REG - Real Est Crd InvsLtd - Annual Financial Report
20/06/2024 07:00
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RNS Number : 2005T Real Estate Credit Investments Ltd 20 June 2024
Real Estate Credit Investments Limited (the "Company")
Annual Report for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of the Company's
Annual Report and Audited Financial Statements (the "Financial Statements")
for the year ended 31 March 2024.
View the Financial Statements:
https://realestatecreditinvestments.com/investors/results-reports-and-presentations
(https://realestatecreditinvestments.com/investors/results-reports-and-presentations)
A copy of the Financial Statements has been submitted to the National Storage
Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
For further information please contact:
Investment Manager: RECIIR@cheynecapital.com (mailto:RECIIR@cheynecapital.com) (Cheyne) +44 (0)20 7968 7450
Broker: Darren Vickers / Edward Mansfield (Liberum Capital) +44 (0)20 3100 2222
Real Estate Credit Investments Limited
Annual Report and Accounts
2024
Attractive returns from credit exposure to UK
and Western European real estate markets
Real Estate Credit Investments is a specialist investor in the United Kingdom
and Western European real estate markets with a focus on fundamental credit
and value
AS AT 31 MARCH 2024
Overview and Highlights
· 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
- 31 positions
- Diverse portfolio across sectors and geography
· Attractive and stable income in a changing interest rate
environment
- Consistent portfolio yield of 9%+ offering a buffer to risk-free
rates
- A high-yielding portfolio, combined with a short weighted average
life, ensures minimal exposure to yield widening and the ability to redeploy
at higher rates quickly
· Access to Cheyne's established real estate investment team and
substantial origination pipeline
Key figures
Total Assets
£326.4m
(31 March 2023: £337.0m)
NAV per share
£1.45
(31 March 2023: £1.47)
Net Assets
£352.3m
(31 March 2023: £419.0m)
Net Profit
£21.9m
(Full year ended 31 March 2023: £20.6m profit)
RECI Offers:
· Focus on senior secured credit, with defensive Loan-to-Values
("LTVs")
· Strong governance control over its loan book
· Large, experienced, well capitalised borrowers
· Conservative and diversified leverage profile
· Dividend stability without compromising risk
· Management from Cheyne's Real Estate team
Total NAV Return
7.0%
(31 March 2023: 6.2%)
Share Price
£1.15
(31 March 2023: £1.34)
Dividend Yield
10.4%
(31 March 2023: 9.0%)
Dividends
12.0 pence
(31 March 2023: 12.0 pence)
OVERVIEW
At a Glance
Our investment strategy provides compelling risk-adjusted returns.
Real Estate Credit Investments ("RECI" or the "Company") is a closed-ended
investment company which originates and invests in real estate debt secured by
commercial or residential properties in Western Europe, focusing primarily on
the United Kingdom, France and Spain.
The Company's aim is to deliver a stable quarterly dividend with minimal
portfolio volatility, across economic and credit cycles, through a levered
exposure to real estate credit investments.
RECI's investments are predominantly in Self-Originated Loans and Bonds. The
Company also holds a small portfolio of Market Bonds (listed real estate debt
securities such as Commercial Mortgage Backed Securities ("CMBS")).
Investment Portfolio Composition
RECI's investment portfolio, a diversified book of 31 positions in real estate
bonds and loans, was valued at £329.4 million including accrued interest, as
at 31 March 2024, down from £400.7 million as at 31 March 2023. The portfolio
had a weighted average levered yield of 10.2% and a loan-to-value ratio of
64.9% as at 31 March 2024.
Portfolio by Geography
by % of Total Committed Capital including PIK
Allocation Change since
March 2024
March 2023
%
%
Country
United Kingdom 57.8 (0.5)
France 26.4 2.6
Spain 5.9 (1.6)
Finland 4.1 0.4
Ireland 1.9 0.4
Italy 1.0 (0.2)
Germany 2.9 1.8
NAV and Share Price As at 31 March 2024
Net Assets £326.4m
Shares Outstanding (net of treasury shares) 225.2m
NAV (per share) £1.45
Share Price (per share) £1.15
Discount (20.7)%
Dividend Yield 10.4%
Market Capitalisation £262.6m
Total NAV Return(1)
Financial Year Ended 31 March 2024 7.0%
Prior Financial Year Ended 31 March 2023 6.2%
Last Three Financial Years Ended 31 March 2024 21.8%
Last Five Financial Years Ended 31 March 2024 30.1%
1 The Total NAV Return measures the combined effect of any dividends paid,
together with the rise or fall in the NAV per share. The Total NAV Return
relates to past performance and takes into account both capital returns and
dividends paid to Shareholders. Any dividends received by a Shareholder are
assumed to have been reinvested in the assets of the Company at its NAV per
share on the ex-dividend date. The Total NAV Return is considered an
Alternative Performance Measure pursuant to ESMA Guidelines which is unaudited
and outside of the scope of International Financial Reporting Standards
("IFRS").
OVERVIEW
About the Company
The Investment Objective of the Company is to provide Shareholders with
attractive and stable returns, primarily in the form of quarterly dividends.
Real Estate Credit Investments Limited ("RECI" or the "Company") is
incorporated in Guernsey, governed by the Companies (Guernsey) Law, 2008 (as
amended) (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;
(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
OVERVIEW
Chairman's Statement
RECI continues to deliver a robust NAV and attractive quarterly dividends of 3
pence per share.
Bob Cowdell
Chairman
I am pleased to report that for the year ended 31 March 2024, RECI delivered a
total net profit of £21.9 million and maintained an unchanged dividend of 3
pence per quarter, despite challenging times for the listed investment company
sector.
The last financial year saw the war in Ukraine continuing and the events of 7
October 2023 and Israel's response in Gaza, have seen heightened tensions in
the Middle East. Elsewhere, geopolitical tensions and concerns remain, in a
year of record numbers of government elections worldwide.
