Real Est Crd InvsLtd - Half-year Report
24/11/2022 07:00
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RNS Number : 4181H Real Estate Credit Investments Ltd 24 November 2022
This announcement contains inside information.
Date and time of release: 24 November 2022, 7:00 am
Real Estate Credit Investments Limited (the "Company")
Interim Financial Statements for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of the Company's
Condensed Unaudited Interim Financial Statements for the six months ended 30
September 2022.
View the Interim Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations/#currentPage=1
(https://gbr01.safelinks.protection.outlook.com/?url=https%3A%2F%2Frealestatecreditinvestments.com%2Finvestors%2Fresults-reports-and-presentations%2F%23currentPage%3D1&data=05%7C01%7Ckitten.ozanne%40aztecgroup.co.uk%7C6135a5916951417a39b308dacd6053ce%7C5f75785019e44329bc48045f1fe3eecd%7C0%7C0%7C638048110913226814%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=Zrp%2BHv4sV2uk1m4ROX5dxEpbNuEJ3ueNz7RYDQEtnvY%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
Condensed Unaudited Interim Financial Statements
For the six months ended 30 September 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
Consistent
Attractive
Dividends
Western European real estate markets
overview and HIGHLIGHTS
As at 30 September 2022
What do
we offer
· Defensive credit exposure to UK and Western European real estate
markets
- Consistent portfolio yield of 7%+
- 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
- 87% of portfolio in senior loans and bonds
- 60.4% WA LTV of portfolio
· Granular portfolio with detailed disclosure
- 62 positions
· Attractive and stable dividend
- Stable dividend delivered consistently since October 2013
- Dividend yield of 8.9% on share price, as at 21 November 2022
· Access to Cheyne's established real estate investment team and
substantial origination pipeline
Highlights
As at 30 September 2022
Total Assets
£465.7m
(31 March 2022: £447.0m)
NAV per Share
£1.48
(31 March 2022: £1.50)
Net Assets
£340.5m
(31 March 2022: £343.9m)
Net Profit
£10.3m
(Full year ended 31 March 2022: £24.6m profit)
RECI offers
Focus on senior secured credit, with defensive LTVs
Self origination gives greater control over its loan book
Large, experienced, well capitalised borrowers
Conservative and flexible leverage profile
Dividend stability without compromising risk
Management from Cheyne Capital's Real Estate team
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 Western Europe, focusing primarily on the United
Kingdom, France and Spain.
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, a diversified book of 62 positions in real estate
bonds and loans, was valued at £426.5 million, excluding accrued interest, as
at 30 September 2022, up from £382.2 million as at 31 March 2022. The
portfolio had a weighted average levered yield of 10.9% and an average
loan-to-value ratio of 60.4% as at 30 September 2022.
Portfolio by Geography (Funded Fair Value)
30 September 2022
UK 51.0%
France 36.7%
Spain 4.8%
Italy 3.2%
Germany 2.0%
Portugal 1.4%
Finland 0.6%
Ireland 0.3%
Sector Breakdown (Funded Fair Value)
£m
Hotel 86.7m
Retail 55.2m
Office 54.4m
Mixed-Use 47.8m
Student Accommodation 26.5m
Residential 26.4m
Healthcare 23.0m
Housebuilder 20.8m
Co-Living 20.8m
Leisure 19.5m
Logistics 18.6m
PRS/Multi-Family 13.0m
Later Living 5.0m
Industrial 4.6m
Assisted Living 4.2m
Total 426.5m
*excluding accrued interest of £11.8m.
NAV and Share Price As at 30 September 2022
Net Assets £340.5m
Shares Outstanding 229.3m
NAV (per share) 1.48
Share Price 1.35
Premium/(Discount) (9.3%)
Dividend Yield 8.9%
Market Capitalisation £308.5m
NAV Total Return*
Half Year Ended 30 September 22 2.9%
Prior Financial Year End 31 March 22 6.9%
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.
.
Chairman's Statement
RECI maintained its disciplined approach to investing and delivering its
quarterly 3 pence dividend per share
Bob Cowdell
Chairman
The half year ended 30 September 2022 saw Russia's illegal invasion and the
war in Ukraine continue; increasing inflation throughout the World; and
Central Banks in the UK and abroad responding by raising interest rates. The
UK suffered political and market turmoil following the removal of Boris
Johnson as Prime Minister, the ill-fated tenure of Liz Truss and the
"Mini-Budget" presented by her Chancellor Kwasi Kwarteng, which destabilised
credit markets. These events caused significant credit and currency market
reaction and Rishi Sunak, the UK's third Prime Minister since the start of the
Company's financial year, has the task of reassuring markets and negating the
political risk premium embedded in credit and UK gilt markets.
Rising energy and commodity prices caused by the Ukraine conflict, have been a
driver of steeply rising inflation and the expectation is for further
increases in interest rates in response. These factors and the forecast of UK
economic recession will exacerbate the "cost of living crisis" being felt by
many.
These international and domestic economic challenges have caused many
headlines and much market volatility. Against this macro backdrop, your Board
and Investment Manager have continued to provide RECI Shareholders and
potential new investors with regular and detailed information: focusing on the
Company's portfolio and investment strategy (including its disciplined cash
and leverage management); and the selective deployment of cash into an
attractive pipeline of new senior debt investment opportunities offering
increased returns for the portfolio.
Financial Performance
RECI reported total net profit for the half year ended 30 September 2022 of
£10.3 million on half year end total assets of £465.7 million; £14.2
million for the half year ended 30 September 2021 on half year end total
assets of £449.8 million.
The NAV as at 30 September 2022 was £1.48 per share (£1.51 per share as at
30 September 2021).
The 30 September 2022 NAV reflects the payment of 6 pence per share during the
half year in respect of the fourth interim dividend for the year ended 31
March 2022 and the first interim dividend of the current financial year,
returning £13.8 million to Shareholders and providing an annualised NAV total
return of 5.9% for the half year.
