Interim Management Statement

RNS Number : 9258J

Real Estate Credit Inv. PCC Ltd

14 August 2012

 



 

14 August 2012

Real Estate Credit Investments PCC Limited

Interim Management Statement for the First Half of Financial Year Ended 31 March 2013

RECI ¹ Highlights

·     From the start of the financial year to 31 July 2012, RECI NAV increased 8.2% from £1.10 per share to £1.19 per share ²

·     Significant early repayments in RECI's bond portfolio have been a primary factor in the positive performance

·     RECI's operating income rose to £3.0m in the first quarter ended 30 June 2012, up  11% from the £2.7 million in the quarter ended 31 March 2012

·     Bond portfolio had nominal value of £127.1 million and a market value of £79.9 million as of 30 June 2012

·     Board has declared a dividend of 1.7p per share in respect of RECI Ordinary Shares for the quarter ended 30 June 2012

RECI made a profit of £0.7 million in the quarter ended 30 June 2012, compared with £4.5 million in the previous quarter. The Company recorded a net gain in the bond portfolio of £1.4 million for the June quarter (being £0.8 million interest income received and £0.6 million in mark to market gains) which is reported as £3.0 million of operating income (based on the yield of the assets) and a £1.6 million negative fair value adjustment.

The positive performance, subsequent to the quarter end, in the bond portfolio was a result of both significant early bond repayments and mark to market gains in the portfolio.  The two largest increases come from asset purchases made in the past twelve months. The Titan 2006-4FS bond has repaid in full earlier than we had expected, and a bond backed by London commercial property has seen a 50% repayment of principal at par and a significant increase in the market price.   These gains reflect the Company's continued focus on identifying good quality bonds that are mis-priced by the market.  The increase in NAV was also supported by an iTraxx Main short that helped mitigate the effects of the Eurozone crisis.

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.

[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 30 June 2012 are pro forma, as the Company will next produce financial statements for half year ended 30 September 2012.

 

[2]The 30 June 2012 P&L figures are pro-forma, as next financial statements will be released for half year ended 30 September 2012.

RECI Key Quarter Financial Data3	31 March 2012	30 June 2012
Gross Assets	£92.7m	£92.1m
Investment Portfolio	£86.8m	£87.5m
Operating Income	£2.7m	£3.0m
Fair Value Gains / (Losses) on Investment Portfolio	£3.4m	£-1.6m
Net Profit4	£4.5m	£0.7m
Net Asset Value per ordinary share	£1.10	£1.12

3. The 30 June 2012 P&L figures are pro-forma, as next financial statements will be released for half year ended 30 September 2012.

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

This interim management statement relates to the period from 31 March 2012 to 13 August 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 11 June 2012 and no later than 17 August 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 31 March 2012 and such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming semi 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 30 June 2012 and 31 July 2012 (in £ million)

	30/06/201211	31/07/201211
Investment Portfolio6	87.52	75.72
Cash and Cash Equivalents	1.31	15.46
Derivative Assets	3.21	3.87
Other Assets 7	-	-
	92.05	95.05
Other Liabilities8	(0.21)	(0.21)
Preference Dividend9	-	(0.31)
Ordinary Dividend10	-	-
Preference Share Liability	(47.14)	(47.14)
	(47.35)	(47.66)
Net Assets (estimate)	44.70	47.39
Shares outstanding	39,966,985	39,966,985
Net Assets per Ordinary Share (estimate)	1.12	1.19

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 Liabilities is the figure used in the financial statements for 31 March 2012. (see Note 17 of the financials as at 31 March 2012 for a breakdown). It excludes the amount 'payable for investments purchased' as this was due to timing of pending trades as at 31 March 2012. The figure is also partially offset by the unamortized preference share issue expenses (see Note 18 of the financials as at 31 March 2012). 9.        Preference Dividend liability accrues over the quarter and is paid on each quarter end. 10.     Ordinary Dividend liability is either ex  or cum the dividend at the valuation date. 11.     30 June figures use EURGBP FX rates at 30 June 2012 and 31 July figures use EURGBP FX rates as at 31 July 2012.

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

Bond Portfolio Summary (as at 31 July 2012)
Number of bonds	115
Fair Value of Bond Portfolio (including accrued interest) as at 31 July Nominal Face Value of Bond Portfolio as at 31 July	68,604,583 113,540,902
Weighted Average Market Price of Bond Portfolio as at 31 July12	0.72
Weighted Average Purchase Price of Bond Portfolio as at 31 July12	0.67
Bond Purchases 1 July to 31 July 2012 (cost)	2,248,143
Average Purchase Price between 1 July and 31 July 2012	0.69
Average Effective Yield of Purchases between 1 July and 31 July13	9.94%
Bond Sales 1 July to 31 July 2012 (cost)	208,861
Average Sale Price between 1 July and 31 July 2012	1.04