While the rate of inflation has been reducing from its peak, strong labour
markets and energy prices have caused Central Banks to delay in cutting
interest rates for longer than was expected. The Bank of Canada and the
European Central Bank have recently announced rate reductions and consensus
remains that interest rates will reduce over the rest of 2024 and 2025
bringing benefits to households and corporate borrowers. The return to
long-term lower interest rates, albeit not to the lows of the last decade,
will see income seekers move away from cash and government bonds as they seek
higher returns on their investment. A reduction in
interest rates should also benefit and allay investor concerns about the
credit and real estate markets.
The economic and geopolitical challenges of the last year, combined with
discount, liquidity and some governance issues, have seen investor sentiment
negatively impacted across the whole listed investment company sector.
Concerns over credit and UK equity markets and real estate and private equity
valuations have driven significant investor selling, allied to the need to
sell investment company shares to provide liquidity to satisfy significant
levels of redemptions in investors' underlying funds. This combination has
seen investment companies' share price discounts widen to near record levels.
Against this challenging backdrop, the Board and Cheyne have continued to
focus on RECI's core strengths and seek to deliver for our Shareholders. The
Company's shares traded at an average discount to NAV of 14.7% during the
financial year ended 31 March 2024. Reflecting market sentiment, the Real
Estate Debt Sector traded at an average discount of 26.3% (excluding RECI)
over the same 12 months(1).
During the last financial year, the Company received interest and repayments
on its portfolio to fund its existing investment commitments. Since the year
end, the Company has received two further repayments totalling £16.7 million.
The Board continues its practice of considering all options when assessing the
levels of excess cash to be retained or deployed by the Company from time to
time and how any such cash available for deployment should be allocated.
Excess cash is regarded as the cash available following recognition of the
obligation to ensure sufficient cash resources to pay, inter alia, the
Company's expenses, borrowings, dividends, and fund its ongoing contractual
loan commitments, from time to time ("Available Cash").
Mindful of the Company's prevailing discount and Available Cash, the Board
launched an initial buyback programme in August 2023 and a successor buyback
programme in March 2024.
The Directors and Cheyne remain committed to providing detail and transparency
regarding the Company's portfolio and investment strategy, allowing all
investors to focus on RECI and its merits and opportunities, notwithstanding
the challenging broader market environment.
I am pleased to report that RECI won the Best Performance Award as the top
performer over three years in the Specialist Debt Category at Citywire's
annual awards ceremony in November 2023.
Reflecting your Board's and our Investment Manager's confidence in RECI and
its future, the Directors and employees of Cheyne have purchased an aggregate
of 1.24 million shares in the Company since the start of the financial year on
1 April 2023.
1 Source: Liberum, company data
Financial Performance
RECI reported a total net profit for the financial year ended 31 March 2024 of
£21.9 million on year-end total assets of £352.3 million, compared with a
£20.6 million net profit in the year ended 31 March 2023, on year-end total
assets of £419.0 million.
The NAV as at 31 March 2024 was £1.45 per share (£1.47 per share as at 31
March 2023) which, combined with the 12 pence per share of dividends payable
in respect of the year ended 31 March 2024, represents an annualised total
return for Shareholders of 7.0%.
During the financial year ended 31 March 2024, the Company's shares traded at
an average discount to NAV of 14.7%, (6.1%
discount for the year ended 31 March 2023).
Total quarterly dividends declared in respect of the financial year ended 31
March 2024 were an unchanged 12 pence per share, returning £27.4 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 6.8%, with average gross leverage
of £73.9 million or 0.22x NAV. RECI also had asset level structured leverage,
totalling £33.9 million at year end, at an average borrowing cost of 7.5%.
When the financial year began on 1 April 2023, RECI had gross balance sheet
leverage of £80.4 million (0.24x NAV) and leverage net of cash of £64.0
million (0.19x NAV). As at 31 March 2024, the Company's gross balance sheet
leverage was £23.8 million (0.07x NAV); its leverage net of cash was £1.0
million (0.00x NAV); and its net effective leverage, including contingent
liabilities of £3.9 million (being the partial recourse commitment,
representing 25% of asset level borrowings provided to certain asset level
structured finance counterparties), was 0.02x NAV.
During the financial year to 31 March 2024, the Company funded £95.2 million
into existing investments, compared with £158.6 million in the previous
financial year. RECI received cash repayments and interest of £134.2 million
in this year, compared with £159.0 million in the year ended 31 March 2023.
The Company also received £9.3 million (net of repo financing) via the sale
of market bonds in the year.
Financial Year Review
Despite the challenging real estate and credit markets, the Company's robust
portfolio ensured the NAV remained stable at an average of £1.47 per share
during the financial year, notwithstanding the payment to Shareholders of four
unchanged dividends, totalling 12 pence per share, during the period.
Cheyne maintained the strategy of focusing portfolio exposure upon lower risk
senior loans, with 86% of the Company's positions comprised of senior assets
by the financial year end. RECI's holding of market bonds had reduced to 2.2%
of the portfolio by 31 March 2024. The weighted average life of the whole
portfolio was 1.4 years for the financial year ended 31 March 2024; and the
weighted average LTV of the Company's portfolio was 64.9% (59.2% at 31 March
2023), maintaining significant defensive equity headroom.
The Board and Cheyne have continued to monitor RECI's cash resources and
repayments and to consider the appropriate level and blend of gearing for the
Company, which saw a reduction in gross and net balance sheet leverage over
the year to 31 March 2024.
The negative market sentiment during our last financial year inevitably
impacted RECI's share price and saw material discount widening across the
investment company sector generally and the credit and real estate sectors, in
particular. The Company's shares traded at an average discount to NAV of 14.7%
for the financial year ended 31 March 2024.
