549300QRGEEMB5OOLX86 2022-04-01 2023-03-31 549300QRGEEMB5OOLX86 2023-03-31 549300QRGEEMB5OOLX86 2022-03-31 549300QRGEEMB5OOLX86 2021-03-31 549300QRGEEMB5OOLX86 2021-04-01 2022-03-31 iso4217:GBP iso4217:GBPxbrli:shares xbrli:shares
Annual
Report and
Accounts
2023
Real Estate Credit Investments Limited
Attractive returns
from credit
exposure to UK
and Western
European real
estate credit
markets
Real Estate Credit Investments is a specialist
investor in the United Kingdom and Western
European real estate credit markets with a
focus on fundamental credit and value.
Annual Report and Accounts 2023
Front cover image:
UK mixed-use portfolio, predominantly office/residential
Overview
Overview and Highlights
02
At a Glance
04
About the Company
06
Chairmanʼs Statement
08
KPIs and Financial Highlights
11
Business and Strategy Review
Strategic Framework and Performance Highlights
14
Strategic Report
16
Investment Manager’s Report
20
Stakeholder Engagement
28
Sustainability Report
32
Governance
Board of Directors
40
Management Team
42
Directors’ Report
44
Remuneration Committee Report
48
Corporate Governance Statement
50
Audit and Risk Committee Report
56
Directors’ Responsibility Statement
60
Financial Statements
Independent Auditor’s Report
64
Statement of Comprehensive Income
72
Statement of Financial Position
73
Statement of Changes in Equity
74
Statement of Cash Flows
75
Notes to the Financial Statements
76
Appendix I – AIFM Remuneration Policy (Unaudited)
108
Appendix II – AIFM Leverage (Unaudited)
109
Glossary
110
Directors and Advisers
111
04
08
62
RECI evolving to capitalise on the scalable
opportunity set
A robust portfolio delivering an attractive and
sustainable annual dividend of 12 pence per share
In this report
Contents
Chairman’s Statement
Financial Statements
At a Glance
Real Estate Credit Investments Limited
01
Annual Report and Accounts 2023
OVERVIEW
AS AT 31 MARCH 2023
Overview and
Highlights
Defensive credit exposure to UK and Western
European real estate credit markets
–
Stable and uninterrupted dividends delivered
consistently since October 2013
Granular portfolio with detailed disclosure
–
53 positions
–
Diverse portfolio across sectors and geography
Attractive and stable income in a changing
interest rate environment
–
Consistent portfolio yield of 7%+ offering a buffer to risk-
free rates
–
A high-yielding portfolio, combined with a short weighted
average life, ensures minimal exposure to yield widening
and the ability to redeploy at higher rates quickly
Access to Cheyne’s established real estate investment team and substantial origination pipeline
Key figures
NAV per share
£1.47
(31 March 2022: £1.50)
Total Assets
£419.0m
(31 March 2022: £447.0m)
Net Assets
£337.0m
(31 March 2022: £343.9m)
Net Profit
£20.6m
(Full year ended 31 March 2022: £24.6m profit)
Hotel development in Finland
Co-living development in Earlsfield, London
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
02
Focus on senior
secured credit, with
defensive LTVs
Strong governance
control over its
loan book
Large,
experienced,
well capitalised
borrowers
Conservative and
flexible leverage profile
Dividend stability without
compromising risk
Management
from Cheyne’s
Real Estate team
RECI Offers:
Total NAV Return
6.2%
(31 March 2022: 6.9%)
Share Price
£1.34
(31 March 2022: £1.51)
Dividend Yield
9.0%
(31 March 2022: 8.0%)
FY 2023 Dividends
12.0 pence
(31 March 2022: 12.0 pence)
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
03
Real Estate Credit Investments (“RECI”) is a closed-ended
investment company which originates and invests in real
estate debt secured by commercial or residential properties
in the United Kingdom and Western Europe.
The Company’s aim is to deliver a stable quarterly dividend
with minimal portfolio volatility, across normal economic
and credit cycles, through a levered exposure to real estate
credit investments.
Investment areas
Bilateral Loans and Bonds
Predominantly bilateral senior real estate loans and bonds.
Market Bonds
Listed real estate debt securities such as Commercial
Mortgage Backed Securities (CMBS) bonds.
Share Price vs NAV
Investment Portfolio Composition
RECI’s investment portfolio is a diversified book of
53 positions in real estate bonds and loans.
OVERVIEW
At a Glance
NAV and Share Price
As at 31 March 2023
Net Assets
£337.0m
Shares Outstanding
229.3m
NAV (per share)
£1.47
Share Price (per share)
£1.34
(Discount)/Premium
(8.8)%
Dividend Yield
9.0%
Market Capitalisation
£307.3m
Total NAV Return*
Half Year Ended 31 March 23
3.1%
Financial Year Ended 31 March 23
6.2%
Prior Financial Year Ended 31 March 22
6.9%
Last Three Financial Years Ended 31 March 23
26.9%
Last Five Financial Years Ended 31 March 23
32.1%
*
The Total NAV Return measures the combined effect of any dividends paid, together
with the rise or fall in the NAV per share. The Total NAV Return relates to past
performance and takes into account both capital returns and dividends paid to
Shareholders. Any dividends received by a Shareholder are assumed to have been
reinvested in the assets of the Company at its NAV per share on the ex-dividend date.
The Total NAV Return is considered an Alternative Performance Measure pursuant
to ESMA Guidelines which is unaudited and outside of the scope of International
Financial Reporting Standards (“IFRS”).
Core
Core+
Value Add / Transitional
Development
Land
0%
10%
20%
30%
40%
50%
60%
70%
Bilateral Deals
Market Bonds
Portfolio by Asset Strategy
(Total Committed Capital)
Providing compelling risk-adjusted returns
190
180
170
160
150
140
130
120
110
100
Share Price
NAV per share
Performance (Pence)
Jan 18
Mar 18
May 18
Jul 18
Sep 18
Nov 18
Jan 19
Mar 19
May 19
Jul 19
Sep 19
Nov 19
Jan 20
Mar 20
May 20
Jul 20
Sep 20
Nov 20
Jan 21
Mar 21
May 21
Jul 21
Sep 21
Nov 21
Jan 22
Mar 22
May 22
Jul 22
Sep 22
Nov 22
Jan 23
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
04
%
Allocation
Mar-23
%
Allocation
Mar-22
Hotel
19.8%
22.6%
Mixed-Use
17.1%
21.2%
Student Accommodation
11.9%
10.2%
Residential
11.8%
6.7%
Office
11.6%
11.7%
Co-Living
7.0%
3.2%
Leisure
5.0%
2.4%
Later Living
3.3%
0.0%
Housebuilder
3.3%
4.8%
Assisted Living
3.2%
3.2%
Retail
1.3%
3.1%
Logistics
2.0%
2.2%
Land
1.9%
0.0%
Industrial
0.8%
0.8%
Healthcare
0.0%
7.9%
France
Spain
Finland
Portugal
Ireland
Italy
Germany
UK
58.3%
13.7%
23.8%
(11.1%)
7.5%
(3.1%)
3.7%
(0.0%)
2.8%
2.8%
1.6%
0.0%
1.2%
(1.4%)
1.1%
(0.9%)
Portfolio by Geography
by % of Total Committed Capital including PIK
Portfolio by Sector
by % of Total Committed Capital including PIK
2022
2023
Country
% Allocation
Mar-23
Since
Mar-22
icons denote Cheyne Real Estate Offices in London, Paris, Berlin and Madrid
Real Estate Credit Investments Limited
05
Annual Report and Accounts 2023
Real Estate Credit Investments Limited (“RECI” or the
“Company”) is incorporated in Guernsey, governed by the
Companies (Guernsey) Law, 2008 (the “Companies Law”)
and regulated as an authorised closed-ended investment
scheme by the Guernsey Financial Services Commission.
At the Annual General Meeting (“AGM”) in September
2021, the continuation vote was passed and the next
continuation resolution will be subject to Shareholder
approval at the AGM to be held in September 2025.
The Company invests in real estate debt secured by
commercial or residential properties in the United Kingdom
and Western European countries focusing primarily on
those countries where it sees the changing dynamics
in the real estate debt market offering a sustainable
deal flow for the foreseeable future. The Company has
adopted a long-term strategic approach to investing and
focuses on identifying value in real estate debt. In making
these investments, the Company uses the expertise and
knowledge of its Alternative Investment Fund Manager
(“AIFM”), Cheyne Capital Management (UK) LLP (“Cheyne”
or the “Investment Manager”).
The shares are currently listed on the premium segment of
the Official List of the UK Listing Authority and trade on the
Main Market of the London Stock Exchange. The shares
offer investors a levered exposure to a portfolio of real
estate credit investments and pay a quarterly dividend.
Website and Share Price Information
The Company has a dedicated website, which can be
found at www.realestatecreditinvestments.com, that
contains information, including regulatory announcements,
share price information, financial reports, investment
objectives and strategy, investor contacts, information on
the Board and information on the Alternative Investment
Fund Managers Directive (“AIFMD”).
Investment Objective and Investment Policy
Investment Objective
The Investment Objective of the Company is to provide
Shareholders with attractive and stable returns, primarily in
the form of quarterly dividends, by exposure to a diversified
portfolio of real estate credit investments, predominantly
comprising real estate loans and bonds.
Investment Policy
To achieve the Investment Objective, the Company invests
and will continue to invest in real estate debt secured by
commercial or residential properties in the United Kingdom
and Western European countries.
About the
Company
OVERVIEW
The Investment Objective of the Company is to
provide Shareholders with attractive and stable
returns, primarily in the form of quarterly dividends, by
exposure to a diversified portfolio of real estate credit
investments, predominantly comprising real estate
loans and bonds.
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
06
The real estate credit investments may take different forms
but are likely to be:
(i)
secured real estate loans, debentures or any
other forms of debt instruments (together
“Secured Debt”). Secured real estate loans are
typically secured by mortgages over the property
or charges over the shares of the property-owning
vehicle. Individual Secured Debt investments will
have a weighted average life profile ranging from
six months to five years. Investments in Secured
Debt will also be directly or indirectly secured by
one or more commercial or residential properties,
and shall not exceed a loan-to-value (“LTV”) of
85% at the time of investment;
(ii)
listed debt securities and securitised tranches
of real estate related debt securities, for example,
residential mortgage backed securities and
commercial mortgage backed securities (together
“MBS”). For the avoidance of doubt, this does not
include equity residual positions in MBS; and
(iii)
other direct or indirect opportunities, including
equity participations in real estate, save that no
more than 20% of the total assets will be invested
in positions with an LTV in excess of 85% or
in equity positions that are uncollateralised.
On certain transactions, the Company may
be granted equity positions as part of its loan
terms. These positions will come as part of the
Company’s overall return on its investments
and may or may not provide extra profit to the
Company depending on market conditions and
the performance of the loan. These positions are
deemed collateralised equity positions. All other
equity positions that the Company may invest in
are deemed uncollateralised equity positions.
Dividend Policy
Subject to the applicable requirements and restrictions
contained in the Companies Law, the Company may
consider making interim dividend payments to Shareholders,
having regard to the net income remaining after the potential
reinvestment of cash or other uses of income, at a level the
Directors deem appropriate, in their sole discretion, from
time to time. There is no fixed date on which it is expected
that dividends will be paid to Shareholders.
As it has since 2013,
the Company intends
to continue to pay
a stable quarterly
dividend with the
potential for additional
payments if investment
returns permit
Hotel development in Finland
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
07
No review of our financial year ended 31 March 2023
can ignore the extraordinary events and global economic
and market volatility which provided the backdrop to
your Company’s performance, as it continued to deliver
a stable NAV and an attractive, sustainable dividend for
our Shareholders.
The war in Ukraine continued throughout the year under
review and there is no imminent sign of a cessation or
peaceful resolution. There have also been rising tensions
in Asia caused by the actions of China and North Korea.
Events saw oil and commodity prices surge higher, with
supply chains still struggling to recover from the Covid
crisis. The consequence was the rise of inflation throughout
the world and the inevitable response of Central Banks in
the UK and abroad in raising interest rates at the fastest
pace seen in decades, which created currency and market
volatility. Nervousness was heightened by the threat of
potential recession and many suffered as the “cost of living
crisis” impacted businesses and individuals.
In addition, the UK suffered political and market turmoil
in Autumn 2022, following the removal of Boris Johnson
as Prime Minister, the ill-fated tenure of Liz Truss and
her government’s September 2022 “Mini-Budget”,
which destabilised credit markets. These events caused
significant credit and currency market reaction and
Rishi Sunak, the UK’s third Prime Minister during the last
financial year, and his Chancellor have been seeking to
steady and reassure markets to negate the political risk
premium in credit and UK gilt markets.
Market confidence was further tested in Q1 of 2023
with concerns arising about the stability of the US and
international banking sector, following the run on deposits
of Silicon Valley Bank in the US and its UK branch and the
issues at Credit Suisse ahead of its acquisition by UBS.
The aggressive hiking of interest rates in the US has led to
further stress being experienced by US regional banks and
driven market concerns about potential issues impacting
the wider banking community.
Inevitably, this has negatively impacted investor sentiment
amid concerns about the credit and real estate markets.
There has been significant sector widening of discounts
for companies investing in real estate debt and for REITs,
reflecting investor nervousness of the negative commentary
on the outlook for commercial real estate valuations.
It is probably no surprise that markets in such a year
have been described to me by several senior market
professionals as “the worst of my career”!
Nevertheless, your Board and Cheyne remained
committed to continuing to deliver attractive returns for
our Shareholders. The Company’s portfolio composition
positioned it well to withstand the various challenges and
steer a course through these difficult markets, as evidenced
by the stable net asset value maintained throughout the
financial year.
Bob Cowdell
Chairman
RECI continued to deliver a
stable NAV and attractive annual
dividend of 12 pence per share,
amid challenging times and
volatile markets
Chairman’s
Statement
OVERVIEW
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
08
I am pleased to report that for the year ended 31 March
2023, RECI delivered a total net profit of £20.6 million and
maintained an unchanged dividend of 3 pence per quarter,
while taking the opportunity to continue to enhance the
quality of RECI’s portfolio.
Reacting to the changing market background, Cheyne
moved to strengthen the Company’s position by: transacting
the majority of new loans on a floating rate basis; increasing
the focus on senior loans to over 90% of the total portfolio;
reducing the holding in public market bonds; and investing
in a pipeline of new, higher return opportunities which will
enhance the dividend income cover.
Financial Performance
RECI reported a total net profit for the financial year ended
31 March 2023 of £20.6 million on year end total assets of
£419.0 million, compared with a £24.6 million net profit in
the year ended 31 March 2022, on year end total assets
of £447.0 million.
The NAV as at 31 March 2023 was £1.47 per share (£1.50
per share as at 31 March 2022) which, combined with the
12 pence per share of dividends payable in respect of the
year ended 31 March 2023, represents an annualised total
return for Shareholders of 6.2%.
During the financial year ended 31 March 2023, the
Company’s shares traded at an average discount to NAV
of 6.1%, (0.7% premium for the year ended 31 March 2022).
Total quarterly dividends declared in respect of the financial
year ended 31 March 2023 were an unchanged 12 pence per
share, returning £27.5 million to our Shareholders.
In the course of the last financial year, the Company utilised
short-term leverage at an average cost of borrowing of
3.2%, with average gross leverage of £121.2 million or 1.36x
NAV. RECI also introduced asset level structured leverage
(totalling £20.6 million at year end), at an average borrowing
cost of 5.9%.
During the financial year to 31 March 2023, the Company
committed £155.2 million to eight new deals and funded
£158.6 million into new and existing deals, compared with
£81.6 million and £113.1 million respectively in the previous
financial year. RECI also received cash repayments and
interest of £159.0 million in this year, compared with
£132.2 million in the year ended 31 March 2022.
Financial Year Review
Despite the challenges to real estate and credit markets,
in particular the yield widening in the bond markets
following the 23 September 2022 “Mini-Budget”, the
Company’s robust portfolio ensured the NAV remained
stable at an average of £1.50 per share during the financial
year, notwithstanding the payment to Shareholders of
four unchanged dividends, totalling 12 pence per share,
during the period.
That NAV resilience reflects the positioning of RECI’s
portfolio. In response to climbing inflation and rising interest
rates, Cheyne moved to execute new loans on floating rather
than fixed rate terms for the majority of its new deals. In line
with our stated strategy of increasing exposure to lower
risk senior positions, 90.3% of the Company’s positions
were in senior assets by the financial year end. The size and
capital strength of RECI’s chosen counterparties continued
to increase and the weighted average life of the whole
portfolio was 2.3 years for the financial year ended 31 March
2023. All scheduled interest and repayments were received
as anticipated during the financial year; endorsing the
credit quality of the portfolio, which is driven by Cheyne’s
investment process and deal selection.
The market turbulence also presented opportunities to
deploy capital to strengthen the Company’s investment
returns, with Cheyne identifying a pipeline of potential
transactions offering enhanced returns of over 10%. These
underpin RECI’s attractive current dividend pay-out of 12
pence per share per annum, improve dividend cover and
provide the opportunity for NAV stability and potential
growth. As at 31 March 2023 the weighted average LTV of
the Company’s portfolio was 59.2% (62.4% at 31 March 2022),
providing significant defensive equity headroom. The new
investments were funded by deploying leverage and cash
from realisations and repayments. The Board maintains its
practice of considering all options when assessing the levels
of cash utilisation and allocation.
When the financial year began on 1 April 2022, RECI had
gross balance sheet leverage of £100.4 million (1.29x NAV)
and leverage net of cash of £47.8 million (1.14x NAV). The
Board and Cheyne have continued to monitor RECI’s cash
resources and repayments and to consider the appropriate
level and blend of gearing for the Company. During the last
financial year, the Company introduced asset level leverage
(which may be structured on a non-recourse or partial
recourse basis), alongside flexible balance sheet leverage.
At the year end, the Company had gross balance sheet
leverage of £80.2 million (1.24x NAV) and leverage net of
cash of £63.7 million (1.20x NAV), together with £20.6 million
of asset level leverage.
RECI has now entered into its first partial recourse asset
level leverage transactions, in line with its strategy of
leverage diversification. As at 31 May 2023, the Company’s
gross balance sheet leverage was £59.3 million (1.17x
NAV); its balance sheet leverage net of £28.7million cash
was 1.09x NAV; and its net effective leverage, including
contingent liabilities of £3.6 million (being the partial
recourse commitment, representing 25% of asset level
borrowings provided to certain asset level structured finance
counterparties), was 1.10x NAV.
The negative market sentiment caused by the geopolitical
and economic events during our last financial year inevitably
impacted RECI’s share price and saw material discount
widening across the investment funds sector generally and
the credit and real estate sectors, in particular.
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
09
During the half year to 30 September 2022, the Company’s
shares traded at an average discount to NAV of 2.4%.
The market volatility following the September 2022 “Mini-
Budget” provoked much greater investor uncertainty in
credit markets, contributing to some reactive selling of RECI
shares, causing the discount to widen further. Overall, the
Company’s shares traded at an average discount to NAV
of 6.1% for the financial year ended 31 March 2023 and the
discount has since widened to trade at an average of 13.7%
since 1 April 2023 reflecting ongoing market nervousness.
The Company’s shares closed at £1.29 on 19 June 2023
(a discount of 13.8%), which would provide a yield of 9.3%
on the basis of continuing to pay a quarterly 3 pence
dividend per share for the rest of the current financial
year. The merits of RECI’s offering and, in particular, the
yield at current share price levels, appears to have been
overlooked amid the broader volatile market background.
Your Board believes that RECI provides investors with a
highly attractive, long-term income stream with enhanced
dividend cover. The Company is positioned to deliver this
attractive dividend stream alongside a stable NAV and
provide investors with a substantial and liquid company
(with total assets of £419.0 million and market capitalisation
of £307.3 million at 31 March 2023) with the potential to
grow over time.
Ravi Stickney, CIO of Cheyne Real Estate, continued the
programme of quarterly updates for Shareholders and
investors, providing a detailed and comprehensive review
of RECI’s portfolio and Cheyne’s views on the broader
credit and property sectors. We are currently reviewing
and seeking to enhance our programme of online events
and meetings for investors. During Autumn 2022, the
Board worked with our service providers to enhance the
Company’s website and Fact Sheet.
The global geopolitical and economic challenges of the last
15 months have caused many headlines and much market
volatility and uncertainty, which has inevitably impacted
investor sentiment. Against this macro backdrop, the
Directors and Cheyne remain committed to providing detail
and transparency regarding the Company’s portfolio and
investment strategy, allowing all investors to focus upon
RECI and its merits and opportunities, notwithstanding the
broader market environment.
Board Update
The Board and its committees continue to operate
effectively, with an equal representation of male and
female Directors.
Reflecting our ESG focus, the Board appointed Colleen
McHugh to the role of “ESG Lead” in October 2022.
Since the start of the last financial year, members of the
Board have purchased an aggregate of 90,000 shares in
the Company, increasing the Directors’ aggregate holding
to 425,250 shares.
Environmental, Social and Governance Matters (“ESG”)
Your Board continues to recognise and support the
growing focus on ESG considerations and the importance
of ethical factors, including climate change, when pursuing
the Company’s investment objective and in the selection of
service providers and advisers to the Company.
In her role as “ESG Lead”, Colleen McHugh is working
closely with Cheyne in developing and implementing
RECI’s ESG approach.
Page 30 of the Stakeholder Engagement section and
pages 32-36 of the Sustainability Report provide further
information about the Company’s and the Manager’s
approach to ESG matters.
Outlook
Several of the geopolitical and economic uncertainties which
provided the backdrop to our financial year ended 31 March
2023 appear likely to remain for the rest of the current financial
year. While it may be hoped that inflation and interest rates
are approaching their peak, despite the UK’s core inflation rate
remaining stubbornly high, both appear likely to remain well
above the average of the last decade for some time yet. The
threat of potential recession remains and there are many who
are feeling the daily impact of the “cost of living crisis”.
Nevertheless, the Company’s robust portfolio composition
and its transition into senior loans and floating rate terms
has positioned it well to withstand these challenges and
steer a course through difficult market conditions.
In considering all options when deciding on the appropriate
allocation of the Company’s cash resources, the Board is
mindful of when opportunities present themselves to
achieve attractive repeatable returns from investments and
reinvestments and thereby enhance the “investment case”
for RECI. Encouragingly, Cheyne and its deal pipeline have
ensured that RECI already has and will continue to benefit from
the opportunities to lend at attractive returns of over 10% to
enhance portfolio returns. The current market dislocation will
benefit RECI in achieving enhanced terms for its lending, as
competitor banks and specialist lenders to the sector withdraw.
In the face of macro volatility, your Board and Investment
Manager have always believed in the benefit of focusing
on that which we can exercise direct control over, namely:
expert origination capability; highly disciplined investment
selection; modest levels of flexible gearing; maintaining
the payment of an attractive and consistent dividend; and
positioning the portfolio to enhance NAV.
The Directors believe that RECI remains soundly positioned
to continue to deliver an attractive and stable dividend to
investors seeking a reliable long-term income stream from a
listed and liquid investment company, with a highly regarded
specialist Investment Manager.
Bob Cowdell
Chairman
21 June 2023
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
10
Key Performance Indicators
31 Mar 2023
31 Mar 2022
Balance Sheet
Net Asset Value (“NAV”) per share
£1.47
£1.50
Share price
£1.34
£1.51
(Discount)/premium
(8.8)%
0.4%
Average (discount)/premium in year*
(6.1)%
0.7%
Leverage (% of NAV)**
23.8%
29.4%
*
Average (discount)/premium in year is the average of the difference between the share price and the NAV per share divided by NAV per share.
**
Leverage is the recourse financing divided by the net assets.
31 Mar 2023
31 Mar 2022
Profit, Loss and Dividends
Earnings per share
9.0p
10.7p
Dividends per share declared for the year
12.0p
12.0p
Total NAV Return (including dividends) annualised
6.2%*
6.9%
* Assumes re-investment of dividends.
Financial Highlights
31 Mar 2023
31 Mar 2022
Balance Sheet
Cash, cash equivalents and cash held by brokers
£16.5m
£52.6m
Net assets
£337.0m
£343.9m
31 Mar 2023
31 Mar 2022
Profit and Loss
Operating income
£30.7m
£32.4m
Net profit
£20.6m
£24.6m
The complete set of the Balance Sheet and Profit and Loss items are presented in the Company’s financial statements.
Further Information
Monthly fact sheets as well as quarterly update presentations are available on the Company’s website:
www.realestatecreditinvestments.com.
KPIs and Financial Highlights
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
11
Business
and Strategy
Review
In this section
Strategic Framework and Performance Highlights
14
Strategic Report
16
Investment Manager’s Report
20
Stakeholder Engagement
28
Sustainability Report
32
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
12
Student accommodation
development in Brent Cross, London
Real Estate Credit Investments Limited
13
Annual Report and Accounts 2023
Provide investors with a
diversified portfolio of real
estate credit investments
Deliver a stable quarterly
dividend with minimal
volatility
Exploit opportunities in the
real estate market
Position the Company to
grow through opportunities
the Investment Manager
is delivering
Newly Committed in year
£155.2m
(as at 31 March 2023)
Return to Shareholders
£27.5m
(as at 31 March 2023)
Investment Portfolio
£400.7m
(as at 31 March 2023)
Strategic Framework
and Performance
Highlights
BUSINESS AND STRATEGY REVIEW
Senior real estate lending remains a high conviction theme
Objectives
Performance Highlights
Real Estate Credit Investments Limited
14
Annual Report and Accounts 2023
• RECI’s investment portfolio is a diversified book
of 53 positions in real estate loans and bonds.
•
Over the course of the last financial year, RECI has
committed £155.2 million to eight new deals, and funded
£158.6 million into new and existing deals during the year.
•
Investment book has grown to £400.7 million (gross
of leverage) as at 31 March 2023 which is spread across
53 positions with a weighted average levered gross yield
of 11.1% and an average loan-to-value of 59.2%.
• All repayments were received on time as anticipated.
• RECI also received cash repayments and interest of
£159.0 million in this year.
•
Paid out dividends of 3 pence per share each quarter,
12 pence over the year.
•
A total of £27.5 million returned to our Shareholders.
•
RECI has continued its migration towards an all-senior
loan book.
• Progress with measures to position the Company to
achieve its longer-term aim of growing the Company.
• Protection and maintenance of dividends by improved
returns on the loans and re-investment.
•
Continue to de-risk and optimise funding lines.
Performance Highlights
Progress in Year Ended 31 March 2023
Portfolio of hotels/spa resorts across the UK
Real Estate Credit Investments Limited
15
Annual Report and Accounts 2023
The Strategic Report describes the business of the Company
and details the principal risks and uncertainties associated
with its activities.
BUSINESS AND STRATEGY REVIEW
Investment Objective and Investment Policy
The Investment Objective and Investment Policy are set
out on page 6, along with a further paragraph “About the
Company” explaining in more detail the corporate structure
and listing of the Company’s shares.
RECI is externally managed by Cheyne, a UK investment
manager authorised and regulated by the Financial
Conduct Authority (“FCA”). Cheyne is a limited liability
partnership registered in England and Wales on 8 August
2006 and is authorised and regulated in the conduct of
investment business in the United Kingdom by the FCA.
Cheyne is also the AIFM of the Company. Cheyne has
offices in London, Berlin, Madrid and Paris.
Current and Future Development
A review of the year and outlook is contained in the
Investment Manager’s Report and also within the
Chairman’s Statement.
Performance
A review of performance is contained in the Key
Performance Indicators (“KPIs”) and financial highlights
section and the Investment Manager’s Report.
A number of performance measures are considered by
the Board and the Investment Manager in assessing
the Company’s success in achieving its objectives and
considering its progress and performance. The KPIs are
shown on page 11.
Duties and Responsibilities
The Board has overall responsibility for maximising
the Company’s success by directing and supervising
the affairs of the business and meeting the appropriate
interests of Shareholders and relevant stakeholders, while
enhancing the value of the Company and also ensuring
the protection of investors. A summary of the Board’s
responsibilities is as follows:
•
statutory obligations and public disclosure;
•
strategic matters and financial reporting;
•
risk assessment and management including reporting,
compliance, governance, monitoring and control; and
• other matters having a material effect on the Company.
The Board is responsible to the Shareholders for the
overall management and strategy of the Company but
has delegated day-to-day operations to the Investment
Manager and Citco Fund Services (Guernsey) Limited
(“Citco” or the “Administrator”), while reserving the
powers of decision making relating to the determination
of the Investment Policy, corporate structure and the
management of the share capital of the Company.
The Board is further responsible for financial reporting
and risk management and determining the dividend
and accounting policies. While the Investment Manager
manages the portfolio of the Company, the Board retains
responsibility for overseeing the Investment Manager and
ensuring the establishment and ongoing operation of a
sound system of internal control. Any material contracts
and those not in the normal course of business are also
subject to approval by the Board.
The Board is also responsible for its own structure,
size and effectiveness, with the delegation of some
duties to Committees made up of its members. The
Board retains control of the Committees and requires
that they report to the full Board on a regular basis,
providing their findings and recommendations. The
Nomination Committee is responsible for considering
the size, structure and composition of the Board;
retirements and appointments of additional and
replacement Directors and, as appropriate, makes
recommendations to the Board. The Remuneration
Committee determines Directors’ remuneration and
sets the Company’s remuneration policy.
The Board performs a formal and rigorous review of its own
performance and continually scrutinises its independence
and transparency.
The Board’s responsibilities for the Annual Report are set
out in the Directors’ responsibility statement. The Board is
also responsible for issuing appropriate half-yearly financial
reports and other price-sensitive public reports.
Strategic Report
Real Estate Credit Investments Limited
16
Annual Report and Accounts 2023
Long-term Viability
The Directors have assessed the prospects of the Company
over a longer period than the 12 months required by the
‘Going Concern’ provision. The Board has chosen a period
of three years for the following reasons:
(i)
The Company’s planning horizon covers a
three-year period;
(ii)
The next continuation vote is due in September
2025; and
(iii) The weighted average life of the bond portfolio
is 2.5 years as at 31 March 2023, the usual term
of a new loan at origination is between 3 to 5
years, so the majority of the assets could be
expected to be realised in a three-year period,
or shortly thereafter.
The Board conducts an annual review, stress testing the
Company’s cash flows arising from the loan and bond
portfolio over a three-year period, including interest
received and proceeds from realisations, short-term finance
obligations of the Company and dividend cover. Further
considerations are the inherent sensitivities within the loan
and bond portfolios and their impact on the cash flows.
The Board has identified a number of principal risks, which
are detailed below. The Board has taken these into account
when considering the long-term viability of the Company.
The Board routinely conducts three-year reviews, stress
testing the performance against a number of adverse
scenarios, such as the fair value write down of the
investments, or reduced cash flows from the investment
portfolio. The fair value stress test was considered relevant
to factor in any potential events affecting the underlying
assets or credit concerns about the borrowers which
potentially could impact on the fair value. The reduced
cash flow stress test was considered relevant in the event
of potential defaults arising on the loan portfolio and the
inability to recover the interest or principal back in full.
In the current environment, the Company has also
considered the future of its Investment Manager when
looking at its own viability, and given the size of the
Investment Manager’s platform away from the Company
and the private capital it manages in numerous other
real estate debt funds, of which the combined total is
approximately £5 billion AUM, the Investment Manager is
expected to be able to continue to manage the Company
for the foreseeable future.
Further consideration has been given with respect to
the current market environment, including the ongoing
economic impacts of relevant geopolitical and macro
economic risks: including increased interest rates,
heightened inflation, supply chain disruption, the
continuing impact of the Ukraine conflict; and the effects
of climate change and cyber security. The Investment
Manager has prepared sensitivity analyses including
various stress scenarios. An evaluation continues to
be performed for each of the positions in light of these
potential impacts on operating models and valuations
and hence recovery prospects for certain individual
positions. The output of this analysis was used to i)
report fair value movements, and ii) update all the cash
and income forecasting for the portfolio. The Investment
Manager continues to perform a granular analysis of the
future liquidity profile of the Company. A detailed cash flow
profile of each investment was completed, incorporating
the probability of likely delays to repayments, other stress
tests (and additional cash needs).
Even taking these stress scenarios into account and
bearing in mind the leverage and liquidity of the bond
portfolio, the Company is expected to be able to meet its
liabilities over the three-year period.
Risk Management
It is the role of the Board of Directors to review and
manage all risks associated with the Company, mitigating
these either directly or through the delegation of certain
responsibilities to the Audit and Risk Committee and
Investment Manager. Additionally the Board seeks to
identify emerging risks and responds to them as they evolve.
The Board considers that the following are the principal
risks and uncertainties faced and has identified the
mitigating actions in place to manage them.
Long-term Strategic Risk
The Company is subject to the risk that its long-term
strategy and its level of performance fail to meet the
expectations of its Shareholders. The shares may trade at
a continuing discount to NAV and Shareholders may be
unable to realise their investments through the secondary
market at NAV per share. The Board monitors the level of
premium or discount of share price to NAV per share.
The Board monitors investment strategy and performance
on an ongoing basis and regularly reviews the Investment
Objective and Investment Policy in light of prevailing
investor sentiment to ensure the Company remains
attractive to its Shareholders. The Board is committed
to promoting the Company with the long-term aim of its
share price trading at or around NAV and will consider all
options to achieve this. This may include consideration, as
part of the ongoing cash allocation policy, of implementing
share buy-backs to enhance NAV per share and potentially
reduce any discount to NAV. This will only be done when
cash resources permit and in the context of prevailing
market conditions and the one-time potential NAV uplift
of a buy-back compared with the potential repeatable
long term benefit of investments in attractive high yielding
opportunities to enhance RECI’s returns. There can be no
certainty that buy-backs will be implemented and/or that
an enhancement to share price would be achieved. No
buybacks were made during the year ended 31 March 2023.
Real Estate Credit Investments Limited
17
Annual Report and Accounts 2023
Strategic Report
(continued)
The Company has the authority to make market purchases
of fully paid shares of up to 14.99% of the shares of no par
value in issue, and renewal of this authority will be sought
from Shareholders at the AGM in September 2023 and
at each subsequent AGM, or earlier at an Extraordinary
General Meeting if the Directors consider it appropriate.
Target Portfolio Returns and Dividend Risk
The Company’s targeted returns are based on estimates
and assumptions that are inherently subject to significant
business and economic uncertainties and contingencies,
and the actual rate of return may be materially lower than
the targeted returns. In addition, the pace of investment
may be slower than expected, or principal may be repaid
earlier than anticipated, causing the return on affected
investments to be less than expected. In addition, if
repayments are not promptly re-invested this may result in
cash drag which may lower portfolio returns. However, as
the Company is able to invest in both bonds and loans, the
Investment Manager has the ability to adjust the asset mix
towards bonds.
As a result the level of dividends and other distributions
to be paid by the Company may fluctuate and there is no
guarantee that any such distributions will be paid.
There may be economic circumstances and wider market
considerations that arise, that mean the Investment
Manager and Board deem it appropriate to maintain higher
levels of cash reserves.
The Investment Manager regularly provides the Board with
reports on pipeline opportunities, which include analysis of
the expected returns available. The Directors also regularly
receive information on the performance of the existing
loans which includes analysis of the likelihood of any early
repayments which may impact returns.
Valuation Risk
The valuation and performance of the Company’s
investments that comprise its portfolio of real estate debt
instruments are the key value drivers for the Company’s NAV
and interest income. Judgements over fair value estimates
could significantly affect these key performance indicators.
The Company categorises its financial assets and liabilities
in accordance with IFRS 9 and establishes fair value utilising
the methodology in accordance with IFRS 13, as set out in
Note 15(d) to the financial statements. Further information on
valuation is detailed in the Audit and Risk Committee Report
on page 56 and Note 2 to the Financial Statements.
Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or
commitment that it has entered into with the Company.
Market Bond Portfolio –
The Company is subject to the
risk that issuers of asset backed securities in which it invests
may default on their obligations and that certain events may
occur which have an immediate and significant adverse
effect on the value of such instruments. There can be no
assurance that an issuer of an instrument in which the
Company invests will not default or that an event which has
an immediate and significant adverse effect on the value of
such instruments will not occur, and that the Company will
not sustain a loss on the transaction as a result.
The Company seeks to mitigate this risk by monitoring its
portfolio of investments, reviewing the underlying credit
quality of its counterparties, on a monthly basis. In addition
to the underlying credit quality of borrowers the weighted
average life of the assets as at 31 March 2023 is 2.5 years,
which is an additional mitigant regarding any loss in value due
to changes in borrowers circumstances over the long term.
Bilateral Loan and Bond Portfolio –
The Company is
subject to the risk that the underlying borrowers to the
loans and bonds in which it invests may default on their
obligations and that certain events may occur which have
an immediate and significant adverse effect on the value
of such instruments. Any loan and bond may become a
defaulted obligation for a variety of reasons, including
non-payment of principal or interest, as well as covenant
violations by the borrower in respect of the underlying loan
and bond documents. In the event of any default on the
Company’s investment in a loan and bond by the borrower,
the Company will bear a risk of loss of principal and
accrued interest on the loan and bond, which could have
a material adverse effect on the Company’s investment.
There can be no assurance that a borrower will not default,
that there will not be an issue with the underlying real
estate security or that an event which has an immediate
and significant adverse effect on the value of these loans
and bonds will not occur, and that the Company will not
sustain a loss on the transaction as a result. The Company
seeks to mitigate this risk by performing due diligence
and monitoring its portfolio of investments, reviewing the
underlying credit quality of its borrowers, performance
of the underlying asset, and loan and bond covenant
compliance against financial information received and
the performance of the security, on a quarterly basis.
Real Estate Credit Investments Limited
18
Annual Report and Accounts 2023
Market Risk
Market risk is the risk that the fair value and future cash flows
of a financial instrument will fluctuate because of changes
in market factors. Market risk comprises interest rate risk,
currency risk and price risk.
The Company’s strategy on the management of market risk
is driven by the Company’s Investment Objective as detailed
on page 6 and in Note 1 to the financial statements.
The Company’s market risk is managed on a daily basis
by the Investment Manager in accordance with policies
and procedures detailed in the latest Prospectus and
summarised in the financial statements.
Interest Rate Risk
Interest rate risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company invests in both direct real estate loans and
floating rate real estate debt securities, which include
mortgage backed securities (“MBS”).
Real estate loans can have fixed interest coupons and are
therefore potentially exposed to the wider effects of changes
in interest rates. For bonds, the interest rate risk arises
from the effects of fluctuations in the prevailing levels of
market interest rates on the fair value of financial assets and
liabilities and future cash flows. A segment of the portfolio
consists of floating rate debt investments which are exposed
to interest rate risk through changes in interest rates,
potentially having an effect on prepayments and defaults of
the underlying loans of the securitisations.
In addition to the underlying credit quality of borrowers, the
weighted average life of the assets as at 31 March 2023 is 2.5
years, which is an additional mitigant regarding any losses in
value due to changes in borrowers’ circumstances over the
long term.
While retaining the ability to do so, the Company does not
currently enter into hedging arrangements in respect of
interest rate fluctuations.
Currency Risk
Currency risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
foreign exchange rates. The Company is exposed to currency
risk to the extent that foreign exchange rates fluctuate in
relation to financial instruments that are denominated in
currencies other than British Pounds (“GBP”).
The Company manages its foreign exchange risk on a
portfolio basis. The Company may bear a level of currency
risk that could otherwise be hedged where it considers that
bearing such risks is appropriate. The Company manages its
foreign exposure via forward foreign exchange contracts.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial
liabilities on a timely basis. The Company’s liquidity risk
is managed on a daily basis by the Investment Manager
in accordance with policies and procedures detailed in
Note 15(c) to the financial statements. Where needed,
the Investment Manager will seek to liquidate positions to
increase cash or reduce leverage.
Much of the market for MBS and real estate loans is relatively
illiquid. In addition, investments that the Company purchases
in privately negotiated (also called “over-the-counter” or
“OTC”) transactions may not be registered under relevant
securities laws or otherwise may not be freely tradable,
resulting in restrictions on their transfer, sale, pledge or other
disposition except in a transaction that is exempt from the
registration requirements of, or is otherwise in accordance
with, those laws. As a result of this illiquidity, the Company’s
ability to vary its portfolio in a timely fashion and to receive
a fair price in response to changes in economic and other
conditions may be limited.
Furthermore, where the Company acquires investments for
which there is no readily available market, the Company’s
ability to deal in any such investment or obtain reliable
information about the value of such investment or risks to
which such investment is exposed may be limited.
For further information on risks, please refer to Note 15 to
the financial statements.
Other Risk Factors
The Board gives consideration to and, together with
Cheyne, monitors other relevant risks, in addition to the
ones highlighted above; this includes a consideration of
any relevant Emerging Risks as they evolve. These currently
include: geopolitical and macro economic risks: including
increased interest rates, heightened inflation, supply chain
disruption, the continuing impact of the Ukraine conflict; and
the effects of climate change and cyber security. Given the
short weighted average life of the assets, and the continual
replacement of assets in the portfolio from the wider
Investment Manager’s pipeline, such macro risks are worked
through in the life of the assets. Any issues that might
potentially impact the value of the investments, including
impacts to supply chains, are taken into account in the fair
value. An evaluation of each of the Company’s positions in
light of these risks is continually monitored.
Real Estate Credit Investments Limited
19
Annual Report and Accounts 2023
BUSINESS AND STRATEGY REVIEW
Investment
Manager’s Report
Market Review
Real Asset Valuations: A painful transition to the new
normal for some
The past year has brought about the recognition that
the era of low interest rates is gone for good.
A painful period of high inflation needed (and received)
sustained higher interest rates. That is set to continue
to mitigate the risk of an entrenched inflationary spiral
in economies. A successful policy response to curtail
entrenched high inflation will not, in our view, lead to rates
returning to the very low base that western economies
have enjoyed for more than a decade. Normalised rates
that spur productivity and remove excess from the markets
are most likely to be the basis for the new normal.
This presages a transitory period of higher rates,
normalising at a level that balances the need for productive
growth and the curtailment of excess.
For the real estate asset class, normalised long-term rates
are a key factor in the determination of valuations. The
long period of low rates brought about the assumption
that all assets (even those that prove to have little basis for
demand) would rise as the search for yield drove demand.
Normalising rates will weed out the weaker assets (those
that have little basis for demand) but will also spur demand
for the best in class assets that are much needed for future
growth of our societies. These assets will help deliver not
just growth in our economies, but also promote the very
best outcomes for the environment and social cohesion.
There are immediate and longer-term implications for asset
values that consequently arise:
•
Assets that do not present the best environmental or
social credentials will give way to assets that do
•
Demand will be driven for assets that address the shifts
in the way we live and work. The demand for assets that
do not address these will decline sharply as they are no
longer supported by low interest rates
•
Values of all asset classes (regardless of demand
strength) will stabilise at lower levels, simply due to
higher yield expectations, before resuming their growth.
European Real Estate Debt Markets: A renewed cycle
of retrenchment
European real estate debt markets (unlike their
counterparts in North America) were already subdued
coming into this last year from a mix of increasingly onerous
regulatory pressure and weak capital ratios.
The declining valuations in real assets have compounded
that issue, as has the latest bout of bank capital uncertainty
brought about by the collapse of Silicon Valley Bank and
Credit Suisse, and the realisation that the perceived
balance sheet strength of the largest banks may need
Ravi Stickney
Portfolio Manager
Managing Partner & CIO of
Cheyne Real Estate
RECI is evolving to capitalise on
the scalable opportunity set
Real Estate Credit Investments Limited
20
Annual Report and Accounts 2023
to be subject to a re-evaluation of their strongest assets
(long-term government debt). As Global and European
banks recognise the deficits arising from the (potentially
permanent) diminution in values of these long-dated
securities, it is very likely that the already low appetite for
capital intensive real estate lending will decline.
We are already seeing that retrenchment not just in the UK,
but across Europe.
Implications for the funding needs of Real Assets
The combination of the above declining values and
retrenching bank lending markets points to a prolonged
concern about the viable refinancing capability of all real
assets, including those that demonstrate the most stable
income profile.
That financing “gap” is now becoming well understood
with several respected publications attempting to quantify
the size of that “gap”. Whilst that gap is indeed significant,
what is more pertinent is that there is a scarcity of capable
capital (especially so in Europe) to provide any of that
financing.
As banks retreat, the alternative lending market (of which
RECI and its manager, Cheyne Real Estate, have been
leading participants for more than 14 years now) will
continue to move to take their place. However, the degree
of expertise and knowledge, and quantum of capital,
needed to effectively lend to the complex real estate asset
class will mean that the European based alternative lending
community will take time to bridge that gap.
The declining valuations and eroding bank markets do
pose issues for incumbent lenders who have potentially
overstretched on the LTV or focused on the higher risk
mezzanine part of the capital structure (particularly
mezzanine on core income assets valued off low yields).
Performance Review
Transition to conservative senior lending puts the
credit book in a sound position
RECI’s evolution away from mezzanine and higher LTV
lending and core assets since Brexit in 2016 has put it in
a very strong position to mitigate this period of transition.
Its gradual shift to senior loans (90.3% of the portfolio
at 31 March 2023) has been deliberate in the aftermath
of Brexit. This shift mirrors the shift in the wider Cheyne
Real Estate platform, which now manages in excess of
£4.1 billion in investor capital, with a majority of that in the
senior lending space.
RECI has evolved its lending to focus on the following:
•
Senior loans with a low-risk basis
•
Absolute governance and strong covenants
•
Lending to the larger and more capable
sponsors with robust business plans and deep
financial resources committed
•
Lending to asset classes that provide for the highest
degree of sustainability (from an environmental and
social standpoint) and which also resonate with the
changes in demand and supply.
With that evolution, the highly diverse lending book RECI
has today remains resilient.
Portfolio Breakdown by Investment Area
(by Commitment Value for Bilateral Loans & Bonds, and Fair Value for Market Bonds)
Funding the Deals
Balance Sheet management
Structurally, RECI has married prudent management
of its balance sheet with the need for efficiency in its
capital usage.
Short-term debt (in the form of rolling REPO lines), has
gradually been replaced with term matched funding lines
