Real Estate Credit
Investments
Limited
Annual Report and Accounts 2022
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
Front cover image:
Co-living development in London
Overview
Overview and Highlights
02
At a Glance
04
About the Company
06
Chairman’s Statement
08
KPIs and Financial Highlights
11
Strategic and Business Review
Objectives
14
Strategic Report
16
Investment Manager’s Report
22
Sustainability Report
26
Governance
Board of Directors
32
Management Team
34
Directors’ Report
36
Remuneration Committee Report
39
Corporate Governance Statement
41
Audit and Risk Committee Report
46
Directors’ Responsibility Statement
49
Financial Statements
Independent Auditor’s Report
52
Statement of Comprehensive Income
62
Statement of Financial Position
63
Statement of Changes in Equity
64
Statement of Cash Flows
65
Notes to the Financial Statements
66
Appendix I – AIFM Remuneration Policy (Unaudited)
92
Appendix II – AIFM Leverage (Unaudited)
93
Directors and Advisers
94
from credit exposure to UK and
Western European real estate markets
Attractive
returns
UK Student Accommodation
Real Estate Credit Investments Limited
01
Annual Report and Accounts 2022
Annual Report and Accounts 2022
Net Assets
£343.9m
(31 March 2021: £346.9m)
Net Profit
£24.6m
(Full year ended 31 March 2021: £37.2m profit)
Total Assets
£447.0m
(31 March 2021: £426.2m)
NAV per share
£1.50
(31 March 2021: £1.51)
What do
we offer
OVERVIEW AND HIGHLIGHTS
As at 31 March 2022
•
Defensive credit exposure to UK and Western European real estate markets
–
Stable and uninterrupted dividends delivered consistently since October 2013
•
Granular portfolio with detailed disclosure
–
63 positions
–
Top position: 12% of full year end NAV (by commitment)
•
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
Highlights
As at 31 March 2022
Real Estate Credit Investments Limited
02
Annual Report and Accounts 2022
Office in Paris
Focus on senior secured credit,
with defensive LTVs
RECI offers
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
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
03
Overview
AT A GLANCE
Our investment
strategy provides
compelling risk-
adjusted returns
Real Estate Credit Investments
(“RECI”) is a closed-ended
investment company which
originates and invests in
real estate debt secured by
commercial or residential
properties in the United Kingdom
and Western Europe.
The Company’s aim is to deliver a stable
quarterly dividend with minimal portfolio
volatility, across economic and credit cycles,
through a levered exposure to real estate
credit investments.
Investments are predominantly in:
Self-Originated Loans and Bonds
Predominantly bilateral senior real estate
loans and bonds.
Market Bonds
Listed real estate debt securities such as
Commercial Mortgage Backed Securities
(CMBS) bonds.
Investment Portfolio Composition
RECI’s investment portfolio is a diversified
book of 63 positions in real estate bonds
and loans.
Portfolio by Geography
(Funded Fair Value)
31 Mar 2022*
31 Mar 2021*
UK
51.4%
60.3%
France
34.2%
26.2%
Spain
4.7%
1.8%
Italy
4.1%
4.3%
Germany
2.6%
2.5%
Portugal
0.9%
2.3%
Finland
0.7%
1.2%
Netherlands
0.1%
0.1%
* Excludes 1.3% (31 March 2021: 1.3%) held in bonds backed by assets in multiple
European countries.
Cheyne Real Estate offices
London,
Paris,
Berlin, and
Madrid
Real Estate Credit Investments Limited
04
Annual Report and Accounts 2022
NAV and Share Price
As at 31 March 2022
Net Assets
£343.9m
Shares Outstanding
229.3m
NAV (pence per share)
£1.50
Share Price (per share)
£1.51
Premium/(Discount)
0.4%
Dividend Yield
8.0%
Market Capitalisation
£345.1m
Total NAV Return*
Half Year Ended 31 March 22
2.9%
Financial Year Ended 31 March 22
6.9%
Prior Financial Year Ended 31 March 21
11.0%
Last Three Financial Years Ended 31 March 22
12.5%
Last Five Financial Years Ended 31 March 22
28.6%
* The NAV total return measures the combined effect of any dividends paid, together
with the rise or fall in the NAV per Share. The NAV total 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 NAV total return is considered an Alternative Performance Measure pursuant to
ESMA Guidelines which is unaudited and outside of the scope of IFRS.
Sector Breakdown
(Funded Fair Value)
21.5%
17.5%
13.6%
12.0%
11.0%
8.0%
4.5%
3.9%
2.9%
2.7%
2.0%
0.4%
£
Mixed Use
82.1m
Hotel
66.8m
Office
51.8m
Student Accommodation
45.8m
Healthcare
42.2m
Housebuilder
30.6m
Residential
17.3m
Leisure
14.8m
Co-Living
11.1m
Retail
10.2m
Logistics
7.9m
Industrial
1.6m
Total
382.2m*
*excluding accrued interest of £12.1m.
190
180
170
160
150
140
130
120
110
100
Share Price
NAV per share
Performance (Pence)
Jan 18
Mar 18
May 18
Ju l 18
Sep 18
Nov 18
Jan 19
Mar 19
May 19
Ju l 19
Sep 19
Nov 19
Jan 20
Mar 20
May 20
Ju l 20
Sep 20
Nov 20
Jan 21
Mar 21
May 21
Ju l 21
Sep 21
Nov 21
Jan 22
Mar 22
Share Price vs NAV
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
05
Overview
ABOUT THE COMPANY
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 leveraged 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 Europe countries. The Real Estate Credit
Investments may take different forms but are likely to be:
(i)
secured real estate loans, debentures or any other
forms of debt instruments (together “Secured Debt”).
Secured real estate loans are typically secured by
mortgages over the property or charges over the shares
of the property-owning vehicle. Individual Secured
Debt investments will have a weighted average life
profile ranging from six months to five years.
Investments in Secured Debt will also be directly or
indirectly secured by one or more commercial or
residential properties, and shall not exceed a
loan-to-value (“LTV”) of 85% at the time of investment;
The Investment Objective of
the Company is to provide
Shareholders with attractive and
stable returns, primarily in the
form of quarterly dividends
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
06
(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.
It is the intention
of the Company
to continue to pay
a stable quarterly
dividend with
the potential for
additional payments
if investment
returns permit
UK Student Accommodation
Real Estate Credit Investments Limited
07
Annual Report and Accounts 2022
Overview
Real Estate Credit Investments Limited
CHAIRMAN’S STATEMENT
I am writing to you about our financial year ended 31 March
2022, which continued to be impacted by Covid-19 and the
various Government measures taken to manage it. There
has been great progress made, with many countries
returning to a degree of normality, driven mostly by
vaccination programmes. Nevertheless, the potential for
further mutations and the need for global vaccination
success, means the pandemic remains a disruptive threat
overshadowing us.
As the last financial year neared its close, the humanitarian
disaster of Russia’s invasion of Ukraine began and continues
as I write, with its attendant economic and geopolitical
shockwaves. While our thoughts are first and foremost
with those affected, I can report that there has been no
direct impact on RECI’s portfolio of investments, either
because of location or the imposition of sanctions by
Western governments.
Late 2021 and this year have seen the return of inflation and
its adverse economic impacts on many households,
something which most people in developed countries have
not seen for over 40 years. Inflation has continued to rise
year to date, fuelled by the war in Ukraine further
exacerbating commodity price increases and continuing
global supply chain constraints. The rise of inflation has led
to central banks increasing interest rates, with the prospect
of further rises to come. RECI’s portfolio composition and
structure positions it well to withstand these challenges, as
further described in the Investment Manager’s Report.
Despite this challenging environment, I am pleased to report
that for the year ended 31 March 2022, RECI delivered for
our Shareholders a total net profit of £24.6 million;
maintained an unchanged dividend of 3 pence per quarter
throughout the year; and saw RECI’s share price return to
trade around NAV.
On 16 September 2021, the Company’s latest four-yearly
continuation vote was passed by Shareholders at our AGM,
with 99.9% of votes cast in favour. Your Board and
Investment Manager are grateful for the support of our
investors and remain committed to continue to deliver
sustainable attractive returns for them going forward.
Financial Performance
RECI reported a total net profit for the financial year ended
31 March 2022 of £24.6 million on year end total assets of
£447.0 million, compared with a £37.2 million net profit in
the year ended 31 March 2021, on year end total assets of
£426.2 million.
The NAV as at 31 March 2022 was £1.50 per share (£1.51 per
share as at 31 March 2021) which, combined with the 12
pence per share of dividends payable in respect of the year
ended 31 March 2022, represents an annualised total return
for Shareholders of 6.9% for the year.
During the financial year ended 31 March 2022, the
Company’s shares traded at an average premium to NAV of
0.7% (14.1% discount for the year ended 31 March 2021).
Total quarterly dividends declared in respect of the financial
year ended 31 March 2022 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 1.84%,
with average gross leverage of £100.5 million or 1.29x NAV.
Throughout the financial year to 31 March 2022, the
Company invested £113.1 million, of which £24.9 million was
funded into real estate loan commitments, £56.7 million into
self-originated real estate bonds, and £31.5 million into
market real estate bonds. RECI also received cash
repayments and interest of £132.2 million in this year.
An attractive sustainable dividend
of 3 pence per quarter and return
to trading around NAV
Bob Cowdell
Chairman
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
08
Financial Year Review
During the financial year, while mindful of balancing prudent
cash retention with utilisation, the Investment Manager
continued to invest into an attractive pipeline of
opportunities offering enhanced returns, which underpin
RECI’s attractive current dividend pay-out of
12 pence per annum, improve dividend cover and provide
the opportunity for NAV growth. The investment was
funded by cash from realisations and repayments and
deploying leverage.
When the financial year began on 1 April 2021, RECI had
gross leverage of 1.22x and leverage net of cash of 1.16x. The
Board and Cheyne continued to consider the appropriate
level of gearing for the Company while weighing up the
market outlook and the emergence of new investment
opportunities; and ended the financial year with gross
leverage of 1.29x (1.14x net of cash). RECI introduced
non-recourse lending on the loan portfolio during the last
financial year and the Directors and Investment Manager
continue to consider potential leverage options at the
Company and portfolio level.
RECI’s share price at the start of the financial year was £1.37,
representing a discount to NAV of 9.4%. Throughout the
year, RECI maintained its 3 pence per share quarterly
dividend; continued to receive realisation proceeds and
repayments; and executed attractive investment
opportunities. This progress was reflected in its share price
which continued to strengthen. The share price had
appreciated 10.2% by the financial year end and the discount
was replaced by a premium of 0.4% as at 31 March 2022.
Since 1 April 2022, the Company’s shares have traded at an
average premium of 0.1%.
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 is working with its service providers to enhance the
Company’s website with the aim of making Shareholder
information more accessible.
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.
The Board remains grateful for the focus and expertise of
Cheyne and our team of advisers who, despite ongoing
Covid-19 disruption to working practices, continued to
support RECI throughout the last financial year.
Board Update
As previously announced, Graham Harrison retired from the
Board at the September 2021 AGM after many years of
valued service.
Following his retirement and Colleen McHugh’s
appointment in March 2021, the Board comprises an equal
representation of male and female Directors.
Since the start of the last financial year, members of the
Board have purchased an aggregate of 42,000 shares
in the Company.
Office in Paris
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
09
Overview
Environmental, Social and Governance Matters (“ESG”)
The Directors continue 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.
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 19-20 of the Strategic Report and pages 26-28 of the
Sustainability Report provide further information about the
Company’s and the Manager’s approach to ESG matters.
Outlook
Nobody can ignore or predict with certainty, the outcome
and impact of the continuing Covid-19 pandemic; the
human tragedy unfolding in Ukraine; the rise of inflation and
interest rates; and the growing cost of living crisis.
Against this background, your Board and Investment
Manager will continue to focus 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.
In these challenging times, the Directors believe that RECI
remains soundly positioned to continue to deliver an
attractive stable dividend to investors seeking a reliable
long-term income stream.
Bob Cowdell
Chairman
23 June 2022
CHAIRMAN’S STATEMENT (CONTINUED)
Real Estate Credit Investments Limited
10
Annual Report and Accounts 2022
Key Performance Indicators
31 Mar 2022
31 Mar 2021
Balance Sheet
Net Asset Value (“NAV”) per share
£1.50
£1.51
Share price
£1.51
£1.37
Premium/(discount)
0.4%
(9.4)%
Average premium/(discount) in year*
0.7%
(14.1)%
Leverage (% of NAV)**
29.4%
22.4%
*
Average premium/(discount) 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 2022
31 Mar 2021
Profit and Loss
Earnings per share
10.7p
16.2p
Dividends per share declared for the year
12.0p
12.0p
NAV total return (including dividends) annualised
6.9%
11.0%
Financial Highlights
31 Mar 2022
31 Mar 2021
Balance Sheet
Cash, cash equivalents and cash held by brokers
£52.6m
£22.2m
Net assets
£343.9m
£346.9m
31 Mar 2022
31 Mar 2021
Profit and Loss
Operating income
£32.4m
£45.3m
Net profit
£24.6m
£37.2m
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
Overview
Real Estate Credit Investments Limited
11
Annual Report and Accounts 2022
Strategic
and Business
Review
In this section
Objectives
14
Strategic Report
16
Investment Manager’s Report
22
Sustainability Report
26
Real Estate Credit Investments Limited
12
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
12
Office in Paris
Real Estate Credit Investments Limited
13
Annual Report and Accounts 2022
Strategic and Business Review
OBJECTIVES
The opportunity set in senior
loans and bonds remains
compelling and sustainable
1
2
Strategic Framework and Performance Highlights
Provide investors with a
diversified portfolio of real
estate credit investments
Deliver a stable
quarterly dividend
with minimal volatility
Progress in Year Ended 31 March 2022
• Over the course of the last financial year
RECI has invested a total of £113.1 million,
of which £24.9 million was funded into real
estate loan commitments, £56.7 million
into self-originated real estate bonds, and
£31.5 million into market real estate bonds.