On 31 August 2023, the Company announced a share buyback programme (the
"Initial Programme"), with a maximum aggregate purchase price of £5.0
million. Pursuant to that programme, a total of 4,095,000 shares were
purchased for treasury for an aggregate amount of £5.0 million. Shares were
repurchased under the Initial Programme at an average discount to net asset
value per share of 16.6%, with the Company's shares trading at an average
discount of 14.2% from 31 August 2023 to 25 March 2024 (the date of the last
share repurchase under the Initial Programme).
On 28 March 2024, the Company announced that it intended to undertake a
further buyback programme (the "Successor Programme") which will run to 30
September 2024. The maximum aggregate purchase price of all shares acquired
under the Successor Programme will be £10.0 million and 1,812,643 shares have
been repurchased to date.
The Company's shares closed at £1.22 on 18 June 2024 (a discount of 16.38%),
which would provide a yield of 9.84% on the basis of continuing to pay a
quarterly 3 pence dividend per share for the rest of the current financial
year.
The merits of RECI's offering and, in particular, the yield at current share
price levels, appear to have been overlooked amid the broader volatile market
and negative sector background. Your Board continues to believe that RECI
provides investors with a highly attractive and sustainable long-term income
stream.
RECI is well positioned to deliver this attractive dividend stream alongside a
robust NAV and provide investors with a substantial and liquid company (with
total assets of £352.3 million and market capitalisation of £262.6 million
at 31 March 2024) with the potential for the shares to re-rate and the Company
to grow over time.
Board Update
Colleen McHugh was appointed on 15 September 2023 as Chair of the Board's
Management Engagement Committee, succeeding Susie Farnon who remains Chair of
the Company's Audit and Risk Committee.
In line with the Board's succession planning and following the appointment of
an independent recruitment firm and a comprehensive search process, the
Company announced on 8 May 2024 that Andreas Tautscher had been appointed as
an independent non-executive director of the Company. He will also serve as a
member of the Company's Audit and Risk, Nomination, Remuneration and
Management Engagement Committees and will stand for election at the Annual
General Meeting to be held in September 2024.
Andreas has over 30 years' experience in the banking and financial services
industry, including as CEO of Deutsche Bank International, and I am looking
forward to the Company benefiting from the experience and complementary skills
he will bring.
Having joined RECI and become Chair in 2015, in accordance with good
governance practice I had agreed with the Board that it would not be
appropriate for me to stand for re-election at the September 2024 AGM and that
I should retire from the Board at the conclusion of that meeting. Accordingly,
led by our senior independent director ("SID"), the Board carried out a
process to recruit a successor Chair candidate earlier this year and a
candidate was identified to join the Board and succeed me after a suitable
handover period. Unfortunately, the candidate has now withdrawn due to a
perceived conflict of interest that had arisen.
As announced on 12 June 2024, John Hallam, the SID and Chair of the
Remuneration Committee, has advised the Board that reluctantly he wishes to
retire from the Board at the September AGM for personal reasons. As a
consequence of John stepping down, the Board has requested that I stand for
re-election and continue as Chair beyond the September 2024 AGM for the
requisite period needed to complete the process to identify a successor as
Chair and achieve a smooth and successful handover. As announced, Susie Farnon
was appointed as the new SID with immediate effect and will lead the process
of recruiting my successor. I would like to record the Board's appreciation of
John's highly valued contribution to RECI as a non-executive director, SID and
committee chair during the course of his tenure.
Environmental, Social and Governance Matters ("ESG")
Your Board continues to recognise and support the growing focus on ESG
considerations and the importance of ethical factors, including climate
change, when pursuing the Company's investment objective and in the selection
of service providers and advisers to the Company.
In her role as "ESG Lead", Colleen McHugh is working closely with Cheyne in
developing and implementing RECI's ESG approach.
Page 26 of the Stakeholder Engagement section and pages 28 to 33 of the
Sustainability Report provide further information about the Company's and the
Investment Manager's approach to ESG matters.
Outlook
The UK general election will be held on Thursday 4 July, with a change of
government widely anticipated. 2024 will also see the greatest ever number of
elections around the globe, with eyes focused on the outcome of November's US
elections as potentially being the most destabilising. A resolution to the
conflicts in Ukraine and the Middle East appears as challenging as ever.
The reduction of inflation should allow Central Banks to move to reduce
interest rates over time, albeit perhaps slower than anticipated. A return to
a lower long-term interest rate environment, even if not returning to the
recently experienced low levels, should benefit RECI as it continues to
provide investors with a highly attractive and sustainable yield.
In considering all options when deciding on the appropriate allocation of the
Company's Available Cash resources, the Board is mindful of when opportunities
present themselves to achieve attractive repeatable returns from new
investments and thereby enhance the "investment case" for RECI. Encouragingly,
Cheyne and its new deal pipeline ensure that RECI will continue to benefit
from the opportunities to lend at attractive returns of over 10% to enhance
portfolio returns and dividend cover. Scheduled portfolio repayments
over the rest of the year will boost Available Cash to be deployed into new
higher yielding opportunities alongside funding the current and potential
future buyback programmes.
Notwithstanding the challenging market and sector background, the Directors
believe that RECI remains soundly positioned to continue to deliver an
attractive and stable dividend to investors seeking a reliable long-term
income stream from a listed and liquid investment company, with a highly
regarded specialist Investment Manager.
Bob Cowdell
Chairman
19 June 2024
KPIs and Financial Highlights(1)
Key Performance Indicators
31 Mar 2024 31 Mar 2023
Balance Sheet
NAV per share £1.45 £1.47
Share price £1.15 £1.34
Discount (20.7)% (8.8)%
Average discount in year(1) (14.7)% (6.1)%
Leverage (% of NAV)(2) 7.3% 23.8%
1 Average discount in year is the average of the difference between the share
price and the NAV per share divided by NAV per share.