and also asset backed funding. Whilst more costly, these
have provided stability to the balance sheet through the
various periods of stress.
RECI’s financial leverage position as at 31 March 2023
is 23.8% of NAV against a maximum permitted financial
leverage of 40%. RECI’s financial leverage (also referred
to as recourse leverage) comprises: (a) the flexible term
repurchase agreements (REPO) on its liquid bonds (the WA
cost of this financing was 5.9% as at 31 March 2023); and
(b) any partial recourse commitment that may be provided
to structured financing counterparties.
0
20
40
60
80
100
Bilateral Loan and
Bond Portfolio
92.2%
7.8%
84.2%
15.8%
Market Bond
Portfolio
March-23
March-22
March-23
March-22
Real Estate Credit Investments Limited
21
Annual Report and Accounts 2023
Funding Summary
We believe that the long-term strategy for the Company
should be a mix of structured term funding on its senior
loan book and to a lesser extent, where relevant, with
REPO financing on its remaining liquid bond book, thereby
maintaining a conservative level of recourse leverage
supported by strong assets and liquid instruments.
Dividend Cover and Promotion
Since 2013, RECI has maintained a dividend on its NAV
of 7% or better. The overarching ambitions of RECI are to
provide investors with stability, transparency and dividend
consistency. On the latter, the aim has been to have the
dividends covered from net income alone (i.e., income from
the credit book and without having to bear regard to mark
to market gains or losses). That ambition has been broadly
achieved now with the move into higher yielding senior
loans and to a more efficient funding profile.
The RECI portfolio delivered a net profit of 6.0% on NAV
as at 31 March 2023. During the year, the Company paid 12
pence per share in dividends, which was £27.5m
(or 8.0% on NAV as at 31 March 2023). Notwithstanding
the MTM losses on the bond portfolio, due to recent global
bond volatility, the dividend covered from net interest
income alone was 6.9%.
The credit strength of the portfolio is good, but the market
bond portfolio does create some price volatility for the YTD
return. Therefore, it is the Manager’s intent to accelerate its
path towards rotation into a focus on senior lending and to
exit the market bond positions in a timely manner.
Annual Dividend for the Year
12.0 pence
Dividend Yield (on share price)
9.0%
Looking Forward
All of the above puts the Company on a sound
asset and liability footing and also positions it well for its
continued delivery of an attractive, long-term dividend
stream for investors.
The priorities of the Company now are to address
the following:
1) To reduce the volatility on the NAV that arises from
the mark to market on its listed bond portfolio. Whilst
the listed bonds do present an attractive investment
proposition in their own right, we see the listed capital
markets as remaining highly volatile for the next few
years, which negates the absolute return upside on this
bond portfolio
2) Continue to move the overall portfolio into relatively
short duration senior loans, with the ambition for RECI
to become a “pure play” senior lender, with no remaining
mezzanine or market bond positions
3) Advance its financial strength further with term
matched financing
4) To continue to improve the dividend cover from
net income
5) Cheyne Real Estate has continually expanded and
improved on its investor engagement and presentations.
The current regime of quarterly updates have been
well received by investors for its transparency and
accessibility. We would like to continue these efforts
to improve engagement with investors.
Growth to capture the significantly higher rates
of return
Cheyne’s Real Estate business has seen substantial
growth in its senior lending book and has moved to capture
a larger share of the market with localised offices across
Europe and by growing the already well-established
large team dedicated to real estate credit origination
and management.
Balance Sheet/
Company Leverage
1
Contingent
Liabilities
2
Cash including cash
collateral at broker
Net Effective
leverage
Asset Level
Structured Funding
£ Amount
£80.2m
£2.9m
£16.5m
£63.7m
£20.6m
% of NAV
23.8%
0.9%
5.2%
19.4%
6.1%
WA cost of finance
5.9%
–
–
7.7%
Number of positions
16
6
1.
RECI has a limit on balance sheet leverage (i.e. Financial Leverage) of 40% of NAV, as set out in its borrowing policy.
2.
Contingent liabilities include any partial recourse commitment provided to asset level structured finance counterparties.
Investment Manager’s Report
(continued)
Real Estate Credit Investments Limited
22
Annual Report and Accounts 2023
We have raised £2.5 billion from 30+ investors across the
latest vintages of our private vehicles with £2.0 billion
committed over 23 deals in the first quarter of 2023.
Cheyne’s immediate pipeline of deals stands at £2.0
billion with a weighted average LTV of 59% and unlevered
IRR of 11.7%.
RECI needs to be in a position to continue to grow
with the wider Cheyne Real Estate business to capture
the significantly higher rates of return for senior loans
available today.
To that end, it is our hope that the conditions return to allow
RECI to resume its path to growth. We are hopeful that
the continued proven performance, attractive dividends
and extensive investor engagement will see the share
price close its current discount to the NAV during this
coming year, and allow RECI to participate fully in Cheyne’s
attractive deal pipeline and wider real estate business.
Portfolio Overview
Portfolio Highlights
New Commitments
£155.2m
Deals Funded
£158.6m
Repayments and Interest
£159.0m
Over the course of RECI’s financial year, the portfolio has
continued its migration towards an all-senior loan book. As
at 31 March 2023, senior loans represented 90.3% of the
portfolio with a weighted average LTV of 59.2%. The Top
10 positions are 100% senior loans and new origination is
entirely senior.
RECI also received cash repayments and interest of
£159.0 million in this year, compared with £132.2 million
in the year ended 31 March 2022.
Senior vs Mezzanine Loans
(by Commitment Value for Bilateral Loans & Bonds, and Fair Value
for Market Bonds)
90.3%
9.7%
Senior
Loan
Mezzanine
Loan
Commitments and Funding
During the year, the Company made £155.2 million of
commitments to eight new deals, and funded £158.6 million
into new and existing deals during the year, compared to
£113.1 million in the previous year.
Of the eight new deals committed to in the year, the split
of fixed and floating rates was as follows:
Split of New Deals by Commitment Value
Fixed
72,955,108
47.0%
Floating
82,235,813
53.0%
£155,190,921
Real Estate Credit Investments Limited
23
Annual Report and Accounts 2023
Portfolio Composition
Number of Positions
53
Total Committed Capital
£572.0m
Drawn Value inc Interest (gross of leverage)
£400.7m
Drawn Value (net of leverage)
£319.4m
RECI’s investment portfolio, a diversified book of 53
positions in real estate bonds and loans, was valued at
£400.7 million per FS including accrued interest as at
31 March 2023, up from £394.3 million as at 31 March 2022.
The portfolio had a weighted average levered yield of 11.1%
and an average loan to value of 59.2% as at 31 March 2023.
Portfolio by Geography
Breakdown by Total Committed Capital including PIK
Top 10 Positions
Top 10 Positions
1
as at 31 March 2023
Deal Description
Commitment
LTV
Investment Strategy
Sector
Country
Asset Type
1
UK Mixed-Use Portfolio,
Predominantly Office/Residential
£83.0m
48%
Senior Loan
Mixed-Use
United Kingdom
Core+
2
London Student Accommodation
£45.2m
58%
Senior Loan
Student
Accommodation
United Kingdom
Development
3
London Residential Led Mixed-Use
Scheme
£32.7m
67%
Senior Loan
Residential
United Kingdom
Development
4
Office development in Saint Ouen,
Paris
£30.9m
58%
Senior Loan
Office
France
Development
5
London Office
£22.8m
59%
Senior Loan
Office
United Kingdom
Core
6
Spanish Villas
£22.4m
49%
Senior Loan
Residential
Spain
Development
7
France Housebuilder Portfolio
£20.6m
36%
Senior Loan
Housebuilder
France
Development
8
Finland Hotel
£20.4m
65%
Senior Loan
Hotel
Finland
Development
9
South of France Hotel
£19.9m
80%
Senior Loan
Hotel
France
Development
10
Luxury Assisting Living Units in
London
£19.7m
60%
Senior Loan
Assisted Living
United Kingdom
Core+
1
Based on total commitment of bonds and loans.
Investment Manager’s Report
(continued)
% Allocation
Mar-23
Since
Mar-22
United Kingdom
58.3%
13.7%
France
23.8%
(11.1)%
Spain
7.5%
(3.1)%
Finland
3.7%
0.0%
Portugal
2.8%
2.8%
Ireland
1.6%
0.0%
Italy
1.2%
(1.4)%
Germany
1.1%
(0.9)%
2022
2023
Real Estate Credit Investments Limited
24
Annual Report and Accounts 2023
Portfolio by Sector
Breakdown by Total Committed Capital including PIK
2022
2023
%
Allocation
Mar-23
%
Allocation
Mar-22
Hotel
19.8%
22.6%
Mixed-Use
17.1%
21.2%
Student Accommodation
11.9%
10.2%
Residential
11.8%
6.7%
Office
11.6%
11.7%
Co-Living
7.0%
3.2%
Leisure
5.0%
2.4%
Later Living
3.3%
0.0%
Housebuilder
3.3%
4.8%
Assisted Living
3.2%
3.2%
Retail
1.3%
3.1%
Logistics
2.0%
2.2%
Land
1.9%
0.0%
Industrial
0.8%
0.8%
Healthcare
0.0%
7.9%
Bilateral Loan and Bond Portfolio
The drawn balance of the bilateral loan and bond
portfolio, including accrued interest, had increased from
£295.9 million as at 31 March 2022 to £351.5 million as at
31 March 2023. The average loan portfolio LTV exposure
as at 31 March 2023 was 60.9%. The portfolio continues
to provide attractive risk-adjusted returns with a weighted
average unlevered yield of 9.5% per annum, before any
back-end fees, profit share or equity element contributions
are taken into account.
Bilateral Loan and Bond Portfolio Summary
as at 31 March 2023
Number of loans
34
Drawn Value (£ millions)
351.5
Undrawn Loan Commitments (£ millions)
168.3
Weighted average yield of portfolio
9.5%
Weighted average yield of portfolio (levered)
10.2%
Weighted average LTV of portfolio
60.9%
Weighted average life of portfolio (years)
1.9
Market Bond Portfolio
As at 31 March 2023, the market bond portfolio of
19 bonds (excluding the self-originated bonds) was valued
at £49.2 million including accrued interest, compared to
£98.5 million as at 31 March 2022.
The remaining bond portfolio:
•
Is characterised by a short duration (2.5 years)
and high coupon
• Has a weighted average unlevered yield as at 31 March
2023 of 12.6%, and the weighted average levered yield
of the bond portfolio was 34.3%.
As described above, the Investment Manager has accelerated
its rotation of the portfolio from market CMBS to senior loans.
In the year ended 31 March 2023, £31.4 million notional of
bonds were sold at a slight discount to carrying value and a
further £16.4 million notional sold the following month, leaving
a bond portfolio of 15 positions and a notional of £41.5m,
representing just 8.7% of the portfolio as at 30 April 2023.
Market Bond Portfolio Summary
as at 31 March 2023
Number of bonds
19
Fair Value (£ millions)
49.2
Weighted average yield of portfolio
12.6%
Weighted average yield of portfolio (levered)
34.3%
Weighted average LTV of portfolio
48.8%
Weighted average life of portfolio (years)
2.5
Real Estate Credit Investments Limited
25
Annual Report and Accounts 2023
Outlook
Scaling the Company
UK and Western European Real Estate is transitioning to
a new “normal” and RECI is poised to benefit. We believe it
is in the Company’s best interests to ensure the Company
continues to be ready to respond to the new opportunities
we are seeing. We will continue with our strategy of
divesting the bonds in favour of the higher returning senior
loans which should in turn provide more stability to RECI’s
NAV and share price.
Given the unprecedented and scalable opportunity, and
the appetite shown from investors by the amount raised by
Cheyne’s private funds over the last two to three years, it
remains the ambition for RECI to echo that growth in the
public markets.
Cheyne Capital Management (UK) LLP
21 June 2023
Environmental, Social and
Governance (ESG)
Cheyne Capital and its Real Estate team remain committed
to operating its business in a progressively responsible
manner, achieved through the incorporation of high
standards of governance and investment stewardship.
Cheyne aims for the consideration, assessment and
integration of Environmental, Social and Governance (ESG)
factors to be a core element of analysis undertaken in its
investment processes.
In the last year, Cheyne has engaged with an external Real
Estate ESG specialist consultant to assist with developing
and provide assurance on a comprehensive scorecard-
based approach. The ultimate aim is to align our principles
with industry recognised benchmark standards to identify
a minimum ESG standard we will need across our portfolio.
The move to a more qualitative system will significantly
help us identify and understand ESG-based risks in our
portfolio more easily, and not only assist us with lowering
risk and increasing quality but will also help us collate and
measure the data required to track progress in what is a
fast moving but increasing important area of focus. We
are currently in the implementation phase of the project,
which includes training for the Real Estate team and wider
Cheyne employees. Further information can be found in
the Sustainability Report on pages 32-36.
Investment Manager’s Report
(continued)
Real Estate Credit Investments Limited
26
Annual Report and Accounts 2023
Portfolio of hotels/spa resorts across the UK
Real Estate Credit Investments Limited
27
Annual Report and Accounts 2023
Stakeholder
Engagement
Whilst directly applicable only to companies incorporated
in the UK, the Board recognises the intention of the AIC
Code that matters set out in section 172 of the Companies
Act 2006 are reported on. The Board strives to understand
the views of the Company’s key stakeholders and to take
these into consideration as part of its discussions and
decision-making process. As an investment company,
the Company does not have any employees and conducts
its core activities through third-party service providers.
Each provider has an established track record and
through regulatory oversight is required to have in place
suitable policies and procedures to ensure they maintain
high standards of business conduct, treat their own
stakeholders fairly, and employ corporate governance
best practice. The Company strongly believes that
fostering healthy and constructive relationships with its
broad range of stakeholders should result in increased
Shareholder value over the long term.
The Board is committed to promoting the long-term success
of the Company whilst conducting business in a fair, ethical
and transparent manner.
BUSINESS AND STRATEGY REVIEW
Portfolio of hotels/spa resorts across the UK
Real Estate Credit Investments Limited
28
Investors
Why they are important
The Board believes that the maintenance of good relations with Shareholders is important for the long-term prospects
of the Company and seeks engagement with investors.
How the Board engages
The Directors and Cheyne are committed to providing detail and transparency regarding the Company’s portfolio and
investment strategy, allowing all investors to focus upon RECI and its merits and opportunities, notwithstanding the broader
market environment. Where appropriate, the Chairman and other Directors are available for discussion about governance and
strategy with major Shareholders and the Chairman ensures communication of Shareholders’ views to the Board. The Board
receives feedback on the views of Shareholders from Liberum Capital Limited (the “Corporate Broker”) and the Investment
Manager, and Shareholders are welcome to contact the Chairman or any Director at any time via the Company Secretary.
Key activities during the year
AGM
The Directors believe that the AGM
provides an appropriate forum for
Shareholders to communicate
with the Board and encourages
participation. There is an opportunity
for individual Shareholders to question
the Chairmen of the Board and the
Audit and Risk Committee at the
AGM. The Board assesses the results
of AGMs considering whether the
number of votes against or withheld in
respect of resolutions are such as to
require discussion in the subsequent
Annual Report.
Publications
The Company reports to Shareholders
with both monthly fact sheets and
quarterly update presentations, along
with the Annual and interim reports.
These are available on the
Company’s website:
realestatecreditinvestments.com
In accordance with the EU Packaged
Retail and Insurance-based Investment
Products Directive on 1 January 2018,
a Key Information Document is available
on the Company’s website.
Events
Throughout the last financial year,
the Investment Manager continued to
provide a detailed and comprehensive
review of RECI’s portfolio as part
of our programme of enhanced
investor communication. A number
of online events and meetings were
held to maintain a regular dialogue
with our Shareholders and potential
new investors. In addition, the Board
continues to work with its service
providers to enhance the Company’s
website and fact sheet.
Portfolio of hotels/spa resorts across the UK
Real Estate Credit Investments Limited
29
Annual Report and Accounts 2023
Why they are important
In carrying out its activities, the Company aims to conduct itself responsibly, ethically and fairly. The Directors recognise
the importance of environmental, social and governance factors, including climate change, when pursuing the Company’s
Investment Objective and in the selection of the service providers and advisers the Company works with. The Board is alive
to the magnitude of the evolving ESG landscape. It has determined that ESG considerations, and their communication,
must be fundamental to all its operations and has consequently nominated an ESG lead to co-ordinate and drive internal
discussion. The Board, in conjunction with the Investment Manager, continues to closely monitor upcoming regulation and
any developments in this area.
How the Board engages
Reflecting this, the Board has asked Colleen McHugh to take up the role of “ESG Lead” and work closely with Cheyne in
developing and implementing RECI’s ESG approach. Pages 32-36 of the Sustainability Report provide further information
about the Company’s and the Manager’s approach to ESG matters.
Key activities during the year
The Investment Manager has now engaged an external Real Estate ESG specialist consultant to assist with developing
and provide assurance on a comprehensive scorecard-based approach using a borrower questionnaire for each deal.
The questions in Cheyne’s borrower questionnaire have been grouped and weighted to enable a proprietary 0-5
scoring against the following Target Characteristics:
• E1 Commitment to Environmental Risk Monitoring
• E2 Contribution to Positive Environmental Action
•
S1 Supporting Social Wellbeing
Qualifying Investments achieve a score of 3 or higher on at least one of the Target Characteristics.
Cheyne will specify that a minimum 50% of the portfolio will comprise Qualifying Investments (based on investment
commitments at each calendar year end). In practice, the Investment Manager expects the portfolio average scores
to be higher.
The ultimate aim is to align the Investment Manager’s principles with industry recognised benchmark standards
to identify a minimum ESG standard needed across RECI’s portfolio. The move to a more qualitative system will
significantly help the Investment Manager identify and understand ESG based risks in its portfolio more easily, and not
only assist with lowering risk and increasing quality, but will also help collate and measure the data required to track
progress in what is a fast moving but increasing important area of focus. The Investment Manager is currently in the
implementation phase of the project, which will include training for the Real Estate team and wider Cheyne employees.
Additionally, the Company has decided to purchase carbon offsets for all flights that may be required by the Directors
and the Investment Manager, thereby facilitating a carbon neutral position, as pertains to travel. The Company
recognises that this action is the first step in an evolving climate strategy, that should encompass carbon removal
as well as carbon offsets.
Further efforts to reduce its carbon footprint, constitute electronic only communications to all Shareholders on the
share registrar. Accordingly, the Company’s website is now the default method of communication for Shareholder
publications. Currently approximately 89% of the Company’s Shareholder register receive documents and other
communications electronically.
Community and Environment
Stakeholder Engagement
(continued)
Real Estate Credit Investments Limited
30
Annual Report and Accounts 2023
Why they are important
Effective relationships with service providers help the Company achieve its objectives, including its investment objectives
and to operate in an efficient and compliant manner.
Commercial service providers: Investment Manager, Administration agent, Corporate broker, Legal advisers, Auditor and Key
service providers retained, providing continuity of service and familiarity with the objectives of the Company.
The Audit and Risk Committee receives information from the Company’s service providers with the majority of information
being directly sourced from the Company Secretary, Administrator, the Investment Manager and the external auditor.
How the board engages
The Management Engagement Committee meets at least once a year for the purpose of evaluating the performance of the
Company’s service providers, the review of service agreements and service level statements and the level and method of their
remuneration. The Audit and Risk Committee considers the nature, scope and results of the auditor’s work and reviews its
performance annually prior to providing a recommendation to the Board on the reappointment or removal of the auditor.
Key activities during the year
The Board has detailed and constructive discussions with some service providers regarding service provision and fees. Details
of the responsibilities of the Investment Manager, Investment Advisor, Link Asset Services (Registrar), and Aztec Financial
Services (Guernsey) Ltd (Company Secretary) can be found on page 111. Other service providers include our corporate broker,
lenders, auditors, counsel and other advisors.
Service Providers
Residential development in Wembley, London
Real Estate Credit Investments Limited
31
Annual Report and Accounts 2023
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.
RECI’s Approach To Sustainability
Sustainability Report
BUSINESS AND STRATEGY REVIEW
Cheyne Real Estate Core ESG Principles
VALUE ENHANCING
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:
–
Supporting higher rents, lower vacancies and
lower operating costs
–
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.
RISK REDUCING
Real Estate Credit Investments Limited
32
Annual Report and Accounts 2023
Cheyne’s Partnership with Evora Global
ESG considerations have formed
a key part of Cheyne’s approach
to investments in real estate for
many years. In February 2022,
Cheyne partnered with Evora, widely recognised as one of
the leading sustainability consultancy specialists to the real
estate industry, to formalise its approach to the incorporation
of sustainability considerations into the investment process.
The ongoing partnership with a leading external
specialist is expected to enable Cheyne to remain at the
forefront of the rapidly evolving ESG agenda and provide
an independent checkpoint to challenge their ESG
investment process and ensure robustness.
Cheyne has taken a staged approach in developing its
ESG strategy, with its philosophy drawing on the following
four drivers:
1.
The Greater Good
2.
Value Enhancement/Risk Management
3.
Regulation
4.
Investor Expectations
Cheyne has worked with Evora to prepare customised
ESG questionnaires for each of the real estate asset types
the Cheyne real estate lending funds finance: standing,
refurbishment and development assets, together with a
borrower questionnaire. An ESG data template has also
been prepared (one template for all asset types).
The questionnaires seek to quantify each investment’s
performance against key ESG criteria, utilising a consistent
approach to enable aggregation across the assets within the
relevant Cheyne fund. The score is set at a stringent enough
level to effect a conversation about enhancing the ESG
characteristics if they are not up to Cheyne’s standards.
The questionnaires are used by Cheyne’s analysts to undertake
a broad based ESG evaluation of a proposed investment –
focusing on both the sponsor and the asset itself.
Standards and Guidance
A range of external guidance and best practice standards
have been used to inform the development of the ESG
questionnaires, including:
•
Global Real Estate Sustainability Benchmark (GRESB)
•
Building Research Establishment Environmental
Assessment Method (BREEAM)
•
EU Taxonomy
•
Sustainable Finance Disclosure Regulations (SFDR)
•
Minimum Energy Efficiency Standards (MEES)
Incorporating Sustainability into the Investment Process
Due Diligence
RECI is primarily invested in real estate loans and other real estate-based debt investments. Key factors taken into consideration, where appropriate
and possible, are best-in-class environmental, design and construction standards, a focus on Building Research Establishment Environmental
Assessment “BREEAM” ratings, governance rights and engagement with sponsors. Sustainability risks are considered during the Investment
Manager’s initial due diligence in respect of an investment opportunity, including as part of the external valuations of the real estate being financed
(such valuations typically consider any environmental and/or social risks) and early engagement with potential borrowers or issuers through a data
gathering exercise.
The Investment Manager’s analysts also compile reports using data gathered from their own due diligence and external reports, environmental
performance indicators (including BREEAM ratings and Energy Performance Certificates) and investigations (including through the use of forensic
accountants and other third-party consultants). This information is included in the investment committee memorandum, which is considered by the
Investment Manager’s investment committee prior to an investment being made.
Decision-Making Process
Sustainability risks are considered as part of the investment decision-making process for RECI. In particular, the following sustainability risks are
typically considered, both in respect of the real estate being financed and/or the relevant borrower or issuer:
•
Environmental: power generation (including its sustainability), construction standards, water capture, energy efficiency, land use and ecology and
pollution.
•
Social: affordable housing provisions, community interaction and health and safety conditions.
•
Governance: management experience and knowledge and anti-money laundering, corruption, and bribery practice.
Ongoing Management
Sustainability risks also form part of the ongoing monitoring of RECI’s investments, with regular reports and ongoing engagement from borrowers
and issuers incorporating information related to sustainability risks provided to the Investment Manager. Where appropriate, the investment team
will assist borrowers and issuers in addressing ESG-related issues and support its borrowers’ and issuers’ efforts to report externally and internally on
their ESG approach and performance in relation to material sustainability risks.
Exit
ESG considerations are already having an impact on underlying real estate values and whilst clear data driven evidence is in its infancy, the
investment manager is acutely aware that during the life of the loans that RECI is writing, this will become much clearer. As such this is an important
consideration regarding risk analysis now, hence the approach above is an integral tool when calculating, managing and measuring risk.
Real Estate Credit Investments Limited
33
Annual Report and Accounts 2023
• There are a number of
initiatives to promote energy
efficiency including motion
sensor lighting and operating
electric vehicles/providing
EV charging points. Targeted
BREEAM Excellent rating.
• The property is looking to
address a shortage of assisted-
living retirement units in London
for residents who are +65
years old and want to remain
within central London.
• Riverstone is governed by an
experienced team and Board
which has put in place policies
to ensure the health and safety
of its residents’ wellbeing are
at the core of its agenda.
• The building has been built to
the highest regulations and will
adhere to the highest standards
of care, providing an ergonomic
and age-appropriate design to
reduce the risk of accidents and
facilitate independence for longer.
Investment example 1
Riverstone Kensington, Senior Living Development, UK
Responsible Investment Highlights 2023
ENVIRONMENTAL
SOCIAL
GOVERNANCE
Real Estate Credit Investments Limited
34
Annual Report and Accounts 2023
• Zero carbon heating will
service the site which will lead
to a reduction in operating
carbon emissions.
•
There will also be a green roof,
rainwater recovery systems,
green electrical utility provider
and a ‘zero waste’ shop on site.
• Brent Cross Town will aim to
achieve net zero carbon by 2030.
•
BREEAM Excellent rating,
with Cheyne currently
considering further funding
to support the improvement
to BREEAM Outstanding.
• The accommodation will create
a social hub for students with
an emphasis on wellbeing and
physical and mental health for
students. There will be outdoor
and relaxation spaces, with
the wider Brent Cross scheme
creating a new community space
for local residents.
• Fusion have teamed up with
Health Assured in April 2020
to provide employees with a
wellbeing platform and complete
support network for personal and
professional problems.
Investment example 2
Fusion Brent Cross, Student Accommodation Development, UK
SOCIAL
GOVERNANCE
ENVIRONMENTAL
Real Estate Credit Investments Limited
35
Annual Report and Accounts 2023
Outlook and Focus Areas 2023 and Beyond
The Company knows that its Shareholders, including the
Directors of your Company, see attention to ESG factors
as critical in its assessment of Cheyne as investment
manager. The Company expects ESG to remain a
dominant theme within the financial services industry
going forward; the course being taken by regulators
suggests that its importance will only increase in years
to come; the research process and the investment
judgements the Company makes will continue to reflect
that and to evolve as necessary.
The continuing evolution is demonstrated through the
Investment Manager making progress towards completing
its ESG framework which will form the basis of an
evaluation tool to influence investment decisions from
an ESG perspective for new projects.
This next phase of its ESG evolution will involve the
implementation of a more rigorous scoring-based system
with the aim of using capital invested to finance strategies/
projects that adhere to robust ESG principles. The Manager
firmly believes that adopting this approach will:
•
Enhance the quality of the portfolio and help to
protect value;
•
Stay ahead of investor demand to invest in sponsors
that have a plausible and demonstrable ESG strategy;
• Use capital to drive/accelerate change in the Real
Estate arena in regard to ESG; and
• Provide a measurable approach to understanding
the ESG dynamics of our portfolio.
These efforts will allow the Investment Manager to
influence borrowers and to improve the ESG standards
of projects which they fund. The framework should be
finalised in 2023. It is intended to be incorporated into
the investment process slowly, beginning in early 2024.
Looking ahead, one of the main focuses will be on new
regulatory requirements. Next year the Investment Manager
will advance its reporting under the TCFD framework.
In addition, the UK’s regulatory framework Sustainability
Disclosures Requirements (“SDR”) comes into force in
stages from later this year. The Investment Manager is
working closely with relevant parties to ensure that it is
meeting the necessary regulatory requirements.
ESG subsequent covenants/conditions may well also be
included in time, driven by risk management principles.
Further details on Cheyne’s ESG policy can be found on
its website. https://www.cheynecapital.com/investment-
strategies/real-estate/investing-responsibly/
Sustainability Report
(continued)
Real Estate Credit Investments Limited
36
Annual Report and Accounts 2023
Residential development in Wembley, London
Real Estate Credit Investments Limited
37
Annual Report and Accounts 2023
Governance
In this section
Board of Directors
40
Management Team
42
Directors’ Report
44
Remuneration Committee Report
48
Corporate Governance Statement
50
Audit and Risk Committee Report
56
Directors’ Responsibility Statement
60
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
38
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
Co-living development in Earlsfield, London
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
39
Board of Directors
Bob Cowdell
Chairman
(UK resident)
Susie Farnon
Chairman of the Audit and Risk Committee
(Guernsey resident)
Bob Cowdell is an independent non-executive director who
has focused on the financial sector throughout his career;
initially as a solicitor and then as a corporate broker and
adviser. He was previously co-founder and Head of the ABN
AMRO Global Investment Funds Team and then Head of
Financials at RBS Hoare Govett.
He is currently chairman of Castel Underwriting Agencies
Limited and a non-executive director of Thomas Miller
Holdings Limited; and a former non-executive director of
Baillie Gifford UK Growth Fund Plc, Catlin Underwriting
Agencies Limited, Catlin Insurance Company (UK) Limited,
XL London Market Limited and XL Insurance Company SE.
A Freeman of the City of London, he is a member of the
Institute of Directors and the Chartered Insurance Institute.
He has been a member of the Board since June 2015.
Mrs Farnon is a Fellow of the Institute of Chartered
Accountants in England and Wales and qualified as an
accountant in 1983. She is a former Banking and Finance
partner of KPMG Channel Islands from 1990 until 2001
and head of the Channel Island Audit Practice from 1999.
She has served as President of the Guernsey Society of
Chartered and Certified Accountants and as a member of
the States of Guernsey Audit Commission and as vice-
chairman of the Guernsey Financial Services Commission.
Susie is a non-executive director of a number of investment
companies listed on the London Stock Exchange or
elsewhere and is a board member of the Association of
Investment Companies. She has been a member of the
Board since February 2018.
Real Estate Credit Investments Limited
40
Annual Report and Accounts 2023
John Hallam
Senior Independent Director
(Guernsey resident)
Colleen McHugh
Independent Director
(Guernsey resident)
Mrs McHugh is acting Chief Investment Officer of Wealthify
(part of the Aviva PLC group) a UK regulated digital adviser.
Prior to this she was managing director of 1818 Venture
Capital, a licensed asset manager based in Guernsey.
She is a non-executive director for private investment
funds, and a Guernsey licensed commercial insurance
company. Colleen has over 20 years’ experience in the
investment and financial services industry having worked
predominantly as an Investment Manager and Private
Banker for publicly listed banks such as HSBC, Barclays and
Butterfield Bank, across several regions, but with a focus
on international financial centres. She holds an economics
degree from the University of Ireland (Galway) and a MBA
from the University of London. Colleen is a Chartered
Wealth Manager and a fellow of the Chartered Institute
of Securities and Investment. She recently obtained her
ESG certification from the CFA Institute. She has been a
member of the Board since March 2021.
Mr Hallam is a Fellow of the Institute of Chartered
Accountants in England and Wales and qualified as
an accountant in 1971. He is a former partner of
PricewaterhouseCoopers having retired in 1999 after
27 years with the firm both in Guernsey and in other
countries.
He is the chairman of NB Distressed Debt Investment Fund
Ltd as well as being a director of a number of financial
services companies, some of which are listed on
recognised stock exchanges. He served for many years as a
member of the Guernsey Financial Services Commission
from which he retired in 2006, having been its chairman for
the previous three years. He has been a member of the
Board since March 2016.
Real Estate Credit Investments Limited
41
Annual Report and Accounts 2023
Ravi Stickney
Head of Cheyne
Real Estate/Portfolio
Manager
Arron Taggart
Head of UK
Ravi is Head of the Real Estate Team. He joined Cheyne in
2008 and has 20 years’ experience in the real estate debt
markets. Previously, he was on ING Bank’s proprietary
investments desk (2005 to 2008), with sole responsibility
for managing a €400 million long/short portfolio of
European commercial real estate credits and CMBS. Prior
to that, he was at Lehman Brothers (2002 to 2005),
structuring and executing UK and European CMBS/RMBS
and commercial real estate mezzanine loans. He acted as
sole operating adviser on the restructuring and eventual
sale of the first distressed UK CMBS deal, and he continues
to play an active role in the direction of various distressed
European real estate credits. He began his career on the UK
commercial real estate desk at Ernst & Young in 1998.
Arron has over 25 years’ experience in the real estate
markets. He joined Cheyne in August 2012 to originate real
estate loans in the UK and Northern Europe. Prior to Cheyne,
Arron was a Property Specialist and Partner at Clydesdale
Bank responsible for the origination and execution of real
estate loans in London and the South of England. He was
also responsible for the management of the loan portfolio
and setting regional strategy. Prior to Clydesdale Bank, he
was at Bank of Scotland and Hitachi Capital.
Richard is Business Manager of the real estate desk, and is
a partner at Cheyne, having joined in 2007. Before joining
Cheyne, Richard worked at Barclays Capital, and prior to
that was at Deutsche Bank, where he was responsible for
the controlling of the commercial mortgage backed
securities and Securitised Products businesses. Before
that, he worked in management roles within the fixed
income areas of RBS and Paine Webber. He is a Fellow of
the Institute of Chartered Accountants in England and
Wales, having qualified as a chartered accountant in 1999.
Raphael joined Cheyne in January 2014 and has 20 years’
experience. Prior to Cheyne, he was an Associate Director
in Real Estate Finance at Deutsche Pfandbriefbank,
responsible for sourcing and structuring commercial real
estate loans across Europe. Prior to that, he held positions
within the Real Estate Finance and CMBS space at
Moody’s, UBS and Morgan Stanley.
Richard Lang
Head of Business
Mngt/Co-Portfolio
Manager
Raphael Smadja
French Origination
Management Team
Real Estate Credit Investments Limited
42
Annual Report and Accounts 2023
Daniel has over 18 years’ experience in the European real
estate debt and ABS markets. He joined Cheyne in 2007
and specialises in the origination, structuring, negotiation
and execution of German real estate credit transactions.
He was previously an associate on Credit Suisse’s asset
finance team in London, which was responsible for
originating and structuring the bank’s European
securitisations. He focused on fundamental analysis
of RMBS collateral.
Lydia is Legal Counsel for the Cheyne Real Estate
Team Prior to joining Cheyne in 2018, Lydia was a senior
associate at Bryan Cave Leighton Paisner LLP where she
worked since starting her legal training in 2008. Lydia
joined BCLP’s real estate finance department upon
qualifying as a solicitor in September 2010. At BCLP,
Lydia was responsible for advising a range of lender and
sponsor clients on real estate focused investment and
development transactions across a variety of sectors,
often including complex intercreditor structures.
Sa’ad joined Cheyne in 2016. Prior to joining Cheyne,
he founded Rhino Investment Management LLP in 2011,
an FCA-authorised boutique investment and advisory firm,
active in the European commercial real estate market.
Among his responsibilities were strategy, origination, client
management, structuring and execution. He previously
worked for Lehman Brothers International (Europe) in 2004,
and for Credit Suisse Securities (Europe) Limited in 2005,
when he was Director in their European Real Estate
Finance & Securitisation area, and had a central role in
building the Titan Europe CMBS platform. Sa’ad started his
career in 2000 with Commerzbank Securities in Asset
Backed Finance.
Sophie is a Business Manager for the Real Estate Team
focusing on Investor Relations for RECI. Prior to this, Sophie
worked at Cheyne in Investor Relations as Client Services
Manager and Product Specialist for Convertible Bonds, and
before that, as Assistant Business Manager for the Real
Estate Team. Prior to joining Cheyne in 2008, she worked
at the University of Exeter’s Business School, co-ordinating
executive education programmes for corporates such as
3i plc. Sophie earned her BSc in Business Administration
from Cardiff University.
Daniel Schuldes
European Origination
Lydia Boos
Legal Counsel
Sa’ad Malik
Structured Credit
Sophie Turner
Business Manager
Real Estate Credit Investments Limited
43
Annual Report and Accounts 2023
GOVERNANCE
The Directors present their Annual Report and the audited
financial statements for the year ended 31 March 2023.
General Information
The Company was incorporated in Guernsey on
6 September 2005 with registered number 43634.
The “About the Company” section of the Annual Report on
page 6 provides information regarding the structure of the
Company, the investment objective and the listing details
of the shares of the Company.
The Company’s investment management activities are
managed by the Investment Manager, who is also the
Alternative Investment Fund Manager (“AIFM”). The
Company has entered into an Investment Management
Agreement under which the Investment Manager
manages its day-to-day investment operations, subject
to supervision by the Company’s Board of Directors. The
Company is an Alternative Investment Fund (“AIF”) within
the meaning of the Alternative Investment Fund Managers
Directive (“AIFMD”) and accordingly the Investment
Manager has been appointed and registered as the
AIFM of the Company.
Principal Activity and Business Review
The principal activity of the Company during the year was
that of an investment company investing in real estate
credit investments. For full details of the Investment Policy
of the Company see page 6.
Results and Dividends
The results for the year and the Company’s financial position
as at year end are shown on pages 72 and 73. Dividends
totalling £27.5 million (31 March 2022:
£27.5 million) were paid on the shares during the year.
A fourth interim dividend for the year ended 31 March 2023
of 3 pence per share (31 March 2022: 3 pence per share) was
declared by the Directors on 21 June 2023 and is payable
on 28 July 2023. This fourth interim dividend has not been
included as a liability in these financial statements.
Capital Structure
Details of the authorised, issued and fully paid share capital,
together with details of the movements in the Company’s
issued share capital during the current and prior year, are
shown in Note 14 to the financial statements.
The Company has one class of shares which carry no right
to fixed dividends. Each share carries the right to one vote
at general meetings of the Company.
No person has any special rights of control over the
Company’s share capital.
Board of Directors
The Board appoints all Directors on merit. When the
Nomination Committee considers Board succession
planning and recommends appointments to the Board,
it takes into account a variety of factors. Knowledge,
experience, skills, personal qualities, residency and
governance credentials play an important part.
The Directors of the Company who served during
the year and to the date of this report were:
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Directors’
Report
Real Estate Credit Investments Limited
44
Annual Report and Accounts 2023
The following summarises the Directors’ directorships
in other public companies listed on the London Stock
Exchange:
Director
Company Name
Susie Farnon
Apax Global Alpha Limited
Ruffer Investment Company Limited
John Hallam
NB Distressed Debt Investment
Fund Ltd
All Directors are independent of the Investment Manager
and free from any business or other relationship that would
materially interfere with the exercise of their independence.
With regard to the appointment and replacement of
Directors, the Company is governed by its Articles
of Incorporation (the “Articles”) and the Companies
(Guernsey) Law, 2008. The Articles themselves may be
amended by special resolution of the Shareholders. The
powers of Directors are described in the Articles and in
the financial statements in the Corporate Governance
Statement. Under its Articles, the Company has authority to
issue an unlimited number of shares of no par value.
The Directors’ interests in the share capital of the Company
(some of which are held directly or by entities in which
the Directors may have a beneficial interest) as at the
publication date are:
Number
of Shares
%
Shares Held
Bob Cowdell (Chairman)
215,000
0.09%
Susie Farnon
45,250
0.02%
John Hallam
135,000
0.06%
Colleen McHugh
30,000
0.01%
Substantial Interests in Share Capital
Chapter 5 of the Disclosure and Transparency Rules
requires disclosure of major Shareholder acquisitions or
disposals (over 5% of the shares) in the Company (see
list below of major Shareholders). During the year, there
was one notification of such a transaction (31 March 2022:
five notifications).
List of major Shareholders as at 31 March 2023:
Name
Total
Shares Held
%
Shares Held
Close Brothers Group
21,059,141
9.18
Bank Leumi Le Israel
18,054,468
7.87
Hargreaves Lansdown Asset Mgt
14,453,888
6.30
Canaccord Genuity Group Inc
13,315,151
5.81
Tilney Smith & Williamson
13,288,277
5.79
Fidelity Worldwide Investment (FIL)
11,871,829
5.18
Issued Share Capital
The issued share capital of the Company consisted of
229.3 million shares (31 March 2022: 229.3 million shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and was
renewed on 6 July 2022.
Listing Information
The shares are currently listed on the premium segment of
the Official List of the UK Listing Authority and trade on the
Main Market of the London Stock Exchange.
Website
The Directors are responsible for the oversight of the
website and delegate to Cheyne responsibility for the
maintenance and integrity of the financial and corporate
information included on it.
The Investment Manager
Having reviewed the performance of the Investment
Manager, the Directors are satisfied that the continued
appointment of the Investment Manager on the terms
agreed is in the best interests of the Shareholders and the
Company. The Company has entered into the Investment
Management Agreement under which the Investment
Manager manages its day-to-day investment operations.
Details of the Investment Management Agreement can be
found in Note 18 to the financial statements.
Real Estate Credit Investments Limited
45
Annual Report and Accounts 2023
Auditor
Deloitte LLP has been the Company’s external auditor
since the Company’s incorporation and in line with best
practice, the Company’s lead audit partner is required to
rotate off after five years of service. Further information
on the work of the auditor is set out in the Audit and Risk
Committee Report.
The Audit and Risk Committee reviews the appointment
of the auditor on an annual basis.
Principal Risks and Uncertainties
Principal risks and uncertainties are discussed in the
Strategic Report.
Related Party Transactions
Related party transactions are disclosed in Note 18 to the
financial statements. There have been no material changes
in the related party transactions described in the last
annual report.
Going Concern
The Directors believe it is appropriate to adopt the going
concern basis in preparing the financial statements as, after
due consideration, they consider that the Company has
adequate resources to continue in operational existence for
a period of at least 12 months from the date of signing the
audited financial statements.
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an
evaluation of each of its positions, taking into account
all relevant geopolitical and macro economic risks, on its
operating models and valuations, and performed a granular
analysis of the future liquidity profile of the Company.
A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments, other stress tests (and additional cash needs).
Stress testing is then performed on this cash flow forecast
against a number of adverse scenarios, such as the fair
value write down of the investments, or reduced cash flows
from the investment portfolio. The fair value stress test
was considered relevant to factor in any potential events
affecting the underlying assets or credit concerns about
the borrowers which potentially could impact on the fair
value. The reduced cash flow stress test was considered
relevant in the event of potential defaults arising on the
loan portfolio and the inability to recover the interest or
principal back in full.
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March
2023 of £14.1 million, together with the cash held at the
broker of £2.4 million, the liquidity of the market bond
portfolio and the financing available through activities
such as repurchase agreements are sufficient to cover
normal operational costs, the funding of borrower loan
commitments and current liabilities, including the proposed
dividend, as they fall due for a period of at least 12 months
from the date of signing the audited financial statements.
The Directors note that a key assumption adopted in the
going concern analysis is that leverage through repurchase
agreements is not withdrawn. Net debt (leverage minus
cash) as at 31 March 2023 was 19.1%. The Directors consider
this to have strengthened the resilience of the Company to
future market uncertainty.
For further information, please refer to Note 2 to the
financial statements.
AGM
It is intended that the AGM of the Company will be held at
10:30am on 15 September 2023 and details of the resolutions
to be proposed at the AGM, together with explanations,
will appear in the Notice of Meeting to be distributed to
Shareholders together with a copy of this Annual Report.
Members of the Board will be in attendance at the AGM
and will be available to answer Shareholder questions.
On behalf of the Board on 21 June 2023.
Bob Cowdell
Susie Farnon
Director
Director
Directors’ Report
(continued)
Real Estate Credit Investments Limited
46
Annual Report and Accounts 2023
Co-living development in Maida Vale, London
Real Estate Credit Investments Limited
Annual Report and Accounts 2023
47
As in other areas of corporate governance, the
Company seeks to adhere to the AIC Code of Corporate
Governance issued in February 2019 and has established
a Remuneration Committee. Although the Company
is not incorporated in England and Wales it is mindful
of the regulations that apply to such companies in the
context of remuneration and will seek to make appropriate
disclosures. All Directors are non-executive and are not
eligible for bonuses, pension benefits, share options, long-
term incentive schemes or other benefits, performance
related or otherwise. Directors do not have service
contracts and there is no provision for compensation for
loss of office. All Directors are entitled to be repaid all
expenses reasonably incurred in the performance of their
duties and have signed a letter of appointment setting out
the terms of such appointment.
The prime purpose of the Committee is to determine
the Company’s remuneration policy within the limits set
by the articles of incorporation which currently state that
the remuneration paid to each Director by way of fees shall
not exceed €160,000 in any financial year. Additionally,
they provide that if any Director performs any special
duties, or renders services, outside of the ordinary duties
of a Director, that Director shall be paid such reasonable
additional remuneration as the Board may determine. The
Committee is authorised by the Board to seek, subject to
a financial limit, such independent advice as it may deem
necessary in the discharge of its responsibilities.
Composition of the Committee
The Committee is chaired by John Hallam, the Company’s
senior independent Director and is composed of all the
Directors including the Chairman of the Company, who
was deemed independent at the time of his appointment.
This membership is considered appropriate as, collectively,
its members are believed to have the necessary experience
and knowledge to fairly determine remuneration.
Remuneration Policy
The current policy adopted by the Committee is set out
below and will be tabled at the next AGM for approval
by Shareholders along with this Report. The Company’s
Remuneration Policy is that fees payable to the Directors
should reflect the experience and expertise of and the
responsibilities borne by the Directors and the time spent
on the Company’s affairs and be sufficient to attract, retain
and motivate individuals of high calibre with suitable
skills, experience and knowledge and to ensure that their
remuneration is set at a reasonable level commensurate
with their duties and responsibilities. No element of the
Directors’ remuneration is performance related.
In determining the level of these fees, the Committee
obtains and takes account of reliable, up-to-date
information about remuneration in other companies of
comparable scale and complexity together with general
economic conditions. To help it fulfil its obligations, the
Committee shall have full authority to appoint remuneration
consultants and to commission or purchase any reports,
surveys or information which it deems necessary.
Implementation of the policy
The last major review of Board remuneration took place
in 2022 and it is anticipated that the next will be in 2025.
In the interim, the Committee notes that during the year
ended 31 December 2022, Guernsey RPIX increased by
8.5% and therefore has recommended that the Chairman’s
fee be increased from £80,000 to £86,800 (an increase
of 8.5%) and the base fee for other Directors move from
£38,500 to £41,750 (an increase of 8.4%) to reflect this.
As a consequence of these recommendations, the
following table sets out the remuneration of Board
members for the financial year ending 31 March 2024 as
compared to the two previous years; it should be noted
that the additional fees set last year, and which remain
unchanged, relate to the roles performed and not to
specific individuals while the table below assumes that
the named individuals will discharge the roles indicated
throughout the coming year.
GOVERNANCE
Remuneration
Committee Report
Real Estate Credit Investments Limited
48
Annual Report and Accounts 2023
Furthermore, the Committee noted that, in the year ended
31 March 2020, additional fees had been paid to the
Chairman (£10,000) and other Directors (£5,000 each) for