Progress in Year Ended 31 March 2022
• 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.
Real Estate Credit Investments Limited
14
Annual Report and Accounts 2022
3
4
Exploit opportunities in
the real estate market
Position the Company
to grow through
opportunities the
Investment Manager
is delivering
Newly Invested in year
£113.1m
(as at 31 March 2022)
Return to Shareholders
£27.5m
(as at 31 March 2022)
Investment Portfolio
£382.2m*
(as at 31 March 2022)
*excluding accrued interest of £12.1m.
Progress in Year Ended 31 March 2022
• Investment book has grown to
£382.2 million, excluding £12.1 million of
accrued interest, as at 31 March 2022
which is spread across 63 positions
with a weighted average levered gross
yield of 10.0% and an average loan-to-
value of 62.4%.
• RECI also received cash repayments and
interest of £132.2 million in the year.
Progress in Year Ended 31 March 2022
•
Preservation of post Covid-19 NAV with a
continued focus on lower risk senior credit.
• 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.
Real Estate Credit Investments Limited
15
Annual Report and Accounts 2022
Strategic and Business Review
STRATEGIC REPORT
The Strategic Report describes the business of
the Company and details the principal risks and
uncertainties associated with its activities.
Investment Objective, Investment Policy
and Business Model
The Investment Objective and Investment Policy are set out
on page 6, and further to this, the Company’s business
model is detailed in the Investment Manager’s Report.
There is also an “About the Company” section on page 6
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.
The
Strategic
Report
Real Estate Credit Investments Limited
16
Annual Report and Accounts 2022
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 3.9
years as at 31 March 2022, the usual term of a new loan
at origination is between three to five years, so the
majority of the assets could be expected to be realised
in a three-year period, or shortly thereafter.
The three-year review considers the Company’s cash flows
arising from the loan and bond portfolios, 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
flows 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 Manager when looking at
its own viability, and given the size of the Manager’s
platform away from the Company and the private capital it
manages in numerous other funds, the 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 the pandemic, the war in Ukraine, as
well as inflationary and interest rate pressures and continued
potential Brexit departure impacts. 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.
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. While the Board may seek to enhance NAV
per share and potentially reduce any discount to NAV
through share buybacks, this will only be done when
resources permit and there can be no certainty that they will
do so and/or that an enhancement to share price will be
achieved. No buybacks were made during the year ended
31 March 2022.
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 2022 and at
each subsequent AGM, or earlier at an Extraordinary
General Meeting if the Directors consider it appropriate.
Real Estate Credit Investments Limited
17
Annual Report and Accounts 2022
Strategic and Business Review
STRATEGIC REPORT (CONTINUED)
Target Portfolio Returns and Dividend
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, thereby
helping the Company mitigate potential cash drag when
loan repayments are made.
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
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 14(d) 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 Bonds
– 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 Loans and Bonds Portfolio
– The Company is
subject to the risk that the underlying borrowers to the loans
and bonds in which it invests, may default on their
obligations and that certain events may occur which have an
immediate and significant adverse effect on the value of
such instruments. Any loan and bond may become a
defaulted obligation for a variety of reasons, including
non-payment of principal or interest, as well as covenant
violations by the borrower in respect of the underlying loan
and bond documents. In the event of any default on the
Company’s investment in a loan and bond by the borrower,
the Company will bear a risk of loss of principal and accrued
interest on the loan and bond, which could have a material
adverse effect on the Company’s investment. There can be
no assurance that a borrower will not default, that there will
not be an issue with the underlying real estate security or
that an event which has an immediate and significant
adverse effect on the value of these loans and bonds will not
occur, and that the Company will not sustain a loss on the
transaction as a result. The Company seeks to mitigate this
risk by performing due diligence and monitoring its portfolio
of investments, reviewing the underlying credit quality of its
borrowers, performance of the underlying asset, and loan
and bond covenant compliance against financial information
received and the performance of the security, on a
quarterly basis.
Market Risk
Market risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of
changes in market factors. Market risk is comprised of
interest rate risk, currency risk, price risk and liquidity 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.
Real Estate Credit Investments Limited
18
Annual Report and Accounts 2022
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 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 currency
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
14(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 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.
For further information on risks, please refer to Note 14 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. These currently include: the potential
geopolitical and economic impacts arising from the war in
Ukraine, current and potential future inflationary and interest
rate rises, and the ongoing impacts of Brexit
and the Covid-19 pandemic. 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.
Environmental, Social and Corporate Governance
(“ESG”) Strategy
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.
The Company has a management contract with the
Investment Manager. It has no employees and all its
Directors are non-executive, with day-to-day activities being
carried out by third parties. While the Company seeks to
consider all aspects of ESG, climate change is not
something that is directly impacted by the activity of the
Company. The Company does not combust fuel and does
not have any greenhouse gas emissions to report from its
operations, nor does it have direct responsibility for any other
emission producing sources. The Board believes that all
companies have a duty to consider their impact on the
community and the environment. The majority of Directors
and some of the Company’s service providers are based in
Guernsey, thus minimising the need for commutes or flights
to and from Board meetings. Technology is readily utilised to
facilitate virtual conference meetings, further reducing the
need for travel, whilst the use of board portals removes
paper requirements for the Directors when attending Board
meetings. Within the normal course of business, the
Company expects there will be some air travel. Indeed, the
Company considers that it is important for good corporate
governance that the Board meets in person on a regular
basis, and at least quarterly, with the Investment Manager
present at least twice per annum.
Real Estate Credit Investments Limited
19
Annual Report and Accounts 2022
Strategic and Business Review
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 68% of the Company’s
Shareholder register receive documents and other
communications electronically.
The Company’s service providers and advisers recognise
the importance of strong corporate governance with a
culture based on integrity, respect and diversity and have
adopted ESG standards. Further, they have documented
and implemented policies on day-to-day functioning and
supporting initiatives to minimise the environmental impact
they have on the climate, where possible or relevant. Details
of the ESG and corporate responsibility of the Company’s
service providers are available on their websites, where
possible or relevant, or may be available upon request.
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) and the Financial Reporting Council’s
Stewardship Code. 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 UN PRI. The Investment
Manager applies a Responsible Investment policy to its
investment process. Cheyne’s Real Estate Team analyses
ESG factors in relation to the Company’s real estate lending
transactions and seeks to engage with the borrowers (to the
extent relevant) to implement appropriate Responsible
Investing (RI) policies. Key factors taken into consideration,
where appropriate and possible, are best-in-class
environmental, design and construction standards, focus on
Building Research Establishment Environmental Assessment
“BREEAM” ratings, governance rights and engagement with
sponsors. By following these steps, the Investment Manager
seeks to ensure that the environmental, social and
governance aspects of the Company’s investments are
taken into account.
STRATEGIC REPORT (CONTINUED)
Responsible Investment Highlights:
An example of the Investment Manager’s approach is the
recent investment into Fusion Brent Cross.
There were several ESG considerations which were
important factors in determining whether this was going
to be a project that they would recommend investing in.
The Investment Manager is pleased that the project
incorporates these elements. For more information on
Brent Cross, please see page 27.
Further information is available in the Sustainability
Report and Corporate Governance Statement on page 26
and 41, respectively.
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
UK Student Accommodation
Real Estate Credit Investments Limited
21
Annual Report and Accounts 2022
Strategic and Business Review
Having just emerged from the uncertainty posed by
Covid-19, global real estate markets are now contending
with a number of issues, namely:
•
Continuing supply chain disruptions feeding into
persistent cost inflation on materials and delays
on delivery.
•
Central banks look certain to move base rates markedly
higher, with our expectations that the new level of base
rates will remain higher for much longer.
•
Anaemic growth, feeding into rent growth that may not
keep pace with inflation.
As experienced during the Covid-19 pandemic to date, real
estate assets are no longer a homogeneous asset class in
their response to the evolving themes. As a case in point, we
view the mid market residential asset class (multi family and
single family homes) as being particularly resilient even in
the face of these factors, given the acute supply and
demand imbalances. In contrast, we see the shopping
centre asset class as being further impacted by weak growth
and high inflation piling more pressure on top of the
structural shifts in shopping patterns evident already.
INVESTMENT MANAGER’S REPORT
In addition to the above, the significant shifts in how we
work, live and play continue to feed into asset class demand
and supply, causing material shifts in demand patterns even
within each asset type. For example, we have consistently
spoken about the shift in demand for office space away from
secondary quality stock to offices that provide for the very
best in environmental and wellbeing credentials. This stock
remains scarce and in demand, whilst secondary stock faces
letting challenges even at steeply discounted rents.
Since mid 2016 (primarily in response to the uncertainty
posed by Brexit), RECI has migrated its risk focus to
concentrate upon: senior loans; working with the strongest
sponsors; and lower leverage exposures. It has also focused
on the “living” asset classes, with very selective entry points
into the cyclical office asset class.
In addition to the migration to a defensive asset risk profile, it
has also maintained a conservative structural risk profile with
a low level of recourse gearing, a very diverse credit book
and a relatively low duration on its loans.
Those elements have enabled the Company to navigate well
through the Covid-19 period to date. In addition, it also gives
the Company the best footing to capitalise on the long-term
economic changes anticipated above.
Sponsors owning, or purchasing, strong assets are set to
face challenges and opportunities from the combination of
slowing growth, rising costs and the continued scarcity
of debt capital. RECI, is well positioned to assist the
European commercial real estate industry with its available
capital and its proven ability to structure meaningful
solutions in a timely manner.
RECI’s profile on the asset and liability sides of the balance
sheet is strong and has evolved to better optimise returns.
On the asset side, the portfolio’s credit profile is robust with
no positions demonstrating material weakness. The
hospitality and housebuilder positions that were mainly
affected by the pandemic have been resolved with a full
recovery of the Company’s investment in both.
The asset book is diverse and predominantly focused on the
senior part of the capital stack.
RECI continues to benefit from
the investment opportunities that
Cheyne is seeing
Ravi Stickney
Portfolio Manager
Real Estate Credit Investments Limited
22
Annual Report and Accounts 2022
Portfolio by Geography
(Funded Fair Value)
31 Mar 2022*
31 Mar 2021*
UK
51.4%
60.3%
France
34.2%
26.2%
Spain
4.7%
1.8%
Italy
4.1%
4.3%
Germany
2.6%
2.5%
Portugal
0.9%
2.3%
Finland
0.7%
1.2%
Netherlands
0.1%
0.1%
* Excludes 1.3% (31 March 2021: 1.3%) held in bonds backed by assets in multiple European
countries.
75%
25%
Loans
Bonds
Investment Portfolio Composition
(Funded Fair Value)
Investment Portfolio Overview
In addition, the loan book has a short duration, allowing the
Company to recycle into new loans that have a yield pick up
from (a) charging a higher risk premium reflecting the
current environment and (b) reflecting the higher floating
base rates into the loans.
On the liability side, during the year, the Company has made
progress towards its aim of structuring and deploying non
recourse financing, on a term basis, against its senior loans.
This project has now been effected with the first loans
benefiting from these accretive funding lines.
The Company has also moved towards term funding
on its balance sheet leverage with the aim for a fair
balance between flexible short-term financing and stable
long-term financing.
The key aims for RECI for the current financial year are
consistent with the prior year, evolving to capture the
opportunities presented by the current environment:
•
To preserve its NAV with a continued focus on lower risk
senior credit
•
To protect and improve on its dividends by improved
returns on the loans and also keeping the book invested
•
To continually de-risk and optimise its funding lines
•
To grow the Company and the diversity of its investor base
•
To continually improve on its investor engagement,
transparency and reporting
The combination of the above, we believe, will sustain RECI
as a consistent performer in terms of NAV, dividends and
shareholder engagement through the year to come.
Real Estate Credit Investments Limited
23
Annual Report and Accounts 2022
Strategic and Business Review
INVESTMENT MANAGER’S REPORT (CONTINUED)
Top 10 Positions
Top 10 Positions
1
as at 31 March 2022
Description
Commitment
LTV
Investment Strategy
Asset Type
Manager Commentary
1
Paris prime resi/retail building
£48.9m
67%
Senior Loan
Value Add /
Transitional
Luxury retail and apartments in super-prime Paris
location
2
UK mixed-use portfolio,
predominantly office/residential
£44.6m
54%
Senior Loan
Core+
Light industrial, office and mid market residential
asset portfolio in the UK
3
Office development in Saint
Ouen, Paris
£29.3m
58%
Senior Loan
Development
Refurbishment and extension of a freehold office
building
4
UK Health Care Centre
£25.9m
73%
Market Bond
Core
Stable, income producing UK Health Care Centres
5
London Office
£23.5m
59%
Senior Loan
Core
Fully let 98,246 sq ft new grade A office block
located in Hoxton
6
UK Care Homes
£23.2m
76%
Senior Loan
Core
Stable, income producing UK care homes
7
Spanish Villas
£22.5m
49%
Senior Loan
Development
Build-for-sale Luxury Villa Development
8
UK Student Housing
£22.4m
78%
Mezzanine Loan
Core
Stable income producing UK student
accommodation assets
9
France Housebuilder Portfolio
£20.6m
56%
Senior Loan
Development
Income producing residential developer
10
Finland Hotel
£20.4m
64%
Senior Loan
Development
Development in progress. Expected completion in
June 2024
1
Based on total commitment of bonds and loans.