During the half year ended 30 September 2022, the Company funded £97.0
million in both the origination of loans and purchases of new bonds for the
portfolio. RECI also received net cash inflow from its operating activities
(including cash repayments and interest) of £36.9 million in this period.
Half Year review and update
The NAV remained broadly stable during the half year to close at £1.48 per
share at 30 September 2022, notwithstanding the payment to Shareholders of two
unchanged dividends, totalling 6 pence per share, during that period.
Reaction to the 23 September "Mini-Budget", saw yield widening in bond markets
continue into October. As at 31 October 2022, however, RECI's NAV was £1.49
per share, impacted by just 0.2 pence per share of negative mark-to-market
adjustments across the bond portfolio. The first interim dividend of the
current financial year was declared on 4 August 2022 and the second interim
dividend was declared on 23 November 2022, both maintaining a payment of 3
pence per share.
When the financial year began on 1 April 2022, RECI had gross leverage of
1.29x and leverage net of cash of 1.14x. Throughout the half year, the Board
and Cheyne continued to monitor RECI's cash resources and repayments and to
consider the appropriate level, type and blend of gearing for the Company. At
the half year end it held cash of £27.4 million and had gross leverage of
1.35x (1.27x net of cash). The Board and Cheyne continue to consider an
expanded range and blend of potential gearing options, including asset level
leverage on a non-recourse or partial recourse basis, alongside flexible
balance sheet leverage. As at 31 October 2022, the Company had gross leverage
of 1.39x (1.33x net of cash) with £10.2 million of asset level leverage
(being all non-recourse).
The Company's shares traded at an average discount to NAV of 2.4% during the
financial half year. The market volatility following the "Mini-Budget"
provoked much investor uncertainty in credit markets, contributing to some
reactive selling of RECI shares on macro concerns, causing the discount to
widen in the aftermath. Following the October Quarterly Update and a series of
meetings between Cheyne and investors to update on RECI and the portfolio, the
discount has begun to narrow. The Company's shares closed at £1.35 on 21
November 2022 (a discount of 9.4%), which would provide a yield of 8.9% on the
basis of continuing to pay a quarterly 3 pence dividend per share for the rest
of the current financial year.
Continuing your Board's and Cheyne's commitment to providing detail and
transparency regarding the Company's portfolio and investment strategy,
Shareholder Quarterly Updates were also held in May and July 2022 and we
appreciate the interest and attendance of both existing and potential new
investors.
Outlook
It appears inevitable that RECI will be operating against a backdrop of high
inflation and increasing interest rates, combined with a challenging
geo-political outlook, for the rest of this financial year. Nevertheless, the
Company's portfolio composition, structure and continued diversification into
Western Europe, position it well to withstand these challenges and steer a
course through difficult market conditions.
Our Investment Manager has worked hard to strengthen the robustness of the
Company's portfolio, with the increased exposure to lower risk senior loans
and bonds and the increased size and capital strength of our chosen
counterparties. The loan portfolio now has a WAL of just 1.6 years and future
loans are expected to be on a floating rate basis.
As was demonstrated in previous times of economic stress and market
uncertainty, Cheyne's expert origination capability has identified a pipeline
of attractive investment opportunities, targeting senior debt with enhanced
yields, which will underpin the continued payment of an attractive and stable
dividend and position the portfolio to enhance NAV.
Your Board remains committed to providing investors with a long-term
opportunity to receive an attractive dividend stream from an expertly managed
exposure to real estate credit assets.
Bob Cowdell
Chairman
23 November 2022
KEY PERFORMANCE INDICATORS AND FINANCIAL HIGHLIGHTS
Key Performance Indicators
30 Sep 2022 31 Mar 2022
Balance Sheet
Net Asset Value ("NAV") per share £1.48 £1.50
Share price £1.35 £1.51
(Discount)/premium (9.3)% 0.4%
Average (discount)/premium in period/year* (2.4)% 0.7%
Leverage (% of NAV)** 35.0% 29.4%
* Average (discount)/premium in period/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.
30 Sep 2022 30 Sep 2021
Profit and Loss, Dividends (6 months ended)
Earnings per share 4.5p 6.2p
Dividends per share declared for the period 6.0p 6.0p
NAV total return (including dividends) annualised 5.9% 8.2%
Financial Highlights
30 Sep 2022 31 Mar 2022
Balance Sheet
Cash, cash equivalents and cash held by brokers £27.4m £52.6m
Net assets £340.5m £343.9m
30 Sep 2022 30 Sep 2021
Profit and Loss (6 months ended)
Operating income £14.7m £18.3m
Net profit £10.3m £14.2m
The complete set of the Balance Sheet and Profit and Loss items are presented
in the Company's condensed unaudited interim financial statements.
Further Information
Monthly fact sheets as well as quarterly update presentations are available on
the Company's website: www.realestatecreditinvestments.com.
Investment Manager's Report
An ongoing pivot to a predominantly senior loan strategy that provides
stability and income through volatile periods
Ravi Stickney
Managing Partner and CIO, Cheyne Real Estate
Market Commentary
At this time last year, we wrote at length on the entrenching inflationary
pressures and their potential impact on real estate. We argued that inflation
was here to stay for quite some time, due mainly to supply chain disruptions.
What was not foreseen was the additional impact on energy and food inflation
from Russia's ongoing war in Ukraine. Also of note, is the now clear idea that
central banks (and, in particular, the US central bank) are prioritising
reducing "hot inflation" and consequently bringing forward recessionary
pressure on the World. This is occurring against a backdrop of no meaningful
fiscal or monetary stimulus being available to cushion markets or consumers.
