REG - Real Est Crd InvsLtd - Annual Financial Report
22/06/2023 07:00
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RNS Number : 4923D Real Estate Credit Investments Ltd 22 June 2023
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 2023.
View the Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations
(https://realestatecreditinvestments.com/investors/results-reports-and-presentations)
For further information please contact:
Broker: Richard Crawley / Edward Mansfield (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
2023
Attractive returns from credit exposure to UK
and Western European real estate credit markets
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.
overview
AS AT 31 MARCH 2023
Overview and Highlights
· Defensive credit exposure to UK and Western European real estate
credit markets
- Stable and uninterrupted dividends delivered consistently since
October 2013
· Granular portfolio with detailed disclosure
- 53 positions
- Diverse portfolio across sectors and geography
· 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
Key figures
Total Assets
£419.0m
(31 March 2022: £447.0m)
NAV per share
£1.47
(31 March 2022: £1.50)
Net Assets
£337.0m
(31 March 2022: £343.9m)
Net Profit
£20.6m
(Full year ended 31 March 2022: £24.6m profit)
RECI Offers:
· Focus on senior secured credit, with defensive LTVs
· Strong governance control over its loan book
· Large, experienced, well capitalised borrowers
· Conservative and flexible leverage profile
· Dividend stability without compromising risk
· Management from Cheyne's
Total NAV Return
6.2%
(31 March 2022: 6.9%)
Share Price
£1.34
(31 March 2022: £1.51)
Dividend Yield
9.0%
(31 March 2022: 8.0%)
FY 2023 Dividends
12.0 pence
(31 March 2022: 12.0 pence)
OVERVIEW
At a Glance
Providing 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 normal economic and credit cycles, through a
levered exposure to real estate credit investments.
Investment areas
Bilateral 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 53 positions in real
estate bonds and loans.
NAV and Share Price As at 31 March 2023
Net Assets £337.0m
Shares Outstanding 229.3m
NAV (per share) £1.47
Share Price (per share) £1.34
(Discount)/Premium (8.8)%
Dividend Yield 9.0%
Market Capitalisation £307.3m
Total NAV Return*
Half Year Ended 31 March 23 3.1%
Financial Year Ended 31 March 23 6.2%
Prior Financial Year Ended 31 March 22 6.9%
Last Three Financial Years Ended 31 March 23 26.9%
Last Five Financial Years Ended 31 March 23 32.1%
* The Total NAV Return measures the combined effect of any dividends paid,
together with the rise or fall in the NAV per Share. The Total NAV 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 Total NAV Return is considered an
Alternative Performance Measure pursuant to ESMA Guidelines which is unaudited
and outside of the scope of International Financial Reporting Standards
("IFRS").
Portfolio by Geography
by % of Total Committed Capital including PIK
% Since
Allocation
Mar-22
Mar-23
UK 58.3% 13.7%
France 23.8% (11.1%)
Spain 7.5% (3.1%)
Finland 3.7% (0.0%)
Portugal 2.8% 2.8%
Ireland 1.6% 0.0%
Italy 1.2% (1.4%)
Germany 1.1% (0.9%)
Portfolio by Sector
by % of Total Committed Capital including PIK
% %
Allocation
Allocation
Mar-23
Mar-22
Hotel 19.8% 22.6%
Mixed-Use 17.1% 21.2%
Student Accommodation 11.9% 10.2%
Residential 11.8% 6.7%
Office 11.6% 11.7%
Co-Living 7.0% 3.2%
Leisure 5.0% 2.4%
Later Living 3.3% 0.0%
Housebuilder 3.3% 4.8%
Assisted Living 3.2% 3.2%
Retail 1.3% 3.1%
Logistics 2.0% 2.2%
Land 1.9% 0.0%
Industrial 0.8% 0.8%
Healthcare 0.0% 7.9%
OVERVIEW
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,
by exposure to a diversified portfolio of real estate credit investments,
predominantly comprising real estate loans and bonds.
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 levered 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 European 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.
As it has since 2013, the Company intends to continue to pay a stable
quarterly dividend with the potential for additional payments if investment
returns permit
OVERVIEW
Chairman's Statement
RECI continued to deliver a stable NAV and attractive annual dividend of 12
pence per share, amid challenging times and volatile markets
Bob Cowdell
Chairman
No review of our financial year ended 31 March 2023 can ignore the
extraordinary events and global economic and market volatility which provided
the backdrop to your Company's performance, as it continued to deliver a
stable NAV and an attractive, sustainable dividend for our Shareholders.
The war in Ukraine continued throughout the year under review and there is no
imminent sign of a cessation or peaceful resolution. There have also been
rising tensions in Asia caused by the actions of China and North Korea. Events
saw oil and commodity prices surge higher, with supply chains still struggling
to recover from the Covid crisis. The consequence was the rise of inflation
throughout the world and the inevitable response of Central Banks in the UK
and abroad in raising interest rates at the fastest pace seen in decades,
which created currency and market volatility. Nervousness was heightened by
the threat of potential recession and many suffered as the "cost of living
crisis" impacted businesses and individuals.
In addition, the UK suffered political and market turmoil in Autumn 2022,
following the removal of Boris Johnson as Prime Minister, the ill-fated tenure
of Liz Truss and her government's September 2022 "Mini-Budget", which
destabilised credit markets. These events caused significant credit and
currency market reaction and Rishi Sunak, the UK's third Prime Minister during
the last financial year, and his Chancellor have been seeking to steady and
reassure markets to negate the political risk premium in credit and UK gilt
markets.
Market confidence was further tested in Q1 of 2023 with concerns arising about
the stability of the US and international banking sector, following the run on
deposits of Silicon Valley Bank in the US and its UK branch and the issues at
Credit Suisse ahead of its acquisition by UBS. The aggressive hiking of
interest rates in the US has led to further stress being experienced by US
regional banks and driven market concerns about potential issues impacting the
wider banking community.
Inevitably, this has negatively impacted investor sentiment amid concerns
about the credit and real estate markets. There has been significant sector
widening of discounts for companies investing in real estate debt and for
REITs, reflecting investor nervousness of the negative commentary on the
outlook for commercial real estate valuations.
It is probably no surprise that markets in such a year have been described to
me by several senior market professionals as "the worst of my career"!
Nevertheless, your Board and Cheyne remained committed to continuing to
deliver attractive returns for our Shareholders. The Company's portfolio
composition positioned it well to withstand the various challenges and steer a
course through these difficult markets, as evidenced by the stable net asset
value maintained throughout the financial year.
I am pleased to report that for the year ended 31 March 2023, RECI delivered a
total net profit of £20.6 million and maintained an unchanged dividend of 3
pence per quarter, while taking the opportunity to continue to enhance the
quality of RECI's portfolio.
Reacting to the changing market background, Cheyne moved to strengthen the
Company's position by: transacting the majority of new loans on a floating
rate basis; increasing the focus on senior loans to over 90% of the total
portfolio; reducing the holding in public market bonds; and investing in a
pipeline of new, higher return opportunities which will enhance the dividend
income cover.
Financial Performance
RECI reported a total net profit for the financial year ended 31 March 2023 of
£20.6 million on year end total assets of £419.0 million, compared with a
£24.6 million net profit in the year ended 31 March 2022, on year end total
assets of £447.0 million.
The NAV as at 31 March 2023 was £1.47 per share (£1.50 per share as at 31
March 2022) which, combined with the 12 pence per share of dividends payable
in respect of the year ended 31 March 2023, represents an annualised total
return for Shareholders of 6.2%.
During the financial year ended 31 March 2023, the Company's shares traded at
an average discount to NAV of 6.1%, (0.7% premium for the year ended 31 March
2022).
Total quarterly dividends declared in respect of the financial year ended 31
March 2023 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 3.2%, with average gross leverage
of £121.2 million or 1.36x NAV. RECI also introduced asset level structured
leverage (totalling £20.6 million at year end), at an average borrowing cost
of 5.9%.
During the financial year to 31 March 2023, the Company committed £155.2
million to eight new deals and funded £158.6 million into new and existing
deals, compared with £81.6 million and £113.1 million respectively in the
previous financial year. RECI also received cash repayments and interest of
£159.0 million in this year, compared with £132.2 million in the year ended
31 March 2022.
Financial Year Review
Despite the challenges to real estate and credit markets, in particular the
yield widening in the bond markets following the 23 September 2022
"Mini-Budget", the Company's robust portfolio ensured the NAV remained stable
at an average of £1.50 per share during the financial year, notwithstanding
the payment to Shareholders of four unchanged dividends, totalling 12 pence
per share, during the period.
That NAV resilience reflects the positioning of RECI's portfolio. In response
to climbing inflation and rising interest rates, Cheyne moved to execute new
loans on floating rather than fixed rate terms for the majority of its new
deals. In line with our stated strategy of increasing exposure to lower risk
senior positions, 90.3% of the Company's positions were in senior assets by
the financial year end. The size and capital strength of RECI's chosen
counterparties continued to increase and the weighted average life of the
whole portfolio was 2.3 years for the financial year ended 31 March 2023. All
scheduled interest and repayments were received as anticipated during the
financial year; endorsing the credit quality of the portfolio, which is driven
by Cheyne's investment process and deal selection.
The market turbulence also presented opportunities to deploy capital to
strengthen the Company's investment returns, with Cheyne identifying a
pipeline of potential transactions offering enhanced returns of over 10%.
These underpin RECI's attractive current dividend pay-out of 12 pence per
share per annum, improve dividend cover and provide the opportunity for NAV
stability and potential growth. As at 31 March 2023 the weighted average LTV
of the Company's portfolio was 59.2% (62.4% at 31 March 2022), providing
significant defensive equity headroom. The new investments were funded by
deploying leverage and cash from realisations and repayments. The Board
maintains its practice of considering all options when assessing the levels of
cash utilisation and allocation.
When the financial year began on 1 April 2022, RECI had gross balance sheet
leverage of £100.4 million (1.29x NAV) and leverage net of cash of £47.8
million (1.14x NAV). The Board and Cheyne have continued to monitor RECI's
cash resources and repayments and to consider the appropriate level and blend
of gearing for the Company. During the last financial year, the Company
introduced asset level leverage (which may be structured on a non-recourse or
partial recourse basis), alongside flexible balance sheet leverage. At the
year end, the Company had gross balance sheet leverage of £80.2 million
(1.24x NAV) and leverage net of cash of £63.7 million (1.20x NAV), together
with £20.6 million of asset level leverage.
RECI has now entered into its first partial recourse asset level leverage
transactions, in line with its strategy of leverage diversification. As at 31
May 2023, the Company's gross balance sheet leverage was £59.3 million (1.17x
NAV); its balance sheet leverage net of £28.7million cash was 1.09x NAV; and
its net effective leverage, including contingent liabilities of £3.6 million
(being the partial recourse commitment, representing 25% of asset level
borrowings provided to certain asset level structured finance counterparties),
was 1.10x NAV.
The negative market sentiment caused by the geopolitical and economic events
during our last financial year inevitably impacted RECI's share price and saw
material discount widening across the investment funds sector generally and
the credit and real estate sectors, in particular. During the half year to 30
September 2022, the Company's shares traded at an average discount to NAV of
2.4%. The market volatility following the September 2022 "Mini-Budget"
provoked much greater investor uncertainty in credit markets, contributing to
some reactive selling of RECI shares, causing the discount to widen further.