Core
Core+
Value Add / Transitional
Development – De-Risked
Development – Fit-out
Development – Groundworks / Superstructure
Real Estate Op-Co / Prop-Co Loan
0%
10%
20%
30%
40%
50%
Bilateral Deals
Market Bonds
Portfolio by Investment Strategy
(Funded Fair Value)
Real Estate Credit Investments Limited
24
Annual Report and Accounts 2022
Maintaining Dividend Stability
Since 2013, RECI has maintained a dividend on its NAV of 7%
or better. It remains the Company’s intention to maintain a
stable quarterly dividend paying capability through economic
cycles. Dividend sustainability will depend on income
coverage and cash coverage. Our granular cash forecasting
and stress scenarios give us the confidence that the
Company can maintain its dividend cash coverage. To
maintain and improve income coverage, RECI will gradually
deploy into the increasingly attractive investment pipeline
(described above).
Portfolio Composition
RECI’s investment portfolio, a diversified book of 63 positions
in real estate bonds and loans, was valued at £382.2 million
excluding accrued interest of £12.1 million as at 31 March 2022,
down from £390.4 million excluding accrued interest of
£11.4 million as at 31 March 2021. The portfolio had a weighted
average levered yield of 10.0% and an average loan to value of
62.4% as at 31 March 2022.
Bilateral Loan and Bond Portfolio
The drawn balance of the bilateral loan and bond portfolio,
excluding accrued interest, had decreased from £310.1
million as at 31 March 2021 to £284.4 million as at 31 March
2022. During the year, the Company made £81.6 million of
commitments to new deals, taking total loan commitments
to £522.9 million as at 31 March 2022. The average loan
portfolio LTV exposure as at 31 March 2022 was 65.4%. The
portfolio continues to provide attractive risk-adjusted returns
with a weighted average unlevered yield of 9.0% 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 2022
Number of loans
35
Drawn Value (£ millions)
284.4
Undrawn Loan Commitments (£ millions)
181.0
Weighted average yield of portfolio
9.0%
Weighted average yield of portfolio (levered)
10.0%
Weighted average LTV of portfolio
65.4%
Weighted average life of portfolio (years)
1.8
Market Bond Portfolio
As at 31 March 2022, the market bond portfolio of 28
bonds (excluding the self-originated bonds) was valued at
£97.8 million excluding accrued interest, compared to
£80.4 million as at 31 March 2021. The recorded interest
income on the bonds in the year ended 31 March 2022 was
£3.2 million compared to £2.9 million in the year ended
31 March 2021.
The bond portfolio has the potential for strong defensive
returns:
• The portfolio is characterised by a short duration
(3.9 years) and high coupon, which is defensive to interest
rate rise and provides resilience in turbulent markets.
• The weighted average unlevered yield of the market bond
portfolio as at 31 March 2022 was 4.6%, and the weighted
average levered yield of the bond portfolio as at 31 March
2022 was 10.1%.
• The average leverage of the portfolio over the financial
year was 20.7%, achieved through the provision of
short-term flexible financing. The Company enters into
repurchase arrangement 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 £212.7 million (31 March 2021: £186.1 million)
and a weighted average cost at 31 March 2022 of 1.2%
(31 March 2021: 2.3%) per annum. The average period to
maturity of the repurchase arrangements is 3 to 6 months.
Market Bond Portfolio Summary
as at 31 March 2022
Number of bonds
28
Fair Value (£ millions)
97.8
Weighted average yield of portfolio
4.6%
Weighted average yield of portfolio (levered)
10.1%
Weighted average LTV of portfolio
53.7%
Weighted average life of portfolio (years)
3.9
Outlook
The Company continues to successfully manage its
investment portfolio and liquidity and benefit from the
investment opportunities that Cheyne is seeing.
The core aims of RECI are to provide its investors with a
stable dividend yield by originating and making investments
in conservative real estate debt in the United Kingdom and
Western European real estate markets. RECI has consistently
done this through the challenging markets of 2009, 2011,
2016 (Brexit) and 2020 to date (Covid-19), and remains well
positioned to do so going forward.
Cheyne Capital Management (UK) LLP
23 June 2022
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
Strategic and Business Review
SUSTAINABILITY REPORT
RECI’s Approach To Sustainability
RECI’s 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 recent assessment
Cheyne was awarded an ‘A’ rating.
The Investment Manager has formed an ESG forum to
oversee 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. Whilst its robust and evolving
ESG approach is being integrated into investment due
diligence analysis and will form part of the wider investment
process soon.
The
Sustainability
Report
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 those
Managers 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
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.
Real Estate Credit Investments Limited
26
Annual Report and Accounts 2022
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 RECIs investments, with regular reports and ongoing
engagement from borrowers and issuers incorporating
information related to sustainability risks provided to the
Investment Manager. Where appropriate, the investment
team will assist borrowers and issuers in addressing
ESG-related issues and support its borrowers’ and issuers’
efforts to report externally and internally on their ESG
approach and performance in relation to material
sustainability risks.
Exit
ESG considerations are already having an impact on
underlying real estate values and whilst clear data driven
evidence is in its infancy, the investment manager is acutely
aware that during the life of the loans that RECI is writing,
this will become much clearer. As such this is an important
consideration regarding risk analysis now, hence the
approach above is an integral tool when calculating,
managing and measuring risk.
Responsible Investment Highlights:
An example of the Investment Manager’s approach is the
recent investment into Fusion Brent Cross, an investment
that closed late 2021.
ESG principles on this project are strong, highlights of which
are as follows:
Environmental
•
Brent Cross Town is targeted to achieve net zero carbon
by 2030 at the latest.
•
Affordable zero carbon heating will service the site which
should lead to a 25-35% reduction in carbon emissions.
•
There will be a green roof, rainwater recovery systems and
a ‘zero waste’ shop on site.
• BREEAM excellent rating.
• Rainwater harvesting and distribution to all WC’s.
• ASHP (air source heat pump) for the domestic hot water.
•
District heating network, low carbon generation.
• Photovoltaic systems to level 10 and level 23 roofs.
•
Low flow sanitaryware for all pods and communal toilets,
reducing daily consumption.
• High efficiency LED luminaires.
• Presence detectors for the lighting in students rooms.
• Movement detectors for corridor lighting.
• Heat Recovery MVHR ventilation units within
student bedrooms.
• Heat recovery ventilation air handling unit for ground floor
social spaces with timed control constant air volume
boxes for individual spaces.
Social
• The accommodation will create a social hub for students
with an emphasis on wellbeing and physical and mental
health for students.
•
Sizeable and high quality outdoor and relaxation spaces.
• The wider Brent Cross Town scheme will create a key new
community space including 50 acres+ of communal
gardens open to general public as well as residents.
•
Targeting WELL Platinum accreditation, which is a
dynamic rating system for buildings and communities that
enables the characteristics of the built spaces that impact
the health and well-being of its occupants to be identified,
measured and monitored.
Real Estate Credit Investments Limited
27
Annual Report and Accounts 2022
Strategic and Business Review
Governance
• Fusion Students LLP has a strong diversity and equal
opportunities policy.
• Charitable efforts and fundraising constitute high
importance and meaning.
Fusion Brent Cross
Next Stage ESG
•
A more quantitative ESG scorecard-based approach is
being devised by Cheyne Capital in conjunction with a
specialist Real Estate ESG consultant.
•
The new model will be a scorecard-based system which
will look to measure the strength of the ESG
characteristics of the opportunity.
• This new approach should enable more consistency on
what ‘good’ looks like.
• Implementation of the new system should be concluded
during 2022 following a soft testing period.
Summary
• Whilst the investment manager is not aligning the
Company’s approach at this stage with any single
measurement/guideline; the adoption of a more bespoke
model is driven by the motivation to use the Company’s
capital to drive change rather than a ‘tick box’ approach.
• The investment manager is expecting a number of deals
to fall outside of their requirements/scorecard which they
believe will help stimulate a discussion to help identify an
alternative approach/ESG enhancements which they
believe will help with value protection/enhancement.
• In the near future the investment manager thinks that the
cost of capital will be aligned with the quality of ESG
strategies with ‘ratchet’ mechanisms being built into loan
terms to motivate change.
• Risk management will remain fundamental to the
Company’s new approach, as the investment manager
firmly believes that there will be divergence of value
between those assets/strategies that adopt a robust ESG
approach compared to those which don’t.
• 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
their website.
real-estate/investing-responsibly/
Real Estate Credit Investments Limited
28
Annual Report and Accounts 2022
Mixed-use development in London
Real Estate Credit Investments Limited
29
Annual Report and Accounts 2022
In this section
Board of Directors
32
Management Team
34
Directors’ Report
36
Remuneration Committee Report
39
Corporate Governance Statement
41
Audit and Risk Committee Report
46
Directors’ Responsibility Statement
49
Governance
Real Estate Credit Investments Limited
30
Annual Report and Accounts 2022
Real Estate Credit Investments Limited
30
Co-living development in London
Real Estate Credit Investments Limited
31
Governance
Annual Report and Accounts 2022
BOARD OF DIRECTORS
Bob Cowdell
Chairman
(UK resident)
Susie Farnon
Chairman of the Audit and Risk Committee
(Guernsey resident)
John Hallam
Senior Independent Director
(Guernsey resident)
Colleen McHugh
Independent Director
(Guernsey resident)
Real Estate Credit Investments Limited
32
Annual Report and Accounts 2022
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.
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.
Mrs McHugh is managing director of 1818 Venture
Capital, a licensed asset manager based in Guernsey.
In addition, she is a non-executive director for a private
investment fund. She sits on the investment committee
for Wealthify (part of the Aviva PLC group) a UK regulated
Robo-adviser.
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.
Real Estate Credit Investments Limited
33
Governance
Annual Report and Accounts 2022
MANAGEMENT TEAM
Ravi Stickney
Head of Cheyne Real Estate/Portfolio Manager
Arron Taggart
UK Origination
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 20 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 10 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
Real Estate Credit Investments Limited
34
Annual Report and Accounts 2022
Daniel has over 10 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.
Morgan joined Cheyne in 2021. Prior to Cheyne, he held
a Client Reporting position at HSBC Global Asset
Management. Prior to that, he held several analyst roles
at hedge funds in London and Dublin. Morgan earned
his BA in Business Studies from Griffith College, Dublin.
Daniel Schuldes
German Origination
Lydia Boos
Legal Counsel
Sa’ad Malik
Structured Credit
Morgan Ryan
Business Administrator
Real Estate Credit Investments Limited
35
Governance
Annual Report and Accounts 2022
DIRECTORS’ REPORT
The Directors present their Annual Report and the audited
financial statements for the year ended 31 March 2022.
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 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 62 and 63. Dividends
totalling £27.5 million (31 March 2021: £27.5 million) were
paid on the shares during the year.
A fourth interim dividend for the year ended 31 March 2022
of 3 pence per share (31 March 2021: 3 pence per share) was
declared by the Directors on 23 June 2022 and is payable on
29 July 2022. 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 13 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
Graham Harrison (resigned 16 September 2021)
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
HICL Infrastructure PLC
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 are:
Number of Shares
% Shares Held
Bob Cowdell (Chairman)
190,000
0.08
John Hallam
100,000
0.04
Susie Farnon
45,250
0.02
Colleen McHugh
10,000
0.00
Real Estate Credit Investments Limited
36
Annual Report and Accounts 2022
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 were 5 notifications of such transactions
(31 March 2021: 2 notifications).
List of Major Shareholders as at 31 March 2022:
Name
Total
Shares Held
%
Shares Held
Close Brothers Group
19,006,272
8.29
Bank Leumi Le Israel
18,257,467
7.96
Canaccord Genuity Group Inc
13,514,228
5.89
Hargreaves Lansdown Asset Mgt
13,348,972
5.82
Tilney Smith & Williamson
13,143,107
5.73
Fidelity Worldwide Investment (FIL)
12,765,260
5.57
Issued Share Capital
The issued share capital of the Company consisted of
229.3 million shares (31 March 2021: 229.3 million shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and due
for renewal 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 17 to the financial statements.
Auditor
Deloitte LLP has been the Company’s external auditor since
the Company’s incorporation and in line with best practice,
the Company’s lead audit partner is required to rotate
off after five years of service. Further information on the work
of the auditor is set out in the Audit and Risk Committee
Report. The Company undertook a competitive tender
process during Autumn 2018 and Deloitte was reappointed.
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 17 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 in light of the likely
long-term impact of the Covid-19 crisis 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). 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
flows 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.
Real Estate Credit Investments Limited
37
Governance
Annual Report and Accounts 2022
DIRECTORS’ REPORT (CONTINUED)
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March
2022 of £47.4 million, together with the cash held at the
broker of £5.2 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 2022 was 14.0%. 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 2022 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 23 June 2022.
Bob Cowdell
Susie Farnon
Director
Director
Real Estate Credit Investments Limited
38
Annual Report and Accounts 2022
REMUNERATION COMMITTEE REPORT
As in other areas of corporate governance the Company
seeks to adhere to the AIC Code of Corporate Governance
issued in February 2019 and has established a Remuneration
Committee in accordance with Principles P, Q and R.
Although the Company is not incorporated in the UK, 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 Remuneration 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 total remuneration paid to each Director is
reported annually, please see page 92.
The Remuneration Committee is authorised by the
Board to seek, subject to a financial limit, such independent
advice as it may deem necessary in the discharge of
its responsibilities.
Composition of the Remuneration Committee
The Remuneration Committee 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 Remuneration Committee
is set out below and will be tabled at the next AGM for
approval by Shareholders, as will this Report.
The Company’s Remuneration Policy is that fees payable to
the Directors should reflect the time spent by the Directors
on the Company’s affairs and the responsibilities borne by
the Directors in ensuring the efficient and effective
operation of the Company 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 Remuneration
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
Remuneration 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
October 2017 with only an inflationary increase being
applied in 2020. Guernsey Retail Price Index Inflation,
excluding mortgage interest payments (RPIX), increased by
13.2% over the five years to March 2022. The Remuneration
Committee, therefore, considered that it was timely for a
fundamental review of the remuneration structure with any
revisions taking place with effect from 1 April 2022.
