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The August restructuring which created Real Estate Credit Investments, a listed fund run by Cheyne Capital, is paying off. Last week one broker put out a buy recommendation after audited results from RECI showed a 10% increase in its net asset value to 110p per share. The real estate bond portfolio has a market value of £82.8m but based on future profits, the embedded value is £136.8m. RECI paid its first dividend under the new set up, 1.7p for the quarter ending March 31, giving it a yield of 7.9%. The results are the fund's first since it realigned its focus on UK and German real estate debt securities and loans, and transferred the legacy residual income assets into another vehicle. Its property debt strategy focuses on secured residential and commercial debt in seeking to exploit opportunities in publicly-traded securities and real estate loans. Since March, the fund has become more defensive. To mitigate the volatility, it bought Class A bonds - those with the highest rating - in April and hedged the portfolio with short positions on the iTraxx Main Europe index. This is composed of the 125 most liquid credit-default swaps referencing European investment grade credits. Shamez Alibhai, a partner at Cheyne, told Financial News that since the end of March the index has widened from 122 basis points to 175-185, reflecting an increase of risk aversion in the European markets. Alibhai said: "We were net buyers of bonds between November and February as they were buoyed by the Long Term Refinancing Operations announced in December. We didn't believe the price rally was sustainable so we stopped buying bonds in March, reflecting our concern about the regulatory and fiscal response to the eurozone crisis. We have been net sellers of bonds since March." This defensive positioning throughout the early part of the second quarter helped RECI see a further NAV increase to 112p per share as of May 15. Alibhai believes that bonds will continue to be available at attractive prices, as they haven't yet recovered from their 2011 highs. He said: "We plan to be net buyers of bonds this year, focusing on high-quality names in core geographies such as the UK and Germany that continue to attract capital and are a safe harbour from the eurozone stress." Alibhai said RECI is also looking at real estate lending. "There is a lot of demand for credit but banks are more interested in finding excuses not to lend than reasons to lend. Given that they are deleveraging substantially and rationing credit, there is an opportunity for private lenders to step in and make loans at attractive prices." In the UK residential market, the fund is offering loans, with an average loan-to-value ratio of 64%, offering a 16% gross margin. He added that there are also significant investment opportunities arising across the real estate debt markets as banks reduce their exposure to commercial real estate in an effort to de-lever their balance sheets. Analysts at Liberum Capital put a buy rating on RECI last Thursday saying: "We expect RECI to continue to benefit from the opportunities that arise from further bank de-leveraging and price dislocation in the market for European real estate securities." Author Bio Find out more about Cheyne Capital and RECI (Real Estate Credit Investments).
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