work in relation to the issuance of a prospectus. It is the
Committee’s recommendation that should a prospectus
be issued during the financial year ending 31 March 2024,
additional fees of the same amount should be paid.
Statement of Shareholder voting
At the last AGM held on 15 September 2022,
a resolution to approve the Remuneration Committee
Report and Remuneration Policy was passed with
79,602,454 votes (99.93%) being cast in favour and
49,997 votes (0.06%) against.
Future Reviews
It is anticipated that full reviews will not take place at less
than three-yearly intervals but that the Committee will, in
the early part of each year, review the changes in Guernsey
RPIX to determine if it is appropriate to increase the
Chairman’s fee and the base fee for other Directors.
John Hallam
Remuneration Committee Chair
21 June 2023
Year ending
31 March 2024
GBP
Year ended
31 March 2023
GBP
Year ended
31 March 2022
GBP
Bob Cowdell (Chairman and Nomination Committee Chair)
86,800
80,000
75,000
Susie Farnon (Audit and Risk Committee and Management Engagement Committee Chair)
56,250
53,000
46,750
John Hallam (Remuneration Committee Chair and Senior Independent Director)
44,250
41,000
36,750
Colleen McHugh (Environmental, Social and Corporate Governance Lead)
44,250
41,000
36,750
Real Estate Credit Investments Limited
49
Annual Report and Accounts 2023
Statement of Compliance with Corporate Governance
The Company is a member of the Association of Investment
Companies (the “AIC”) and by complying with the February
2019 edition of the AIC code of Corporate Governance for
investment companies (“AIC Code”) is deemed to comply with
both the UK and Guernsey Codes of Corporate Governance.
To comply with the UK Listing Regime, the Company
must comply with the requirements of the UK Corporate
Governance Code.
The Board has considered the principles and
recommendations of the AIC Code, by reference to the
guidance notes provided by the AIC Guide, and considers that
reporting against these will provide appropriate information
to Shareholders. To ensure ongoing compliance with these
principles the Board reviews a report from the Company
Secretary identifying how the Company is in compliance and
identifying any changes that might be necessary.
The Company has complied with the recommendations of the
AIC Code throughout the accounting period, except as set
out below.
The AIC Code includes provisions relating to:
•
the role of the chief executive;
•
executive directors’ remuneration; and
•
the whistle-blowing policy.
The Board considers some of these provisions are not relevant
to the position of the Company as it is an externally managed
investment company. The Directors are non-executive and
the Company does not have employees and the Board is
satisfied that any relevant issues that arise can be properly
considered by the Board or by Shareholders at AGMs. The
Remuneration Committee considers matters relating to
Directors’ remuneration. An external assessment of Directors’
remuneration has not been undertaken.
The Company’s Remuneration policy is that fees payable to
the Directors should reflect the experience and expertise of
and the responsibilities borne by the Directors and the time
spent on the Company’s affairs and be sufficient to attract,
retain and motivate Directors of a quality required to run the
Company successfully. Please refer to the Remuneration
Committee Report on pages 48-49.
The Board
The Directors’ details are listed in the Directors’ Report, which
set out their range of investment, financial and business skills
and experience.
The Board meets at least four times a year and, in addition,
there is regular contact between the Board, the Investment
Manager and the Company Secretary including an annual
strategy meeting and Investment Manager due diligence
visits, when the Board attends the offices of the Investment
Manager and meets with senior executives. Further, the Board
requires that it is supplied in a timely manner with information
by the Investment Manager, the Company Secretary and
other advisers in a form and of a quality appropriate to enable
it to discharge its duties.
Duties and Responsibilities
The Board has overall responsibility for optimising the
Company’s performance by directing and supervising the
affairs of the business and meeting the appropriate interests
of Shareholders and relevant stakeholders, while enhancing
the value of the Company and also ensuring the protection
of investors. A summary of the Board’s responsibilities is as
follows:
•
statutory obligations and public disclosure;
•
strategic matters and financial reporting;
•
risk assessment and management including reporting,
compliance, governance, monitoring and control; and
• other matters having a material effect on the Company.
GOVERNANCE
Corporate
Governance
Statement
Real Estate Credit Investments Limited
50
Annual Report and Accounts 2023
The Board is responsible to Shareholders for the overall
management of the Company.
The Board has delegated the day-to-day operation of the
Company to the Investment Manager, Administrator and
the Company Secretary. The Board reserves the powers of
decisions relating to the determination of the Investment
Policy, the approval of changes in strategy, capital
structure, statutory obligations, public disclosure and the
entering into of any material contracts by the Company.
The previous table is an extract of the various Directors’
attendance at Board and Committee meetings for the
financial year compared against those for which they were
eligible to attend.
Additionally, five ad-hoc meetings and a further three
informal meetings were held during the year which, as they
dealt primarily with administrative and transaction matters,
were attended by those Directors available at the time.
Chairman
The Chairman, Mr Cowdell, is responsible for leadership
of the Board, ensuring its effectiveness on all aspects
of its role and setting its agenda. The Chairman is also
responsible for ensuring that the Directors receive
accurate, timely and clear information. The Chairman is
responsible for effective communication with Shareholders
and can be contacted through the Company Secretary.
Senior Independent Director (“SID”)
Mr Hallam is the SID and, as such, his primary roles are
to support the Chairman and act as an intermediary for
the other non-executive Directors in matters relating
to the Chairman, including leading them in the annual
performance evaluation of the Chairman. The SID is also
available to Shareholders who may have any concerns
which contact through the normal channels of the
Chairman and AIFM has failed to resolve or for which such
contact is inappropriate. Mr Hallam can also be contacted
through the Company Secretary.
Board Independence
For the purposes of assessing compliance with the AIC
Code’s Principles and Provisions, the Board considers
whether the current Directors are independent of the
Investment Manager and free from any business or
other relationship that could materially interfere with the
exercise of their independent judgement. In making this
assessment, consideration is also given to all other factors
which might be relevant including length of service. The
Board has concluded that all Directors remain independent.
Committees of the Board
In accordance with the AIC Code, the Board has
established an Audit and Risk Committee, a Nomination
Committee, a Management Engagement Committee and
a Remuneration Committee, in each case with formally
delegated duties and responsibilities within written terms
of reference.
Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon,
and its other members are Mr Cowdell, Mr Hallam and
Mrs McHugh. The terms of reference of the Audit and Risk
Committee state that it will meet not less than three times
in each financial year. In the year ended 31 March 2023,
the Audit and Risk Committee met at one ad-hoc meeting
and four informal meetings. The Audit and Risk Committee
Report on pages 56-59 sets out the role and activities of this
Committee and its relationship with the external auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Cowdell and
its other members are Mr Hallam, Mrs Farnon and Mrs
McHugh. The members of the Nomination Committee are
and will be independent Directors. The terms of reference
state that the Nomination Committee will meet not less
than once a year; will have responsibility for considering the
size, structure and composition of the Board; retirements
and appointments of additional and replacement Directors;
and that the Nomination Committee will make appropriate
recommendations to the Board.
Scheduled
Board
Meetings
Attendance
Nomination
Committee
Meeting
Attendance
Audit and Risk
Committee
Meeting
Attendance
Management
Engagement
Committee
Meeting
Attendance
Remuneration
Committee
Meeting
Attendance
Attendance by:
Bob Cowdell (Chairman)
4/4
1/1
3/3
1/1
1/1
Susie Farnon
4/4
1/1
3/3
1/1
1/1
John Hallam
4/4
1/1
3/3
1/1
1/1
Colleen McHugh
4/4
1/1
3/3
1/1
1/1
Real Estate Credit Investments Limited
51
Annual Report and Accounts 2023
The Board appoints all Directors on merit. When the
Nomination Committee considers Board succession
planning and recommends appointments to the Board,
it takes into account a variety of factors. Knowledge,
experience, skills, personal qualities, residency and
governance credentials play an important part. The Board
aims to have a balance of skills, experience, diversity
(including gender) and length of service and knowledge
of the industry. The Board undertakes an evaluation of its
performance on an annual basis. The performance of each
Director is considered as part of a formal review by the
Nomination Committee.
The position of Chairman of each Committee will be
reviewed on an annual basis by the Nomination Committee
and their membership and terms of reference are kept
under review.
The performance of the Chairman of the Board will be
assessed by the SID through appraisal questionnaires and
discussions with the other Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by
Mrs Farnon, with its other members being Mr Hallam, Mr
Cowdell and Mrs McHugh. The Committee will meet at least
once a year for the purpose of evaluating the performance
of the Company’s service providers, the review of service
agreements and service level statements and the level and
method of their remuneration. It is proposed that Mrs McHugh
will succeed Mrs Farnon as chair of the Committee following
the Company’s next AGM.
Remuneration Committee
The Remuneration Committee is chaired by Mr Hallam, with
its other members being Mr Cowdell, Mrs Farnon and Mrs
McHugh. The Committee will meet at least once a year for the
purpose of determining Directors’ remuneration and setting
the Company’s remuneration policy.
Director Re-Election Tenure and Induction
The Nomination Committee has considered the question of a
policy on Board tenure. It is strongly committed to striking the
correct balance between the benefits of continuity and those
that come from the introduction of new perspectives to the
Board. As provided for in the AIC guidelines and in order to
phase future retirements and appointments the Board has not,
at this stage, adopted any specific limits to terms, but expects
to refresh the Board at appropriate intervals.
The Board regards all Directors as being independent.
The Board has adopted a policy whereby all Directors will
be proposed for re-election each year and so all Directors
will be proposed for re-election at the forthcoming AGM.
Details of Directors’ tenure are disclosed on pages 40-41.
Internal Controls
The Board has established a continuous process for
identifying, evaluating and managing the significant risks
the Company faces. The Board regularly reviews the
process, which has been in place from the start of the
financial year to the date of approval of this report. The
Board is responsible for the Company’s system of internal
control and for reviewing its effectiveness. Such a system
is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can only provide
reasonable and not absolute assurance against material
misstatement or loss.
In compliance with the Principles and Provisions of the
AIC Code, the Board regularly reviews the effectiveness
of the Company’s system of internal control. The Board’s
monitoring covers all controls, including financial,
operational and compliance controls and risk management.
It is based principally on reviewing reports from the
Investment Manager in order to consider whether all
significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses are
promptly remedied and indicate a need for more extensive
monitoring. To this end, a Risk Matrix is maintained, which
identifies the significant risks faced by the Company
together with the controls intended to manage them and
is reviewed at each scheduled Board meeting. The Board
has also performed a specific assessment considering all
significant aspects of internal control arising during the
year covered by this report. The Audit and Risk Committee
assists the Board in discharging its review responsibilities.
During the course of its review of the system of internal
control, the Board has not identified nor been advised of
any failings or weaknesses which it has determined to be
significant.
While investment management is provided by Cheyne,
the Board is responsible for setting the overall Investment
Policy and monitors the actions of the Investment Manager
at regular Board meetings. Administration services are
provided by Citco. Regular compliance reports from
both the Investment Manager and the Administrator are
received by the Board. In addition, the Administrator makes
available its Global Fund Accounting and Custody Controls
Examination, SOC 1 report to the Board on an annual basis.
Corporate Governance Statement
(continued)
Real Estate Credit Investments Limited
52
Annual Report and Accounts 2023
Custody of assets is undertaken by the Depositary,
The Bank of New York Mellon (International) Limited.
The Investment Manager has established an internal
control framework and reviews the segregation of duties
within this to ensure that control functions are segregated
from the trading and investing functions. As a part of
this framework, the valuation of financial instruments
is overseen by an internal pricing committee which is
supported by resources which ensure that it is able to
function at an appropriate level of quality and effectiveness.
Specifically, the Investment Manager’s pricing committee
is responsible for establishing and monitoring compliance
with valuation policy. Within the trading and investing
functions, the Investment Manager has established policies
and procedures that relate to the approval of all new
transactions, transaction pricing sources and fair value
hierarchy coding within the financial reporting system.
The Directors of the Company clearly define the duties
and responsibilities of their agents and advisers,
whose appointments are made by the Board after
due consideration. The Board monitors the ongoing
performance of such agents and advisers. Each agent and
adviser maintains its own systems of internal control on
which it reports to the Board. The systems are designed
to ensure effective and efficient operation, internal control
and compliance with laws and regulations. In establishing
the systems of internal control, regard is paid to the
materiality of relevant risks, the likelihood of costs being
incurred and costs of control. It follows, therefore, that the
systems of internal control can only provide reasonable
but not absolute assurance against the risk of material
misstatement or loss.
The Board has reviewed the need for an internal audit
function and has decided that the systems and procedures
employed by the Administrator and Investment Manager,
including their own internal controls and procedures,
provide sufficient assurance that a sound system of risk
management and internal control, which safeguards
Shareholders’ investment and the Company’s assets,
is maintained. An internal audit function specific to the
Company is therefore considered unnecessary.
Corporate Social Responsibility
The Board keeps under review developments involving
social and environmental issues, and will report on those to
the extent they are considered relevant to the Company’s
operations. The Company’s ESG strategy is outlined on
page 30 of the Stakeholder Engagement section and in the
Sustainability Report on pages 32-36.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has
introduced a new Corporate Criminal Offence of “failing
to take reasonable steps to prevent the facilitation of tax
evasion”, the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
General Data Protection Regulation (“GDPR”)
The Board confirms that the Company has considered
GDPR and taken measures itself and with its service
providers, to meet the requirements of GDPR and
equivalent Guernsey law.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-Bribery and
Corruption Policy. The policy applies to the Company and
to each of its Directors. Furthermore, the policy is shared
with each of the Company’s main service providers.
Whistle-blowing
As the Company has no employees of its own, it does not
have a whistle-blowing policy but in its review of service
providers the Management Engagement Committee
ensures that they do.
Employees and Socially Responsible Investment
The Company has a management contract with the
Investment Manager. It has no employees and all of its
Directors are non-executive, with day-to-day activities
being carried out by third parties. There are therefore no
disclosures to be made in respect of employees.
The Company’s main activities are carried out by the
Investment Manager who was one of the initial signatories
to the Standards Board for Alternative Investments
(formerly known as the Hedge Fund Standards Board) and
is a signatory to the United Nations- supported Principles
for Responsible Investment (“PRI”).
Modern Slavery Act 2015
The Company as a Guernsey incorporated entity
is not within scope of the Modern Slavery Act
2015, and is therefore not obliged to make a human
trafficking statement.
Real Estate Credit Investments Limited
53
Annual Report and Accounts 2023
Gender Metrics
The Company, in conjunction with the Investment Manager,
strives to achieve a diverse workforce that embraces
individuals of all gender, race, nationality, religion, age and
orientation and to develop a unique workplace to come
together and grow professionally and personally.
Cheyne is committed to supporting diversity, equality and
inclusion through implementing change and supporting
initiatives, partnerships and programmes across the firm
and the industry, under the oversight of Cheyne’s DE&I
Committee. Cheyne is comprised of a diverse range of
employees and is committed to providing equal employment
opportunities to all colleagues and applicants without regard
to gender, race, nationality, religion, age, orientation or
disability. To this end, Cheyne has implemented reporting
tools within its HR system to enable a more granular
measurement of gender and ethnicity, using the AIMA/
Albourne classifications within their DE&I Questionnaire,
that is compliant with data privacy considerations. The
ongoing evolution and monitoring of this data will allow
the Investment Manager to assess how its DE&I Policy
and supporting action plans are working in practice,
while enabling the DE&I Committee to identify areas
for improvement and target its efforts to effect change.
The business case behind the data collection has been
communicated to all employees.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify
the emerging and principal risks that could affect the
Company, including those that would threaten its business
model, future performance, solvency or liquidity. It has
adopted a controls based approach to its risk monitoring
requiring each of the relevant service providers, including
the Investment Manager, to establish the necessary
controls to ensure that all known risks are monitored and
controlled in accordance with agreed procedures. The
Directors receive periodic updates at their Board meetings
on key risks and have adopted their own control review to
ensure, where possible, risks are monitored appropriately.
Each Director is aware of the principal risks and
uncertainties inherent in the Company’s business and
understands the importance of identifying, evaluating and
monitoring these risks. The Board has adopted procedures
and controls that enable it to manage these principal risks
and uncertainties within acceptable limits and to meet all of
its legal and regulatory obligations.
The Board considers the process for identifying, evaluating
and managing these principal risks and uncertainties faced
by the Company on an ongoing basis and these principal
risks and uncertainties are reported and discussed at Board
meetings. It ensures that effective controls are in place
to mitigate these risks and that a satisfactory compliance
regime exists to ensure all applicable local and international
laws and regulations are upheld.
The Company’s principal risks are discussed in the
Strategic Report of these financial statements and in
the Company’s Prospectus, available on the Company’s
website (www.realestatecreditinvestments.com) while
those specifically relating to financial reporting are
discussed in the Audit and Risk Committee Report and
Note 15 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation
as it impacts the Company and its policies.
Corporate Governance Statement
(continued)
Real Estate Credit Investments Limited
54
Annual Report and Accounts 2023
Luxury villa development in Ibiza, Spain
Real Estate Credit Investments Limited
55
Annual Report and Accounts 2023
Dear Shareholders,
On the following pages, we present the Audit and Risk
Committee’s report for 2023, setting out the responsibilities
of the Audit and Risk Committee and its key activities
during the year ended 31 March 2023. As in previous
years, the Audit and Risk Committee has reviewed the
Company’s financial reporting, the independence and
effectiveness of the external auditor and the internal control
and risk management systems of the Company’s service
providers. In order to assist the Audit and Risk Committee
in discharging these responsibilities, regular reports are
received and reviewed from the Investment Manager,
Administrator and external auditor.
A member of the Audit and Risk Committee will be
available at each AGM to respond to any Shareholder
questions on the activities of the Audit and Risk
Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
Membership of the Audit and Risk Committee
The Audit and Risk Committee is chaired by Mrs Farnon,
and its other members are Mr Cowdell, Mr Hallam and
Mrs McHugh. The FRC Guidance on Audit and Risk
Committees recommends that such a committee should
comprise solely of independent non-executive directors
and, as noted in the Corporate Governance Statement, the
Board has considered the independence of its members
and has concluded that they all remain independent. The
Company Chairman currently serves as a member of the
Audit and Risk Committee. The terms of reference state
that the Audit and Risk Committee will meet not less than
three times in the year and meet the external auditor twice
a year, on which occasions the need to meet without
representatives of either the Investment Manager or the
Administrator being present is considered. The terms of
reference include all matters indicated in the Disclosure
and Transparency Rule 7.1 and the AIC Code.
The Board has taken note of the requirement that at least
one member of the Committee should have recent and
relevant financial experience and is satisfied that the
Committee is properly constituted in that respect with all
members being highly experienced and Mrs Farnon and
Mr Hallam being chartered accountants who also sit or
have sat on other audit committees.
Responsibilities
The Audit and Risk Committee has regard to the AIC Code
and examines the effectiveness of the Company’s internal
control systems, the integrity of the annual and half-
yearly reports and financial statements and ensures that
they are fair, balanced and understandable and provide
the necessary information. It also considers the auditor’s
remuneration and engagement, as well as the auditor’s
independence and any non-audit services provided by
them. Other areas of responsibility include:
• Consideration of the fair value of the Company’s
investments and income generated from the portfolio;
• Consideration of the accounting policies of the
Company;
• Meeting with the external auditor to discuss the
proposed audit plan and reporting;
• Assess the effectiveness of the external auditor and audit
process;
•
Consideration of the need for an internal audit function;
• Review of any independent reports in respect of the
Investment Manager, the Administrator or the Depositary;
• Consideration of the risks facing the Company including
the Company’s anti-bribery, corruption and similar
obligations; and
• Monitoring the Company’s procedures for ensuring
compliance with statutory regulations and other
reporting requirements.
In addressing all of the above considerations, the Audit and
Risk Committee seeks the appropriate input from the external
auditor, Investment Manager, Administrator, Company
Secretary and Legal Counsel and makes a recommendation
to the Board of the Company as appropriate.
GOVERNANCE
Audit and Risk
Committee Report
Real Estate Credit Investments Limited
56
Annual Report and Accounts 2023
Meetings
The Audit and Risk Committee normally meets at least three
times annually, including shortly before the Board meets
to consider the Company’s half-yearly and annual financial
reports, and reports to the Board on its deliberations and
recommendations. It also has an annual planning meeting
with the auditor and other ad-hoc meetings as considered
necessary.
The Audit and Risk Committee operates within clearly
defined terms of reference and provides a forum through
which the Company’s external auditor reports to the Board.
The terms of reference of the Audit and Risk Committee
are available from the Company’s registered office. The
Audit and Risk Committee receives information from the
Company’s service providers with the majority of information
being directly sourced from the Company Secretary,
Administrator, the Investment Manager and the external
auditor. The Audit and Risk Committee considers the nature,
scope and results of the auditor’s work and reviews their
performance annually prior to providing a recommendation
to the Board on the reappointment or removal of the auditor.
Significant Issues Considered over Financial Reporting
The Audit and Risk Committee has determined that the key
risks of misstatement of the Company’s financial statements
relate to the judgements in respect of the fair value of the
Company’s portfolio and income recognition.
Additional information regarding principal risks and
uncertainties is provided in the Strategic Report and in Note
15 to the financial statements.
The Board considers a report from the Investment Manager
at each Board meeting which sets out a review of the
portfolio and its performance. The report also details
earnings forecasts and asset class analysis. As a result, the
Board is able to interrogate the Investment Manager on
the basis of the assumptions made and the validity of the
expected forecasts.
Valuation of Portfolios
The Audit and Risk Committee conducted a detailed review
of each bilateral loan and bond position through discussions
with the AIFM’s relevant individual asset managers
challenging them as appropriate. Such discussions covered
aspects such as:
• Available and recent professional valuations of the
underlying collateral;
•
Credit quality of the individual borrower;
•
Quality of the underlying collateral;
•
Operational and financial performance of the borrower;
•
Status of development schedules compared to
original plans;
•
Planning or other disputes;
•
Comparison between effective and actual yields; and
• Whether or not any value should be ascribed to contingent
fees and potential profit participations provided for in
contractual arrangements.
When considering the bilateral bond investments, the
Audit and Risk Committee considered a number of factors
including, but not restricted to:
•
The key valuation judgement whereby the effective
interest rate calculated when the loan or bond was issued
is used as proxy for the market yield at the valuation date;
•
Pricing sources;
• The valuation approach used to value certain bonds by the
independent pricing adviser and challenging the AIFM’s
assessment of the comparable securities and sector
analysis used in determining the valuation of these bonds;
• The range of valuations determined by the independent
pricing adviser in light of the approaches used and the
weighting applied by the Investment Manager to derive
fair value point estimate;
•
Comparison between effective and actual yields;
•
Depth of prices and any disparity between different marks;
•
Indicative liquidity;
•
Comparison of realised prices with previous valuations;
and
• The significance of unobservable inputs used to
determine the fair value of the bond investments and
classification within the fair value hierarchy.
Having conducted this process the Audit and Risk
Committee concluded that any assumptions used were
reasonable and that the valuations were in accordance with
the applicable standards.
During the year, the Chairman of the Audit and Risk
Committee and/or other members of the Board attended at
least two of the meetings held between the auditor and the
Investment Manager in respect of valuations.
Income Recognition
The Audit and Risk Committee and the Board as a whole
considered and challenged the Investment Manager’s
expected realisation or maturity dates and the resultant
expected cash flows. The Committee found that the
assumptions used were reasonable and that whilst it is
possible that the expected realisation dates may change
over time the Committee and the Board are satisfied that the
assumed realisation dates and the Investment Manager’s
methods of calculating income are reasonable and in line
with International Financial Reporting Standards (“IFRS”).
Real Estate Credit Investments Limited
57
Annual Report and Accounts 2023
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an
evaluation of each of its positions, taking into account
all relevant geopolitical and macro economic risks, on its
operating models and valuations. A detailed cash flow
profile of each investment was completed, incorporating the
probability of likely delays to repayments, other stress tests
(and additional cash needs); these were taken into account
in the modelled expected cash flows for 31 March 2023.
Risk Management
The Company’s risk assessment process and the way in
which significant business risks are managed is a key area
of focus for the Committee. The work of the Audit and Risk
Committee is driven primarily by the Company’s assessment
of its principal risks and uncertainties as set out in the
Strategic Report and in Note 15 to the financial statements,
and it receives reports from the Investment Manager on the
Company’s risk evaluation process and reviews changes to
significant risks identified.
Internal Audit
The Committee considers at least once a year whether or
not there is a need for an internal audit function. Currently,
the Committee believes that, given the Company has no
employees, the SOC 1 internal control report provided by the
Administrator and the reporting provided by the Investment
Manager are sufficient and has made a recommendation to
the Board to this effect.
External Audit
Deloitte LLP has been the Company’s external auditor since
the Company’s inception.
The objectivity of the auditor is reviewed by the Committee
which also reviews the terms under which the external
auditor may be appointed to perform non-audit services.
Auditor independence is maintained through limiting non-
audit services to audit-related work that falls within defined
categories. All engagements with the auditor are subject
to pre-approval from the Audit and Risk Committee and
fully disclosed within the Annual Report for the relevant
period. A new lead audit partner is appointed every five
years and the Audit and Risk Committee ensures the auditor
has appropriate internal mechanisms in place to ensure its
independence.
When evaluating the external auditor, the Committee has
regard to a variety of criteria including industry experience,
independence, reasonableness of audit plan, ability to deliver
constructive criticism, effectiveness of communication with
the Board and the Company’s service providers, quality
control procedures, management of audit process, price and
added value beyond assurance in audit opinion.
In order to maintain auditor independence, Deloitte LLP
ensured the following safeguards were in place:
•
review and challenge of key decisions by the Quality
Review Partner and engagement quality control review by
a member of the Independent Professional Standard
Review Team.
John Clacy replaced David Becker as audit partner from
the year ended 31 March 2021. He also served as the audit
partner for the years ended 31 March 2011 to 31 March 2015.
The Audit and Risk Committee has considered this in light
of guidance and the changes to the business since this time
and, as such, they are satisfied that his independence is not
impaired.
The Committee reviews the scope and results of the audit,
its cost effectiveness and the independence and objectivity
of the auditor, with particular regard to the level of non-audit
fees. During the year, Deloitte charged non-audit fees of
£39,500 for the 30 September 2022 interim review.
Notwithstanding the provisions of such services, the
Audit and Risk Committee considers Deloitte LLP to be
independent of the Company and that the provision of such
non-audit services is not a threat to the objectivity and
independence of the conduct of the audit as appropriate
safeguards are in place.
Audit and Risk Committee Report
(continued)
Real Estate Credit Investments Limited
58
Annual Report and Accounts 2023
To fulfil its responsibility regarding the independence of
the auditor, the Audit and Risk Committee considers:
• discussions with or reports from the auditor describing
its arrangements to identify, report and manage any
conflicts of interests in light of the requirements of the
Crown Dependencies’ Audit Rules and Guidance; and
•
the extent of non-audit services provided by
the auditor and arrangements for ensuring the
independence, objectivity and robustness and
perceptiveness of the auditor and their handling
of key accounting and audit judgements.
To assess the effectiveness of the auditor and
the audit process, the Committee reviews:
• the auditor’s fulfilment of the agreed
audit plan and variations from it;
•
discussions or reports highlighting the major issues
that arose during the course of the audit;
• feedback from other service providers evaluating
the performance of the audit team;
• arrangements for ensuring independence
and objectivity; and
• robustness of the auditor in handling key
accounting and audit judgements.
The Audit and Risk Committee was satisfied with the audit
process and Deloitte LLP’s effectiveness and independence
as an Auditor, having considered the degree of diligence
and professional scepticism demonstrated by them.
During the year ended 31 March 2023, the auditor had
three meetings with the Audit and Risk Committee
and met with the Chairman of the Audit and Risk
Committee on other occasions when necessary.
On behalf of the Audit and Risk Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
21 June 2023
Real Estate Credit Investments Limited
59
Annual Report and Accounts 2023
The Directors are responsible for preparing the Annual
Report and the financial statements in accordance with
applicable law and regulations.
The Companies (Guernsey) Law, 2008 requires the
Directors to prepare financial statements for each financial
year. Under that law, the Directors have elected to prepare
the Company financial statements in accordance with
IFRS. Under company law, the Directors must not approve
the accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that year. In preparing
these financial statements, International Accounting
Standard 1 (“IAS 1”) requires that Directors:
•
properly select and apply accounting policies;
•
present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable
users to understand the impact of particular transactions,
other events and conditions on the entity’s financial
position and financial performance; and
• make an assessment of the Company’s ability to continue
as a going concern.
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the Company’s transactions and disclose with reasonable
accuracy at any time the financial position of the Company
and enable them to ensure that the financial statements
comply with the Companies (Guernsey) Law, 2008. They
are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the Company’s website. Legislation in Guernsey
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
(i) The financial statements, prepared in accordance with
IFRS, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company;
(ii) The Chairman’s Statement, the Strategic Report and the
Investment Manager’s Report include a fair review of the
development and performance of the business and the
position of the Company together with a description of
the principal risks and uncertainties they face; and
(iii) So far as each Director is aware, there is no relevant
audit information of which the Company’s auditor is
unaware, and each Director has taken all the steps
that he/she ought to have taken as a Director in order
to make himself/herself aware of any relevant audit
information and to establish that the Company’s auditor
is aware of that information. This confirmation is given
and should be interpreted in accordance with the
provisions of section 249 of the Companies (Guernsey)
Law, 2008 (as amended).
Responsibility Statement of the Directors in Respect
of the Annual Report under the UK Corporate
Governance Code
The Directors are responsible for preparing the Annual
Report in accordance with applicable law and regulations.
Having taken advice from the Audit and Risk Committee,
the Directors consider the Annual Report and financial
statements, taken as a whole, as fair, balanced and
understandable and that it provides the information
necessary for Shareholders to assess the Company’s
performance, business model and strategy.
By order of the Board.
Bob Cowdell
Susie Farnon
Director
Director
21 June 2023
GOVERNANCE
Directors’
Responsibility
Statement
Real Estate Credit Investments Limited
60
Annual Report and Accounts 2023
Fully let office in Shoreditch, London
Real Estate Credit Investments Limited
61
Annual Report and Accounts 2023
Financial
Statements
In this section
Independent Auditor’s Report
64
Statement of Comprehensive Income
72
Statement of Financial Position
73
Statement of Changes in Equity
74
Statement of Cash Flows
75
Notes to the Financial Statements
76
Appendix I – AIFM Remuneration Policy (Unaudited)
108
Appendix II – AIFM Leverage (Unaudited)
109
Glossary
110
Directors and Advisers
111
Annual Report and Accounts 2023
Real Estate Credit Investments Limited
62
Mixed-use development in London
Real Estate Credit Investments Limited
63
Annual Report and Accounts 2023
Independent Auditor’s Report to the Members of Real Estate
Credit Investments Limited
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Real Estate Credit Investments Limited (the ‘Company’):
•
give a true and fair view of the state of the Company’s affairs as at 31 March 2023 and of its profit for the year then ended;
•
have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the
International Accounting Standards Board (IASB); and
•
have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
•
the statement of comprehensive income;
•
the statement of financial position;
•
the statement of changes in equity;
•
the statement of cash flows; and
• the related notes 1 to 22.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial
statements section of our report.
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit
services provided to the Company for the year are disclosed in note 5 to the financial statements. We confirm that we have not
provided any non-audit services prohibited by the FRC’s Ethical Standard to the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matter that we identified in the current year was:
•
Key Judgement in the valuation of bilateral loan and bond portfolio
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Real Estate Credit Investments Limited
64
Annual Report and Accounts 2023
Key audit matters
Materiality
The materiality that we used in the current year was £6.7 million which was determined on the
basis of approximately 2% of net assets of the Company.
Scoping
Audit work to respond to the risks of material misstatement was performed directly by the audit
engagement team.
Significant changes in our approach
There have been no significant changes in our audit approach.
In the current year audit, our key audit matter regarding the valuation of bilateral loan and bond
portfolio relates specifically to the judgement used by management that the initial effective yield of
investments remains suitable to be used as a discount rate in the current market environment.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting
in the preparation of the financial statements is appropriate.
Our evaluation of the Directors’ assessment of the Company’s ability to continue to adopt the going concern basis of
accounting included:
•
Evaluating management’s going concern paper, identifying the assumptions applied in the going concern assessment
particularly the considerations of the current macroeconomic challenges and testing the mechanical accuracy of the
underlying forecasts;
• Performing reverse stress testing on the key assumptions applied to understand those that could potentially give rise to a
material uncertainty in respect of the use of the going concern basis;
•
Checking consistency of the forecast assumptions applied in the going concern assessment with other forecasts, including
asset maturity and valuation assumptions; and
•
Assessing the liquidity position of the Company including its ability to meet its undrawn commitments by evaluating the
impact of repayment of the Company’s financing agreements at maturity without renewal, and considered the mitigating
actions identified by the Directors as available responses to liquidity risks.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a period of
at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the Company has applied the UK Corporate Governance Code, we have nothing material
to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors
considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant
sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Real Estate Credit Investments Limited
65
Annual Report and Accounts 2023
Independent Auditor’s Report to the Members of Real Estate
Credit Investments Limited
(continued)
5.1. Key Judgement in the valuation of bilateral loan and bond portfolio
Key audit matter
description
The bilateral loan and bond investments of £351.5 million (2022: £295.9 million) make up 84%
(2022: 66%) of total assets and are a key value driver for the Company’s Net Asset Value (NAV).
As the Company’s investments are measured at fair value, the discount rate that should be used
to calculate the present value of future cash flows should be the market yield prevailing at the
valuation date.
Management has made a judgement that for these instruments that are highly bespoke and are
not adequately comparable to other market positions, the initial effective yield of investment is
considered an appropriate representative of the current market yield at the valuation date. This is
the key judgement made by management in the valuation of the investment portfolio.
This has contributed to a risk of fraud and error associated with the valuation approach applied
particularly around the fixed income investments. This has become of more importance as a result
of the changes in the macroeconomic environment and the movement in market yield during the
year.
This judgement is described as one of the key sources of estimation uncertainty in note 3 and 15
to the financial statements. This is further described in the Audit and Risk Committee Report on
pages 56-59.
How the scope of our
audit responded to
the key audit matter
To respond to the key audit matter, we have performed the following audit procedures:
•
Obtained an understanding of, and tested the operating effectiveness of the controls around the
valuation process.
• Challenged management’s use of bond or loan’s initial effective yield as a representative of
market yield by performing management enquiries and assessing the assumptions used.
• Analysed the bilateral loans and bonds investment portfolio by comparing the yield of each fixed
interest rate loan or bond with the relevant range of market yields at the valuation date using
independent expert third-party data.
• Analysed the yields implicit in loans and bonds issued during the year and compared with the
yields of more seasoned loans to evaluate management’s assertion that the yield of the
Company’s assets is dislocated from the movement in market yields.
•
Searched for contradictory evidence by verifying a number of data points including the
realisation of loans and bonds during the year and the pricing of bonds and loans valued using
market comparables.
• Assessed the financial statements related disclosures to evaluate whether they appropriately
explain judgements made by management, including the associated assumptions, and highlight
the sensitivity to changes in those assumptions.
Key observations
We concluded that the judgement applied by management, in arriving at the fair value of the
Company’s self-originated bonds and loans investments, was reasonable, and that the resulting
valuations are not materially misstated. We also concluded that the related disclosures are appropriate.
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Annual Report and Accounts 2023
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the
scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
£6.7 million (2022: £6.9 million)
Basis for determining
materiality
2% (2022: 2%) of the Net Asset Value as at 31 March
Rationale for the
benchmark applied
Net Asset Value is the most appropriate benchmark as it is considered one of the principal
considerations for members of the Company in assessing financial performance and represents
total Shareholders’ interest.
£337.0m
NAV
Group materiality
Audit Committee reporting threshold
£6.7m
£0.34m
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at
70% of materiality for the 2023 audit (2022: 70%). In determining performance materiality, we considered the following factors:
•
our risk assessment, including our assessment of the Company’s overall control environment, including that of the
administrator; and
•
our past experience of the audit, which has indicated a low number of corrected and uncorrected misstatements identified in
prior periods.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £336,000
(2022: £343,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of
the financial statements.
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Annual Report and Accounts 2023
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Company and its environment, including internal control, and
assessing the risks of material misstatement. Audit work to respond to the risks of material misstatement was performed
directly by the audit engagement team.
7.2. Our consideration of the control environment
The accounting function for the Company is provided by a third-party administrator. In performing our audit, we obtained an
understanding of relevant controls at the administrator that are relevant to the business processes of the Company. We have
obtained an understanding of and tested the operating effectiveness of the control procedures at the investment manager
level around the key valuation judgement used in the valuation but we have not followed a control reliance approach.
7.3. Our consideration of climate-related risks
In planning our audit, we have considered the potential impact of climate change on the Company’s business and its
financial statements.
The Company continues to develop its assessment of the potential impacts of environmental, social and governance
(“ESG”) related risks, including climate change, as outlined on page 32.
We performed our own qualitative risk assessment of the potential impact of climate change on the Company’s account
balances and classes of transactions.
We have also read the annual report to consider whether they are materially consistent with the financial statements and
our knowledge obtained in the audit.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our
auditor’s report thereon. The Directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this
gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors’ responsibility statement, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless
the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Independent Auditor’s Report to the Members of Real Estate
Credit Investments Limited
(continued)
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Annual Report and Accounts 2023
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with
our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to
which our procedures are capable of detecting irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
•
the nature of the industry and sector, control environment and business performance including the design of the Company’s
remuneration policies, key drivers for the investment manager and Directors’ remuneration, and performance targets;
• the Company’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was last
approved by the Board on 13 June 2023;
•
results of our enquiries of management and the Audit Committee about their own identification and assessment of the risks
of irregularities;
• any matters we identified having obtained and reviewed the Company’s documentation of their policies and procedures
relating to:
—
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of
non-compliance;
—
detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
—
the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
•
the matters discussed among the audit engagement team and relevant internal specialists, including tax, valuations
and industry specialists regarding how and where fraud might occur in the financial statements and any potential
indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for
fraud and identified the greatest potential for fraud in the following area:
•
Key Judgement in the valuation of bilateral loan and bond portfolio
In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory frameworks that the Company operates in, focusing on
provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in
the financial statements. The key laws and regulations we considered in this context included the Companies (Guernsey) Law,
2008, the Listing Rules and relevant tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements
but compliance with which may be fundamental to the Company’s ability to operate or to avoid a material penalty. These
included the Company’s regulatory licences under The Protection of Investors (Bailiwick of Guernsey) Law, 2020.
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Annual Report and Accounts 2023
11.2. Audit response to risks identified
As a result of performing the above, we identified key judgement in the valuation of bilateral loan and bond portfolio as a key audit
matter related to the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also
describes the specific procedures we performed in response to that key audit matter.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect on the financial statements;
•
enquiring of management and the Audit Committee concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
misstatement due to fraud;
•
reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing
correspondence with the Guernsey Financial Services Commission; and
•
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and
other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias;
and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members
including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations
throughout the audit.
Report on other legal and regulatory requirements
12. Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate
Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained
during the audit:
• the Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and
any material uncertainties identified set out on page 46;
•
the Directors’ explanation as to its assessment of the Company’s prospects, the period this assessment covers and
why the period is appropriate set out on page 17;
•
the Directors’ statement on fair, balanced and understandable set out on page 60;
• the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on
page 54;
• the section of the annual report that describes the review of effectiveness of risk management and internal control
systems set out on pages 52-53; and
•
the section describing the work of the Audit Committee set out on pages 56-59.
Independent Auditor’s Report to the Members of Real Estate
Credit Investments Limited
(continued)
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Annual Report and Accounts 2023
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting records
Under the Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
•
we have not received all the information and explanations we require for our audit; or
•
proper accounting records have not been kept; or
• the financial statements are not in agreement with the accounting records.
We have nothing to report in respect of these matters.
14. Other matters which we are required to address
14.1. Auditor tenure
Following the recommendation of the Audit Committee as a result of the most recent tender process, we were appointed by
the Board of Directors on 13 June 2018 to audit the financial statements for the year ending 31 March 2019 and subsequent
financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm
is 18 years, covering the years ending 31 March 2006 to 31 March 2023.
14.2. Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance
with ISAs (UK).
15. Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Section 262 of the Companies
(Guernsey) Law, 2008. Our audit work has been undertaken so that we might state to the Company’s members those matters
we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these
financial statements will form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on
the National Storage Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This
auditor’s report provides no assurance over whether the annual financial report has been prepared using the single electronic
format specified in the ESEF RTS.
John Clacy, FCA
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
21 June 2023
Real Estate Credit Investments Limited
71
Annual Report and Accounts 2023
 