In accordance with the stated policy a number of factors
were considered:
a)
Given the residence of the Company and the majority of
the Board members, Guernsey RPIX is considered to be
the relevant inflation benchmark and in the 12 months to
31 December 2021 this rose by 4.6%,
b)
Publicly available market research was reviewed,
c)
The current remuneration levels reported by other listed
investment companies, of a similar size and nature, was
analysed with particular regard being given to those
that had recently been launched, and
d)
The responsibilities of different Board members were
analysed to identify significant changes since the
2017 review.
As stated in the policy, and given that all Directors are
non-executive, remuneration decisions are not influenced
by the financial performance of the Company, be that in
terms of share price or net asset value. Accordingly, such
information is not presented here.
The Remuneration Committee concluded that, as it had not
changed since 2017, the Chairman’s fee should increase
from £75,000 to £80,000 (a 6.7% increase); and the base
fee for other Directors should increase from £36,750, as set
in 2020, to £38,500 (a 4.8% increase).
The review of other responsibilities and leadership roles
concluded that the following changes were appropriate:
Audit and Risk Committee chair
– the additional fee
should increase from £10,000 to £12,500 per annum in light
of the addition of further Risk responsibilities;
Real Estate Credit Investments Limited
39
Governance
Annual Report and Accounts 2022
Management Engagement Committee chair
– this
Committee was set up in 2017 since when its remit
and activities have increased, accordingly it was determined
that the role of Chair warranted an additional fee of £2,000
per annum;
ESG lead
– the Board has determined that ESG
considerations, and their communication, must be
fundamental to all its operations and that the lead role in
coordinating the Company’s ESG initiatives warranted a fee
of £2,500 per annum;
Remuneration Committee chair
– this Committee having
recently been established it was concluded that the role of
Chair warranted an additional fee of £2,500 per annum;
REMUNERATION COMMITTEE REPORT (CONTINUED)
Year ending
31 March 2023
GBP
Year ended
31 March 2022
GBP
Year ended
31 March 2021
GBP
Bob Cowdell (Chairman and Nomination Committee Chair)
80,000
75,000
75,000
Susie Farnon (Audit and Risk Committee and Management Engagement Committee Chair)
53,000
46,750
45,875
John Hallam (Remuneration Committee Chair and Senior Independent Director)
41,000
36,750
35,875
Colleen McHugh (Environmental, Social and Corporate Governance Lead)
41,000
36,750
3,062
Graham Harrison (resigned 16 September 2021)
Nil
18,375
35,875
Nomination Committee chair
– it was determined that the
role of Chair warranted an additional fee of £2,000 per
annum, but only if it was not undertaken by the Company
Chairman, as is currently the case; and
Senior Independent Director
– the Committee concluded
that this role should only be remunerated on an ad-hoc basis
as and when a significant time commitment was needed.
As a consequence of these recommendations the following
table sets out the remuneration of Board members for the
financial year ending 31 March 2023 as compared to the two
previous years; it should be noted that the additional fees set
out above relate to the roles performed and not to specific
individuals, while the table assumes that the named
individuals will discharge the roles indicated throughout the
coming year (and no discretionary additional remuneration
is paid):
Furthermore, the Remuneration Committee noted that, in
the past, 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
Remuneration Committee’s recommendation that
should a prospectus be issued during the financial
year ending 31 March 2023, the Board should use its
discretion to determine if additional fees of the same
amount should be paid.
Statement of Shareholder Voting
At the last AGM held on 16 September 2021 a resolution
to approve the Remuneration Committee Report and
Remuneration Policy was passed with 106,145,099 votes
(99.95%) being cast in favour and 53,819 votes
(0.05%) against.
Future Reviews
It is anticipated that full reviews will not take place at less
than three yearly intervals, but that the Remuneration
Committee will, in the early part of each year, review the
changes in Guernsey RPIX and increase the Chairman’s fee
and the base fee for other Directors proportionally.
John Hallam
Remuneration Committee Chair
23 June 2022
Real Estate Credit Investments Limited
40
Annual Report and Accounts 2022
CORPORATE GOVERNANCE STATEMENT
Statement of Compliance with Corporate Governance
The Company is a member of the Association of Investment
Companies (the “AIC”) and by complying with the February
2019 edition of the AIC code of Corporate Governance for
investment companies (“AIC Code”) is deemed to comply with
both the UK and Guernsey Codes of Corporate Governance.
To comply with the UK Listing Regime, the Company
must comply with the requirements of the UK Corporate
Governance Code.
The Board has considered the principles and
recommendations of the AIC Code, by reference to the
guidance notes provided by the AIC Guide, and considers that
reporting against these will provide appropriate information to
Shareholders. To ensure ongoing compliance with these
principles the Board reviews a report from the Company
Secretary identifying how the Company is in compliance and
identifying any changes that might be necessary.
The Company has complied with the recommendations of
the AIC Code throughout the accounting period, except as set
out below.
The AIC Code includes provisions relating to:
•
the role of the chief executive;
•
executive directors’ remuneration; and
•
the whistle-blowing policy.
The Board considers some of these provisions are not
relevant to the position of the Company as it is an externally
managed investment company. The Directors are non-
executive and the Company does not have employees and
the Board is satisfied that any relevant issues that arise can
be properly considered by the Board or by Shareholders at
AGMs. The Remuneration Committee considers matters
relating to Directors’ remuneration. An external assessment
of Directors’ remuneration has not been undertaken. The
Company’s Remuneration policy is that fees payable to the
Directors should reflect the time spent by the Directors on
the Company’s affairs and the responsibilities borne by the
Directors 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 39 to 40.
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. During the
last financial year, some of the Board’s formal and informal
meetings were carried out virtually (or hybrid), in accordance
with Government guidelines on travel in relation to Covid-19.
Duties and Responsibilities
The Board has overall responsibility for optimising the
Company’s performance by directing and supervising the
affairs of the business and meeting the appropriate interests
of Shareholders and relevant stakeholders, while enhancing
the value of the Company and also ensuring the protection
of investors. A summary of the Board’s responsibilities is
as follows:
•
statutory obligations and public disclosure;
•
strategic matters and financial reporting;
•
risk assessment and management including reporting,
compliance, governance, monitoring and control; and
• other matters having a material effect on the Company.
The Board is responsible to Shareholders for the overall
management of the Company. The Board has delegated the
day-to-day operation of the Company to the Investment
Manager, Administrator and the Company Secretary. The
Board reserves the powers of decisions relating to the
determination of the Investment Policy, the approval of
changes in strategy, capital structure, statutory obligations,
public disclosure and the entering into of any material
contracts by the Company.
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
2/2
3/3
1/1
2/2
Susie Farnon
4/4
2/2
3/3
1/1
2/2
John Hallam
4/4
2/2
3/3
1/1
2/2
Colleen McHugh
4/4
2/2
3/3
1/1
2/2
Graham Harrison (resigned 16 September 2021)
1/2
0/1
1/1
0/1
1/1
Real Estate Credit Investments Limited
41
Governance
Annual Report and Accounts 2022
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. Despite Covid-19, the Board were
physically present for approximately 70% of these meetings.
Additionally, a number of ad-hoc 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. The Audit and Risk Committee Report
on pages 46 to 48 sets out the role and activities of this
Committee and its relationship with the external auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Cowdell and its
other members are Mr Hallam, Mrs Farnon and Mrs
McHugh. The members of the Nomination Committee are
and will be independent Directors. The terms of reference
state that the Nomination Committee will meet not less than
once a year; will have responsibility for considering the size,
structure and composition of the Board; retirements and
appointments of additional and replacement Directors; and
that the Nomination Committee will make appropriate
recommendations to the Board.
The Board appoints all Directors on merit. When the
Nomination Committee considers Board succession
planning and recommends appointments to the Board, it
takes into account a variety of factors. Knowledge,
experience, skills, personal qualities, residency and
governance credentials play an important part. The Board
aims to have a balance of skills, experience, diversity
(including gender) and length of service and knowledge of
the industry. The Board undertakes an evaluation of its
performance on an annual basis. The performance of each
Director is considered as part of a formal review by the
Nomination Committee.
The position of Chairman of each Committee will be
reviewed on an annual basis by the Nomination Committee
and their membership and terms of reference are kept
under review.
The performance of the Chairman of the Board will be
assessed by the SID through appraisal questionnaires and
discussions with the other Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by
Mrs Farnon, with its other members being Mr Hallam, Mr
Cowdell and Mrs McHugh. The Committee will meet at least
once a year for the purpose of evaluating the performance of
the Company’s service providers, the review of service
agreements and service level statements and the level and
method of their remuneration.
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.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Real Estate Credit Investments Limited
42
Annual Report and Accounts 2022
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 32 to 33.
Internal Controls
The Board has established a continuous process for
identifying, evaluating and managing the significant risks the
Company faces. The Board regularly reviews the process,
which has been in place from the start of the financial year
to the date of approval of this report. The Board is
responsible for the Company’s system of internal control and
for reviewing its effectiveness. Such a system is designed to
manage rather than eliminate the risk of failure to achieve
business objectives, and can only provide reasonable and
not absolute assurance against material misstatement
or loss.
In compliance with the Principles and Provisions of the AIC
Code, the Board regularly reviews the effectiveness of the
Company’s system of internal control. The Board’s
monitoring covers all controls, including financial,
operational and compliance controls and risk management.
It is based principally on reviewing reports from the
Investment Manager in order to consider whether all
significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses are
promptly remedied and indicate a need for more extensive
monitoring. To this end, a Risk Matrix is maintained, which
identifies the significant risks faced by the Company
together with the controls intended to manage them and is
reviewed at each scheduled Board meeting. The Board has
also performed a specific assessment considering all
significant aspects of internal control arising during the year
covered by this report. The Audit and Risk Committee assists
the Board in discharging its review responsibilities.
During the course of its review of the system of internal
control, the Board has not identified nor been advised
of any failings or weaknesses which it has determined to
be significant.
While investment management is provided by Cheyne, the
Board is responsible for setting the overall Investment Policy
and monitors the actions of the Investment Manager at
regular Board meetings. Administration services are
provided by Citco. Regular compliance reports from both the
Investment Manager and the Administrator are received by
the Board. In addition, the Administrator makes available its
Global Fund Accounting and Custody Controls Examination,
SOC 1 report to the Board on an annual basis.
Custody of assets is undertaken by the Depositary, The Bank
of New York Mellon (International) Limited.
The Investment Manager has established an internal control
framework and reviews the segregation of duties within this
to ensure that control functions are segregated from the
trading and investing functions. As a part of this framework,
the valuation of financial instruments is overseen by an
internal pricing committee which is supported by resources
which ensure that it is able to function at an appropriate
level of quality and effectiveness.
Specifically, the Investment Manager’s pricing committee is
responsible for establishing and monitoring compliance with
valuation policy. Within the trading and investing functions,
the Investment Manager has established policies and
procedures that relate to the approval of all new
transactions, transaction pricing sources and fair value
hierarchy coding within the financial reporting system.
The Directors of the Company clearly define the duties and
responsibilities of their agents and advisers, whose
appointments are made by the Board after due
consideration. The Board monitors the ongoing performance
of such agents and advisers. Each agent and adviser
maintains its own systems of internal control on which it
reports to the Board. The systems are designed to ensure
effective and efficient operation, internal control and
compliance with laws and regulations. In establishing the
systems of internal control, regard is paid to the materiality of
relevant risks, the likelihood of costs being incurred and
costs of control. It follows, therefore, that the systems of
internal control can only provide reasonable but not absolute
assurance against the risk of material misstatement or loss.
The Board has reviewed the need for an internal audit
function and has decided that the systems and procedures
employed by the Administrator and Investment Manager,
including their own internal controls and procedures,
provide sufficient assurance that a sound system of risk
management and internal control, which safeguards
Shareholders’ investment and the Company’s assets, is
maintained. An internal audit function specific to the
Company is therefore considered unnecessary.
Shareholder Engagement
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.
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.
Real Estate Credit Investments Limited
43
Governance
Annual Report and Accounts 2022
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.
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
pages 19-20 of the Strategic Report and in the Sustainability
Report on page 26.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has
introduced a new Corporate Criminal Offence of “failing to
take reasonable steps to prevent the facilitation of tax
evasion”, the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
General Data Protection Regulation (“GDPR”)
The Board confirms that the Company has considered
GDPR and taken measures itself and with its service
providers, to meet the requirements of GDPR and equivalent
Guernsey law.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-Bribery and Corruption
Policy. The policy applies to the Company and to each of its
Directors. Furthermore, the policy is shared with each of the
Company’s main service providers.
Whistle-blowing
As the Company has no employees of its own, it does not
have a whistle-blowing policy but in its review of service
providers the Management Engagement Committee
ensures that they do.
Employees and Socially Responsible Investment
The Company has a management contract with the
Investment Manager. It has no employees and all of its
Directors are non-executive, with day-to-day activities being
carried out by third parties. There are therefore no
disclosures to be made in respect of employees.
The Company’s main activities are carried out by the
Investment Manager who was one of the initial signatories to
the Standards Board for Alternative Investments (formerly
known as the Hedge Fund Standards Board) and is a
signatory to the United Nations-supported Principles for
Responsible Investment (“PRI”).
Modern Slavery Act 2015
The Company as a Guernsey incorporated entity is not
within scope of the Modern Slavery Act 2015, and is
therefore not obliged to make a human trafficking statement.
Gender Metrics
The Company, in conjunction with the Investment Manager,
strive 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’s
Diversity, Equality & Inclusion Committee empowers
employee engagement, transparency and collaboration,
ensuring that each colleague feels valued for the unique
contributions and insights they bring.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify
the 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 14 to the
financial statements.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Real Estate Credit Investments Limited
44
Annual Report and Accounts 2022
Changes in Regulation
The Board monitors and responds to changes in regulation
as it impacts the Company and its policies.