The recession that has already begun in Western economies is likely to last
well into 2023; with inflation only set to fall with a meaningful decline in
consumer purchasing power and money supply. However, and very pertinently to
real estate, we do not expect core inflation to revert to the current
long-term targets of most Western governments at circa 2%. Indeed, we expect
the targeting of term inflation to adjust, and reflect core inflation moving
closer to 4%.
It is expected that interest rates will retrench somewhat from the present
elevated levels as the recession bites. We do not, however, see them falling
back to the levels evident for much of the last decade. We expect long-term
rates to stabilise at 200 - 300 basis points above zero.
Transitioning to this new interest rate environment will have a material
impact upon valuations and operational performance of the global real estate
asset class. The downward revisions to valuations, whilst applicable to all
real estate assets, are likely to fall harder on those assets which are not
supported by long-term fundamentals and the changes in the way we live and
work, such as shopping centres and secondary quality offices. It will also
materially impact those asset classes that have historically benefited from
assumptions of significant rental acceleration and permanently low yields,
such as logistics.
In addition to changes in valuations and income, real estate will also need to
contend with the growing financing gap presented by a lack of debt and equity
funding availability. This is especially acute in Europe and Australasia,
where the banking markets are much more constrained and alternative lending
markets are not as established, as they are in North America.
At the time of writing, we are already seeing a substantial demand for debt
and equity capital to plug that financing gap in the UK and Western Europe.
The growing demand is unlikely to be met by the banks and it will fall to
alternative lenders, such as RECI, to aid in plugging that gap.
The decline in valuations, alongside the lack of available funding, is likely
to trigger a period of painful adjustment for the global real estate industry.
Unlike the post pandemic period, banks are unlikely to stall on defaults or
enforcements as they seek a quick recovery on their loans.
All of this leaves investors in the most exposed asset classes (shopping
centres, secondary offices, logistics) and in the most exposed part of the
capital structure (equity, preferred equity and mezzanine) in a position of
needing to raise substantial capital to recapitalise their assets, or face
steep loss realisations on their assets. It should be noted that RECI is
neither meaningfully exposed to these asset classes, nor to the junior
elements of the capital structure (with over 90% of the portfolio invested in
senior loans).
Whilst public market, REITS, have been quick to adjust to the new reality,
private markets have yet to acknowledge this gap. It is very likely that the
pressures will come to bear on private markets in the second half of 2023 as
valuations are drawn, further validating RECI's pivot to a predominantly
senior loan defensive strategy.
Beyond the purely financial criteria, RECI carefully considers other
qualitative factors in evaluating potential investments. Selecting the
opportunities that include "best in class" ESG credentials, should help to
insulate much of the volatility that higher interest rates and yields will
cause in the short/medium term. It has become increasingly apparent that the
assets which look to deliver the highest standards in regards to ESG should
perform better in regards to occupational demand, as well as value retention.
Take, for example, the office asset class. We are pleased to note that RECI
(and Cheyne Real Estate) are significant supporters of City offices that are
being refurbished to a BREEAM Outstanding and Excellent grading with
observable energy efficiency measures and sustainable methods of build. BREEAM
("Building Research Establishment Environmental Assessment Method"), is an
assessment undertaken to categorise buildings using a range of environmental
issues: i.e. energy use, pollution, management processes. Cheyne and the wider
investment community, do recognise that such an office asset does attract the
strongest occupational demand, is severely undersupplied and will attract the
most efficient cost of capital. A similar picture is true also for residential
assets that cater for an inclusive community.
In a world where funding is scarce, we do expect that the available capital
will pursue assets that display the very best ESG credentials, and that the
current conditions will accelerate that move.
Resilience and opportunity from the changes since BREXIT present RECI with a
sound platform to capitalise on the current environment
Since 2016, RECI has benefited from pivoting its investment strategy away from
mezzanine (and subordinate) loans towards lower risk senior loans and bonds.
Senior loans and bonds accounted for 46% of its investment portfolio by value
in March 2016, whilst today, it represents 91%.
With a further mezzanine loan expected to repay in Q4 2022, RECI's book will
see the remaining mezzanine book fall to under 8% of its GAV. Its top 10
positions are all senior loans as is its pipeline of new investments.
This gradual repositioning recognised and reflected the fact that global
volatility and uncertainty were likely to persist and economic cycles were
likely to be increasingly short.
Another benefit as the Company has developed, is that it has moved its
origination away from the small/mid market borrowers and towards the larger,
well capitalised and experienced borrower counterparties.
These strategic initiatives have positioned the Company's investment portfolio
well, to face the challenges of the present period of volatility and
transition.
Leverage Update
RECI maintains its conservative approach to financial leverage, with its long
standing cap on gross balance sheet leverage ratio of 1.40x.
Since 2016, RECI has moved to improve its financial flexibility and also the
optimisation of its returns on the senior loan book by the prudent use of a
mixture of types of lending between:
· Flexible long-term and short-term repo financing on its liquid
bond book; and more recently
· Long-term structured financing on some of its senior loan
positions
Such improvements have resulted in RECI maintaining a defensive credit book,
furthering its structural strength, whilst having the firepower to participate
and benefit from the funding gap in the market.
RECI's current pipeline of senior loan opportunities (across the core+,
value-add, transitional and development asset classes) now offers total
returns (and low risk profiles) that are unprecedented. This is reflective of
the significant need for funding and the dearth of established alternative
lenders, of scale in the UK and Western Europe.
The sum of these developments, and RECI's strategic focus presents the Company
with the following resilient profile and opportunities:
· A defensive book ready to weather the present conditions:
- Senior loans with strong governance and low risk basis
- A focus on the relatively resilient asset classes (predominantly
the "living" asset class)
- A strong borrower base with relatively deep experience and
financial resources
· RECI is ready to capitalise on the fast-emerging opportunity set:
- Significantly higher margins for senior loans
- Floating rate loans (including those for development)
- An unprecedented pipeline of opportunities spanning both new
acquisitions and much needed recapitalisations
- An improvement in the availability of structured financing for its
senior loan book, improving the yield profile of select senior loans
Maintaining Dividend Stability
Since 2013, the Company has maintained a dividend on its NAV of 7% or better.