Overall, the Company's shares traded at an average discount to NAV of 6.1% for
the financial year ended 31 March 2023 and the discount has since widened to
trade at an average of 13.7% since 1 April 2023 reflecting ongoing market
nervousness.
The Company's shares closed at £1.29 on 19 June 2023 (a discount of 13.8%),
which would provide a yield of 9.3% on the basis of continuing to pay a
quarterly 3 pence dividend per share for the rest of the current financial
year. The merits of RECI's offering and, in particular, the yield at current
share price levels, appears to have been overlooked amid the broader volatile
market background. Your Board believes that RECI provides investors with a
highly attractive, long-term income stream with enhanced dividend cover. The
Company is positioned to deliver this attractive dividend stream alongside a
stable NAV and provide investors with a substantial and liquid company (with
total assets of £419.0 million and market capitalisation of £307.3 million
at 31 March 2023) with the potential to grow over time.
Ravi Stickney, CIO of Cheyne Real Estate, continued the programme of quarterly
updates for Shareholders and investors, providing a detailed and comprehensive
review of RECI's portfolio and Cheyne's views on the broader credit and
property sectors. We are currently reviewing and seeking to enhance our
programme of online events and meetings for investors. During Autumn 2022, the
Board worked with our service providers to enhance the Company's website and
Fact Sheet.
The global geopolitical and economic challenges of the last 15 months have
caused many headlines and much market volatility and uncertainty, which has
inevitably impacted investor sentiment. Against this macro backdrop, the
Directors and Cheyne remain 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.
Board Update
The Board and its committees continue to operate effectively, with an equal
representation of male and female Directors.
Reflecting our ESG focus, the Board appointed Colleen McHugh to the role of
"ESG Lead" in October 2022.
Since the start of the last financial year, members of the Board have
purchased an aggregate of 90,000 shares in the Company, increasing the
Directors' aggregate holding to 425,250 shares.
Environmental, Social and Governance Matters ("ESG")
Your Board continues 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.
In her role as "ESG Lead", Colleen McHugh is working closely with Cheyne in
developing and implementing RECI's ESG approach.
Page 30 of the Stakeholder Engagement section and pages 32-36 of the
Sustainability Report provide further information about the Company's and the
Manager's approach to ESG matters.
Outlook
Several of the geopolitical and economic uncertainties which provided the
backdrop to our financial year ended 31 March 2023 appear likely to remain for
the rest of the current financial year. While it may be hoped that inflation
and interest rates are approaching their peak, despite the UK's core inflation
rate remaining stubbornly high, both appear likely to remain well above the
average of the last decade for some time yet. The threat of potential
recession remains and there are many who are feeling the daily impact of the
"cost of living crisis".
Nevertheless, the Company's robust portfolio composition and its transition
into senior loans and floating rate terms has positioned it well to withstand
these challenges and steer a course through difficult market conditions.
In considering all options when deciding on the appropriate allocation of the
Company's cash resources, the Board is mindful of when opportunities present
themselves to achieve attractive repeatable returns from investments and
reinvestments and thereby enhance the "investment case" for RECI.
Encouragingly, Cheyne and its deal pipeline have ensured that RECI already has
and will continue to benefit from the opportunities to lend at attractive
returns of over 10% to enhance portfolio returns. The current market
dislocation will benefit RECI in achieving enhanced terms for its lending, as
competitor banks and specialist lenders to the sector withdraw.
In the face of macro volatility, your Board and Investment Manager have always
believed in the benefit of focusing 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.
The Directors believe that RECI remains soundly positioned to continue to
deliver an attractive and stable dividend to investors seeking a reliable
long-term income stream from a listed and liquid investment company, with a
highly regarded specialist Investment Manager.
Bob Cowdell
Chairman
21 June 2023
KPIs and Financial Highlights
Key Performance Indicators
31 Mar 2023 31 Mar 2022
Balance Sheet
Net Asset Value ("NAV") per share £1.47 £1.50
Share price £1.34 £1.51
(Discount)/premium (8.8)% 0.4%
Average (discount)/premium in year* (6.1)% 0.7%
Leverage (% of NAV)** 23.8% 29.4%
* Average (discount)/premium 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 2023 31 Mar 2022
Profit, Loss and Dividends
Earnings per share 9.0p 10.7p
Dividends per share declared for the year 12.0p 12.0p
Total NAV Return (including dividends) annualised 6.2%* 6.9%
* Assumes re-investment of dividends.
Financial Highlights
31 Mar 2023 31 Mar 2022
Balance Sheet
Cash, cash equivalents and cash held by brokers £16.5m £52.6m
Net assets £337.0m £343.9m
31 Mar 2023 31 Mar 2022
Profit and Loss
Operating income £30.7m £32.4m
Net profit £20.6m £24.6m
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.
Annual Report and Accounts 2023
Business
and Strategy Review
In this section
Strategic Framework and Performance Highlights
Strategic Report
Investment Manager's Report
Stakeholder Engagement
Sustainability Report
Business and Strategy Review
Strategic Framework and Performance Highlights
Senior real estate lending remains a high conviction theme
Objectives
1 Provide investors with a diversified portfolio of real estate
credit investments
2 Deliver a stable quarterly dividend with minimal volatility
3 Exploit opportunities in the real estate market
4 Position the Company to grow through opportunities the
Investment Manager is delivering
Performance Highlights
Newly Committed in year
£155.2m
(as at 31 March 2023)
Return to Shareholders
£27.5m
(as at 31 March 2023)
Investment Portfolio
£400.7m
(as at 31 March 2023)
Performance Highlights
Progress in Year Ended 31 March 2023
1
· RECI's investment portfolio is a diversified book of 53 positions
in real estate loans and bonds.
· Over the course of the last financial year, RECI has committed
£155.2 million to eight new deals, and funded £158.6 million into new and
existing deals during the year.
2
· 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
· Investment book has grown to £400.7 million (gross of leverage) as
at 31 March 2023 which is spread across 53 positions with a weighted average
levered gross yield of 11.1% and an average loan-to-value of 59.2%.
· All repayments were received on time as anticipated.
· RECI also received cash repayments and interest of £159.0 million
in this year.
4
· RECI has continued its migration towards an all-senior loan book.
· 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.
Business and Strategy Review
Strategic Report
The Strategic Report describes the business of the Company and details the
principal risks and uncertainties associated with its activities.
Investment Objective and Investment Policy
The Investment Objective and Investment Policy are set out on page 6, along
with a further paragraph "About the Company" 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 2.5 years as at 31
March 2023, the usual term of a new loan at origination is between 3 to 5
years, so the majority of the assets could be expected to be realised in a
three-year period, or shortly thereafter.
The Board conducts an annual review, stress testing the Company's cash flows
arising from the loan and bond portfolio over a three-year period, 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
flow 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
Investment Manager when looking at its own viability, and given the size of
the Investment Manager's platform away from the Company and the private
capital it manages in numerous other real estate debt funds, of which the
combined total is approximately £5 billion AUM, the Investment 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 relevant geopolitical
and macro economic risks: including increased interest rates, heightened
inflation, supply chain dispruption, the continuing impact of the Ukraine
conflict; and the effects of climate change and cyber security. 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. Additionally the Board seeks to identify emerging risks
and responds to them as they evolve.
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. The Board is committed to promoting the Company with the
long-term aim of its share price trading at or around NAV and will consider
all options to achieve this. This may include consideration, as part of the
ongoing cash allocation policy, of implementing share buy-backs to enhance NAV
per share and potentially reduce any discount to NAV. This will only be done
when cash resources permit and in the context of prevailing market conditions
and the one-time potential NAV uplift of a buy-back compared with the
potential repeatable long term benefit of investments in attractive high
yielding opportunities to enhance RECI's returns. There can be no certainty
that buy-backs will be implemented and/or that an enhancement to share price
would be achieved. No buybacks were made during the year ended 31 March 2023.
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 2023 and at
each subsequent AGM, or earlier at an Extraordinary General Meeting if the
Directors consider it appropriate.
Target Portfolio Returns and Dividend Risk
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.
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 Risk
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 15(d) to the financial statements. Further
information on valuation is detailed in the Audit and Risk Committee Report on
page 56 and Note 2 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 Bond Portfolio - 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. In addition to the underlying credit quality of borrowers the
weighted average life of the assets as at 31 March 2023 is 2.5 years, which is
an additional mitigant regarding any loss in value due to changes in borrowers
circumstances over the long term.
Bilateral Loan and Bond 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 comprises interest rate risk, currency risk and price 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.
In addition to the underlying credit quality of borrowers, the weighted
average life of the assets as at 31 March 2023 is 2.5 years, which is an
additional mitigant regarding any losses in value due to changes in borrowers'
circumstances over the long term.
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 British Pounds ("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 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 15(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 no
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 15 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; this includes a
consideration of any relevant Emerging Risks as they evolve. These currently
include: geopolitical and macro economic risks: including increased interest
rates, heightened inflation, supply chain disruption, the continuing impact of
the Ukraine conflict; and the effects of climate change and cyber security.
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.
Business and Strategy Review
Investment Manager's Report
RECI is evolving to capitalise on the scalable opportunity set
Ravi Stickney
Portfolio Manager
Managing Partner & CIO of Cheyne Real Estate
Market Review
Real Asset Valuations: A painful transition to the new normal for some
The past year has brought about the recognition that the era of low interest
rates is gone for good.
A painful period of high inflation needed (and received) sustained higher
interest rates. That is set to continue to mitigate the risk of an entrenched
inflationary spiral in economies. A successful policy response to curtail
entrenched high inflation will not, in our view, lead to rates returning to
the very low base that western economies have enjoyed for more than a decade.
Normalised rates that spur productivity and remove excess from the markets are
most likely to be the basis for the new normal.
This presages a transitory period of higher rates, normalising at a level that
balances the need for productive growth and the curtailment of excess.
For the real estate asset class, normalised long-term rates are a key factor
in the determination of valuations. The long period of low rates brought about
the assumption that all assets (even those that prove to have little basis for
demand) would rise as the search for yield drove demand. Normalising rates
will weed out the weaker assets (those that have little basis for demand) but
will also spur demand for the best in class assets that are much needed for
future growth of our societies. These assets will help deliver not just growth
in our economies, but also promote the very best outcomes for the environment
and social cohesion.
There are immediate and longer-term implications for asset values that
consequently arise:
· Assets that do not present the best environmental or social
credentials will give way to assets that do
· Demand will be driven for assets that address the shifts in the way
we live and work. The demand for assets that do not address these will decline
sharply as they are no longer supported by low interest rates
· Values of all asset classes (regardless of demand strength) will
stabilise at lower levels, simply due to higher yield expectations, before
resuming their growth.
European Real Estate Debt Markets: A renewed cycle of retrenchment
European real estate debt markets (unlike their counterparts in North America)
were already subdued coming into this last year from a mix of increasingly
onerous regulatory pressure and weak capital ratios.
