Shift in focus by Cheyne Capital’s listed hedge fund reaps rewards

A change of focus by listed hedge fund Real Estate Credit Investments to concentrate on real estate debt including mortgages backed by residential and commercial property paid off last quarter, as it posted a 7% rise in portfolio value and a 48% jump in profits.

RECI is the sole listed hedge fund in Europe to give investors the chance to exploit dislocation in Europe’s real estate debt market.

Last quarter its shares rose 25%, to a 29 month high of €1.24, driven largely by retail investors, who have also been the primary drivers of a daily turnover of 100,000 shares.

It also posted its six consecutive quarterly profit, at €4.6m, up from €3.1m in the quarter to 30 September.

Investors can buy preference shares, maturing in December 2017 and with an 8% coupon covered 2.3 times, or ordinary equity with a 5% dividend yield, currently trading at a 30% discount to NAV. This is tighter than the 40% discount to NAV on 17 September.

The fund, formerly called Queens Walk Investments and managed by Cheyne Capital’s Shamez Alibhai, is selling down its book of SME loans, UK and European mortgages. This is even though they generated cash of €5.8m last quarter, compared to €3.7m the previous quarter, and easily outdid the manager’s forecast cashflows from them in December, too.

RECI raised about €27m fresh capital in September, and last quarter spent €21m on new residential debt securities. By 28 February it had spent a further €13.2m for the real estate debt portfolio.

This holds bonds at a fair value of €68.3m and a weighted average yield to maturity of 13.2%.

The value of its real estate debt portfolio gained 6.5% in value last quarter. These investments now represent 52.4% of its total assets.

Alibhai told Investment Europe market liquidity and opportunities would govern how rapidly residual assets would be sold off, and any profit would be recycled into the real estate debt portfolio. He already sold one legacy portfolio in January, mainly comprising UK mortgages, at a profit.

Alibhai explained the reasoning for RECI’s new focus: “Our investors appreciate the transparency around the bond portfolio, whose value is marked to market.

“There is also greater liquidity relative to the legacy portfolio though right now, the strategies are doing well and complementing one another.”

RECI is building up its new remit, where values are marked to market, and it will make approximately two thirds of new investments in bonds backed by commercial real estate in the form of CMBS and one third in similar securities, backed by RMBS.

Alibhai said around €500bn of refinancing of European commercial real estate is falling due over three years “so there will be stress, and opportunities. There will be people who do not understand the real estate space and dynamics, and they will sell holdings.

“Also, there are still a lot of motivated sellers looking to reduce their holdings in asset-backed securities.”


David Walker

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