The second interim dividend was declared on 23 November 2022, maintaining a
payment of 3 pence per share.
It remains the Company's intention to maintain a stable quarterly dividend
paying capability through economic cycles.
The increase in yields available from its senior loan origination, alongside
the growth in the Company's ability to utilise efficient structured financing
of its senior loan book, combine to support the aim: firstly, of ensuring that
the dividend is entirely covered from income alone; and secondly, to present a
pathway towards potential dividend increases in the future.
Bilateral Loan and Bond Portfolio
The drawn fair value of the bilateral loan and bond portfolio, excluding
accrued interest, had increased from £284.4 million as at 31 March 2022 to
£337.2 million as at 30 September 2022.
The average loan portfolio LTV exposure as at 30 September 2022 was 62.3%. The
portfolio continues to provide attractive risk-adjusted returns with a
weighted average unlevered yield of 8.8% per annum, before any back-end fees,
profit share or equity element contributions are taken into account.
Investment Portfolio Overview
Portfolio Composition
RECI's investment portfolio, a diversified book of 62 positions in real estate
bonds and loans, was valued at £426.5 million, excluding accrued interest of
£11.8 million, as at 30 September 2022. The portfolio had a weighted average
levered yield of 10.9% and an average loan to value of 60.4% as at 30
September 2022.
Portfolio by Geography (Funded Fair Value)
30 Sep 2022 31 Mar 2022*
UK 51.0% 51.4%
France 36.7% 34.2%
Spain 4.8% 4.7%
Italy 3.2% 4.1%
Germany 2.0% 2.6%
Portugal 1.4% 0.9%
Finland 0.6% 0.7%
Ireland 0.3% -%
Netherlands -% 0.1%
* Excludes 1.3% held in bonds backed by assets in multiple European
countries.
Top 10 Positions(1) (by commitment)
Description Commitment LTV Investment Strategy Sector Country Asset Type
1 UK mixed use portfolio, predominantly office/residential £82.5m 58% Senior Loan Mixed-Use United Kingdom Core+
2 Paris prime resi/retail building £49.4m 67% Senior Loan Retail France Value Add / Transitional
3 London Residential Led £32.7m 67% Senior Loan Residential United Kingdom Development
Mixed Use Scheme
4 Office development in £30.8m 58% Senior Loan Office France Development
Saint Ouen, Paris
5 UK Health Care Centre £23.2m 73% Market Bond Healthcare United Kingdom Core
6 London Office £22.8m 59% Senior Loan Office United Kingdom Core
7 Spanish Villas £22.5m 49% Senior Loan Residential Spain Development
8 France Housebuilder Portfolio £20.7m 36% Senior Loan Housebuilder France Development
9 Finland Hotel £20.3m 65% Senior Loan Hotel Finland Development
10 French Hotels in Nice and Paris £19.9m 80% Senior Loan Hotel France Development
Description
Commitment
LTV
Investment Strategy
Sector
Country
Asset Type
1
UK mixed use portfolio, predominantly office/residential
£82.5m
58%
Senior Loan
Mixed-Use
United Kingdom
Core+
2
Paris prime resi/retail building
£49.4m
67%
Senior Loan
Retail
France
Value Add / Transitional
3
London Residential Led
Mixed Use Scheme
£32.7m
67%
Senior Loan
Residential
United Kingdom
Development
4
Office development in
Saint Ouen, Paris
£30.8m
58%
Senior Loan
Office
France
Development
5
UK Health Care Centre
£23.2m
73%
Market Bond
Healthcare
United Kingdom
Core
6
London Office
£22.8m
59%
Senior Loan
Office
United Kingdom
Core
7
Spanish Villas
£22.5m
49%
Senior Loan
Residential
Spain
Development
8
France Housebuilder Portfolio
£20.7m
36%
Senior Loan
Housebuilder
France
Development
9
Finland Hotel
£20.3m
65%
Senior Loan
Hotel
Finland
Development
10
French Hotels in Nice and Paris
£19.9m
80%
Senior Loan
Hotel
France
Development
1 Based on total commitment of bonds and loans.
Bilateral Loan and Bond Portfolio Summary
as at 30 September 2022
Number of loans 36
Drawn Value (£ millions) 337.2
Undrawn Loan Commitments (£ millions) 242.8
Weighted average yield of portfolio 8.8%
Weighted average yield of portfolio (levered) 10.4%
Weighted average LTV of portfolio 62.3%
Weighted average life of portfolio (years) 1.6
Number of loans
36
Drawn Value (£ millions)
337.2
Undrawn Loan Commitments (£ millions)
242.8
Weighted average yield of portfolio
8.8%
Weighted average yield of portfolio (levered)
10.4%
Weighted average LTV of portfolio
62.3%
Weighted average life of portfolio (years)
1.6
Market Bond Portfolio
As at 30 September 2022, the market bond portfolio of 26 bonds (excluding the
self-originated bonds) was valued at £89.8 million, compared to £98.5
million as at 31 March 2022.
The bond portfolio has the potential for strong defensive returns:
· The portfolio is characterised by a short duration (3.1 years)
and high coupon, which is defensive to interest rate rises and provides
resilience in turbulent markets; and
· The weighted average unlevered yield of the market bond portfolio
as at 30 September 2022 was 8.0%; with the weighted average levered yield of
the bond portfolio as at 30 September 2022 being 17.4%.