Note
31 Mar 2023
GBP
31 Mar 2022
GBP
Interest income
6
31,922,543
26,981,790
Net (loss)/gain on financial assets and liabilities at fair value through profit or loss
4
(1,264,149)
5,351,474
Other income
7,940
37,017
Operating income
30,666,334
32,370,281
Operating expenses
5
(6,143,662)
(5,841,351)
Profit before finance costs
24,522,672
26,528,930
Finance costs
6
(3,972,353)
(1,954,553)
Net profit
20,550,319
24,574,377
Other comprehensive income
–
–
Total comprehensive income
20,550,319
24,574,377
Earnings per share
Basic and diluted
8
9.0p
10.7p
Weighted average shares outstanding
Number
Number
Basic and diluted
8
229,332,478
229,332,478
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the financial statements.
Statement of Comprehensive Income
For the year ended 31 March 2023
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Annual Report and Accounts 2023
 
Statement of Financial Position
As at 31 March 2023
Note(s)
31 Mar 2023
GBP
31 Mar 2022
GBP
Non-current assets
Financial assets at fair value through profit or loss
9,15
400,741,910
394,341,104
400,741,910
394,341,104
Current assets
Cash and cash equivalents
9
14,081,343
47,385,138
Cash collateral at broker
9,17
2,383,962
5,204,692
Derivative financial assets
9,10
1,756,118
–
Other assets
9
27,345
22,708
18,248,768
52,612,538
Total assets
418,990,678
446,953,642
Equity and liabilities
Equity
Reserves
336,965,907
343,935,484
336,965,907
343,935,484
Current liabilities
Financing agreements
9,13
80,154,134
100,368,732
Derivative financial liabilities
9,10
–
1,072,792
Other liabilities
9,11
1,870,637
1,576,634
82,024,771
103,018,158
Total liabilities
82,024,771
103,018,158
Total equity and liabilities
418,990,678
446,953,642
Shares outstanding
14
229,332,478
229,332,478
Net asset value per share
£1.47
£1.50
The accompanying notes form an integral part of the financial statements.
Signed on behalf of the Board of Directors by:
Bob Cowdell
Susie Farnon
Director
Director
21 June 2023
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Annual Report and Accounts 2023
 
