REG - Real Est Crd InvsLtd - Half-year Report
29/11/2023 07:00
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RNS Number : 9741U Real Estate Credit Investments Ltd 29 November 2023
This announcement contains inside information.
Date and time of release: 29 November 2023, 7:00 am
Real Estate Credit Investments Limited (the "Company")
Interim Financial Statements for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of the Company's
Condensed Unaudited Interim Financial Statements for the six months ended 30
September 2023.
View the Interim Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations/#currentPage=1
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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
Interim
Financial
Report
2023
Consistent attractive dividends from credit exposure to UK and Western
European real estate 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 30 SEPTEMBER 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
- 45 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
£408.5m
(31 March 2023: £419.0m)
NAV per share
£1.48
(31 March 2023: £1.47)
Net Assets
£338.8m
(31 March 2023: £337.0m)
Net Profit
£15.6m
(Full year ended 31 March 2023: £20.6m profit)
RECI Offers:
· Focus on senior secured credit, with defensive Loan to Values
("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 Real Estate team
H1 2023 Total NAV Return (annualised)
9.4%
(30 September 2022: 5.9%)
Share Price
£1.32
(31 March 2023: £1.34)
Dividend Yield
9.1%
(31 March 2023: 9.0%)
HY 2023 Dividends
6.0 pence
(30 September 2022: 6.0 pence)
OVERVIEW
At a Glance
Providing compelling risk-adjusted returns
Real Estate Credit Investments Limited ("RECI") is a closed-ended investment
company which originates and invests in real estate debt secured by commercial
or residential properties in Western Europe, focusing primarily in the United
Kingdom, France and Spain.
The Company's aim is to deliver a stable quarterly dividend with minimal
portfolio volatility, across economic and credit cycles, through a levered
exposure to real estate credit investments.
Investments are predominantly in:
· Self-Originated Loans and Bonds
· Predominantly bilateral senior real estate loans and bonds.
· Market Bonds
· Listed real estate debt securities such as Commercial Mortgage
Backed Securities ("CMBS") bonds.
Investment Portfolio Composition
RECI's investment portfolio, a diversified book of 45 positions in real estate
bonds and loans, was valued at £395.9 million, including accrued interest, as
at 30 September 2023, down from £400.7 million as at 31 March 2023. The
portfolio had a weighted average levered yield of 10.4% and an average
loan-to-value ratio of 60.1% as at 30 September 2023.
NAV and Share Price As at 30 September 2023
Net Assets £338.8m
Shares Outstanding 229.3m
NAV (per share) £1.48
Share Price (per share) £1.32
(Discount)/Premium (10.8)%
Dividend Yield 9.1%
Market Capitalisation £301.6m
Total NAV Return*
Half Year Ended 30 September 23 (Annualised) 9.4%
Prior Financial Year End 31 March 23 6.2%
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 outside
of the scope of IFRS.
OVERVIEW
Chairman's Statement
RECI continued to deliver a stable NAV and attractive quarterly 3 pence
dividend per share
Bob Cowdell
Chairman
The period since commencement of the Company's current financial year on 1
April 2023 has seen a continuation of the geopolitical and economic themes
which have challenged global markets and investor sentiment. In addition,
October saw the start of the harrowing events in Israel and Gaza which have
raised tensions in the Middle East and further increased global uncertainties.
Central banks around the world continued to raise interest rates during the
period as they battled to control high levels of inflation. The September and
November rate setting meetings brought a pause in increases by the Federal
Reserve and Bank of England, leading to speculation that rate rises may have
peaked as inflation data showed some easing. Investors and commentators have
continued to speculate as to the future direction of rates, as wage growth and
rising winter fuel costs loom which may boost inflation, while balancing the
risk that levels of Western economy growth appear sluggish, raising the threat
of potential recession. While the latest UK inflation data shows some
reduction, concerns persist that interest rates may remain at elevated levels
for longer and that a return to the very low levels of the last decade may not
be achievable.
The rapid rise in interest rates and the associated risk free return that can
be generated has put pricing pressure upon bonds and income funds, with yields
expanding accordingly. This coupled with investor nervousness continues to see
most UK listed investment trusts and companies trading at historically high
discount levels.
Investors and commentators have raised questions regarding the valuation of
assets in the alternative assets sector. Of relevance to RECI, the scrutiny of
commercial property valuations has heightened as prolonged high interest rates
and recessionary concerns impact tenants, operators and developers. In
addition, the attraction of certain sectors, such as retail premises and city
centre office space, continues to be impacted by the cost of living crisis and
the changed workplace patterns since the COVID pandemic. In addition to the
varying attraction of different property sectors, the focus has also alighted
upon the widening difference between the valuation of tired, older generation
properties when contrasted with the merits of new, high specification, ESG
compliant buildings built for the demanding tenants and clients of the 21st
century.
Our investment manager had anticipated this trend and Cheyne's investment
process and deal selection continues to identify and lend against those
quality real estate assets within its preferred sectors and with fundamentals
that underpin and support their valuations.
Continuing the pivot towards senior loans which commenced in 2017, our
Investment Manager has strengthened the resilience of the Company's portfolio.
As at 30 September 2023, the exposure to lower risk senior loans and bonds was
89.2%; the total portfolio had a Weighted Average Life ("WAL") of just 1.5
years; and the weighted average LTV of the Company's portfolio was 60.1%
(60.4% at 30 September 2022), providing significant defensive equity headroom.
Financial Performance
RECI reported total net profit for the half year ended 30 September 2023 of
£15.6 million on half year end total assets of £408.5 million; £10.3
million for the half year ended 30 September 2022 on half year end total
assets of £465.7 million.
The NAV as at 30 September 2023 was £1.48 per share (£1.48 per share as at
30 September 2022). The 30 September 2023 NAV reflects the dividends of 6
pence per share declared during the half year in respect of the fourth interim
dividend for the year ended 31 March 2023 and the first interim dividend of
the current financial year, returning £13.8 million to Shareholders and
providing an annualised total NAV return of 9.4% for the half year.
During the half year ended 30 September 2023, the Company funded £50.7
million in the origination of loans; received £15.6 million from the sale of
market bonds; and received cash repayments and interest of £72.6 million.
Half Year Review
Reflecting RECI's robust portfolio, the Company's NAV continued to be stable
during the half year to close at £1.48 per share at 30 September 2023.
Having commenced the half year period at a price of £1.34 per share, the
Company's shares traded at an average discount to NAV of 14.7% during the
financial half year to close at 30 September 2023 at £1.32 per share (a
discount of 10.8%). Reflecting market sentiment, the Real Estate debt sector
traded at an average discount of 23.5% (excluding RECI) over the six months to
30 September 2023 (source: Liberum, company data).
The Board continues its practice of considering all options when assessing the
levels of excess cash to be retained or deployed by the Company from time to
time and how any such cash available for deployment should be allocated.
Excess cash is regarded as the cash available following recognition of the
obligation to ensure sufficient cash resources to pay, inter alia, the
Company's expenses, borrowings, dividends and fund its ongoing contractual
loan commitments, from time to time ("Available Cash").
On 30 August 2023, the Company announced a share buyback programme (the
"Programme") to expire on 31 March 2024 at the end of the current financial
year. The Board's decision allocated Available Cash to finance the Programme
alongside future potential reinvestment into new enhanced return investment
opportunities, as and when appropriate.
