Real Est Crd InvsLtd - Annual Financial Report
23/06/2022 12:46
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RNS Number : 9868P Real Estate Credit Investments Ltd 23 June 2022
This announcement contains inside information.
Real Estate Credit Investments Limited (the "Company")
Annual Report for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of the Company's Annual Report and Audited Financial Statements (the "Financial Statements") for the year ended 31 March 2022.
View the Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations (https://gbr01.safelinks.protection.outlook.com/?url=https%3A%2F%2Frealestatecreditinvestments.com%2Finvestors%2Fresults-reports-and-presentations&data=05%7C01%7Ckitten.ozanne%40aztecgroup.co.uk%7Cd3ab65afabe042948ef908da546a0db4%7C5f75785019e44329bc48045f1fe3eecd%7C0%7C0%7C637915111737367329%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=HOenssrFamM6dF5ZyB3QNzauB1TGYiJo95%2BOeWu6nrY%3D&reserved=0)
For further information please contact:
Broker: Richard Crawley / Darren Vickers (Liberum Capital) +44 (0)20 3100 2222
Investment Manager: Richard Lang (Cheyne) +44 (0)20 7968 7328
Real Estate Credit Investments Limited
Annual Report and Accounts 2022
Real Estate Credit Investments is a specialist investor in the United Kingdom
and Western European real estate credit markets with a focus on fundamental
credit and value
Attractive returns
overview and HIGHLIGHTS
As at 31 March 2022
What do
we offer
· Defensive credit exposure to UK and Western European real estate
markets
- Stable and uninterrupted dividends delivered consistently since
October 2013
· Granular portfolio with detailed disclosure
- 63 positions
- Top position: 12% of full year end NAV (by commitment)
· Attractive and stable income in a changing interest rate
environment
- Consistent portfolio yield of 7%+ offering a buffer to risk-free
rates
- A high-yielding portfolio, combined with a short weighted average
life, ensures minimal exposure to yield widening and the ability to redeploy
at higher rates quickly
· Access to Cheyne's established real estate investment team and
substantial origination pipeline
Highlights
As at 31 March 2022
Total Assets
£447.0m
(31 March 2021: £426.2m)
NAV per share
£1.50
(31 March 2021: £1.51)
Net Assets
£343.9m
(31 March 2021: £346.9m)
Net Profit
£24.6m
Full year ended 31 March 2021: £37.2m profit
At A GLANCE
Our investment strategy provides compelling risk-adjusted returns
Real Estate Credit Investments ("RECI") is a closed-ended investment company
which originates and invests in real estate debt secured by commercial or
residential properties in the United Kingdom and Western Europe.
The Company's aim is to deliver a stable quarterly dividend with minimal
portfolio volatility, across economic and credit cycles, through a levered
exposure to real estate credit investments.
Investments are predominantly in:
Self-Originated Loans and Bonds
Predominantly bilateral senior real estate loans and bonds.
Market Bonds
Listed real estate debt securities such as Commercial Mortgage Backed
Securities (CMBS) bonds.
Investment Portfolio Composition
RECI's investment portfolio is a diversified book of 63 positions in real
estate bonds and loans.
Portfolio by Geography (Funded Fair Value)
31 Mar 2022* 31 Mar 2021*
UK 51.4% 60.3%
France 34.2% 26.2%
Spain 4.7% 1.8%
Italy 4.1% 4.3%
Germany 2.6% 2.5%
Portugal 0.9% 2.3%
Finland 0.7% 1.2%
Netherlands 0.1% 0.1%
* Excludes 1.3% (31 March 2021: 1.3%) held in bonds backed by assets in
multiple European countries.
Sector Breakdown (Funded Fair Value)
£
Mixed Use 82.1m
Hotel 66.8m
Office 51.8m
Student Accommodation 45.8m
Healthcare 42.2m
Housebuilder 30.6m
Residential 17.3m
Leisure 14.8m
Co-Living 11.1m
Retail 10.2m
Logistics 7.9m
Industrial 1.6m
Total 382.2m*
*excluding accrued interest of £12.1m.
NAV and Share Price As at 31 March 2022
Net Assets £343.9m
Shares Outstanding 229.3m
NAV (pence per share) £1.50
Share Price (per share) £1.51
Premium/(Discount) 0.4%
Dividend Yield 8.0%
Market Capitalisation £345.1m
Total NAV Return*
Half Year Ended 31 March 22 2.9%
Financial Year Ended 31 March 22 6.9%
Prior Financial Year Ended 31 March 21 11.0%
Last Three Financial Years Ended 31 March 22 12.5%
Last Five Financial Years Ended 31 March 22 28.6%
* The NAV total return measures the combined effect of any dividends paid,
together with the rise or fall in the NAV per Share. The NAV total return
relates to past performance and takes into account both capital returns and
dividends paid to Shareholders. Any dividends received by a Shareholder are
assumed to have been reinvested in the assets of the Company at its NAV per
Share on the ex-dividend date. The NAV total return is considered an
Alternative Performance Measure pursuant to ESMA Guidelines which is unaudited
and outside of the scope of IFRS.
ABOUT THE COMPANY
The Investment Objective of the Company is to provide Shareholders with
attractive and stable returns, primarily in the form of quarterly dividends
Real Estate Credit Investments Limited ("RECI" or the "Company") is
incorporated in Guernsey, governed by the Companies (Guernsey) Law, 2008 (the
"Companies Law") and regulated as an authorised closed-ended investment scheme
by the Guernsey Financial Services Commission. At the Annual General Meeting
("AGM") in September 2021, the continuation vote was passed and the next
continuation resolution will be subject to Shareholder approval at the AGM to
be held in September 2025.
The Company invests in real estate debt secured by commercial or residential
properties in the United Kingdom and Western European countries focusing
primarily on those countries where it sees the changing dynamics in the real
estate debt market offering a sustainable deal flow for the foreseeable
future. The Company has adopted a long-term strategic approach to investing
and focuses on identifying value in real estate debt. In making these
investments, the Company uses the expertise and knowledge of its Alternative
Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK) LLP ("Cheyne"
or the "Investment Manager").
The shares are currently listed on the premium segment of the Official List of
the UK Listing Authority and trade on the Main Market of the London Stock
Exchange. The shares offer investors a leveraged exposure to a portfolio of
real estate credit investments and pay a quarterly dividend.
Website and Share Price Information
The Company has a dedicated website, which can be found at
www.realestatecreditinvestments.com that contains information, including
regulatory announcements, share price information, financial reports,
investment objectives and strategy, investor contacts, information on the
Board and information on the Alternative Investment Fund Managers Directive
("AIFMD").
Investment Objective and Investment Policy
Investment Objective
The Investment Objective of the Company is to provide Shareholders with
attractive and stable returns, primarily in the form of quarterly dividends,
by exposure to a diversified portfolio of real estate credit investments,
predominantly comprising real estate loans and bonds.
Investment Policy
To achieve the Investment Objective, the Company invests and will continue to
invest in real estate debt secured by commercial or residential properties in
the United Kingdom and Western Europe countries. The Real Estate Credit
Investments may take different forms but are likely to be:
(i) secured real estate loans, debentures or any other forms of debt
instruments (together "Secured Debt"). Secured real estate loans are typically
secured by mortgages over the property or charges over the shares of the
property-owning vehicle. Individual Secured Debt investments will have a
weighted average life profile ranging from six months to five years.
Investments in Secured Debt will also be directly or indirectly secured by one
or more commercial or residential properties, and shall not exceed a
loan-to-value ("LTV") of 85% at the time of investment;
(ii) listed debt securities and securitised tranches of real estate related
debt securities, for example, residential mortgage backed securities and
commercial mortgage backed securities (together "MBS"). For the avoidance of
doubt, this does not include equity residual positions in MBS; and
(iii) other direct or indirect opportunities, including equity
participations in real estate, save that no more than 20% of the total assets
will be invested in positions with an LTV in excess of 85% or in equity
positions that are uncollateralised. On certain transactions, the Company may
be granted equity positions as part of its loan terms. These positions will
come as part of the Company's overall return on its investments and may or may
not provide extra profit to the Company depending on market conditions and the
performance of the loan. These positions are deemed collateralised equity
positions. All other equity positions that the Company may invest in are
deemed uncollateralised equity positions.
Dividend Policy
Subject to the applicable requirements and restrictions contained in the
Companies Law, the Company may consider making interim dividend payments to
Shareholders, having regard to the net income remaining after the potential
reinvestment of cash or other uses of income, at a level the Directors deem
appropriate, in their sole discretion, from time to time. There is no fixed
date on which it is expected that dividends will be paid to Shareholders.
It is the intention of the Company to continue to pay a stable quarterly
dividend with the potential for additional payments if investment returns
permit
Chairman's Statement
An attractive sustainable dividend of 3 pence per quarter and return to
trading around NAV
Bob Cowdell
Chairman
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, RECI 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 RECI remains soundly
positioned to continue to deliver an attractive stable dividend to investors
seeking a reliable long-term income stream.
Bob Cowdell
Chairman
23 June 2022
KPIs AND FINANCIAL HIGHLIGHTS
Key Performance Indicators
31 Mar 2022 31 Mar 2021
Balance Sheet
Net Asset Value ("NAV") per share £1.50 £1.51
Share price £1.51 £1.37
Premium/(discount) 0.4% (9.4)%
Average premium/(discount) in year* 0.7% (14.1)%
Leverage (% of NAV)** 29.4% 22.4%
* Average premium/(discount) in year is the average of the difference
between the share price and the NAV per share divided by NAV per share.
** Leverage is the recourse financing divided by the net assets.
31 Mar 2022 31 Mar 2021
Profit and Loss
Earnings per share 10.7p 16.2p
Dividends per share declared for the year 12.0p 12.0p
NAV total return (including dividends) annualised 6.9% 11.0%
Financial Highlights
31 Mar 2022 31 Mar 2021
Balance Sheet
Cash, cash equivalents and cash held by brokers £52.6m £22.2m
Net assets £343.9m £346.9m
31 Mar 2022 31 Mar 2021
Profit and Loss
Operating income £32.4m £45.3m
Net profit £24.6m £37.2m
The complete set of the Balance Sheet and Profit and Loss items are presented
in the Company's financial statements.
Further Information
Monthly fact sheets as well as quarterly update presentations are available on
the Company's website: www.realestatecreditinvestments.com.
Strategic and Business Review
Objectives
The opportunity set in senior loans and bonds remains compelling and
sustainable
Strategic Framework and Performance Highlights
Newly Invested in year
£113.1m
(as at 31 March 2022)
Return to Shareholders
£27.5m
(as at 31 March 2022)
Investment Portfolio
£382.2m*
(as at 31 March 2022)
*excluding accrued interest of £12.1m.
1 Provide investors with a diversified portfolio of real estate credit
investments
Progress in Year Ended 31 March 2022
· Over the course of the last financial year RECI has invested a
total of £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.
2 Deliver a stable quarterly dividend with minimal volatility
Progress in Year Ended 31 March 2022
· Paid out dividends of 3 pence per share each quarter, 12 pence over
the year.
· A total of £27.5 million returned to our Shareholders.
3 Exploit opportunities in the real estate market
Progress in Year Ended 31 March 2022
· Investment book has grown to £382.2 million, excluding £12.1
million of accrued interest, as at 31 March 2022 which is spread across 63
positions with a weighted average levered gross yield of 10.0% and an average
loan-to-value of 62.4%.
· RECI also received cash repayments and interest of £132.2 million
in the year.
4 Position the Company to grow through opportunities the Investment Manager is
delivering
Progress in Year Ended 31 March 2022
· Preservation of post Covid-19 NAV with a continued focus on lower
risk senior credit.
· Progress with measures to position the Company to achieve its
longer-term aim of growing the Company.
· Protection and maintenance of dividends by improved returns on the
loans and re-investment.
· Continue to de-risk and optimise funding lines.
Strategic Report
The Strategic
Report
The Strategic Report describes the business of the Company and details the
principal risks and uncertainties associated with its activities.
Investment Objective, Investment Policy and Business Model
The Investment Objective and Investment Policy are set out on page 6, and
further to this, the Company's business model is detailed in the Investment
Manager's Report.
There is also an "About the Company" section on page 6 explaining in more
detail the corporate structure and listing of the Company's shares.
RECI is externally managed by Cheyne, a UK investment manager authorised and
regulated by the Financial Conduct Authority ("FCA"). Cheyne is a limited
liability partnership registered in England and Wales on 8 August 2006 and is
authorised and regulated in the conduct of investment business in the United
Kingdom by the FCA. Cheyne is also the AIFM of the Company. Cheyne has offices
in London, Berlin, Madrid and Paris.
Current and Future Development
A review of the year and outlook is contained in the Investment Manager's
Report and also within the Chairman's Statement.
Performance
A review of performance is contained in the Key Performance Indicators
("KPIs") and financial highlights section and the Investment Manager's Report.
A number of performance measures are considered by the Board and the
Investment Manager in assessing the Company's success in achieving its
objectives and considering its progress and performance. The KPIs are shown on
page 11.
Duties and Responsibilities
The Board has overall responsibility for maximising the Company's success by
directing and supervising the affairs of the business and meeting the
appropriate interests of Shareholders and relevant stakeholders, while
enhancing the value of the Company and also ensuring the protection of
investors. A summary of the Board's responsibilities is as follows:
· statutory obligations and public disclosure;
· strategic matters and financial reporting;
· risk assessment and management including reporting, compliance,
governance, monitoring and control; and
· other matters having a material effect on the Company.
The Board is responsible to the Shareholders for the overall management and
strategy of the Company but has delegated day-to-day operations to the
Investment Manager and Citco Fund Services (Guernsey) Limited ("Citco" or the
"Administrator"), while reserving the powers of decision making relating to
the determination of the Investment Policy, corporate structure and the
management of the share capital of the Company.
The Board is further responsible for financial reporting and risk management
and determining the dividend and accounting policies. While the Investment
Manager manages the portfolio of the Company, the Board retains responsibility
for overseeing the Investment Manager and ensuring the establishment and
ongoing operation of a sound system of internal control. Any material
contracts and those not in the normal course of business are also subject to
approval by the Board.
The Board is also responsible for its own structure, size and effectiveness,
with the delegation of some duties to Committees made up of its members. The
Board retains control of the Committees and requires that they report to the
full Board on a regular basis providing their findings and recommendations.
The Nomination Committee is responsible for considering the size, structure
and composition of the Board; retirements and appointments of additional and
replacement Directors and, as appropriate, makes recommendations to the Board.
The Remuneration Committee determines Directors' remuneration and sets the
Company's remuneration policy.
The Board performs a formal and rigorous review of its own performance and
continually scrutinises its independence and transparency.
The Board's responsibilities for the Annual Report are set out in the
Directors' responsibility statement. The Board is also responsible for issuing
appropriate half-yearly financial reports and other price-sensitive public
reports.
Long-term Viability
The Directors have assessed the prospects of the Company over a longer period
than the 12 months required by the 'Going Concern' provision. The Board has
chosen a period of three years for the following reasons:
(i) The Company's planning horizon covers a three-year period;
(ii) The next continuation vote is due in September 2025; and
(iii) The weighted average life of the bond portfolio is 3.9 years as at 31
March 2022, the usual term of a new loan at origination is between three to
five years, so the majority of the assets could be expected to be realised in
a three-year period, or shortly thereafter.
The three-year review considers the Company's cash flows arising from the loan
and bond portfolios, including interest received and proceeds from
realisations, short-term finance obligations of the Company and dividend
cover. Further considerations are the inherent sensitivities within the loan
and bond portfolios and their impact on the cash flows.
The Board has identified a number of principal risks, which are detailed
below. The Board has taken these into account when considering the long-term
viability of the Company.
The Board routinely conducts three-year reviews, stress testing the
performance against a number of adverse scenarios, such as the fair value
write down of the investments, or reduced cash flows from the investment
portfolio. The fair value stress test was considered relevant to factor in any
potential events affecting the underlying assets or credit concerns about the
borrowers which potentially could impact on the fair value. The reduced cash
flows stress test was considered relevant in the event of potential defaults
arising on the loan portfolio and the inability to recover the interest or
principal back in full.
In the current environment the Company has also considered the future of its
Manager when looking at its own viability, and given the size of the Manager's
platform away from the Company and the private capital it manages in numerous
other funds, the Manager is expected to be able to continue to manage the
Company for the foreseeable future.
Further consideration has been given with respect to the current market
environment, including the ongoing economic impacts of the pandemic, the war
in Ukraine, as well as inflationary and interest rate pressures and continued
potential Brexit departure impacts. The Investment Manager has prepared
sensitivity analyses including various stress scenarios. An evaluation
continues to be performed for each of the positions in light of these
potential impacts on operating models and valuations and hence recovery
prospects for certain individual positions. The output of this analysis was
used to i) report fair value movements, and ii) update all the cash and income
forecasting for the portfolio. The Investment Manager continues to perform a
granular analysis of the future liquidity profile of the Company.
A detailed cash flow profile of each investment was completed, incorporating
the probability of likely delays to repayments, other stress tests (and
additional cash needs).
Even taking these stress scenarios into account and bearing in mind the
leverage and liquidity of the bond portfolio, the Company is expected to be
able to meet its liabilities over the three-year period.
Risk Management
It is the role of the Board of Directors to review and manage all risks
associated with the Company, mitigating these either directly or through the
delegation of certain responsibilities to the Audit and Risk Committee and
Investment Manager.
The Board considers that the following are the principal risks and
uncertainties faced and has identified the mitigating actions in place to
manage them.
Long-term Strategic Risk
The Company is subject to the risk that its long-term strategy and its level
of performance fail to meet the expectations of its Shareholders. The shares
may trade at a continuing discount to NAV and Shareholders may be unable to
realise their investments through the secondary market at NAV per share. The
Board monitors the level of premium or discount of share price to NAV per
share.
The Board monitors investment strategy and performance on an ongoing basis and
regularly reviews the Investment Objective and Investment Policy in light of
prevailing investor sentiment to ensure the Company remains attractive to its
Shareholders. While the Board may seek to enhance NAV per share and
potentially reduce any discount to NAV through share buybacks, this will only
be done when resources permit and there can be no certainty that they will do
so and/or that an enhancement to share price will be achieved. No buybacks
were made during the year ended 31 March 2022.
The Company has the authority to make market purchases of fully paid shares of
up to 14.99% of the shares of no par value in issue, and renewal of this
authority will be sought from Shareholders at the AGM in September 2022 and at
each subsequent AGM, or earlier at an Extraordinary General Meeting if the
Directors consider it appropriate.
Target Portfolio Returns and Dividend
The Company's targeted returns are based on estimates and assumptions that are
inherently subject to significant business and economic uncertainties and
contingencies, and the actual rate of return may be materially lower than the
targeted returns. In addition, the pace of investment may be slower than
expected, or principal may be repaid earlier than anticipated, causing the
return on affected investments to be less than expected. In addition, if
repayments are not promptly re-invested this may result in cash drag which may
lower portfolio returns. However, as the Company is able to invest in both
bonds and loans, the Investment Manager has the ability to adjust the asset
mix towards bonds, thereby helping the Company mitigate potential cash drag
when loan repayments are made.
As a result, the level of dividends and other distributions to be paid by the
Company may fluctuate and there is no guarantee that any such distributions
will be paid.
There may be economic circumstances and wider market considerations that
arise, that mean the Investment Manager and Board deem it appropriate to
maintain higher levels of cash reserves.
The Investment Manager regularly provides the Board with reports on pipeline
opportunities, which include analysis of the expected returns available. The
Directors also regularly receive information on the performance of the
existing loans which includes analysis of the likelihood of any early
repayments which may impact returns.
Valuation
The valuation and performance of the Company's investments that comprise its
portfolio of real estate debt instruments are the key value drivers for the
Company's NAV and interest income. Judgements over fair value estimates could
significantly affect these key performance indicators.
The Company categorises its financial assets and liabilities in accordance
with IFRS 9 and establishes fair value utilising the methodology in accordance
with IFRS 13, as set out in Note 14(d) to the financial statements.
Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Company.
Market Bonds - The Company is subject to the risk that issuers of asset backed
securities in which it invests may default on their obligations and that
certain events may occur which have an immediate and significant adverse
effect on the value of such instruments. There can be no assurance that an
issuer of an instrument in which the Company invests will not default or that
an event which has an immediate and significant adverse effect on the value of
such instruments will not occur, and that the Company will not sustain a loss
on the transaction as a result. The Company seeks to mitigate this risk by
monitoring its portfolio of investments, reviewing the underlying credit
quality of its counterparties, on a monthly basis.
Bilateral Loans and Bonds Portfolio - The Company is subject to the risk that
the underlying borrowers to the loans and bonds in which it invests, may
default on their obligations and that certain events may occur which have an
immediate and significant adverse effect on the value of such instruments. Any
loan and bond may become a defaulted obligation for a variety of reasons,
including non-payment of principal or interest, as well as covenant violations
by the borrower in respect of the underlying loan and bond documents. In the
event of any default on the Company's investment in a loan and bond by the
borrower, the Company will bear a risk of loss of principal and accrued
interest on the loan and bond, which could have a material adverse effect on
the Company's investment. There can be no assurance that a borrower will not
default, that there will not be an issue with the underlying real estate
security or that an event which has an immediate and significant adverse
effect on the value of these loans and bonds will not occur, and that the
Company will not sustain a loss on the transaction as a result. The Company
seeks to mitigate this risk by performing due diligence and monitoring its
portfolio of investments, reviewing the underlying credit quality of its
borrowers, performance of the underlying asset, and loan and bond covenant
compliance against financial information received and the performance of the
security, on a quarterly basis.
Market Risk
Market risk is the risk that the fair value and future cash flows of a
financial instrument will fluctuate because of changes in market factors.
Market risk is comprised of interest rate risk, currency risk, price risk and
liquidity risk.
The Company's strategy on the management of market risk is driven by the
Company's Investment Objective as detailed on page 6 and in Note 1 to the
financial statements.
The Company's market risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures detailed in the latest
Prospectus and summarised in the financial statements.
Interest Rate Risk
Interest rate risk is the risk that the fair value and future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
The Company invests in both direct real estate loans and floating rate real
estate debt securities, which include mortgage backed securities ("MBS").
Real estate loans can have fixed interest coupons and are therefore
potentially exposed to the wider effects of changes in interest rates. For
bonds, the interest rate risk arises from the effects of fluctuations in the
prevailing levels of market interest rates on the fair value of financial
assets and liabilities and future cash flows. A segment of the portfolio
consists of floating rate debt investments which are exposed to interest rate
risk through changes in interest rates, potentially having an effect on
prepayments and defaults of the underlying loans of the securitisations.
While retaining the ability to do so, the Company does not currently enter
into hedging arrangements in respect of interest rate fluctuations.
