The Board of Directors of Real Estate Credit Investments Limited (LON:RECI) has announced the release of the Company’s Annual Report and Audited Financial Statements for the year ended 31 March 2022.

An attractive sustainable dividend of 3 pence per quarter and return to trading around NAV

Chairman’s statement

I am writing to you about our financial year ended 31 March 2022, which continued to be impacted by Covid-19 and the various Government measures taken to manage it. There has been great progress made, with many countries returning to a degree of normality, driven mostly by vaccination programmes. Nevertheless, the potential for further mutations and the need for global vaccination success, means the pandemic remains a disruptive threat overshadowing us.

As the last financial year neared its close, the humanitarian disaster of Russia’s invasion of Ukraine began and continues as I write, with its attendant economic and geopolitical shockwaves. While our thoughts are first and foremost

with those affected, I can report that there has been no direct impact on RECI’s portfolio of investments, either because of location or the imposition of sanctions by Western governments.

Late 2021 and this year have seen the return of inflation and its adverse economic impacts on many households, something which most people in developed countries have not seen for over 40 years. Inflation has continued to rise year to date, fuelled by the war in Ukraine further exacerbating commodity price increases and continuing global supply chain constraints. The rise of inflation has led to central banks increasing interest rates, with the prospect of further rises to come. RECI’s portfolio composition and structure positions it well to withstand these challenges, as further described in the Investment Manager’s Report.

Despite this challenging environment, I am pleased to report that for the year ended 31 March 2022, RECI delivered for our Shareholders a total net profit of £24.6 million; maintained an unchanged dividend of 3 pence per quarter throughout the year; and saw RECI’s share price return to trade around NAV.

On 16 September 2021, the Company’s latest four-yearly continuation vote was passed by Shareholders at our AGM, with 99.9% of votes cast in favour. Your Board and Investment Manager are grateful for the support of our investors and remain committed to continue to deliver sustainable attractive returns for them going forward.

Financial Performance

RECI reported a total net profit for the financial year ended 31 March 2022 of £24.6 million on year end total assets of £447.0 million, compared with a £37.2 million net profit in the year ended 31 March 2021, on year end total assets of £426.2 million.

The NAV as at 31 March 2022 was £1.50 per share (£1.51 per share as at 31 March 2021) which, combined with the 12 pence per share of dividends payable in respect of the year ended 31 March 2022, represents an annualised total return for Shareholders of 6.9% for the year.

During the financial year ended 31 March 2022, the Company’s shares traded at an average premium to NAV of 0.7% (14.1% discount for the year ended 31 March 2021).

Total quarterly dividends declared in respect of the financial year ended 31 March 2022 were an unchanged 12 pence per share, returning £27.5 million to our Shareholders.

In the course of the last financial year, the Company utilised short-term leverage at an average cost of borrowing of 1.84%, with average gross leverage of £100.5 million or 1.29x NAV.

Throughout the financial year to 31 March 2022, the Company invested £113.1 million, of which £24.9 million was funded into real estate loan commitments, £56.7 million into self-originated real estate bonds, and £31.5 million into market real estate bonds. RECI also received cash repayments and interest of £132.2 million in this year.

Financial Year Review

During the financial year, while mindful of balancing prudent cash retention with utilisation, the Investment Manager continued to invest into an attractive pipeline of opportunities offering enhanced returns, which underpin RECI’s attractive current dividend pay-out of 12 pence per annum, improve dividend cover and provide the opportunity for NAV growth. The investment was funded by cash from realisations and repayments and deploying leverage.

 

When the financial year began on 1 April 2021, Real Estate Credit Investments had gross leverage of 1.22x and leverage net of cash of 1.16x. The Board and Cheyne continued to consider the appropriate level of gearing for the Company while weighing up the market outlook and the emergence of new investment opportunities; and ended the financial year with gross leverage of 1.29x (1.14x net of cash). RECI introduced non-recourse lending on the loan portfolio during the last financial year and the Directors and Investment Manager continue to consider potential leverage options at the Company and portfolio level.