Reflecting the uncertain market background and its policy of prudent cash
management, the aggregate purchase price of all shares acquired under the
Programme will be no greater than £5.0 million. The Company appointed Liberum
Capital Limited to make market purchases of shares in accordance with certain
pre-set parameters, the Company's existing authorities and relevant regulatory
requirements. RECI's shares closed at £1.28 per share (a discount of 13.6%)
on 30 August 2023, the eve of the buyback announcement and traded at an
average price of £1.30 (12.3% discount) from the date of announcement until
27 November 2023. To date Liberum have not exercised their discretion to
purchase shares under the Programme, reflecting the market demand they are
seeing for the Company's shares from existing and new investors and the
resilient share price performance.
The Company's shares closed at £1.32 on 27 November 2023 (a discount of
11.4%), which would provide a yield of 9.1% on the basis of continuing to pay
a quarterly 3 pence dividend per share for the rest of the current financial
year.
When the financial year began on 1 April 2023, RECI had gross balance sheet
leverage of £80.4 million (0.24x NAV) and leverage net of £16.5 million cash
was 0.19x 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. As at 30
September 2023, the Company's gross balance sheet leverage was £59.3 million
(0.18x NAV); its balance sheet leverage net of £12.6 million cash was 0.14x
NAV; and its net effective leverage, including contingent liabilities (being
the partial recourse commitment representing 25% of asset level borrowings
provided to certain asset level structured finance counterparties), was £49.8
million (0.15x NAV).
Reflecting your Board's and our Investment Manager's confidence in RECI and
its future, the Directors and employees of Cheyne have purchased an aggregate
of 1.16 million shares in the Company since the start of the current financial
year.
Colleen McHugh was appointed on 15 September 2023 as Chair of the Board's
Management Engagement Committee, succeeding Susie Farnon who remains Chair of
the Company's Audit & Risk Committee.
I am pleased to report that RECI won the Best Performance Award as the top
performer over three years in the Specialist Debt category at Citywire's
annual awards ceremony earlier this month.
Outlook
The continued uncertainty as to the future level of inflation and interest
rates will likely pervade for the rest of this financial year. The
macroeconomic background will feed into valuation concerns for certain sectors
and property types within the real estate market. The Board is confident that
Cheyne's management expertise and focus on only lending in respect of high
quality assets, in their preferred sectors and contracting with substantial
quality sponsors, will position RECI well to withstand the broader challenges
and steer a course through difficult market conditions.
The Company's buyback Programme remains in place and will be reviewed at the
end of the current financial year. Scheduled portfolio repayments will boost
Available Cash resources during H1 2024, which may be deployed into a
successor to the Programme and potential investments into the attractive
higher yielding opportunities identified by Cheyne.
Your Board remains committed to providing investors with a long-term
opportunity to receive an attractive dividend stream from an expertly managed
exposure to selected real estate credit assets.
Bob Cowdell
Chairman
28 November 2023
KPIs and Financial Highlights
Key Performance Indicators
30 Sep 2023 31 Mar 2023
Balance Sheet
Net Asset Value ("NAV") per share £1.48 £1.47
Share price £1.32 £1.34
Discount (10.8)% (8.8)%
Average discount in period/year* (14.7)% (6.1)%
Leverage (% of NAV)** 17.5% 23.8%
* Average discount in period/year is the average of the difference
between the share price and the NAV per share divided by NAV per share.
** Leverage is the recourse financing divided by the net assets.
30 Sep 2023 30 Sep 2022
Profit, Loss and Dividends (6 months ended)
Earnings per share 6.8p 4.5p
Dividends per share declared for the period 6.0p 6.0p
Total NAV Return (including dividends) annualised 9.4%* 5.9%
* Assumes re-investment of dividends.
Financial Highlights
30 Sep 2023 31 Mar 2023
Balance Sheet
Cash, cash equivalents and cash held by brokers £12.6m £16.5m
Net assets £338.8m £337.0m
30 Sep 2023 30 Sep 2022
Profit and Loss (6 months ended)
Operating income £20.6m £14.7m
Net profit £15.6m £10.3m
The complete set of the Balance Sheet and Profit and Loss items are presented
in the Company's condensed unaudited interim financial statements.
Further Information
Monthly fact sheets as well as quarterly update presentations are available on
the Company's website: www.realestatecreditinvestments.com.
Business and Strategy Review
Investment Manager's Report
Well Positioned Portfolio to Successfully Navigate Transition
Ravi Stickney
Portfolio Manager
Managing Partner and CIO, Cheyne Real Estate
Market Review
Real Asset Valuations: Exogenous shocks and a transition to higher for longer
Prior to the beginning of October this year, expectations for long-term rates
had begun to decline as inflation was seen to be easing and employment markets
were seen to be softening.
However, expectations today have been materially revised for two main reasons:
· A resurgence of geopolitical uncertainty, leading to exogenous
risks coming back to the fore, and
· Economies (and employment) have proven very resilient to a
prolonged period of higher rates
On the latter, economies are demonstrating that marginally higher terminal
rates in the region of 3% to 4% are not necessarily destructive to the economy
and, indeed, may be productive in the long run.
On the former, exogenous inflation is a threat that is difficult to now
forecast a path through. A continued prolonged period of inflation, not
matched with growth, may well lead to a stagflationary environment posing a
threat to global asset valuations.
Our view remains that a terminal interest rate in the region of 3-4% globally
is conducive to productivity and growth. However, exogenous inflationary
threats are a concern which are now difficult to assess with certainty.
Real Estate Valuations and the need to sell
Real estate valuations are under pressure. Holders of income generating real
assets are seeing a race between improvements in rents against yields
remaining higher for longer and the need to sell. The hope for holders of
productive, income generating assets is that the rise in income is more than
sufficient to offset the impact of rising yields and that this will happen
before they are forced to sell. This would allow them a pathway to refinance
their assets and continue to hold them for the long term.
However, increasingly, that outcome is being dictated by a sale being forced
upon asset owners.
For the last two years of this cycle, we have seen little of this element as
lenders ranking ahead of the equity have waited out the rate cycle, and also
as open ended funds have managed to forestall their own liquidity redemption
requests.
However, this is markedly changing and quickly:
· Loans originated prior to 2020 are now fast approaching their
maturity dates and lenders are reluctant to extend
· After a period of relative calm, redemptions from open ended
funds are accelerating
The confluence of the above is moving global real asset markets towards the
emergence of forced sellers. This is unfortunate, especially for sponsors who
do hold clearly productive assets which demonstrate a certain path towards
higher rents.
The rational decision, for holders of assets facing such pressures, is to
raise more equity (and new debt) to repay or reduce their indebtedness or to
meet liquidity requirements from exiting investors.
The capital so raised may be expensive, but it enables the owner to manage
through the crystallisation of those higher rents, which should deliver a
favourable exit in a matter of time.
However, not all sponsors are in such a position and debt markets are
especially weak in Europe, which makes such a recapitalisation onerous.
Performance Review
Implications for RECI
RECI began rotating its investment book to senior loans (and away from
subordinated positions) some years ago and accelerated this change through the
COVID period.
Its borrowers on senior loans are mainly institutional grade larger
institutions. Whilst every sponsor is facing similar pressures, larger
institutional sponsors have been proven to have the resources and skills to
defend their assets with additional capital and a constructive approach to
their lenders.
Protecting the downside
The first implication is that RECI will continue to do what it has done best
through the previous periods of stress (e.g. Brexit and COVID), which is to
protect its positions by working consensually with the sponsors towards
de-risking its loan book whilst, in exchange, affording the sponsors time to
realise the improving rental tone and seek an orderly exit.
For the rare borrowers that cannot or will not seek an orderly exit, RECI has
in the past sought to enforce its position to realise the underlying asset on
its own (a position it is able to do as its manager has a significant real
estate platform capable of owning, developing and operating real estate assets
throughout Europe and the UK).