Statement of Changes in Equity
For the year ended 31 March 2023
Note
31 Mar 2023
GBP
Balance as at 31 March 2022
343,935,484
Total comprehensive income
20,550,319
Dividends
7
(27,519,896)
Balance as at 31 March 2023
336,965,907
Note
31 Mar 2022
GBP
Balance as at 31 March 2021
346,881,003
Total comprehensive income
24,574,377
Dividends
7
(27,519,896)
Balance as at 31 March 2022
343,935,484
The accompanying notes form an integral part of the financial statements.
Real Estate Credit Investments Limited
74
Annual Report and Accounts 2023
 
Statement of Cash Flows
For the year ended 31 March 2023
Note
31 Mar 2023
GBP
31 Mar 2022
GBP
Net profit
20,550,319
24,574,377
Purchases of investment portfolio
(158,644,471)
(258,415,073)
Repayments of investment portfolio
158,975,081
269,398,579
Movement in realised and unrealised gains on investment portfolio
4
(4,466,341)
(2,742,188)
Net movement on derivative financial assets and liabilities
(2,828,910)
3,333,189
Interest income
(31,922,543)
(26,981,790)
Interest expense
3,972,353
1,954,553
Operating cash flows before movement in working capital
(14,364,512)
11,121,647
Decrease/(increase) in cash collateral at broker
2,820,730
(4,260,712)
Increase in other assets
(4,637)
(1,788)
Increase/(decrease) in other liabilities
200,882
(63,571)
Movement in working capital
3,016,975
(4,326,071)
Interest received
29,657,468
26,201,075
Net cash flow from operating activities
18,309,931
32,996,651
Financing activities
Dividends paid to Shareholders
(27,519,896)
(27,519,896)
Payments under financing agreements
(689,398,896)
(617,305,171)
Proceeds under financing agreements
666,877,816
639,854,100
Finance costs paid
(1,572,750)
(1,861,358)
Net cash outflow from financing activities
(51,613,726)
(6,832,325)
Net (decrease)/increase in cash and cash equivalents
(33,303,795)
26,164,326
Cash and cash equivalents at the start of the year
47,385,138
21,220,812
Cash and cash equivalents at the end of the year
14,081,343
47,385,138
The accompanying notes form an integral part of the financial statements.
Real Estate Credit Investments Limited
75
Annual Report and Accounts 2023
 
