Interim Management Statement

RNS Number : 5266L

Real Estate Credit Inv. PCC Ltd

13 August 2013

 



 

13 August 2013

Real Estate Credit Investments PCC Limited

Interim Management Statement for the First Half of Financial Year Ending 31 March 2014

RECI¹ Highlights

·     RECI made a net profit of £1.3 million in the quarter ended 30 June 2013, compared with £5.9 million in the previous quarter, reflecting similar levels of operating income but lower levels of fair value gains.

·     From 31 March 2013 to 30 June 2013, RECI's NAV increased 0.6% from £1.50 per share to £1.51 per share². NAV increased to £1.53 per share as at 31 July.

·     As at 30 June 2013 the bond portfolio had nominal value of £103.0 million and a market value of £75.4 million.

·     Since 31 March 2013, RECI made £12.5 million of new bond investments at an average yield of 7.0%.

·     As at 30 June 2013, RECI's loan portfolio accounted for 23.9% of gross assets, following total investments of £7.5 million since 31 March 2013 at an average yield of 13.6%.

·     The Board has declared a dividend of 2.3p per share in respect of RECI Ordinary Shares for the quarter ended 30 June 2013.

Continued Investment Opportunities in Bond and Loan Markets

RECI has continued to make significant progress with new investments in real estate loans in the period ended 30 June 2013, adding a further £7.5 million of loan purchases in the quarter. These were split between 2 loans, both secured against multi-family homes in Germany. The first loan was for €5.9 million with an expected return in excess of 15%. The second loan was for €3.0 and has an LTV of 40% with a yield in excess of 10%.

In addition to loan investments, the Company has also secured a €10.4 million allocation of the new issue GRF 2013-1 Class D & E investment grade bonds.  Cheyne managed funds were a large cornerstone investor in this securitisation.

New investments made in the quarter ended 30 June 2013 totalled £19.4 million and yielded an average of 9.4%. This compares with £7.8 million and 8.9% in the quarter ended 31 March 2013. RECI also made sales of £14.4 million in the quarter. Sales were made at an average price of 98 per cent of par versus a purchase price of 77 per cent of par. The significant majority of bond sales were made in order to fund new investments.

The current pipeline for new investments remains attractive and includes loans secured by London offices, UK hotels and London residential. 

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 the quarter ended 30 June 2013 are pro forma, as the Company will next produce financial statements for the half year ended 30 September 2013

2. Based on 30 June 2013 pro forma figures.

Bond Repayments Supported by Strong Asset Quality

Since the quarter ended 30 June 2013, there have been a number of announcements relating to repayments on positions held in the Company's bond portfolio, with 15 of the Company's bonds expected to redeem in full or substantially de-lever in the near term. As at 30 June 2013, these bonds had a market value of £9.1 million versus a notional value of £11.0 million, which would represent a 20% uplift in value of the bonds if all of them are repaid in full.

These repayments underscore the quality of the bond portfolio and the focus on good quality real estate assets underpinning the bond portfolio.

RECI Key Quarter Financial Data3	31 March 2013	30 June 2013
Gross Assets	£106.7m	£107.3m
Investment Portfolio	£94.6m	£101.0m
Operating Income	£3.2m	£3.2m
Fair Value Gains / (Losses) on Investment Portfolio	£5.1m	£0.2m
Net Profit4	£5.9m	£1.3m
Net Asset Value per Ordinary Share	£1.50	£1.51

3. The 30 June 2013 P&L figures are pro-forma, as next financial statements will be released for half-year ended 30 September 2013.

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

This interim management statement relates to the period from 31 March 2012 to 12 August 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 June 2013 and no later than 19 August 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 31 March 2013 and such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming half year 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 March 2013 and 31 July 2013 (in £ million)

	31/03/201312	31/07/201312
Investment Portfolio6	94.6	100.0
Cash and Cash Equivalents	8.5	7.5
Derivative Assets	2.8	-
Other Assets 7,8	0.9	-
	106.7	107.4
Other Liabilities9	(1.0)	(1.0)
Derivative Assets	-	(0.2)
Preference Dividend10	-	(0.3)
Ordinary Dividend11	-	-
Preference Share Liability	(45.0)	(45.0)
	(46.7)	(46.4)
Net Assets (estimate)	60.0	61.0
Shares outstanding	39.97	39.97
Net Assets per Ordinary Share (estimate)	1.50	1.53

Pro Forma NAV Assumptions

5.        Unaudited figures produced by Cheyne 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 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 pro forma financial statements for 31 March 2013. 9.        Other Liabilities is the figure used in the pro forma financial statements for 31 March 2013. 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 March figures use EURGBP FX rates at 31 March 2013 and 31 July figures use EURGBP FX rates as at 31 July 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 July 2013
Market Value                                    £61.8 million
WA Original LTV¹⁴                            58.7%
WA Cheyne Current LTV¹⁴            60.5%
WA Effective Yield¹⁵                      11.9%   