The declining valuations in real assets have compounded that issue, as has the
latest bout of bank capital uncertainty brought about by the collapse of
Silicon Valley Bank and Credit Suisse, and the realisation that the perceived
balance sheet strength of the largest banks may need to be subject to a
re-evaluation of their strongest assets (long-term government debt). As Global
and European banks recognise the deficits arising from the (potentially
permanent) diminution in values of these long-dated securities, it is very
likely that the already low appetite for capital intensive real estate lending
will decline.
We are already seeing that retrenchment not just in the UK, but across Europe.
Implications for the funding needs of Real Assets
The combination of the above declining values and retrenching bank lending
markets points to a prolonged concern about the viable refinancing capability
of all real assets, including those that demonstrate the most stable income
profile.
That financing "gap" is now becoming well understood with several respected
publications attempting to quantify the size of that "gap". Whilst that gap is
indeed significant, what is more pertinent is that there is a scarcity of
capable capital (especially so in Europe) to provide any of that financing.
As banks retreat, the alternative lending market (of which RECI and its
manager, Cheyne Real Estate, have been leading participants for more than 14
years now) will continue to move to take their place. However, the degree of
expertise and knowledge, and quantum of capital, needed to effectively lend to
the complex real estate asset class will mean that the European based
alternative lending community will take time to bridge that gap.
The declining valuations and eroding bank markets do pose issues for incumbent
lenders who have potentially overstretched on the LTV or focused on the higher
risk mezzanine part of the capital structure (particularly mezzanine on core
income assets valued off low yields).
Performance Review
Transition to conservative senior lending puts the credit book in a sound
position
RECI's evolution away from mezzanine and higher LTV lending and core assets
since Brexit in 2016 has put it in a very strong position to mitigate this
period of transition. Its gradual shift to senior loans (90.3% of the
portfolio at 31 March 2023) has been deliberate in the aftermath of Brexit.
This shift mirrors the shift in the wider Cheyne Real Estate platform, which
now manages in excess of £4.1 billion in investor capital, with a majority of
that in the senior lending space.
RECI has evolved its lending to focus on the following:
· Senior loans with a low-risk basis
· Absolute governance and strong covenants
· Lending to the larger and more capable sponsors with robust
business plans and deep financial resources committed
· Lending to asset classes that provide for the highest degree of
sustainability (from an environmental and social standpoint) and which also
resonate with the changes in demand and supply.
With that evolution, the highly diverse lending book RECI has today remains
resilient.
Funding the Deals
Balance Sheet management
Structurally, RECI has married prudent management of its balance sheet with
the need for efficiency in its capital usage.
Short-term debt (in the form of rolling REPO lines), has gradually been
replaced with term matched funding lines and also asset backed funding. Whilst
more costly, these have provided stability to the balance sheet through the
various periods of stress.
RECI's financial leverage position as at 31 March 2023 is 23.8% of NAV against
a maximum permitted financial leverage of 40%. RECI's financial leverage (also
referred to as recourse leverage) comprises: (a) the flexible term repurchase
agreements (REPO) on its liquid bonds (the WA cost of this financing was 5.9%
as at 31 March 2023); and (b) any partial recourse commitment that may be
provided to structured financing counterparties.
Funding Summary
We believe that the long-term strategy for the Company should be a mix of
structured term funding on its senior loan book and to a lesser extent, where
relevant, with REPO financing on its remaining liquid bond book, thereby
maintaining a conservative level of recourse leverage supported by strong
assets and liquid instruments.
Dividend Cover and Promotion
Since 2013, RECI has maintained a dividend on its NAV of 7% or better. The
overarching ambitions of RECI are to provide investors with stability,
transparency and dividend consistency. On the latter, the aim has been to have
the dividends covered from net income alone (i.e., income from the credit book
and without having to bear regard to mark to market gains or losses). That
ambition has been broadly achieved now with the move into higher yielding
senior loans and to a more efficient funding profile.
The RECI portfolio delivered a net profit of 6.0% on NAV as at 31 March 2023.
During the year, the Company paid 12 pence per share in dividends, which was
£27.5m
(or 8.0% on NAV as at 31 March 2023). Notwithstanding the MTM losses on the
bond portfolio, due to recent global bond volatility, the dividend covered
from net interest income alone was 6.9%.
The credit strength of the portfolio is good, but the market bond portfolio
does create some price volatility for the YTD return. Therefore, it is the
Manager's intent to accelerate its path towards rotation into a focus on
senior lending and to exit the market bond positions in a timely manner.
Annual Dividend for the Year
12.0 pence
Dividend Yield (on share price)
9.0%
Balance Sheet/Company Leverage(1) Contingent Liabilities(2) Cash including cash collateral at broker Net Effective leverage Asset Level
Structured Funding
£ Amount £80.2m £2.9m £16.5m £63.7m £20.6m
% of NAV 23.8% 0.9% 5.2% 19.4% 6.1%
WA cost of finance 5.9% - - 7.7%
Number of positions 16 6
1. RECI has a limit on balance sheet leverage (i.e. Financial Leverage) of 40%
of NAV, as set out in its borrowing policy.
2. Contingent liabilities include any partial recourse commitment provided to
asset level structured finance counterparties.
Looking Forward
All of the above puts the Company on a sound asset and liability footing and
also positions it well for its continued delivery of an attractive, long-term
dividend stream for investors.
The priorities of the Company now are to address the following:
1) To reduce the volatility on the NAV that arises from the mark to
market on its listed bond portfolio. Whilst the listed bonds do present an
attractive investment proposition in their own right, we see the listed
capital markets as remaining highly volatile for the next few years, which
negates the absolute return upside on this bond portfolio
2) Continue to move the overall portfolio into relatively short duration
senior loans, with the ambition for RECI to become a "pure play" senior
lender, with no remaining mezzanine or market bond positions
3) Advance its financial strength further with term matched financing
4) To continue to improve the dividend cover from net income
5) Cheyne Real Estate has continually expanded and improved on its
investor engagement and presentations. The current regime of quarterly updates
have been well received by investors for its transparency and accessibility.
We would like to continue these efforts to improve engagement with investors.
Growth to capture the significantly higher rates of return
Cheyne's Real Estate business has seen substantial growth in its senior
lending book and has moved to capture a larger share of the market with
localised offices across Europe and by growing the already well-established
large team dedicated to real estate credit origination and management. We have
raised £2.5 billion from 30+ investors across the latest vintages of our
private vehicles with £2.0 billion committed over 23 deals in the first
quarter of 2023. Cheyne's immediate pipeline of deals stands at £2.0 billion
with a weighted average LTV of 59% and unlevered IRR of 11.7%.
RECI needs to be in a position to continue to grow with the wider Cheyne Real
Estate business to capture the significantly higher rates of return for senior
loans available today.
To that end, it is our hope that the conditions return to allow RECI to resume
its path to growth. We are hopeful that the continued proven performance,
attractive dividends and extensive investor engagement will see the share
price close its current discount to the NAV during this coming year, and allow
RECI to participate fully in Cheyne's attractive deal pipeline and wider real
estate business.
Portfolio Overview
Portfolio Highlights
New Commitments
£155.2m
Deals Funded
£158.6m
Repayments and Interest
£159.0m
Over the course of RECI's financial year, the portfolio has continued its
migration towards an all-senior loan book. As at 31 March 2023, senior loans
represented 90.3% of the portfolio with a weighted average LTV of 59.2%. The
Top 10 positions are 100% senior loans and new origination is entirely senior.
RECI also received cash repayments and interest of £159.0 million in this
year, compared with £132.2 million in the year ended 31 March 2022.
Commitments and Funding
During the year, the Company made £155.2 million of commitments to eight new
deals, and funded £158.6 million into new and existing deals during the year,
compared to £113.1 million in the previous year.
Of the eight new deals committed to in the year, the split of fixed and
floating rates was as follows:
Split of New Deals by Commitment Value
Fixed 72,955,108 47.0%
Floating 82,235,813 53.0%
£155,190,921
Portfolio Composition
Number of Positions
53
Total Committed Capital
£572.0m
Drawn Value inc Interest (gross of leverage)
£400.7m
Drawn Value (net of leverage)
£319.4m
RECI's investment portfolio, a diversified book of 53 positions in real estate
bonds and loans, was valued at £400.7 million per FS including accrued
interest as at
31 March 2023, up from £394.3 million as at 31 March 2022. The portfolio had
a weighted average levered yield of 11.1% and an average loan to value of
59.2% as at 31 March 2023.
Portfolio by Geography
by % of Total Committed Capital including PIK
% Since
Allocation
Mar-22
Mar-23
United Kingdom 58.3% 13.7%
France 23.8% (11.1%)
Spain 7.5% (3.1%)
Finland 3.7% (0.0%)
Portugal 2.8% 2.8%
Ireland 1.6% 0.0%
Italy 1.2% (1.4%)
Germany 1.1% (0.9%)
Top 10 Positions
Top 10 Positions1 as at 31 March 2023
Description Commitment LTV Investment Strategy Sector Country Asset Type
1 UK Mixed-Use Portfolio, Predominantly Office/Residential £83.0m 48% Senior Loan Mixed-Use United Kingdom Core+
2 London Student Accommodation £45.2m 58% Senior Loan Student Accommodation United Kingdom Development
3 London Residential Led Mixed-Use Scheme £32.7m 67% Senior Loan Residential United Kingdom Development
4 Office development in Saint Ouen, Paris £30.9m 58% Senior Loan Office France Development
5 London Office £22.8m 59% Senior Loan Office United Kingdom Core
6 Spanish Villas £22.4m 49% Senior Loan Residential Spain Development
7 France Housebuilder Portfolio £20.6m 36% Senior Loan Housebuilder France Development
8 Finland Hotel £20.4m 65% Senior Loan Hotel Finland Development
9 South of France Hotel £19.9m 80% Senior Loan Hotel France Development
10 Luxury Assisting Living Units in London £19.7m 60% Senior Loan Assisted Living United Kingdom Core+
1 Based on total commitment of bonds and loans.
Portfolio by Sector
by % of Total Committed Capital including PIK
% %
Allocation
Allocation
Mar-23
Mar-22
Hotel 19.8% 22.6%
Mixed-Use 17.1% 21.2%
Student Accommodation 11.9% 10.2%
Residential 11.8% 6.7%
Office 11.6% 11.7%
Co-Living 7.0% 3.2%
Leisure 5.0% 2.4%
Later Living 3.3% 0.0%
Housebuilder 3.3% 4.8%
Assisted Living 3.2% 3.2%
Retail 1.3% 3.1%
Logistics 2.0% 2.2%
Land 1.9% 0.0%
Industrial 0.8% 0.8%
Healthcare 0.0% 7.9%
Bilateral Loan and Bond Portfolio
The drawn balance of the bilateral loan and bond portfolio, including accrued
interest, had increased from £295.9 million as at 31 March 2022 to £351.5
million as at 31 March 2023. The average loan portfolio LTV exposure as at 31
March 2023 was 60.9%. The portfolio continues to provide attractive
risk-adjusted returns with a weighted average unlevered yield of 9.5% 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 2023
Number of loans 34
Drawn Value (£ millions) 351.5
Undrawn Loan Commitments (£ millions) 168.3
Weighted average yield of portfolio 9.5%
Weighted average yield of portfolio (levered) 10.2%
Weighted average LTV of portfolio 60.9%
Weighted average life of portfolio (years) 1.9
Market Bond Portfolio
As at 31 March 2023, the market bond portfolio of 19 bonds (excluding the
self-originated bonds) was valued at £49.2 million including accrued
interest, compared to £98.5 million as at 31 March 2022.