Notes to the Financial Statements
For the year ended 31 March 2023
1. General Information
Real Estate Credit Investments Limited (“RECI” or the “Company”) was incorporated in Guernsey, Channel Islands on
6 September 2005 with registered number 43634. The Company commenced its operations on 8 December 2005.
The Company invests in real estate debt secured by commercial or residential properties in the United Kingdom and
Western Europe, focusing primarily on those countries where it sees the changing dynamics in the real estate debt market
offering a sustainable deal flow for the foreseeable future. The Company has adopted a long-term strategic approach to
investing and focuses on identifying value in real estate debt. In making these investments the Company uses the expertise
and knowledge of its Alternative Investment Fund Manager (“AIFM”), Cheyne Capital Management (UK) LLP (“Cheyne” or
the “Investment Manager”).
The Company’s shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade
on the Main Market of the London Stock Exchange. The shares offer investors a levered exposure to a portfolio of real estate
credit investments and aim to pay a quarterly dividend.
The Company’s investment management activities are managed by the Investment Manager, who is also the AIFM. The
Company has entered into an Investment Management Agreement (the “Investment Management Agreement”) under
which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company’s
Board of Directors. The Company is an Alternative Investment Fund (“AIF”) within the meaning of the Alternative Investment
Fund Managers Directive (“AIFMD”) and accordingly the Investment Manager has been appointed as the AIFM of the
Company, which has no employees of its own. For its services, the Investment Manager receives a monthly Management
Fee, expense reimbursements and accrues a Performance Fee (see Note 18). The Company has no ownership interest in the
Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and provides all administration services to the Company in this
capacity. The Bank of New York Mellon (International) Limited is the Depositary and undertakes the custody of assets. Aztec
Financial Services (Guernsey) Limited is the Company Secretary.
2. Significant Accounting Policies
Statement of Compliance
The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
(“IFRS”), which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”),
and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International
Accounting Standards Committee (“IASC”) that remain in effect, together with applicable legal and regulatory requirements
of Guernsey Law and the Listing Rules of the UK Listing Authority. The same accounting policies, presentation and methods
of computation have been followed in these financial statements as were applied in the preparation of the Company’s audited
financial statements for the year ended 31 March 2022.
New Standards, Amendments and Interpretations Issued and Effective for the Financial Year Beginning 1 April 2022
Amendment to International Accounting Standards (“IAS”) 37 – Onerous Contracts: Cost of Fulfilling a Contract
The amendments apply a ‘direct related cost approach’. The costs that relate directly to a contract to provide goods or services
include both incremental costs and an allocation of costs directly related to contract activities. General and administrative
costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the
contract. The amendments must be applied prospectively to contracts for which an entity has not yet fulfilled its obligations at
the beginning of the annual reporting period in which it first applies the amendments. The amendment is intended to provide
clarity and help ensure consistent application of the standard. Entities that have previously applied the incremental cost
approach will see increased provisions to reflect the intrusion of costs related directly to contract activities. Judgement will
be required in determining which costs are ‘directly related to contract activities’, but the guidance in IFRS 15 Revenue from
Contracts with Customers will be relevant. The amendments to IAS 37 are effective for annual periods beginning on or after
1 January 2022. The amendments have no material impact on the financial statements of the Company.
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Annual Report and Accounts 2023
 
New Standards, Amendments and Interpretations Issued but not Effective for the Financial Year Beginning 1 April 2022
and not Early Adopted
Title
Effective for
periods beginning
on or after
IFRS 17
Insurance Contracts
1 January 2023
Amendments to IAS 1 –
Classification of Liabilities as Current or Non-current
1 January 2023
Amendments to IAS 8 –
Definition of Accounting Estimates
1 January 2023
Amendments to IAS 1 and IFRS Practice Statement 2 –
Disclosure of Accounting Policies
1 January 2023
Amendments to IAS 12 –
Deferred Tax related to Assets and Liabilities arising from a Single Transaction
1 January 2023
IFRS 17 Insurance Contracts has no material impact on the financial statements as the Company does not have
insurance contracts.
Amendments to IAS 1 affect only the presentation of liabilities in the Statement of Financial Position and not the amount or timing
of recognition of any asset, liability income or expenses, or the information that the Company discloses about those items.
Amendments to IAS 8 are intended to provide preparers of financial statements with greater clarity as to the definition of
accounting estimates, particularly in terms of the difference between accounting estimates and accounting policies. Earlier
application is permitted. The Company did not early adopt these amendments and expects that the amendments will have
no material impact on the financial statements.
Amendments to IAS 1 and IFRS Practice Statement 2 provide guidance and examples to help entities apply materiality
judgements to accounting policy disclosures. Determining whether accounting policies are material or not requires use
of judgement. Earlier application is permitted. The Company did not early adopt these amendments and expects that the
amendments will have no material impact on the financial statements.
Amendments to IAS 12 clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement
(having considered the applicable tax law) whether such deductions are attributable for tax purposes to the liability recognised
in the financial statements (and interest expense) or to the related asset component (and interest expense). Earlier application is
permitted. The Company did not early adopt these amendments and expects that the amendments will have no material impact
on the financial statements.
Basis of Preparation
The financial statements of the Company are prepared under IFRS on the historical cost or amortised cost basis except for
financial assets and liabilities classified at fair value through profit or loss which have been measured at fair value.
The functional and presentation currency of the Company is British Pounds (“GBP” or “£”) which the Board considers best
represents the economic environment in which the Company operates.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in preparing the financial statements as, after due
consideration, they consider that the Company has adequate resources to continue in operational existence for a period of
at least twelve months from the date of signing the audited financial statements.
The Investment Manager performed an evaluation of each of its positions in light of all macroeconomic factors on operating
models and valuations, and performed a granular analysis of the future liquidity profile of the Company. A detailed cash flow
profile of each investment was completed, incorporating the probability of likely delays to repayments, other stress tests (and
additional cash needs).
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Annual Report and Accounts 2023
 
Taking account of the updated forecasting, the Directors consider that the cash resources available as at 31 March 2023
of £14.1 million (31 March 2022: £47.4 million), together with the cash collateral at broker of £2.4 million (31 March 2022:
£5.2 million), the liquidity of the market bond portfolio and the financing available through activities such as repurchase
agreements as described in Note 13, are sufficient to cover normal operational costs and current liabilities, including the
proposed dividend, and the expected funding of loan commitments as they fall due for a period of at least twelve months from
the date of signing the audited financial statements. The Directors note that a key assumption adopted in the going concern
analysis is that leverage through repurchase agreements is not withdrawn. Net debt (leverage minus cash) as at 31 March
2023 was 19.1% (31 March 2022: 14.0%).
Notwithstanding the Directors’ belief that this assumption remains justifiable, the Directors have also determined a number
of mitigations to address a scenario where all outstanding repurchase agreements are required to be settled as they fall
due. Whilst there would be a number of competing strategic factors to consider before implementation of such options, the
Directors believe that these are credible and can generate sufficient liquidity to enable the Company to meet its obligations
as they fall due. Such strategies include further sales of assets within the bond portfolio, cessation or delay of any future
dividends, obtaining longer-term and non-recourse financing, and entering into some off-balance sheet financing agreements
which have partial recourse to the Company.
In carrying out the Company’s strategy, the Investment Manager undertakes the following measures:
• An initial and continuing detailed evaluation of each of its positions in light of the various impacts of changing economic
circumstances on operating models and valuations;
•
Positive engagement with all borrowers and counterparties; and
•
Continued granular analysis of the future liquidity profile of the Company.
As disclosed in Note 19, as at 31 March 2023, the Company had committed £572.0 million into the loan and bond portfolio of
which £367.8 million had been funded (31 March 2022: £522.9 million commitment of which £284.4 million had been funded).
The Investment Manager models these expected commitments and only funds if the borrowers meet specific business plan
milestones.
In consideration of this additional stressed scenario and mitigations identified, the Directors consider that the Company has
adequate resources to continue in operational existence for a period of at least twelve months from the date of signing the
financial statements.
Financial Assets at Fair Value Through Profit or Loss
The Company classifies its investments based on both the Company’s business model for managing those financial assets and
the contractual cash flow characteristics of the financial assets. The portfolio of financial assets is managed and performance
is evaluated on a fair value basis. The Company is primarily focused on fair value information and uses that information to
assess the assets’ performance and to make decisions. The Company has not taken the option to irrevocably designate
any equity securities at fair value through other comprehensive income. The contractual cash flows of the Company’s debt
securities are not solely principal and interest, and these securities are neither held for the purpose of collecting contractual
cash flows nor held both for collecting contractual cash flows and for sale. The collection of contractual cash flows is only
incidental to achieving the Company’s business model’s objective. Consequently, all investments are measured at fair
value through profit or loss. The gain or loss on reassessment of fair value is recognised immediately in the Statement of
Comprehensive Income.
The interest receivable from loans and bonds were reported as part of financial assets at fair value through profit or loss.
The related interest income and expense remained to be included under interest income and expense accounts.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
78
Annual Report and Accounts 2023
 
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient portfolio management are measured at fair value through profit
or loss. The gain or loss on reassessment of fair value is required to be split into the amount of change in fair value attributable
to changes in credit risk of the liability, presented in other comprehensive income, and the remaining amount presented in profit
or loss. The Company’s gain or loss on reassessment of fair value is recognised immediately in the Statement of Comprehensive
Income as the Company has taken its position to recognise the full amount of change in the fair value in profit or loss.
Financial Assets at Amortised Cost
A financial asset is measured at amortised cost if it is held within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding. This includes cash and cash equivalents, cash
collateral at broker and other assets.
Financial Liabilities at Amortised Cost
Other liabilities include all other liabilities.
Initial Measurement
Financial assets and liabilities at fair value through profit or loss are measured initially at fair value, with transaction costs
for such financial assets and liabilities being recognised directly in the Statement of Comprehensive Income.
Financial assets and liabilities at amortised cost are measured initially at their fair value plus any directly attributable
incremental costs of acquisition or issue.
Purchases and sales of financial assets and liabilities at fair value through profit or loss are accounted for at trade date.
Realised gain/(loss) on disposals of financial assets and liabilities is calculated using the first-in, first-out (“FIFO”) method.
Subsequent Measurement
After initial measurement, the Company measures financial assets which are classified as at fair value through profit or loss,
at fair value.
Financial liabilities held for trading are measured at fair value through profit or loss, and all other financial liabilities are
measured at amortised cost, unless the fair value option is applied. The Company classifies its financial liabilities as at fair value
through profit or loss.
After initial measurement, the Company measures financial assets and liabilities which are classified as at amortised cost,
at amortised cost using effective interest method.
Recognition
All regular way purchases and sales of financial assets or liabilities are recognised on the trade date, which is the date on which
the Company commits to purchase or sell the financial assets or liabilities. Regular way purchases or sales are purchases or
sales of financial assets or liabilities that require delivery of assets within the period generally established by regulation or
convention in the market place.
Real Estate Credit Investments Limited
79
Annual Report and Accounts 2023
 
Derecognition
The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire
or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IFRS 9.
The Company derecognises a financial liability when the obligation specified in the contract is discharged, cancelled or
has expired.
 
Cash and Cash Equivalents
Cash and cash equivalents includes amounts held in interest-bearing accounts and overdraft facilities with original maturities
of less than three months.
 
Derivative Financial Instruments
Derivative financial instruments used by the Company to manage its exposure to foreign exchange arising from operational,
financing and investment activities are accounted for as financial assets or liabilities at fair value through profit or loss.
Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on revaluation of fair
value is recognised immediately in the Statement of Comprehensive Income.
The fair value of an open forward foreign exchange contract is calculated as the difference between the contracted rate and
the current forward rate that would close out the contract on the reporting date. The change in value is recorded in net gains
on financial assets and liabilities through profit or loss in the Statement of Comprehensive Income. Realised gains and losses
are recognised on the maturity of a contract, or when the contract is closed out and they are transferred to realised gains or
losses in the Statement of Comprehensive Income.
Fair Value
All financial assets carried at fair value are initially recognised at fair value which is equivalent to cost and subsequently
re-measured at fair value. If independent prices are unavailable, the fair value of the financial asset is estimated by reference
to market information which includes, but is not limited to, broker marks, prices of comparable assets and using pricing models
incorporating discounted cash flow techniques and valuation techniques such as modelling.
These pricing models apply assumptions regarding asset specific factors and economic conditions generally, including
delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be
relevant to each financial asset.
The objective of a fair value measurement is to determine the price at which an orderly transaction would take place between
market participants on the measurement date, rather than the price arrived at in a forced liquidation or distressed sale. Where
the Company has considered all available information and there is evidence that the transaction was forced, it will not use
such a transaction price as being determinative of fair value.
Note 3 provides specific information regarding the determination of fair value for the Company’s bonds and loans.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount is reported within assets and liabilities when there is a legally
enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and
settle the liability simultaneously.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
80
Annual Report and Accounts 2023
 
Expenses Attributable to Any Issue of Shares
The expenses of the Company attributable to any issue of shares are those which are necessary to implement such an issue
including registration, listing and admission fees, corporate finance fees, printing, advertising and distribution costs, legal fees
and other applicable expenses. They are recognised as incurred and are included as a reduction to Reserves in the Statement
of Changes in Equity.
Foreign Currency Transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the Statement of Financial Position date are translated to GBP at the
foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are recognised in gains and losses on financial assets and liabilities at fair
value through profit or loss in the Statement of Comprehensive Income. Foreign currency denominated non-monetary assets
and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the
date of transaction.
Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to GBP
at foreign exchange rates ruling at the reporting date. Differences arising on translation of these non-monetary assets and
liabilities between valuation points are recognised in the Statement of Comprehensive Income.
Interest Income
Interest income from financial assets at fair value through profit or loss are recognised within interest income in the Statement
of Comprehensive Income using the effective interest method.
 
Expenses
All expenses are included in the Statement of Comprehensive Income on an accrual basis.
 
Taxation
The Company is a tax-exempt Guernsey limited company and accordingly, no provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short term in nature and are accordingly stated at their nominal value as
reduced by appropriate allowances for estimated irrecoverable amounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the substance of the underlying contractual arrangements. An equity
instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Financial liabilities and equity are initially recorded at the proceeds received, net of issue costs and subsequently at amortised
cost. The shares have been classified as equity.
Real Estate Credit Investments Limited
81
Annual Report and Accounts 2023
 
Other Liabilities
Other liabilities are not interest-bearing and are stated at their accrued value.
Segment Information
The Company has two reportable segments, being the Bilateral Loan and Bond Portfolio and the Market Bond Portfolio.
The real estate debt investment strategy of the Company focuses on secured commercial and residential debt in the
United Kingdom and Western Europe. Each segment engages in separate business activities and the results of each segment
are regularly reviewed by the Board of Directors which fulfils the role of Chief Operating Decision Maker for performance
assessment purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of efficient portfolio management. There are no material
revenues arising from the use of repurchase agreements and transaction costs are embedded in the price of the investments
and are not separately identifiable. Securities purchased under agreements to resell are valued at fair value and adjusted for
any movements in foreign exchange rates. Interest rates vary for each repurchase agreement and are set at the initiation of
each agreement. It is the lender’s policy to take custody of securities purchased under repurchase agreements and to value
the securities on a daily basis to protect the lender in the event the securities are not repurchased by the Company. The
Company will generally post additional collateral if the market value of the underlying securities decline and are less than the
face value of the repurchase agreements plus any accrued interest. In the event of default on the obligation to repurchase, the
lender has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realisation and/or retention of the collateral or proceeds may be subject to
legal proceedings.
Financial Guarantee
Financial guarantees require the Company to make specified payments to reimburse the holder of the guarantee for a loss it
incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt
instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees
received. This amount is amortised on a straight line basis over the life of the guarantee. At the end of each reporting period,
the guarantees are measured at the higher of (i) the amount of the loss allowance for the guaranteed exposure determined
based on the expected loss model and (ii) the remaining unamortised balance of the amount at initial recognition.
3. Critical Accounting Judgements and Key Sources of Estimation Uncertainty
In the process of applying the Company’s accounting policies (described in Note 2), the Company has determined that the
following judgements and estimates have the most significant effect on the amounts recognised in the financial statements:
Critical Accounting Judgements
Classification of Financial Assets at Fair Value Through Profit or Loss
As described on pages 78-79, classification and measurement of financial assets under IFRS 9 are driven by the entity’s business
model for managing financial assets and the contractual cash flow characteristics of those financial assets.
As further described on pages 78-79, the contractual cash flow characteristics for loan investments are not solely payments of
principal and interest. For the loans held via Stornoway Finance S.à r.l. and ENIV S.à r.l., the Company receives the return for each
underlying loan net of expenses and so it is not considered to be a basic lending arrangement under the standard. As such, these
loan investments are required to be measured at fair value through profit or loss. The loans held via ENIV S.à r.l. are listed and
considered bonds.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
82
Annual Report and Accounts 2023
 
In making the judgement regarding Stornoway Finance S.à r.l. and ENIV S.à r.l., the Directors have considered the power
the Company has to influence the investment decisions of the Special Purpose Vehicle housing the underlying loans and
where the Company holds the majority interest it has been determined that the contractual cash flow characteristics for a
basic lending arrangement would be met. However, IFRS 9 also requires an assessment of the business model within which
assets are held. In the case of the Company’s loan investments the Directors have determined that they monitor and evaluate
business performance, manage risk and compensate the Investment Manager based on fair value measures. The business
model is therefore not solely for holding and collecting contractual cash flows to maturity and requires all loan investments to
be measured at fair value through profit or loss.
The Company’s bond investments are classified and measured at fair value through profit or loss in accordance with the above
fact pattern.
Were it to be determined that the business model for managing financial assets and the contractual cash flow characteristics
of those financial assets were not described above, these assets would be classified and measured at amortised cost with
provisions made for expected credits losses and changes to expected credit losses at each reporting date.
Fully let London office asset
Real Estate Credit Investments Limited
83
Annual Report and Accounts 2023
 
Key Sources of Estimation Uncertainty
Valuation of Financial Assets at Fair Value Through Profit or Loss
In accordance with the Company’s accounting policies, the fair value of market bonds is based on quoted prices where such
prices are available from a third party in a liquid market.
The Company has made loans and bonds into structures to gain exposure to real estate secured debt in, but not limited to,
the United Kingdom and Western Europe. These loans are not traded in an active market and there are no independent quotes
available for these loans. The fair values of financial instruments that are not traded in an active market are determined using
valuation techniques such as discounted cash flows models. The rate used to discount future cash flows represents key source of
estimation uncertainty that has material impact on the valuation of the investment portfolio. In the absence of market observable
inputs, this uncertainty translates into a wide range of appropriate discount rates. The Investment Manager believes that the loan
or bond’s own initial effective interest rate represents the most appropriate point estimate within that range.
The Investment Manager has considered relevant geopolitical and macro economic factors including the rise of market interest
rate and continues to believe that this key judgement remains appropriate due to the bespoke nature of the investment portfolio
and the dislocation between the yield of these assets and the market interest rate. The fair value of these loans is linked directly
to the value of the real estate loans in the underlying structure the Company invests in, which are determined based on modelled
expected cash flows (drawdown principal and interest repayments, and maturity dates) with effective yields ranging from 6.2% to
13.2% (31 March 2022: 5.1% to 13.3%).
As highlighted in the long-term viability section in the Strategic Report, the Investment Manager performed an evaluation of each
of its positions, taking into account all relevant geopolitical and macro economic risks, on its operating models and valuations. A
detailed cash flow profile of each investment was completed, incorporating the probability of likely delays to repayments, other
stress tests (and additional cash needs); these were taken into account in the modelled expected cash flows for 31 March 2023.
Adjustments in the fair value of the real estate loans are considered in light of changes in the credit quality of the borrower and
underlying property collateral. On origination of the loan, the Investment Manager performs due diligence on the borrower
and related security/property. This includes obtaining a valuation of the underlying property (to assess loan-to-value of the
investment). In most instances, the terms of the loan require periodic re-valuation of the underlying property to check against
loan-to-value covenants.
The valuation policy for contingent fees and potential profit participations provided for in contractual arrangements is to mark
them at fair value, which in most instances have been obtained for a zero or de-minimis cost, and they are held at this value until
there is sufficient evidence that the position should be revalued.
The Company has been closely monitoring this and indeed all other material macro sources of uncertainty related developments,
such as inflation, supply chains, and other events (including The Ukraine effect, Covid-19 pandemic, the effects of climate change
and cyber security), to ensure that these updated assumptions and any potential impact have been reflected in the valuation of
financial assets at fair value through profit or loss as at 31 March 2023. Future valuation might change significantly in the future.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
84
Annual Report and Accounts 2023
Hotel and golf club house development in the Algarve, Portugal
Real Estate Credit Investments Limited
85
Annual Report and Accounts 2023
 