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		E	Portfolio of commercial loans secured by properties in Germany
Commercial		Loan	Loan secured against German multi-family properties
Commercial		D	Portfolio of Karstadt retail stores in Germany
Commercial		Loan	Portfolio of commercial real estate loans in the Netherlands
Commercial		D	Portfolio of commercial loans secured by properties in Germany
Commercial		E	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 July 2013 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 July 2013)
Number of bonds	80
Dirty Fair Value of Bond Portfolio as at 31 July 2013 Nominal Face Value of Bond Portfolio as at 31 July 2013	71,615,903 98,040,663
Bond Purchases 1 July to 31 July 2013 (cost)	589,091
Average Purchase Price between 1 July and 31 July 2013	1.00
Average Effective Yield of Purchases between 1 July and 31 July16	13.00%
Bond Sales 1 July to 31 July 2013 (cost)	1,608,735
Average Sale Price between 1 July and 31 July 2013	0.94
Average Purchase Price of Bonds Sold Between 1 July and 31 July 2013	0.76

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

	February	March	April	May	June	July
% Fair Value Change17	2.65%	1.12%	1.75%	1.31%	(0.39)%	0.48%
WA Purchase Price18	0.84	0.66	0.48	0.34	0.95	1.00
WA Purchase Yield18	8.66%	11.70%	12.11%	21.51%	6.24%	13.00%

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 July 2013

Asset Class	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	Total (30 Jun)
CLASS A	11.6%	0.0%	0.0%	0.2%	11.9% (11.1%)
CLASS B	23.8%	0.0%	4.7%	0.0%	28.5% (29.5%)
CLASS C	4.6%	0.7%	6.3%	0.0%	11.5% (11.6%)
CLASS D	2.9%	3.0%	14.7%	0.3%	20.9% (19.8%)
CLASS E and below	4.8%	8.9%	13.5%	0.0%	27.2% (28.0%)
Grand Total	47.7%	12.6%	39.2%	0.5%	100.0%

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

31 March 2013

UK	67.3%
Germany	28.2%
Holland	2.8%
Italy	1.2%
Ireland	0.3%
Portugal	0.2%
Total (£mm)	£75.4mm

31 July 2013

UK	66.8%
Germany	28.8%
Holland	2.8%
Italy	1.2%
Ireland	0.3%
Portugal	0.2%
Total (£mm)	£71.6mm

Values may not sum to 100% due to rounding differences

Loan Portfolio Summary

(as at 31 July 2013)

Number of loans	5
Dirty FV (£ millions) Loans as % of GAV	28.3 26.4%
Weighted average yield of loan portfolio19	13.9%
Weighted average LTV of portfolio20	63.1%

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

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.

Given the strong loan pipeline, the Company expects that loans will account for approximately 45 per cent of total assets by the end of the quarter ended 30 September 2013.

The bond portfolio continues to perform well with recent price volatility a function of broader macro issues versus specific credit concerns.  The bonds should continue to pull to par as they approach their maturity date. 

Looking ahead the Company should continue to maintain its dividend yield with continued NAV growth.

European Residual Income Investments (ERII)  ERII Cell Position Summary (in € million)
Number of Positions as at 12 August 2013	5
Residual Income Portfolio Valuation (12 August 2013)21	€11.2m

ERII Cell Cash Summary (in € million)
Cash as at 12 August 2013	€3.0m

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 12 August 2013, but at the pro forma dirty fair value per 30 June 2013.

Overview

The Company has today announced a distribution of €2.4 million to Cell shareholders of the cash proceeds following the recent realisation of one of the Cell's assets, Sestante. The distribution will be by way of  compulsory share redemption of Cell shares. Details of the redemption are detailed in a separate announcement "Return of Capital to Cell Shareholders" dated 12 August 2013.

ERII reported cash flows for the quarter ended 30 June 2013 of €0.8 million, compared to €1.0 million in the previous quarter and net write downs of €0.7 million. Write downs in the SME mortgage portfolio were partially offset by gains in the UK mortgage portfolio.

The Company expects gross cash flows from the investment portfolio of €2.2 million in the next 12 months.

European Mortgage Portfolio

The European Mortgage Portfolio generated €0.1 million of cash flows for the quarter ended 30 June 2013, compared to €0.3 million in the previous quarter. Write downs in the portfolio totalled €0.2 million. 

On 2 August 2013, the Company sold the Sestante position at a price accretive to NAV.

SME Portfolio

The Company has decreased the fair value of Smart 06-1 to €1.1 million versus a fair value of €2.2 million in the previous quarter following an increase in the expected final repayment date. Cash flows for Smart 06-1 in the quarter ended 30 June 2013 totalled €0.1 million, unchanged from the previous quarter.

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded interest cash flows of £0.5 million in the quarter ended 30 June 2013, unchanged from the previous quarter.  As at 30 June 2013 the portfolio totalled £1.7 million, with net write ups of £0.5 million.

Disclaimer:

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

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 FCA's Conduct of Business Sourcebook.  This document must not be relied or acted upon by any other persons. Cheyne Capital 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 FCA 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 Capital 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 Capital 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 Capital 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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