Stakeholders Engagement Section 172 Statement
The Board is committed to promoting the long-term success
of the Company whilst conducting business in a fair, ethical
and transparent manner. Whilst directly applicable only to
companies incorporated in the UK, the Board recognises the
intention of the AIC Code that matters set out in section 172
of the Companies Act 2006 are reported on. The Board
strives to understand the views of the Company’s key
stakeholders and to take these into consideration as part of
its discussions and decision-making process. As an
investment company, the Company does not have any
employees and conducts its core activities through third-
party service providers. Each provider has an established
track record and through regulatory oversight is required to
have in place suitable policies and procedures to ensure
they maintain high standards of business conduct, treat their
own stakeholders fairly, and employ corporate governance
best practice. The Company strongly believes that fostering
healthy and constructive relationships with its broad range
of stakeholders should result in increased Shareholder value
over the long term.
Key stakeholder groups over the last year:
•
Shareholders: Institutional and Retail shareholders;
•
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.
How RECI has communicated and engaged:
•
Annual General Meeting;
•
Regular market announcements;
• Investor communications including monthly factsheets
and quarterly updates;
•
Dedicated and upgraded RECI website;
•
Investor presentations;
•
Annual and interim reports;
• Views and feedback sought from institutional
shareholders via corporate broker;
• Regular Board meetings during the period attended by
representatives from the Investment Manager;
•
Annual service provider questionnaire; and
• Webinars and Zoom meetings.
Key Information Document
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 at: https://www.realestatecreditinvestments.com.
Real Estate Credit Investments Limited
45
Governance
Annual Report and Accounts 2022
AUDIT AND RISK COMMITTEE REPORT
Dear Shareholder,
On the following pages, we present the Audit and Risk
Committee’s report for 2022, setting out the responsibilities
of the Audit and Risk Committee and its key activities during
the year ended 31 March 2022. 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. They also consider the auditor’s
remuneration and engagement, as well as the auditor’s
independence and any non-audit services provided by
them. Other areas of responsibility include:
• Consideration of the fair value of the Company’s
investments and income generated from the portfolio;
•
Consideration of the accounting policies of the Company;
• Meeting with the external auditor to discuss the proposed
audit plan and reporting;
• Assess the effectiveness of the external auditor and
audit process;
•
Consideration of the need for an internal audit function;
• Review of any independent reports in respect of the
Investment Manager, the Administrator or the Depositary;
• Consideration of the risks facing the Company including
the Company’s anti-bribery, corruption and similar
obligations; and
• Monitoring the Company’s procedures for ensuring
compliance with statutory regulations and other
reporting requirements.
In addressing all of the above considerations, the Audit
and Risk Committee seeks the appropriate input
from the external auditor, Investment Manager,
Administrator, Company Secretary and Legal Counsel
and makes a recommendation to the Board of the
Company as appropriate.
Meetings
The Audit and Risk Committee normally meets at least three
times annually, including shortly before the Board meets to
consider the Company’s half-yearly and annual financial
reports, and reports to the Board on its deliberations and
recommendations. It also has an annual planning meeting
with the auditor and other ad-hoc meetings as considered
necessary. During the past year Covid-19 restrictions have
meant that not all such meetings could be held in person
and some were held by video and telephone conference as
circumstances required.
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.
Real Estate Credit Investments Limited
46
Annual Report and Accounts 2022
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 14
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 loan 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 self-originated bonds investments the
Audit and Risk Committee considered a number of factors
including, but not restricted to:
•
Pricing sources;
• The valuation approach used to value certain bonds by
the independent pricing adviser and challenging the
AIFM’s assessment of the comparable securities and
sector analysis used in determining the valuation of
these bonds;
• The range of valuations determined by the independent
pricing adviser in light of the approaches used and the
weighting applied by the Investment Manager to derive a
fair value point estimate;
•
Comparison between effective and actual yields;
•
Depth of prices and any disparity between different marks;
•
Indicative liquidity;
• Comparison of realised prices with previous
valuations; and
• The significance of unobservable inputs used to
determine the fair value of the bond investments
and classification within the fair value hierarchy.
Having conducted this process the Audit and Risk Committee
concluded that any assumptions used were reasonable
and that the valuations were in accordance with the
applicable standards.
During the year, the Chairman of the Audit and Risk
Committee and/or other members of the Board attended at
least two of the meetings held between the auditor and the
Investment Manager.
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”).
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 14 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 Company undertook a
competitive tender process during Autumn 2018 and
Deloitte was reappointed.
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
Real Estate Credit Investments Limited
47
Governance
Annual Report and Accounts 2022
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
£37,500 for the 30 September 2021 interim review.
Notwithstanding the provisions of such services, the Audit
and Risk Committee considers Deloitte LLP to be
independent of the Company and that the provision of such
non-audit services is not a threat to the objectivity and
independence of the conduct of the audit as appropriate
safeguards are in place.
To fulfil its responsibility regarding the independence of the
auditor, the Audit and Risk Committee considers:
• discussions with or reports from the auditor describing its
arrangements to identify, report and manage any conflicts
of interests in light of the requirements of the Crown
Dependencies’ Audit Rules and Guidance; and
•
the extent of non-audit services provided by the auditor
and arrangements for ensuring the independence,
objectivity and robustness and perceptiveness of the
auditor and their handling of key accounting and
audit judgements.
To assess the effectiveness of the auditor and the audit
process, the Committee reviews:
• the auditor’s fulfilment of the agreed audit plan and
variations from it;
• discussions or reports highlighting the major issues that
arose during the course of the audit;
• feedback from other service providers evaluating the
performance of the audit team;
• arrangements for ensuring independence and
objectivity; and
• robustness of the auditor in handling key accounting
and audit judgements.
The Audit and Risk Committee was satisfied with the audit
process and Deloitte LLP’s effectiveness and independence
as an Auditor having considered the degree of diligence and
professional scepticism demonstrated by them.
During the year ended 31 March 2022, the auditor had three
meetings with the Audit and Risk Committee and 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
23 June 2022
AUDIT AND RISK COMMITTEE REPORT (CONTINUED)
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48
Annual Report and Accounts 2022
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.
DIRECTORS’ RESPONSIBILITY STATEMENT
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
23 June 2022
Real Estate Credit Investments Limited
49
Governance
Annual Report and Accounts 2022
Financial
Statements
In this section
Independent Auditor’s Report
52
Statement of Comprehensive Income
62
Statement of Financial Position
63
Statement of Changes in Equity
64
Statement of Cash Flows
65
Notes to the Financial Statements
66
Appendix I – AIFM Remuneration Policy (Unaudited)
92
Appendix II – AIFM Leverage (Unaudited)
93
Directors and Advisers
94
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
Real Estate Credit Investments Limited
50
Mixed-use development in London
Real Estate Credit Investments Limited
51
Financial Statements
Annual Report and Accounts 2022
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 2022 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 21.
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 matters that we identified in the current year were:
•
Key inputs to the valuation of self-originated bond investments; and
•
Valuation of self-originated loan investments.
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used in the current year was £6.9 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.
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Annual Report and Accounts 2022
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 and
testing the mechanical accuracy of the underlying forecasts;
• Performing sensitivity analysis 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 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.
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Financial Statements
Annual Report and Accounts 2022
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
REAL ESTATE CREDIT INVESTMENTS LIMITED (CONTINUED)
5.1. Key inputs to the valuation of self-originated bond investments
Key audit matter
description
Self-originated bond investments of £186.0 million (2021: £173.9 million) make up 42% (2021: 41%) of
total assets and are a key value driver for the Company’s Net Asset Value (NAV) and interest income.
The primary pricing source for the self-originated bonds is from an independent pricing provider (IHS
Markit Private Team). The IHS Markit Private Team values the bonds using a market-based valuation
methodology, which involves material assumptions relating to comparable observable bond prices
and yields. In addition, IHS Markit Private Team determine a valuation based on internal proprietary
sector curves (“the Sector Curve Price”).
The key inputs to valuation of the bond investments are therefore:
•
The pricing of self-originated bonds by the IHS Markit Private Team, including the comparable
bonds selected to determine the yield to maturity of the self-originated bonds and the proprietary
sector curves; and
•
The use and application of the mid-point of those pricing sources to the self-originated bond
portfolio.
This has contributed to a risk of fraud and error associated with the valuation approach applied,
whether this is acceptable or consistent with IFRS 13 Fair value measurement, and that inappropriate
inputs have been used leading to a material misstatement of fair value.
There is also a risk that there are significant unobservable inputs used to determine the fair value of
the self-originated bonds at the balance sheet date to the extent that these inputs will impact the
classification in the Fair Value Hierarchy under IFRS 13.
The accounting policies related to this key audit matter can be found in note 2 to the financial
statements, with the valuation 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 46-48.
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Annual Report and Accounts 2022
5.1. Key inputs to the valuation of self-originated bond investments
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 relevant controls in relation to the valuation process;
• Assessed the Company’s processes for challenging the reliability of the independent prices
through discussions with management and inquiries with the IHS Markit Private Team;
•
Inspected the 31 March 2022, and post year end, bond surveillance reports to identify any
evidence of fair value changes including whether the bonds are not performing, any delinquency
in contractual payments or signs of financial distress by the borrower;
•
With the involvement of our valuation specialists, we:
—
Evaluated the competence, capabilities and objectivity of IHS Markit Private Team;
— Assessed the Investment Manager’s and IHS Markit Private Team’s approach to the valuation of
the bonds against accepted market practices;
— Challenged the valuation methodology used by MarkIT Private Team and the weighting applied
by management to the Comparable Debt Price and the Sector Curve Price; and
—
Re-performed the valuation analysis to determine the bond prices and assessed the
appropriateness and consistency of the comparables used by the IHS Markit Private Team.
•
On a sample basis, performed sensitivity analysis on the yield to maturity and sector curve
discount yields, including weighting of pricing sources applied by management;
• Challenged management’s judgement over the classification of the bonds in the Fair Value
Hierarchy under IFRS 13 by assessing the significance of observable and unobservable inputs
used to determine fair value; and
•
Performed back testing by agreeing proceeds received from the sale of bonds, if any, both during
the year and subsequent to 31 March 2022, against their fair value prior to the sale.
Key observations
We concluded that the assumptions applied by management, in arriving at the fair value of the
Company’s self-originated bond investments were reasonable, and that the resulting valuations are
appropriately stated.
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Financial Statements
Annual Report and Accounts 2022
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
REAL ESTATE CREDIT INVESTMENTS LIMITED (CONTINUED)
5.2. Valuation of self-originated loan investments
Key audit matter
description
Loan investments of £109.8 million (2021: £136.1 million) make up 25% (2021: 32%) of total assets and
are a key value driver for the Company’s Net Asset Value (NAV) and interest income.
There is a risk of fraud and error associated with the incorrect recognition and measurement criteria
applied to loan investments through potentially complex structures or agreements. Any material
changes in the estimated performance of a loan (including return on collateral, timing of exit and
related cash flows) or lending and real estate market movements could have a significant impact on
the fair value.
Judgements over the credit quality of the borrower and underlying collateral along with the valuation
of equity participation positions in certain loans, which impact fair value estimates, could significantly
affect key performance indicators and the fair value of loan investments where applicable. The
investment manager prepares cash flow models and documents judgements in relation to estimated
performance of the loans within ‘Loan Surveillance Reports’. These are presented to the Board when
determining fair value of the loan portfolio.
The accounting policies related to this key audit matter can be found in note 2 to the financial
statements, with the valuation 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 46-48.
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 relevant controls in relation to the valuation process;
• Assessed the 31 March 2022 Loan Surveillance Reports to identify any evidence of fair value
changes including whether the loans are not performing, any covenant breaches, delinquency in
contractual payments or signs of financial distress by the borrower;
• Attended valuation calls with the investment manager to discuss and assessed the performance
of the loan portfolio, significant assumptions made and the valuation of the underlying collateral;
•
Where actual fair value changes have been identified, we will challenge the assumptions made by
the investment manager in respect of the valuation of the loans in light of available evidence and
underlying collateral;
•
Performed back testing by agreeing proceeds received from loan repayments, both during the
year and subsequent to 31 March 2022, against their fair value prior to the repayment;
• Challenged Company’s assessment of any equity uplifts with reference to the valuation and
performance of underlying collateral;
• Evaluated the developments in the lending and relevant real estate markets at a macro level to
assess changes in lending rates and potential changes in collateral values; and
• Evaluated the assumptions made by the investment manager in assessing whether the loans are
properly valued at 31 March 2022, where indicators of fair value change have been identified.
Key observations
We concluded that the assumptions applied by management, in arriving at the fair value of the
Company’s loan investments were reasonable, and that the resulting valuations are appropriately stated.
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Annual Report and Accounts 2022
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
£6.9 million (2021: £6.9 million)
Basis for determining
materiality
2% (2021: 2%) of Net Asset Value
Rationale for the
benchmark applied
We believe 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.
£343.9m
NAV
Materiality
Audit and Risk Committee reporting threshold
£6.9m
£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 2022 audit (2021: 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 and Risk Committee that we would report to the Committee all audit differences in excess of
£343,000 (2021: £346,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit and Risk Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
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Financial Statements
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
REAL ESTATE CREDIT INVESTMENTS LIMITED (CONTINUED)
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.
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 26.
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’ responsibilities statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.
org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
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Annual Report and Accounts 2022
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 17 February 2022;
• results of our enquiries of management and the Audit and Risk 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 areas:
•
Key inputs to the valuation of self-originated bond investments; and
•
Valuation of self-originated loan investments.
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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Financial Statements
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11.2. Audit response to risks identified
As a result of performing the above, we identified key inputs to the valuation of self-originated bond investments and valuation of
self-originated loan investments as key audit matters related to the potential risk of fraud. The key audit matters section of our
report explains the matters in more detail and also describes the specific procedures we performed in response to those key
audit matters.