2 Leverage is the recourse financing divided by the net assets.
31 Mar 2024 31 Mar 2023
Profit, Loss and Dividends
Earnings per share 9.6p 9.0p
Dividends per share declared for the year 12.0p 12.0p
Total NAV Return (including dividends) annualised(1) 7.0% 6.2%
* Assumes re-investment of dividends.
Financial Highlights
31 Mar 2024 31 Mar 2023
£m £m
Balance Sheet
Cash, cash equivalents and cash held by brokers 22.8 16.5
Net assets 326.4 337.0
31 Mar 2024 31 Mar 2023
£m £m
Profit and Loss
Operating income 31.4 30.7
Net profit 21.9 20.6
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:
realestatecreditinvestments.com.
1 Alternative Performance Measures are described in Glossary on page 102.
Annual Report and Accounts 2024
Business
and Strategy Review
In this section
Strategic Framework and Performance Highlights
Strategic Report
Investment Manager's Report
Stakeholder Engagement
Sustainability Report
Business and Strategy Review
Strategic Framework and Performance Highlights
Senior real estate lending remains a high conviction theme
Objectives
1 Provide investors with a diversified portfolio of real
estate credit investments
2 Deliver a stable quarterly dividend with minimal
volatility
3 Exploit opportunities in the real estate market
4 Position the Company to grow through opportunities the
Investment Manager is delivering
Performance Highlights
Deal Repayments and Interest in Year
£134.2m
(as at 31 March 2024)
Dividends Paid
£27.4m
(as at 31 March 2024)
Investment Portfolio
£329.4m
(as at 31 March 2024)
Performance Highlights
Progress in Year Ended 31 March 2024
1
· RECI's investment portfolio is a diversified book of 31 positions
in real estate loans and bonds.
· Over the course of the last financial year RECI funded £95.2
million into existing deals during the year with no new commitment to deals.
2
· Paid out dividends of 3 pence per share each quarter, 12 pence
over the year.
· A total of £27.4 million in dividends returned to our
Shareholders.
3
· Investment book has reduced to £360.0 million (gross of
leverage) as at 31 March 2024 which is spread across 31 positions with a
weighted average levered gross yield of 10.2% and an average loan-to-value of
64.9%.
· RECI also received cash repayments and interest of £134.2
million in this year.
4
· RECI continues to migrate towards an all-senior loan book.
· 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.
Business and Strategy 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 and Investment Policy
The Investment Objective and Investment Policy are set out on page 6, along
with a further paragraph "About the Company" explaining in more detail the
corporate structure and listing of the Company's shares.
RECI is externally managed by Cheyne, a UK investment manager authorised and
regulated by the Financial Conduct Authority ("FCA"). Cheyne is a limited
liability partnership registered in England and Wales on 8 August 2006 and is
authorised and regulated in the conduct of investment business in the United
Kingdom by the FCA. Cheyne is also the AIFM of the Company. Cheyne has offices
in London, Berlin, Madrid, Bermuda, Dublin, Dubai, New York, Zurich, Monaco,
Munich, Sydney and Paris.
Current and Future Development
A review of the year and outlook is contained in the Investment Manager's
Report and also in 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 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 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, 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, making 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.
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 continuation vote is due within the three-year period;
(iii) The average life of the portfolio is within the three year period.
The Board conducts an annual review, stress testing the Company's cash flows
arising from the loan and bond portfolio over a three-year period, including
interest received and proceeds from realisations, short-term finance
obligations of the Company and dividend cover. Further considerations are the
inherent sensitivities within the loan and bond portfolios and their impact on
the cash flows.
The Board has identified a number of principal risks, which are detailed
below. The Board has taken these into account when considering the long-term
viability of the Company.
The Board routinely conducts three-year reviews, stress testing the
performance against a number of adverse scenarios, such as the fair value
write-down of the investments, or reduced cash flows from the investment
portfolio. The fair value stress test was considered relevant to factor in any
potential events affecting the underlying assets or credit concerns about the
borrowers which potentially could impact on the fair value. The reduced cash
flow stress test was considered relevant in the event of potential defaults
arising on the loan portfolio and the inability to recover the interest or
principal back in full.
In the current environment the Company has also considered the future of its
Investment Manager when looking at its own viability, and given the size of
the Investment Manager's platform away from the Company and the private
capital it manages in numerous other real estate debt funds, of which the
combined total is approximately £5 billion Assets Under Management ("AUM"),
the Investment Manager is expected to be able to continue to manage the
Company for the foreseeable future.
Further consideration has been given with respect to the current market
environment, including the ongoing economic impacts of relevant geopolitical
and macroeconomic risks: including sustained higher interest rates, heightened
inflation, supply chain disruption, the continuing impact of conflicts and a
number of global elections happening around the world; and the effects of
climate change and cyber security. The Investment Manager has prepared
sensitivity analyses including various stress scenarios. An evaluation
continues to be performed for each of the positions in light of these
potential impacts on operating models and valuations and hence recovery
prospects for certain individual positions. The output of this analysis was
used to (i) report fair value movements, and (ii) update all the cash and
income forecasting for the portfolio. The Investment Manager continues to
perform a granular analysis of the future liquidity profile of the Company. A
detailed cash flow profile of each investment was completed, incorporating the
probability of likely delays to repayments, other stress tests (and additional
cash needs).
Even taking these stress scenarios into account and bearing in mind the
leverage and liquidity of the bond portfolio, the Company is expected to be
able to meet its liabilities over the three-year period.
Risk Management
It is the role of the Board of Directors to review and manage all risks
associated with the Company, mitigating these either directly or through the
delegation of certain responsibilities to the Audit and Risk Committee and
Investment Manager. Additionally, the Board seeks to identify emerging risks
and responds to them as they evolve.