RECI’s share price at the start of the financial year was £1.37, representing a discount to NAV of 9.4%. Throughout the year, RECI maintained its 3 pence per share quarterly dividend; continued to receive realisation proceeds and repayments; and executed attractive investment opportunities. This progress was reflected in its share price which continued to strengthen. The share price had appreciated 10.2% by the financial year end and the discount was replaced by a premium of 0.4% as at 31 March 2022. Since 1 April 2022, the Company’s shares have traded at an average premium of 0.1%.

Throughout the last financial year, the Investment Manager continued to provide a detailed and comprehensive review of RECI’s portfolio as part of our programme of enhanced investor communication. A number of online events and meetings were held to maintain a regular dialogue with our Shareholders and potential new investors. In addition, the Board is working with its service providers to enhance the Company’s website with the aim of making Shareholder information more accessible.

The Directors and Cheyne are committed to providing detail and transparency regarding the Company’s portfolio and investment strategy, allowing all investors to focus upon RECI and its merits and opportunities, notwithstanding the broader market environment.

The Board remains grateful for the focus and expertise of Cheyne and our team of advisers who, despite ongoing Covid-19 disruption to working practices, continued to support RECI throughout the last financial year.

Board Update

As previously announced, Graham Harrison retired from the Board at the September 2021 AGM after many years of valued service.

Following his retirement and Colleen McHugh’s appointment in March 2021, the Board comprises an equal representation of male and female Directors.

Since the start of the last financial year, members of the Board have purchased an aggregate of 42,000 shares in the Company.

Environmental, Social and Governance Matters (“ESG”)

The Directors continue to recognise and support the growing focus on ESG considerations and the importance of ethical factors, including climate change, when pursuing the Company’s investment objective and in the selection of service providers and advisers to the Company.

Reflecting this, the Board has asked Colleen McHugh to take up the role of “ESG Lead” and work closely with Cheyne in developing and implementing RECI’s ESG approach.

Pages 19-20 of the Strategic Report and pages 26-28 of the Sustainability Report provide further information about the Company’s and the Manager’s approach to ESG matters.

Outlook

Nobody can ignore or predict with certainty, the outcome and impact of the continuing Covid-19 pandemic; the human tragedy unfolding in Ukraine; the rise of inflation and interest rates; and the growing cost of living crisis.

Against this background, your Board and Investment Manager will continue to focus on that which we can exercise direct control over, namely: expert origination capability; highly disciplined investment selection; modest levels of flexible gearing; maintaining the payment of an attractive and consistent dividend; and positioning the portfolio to enhance NAV.

In these challenging times, the Directors believe that Real Estate Credit Investments remains soundly positioned to continue to deliver an attractive stable dividend to investors seeking a reliable long-term income stream.

Bob Cowdell

Chairman

NatWest has provided a £21.3 million development finance facility for Cheyne Impact Real Estate’s project in Oldham Road, Manchester.

The development, which is due to top out this month, will be mixed tenure with 35% of the 144 homes allocated to local key workers at a significant discount to market-rate rent.  In keeping with all of Cheyne Impact Real Estate’s projects, the accommodation will be ‘tenure blind’ with no difference in specification or service between the homes offered at discounted rent and those at full market rate.

Following acquisition, Cheyne substantially reconfigured the development, lifting the average EPC rating to B, upgrading the specification, and converting space previously designated as commercial into communal work, entertainment and relaxation spaces for residents.

Laurus Property Partners advised Cheyne on the financing of the scheme.

NatWest has provided a £21.3m development finance facility for a residential project in Manchester.

The development, on Oldham Road, is due to top out this month and will be mixed tenure with 35 per cent of the 144 homes allocated to local key workers at a “significant” discount to market-rate rent.

In keeping with all of Cheyne Impact Real Estate’s projects, the accommodation will be ‘tenure blind’ with no difference in specification or service between the homes offered at discounted rent and those at full market rate.

Following acquisition, Cheyne substantially reconfigured the development, lifting the average EPC rating to B, upgrading the specification, and converting space previously designated as commercial into communal work, entertainment and relaxation spaces for residents.

Laurus Property Partners advised Cheyne on the financing of the scheme.

Phil Hooper, head of real estate at NatWest, said: “We are delighted to support Cheyne Impact Real Estate in the delivery of 144 new build-to-rent homes which help to provide much needed UK housing and include homes solely designated for key workers at discounted rent.”