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

13.     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

	February	March	April	May	June	July
% Fair Value Change14	1.49%	3.08%	0.55%	-0.47%	0.62%	3.61%
WA Purchase Price15	0.75	0.66	0.74	0.82	0.95	0.69
WA Purchase Yield15	9.63%	13.48%	9.82%	8.82%	8.96%	9.94%

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

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

Portfolio Breakdown as at 31 July 2012

Current Rating16	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total (30 Jun)
AAA	0.0%	0.0%	0.0%	0.0%	0.0%	0.0% (0.0%)
AA	1.5%	1.8%	2.2%	0.0%	0.0%	5.5% (5.5%)
A	6.5%	8.6%	8.1%	0.0%	0.0%	23.2% (21.9%)
BBB	6.1%	5.8%	3.8%	0.0%	0.0%	15.7% (14.9%)
BB and Below	28.0%	7.6%	19.6%	0.4%	0.0%	55.6% (57.7%)
Grand Total	42.1%	23.8%	33.7%	0.4%	0.0%	100.0%

Source:  Cheyne Capital. Unaudited.  N.B. Column totals may not sum due to rounding.  16. Ratings sourced from S&P or Fitch

Asset Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total (30 Jun)
CLASS A	18.7%	2.7%	6.0%	0.2%	0.0%	27.7 (26.0%)
CLASS B	3.0%	7.7%	10.6%	0.0%	0.0%	21.3 (28.5%)
CLASS C	6.8%	4.3%	4.0%	0.0%	0.0%	15.0 (13.2%)
CLASS D	3.9%	3.2%	9.4%	0.2%	0.0%	16.8 (15.4%)
CLASS E and below	9.7%	5.9%	3.6%	0.0%	0.0%	19.2 (16.8%)
Grand Total	42.1%	23.8%	33.7%	0.4%	0.0%	100.0%

Top 10 Bonds¹⁶ as at 31 July 2012
Market Value                                    £30.5 million
WA Original LTV¹⁷                            50.8%
WA Cheyne Current LTV¹⁷            58.4%
WA Effective Yield¹⁸                      11.8%   

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

Source:  Cheyne Capital. Unaudited. 16. Based on fair value of bonds.  17. The Weighted Average Original Loan to Value ("LTV") 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.   18.  Weighted average effective yield is based on the effective yield using prices as at 31 July 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 31 March 2012 and 31 July 2012 by jurisdiction (by reference to underlying asset originator) is set out below.

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

31 July 2012

UK	65.9%
Germany	29.9%
Holland	2.6%
Italy	1.1%
Ireland	0.3%
Portugal	0.1%
Total (£mm)	£68.6mm

Values may not sum to 100% due to rounding differences

Outlook for RECI

Pressure on banks to reduce leverage and offload certain risk-weighted assets should create opportunities for RECI to buy high quality bonds and loans at attractive returns. Early indications of portfolio performance in the second quarter of the financial year have been positive with a 3.6% rise in the fair value of the bond portfolio during July and a rise in NAV to £1.19 per ordinary share¹⁹.

RECI appreciates that unresolved stresses in the EU could continue and the company will continue with an active hedging strategy to offset mark to market losses resulting from Eurozone volatility. The investment team's strategy of rotating towards more liquid names in the bond portfolio should reduce the impact of any downward price pressures caused by continued stresses in the credit markets. 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.

Further bond repayments are expected to be received as underlying properties are either refinanced or sold. The company profited from its position in Titan 2006-4FS (backed by a portfolio of nursing homes operated by Four Seasons Health Care Group) recording an annualised IRR of 14.4%. The Company's strategy of focusing on good quality assets with credible refinancing outcomes is delivering success. We expect continued repayments in the coming months which should support NAV growth.   

Looking ahead, the Company will look to increase Its exposure to real estate loans.  The investment return in the commercial real estate loans market is looking increasingly attractive and the Investment Manager sees a number of opportunities. 

19. NAV per share for 31 July 2012 is pro forma as next financial statements will be released for half year ended 30 September 2012.

ERII Cell Position Summary (in € million)
Number of Positions	7
Residual Income Portfolio valuation (30 June 2012)20	€19.58m

ERII Cell Cash Summary (in € million)21
Total Cash as at 31 July 2012	€4.74m
This balance includes:
Payments received on NGATE asset that need to be retained22	€2.40m
Reserves held for expenses (mainly for litigation)	€1.20m

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.

20. Real Estate Credit Investment PCC Limited is a protected cell company, consisting of a Core and a Cell. European Residual Income Investments 'ERII" is the Cell within the company This figure contains the Residual Income Positions remaining as at 31 July 2012, but at the pro forma dirty fair value (includes accrued interest) per 30 June 2012

21. The preference share cover test was not met for the quarter ended 30 June 2012

22. Cash payments received from the Newgate  are not available for distribution and are held in a segregated account.

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.

 

END

 

 

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