The Board considers that the following are the principal risks and
uncertainties faced and has identified the mitigating actions in place to
manage them. There are no additional emerging risks that have been identified.
Long-term Strategic Risk
The Company is subject to the risk that its long-term strategy and its level
of performance fail to meet the expectations of its Shareholders. The shares
may trade at a continuing discount to NAV and Shareholders may be unable to
realise their investments through the secondary market at NAV per share. The
Board monitors the level of premium or discount of share price to NAV per
share.
The Board monitors investment strategy and performance on an ongoing basis and
regularly reviews the Investment Objective and Investment Policy in light of
prevailing investor sentiment to ensure the Company remains attractive to its
Shareholders. The Board is committed in promoting the Company with the
long-term aim of its share price trading at or around NAV and considers all
options to achieve this. This includes consideration, as part of the ongoing
cash allocation policy, of implementing share buybacks to enhance NAV per
share and potentially reduce any discount to NAV. This may be done when cash
resources permit and in the context of prevailing market conditions and the
one-time potential NAV uplift of a buyback compared with the potential
repeatable long-term benefit of investments in attractive high yielding
opportunities to enhance RECI's returns.
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 2024 and at
each subsequent AGM, or earlier at an Extraordinary General Meeting if the
Directors consider it appropriate. During the year ended 31 March 2024, the
Company has purchased 4.1 million shares into treasury.
Target Portfolio Returns and Dividend Risk
The Company's targeted returns are based on estimates and assumptions that are
inherently subject to significant business and economic uncertainties and
contingencies, and the actual rate of return may be materially lower than the
targeted returns. In addition, the pace of investment may be slower than
expected, or principal may be repaid earlier than anticipated, causing the
return on affected investments to be less than expected. In addition, if
repayments are not promptly re-invested this may result in cash drag which may
lower portfolio returns. However, as the Company is able to invest in both
bonds and loans, the Investment Manager has the ability to adjust the asset
mix towards bonds.
As a result the level of dividends and other distributions to be paid by the
Company may fluctuate and there is no guarantee that any such distributions
will be paid.
There may be economic circumstances and wider market considerations that
arise, that mean the Investment Manager and Board deem it appropriate to
maintain higher levels of cash reserves.
The Investment Manager regularly provides the Board with reports on pipeline
opportunities, which include analysis of the expected returns available. The
Directors also regularly receive information on the performance of the
existing loans which includes analysis of the likelihood of any early or late
repayments which may impact returns.
Valuation Risk
The valuation and performance of the Company's investments that comprise its
portfolio of real estate debt instruments are the key value drivers for the
Company's NAV and interest income. Judgements over fair value estimates could
significantly affect these key performance indicators.
The Company categorises its financial assets and liabilities in accordance
with IFRS 9 and establishes fair value utilising the methodology in accordance
with IFRS 13, as set out in Note 15(d) to the financial statements. Further
information on valuation is detailed in the Audit and Risk Committee Report on
page 52 and Note 2 to the financial statements.
Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment that it has entered into with
the Company.
Market Bond Portfolio - The Company is subject to the risk that issuers of
asset-backed securities in which it invests may default on their obligations
and that certain events may occur which have an immediate and significant
adverse effect on the value of such instruments. There can be no assurance
that an issuer of an instrument in which the Company invests will not default
or that an event which has an immediate and significant adverse effect on the
value of such instruments will not occur, and that the Company will not
sustain a loss on the transaction as a result.
The Company seeks to mitigate this risk by monitoring its portfolio of
investments, reviewing the underlying credit quality of its counterparties, on
a monthly basis. In addition to the underlying credit quality of borrowers the
weighted average life of the assets as at 31 March 2024 is 2.4 years, which is
an additional mitigant regarding any loss in value due to changes in borrowers
circumstances over the long term.
Bilateral Loan and Bond Portfolio - The Company is subject to the risk that
the underlying borrowers to the loans and bonds in which it invests may
default on their obligations and that certain events may occur which have an
immediate and significant adverse effect on the value of such instruments. Any
loan and bond may become a defaulted obligation for a variety of reasons,
including non-payment of principal or interest, as well as covenant violations
by the borrower in respect of the underlying loan and bond documents. In the
event of any default on the Company's investment in a loan and bond by the
borrower, the Company will bear a risk of loss of principal and accrued
interest on the loan and bond, which could have a material adverse effect on
the Company's investment. There can be no assurance that a borrower will not
default, that there will not be an issue with the underlying real estate
security or that an event which has an immediate and significant adverse
effect on the value of these loans and bonds will not occur, and that the
Company will not sustain a loss on the transaction as a result. The Company
seeks to mitigate this risk by performing due diligence and monitoring its
portfolio of investments, reviewing the underlying credit quality of its
borrowers, performance of the underlying asset, and loan and bond covenant
compliance against financial information received and the performance of the
security and the performance of the security, which is provided by the
Servicer to the Company 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 comprises currency risk, interest rate risk and other price risk.
The Company's strategy on the management of market risk is driven by the
Company's Investment Objective as detailed on page 6 and in Note 1 to the
financial statements.
The Company's market risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures detailed in the latest
Prospectus and summarised in the financial statements.
Currency Risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign exchange
rates. The Company is exposed to currency risk to the extent that foreign
exchange rates fluctuate in relation to financial instruments that are
denominated in currencies other than British Pounds ("GBP").
The Company manages its foreign exchange risk on a portfolio basis. The
Company may bear a level of currency risk that could otherwise be hedged where
it considers that bearing such risks is appropriate. The Company manages its
foreign exposure via forward foreign exchange contracts.
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 CMBS.