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 and Risk 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.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
REAL ESTATE CREDIT INVESTMENTS LIMITED (CONTINUED)
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 pages 37-38;
•
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 49;
•
the Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 44;
• the section of the Annual Report that describes the review of effectiveness of risk management and internal control
systems set out on page 43; and
•
the section describing the work of the Audit and Risk Committee set out on pages 46-48.
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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 and Risk 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 17 years, covering the years ending 31 March 2006 to 31 March 2022.
14.2. Consistency of the audit report with the additional report to the Audit and Risk Committee
Our audit opinion is consistent with the additional report to the Audit and Risk 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 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
23 June 2022
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Note
31 Mar 2022
GBP
31 Mar 2021
GBP
Interest income
6
Net gain on financial assets and liabilities at fair value through profit or loss
4
Other income
Operating income
Operating expenses
5
(5,841,351 )
(5,842,223 )
Profit before finance costs
Finance costs
6
(1,954,553 )
(2,237,927 )
Net profit
Other comprehensive income
Total comprehensive income
Earnings per share
Basic and diluted
8
Weighted average shares outstanding
Number
Number
Basic and diluted
8
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 2022
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
Note(s)
31 Mar 2022
GBP
31 Mar 2021
GBP
Non-current assets
Financial assets at fair value through profit or loss*
9,14
Current assets
Cash and cash equivalents
9
Cash collateral at broker
9,16
Derivative financial assets
9,10
Other assets*
9
Total assets
Equity and liabilities
Equity
Reserves
Current liabilities
Financing agreements
9,12
Derivative financial liabilities
9,10
Other liabilities
9,11
Total liabilities
Total equity and liabilities
Shares outstanding
13
Net asset value per share
£ 1.50
£ 1.51
* The interest receivable from loans and bonds were presented as part of financial assets at fair value through profit or loss in the
current period. The prior period was not amended. For further information, please refer to Basis of Preparation in Note 2 of the
financial statements.
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
23 June 2022
STATEMENT OF FINANCIAL POSITION
As at 31 March 2022
Real Estate Credit Investments Limited
63
Financial Statements
Annual Report and Accounts 2022
Note
31 Mar 2022
GBP
Balance as at 31 March 2021
Total comprehensive income
Dividends
7
(27,519,896 )
Balance as at 31 March 2022
Note
31 Mar 2021
GBP
Balance as at 31 March 2020
Total comprehensive income
Dividends
7
(27,519,896 )
Balance as at 31 March 2021
The accompanying notes form an integral part of the financial statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 March 2022
Real Estate Credit Investments Limited
64
Annual Report and Accounts 2022
Note
31 Mar 2022
GBP
31 Mar 2021
GBP
Profit before finance costs
Net sales/(purchases) of financial assets
(4,234,290 )
Net sales/(purchases) of derivative financial assets and liabilities
(3,680,177 )
Movement in realised and unrealised gains on financial assets
4
(2,742,188 )
(11,046,019 )
Movement in derivative financial assets and liabilities
(2,119,166 )
(4,757,127 )
Operating cash flows before movement in working capital
(Increase)/decrease in other assets*
Increase in other liabilities
Movement in cash collateral at/due to broker
(4,260,712 )
Movement in interest receivable*
(12,141,535 )
Movement in working capital
(5,013,591 )
Net cash flow from operating activities
Financing activities
Dividends paid to Shareholders
(27,519,896 )
(27,519,896 )
Net proceeds/(repayments) under financing agreements and the related finance charges
(21,385,002 )
Net cash outflow from financing activities
(6,925,520 )
(48,904,898 )
Net increase/(decrease) in cash and cash equivalents
(5,798,961 )
Cash and cash equivalents at the start of the year
Cash and cash equivalents at the end of the year
* The interest receivable from loans and bonds were presented separately from other assets in the current period. The prior
period was not amended. For further information, please refer to Basis of Preparation in Note 2 of the financial statements.
The accompanying notes form an integral part of the financial statements.
STATEMENT OF CASH FLOWS
For the year ended 31 March 2022
Real Estate Credit Investments Limited
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Financial Statements
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1. General Information
6 September 2005 with registered number 43634. The Company commenced its operations on 8 December 2005.
The Company’s shares are currently listed on the premium segment of the Official List of the UK Listing Authority and trade on
the Main Market of the London Stock Exchange. The shares offer investors a levered exposure to a portfolio of real estate credit
investments and aim to pay a quarterly dividend.
The Company’s investment management activities are managed by the Investment Manager, who is also the AIFM.
The Company has entered into an Investment Management Agreement (the “Investment Management Agreement”) under
which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company’s
Board of Directors. The Company is an Alternative Investment Fund (“AIF”) within the meaning of the Alternative Investment
Fund Managers Directive (“AIFMD”) and accordingly the Investment Manager has been appointed as AIFM of the Company,
which has no employees of its own. For its services, the Investment Manager receives a monthly Management Fee,
expense reimbursements and accrues a Performance Fee (see Note 17). 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 2021.
New Standards, Amendments and Interpretations Issued and Effective for the Financial Year Beginning 1 April 2021
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest Rate Benchmark Reform Phase 2
On 27 August 2020, the IASB published
Amendments to IFRS 9, IAS 39 and IFRS 7, IFRS 4 and IFRS 16 – Interest Rate
Benchmark Reform Phase 2.
With publication of the phase 2 amendments, the IASB has completed its work in response
to IBOR reform. The amendments provide temporary relief which address the financial reporting effects when an IBOR is
replaced with an alternative nearly risk-free interest rate. The amendments to IFRS 9, IAS 39 IFRS 7, IFRS 4 and IFRS 16 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.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 March 2022
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
New Standards, Amendments and Interpretations Issued but not Effective for the Financial Year Beginning 1 April
2021 and not Early Adopted
Title
Effective for
periods beginning
on or after
Amendment to IAS 37 –
Onerous Contracts: Cost of fulfilling a Contract
1 January 2022
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
Amendments to IAS 37 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. The Company expects
that the amendments will have no material impact on the financial statements.
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 disclose 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 provides 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.
During the year, the Company has corrected its presentation of the financial assets at fair value through profit or loss.
Investments at fair value through profit or loss now includes the related interest receivable to reflect the measurement of the
Company’s investments as a single unit of account, which includes all cash flows associated with the asset. The comparative
figures have not been amended due to the materiality of the correction, having previously been presented separately and the
combined fair value included in Note 9.
The functional and presentation currency of the Company is GBP (£), which the Board considers best represents the economic
environment in which the Company operates.
Real Estate Credit Investments Limited
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Financial Statements
Annual Report and Accounts 2022
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 the likely long-term impact of the Covid-19
crisis on operating models and valuations, and performed a granular analysis of the future liquidity profile of the Company.
A detailed cash flow profile of each investment was completed, incorporating the probability of likely delays to repayments,
other stress tests (and additional cash needs).
Taking account of the updated forecasting, the Directors consider that the cash resources available as at 31 March 2022 of £47.4
million (31 March 2021: £21.2 million), together with the cash collateral at broker of £5.2 million (31 March 2021: £0.9 million), the
liquidity of the market bond portfolio and the financing available through activities such as repurchase agreements as described
in Note 12, 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 2022 was 14.0%. The Directors
consider this to have strengthened the resilience of the Company to future market uncertainty.
Since the onset of Covid-19, the Company continues to take the following measures:
• An initial and continuing detailed evaluation of each of its positions in light of the various impacts of the crisis 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 18, as at 31 March 2022, the Company had committed £522.9 million (31 March 2021: £117.2 million) into
bilateral loans and bonds of which £284.4 million (31 March 2021: £43.9 million) had been funded. The Investment Manager
models these expected commitments, and only funds if the borrowers meet specific business plan milestones, and remains
comfortable that it has sufficient liquidity over the expected funding timeframes.
Notwithstanding the Directors’ belief that this assumption remains justifiable, the Directors have also determined a number of
mitigations to address a scenario where all outstanding repurchase agreements are required to be settled as they fall due. Whilst
there would be a number of competing strategic factors to consider before implementation of such options, the Directors believe
that these are credible and can generate sufficient liquidity to enable the Company to meet its obligations as they fall due. Such
strategies include further sales of assets within the bond portfolio, cessation or delay of any future dividends and obtaining
longer-term, non-recourse financing.
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.
In line with its Articles of Incorporation, the Company passed a resolution for its continuation during the Annual General Meeting
(AGM) held on 16 September 2021. The Directors are therefore satisfied that it is appropriate to adopt the going concern basis of
accounting in preparing these financial statements.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
68
Annual Report and Accounts 2022
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.
Following a correction of the presentation of the financial assets at fair value through profit or loss, the interest receivable from
loans and bonds were reported as part of financial assets at fair value through profit or loss in the current period. The prior period
was not amended due to the materiality of the correction. The related interest income and expense remained to be included
under interest income and expense accounts.
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient portfolio management are measured at fair value through profit or
loss. The gain or loss on reassessment of fair value is recognised immediately in the Statement of Comprehensive Income.
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 and liabilities which are classified as at fair value through
profit or loss, at fair value.
After initial measurement, the Company measures financial assets and liabilities which are classified as at amortised cost, at
amortised cost using effective interest method.
Recognition
All regular way purchases and sales of financial assets or liabilities are recognised on the trade date, which is the date on which
the Company commits to purchase or sell the financial assets or liabilities. Regular way purchases or sales are purchases or sales
of financial assets or liabilities that require delivery of assets within the period generally established by regulation or convention
in the market place.
Derecognition
The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it
transfers the financial asset and the transfer qualifies for derecognition in accordance with IFRS 9.
The Company derecognises a financial liability when the obligation specified in the contract is discharged, cancelled or has expired.
Real Estate Credit Investments Limited
69
Financial Statements
Annual Report and Accounts 2022
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 and interest rate risks arising
from operational, financing and investment activities that do not qualify for hedge accounting 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 reassessment of fair
value is recognised immediately in the Statement of Comprehensive Income.
The fair value of an open forward foreign currency exchange contract is calculated as the difference between the contracted
rate and the current forward rate that would close out the contract on the reporting date. The change in value is recorded in net
gains on financial assets and liabilities through profit or loss in the Statement of Comprehensive Income. Realised gains and
losses are recognised on the maturity of a contract, or when the contract is closed out and they are transferred to realised gains
or losses in the Statement of Comprehensive Income.
Fair Value
All financial assets carried at fair value are initially recognised at fair value which is equivalent to cost and subsequently re-
measured at fair value. If independent prices are unavailable, the fair value of the financial asset is estimated by reference to
market information which includes, but is not limited to, broker marks, prices of comparable assets and using pricing models
incorporating discounted cash flow techniques and valuation techniques such as modelling.
These pricing models apply assumptions regarding asset specific factors and economic conditions generally, including
delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be
relevant to each financial asset.
The objective of a fair value measurement is to determine the price at which an orderly transaction would take place between
market participants on the measurement date; rather than the price arrived at in a forced liquidation or distressed sale. Where
the Company has considered all available information and there is evidence that the transaction was forced, it will not use such a
transaction price as being determinative of fair value.
Note 3 provides specific information regarding the determination of fair value for the Company’s bonds and loans.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount is reported within assets and liabilities when there is a legally
enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and
settle the liability simultaneously.
Expenses Attributable to Any Issue of Shares
The expenses of the Company attributable to any issue of shares are those which are necessary to implement such an issue
including registration, listing and admission fees, corporate finance fees, printing, advertising and distribution costs, legal fees
and other applicable expenses. They are recognised as incurred and are included as a reduction to Reserves in the Statement of
Changes in Equity.
Foreign Currency Transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the Statement of Financial Position date are translated to GBP at the
foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are recognised in gains and losses on financial assets and liabilities at fair
value through profit or loss in the Statement of Comprehensive Income. Foreign currency denominated non-monetary assets
and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the
date of transaction.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
70
Annual Report and Accounts 2022
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 is accrued based on the expected realisation date of the investments using the effective interest method as
defined under IFRS 9. Where the Company adjusts its expected cash flow projections to take account of any change in
underlying assumptions, such adjustments are recognised in interest income in the Statement of Comprehensive Income by
reflecting changes in the fair value of the investment calculated using the original effective interest rate and applying the original
effective interest rate to this revised value for the purposes of calculating future income.
Expenses
All expenses are included in the Statement of Comprehensive Income on an accrual basis.
Taxation
The Company is a tax-exempt Guernsey limited company and accordingly, no provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as
reduced by appropriate allowances for estimated irrecoverable amounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the substance of the underlying contractual arrangements. An equity
instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Financial liabilities and equity are initially recorded at the proceeds received, net of issue costs and subsequently at amortised
cost. The shares have been classified as equity.
Other Liabilities
Other liabilities are not interest-bearing and are stated at their accrued value.
Segment Information
The Company has two reportable segments, being the Bilateral Loan and Bond Portfolio and the Market Bond Portfolio. The real
estate debt investment strategy of the Company focuses on secured commercial and residential debt in the United Kingdom and
Western Europe. Each segment engages in separate business activities and the results of each segment are regularly reviewed
by the Board of Directors which fulfils the role of Chief Operating Decision Maker for performance assessment purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of efficient portfolio management. There are no material
revenues arising from the use of repurchase agreements and transaction costs are embedded in the price of the investments and
are not separately identifiable. Securities purchased under agreements to resell are valued at fair value and adjusted for any
movements in foreign exchange rates. Interest rates vary for each repurchase agreement and are set at the initiation of each
agreement. It is the lender’s policy to take custody of securities purchased under repurchase agreements and to value the securities
on a daily basis to protect the lender’s 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.