4. Net (Losses)/Gains on Financial Assets and Liabilities at Fair Value Through Profit or Loss
31 Mar 2023
GBP
31 Mar 2022
GBP
Net gains/(losses)
Net (losses)/gains on market bond portfolio
(8,155,580)
369,084
Net gains on bilateral loan and bond portfolio
12,621,921
2,373,105
Net (losses)/gains on foreign exchange instruments and other foreign currency
transactions
(5,730,490)
2,609,285
Net (losses)/gains on financial assets and liabilities at fair value through
profit or loss
(1,264,149)
5,351,474
5. Operating Expenses
Note
31 Mar 2023
GBP
31 Mar 2022
GBP
Investment management, administration and depositary fees
Investment management fees
18
4,296,688
4,367,244
Administration fees
18
276,595
261,584
Depositary fees
18
65,137
65,969
4,638,420
4,694,797
Other operating expenses
Legal fees
456,542
298,801
Directors’ fees
215,000
213,625
Audit fees
140,775
115,250
Corporate secretary fees
96,214
87,761
Registrar fees
60,000
(23,127)
Fees to auditor for non-audit services
39,500
37,500
D&O insurance fees
24,547
(9,558)
Regulatory body expenses
23,732
36,266
Research fees
35,000
60,388
Other expenses
413,932
329,648
1,505,242
1,146,554
Total operating expenses
6,143,662
5,841,351
The ongoing costs of the Company are shown in the Key Information Document (KID) published on the Company’s website.
The total figure of 2.23% (31 March 2022: 2.36%) is made up of the Investment Manager’s fee of 1.25% (31 March 2022: 1.25%),
other ongoing costs of 0.42% (31 March 2022: 0.46%), and finance costs (which are disclosed separately in the financial
statements) of 0.56% (31 March 2022: 0.65%). The finance costs may vary and are only incurred to increase the overall returns
to investors.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
86
Annual Report and Accounts 2023
 
6. Interest Income and Finance Costs
The following table details interest income and finance costs from financial assets and liabilities for the year:
31 Mar 2023
GBP
31 Mar 2022
GBP
Interest income
Real Estate Credit Investments – market bond portfolio
4,960,473
3,241,955
Real Estate Credit Investments – bilateral loan and bond portfolio
26,747,271
23,729,772
Cash and cash equivalents and other receivables
214,799
10,063
Total interest income
31,922,543
26,981,790
Finance costs:
Cost of financing agreements
(3,972,353)
(1,954,553)
Total finance costs
(3,972,353)
(1,954,553)
7. Dividends
31 Mar 2023
GBP
31 Mar 2022
GBP
Share dividends
Fourth dividend for the year ended 31 March 2022/31 March 2021
6,879,974
6,879,974
First dividend for the year ended 31 March 2023/31 March 2022
6,879,974
6,879,974
Second dividend for the year ended 31 March 2023/31 March 2022
6,879,974
6,879,974
Third dividend for the year ended 31 March 2023/31 March 2022
6,879,974
6,879,974
Dividends paid to Shareholders in the year
27,519,896
27,519,896
The total dividends paid during the financial year ended 31 March 2023 amounted to 12 pence per share (31 March 2022:
12 pence per share).
Under Guernsey law, companies can pay dividends provided they satisfy the solvency test prescribed under the Companies
(Guernsey) Law, 2008 as amended, which considers whether a company is able to pay its debts when they become due and
whether the value of a company’s assets is greater than its liabilities.
The Directors considered that the Company satisfied the solvency test for all dividend payments during the period from
1 April 2022 to 31 March 2023.
Real Estate Credit Investments Limited
87
Annual Report and Accounts 2023
 
8. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
31 Mar 2023
31 Mar 2022
Net earnings attributable to shares (GBP)
20,550,319
24,574,377
Weighted average number of shares for the purposes of basic and diluted earnings per share
229,332,478
229,332,478
Earnings per share
Basic and diluted (pence)
9.0
10.7
9. Categories of Financial Instruments
The following table details the categories of financial assets and liabilities held by the Company at the year end date.
31 Mar 2023
GBP
31 Mar 2022
GBP
Assets
Financial assets at fair value through profit or loss:
Real Estate Credit Investments – market bond portfolio
49,243,187
98,450,555
Real Estate Credit Investments – bilateral loan and bond portfolio
351,498,723
295,890,549
Investments at fair value through profit or loss
400,741,910
394,341,104
Derivative financial assets:
Forward foreign exchange contracts
1,756,118
–
Financial assets at amortised cost:
Cash and cash equivalents
14,081,343
47,385,138
Cash collateral at broker
2,383,962
5,204,692
Other assets
27,345
22,708
Total assets
418,990,678
446,953,642
Liabilities
Financial liabilities at fair value through profit or loss:
Financing agreements
80,154,134
100,368,732
Derivative financial liabilities:
Forward foreign exchange contracts
–
1,072,792
Financial liabilities at amortised cost:
Other liabilities
1,870,637
1,576,634
Total liabilities
82,024,771
103,018,158
The value of the bond portfolio assets was £231.4 million as at 31 March 2023, excluding accrued interest of £4.3 million
(31 March 2022: £282.4 million, excluding accrued interest of £2.1 million).
See Note 16 for a summary of the movement in fair value in the Company’s investments for the year.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
88
Annual Report and Accounts 2023
 
10. Derivative Contracts
Forward Foreign Exchange Contracts
The following forward foreign exchange contracts were open as at 31 March 2023:
Counterparty
Settlement date
Buy currency
Buy amount
Sell currency
Sell amount
Unrealised gain
GBP
The Bank of New York Mellon
19 May 2023
GBP
163,823,152
EUR
(184,070,000)
1,756,118
Unrealised gain on forward foreign exchange contracts
1,756,118
The following forward foreign exchange contracts were open as at 31 March 2022:
Counterparty
Settlement date
Buy currency
Buy amount
Sell currency
Sell amount
Unrealised loss
GBP
The Bank of New York Mellon
20 May 2022
GBP
161,432,186
EUR
(192,000,000)
(1,072,792)
Unrealised loss on forward foreign exchange contracts
(1,072,792)
11. Other Liabilities
31 Mar 2023
GBP
31 Mar 2022
GBP
Investment management, depositary and administration fees payable
Investment management fees payable
358,118
365,525
Depositary fees payable
33,090
27,086
Administration fees payable
41,939
48,392
433,147
441,003
Other operating payables
Interest payable
287,023
193,902
Registrar fees payable
88,917
28,917
Legal fees payable
73,800
27,199
Directors' fees payable
53,750
48,812
Audit fees payable
30,775
85,250
Corporate secretary fees payable
18,750
18,750
Research fees payable
17,644
17,839
Other expense accruals
866,831
714,962
1,437,490
1,135,631
Total liabilities
1,870,637
1,576,634
Real Estate Credit Investments Limited
89
Annual Report and Accounts 2023
 
12. Structured Entities Not Consolidated
As at 31 March 2023 and 31 March 2022, the Company had an interest in the following structured entities. The Company
has concluded that the unlisted entities in which it invests, but that it does not consolidate, meet the definition of structured
entities because:
•
the Company has obtained funds for the purpose of providing investors with investment management services;
•
the Company’s business purpose, which was communicated directly to investors, is investing solely for returns from capital
appreciation and investment income; and
• the performance of investments is measured and evaluated on a fair value basis.
This conclusion will be reassessed on an annual basis, if any of these criteria or characteristics change.
As a result, the Company recognises its interests in structured entities as investments at fair value through profit or loss in
accordance with IFRS 10 and therefore there is no requirement to consolidate in full. However, in line with IFRS 12 Disclosure
of Interest in Other Entities, the details of the interests in the unconsolidated structured entities are disclosed below. The
maximum exposure to loss is the carrying amount of the financial assets held which is equal to the fair value of loans and units
in funds as at 31 March 2023 and 31 March 2022.
31 March 2023
Name
Fair value
of loans***
GBP
Undrawn
commitment
GBP
Nature and purpose
of the entity
Location
Equity
held
Percentage
held
Other
exposure*
Real Estate Loan Funding
(RELF)**
Earlsfield
12,612,167
707,833
To invest in
Earlsfield real estate
United
Kingdom
No
– %
No
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
Lifestory real estate
Luxembourg
No
– %
No
Pamplona
3,084,772
1,469,228
To invest in
Pamplona real estate
Luxembourg
No
– %
No
Ruby
2,807,680
8,577,320
To invest in
Ruby real estate
Luxembourg
No
– %
No
Cheyne French Funding
Sub-Fund 3
11,650,667
3,630,876
To invest in
Cheyne French
Funding Sub-Fund 3
real estate
France
No
– %
No
Cheyne French Funding
Sub-Fund 8
22,663,417
7,788,478
To invest in
Cheyne French
Funding Sub-Fund 8
real estate
France
No
– %
No
Cheyne French Funding
Sub-Fund 9
8,470,707
2,477,156
To invest in
Cheyne French
Funding Sub-Fund 9
real estate
France
No
– %
No
*
Other exposure indicates if the investment in the structured entity comes with any associated potential valuation uplift. These can include, but are not limited to: profit share, variable exit
fees, and exposure to enterprise value uplift.
**
The total loan exposure on RELF includes financing within the RELF structure.
*** This amount excludes interest receivables.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
90
Annual Report and Accounts 2023
 
31 March 2022
Name
Fair value
of loans***
GBP
Undrawn
commitment
GBP
Nature and purpose
of the entity
Location
Equity
held
Percentage
held
Other
exposure*
Real Estate Loan Funding
(RELF)**
Earlsfield
6,665,679
6,687,513
To invest in
Earlsfield real estate
United
Kingdom
No
– %
No
Cheyne French Funding
Sub-Fund 3
8,418,393
6,278,159
To invest in
Cheyne French
Funding Sub-Fund 3
real estate
France
No
– %
No
Cheyne French Funding
Sub-Fund 7
339,932
665,701
To invest in
Cheyne French
Funding Sub-Fund 7
real estate
France
No
– %
No
Cheyne French Funding
Sub-Fund 8
15,806,040
13,480,123
To invest in
Cheyne French
Funding Sub-Fund 8
real estate
France
No
– %
No
Cheyne French Funding
Sub-Fund 9
7,206,459
3,322,312
To invest in
Cheyne French
Funding Sub-Fund 9
real estate
France
No
– %
No
*
Other exposure indicates if the investment in the structured entity comes with any associated potential valuation uplift. These can include, but are not limited to: profit share, variable exit
fees, and exposure to enterprise value uplift.
**
The total loan exposure on RELF includes financing within the RELF structure.
*** This amount excludes interest receivables.
The Company did not provide support/assistance without a contractual obligation to do so during the year other than as part
of normal investment activity, and the Company has no intention to provide support/assistance to the entities.
Real Estate Credit Investments Limited
91
Annual Report and Accounts 2023
 
13. Financing Agreements
The Company enters into repurchase agreements with several banks to provide leverage. This financing is collateralised
against certain of the Company’s bond portfolio assets with a fair value totalling £139.9 million (31 March 2022: £212.7 million)
and a weighted average cost of 5.86% (31 March 2022: 1.2%) per annum. The contractual maturity period of the repurchase
arrangements is 3 to 6 months (31 March 2022: 3 to 6 months).
This short-term financing is shown as a current liability in the Statement of Financial Position whereas the collateralised assets
are shown as non-current. The movement in financing agreement amounting to £22.5 million (31 March 2022: £20.6 million)
and finance cost amounting to £1.6 million (31 March 2022: £1.9 million) are shown as financing activity in the Statement of
Cash Flows.
During the financial year ended 31 March 2023, the Company continued to maintain some off-balance sheet financing
agreements. These facilities entered into during the previous financial year do not have recourse to the Company, and the
lending is structured using off-balance entities, and secured against the specific loans involved. The aggregate amount of
these off-balance sheet loans as at 31 March 2023 was £20.6 million (31 March 2022: £2.8 million).
During the financial year ended 31 March 2023, the Company also entered into an off-balance sheet financing agreement
which does have partial recourse to the Company. The amount of partial recourse commitment as at 31 March 2023 was
£2.9 million (31 March 2022: £Nil). No expected loss from providing this guarantee has been recognised in these financial
statements and no additional collateralisation has been paid as of year end.
14. Share Capital
The issued share capital of the Company consists of shares and its capital as at the year end is represented by the net
proceeds from the issuance of shares and profits retained up to that date. The Company does not have any externally imposed
capital requirements. As at 31 March 2023, the Company had capital of £337.0 million (31 March 2022: £343.9 million).
31 Mar 2023
Number of Shares
31 Mar 2022
Number of Shares
Authorised Share Capital
Shares of no par value each
Unlimited
Unlimited
Shares issued and fully paid
Balance at the start of the year
229,332,478
229,332,478
Balance at the end of the year
229,332,478
229,332,478
The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to
Shareholders. The Company’s overall strategy was outlined in the Prospectus which is published on the Company’s website.
The capital structure of the Company consists of the equity of the Company as disclosed in the Statement of Changes in Equity.
15. Financial Instruments and Associated Risks
The Company’s investment activities expose it to various types of risk which are associated with the financial instruments and
markets in which it invests. The Company’s risk management policies seek to minimise the potential adverse effects of these
risks on the Company’s financial performance.
The financial risks to which the Company is exposed include market price risk, interest rate risk, liquidity risk, currency risk,
credit risk, prepayment and re-investment risk. In certain instances as described more fully below, the Company enters into
derivative transactions in order to help mitigate particular types of risk.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
92
Annual Report and Accounts 2023
 
(a) Market Risk
Market risk is the risk that the fair value and future cash flows of a financial instrument will fluctuate because of changes
in market factors. Market risk comprises interest rate risk, currency risk and other price risk.
The Company’s strategy on the management of market risk is driven by the Company’s investment objectives detailed in Note
1 which in respect of the Company is to invest primarily in debt secured by commercial or residential properties in the United
Kingdom and Western Europe.
The Company’s market risk is managed on a daily basis by the Investment Manager in accordance with policies and
procedures detailed below.
The sensitivity analysis below is based on a change in one variable while holding all other variables constant. In practice, this
is unlikely to occur, and changes in some of the assumptions may be correlated – for example, change in foreign currency rate
and change in market values. In addition, as the sensitivity analysis uses historical data as a basis for determining future events,
it does not encompass all possible scenarios, particularly those that are of an extreme nature.
(i) Currency Risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
foreign exchange rates.
The Company is exposed to currency risk to the extent that foreign exchange rates fluctuate as it has financial instruments that
are denominated in currencies other than GBP.
The Company manages its foreign exchange exposure forward foreign exchange contracts. These instruments are detailed in
Note 10.
The currency profile of the Company, including derivatives at fair value, at the year end date was as follows:
As at 31 March 2023:
Monetary
Assets
GBP
Monetary
Liabilities
GBP
Forward Foreign
Currency Exchange
Contracts
GBP
Net
currency
exposure
GBP
Currency
GBP
242,499,869
(60,997,713)
163,823,152
345,325,308
EUR
174,728,260
(21,027,058)
(162,067,034)
(8,365,832)
USD
6,431
–
–
6,431
417,234,560
(82,024,771)
1,756,118
336,965,907
As at 31 March 2022:
Monetary
Assets
GBP
Monetary
Liabilities
GBP
Forward Foreign
Currency Exchange
Contracts
GBP
Net
currency
exposure
GBP
Currency
GBP
236,062,842
(50,234,754)
161,432,186
347,260,274
EUR
210,880,008
(51,710,612)
(162,504,978)
(3,335,582)
USD
10,792
–
–
10,792
446,953,642
(101,945,366)
(1,072,792)
343,935,484
Real Estate Credit Investments Limited
93
Annual Report and Accounts 2023
 
As at 31 March 2023, had the GBP strengthened by 5% or 10% in relation to all currency exposure of the Company with all
other variables held constant, the equity of the Company and the net profit/(loss) per the Statement of Comprehensive Income
would have changed by the amounts shown below. The analysis is performed on the same basis for 2022.
By 5%
31 Mar 2023
GBP
31 Mar 2022
GBP
EUR
(418,292)
(166,779)
USD
322
540
Total
(417,970)
(166,239)
By 10%
31 Mar 2023
GBP
31 Mar 2022
GBP
EUR
(836,583)
(333,558)
USD
643
1,079
Total
(835,940)
(332,479)
A 5% or 10% weakening of the GBP against the above currencies would have resulted in an equal but opposite effect on the
equity of the Company and net profit/(loss) per the Statement of Comprehensive Income to the amounts shown above, on the
basis that all other variables remained constant.
The sensitivity analysis reflects how the equity of the Company would have been affected by changes in the relevant risk
variable that were reasonably possible at the reporting date. Management has determined that a fluctuation of 5% in foreign
exchange rates is reasonably possible, considering the environment in which the Company operates.
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value and future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company’s interest rate risk is managed by the Investment Manager in accordance with policies and procedures
detailed below.
The Company invests in fixed and floating rate real estate related debt assets (which includes loans and bonds). Interest rate
risk arises from the effects of fluctuations in the prevailing levels of market interest rates on the fair value of financial assets
and liabilities and future cash flow.
A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite
directions. When market interest rates rise, prices of fixed-rate bonds fall. However, as explained under the key sources
of estimation uncertainty in Note 3, the Investment Manager believes that the loan or bond’s own initial effective interest
rate represents the most appropriate rate to discount future cash flows. The use of this judgement limits the impact of the
fluctuations in market interest rates on the valuation of the bilateral bonds and loans portfolio.
The Investment Manager has considered relevant geopolitical and macro economic factors including the rise of market
interest rate during the year and continues to believe that this key judgement remains appropriate due to the bespoke
nature of the investment portfolio and the dislocation between the yield of these assets and the market interest rate.
Had movement in market interest rates been fully reflected in the valuation of fixed-rate assets held by the Company, the
estimated impact of a rise of 1% (100 basis points) or 5% (500 basis points) (31 March 2022: 1% (100 basis points) or 5% (500
basis points)) on the net asset value (“NAV”) of the Company, is a decrease of £6.3 million or £31.7 million (31 March 2022:
£3.7 million or £18.3 million), respectively. A decrease in interest rates by 100 basis points or 500 basis points is estimated to
result in an increase in the NAV of the Company by a similar amount. These estimates are calculated based on the fair value
of the fixed-rate securities including accrued interest held by the Company as at 31 March 2023 and 31 March 2022, and
their weighted average lives.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
94
Annual Report and Accounts 2023
 
The interest rate profile of the Company as at 31 March 2023 was as follows:
Fixed
GBP
Floating
GBP
Non-interest bearing
GBP
Total
GBP
Financial assets at fair value through profit or loss
287,268,165
99,067,135
14,406,610
*
400,741,910
Cash and cash equivalents
–
14,081,343
–
14,081,343
Cash collateral at broker
–
2,383,962
–
2,383,962
Derivative financial assets
– forward foreign exchange contracts
–
–
1,756,118
1,756,118
Other assets
–
–
27,345
27,345
Financing agreements
–
(80,154,134)
–
(80,154,134)
Other liabilities
–
–
(1,870,637)
(1,870,637)
Total
287,268,165
35,378,306
14,319,436
336,965,907
* Accrued interest related to financial assets at fair value through profit or loss.
The maturity profile of the Company as at 31 March 2023 was as follows:
Within
one year
GBP
One to
five years
GBP
Over
five years
GBP
Total
GBP
Financial assets at fair value through profit or loss
81,576,013
150,257,260
168,908,637
400,741,910
Cash and cash equivalents
14,081,343
–
–
14,081,343
Cash collateral at broker
2,383,962
–
–
2,383,962
Derivative financial assets
– forward foreign exchange contracts
1,756,118
–
–
1,756,118
Other assets
27,345
–
–
27,345
Financing agreements
(80,154,134)
–
–
(80,154,134)
Other liabilities
(1,870,637)
–
–
(1,870,637)
Net Assets
17,800,010
150,257,260
168,908,637
336,965,907
Real Estate Credit Investments Limited
95
Annual Report and Accounts 2023
 
The interest rate profile of the Company as at 31 March 2022 was as follows:
Fixed
GBP
Floating
GBP
Non-interest bearing
GBP
Total
GBP
Financial assets at fair value through profit or loss
292,129,354
90,070,215
12,141,535
*
394,341,104
Cash and cash equivalents
–
47,385,138
–
47,385,138
Cash collateral at broker
–
5,204,692
–
5,204,692
Other assets
–
–
22,708
22,708
Financing agreements
–
(100,368,732)
–
(100,368,732)
Derivative financial assets
– forward foreign exchange contracts
–
–
(1,072,792)
(1,072,792)
Other liabilities
–
–
(1,576,634)
(1,576,634)
Total
292,129,354
42,291,313
9,514,817
343,935,484
* Accrued interest related to financial assets at fair value through profit or loss.
The maturity profile of the Company as at 31 March 2022 was as follows:
Within
one year
GBP
One to
five years
GBP
Over
five years
GBP
Total
GBP
Financial assets at fair value through profit or loss
82,272,397
121,831,664
190,237,043
394,341,104
Cash and cash equivalents
47,385,138
–
–
47,385,138
Cash collateral at broker
5,204,692
–
–
5,204,692
Other assets
22,708
–
–
22,708
Financing agreements
(100,368,732)
–
–
(100,368,732)
Derivative financial assets
– forward foreign exchange contracts
(1,072,792)
–
–
(1,072,792)
Other liabilities
(1,576,634)
–
–
(1,576,634)
Net Assets
31,866,777
121,831,664
190,237,043
343,935,484
The value of the asset backed securities will fluctuate as a result of changes in market prices (other than those arising from
interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer or all factors
affecting all instruments traded in the market. The loans in the Company are recorded at fair value on initial recognition and
subsequent measurement.
A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some
interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as “IBOR reform”). As at 31 March 2023, it
is still unclear when the announcement that will set a date for the termination of the publication of IBORs will take place.
Nevertheless, the Company has updated provisions for all IBOR indexed exposures as at 31 March 2023. As the Company has
minimal IBOR exposure, IBOR reform does not have any significant impact on the Company’s financial statements.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
96
Annual Report and Accounts 2023
 
(b) Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has
entered into with the Company. Credit risk is generally higher for a non-exchange traded financial instrument because the
counterparty for non exchange traded financial instruments is not backed by an exchange-clearing house.
The Company has credit exposure in relation to its financial assets. The Company invested in financial assets with The Bank of
New York Mellon with the credit quality of AA- (31 March 2022: AA-) according to Standard and Poor’s.
The Company’s maximum exposure to credit risk for financial assets is as follows:
31 Mar 2023
GBP
31 Mar 2022
GBP
Instrument
Financial assets at fair value through profit or loss
400,741,910
394,341,104
Cash and cash equivalents
14,081,343
47,385,138
Cash collateral at broker
2,383,962
5,204,692
Derivative financial assets
1,756,118
–
Total
418,963,333
446,930,934
Market Bond Portfolio
The Company is subject to the risk that issuers of asset backed securities in which it invests may default on their obligations
and that certain events may occur which have an immediate and significant adverse effect on the value of such instruments.
There can be no assurance that an issuer of an instrument in which the Company invests will not default or that an event
which has an immediate and significant adverse effect on the value of such instruments will not occur, and that the Company
will not sustain a loss on the transaction as a result. The Company seeks to mitigate this risk by monitoring its portfolio of
investments, reviewing the underlying credit quality of its counterparties, on a monthly basis.
Bilateral Loan and Bond Portfolio
The Company is subject to the risk that the underlying borrowers to the loans and bonds in which it invests, may default on
their obligations and that certain events may occur which have an immediate and significant adverse effect on the value of
such instruments. Any loan and bond may become a defaulted obligation for a variety of reasons, including non-payment of
principal or interest, as well as covenant violations by the borrower in respect of the underlying loan and bond documents.
In the event of any default on the Company’s investment in a loan and bond by the borrower, the Company will bear a risk of
loss of principal and accrued interest on the loan and bond, which could have a material adverse effect on the Company’s
investment.
There can be no assurance that a borrower will not default, that there will not be an issue with the underlying real estate
security or that an event which has an immediate and significant adverse effect on the value of these loans and bonds will not
occur, and that the Company will not sustain a loss on the transaction as a result. The Company seeks to mitigate this risk by
performing due diligence and monitoring its portfolio of investments, reviewing the underlying credit quality of its borrowers,
performance of the underlying asset, and loan and bond covenants compliance against financial information received and the
performance of the security, on a quarterly basis.
The Company’s total investment in bilateral loan and bond portfolio as at 31 March 2023, amounted to £337.4 million (31 March
2022: £284.4 million) which excludes any interest accrued on loans and bonds at this date.
Real Estate Credit Investments Limited
97
Annual Report and Accounts 2023
 
Derivative Contracts
Transactions involving derivative instruments are usually with counterparties with whom the Company has signed master
netting agreements. Master netting agreements provide for the net settlement of contracts with the same counterparty in the
event of default. The impact of the master netting agreements is to reduce credit risk from the amounts shown as derivative
financial assets on the Statement of Financial Position. The credit risk associated with derivative financial assets subject to a
master netting arrangement is eliminated only to the extent that financial liabilities due to the same counterparty will be settled
after the assets are realised.
The exposure to credit risk reduced by master netting arrangements may change significantly within a short period of time
as a result of transactions subject to the arrangement. The corresponding assets and liabilities have not been offset on the
Statement of Financial Position.
Below are the derivative assets by counterparty and details of the collateral received and pledged by the Company as at
31 March 2023:
Derivative Type
Counterparty
Value of
derivative
assets
GBP
Collateral
received
GBP
Collateral
pledged
GBP
Net (if greater
than zero)
GBP
Forward foreign exchange contracts
The Bank of New York Mellon
1,756,118
–
–
1,756,118
Below are the derivative liabilities by counterparty and details of the collateral received and pledged by the Company as at
31 March 2022:
Derivative Type
Counterparty
Value of
derivative
liabilities
GBP
Collateral
received
GBP
Collateral
pledged*
GBP
Net (if greater
than zero)
GBP
Forward foreign exchange contracts
The Bank of New York Mellon
(1,072,792)
–
1,072,792
–
* Over collateralisation is not presented in this table. The amount of collateral reflected is limited to the amount of the derivative liabilities.
Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled
transactions is considered small due to the short settlement period involved and the high credit quality of the brokers used.
The Company monitors the credit quality and financial positions of the brokers used to further mitigate this risk.
Custody
The Company monitors its credit risk by monitoring the credit quality of The Bank of New York Mellon (International)
Limited, as reported by Standard & Poor’s or Moody’s.
If the credit quality or the financial position of The Bank of New York Mellon (International) Limited were to deteriorate
significantly, the Investment Manager will seek to move the Company’s assets to another bank. The Bank of New York
Mellon (International) Limited is a Trust Company with a credit quality of Aa2 at the reporting date (31 March 2022: Aa2)
according to Moody’s.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
98
Annual Report and Accounts 2023
 