In the event it needs to do so again, it will.
Senior loans with full governance
RECI's senior loan book affords it absolute governance over the underlying
asset i.e. it is never a forced seller of its loan investment or asset. As
such, RECI can rely on the work of its manager to maximise value, if needed,
towards an exit that recovers its full position.
Where a lender loses governance, they will potentially be in the subordinated
(mezzanine or preferred equity) positions. RECI's current exposure to
subordinated positions is 11% of total commitment in six positions.
Valuations
Valuations of real estate assets are in sharp focus today for equity funds.
There is an emerging difference in valuations between the owner that is able
to retain the asset to capture its upside potential and those that are forced
to sell.
Open ended funds and levered equity positions are at risk of being forced
sellers and do need to move to a "spot" market liquidation valuation (which
will likely be a valuation that reflects not just the current uncertain
environment but also the distressed nature of the sale).
RECI's senior loans are held on a fair value basis. To the extent that the
exit value of the asset is demonstrably less than the value of the debt, and
there is no evident path to value recovery, RECI does take what is effectively
a provision against those future expected losses on its position. This has
occurred a number of times in the past, notably with its equity exposure to a
UK housebuilder where a conservative provision for potential loss was taken,
with an ultimate actual loss of "NIL" achieved after a favourable
restructuring and recovery.
As this crisis unfolds, and where necessary, similar fair value losses may be
taken, if appropriate.
However, RECI is never a forced seller on its senior loan book. These loans
have been crafted with absolute governance and hence no other lender or
counterparty can force the sale of its senior loan investment. As such, even
in the instance where a fair value loss is taken, RECI does have the benefit
of time and ability to recover its investment.
For its limited subordinated loan book, we are mindful of the need to work
constructively with the senior lender(s) to retain control and effect an
orderly exit in this environment.
For its minor positions in liquid securities held for trading (predominantly
CMBS), we would expect that the market volatility continues to suppress
valuations. Albeit, the relatively short duration nature of these bonds lends
some price protection against widening yields and rates. RECI's liquid
securities book represents a carrying value of £35.2 million or 10.4% of its
NAV and is held at an average of 88.2% of par, with a duration of 2.4 years.
It is the Company's intent to continue its gradual rotation out of its market
bond portfolio.
Investing and Growth
RECI's manager, Cheyne Real Estate, believes that the present period of
transition to the new normal of higher rates and productive assets is healthy
for the long-term future of real assets, but it does produce an acute and
sustained period of value adjustment and a critical need for debt financing in
the interim.
Cheyne Real Estate has, during the course of 2021 and 2022, raised
approximately £2.5 billion of new capital which has been used effectively to
finance these much needed productive assets across mainly the UK and also
continental Europe. It has helped numerous sponsors recapitalise, stabilise,
purchase and develop these assets through this period and continues to do so.
It has also significantly expanded its investment and risk management teams in
the UK, France, Spain and Germany to future enhance its ability to assist
borrowers and serve its investors.
It goes without saying that the margins and absolute rates of return garnered
on its new senior loan origination far surpass those at any period of time,
including the 2008-9 period.
We appreciate that the current share price discount and the need to fund a
buyback programme, in addition to the dividend payment certainty, impose some
constraints on available cash to allow RECI to participate and benefit from
these investments.
However, the ability to do so will enable RECI to continue to build a diverse
book of senior credits and benefit from those higher returns (thus enabling it
to better cover its dividends and potentially grow its dividend payments).
ESG Update
Cheyne Capital and its Real Estate business remain committed to operating 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 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 providing 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 to achieve 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 ongoing training for the Real Estate team and wider
Cheyne employees. Further information can be found in the Sustainability
Report on pages 16-18.
Portfolio Overview
Portfolio Highlights
Deals Repaid
7
Repayments and Interest
£72.6m
Deals Funded
£50.7m
Commitments and Funding
During the half year, given the lack of incremental sources of capital, there
were no commitments made to new deals, however the Company funded £50.7
million into existing deals during the period, and received £72.6 million in
cash repayments and interest compared with £85.9 million in the half year
ended 30 September 2022.
As part of its strategy to rotate out of the Market Bond Portfolio, the
Company sold £15.6 million of market bonds in the half year, with a further
£25.2 million sold in October 2023.
Portfolio Composition
RECI's investment portfolio, a diversified book of 45 positions in real estate
bonds and loans, was valued at £395.9 million including accrued interest as
at 30 September 2023. The portfolio had a weighted average levered yield of
10.4% and an average loan to value of 60.1% as at 30 September 2023.
Portfolio by Geography
(Breakdown by Total Committed Capital including PIK)
Country 30 Sep 2023 31 Mar 2023
United Kingdom 60.2% 58.3%
France 23.4% 23.8%
Spain 8.3% 7.5%
Finland 4.0% 3.7%
Ireland 1.8% 1.6%
Italy 1.0% 1.2%
Germany 1.3% 1.1%
Portugal 0.0% 2.8%
Top 10 Positions(1) (by commitment)
Deal Description Commitment % of NAV Entry LTV Investment Strategy Sector Country Asset Type
1 Light industrial, office and mid-market residential asset portfolio in the UK £82.4m 11.0% 48% Senior Loan Mixed-Use United Kingdom Development
2 Student accommodation development in London £45.2m 4.8% 58% Senior Loan Student Accommodation United Kingdom Development
3 Residential, affordable housing and mixed-use scheme over five blocks within £32.7m 3.4% 67% Senior Loan Residential United Kingdom Development
Greater London
4 Refurbishment and extension of a freehold office building in Saint Ouen, Paris £30.9m 8.8% 58% Senior Loan Office France Value Add/Transitional
5 Fully let 98,246 sq ft new grade A office block located in Hoxton, London £22.8m 6.9% 59% Senior Loan Office United Kingdom Core+
6 Build-for-sale luxury villa development £22.4m 4.4% 49% Senior Loan Residential Spain Development
7 Income producing residential developer in France £20.6m 5.9% 36% Senior Loan Housebuilder France Development
8 Finland hotel development in progress. Expected completion in Q3 2024 £20.4m 2.7% 65% Senior Loan Hotel Finland Development
9 French Hotels in Nice and Paris. Development in progress. Expected completion £19.9m 4.7% 80% Senior Loan Hotel France Development
in Q3 2024
10 Acquisition of the leasehold interest in 190 luxury assisted living units in £19.7m 5.4% 60% Senior Loan Assisted Living United Kingdom Core+
Kensington, London
1 Based on total commitment of bonds and loans.
Bilateral Loan and Bond Portfolio
The drawn fair value of the bilateral loan and bond portfolio, including
accrued interest, had increased from £351.5 million as at 31 March 2023 to
£360.7 million as at 30 September 2023. The average loan portfolio LTV
exposure as at 30 September 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 30 September 2023
Number of assets 30
Total committed capital £523.2m
Total capital deployed £360.2m
Leverage deployed £37.7m
Drawn fair value (gross) £360.7m
Drawn fair value (net) £323.8m
Weighted average unlevered yield 9.5%
Weighted average portfolio yield 9.8%
Weighted average LTV 60.9%
Weighted average life (yrs) 1.5
Market Bond Portfolio
As at 30 September 2023, the market bond portfolio of 15 bonds (excluding the
self-originated bonds) was valued at £35.2 million, compared to 19 bonds,
valued at £49.2 million as at 31 March 2023. Four bonds were sold during the
period at realisations above fair value valuations.