The remaining bond portfolio:
· Is characterised by a short duration (2.5 years) and high coupon
· Has a weighted average unlevered yield as at 31 March 2023 of
12.6%, and the weighted average levered yield of the bond portfolio was 34.3%.
As described above, the Investment Manager has accelerated its rotation of the
portfolio from market CMBS to senior loans.
In the year ended 31 March 2023, £31.4 million notional of bonds were sold at
a slight discount to carrying value and a further £16.4 million notional sold
the following month, leaving a bond portfolio of 15 positions and a notional
of £41.5m, representing just 8.7% of the portfolio as at 30 April 2023.
Market Bond Portfolio Summary
as at 31 March 2023
Number of bonds 19
Fair Value (£ millions) 49.2
Weighted average yield of portfolio 12.6%
Weighted average yield of portfolio (levered) 34.3%
Weighted average LTV of portfolio 48.8%
Weighted average life of portfolio (years) 2.5
Environmental, Social and Governance (ESG)
Cheyne Capital and its Real Estate team remain committed to operating its
business in a progressively responsible manner, achieved through the
incorporation of high standards of governance and investment stewardship.
Cheyne aims for the consideration, assessment and integration of
Environmental, Social and Governance (ESG) factors to be a core element of
analysis undertaken in its investment processes.
In the last year, Cheyne has engaged with an external Real Estate ESG
specialist consultant to assist with developing and provide assurance on a
comprehensive scorecard-based approach. The ultimate aim is to align our
principles with industry recognised benchmark standards to identify a minimum
ESG standard we will need across our portfolio. The move to a more qualitative
system will significantly help us identify and understand ESG-based risks in
our portfolio more easily, and not only assist us with lowering risk and
increasing quality but will also help us collate and measure the data required
to track progress in what is a fast moving but increasing important area of
focus. We are currently in the implementation phase of the project, which
includes training for the Real Estate team and wider Cheyne employees. Further
information can be found in the Sustainability Report on pages 32-36.
Outlook
Scaling the Company
UK and Western European Real Estate is transitioning to a new "normal" and
RECI is poised to benefit. We believe it is in the Company's best interests to
ensure the Company continues to be ready to respond to the new opportunities
we are seeing. We will continue with our strategy of divesting the bonds in
favour of the higher returning senior loans which should in turn provide more
stability to RECI's NAV and share price.
Given the unprecedented and scalable opportunity, and the appetite shown from
investors by the amount raised by Cheyne's private funds over the last two to
three years, it remains the ambition for RECI to echo that growth in the
public markets.
Cheyne Capital Management (UK) LLP
21 June 2023
Business and Strategy Review
Stakeholder Engagement
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.
Investors
Why they are important
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.
How the Board engages
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. 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.
Key activities during the year
AGM Publications Events
The Directors believe that the AGM provides an appropriate forum for The Company reports to Shareholders with both monthly fact sheets and Throughout the last financial year, the Investment Manager continued to
Shareholders to communicate with the Board and encourages participation. There quarterly update presentations, along with the Annual and interim reports. provide a detailed and comprehensive review of RECI's portfolio as part of our
is an opportunity for individual Shareholders to question the Chairmen of the
programme of enhanced investor communication. A number of online events and
Board and the Audit and Risk Committee at the AGM. The Board assesses the These are available on the Company's website: meetings were held to maintain a regular dialogue with our Shareholders and
results of AGMs considering whether the number of votes against or withheld in https://realestatecreditinvestments.com/ potential new investors. In addition, the Board continues to work with its
respect of resolutions are such as to require discussion in the subsequent (https://realestatecreditinvestments.com/) service providers to enhance the Company's website and fact sheet.
Annual Report.
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.
Community and Environment
Why they are important
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.
How the Board engages
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 32-36 of the Sustainability Report provide further
information about the Company's and the Manager's approach to ESG matters.
Key activities during the year
The Investment Manager has now engaged an external Real Estate ESG specialist
consultant to assist with developing and provide assurance on a comprehensive
scorecard-based approach using a borrower questionnaire for each deal. The
questions in Cheyne's borrower questionnaire have been grouped and weighted to
enable a proprietary 0-5 scoring against the following Target Characteristics:
• E1 Commitment to Environmental Risk Monitoring
• E2 Contribution to Positive Environmental Action
• S1 Supporting Social Wellbeing
Qualifying Investments achieve a score of 3 or higher on at least one of the
Target Characteristics.
Cheyne will specify that a minimum 50% of the portfolio will comprise
Qualifying Investments (based on investment commitments at each calendar year
end). In practice, the Investment Manager expects the portfolio average scores
to be higher.
The ultimate aim is to align the Investment Manager's principles with industry
recognised benchmark standards to identify a minimum ESG standard needed
across RECI's portfolio. The move to a more qualitative system will
significantly help the Investment Manager identify and understand ESG based
risks in its portfolio more easily, and not only assist with lowering risk and
increasing quality, but will also help collate and measure the data required
to track progress in what is a fast moving but increasing important area of
focus. The Investment Manager is currently in the implementation phase of the
project, which will include training for the Real Estate team and wider Cheyne
employees.
Additionally, 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 89% of the Company's Shareholder
register receive documents and other communications electronically.
Service Providers
Why they are important
Effective relationships with service providers help the Company achieve its
objectives, including its investment objectives and to operate in an efficient
and compliant manner.
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.
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.
How the Board engages
The Management Engagement Committee meets 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. The Audit and Risk Committee considers the nature, scope
and results of the auditor's work and reviews its performance annually prior
to providing a recommendation to the Board on the reappointment or removal of
the auditor.
Key activities during the year
The Board has detailed and constructive discussions with some service
providers regarding service provision and fees. Details of the
responsibilities of the Investment Manager, Investment Advisor, Link Asset
Services (Registrar), and Aztec Financial Services (Guernsey) Ltd (Company
Secretary) can be found on page 111. Other service providers include our
corporate broker, lenders, auditors, counsel and other advisors.
Business and Strategy Review
Sustainability Report
RECI's Approach To Sustainability
RECI 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 most recent assessment, Cheyne scored 4
stars out of 5 in all modules bar one. Cheyne received a score of 68% (4 stars
out of 5) in the Investment and Stewardship Policy module (where the PRI
median was 62%). Over 40% of its sub-indicators in this module received a
perfect score.
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), the Financial Reporting Council's Stewardship Code, and the FCA's
Sustainability Disclosure Requirements (SDR).
The Investment Manager's ESG Implementation Forum oversees 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.
Cheyne Real Estate Core ESG Principles
Cheyne believes that an overarching focus on ESG considerations is entirely
aligned with our investment goals.
· Sustainability credentials directly support real estate valuations
· Sustainable, energy efficient buildings are more valuable to asset
owners by:
o Supporting higher rents, lower vacancies and lower operating costs
o Supporting exit valuations.
ESG considerations in our investments are not merely a passive analysis but
rather the opportunity to effect positive change.
· Cheyne Real Estate is a key stakeholder in our investments,
frequently the sole lender to a real estate asset
· This provides the ability to directly engage with all new sponsors
to help drive the ESG agenda directly and seek to address any deficiencies and
opportunities to improve sustainability credentials of the asset
· This is particularly relevant in development, value-add and
transitional financing, which represents a core focus for Cheyne Real Estate.
Cheyne's Partnership with Evora Global
ESG considerations have formed a key part of Cheyne's approach to investments
in real estate for many years. In February 2022, Cheyne partnered with Evora,
widely recognised as one of the leading sustainability consultancy specialists
to the real estate industry, to formalise its approach to the incorporation of
sustainability considerations into the investment process.
The ongoing partnership with a leading external specialist is expected to
enable Cheyne to remain at the forefront of the rapidly evolving ESG agenda
and provide an independent checkpoint to challenge their ESG investment
process and ensure robustness.
Cheyne has taken a staged approach in developing its ESG strategy, with its
philosophy drawing on the following four drivers:
1. The Greater Good
2. Value Enhancement/Risk Management
3. Regulation
4. Investor Expectations
Cheyne has worked with Evora to prepare customised ESG questionnaires for each
of the real estate asset types the Cheyne real estate lending funds finance:
standing, refurbishment and development assets, together with a borrower
questionnaire. An ESG data template has also been prepared (one template for
all asset types).
The questionnaires seek to quantify each investment's performance against key
ESG criteria, utilising a consistent approach to enable aggregation across the
assets within the relevant Cheyne fund. The score is set at a stringent enough
level to effect a conversation about enhancing the ESG characteristics if they
are not up to Cheyne's standards.
The questionnaires are used by Cheyne's analysts to undertake a broad based
ESG evaluation of a proposed investment - focusing on both the sponsor and the
asset itself.
Standards and Guidance
A range of external guidance and best practice standards have been used to
inform the development of the ESG questionnaires, including:
Global Real Estate Sustainability Benchmark (GRESB)
· Building Research Establishment Environmental Assessment Method
(BREEAM)
· EU Taxonomy
· Sustainable Finance Disclosure Regulations (SFDR)
· Minimum Energy Efficiency Standards (MEES)
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 RECI's
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 2023
Investment example 1
Riverstone Kensington, Senior Living Development, UK
Environmental
· There are a number of initiatives to promote energy efficiency
including motion sensor lighting and operating electric vehicles/providing EV
charging points. Targeted BREEAM Excellent rating.
Social
· The property is looking to address a shortage of assisted-living
retirement units in London for residents who are +65 years old and want to
remain within central London.
Governance
· Riverstone is governed by an experienced team and Board which has
put in place policies to ensure the health and safety of its residents'
wellbeing are at the core of its agenda.
· The building has been built to the highest regulations and will
adhere to the highest standards of care, providing an ergonomic and
age-appropriate design to reduce the risk of accidents and facilitate
independence for longer.
Investment example 2
Fusion Brent Cross, Student Accommodation Development, UK
Environmental
· Zero carbon heating will service the site which will lead to a
reduction in operating carbon emissions.
· There will also be a green roof, rainwater recovery systems, green
electrical utility provider and a 'zero waste' shop on site.
· Brent Cross Town will aim to achieve net zero carbon by 2030.
· BREEAM Excellent rating, with Cheyne currently considering further
funding to support the improvement to BREEAM Outstanding.
Social
· The accommodation will create a social hub for students with an
emphasis on wellbeing and physical and mental health for students. There will
be outdoor and relaxation spaces, with the wider Brent Cross scheme creating a
new community space for local residents.
Governance
· Fusion have teamed up with Health Assured in April 2020 to provide
employees with a wellbeing platform and complete support network for personal
and professional problems.