Andrew Wheldon, managing director at Laurus Property Partners, added: “The current inflationary pressures and rising interest rates mean that the Build-to-Rent sector is set to play an increasingly central role in the UK housing market. Given that it is key workers who often feel these pressures most acutely, it has been a pleasure to assist Cheyne in its delivery of high quality, affordable homes for key workers in Central Manchester.”

Andrew Sergeant, of Cheyne Impact Real Estate, said: “We are pleased to be partnering with NatWest on this exciting journey where we aim to demonstrate that high quality, aspirational homes can be provided by impact-led institutional investors at affordable rents.”

NatWest has provided a £21.3 million development finance facility for Cheyne Impact Real Estate’s project in Oldham Road, Manchester.

The development, which is due to top out this month, will be mixed tenure with 35% of the 144 homes allocated to local key workers at a significant discount to market-rate rent.  In keeping with all of Cheyne Impact Real Estate’s projects, the accommodation will be ‘tenure blind’ with no difference in specification or service between the homes offered at discounted rent and those at full market rate.

Following acquisition, Cheyne substantially reconfigured the development, lifting the average EPC rating to B, upgrading the specification, and converting space previously designated as commercial into communal work, entertainment and relaxation spaces for residents.

Laurus Property Partners advised Cheyne on the financing of the scheme.

Phil Hooper, Head of Real Estate at NatWest said: “We are delighted to support Cheyne Impact Real Estate in the delivery of 144 new build-to-rent homes which help to provide much needed UK housing and include homes solely designated for key workers at discounted rent.”

Andrew Wheldon, managing director at Laurus Property Partners, added: “The current inflationary pressures and rising interest rates mean that the Build-to-Rent sector is set to play an increasingly central role in the UK housing market.  Given that it is key workers who often feel these pressures most acutely, it has been a pleasure to assist Cheyne in its delivery of high quality, affordable homes for key workers in Central Manchester.”

Andrew Sergeant of Cheyne Impact Real Estate concluded: “We are pleased to be partnering with NatWest on this exciting journey where we aim to demonstrate that high quality, aspirational homes can be provided by impact-led institutional investors at affordable rents.”

Banking group NatWest has provided a £21.3m development finance facility for Cheyne Impact Real Estate’s project in Oldham Road, Manchester.

The development, which is due to top out this month, will be mixed tenure with 35% of the 144 homes allocated to local key workers at a significant discount to market-rate rent.

In keeping with all of Cheyne Impact Real Estate’s projects, the accommodation will be ‘tenure blind’ with no difference in specification or service between the homes offered at discounted rent and those at full market rate.

Following acquisition, Cheyne substantially reconfigured the development, lifting the average EPC rating to B, upgrading the specification, and converting space previously designated as commercial into communal work, entertainment and relaxation spaces for residents

Laurus Property Partners advised Cheyne on the financing of the scheme.

Andrew Wheldon, managing director at Laurus Property Partners, said: “The current inflationary pressures and rising interest rates mean that the Build-to-Rent sector is set to play an increasingly central role in the UK housing market.

“Given that it is key workers who often feel these pressures most acutely, it has been a pleasure to assist Cheyne in its delivery of high quality, affordable homes for key workers in Central Manchester.”

Andrew Sergeant, of Cheyne Impact Real Estate, said: “We are pleased to be partnering with NatWest on this exciting journey where we aim to demonstrate that high quality, aspirational homes can be provided by impact-led institutional investors at affordable rents.”

Leading alternative asset manager Cheyne Capital has today announced the sale of its majority shareholding in independent housebuilder Elivia Homes to funds advised by Octopus Investments, part of Octopus Group.

Since it first invested in Elivia Homes, formerly Vanderbilt Homes, in 2014, Cheyne has played an integral role in supporting the firm’s ambitious growth into one of the South-East’s leading housebuilders. In the four years since Cheyne recommitted to its investment, Elivia has more than doubled its number of homes.

Cheyne has also supported Elivia’s management team in improving its business model, investing in talent and clarifying its growth strategy, and was the source of the innovative financing solution that enabled the business to acquire Crayfern Homes and successfully integrate the business into the Group.