Currency Risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign exchange
rates. The Company is exposed to currency risk to the extent that foreign
exchange rates fluctuate in relation to financial instruments that are
denominated in currencies other than GBP.
The Company manages its foreign exchange risk on a portfolio basis. The
Company may bear a level of currency risk that could otherwise be hedged where
it considers that bearing such risks is appropriate. The Company manages its
foreign exposure via forward foreign currency exchange contracts.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities on a timely basis.
The Company's liquidity risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures detailed in Note 14(c) to
the financial statements. Where needed, the Investment Manager will seek to
liquidate positions to increase cash or reduce leverage.
Much of the market for MBS and real estate loans is relatively illiquid. In
addition, investments that the Company purchases in privately negotiated (also
called "over the counter" or "OTC") transactions may not be registered under
relevant securities laws or otherwise may not be freely tradable, resulting in
restrictions on their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this illiquidity, the
Company's ability to vary its portfolio in a timely fashion and to receive a
fair price in response to changes in economic and other conditions may be
limited.
Furthermore, where the Company acquires investments for which there is not a
readily available market, the Company's ability to deal in any such investment
or obtain reliable information about the value of such investment or risks to
which such investment is exposed may be limited.
For further information on risks, please refer to Note 14 to the financial
statements.
Other Risk Factors
The Board gives consideration to and, together with Cheyne, monitors other
relevant risks, in addition to the ones highlighted above. These currently
include: the potential geopolitical and economic impacts arising from the war
in Ukraine, current and potential future inflationary and interest rate rises,
and the ongoing impacts of Brexit
and the Covid-19 pandemic. Given the short weighted average life of the
assets, and the continual replacement of assets in the portfolio from the
wider Investment Manager's pipeline, such macro risks are worked through in
the life of the assets. Any issues that might potentially impact the value of
the investments, including impacts to supply chains, are taken into account in
the fair value. An evaluation of each of the Company's positions in light of
these risks is continually monitored.
Environmental, Social and Corporate Governance ("ESG") Strategy
In carrying out its activities, the Company aims to conduct itself
responsibly, ethically, and fairly. The Directors recognise the importance of
environmental, social and governance factors, including climate change, when
pursuing the Company's Investment Objective and in the selection of the
service providers and advisers the Company works with. The Board is alive to
the magnitude of the evolving ESG landscape. It has determined that ESG
considerations, and their communication, must be fundamental to all its
operations and has consequently nominated an ESG lead to co-ordinate and drive
internal discussion. The Board in conjunction with the Investment Manager,
continues to closely monitor upcoming regulation and any developments in this
area.
The Company has a management contract with the Investment Manager. It has no
employees and all its Directors are non-executive, with day-to-day activities
being carried out by third parties. While the Company seeks to consider all
aspects of ESG, climate change is not something that is directly impacted by
the activity of the Company. The Company does not combust fuel and does not
have any greenhouse gas emissions to report from its operations, nor does it
have direct responsibility for any other emission producing sources. The Board
believes that all companies have a duty to consider their impact on the
community and the environment. The majority of Directors and some of the
Company's service providers are based in Guernsey, thus minimising the need
for commutes or flights to and from Board meetings. Technology is readily
utilised to facilitate virtual conference meetings, further reducing the need
for travel, whilst the use of board portals removes paper requirements for the
Directors when attending Board meetings. Within the normal course of business,
the Company expects there will be some air travel. Indeed, the Company
considers that it is important for good corporate governance that the Board
meets in person on a regular basis, and at least quarterly, with the
Investment Manager present at least twice per annum.
The Company has decided to purchase carbon offsets for all flights that may be
required by the Directors and the Investment Manager, thereby facilitating a
carbon neutral position, as pertains to travel. The Company recognises that
this action is the first step in an evolving climate strategy, that should
encompass carbon removal as well as carbon offsets.
Further efforts to reduce its carbon footprint, constitute electronic only
communications to all Shareholders on the share registrar. Accordingly, the
Company's website is now the default method of communication for Shareholder
publications. Currently approximately 68% of the Company's Shareholder
register receive documents and other communications electronically.
The Company's service providers and advisers recognise the importance of
strong corporate governance with a culture based on integrity, respect and
diversity and have adopted ESG standards. Further, they have documented and
implemented policies on day-to-day functioning and supporting initiatives to
minimise the environmental impact they have on the climate, where possible or
relevant. Details of the ESG and corporate responsibility of the Company's
service providers are available on their websites, where possible or relevant,
or may be available upon request.
Several standards and codes have received prominence as metrics for investment
managers. These include, for example, the UN Principles for Responsible
Investment (UN PRI), the Task Force on Climate-related Financial Disclosures
(TCFD) and the Financial Reporting Council's Stewardship Code. The Company's
main activities are carried out by the Investment Manager who was one of the
initial signatories to the Standards Board for Alternative Investments
(formerly known as the Hedge Fund Standards Board) and is a signatory to the
UN PRI. The Investment Manager applies a Responsible Investment policy to its
investment process. Cheyne's Real Estate Team analyses ESG factors in relation
to the Company's real estate lending transactions and seeks to engage with the
borrowers (to the extent relevant) to implement appropriate Responsible
Investing (RI) policies. Key factors taken into consideration, where
appropriate and possible, are best-in-class environmental, design and
construction standards, focus on Building Research Establishment Environmental
Assessment "BREEAM" ratings, governance rights and engagement with sponsors.
By following these steps, the Investment Manager seeks to ensure that the
environmental, social and governance aspects of the Company's investments are
taken into account.
Responsible Investment Highlights:
An example of the Investment Manager's approach is the recent investment into
Fusion Brent Cross.
There were several ESG considerations which were important factors in
determining whether this was going to be a project that they would recommend
investing in.
The Investment Manager is pleased that the project incorporates these
elements. For more information on Brent Cross, please see page 27.
Further information is available in the Sustainability Report and Corporate
Governance Statement on page 26 and 41, respectively.
Investment Manager's Report
RECI continues to benefit from the investment opportunities that Cheyne is
seeing
Ravi Stickney
Portfolio Manager
Having just emerged from the uncertainty posed by Covid-19, global real estate
markets are now contending with a number of issues, namely:
· Continuing supply chain disruptions feeding into persistent cost
inflation on materials and delays on delivery.
· Central banks look certain to move base rates markedly higher, with
our expectations that the new level of base rates will remain higher for much
longer.
· Anaemic growth, feeding into rent growth that may not keep pace
with inflation.
As experienced during the Covid-19 pandemic to date, real estate assets are no
longer a homogeneous asset class in their response to the evolving themes. As
a case in point, we view the mid market residential asset class (multi family
and single family homes) as being particularly resilient even in the face of
these factors, given the acute supply and demand imbalances. In contrast, we
see the shopping centre asset class as being further impacted by weak growth
and high inflation piling more pressure on top of the structural shifts in
shopping patterns evident already.
In addition to the above, the significant shifts in how we work, live and play
continue to feed into asset class demand and supply, causing material shifts
in demand patterns even within each asset type. For example, we have
consistently spoken about the shift in demand for office space away from
secondary quality stock to offices that provide for the very best in
environmental and wellbeing credentials. This stock remains scarce and in
demand, whilst secondary stock faces letting challenges even at steeply
discounted rents.
Since mid 2016 (primarily in response to the uncertainty posed by Brexit),
RECI has migrated its risk focus to concentrate upon: senior loans; working
with the strongest sponsors; and lower leverage exposures. It has also focused
on the "living" asset classes, with very selective entry points into the
cyclical office asset class.
In addition to the migration to a defensive asset risk profile, it has also
maintained a conservative structural risk profile with a low level of recourse
gearing, a very diverse credit book and a relatively low duration on its
loans.
Those elements have enabled the Company to navigate well through the Covid-19
period to date. In addition, it also gives the Company the best footing to
capitalise on the long-term economic changes anticipated above.
Sponsors owning, or purchasing, strong assets are set to face challenges and
opportunities from the combination of slowing growth, rising costs and the
continued scarcity of debt capital. RECI, is well positioned to assist the
European commercial real estate industry with its available capital and its
proven ability to structure meaningful solutions in a timely manner.
RECI's profile on the asset and liability sides of the balance sheet is strong
and has evolved to better optimise returns.
On the asset side, the portfolio's credit profile is robust with no positions
demonstrating material weakness. The hospitality and housebuilder positions
that were mainly affected by the pandemic have been resolved with a full
recovery of the Company's investment in both.
The asset book is diverse and predominantly focused on the senior part of the
capital stack.
In addition, the loan book has a short duration, allowing the Company to
recycle into new loans that have a yield pick up from (a) charging a higher
risk premium reflecting the current environment and (b) reflecting the higher
floating base rates into the loans.
On the liability side, during the year, the Company has made progress towards
its aim of structuring and deploying non recourse financing, on a term basis,
against its senior loans. This project has now been effected with the first
loans benefiting from these accretive funding lines.
The Company has also moved towards term funding on its balance sheet leverage
with the aim for a fair balance between flexible short-term financing and
stable long-term financing.
The key aims for RECI for the current financial year are consistent with the
prior year, evolving to capture the opportunities presented by the current
environment:
· To preserve its NAV with a continued focus on lower risk senior
credit
· To protect and improve on its dividends by improved returns on the
loans and also keeping the book invested
· To continually de-risk and optimise its funding lines
· To grow the Company and the diversity of its investor base
· To continually improve on its investor engagement, transparency and
reporting
The combination of the above, we believe, will sustain RECI as a consistent
performer in terms of NAV, dividends and shareholder engagement through the
year to come.
Portfolio by Geography (Funded Fair Value)
31 Mar 2022* 31 Mar 2021*
UK 51.4% 60.3%
France 34.2% 26.2%
Spain 4.7% 1.8%
Italy 4.1% 4.3%
Germany 2.6% 2.5%
Portugal 0.9% 2.3%
Finland 0.7% 1.2%
Netherlands 0.1% 0.1%
* Excludes 1.3% (31 March 2021: 1.3%) held in bonds backed by assets in
multiple European countries.
Top 10 Positions
Top 10 Positions1 as at 31 March 2022
Description Commitment LTV Investment Strategy Asset Type Manager Commentary
1 Paris prime resi/retail building £48.9m 67% Senior Loan Value Add / Transitional Luxury retail and apartments in super-prime Paris location
2 UK mixed-use portfolio, predominantly office/residential £44.6m 54% Senior Loan Core+ Light industrial, office and mid market residential asset portfolio in the UK
3 Office development in Saint Ouen, Paris £29.3m 58% Senior Loan Development Refurbishment and extension of a freehold office building
4 UK Health Care Centre £25.9m 73% Market Bond Core Stable, income producing UK Health Care Centres
5 London Office £23.5m 59% Senior Loan Core Fully let 98,246 sq ft new grade A office block located in Hoxton
6 UK Care Homes £23.2m 76% Senior Loan Core Stable, income producing UK care homes
7 Spanish Villas £22.5m 49% Senior Loan Development Build-for-sale Luxury Villa Development
8 UK Student Housing £22.4m 78% Mezzanine Loan Core Stable income producing UK student accommodation assets
9 France Housebuilder Portfolio £20.6m 56% Senior Loan Development Income producing residential developer
10 Finland Hotel £20.4m 64% Senior Loan Development Development in progress. Expected completion in June 2024
1 Based on total commitment of bonds and loans.
Maintaining Dividend Stability
Since 2013, RECI has maintained a dividend on its NAV of 7% or better. It
remains the Company's intention to maintain a stable quarterly dividend paying
capability through economic cycles. Dividend sustainability will depend on
income coverage and cash coverage. Our granular cash forecasting and stress
scenarios give us the confidence that the Company can maintain its dividend
cash coverage. To maintain and improve income coverage, RECI will gradually
deploy into the increasingly attractive investment pipeline (described above).
Portfolio Composition
RECI's investment portfolio, a diversified book of 63 positions in real estate
bonds and loans, was valued at £382.2 million excluding accrued interest of
£12.1 million as at 31 March 2022, down from £390.4 million excluding
accrued interest of £11.4 million as at 31 March 2021. The portfolio had a
weighted average levered yield of 10.0% and an average loan to value of 62.4%
as at 31 March 2022.
Bilateral Loan and Bond Portfolio
The drawn balance of the bilateral loan and bond portfolio, excluding accrued
interest, had decreased from £310.1 million as at 31 March 2021 to £284.4
million as at 31 March 2022. During the year, the Company made £81.6 million
of commitments to new deals, taking total loan commitments to £522.9 million
as at 31 March 2022. The average loan portfolio LTV exposure as at 31 March
2022 was 65.4%. The portfolio continues to provide attractive risk-adjusted
returns with a weighted average unlevered yield of 9.0% per annum, before any
back end fees, profit share or equity element contributions are taken into
account.
Bilateral Loan and Bond Portfolio Summary
as at 31 March 2022
Number of loans 35
Drawn Value (£ millions) 284.4
Undrawn Loan Commitments (£ millions) 181.0
Weighted average yield of portfolio 9.0%
Weighted average yield of portfolio (levered) 10.0%
Weighted average LTV of portfolio 65.4%
Weighted average life of portfolio (years) 1.8
Market Bond Portfolio
As at 31 March 2022, the market bond portfolio of 28 bonds (excluding the
self-originated bonds) was valued at £97.8 million excluding accrued
interest, compared to £80.4 million as at 31 March 2021. The recorded
interest income on the bonds in the year ended 31 March 2022 was £3.2 million
compared to £2.9 million in the year ended 31 March 2021.
The bond portfolio has the potential for strong defensive returns:
· The portfolio is characterised by a short duration (3.9 years) and
high coupon, which is defensive to interest rate rise and provides resilience
in turbulent markets.
· The weighted average unlevered yield of the market bond portfolio
as at 31 March 2022 was 4.6%, and the weighted average levered yield of the
bond portfolio as at 31 March 2022 was 10.1%.
· The average leverage of the portfolio over the financial year was
20.7%, achieved through the provision of short-term flexible financing. The
Company enters into repurchase arrangement agreements with several banks to
provide leverage. This financing is collateralised against certain of the
Company's bond portfolio assets with a fair value totalling £212.7 million
(31 March 2021: £186.1 million) and a weighted average cost at 31 March 2022
of 1.2% (31 March 2021: 2.3%) per annum. The average period to maturity of the
repurchase arrangements is 3 to 6 months.
Market Bond Portfolio Summary
as at 31 March 2022
Number of bonds 28
Fair Value (£ millions) 97.8
Weighted average yield of portfolio 4.6%
Weighted average yield of portfolio (levered) 10.1%
Weighted average LTV of portfolio 53.7%
Weighted average life of portfolio (years) 3.9
Outlook
The Company continues to successfully manage its investment portfolio and
liquidity and benefit from the investment opportunities that Cheyne is seeing.
The core aims of RECI are to provide its investors with a stable dividend
yield by originating and making investments in conservative real estate debt
in the United Kingdom and Western European real estate markets. RECI has
consistently done this through the challenging markets of 2009, 2011, 2016
(Brexit) and 2020 to date (Covid-19), and remains well positioned to do so
going forward.
Cheyne Capital Management (UK) LLP
23 June 2022
Sustainability Report
The Sustainability Report
RECI's Approach To Sustainability
RECI's aims to operate in a responsible and sustainable manner over the long
term. The Company prioritises continuous enhancement of ESG credentials across
the portfolio, and its success is aligned with the delivery of positive
outcomes for all its stakeholders, not least the communities in which the
buildings that it finances, live, work and enjoy.
The Company's main activities are carried out by Cheyne, the Investment
Manager, and as such the Company adopts the Investment Manager's policy and
approach to sustainability and integrating ESG principles.
The Investment Manager was one of the initial signatories to the Standards
Board for Alternative Investments (formerly known as the Hedge Fund Standards
Board) and is a signatory to the United Nations-supported Principles for
Responsible Investment ("PRI"). In its recent assessment Cheyne was awarded an
'A' rating.
The Investment Manager has formed an ESG forum to oversee both the Responsible
Investment and ESG policies to ensure that it continuously improves its ESG
standards.
Its Responsible Investment policy is already incorporated into its investment
process. Whilst its robust and evolving ESG approach is being integrated into
investment due diligence analysis and will form part of the wider investment
process soon.
This next phase of its ESG evolution will involve the implementation of a more
rigorous scoring-based system with the aim of using capital invested to
finance strategies/ projects that adhere to robust ESG principles. The Manager
firmly believes that adopting this approach will:
· Enhance the quality of the portfolio and help to protect value;
· Stay ahead of Investor demand to invest in those Managers that have
a plausible and demonstrable ESG strategy;
· Use capital to drive/accelerate change in the Real Estate arena in
regard to ESG; and
· Provide a measurable approach to understanding
· the ESG dynamics of our portfolio
Incorporating Sustainability into the Investment Process
Due Diligence
RECI is primarily invested in real estate loans and other real estate-based
debt investments. Key factors taken into consideration, where appropriate and
possible, are best-in-class environmental, design and construction standards,
a focus on Building Research Establishment Environmental Assessment "BREEAM"
ratings, governance rights and engagement with sponsors. Sustainability Risks
are considered during the Investment Manager's initial due diligence in
respect of an investment opportunity, including as part of the external
valuations of the real estate being financed (such valuations typically
consider any environmental and/or social risks) and early engagement with
potential borrowers or issuers through a data gathering exercise.
The Investment Manager's analysts also compile reports using data gathered
from their own due diligence and external reports, environmental performance
indicators (including BREEAM ratings and Energy Performance Certificates) and
investigations (including through the use of forensic accountants and other
third-party consultants). This information is included in the investment
committee memorandum, which is considered by the Investment Manager's
investment committee prior to an investment being made.
Decision-Making Process
Sustainability Risks are considered as part of the investment decision-making
process for RECI. In particular, the following sustainability risks are
typically considered, both in respect of the real estate being financed and/or
the relevant borrower or issuer:
· Environmental: power generation (including its sustainability),
construction standards, water capture, energy efficiency, land use and ecology
and pollution.
· Social: affordable housing provisions, community interaction and
health and safety conditions.
· Governance: management experience and knowledge and anti-money
laundering, corruption, and bribery practice.
Ongoing Management
Sustainability risks also form part of the ongoing monitoring of RECIs
investments, with regular reports and ongoing engagement from borrowers and
issuers incorporating information related to sustainability risks provided to
the Investment Manager. Where appropriate, the investment team will assist
borrowers and issuers in addressing ESG-related issues and support its
borrowers' and issuers' efforts to report externally and internally on their
ESG approach and performance in relation to material sustainability risks.
Exit
ESG considerations are already having an impact on underlying real estate
values and whilst clear data driven evidence is in its infancy, the investment
manager is acutely aware that during the life of the loans that RECI is
writing, this will become much clearer. As such this is an important
consideration regarding risk analysis now, hence the approach above is an
integral tool when calculating, managing and measuring risk.
Responsible Investment Highlights:
An example of the Investment Manager's approach is the recent investment into
Fusion Brent Cross, an investment that closed late 2021.
ESG principles on this project are strong, highlights of which are as follows:
Environmental
· Brent Cross Town is targeted to achieve net zero carbon by 2030 at
the latest.
· Affordable zero carbon heating will service the site which should
lead to a 25-35% reduction in carbon emissions.
· There will be a green roof, rainwater recovery systems and a 'zero
waste' shop on site.
· BREEAM excellent rating.
· Rainwater harvesting and distribution to all WC's.
· ASHP (air source heat pump) for the domestic hot water.
· District heating network, low carbon generation.
· Photovoltaic systems to level 10 and level 23 roofs.
· Low flow sanitaryware for all pods and communal toilets, reducing
daily consumption.
· High efficiency LED luminaires.
· Presence detectors for the lighting in students rooms.
· Movement detectors for corridor lighting.
· Heat Recovery MVHR ventilation units within student bedrooms.
· Heat recovery ventilation air handling unit for ground floor social
spaces with timed control constant air volume boxes for individual spaces.
Social
· The accommodation will create a social hub for students with an
emphasis on wellbeing and physical and mental health for students.
· Sizeable and high quality outdoor and relaxation spaces.
· The wider Brent Cross Town scheme will create a key new community
space including 50 acres+ of communal gardens open to general public as well
as residents.
· Targeting WELL Platinum accreditation, which is a dynamic rating
system for buildings and communities that enables the characteristics of the
built spaces that impact the health and well-being of its occupants to be
identified, measured and monitored.
Governance
· Fusion Students LLP has a strong diversity and equal opportunities
policy.
· Charitable efforts and fundraising constitute high importance and
meaning.
Fusion Brent Cross
Next Stage ESG
· A more quantitative ESG scorecard-based approach is being devised
by Cheyne Capital in conjunction with a specialist Real Estate ESG consultant.
· The new model will be a scorecard-based system which will look to
measure the strength of the ESG characteristics of the opportunity.
· This new approach should enable more consistency on what 'good'
looks like.
· Implementation of the new system should be concluded during 2022
following a soft testing period.
Summary
· Whilst the investment manager is not aligning the Company's
approach at this stage with any single measurement/guideline; the adoption of
a more bespoke model is driven by the motivation to use the Company's capital
to drive change rather than a 'tick box' approach.
· The investment manager is expecting a number of deals to fall
outside of their requirements/scorecard which they believe will help stimulate
a discussion to help identify an alternative approach/ESG enhancements which
they believe will help with value protection/enhancement.
· In the near future the investment manager thinks that the cost of
capital will be aligned with the quality of ESG strategies with 'ratchet'
mechanisms being built into loan terms to motivate change.
· Risk management will remain fundamental to the Company's new
approach, as the investment manager firmly believes that there will be
divergence of value between those assets/strategies that adopt a robust ESG
approach compared to those which don't.
· ESG subsequent covenants/conditions may well also be included in
time, driven by risk management principles.
Further details on Cheyne's ESG policy can be found on their website.
https://www.cheynecapital.com/investment-strategies/real-estate/investing-responsibly/
Governance
BOARD OF DIRECTORS
Bob Cowdell
Chairman (UK resident)
Bob Cowdell is an independent non-executive director who has focused on the
financial sector throughout his career; initially as a solicitor and then as a
corporate broker and adviser. He was previously co-founder and Head of the ABN
AMRO Global Investment Funds Team and then Head of Financials at RBS Hoare
Govett.
He is currently chairman of Castel Underwriting Agencies Limited and a
non-executive director of Thomas Miller Holdings Limited; and a former
non-executive director of Baillie Gifford UK Growth Fund Plc, Catlin
Underwriting Agencies Limited, Catlin Insurance Company (UK) Limited, XL
London Market Limited and XL Insurance Company SE. A Freeman of the City of
London, he is a member of the Institute of Directors and the Chartered
Insurance Institute. He has been a member of the Board since June 2015.