Market Bond Portfolio Summary
as at 30 September 2022
Number of bonds 26
Fair Value (£ millions) 89.8
Weighted average yield of portfolio 8.0%
Weighted average yield of portfolio (levered) 17.4%
Weighted average LTV of portfolio 51.0%
Weighted average life of portfolio (years) 3.1
Outlook
RECI's strategic pivot to predominantly senior loans and its move to flexible
term financing, positions it well as the markets transition to the "new
normal". It has a defensive credit portfolio and it has financial flexibility
to continue to take advantage of the emerging opportunities.
RECI's ambition is to continue to pay its stable dividend and to have the
potential to increase the dividend over time, without incremental risk to its
underlying credit portfolio. The strategic path of the Company and the
emerging opportunity to earn a much higher return from senior loans, fully
support that aim.
Cheyne Capital Management (UK) LLP
23 November 2022
Directors' Responsibility Statement
We confirm that to the best of our knowledge:
a) the condensed unaudited interim financial statements have been
prepared in accordance with IAS 34 "Interim Financial Reporting";
b) the interim management report (contained in the Chairman's Statement
and Investment Manager's Report) includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and a description of principal risks and uncertainties for the
remaining six months of the year); and
c) the interim management report (contained in the Chairman's Statement
and Investment Manager's Report) includes a fair review of the information
required by DTR 4.2.8R (disclosure of related party transactions and changes
therein).
Principal Risks and Uncertainties
The principal risks and uncertainties faced at the time of the last annual
report remain valid for the purposes of the interim management report. The
detailed explanation of the principal risks and uncertainties can be found in
the Strategic Report section under the Risk Management section of the 31 March
2022 annual report, which is available on the Company's website.
Since that report, the Company has identified one new risk related to higher
than recent levels of inflation, geopolitical uncertainty and the potential
impact of real interest rate movements on economic growth and valuations.
There have been no other changes to the principal risks.
By order of the Board
Bob
Cowdell
Susie Farnon
Director
Director
23 November 2022
Financial
Statements
INDEPENDENT REVIEW REPORT
TO REAL ESTATE CREDIT INVESTMENTS LIMITED
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2022 which comprises the condensed unaudited statement of
comprehensive income, the condensed unaudited statement of financial position,
the condensed unaudited statement of changes in equity, the condensed
unaudited statement of cash flows and related notes 1 to 19.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2022 is not prepared,
in all material respects, in accordance with International Accounting Standard
34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim
financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
As disclosed in note 2, the annual financial statements of the company are
prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the IASB. The condensed set of financial statements
included in this half-yearly financial report has been prepared in accordance
with International Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410; however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, 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.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for
expressing to the company a conclusion on the condensed set of financial
statements in the half-yearly financial report. Our Conclusion, including our
Conclusion Relating to Going Concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the company in accordance with ISRE (UK) 2410.
Our work has been undertaken so that we might state to the company those
matters we are required to state to it in an independent review 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, for our review work,
for this report, or for the conclusions we have formed.
Deloitte LLP
Recognised Auditor
Guernsey, Channel Islands
23 November 2022
CONDENSED UNAUDITED Statement of Comprehensive Income
For the six months ended 30 September 2022
Note 30 Sep 2022 30 Sep 2021
GBP
GBP
Interest income 5 16,577,696 13,868,816
Net (losses)/gains on financial assets and financial liabilities at fair value 3 (1,844,587) 4,400,966
through
profit or loss
Other income 5,483 13,026
Operating income 14,738,592 18,282,808
Operating expenses 4 (3,161,657) (3,052,432)
Profit before finance costs 11,576,935 15,230,376
Finance costs 5 (1,279,770) (1,025,444)
Net profit 10,297,165 14,204,932
Other comprehensive income - -
Total comprehensive income 10,297,165 14,204,932
Earnings per share
Basic and diluted 9 4.5p 6.2p
Weighted average shares outstanding Number Number
Basic and diluted 9 229,332,478 229,332,478
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Condensed Unaudited Statement of Financial Position
As at 30 September 2022
Note(s) 30 Sep 2022 31 Mar 2022
GBP
GBP
Non-current assets
Financial assets at fair value through profit or loss 11,13 438,335,993 394,341,104
438,335,993 394,341,104
Current assets
Cash and cash equivalents 12,951,555 47,385,138
Cash collateral at broker 14 14,398,961 5,204,692
Other assets 39,322 22,708
27,389,838 52,612,538
Total assets 465,725,831 446,953,642
Equity and liabilities
Equity
Reserves 340,472,701 343,935,484
340,472,701 343,935,484
Current liabilities
Financing agreements 7 117,885,374 100,368,732
Derivative financial liabilities 12 5,603,924 1,072,792
Other liabilities 6 1,763,832 1,576,634
125,253,130 103,018,158
Total liabilities 125,253,130 103,018,158
Total equity and liabilities 465,725,831 446,953,642
Shares outstanding 10 229,332,478 229,332,478
Net asset value per share £1.48 £1.50
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Signed on behalf of the Board of Directors by:
Bob
Cowdell
Susie Farnon
Director
Director
23 November 2022
Condensed Unaudited Statement of Changes in Equity
For the six months ended 30 September 2022
Note GBP
Balance as at 31 March 2022 343,935,484
Total comprehensive income 10,297,165
Dividends 8 (13,759,948)
Balance as at 30 September 2022 340,472,701
For the six months ended 30 September 2021
Balance as at 31 March 2021 346,881,003
Total comprehensive income 14,204,932
Dividends 8 (13,759,948)
Balance as at 30 September 2021 347,325,987
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Condensed Unaudited Statement of Cash Flows
For the six months ended 30 September 2022
30 Sep 2022 30 Sep 2021
GBP
GBP
Net profit 10,297,165 14,204,932
Net (purchases)/sales of financial assets (39,767,069) 20,330,362
Net sales of derivative financial assets and liabilities 249,036 2,403,212
Movement in realised and unrealised gains on financial assets (4,561,286) (5,544,848)
Movement in realised and unrealised losses on derivative financial assets and 4,282,096 846,530
liabilities
Interest income (16,577,696) (13,868,816)
Interest expense 1,279,770 1,025,444
Operating cash flows before movement in working capital (44,797,984) 19,396,816
Increase in other assets (16,614) (13,707)
Increase in other liabilities 187,198 328,063
Increase in cash collateral at broker (9,194,269) (3,163,453)
Increase in cash due to brokers - 723,606
Movement in working capital (9,023,685) (2,125,491)
Interest received 16,911,162 9,725,369
Net cash flow (used in)/from operating activities (36,910,507)* 26,996,694
Financing activities
Dividends paid to Shareholders (13,759,948) (13,759,948)
Net proceeds under financing agreements 17,516,642 21,115,875
Finance costs (1,279,770) (1,025,444)
Net cash inflow from financing activities 2,476,924 6,330,483
Net (decrease)/increase in cash and cash equivalents (34,433,583) 33,327,177
Cash and cash equivalents at the start of the period 47,385,138 21,220,812
Cash and cash equivalents at the end of the period 12,951,555 54,547,989
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
* Due to an increase in investments made during the period ended September
2022.