Real Estate Credit Investments Limited
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Financial Statements
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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 page 69, 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 page 69, the contractual cash flow characteristics for loan investments are not solely payments of
principal and interest. For the loans held via Stornoway Finance S.à r.l. and ENIV S.à r.l., the Company receives the return for each
underlying loan net of expenses and so it is not considered to be a basic lending arrangement under the standard. As such,
these loan investments are required to be measured at fair value through profit or loss. The loans held via ENIV S.à r.l. are listed
and considered bonds.
In making the judgement regarding Stornoway Finance S.à r.l. and ENIV S.à r.l., the Directors have considered the power the
Company has to influence the investment decisions of the Special Purpose Vehicle housing the underlying loans and where the
Company holds the majority interest it has been determined that the contractual cash flow characteristics for a basic lending
arrangement would be met. However, IFRS 9 also requires an assessment of the business model within which assets are held.
In the case of the Company’s loan investments the Directors have determined that they monitor and evaluate business
performance, manage risk and compensate the investment manager based on fair value measures. The business model is
therefore not solely for holding and collecting contractual cash flows to maturity and requires all loan investments to be
measured at fair value through profit or loss.
The Company’s bond investments are classified and measured at fair value through profit or loss in accordance with the above
fact pattern.
Were it to be determined that the business model for managing financial assets and the contractual cash flow characteristics of
those financial assets were not described above, these assets would be classified and measured at amortised cost with
provisions made for expected credits losses and changes to expected credit losses at each reporting date.
Level Classification of Financial Assets at Fair Value Through Profit or Loss
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis
of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input
is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a
particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes “observable” requires significant judgement by the Company. The Company considers
observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively involved in the relevant market.
As at 31 March 2022, the Company has determined the fair value of self-originated bonds as described in the Key Sources of
Estimation Uncertainty section below. The Directors have considered the significance of proprietary data used to determine the fair
value of the self-originated bond portfolio and have determined that the fair value measurement should be classified as Level 3 in
the fair value hierarchy. If observable prices from comparable bonds were used as the sole data point to estimate fair value, this
would have produced a fair value for the self-originated bond investments of £97.8 million (31 March 2021: £82.7 million) as at
31 March 2022.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
72
Annual Report and Accounts 2022
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 financial assets is based on quoted prices where such
prices are available from a third party in a liquid market.
Bonds held in the Company are valued either using independent market prices (supplied by IHS Markit’s ABS Bond and
Bloomberg’s BVAL pricing services) or the Company obtains pricing reports from independent vendors for bonds where prices
are not directly observable in the market.
The vendors (IHS Markit Private Debt Team and JPM Pricing Direct) may use publicly available prices for comparable securities
as the key input to the evaluated price of these bonds which are reviewed and corroborated by the Investment Manager. In
addition, for the self-originated bonds, IHS Markit includes an additional valuation result based on internal proprietary sector
curves. The midpoint of the sector curve price and the comparable bonds price is used to value the Company’s self-originated
bonds. As such, the sector curve input used to determine the discount yield and the weighting of the two techniques represent
key sources of estimation uncertainty.
The Company has made loans 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 modelling. 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 5.1% to 13.3% (31 March 2021: 5.1% to 15.0%).
As highlighted in the long-term viability section of the Strategic Report, the Investment Manager performed an evaluation of
each of its positions in light of the likely long-term impact of the Covid-19 crisis on 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 2022.
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 Covid-19 and the potential of a global recession, 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 2022. Future valuation
might change significantly in the future.
Real Estate Credit Investments Limited
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Financial Statements
Annual Report and Accounts 2022
4. Net Gains/(Losses) on Financial Assets and Liabilities at Fair Value Through Profit or Loss
31 Mar 2022
GBP
31 Mar 2021
GBP
Net gains/(losses)
Net gains on market bonds
369,084
3,264,950
Net (losses)/gains on self-originated bonds
(1,953)
7,338,230
Net gains on self-originated loans
2,375,058
442,839
Net gains on foreign exchange instruments and other foreign currency transactions
2,609,285
7,139,845
Net gains on financial assets and liabilities at fair value through profit or loss
5,351,474
18,185,864
5. Operating Expenses
Note
31 Mar 2022
GBP
31 Mar 2021
GBP
Investment management, administration and depositary fees
Investment management fee
17
(4,367,244)
(4,280,498)
Administration fee
17
(250,286)
(245,781)
Depositary fee
17
(65,969)
(64,656)
(4,683,499)
(4,590,935)
Other operating expenses
Legal fees
(298,801)
(317,011)
Directors’ fees
(213,625)
(195,687)
Audit fees
(115,250)
(103,000)
Corporate secretary fees
(87,761)
(80,596)
Fees to auditor for non-audit services
(37,500)
(34,000)
Regulatory body expenses
(36,266)
(38,407)
Research fees
(25,388)
(12,371)
Other expenses
(343,261)
(470,216)
(1,157,852)
(1,251,288)
Total operating expenses
(5,841,351)
(5,842,223)
The ongoing costs of the Company are shown in the Key Information Document (KID) published on the Company’s website.
The total figure of 2.36% (31 March 2021: 2.36%) is made up of the Investment Manager’s fee of 1.25% (31 March 2021: 1.25%),
other ongoing costs of 0.46% (31 March 2021: 0.46%), and finance costs (which are disclosed separately in the financial
statements) of 0.65% (31 March 2021: 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 2022
Real Estate Credit Investments Limited
74
Annual Report and Accounts 2022
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 2022
GBP
31 Mar 2021
GBP
Interest income
Real Estate Credit Investments – market bonds
3,241,955
2,923,845
Real Estate Credit Investments – self-originated bonds
12,406,041
10,022,570
Real Estate Credit Investments – self-originated loans
11,323,731
14,051,266
Cash and cash equivalents and other receivables
10,063
6,623
Total interest income
26,981,790
27,004,304
Finance costs
Net cost of financing agreements
(1,954,553)
(2,237,927)
Total finance costs
(1,954,553)
(2,237,927)
7. Dividends
31 Mar 2022
GBP
31 Mar 2021
GBP
Share dividends
Fourth dividend for the year ended 31 March 2021/31 March 2020
6,879,974
6,879,974
First dividend for the year ended 31 March 2022/31 March 2021
6,879,974
6,879,974
Second dividend for the year ended 31 March 2022/31 March 2021
6,879,974
6,879,974
Third dividend for the year ended 31 March 2022/31 March 2021
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 2022 amounted to 12 pence per share (31 March 2021:
12 pence per share).
Under Guernsey law, companies can pay dividends provided they satisfy the solvency test prescribed under The Companies
(Guernsey) Law, 2008 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 each dividend payment during the years ended
31 March 2022 and 31 March 2021.
Real Estate Credit Investments Limited
75
Financial Statements
Annual Report and Accounts 2022
8. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
31 Mar 2022
31 Mar 2021
Net earnings attributable to shares (GBP)
24,574,377
37,243,702
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)
10.7
16.2
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 2022
GBP
31 Mar 2021
GBP
Assets
Financial assets at fair value through profit or loss:
Real Estate Credit Investments – market bonds*
98,450,555
80,359,507
Real Estate Credit Investments – self-originated bonds*
186,047,325
173,931,664
Real Estate Credit Investments – self-originated loans*
109,843,224
136,149,715
Investments at fair value through profit or loss
394,341,104
390,440,886
Derivative financial assets:
Forward foreign exchange contracts
–
2,260,399
Financial assets at amortised cost:
Cash and cash equivalents
47,385,138
21,220,812
Cash collateral at broker
5,204,692
943,980
Other assets*
22,708
11,381,740
Total assets
446,953,642
426,247,817
Liabilities
Financial liabilities at fair value through profit or loss:
Financing agreements
100,368,732
77,819,803
Derivative financial liabilities:
Forward foreign exchange contracts
1,072,792
–
Financial liabilities at amortised cost:
Other liabilities
1,576,634
1,547,011
Total liabilities
103,018,158
79,366,814
* As at 31 March 2021, the dirty fair value (financial assets at fair value through profit or loss, plus accrued interest) of the market bond portfolio is £80,714,401, the dirty fair value of the self-
originated bond portfolio is £175,855,550 and the dirty fair value of the self-originated loan portfolio is £145,231,755. As at 31 March 2022, the presentation of the financial assets at fair value
through profit or loss has been corrected.
The value of the bond portfolio assets was £284.5 million as at 31 March 2022 (31 March 2021: £254.3 million, excluding accrued
interest of £11.4 million; the financing against these is shown as £100.4 million as at 31 March 2022 (31 March 2021: £77.8 million).
See Note 15 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 2022
Real Estate Credit Investments Limited
76
Annual Report and Accounts 2022
10. Derivative Contracts
Forward Foreign Exchange Contracts
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)
The following forward foreign exchange contracts were open as at 31 March 2021:
Counterparty
Settlement date
Buy currency
Buy amount
Sell currency
Sell amount
Unrealised Gain
GBP
The Bank of New York Mellon
20 May 2021
GBP
114,299,465
EUR
(131,400,000)
2,260,399
Unrealised gain on forward foreign exchange contracts
2,260,399
11. Other Liabilities
31 Mar 2022
GBP
31 Mar 2021
GBP
Investment management fee payable
365,525
368,655
Interest payable
193,902
100,707
Depositary fee payable
27,086
21,000
Administration fee payable
20,892
20,865
Other expense accruals
969,229
1,035,784
Total liabilities
1,576,634
1,547,011
12. 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 £212.7 million (31 March 2021: £186.1 million) and a
weighted average cost of 1.2% (31 March 2021: 2.3%) per annum. The typical period to maturity of the repurchase arrangements
is 3 to 6 months (31 March 2021: 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 and the related finance charges amounting to £20.6 million
(31 March 2021: £21.4 million) is shown as financing activity in the Statement of Cash Flows.
During the financial year ended 31 March 2022, the Company entered into some off-balance sheet financing agreements. These
facilities 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 2022 was £2.8 million (31 March
2021: £Nil).
Real Estate Credit Investments Limited
77
Financial Statements
Annual Report and Accounts 2022
13. 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 2022, the Company had capital of £343.9 million (31 March 2021: £346.9 million).
31 Mar 2022
Number of Shares
31 Mar 2021
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.
14. Financial Instruments and Associated Risks
The Company’s investment activities expose it to various types of risk which are associated with the financial instruments and
markets in which it invests. The Company’s risk management policies seek to minimise the potential adverse effects of these
risks on the Company’s financial performance.
The financial risks to which the Company is exposed include market price risk, interest rate risk, liquidity risk, currency risk, credit
risk, prepayment and re-investment risk. In certain instances as described more fully below, the Company enters into derivative
transactions in order to help mitigate particular types of risk.
(a) Market Risk
Market risk is the risk that the fair value and future cash flows of a financial instrument will fluctuate because of changes in
market factors. Market risk comprises of 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 currency exchange contracts. These instruments are
detailed in Note 10.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
78
Annual Report and Accounts 2022
The currency profile of the Company, including derivatives at fair value, at the year end date was as follows:
As at 31 March 2022:
Net
currency
exposure
GBP
Monetary
Assets
GBP
Monetary
Liabilities
GBP
Forward Foreign
Currency Exchange
Contracts
GBP
Currency
GBP
347,260,274
236,062,842
(50,234,754)
161,432,186
EUR
(3,335,582)
210,880,009
(51,710,613)
(162,504,978)
USD
10,792
10,792
–
–
343,935,484
446,953,643
(101,945,367)
(1,072,792)
As at 31 March 2021:
Net
currency
exposure
GBP
Monetary
Assets
GBP
Monetary
Liabilities
GBP
Forward Foreign
Currency Exchange
Contracts
GBP
Currency
GBP
350,670,329
269,174,884
(32,804,020)
114,299,465
EUR
(3,799,685)
154,802,177
(46,562,795)
(112,039,067)
USD
10,359
10,359
–
–
346,881,003
423,987,420
(79,366,815)
2,260,398
As at 31 March 2022, 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 2021.
By 5%
31 Mar 2022
GBP
31 Mar 2021
GBP
EUR
(166,779)
(189,984)
USD
540
518
Total
(166,239)
(189,466)
By 10%
31 Mar 2022
GBP
31 Mar 2021
GBP
EUR
(333,558)
(379,969)
USD
1,079
1,036
Total
(332,479)
(378,933)
Real Estate Credit Investments Limited
79
Financial Statements
Annual Report and Accounts 2022
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 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.
Should interest rates rise by 1% (100 basis points) or 5% (500 basis points) (31 March 2021: 1% (100 basis points) or 2% (200 basis
points)) in relation to the fixed-rate assets held by the Company, the estimated impact on the net asset value (“NAV”) of the
Company is a decrease of £3.7 million or £18.3 million (31 March 2021: £7.5 million or £15.0 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 2022 and 31 March 2021, and their weighted average lives. A fundamental principle of bond investing is
that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of
fixed-rate bonds fall.
The 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
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
80
Annual Report and Accounts 2022
The maturity profile of the Company as at 31 March 2022 was as follows:
Net Assets
GBP
Within one year
GBP
One to five years
GBP
Over five years
GBP
Financial assets at fair value through profit or loss
394,341,104
82,272,397
121,831,664
190,237,043
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
343,935,484
31,866,777
121,831,664
190,237,043
The interest rate profile of the Company as at 31 March 2021 was as follows:
Fixed
GBP
Floating
GBP
Non-interest bearing
GBP
Total
GBP
Financial assets at fair value through profit or loss
220,927,550
169,513,336
–
390,440,886
Cash and cash equivalents
–
21,220,812
–
21,220,812
Cash collateral at broker
–
943,980
–
943,980
Derivative financial assets
– forward foreign exchange contracts
–
–
2,260,399
2,260,399
Other assets
–
–
11,381,740
11,381,740
Financing agreements
–
(77,819,803)
–
(77,819,803)
Other liabilities
–
–
(1,547,011)
(1,547,011)
Total
220,927,550
113,858,325
12,095,128
346,881,003
The maturity profile of the Company as at 31 March 2021 was as follows:
Net assets
GBP
Within one year
GBP
One to five years
GBP
Over five years
GBP
Financial assets at fair value through profit or loss*
390,440,886
86,958,465
137,376,487
166,105,934
Cash and cash equivalents
21,220,812
21,220,812
–
–
Cash collateral at broker
943,980
943,980
–
–
Derivative financial assets
– forward foreign exchange contracts
2,260,399
2,260,399
–
–
Other assets*
11,381,740
11,381,740
–
–
Financing agreements
(77,819,803)
(77,819,803)
–
–
Other liabilities
(1,547,011)
(1,547,011)
–
–
Net Assets
346,881,003
43,398,582
137,376,487
166,105,934
*Accrued interest related to financial assets at fair value through profit or loss is included within other assets.