Susie Farnon
Chairman of the Audit and Risk Committee (Guernsey resident)
Mrs Farnon is a Fellow of the Institute of Chartered Accountants in England
and Wales and qualified as an accountant in 1983. She is a former Banking and
Finance partner of KPMG Channel Islands from 1990 until 2001 and head of the
Channel Island Audit Practice from 1999. She has served as President of the
Guernsey Society of Chartered and Certified Accountants and as a member
of the States of Guernsey Audit Commission and as vice-chairman of the
Guernsey Financial Services Commission. Susie is a non-executive director of a
number of investment companies listed on the London Stock Exchange or
elsewhere and is a board member of the Association of Investment Companies.
She has been a member of the Board since February 2018.
John Hallam
Senior Independent Director (Guernsey resident)
Mr Hallam is a Fellow of the Institute of Chartered Accountants in England and
Wales and qualified as an accountant in 1971. He is a former partner of
PricewaterhouseCoopers having retired in 1999 after 27 years with the firm
both in Guernsey and in other countries.
He is the chairman of NB Distressed Debt Investment Fund Ltd as well as being
a director of a number of financial services companies, some of which are
listed on recognised stock exchanges. He served for many years as a member of
the Guernsey Financial Services Commission from which he retired in 2006,
having been its chairman for the previous three years. He has been a member of
the Board since March 2016.
Colleen McHugh
Independent Director (Guernsey resident)
Mrs McHugh is managing director of 1818 Venture Capital, a licensed asset
manager based in Guernsey. In addition, she is a non-executive director for a
private investment fund. She sits on the investment committee for Wealthify
(part of the Aviva PLC group) a UK regulated Robo-adviser.
Colleen has over 20 years' experience in the investment and financial services
industry having worked predominantly as an Investment Manager and Private
Banker for publicly listed banks such as HSBC, Barclays and Butterfield Bank,
across several regions, but with a focus on international financial centres.
She holds an economics degree from the University of Ireland (Galway) and a
MBA from the University of London. Colleen is a Chartered Wealth Manager and a
fellow of the Chartered Institute of Securities and Investment.
Management Team
Ravi Stickney
Head of Cheyne Real Estate/Portfolio Manager
Ravi is Head of the Real Estate Team. He joined Cheyne in 2008 and has 20
years' experience in the real estate debt markets. Previously, he was on ING
Bank's proprietary investments desk (2005 to 2008), with sole responsibility
for managing a €400 million long/short portfolio of European commercial real
estate credits and CMBS. Prior to that, he was at Lehman Brothers (2002 to
2005), structuring and executing UK and European CMBS/RMBS and commercial real
estate mezzanine loans. He acted as sole operating adviser on the
restructuring and eventual sale of the first distressed UK CMBS deal, and he
continues to play an active role in the direction of various distressed
European real estate credits. He began his career on the UK commercial real
estate desk at Ernst & Young in 1998.
Richard Lang
Head of Business Mngt/Co-Portfolio Manager
Richard is Business Manager of the real estate desk, and is a partner at
Cheyne, having joined in 2007. Before joining Cheyne, Richard worked at
Barclays Capital, and prior to that was at Deutsche Bank, where he was
responsible for the controlling of the commercial mortgage backed securities
and Securitised Products businesses. Before that, he worked in management
roles within the fixed income areas of RBS and Paine Webber. He is a Fellow of
the Institute of Chartered Accountants in England and Wales, having qualified
as a chartered accountant in 1999.
Arron Taggart
UK Origination
Arron has over 20 years' experience in the real estate markets. He joined
Cheyne in August 2012 to originate real estate loans in the UK and Northern
Europe. Prior to Cheyne, Arron was a Property Specialist and Partner at
Clydesdale Bank responsible for the origination and execution of real estate
loans in London and the South of England. He was also responsible for the
management of the loan portfolio and setting regional strategy. Prior to
Clydesdale Bank, he was at Bank of Scotland and Hitachi Capital.
Raphael Smadja
French Origination
Raphael joined Cheyne in January 2014 and has 10 years' experience. Prior to
Cheyne, he was an Associate Director in Real Estate Finance at Deutsche
Pfandbriefbank, responsible for sourcing and structuring commercial real
estate loans across Europe. Prior to that, he held positions within the Real
Estate Finance and CMBS space at Moody's, UBS and Morgan Stanley.
Daniel Schuldes
German Origination
Daniel has over 10 years' experience in the European real estate debt and ABS
markets. He joined Cheyne in 2007 and specialises in the origination,
structuring, negotiation and execution of German real estate credit
transactions. He was previously an associate on Credit Suisse's asset finance
team in London, which was responsible for originating and structuring the
bank's European securitisations. He focused on fundamental analysis of RMBS
collateral.
Sa'ad Malik
Structured Credit
Sa'ad joined Cheyne in 2016. Prior to joining Cheyne, he founded Rhino
Investment Management LLP in 2011, an FCA-authorised boutique investment and
advisory firm, active in the European commercial real estate market. Among his
responsibilities were strategy, origination, client management, structuring
and execution. He previously worked for Lehman Brothers International (Europe)
in 2004, and for Credit Suisse Securities (Europe) Limited in 2005, when he
was Director in their European Real Estate Finance & Securitisation area,
and had a central role in building the Titan Europe CMBS platform. Sa'ad
started his career in 2000 with Commerzbank Securities in Asset-Backed
Finance.
Lydia Boos
Legal Counsel
Lydia is Legal Counsel for the Cheyne Real Estate Team. Prior to joining
Cheyne in 2018, Lydia was a senior associate at Bryan Cave Leighton Paisner
LLP where she worked since starting her legal training in 2008. Lydia joined
BCLP's real estate finance department upon qualifying as a solicitor in
September 2010. At BCLP, Lydia was responsible for advising a range of lender
and sponsor clients on real estate focused investment and development
transactions across a variety of sectors, often including complex
intercreditor structures.
Morgan Ryan
Business Administrator
Morgan joined Cheyne in 2021. Prior to Cheyne, he held a Client Reporting
position at HSBC Global Asset Management. Prior to that, he held several
analyst roles at hedge funds in London and Dublin. Morgan earned his BA in
Business Studies from Griffith College, Dublin.
Directors' Report
The Directors present their Annual Report and the audited financial statements
for the year ended 31 March 2022.
General Information
The Company was incorporated in Guernsey on 6 September 2005 with registered
number 43634.
The "About the Company" section of the Annual Report on page 6 provides
information regarding the structure of the Company, the investment objective
and the listing details of the shares of the Company.
The Company's investment management activities are managed by the Investment
Manager, who is also the Alternative Investment Fund Manager ("AIFM"). The
Company has entered into an Investment Management Agreement under which the
Investment Manager manages its day-to-day investment operations, subject to
supervision by the Company's Board of Directors. The Company is an Alternative
Investment Fund ("AIF") within the meaning of the Alternative Investment Fund
Managers Directive ("AIFMD") and accordingly the Investment Manager has been
appointed and registered as AIFM of the Company.
Principal Activity and Business Review
The principal activity of the Company during the year was that of an
investment company investing in real estate credit investments. For full
details of the Investment Policy of the Company see page 6.
Results and Dividends
The results for the year and the Company's financial position as at year end
are shown on pages 62 and 63. Dividends totalling £27.5 million (31 March
2021: £27.5 million) were paid on the shares during the year.
A fourth interim dividend for the year ended 31 March 2022 of 3 pence per
share (31 March 2021: 3 pence per share) was declared by the Directors on 23
June 2022 and is payable on 29 July 2022. This fourth interim dividend has not
been included as a liability in these financial statements.
Capital Structure
Details of the authorised, issued and fully paid share capital, together with
details of the movements in the Company's issued share capital during the
current and prior year, are shown in Note 13 to the financial statements.
The Company has one class of shares which carry no right to fixed dividends.
Each share carries the right to one vote at general meetings of the Company.
No person has any special rights of control over the Company's share capital.
Board of Directors
The Board appoints all Directors on merit. When the Nomination Committee
considers Board succession planning and recommends appointments to the Board,
it takes into account a variety of factors. Knowledge, experience, skills,
personal qualities, residency and governance credentials play an important
part.
The Directors of the Company who served during the year and to the date of
this report were:
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Graham Harrison (resigned 16 September 2021)
The following summarises the Directors' directorships in other public
companies listed on the London Stock Exchange:
Director Company Name
Susie Farnon Apax Global Alpha Limited
HICL Infrastructure PLC
John Hallam NB Distressed Debt Investment Fund Ltd
All Directors are independent of the Investment Manager and free from any
business or other relationship that would materially interfere with the
exercise of their independence.
With regard to the appointment and replacement of Directors, the Company is
governed by its Articles of Incorporation (the "Articles") and The Companies
(Guernsey) Law, 2008. The Articles themselves may be amended by special
resolution of the Shareholders. The powers of Directors are described in the
Articles and in the financial statements in the Corporate Governance
Statement. Under its Articles, the Company has authority to issue an unlimited
number of shares of no par value.
The Directors' interests in the share capital of the Company (some of which
are held directly or by entities in which the Directors may have a beneficial
interest) as at the publication are:
Number of Shares % Shares Held
Bob Cowdell (Chairman) 190,000 0.08
John Hallam 100,000 0.04
Susie Farnon 45,250 0.02
Colleen McHugh 10,000 0.00
Substantial Interests in Share Capital
Chapter 5 of the Disclosure and Transparency Rules, requires disclosure of
major shareholder acquisitions or disposals (over 5% of the shares) in the
Company (see list below of major Shareholders). During the year, there were 5
notifications of such transactions (31 March 2021: 2 notifications).
List of Major Shareholders as at 31 March 2022:
Name Total Shares Held % Shares Held
Close Brothers Group 19,006,272 8.29
Bank Leumi Le Israel 18,257,467 7.96
Canaccord Genuity Group Inc 13,514,228 5.89
Hargreaves Lansdown Asset Mgt 13,348,972 5.82
Tilney Smith & Williamson 13,143,107 5.73
Fidelity Worldwide Investment (FIL) 12,765,260 5.57
Issued Share Capital
The issued share capital of the Company consisted of 229.3 million shares (31
March 2021: 229.3 million shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and due for renewal on
6 July 2022.
Listing Information
The shares are currently listed on the premium segment of the Official List of
the UK Listing Authority and trade on the Main Market of the London Stock
Exchange.
Website
The Directors are responsible for the oversight of the website and delegate to
Cheyne responsibility for the maintenance and integrity of the financial and
corporate information included on it.
The Investment Manager
Having reviewed the performance of the Investment Manager, the Directors are
satisfied that the continued appointment of the Investment Manager on the
terms agreed is in the best interests of the Shareholders and the Company. The
Company has entered into the Investment Management Agreement under which the
Investment Manager manages its day-to-day investment operations. Details of
the Investment Management Agreement can be found in Note 17 to the financial
statements.
Auditor
Deloitte LLP has been the Company's external auditor since the Company's
incorporation and in line with best practice, the Company's lead audit partner
is required to rotate off after five years of service. Further information on
the work of the auditor is set out in the Audit and Risk Committee Report. The
Company undertook a competitive tender process during Autumn 2018 and Deloitte
was reappointed.
The Audit and Risk Committee reviews the appointment of the auditor on an
annual basis.
Principal Risks and Uncertainties
Principal risks and uncertainties are discussed in the Strategic Report.
Related Party Transactions
Related party transactions are disclosed in Note 17 to the financial
statements. There have been no material changes in the related party
transactions described in the last annual report.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in
preparing the financial statements as, after due consideration, they consider
that the Company has adequate resources to continue in operational existence
for a period of at least 12 months from the date of signing the audited
financial statements.
As highlighted in the long-term viability section in the Strategic Report, the
Investment Manager performed an evaluation of each of its positions in light
of the likely long-term impact of the Covid-19 crisis on operating models and
valuations, and performed a granular analysis of the future liquidity profile
of the Company. A detailed cash flow profile of each investment was completed,
incorporating the probability of likely delays to repayments, other stress
tests (and additional cash needs). Stress testing is then performed on this
cash flow forecast against a number of adverse scenarios, such as the fair
value write down of the investments, or reduced cash flows from the investment
portfolio. The fair value stress test was considered relevant to factor in any
potential events affecting the underlying assets or credit concerns about the
borrowers which potentially could impact on the fair value. The reduced cash
flows stress test was considered relevant in the event of potential defaults
arising on the loan portfolio and the inability to recover the interest or
principal back in full.
Taking account of the updated forecasting, the Directors consider that the
cash resources available as at 31 March 2022 of £47.4 million, together with
the cash held at the broker of £5.2 million, the liquidity of the market bond
portfolio and the financing available through activities such as repurchase
agreements are sufficient to cover normal operational costs, the funding of
borrower loan commitments and current liabilities, including the proposed
dividend, as they fall due for a period of at least 12 months from the date of
signing the audited financial statements. The Directors note that a key
assumption adopted in the going concern analysis is that leverage through
repurchase agreements is not withdrawn. Net debt (leverage minus cash) as at
31 March 2022 was 14.0%. The Directors consider this to have strengthened the
resilience of the Company to future market uncertainty.
For further information, please refer to Note 2 to the financial statements.
AGM
It is intended that the AGM of the Company will be held at 10:30am on 15
September 2022 and details of the resolutions to be proposed at the AGM,
together with explanations, will appear in the Notice of Meeting to be
distributed to Shareholders together with a copy of this Annual Report.
Members of the Board will be in attendance at the AGM and will be available to
answer Shareholder questions.
On behalf of the Board on 23 June 2022.
Bob Cowdell Susie
Farnon
Director
Director
Remuneration COMMITTEE Report
As in other areas of corporate governance the Company seeks to adhere to the
AIC Code of Corporate Governance issued in February 2019 and has established a
Remuneration Committee in accordance with Principles P, Q and R. Although the
Company is not incorporated in the UK, it is mindful of the regulations that
apply to such companies in the context of remuneration and will seek to make
appropriate disclosures. All Directors are non-executive and are not eligible
for bonuses, pension benefits, share options, long-term incentive schemes or
other benefits, performance related or otherwise. Directors do not have
service contracts and there is no provision for compensation for loss of
office. All Directors are entitled to be repaid all expenses reasonably
incurred in the performance of their duties and have signed a letter of
appointment setting out the terms of such appointment.
The prime purpose of the Remuneration Committee is to determine the Company's
remuneration policy within the limits set by the Articles of Incorporation,
which currently state that the remuneration paid to each Director by way of
fees shall not exceed €160,000 in any financial year. Additionally, they
provide that if any Director performs any special duties, or renders services,
outside of the ordinary duties of a Director, that Director shall be paid such
reasonable additional remuneration as the Board may determine. The total
remuneration paid to each Director is reported annually, please see page 92.
The Remuneration Committee is authorised by the Board to seek, subject to a
financial limit, such independent advice as it may deem necessary in the
discharge of its responsibilities.
Composition of the Remuneration Committee
The Remuneration Committee is composed of all the Directors including the
Chairman of the Company, who was deemed independent at the time of his
appointment. This membership is considered appropriate as, collectively, its
members are believed to have the necessary experience and knowledge to fairly
determine remuneration.
Remuneration Policy
The current policy adopted by the Remuneration Committee is set out below and
will be tabled at the next AGM for approval by Shareholders, as will this
Report.
The Company's Remuneration Policy is that fees payable to the Directors should
reflect the time spent by the Directors on the Company's affairs and the
responsibilities borne by the Directors in ensuring the efficient and
effective operation of the Company and be sufficient to attract, retain and
motivate individuals of high calibre with suitable skills, experience and
knowledge and to ensure that their remuneration is set at a reasonable level
commensurate with their duties and responsibilities. No element of the
Directors' remuneration is performance related.
In determining the level of these fees, the Remuneration Committee obtains and
takes account of reliable, up-to-date information about remuneration in other
companies of comparable scale and complexity together with general economic
conditions. To help it fulfil its obligations the Remuneration Committee shall
have full authority to appoint remuneration consultants and to commission or
purchase any reports, surveys or information which it deems necessary.
Implementation of the Policy
The last major review of Board remuneration took place in October 2017 with
only an inflationary increase being applied in 2020. Guernsey Retail Price
Index Inflation, excluding mortgage interest payments (RPIX), increased by
13.2% over the five years to March 2022. The Remuneration Committee,
therefore, considered that it was timely for a fundamental review of the
remuneration structure with any revisions taking place with effect from 1
April 2022.
In accordance with the stated policy a number of factors were considered:
a) Given the residence of the Company and the majority of the Board
members, Guernsey RPIX is considered to be the relevant inflation benchmark
and in the 12 months to 31 December 2021 this rose by 4.6%,
b) Publicly available market research was reviewed,
c) The current remuneration levels reported by other listed investment
companies, of a similar size and nature, was analysed with particular regard
being given to those that had recently been launched, and
d) The responsibilities of different Board members were analysed to
identify significant changes since the 2017 review.
As stated in the policy, and given that all Directors are non-executive,
remuneration decisions are not influenced by the financial performance of the
Company, be that in terms of share price or net asset value. Accordingly, such
information is not presented here.
The Remuneration Committee concluded that, as it had not changed since 2017,
the Chairman's fee should increase from £75,000 to £80,000 (a 6.7%
increase); and the base fee for other Directors should increase from £36,750,
as set in 2020, to £38,500 (a 4.8% increase).
The review of other responsibilities and leadership roles concluded that the
following changes were appropriate:
Audit and Risk Committee chair - the additional fee should increase from
£10,000 to £12,500 per annum in light of the addition of further Risk
responsibilities;
Management Engagement Committee chair - this Committee was set up in 2017
since when its remit and activities have increased, accordingly it was
determined that the role of Chair warranted an additional fee of £2,000 per
annum;
ESG lead - the Board has determined that ESG considerations, and their
communication, must be fundamental to all its operations and that the lead
role in coordinating the Company's ESG initiatives warranted a fee of £2,500
per annum;
Remuneration Committee chair - this Committee having recently been established
it was concluded that the role of Chair warranted an additional fee of £2,500
per annum;
Nomination Committee chair - it was determined that the role of Chair
warranted an additional fee of £2,000 per annum, but only if it was not
undertaken by the Company Chairman, as is currently the case; and
Senior Independent Director - the Committee concluded that this role should
only be remunerated on an ad-hoc basis as and when a significant time
commitment was needed.
As a consequence of these recommendations the following table sets out the
remuneration of Board members for the financial year ending 31 March 2023 as
compared to the two previous years; it should be noted that the additional
fees set out above relate to the roles performed and not to specific
individuals, while the table assumes that the named individuals will discharge
the roles indicated throughout the coming year (and no discretionary
additional remuneration is paid):
Year ending Year ended Year ended
31 Mar 2023
31 Mar 2022
31 Mar 2021
GBP
GBP
GBP
Bob Cowdell (Chairman and Nomination Committee Chair) 80,000 75,000 75,000
Susie Farnon (Audit and Risk Committee and Management Engagement Committee 53,000 46,750 45,875
Chair)
John Hallam (Remuneration Committee Chair and Senior Independent Director) 41,000 36,750 35,875
Colleen McHugh (Environmental, Social and Corporate Governance Lead) 41,000 36,750 3,062
Graham Harrison (resigned 16 September 2021) Nil 18,375 35,875
Furthermore, the Remuneration Committee noted that, in the past, additional
fees had been paid to the Chairman (£10,000) and other Directors (£5,000
each) for work in relation to the issuance of a prospectus. It is the
Remuneration Committee's recommendation that should a prospectus be issued
during the financial year ending 31 March 2023, the Board should use its
discretion to determine if additional fees of the same amount should be paid.
Statement of Shareholder Voting
At the last AGM held on 16 September 2021 a resolution
to approve the Remuneration Committee Report and Remuneration Policy was
passed with 106,145,099 votes (99.95%) being cast in favour and 53,819 votes
(0.05%) against.
Future Reviews
It is anticipated that full reviews will not take place at less than three
yearly intervals, but that the Remuneration Committee will, in the early part
of each year, review the changes in Guernsey RPIX and increase the Chairman's
fee and the base fee for other Directors proportionally.
John Hallam
Remuneration Committee Chair
23 June 2022
Corporate Governance Statement
Statement of Compliance with Corporate Governance
The Company is a member of the Association of Investment Companies (the "AIC")
and by complying with the February 2019 edition of the AIC code of Corporate
Governance for investment companies ("AIC Code") is deemed to comply with both
the UK and Guernsey Codes of Corporate Governance.
To comply with the UK Listing Regime, the Company must comply with the
requirements of the UK Corporate Governance Code.
The Board has considered the principles and recommendations of the AIC Code,
by reference to the guidance notes provided by the AIC Guide, and considers
that reporting against these will provide appropriate information to
Shareholders. To ensure ongoing compliance with these principles the Board
reviews a report from the Company Secretary identifying how the Company is in
compliance and identifying any changes that might be necessary.
The Company has complied with the recommendations of the AIC Code throughout
the accounting period, except as set out below.
The AIC Code includes provisions relating to:
· the role of the chief executive;
· executive directors' remuneration; and
· the whistle-blowing policy.
The Board considers some of these provisions are not relevant to the position
of the Company as it is an externally managed investment company. The
Directors are non-executive and the Company does not have employees and the
Board is satisfied that any relevant issues that arise can be properly
considered by the Board or by Shareholders at AGMs. The Remuneration Committee
considers matters relating to Directors' remuneration. An external assessment
of Directors' remuneration has not been undertaken. The Company's Remuneration
policy is that fees payable to the Directors should reflect the time spent by
the Directors on the Company's affairs and the responsibilities borne by the
Directors and be sufficient to attract, retain and motivate Directors of a
quality required to run the Company successfully. Please refer to the
Remuneration Committee Report on pages 39 to 40.
The Board
The Directors' details are listed in the Directors' Report, which set out
their range of investment, financial and business skills and experience.
The Board meets at least four times a year and, in addition, there is regular
contact between the Board, the Investment Manager and the Company Secretary
including an annual strategy meeting and Investment Manager due diligence
visits, when the Board attends the offices of the Investment Manager and meets
with senior executives. Further, the Board requires that it is supplied in a
timely manner with information by the Investment Manager, the Company
Secretary and other advisers in a form and of a quality appropriate to enable
it to discharge its duties. During the last financial year, some of the
Board's formal and informal meetings were carried out virtually (or hybrid),
in accordance with Government guidelines on travel in relation to Covid-19.
Duties and Responsibilities
The Board has overall responsibility for optimising the Company's performance
by directing and supervising the affairs of the business and meeting the
appropriate interests of Shareholders and relevant stakeholders, while
enhancing the value of the Company and also ensuring the protection of
investors. A summary of the Board's responsibilities is as follows:
· statutory obligations and public disclosure;
· strategic matters and financial reporting;
· risk assessment and management including reporting, compliance,
governance, monitoring and control; and
· other matters having a material effect on the Company.