Notes to the Condensed Unaudited Interim
Financial Statements
For the six months ended 30 September 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
15). 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 condensed unaudited interim financial statements for the period ended 30
September 2022 have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting ("IAS 34") as issued by the
International Accounting Standards Board ("IASB"). The same accounting
policies, presentation and methods of computation have been followed in these
condensed unaudited interim financial statements as were applied in the
preparation of the Company's audited financial statements for the year ended
31 March 2022.
The condensed unaudited interim financial statements do not contain all the
information and disclosures required in a full set of annual financial
statements and should be read in conjunction with the audited financial
statements of the Company for the year ended 31 March 2022, which were
prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the IASB.
The comparative information for the year ended 31 March 2022 does not
constitute Statutory Accounts as defined by Guernsey law. A copy of the
Statutory Accounts for that year has been delivered to the Shareholders and is
available on the Company's website: www.realestatecreditinvestments.com.
The operations of the Company are not subject to seasonal fluctuations.
New Standards, Amendments and Interpretations Issued and Effective for the
Financial Year Beginning 1 April 2022
Amendments to IAS 37 - Onerous contracts: Cost of fulfilling a Contract
The amendments 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.
General and administrative costs do not relate directly to a contract and are
excluded unless they are explicitly chargeable to the counterparty under the
contract. The amendments must be applied prospectively to contracts for which
an entity has not yet fulfilled its obligations at the beginning of the annual
reporting period in which it first applies the amendments. Earlier application
is permitted and must be disclosed. The amendment is intended to provide
clarity and help ensure consistent application of the standard. Entities that
have previously applied the incremental cost approach will see increased
provisions to reflect the intrusion of costs related directly to contract
activities. Judgement will be required in determining which costs are
'directly related to contract activities', but the guidance in IFRS 15 Revenue
from Contracts with Customers will be relevant. The amendments to IAS 37 are
effective for annual periods beginning on or after 1 January 2022. The
amendments has 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 2022 and not Early Adopted
Title Effective for periods beginning on or after
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
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
Condensed Unaudited 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 provide 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 condensed unaudited interim 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.
For the period ended 30 September 2022 and year ended 31 March 2022, the
financial assets at fair value through profit or loss include 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 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 condensed unaudited interim 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 condensed unaudited interim financial statements.
The Investment Manager performed an evaluation of each of its positions in
light of all macroeconomic factors 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 30 September 2022 of £13.0 million (31 March
2022: £47.4 million), the liquidity of the market bond portfolio and the
financing available through activities such as repurchase agreements as
described in Note 7, 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 condensed unaudited interim 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 30 September 2022 was 26.9% (31 March 2022:
14.0%).
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 carrying out the Company's strategy, the Investment Manager undertakes the
following measures:
· An initial and continuing detailed evaluation of each of its
portfolio positions in light of the various impacts of changing economic
circumstances 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 16, as at 30 September 2022, the Company had committed
£602.1 million into loans of which £358.7 million had been funded (31 March
2022: £522.9 million commitment of which £284.4 million had been funded).
The Investment Manager models these expected commitments and only funds if the
borrowers meet specific business plan milestones.
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 condensed unaudited interim financial statements.
3. Net (Losses)/Gains on Financial Assets and Liabilities at Fair Value
through Profit or Loss
30 Sep 2022 30 Sep 2021
GBP
GBP
Net gains/(losses)
Net (losses)/gains on market bonds (4,407,934) 1,913,243
Net gains on self-originated bonds 3,349,522 2,032,444
Net gains on self-originated loans 5,619,698 1,599,162
Net losses on foreign exchange instruments and other foreign currency (6,405,873) (1,143,883)
transactions
Net (losses)/gains on financial assets and liabilities at fair value through (1,844,587) 4,400,966
profit or loss
4. Operating Expenses
Note 30 Sep 2022 30 Sep 2021
GBP
GBP
Investment management, administration and depositary fees
Investment management fee 15 2,162,157 2,195,084
Administration fee 15 124,555 125,634
Depositary fee 15 32,209 32,914
2,318,921 2,353,632
Other operating expenses
Legal fees 296,167 167,088
Directors' fees 107,500 117,664
Audit fees 59,444 34,000
Corporate secretary fees 44,539 44,299
Fees to auditor for non-audit services 37,500 37,500
Regulatory body expenses 15,283 -
Research fees 950 24,746
Other expenses 281,353 273,503
842,736 698,800
Total operating expenses 3,161,657 3,052,432
The ongoing costs of the Company are shown in the Key Information Document
(KID) published on the Company's website. The total figure of 2.23% (30
September 2021: 2.36%) is made up of the Investment Manager's fee of 1.25% (30
September 2021: 1.25%), other ongoing costs of 0.42% (30 September 2021:
0.46%), and finance costs (which are disclosed separately in the financial
statements) of 0.56% (30 September 2021: 0.65%). The finance costs may vary
and are only incurred to increase the overall returns to investors.