The bond portfolio has the potential for strong defensive returns:
· The portfolio is characterised by a short duration (2.4 years)
and high coupon, which is defensive to interest rate rises and provides
resilience in turbulent markets; and
· The weighted average unlevered yield of the market bond portfolio
as at 30 September 2023 was 12.6%, with the weighted average levered yield of
the bond portfolio as at 30 September 2023 being 29.1%.
Market Bond Portfolio Summary
as at 30 September 2023
Number of assets 15
Gross fair value £35.2m
Average Carrying Price (% of par) 88.2%
Net fair value £10.3m
Leverage deployed £24.9m
Weighted average unlevered yield 12.6%
Weighted average levered yield 29.1%
Weighted average LTV 53.3%
Weighted average life (yrs) 2.4
Cheyne Capital Management (UK) LLP
28 November 2023
Business and Strategy Review
Sustainability Report
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'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.
Cheyne Real Estate Core ESG Principles
VALUE ENHANCING
RISK REDUCING
ACTIVELY ENGAGED
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.
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.
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 its 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 Regulation ("SFDR")
· Minimum Energy Efficiency Standards ("MEES")
· Outlook and Focus Areas 2023 and Beyond
The Company knows that its Shareholders, which include both the Directors and
senior members of the investment management team 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 the Investment Manager's 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 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/investment-strategies/real-estate/investing-responsibly/
GOVERNANCE
Directors' Responsibility
Statement
We confirm that to the best of our knowledge:
(a) the condensed unaudited interim financial statements have been
prepared in accordance with International Accounting Standard 34 Interim
Financial Reporting ("IAS 34")
(b) the interim management report (contained in the Chairman's Statement
and Investment Manager's Report) includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and a description of principal risks and uncertainties for the
remaining six months of the year); and
(c) the interim management report (contained in the Chairman's Statement
and Investment Manager's Report) includes a fair review of the information
required by DTR 4.2.8R (disclosure of related party transactions and changes
therein).
Principal Risks and Uncertainties
The principal risks and uncertainties faced at the time of the last annual
report remain valid for the purposes of the interim management report. The
Board considers that the following are the principal risks and uncertainties
faced by the Company.
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.
Target Portfolio Returns
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.
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.
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 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.
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.
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.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities on a timely basis.
Other Risk Factors
These currently include: geopolitical and macroeconomic risks: including
increased interest rates, heightened inflation, supply chain disruption, the
continuing impact of conflicts around the world; and the effects of climate
change and cyber security. There are no emerging risks since the 31 March 2023
Annual Report.
The detailed explanation of these principal risks and uncertainties can be
found in the Strategic Report section under the Risk Management section of the
31 March 2023 Annual Report, which is available on the Company's website.
By order of the Board
Bob
Cowdell
Susie Farnon
Director
Director
28 November 2023
Condensed Unaudited Interim Financial Statements
For the six months ended 30 September 2023
Financial
Statements
In this section
Independent Review Report
Condensed Unaudited Statement of Comprehensive Income
Condensed Unaudited Statement of Financial Position
Condensed Unaudited Statement of Changes in Equity
Condensed Unaudited Statement of Cash Flows
Notes to the Condensed Unaudited Interim Financial Statements
Directors and Advisers
Independent Review Report
to Real Estate Credit Investments Limited
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2023 which comprises the condensed unaudited statement of
comprehensive income, the condensed unaudited statement of financial position,
the condensed unaudited statement of changes in equity, the condensed
unaudited statement of cash flows and related notes 1 to 20.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2023 is not prepared,
in all material respects, in accordance with International Accounting Standard
34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom (ISRE (UK) 2410).
A review of interim financial information consists of making inquiries,
primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with International
Standards on Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 2, the annual financial statements of the company are
prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the IASB. The condensed set of financial statements
included in this half-yearly financial report has been prepared in accordance
with International Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410; however future events or conditions may cause the entity to
cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the Company's ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate the
company or to cease operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for
expressing to the company a conclusion on the condensed set of financial
statements in the half-yearly financial report. Our Conclusion, including our
Conclusion Relating to Going Concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.
Use of our report
This report is made solely to the company in accordance with ISRE (UK) 2410.
Our work has been undertaken so that we might state to the company those
matters we are required to state to it in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company, for our review work,
for this report, or for the conclusions we have formed.
Deloitte LLP
Recognised Auditor
Guernsey, Channel Islands
28 November 2023
Condensed Unaudited Statement of Comprehensive Income
For the six months ended 30 September 2023
Note 30 Sep 2023 30 Sep 2022
GBP
GBP
Interest income 5 15,239,555 16,577,696
Net gains/(losses) on financial assets and financial liabilities at fair value
through profit or loss
3 5,240,595 (1,844,587)
Other income 72,986 5,483
Operating income 20,553,136 14,738,592
Operating expenses 4 (2,873,145) (3,161,657)
Profit before finance costs 17,679,991 11,576,935
Finance costs 5 (2,089,118) (1,279,770)
Net profit 15,590,873 10,297,165
Other comprehensive income - -
Total comprehensive income 15,590,873 10,297,165
Earnings per share
Basic and diluted 10 6.8p 4.5p
Weighted average shares outstanding Number Number
Basic and diluted 10 229,332,478 229,332,478
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Condensed Unaudited Statement of Financial Position
As at 30 September 2023
Note(s) 30 Sep 2023 31 Mar 2023
GBP
GBP
Non-current assets
Financial assets at fair value through profit or loss 12,14 395,861,303 400,741,910
395,861,303 400,741,910
Current assets
Cash and cash equivalents 5,405,921 14,081,343
Cash collateral at broker 15 7,153,937 2,383,962
Derivative financial assets 13 - 1,756,118
Other assets 45,360 27,345
12,605,218 18,248,768
Total assets 408,466,521 418,990,678
Equity and liabilities
Equity
Reserves 338,796,832 336,965,907
338,796,832 336,965,907
Current liabilities
Financing agreements 8 59,330,999 80,441,157
Dividends payable 9 6,879,974 -
Derivative financial liabilities 13 1,655,860 -
Other liabilities 6 1,802,856 1,583,614
69,669,689 82,024,771
Total liabilities 69,669,689 82,024,771
Total equity and liabilities 408,466,521 418,990,678
Shares outstanding 11 229,332,478 229,332,478
Net asset value per share £1.48 £1.47
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Signed on behalf of the Board of Directors by:
Bob
Cowdell
Susie Farnon
Director
Director
28 November 2023
Condensed Unaudited Statement of Changes in Equity
For the six months ended 30 September 2023
Note 30 Sep 2023
GBP
Balance as at 31 March 2023 336,965,907
Total comprehensive income 15,590,873
Dividends 9 (13,759,948)
Balance as at 30 September 2023 338,796,832
Note 30 Sep 2022
GBP
Balance as at 31 March 2022 343,935,484
Total comprehensive income 10,297,165
Dividends 9 (13,759,948)
Balance as at 30 September 2022 340,472,701
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Condensed Unaudited Statement of Cash Flows
For the six months ended 30 September 2023
30 Sep 2023 30 Sep 2022
GBP
GBP
Net profit 15,590,873 10,297,165
Purchases of investment portfolio (50,695,576) (108,801,376)
Repayments of investment portfolio 59,321,049 69,034,307
Movement in realised and unrealised gains on investment portfolio (1,784,919) (4,561,286)
Net movement on derivative financial assets and liabilities 3,411,976 4,531,132
Interest income (15,239,555) (16,577,696)
Interest expense 2,089,118 1,279,770
Operating cash flows before movement in working capital 12,692,966 (44,797,984)
Increase in cash collateral at broker (4,769,975) (9,194,269)
Increase in other assets (18,015) (16,614)
Increase in other liabilities 219,242 127,733
Movement in working capital (4,568,748) (9,083,150)
Interest received 13,279,611 16,911,162
Net cash flow from/(used in) operating activities 21,403,829 (36,969,972)
Financing activities
Dividends paid to Shareholders (6,879,974) (13,759,948)
Payments under financing agreements (154,253,212) (296,667,889)
Proceeds under financing agreements 132,884,372 314,184,531
Finance costs paid (1,830,437) (1,220,305)
Net cash (used in)/from financing activities (30,079,251) 2,536,389
Net decrease in cash and cash equivalents (8,675,422) (34,433,583)
Cash and cash equivalents at the start of the period 14,081,343 47,385,138
Cash and cash equivalents at the end of the period 5,405,921 12,951,555
The accompanying notes form an integral part of the condensed unaudited
interim financial statements.