Real estate loans can have fixed interest coupons and are therefore
potentially exposed to the wider effects of changes in interest rates. For
bonds, the interest rate risk arises from the effects of fluctuations in the
prevailing levels of market interest rates on the fair value of financial
assets and liabilities and future cash flows. A segment of the portfolio
consists of floating rate debt investments which are exposed to interest rate
risk through changes in interest rates, potentially having an effect on
prepayments and defaults of the underlying loans of the securitisations.
In addition to the underlying credit quality of borrowers, the weighted
average life of the assets as at 31 March 2024 is 2.4 years, which is an
additional mitigant regarding any losses in value due to changes in borrowers'
circumstances over the long term.
While retaining the ability to do so, the Company does not currently enter
into hedging arrangements in respect of interest rate fluctuations.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities on a timely basis.
The Company's liquidity risk is managed on a daily basis by the Investment
Manager in accordance with policies and procedures detailed in Note 15(c) to
the financial statements. Where needed, the Investment Manager will seek to
liquidate positions to increase cash or reduce leverage.
Much of the market for CMBS and real estate loans is relatively illiquid. In
addition, investments that the Company purchases in privately negotiated (also
called "over-the-counter" or "OTC") transactions may not be registered under
relevant securities laws or otherwise may not be freely tradable, resulting in
restrictions on their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this illiquidity, the
Company's ability to vary its portfolio in a timely fashion and to receive a
fair price in response to changes in economic and other conditions may be
limited.
Furthermore, where the Company acquires investments for which there is no
readily available market, the Company's ability to deal in any such investment
or obtain reliable information about the value of such investment or risks to
which such investment is exposed may be limited.
For further information on risks, please refer to Note 15 to the financial
statements.
Other Risk Factors
The Board gives consideration to and, together with Cheyne, monitors other
relevant risks, in addition to the ones highlighted above; this includes a
consideration of any relevant Emerging Risks as they evolve. The performance
of service providers is a relevant risk, as the Company is dependent on the
performance of the service providers. The Board and Cheyne regularly measure
and evaluate the performance of the providers. These currently include:
geopolitical and macro economic risks sustained higher interest rates and
stubborn inflation pressure, supply chain disruption, the continuing impact of
conflicts around the world; and the effects of climate change and cyber
security. Given the short weighted average life of the assets, and the
continual replacement of assets in the portfolio from the wider Investment
Manager's pipeline, such macro risks are worked through in the life of the
assets. Any issues that might potentially impact the value of the investments,
including impacts to supply chains, are taken into account in the fair value.
An evaluation of each of the Company's positions in light of these risks is
continually monitored.
Business and Strategy Review
Investment Manager's Report
Delivering the Company's key objectives through a challenging period.
Ravi Stickney
Portfolio Manager
Managing Partner and CIO, Cheyne Real Estate
Macroeconomic backdrop and implications for real assets
In our prior year annual manager's report, we expanded on the thesis of
inflation and rates remaining higher for longer and its implications for real
asset valuations.
Rolling forward a year, and that thesis is now entrenched into the wider
market thinking as well. Those that argued for inflation to retrench, along
with rates, are increasingly coming to consensus that long-term structural
inflation is greater than 2% and that terminal interest rates will remain
significant higher for longer.
The implications for real estate, globally, has seen the marked decline in
valuations this year. Assets that demonstrate a long-term productive and
sustainable need (such as mid-market dwellings), have seen relative modest
declines. Assets that are structurally obsolete (such as old office buildings
in need of substantial refurbishment) have seen declines or more than half
their values.
Whilst many European banks are, broadly, shielded from these valuation
declines (by virtue of conservative senior lending since 2008), we saw, at the
beginning of 2024, the material impact of highly levered regional banks on the
wider real estate sectors in the North American, German and Scandinavian
markets.
Looking forward, there is much focus on a potential soft landing for the US
economy and a Eurozone recession. That augurs for a dual track rates regime,
with persistent higher rates in the US in contrast to depreciating rates in
the Eurozone. The latter is likely mildly supportive of European real estate
valuations. There is also the great unknowns of global political uncertainty
and the policy changes those may bring at the back end of 2024. All of these
present the case for continued volatility in global real asset markets and
wider capital markets.
None of this is new to RECI's manager, Cheyne Real Estate. Indeed, since 2016
(Brexit) and 2020 (Pandemic), we have been mindful to seek out the lowest
possible risk profile for RECI's investment book. This has presented itself in
the senior lending space, which has brought RECI its relative stability in a
turbulent world.
Debt markets in Europe
Against the volatile backdrop, the case for productive and sustainable real
assets is significant. For example, our key cities remain blighted by a lack
of affordable housing and Western economies are also playing catch up on the
creation of much needed technologically driven production facilities. In the
leisure sector, years of underinvestment have meant limited choice of quality
accommodation in city centres and for leisure. Even in the office sector, the
availability of prime grade A offices in central London, for example, remains
extremely low.
Real estate buyers, developers, and owners that we work with are increasingly
active in seeking funding (debt and equity) for the following efforts:
1. Towards the refinancing of their current high quality productive cash
flowing assets
2. In the development of new productive assets
3. To the repurposing of obsolete assets (for example in transforming an old
polluting office to a best-in-class super prime offering)
In addition, the need for debt capital is not being met by supply, for the
reasons we have articulated previously:
• The continued retrenchment of banks from commercial real
estate lending due to regulatory capital pressures
• The very high barriers to entry in European real estate
lending, proving difficult for nascent local lenders to grow, and for foreign
lenders to gain a meaningful foothold in Europe
• The severe weakening of German and Scandinavian lending banks
in light of the ongoing regional banking concerns in both markets.
As such, the market remains compelling for established lenders to provide much
needed assistance via senior debt capital towards the above needs.
Asset Performance
The past year has seen an acceleration of the themes we highlighted in last
year's commentary, namely the resilience of sustainable productive assets and
the weakness in anything other than this.