The Board is responsible to Shareholders for the overall management of the
Company. The Board has delegated the day-to-day operation of the Company to
the Investment Manager, Administrator and the Company Secretary. The Board
reserves the powers of decisions relating to the determination of the
Investment Policy, the approval of changes in strategy, capital structure,
statutory obligations, public disclosure and the entering into of any material
contracts by the Company.
Scheduled Nomination Audit and Risk Management Remuneration
Board Committee Committee Engagement Committee
Meetings Meeting Meeting Committee Meeting
Attendance Attendance Attendance Meeting Attendance
Attendance
Attendance by:
Bob Cowdell (Chairman) 4/4 2/2 3/3 1/1 2/2
Susie Farnon 4/4 2/2 3/3 1/1 2/2
John Hallam 4/4 2/2 3/3 1/1 2/2
Colleen McHugh 4/4 2/2 3/3 1/1 2/2
Graham Harrison (resigned 16 September 2021) 1/2 0/1 1/1 0/1 1/1
The previous table is an extract of the various Directors' attendance at Board
and Committee meetings for the financial year compared against those for which
they were eligible to attend. Despite Covid-19, the Board were physically
present for approximately 70% of these meetings.
Additionally, a number of ad-hoc meetings were held during the year which, as
they dealt primarily with administrative and transaction matters, were
attended by those Directors available at the time.
Chairman
The Chairman, Mr Cowdell, is responsible for leadership of the Board, ensuring
its effectiveness on all aspects of its role and setting its agenda. The
Chairman is also responsible for ensuring that the Directors receive accurate,
timely and clear information. The Chairman is responsible for effective
communication with Shareholders and can be contacted through the Company
Secretary.
Senior Independent Director ("SID")
Mr Hallam is the SID and, as such, his primary roles are to support the
Chairman and act as an intermediary for the other non-executive Directors in
matters relating to the Chairman including leading them in the annual
performance evaluation of the Chairman. The SID is also available to
Shareholders who may have any concerns which contact through the normal
channels of the Chairman and AIFM has failed to resolve or for which such
contact is inappropriate. Mr Hallam can also be contacted through the Company
Secretary.
Board Independence
For the purposes of assessing compliance with the AIC Code's Principles and
Provisions, the Board considers whether the current Directors are independent
of the Investment Manager and free from any business or other relationship
that could materially interfere with the exercise of their independent
judgement. In making this assessment, consideration is also given to all other
factors which might be relevant including length of service. The Board has
concluded that all Directors remain independent.
Committees of the Board
In accordance with the AIC Code, the Board has established an Audit and Risk
Committee, a Nomination Committee, a Management Engagement Committee and a
Remuneration Committee, in each case with formally delegated duties and
responsibilities within written terms of reference.
Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon, and its other members
are Mr Cowdell, Mr Hallam and Mrs McHugh. The terms of reference of the Audit
and Risk Committee state that it will meet not less than three times in each
financial year. The Audit and Risk Committee Report on pages 46 to 48 sets out
the role and activities of this Committee and its relationship with the
external auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Cowdell and its other members are Mr
Hallam, Mrs Farnon and Mrs McHugh. The members of the Nomination Committee are
and will be independent Directors. The terms of reference state that the
Nomination Committee will meet not less than once a year; will have
responsibility for considering the size, structure and composition of the
Board; retirements and appointments of additional and replacement Directors;
and that the Nomination Committee will make appropriate recommendations to the
Board.
The Board appoints all Directors on merit. When the Nomination Committee
considers Board succession planning and recommends appointments to the Board,
it takes into account a variety of factors. Knowledge, experience, skills,
personal qualities, residency and governance credentials play an important
part. The Board aims to have a balance of skills, experience, diversity
(including gender) and length of service and knowledge of the industry. The
Board undertakes an evaluation of its performance on an annual basis. The
performance of each Director is considered as part of a formal review by the
Nomination Committee.
The position of Chairman of each Committee will be reviewed on an annual basis
by the Nomination Committee and their membership and terms of reference are
kept under review.
The performance of the Chairman of the Board will be assessed by the SID
through appraisal questionnaires and discussions with the other Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by Mrs Farnon, with its other
members being Mr Hallam, Mr Cowdell and Mrs McHugh. The Committee will meet at
least once a year for the purpose of evaluating the performance of the
Company's service providers, the review of service agreements and service
level statements and the level and method of their remuneration.
Remuneration Committee
The Remuneration Committee is chaired by Mr Hallam, with its other members
being Mr Cowdell, Mrs Farnon and Mrs McHugh. The Committee will meet at least
once a year for the purpose of determining Directors' remuneration and setting
the Company's remuneration policy.
Director Re-Election Tenure and Induction
The Nomination Committee has considered the question of a policy on Board
tenure. It is strongly committed to striking the correct balance between the
benefits of continuity and those that come from the introduction of new
perspectives to the Board. As provided for in the AIC guidelines and in order
to phase future retirements and appointments the Board has not, at this stage,
adopted any specific limits to terms, but expects to refresh the Board at
appropriate intervals.
The Board regards all Directors as being independent. The Board has adopted a
policy whereby all Directors will be proposed for re-election each year and so
all Directors will be proposed for re-election at the forthcoming AGM. Details
of Directors' tenure are disclosed on pages 32 to 33.
Internal Controls
The Board has established a continuous process for identifying, evaluating and
managing the significant risks the Company faces. The Board regularly reviews
the process, which has been in place from the start of the financial year to
the date of approval of this report. The Board is responsible for the
Company's system of internal control and for reviewing its effectiveness. Such
a system is designed to manage rather than eliminate the risk of failure to
achieve business objectives, and can only provide reasonable and not absolute
assurance against material misstatement or loss.
In compliance with the Principles and Provisions of the AIC Code, the Board
regularly reviews the effectiveness of the Company's system of internal
control. The Board's monitoring covers all controls, including financial,
operational and compliance controls and risk management. It is based
principally on reviewing reports from the Investment Manager in order to
consider whether all significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses are promptly remedied and
indicate a need for more extensive monitoring. To this end, a Risk Matrix is
maintained, which identifies the significant risks faced by the Company
together with the controls intended to manage them and is reviewed at each
scheduled Board meeting. The Board has also performed a specific assessment
considering all significant aspects of internal control arising during the
year covered by this report. The Audit and Risk Committee assists the Board in
discharging its review responsibilities.
During the course of its review of the system of internal control, the Board
has not identified nor been advised of any failings or weaknesses which it has
determined to be significant.
While investment management is provided by Cheyne, the Board is responsible
for setting the overall Investment Policy and monitors the actions of the
Investment Manager at regular Board meetings. Administration services are
provided by Citco. Regular compliance reports from both the Investment Manager
and the Administrator are received by the Board. In addition, the
Administrator makes available its Global Fund Accounting and Custody Controls
Examination, SOC 1 report to the Board on an annual basis.
Custody of assets is undertaken by the Depositary, The Bank of New York Mellon
(International) Limited.
The Investment Manager has established an internal control framework and
reviews the segregation of duties within this to ensure that control functions
are segregated from the trading and investing functions. As a part of this
framework, the valuation of financial instruments is overseen by an internal
pricing committee which is supported by resources which ensure that it is able
to function at an appropriate level of quality and effectiveness.
Specifically, the Investment Manager's pricing committee is responsible for
establishing and monitoring compliance with valuation policy. Within the
trading and investing functions, the Investment Manager has established
policies and procedures that relate to the approval of all new transactions,
transaction pricing sources and fair value hierarchy coding within the
financial reporting system.
The Directors of the Company clearly define the duties and responsibilities of
their agents and advisers, whose appointments are made by the Board after due
consideration. The Board monitors the ongoing performance of such agents and
advisers. Each agent and adviser maintains its own systems of internal control
on which it reports to the Board. The systems are designed to ensure effective
and efficient operation, internal control and compliance with laws and
regulations. In establishing the systems of internal control, regard is paid
to the materiality of relevant risks, the likelihood of costs being incurred
and costs of control. It follows, therefore, that the systems of internal
control can only provide reasonable but not absolute assurance against the
risk of material misstatement or loss.
The Board has reviewed the need for an internal audit function and has decided
that the systems and procedures employed by the Administrator and Investment
Manager, including their own internal controls and procedures, provide
sufficient assurance that a sound system of risk management and internal
control, which safeguards Shareholders' investment and the Company's assets,
is maintained. An internal audit function specific to the Company is therefore
considered unnecessary.
Shareholder Engagement
The Board believes that the maintenance of good relations with Shareholders is
important for the long-term prospects of the Company and seeks engagement with
investors. Where appropriate, the Chairman and other Directors are available
for discussion about governance and strategy with major Shareholders and the
Chairman ensures communication of Shareholders' views to the Board. The Board
receives feedback on the views of Shareholders from Liberum Capital Limited
(the "Corporate Broker") and the Investment Manager, and Shareholders are
welcome to contact the Chairman or any Director at any time via the Company
Secretary.
The Directors believe that the AGM provides an appropriate forum for
Shareholders to communicate with the Board and encourages participation. There
is an opportunity for individual Shareholders to question the Chairmen of the
Board and the Audit and Risk Committee at the AGM. The Board assesses the
results of AGMs considering whether the number of votes against or withheld in
respect of resolutions are such as to require discussion in the subsequent
Annual Report.
Corporate Social Responsibility
The Board keeps under review developments involving social and environmental
issues, and will report on those to the extent they are considered relevant to
the Company's operations. The Company's ESG strategy is outlined on pages 19
to 20 of this report and in the Sustainability Report on page 26.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of "failing to take reasonable steps to prevent the
facilitation of tax evasion", the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
General Data Protection Regulation ("GDPR")
The Board confirms that the Company has considered GDPR and taken measures
itself and with its service providers, to meet the requirements of GDPR and
equivalent Guernsey law.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-Bribery and Corruption Policy. The policy
applies to the Company and to each of its Directors. Furthermore, the policy
is shared with each of the Company's main service providers.
Whistle-blowing
As the Company has no employees of its own, it does not have a whistle-blowing
policy but in its review of service providers the Management Engagement
Committee ensures that they do.
Employees and Socially Responsible Investment
The Company has a management contract with the Investment Manager. It has no
employees and all of its Directors are non-executive, with day-to-day
activities being carried out by third parties. There are therefore no
disclosures to be made in respect of employees.
The Company's main activities are carried out by the Investment Manager who
was one of the initial signatories to the Standards Board for Alternative
Investments (formerly known as the Hedge Fund Standards Board) and is a
signatory to the United Nations-supported Principles for Responsible
Investment ("PRI").
Modern Slavery Act 2015
The Company as a Guernsey incorporated entity is not within scope of the
Modern Slavery Act 2015, and is therefore not obliged to make a human
trafficking statement.
Gender Metrics
The Company, in conjunction with the Investment Manager, strive to achieve a
diverse workforce that embraces individuals of all gender, race, nationality,
religion, age and orientation and to develop a unique workplace to come
together and grow professionally and personally. Cheyne's Diversity, Equality
& Inclusion Committee empowers employee engagement, transparency and
collaboration, ensuring that each colleague feels valued for the unique
contributions and insights they bring.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify the principal risks
that could affect the Company, including those that would threaten its
business model, future performance, solvency or liquidity. It has adopted a
controls-based approach to its risk monitoring requiring each of the relevant
service providers, including the Investment Manager, to establish the
necessary controls to ensure that all known risks are monitored and controlled
in accordance with agreed procedures. The Directors receive periodic updates
at their Board meetings on key risks and have adopted their own control review
to ensure where possible, risks are monitored appropriately.
Each Director is aware of the principal risks and uncertainties inherent in
the Company's business and understands the importance of identifying,
evaluating and monitoring these risks. The Board has adopted procedures and
controls that enable it to manage these principal risks and uncertainties
within acceptable limits and to meet all of its legal and regulatory
obligations.
The Board considers the process for identifying, evaluating and managing these
principal risks and uncertainties faced by the Company on an ongoing basis and
these principal risks and uncertainties are reported and discussed at Board
meetings. It ensures that effective controls are in place to mitigate these
risks and that a satisfactory compliance regime exists to ensure all
applicable local and international laws and regulations are upheld.
The Company's principal risks are discussed in the Strategic Report of these
financial statements and in the Company's Prospectus, available on the
Company's website (www.realestatecreditinvestments.com) while those
specifically relating to financial re-porting are discussed in the Audit and
Risk Committee Report and Note 14 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation as it impacts the
Company and its policies.
Stakeholders Engagement Section 172 Statement
The Board is committed to promoting the long-term success of the Company
whilst conducting business in a fair, ethical and transparent manner. Whilst
directly applicable only to companies incorporated in the UK, the Board
recognises the intention of the AIC Code that matters set out in section 172
of the Companies Act 2006 are reported on. The Board strives to understand the
views of the Company's key stakeholders and to take these into consideration
as part of its discussions and decision‑making process. As an investment
company, the Company does not have any employees and conducts its core
activities through third-party service providers. Each provider has an
established track record and through regulatory oversight is required to have
in place suitable policies and procedures to ensure they maintain high
standards of business conduct, treat their own stakeholders fairly, and employ
corporate governance best practice. The Company strongly believes that
fostering healthy and constructive relationships with its broad range of
stakeholders should result in increased Shareholder value over the long term.
Key stakeholder groups over the last year:
· Shareholders: Institutional and Retail shareholders;
· Commercial service providers: Investment Manager, Administration
agent, Corporate broker, Legal advisers, Auditor; and
· Key service providers retained, providing continuity of service and
familiarity with the objectives of the Company.
How RECI has communicated and engaged:
· Annual General Meeting;
· Regular market announcements;
· Investor communications including monthly factsheets and quarterly
updates;
· Dedicated and upgraded RECI website;
· Investor presentations;
· Annual and interim reports;
· Views and feedback sought from institutional shareholders via
corporate broker;
· Regular Board meetings during the period attended by
representatives from the Investment Manager;
· Annual service provider questionnaire; and
· Webinars and Zoom meetings.
Key Information Document
In accordance with the EU Packaged Retail and Insurance- based Investment
Products Directive on 1 January 2018, a Key Information Document is available
on the Company's website at: https://www.realestatecreditinvestments.com.
Audit Committee Report
Dear Shareholder,
On the following pages, we present the Audit and Risk Committee's report for
2022, setting out the responsibilities of the Audit and Risk Committee and its
key activities during the year ended 31 March 2022. As in previous years, the
Audit and Risk Committee has reviewed the Company's financial reporting, the
independence and effectiveness of the external auditor and the internal
control and risk management systems of the Company's service providers. In
order to assist the Audit and Risk Committee in discharging these
responsibilities, regular reports are received and reviewed from the
Investment Manager, Administrator and external auditor.
A member of the Audit and Risk Committee will be available at each AGM to
respond to any Shareholder questions on the activities of the Audit and Risk
Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
Membership of the Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon, and its other members
are Mr Cowdell, Mr Hallam and Mrs McHugh. The FRC Guidance on Audit and Risk
Committees recommends that such a committee should comprise solely of
independent non-executive directors and, as noted in the Corporate Governance
Statement, the Board has considered the independence of its members and has
concluded that they all remain independent. The Company Chairman currently
serves as a member of the Audit and Risk Committee. The terms of reference
state that the Audit and Risk Committee will meet not less than three times in
the year and meet the external auditor twice a year, on which occasions the
need to meet without representatives of either the Investment Manager or the
Administrator being present is considered. The terms of reference include all
matters indicated in the Disclosure and Transparency Rule 7.1 and the AIC
Code.
The Board has taken note of the requirement that at least one member of the
Committee should have recent and relevant financial experience and is
satisfied that the Committee is properly constituted in that respect, with all
members being highly experienced and Mrs Farnon and Mr Hallam being chartered
accountants who also sit or have sat on other audit committees.
Responsibilities
The Audit and Risk Committee has regard to the AIC Code and examines the
effectiveness of the Company's internal control systems, the integrity of the
annual and half-yearly reports and financial statements and ensures that they
are fair, balanced and understandable and provide the necessary information.
They also consider the auditor's remuneration and engagement, as well as the
auditor's independence and any non-audit services provided by them. Other
areas of responsibility include:
· Consideration of the fair value of the Company's investments and
income generated from the portfolio;
· Consideration of the accounting policies of the Company;
· Meeting with the external auditor to discuss the proposed audit
plan and reporting;
· Assess the effectiveness of the external auditor and audit process;
· Consideration of the need for an internal audit function;
· Review of any independent reports in respect of the Investment
Manager, the Administrator or the Depositary;
· Consideration of the risks facing the Company including the
Company's anti-bribery, corruption and similar obligations; and
· Monitoring the Company's procedures for ensuring compliance with
statutory regulations and other reporting requirements.
In addressing all of the above considerations, the Audit and Risk Committee
seeks the appropriate input from the external auditor, Investment Manager,
Administrator, Company Secretary and Legal Counsel and makes a recommendation
to the Board of the Company as appropriate.
Meetings
The Audit and Risk Committee normally meets at least three times annually,
including shortly before the Board meets to consider the Company's half-yearly
and annual financial reports, and reports to the Board on its deliberations
and recommendations. It also has an annual planning meeting with the auditor
and other ad-hoc meetings as considered necessary. During the past year
Covid-19 restrictions have meant that not all such meetings could be held in
person and some were held by video and telephone conference as circumstances
required.
The Audit and Risk Committee operates within clearly defined terms of
reference and provides a forum through which the Company's external auditor
reports to the Board. The terms of reference of the Audit and Risk Committee
are available from the Company's registered office. The Audit and Risk
Committee receives information from the Company's service providers with the
majority of information being directly sourced from the Company Secretary,
Administrator, the Investment Manager and the external auditor. The Audit and
Risk Committee considers the nature, scope and results of the auditor's work
and reviews their performance annually prior to providing a recommendation to
the Board on the reappointment or removal of the auditor.
Significant Issues Considered over Financial Reporting
The Audit and Risk Committee has determined that the key risks of misstatement
of the Company's financial statements relate to the judgements in respect of
the fair value of the Company's portfolio and income recognition.
Additional information regarding principal risks and uncertainties is provided
in the Strategic Report and in Note 14 to the financial statements.
The Board considers a report from the Investment Manager at each Board meeting
which sets out a review of the portfolio and its performance. The report also
details earnings forecasts and asset class analysis. As a result, the Board is
able to interrogate the Investment Manager on the basis of the assumptions
made and the validity of the expected forecasts.
Valuation of Portfolios
The Audit and Risk Committee conducted a detailed review of each loan position
through discussions with the AIFM's relevant individual asset managers
challenging them as appropriate. Such discussions covered aspects such as:
· Available and recent professional valuations of the underlying
collateral;
· Credit quality of the individual borrower;
· Quality of the underlying collateral;
· Operational and financial performance of the borrower;
· Status of development schedules compared to original plans;
· Planning or other disputes;
· Comparison between effective and actual yields; and
· Whether or not any value should be ascribed to contingent fees and
potential profit participations provided for in contractual arrangements.
When considering the self-originated bonds investments the Audit and Risk
Committee considered a number of factors including, but not restricted to:
· Pricing sources;
· The valuation approach used to value certain bonds by the
independent pricing adviser and challenging the AIFM's assessment of the
comparable securities and sector analysis used in determining the valuation of
these bonds;
· The range of valuations determined by the independent pricing
adviser in light of the approaches used and the weighting applied by the
Investment Manager to derive a fair value point estimate;
· Comparison between effective and actual yields;
· Depth of prices and any disparity between different marks;
· Indicative liquidity;
· Comparison of realised prices with previous valuations; and
· The significance of unobservable inputs used to determine the fair
value of the bond investments and classification within the fair value
hierarchy.
Having conducted this process the Audit and Risk Committee concluded that any
assumptions used were reasonable and that the valuations were in accordance
with the applicable standards.
During the year, the Chairman of the Audit and Risk Committee and/or other
members of the Board attended at least two of the meetings held between the
auditor and the Investment Manager.
Income Recognition
The Audit and Risk Committee and the Board as a whole considered and
challenged the Investment Manager's expected realisation or maturity dates and
the resultant expected cash flows. The Committee found that the assumptions
used were reasonable and that whilst it is possible that the expected
realisation dates may change over time, the Committee and the Board are
satisfied that the assumed realisation dates and the Investment Manager's
methods of calculating income are reasonable and in line with International
Financial Reporting Standards ("IFRS").
Risk Management
The Company's risk assessment process and the way in which significant
business risks are managed is a key area of focus for the Committee. The work
of the Audit and Risk Committee is driven primarily by the Company's
assessment of its principal risks and uncertainties as set out in the
Strategic Report and in Note 14 to the financial statements, and it receives
reports from the Investment Manager on the Company's risk evaluation process
and reviews changes to significant risks identified.
Internal Audit
The Committee considers at least once a year whether or not there is a need
for an internal audit function. Currently, the Committee believes that, given
the Company has no employees, the SOC 1 internal control report provided by
the Administrator and the reporting provided by the Investment Manager are
sufficient and has made a recommendation to the Board to this effect.
External Audit
Deloitte LLP has been the Company's external auditor since the Company's
inception. The Company undertook a competitive tender process during Autumn
2018 and Deloitte was reappointed.
The objectivity of the auditor is reviewed by the Committee which also reviews
the terms under which the external auditor may be appointed to perform
non-audit services. Auditor independence is maintained through limiting
non-audit services to audit-related work that falls within defined categories.
All engagements with the auditor are subject to pre-approval from the Audit
and Risk Committee and fully disclosed within the Annual Report for the
relevant period. A new lead audit partner is appointed every five years and
the Audit and Risk Committee ensures the auditor has appropriate internal
mechanisms in place to ensure its independence.
When evaluating the external auditor, the Committee has regard to a variety of
criteria including industry experience, independence, reasonableness of audit
plan, ability to deliver constructive criticism, effectiveness of
communication with the Board and the Company's service providers, quality
control procedures, management of audit process, price and added value beyond
assurance in audit opinion.
In order to maintain auditor independence, Deloitte LLP ensured the following
safeguards were in place:
· review and challenge of key decisions by the Quality Review Partner
and engagement quality control review by a member of the Independent
Professional Standard Review Team.
John Clacy replaced David Becker as audit partner from the year ended 31 March
2021. He also served as the audit partner for the years ended 31 March 2011 to
31 March 2015. The Audit and Risk Committee has considered this in light of
guidance and the changes to the business since this time, and as such, they
are satisfied that his independence is not impaired.
The Committee reviews the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the auditor, with
particular regard to the level of non-audit fees. During the year, Deloitte
charged non-audit fees of £37,500 for the 30 September 2021 interim review.