Notes to the Condensed Unaudited Interim Financial Statements
For the six months ended 30 September 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 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
16). The Company has no ownership interest in the Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and provides all
administration services to the Company in this capacity. The Bank of New York
Mellon (International) Limited is the Depositary and undertakes the custody of
assets. Aztec Financial Services (Guernsey) Limited is the Company Secretary.
2. Significant Accounting Policies
Statement of Compliance
The condensed unaudited interim financial statements for the period ended 30
September 2023 have been prepared in accordance with International Accounting
Standard ("IAS") 34 Interim Financial Reporting ("IAS 34") as issued by the
International Accounting Standards Board ("IASB"). The same accounting
policies, presentation and methods of computation have been followed in these
condensed unaudited interim financial statements as were applied in the
preparation of the Company's audited financial statements for the year ended
31 March 2023.
The condensed unaudited interim financial statements do not contain all the
information and disclosures required in a full set of annual financial
statements and should be read in conjunction with the audited financial
statements of the Company for the year ended 31 March 2023, which were
prepared in accordance with International Financial Reporting Standards
("IFRS") as issued by the IASB.
The comparative information for the year ended 31 March 2023 does not
constitute Statutory Accounts as defined by Guernsey law. A copy of the
Statutory Accounts for that year has been delivered to the Shareholders and is
available on the Company's website: www.realestatecreditinvestments.com.
(http://www.realestatecreditinvestments.com/)
The operations of the Company are not subject to seasonal fluctuations.
New Standards, Amendments and Interpretations Issued and Effective for the
Financial Year Beginning 1 April 2023 Amendments to IFRS 17 - Insurance
contracts
In June 2020, the IASB issued amendments to IFRS 17 Insurance Contracts to
provide three additional transition reliefs relating to: (1) contracts
acquired before transition, (2) the risk mitigation option at transition, and
(3) investment contracts with discretionary participation features. Issued in
May 2017, IFRS 17 sets out the requirements for an entity reporting
information about insurance contracts it issues and reinsurance contracts it
holds. IFRS 17 replaces an interim Standard - IFRS 4 Insurance Contracts -
from annual reporting periods beginning on or after 1 January 2023. Entities
have been required to apply IFRS 9 Financial Instruments since annual
reporting periods beginning on or after 1 January 2018. However, IFRS 4
Insurance Contracts has allowed the temporary deferral of the application of
IFRS 9. Entities that have elected to defer IFRS 9 application have instead
continued to apply IAS 39 Financial Instruments: Recognition and Measurement.
The IASB extended the fixed expiry date for the temporary deferral to annual
reporting periods beginning on or after 1 January 2023. The amendments have no
material impact on the financial statements of the Company.
Amendments to IAS 8 - Definition of Accounting Estimates
In February 2021, the IASB issued amendments to IAS 8, in which it introduced
a new definition of 'accounting estimates'. The amendments 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. The amendments should
provide helpful guidance for entities in determining whether changes are to be
treated as changes in estimates, changes in policies, or errors. The
amendments to IAS 8 are effective for annual periods beginning on or after 1
January 2023. The amendments have no material impact on the financial
statements of the Company.
Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting
Policies
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice
Statement 2 Making Materiality Judgements, in which it provided guidance and
examples to help entities apply materiality judgements to accounting policy
disclosures. The amendments aim to help entities provide accounting policy
disclosures that are more useful by (i) replacing the requirement for entities
to disclose their 'significant' accounting policies with a requirement to
disclose their 'material' accounting policies and (ii) adding guidance on how
entities apply the concept of materiality in making decisions about accounting
policy disclosures. Determining whether accounting policies are material or
not requires use of judgement. Therefore, entities are encouraged to revisit
their accounting policy information disclosures to ensure consistency with the
amended standard. Entities should carefully consider whether 'standardised
information, or information that only duplicates or summarises the
requirements of the IFRSs' is material information and, if not, whether it
should be removed from the accounting policy disclosures to enhance the
usefulness of the financial statements. The amendments to IAS 1 and IFRS
Practice Statement 2 are effective for annual periods beginning on or after 1
January 2023. Earlier application is permitted as long as this fact is
disclosed. The amendments have no material impact on the financial statements
of the Company.
Amendments to IAS 12 - Deferred Tax Related to Assets and Liabilities Arising
from a Single Transaction
In May 2021, the IASB issued amendments to IAS 12, which narrowed the scope of
the initial recognition exception under IAS 12, so that it no longer applied
to transactions that give rise to equal taxable and deductible temporary
differences. The amendments 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).
This judgement is important in determining whether any temporary differences
exist on initial recognition of the asset and liability. The amendments to IAS
12 are effective for annual periods beginning on or after 1 January 2023. 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 2023 and not Early Adopted
Title Effective for periods beginning on or after
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current 1 January 2024
Amendments to IAS 7 and IFRS 7 - Supplier Finance Arrangements 1 January 2024
Amendments to IFRS 16 - Lease Liability in a Sale and Leaseback 1 January 2024
Amendments to IAS 1 - Non-current Liabilities with Covenants 1 January 2024
Amendments to IAS 21 - Lack of Exchangeability 1 January 2025
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current
affect only the presentation of liabilities in the Condensed Unaudited
Statement of Financial Position and not the amount or timing of recognition of
any asset, liability income or expenses, or the information that the Company
disclose about those items.
Amendments to IAS 7 and IFRS 7 have no material impact on the financial
statements as the Company does not have supplier finance arrangements.
Amendments to IFRS 16 have no material impact on the financial statements as
the Company does not have sale and leaseback transactions.
Amendments to IAS 1 - Non-current Liabilities with Covenants improve the
information an entity provides when its right to defer settlement of a
liability for at least twelve months is subject to compliance with covenants.
The amendments also respond to stakeholders' concerns about the classification
of such a liability as current or non-current. 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 21 provide guidance to specify when a currency is
exchangeable and how to determine the exchange rate when it is not. Earlier
application is permitted. The Company did not early adopt these amendments and
expects that the amendments will have no material impact on the financial
statements.
Basis of Preparation
The condensed unaudited interim financial statements of the Company are
prepared under IFRS on the historical cost or amortised cost basis except for
financial assets and liabilities classified at fair value through profit or
loss which have been measured at fair value.
For the period ended 30 September 2023 and year ended 31 March 2023, the
financial assets at fair value through profit or loss include the related
interest receivable to reflect the measurement of the Company's investments as
a single unit of account, which includes all cash flows associated with the
asset.
The functional and presentation currency of the Company is GBP (£), which the
Board considers best represents the economic environment in which the Company
operates.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in
preparing the condensed unaudited interim financial statements as, after due
consideration, they consider that the Company has adequate resources to
continue in operational existence for a period of at least twelve months from
the date of signing the condensed unaudited interim financial statements.