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities.
The Company’s liquidity risk is managed on a daily basis by the Investment Manager in accordance with policies and procedures
detailed below. Where needed, the Investment Manager will liquidate positions to increase cash or reduce leverage.
The following tables detail the current and long-term financial liabilities of the Company at the year end date:
As at 31 March 2023:
Less than 1 month
GBP
1-3 months
GBP
3 months to 1 year
GBP
Greater than 1 year
GBP
Financial liabilities excluding derivatives
– Financing agreements
26,808,659
41,612,299
11,733,176
–
– Other liabilities
–
1,870,637
–
–
26,808,659
43,482,936
11,733,176
–
As at 31 March 2022:
Less than 1 month
GBP
1-3 months
GBP
3 months to 1 year
GBP
Greater than 1 year
GBP
Financial liabilities excluding derivatives
– Financing agreements
17,803,852
72,328,125
10,236,755
–
– Other liabilities
–
1,576,634
–
–
17,803,852
73,904,759
10,236,755
–
The market for subordinated asset backed securities including real estate loans into which the Company is invested, is
illiquid. In addition, investments that the Company purchases in privately negotiated (also called “over-the-counter” or
“OTC”) transactions may not be registered under relevant securities laws or otherwise may not be freely tradable, resulting
in restrictions on their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws. As a result of this illiquidity, the Company’s ability to vary its
portfolio in a timely fashion and to receive a fair price in response to changes in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which there is not a readily available market, the Company’s
ability to deal in any such investment or obtain reliable information about the value of such investment or risks to which such
investment is exposed may be limited.
(d) Valuation of Financial Instruments
IFRS 13 Fair Value Measurement requires disclosures surrounding the level in the fair value hierarchy in which fair value
measurement inputs are categorised for assets and liabilities measured in the Statement of Financial Position. The
determination of the fair value for financial assets and financial liabilities for which there is no observable market price requires
the use of valuation techniques as described in Note 2, Significant accounting policies and in Note 3, Critical accounting
judgements and key sources of estimation uncertainty. For financial instruments that trade infrequently and have little price
transparency, fair value is less objective.
Real Estate Credit Investments Limited
99
Annual Report and Accounts 2023
 
The Company categorises investments using the following hierarchy as defined by IFRS 13:
•
Level 1 – Quoted market prices in an active market for an identical instrument;
•
Level 2 – Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than
active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data; and
•
Level 3 – Valuation techniques using significant unobservable inputs. This category includes all instruments where the
valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant impact
on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments
where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of the Company’s financial assets and liabilities measured at fair value
at the year end date:
As at 31 March 2023:
Level 1
GBP
Level 2
GBP
Level 3
GBP
Total
GBP
Current assets
Forward foreign exchange contracts
–
1,756,118
–
1,756,118
Non-current assets
Real Estate Credit Investments – market bond portfolio
–
29,763,268
19,479,919
49,243,187
Real Estate Credit Investments – bilateral loan and bond portfolio
–
–
351,498,723
351,498,723
Total non-current assets
–
29,763,268
370,978,642
400,741,910
Current liabilities
Real Estate Credit Investments – repurchase agreements
–
(80,154,134)
*
–
(80,154,134)
–
(48,634,748)
370,978,642
322,343,894
* Includes repurchase agreements related to Level 3 investments.
As at 31 March 2022:
Level 1
GBP
Level 2
GBP
Level 3
GBP
Total
GBP
Non-current assets
Real Estate Credit Investments – market bond portfolio
–
98,450,555
–
98,450,555
Real Estate Credit Investments – bilateral loan and bond portfolio
–
–
295,890,549
295,890,549
Total non-current assets
–
98,450,555
295,890,549
394,341,104
Current liabilities
Forward foreign exchange contracts
–
(1,072,792)
–
(1,072,792)
Real Estate Credit Investments – repurchase agreements
–
(100,368,732)
*
–
(100,368,732)
–
(2,990,969)
295,890,549
292,899,580
* Includes repurchase agreements related to Level 3 investments.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined based
on the lowest level input that is significant to the fair value measurement in its entirety.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
100
Annual Report and Accounts 2023
 
The fair value of forward foreign exchange contracts is the difference between the contracts price and reported market prices
of the underlying contract variables. These are included in Level 2 of the fair value hierarchy.
The fair value of the repurchase agreements is valued at cost or principal and is included in Level 2 of the fair value hierarchy.
The fair values of investments that trade in markets that are not considered to be active but are valued based on quoted
market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2.
These include investment grade corporate bonds (“Real Estate Credit Investments”).
As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions,
valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market
information. In cases where material discounts are applied, the positions will be valued as Level 3.
The Company obtains pricing reports from independent vendors for bonds where prices are not directly observable in the
market. These bonds are classified as Level 3 in the fair value hierarchy. Please refer to Valuation of Financial Assets at Fair
Value Through Profit or Loss in Note 3 for further details which describes the weighting of the valuation between observable
prices from comparable bonds and the valuation result based on proprietary sector curve discount yields is a key unobservable
input in deriving fair value of the investments. A 50% weighting to each data point has been applied and the fair value range
generated by the two approaches is £0.2 million (31 March 2022: £2.5 million). The sector curve discount yields used range
from 4.8% to 11.9% (31 March 2022: 4.0% to 14.0%). Applying a discount yield +/-2% to the valuation would reduce/increase the
fair value at 31 March 2023 by £(1.7) million and £1.6 million (31 March 2022: £(2.5) million and £2.6 million) respectively.
The Company makes loans into structures to gain exposure to real estate secured debt in the United Kingdom and Western
Europe. These loans are not traded in an active market and there are no independent quotes available for these loans. Such
holdings are classified as Level 3 investments. The fair value of these loans is linked directly to the value of the real estate loans
that the underlying structures invests in, which are determined based on modelled expected cash flows (drawdown principal
and interest repayments, and maturity dates) with effective yields ranging from 6.2% to 13.2% (31 March 2022: 5.1% to 13.3%)
(the unobservable input).
Fair value of the real estate loans is adjusted for changes in the credit quality of both the borrower and the underlying property
collateral, and changes in the market rate on similar instruments where changes are material. No material movements on the
fair value of the real estate loans have been identified and the par value of the loans was used. On origination of the loan, the
Investment Manager performs due diligence on the borrower and related security/property. This includes obtaining a valuation
of the underlying property (to assess loan-to-value of the investment). In most instances, the terms of the loan require periodic
revaluation of the underlying property to check against loan-to-value covenants. All the fees associated with the investments
(arrangement fees, exit fees, etc.) are paid directly to the Company and not paid to the Investment Manager.
Previously, many of the Company’s investments in loans were made through a Luxembourg based entity, Stornoway Finance
S.à r.l. via loan note instruments. The majority of the Company’s investments are now made through another Luxembourg
based entity, ENIV S.à r.l. via separate note instruments. As and when market information, such as market prices from
recognised financial data providers becomes available, the Company will assess the impact on its portfolio of loans and
whether there should be any transfers between levels in the fair value hierarchy.
As at 31 March 2023, the Investment Manager has taken into account movements in market rates, any indications of
impairment, significant credit events or significant negative performance of the underlying property structures, which might
affect the fair value of the loans and bonds. Please refer to page 94 for the effects of movement in market rates.
Real Estate Credit Investments Limited
101
Annual Report and Accounts 2023
 
Level 3 Reconciliation
The following table shows a reconciliation of all movements in the fair value of financial instruments categorised within Level 3
between the beginning and the end of the financial year:
Level 3
31 Mar 2023
GBP
Level 3
31 Mar 2022
GBP
Financial assets at fair value through profit or loss
Opening balance
295,890,549
321,199,802
Total gains recognised in the Statement of Comprehensive Income for the year
10,170,687
2,260,608
Purchases
167,591,125
81,589,656
Sales
(118,994,111)
(109,625,571)
Increase in interest receivable
2,619,692
466,054
Transfer in to Level 3
13,700,700
–
Closing balance
370,978,642
295,890,549
Unrealised gain/(loss) on investments classified as Level 3
at year end
3,840,715
(688,552)
(e) Prepayment and Re-Investment Risk
The Company’s real estate loans have the facility for prepayment. The Company’s exposure to real estate debt securities also
has exposure to potential prepayment risk which may have an impact on the value of the Company’s portfolio. Prepayment
rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond the
Company’s control and consequently cannot be predicted with certainty.
The level and timing of prepayments made by borrowers in respect of the mortgage loans that collateralise certain of the
Company’s investments may have an adverse impact on the income earned by the Company from those investments.
Early prepayments also give rise to increased re-investment risk. If the Company is unable to reinvest such cash in a new
investment with an expected rate of return at least equal to that of the loan repaid, the Company’s net income will be lower
and, consequently, could have an adverse impact on the Company’s ability to pay dividends.
The Investment Manager reviews the prepayment assumptions each quarter and will update as required. These assumptions
are considered through a review of the underlying loan performance information of the securitisations.
16. Segmental Reporting
The Company has adopted IFRS 8 Operating Segments. The standard requires a “management approach”, under which
segment information is presented on the same basis as that used for internal reporting purposes.
Whilst the Investment Manager may make the investment decisions on a day-to-day basis regarding the allocation of funds to
different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board,
even though they may be proposed by the Investment Manager. The Board retains full responsibility as to the major allocation
decisions made on an ongoing basis and is therefore considered the “Chief Operating Decision Maker” under IFRS 8.
The Company invests in Real Estate Credit Investments. The Real Estate Credit Investments may take different forms but
are likely to be: (i) secured real estate loans; and (ii) debentures or any other form of debt instrument, securitised tranches of
secured real estate related debt securities, for example, RMBS and CMBS (together “MBS”). The real estate debt strategy
focuses on secured residential and commercial debt in the United Kingdom and Western Europe, seeking to exploit
opportunities in publicly traded securities and real estate loans.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
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Annual Report and Accounts 2023
 
The Company has two reportable segments, being the Market Bond Portfolio and Bilateral Loan and Bond Portfolio.
For each of the segments, the Board of Directors reviews internal management reports prepared by the Investment Manager
on a quarterly basis. The Investment Manager has managed each of the Market Bond Portfolio and the Bilateral Loan and
Bond Portfolio separately; thus two reportable segments are displayed in the financial statements.
Information regarding the results of each reportable segment is included below. Performance is measured based on segment
profit/(loss), as included in the internal management reports that are reviewed by the Board of Directors. Segment profit/(loss)
is used to measure performance as management believes that such information is the most relevant in evaluating the results.
Year ended 31 March 2023:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Interest income
4,960,473
26,962,070
31,922,543
Net (loss)/gain on financial assets and liabilities at fair value
through profit or loss
(8,155,580)
12,621,921
4,466,341
Reportable segment (loss)/profit
(3,195,107)
39,583,991
36,388,884
Finance costs
(1,783,805)
(2,188,548)
(3,972,353)
Year ended 31 March 2022:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Interest income
3,241,985
23,739,806
26,981,791
Net gain on financial assets and liabilities at fair value through
profit or loss
369,084
2,373,104
2,742,188
Reportable segment profit
3,611,069
26,112,910
29,723,979
Finance costs
(514,412)
(1,440,141)
(1,954,553)
Year ended 31 March 2023:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Reportable segment assets
49,243,187
351,498,723
400,741,910
Non-segmental assets
–
–
18,248,768
Financing agreements
(36,015,629)
(44,138,505)
(80,154,134)
Non-segmental liabilities
–
–
(1,870,637)
Net assets
336,965,907
Year ended 31 March 2022:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Reportable segment assets
98,450,555
295,890,549
394,341,104
Non-segmental assets
–
–
52,612,538
Financing agreements
(51,702,018)
(48,666,714)
(100,368,732)
Non-segmental liabilities
–
–
(2,649,426)
Net assets
343,935,484
Real Estate Credit Investments Limited
103
Annual Report and Accounts 2023
 
Information regarding the basis of geographical segments is presented in the Investment Manager’s Report and is based on
the countries of the underlying collateral.
All segment revenues are from external sources. There are no inter-segment transactions between the reportable segments
during the year. Certain income and expenditure is not considered part of the performance of either segment. This includes
gains/(losses) on net foreign exchange and derivative instruments, expenses and interest on borrowings.
The following table provides a reconciliation between net reportable income and operating profits.
31 Mar 2023
GBP
31 Mar 2022
GBP
Reportable segment profit
36,388,884
29,723,979
Net (losses)/gains on foreign exchange instruments and other foreign currency transactions
(5,730,490)
2,609,285
Other income
7,940
37,017
30,666,334
32,370,281
Operating expenses
(6,143,662)
(5,841,351)
Finance costs
(3,972,353)
(1,954,553)
Net profit
20,550,319
24,574,377
Certain assets are not considered to be attributable to either segment, these include, other receivables and prepayments, cash
and cash equivalents and derivative financial assets.
The following table provides a reconciliation between net total segment assets and total assets.
31 Mar 2023
GBP
31 Mar 2022
GBP
Reportable segment assets
400,741,910
394,341,104
Cash and cash equivalents
14,081,343
47,385,138
Cash collateral at broker
2,383,962
5,204,692
Derivative financial assets
1,756,118
–
Other assets
27,345
22,708
418,990,678
446,953,642
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
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Annual Report and Accounts 2023
 
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
GBP
Bilateral Loan
and Bond
Portfolio
GBP
Total
GBP
Financial assets at fair value through profit or loss
Opening fair value
98,450,555
295,890,549
394,341,104
Purchases
–
158,644,471
158,644,471
Repayments/sales proceeds
(40,697,172)
(118,277,909)
(158,975,081)
(Decrease)/increase in interest receivable
(354,617)
2,619,692
2,265,075
Realised loss on sales
(4,547,798)
(5,408,771)
(9,956,569)
Net movement in unrealised (loss)/gain on investments at fair
value through profit or loss
(3,607,781)
18,030,691
14,422,910
Closing fair value
49,243,187
351,498,723
400,741,910
The following is a summary of the movements in the Company’s investments analysed by the Loan and Bond Portfolios for the
year ended 31 March 2022:
Year ended 31 March 2022:
Market Bond
Portfolio
GBP
Bilateral Loan
and Bond
Portfolio
GBP
Total
GBP
Financial assets at fair value through profit or loss
Opening fair value
80,359,507
310,081,379
390,440,886
Purchases
31,500,000
81,589,656
113,089,656
Repayments/sales proceeds
(14,447,591)
(109,625,571)
(124,073,162)
Increase in interest receivable
669,555
11,471,980
12,141,535
Realised loss on sales
(390,363)
(99,945)
(490,308)
Net movement in unrealised gain on investments at fair value
through profit or loss
759,447
2,473,050
3,232,497
Closing fair value
98,450,555
295,890,549
394,341,104
17. Cash Collateral
The Company manages some of its financial risks through the use of financial derivative instruments which are subject to
collateral requirements. As at 31 March 2023, a total of £2.4 million (31 March 2022: £5.2 million) was due from various financial
institutions under the terms of the relevant arrangements. The cash held by brokers is restricted and is shown as Cash
collateral at broker on the Statement of Financial Position.
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Annual Report and Accounts 2023
 
18. Material Agreements and Related Party Transactions
Loan Investments
Previously, many of the Company’s investments in loans were made through a Luxembourg based entity, Stornoway Finance
S.à r.l. via loan note instruments. The loan investments are now made through another Luxembourg based entity, ENIV S.à r.l.
via separate note instruments. This entity has separate compartments for each loan deal which effectively ringfences each
loan deal. Other funds managed by the Investment Manager may invest pari passu in these compartments.
Investment Manager
The Company is party to an Investment Management Agreement with the Investment Manager, dated 22 February 2017,
pursuant to which the Company has appointed the Investment Manager to manage its assets on a day-to-day basis in
accordance with its investment objectives and policies, subject to the overall supervision and direction of the Board of
Directors.
The Company pays the Investment Manager a Management Fee and a Performance Fee.
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Company
an annual Management Fee of 1.25% on an adjusted NAV, being the NAV of the shares.
During the year ended 31 March 2023, the Management Fee totalled £4.3 million (31 March 2022: £4.4 million), of which
£0.4 million (31 March 2022: £0.4 million) was outstanding at the year end.
Performance Fee
Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Company
a performance fee calculated as ((A-B) x 20% x C) where:
A = the Adjusted Performance NAV per share, as defined in the Prospectus.
B =
the NAV per share as at the first business day of the Performance Period increased by a simple annual rate of return of
7% over the Performance Period or, if no Performance Fee was payable in the previous Performance Period, the NAV per
share on the first business day of the Performance Period immediately following the last Performance Period in which a
Performance Fee was paid (the “Starting Date”) increased by a simple annual rate of return of 7% over the period since the
Starting Date (“Hurdle Assets”).
C =
the time weighted average number of shares in issue in the period since the Starting Date.
On 1 October 2021, the Company entered a new Performance Period which is expected to run until the end date of the quarter
in which the next continuation resolution is passed. As no Performance Fee was payable in the previous Performance Period,
the NAV on which the Hurdle Assets will be determined in accordance with the above formula was the NAV per share of £1.63
as at 2 October 2017 (being the Starting Date of the Performance Period immediately following the last Performance Period in
which a Performance Fee was paid).
During the year ended 31 March 2023 and 31 March 2022, there were no performance fees accrued.
Administration Fee
Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Company a monthly
administration fee based on the prior month gross assets of the Company adjusted for current month subscriptions and
redemptions of the Company at the relevant basis points per annum rate, subject always to a minimum monthly fee £10,000.
During the year ended 31 March 2023, the administration fee totalled £276,595 (31 March 2022: £261,584), of which £41,939
(31 March 2022: £48,392) was outstanding at the year end.
Notes to the Financial Statements
(continued)
For the year ended 31 March 2023
Real Estate Credit Investments Limited
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Annual Report and Accounts 2023
 
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is entitled to receive from the Company an annual Depositary
fee of 0.02% (31 March 2022: 0.02%) of the NAV of the Company. During the year ended 31 March 2023, the Depositary fee
totalled £65,137 (31 March 2022: £65,969). The Company owed £33,090 (31 March 2022: £27,086) to the Depositary at the year
end date.
19. Contingencies and Commitments
As at 31 March 2023, the Company had committed £572.0 million into bilateral loans and bonds of which £367.8 million had
been funded (31 March 2022: £522.9 million commitment of which £284.4 million had been funded).
During the financial year ended 31 March 2023, the Company entered into some off-balance sheet financing agreements
which have partial recourse to the Company. The amount of partial recourse commitment as at 31 March 2023 was £2.9 million
(31 March 2022: £Nil).
20. Subsequent Events
The Directors declared a dividend of 3 pence per share on 21 June 2023.
Since 1 April 2023, RECI received a total of £17.0 million from 2 loans that have repaid.
There have been no other significant events affecting the Company since the year end date that require amendment to or
disclosure in the financial statements.
21. Foreign Exchange Rates Applied to Combined Totals Used in the Preparation of the Financial Statements
The following foreign exchange rates relative to the GBP were used as at the year end date:
Currency
31 Mar 2023
GBP
31 Mar 2022
GBP
EUR
1.14
1.18
USD
1.24
1.32
22. Approval of the Financial Statements
The Annual Report and audited financial statements of the Company were approved by the Directors on 21 June 2023.
Real Estate Credit Investments Limited
107
Annual Report and Accounts 2023
Annual Remuneration Disclosure for the Year to 31 March 2023
Cheyne Capital Management (UK) LLP (“Cheyne”), the Alternative Investment Fund Manager (“AIFM”), has implemented a
Remuneration Policy (“the Policy”) that is applicable to all remuneration matters within the firm, with a particular focus on those
persons who have been identified as having a material impact on the risk profile of the AIF (“Code Staff”). This includes senior
management, risk takers and control functions.
The Policy is in line with Cheyne’s business strategy, objectives, values and long-term interests. As an AIFM, Cheyne’s overall
objective is to achieve attractive and controlled performance and capital growth for all funds under management, including
the AIF and to develop strong long-term relationships with investors. Cheyne’s income is dependent upon the funds for
which it serves as manager or AIFM, and therefore the profit available for distribution under the Policy is dependent upon
the performance of such funds including the AIF. As such, the fulfilment of Cheyne’s objectives is interlinked with the best
interests of Cheyne’s clients, which in turn is in line with the Policy. The Policy promotes effective risk management and does
not tolerate breaches of internal risk guidelines.
Cheyne has a Remuneration Committee (currently the COO and CFO) who report into the Incentivisation Committee
(currently the CEO and President) that oversees the remuneration of individuals, including Code Staff, and approval of the
allocation of profits available for discretionary division among members.
Cheyne was authorised as an AIFM on 22 July 2014. The quantitative disclosures required under Article 22 of AIFMD in
accordance with the European Securities and Markets Authority (“ESMA”) guidance for the year ended 31 March 2023, in
respect of remuneration derived from the AIF are as follows:
Business Area
Number of
Code Staff
AIFM Total
Remuneration
(all variable)
Code Staff
relevant to
the AIF
Remuneration
derived from the
AIF (all variable)
Deferred
Remuneration
derived from
the AIF
Portfolio Management
29
£29,182,131
7
£1,283,214
£280,872
Senior Management
6
£12,014,016
6
£456,120
£119,605
Total
35
£41,196,147
13
£1,739,334
£400,477
Remuneration Code information is provided as required under the FCA Rules.
Appendix I – AIFM Remuneration Policy (Unaudited)
Real Estate Credit Investments Limited
108
Annual Report and Accounts 2023
For the purposes of this disclosure, leverage is any method by which a fund’s exposure is increased. A fund’s exposure may
be increased by using derivatives, by reinvesting cash borrowings, through positions within repurchase or reverse repurchase
agreements, through securities lending or securities borrowing arrangements, or by any other means (such increase referred
to herein as the “Incremental Exposure”). The AIFMD prescribes two methodologies for calculating overall exposure of a fund:
the “gross methodology” and the “commitment methodology”. These methodologies are briefly summarised below.
The commitment methodology takes account of the hedging and netting arrangements employed by a fund at any given
time (purchased and sold derivative positions will be netted where both relate to the same underlying asset). This calculation
of exposure includes all Incremental Exposure as well as a fund’s own physical holdings; and cash. By contrast, the gross
methodology does not take account of the netting or hedging arrangements employed by a Company. This calculation of
exposure includes all Incremental Exposure as well as the Company’s own physical holdings; cash is excluded.
The AIFMD requires that each leverage ratio be expressed as the ratio between a fund’s total exposure (including any
Incremental Exposure) and its NAV. Using the methodologies prescribed under the AIFMD and implementing legislation, the
Company has set a maximum level of leverage, taking into account atypical and volatile market conditions. Leverage will not
exceed the ratio of 5:1 using the commitment methodology and 5:1 using the gross methodology.
The use of leverage, including borrowings, may increase the volatility of the Company’s NAV per share and also amplify any
loss in the value of the Company’s assets.
While the use of borrowing should enhance the total return on the shares where the return on the Company’s underlying
assets is rising and exceeds the cost of borrowing, it will have the opposite effect where the return on the Company’s
underlying assets is falling or rising at a lower rate than the cost of borrowing, reducing the total return on the shares. As a
result, the use of borrowing by the Company may increase the volatility of the NAV per share.
Any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its
NAV (which is likely to adversely affect the price of a share). Any reduction in the number of shares in issue (for example, as a
result of buy-backs or tender offers) will, in the absence of a corresponding reduction in borrowing, result in an increase in the
Company’s level of gearing.
To the extent that a fall in the value of the Company’s investments causes gearing to rise to a level that is not consistent with
the Company’s gearing policy or borrowing limits, the Company may have to sell investments in order to reduce borrowing.
The Company will pay interest on its borrowing. As such, the Company is exposed to interest rate risk due to fluctuations in the
prevailing market rates. The Company may employ hedging techniques designed to reduce the risk of adverse movements in
interest rates. However, such strategies may also result in losses and overall poorer performance than if the Company had not
entered into such hedging transactions.
The risks associated with the derivatives used by the Company and that may contribute to the leverage of the Company are
set out earlier.
Leverage is limited to 500% of NAV of the Company under both the Gross and Commitment approaches. Up to 31 March 2023,
the maximum leverage calculated has been 166.91% for the Gross Approach and 123.99% for the Commitment Approach. In the
year ended 31 March 2022, the maximum leverage calculated has been 161.99% for the Gross Approach and 130.06% for the
Commitment Approach.
Appendix II – AIFM Leverage (Unaudited)
Real Estate Credit Investments Limited
109
Annual Report and Accounts 2023
Core
Assets that benefit from having long-term income.
Core +
Assets that benefit from having strong current income, but do require some
measure of asset management to optimise their income profile and term.
Value add/transitional
Assets that require asset management (typically refurbishment) and re-letting to
secure a core income profile.
Development
Groundworks/Superstructure assets that are to be built from the ground up and are
in the groundworks stage or building the superstructure has commenced. These
typically already benefit from the requisite consent to develop.
Development
Fit-Out – assets that have either been built from the ground up and have reached
the completion of the superstructure (“topped out”), or assets which are in need of
substantial refurbishment works. These typically already benefit from the requisite
consent to develop.
Development
De-Risked – development assets which benefit from being substantially pre-sold
or pre-let.
Real Estate Op-Co/Prop-Co Loan
Loan secured by both the operating company as well as all of the Company’s
real assets.
Performance Measures
NAV per share
The net asset value of the Company divided by the number of shares in issuance at
the relevant reporting date.
Total NAV Return
The return on the movement in the NAV per share at the end of the period together
with all the dividends paid during the period, divided by the NAV per share at the
beginning of the period/year.
Share Price Premium/Discount
The percentage difference between the NAV per share and the quoted price of
each share as at the relevant reporting date.
Dividend Yield
The total dividends paid in the reporting period (per share) divided by the quoted
price of each share as at the relevant reporting date.
Market capitalisation
The number of shares in issuance at the relevant reporting date divided by the
share price at the relevant reporting date.
Glossary
Asset Strategy definitions
Real Estate Credit Investments Limited
110
Annual Report and Accounts 2023
 
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Secretary of the Company
Aztec Financial Services (Guernsey) Limited
PO Box 656
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Corporate Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London, EC2Y 9LY
Registrar
Link Market Services (Guernsey) Limited
Mount Crevelt House
Bulwer Avenue
St. Sampson
Guernsey, GY2 4LH
Depositary
The Bank of New York Mellon (International) Limited
One Canada Square
London, E14 5AL
Registered Office
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Alternative Investment Fund Manager
Cheyne Capital Management (UK) LLP
Stornoway House
13 Cleveland Row
London, SW1A 1DH
Independent Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey, GY1 3HW
UK Transfer Agent
Link Group Limited
10th Floor
Central Square
29 Wellington Street
Leeds, LS1 4DL
Administrator
Citco Fund Services (Guernsey) Limited
PO Box 273
Frances House
Sir William Place
St Peter Port
Guernsey, GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza
Block 6
International Financial Services Centre
Ireland
Dublin 1
Directors and Advisers
Real Estate Credit Investments Limited
111
Annual Report and Accounts 2023
Notes
Real Estate Credit Investments Limited
112
Annual Report and Accounts 2023
Design by Dusted.
Real Estate Credit Investments Limited
East Wing
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3PP
www.realestatecreditinvestments.com