Notwithstanding the provisions of such services, the Audit and Risk Committee
considers Deloitte LLP to be independent of the Company and that the provision
of such non-audit services is not a threat to the objectivity and independence
of the conduct of the audit as appropriate safeguards are in place.
To fulfil its responsibility regarding the independence of the auditor, the
Audit and Risk Committee considers:
· discussions with or reports from the auditor describing its
arrangements to identify, report and manage any conflicts of interests in
light of the requirements of the Crown Dependencies' Audit Rules and Guidance;
and
· the extent of non-audit services provided by the auditor and
arrangements for ensuring the independence, objectivity and robustness and
perceptiveness of the auditor and their handling of key accounting and audit
judgements.
To assess the effectiveness of the auditor and the audit process, the
Committee reviews:
· the auditor's fulfilment of the agreed audit plan and variations
from it;
· discussions or reports highlighting the major issues that arose
during the course of the audit;
· feedback from other service providers evaluating the performance of
the audit team;
· arrangements for ensuring independence and objectivity; and
· robustness of the auditor in handling key accounting and audit
judgements.
The Audit and Risk Committee was satisfied with the audit process and Deloitte
LLP's effectiveness and independence as an Auditor having considered the
degree of diligence and professional scepticism demonstrated by them.
During the year ended 31 March 2022, the auditor had three meetings with the
Audit and Risk Committee and with the Chairman of the Audit and Risk Committee
on other occasions when necessary.
On behalf of the Audit and Risk Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
23 June 2022
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
The Companies (Guernsey) Law, 2008 requires the Directors to prepare financial
statements for each financial year. Under that law, the Directors have elected
to prepare the Company financial statements in accordance with IFRS. Under
company law, the Directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that year. In preparing
these financial statements, International Accounting Standard 1 ("IAS 1")
requires that Directors:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRS are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity's
financial position and financial performance; and
· make an assessment of the Company's ability to continue as a going
concern.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
(i) The financial statements, prepared in accordance with IFRS, give a
true and fair view of the assets, liabilities, financial position and profit
or loss of the Company;
(ii) The Chairman's Statement, the Strategic Report and the Investment
Manager's Report include a fair review of the development and performance of
the business and the position of the Company together with a description of
the principal risks and uncertainties they face; and
(iii) So far as each Director is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps that he/she ought to have taken as a Director in order to
make himself/herself aware of any relevant audit information and to establish
that the Company's auditor is aware of that information. This confirmation is
given and should be interpreted in accordance with the provisions of section
249 of the Companies (Guernsey) Law, 2008 (as amended).
Responsibility Statement of the Directors in Respect of the Annual Report
under the UK Corporate Governance Code
The Directors are responsible for preparing the Annual Report in accordance
with applicable law and regulations. Having taken advice from the Audit and
Risk Committee, the Directors consider the Annual Report and financial
statements, taken as a whole, as fair, balanced and understandable and that it
provides the information necessary for Shareholders to assess the Company's
performance, business model and strategy.
By order of the Board.
Bob Cowdell Susie
Farnon
Director
Director
23 June 2022
Financial
Statements
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF REAL ESTATE CREDIT INVESTMENTS
LIMITED
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Real Estate Credit Investments
Limited (the "Company"):
· give a true and fair view of the state of the Company's affairs as
at 31 March 2022 and of its profit for the year then ended;
· have been properly prepared in accordance with International
Financial Reporting Standards ("IFRSs") as issued by the International
Accounting Standards Board (IASB); and
· have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
· the statement of comprehensive income;
· the statement of financial position;
· the statement of changes in equity;
· the statement of cash flows; and
· the related notes 1 to 21.
The financial reporting framework that has been applied in their preparation
is applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the auditor's responsibilities for the
audit of the financial statements section of our report.
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the UK,
including the Financial Reporting Council's (the "FRC's") Ethical Standard as
applied to listed public interest entities, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. The non-audit
services provided to the Company for the year are disclosed in note 5 to the
financial statements. We confirm that we have not provided any non-audit
services prohibited by the FRC's Ethical Standard to the Company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
· Key inputs to the valuation of self-originated bond investments;
and
· Valuation of self-originated loan investments.
Within this report, key audit matters are identified as follows:
· Newly identified
· Increased level of risk
· Similar level of risk
· Decreased level of risk
Materiality
The materiality that we used in the current year was £6.9 million which was
determined on the basis of approximately 2%
of net assets of the Company.
Scoping
Audit work to respond to the risks of material misstatement was performed
directly by the audit engagement team.
Significant changes in our approach
There have been no significant changes in our audit approach.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors'
use of the going concern basis of accounting
in the preparation of the financial statements is appropriate.
Our evaluation of the Directors' assessment of the Company's ability to
continue to adopt the going concern basis of
accounting included:
· Evaluating management's going concern paper, identifying the
assumptions applied in the going concern assessment and testing the mechanical
accuracy of the underlying forecasts;
· Performing sensitivity analysis on the key assumptions applied to
understand those that could potentially give rise to a material uncertainty in
respect of the use of the going concern basis;
· Checking consistency of the forecast assumptions applied in the
going concern assessment with other forecasts, including asset maturity and
valuation assumptions;
· Assessing the liquidity position of the Company by evaluating the
impact of repayment of the Company's financing agreements at maturity without
renewal, and considered the mitigating actions identified by the Directors as
available responses to liquidity risks.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Company's ability to continue
as a going concern for a period of
at least twelve months from when the financial statements are authorised for
issue.
In relation to the reporting on how the Company has applied the UK Corporate
Governance Code, we have nothing material
to add or draw attention to in relation to the Directors' statement in the
financial statements about whether the Directors considered it appropriate to
adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to
going concern are described in the relevant sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters
included those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
5.1. Key inputs to the valuation of self-originated bond investments
Key audit matter description Self-originated bond investments of £186.0 million (2021: £173.9 million)
make up 42% (2021: 41%) of total assets and are a key value driver for the
Company's Net Asset Value (NAV) and interest income.
The primary pricing source for the self-originated bonds is from an
independent pricing provider (IHS Markit Private Team). The IHS Markit Private
Team values the bonds using a market-based valuation methodology, which
involves material assumptions relating to comparable observable bond prices
and yields. In addition, IHS Markit Private Team determine a valuation based
on internal proprietary sector curves ("the Sector Curve Price").
The key inputs to valuation of the bond investments are therefore:
· The pricing of self-originated bonds by the IHS Markit Private
Team, including the comparable bonds selected to determine the yield to
maturity of the self-originated bonds and the proprietary sector curves; and
· The use and application of the mid-point of those pricing sources
to the self-originated
bond portfolio.
This has contributed to a risk of fraud and error associated with the
valuation approach applied, whether this is acceptable or consistent with IFRS
13 Fair value measurement, and that inappropriate inputs have been used
leading to a material misstatement of fair value.
There is also a risk that there are significant unobservable inputs used to
determine the fair value of the self-originated bonds at the balance sheet
date to the extent that these inputs will impact the classification in the
Fair Value Hierarchy under IFRS 13.
The accounting policies related to this key audit matter can be found in note
2 to the financial statements, with the valuation described as one of the key
sources of estimation uncertainty in note 3 and 15 to the financial
statements. This is further described in the Audit and Risk Committee Report
on pages 46-48.
5.1. Key inputs to the valuation of self-originated bond investments
How the scope of our audit responded to the key audit matter To respond to the key audit matter, we have performed the following audit
procedures:
· Obtained an understanding of relevant controls in relation to the
valuation process;
· Assessed the Company's processes for challenging the reliability of
the independent prices through discussions with management and inquiries with
the IHS Markit Private Team;
· Inspected the 31 March 2022, and post year end, bond surveillance
reports to identify any evidence of fair value changes including whether the
bonds are not performing, any delinquency in contractual payments or signs of
financial distress by the borrower;
· With the involvement of our valuation specialists, we:
- Evaluated the competence, capabilities and objectivity of IHS Markit
Private Team;
- Assessed the Investment Manager's and IHS Markit Private Team's
approach to the valuation of the bonds against accepted market practices;
- Challenged the valuation methodology used by MarkIT Private Team and
the weighting applied
- by management to the Comparable Debt Price and the Sector Curve
Price; and
- Re-performed the valuation analysis to determine the bond prices and
assessed the
- appropriateness and consistency of the comparables used by the IHS
Markit Private Team.
· On a sample basis, performed sensitivity analysis on the yield to
maturity and sector curve discount yields, including weighting of pricing
sources applied by management;
· Challenged management's judgement over the classification of the
bonds in the Fair Value Hierarchy under IFRS 13 by assessing the significance
of observable and unobservable inputs used to determine fair value; and
· Performed back testing by agreeing proceeds received from the sale
of bonds, if any, both during the year and subsequent to 31 March 2022,
against their fair value prior to the sale.
Key observations We concluded that the assumptions applied by management, in arriving at the
fair value of the Company's self-originated bond investments were reasonable,
and that the resulting valuations are appropriately stated.
5.2. Valuation of self-originated loan investments
Key audit matter description Loan investments of £109.8 million (2021: £136.1 million) make up 25% (2021:
32%) of total assets and are a key value driver for the Company's Net Asset
Value (NAV) and interest income.
There is a risk of fraud and error associated with the incorrect recognition
and measurement criteria applied to loan investments through potentially
complex structures or agreements. Any material changes in the estimated
performance of a loan (including return on collateral, timing of exit and
related cash flows) or lending and real estate market movements could have a
significant impact on the fair value.
Judgements over the credit quality of the borrower and underlying collateral
along with the valuation of equity participation positions in certain loans,
which impact fair value estimates, could significantly affect key performance
indicators and the fair value of loan investments where applicable. The
investment manager prepares cash flow models and documents judgements in
relation to estimated performance of the loans within 'Loan Surveillance
Reports'. These are presented to the Board when determining fair value of the
loan portfolio.
The accounting policies related to this key audit matter can be found in note
2 to the financial statements, with the valuation described as one of the key
sources of estimation uncertainty in note 3 and 15 to the financial
statements. This is further described in the Audit and Risk Committee Report
on pages 46-48.
How the scope of our audit responded to the key audit matter To respond to the key audit matter, we have performed the following audit
procedures:
· Obtained an understanding of relevant controls in relation to the
valuation process;
· Assessed the 31 March 2022 Loan Surveillance Reports to identify
any evidence of fair value changes including whether the loans are not
performing, any covenant breaches, delinquency in contractual payments or
signs of financial distress by the borrower;
· Attended valuation calls with the investment manager to discuss and
assessed the performance of the loan portfolio, significant assumptions made
and the valuation of the underlying collateral;
· Where actual fair value changes have been identified, we will
challenge the assumptions made by the investment manager in respect of the
valuation of the loans in light of available evidence and underlying
collateral;
· Performed back testing by agreeing proceeds received from loan
repayments, both during the year and subsequent to 31 March 2022, against
their fair value prior to the repayment;
· Challenged Company's assessment of any equity uplifts with
reference to the valuation and performance of underlying collateral;
· Evaluated the developments in the lending and relevant real estate
markets at a macro level to assess changes in lending rates and potential
changes in collateral values; and
· Evaluated the assumptions made by the investment manager in
assessing whether the loans are properly valued at 31 March 2022, where
indicators of fair value change have been identified.
Key observations We concluded that the assumptions applied by management, in arriving at the
fair value of the Company's loan investments were reasonable, and that the
resulting valuations are appropriately stated.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both
in planning the scope of our audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Materiality £6.9 million (2021: £6.9 million)
Basis for determining materiality 2% (2021: 2%) of Net Asset Value
Rationale for the benchmark applied We believe Net Asset Value is the most appropriate benchmark as it is
considered one of the principal considerations for members of the Company in
assessing financial performance and represents total Shareholders' interest.
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements
exceed the materiality for the financial statements as a whole. Performance
materiality was set at 70% of materiality for the 2022 audit (2021: 70%). In
determining performance materiality, we considered the following factors:
· our risk assessment, including our assessment of the Company's
overall control environment, including that of the administrator;
· our past experience of the audit, which has indicated a low number
of corrected and uncorrected misstatements identified
in prior periods.
6.3. Error reporting threshold
We agreed with the Audit and Risk Committee that we would report to the
Committee all audit differences in excess of £343,000 (2021: £346,000), as
well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds. We also report to the Audit and Risk
Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Company and its
environment, including internal control, and assessing the risks of material
misstatement. Audit work to respond to the risks of material misstatement was
performed directly by the audit engagement team.
7.2. Our consideration of the control environment
The accounting function for the Company is provided by a third-party
administrator. In performing our audit, we obtained
an understanding of relevant controls at the administrator that are relevant
to the business processes of the Company.
7.3. Our consideration of climate-related risks
In planning our audit, we have considered the potential impact of climate
change on the Company's business and its financial statements.
The Company continues to develop its assessment of the potential impacts of
environmental, social and governance ("ESG") related risks, including climate
change, as outlined on page 26.
We performed our own qualitative risk assessment of the potential impact of
climate change on the Company's account balances and classes of transactions.
We have also read the annual report to consider whether they are materially
consistent with the financial statements and our knowledge obtained in the
audit.
8. Other information
The other information comprises the information included in the annual report,
other than the financial statements and our auditor's report thereon. The
Directors are responsible for the other information contained within the
Annual Report.
Our opinion on the financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or otherwise
appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives rise to a
material misstatement in the financial statements themselves. If, based on the
work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors' responsibilities statement, the
Directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the Directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the Company or
to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of
irregularities, including fraud and non-compliance with laws and regulations,
we considered the following:
· the nature of the industry and sector, control environment and
business performance including the design of the Company's remuneration
policies, key drivers for the Investment Manager and Directors' remuneration,
and performance targets;
· the Company's own assessment of the risks that irregularities may
occur either as a result of fraud or error that was approved by the Board on
17 February 2022;
· results of our enquiries of management and the Audit and Risk
Committee about their own identification and assessment of the risks of
irregularities;
· any matters we identified having obtained and reviewed the
Company's documentation of their policies and procedures relating to:
- identifying, evaluating and complying with laws and regulations and
whether they were aware of any instances
of non-compliance;
- detecting and responding to the risks of fraud and whether they have
knowledge of any actual, suspected or alleged fraud;
- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
· the matters discussed among the audit engagement team and relevant
internal specialists, including tax, valuations
and industry specialists regarding how and where fraud might occur in the
financial statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and
incentives that may exist within the organisation for fraud and identified the
greatest potential for fraud in the following areas:
· Key inputs to the valuation of self-originated bond investments;
and
· Valuation of self-originated loan investments.
In common with all audits under ISAs (UK), we are also required to perform
specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that
the Company operates in, focusing on provisions of those laws and regulations
that had a direct effect on the determination of material amounts and
disclosures in the financial statements. The key laws and regulations we
considered in this context included the Companies (Guernsey) Law, 2008, the
Listing Rules and relevant tax legislation.
In addition, we considered provisions of other laws and regulations that do
not have a direct effect on the financial statements but compliance with which
may be fundamental to the Company's ability to operate or to avoid a material
penalty. These included the Company's regulatory licences under The Protection
of Investors (Bailiwick of Guernsey) Law, 2020.
11.2. Audit response to risks identified
As a result of performing the above, we identified key inputs to the valuation
of self-originated bond investments and valuation of self-originated loan
investments as key audit matters related to the potential risk of fraud. The
key audit matters section of our report explains the matters in more detail
and also describes the specific procedures we performed in response to those
key audit matters.
In addition to the above, our procedures to respond to risks identified
included the following:
· reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of relevant laws
and regulations described as having a direct effect on the financial
statements;
· enquiring of management and the Audit and Risk Committee concerning
actual and potential litigation and claims;
· performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material misstatement due
to fraud;
· reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence with the
Guernsey Financial Services Commission; and
· in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting
estimates are indicative of a potential bias; and evaluating the business
rationale of any significant transactions that are unusual or outside the
normal course of business.
We also communicated relevant identified laws and regulations and potential
fraud risks to all engagement team members including internal specialists, and
remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
12. Corporate Governance Statement
The Listing Rules require us to review the Directors' statement in relation to
going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the Company's compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements and our knowledge obtained during the
audit:
· the Directors' statement with regards to the appropriateness of
adopting the going concern basis of accounting and any material uncertainties
identified set out on pages 37-38;
· the Directors' explanation as to its assessment of the Company's
prospects, the period this assessment covers and why the period is appropriate
set out on page 17;
· the Directors' statement on fair, balanced and understandable set
out on page 49;
· the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks set out on page 44;
· the section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems set out on page
43; and
· the section describing the work of the Audit and Risk Committee set
out on pages 46-48.
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting records
Under the Companies (Guernsey) Law, 2008 we are required to report to you if,
in our opinion:
· we have not received all the information and explanations we
require for our audit; or
· proper accounting records have not been kept; or
· the financial statements are not in agreement with the accounting
records.
We have nothing to report in respect of these matters.
14. Other matters which we are required to address
14.1. Auditor tenure
Following the recommendation of the Audit and Risk Committee as a result of
the most recent tender process, we were appointed by the Board of Directors on
13 June 2018 to audit the financial statements for the year ending 31 March
2019 and subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the firm is 17
years, covering the years ending 31 March 2006 to 31 March 2022.
14.2. Consistency of the audit report with the additional report to the Audit
Committee
Our audit opinion is consistent with the additional report to the Audit and
Risk Committee we are required to provide in accordance with ISAs (UK).
15. Use of our report
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has
been undertaken so that we might state to the Company's members those matters
we are required to state to them in an auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members as a
body, for our audit work, for this report, or for the opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and
Transparency Rule (DTR) 4.1.14R, these financial statements form part of the
European Single Electronic Format (ESEF) prepared Annual Financial Report
filed on the National Storage Mechanism of the UK FCA in accordance with the
ESEF Regulatory Technical Standard ('ESEF RTS'). This auditor's report
provides no assurance over whether the annual financial report has been
prepared using the single electronic format specified in the ESEF RTS.
John Clacy, FCA
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
23 June 2022
Statement of Comprehensive Income
For the year ended 31 March 2022
Note 31 Mar 2022 31 Mar 2021
GBP
GBP
Interest income 6 26,981,790 27,004,304
Net gain on financial assets and liabilities at fair value through profit or 4 5,351,474 18,185,864
loss
Other income 37,017 133,684
Operating income 32,370,281 45,323,852
Operating expenses 5 (5,841,351) (5,842,223)
Profit before finance costs 26,528,930 39,481,629
Finance costs 6 (1,954,553) (2,237,927)
Net profit 24,574,377 37,243,702
Other comprehensive income - -
Total comprehensive income 24,574,377 37,243,702
Earnings per share
Basic and diluted 8 10.7p 16.2p
Weighted average shares outstanding Number Number
Basic and diluted 8 229,332,478 229,332,478
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the financial statements.
Statement of Financial Position
As at 31 March 2022
Note(s) 31 Mar 2022 31 Mar 2021
GBP
GBP
Non-current assets
Financial assets at fair value through profit or loss* 9,14 394,341,104 390,440,886
394,341,104 390,440,886
Current assets
Cash and cash equivalents 9 47,385,138 21,220,812
Cash collateral at broker 9,16 5,204,692 943,980
Derivative financial assets 9,10 - 2,260,399
Other assets* 9 22,708 11,381,740
52,612,538 35,806,931
Total assets 446,953,642 426,247,817
Equity and liabilities
Equity
Reserves 343,935,484 346,881,003
343,935,484 346,881,003
Current liabilities
Financing agreements 9,12 100,368,732 77,819,803
Derivative financial liabilities 9,10 1,072,792 -
Other liabilities 9,11 1,576,634 1,547,011
103,018,158 79,366,814
Total liabilities 103,018,158 79,366,814
Total equity and liabilities 446,953,642 426,247,817
Shares outstanding 13 229,332,478 229,332,478
Net asset value per share £1.50 £1.51
* The interest receivable from loans and bonds were presented as part of
financial assets at fair value through profit or loss in the current period.
The prior period was not amended. For further information, please refer to
Basis of Preparation in Note 2 of the financial statements.
The accompanying notes form an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Bob Cowdell Susie
Farnon
Director
Director
23 June 2022
Statement of Changes in Equity
For the year ended 31 March 2022
Note 31 Mar 2022 GBP
Balance as at 31 March 2021 346,881,003
Total comprehensive income 24,574,377
Dividends 7 (27,519,896)
Balance as at 31 March 2022 343,935,484
Note 31 Mar 2021 GBP
Balance as at 31 March 2020 337,157,197
Total comprehensive income 37,243,702
Dividends 7 (27,519,896)
Balance as at 31 March 2021 346,881,003
The accompanying notes form an integral part of the financial statements.
Statement of Cash Flows
For the year ended 31 March 2022
Note 31 Mar 2022 31 Mar 2021
GBP
GBP
Profit before finance costs 26,528,930 39,481,629
Net sales/(purchases) of financial assets 10,983,506 (4,234,290)
Net sales/(purchases) of derivative financial assets and liabilities 5,452,355 (3,680,177)
Movement in realised and unrealised gains on financial assets 4 (2,742,188) (11,046,019)
Movement in derivative financial assets and liabilities (2,119,166) (4,757,127)
Operating cash flows before movement in working capital 38,103,437 15,764,016
(Increase)/decrease in other assets* 11,359,032 3,259,732
Increase in other liabilities 29,624 69,224
Movement in cash collateral at/due to broker (4,260,712) 24,012,965
Movement in interest receivable* (12,141,535) -
Movement in working capital (5,013,591) 27,341,921
Net cash flow from operating activities 33,089,846 43,105,937
Financing activities
Dividends paid to Shareholders (27,519,896) (27,519,896)
Net proceeds/(repayments) under financing agreements and the related finance 20,594,376 (21,385,002)
charges
Net cash outflow from financing activities (6,925,520) (48,904,898)
Net increase/(decrease) in cash and cash equivalents 26,164,326 (5,798,961)
Cash and cash equivalents at the start of the year 21,220,812 27,019,773
Cash and cash equivalents at the end of the year 47,385,138 21,220,812
* The interest receivable from loans and bonds were presented separately
from other assets in the current period. The prior period was not amended. For
further information, please refer to Basis of Preparation in Note 2 of the
financial statements.
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 31 March 2022
1. General Information
Real Estate Credit Investments Limited ("RECI" or the "Company") was
incorporated in Guernsey, Channel Islands on 6 September 2005 with registered
number 43634. The Company commenced its operations on 8 December 2005.