Outlook and Focus Areas 2023 and Beyond
The Company knows that its Shareholders, including the Directors of your
Company, see attention to ESG factors as critical in its assessment of Cheyne
as investment manager. The Company expects ESG to remain a dominant theme
within the financial services industry going forward; the course being taken
by regulators suggests that its importance will only increase in years to
come; the research process and the investment judgements the Company makes
will continue to reflect that and to evolve as necessary.
The continuing evolution is demonstrated through the Investment Manager making
progress towards completing its ESG framework which will form the basis of an
evaluation tool to influence investment decisions from an ESG perspective for
new projects.
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 sponsors 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.
These efforts will allow the Investment Manager to influence borrowers and to
improve the ESG standards of projects which they fund. The framework should be
finalised in 2023. It is intended to be incorporated into the investment
process slowly, beginning in early 2024.
Looking ahead, one of the main focuses will be on new regulatory requirements.
Next year the Investment Manager will advance its reporting under the TCFD
framework.
In addition, the UK's regulatory framework Sustainability Disclosures
Requirements ("SDR") comes into force in stages from later this year. The
Investment Manager is working closely with relevant parties to ensure that it
is meeting the necessary regulatory requirements.
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 its website.
https://www.cheynecapital.com/investmentstrategies/real-estate/investing-responsibly/
Annual Report and Accounts 2023
Governance
In this section
Board of Directors
Management Team
Directors' Report
Remuneration Committee Report
Corporate Governance Statement
Audit and Risk Committee Report
Directors' Responsibility Statement
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 acting Chief Investment Officer of Wealthify (part of the Aviva
PLC group) a UK regulated digital adviser. Prior to this she was managing
director of 1818 Venture Capital, a licensed asset manager based in Guernsey.
She is a non-executive director for private investment funds, and a Guernsey
licensed commercial insurance company. 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. She recently obtained her ESG certification from
the CFA Institute. She has been a member of the Board since March 2021.
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
Head of UK
Arron has over 25 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 20 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
European Origination
Daniel has over 18 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.
Sophie Turner
Business Manager
Sophie is a Business Manager for the Real Estate Team focusing on Investor
Relations for RECI. Prior to this, Sophie worked at Cheyne in Investor
Relations as Client Services Manager and Product Specialist for Convertible
Bonds, and before that, as Assistant Business Manager for the Real Estate
Team. Prior to joining Cheyne in 2008, she worked at the University of
Exeter's Business School, co-ordinating executive education programmes for
corporates such as 3i plc. Sophie earned her BSc in Business Administration
from Cardiff University.
Directors' Report
The Directors present their Annual Report and the audited financial statements
for the year ended 31 March 2023.
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 the 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 72 and 73. Dividends totalling £27.5 million (31 March
2022: £27.5 million) were paid on the shares during the year.
A fourth interim dividend for the year ended 31 March 2023 of 3 pence per
share (31 March 2022: 3 pence per share) was declared by the Directors on 21
June 2023 and is payable on 28 July 2023. 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 14 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
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
Ruffer Investment Company Limited
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 date are:
Number of Shares % Shares Held
Bob Cowdell (Chairman) 215,000 0.09%
Susie Farnon 45,250 0.02%
John Hallam 135,000 0.06%
Colleen McHugh 30,000 0.01%
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 was one
notification of such a transaction (31 March 2022: five notifications).
List of major Shareholders as at 31 March 2023:
Name Total Shares Held % Shares Held
Close Brothers Group 21,059,141 9.18
Bank Leumi Le Israel 18,054,468 7.87
Hargreaves Lansdown Asset Mgt 14,453,888 6.30
Canaccord Genuity Group Inc 13,315,151 5.81
Tilney Smith & Williamson 13,288,277 5.79
Fidelity Worldwide Investment (FIL) 11,871,829 5.18
Issued Share Capital
The issued share capital of the Company consisted of 229.3 million shares (31
March 2022: 229.3 million shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and was renewed 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 18 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 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 18 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, taking
into account all relevant geopolitical and macro economic risks, on its
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 flow 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 2023 of £14.1 million, together with
the cash held at the broker of £2.4 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 2023 was 19.1%. 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 2023 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 21 June 2023.
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. Although the Company is not incorporated in England
and Wales 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 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 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 Committee is chaired by John Hallam, the Company's senior independent
Director and 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 Committee is set out below and will be
tabled at the next AGM for approval by Shareholders along with this Report.
The Company's Remuneration Policy is that fees payable to the Directors should
reflect the experience and expertise of and the responsibilities borne by the
Directors and the time spent on the Company's affairs 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 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 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 2022 and it is
anticipated that the next will be in 2025. In the interim, the Committee notes
that during the year ended 31 December 2022, Guernsey RPIX increased by 8.5%
and therefore has recommended that the Chairman's fee be increased from
£80,000 to £86,800 (an increase of 8.5%) and the base fee for other
Directors move from £38,500 to £41,750 (an increase of 8.4%) to reflect
this.
As a consequence of these recommendations, the following table sets out the
remuneration of Board members for the financial year ending 31 March 2024 as
compared to the two previous years; it should be noted that the additional
fees set last year, and which remain unchanged, relate to the roles performed
and not to specific individuals while the table below assumes that the named
individuals will discharge the roles indicated throughout the coming year.
Furthermore, the Committee noted that, in the year ended 31 March 2020,
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
Committee's recommendation that should a prospectus be issued during the
financial year ending 31 March 2024, additional fees of the same amount should
be paid.
Statement of Shareholder voting
At the last AGM held on 15 September 2022, a resolution to approve the
Remuneration Committee Report and Remuneration Policy was passed with
79,602,454 votes (99.93%) being cast in favour and 49,997 votes (0.06%)
against.
Future Reviews
It is anticipated that full reviews will not take place at less than
three-yearly intervals but that the Committee will, in the early part of each
year, review the changes in Guernsey RPIX to determine if it is appropriate to
increase the Chairman's fee and the base fee for other Directors.
Year ending Year ending Year ended
31 Mar 2024
31 Mar 2023
31 Mar 2022
GBP
GBP
GBP
Bob Cowdell (Chairman and Nomination Committee Chair) 86,800 80,000 75,000
Susie Farnon (Audit and Risk Committee and Management Engagement Committee 56,250 53,000 46,750
Chair)
John Hallam (Remuneration Committee Chair and Senior Independent Director) 44,250 41,000 36,750
Colleen McHugh (Environmental, Social and Corporate Governance Lead) 44,250 41,000 36,750
John Hallam
Remuneration Committee Chair
21 June 2023
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 experience and
expertise of and the responsibilities borne by the Directors and the time
spent on the Company's affairs 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 48-49.
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.
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.
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.
Additionally, five ad-hoc meetings and a further three informal 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.
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 1/1 3/3 1/1 1/1
Susie Farnon 4/4 1/1 3/3 1/1 1/1
John Hallam 4/4 1/1 3/3 1/1 1/1
Colleen McHugh 4/4 1/1 3/3 1/1 1/1
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. In the year ended 31 March 2023, the Audit and Risk Committee
met at one ad-hoc meeting and four informal meetings. The Audit and Risk
Committee Report on pages 56-59 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. It is
proposed that Mrs McHugh will succeed Mrs Farnon as chair of the Committee
following the Company's next AGM.
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 40-41.
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.
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 page 30 of
the Stakeholder Engagement section and in the Sustainability Report on pages
32-36.
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, strives 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 is committed to supporting diversity, equality and inclusion through
implementing change and supporting initiatives, partnerships and programmes
across the firm and the industry, under the oversight of Cheyne's DE&I
Committee. Cheyne is comprised of a diverse range of employees and is
committed to providing equal employment opportunities to all colleagues and
applicants without regard to gender, race, nationality, religion, age,
orientation or disability. To this end, Cheyne has implemented reporting tools
within its HR system to enable a more granular measurement of gender and
ethnicity, using the AIMA/Albourne classifications within their DE&I
Questionnaire, that is compliant with data privacy considerations. The ongoing
evolution and monitoring of this data will allow the Investment Manager to
assess how its DE&I Policy and supporting action plans are working in
practice, while enabling the DE&I Committee to identify areas for
improvement and target its efforts to effect change. The business case behind
the data collection has been communicated to all employees.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify the emerging and
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 reporting are discussed in the Audit and
Risk Committee Report and Note 15 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation as it impacts the
Company and its policies.
Audit and Risk Committee Report
Dear Shareholders,
On the following pages, we present the Audit and Risk Committee's report for
2023, setting out the responsibilities of the Audit and Risk Committee and its
key activities during the year ended 31 March 2023. 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.
It also considers 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.
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 15 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 bilateral
loan and bond 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 bilateral bond investments, the Audit and Risk Committee
considered a number of factors including, but not restricted to:
· The key valuation judgement whereby the effective interest rate
calculated when the loan or bond was issued is used as proxy for the market
yield at the valuation date;
· 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 in respect of valuations.
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").
As highlighted in the long-term viability section in the Strategic Report, the
Investment Manager performed an evaluation of each of its positions, taking
into account all relevant geopolitical and macro economic risks, on its
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 2023.
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 15 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 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 £39,500 for the 30 September 2022 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 2023, the auditor had three meetings with the
Audit and Risk Committee and met 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
21 June 2023
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
21 June 2023
Annual Report and Accounts 2023
Financial
Statements
In this section
Independent Auditor's Report
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
Appendix I - AIFM Remuneration Policy (Unaudited)
Appendix II - AIFM Leverage (Unaudited)
Glossary
Directors and Advisers
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 2023 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 22.
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 matter that we identified in the current year was:
· Key Judgement in the valuation of bilateral loan and bond portfolio
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 £6.7 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.
In the current year audit, our key audit matter regarding the valuation of
bilateral loan and bond portfolio relates specifically to the judgement used
by management that the initial effective yield of investments remains suitable
to be used as a discount rate in the current market environment.
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 particularly the
considerations of the current macroeconomic challenges and testing the
mechanical accuracy of the underlying forecasts;
· Performing reverse stress testing 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; and
· Assessing the liquidity position of the Company including its
ability to meet its undrawn commitments 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 Judgement in the valuation of bilateral loan and bond portfolio
Key audit matter description The bilateral loan and bond investments of £351.5 million (2022: £295.9
million) make up 84% (2022: 66%) of total assets and are a key value driver
for the Company's Net Asset Value (NAV).
As the Company's investments are measured at fair value, the discount rate
that should be used to calculate the present value of future cash flows should
be the market yield prevailing at the valuation date.
Management has made a judgement that for these instruments that are highly
bespoke and are not adequately comparable to other market positions, the
initial effective yield of investment is considered an appropriate
representative of the current market yield at the valuation date. This is the
key judgement made by management in the valuation of the investment portfolio.
This has contributed to a risk of fraud and error associated with the
valuation approach applied particularly around the fixed income investments.
This has become of more importance as a result of the changes in the
macroeconomic environment and the movement in market yield during the year.
This judgement is 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 56-59.
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, and tested the operating
effectiveness of the controls around the valuation process.
· Challenged management's use of bond or loan's initial effective
yield as a representative of market yield by performing management enquiries
and assessing the assumptions used.
· Analysed the bilateral loans and bonds investment portfolio by
comparing the yield of each fixed interest rate loan or bond with the relevant
range of market yields at the valuation date using independent expert
third-party data.