The Investment Manager performed an evaluation of each of its positions in
light of all macroeconomic factors on operating models and valuations, and
performed a granular analysis of the future liquidity profile of the Company.
A detailed cash flow profile of each investment was completed, incorporating
the probability of likely delays to repayments, other stress tests (and
additional cash needs).
Taking account of the updated forecasting, the Directors consider that the
cash resources available as at 30 September 2023 of
£5.4 million (31 March 2023: £14.1 million), together with the cash
collateral at the broker of £7.2 million (31 March 2023: £2.4 million), the
liquidity of the market bond portfolio and the financing available through
activities such as repurchase agreements as described in Note 8, are
sufficient to cover normal operational costs and current liabilities,
including the proposed dividend, and the expected funding of loan commitments
as they fall due for a period of at least twelve months from the date of
signing the condensed unaudited interim financial statements. The Directors
note that a key assumption adopted in the going concern analysis is that
leverage through repurchase agreements is not withdrawn. Net debt (leverage
minus cash) as at 30 September 2023 was 13.8% (31 March 2023: 19.1%).
Notwithstanding the Directors' belief that this assumption remains
justifiable, the Directors have also determined a number of mitigations to
address a scenario where all outstanding repurchase agreements are required to
be settled as they fall due. Whilst there would be a number of competing
strategic factors to consider before implementation of such options, the
Directors believe that these are credible and can generate sufficient
liquidity to enable the Company to meet its obligations as they fall due. Such
strategies include further sales of assets within the bond portfolio,
cessation or delay of any future dividends and obtaining longer-term,
non-recourse financing, 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
portfolio positions in light of the various impacts of changing economic
circumstances on operating models and valuations;
· Positive engagement with all borrowers and counterparties; and
· Continued granular analysis of the future liquidity profile of
the Company.
As disclosed in Note 17, as at 30 September 2023, the Company had committed
£523.2 million into the loan and bond portfolio of which £360.2 million had
been funded (31 March 2023: £572.0 million commitment of which £367.8
million had been funded).
The Investment Manager models these expected commitments and only funds if the
borrowers meet specific business plan milestones.
In consideration of this additional stressed scenario and mitigations
identified, the Directors consider that the Company has adequate resources to
continue in operational existence for a period of at least twelve months from
the date of signing the condensed unaudited interim financial statements.
3. Net Gains/(Losses) on Financial Assets and Liabilities at Fair Value
through Profit or Loss
30 Sep 2023 30 Sep 2022
GBP
GBP
Net gains/(losses)
Net gains/(losses) on market bond portfolio 1,526,664 (4,407,934)
Net gains on bilateral loan and bond portfolio 258,255 8,969,220
Net gains/(losses) on foreign exchange instruments and other foreign currency 3,455,676 (6,405,873)
transactions
Net gains/(losses) on financial assets and liabilities at fair value through 5,240,595 (1,844,587)
profit or loss
4. Operating Expenses
Note 30 Sep 2023 30 Sep 2022
GBP
GBP
Investment management, administration and depositary fees
Investment management fees 16 2,139,184 2,162,157
Administration fees 16 142,064 141,118
Depositary fees 16 32,060 32,209
2,313,308 2,335,484
Other operating expenses
Directors' fees 115,775 107,500
Legal fees 60,375 296,167
Audit fees 56,625 59,444
Fees to auditor for non-audit services 39,500 37,500
Corporate secretary fees 37,500 44,539
Registration fees 30,000 30,000
Research fees 18,450 18,450
Directors and Officers' insurance fees 10,239 13,820
Regulatory body expenses 8,733 15,283
Other expenses 182,640 203,470
559,837 826,173
Total operating expenses 2,873,145 3,161,657
The ongoing costs of the Company are shown in the Key Information Document
(KID) published on the Company's website.
The total figure of 2.94% (30 September 2022: 2.23%) is made up of the
Investment Manager's fee of 1.25% (30 September
2022: 1.25%), other ongoing costs of 0.53% (30 September 2022: 0.42%), and
finance costs (which are disclosed separately in
the financial statements) of 1.16% (30 September 2022: 0.56%). The finance
costs may vary and are only incurred to increase
the overall returns to investors.
5. Interest Income and Finance Costs
The following table details interest income and finance costs from financial
assets and liabilities for the period:
30 Sep 2023 30 Sep 2022
GBP
GBP
Interest income
Real Estate Credit Investments - market bond portfolio 1,428,088 2,285,806
Real Estate Credit Investments - bilateral loan and bond portfolio 13,700,139 14,241,503
Cash and cash equivalents and other receivables 111,328 50,387
Total interest income 15,239,555 16,577,696
Finance costs
Cost of financing agreements (2,089,118) (1,279,770)
Total finance costs (2,089,118) (1,279,770)
6. Other Liabilities
30 Sep 2023 31 Mar 2023
GBP
GBP
Investment management, depositary and administration fees payable
Investment management fees payable 348,437 358,118
Depositary fees payable 54,265 33,090
Administration fees payable 38,666 41,939
441,368 433,147
Other operating payables
Registration fees payable 118,917 88,917
Legal fees payable 89,169 73,800
Audit fees payable 76,375 30,775
Corporate secretary fees payable 56,250 18,750
Directors' fees payable 53,750 53,750
Research fees payable 17,644 17,644
Other expense accruals 949,383 866,831
1,361,488 1,150,467
Total liabilities 1,802,856 1,583,614
7. Structured Entities Not Consolidated
As at 30 September 2023 and 31 March 2023, 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
Consolidated Financial Statements 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 30 September 2023 and 31 March 2023.
30 September 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 12,613,190 - To invest in United Kingdom No - No
Earlsfield real estate
Kensington 18,258,132 235,921 To invest in Kensington real estate United Kingdom No - No
Lifestory 12,650,000 - To invest in Luxembourg No - No
Lifestory real estate
Pamplona 4,132,282 421,718 To invest in Luxembourg No - No
Pamplona real estate
Ruby 6,173,178 5,211,822 To invest in Luxembourg No - No
Ruby real estate
Sabina 17,204,253 9,234,247 To invest in Luxembourg No - No
Sabina real estate
Cheyne French Funding Sub-Fund 3 11,501,458 3,584,184 To invest in France No - No
Cheyne French Funding Sub-Fund 3 real estate
Cheyne French Funding Sub-Fund 8 24,755,041 5,306,541 To invest in France No - No
Cheyne French Funding Sub-Fund 8
real estate
* This amount excludes interest receivables.
** 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.
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 Luxembourg 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 France 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
* This amount excludes interest receivables.
** 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.
8. 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 £89.8 million (31 March
2023: £139.9 million) and a weighted average cost of 6.80% (31 March 2023:
5.86%) per annum. The contractual maturity period of the repurchase
arrangements is 3 to 6 months (31 March 2023: 3 to 6 months).
This short-term financing is shown as a current liability in the Condensed
Unaudited Statement of Financial Position whereas the collateralised assets
are shown as non-current. The movement in financing agreement amounting to
£21.4 million
(30 September 2022: £17.5 million) and finance costs amounting to £1.8
million (30 September 2022: £1.2 million) are shown as financing activities
in the Condensed Unaudited Statement of Cash Flows.
During the financial period ended 30 September 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 30 September 2023 was £30.6 million (31 March 2023: £20.6
million).
The Company also enters into an off-balance sheet financing agreement which
does have partial recourse. The amount of partial recourse commitment as at 30
September 2023 was £3.0 million (31 March 2023: £2.9 million). No expected
loss from providing this guarantee has been recognised in these financial
statements and no additional collateralisation has been paid as at the period
end.