5. Interest Income and Finance Costs
The following table details interest income and finance costs from financial
assets and liabilities for the period:
30 Sep 2022 30 Sep 2021
GBP
GBP
Interest income
Real Estate Credit Investments - market bonds 2,285,806 1,711,241
Real Estate Credit Investments - self-originated bonds 8,375,764 5,346,760
Real Estate Credit Investments - self-originated loans 5,865,739 6,808,030
Cash and cash equivalents and other receivables 50,387 2,785
Total interest income 16,577,696 13,868,816
Finance costs
Net cost of financing agreements (1,279,770) (1,025,444)
Total finance costs (1,279,770) (1,025,444)
6. Other Liabilities
30 Sep 2022 31 Mar 2022
GBP
GBP
Investment management, depositary and administration fees payable
Investment management fees payable 350,160 365,525
Depositary fees payable 44,809 27,086
Administration fees payable 20,135 20,892
415,104 413,503
Other operating payables
Interest payable 253,367 193,902
Audit fees payable 76,375 85,250
Directors' fees payable 53,750 48,812
Corporate secretary fees payable 37,500 18,750
Legal fees payable 34,485 27,199
Other expense accruals 893,251 789,218
1,348,728 1,163,131
Total liabilities 1,763,832 1,576,634
7. 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 £232.3 million (31 March
2022: £212.7 million) and a weighted average cost of 3.6% (31 March 2022:
1.2%) per annum. The contractual maturity period of the repurchase
arrangements is 3 to 12 months (31 March 2022: 3 to 6 months).
This short-term financing is shown as a current liability in the Condensed
Unaudited Statement of Financial Position whereas the collateralised assets
are shown as non-current. The movement in financing agreement amounting to
£17.5 million (30 September 2021: £21.1 million) and finance costs amounting
to £1.3 million (30 September 2021: £1.0 million) are shown as financing
activities in the Condensed Unaudited Statement of Cash Flows.
The Company had 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 30
September 2022 was £11.7 million (31 March 2022: £2.8 million).
8. Quarterly Dividends
30 Sep 2022 30 Sep 2021
GBP
GBP
Share dividends
Fourth interim dividend for the year ending 31 March 2022/31 March 2021 6,879,974 6,879,974
First interim dividend for the year ending 31 March 2023/31 March 2022 6,879,974 6,879,974
Dividends paid to Shareholders in the period 13,759,948 13,759,948
The total dividends paid during the financial period ended 30 September 2022
amounted to 6 pence per share (30 September 2021: 6 pence per share).
Under Guernsey law, companies can pay dividends provided they satisfy the
solvency test prescribed under The Companies (Guernsey) Law, 2008, as amended,
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 all
dividend payments during the period from 1 April 2021 to 30 September 2022.
9. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
30 Sep 2022 30 Sep 2021
Net earnings attributable to shares (GBP) 10,297,165 14,204,932
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) 4.5 6.2
10. Share Capital
The issued share capital of the Company consists of shares and its capital as
at the period 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 30 September 2022, the Company
had capital of £340.5 million (31 March 2022: £343.9 million).
30 Sep 2022 31 Mar 2022
Number of Shares
Number of Shares
Authorised Share Capital
Shares of no par value each Unlimited Unlimited
Shares issued and fully paid 30 Sep 2022 31 Mar 2022
Number of Shares
Number of Shares
Shares at the start of the period/year 229,332,478 229,332,478
Shares at the end of the period/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 Condensed Unaudited Statement of Changes in
Equity.
11. 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 Condensed Unaudited
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. 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; and
· 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 period/year end
date:
As at 30 September 2022 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Non-current assets
Real Estate Credit Investments - market bonds - 89,767,759 - 89,767,759
Real Estate Credit Investments - self-originated bonds - - 216,825,397 216,825,397
Real Estate Credit Investments - self-originated loans - - 131,742,837 131,742,837
Total non-current assets - 89,767,759 348,568,234 438,335,993
Current liabilities
Forward foreign exchange contracts - (5,603,924) - (5,603,924)
Real Estate Credit Investments - repurchase agreements - (117,885,374)* - (117,885,374)
- (33,721,539) 348,568,234 314,846,695
* Includes repurchase agreements related to Level 3 investments.
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.
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") and repurchase agreements.
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. The weighting of the valuation between
observable prices from comparable bonds and the valuation result based on
proprietary sector curve discount yields is a key unobservable input in
deriving fair value of the investments. A 50% weighting to each data point has
been applied and the fair value range generated by the two approaches is £0.7
million (31 March 2022: £2.5 million). The sector curve discount yields used
range from 4.4% to 16.0% (31 March 2022: 4.0% to 14.0%). Applying a discount
yield +/-2% to the valuation would reduce/increase the fair value at 30
September 2022 by £(0.4) million and £1.0 million (31 March 2022: £(2.5)
million and £2.6 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 4.9% to 13.2% (31 March
2022: 5.1% to 13.3%) (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.