· Analysed the yields implicit in loans and bonds issued during the
year and compared with the yields of more seasoned loans to evaluate
management's assertion that the yield of the Company's assets is dislocated
from the movement in market yields.
· Searched for contradictory evidence by verifying a number of data
points including the realisation of loans and bonds during the year and the
pricing of bonds and loans valued using market comparables.
· Assessed the financial statements related disclosures to evaluate
whether they appropriately explain judgements made by management, including
the associated assumptions, and highlight the sensitivity to changes in those
assumptions.
Key observations We concluded that the judgement applied by management, in arriving at the fair
value of the Company's self-originated bonds and loans investments, was
reasonable, and that the resulting valuations are not materially misstated. We
also concluded that the related disclosures are appropriate.
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 £6.7 million (2022: £6.9 million)
Basis for determining materiality 2% (2022: 2%) of the Net Asset Value as at 31 March
Rationale for the benchmark applied 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 2023 audit (2022: 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; and
· 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 Committee that we would report to the Committee all
audit differences in excess of £336,000 (2022: £343,000), as well as
differences below that threshold that, in our view, warranted reporting on
qualitative grounds. We also report to the Audit 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. We have obtained an understanding of and tested the
operating effectiveness of the control procedures at the investment manager
level around the key valuation judgement used in the valuation but we have not
followed a control reliance approach.
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 32.
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' responsibility 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 last approved by the Board
on 13 June 2023;
· results of our enquiries of management and the Audit 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 area:
· Key Judgement in the valuation of bilateral loan and bond portfolio
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 judgement in the
valuation of bilateral loan and bond portfolio as a key audit matter related
to the potential risk of fraud. The key audit matters section of our report
explains the matter in more detail and also describes the specific procedures
we performed in response to that key audit matter.
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 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 page 46;
· 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 60;
· the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks set out on page 54;
· the section of the annual report that describes the review of
effectiveness of risk management and internal control systems set out on pages
52-53; and
· the section describing the work of the Audit Committee set out on
pages 56-59.
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 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 18 years,
covering the years ending 31 March 2006 to 31 March 2023.
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
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 will 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
21 June 2023
Statement of Comprehensive Income
For the year ended 31 March 2023
Note 31 Mar 2023 31 Mar 2022
GBP
GBP
Interest income 6 31,922,543 26,981,790
Net (loss)/gain on financial assets and liabilities at fair value through 4 (1,264,149) 5,351,474
profit or loss
Other income 7,940 37,017
Operating income 30,666,334 32,370,281
Operating expenses 5 (6,143,662) (5,841,351)
Profit before finance costs 24,522,672 26,528,930
Finance costs 6 (3,972,353) (1,954,553)
Net profit 20,550,319 24,574,377
Other comprehensive income - -
Total comprehensive income 20,550,319 24,574,377
Earnings per share
Basic and diluted 8 9.0p 10.7p
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 2023
Note(s) 31 Mar 2023 31 Mar 2022
GBP
GBP
Non-current assets
Financial assets at fair value through profit or loss 9,15 400,741,910 394,341,104
400,741,910 394,341,104
Current assets
Cash and cash equivalents 9 14,081,343 47,385,138
Cash collateral at broker 9,17 2,383,962 5,204,692
Derivative financial assets 9,10 1,756,118 -
Other assets 9 27,345 22,708
18,248,768 52,612,538
Total assets 418,990,678 446,953,642
Equity and liabilities
Equity
Reserves 336,965,907 343,935,484
336,965,907 343,935,484
Current liabilities
Financing agreements 9,13 80,154,134 100,368,732
Derivative financial liabilities 9,10 - 1,072,792
Other liabilities 9,11 1,870,637 1,576,634
82,024,771 103,018,158
Total liabilities 82,024,771 103,018,158
Total equity and liabilities 418,990,678 446,953,642
Shares outstanding 14 229,332,478 229,332,478
Net asset value per share £1.47 £1.50
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
21 June 2023
Statement of Changes in Equity
For the year ended 31 March 2023
Note 31 Mar 2023
GBP
Balance as at 31 March 2022 343,935,484
Total comprehensive income 20,550,319
Dividends 7 (27,519,896)
Balance as at 31 March 2023 336,965,907
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
The accompanying notes form an integral part of the financial statements.
Statement of Cash Flows
For the year ended 31 March 2023
Note 31 Mar 2023 31 Mar 2022
GBP
GBP
Net profit 20,550,319 24,574,377
Purchases of investment portfolio (158,644,471) (258,415,073)
Repayments of investment portfolio 158,975,081 269,398,579
Movement in realised and unrealised gains on investment portfolio 4 (4,466,341) (2,742,188)
Net movement on derivative financial assets and liabilities (2,828,910) 3,333,189
Interest income (31,922,543) (26,981,790)
Interest expense 3,972,353 1,954,553
Operating cash flows before movement in working capital (14,364,512) 11,121,647
Decrease/(increase) in cash collateral at broker 2,820,730 (4,260,712)
Increase in other assets (4,637) (1,788)
Increase/(decrease) in other liabilities 200,882 (63,571)
Movement in working capital 3,016,975 (4,326,071)
Interest received 29,657,468 26,201,075
Net cash flow from operating activities 18,309,931 32,996,651
Financing activities
Dividends paid to Shareholders (27,519,896) (27,519,896)
Payments under financing agreements (689,398,896) (617,305,171)
Proceeds under financing agreements 666,877,816 639,854,100
Finance costs paid (1,572,750) (1,861,358)
Net cash outflow from financing activities (51,613,726) (6,832,325)
Net (decrease)/increase in cash and cash equivalents (33,303,795) 26,164,326
Cash and cash equivalents at the start of the year 47,385,138 21,220,812
Cash and cash equivalents at the end of the year 14,081,343 47,385,138
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 31 March 2023
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 the 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
18). 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 2022.
New Standards, Amendments and Interpretations Issued and Effective for the
Financial Year Beginning 1 April 2022
Amendment to International Accounting Standards ("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. 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 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 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
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
discloses 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 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.
The functional and presentation currency of the Company is British Pounds
("GBP" or "£") 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 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 31 March 2023 of £14.1 million (31 March 2022:
£47.4 million), together with the cash collateral at broker of £2.4 million
(31 March 2022: £5.2 million), the liquidity of the market bond portfolio and
the financing available through activities such as repurchase agreements as
described in Note 13, 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 2023 was 19.1% (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, obtaining longer-term and
non-recourse financing, and entering into some off-balance sheet financing
agreements which have partial recourse to the Company.
In carrying out the Company's strategy, the Investment Manager undertakes the
following measures:
· An initial and continuing detailed evaluation of each of its
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 19, as at 31 March 2023, the Company had committed
£572.0 million into the loan and bond portfolio of which £367.8 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 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.
The interest receivable from loans and bonds were reported as part of
financial assets at fair value through profit or loss. 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 required to be split into the amount of
change in fair value attributable to changes in credit risk of the liability,
presented in other comprehensive income, and the remaining amount presented in
profit or loss. The Company's gain or loss on reassessment of fair value is
recognised immediately in the Statement of Comprehensive Income as the Company
has taken its position to recognise the full amount of change in the fair
value in profit or loss.
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 which are
classified as at fair value through profit or loss, at fair value.
Financial liabilities held for trading are measured at fair value through
profit or loss, and all other financial liabilities are measured at amortised
cost, unless the fair value option is applied. The Company classifies its
financial liabilities as at fair value through profit or loss.
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 arising from operational, financing and investment activities
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 revaluation of fair value is recognised
immediately in the Statement of Comprehensive Income.
The fair value of an open forward foreign 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 from financial assets at fair value through profit or loss are
recognised within interest income in the Statement of Comprehensive Income
using the effective interest method.
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 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.
Financial Guarantee
Financial guarantees require the Company to make specified payments to
reimburse the holder of the guarantee for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument. Financial guarantees are initially
recognised at their fair value, which is normally evidenced by the amount of
fees received. This amount is amortised on a straight line basis over the life
of the guarantee. At the end of each reporting period, the guarantees are
measured at the higher of (i) the amount of the loss allowance for the
guaranteed exposure determined based on the expected loss model and (ii) the
remaining unamortised balance of the amount at initial recognition.
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 pages 78-79, 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 pages 78-79, 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.
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 market
bonds is based on quoted prices where such prices are available from a third
party in a liquid market.
The Company has made loans and bonds 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 discounted cash flows models. The rate used to
discount future cash flows represents key source of estimation uncertainty
that has material impact on the valuation of the investment portfolio. In the
absence of market observable inputs, this uncertainty translates into a wide
range of appropriate discount rates. The Investment Manager believes that the
loan or bond's own initial effective interest rate represents the most
appropriate point estimate within that range.
The Investment Manager has considered relevant geopolitical and macro economic
factors including the rise of market interest rate and continues to believe
that this key judgement remains appropriate due to the bespoke nature of the
investment portfolio and the dislocation between the yield of these assets and
the market interest rate. 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 6.2% to 13.2% (31 March 2022: 5.1% to 13.3%).
As highlighted in the long-term viability section in the Strategic Report, the
Investment Manager performed an evaluation of each of its positions, taking
into account all relevant geopolitical and macro economic risks, on its
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 2023.
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 inflation, supply
chains, and other events (including The Ukraine effect, Covid-19 pandemic, the
effects of climate change and cyber security), 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 2023.
Future valuation might change significantly in the future.
4. Net (Losses)/Gains on Financial Assets and Liabilities at Fair Value
Through Profit or Loss
31 Mar 2023 31 Mar 2022
GBP
GBP
Net gains/(losses)
Net (losses)/gains on market bond portfolio (8,155,580) 369,084
Net gains on bilateral loan and bond portfolio 12,621,921 2,373,105
Net (losses)/gains on foreign exchange instruments and other foreign currency (5,730,490) 2,609,285
transactions
Net (losses)/gains on financial assets and liabilities at fair value through (1,264,149) 5,351,474
profit or loss
5. Operating Expenses
Note 31 Mar 2023 31 Mar 2022
GBP
GBP
Investment management, administration and depositary fees
Investment management fees 18 4,296,688 4,367,244
Administration fees 18 276,595 261,584
Depositary fees 18 65,137 65,969
4,638,420 4,694,797
Other operating expenses
Legal fees 456,542 298,801
Directors' fees 215,000 213,625
Audit fees 140,775 115,250
Corporate secretary fees 96,214 87,761
Registrar fees 60,000 (23,127)
Fees to auditor for non-audit services 39,500 37,500
D&O insurance fees 24,547 (9,558)
Regulatory body expenses 23,732 36,266
Research fees 35,000 60,388
Other expenses 413,932 329,648
1,505,242 1,146,554
Total operating expenses 6,143,662 5,841,351
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% (31 March
2022: 2.36%) is made up of the Investment Manager's fee of 1.25% (31 March
2022: 1.25%), other ongoing costs of 0.42% (31 March 2022: 0.46%), and finance
costs (which are disclosed separately in the financial statements) of 0.56%
(31 March 2022: 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 2023 31 Mar 2022
GBP
GBP
Interest income
Real Estate Credit Investments - market bond portfolio 4,960,473 3,241,955
Real Estate Credit Investments - bilateral loan and bond portfolio 26,747,271 23,729,772
Cash and cash equivalents and other receivables 214,799 10,063
Total interest income 31,922,543 26,981,790
Finance costs:
Cost of financing agreements (3,972,353) (1,954,553)
Total finance costs (3,972,353) (1,954,553)
7. Dividends
31 Mar 2023 31 Mar 2022
GBP
GBP
Share dividends
Fourth dividend for the year ended 31 March 2022/31 March 2021 6,879,974 6,879,974
First dividend for the year ended 31 March 2023/31 March 2022 6,879,974 6,879,974
Second dividend for the year ended 31 March 2023/31 March 2022 6,879,974 6,879,974
Third dividend for the year ended 31 March 2023/31 March 2022 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 2023
amounted to 12 pence per share (31 March 2022: 12 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 2022 to 31 March 2023.
8. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
31 Mar 2023 31 Mar 2022
Net earnings attributable to shares (GBP) 20,550,319 24,574,377
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) 9.0 10.7
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 2023 31 Mar 2022
GBP
GBP
Assets
Financial assets at fair value through profit or loss:
Real Estate Credit Investments - market bond portfolio 49,243,187 98,450,555
Real Estate Credit Investments - bilateral loan and bond portfolio 351,498,723 295,890,549
Investments at fair value through profit or loss 400,741,910 394,341,104
Derivative financial assets:
Forward foreign exchange contracts 1,756,118 -
Financial assets at amortised cost:
Cash and cash equivalents 14,081,343 47,385,138
Cash collateral at broker 2,383,962 5,204,692
Other assets 27,345 22,708
Total assets 418,990,678 446,953,642
Liabilities
Financial liabilities at fair value through profit or loss:
Financing agreements 80,154,134 100,368,732
Derivative financial liabilities:
Forward foreign exchange contracts - 1,072,792
Financial liabilities at amortised cost:
Other liabilities 1,870,637 1,576,634
Total liabilities 82,024,771 103,018,158
The value of the bond portfolio assets was £231.4 million as at 31 March
2023, excluding accrued interest of £4.3 million (31 March 2022: £282.4
million, excluding accrued interest of £2.1 million).
See Note 16 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
2023:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised gain
GBP
The Bank of New York Mellon 19 May 2023 GBP 163,823,152 EUR (184,070,000) 1,756,118
Unrealised gain on forward foreign exchange contracts 1,756,118
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)
11. Other Liabilities
31 Mar 2023 31 Mar 2022
GBP
GBP
Investment management, depositary and administration fees payable
Investment management fees payable 358,118 365,525
Depositary fees payable 33,090 27,086
Administration fees payable 41,939 48,392
433,147 441,003
Other operating payables
Interest payable 287,023 193,902
Registrar fees payable 88,917 28,917
Legal fees payable 73,800 27,199
Directors' fees payable 53,750 48,812
Audit fees payable 30,775 85,250
Corporate secretary fees payable 18,750 18,750
Research fees payable 17,644 17,839
Other expense accruals 866,831 714,962
1,437,490 1,135,631
Total liabilities 1,870,637 1,576,634
12. Structured Entities Not Consolidated
As at 31 March 2023 and 31 March 2022, the Company had an interest in the
following structured entities. The Company has concluded that the unlisted
entities in which it invests, but that it does not consolidate, meet the
definition of structured entities because:
· the Company has obtained funds for the purpose of providing
investors with investment management services;
· the Company's business purpose, which was communicated directly to
investors, is investing solely for returns from capital appreciation and
investment income; and
· the performance of investments is measured and evaluated on a fair
value basis.
This conclusion will be reassessed on an annual basis, if any of these
criteria or characteristics change.
As a result, the Company recognises its interests in structured entities as
investments at fair value through profit or loss in accordance with IFRS 10
and therefore there is no requirement to consolidate in full. However, in line
with IFRS 12 Disclosure of Interest in Other Entities, the details of the
interests in the unconsolidated structured entities are disclosed below. The
maximum exposure to loss is the carrying amount of the financial assets held
which is equal to the fair value of loans and units in funds as at 31 March
2023 and 31 March 2022.
31 March 2023 Fair value Undrawn Nature and purpose Location Equity Percentage Other
of loans***
commitment
of the entity
held
held
exposure*
Name
GBP
GBP
Real Estate Loan Funding (RELF)**
Earlsfield 12,612,167 707,833 To invest in United Kingdom No - % No
Earlsfield real estate
Kensington 8,896,085 10,737,000 To invest in Kensington real estate United Kingdom No - % No
Lifestory 8,215,843 4,434,157 To invest in United Kingdom No - % No
Lifestory real estate
Pamplona 3,084,772 1,469,228 To invest in Luxembourg No - % No
Pamplona real estate
Ruby 2,807,680 8,577,320 To invest in Luxembourg No - % No
Ruby real estate
Cheyne French Funding Sub-Fund 3 11,650,667 3,630,876 To invest in Luxembourg No - % No
Cheyne French Funding Sub-Fund 3 real estate
Cheyne French Funding Sub-Fund 8 22,663,417 7,788,478 To invest in France No - % No
Cheyne French Funding Sub-Fund 8
real estate
Cheyne French Funding Sub-Fund 9 8,470,707 2,477,156 To invest in France No - % No
Cheyne French Funding Sub-Fund 9 real estate
* Other exposure indicates if the investment in the structured entity comes
with any associated potential valuation uplift. These can include, but are not
limited to: profit share, variable exit fees, and exposure to enterprise value
uplift.
** The total loan exposure on RELF includes financing within the RELF
structure.
***This amount excludes interest receivables.
31 March 2022 Fair value Undrawn Nature and purpose Location Equity Percentage Other
of loans***
commitment
of the entity
held
held
exposure*
Name
GBP
GBP
Real Estate Loan Funding (RELF)**
Earlsfield 6,665,679 6,687,513 To invest in United Kingdom No - % No
Earlsfield real estate
Cheyne French Funding Sub-Fund 3 8,418,393 6,278,159 To invest in France No - % No
Cheyne French Funding Sub-Fund 3 real estate
Cheyne French Funding Sub-Fund 7 339,932 665,701 To invest in France No - % No
Cheyne French Funding Sub-Fund 7
real estate
Cheyne French Funding Sub-Fund 8 15,806,040 13,480,123 To invest in France No - % No
Cheyne French Funding Sub-Fund 8 real estate
Cheyne French Funding Sub-Fund 9 7,206,459 3,322,312 To invest in France No - % No
Cheyne French Funding Sub-Fund 9 real estate
* Other exposure indicates if the investment in the structured entity comes
with any associated potential valuation uplift. These can include, but are not
limited to: profit share, variable exit fees, and exposure to enterprise value
uplift.
** The total loan exposure on RELF includes financing within the RELF
structure.
***This amount excludes interest receivables.
The Company did not provide support/assistance without a contractual
obligation to do so during the year other than as part of normal investment
activity, and the Company has no intention to provide support/assistance to
the entities.
13. 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 £139.9 million (31 March
2022: £212.7 million) and a weighted average cost of 5.86% (31 March 2022:
1.2%) per annum. The contractual maturity period of the repurchase
arrangements is 3 to 6 months (31 March 2022: 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 amounting to £22.5 million (31 March
2022: £20.6 million) and finance cost amounting to £1.6 million (31 March
2022: £1.9 million) are shown as financing activity in the Statement of Cash
Flows.
During the financial year ended 31 March 2023, the Company continued to
maintain some off-balance sheet financing agreements. These facilities entered
into during the previous financial year 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 2023 was £20.6 million (31 March 2022: £2.8 million).
During the financial year ended 31 March 2023, the Company also entered into
an off-balance sheet financing agreement which does have partial recourse to
the Company. The amount of partial recourse commitment as at 31 March 2023 was
£2.9 million (31 March 2022: £Nil). No expected loss from providing this
guarantee has been recognised in these financial statements and no additional
collateralisation has been paid as of year end.
14. 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 2023, the Company had capital of
£337.0 million (31 March 2022: £343.9 million).
31 Mar 2023 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
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.
15. 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 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 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 2023: Monetary Forward Foreign Net
Monetary
Liabilities Currency Exchange currency
Assets
GBP Contracts exposure
GBP
GBP GBP
Currency
GBP 242,499,869 (60,997,713) 163,823,152 345,325,308
EUR 174,728,260 (21,027,058) (162,067,034) (8,365,832)
USD 6,431 - - 6,431
417,234,560 (82,024,771) 1,756,118 336,965,907
As at 31 March 2022: Monetary Forward Foreign Net
Monetary
Liabilities Currency Exchange currency
Assets
GBP Contracts exposure
GBP
GBP GBP
Currency
GBP 236,062,842 (50,234,754) 161,432,186 347,260,274
EUR 210,880,008 (51,710,612) (162,504,978) (3,335,582)
USD 10,792 - - 10,792
446,953,642 (101,945,366) (1,072,792) 343,935,484
As at 31 March 2023, 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 2022.
By 5% 31 Mar 2023 31 Mar 2022
GBP
GBP
EUR (418,292) (166,779)
USD 322 540
Total (417,970) (166,239)
By 10% 31 Mar 2023 31 Mar 2022
GBP
GBP
EUR (836,583) (333,558)
USD 643 1,079
Total (835,940) (332,479)
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 the 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.
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. However, as explained under the key
sources of estimation uncertainty in Note 3, the Investment Manager believes
that the loan or bond's own initial effective interest rate represents the
most appropriate rate to discount future cash flows. The use of this judgement
limits the impact of the fluctuations in market interest rates on the
valuation of the bilateral bonds and loans portfolio.
The Investment Manager has considered relevant geopolitical and macro economic
factors including the rise of market interest rate during the year and
continues to believe that this key judgement remains appropriate due to the
bespoke nature of the investment portfolio and the dislocation between the
yield of these assets and the market interest rate.
Had movement in market interest rates been fully reflected in the valuation of
fixed-rate assets held by the Company, the estimated impact of a rise of 1%
(100 basis points) or 5% (500 basis points) (31 March 2022: 1% (100 basis
points) or 5% (500 basis points)) on the net asset value ("NAV") of the
Company, is a decrease of £6.3 million or £31.7 million (31 March 2022:
£3.7 million or £18.3 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 2023 and 31 March 2022, and their
weighted average lives.
The interest rate profile of the Company as at 31 March 2023 was as follows:
Fixed Floating Non-interest bearing Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 287,268,165 99,067,135 14,406,610* 400,741,910
Cash and cash equivalents - 14,081,343 - 14,081,343
Cash collateral at broker - 2,383,962 - 2,383,962
Derivative financial assets
- forward foreign exchange contracts - - 1,756,118 1,756,118
Other assets - - 27,345 27,345
Financing agreements - (80,154,134) - (80,154,134)
Other liabilities - - (1,870,637) (1,870,637)
Total 287,268,165 35,378,306 14,319,436 336,965,907
* Accrued interest related to financial assets at fair value through profit or
loss.