The main living asset class, mid-market housing for rent and for purchase,
continues to perform well across the key cities in Europe. The need for
housing is great and the supply is severely constrained. Rental growth
continues to accelerate in key cities and a lack of governmental support in
funding the sector (and in tight planning regulations) has exacerbated the
issue. Our top pick for senior funding remains in supporting the growth of
mid-market housing in the key cities of the UK and Europe.
Other living assets such as Purpose-Built Student Accommodation ("PBSA")
continues to see growth from a lack of supply and a resurgence of demand in
our key education hubs. Later living, senior living and healthcare housing
continue to need funding to grow to service our communities.
The industrial sector has seen significant demand from the need for high value
production being brought closer to shore and a transition away from polluting
industries. In tandem, the need for logistics assets, though declining as
supply has responded to demand, remains stable.
City centre and leisure destination hotels have seen a significant growth in
demand through the last two years. This has not been met by supply of new
premises due to underinvestment and a lack of funding since the pandemic.
Hotels in particular remain a challenged asset class for bank lending to
partake in.
Finally, the office sector has seen a strong growth in demand for core city
centre locations and super prime "grade A" offices offering the very best in
accommodation standards and environmental credentials. Whilst city centre
demand is driving strong rental growth in the core central locations (for
example in the core City and West End locations in London), the secondary
locations have yet to experience the spill over in demand.
RECI - Review of the prior year
RECI has faced a challenging year reflecting both the market and sector
background. Nevertheless, Cheyne's focus has remained on delivering upon the
main objectives of the Company;
· NAV preservation
· Portfolio Income stability
· Attractive dividend payouts
· Growth over time
The persistent pressure on the share price has seen the Company enact two
share buyback programmes, with the deployment of available cash to fund such
buybacks impacting the ability of the Company to invest into new loans.
Current Loan Book NAV
RECI's senior loan focus mitigates valuation declines and market stress
RECI's move towards a focus on senior loans (accelerated post the 2020
pandemic period), has significantly helped it in navigating the material
downturn in property valuations that played out in 2022 and 2023. Senior loans
give RECI the absolute security, governance, control and covenants necessary
to work with sponsors to navigate their challenged valuations.
Whilst valuations have decreased across the book, RECI is free to address the
issues bilaterally with the sponsors, with no governance dilution given away
to other lenders. A mezzanine heavy strategy would not have afforded this
capability. Indeed, we see significant losses in mezzanine lenders unable to
forestall enforcement by senior lenders as valuations decline.
Over the past two years, RECI has been able to assist capable sponsors in
navigating value declines, by giving them the assistance and time to improve
the income from their assets and move to a refinancing or sale of their
assets. In exchange for this assistance, RECI has managed to seek a meaningful
"derisking" of its position via incremental amortisations or principal
paydowns. Effecting this strategy is only possible due to RECI's unfettered
governance in senior loans.
The above assistance to sponsors is a "win-win" solution for RECI and its
sponsors; enabling the sponsor to earn a good recovery on equity in a very
challenged time, whilst addressing the risk position of RECI. The proof of the
success in this strategy has been the large number of repayments RECI has seen
over the past year, despite the very challenging conditions. RECI saw the
repayment of nine loans which realised gross proceeds of £111.3 million and
realised IRR of 9.2%. This included the repayment, in full, of senior loans
collateralised by a London office asset and also a logistics asset which saw
its "red book" formal valuation decline by 40%. All of the nine loan
repayments were for the full principal balance and all accrued coupons plus
fees.
Portfolio Profile
Reflecting market conditions, while RECI continued to fund its existing
commitments, it made just two new loan investments in the last two financial
years. As such, its loan portfolio is predominantly a legacy book accumulated
prior to mid-2022. Despite the significant valuation shifts in the last two
years, RECI's loan book has avoided significant stress and volatility. As
above, this is predominantly related to the senior loan dominance of this
book. The book, currently, has 25 remaining loans, with a gross value of
£352.1 million. The current WA LTV of the book is 64.9% (based on latest
valuations) compared to 60.5% at origination. The main reason for the muted
rise in the WA LTV are (a) the continued repayments being achieved and (b) the
de-risking provided by, most, sponsors.
Challenged Sectors - Offices & Retail
The RECI loan book is resilient across 22 out of 25 of its deals. The office
sector in Europe and the US remains challenged post pandemic in the migration
to increased home working. The demand for offices, today, resides in the best
ESG credentialled prime Grade A offices. The supply is heavy in substandard,
inefficient offices. The dynamics of the sector has led to a slow take up of
office space (albeit at stable rents for Grade A stock) across Europe. Office
senior loans make up 13% of RECI's NAV. Both are senior loans with collateral
located in Paris and have sponsors who have successfully delivered prime
"Grade A", ESG excellent offices in Paris. Both assets are, however, in
secondary locations outside the core central business district. Of the two,
one asset is located in the weaker eastern district (3% of NAV), whilst the
other (larger) asset is in the stronger north west district (9% of NAV).
The sponsor in the former asset has defaulted on its loan and RECI has reduced
the fair value of the loan to reflect the ultimate recovery value that has
been assessed by its valuers. The loan is carried today at 72% of its par
balance. RECI benefits from the continued efforts of Cheyne Real Estate's
large French team in working towards a recovery on this asset. Whilst the
recovery will take time, we do expect a recovery above the current carrying
value.
The sponsor in the latter asset has agreed to make a material repayment of the
loan balance and is also a capable asset manager who recognises the potential
for a long-term lease of this asset. RECI will provide this sponsor with the
assistance needed for the sponsors recovery, in consideration for the
de-risking agreed.
RECI's exposure to retail rests in a single mixed-use asset, which is
currently carried at a valuation that is 25% of its par balance and represents
0.8% of the Company's NAV.
Further Repayments
Other than the challenged assets above, we continue to expect timely
repayments on RECI's loan book. Since the financial year end, the Company has
already received two further repayments totalling £16.7 million.