9. Quarterly Dividends
30 Sep 2023 30 Sep 2022
GBP
GBP
Share Dividends
Fourth interim dividend for the year ended 31 March 2023/31 March 2022 6,879,974 6,879,974
First interim dividend for the year ending 31 March 2024/31 March 2023 6,879,974 6,879,974
Dividends announced to Shareholders during the period 13,759,948 13,759,948
The total dividends announced during the financial period ended 30 September
2023 amounted to 6 pence per share (30 September 2022: 6 pence per share).
During the financial period ended 30 September 2023, the dividends paid
totalled £6.9 million (30 September 2022: £13.8 million) while £6.9 million
(31 March 2023: £Nil) was payable at the period end.
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 30 September 2023.
10. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
30 Sep 2023 30 Sep 2022
Net earnings attributable to shares (GBP) 15,590,873 10,297,165
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) 6.8 4.5
11. Share Capital
The issued share capital of the Company consists of shares and its capital as
at the period end is represented by the net proceeds from the issuance of
shares and profits retained up to that date. The Company does not have any
externally imposed capital requirements. As at 30 September 2023, the Company
had capital of £338.8 million (31 March 2023: £337.0 million).
30 Sep 2023 31 Mar 2023
Number of Shares
Number of Shares
Authorised Share Capital
Shares of no par value each Unlimited Unlimited
Shares issued and fully paid
Shares at the start of the period/year 229,332,478 229,332,478
Shares at the end of the period/year 229,332,478 229,332,478
The Company manages its capital to ensure that it will be able to continue as
a going concern while maximising the return to Shareholders. The Company's
overall strategy was outlined in the Prospectus which is published on the
Company's website. The capital structure of the Company consists of the equity
of the Company as disclosed in the Condensed Unaudited Statement of Changes in
Equity.
12. Valuation of Financial Instruments
IFRS 13 Fair Value Measurement requires disclosures surrounding the level in
the fair value hierarchy in which fair value measurement inputs are
categorised for assets and liabilities measured in the Condensed Unaudited
Statement of Financial Position. The determination of the fair value for
financial assets and financial liabilities for which there is no observable
market price requires the use of valuation techniques. For financial
instruments that trade infrequently and have little price transparency, fair
value is less objective.
The Company categorises investments using the following hierarchy as defined
by IFRS 13:
· Level 1 - Quoted market prices in an active market for an
identical instrument;
· Level 2 - Valuation techniques based on observable inputs. This
category includes instruments valued using: quoted market prices in active
markets for similar instruments; quoted prices for similar instruments in
markets that are considered less than active; or other valuation techniques
where all significant inputs are directly or indirectly observable from market
data; and
· Level 3 - Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation technique
includes inputs not based on observable data and the unobservable inputs could
have a significant impact on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for similar
instruments where significant unobservable adjustments or assumptions are
required to reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of the Company's
financial assets and liabilities measured at fair value at the period/year end
date:
Level 1 Level 2 Level 3 Total
As at 30 September 2023: GBP GBP GBP GBP
Non-current assets
Real Estate Credit Investments - market bond portfolio - 21,259,504 13,909,308 35,168,812
Real Estate Credit Investments - bilateral loan and bond portfolio - - 360,692,491 360,692,491
Total non-current assets - 21,259,504 374,601,799 395,861,303
Current liabilities
Forward foreign exchange contracts - (1,655,860) - (1,655,860)
Real Estate Credit Investments - repurchase agreements - (59,330,999)* - (59,330,999)
- (39,727,355) 374,601,799 334,874,444
* Includes repurchase agreements related to Level 3 investments.
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 - (80,441,157)* - (80,441,157)
- (48,921,771) 370,978,642 322,056,871
* 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
self-originated bonds where prices are not directly observable in the market.
These bonds are classified as Level 3 in the fair value hierarchy. The
weighting of the valuation between observable prices from comparable bonds and
the valuation result based on proprietary sector curve discount yields is a
key unobservable input in deriving fair value of the investments. A 50%
weighting to each data point has been applied and the fair value range
generated by the two approaches is £0.2 million (31 March 2023: £0.2
million). The sector curve discount yields used range from 9.5% to 12.6% (31
March 2023: 4.8% to 11.9%). Applying a discount yield +/-2% to the valuation
would reduce/increase the fair value at 30 September 2023 by £(0.8) million
and £1.0 million (31 March 2023: £(1.7) million and £1.6 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 invest 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
2023: 6.2% to 13.2%) (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.
A fundamental principle of bond investing is that market interest rates and
bond prices generally move in opposite directions. When market interest rates
rise, prices of fixed-rate bonds fall. The 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 judgment
reflects the limited impact the fluctuations in market interest rates have on
the valuation of the bilateral bonds and loans portfolio.
The Investment Manager has considered relevant geopolitical and macroeconomic
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.
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) on the net asset value ("NAV") of
the Company, is a decrease of
£4.1 million or £20.3 million (31 March 2023: £6.3 million or £31.7
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 30 September 2023 and 31 March 2023, and their weighted average
lives.
Level 3 Reconciliation
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the financial period/year:
Level 3 Level 3
30 Sep 2023 31 Mar 2023
GBP GBP
Financial assets at fair value through profit or loss
Opening balance 370,978,642 295,890,549
Total gains recognised in the Condensed Unaudited Statement of Comprehensive
Income for the period/year
1,030,933 10,170,687
Purchases 50,695,576 167,591,125
Sales (50,063,992) (118,994,111)
Increase in interest receivable 1,960,640 2,619,692
Transfer in to Level 3 - 13,700,700
Closing balance 374,601,799 370,978,642
Unrealised gains on investments classified as Level 3 at period/year end 936,518 3,840,715
13. Derivative Contracts
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 2023: AA-) according to Standard and Poor's.
Transactions involving derivative instruments are usually with counterparties
with whom the Company has signed master netting agreements. Master netting
agreements provide for the net settlement of contracts with the same
counterparty in the event of default. The impact of the master netting
agreements is to reduce credit risk from the amounts shown as derivative
financial assets on the Condensed Unaudited Statement of Financial Position.
The credit risk associated with derivative financial assets subject to a
master netting arrangement is eliminated only to the extent that financial
liabilities due to the same counterparty will be settled after the assets are
realised.
The exposure to credit risk reduced by master netting arrangements may change
significantly within a short period of time as a result of transactions
subject to the arrangement. The corresponding assets and liabilities have not
been offset on the Condensed Unaudited Statement of Financial Position.
Below are the derivative financial assets and liabilities by counterparty as
at 30 September 2023 and 31 March 2023.
Forward Foreign Exchange Contracts
The following forward foreign exchange contracts were open as at 30 September
2023:
Counterparty Settlement Date Buy Currency Buy Amount Sell Currency Sell Amount Unrealised Loss
GBP
The Bank of New York Mellon 17 November 2023 GBP 162,734,240 EUR (189,230,000) (1,655,860)
Unrealised loss on forward foreign exchange contracts (1,655,860)
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
14. 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 condensed unaudited interim financial statements.
Information regarding the results of each reportable segment is included
below. Performance is measured based on segment profit/(loss), as included in
the internal management reports that are reviewed by the Board of Directors.
Segment profit/(loss) is used to measure performance as management believes
that such information is the most relevant in evaluating the results.