The Company invests in real estate debt secured by commercial or residential
properties in the United Kingdom and Western Europe, focusing primarily on
those countries where it sees the changing dynamics in the real estate debt
market offering a sustainable deal flow for the foreseeable future. The
Company has adopted a long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments the Company
uses the expertise and knowledge of its Alternative Investment Fund Manager
("AIFM"), Cheyne Capital Management (UK) LLP ("Cheyne" or the "Investment
Manager").
The Company's shares are currently listed on the premium segment of the
Official List of the UK Listing Authority and trade on the Main Market of the
London Stock Exchange. The shares offer investors a levered exposure to a
portfolio of real estate credit investments and aim to pay a quarterly
dividend.
The Company's investment management activities are managed by the Investment
Manager, who is also the AIFM.
The Company has entered into an Investment Management Agreement (the
"Investment Management Agreement") under which the Investment Manager manages
its day-to-day investment operations, subject to the supervision of the
Company's Board of Directors. The Company is an Alternative Investment Fund
("AIF") within the meaning of the Alternative Investment Fund Managers
Directive ("AIFMD") and accordingly the Investment Manager has been appointed
as AIFM of the Company, which has no employees of its own. For its services,
the Investment Manager receives a monthly Management Fee, expense
reimbursements and accrues a Performance Fee (see Note 17). The Company has no
ownership interest in the Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and provides all
administration services to the Company in this capacity. The Bank of New York
Mellon (International) Limited is the Depositary and undertakes the custody of
assets. Aztec Financial Services (Guernsey) Limited is the Company Secretary.
2. Significant Accounting Policies
Statement of Compliance
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), which comprise standards
and interpretations approved by the International Accounting Standards Board
("IASB"), and International Accounting Standards and Standing Interpretations
Committee interpretations approved by the International Accounting Standards
Committee ("IASC") that remain in effect, together with applicable legal and
regulatory requirements of Guernsey Law and the Listing Rules of the UK
Listing Authority. The same accounting policies, presentation and methods of
computation have been followed in these financial statements as were applied
in the preparation of the Company's audited financial statements for the year
ended 31 March 2021.
New Standards, Amendments and Interpretations Issued and Effective for the
Financial Year Beginning 1 April 2021
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 - Interest Rate
Benchmark Reform Phase 2
On 27 August 2020, the IASB published Amendments to IFRS 9, IAS 39 and IFRS 7,
IFRS 4 and IFRS 16 - Interest Rate Benchmark Reform Phase 2. With publication
of the phase 2 amendments, the IASB has completed its work in response to IBOR
reform. The amendments provide temporary relief which address the financial
reporting effects when an IBOR is replaced with an alternative nearly
risk-free interest rate. The amendments to IFRS 9, IAS 39 IFRS 7, IFRS 4 and
IFRS 16 are effective for annual periods beginning on or after 1 January 2022.
The amendments have no material impact on the financial statements of the
Company.
New Standards, Amendments and Interpretations Issued but not Effective for the
Financial Year Beginning 1 April 2021 and not Early Adopted
Title Effective for periods beginning on or after
Amendment to IAS 37 - Onerous Contracts: Cost of fulfilling a Contract 1 January 2022
IFRS 17 - Insurance Contracts 1 January 2023
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current 1 January 2023
Amendments to IAS 8 - Definition of Accounting Estimates 1 January 2023
Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting 1 January 2023
Policies
Amendments to IAS 12 - Deferred Tax related to Assets and Liabilities arising 1 January 2023
from a Single Transaction
Amendments to IAS 37 apply a 'direct related cost approach'. The costs that
relate directly to a contract to provide goods or services include both
incremental costs and an allocation of costs directly related to contract
activities. The Company expects that the amendments will have no material
impact on the financial statements.
IFRS 17 Insurance Contracts has no material impact on the financial statements
as the Company does not have insurance contracts.
Amendments to IAS 1 affect only the presentation of liabilities in the
Statement of Financial Position and not the amount or timing of recognition of
any asset, liability income or expenses, or the information that the Company
disclose about those items.
Amendments to IAS 8 are intended to provide preparers of financial statements
with greater clarity as to the definition of accounting estimates,
particularly in terms of the difference between accounting estimates and
accounting policies. Earlier application is permitted. The Company did not
early adopt these amendments and expects that the amendments will have no
material impact on the financial statements.
Amendments to IAS 1 and IFRS Practice Statement 2 provides guidance and
examples to help entities apply materiality judgements to accounting policy
disclosures. Determining whether accounting policies are material or not
requires use of judgement. Earlier application is permitted. The Company did
not early adopt these amendments and expects that the amendments will have no
material impact on the financial statements.
Amendments to IAS 12 clarify that where payments that settle a liability are
deductible for tax purposes, it is a matter of judgement (having considered
the applicable tax law) whether such deductions are attributable for tax
purposes to the liability recognised in the financial statements (and interest
expense) or to the related asset component (and interest expense). Earlier
application is permitted. The Company did not early adopt these amendments and
expects that the amendments will have no material impact on the financial
statements.
Basis of Preparation
The financial statements of the Company are prepared under IFRS on the
historical cost or amortised cost basis except for financial assets and
liabilities classified at fair value through profit or loss which have been
measured at fair value.
During the year, the Company has corrected its presentation of the financial
assets at fair value through profit or loss. Investments at fair value through
profit or loss now includes the related interest receivable to reflect the
measurement of the Company's investments as a single unit of account, which
includes all cash flows associated with the asset. The comparative figures
have not been amended due to the materiality of the correction, having
previously been presented separately and the combined fair value included in
Note 9.
The functional and presentation currency of the Company is GBP (£), which the
Board considers best represents the economic environment in which the Company
operates.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in
preparing the financial statements as, after due consideration, they consider
that the Company has adequate resources to continue in operational existence
for a period of at least twelve months from the date of signing the audited
financial statements.
The Investment Manager performed an evaluation of each of its positions in
light of the likely long-term impact of the Covid-19 crisis on operating
models and valuations, and performed a granular analysis of the future
liquidity profile of the Company.
A detailed cash flow profile of each investment was completed, incorporating
the probability of likely delays to repayments, other stress tests (and
additional cash needs).
Taking account of the updated forecasting, the Directors consider that the
cash resources available as at 31 March 2022 of £47.4 million (31 March 2021:
£21.2 million), together with the cash collateral at broker of £5.2 million
(31 March 2021: £0.9 million), the liquidity of the market bond portfolio and
the financing available through activities such as repurchase agreements as
described in Note 12, are sufficient to cover normal operational costs and
current liabilities, including the proposed dividend, and the expected funding
of loan commitments as they fall due for a period of at least twelve months
from the date of signing the audited financial statements. The Directors note
that a key assumption adopted in the going concern analysis is that leverage
through repurchase agreements is not withdrawn. Net debt (leverage minus cash)
as at 31 March 2022 was 14.0%. The Directors consider this to have
strengthened the resilience of the Company to future market uncertainty.
Since the onset of Covid-19, the Company continues to take the following
measures:
· An initial and continuing detailed evaluation of each of its
positions in light of the various impacts of the crisis on operating models
and valuations;
· Positive engagement with all borrowers and counterparties; and
· Continued granular analysis of the future liquidity profile of the
Company.
As disclosed in Note 18, as at 31 March 2022, the Company had committed
£522.9 million (31 March 2021: £117.2 million) into bilateral loans and
bonds of which £284.4 million (31 March 2021: £43.9 million) had been
funded. The Investment Manager models these expected commitments, and only
funds if the borrowers meet specific business plan milestones, and remains
comfortable that it has sufficient liquidity over the expected funding
timeframes.
Notwithstanding the Directors' belief that this assumption remains
justifiable, the Directors have also determined a number of mitigations to
address a scenario where all outstanding repurchase agreements are required to
be settled as they fall due. Whilst there would be a number of competing
strategic factors to consider before implementation of such options, the
Directors believe that these are credible and can generate sufficient
liquidity to enable the Company to meet its obligations as they fall due. Such
strategies include further sales of assets within the bond portfolio,
cessation or delay of any future dividends and obtaining longer-term,
non-recourse financing.
In consideration of this additional stressed scenario and mitigations
identified, the Directors consider that the Company has adequate resources to
continue in operational existence for a period of at least twelve months from
the date of signing the financial statements.
In line with its Articles of Incorporation, the Company passed a resolution
for its continuation during the Annual General Meeting (AGM) held on 16
September 2021. The Directors are therefore satisfied that it is appropriate
to adopt the going concern basis of accounting in preparing these financial
statements.
Financial Assets at Fair Value Through Profit or Loss
The Company classifies its investments based on both the Company's business
model for managing those financial assets and the contractual cash flow
characteristics of the financial assets. The portfolio of financial assets is
managed and performance is evaluated on a fair value basis. The Company is
primarily focused on fair value information and uses that information to
assess the assets' performance and to make decisions. The Company has not
taken the option to irrevocably designate any equity securities at fair value
through other comprehensive income. The contractual cash flows of the
Company's debt securities are not solely principal and interest, and these
securities are neither held for the purpose of collecting contractual cash
flows nor held both for collecting contractual cash flows and for sale. The
collection of contractual cash flows is only incidental to achieving the
Company's business model's objective. Consequently, all investments are
measured at fair value through profit or loss. The gain or loss on
reassessment of fair value is recognised immediately in the Statement of
Comprehensive Income.
Following a correction of the presentation of the financial assets at fair
value through profit or loss, the interest receivable from loans and bonds
were reported as part of financial assets at fair value through profit or loss
in the current period. The prior period was not amended due to the materiality
of the correction. The related interest income and expense remained to be
included under interest income and expense accounts.
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient portfolio
management are measured at fair value through profit or loss. The gain or loss
on reassessment of fair value is recognised immediately in the Statement of
Comprehensive Income.
Financial Assets at Amortised Cost
A financial asset is measured at amortised cost if it is held within a
business model whose objective is to hold financial assets in order to collect
contractual cash flows and its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding. This includes cash and cash equivalents, cash
collateral at broker and other assets.
Financial Liabilities at Amortised Cost
Other liabilities include all other liabilities.
Initial Measurement
Financial assets and liabilities at fair value through profit or loss are
measured initially at fair value, with transaction costs for such financial
assets and liabilities being recognised directly in the Statement of
Comprehensive Income.
Financial assets and liabilities at amortised cost are measured initially at
their fair value plus any directly attributable incremental costs of
acquisition or issue.
Purchases and sales of financial assets and liabilities at fair value through
profit or loss are accounted for at trade date. Realised gain/(loss) on
disposals of financial assets and liabilities is calculated using the
first-in, first-out ("FIFO") method.
Subsequent Measurement
After initial measurement, the Company measures financial assets and
liabilities which are classified as at fair value through profit or loss, at
fair value.
After initial measurement, the Company measures financial assets and
liabilities which are classified as at amortised cost, at amortised cost using
effective interest method.
Recognition
All regular way purchases and sales of financial assets or liabilities are
recognised on the trade date, which is the date on which the Company commits
to purchase or sell the financial assets or liabilities. Regular way purchases
or sales are purchases or sales of financial assets or liabilities that
require delivery of assets within the period generally established by
regulation or convention in the market place.
Derecognition
The Company derecognises a financial asset when the contractual rights to the
cash flows from the financial asset expire or it transfers the financial asset
and the transfer qualifies for derecognition in accordance with IFRS 9.
The Company derecognises a financial liability when the obligation specified
in the contract is discharged, cancelled or has expired.
Cash and Cash Equivalents
Cash and cash equivalents includes amounts held in interest bearing accounts
and overdraft facilities with original maturities of less than three months.
Derivative Financial Instruments
Derivative financial instruments used by the Company to manage its exposure to
foreign exchange and interest rate risks arising from operational, financing
and investment activities that do not qualify for hedge accounting are
accounted for as financial assets or liabilities at fair value through profit
or loss.
Subsequent to initial recognition, derivative financial instruments are stated
at fair value. The gain or loss on reassessment of fair value is recognised
immediately in the Statement of Comprehensive Income.
The fair value of an open forward foreign currency exchange contract is
calculated as the difference between the contracted rate and the current
forward rate that would close out the contract on the reporting date. The
change in value is recorded in net gains on financial assets and liabilities
through profit or loss in the Statement of Comprehensive Income. Realised
gains and losses are recognised on the maturity of a contract, or when the
contract is closed out and they are transferred to realised gains or losses in
the Statement of Comprehensive Income.
Fair Value
All financial assets carried at fair value are initially recognised at fair
value which is equivalent to cost and subsequently re-measured at fair value.
If independent prices are unavailable, the fair value of the financial asset
is estimated by reference to market information which includes, but is not
limited to, broker marks, prices of comparable assets and using pricing models
incorporating discounted cash flow techniques and valuation techniques such as
modelling.
These pricing models apply assumptions regarding asset specific factors and
economic conditions generally, including delinquency rates, severity rates,
prepayment rates, default rates, maturity profiles, interest rates and other
factors that may be relevant to each financial asset.
The objective of a fair value measurement is to determine the price at which
an orderly transaction would take place between market participants on the
measurement date; rather than the price arrived at in a forced liquidation or
distressed sale. Where the Company has considered all available information
and there is evidence that the transaction was forced, it will not use such a
transaction price as being determinative of fair value.
Note 3 provides specific information regarding the determination of fair value
for the Company's bonds and loans.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount is reported
within assets and liabilities when there is a legally enforceable right to set
off the recognised amounts and there is an intention to settle on a net basis,
or realise the asset and settle the liability simultaneously.
Expenses Attributable to Any Issue of Shares
The expenses of the Company attributable to any issue of shares are those
which are necessary to implement such an issue including registration, listing
and admission fees, corporate finance fees, printing, advertising and
distribution costs, legal fees and other applicable expenses. They are
recognised as incurred and are included as a reduction to Reserves in the
Statement of Changes in Equity.
Foreign Currency Transactions
Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the Statement of Financial Position date
are translated to GBP at the foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are recognised in gains
and losses on financial assets and liabilities at fair value through profit or
loss in the Statement of Comprehensive Income. Foreign currency denominated
non-monetary assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate at the date
of transaction.
Non-monetary assets and liabilities denominated in foreign currencies that are
stated at fair value are translated to GBP at foreign exchange rates ruling at
the reporting date. Differences arising on translation of these non-monetary
assets and liabilities between valuation points are recognised in the
Statement of Comprehensive Income.
Interest Income
Interest income is accrued based on the expected realisation date of the
investments using the effective interest method as defined under IFRS 9. Where
the Company adjusts its expected cash flow projections to take account of any
change in underlying assumptions, such adjustments are recognised in interest
income in the Statement of Comprehensive Income by reflecting changes in the
fair value of the investment calculated using the original effective interest
rate and applying the original effective interest rate to this revised value
for the purposes of calculating future income.
Expenses
All expenses are included in the Statement of Comprehensive Income on an
accrual basis.
Taxation
The Company is a tax-exempt Guernsey limited company and accordingly, no
provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short-term in nature and
are accordingly stated at their nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the substance of
the underlying contractual arrangements. An equity instrument is any contract
that evidences a residual interest in the assets of the Company after
deducting all of its liabilities.
Financial liabilities and equity are initially recorded at the proceeds
received, net of issue costs and subsequently at amortised cost. The shares
have been classified as equity.
Other Liabilities
Other liabilities are not interest-bearing and are stated at their accrued
value.
Segment Information
The Company has two reportable segments, being the Bilateral Loan and Bond
Portfolio and the Market Bond Portfolio. The real estate debt investment
strategy of the Company focuses on secured commercial and residential debt in
the United Kingdom and Western Europe. Each segment engages in separate
business activities and the results of each segment are regularly reviewed by
the Board of Directors which fulfils the role of Chief Operating Decision
Maker for performance assessment purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of efficient
portfolio management. There are no material revenues arising from the use of
repurchase agreements and transaction costs are embedded in the price of the
investments and are not separately identifiable. Securities purchased under
agreements to resell are valued at fair value and adjusted for any movements
in foreign exchange rates. Interest rates vary for each repurchase agreement
and are set at the initiation of each agreement. It is the lender's policy to
take custody of securities purchased under repurchase agreements and to value
the securities on a daily basis to protect the lender's in the event the
securities are not repurchased by the Company. The Company will generally post
additional collateral if the market value of the underlying securities decline
and are less than the face value of the repurchase agreements plus any accrued
interest. In the event of default on the obligation to repurchase, the lender
has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
counterparty to the agreement, realisation and/or retention of the collateral
or proceeds may be subject to legal proceedings.
3. Critical Accounting Judgements and Key Sources of Estimation Uncertainty
In the process of applying the Company's accounting policies (described in
Note 2), the Company has determined that the following judgements and
estimates have the most significant effect on the amounts recognised in the
financial statements:
Critical Accounting Judgements
Classification of Financial Assets at Fair Value Through Profit or Loss
As described on page 69, classification and measurement of financial assets
under IFRS 9 are driven by the entity's business model for managing financial
assets and the contractual cash flow characteristics of those financial
assets.
As further described on page 69, the contractual cash flow characteristics for
loan investments are not solely payments of principal and interest. For the
loans held via Stornoway Finance S.à r.l. and ENIV S.à r.l., the Company
receives the return for each underlying loan net of expenses and so it is not
considered to be a basic lending arrangement under the standard. As such,
these loan investments are required to be measured at fair value through
profit or loss. The loans held via ENIV S.à r.l. are listed and considered
bonds.
In making the judgement regarding Stornoway Finance S.à r.l. and ENIV S.à
r.l., the Directors have considered the power the Company has to influence the
investment decisions of the Special Purpose Vehicle housing the underlying
loans and where the Company holds the majority interest it has been determined
that the contractual cash flow characteristics for a basic lending arrangement
would be met. However, IFRS 9 also requires an assessment of the business
model within which assets are held.
In the case of the Company's loan investments the Directors have determined
that they monitor and evaluate business performance, manage risk and
compensate the investment manager based on fair value measures. The business
model is therefore not solely for holding and collecting contractual cash
flows to maturity and requires all loan investments to be measured at fair
value through profit or loss.
The Company's bond investments are classified and measured at fair value
through profit or loss in accordance with the above fact pattern.
Were it to be determined that the business model for managing financial assets
and the contractual cash flow characteristics of those financial assets were
not described above, these assets would be classified and measured at
amortised cost with provisions made for expected credits losses and changes to
expected credit losses at each reporting date.
Level Classification of Financial Assets at Fair Value Through Profit or Loss
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety. For
this purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable
inputs that require significant adjustment based on unobservable inputs, that
measurement is a Level 3 measurement. Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes "observable" requires significant
judgement by the Company. The Company considers observable data to be that
market data that is readily available, regularly distributed or updated,
reliable and verifiable, not proprietary, and provided by independent sources
that are actively involved in the relevant market.
As at 31 March 2022, the Company has determined the fair value of
self-originated bonds as described in the Key Sources of Estimation
Uncertainty section below. The Directors have considered the significance of
proprietary data used to determine the fair value of the self-originated bond
portfolio and have determined that the fair value measurement should be
classified as Level 3 in the fair value hierarchy. If observable prices from
comparable bonds were used as the sole data point to estimate fair value, this
would have produced a fair value for the self-originated bond investments of
£97.8 million (31 March 2021: £82.7 million) as at 31 March 2022.
Key Sources of Estimation Uncertainty
Valuation of Financial Assets at Fair Value Through Profit or Loss
In accordance with the Company's accounting policies, the fair value of
financial assets is based on quoted prices where such prices are available
from a third party in a liquid market.
Bonds held in the Company are valued either using independent market prices
(supplied by IHS Markit's ABS Bond and Bloomberg's BVAL pricing services) or
the Company obtains pricing reports from independent vendors for bonds where
prices are not directly observable in the market.
The vendors (IHS Markit Private Debt Team and JPM Pricing Direct) may use
publicly available prices for comparable securities as the key input to the
evaluated price of these bonds which are reviewed and corroborated by the
Investment Manager. In addition, for the self-originated bonds, IHS Markit
includes an additional valuation result based on internal proprietary sector
curves. The midpoint of the sector curve price and the comparable bonds price
is used to value the Company's self-originated bonds. As such, the sector
curve input used to determine the discount yield and the weighting of the two
techniques represent key sources of estimation uncertainty.
The Company has made loans into structures to gain exposure to real estate
secured debt in, but not limited to, the United Kingdom and Western Europe.
These loans are not traded in an active market and there are no independent
quotes available for these loans. The fair values of financial instruments
that are not traded in an active market are determined using valuation
techniques such as modelling. The fair value of these loans is linked directly
to the value of the real estate loans in the underlying structure the Company
invests in, which are determined based on modelled expected cash flows
(drawdown principal and interest repayments, and maturity dates) with
effective yields ranging from 5.1% to 13.3% (31 March 2021: 5.1% to 15.0%).
As highlighted in the long-term viability section of the Strategic Report, the
Investment Manager performed an evaluation of each of its positions in light
of the likely long-term impact of the Covid-19 crisis on operating models and
valuations. A detailed cash flow profile of each investment was completed,
incorporating the probability of likely delays to repayments, other stress
tests (and additional cash needs), these were taken into account in the
modelled expected cash flows for 31 March 2022. Adjustments in the fair value
of the real estate loans are considered in light of changes in the credit
quality of the borrower and underlying property collateral. On origination of
the loan, the Investment Manager performs due diligence on the borrower and
related security/property. This includes obtaining a valuation of the
underlying property (to assess loan-to-value of the investment). In most
instances, the terms of the loan require periodic re-valuation of the
underlying property to check against loan-to-value covenants.
The valuation policy for contingent fees and potential profit participations
provided for in contractual arrangements is to mark them at fair value, which
in most instances have been obtained for a zero or de-minimis cost, and they
are held at this value until there is sufficient evidence that the position
should be revalued.
The Company has been closely monitoring this and indeed all other material
macro sources of uncertainty related developments, such as Covid-19 and the
potential of a global recession, to ensure that these updated assumptions and
any potential impact have been reflected in the valuation of financial assets
at fair value through profit or loss as at 31 March 2022. Future valuation
might change significantly in the future.
4. Net Gains/(Losses) on Financial Assets and Liabilities at Fair Value
Through Profit or Loss
31 Mar 2022 31 Mar 2021
GBP
GBP
Net gains/(losses)
Net gains on market bonds 369,084 3,264,950
Net (losses)/gains on self-originated bonds (1,953) 7,338,230
Net gains on self-originated loans 2,375,058 442,839
Net gains on foreign exchange instruments and other foreign currency 2,609,285 7,139,845
transactions
Net gains on financial assets and liabilities at fair value through profit or 5,351,474 18,185,864
loss
5. Operating Expenses
Note 31 Mar 2022 31 Mar 2021
GBP
GBP
Investment management, administration and depositary fees
Investment management fee 17 (4,367,244) (4,280,498)
Administration fee 17 (250,286) (245,781)
Depositary fee 17 (65,969) (64,656)
(4,683,499) (4,590,935)
Other operating expenses
Legal fees (298,801) (317,011)
Directors' fees (213,625) (195,687)
Audit fees (115,250) (103,000)
Corporate secretary fees (87,761) (80,596)
Fees to auditor for non-audit services (37,500) (34,000)
Regulatory body expenses (36,266) (38,407)
Research fees (25,388) (12,371)
Other expenses (343,261) (470,216)
(1,157,852) (1,251,288)
Total operating expenses (5,841,351) (5,842,223)
The ongoing costs of the Company are shown in the Key Information Document
(KID) published on the Company's website.