The Octopus team have a long-term strategy in place to continue Elivia’s growth, with the aim of transforming it into a £250m turnover business, delivering over 600 design-led and sustainable homes in aspirational locations per year.

Rob Turner of Cheyne Capital Real Estate, said: “A key tenet of Cheyne’s real estate strategy has been to provide flexible finance solutions to housebuilders delivering high-quality homes in areas with a severe shortage of supply. This investment is a perfect example of this and the results are a testament to what can be achieved through the application of deep expertise and dedicated partnership.”

Ravi Stickney, Managing Partner and CIO of Cheyne Capital Real Estate, added: “We are very proud of what has been achieved in our eight year journey with Elivia Homes. This has not been an easy environment for SME housebuilders but together we have navigated the challenges posed by such major geopolitical issues as Brexit, the COVID-19 pandemic and, most recently, the outbreak of war in Ukraine, and, in spite of this tumult, the business has emerged stronger than ever.

“We are confident that the Octopus team will continue this strong momentum and support the next stage of Elivia’s growth. We wish both them and everyone at Elivia all the best for the future.”

Alternative asset manager Cheyne Capital has sold its majority shareholding in independent housebuilder Elivia Homes to funds advised by Octopus Investments, part of the Octopus Group.

Since it first invested in Elivia Homes, formerly Vanderbilt Homes, in 2014, Cheyne has played an integral role in supporting the firm’s ambitious growth into one of the South-East’s leading housebuilders. In the four years since Cheyne recommitted to its investment, Elivia has more than doubled its number of homes.

The Octopus team have a long-term strategy in place to continue Elivia’s growth, with the aim of transforming it into a £250 million turnover business, delivering over 600 design-led and sustainable homes in aspirational locations per year.

Octopus Investments funds have bought Cheyne Capital’s majority stake in UK housebuilder Elivia Homes for an undisclosed amount.

Cheyne Capital first invested in Elivia Homes, formerly Vanderbilt Homes, in 2014.

Cheyne Capital said the Octopus plans to continue Elivia’s growth, with the aim of transforming it into a £250m (€293.6m) turnover business, delivering over 600 design-led and sustainable homes per year.

Rob Turner of Cheyne Capital Real Estate, said: “A key tenet of Cheyne’s real estate strategy has been to provide flexible finance solutions to housebuilders delivering high-quality homes in areas with a severe shortage of supply.

”This investment is a perfect example of this and the results are a testament to what can be achieved through the application of deep expertise and dedicated partnership.”

Ravi Stickney, managing partner and CIO of Cheyne Capital Real Estate, said: “We are very proud of what has been achieved in our eight-year journey with Elivia Homes.

”This has not been an easy environment for SME housebuilders but together we have navigated the challenges posed by such major geopolitical issues as Brexit, the COVID-19 pandemic and, most recently, the outbreak of war in Ukraine, and, in spite of this tumult, the business has emerged stronger than ever.

Cheyne Capital Management has provided a loan of £187million to LaSalle Investment Management to finance the development of a mixed-use scheme in Wembley.

The development will be comprised of 40,000 sq ft of urban logistics and commercial space as well as 759 new homes.

Regal London is managing the development.

Construction is set to begin this September and is scheduled for completion in 2025.

Arron Taggart, head of UK real estate at Cheyne Capital, said: “As a firm, we believe that projects like this have the potential to make a powerful, positive impact on the communities they serve.

“Wembley has been undergoing a significant regeneration in recent years and this mixed-use scheme will build on this, providing residents with high-quality and affordable homes in a desirable location, while also delivering valuable commercial space and local employment.

“We are confident that our partnership with LaSalle and Regal London will deliver a best-in-class development.”

Marc Eden, investment director at Regal London, added: “We have designed a first-class mixed-use development using significant innovation in our construction methods and upholding our fundamental principles of sustainability.

“We are delighted that LaSalle has put its trust in our brand and ability to deliver our planning consent and to work closely with Cheyne Capital again.”

Property income fund, Real Estate Credit Investments Ltd (LON:RECI) published on 6 May 2022 its Investment Manager, Cheyne Capital’s Q4 Investor Presentation. 