For the six months ended 30 September 2023: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Interest income 1,428,088 13,811,467 15,239,555
Net gains on financial assets and liabilities at fair value through profit or 1,526,664 258,255 1,784,919
loss
Reportable segment profit 2,954,752 14,069,722 17,024,474
Finance costs (593,865) (1,495,253) (2,089,118)
For the six months ended 30 September 2022: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Interest income 2,285,806 14,291,890 16,577,696
Net (losses)/gains on financial assets and liabilities at fair value through (4,407,934) 8,969,220 4,561,286
profit or loss
Reportable segment (loss)/profit (2,122,128) 23,261,110 21,138,982
Finance costs (454,867) (824,903) (1,279,770)
As at 30 September 2023: Market Bond Portfolio Bilateral Loan and Total
GBP Bond Portfolio GBP
GBP
Reportable segment assets 35,168,812 360,692,491 395,861,303
Non-segmental assets - - 12,605,218
Financing agreements (24,582,184) (34,748,815) (59,330,999)
Non-segmental liabilities - - (10,338,690)
Net assets 338,796,832
As at 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 (36,015,630) (44,425,527) (80,441,157)
Non-segmental liabilities - - (1,583,614)
Net assets 336,965,907
Information regarding the basis of geographical segments is presented in the
Investment Manager's Report and is based on the countries of the underlying
collateral.
All segment revenues are from external sources. There are no inter-segment
transactions between the reportable segments during the period. Certain income
and expenditure is not considered part of the performance of either segment.
This includes gains/(losses) on net foreign exchange and derivative
instruments, expenses and interest on borrowings.
The following table provides a reconciliation between net reportable income
and operating profits.
30 Sep 2023 30 Sep 2022
GBP
GBP
Reportable segment profit 17,024,474 21,138,982
Net gains/(losses) on foreign exchange instruments and other foreign currency 3,455,676 (6,405,873)
transactions*
Other income 72,986 5,483
20,553,136 14,738,592
Operating expenses (2,873,145) (3,161,657)
Finance costs (2,089,118) (1,279,770)
Net profit 15,590,873 10,297,165
* The Company enters into foreign exchange contracts to hedge its exposure
to non-GBP investments, movements in the value of its foreign exchange
contracts are offset by the corresponding opposite move in its non-GBP
investments.
Certain assets are not considered to be attributable to either segment; these
include other receivables and prepayments, cash and cash equivalents and
derivative financial assets.
The following table provides a reconciliation between net total segment assets
and total assets.
30 Sep 2023 31 Mar 2023
GBP
GBP
Reportable segment assets 395,861,303 400,741,910
Cash and cash equivalents 5,405,921 14,081,343
Cash collateral at broker 7,153,937 2,383,962
Derivative financial assets - 1,756,118
Other assets 45,360 27,345
408,466,521 418,990,678
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios for the period ended 30 September
2023:
Year ended 30 September 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 49,243,187 351,498,723 400,741,910
Purchases - 50,695,576 50,695,576
Repayments/sales proceeds (15,600,346) (43,720,703) (59,321,049)
(Decrease)/increase in interest receivable (693) 1,960,640 1,959,947
Realised (losses)/gains on sales (886,334) 875,252 (11,082)
Net movement in unrealised gains/(losses) on investments at fair value through
profit or loss
2,412,998 (616,997) 1,796,001
Closing fair value 35,168,812 360,692,491 395,861,303
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 losses on sales (4,547,798) (5,408,771) (9,956,569)
Net movement in unrealised (losses)/gains on investments at fair value through
the profit or loss
(3,607,781) 18,030,691 14,422,910
Closing fair value 49,243,187 351,498,723 400,741,910
15. Cash Collateral
The Company manages some of its financial risks through the use of financial
derivative instruments and repurchase agreements which are subject to
collateral requirements. As at 30 September 2023, a total of £7.2 million (31
March 2023: £2.4 million) was due from various financial institutions under
the terms of the relevant arrangements. The cash held by brokers is restricted
and is shown as Cash collateral at broker on the Condensed Unaudited Statement
of Financial Position.
16. Material Agreements and Related Party Transactions
Loan Investments
Previously, many of the Company's investments in loans were made through a
Luxembourg based entity, Stornoway Finance S.à r.l. via loan note
instruments. The loan investments are now made through another Luxembourg
based entity, ENIV S.à r.l. via separate note instruments. This entity has
separate compartments for each loan deal which effectively ringfences each
loan deal. Other funds managed by the Investment Manager may invest pari passu
in these compartments.
Investment Manager
The Company is party to an Investment Management Agreement with the Investment
Manager, dated 22 February 2017, pursuant to which the Company has appointed
the Investment Manager to manage its assets on a day-to-day basis in
accordance with its investment objectives and policies, subject to the overall
supervision and direction of the Board of Directors.
The Company pays the Investment Manager a Management Fee and a Performance
Fee.
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company an annual Management Fee of 1.25% on
an adjusted NAV, being the NAV of the shares.
During the period ended 30 September 2023, the Management Fee totalled £2.1
million (30 September 2022: £2.2 million), of which £0.3 million (31 March
2023: £0.4 million) was outstanding at the period end.
Performance Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company a performance fee calculated as ((A-B)
x 20% x C) where:
A = the Adjusted Performance NAV per share, as defined in the Prospectus.
B = the NAV per share as at the first business day of the Performance Period
increased by a simple annual rate of return of 7% over the Performance Period
or, if no Performance Fee was payable in the previous Performance Period, the
NAV per share on the first business day of the Performance Period immediately
following the last Performance Period in which a Performance Fee was paid (the
"Starting Date") increased by a simple annual rate of return of 7% over the
period since the Starting Date ("Hurdle Assets").
C = the time weighted average number of shares in issue in the period since
the Starting Date.
On 1 October 2021, the Company entered a new Performance Period which is
expected to run until the end date of the quarter in which the next
continuation resolution is passed. 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 period ended 30 September 2023, there were no performance fees
accrued.
Administration Fee
Under the terms of the Administration Agreement, the Administrator is entitled
to receive from the Company a monthly administration fee based on the prior
month gross assets of the Company adjusted for current month subscriptions and
redemptions of the Company at the relevant basis points per annum rate,
subject always to a minimum monthly fee £10,000.
During the period ended 30 September 2023, the administration fee totalled
£142,064 (30 September 2022: £141,118), of which
£38,666 (31 March 2023: £41,939) was outstanding at the period end.
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is entitled to
receive from the Company an annual Depositary fee of 0.02% (31 March 2023:
0.02%) of the NAV of the Company. During the period ended 30 September 2023,
the Depositary fee totalled £32,060 (30 September 2022: £32,209). The
Company owed £54,265 (31 March 2023: £33,090) to the Depositary at the
period end date.
17. Contingencies and Commitments
As at 30 September 2023, the Company had committed £523.2 million into
bilateral loans and bonds of which £360.2 million had been funded (31 March
2023: £572.0 million into bilateral loans and bonds of which £367.8 million
had been funded).
During the financial period ended 30 September 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 30 September 2023 was
£3.0 million (31 March 2023: £2.9 million).
18. Subsequent Events
In October 2023, the Company sold £25.2 million of market bonds.
The Directors declared a second interim dividend of 3 pence per share on 28
November 2023.
There have been no other significant events affecting the Company since the
period end date that require amendment to or disclosure in the condensed
unaudited interim financial statements.
19. Foreign Exchange Rates Applied to Combined Totals Used in the Preparation
of the Condensed Unaudited Interim Financial Statements
The following foreign exchange rates relative to the GBP were used as at the
period/year end date:
Currency 30 Sep 2023 31 Mar 2023
GBP
GBP
EUR 1.15 1.14
USD 1.22 1.24
20. Approval of the Condensed Unaudited Interim Financial Statements
The condensed unaudited interim financial statements of the Company were
approved by the Directors on 28 November 2023.
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
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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