The maturity profile of the Company as at 31 March 2023 was as follows:
Within one year One to five years Over five years Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 81,576,013 150,257,260 168,908,637 400,741,910
Cash and cash equivalents 14,081,343 - - 14,081,343
Cash collateral at broker 2,383,962 - - 2,383,962
Derivative financial assets
- forward foreign exchange contracts 1,756,118 - - 1,756,118
Other assets 27,345 - - 27,345
Financing agreements (80,154,134) - - (80,154,134)
Other liabilities (1,870,637) - - (1,870,637)
Net Assets 17,800,010 150,257,260 168,908,637 336,965,907
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
* Accrued interest related to financial assets at fair value through profit or
loss.
The maturity profile of the Company as at 31 March 2022 was as follows:
Within one year One to five years Over five years Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 82,272,397 121,831,664 190,237,043 394,341,104
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)
Net Assets 31,866,777 121,831,664 190,237,043 343,935,484
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 2023, 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 2023. 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 has credit exposure in relation to its financial assets. The
Company invested in financial assets with The Bank of New York Mellon with the
credit quality of AA- (31 March 2022: AA-) according to Standard and Poor's.
The Company's maximum exposure to credit risk for financial assets is as
follows:
31 Mar 2023 31 Mar 2022
GBP
GBP
Instrument
Financial assets at fair value through profit or loss 400,741,910 394,341,104
Cash and cash equivalents 14,081,343 47,385,138
Cash collateral at broker 2,383,962 5,204,692
Derivative financial assets 1,756,118 -
Total 418,963,333 446,930,934
Market Bond Portfolio
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 Loan and Bond 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 bilateral loan and bond portfolio as at 31
March 2023, amounted to £337.4 million (31 March 2022: £284.4 million) which
excludes any interest accrued on loans and bonds at this date.
Derivative Contracts
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 assets by counterparty and details of the collateral
received and pledged by the Company as at 31 March 2023:
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 1,756,118 - - 1,756,118
Below are the derivative liabilities by counterparty and details of the
collateral received and pledged by the 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 -
* Over collateralisation is not presented in this table. The amount of
collateral reflected is limited to the amount of the derivative liabilities.
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 quality 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 &
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
quality of Aa2 at the reporting date (31 March 2022: 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 tables detail the current and long-term financial liabilities of
the Company at the year end date:
As at 31 March 2023: 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 26,808,659 41,612,299 11,733,176 -
- Other liabilities - 1,870,637 - -
26,808,659 43,482,936 11,733,176 -
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 -
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; 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 year end date:
As at 31 March 2023: Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Current assets
Forward foreign exchange contracts - 1,756,118 - 1,756,118
Non-current assets
Real Estate Credit Investments - market bond portfolio - 29,763,268 19,479,919 49,243,187
Real Estate Credit Investments - bilateral loan and bond portfolio - - 351,498,723 351,498,723
Total non-current assets - 29,763,268 370,978,642 400,741,910
Current liabilities
Real Estate Credit Investments - repurchase agreements - (80,154,134)* - (80,154,134)
- (48,634,748) 370,978,642 322,343,894
* Includes repurchase agreements related to Level 3 investments.
Level 1 Level 2 Level 3 Total
As at 31 March 2022: GBP GBP GBP GBP
Non-current assets
Real Estate Credit Investments - market bond portfolio - 98,450,555 - 98,450,555
Real Estate Credit Investments - bilateral loan and bond portfolio - - 295,890,549 295,890,549
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 foreign exchange 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 value of the repurchase agreements is valued at cost or principal and
is 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").
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 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 £0.2 million (31 March 2022:
£2.5 million). The sector curve discount yields used range from 4.8% to 11.9%
(31 March 2022: 4.0% to 14.0%). Applying a discount yield +/-2% to the
valuation would reduce/increase the fair value at 31 March 2023 by £(1.7)
million and £1.6 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 6.2% 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 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 2023, 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. Please refer to page 94
for the effects of movement in market rates.
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 2023 31 Mar 2022
GBP GBP
Financial assets at fair value through profit or loss
Opening balance 295,890,549 321,199,802
Total gains recognised in the Statement of Comprehensive Income for the year 10,170,687 2,260,608
Purchases 167,591,125 81,589,656
Sales (118,994,111) (109,625,571)
Increase in interest receivable 2,619,692 466,054
Transfer in to Level 3 13,700,700 -
Closing balance 370,978,642 295,890,549
Unrealised gain/(loss) on investments classified as Level 3 at year end 3,840,715 (688,552)
(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.
16. 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 are 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 2023: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Interest income 4,960,473 26,962,070 31,922,543
Net (loss)/gain on financial assets and liabilities at fair value through (8,155,580) 12,621,921 4,466,341
profit or loss
Reportable segment (loss)/profit (3,195,107) 39,583,991 36,388,884
Finance costs (1,783,805) (2,188,548) (3,972,353)
Year ended 31 March 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Interest income 3,241,985 23,739,806 26,981,791
Net gain on financial assets and liabilities at fair value through profit or 369,084 2,373,104 2,742,188
loss
Reportable segment profit 3,611,069 26,112,910 29,723,979
Finance costs (514,412) (1,440,141) (1,954,553)
Year ended 31 March 2023: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment assets 49,243,187 351,498,723 400,741,910
Non-segmental assets - - 18,248,768
Financing agreements (36,015,629) (44,138,505) (80,154,134)
Non-segmental liabilities - - (1,870,637)
Net assets 336,965,907
Year ended 31 March 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment assets 98,450,555 295,890,549 394,341,104
Non-segmental assets - - 52,612,538
Financing agreements (51,702,018) (48,666,714) (100,368,732)
Non-segmental liabilities - - (2,649,426)
Net assets 343,935,484
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 2023 31 Mar 2022
GBP
GBP
Reportable segment profit 36,388,884 29,723,979
Net (losses)/gains on foreign exchange instruments and other foreign currency (5,730,490) 2,609,285
transactions
Other income 7,940 37,017
30,666,334 32,370,281
Operating expenses (6,143,662) (5,841,351)
Finance costs (3,972,353) (1,954,553)
Net profit 20,550,319 24,574,377
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 2023 31 Mar 2022
GBP
GBP
Reportable segment assets 400,741,910 394,341,104
Cash and cash equivalents 14,081,343 47,385,138
Cash collateral at broker 2,383,962 5,204,692
Derivative financial assets 1,756,118 -
Other assets 27,345 22,708
418,990,678 446,953,642
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios for the year ended 31 March 2023:
Year ended 31 March 2023: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Financial assets at fair value through profit or loss
Opening fair value 98,450,555 295,890,549 394,341,104
Purchases - 158,644,471 158,644,471
Repayments/sales proceeds (40,697,172) (118,277,909) (158,975,081)
(Decrease)/increase in interest receivable (354,617) 2,619,692 2,265,075
Realised loss on sales (4,547,798) (5,408,771) (9,956,569)
Net movement in unrealised (loss)/gain on investments at fair value through (3,607,781) 18,030,691 14,422,910
profit or loss
Closing fair value 49,243,187 351,498,723 400,741,910
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)
Increase in interest receivable 669,555 11,471,980 12,141,535
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
Closing fair value 98,450,555 295,890,549 394,341,104
17. 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 2023, a total of £2.4 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 Statement of Financial Position.
18. 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 year ended 31 March 2023, the Management Fee totalled £4.3 million
(31 March 2022: £4.4 million), of which £0.4 million (31 March 2022: £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.
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. As no Performance Fee was payable in the
previous Performance Period, the NAV on which the Hurdle Assets will be
determined in accordance with the above formula was the NAV per share of
£1.63 as at 2 October 2017 (being the Starting Date of the Performance Period
immediately following the last Performance Period in which a Performance Fee
was paid).
During the year ended 31 March 2023 and 31 March 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 year ended 31 March 2023, the administration fee totalled £276,595
(31 March 2022: £261,584), of which £41,939
(31 March 2022: £48,392) 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 2022:
0.02%) of the NAV of the Company. During the year ended 31 March 2023, the
Depositary fee totalled £65,137 (31 March 2022: £65,969). The Company owed
£33,090 (31 March 2022: £27,086) to the Depositary at the year end date.
19. Contingencies and Commitments
As at 31 March 2023, the Company had committed £572.0 million into bilateral
loans and bonds of which £367.8 million had been funded (31 March 2022:
£522.9 million commitment of which £284.4 million had been funded).
During the financial year ended 31 March 2023, the Company entered into some
off-balance sheet financing agreements which have partial recourse to the
Company. The amount of partial recourse commitment as at 31 March 2023 was
£2.9 million (31 March 2022: £Nil).
20. Subsequent Events
The Directors declared a dividend of 3 pence per share on 21 June 2023.
Since 1 April 2023, RECI received a total of £17.0 million from 2 loans that
have repaid.
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.
21. 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 2023 31 Mar 2022
GBP
GBP
EUR 1.14 1.18
USD 1.24 1.32
22. Approval of the Financial Statements
The Annual Report and audited financial statements of the Company were
approved by the Directors on 21 June 2023.
Appendix I - AIFM Remuneration Policy (Unaudited)
Annual Remuneration Disclosure for the Year to 31 March 2023
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 2023, 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 £29,182,131 7 £1,283,214 £280,872
Senior Management 6 £12,014,016 6 £456,120 £119,605
Total 35 £41,196,147 13 £1,739,334 £400,477
Remuneration Code information is provided as required under the FCA Rules.
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
borrowing 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 borrowing, 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 borrowing. 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 2023, the maximum leverage calculated
has been 166.91% for the Gross Approach and 123.99% for the Commitment
Approach. In the year ended 31 March 2022, the maximum leverage calculated has
been 161.99% for the Gross Approach and 130.06% for the Commitment Approach.
Glossary
Asset Strategy definitions
Core
Assets that benefit from having long-term income.
Core +
Assets that benefit from having strong current income,
but do require some measure of asset management to optimise their income
profile and term.
Value add / transitional
Assets that require asset management (typically refurbishment) and
re-letting to secure a core income profile.
Development
Groundworks/Superstructure assets that are to be built from the ground
up and are in the groundworks stage or building the superstructure has
commenced. These typically already benefit from the requisite consent to
develop.
Development
Fit-Out - assets that have either been built from the ground up and
have reached the completion of the superstructure ("topped out"), or assets
which are in need of substantial refurbishment works. These typically already
benefit from the requisite consent to develop.
Development
De-Risked - development assets which benefit from being substantially
pre-sold or pre-let.
Real Estate Op-Co/Prop-Co Loan Loan secured by both the
operating company as well as all of the Company's real assets.
Performance Measures
NAV per share
The net asset value of the Company divided by the number of shares in
issuance at the relevant reporting date.
Total NAV Return
The return on the movement in the NAV per share at the end of the period
together with all the dividends paid during the period, divided by the NAV per
share at the beginning of the period/year.
Share Price Premium / Discount The percentage
difference between the NAV per share and the quoted price of each share as at
the relevant reporting date.
Dividend Yield
The total dividends paid in the reporting period (per share) divided
by the quoted price of each share as at the relevant reporting date.
Market capitalisation
The number of shares in issuance at the relevant reporting date divided by
the share price at the relevant reporting date.
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
PO Box 273
Frances House
Sir William Place
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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