loan portfolio19	13.5%
Weighted average LTV of portfolio20	66.6%

19.  WA effective yield is based on the effective yield using prices as at 31 January 2013 and is based on Cheyne's pricing assumptions and actual returns may differ materially from those expressed or implied herein. 20. The Weighted Average 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.  

Outlook for RECI

The Company expects further gains on the existing bond portfolio in 2013 and also attractive new investment opportunities in primary and secondary bond and loan markets.

As investors searching for yield rotate out of safe haven investments, increasing numbers will seek out the higher relative value offered in European RMBS and CMBS.  The bonds' Libor-linked rates protect investors from upward shifts in the yield curve. At the same time credit spreads remain at historically high levels relative to traditional credit or high-yield bonds while offering the protection of hard property assets principally located in the UK and Germany.  We expect credit spreads to continue to tighten through 2013, resulting in higher bond prices. 

Cheyne continues to exploit its position as a corner-stone investor in European real estate bond markets, working strategically with new issuers and banks to structure and anchor new primary bond issuances in which RECI participates. We expect CMBS bond issuance to increase in 2013 as the pool of investors has deepened in recent years, supported by strong performance in the sector generally. The investment team has identified a strong pipeline of new issue bonds and loans with yields in excess of 10%, and we expect more deals to be funded in the coming quarter.  

In secondary bond markets the team will continue to use its expertise to identify mispriced bonds at a range of points across the capital structure offering the highest relative value.

At present, the Company's ability to participate in new investments is limited by cash on the balance sheet.  As such, RECI will continue to rotate out of lower yielding bonds which have limited potential for price appreciation into bonds and loans with higher returns.

ERII Cell Position Summary (in € million)
Number of Positions	6
Residual Income Portfolio Valuation (31 December 2012)21	€14.4m

ERII Cell Cash Summary (in € million)
Cash as at 31 January 2013	€17.5m

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.

21.   This figure contains the Residual Income Positions remaining as at 31 January 2013, but at the pro forma dirty fair value per 31 December 2012.

Overview

The Company has today separately announced a distribution to Cell shareholders of the cash proceeds from the recent realisation of one of the Cell's assets, as described in the Cell announcement of 19 December 2012. The distribution will be by way of a compulsory share redemption of Cell shares.

ERII reported cash flows for the quarter ended 31 December 2012 of €13.8 million, compared to €1.2 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.

The Company expects gross cash flows from the investment portfolio of €2.6 million in 2013.

European Mortgage Portfolio

The European Mortgage Portfolio generated €0.2 million of cash flows for the quarter ended 31 December 2012, compared to less than €0.1 million in the previous quarter. Write downs in the portfolio totalled €1.5 million and included a €1.4 million write down in the Magellan 1 mortgage portfolio.  Write downs were a result of an extension in the time required to foreclose and liquidate properties in Portugal. 

SME Portfolio

The Company has increased the fair value of Smart 06-1 to €1.7 million versus a fair value of €1.6 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

In the quarter ended 31 December 2012 there was a significant realisation of an asset within the UK Mortgage Portfolio. The UK Mortgage Portfolio also recorded other interest cash flows of £1.2 million in the quarter ended 31 December 2012 compared to £0.9 million in the previous quarter.  Excluding the realised asset, gains in the remaining portfolio totalled £0.2 million with all investments recording a gain in their market value.  

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 ("Company") 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 Cheyne or the Company, 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 the Company 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 the Company 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) The Company's investment program is speculative in nature and entails substantial risks; (2) the investments of the Company 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 the Company, it may be difficult or impossible for the Company 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, the Company may suffer losses; (5) Cheyne will receive performance-based remuneration; (6) the market price of shares in the Company do 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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