The total figure of 2.36% (31 March 2021: 2.36%) is made up of the Investment
Manager's fee of 1.25% (31 March 2021: 1.25%), other ongoing costs of 0.46%
(31 March 2021: 0.46%), and finance costs (which are disclosed separately in
the financial statements) of 0.65% (31 March 2021: 0.65%). The finance costs
may vary and are only incurred to increase the overall
returns to investors.
6. Interest Income and Finance Costs
The following table details interest income and finance costs from financial
assets and liabilities for the year:
31 Mar 2022 31 Mar 2021
GBP
GBP
Interest income
Real Estate Credit Investments - market bonds 3,241,955 2,923,845
Real Estate Credit Investments - self-originated bonds 12,406,041 10,022,570
Real Estate Credit Investments - self-originated loans 11,323,731 14,051,266
Cash and cash equivalents and other receivables 10,063 6,623
Total interest income 26,981,790 27,004,304
Finance costs
Net cost of financing agreements (1,954,553) (2,237,927)
Total finance costs (1,954,553) (2,237,927)
7. Dividends
31 Mar 2022 31 Mar 2021
GBP
GBP
Share dividends
Fourth dividend for the year ended 31 March 2021/31 March 2020 6,879,974 6,879,974
First dividend for the year ended 31 March 2022/31 March 2021 6,879,974 6,879,974
Second dividend for the year ended 31 March 2022/31 March 2021 6,879,974 6,879,974
Third dividend for the year ended 31 March 2022/31 March 2021 6,879,974 6,879,974
Dividends paid to Shareholders in the year 27,519,896 27,519,896
The total dividends paid during the financial year ended 31 March 2022
amounted to 12 pence per share (31 March 2021: 12 pence per share).
Under Guernsey law, companies can pay dividends provided they satisfy the
solvency test prescribed under The Companies (Guernsey) Law, 2008 which
considers whether a company is able to pay its debts when they become due and
whether the value of a company's assets is greater than its liabilities.
The Directors considered that the Company satisfied the solvency test for each
dividend payment during the years ended 31 March 2022 and 31 March 2021.
8. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
31 Mar 2022 31 Mar 2021
Net earnings attributable to shares (GBP) 24,574,377 37,243,702
Weighted average number of shares for the purposes of basic and diluted 229,332,478 229,332,478
earnings per share
Earnings per share
Basic and diluted (pence) 10.7 16.2
9. Categories of Financial Instruments
The following table details the categories of financial assets and liabilities
held by the Company at the year end date.
31 Mar 2022 31 Mar 2021
GBP
GBP
Assets
Financial assets at fair value through profit or loss:
Real Estate Credit Investments - market bonds* 98,450,555 80,359,507
Real Estate Credit Investments - self-originated bonds* 186,047,325 173,931,664
Real Estate Credit Investments - self-originated loans* 109,843,224 136,149,715
Investments at fair value through profit or loss 394,341,104 390,440,886
Derivative financial assets:
Forward foreign exchange contracts - 2,260,399
Financial assets at amortised cost:
Cash and cash equivalents 47,385,138 21,220,812
Cash collateral at broker 5,204,692 943,980
Other assets* 22,708 11,381,740
Total assets 446,953,642 426,247,817
Liabilities
Financial liabilities at fair value through profit or loss:
Financing agreements 100,368,732 77,819,803
Derivative financial liabilities:
Forward foreign exchange contracts 1,072,792 -
Financial liabilities at amortised cost:
Other liabilities 1,576,634 1,547,011
Total liabilities 103,018,158 79,366,814
* As at 31 March 2021, the dirty fair value (financial assets at fair value
through profit or loss, plus accrued interest) of the market bond portfolio is
£80,714,401, the dirty fair value of the self-originated bond portfolio is
£175,855,550 and the dirty fair value of the self-originated loan portfolio
is £145,231,755. As at 31 March 2022, the presentation of the financial
assets at fair value through profit or loss has been corrected.
The value of the bond portfolio assets was £284.5 million as at 31 March 2022
(31 March 2021: £254.3 million, excluding accrued interest of £11.4 million;
the financing against these is shown as £100.4 million as at 31 March 2022
(31 March 2021: £77.8 million).
See Note 15 for a summary of the movement in fair value in the Company's
investments for the year.
10. Derivative Contracts
Forward Foreign Exchange Contracts:
The following forward foreign exchange contracts were open as at 31 March
2022:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised Loss
GBP
The Bank of New York Mellon 20 May 2022 GBP 161,432,186 EUR (192,000,000) (1,072,792)
Unrealised loss on forward foreign exchange contracts (1,072,792)
The following forward foreign exchange contracts were open as at 31 March
2021:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised Gain
GBP
The Bank of New York Mellon 20 May 2021 GBP 114,299,465 EUR (131,400,000) 2,260,399
Unrealised gain on forward foreign exchange contracts 2,260,399
11. Other Liabilities
31 Mar 2022 31 Mar 2021
GBP
GBP
Investment management fee payable 365,525 368,655
Interest payable 193,902 100,707
Depositary fee payable 27,086 21,000
Administration fee payable 20,892 20,865
Other expense accruals 969,229 1,035,784
Total liabilities 1,576,634 1,547,011
12. Financing Agreements
The Company enters into repurchase agreements with several banks to provide
leverage. This financing is collateralised against certain of the Company's
bond portfolio assets with a fair value totalling £212.7 million (31 March
2021: £186.1 million) and a weighted average cost of 1.2% (31 March 2021:
2.3%) per annum. The typical period to maturity of the repurchase arrangements
is 3 to 6 months (31 March 2021: 3 to 6 months).
This short-term financing is shown as a current liability in the Statement of
Financial Position whereas the collateralised assets are shown as non-current.
The movement in financing agreement and the related finance charges amounting
to £20.6 million (31 March 2021: £21.4 million) is shown as financing
activity in the Statement of Cash Flows.
During the financial year ended 31 March 2022, the Company entered into some
off-balance sheet financing agreements. These facilities do not have recourse
to the Company, and the lending is structured using off-balance entities, and
secured against the specific loans involved. The aggregate amount of these
off-balance sheet loans as at 31 March 2022 was £2.8 million (31 March 2021:
£Nil).
13. Share Capital
The issued share capital of the Company consists of shares and its capital as
at the year end is represented by the net proceeds from the issuance of shares
and profits retained up to that date. The Company does not have any externally
imposed capital requirements. As at 31 March 2022, the Company had capital of
£343.9 million (31 March 2021: £346.9 million).
31 Mar 2022 31 Mar 2021
Number of Shares
Number of Shares
Authorised Share Capital
Shares of no par value each Unlimited Unlimited
Shares issued and fully paid
Balance at the start of the year 229,332,478 229,332,478
Balance at the end of the year 229,332,478 229,332,478
The Company manages its capital to ensure that it will be able to continue as
a going concern while maximising the return to Shareholders. The Company's
overall strategy was outlined in the Prospectus which is published on the
Company's website.
The capital structure of the Company consists of the equity of the Company as
disclosed in the Statement of Changes in Equity.
14. Financial Instruments and Associated Risks
The Company's investment activities expose it to various types of risk which
are associated with the financial instruments and markets in which it invests.
The Company's risk management policies seek to minimise the potential adverse
effects of these risks on the Company's financial performance.
The financial risks to which the Company is exposed include market price risk,
interest rate risk, liquidity risk, currency risk, credit risk, prepayment and
re-investment risk. In certain instances as described more fully below, the
Company enters into derivative transactions in order to help mitigate
particular types of risk.
(a) Market Risk
Market risk is the risk that the fair value and future cash flows of a
financial instrument will fluctuate because of changes in market factors.
Market risk comprises of interest rate risk, currency risk and other price
risk.
The Company's strategy on the management of market risk is driven by the
Company's investment objectives detailed in Note 1 which in respect of the
Company is to invest primarily in debt secured by commercial or residential
properties in the United Kingdom and Western Europe.
The Company's market risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures detailed below.
The sensitivity analysis below is based on a change in one variable while
holding all other variables constant. In practice, this is unlikely to occur,
and changes in some of the assumptions may be correlated - for example, change
in foreign currency rate and change in market values. In addition, as the
sensitivity analysis uses historical data as a basis for determining future
events, it does not encompass all possible scenarios, particularly those that
are of an extreme nature.
(i) Currency Risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign exchange
rates.
The Company is exposed to currency risk to the extent that foreign exchange
rates fluctuate as it has financial instruments that are denominated in
currencies other than GBP.
The Company manages its foreign exchange exposure forward foreign currency
exchange contracts. These instruments are detailed in Note 10.
The currency profile of the Company, including derivatives at fair value, at
the year end date was as follows:
As at 31 March 2022: Net Monetary Monetary Forward Foreign
currency Assets Liabilities Currency Exchange
exposure GBP GBP Contracts
GBP GBP
Currency
GBP 347,260,274 236,062,842 (50,234,754) 161,432,186
EUR (3,335,582) 210,880,009 (51,710,613) (162,504,978)
USD 10,792 10,792 - -
343,935,484 446,953,643 (101,945,367) (1,072,792)
As at 31 March 2021: Net Monetary Monetary Forward Foreign
currency Assets Liabilities Currency Exchange
exposure GBP GBP Contracts
GBP GBP
Currency
GBP 350,670,329 269,174,884 (32,804,020) 114,299,465
EUR (3,799,685) 154,802,177 (46,562,795) (112,039,067)
USD 10,359 10,359 - -
346,881,003 423,987,420 (79,366,815) 2,260,398
As at 31 March 2022, had the GBP strengthened by 5% or 10% in relation to all
currency exposure of the Company with all other variables held constant, the
equity of the Company and the net profit/(loss) per the Statement of
Comprehensive Income would have changed by the amounts shown below. The
analysis is performed on the same basis for 2021.
By 5% 31 Mar 2022 31 Mar 2021
GBP
GBP
EUR (166,779) (189,984)
USD 540 518
Total (166,239) (189,466)
By 10% 31 Mar 2022 31 Mar 2021
GBP
GBP
EUR (333,558) (379,969)
USD 1,079 1,036
Total (332,479) (378,933)
A 5% or 10% weakening of the GBP against the above currencies would have
resulted in an equal but opposite effect on the equity of the Company and net
profit/(loss) per the Statement of Comprehensive Income to the amounts shown
above, on the basis that all other variables remained constant.
The sensitivity analysis reflects how equity of the Company would have been
affected by changes in the relevant risk variable that were reasonably
possible at the reporting date. Management has determined that a fluctuation
of 5% in foreign exchange rates is reasonably possible, considering the
environment in which the Company operates.
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value and future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
The Company's interest rate risk is managed by the Investment Manager in
accordance with policies and procedures detailed below.
The Company invests in fixed and floating rate real estate related debt assets
(which includes loans and bonds). Interest rate risk arises from the effects
of fluctuations in the prevailing levels of market interest rates on the fair
value of financial assets and liabilities and future cash flow.
Should interest rates rise by 1% (100 basis points) or 5% (500 basis points)
(31 March 2021: 1% (100 basis points) or 2% (200 basis points)) in relation to
the fixed-rate assets held by the Company, the estimated impact on the net
asset value ("NAV") of the Company is a decrease of £3.7 million or £18.3
million (31 March 2021: £7.5 million or £15.0 million), respectively. A
decrease in interest rates by 100 basis points or 500 basis points is
estimated to result in an increase in the NAV of the Company by a similar
amount. These estimates are calculated based on the fair value of the
fixed-rate securities including accrued interest held by the Company as at 31
March 2022 and 31 March 2021, and their weighted average lives. A fundamental
principle of bond investing is that market interest rates and bond prices
generally move in opposite directions. When market interest rates rise, prices
of fixed-rate bonds fall.
The interest rate profile of the Company as at 31 March 2022 was as follows:
Fixed Floating Non-interest bearing Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 292,129,354 90,070,215 12,141,535 394,341,104
Cash and cash equivalents - 47,385,138 - 47,385,138
Cash collateral at broker - 5,204,692 - 5,204,692
Other assets - - 22,708 22,708
Financing agreements - (100,368,732) - (100,368,732)
Derivative financial assets
- forward foreign exchange contracts - - (1,072,792) (1,072,792)
Other liabilities - - (1,576,634) (1,576,634)
Total 292,129,354 42,291,313 9,514,817 343,935,484
The maturity profile of the Company as at 31 March 2022 was as follows:
Net Assets Within one year One to five years Over five years
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 394,341,104 82,272,397 121,831,664 190,237,043
Cash and cash equivalents 47,385,138 47,385,138 - -
Cash collateral at broker 5,204,692 5,204,692 - -
Other assets 22,708 22,708 - -
Financing agreements (100,368,732) (100,368,732) - -
Derivative financial assets
- forward foreign exchange contracts (1,072,792) (1,072,792) - -
Other liabilities (1,576,634) (1,576,634) - -
Total 343,935,484 31,866,777 121,831,664 190,237,043
The interest rate profile of the Company as at 31 March 2021 was as follows:
Fixed Floating Non-interest bearing Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 220,927,550 169,513,336 - 390,440,886
Cash and cash equivalents - 21,220,812 - 21,220,812
Cash collateral at broker - 943,980 - 943,980
Derivative financial assets
- forward foreign exchange contracts - - 2,260,399 2,260,399
Other assets - - 11,381,740 11,381,740
Financing agreements - (77,819,803) - (77,819,803)
Other liabilities - - (1,547,011) (1,547,011)
Total 220,927,550 113,858,325 12,095,128 346,881,003
The maturity profile of the Company as at 31 March 2021 was as follows:
Net assets Within one year One to five years Over five years
GBP GBP GBP GBP
Financial assets at fair value through profit or loss* 390,440,886 86,958,465 137,376,487 166,105,934
Cash and cash equivalents 21,220,812 21,220,812 - -
Cash collateral at broker 943,980 943,980 - -
Derivative financial assets
- forward foreign exchange contracts 2,260,399 2,260,399 - -
Other assets* 11,381,740 11,381,740 - -
Financing agreements (77,819,803) (77,819,803) - -
Other liabilities (1,547,011) (1,547,011) - -
Net Assets 346,881,003 43,398,582 137,376,487 166,105,934
*Accrued interest related to financial assets at fair value through profit or
loss is included within other assets.
The value of the asset-backed securities will fluctuate as a result of changes
in market prices (other than those arising from interest rate risk or currency
risk), whether caused by factors specific to an individual investment, its
issuer or all factors affecting all instruments traded in the market. The
loans in the Company are recorded at fair value on initial recognition and
subsequent measurement.
A fundamental reform of major interest rate benchmarks is being undertaken
globally, including the replacement of some interbank offered rates (IBORs)
with alternative nearly risk-free rates (referred to as "IBOR reform"). As at
31 March 2022, it is still unclear when the announcement that will set a date
for the termination of the publication of IBORs will take place. Nevertheless,
the Company has updated provisions for all IBOR indexed exposures as at 31
March 2022. As the Company has minimal IBOR exposure, IBOR reform does not
have any significant impact on the Company's financial statements.
(b) Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Company. Credit risk is generally higher for a non-exchange traded
financial instrument because the counterparty for non exchange traded
financial instruments is not backed by an exchange-clearing house.
The Company's financial assets, other than the investment portfolio discussed
below, exposed to credit risk, at the year end date were as follows:
31 Mar 2022 31 Mar 2021
GBP
GBP
Cash and cash equivalents 47,385,138 21,220,812
Cash collateral at broker 5,204,692 943,980
Total 52,589,830 22,164,792
Credit rating for the custodian of the cash balance is on page 83.
Market Bonds
The Company is subject to the risk that issuers of asset backed securities in
which it invests may default on their obligations and that certain events may
occur which have an immediate and significant adverse effect on the value of
such instruments. There can be no assurance that an issuer of an instrument in
which the Company invests will not default or that an event which has an
immediate and significant adverse effect on the value of such instruments will
not occur, and that the Company will not sustain a loss on the transaction as
a result. The Company seeks to mitigate this risk by monitoring its portfolio
of investments, reviewing the underlying credit quality of its counterparties,
on a monthly basis.
Bilateral Loans and Bonds Portfolio
The Company is subject to the risk that the underlying borrowers to the loans
and bonds in which it invests may default on their obligations and that
certain events may occur which have an immediate and significant adverse
effect on the value of such instruments. Any loan and bond may become a
defaulted obligation for a variety of reasons, including non-payment of
principal or interest, as well as covenant violations by the borrower in
respect of the underlying loan and bond documents. In the event of any default
on the Company's investment in a loan and bond by the borrower, the Company
will bear a risk of loss of principal and accrued interest on the loan and
bond, which could have a material adverse effect on the Company's investment.
There can be no assurance that a borrower will not default, that there will
not be an issue with the underlying real estate security or that an event
which has an immediate and significant adverse effect on the value of these
loans and bonds will not occur, and that the Company will not sustain a loss
on the transaction as a result. The Company seeks to mitigate this risk by
performing due diligence and monitoring its portfolio of investments,
reviewing the underlying credit quality of its borrowers, performance of the
underlying asset, and loan and bond covenants compliance against financial
information received and the performance of the security, on a quarterly
basis.
The Company's total investment in loans and bonds as at 31 March 2022,
amounted to £99.8 million (31 March 2021:
£136.1 million) and £184.6 million (31 March 2021: £173.9 million),
respectively which excludes any interest accrued on loans and bonds at this
date.
Derivative Contracts
The Company has credit exposure in relation to its derivative contracts. The
Company was invested in derivative contracts with The Bank of New York Mellon
as at 31 March 2022 and 31 March 2021, respectively, with the following credit
rating and credit quality according to Standard and Poor's:
31 Mar 2022 31 Mar 2021 31 Mar 2022 31 Mar 2021
GBP
GBP
Rating Rating
The Bank of New York Mellon AA- AA- (1,072,792) 2,260,399
Transactions involving derivative instruments are usually with counterparties
with whom the Company has signed master netting agreements. Master netting
agreements provide for the net settlement of contracts with the same
counterparty in the event of default. The impact of the master netting
agreements is to reduce credit risk from the amounts shown as derivative
financial assets on the Statement of Financial Position. The credit risk
associated with derivative financial assets subject to a master netting
arrangement is eliminated only to the extent that financial liabilities due to
the same counterparty will be settled after the assets are realised.
The exposure to credit risk reduced by master netting arrangements may change
significantly within a short period of time as a result of transactions
subject to the arrangement. The corresponding assets and liabilities have not
been offset on the Statement of Financial Position.
Below are the derivative liabilities by counterparty and details of the
collateral received and pledged by Company as at 31 March 2022:
Derivative Type Counterparty Value of Collateral Collateral Net (if greater
derivative
received
pledged than zero)
liabilities GBP
GBP GBP
GBP
Forward foreign exchange contracts The Bank of New York Mellon (1,072,792) - 1,072,792 -
Below are the derivative assets by counterparty and details of the collateral
received and pledged by Company as at 31 March 2021:
Derivative Type Counterparty Value of Collateral Collateral Net (if greater
derivative
received
pledged than zero)
assets GBP
GBP GBP
GBP
Forward foreign exchange contracts The Bank of New York Mellon 2,260,399 - - 2,260,399
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered
small due to the short settlement period involved and the high credit quality
of the brokers used. The Company monitors the credit rating and financial
positions of the brokers used to further mitigate this risk.
Custody
The Company monitors its credit risk by monitoring the credit quality of The
Bank of New York Mellon (International) Limited, as reported by Standard and
Poor's or Moody's.
If the credit quality or the financial position of The Bank of New York Mellon
(International) Limited were to deteriorate significantly, the Investment
Manager will seek to move the Company's assets to another bank. The Bank of
New York Mellon (International) Limited is a Trust Company with a credit
rating of Aa2 at the reporting date (31 March 2021: Aa2) according to Moody's.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with its financial liabilities. The Company's
liquidity risk is managed on a daily basis by the Investment Manager in
accordance with policies and procedures detailed below. Where needed, the
Investment Manager will liquidate positions to increase cash or reduce
leverage.
The following table details the current and long-term financial liabilities of
the Company at the year end date:
As at 31 March 2022: Less than 1 month 1-3 months 3 months to 1 year Greater than 1 year
GBP GBP GBP GBP
Financial liabilities excluding derivatives
- Financing agreements 17,803,852 72,328,125 10,236,755 -
- Other liabilities - 1,576,634 - -
17,803,852 73,904,759 10,236,755 -
As at 31 March 2021: Less than 1 month 1-3 months 3 months to 1 year Greater than 1 year
GBP GBP GBP GBP
Financial liabilities excluding derivatives
- Financing agreements - 65,367,390 12,452,413 -
- Other liabilities - 1,547,011 - -
- 66,914,401 12,452,413 -
The market for subordinated asset-backed securities, including real estate
loans into which the Company is invested, is illiquid. In addition,
investments that the Company purchases in privately negotiated (also called
"over-the-counter" or "OTC") transactions may not be registered under relevant
securities laws or otherwise may not be freely tradable, resulting in
restrictions on their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this illiquidity, the
Company's ability to vary its portfolio in a timely fashion and to receive a
fair price in response to changes in economic and other conditions may be
limited.
Furthermore, where the Company acquires investments for which there is not a
readily available market, the Company's ability to deal in any such investment
or obtain reliable information about the value of such investment or risks to
which such investment is exposed may be limited.
(d) Valuation of Financial Instruments
IFRS 13 Fair Value Measurement requires disclosures surrounding the level in
the fair value hierarchy in which fair value measurement inputs are
categorised for assets and liabilities measured in the Statement of Financial
Position. The determination of the fair value for financial assets and
financial liabilities for which there is no observable market price requires
the use of valuation techniques as described in Note 2, Significant accounting
policies and in Note 3, Critical accounting judgements and key sources of
estimation uncertainty. For financial instruments that trade infrequently and
have little price transparency, fair value is less objective.
The Company categorises investments using the following hierarchy as defined
by IFRS 13:
· Level 1 - Quoted market prices in an active market for an identical
instrument.
· Level 2 - Valuation techniques based on observable inputs. This
category includes instruments valued using: quoted market prices in active
markets for similar instruments; quoted prices for similar instruments in
markets that are considered less than active; or other valuation techniques
where all significant inputs are directly or indirectly observable from market
data.