No material movements on the fair value of the real estate loans have been
identified and the par value of the loans was used. 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 at 30 September 2022, the Investment Manager has taken into account
movements in 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 5% (31 March
2022: 1% or 2%) decrease in the discount rate would decrease the fair value by
£5.6 million or £28.2 million (31 March 2022: £3.7 million or £7.3
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 period/year:
Level 3 Level 3
30 Sep 2022 31 Mar 2022
GBP GBP
Financial assets at fair value through profit or loss
Opening balance 284,418,569 310,193,876
Total gains recognised in the Condensed Unaudited Statement of Comprehensive 8,969,220 2,260,608
Income for the period/year
Purchases 97,012,654 81,589,656
Sales (53,175,033) (109,625,571)
Closing balance* 337,225,410 284,418,569
Unrealised gain/(loss) on investments classified as Level 3 at period/year end 4,924,107 (688,552)
* The closing balance does not include interest receivable of £11,342,824 (31
March 2022: £11,471,980) included in the fair value of Level 3 financial
assets at fair value through profit or loss.
12. Derivative Contracts
The Company has credit exposure in relation to its derivative contracts. The
Company invested in derivative contracts with the Bank of New York Mellon with
the following credit quality according to Standard and Poor's:
Rating 30 Sep 2022 31 Mar 2022
GBP
GBP
The Bank of New York Mellon - AA- (Derivatives) (5,603,924) (1,072,792)
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 Condensed Unaudited 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 Condensed Unaudited Statement of Financial Position.
Below are the derivative liabilities by counterparty as at 30 September 2022
and 31 March 2022.
Forward Foreign Exchange Contracts
The following forward foreign exchange contracts were open as at 30 September
2022:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised Loss
GBP
The Bank of New York Mellon 18 November 2022 GBP 156,442,691 EUR (184,370,000) (5,603,924)
Unrealised loss on forward foreign exchange contracts (5,603,924)
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 Gain
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)
13. 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 condensed unaudited interim 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.
For the six months ended 30 September 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment profit/(loss) (2,122,129) 23,261,111 21,138,982
For the six months ended 30 September 2021:
Reportable segment profit 3,624,484 15,789,179 19,413,663
As at 30 September 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment assets 89,767,759 348,568,234 438,335,993
Non-segmental assets 27,389,838
Total assets 465,725,831
As at 31 March 2022:
Reportable segment assets 98,450,555 295,890,549 394,341,104
Non-segmental assets 52,612,538
Total assets 446,953,642
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 period. 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.
30 Sep 2022 30 Sep 2021
GBP
GBP
Reportable segment profit 21,138,982 19,413,663
Net losses on foreign exchange instruments and other foreign currency (6,405,873) (1,143,881)
transactions*
Other income 5,483 13,026
14,738,592 18,282,808
Operating expenses (3,161,657) (3,052,432)
Finance costs (1,279,770) (1,025,444)
Net profit 10,297,165 14,204,932
* The Company enters into foreign exchange contracts to hedge it's
exposure to non-GBP investments, movements in the value of its foreign
exchange contracts are offset by the corresponding opposite move in its
non-GBP investments.
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.
30 Sep 2022 31 Mar 2022
GBP
GBP
Reportable segment assets 438,335,993 394,341,104
Cash and cash equivalents 12,951,555 47,385,138
Cash collateral at broker 14,398,961 5,204,692
Other assets 39,322 22,708
465,725,831 446,953,642
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios for the period ended 30 September
2022:
As at 30 September 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 97,781,000 284,418,569 382,199,569
Purchases - 97,012,654 97,012,654
Repayments/sales proceeds (4,070,552) (53,175,033) (57,245,585)
Realised loss on sales (136,871) (7,485,098) (7,621,969)
Net movement in unrealised (loss)/gain on investments at fair value through (4,271,063) 16,454,318 12,183,255
profit or loss
Closing fair value* 89,302,514 337,225,410 426,527,924
* The 30 September 2022 closing fair value does not include interest
receivable of £465,245 and £11,342,824 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 2022:
As at 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 profit or 759,447 2,473,050 3,232,497
loss
* The 31 March 2022 closing fair value does not include interest receivable of
£669,555 and £11,471,980 included in the fair value of Market Bond Portfolio
and Bilateral Loan and Bond Portfolio, respectively.
14. 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 30
September 2022, a total of £14.4 million (31 March 2022: £5.2 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 Condensed Unaudited Statement of Financial
Position.
15. 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 through another Luxembourg
based entity, ENIV S.à r.l. via separate note instruments. This entity has
separate compartments for each loan deal which effectively ringfences 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 period ended 30 September 2022, the Management Fee totalled £2.2
million (30 September 2021: £2.2 million), of which £0.4 million (31 March
2022: £0.4 million) was outstanding at the period 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.
On 1 October 2021, the Company entered a new Performance Period 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 12 months period ended 30 September 2022, there were no performance
fees accrued.
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 period ended 30 September 2022, the administration fee totalled
£124,555 (30 September 2021: £125,634), of which £20,135 (31 March 2022:
£20,892) was outstanding at the period 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 2022:
0.02%) of the NAV of the Company. During the period ended 30 September 2022,
the Depositary fee totalled £32,209 (30 September 2021: £32,914). The
Company owed £44,809 (31 March 2022: £27,086) to the Depositary at the
period end date.
16. Contingencies and Commitments
As at 30 September 2022, the Company had committed £602.1 million into
bilateral loans and bonds of which £358.7 million had been funded (31 March
2022: £522.9 million commitment of which £284.4 million had been funded).
17. Subsequent Events
The Directors declared a second interim dividend of 3 pence per share on 23
November 2022.
There have been no other significant events affecting the Company since the
period end date that require amendment to or disclosure in the condensed
unaudited interim financial statements.
18. Foreign Exchange Rates Applied to Combined Totals Used in the Preparation
of the Condensed Unaudited Interim Financial Statements
The following foreign exchange rates relative to the GBP were used as at the
period/year end date:
Currency 30 Sep 2022 31 Mar 2022
GBP
GBP
EUR 1.14 1.18
USD 1.12 1.32
19. Approval of the Condensed Unaudited Interim Financial Statements
The condensed unaudited interim financial statements of the Company were
approved by the Directors on 23 November 2022.
Directors and Advisers
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
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
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