Darren Turgel, MD of DirectorsTalk, caught up with Ravi Stickney, Managing Partner and CIO, Cheyne Capital Real Estate to discuss the highlights, the impact of the current interest rate environment and Cheyne’s real estate pipeline.

https://www.directorstalkinterviews.com/wp-content/uploads/2022/05/reci-april-2022-company-update-presentation-2022-05-final.pdf 

Q1: What are the highlights in the fourth quarter? 

A1: The company, in the last 12 months, has completed roughly £172 million of commitments since 31st March 2021. In the last quarter alone, it has completed two new loans sum totalling about £46 million of new commitments.

There are no defaults in the portfolio today, indeed in the last quarter, there was one repayment of a £10.5 million exposure with a net IRR of 8.2% for that senior position that repaid.

The hotel portfolio which did pose a challenge during the COVID pandemic period has been fully restructured, favourably for RECI with all of the hotel exposures performing well to date.

The cash position in the company remains robust at roughly £52 million of cash held to date albeit a large amount of that is spoken for in terms of new deals that are being funded.

The company has been successful in progressing with its term matched financing programme, both on the balance sheet as well as on an off-balance sheet basis as well.

The opportunities for the company remain robust – banks are still constrained in lending plus also, unsurprisingly, the present crisis does present interesting opportunities for the company in terms of lower leverage or lower risk positions that are coming on to the pipeline with a higher rate of return.

Q2: How do you see the interest rate environment as it pertains to RECI’s book? 

A2: To summarise their current book of bonds as well as loans: the public market bonds are more exposed from a mark-to-market perspective in regard to a rising interest rate environment. Having said that, the overall book currently has roughly 80% of its book being fixed rate in nature, of which a significant amount of that is the private loans.

The rated average modified duration of the fixed rate book is roughly 1.65 years which is very short and that simply means that as these loans repay, there is the opportunity to reset the loans onto either a floating rate or a higher rate to compensate for the rate environment that we’re in.

The private market loans do not suffer from mark-to-market volatility for rate movements though the fixed rate public market bonds will. Turning to the fixed rate market bonds, they represent roughly 12% of the NAV of the company and a duration of roughly 1.25 years which again, is very short. Therefore, whilst there has been some mark-to-market impact on those bonds, that should be ameliorated by the very short duration in the fast amortising nature of those bonds.

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Finally, to say, as these loans repay, and also pointing to the pipeline of loans that we have for the company to date, unsurprisingly we have moved to floating rate loans or indeed to increase the rate on the fixed rate loans to compensate for the rate environment that we see ourselves in, for the foreseeable future.

Q3: Are there any updates to mention within the key sectors? 

A3: In terms of RECI’s exposure to mixed-use assets, position number 1 on page 18 of the Q4 presentation is a large exposure for the company and performs very well, it continues to deliver quickly with a combination of a diversified portfolio across the UK; residential, office, light industrials, and logistics as well.

Position number 2 on page 18 has been in the book for quite some time and it is a luxury retail and residential building in one of the best streets in Paris. Again, it performs very well to date.

In terms of hotels, an update on page 19. The largest position there was, as you may recall, one of the positions we had to deal with intensively during the COVID pandemic. There’s an update on that position since the successful restructuring especially in the last quarter.

The performance of the hotel portfolio both in terms of occupational levels as well as ADR has surpassed our expectations and that has led to a material revision in terms of the valuation of the portfolio. So, our hotel exposure to date does not give us any concern going forward.

Housebuilders on page 21 provides an update on the UK housebuilding position. We mentioned at the last quarterly update that given the positive performance on the housebuilder itself, in addition to the revision of some of the fair value write-downs that have been taken, the position would’ve been put up for sale. Indeed, a preferred bidder has been selected for the asset to go through and complete the final due diligence and we’re hopeful of a transaction in short order.

Q4: What’s the current Cheyne real estate pipeline that RECI can participate in? 

A4: The pipeline today is represented by 14 deals in total and this is across the Cheyne real estate business of which Real Estate Credit Investments participate as it has the cash available to do so.

There are 14 deals with a sum total of roughly £950 million of total commitments across those 14 deals that are at various stages of closing. Most imminent, 3 deals with a sum total of £173 million are in the closing phase that we are hopeful that RECI will participate in as well.