Real Estate Credit Investments Limited
81
Financial Statements
Annual Report and Accounts 2022
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 2022, 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 2022. As the Company has minimal IBOR
exposure, IBOR reform does not have any significant impact on the Company’s financial statements.
(b) Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has
entered into with the Company. Credit risk is generally higher for a non-exchange traded financial instrument because the
counterparty for non exchange traded financial instruments is not backed by an exchange-clearing house.
The Company’s financial assets, other than the investment portfolio discussed below, exposed to credit risk, at the year end date
were as follows:
31 Mar 2022
GBP
31 Mar 2021
GBP
Cash and cash equivalents
47,385,138
21,220,812
Cash collateral at broker
5,204,692
943,980
Total
52,589,830
22,164,792
Credit rating for the custodian of the cash balance is on page 83.
Market Bonds
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 Loans and Bonds 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 loans and bonds as at 31 March 2022, amounted to £99.8 million (31 March 2021:
£136.1 million) and £184.6 million (31 March 2021: £173.9 million), respectively which excludes any interest accrued on loans
and bonds at this date.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
82
Annual Report and Accounts 2022
Derivative Contracts
The Company has credit exposure in relation to its derivative contracts. The Company was invested in derivative contracts with
The Bank of New York Mellon as at 31 March 2022 and 31 March 2021, respectively, with the following credit rating and credit
quality according to Standard and Poor’s:
31 Mar 2022
Rating
31 Mar 2021
Rating
31 Mar 2022
GBP
31 Mar 2021
GBP
The Bank of New York Mellon
AA-
AA-
(1,072,792)
2,260,399
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 liabilities by counterparty and details of the collateral received and pledged by 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
–
Below are the derivative assets by counterparty and details of the collateral received and pledged by Company as at 31 March 2021:
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
2,260,399
–
–
2,260,399
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 rating 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 and 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 rating of Aa2 at the reporting date (31 March 2021: Aa2) according
to Moody’s.
Real Estate Credit Investments Limited
83
Financial Statements
Annual Report and Accounts 2022
(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 table details the current and long-term financial liabilities of the Company at the year end date:
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
–
As at 31 March 2021:
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
–
65,367,390
12,452,413
–
– Other liabilities
–
1,547,011
–
–
–
66,914,401
12,452,413
–
The market for subordinated asset-backed securities, including real estate loans into which the Company is invested, is illiquid. In
addition, investments that the Company purchases in privately negotiated (also called “over-the-counter” or “OTC”) transactions
may not be registered under relevant securities laws or otherwise may not be freely tradable, resulting in restrictions on their
transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this illiquidity, the Company’s ability to vary its portfolio in a timely
fashion and to receive a fair price in response to changes in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which there is not a readily available market, the Company’s ability to
deal in any such investment or obtain reliable information about the value of such investment or risks to which such investment is
exposed may be limited.
(d) Valuation of Financial Instruments
IFRS 13
Fair Value Measurement
requires disclosures surrounding the level in the fair value hierarchy in which fair value
measurement inputs are categorised for assets and liabilities measured in the Statement of Financial Position. The determination of
the fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation
techniques as described in Note 2, Significant accounting policies and in Note 3, Critical accounting judgements and key sources of
estimation uncertainty. For financial instruments that trade infrequently and have little price transparency, fair value is less objective.
The Company categorises investments using the following hierarchy as defined by IFRS 13:
•
Level 1 – Quoted market prices in an active market for an identical instrument.
• Level 2 – Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than
active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
• 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.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
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 2022:
Level 1
GBP
Level 2
GBP
Level 3
GBP
Total
GBP
Non-current assets
Real Estate Credit Investments – market bonds
–
98,450,555
–
98,450,555
Real Estate Credit Investments – self-originated bonds
–
–
186,047,325
186,047,325
Real Estate Credit Investments – self-originated loans
–
–
109,843,224
109,843,224
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.
As at 31 March 2021:
Level 1
GBP
Level 2
GBP
Level 3
GBP
Total
GBP
Current assets
Forward foreign exchange contracts
–
2,260,399
–
2,260,399
Non-current assets
Real Estate Credit Investments – market bonds*
–
80,247,010
112,497
80,359,507
Real Estate Credit Investments – self-originated bonds*
–
–
173,931,664
173,931,664
Real Estate Credit Investments – self-originated loans*
–
–
136,149,715
136,149,715
Total non-current assets
–
80,247,010
310,193,876
390,440,886
Current liabilities
Real Estate Credit Investments – repurchase agreements
–
(77,819,803)**
–
(77,819,803)
–
4,687,606
310,193,876
314,881,482
* Excludes accrued interest.
** Includes repurchase agreements related to Level 3 investments.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined based on
the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of forward 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 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”), repurchase agreements and
over-the-counter derivatives.
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.
Real Estate Credit Investments Limited
85
Financial Statements
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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 as a key unobservable input in
deriving fair value of these investments. A 50% weighting to each data point has been applied and the fair value range generated
by the two approaches is £2.5 million (31 March 2021: 1.4 million). The sector curve discount yields used range from 4.0% to 14.0%
(31 March 2021: 5.8% to 10.0%). Applying a discount yield +/-2% to the valuation would reduce/increase the fair value at 31 March
2022 by £(2.5) million and £2.6 million (31 March 2021: £1.1 million and £2.0 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 5.1% to 13.3% (31 March 2021: 5.1% to 15.0%) (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. 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 2022, the Investment Manager was not aware of any significant movement in the 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. Whilst no defaults in the underlying investment are expected, a 1% or 2% decrease
in the discount rate would decrease the fair value by £3.7 million or £7.3 million (31 March 2021: £7.5 million or £15.0 million),
respectively and increase net profit by an equal amount; an equal change in the opposite direction would decrease the equity
of the loan and bond portfolio within the Company and decrease net profit by an equal amount.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
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Annual Report and Accounts 2022
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 2022
GBP
Level 3
31 Mar 2021
GBP
Financial assets at fair value through profit or loss
Opening balance
310,193,876
137,815,691
Total gains recognised in the Statement of Comprehensive Income for the year
2,260,608
7,702,126
Purchases
81,589,656
85,193,214
Sales
(109,625,571)
(70,148,329)
Transfer in to Level 3
–
149,631,174*
Closing balance**
284,418,569
310,193,876
Unrealised loss on investments classified as Level 3 at year end
(688,552)
(847,497)
* During the year ended 31 March 2021, following a change in accounting estimate for the bilateral bond portfolio, they have been moved from Level 2 to Level 3. For further details please see
pages 73 and 86.
**The closing balance does not include accrued interest of £11,471,980 (31 March 2021: £11,005,926) included in the fair value of Level 3 financial assets at fair value through profit or loss.
(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.
15. 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 will be
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.
Real Estate Credit Investments Limited
87
Financial Statements
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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 2022:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Reportable segment profit
3,611,069
26,112,910
29,723,979
Year ended 31 March 2021:
Reportable segment profit
6,188,794
31,861,530
38,050,324
Year ended 31 March 2022:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Total assets
–
–
446,953,642
Non-segmental assets
–
–
52,612,538
Reportable segment assets
98,450,555
295,890,549
394,341,104
Year ended 31 March 2021:
Total assets
–
–
426,247,817
Non-segmental assets
–
–
24,446,111
Reportable segment assets
80,714,401
321,087,305
401,801,706
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.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
88
Annual Report and Accounts 2022
The following table provides a reconciliation between net reportable income and operating profits.
31 Mar 2022
GBP
31 Mar 2021
GBP
Reportable segment profit
29,723,979
38,050,324
Net gains on foreign exchange instruments and other foreign currency transactions
2,609,285
7,139,844
Other income
37,017
133,684
32,370,281
45,323,852
Operating expenses
(5,841,351)
(5,842,223)
Finance costs
(1,954,553)
(2,237,927)
Net profit
24,574,377
37,243,702
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 2022
GBP
31 Mar 2021
GBP
Reportable segment assets
394,341,104
401,801,706
Cash and cash equivalents
47,385,138
21,220,812
Cash collateral at broker
5,204,692
943,980
Derivative financial assets
–
2,260,399
Other assets
22,708
20,920
446,953,642
426,247,817
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)
Realised loss on sales
(390,363)
(99,945)
(490,308)
Net movement in unrealised gain on investments at fair value
through the profit or loss
759,447
2,473,050
3,232,497
Closing fair value*
97,781,000
284,418,569
382,199,569
* The 31 March 2022 closing fair value does not include accrued interest of £669,555 and £11,471,980 included in the fair value of Market Bond Portfolio and Bilateral Loan and Bond Portfolio,
respectively.
Real Estate Credit Investments Limited
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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 2021:
Year ended 31 March 2021:
Market Bond Portfolio
GBP
Bilateral Loan and
Bond Portfolio
GBP
Total
GBP
Financial assets at fair value through profit or loss
Opening fair value
87,905,159
287,255,418
375,160,577
Purchases
23,213,994
85,193,214
108,407,208
Repayments/sales proceeds
(34,024,589)
(70,148,329)
(104,172,918)
Realised (loss)/gain on sales
(4,170,757)
2,826,294
(1,344,463)
Net movement in unrealised gain on investments at fair value
through the profit or loss
7,435,700
4,954,782
12,390,482
Closing fair value
80,359,507
310,081,379
390,440,886
16. 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 2022, a total of £5.2 million (31 March 2021: £0.9 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.
17. 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 though another Luxembourg-based entity, ENIV S.à r.l. via
separate note instruments. This entity has separate compartments for each loan deal which effectively ring-fences 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 2022, the management fee totalled £4.4 million (31 March 2020: £4.3 million), of which
£0.4 million (31 March 2021: £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.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year ended 31 March 2022
Real Estate Credit Investments Limited
90
Annual Report and Accounts 2022
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.
Upon passing of the second continuation resolution at the AGM held on 16 September 2021, the Company entered a new
Performance Period commencing on 1 October 2021 which is expected to run until the end date of the quarter in which the next
continuation resolution is passed. With the commencement of a new Performance Period, the NAV on which the Hurdle Assets
will be determined in accordance with the above formula was reset to the NAV per share of £1.51 as at 30 September 2021 (being
the Starting Date of the new Performance Period).
During the year ended 31 March 2022 and 31 March 2021, there were no performance fees.
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 years ended 31 March 2022, the administration fee totalled £250,286 (31 March 2021: £245,781), of which £20,892
(31 March 2021: £20,865) was outstanding at the year end.
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is entitled to receive from the Company an annual Depositary fee
of 0.02% (31 March 2021: 0.02%) of the NAV of the Company. During the year ended 31 March 2022, the Depositary fee totalled
£65,969 (31 March 2021: £64,656). The Company owed £27,086 (31 March 2021: £21,000) to the Depositary at the year end date.
18. Contingencies and Commitments
As at 31 March 2022, the Company had committed £522.9 million into bilateral loans and bonds of which £284.4 million had been
funded (31 March 2021: £117.2 million into loans of which £43.9 million had been funded).
19. Subsequent Events
The Directors declared a dividend of 3 pence per share on 23 June 2022.
Since 1 April 2022, RECI has committed £38.6 million into 4 loans and RECI received a total of £71.5 million from 5 loans that have
repaid.
As mentioned in Other Risks on page 19, the Board and the Investment Manager continue to monitor the assets and strategy in
light of the latest market events including inter alia, the war in Ukraine, inflationary and interest rate rises, Brexit and Covid-19
impacts, and at the date of signing are not aware of any direct or immediate impacts that materially affect the contents of this
Annual Report.
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.
20. 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 2022
GBP
31 Mar 2021
GBP
EUR
1.18
1.17
USD
1.32
1.38
21. Approval of the Financial Statements
The Annual Report and audited financial statements of the Company were approved by the Directors on 23 June 2022.
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Annual Remuneration Disclosure for the Year to 31 March 2022
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 2022, 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
£14,225,990
7
£823,715
£134,550
Senior Management
6
£ 5,683,780
6
£383,973
£52,394
Total
35
£ 19,909,770
13
£1,207,688
£186,944
Remuneration Code information is provided as required under the FCA Rules (BIPRU 11.5.18).
APPENDIX I – AIFM REMUNERATION POLICY (UNAUDITED)
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92
Annual Report and Accounts 2022
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
borrowings 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 borrowings, 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 borrowings. 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 2022,
the maximum leverage calculated has been 161.99% for the Gross Approach and 130.06% for the Commitment Approach. In the
year ended 31 March 2021, the maximum leverage calculated has been 148.12% for the Gross Approach and 122.22% for the
Commitment Approach.
APPENDIX II – AIFM LEVERAGE (UNAUDITED)
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DIRECTORS AND ADVISERS
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Graham Harrison (resigned 16 September 2021)
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
Arnold House
St. Julian’s Avenue
St. Peter Port
Guernsey, GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza, Block 6
International Financial Services Centre
Ireland, Dublin 1
Real Estate Credit Investments Limited
94
Annual Report and Accounts 2022
Design by Dusted.
Real Estate Credit Investments Limited
East Wing
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3PP