· Level 3 - Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation technique
includes inputs not based on observable data and the unobservable inputs could
have a significant impact on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for similar
instruments where significant unobservable adjustments or assumptions are
required to reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of the Company's
financial assets and liabilities measured at fair value at the year end date:
As at 31 March 2022: Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Non-current assets
Real Estate Credit Investments - market bonds - 98,450,555 - 98,450,555
Real Estate Credit Investments - self-originated bonds - - 186,047,325 186,047,325
Real Estate Credit Investments - self-originated loans - - 109,843,224 109,843,224
Total non-current assets - 98,450,555 295,890,549 394,341,104
Current liabilities
Forward foreign exchange contracts - (1,072,792) - (1,072,792)
Real Estate Credit Investments - repurchase agreements - (100,368,732)* - (100,368,732)
- (2,990,969) 295,890,549 292,899,580
* Includes repurchase agreements related to Level 3 investments.
Level 1 Level 2 Level 3 Total
As at 31 March 2021: GBP GBP GBP GBP
Current assets
Forward foreign exchange contracts - 2,260,399 - 2,260,399
Non-current assets
Real Estate Credit Investments - market bonds* - 80,247,010 112,497 80,359,507
Real Estate Credit Investments - self-originated bonds* - - 173,931,664 173,931,664
Real Estate Credit Investments - self-originated loans* - - 136,149,715 136,149,715
Total non-current assets - 80,247,010 310,193,876 390,440,886
Current liabilities
Real Estate Credit Investments - repurchase agreements - (77,819,803)** - (77,819,803)
- 4,687,606 310,193,876 314,881,482
* Excludes accrued interest.
** Includes repurchase agreements related to Level 3 investments.
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
The fair value of forward contracts is the difference between the contracts
price and reported market prices of the underlying contract variables. These
are included in Level 2 of the fair value hierarchy.
The fair values of investments that trade in markets that are not considered
to be active but are valued based on quoted market prices, dealer quotations
or alternative pricing sources supported by observable inputs are classified
within Level 2. These include investment grade corporate bonds ("Real Estate
Credit Investments"), repurchase agreements and over-the-counter derivatives.
As Level 2 investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be adjusted to
reflect illiquidity and/or non-transferability, which are generally based on
available market information. In cases where material discounts are applied,
the positions will be valued as Level 3.
The Company obtains pricing reports from independent vendors for bonds where
prices are not directly observable in the market. These bonds are classified
as Level 3 in the fair value hierarchy. Please refer to Valuation of Financial
Assets at Fair Value Through Profit or Loss in Note 3 for further details
which describes the weighting of the valuation between observable prices from
comparable bonds and the valuation result based on proprietary sector curve
discount yields as a key unobservable input in deriving fair value of these
investments. A 50% weighting to each data point has been applied and the fair
value range generated by the two approaches is £2.5 million (31 March 2021:
1.4 million). The sector curve discount yields used range from 4.0% to 14.0%
(31 March 2021: 5.8% to 10.0%). Applying a discount yield +/-2% to the
valuation would reduce/increase the fair value at 31 March 2022 by £(2.5)
million and £2.6 million (31 March 2021: £1.1 million and £2.0 million)
respectively.
The Company makes loans into structures to gain exposure to real estate
Secured Debt in the United Kingdom and Western Europe. These loans are not
traded in an active market and there are no independent quotes available for
these loans. Such holdings are classified as Level 3 investments. The fair
value of these loans is linked directly to the value of the real estate loans
that the underlying structures invests in, which are determined based on
modelled expected cash flows (drawdown principal and interest repayments, and
maturity dates) with effective yields ranging from 5.1% to 13.3% (31 March
2021: 5.1% to 15.0%) (the unobservable input).
Fair value of the real estate loans is adjusted for changes in the credit
quality of both the borrower and the underlying property collateral, and
changes in the market rate on similar instruments where changes are material.
On origination of the loan, the Investment Manager performs due diligence on
the borrower and related security/property. This includes obtaining a
valuation of the underlying property (to assess loan-to-value of the
investment). In most instances, the terms of the loan require periodic
revaluation of the underlying property to check against loan-to-value
covenants. All the fees associated with the investments (arrangement fees,
exit fees, etc.) are paid directly to the Company and not paid to the
Investment Manager.
Previously, many of the Company's investments in loans were made through a
Luxembourg-based entity, Stornoway Finance
S.à r.l. via loan note instruments. The majority of the Company's investments
are now made through another Luxembourg-based entity, ENIV S.à r.l. via
separate note instruments. As and when market information, such as market
prices from recognised financial data providers becomes available, the Company
will assess the impact on its portfolio of loans and whether there should be
any transfers between levels in the fair value hierarchy.
As at 31 March 2022, the Investment Manager was not aware of any significant
movement in the market rates, any indications
of impairment, significant credit events or significant negative performance
of the underlying property structures, which might affect the fair value of
the loans and bonds. Whilst no defaults in the underlying investment are
expected, a 1% or 2% decrease in the discount rate would decrease the fair
value by £3.7 million or £7.3 million (31 March 2021: £7.5 million or
£15.0 million), respectively and increase net profit by an equal amount; an
equal change in the opposite direction would decrease the equity of the loan
and bond portfolio within the Company and decrease net profit by an equal
amount.
Level 3 Reconciliation
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the financial year:
Level 3 Level 3
31 Mar 2022 31 Mar 2021
GBP GBP
Financial assets at fair value through profit or loss
Opening balance 310,193,876 137,815,691
Total gains recognised in the Statement of Comprehensive Income for the year 2,260,608 7,702,126
Purchases 81,589,656 85,193,214
Sales (109,625,571) (70,148,329)
Transfer in to Level 3 - 149,631,174*
Closing balance** 284,418,569 310,193,876
Unrealised loss on investments classified as Level 3 at year end (688,552) (847,497)
* During the year ended 31 March 2021, following a change in accounting
estimate for the bilateral bond portfolio, they have been moved from Level 2
to Level 3. For further details please see pages 73 and 86.
** The closing balance does not include accrued interest of £11,471,980
(31 March 2021: £11,005,926) included in the fair value of Level 3 financial
assets at fair value through profit or loss.
(e) Prepayment and Re-Investment Risk
The Company's real estate loans have the facility for prepayment. The
Company's exposure to real estate debt securities also has exposure to
potential prepayment risk which may have an impact on the value of the
Company's portfolio. Prepayment rates are influenced by changes in interest
rates and a variety of economic, geographic and other factors beyond the
Company's control and consequently cannot be predicted with certainty.
The level and timing of prepayments made by borrowers in respect of the
mortgage loans that collateralise certain of the Company's investments may
have an adverse impact on the income earned by the Company from those
investments.
Early prepayments also give rise to increased re-investment risk. If the
Company is unable to reinvest such cash in a new investment with an expected
rate of return at least equal to that of the loan repaid, the Company's net
income will be lower and, consequently, could have an adverse impact on the
Company's ability to pay dividends.
The Investment Manager reviews the prepayment assumptions each quarter and
will update as required. These assumptions are considered through a review of
the underlying loan performance information of the securitisations.
15. Segmental Reporting
The Company has adopted IFRS 8 Operating Segments. The standard requires a
"management approach", under which segment information is presented on the
same basis as that used for internal reporting purposes.
Whilst the Investment Manager may make the investment decisions on a
day-to-day basis regarding the allocation of funds to different investments,
any changes to the investment strategy or major allocation decisions have to
be approved by the Board, even though they may be proposed by the Investment
Manager. The Board retains full responsibility as to the major allocation
decisions made on an ongoing basis and is therefore considered the "Chief
Operating Decision Maker" under IFRS 8.
The Company invests in Real Estate Credit Investments. The Real Estate Credit
Investments may take different forms but will be likely to be: (i) secured
real estate loans; and (ii) debentures or any other form of debt instrument,
securitised tranches of secured real estate related debt securities, for
example, RMBS and CMBS (together "MBS"). The real estate debt strategy focuses
on secured residential and commercial debt in the United Kingdom and Western
Europe, seeking to exploit opportunities in publicly traded securities and
real estate loans.
The Company has two reportable segments, being the Market Bond Portfolio and
Bilateral Loan and Bond Portfolio.
For each of the segments, the Board of Directors reviews internal management
reports prepared by the Investment Manager on a quarterly basis. The
Investment Manager has managed each of the Market Bond Portfolio and the
Bilateral Loan and Bond Portfolio separately, thus two reportable segments are
displayed in the financial statements.
Information regarding the results of each reportable segment is included
below. Performance is measured based on segment profit/(loss), as included in
the internal management reports that are reviewed by the Board of Directors.
Segment profit/(loss) is used to measure performance as management believes
that such information is the most relevant in evaluating the results.
Year ended 31 March 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment profit 3,611,069 26,112,910 29,723,979
Year ended 31 March 2021:
Reportable segment profit 6,188,794 31,861,530 38,050,324
Year ended 31 March 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Total assets - - 446,953,642
Non-segmental assets - - 52,612,538
Reportable segment assets 98,450,555 295,890,549 394,341,104
Year ended 31 March 2021:
Total assets - - 426,247,817
Non-segmental assets - - 24,446,111
Reportable segment assets 80,714,401 321,087,305 401,801,706
Information regarding the basis of geographical segments is presented in the
Investment Manager's Report and is based on the countries of the underlying
collateral.
All segment revenues are from external sources. There are no inter-segment
transactions between the reportable segments during the year. Certain income
and expenditure is not considered part of the performance of either segment.
This includes gains/(losses) on net foreign exchange and derivative
instruments, expenses and interest on borrowings.
The following table provides a reconciliation between net reportable income
and operating profits.
31 Mar 2022 31 Mar 2021
GBP
GBP
Reportable segment profit 29,723,979 38,050,324
Net gains on foreign exchange instruments and other foreign currency 2,609,285 7,139,844
transactions
Other income 37,017 133,684
32,370,281 45,323,852
Operating expenses (5,841,351) (5,842,223)
Finance costs (1,954,553) (2,237,927)
Net profit 24,574,377 37,243,702
Certain assets are not considered to be attributable to either segment, these
include, other receivables and prepayments, cash and cash equivalents and
derivative financial assets.
The following table provides a reconciliation between net total segment assets
and total assets.
31 Mar 2022 31 Mar 2021
GBP
GBP
Reportable segment assets 394,341,104 401,801,706
Cash and cash equivalents 47,385,138 21,220,812
Cash collateral at broker 5,204,692 943,980
Derivative financial assets - 2,260,399
Other assets 22,708 20,920
446,953,642 426,247,817
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios for the year ended 31 March 2022:
Year ended 31 March 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Financial assets at fair value through profit or loss
Opening fair value 80,359,507 310,081,379 390,440,886
Purchases 31,500,000 81,589,656 113,089,656
Repayments/sales proceeds (14,447,591) (109,625,571) (124,073,162)
Realised loss on sales (390,363) (99,945) (490,308)
Net movement in unrealised gain on investments at fair value through the 759,447 2,473,050 3,232,497
profit or loss
Closing fair value* 97,781,000 284,418,569 382,199,569
* The 31 March 2022 closing fair value does not include accrued interest of
£669,555 and £11,471,980 included in the fair value of Market Bond Portfolio
and Bilateral Loan and Bond Portfolio, respectively.
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios for the year ended 31 March 2021:
Year ended 31 March 2021: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Financial assets at fair value through profit or loss
Opening fair value 87,905,159 287,255,418 375,160,577
Purchases 23,213,994 85,193,214 108,407,208
Repayments/sales proceeds (34,024,589) (70,148,329) (104,172,918)
Realised (loss)/gain on sales (4,170,757) 2,826,294 (1,344,463)
Net movement in unrealised gain on investments at fair value through the 7,435,700 4,954,782 12,390,482
profit or loss
Closing fair value 80,359,507 310,081,379 390,440,886
16. Cash Collateral
The Company manages some of its financial risks through the use of financial
derivative instruments which are subject to collateral requirements. As at 31
March 2022, a total of £5.2 million (31 March 2021: £0.9 million) was due
from various financial institutions under the terms of the relevant
arrangements. The cash held by brokers is restricted and is shown as Cash
collateral at broker on the Statement of Financial Position.
17. Material Agreements and Related Party Transactions
Loan Investments
Previously, many of the Company's investments in loans were made through a
Luxembourg-based entity, Stornoway Finance S.à r.l. via loan note
instruments. The loan investments are now made though another Luxembourg-based
entity, ENIV S.à r.l. via separate note instruments. This entity has separate
compartments for each loan deal which effectively ring-fences each loan deal.
Other funds managed by the Investment Manager may invest pari passu in these
compartments.
Investment Manager
The Company is party to an Investment Management Agreement with the Investment
Manager, dated 22 February 2017, pursuant to which the Company has appointed
the Investment Manager to manage its assets on a day-to-day basis in
accordance with its investment objectives and policies, subject to the overall
supervision and direction of the Board of Directors.
The Company pays the Investment Manager a Management Fee and a Performance
Fee.
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company an annual Management Fee of 1.25% on
an adjusted NAV, being the NAV of the shares.
During the year ended 31 March 2022, the management fee totalled £4.4 million
(31 March 2020: £4.3 million), of which £0.4 million (31 March 2021: £0.4
million) was outstanding at the year end.
Performance Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company a performance fee calculated as ((A-B)
x 20% x C) where:
A = the Adjusted Performance NAV per share, as defined in the Prospectus.
B = the NAV per share as at the first business day of the Performance Period
increased by a simple annual rate of return of 7% over the Performance Period
or, if no Performance Fee was payable in the previous Performance Period, the
NAV per share on the first business day of the Performance Period immediately
following the last Performance Period in which a Performance Fee was paid (the
"Starting Date") increased by a simple annual rate of return of 7% over the
period since the Starting Date ("Hurdle Assets").
C = the time weighted average number of shares in issue in the period since
the Starting Date.
Upon passing of the second continuation resolution at the AGM held on 16
September 2021, the Company entered a new Performance Period commencing on 1
October 2021 which is expected to run until the end date of the quarter in
which the next continuation resolution is passed. With the commencement of a
new Performance Period, the NAV on which the Hurdle Assets will be determined
in accordance with the above formula was reset to the NAV per share of £1.51
as at 30 September 2021 (being the Starting Date of the new Performance
Period).
During the year ended 31 March 2022 and 31 March 2021, there were no
performance fees.
Administration Fee
Under the terms of the Administration Agreement, the Administrator is entitled
to receive from the Company a monthly administration fee based on the prior
month gross assets of the Company adjusted for current month subscriptions and
redemptions of the Company at the relevant basis points per annum rate,
subject always to a minimum monthly fee £10,000.
During the years ended 31 March 2022, the administration fee totalled
£250,286 (31 March 2021: £245,781), of which £20,892 (31 March 2021:
£20,865) was outstanding at the year end.
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is entitled to
receive from the Company an annual Depositary fee of 0.02% (31 March 2021:
0.02%) of the NAV of the Company. During the year ended 31 March 2022, the
Depositary fee totalled £65,969 (31 March 2021: £64,656). The Company owed
£27,086 (31 March 2021: £21,000) to the Depositary at the year end date.
18. Contingencies and Commitments
As at 31 March 2022, the Company had committed £522.9 million into bilateral
loans and bonds of which £284.4 million had been funded (31 March 2021:
£117.2 million into loans of which £43.9 million had been funded).
19. Subsequent Events
The Directors declared a dividend of 3 pence per share on 23 June 2022.
Since 1 April 2022, RECI has committed £38.6 million into 4 loans and RECI
received a total of £71.5 million from 5 loans that have repaid.
As mentioned in Other Risks on page 19, the Board and the Investment Manager
continue to monitor the assets and strategy in light of the latest market
events including inter alia, the war in Ukraine, inflationary and interest
rate rises, Brexit and Covid-19 impacts, and at the date of signing are not
aware of any direct or immediate impacts that materially affect the contents
of this Annual Report.
There have been no other significant events affecting the Company since the
year end date that require amendment to or disclosure in the financial
statements.
20. Foreign Exchange Rates Applied to Combined Totals Used in the Preparation
of the Financial Statements
The following foreign exchange rates relative to the GBP were used as at the
year end date:
Currency 31 Mar 2022 31 Mar 2021
GBP
GBP
EUR 1.18 1.17
USD 1.32 1.38
21. Approval of the Financial Statements
The Annual Report and audited financial statements of the Company were
approved by the Directors on 23 June 2022.
Appendix I - AIFM Remuneration Policy (Unaudited)
Annual Remuneration Disclosure for the Year to 31 March 2022
Cheyne Capital Management (UK) LLP (Cheyne), the Alternative Investment Fund
Manager ("AIFM"), has implemented a Remuneration Policy ("the Policy") that is
applicable to all remuneration matters within the firm, with a particular
focus on those persons who have been identified as having a material impact on
the risk profile of the AIF ("Code Staff"). This includes senior management,
risk takers and control functions.
The Policy is in line with Cheyne's business strategy, objectives, values and
long-term interests. As an AIFM, Cheyne's overall objective is to achieve
attractive and controlled performance and capital growth for all funds under
management, including the AIF and to develop strong long-term relationships
with investors. Cheyne's income is dependent upon the funds for which it
serves as manager or AIFM, and therefore the profit available for distribution
under the Policy is dependent upon the performance of such funds including the
AIF. As such, the fulfilment of Cheyne's objectives is interlinked with the
best interests of Cheyne's clients, which in turn is in line with the Policy.
The Policy promotes effective risk management and does not tolerate breaches
of internal risk guidelines.
Cheyne has a Remuneration Committee (currently the COO and CFO) who report
into the Incentivisation Committee (currently the CEO and President) that
oversees the remuneration of individuals, including Code Staff, and approval
of the allocation of profits available for discretionary division among
members.
Cheyne was authorised as an AIFM on 22 July 2014. The quantitative disclosures
required under Article 22 of AIFMD in accordance with the European Securities
and Markets Authority ("ESMA") guidance for the year ended 31 March 2022, in
respect of remuneration derived from the AIF are as follows:
Business Area Number of AIFM Total Code Staff Remuneration Deferred Remuneration
Code Staff Remuneration relevant to derived from the derived from
(all variable) the AIF AIF (all variable) the AIF
Portfolio Management 29 £14,225,990 7 £823,715 £134,550
Senior Management 6 £ 5,683,780 6 £383,973 £52,394
Total 35 £ 19,909,770 13 £1,207,688 £186,944
Remuneration Code information is provided as required under the FCA Rules
(BIPRU 11.5.18).
Appendix II - AIFM Leverage (Unaudited)
For the purposes of this disclosure, leverage is any method by which a fund's
exposure is increased. A fund's exposure may be increased by using
derivatives, by reinvesting cash borrowings, through positions within
repurchase or reverse repurchase agreements, through securities lending or
securities borrowing arrangements, or by any other means (such increase
referred to herein as the "Incremental Exposure"). The AIFMD prescribes two
methodologies for calculating overall exposure of a fund: the "gross
methodology" and the "commitment methodology". These methodologies are briefly
summarised below.
The commitment methodology takes account of the hedging and netting
arrangements employed by a fund at any given time (purchased and sold
derivative positions will be netted where both relate to the same underlying
asset). This calculation of exposure includes all Incremental Exposure as well
as a fund's own physical holdings; and cash. By contrast, the gross
methodology does not take account of the netting or hedging arrangements
employed by a Company. This calculation of exposure includes all Incremental
Exposure as well as the Company's own physical holdings, Cash is excluded.
The AIFMD requires that each leverage ratio be expressed as the ratio between
a fund's total exposure (including any Incremental Exposure) and its NAV.
Using the methodologies prescribed under the AIFMD and implementing
legislation, the Company has set a maximum level of leverage, taking into
account atypical and volatile market conditions. Leverage will not exceed the
ratio of 5:1 using the commitment methodology and 5:1 using the gross
methodology.
The use of leverage, including borrowings, may increase the volatility of the
Company's NAV per share and also amplify any loss in the value of the
Company's assets.
While the use of borrowing should enhance the total return on the shares where
the return on the Company's underlying assets is rising and exceeds the cost
of borrowing, it will have the opposite effect where the return on the
Company's underlying assets is falling or rising at a lower rate than the cost
of borrowing, reducing the total return on the shares. As a result, the use of
borrowings by the Company may increase the volatility of the NAV per share.
Any reduction in the value of the Company's investments may lead to a
correspondingly greater percentage reduction in its NAV (which is likely to
adversely affect the price of a share). Any reduction in the number of shares
in issue (for example, as a result of buy-backs or tender offers) will, in the
absence of a corresponding reduction in borrowings, result in an increase in
the Company's level of gearing.
To the extent that a fall in the value of the Company's investments causes
gearing to rise to a level that is not consistent with the Company's gearing
policy or borrowing limits, the Company may have to sell investments in order
to reduce borrowing.
The Company will pay interest on its borrowings. As such, the Company is
exposed to interest rate risk due to fluctuations in the prevailing market
rates. The Company may employ hedging techniques designed to reduce the risk
of adverse movements in interest rates. However, such strategies may also
result in losses and overall poorer performance than if the Company had not
entered into such hedging transactions.
The risks associated with the derivatives used by the Company and that may
contribute to the leverage of the Company are set out earlier.
Leverage is limited to 500% of NAV of the Company under both the Gross and
Commitment approaches. Up to 31 March 2022, the maximum leverage calculated
has been 161.99% for the Gross Approach and 130.06% for the Commitment
Approach. In the year ended 31 March 2021, the maximum leverage calculated has
been 148.12% for the Gross Approach and 122.22% for the Commitment Approach.
Directors and Advisers
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Graham Harrison (resigned 16 September 2021)
Secretary of the Company
Aztec Financial Services (Guernsey) Limited
PO Box 656
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Corporate Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London, EC2Y 9LY
Registrar
Link Market Services (Guernsey) Limited
Mount Crevelt House
Bulwer Avenue
St. Sampson
Guernsey, GY2 4LH
Depositary
The Bank of New York Mellon (International) Limited
One Canada Square
London, E14 5AL
Registered Office
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Alternative Investment Fund Manager
Cheyne Capital Management (UK) LLP
Stornoway House
13 Cleveland Row
London, SW1A 1DH
Independent Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey, GY1 3HW
UK Transfer Agent
Link Group Limited
10th Floor
Central Square
29 Wellington Street
Leeds, LS1 4DL
Administrator
Citco Fund Services (Guernsey) Limited
Arnold House
St. Julian's Avenue
St. Peter Port
Guernsey, GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza, Block 6
International Financial Services Centre
Ireland, Dublin 1
Real Estate Credit Investments Limited
East Wing
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3PP
www.realestatecreditinvestments.com
--END--
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