Income & Dividend - stability and growth
It has been challenging to navigate the need for income stability and growth.
A sustained constraint on the ability to invest in new deals to replenish the
portfolio brings the challenge of dealing with a lower base of income, less
operational efficiency and less flexibility. Whilst income decline in the last
financial year was not meaningful, further retrenchment from the loan book
would see that income at risk.
To mitigate (and reverse) this risk, we do see the need for RECI to balance
its need for share buybacks with the need for investment in new loans, which
offer a very high level of current running cash income. The wider Cheyne Real
Estate platform sees, as its most compelling investment thesis today, the
origination of substantial senior loans secured by core income producing
assets for running yield of around 10%. With funding from RECI's banking
partners, that running return should be greater than 15% on such core deals.
It is this deal profile that, we believe, RECI should allocate some of its
cash resources to (especially as repayments remain regular).
Growth
RECI's manager, Cheyne Real Estate, and its investors, see a substantial
attractive opportunity set in the provision of senior loans in Europe for the
reasons we have expanded on above. As of 31 March 2024, Cheyne's firmwide AUM
stood at USD 11.2 billion, of which Cheyne Real Estate represented USD 5.4
billion. The Real Estate team is currently launching the next flagship credit
funds within the Cheyne Real Estate Credit Holdings ("CRECH") Programme: CRECH
Senior Loan Fund (target raise £5.0 billion) and CRECH Capital Solutions Fund
(target raise £2.0 billion, anchored and seeded by an existing Sovereign
Wealth Fund investor). It is our fervent hope that RECI can, in time, grow its
capital base to partake in these accretive loans for the benefit of its
investors.
Leverage
RECI's current gross leverage stands at £23.8 million, representing a 0.07x
debt to equity ratio, set against a maximum of a 1.40x ratio. RECI's low level
of leverage is a function of the repayments it has seen through the year,
coupled with no new investments absorbing the cash proceeds.
Looking to the coming year
RECI cannot ignore the market backdrop nor the deep discounts and other issues
across the investment company sector which, looking to the coming year, will
continue to put pressure on RECI's share price. We do note the emergence of
new buyers at these discounted share prices. However, we are also acutely
aware of the constant pressure on some of RECI's shareholders to seek
liquidity for their underlying funds. To this end, we are supportive of the
Board in its decision to enact two share buyback schemes to date.
Despite the constraints on cash flow and growth, we will continue to manage
RECI to its key objectives and for the preservation of the valuable income to
its shareholders. This will be done with:
· A continued focus on asset management of its current loan book.
RECI benefits from the 60 strong team of investment and asset management
professionals dedicated to real estate debt at Cheyne Real Estate, located in
offices across London, Berlin, Madrid, Bermuda, Dublin, Dubai, New York,
Zurich, Monaco, Munich, Sydney and Paris
· A proportionate allocation of cash (from loan repayments) towards
new, highly cash flow generating, senior loans
The Cheyne Real Estate business continues to grow and to support RECI. We
remain dedicated to the success and, eventual, growth of the Company.
Business and Strategy Review
Stakeholder Engagement
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.
Investors
Why they are important
The Board believes that the maintenance of good relations with Shareholders is
important for the long-term prospects of the Company and seeks engagement with
investors.
How the Board engages
The Directors and Cheyne are committed to providing detail and transparency
regarding the Company's portfolio and investment strategy, allowing all
investors to focus upon RECI and its merits and opportunities, notwithstanding
the broader market environment. 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
also receives feedback on the views of Shareholders from Liberum Capital
Limited (the "Corporate Broker") and the Investment Manager, and Shareholders
are welcome to contact the Chairman or any Director at any time via the
Company Secretary.
Key activities during the year
AGM Publications Events
The Directors believe that the AGM provides an appropriate forum for The Company reports to Shareholders with both monthly fact sheets and Throughout the last financial year, the Investment Manager continued to
Shareholders to communicate with the Board and encourages participation. There quarterly update presentations, along with the Annual and interim reports. provide a detailed and comprehensive review of RECI's portfolio as part of our
is an opportunity for individual Shareholders to question the Chairmen of
programme of enhanced investor communication. A number of online events and
the Board and the Audit and Risk Committee at the AGM. The Board assesses the These are available on the Company's website: meetings were held to maintain a regular dialogue with our Shareholders and
results of AGMs considering whether the number of votes against or withheld in
realestatecreditinvestments.com potential new investors. In addition, the Board continues to work with its
respect of resolutions are such as to require discussion in the subsequent
service providers to enhance the Company's website and fact sheet.
Annual Report. 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.
Community and Environment
Why they are important
In carrying out its activities, the Company aims to conduct itself
responsibly, ethically and fairly. The Directors recognise the importance of
environmental, social and governance factors, including climate change, when
pursuing the Company's Investment Objective and in the selection of the
service providers and advisers the Company works with. The Board is alive to
the magnitude of the evolving ESG landscape. It has determined that ESG
considerations, and their communication, must be fundamental to all its
operations and has consequently nominated an ESG lead to co-ordinate and drive
internal discussion. The Board, in conjunction with the Investment Manager,
continues to closely monitor upcoming regulation and any developments in this
area.
How the Board engages
The Board's ESG Lead, Colleen McHugh works closely with Cheyne in developing
and implementing RECI's ESG approach. Pages 28 to 33 of the Sustainability
Report provide further information about the Company's and the Investment
Manager's approach to ESG matters.
Key activities during the year
The Investment Manager engages on an ongoing basis with an external Real
Estate ESG specialist consultant to assist with developing its framework and
provide assurance on a comprehensive scorecard based approach using a borrower
questionnaire for each deal. The questions in Cheyne's borrower questionnaire
have been grouped and weighted to enable a proprietary 0-5 scoring against the
following Target Characteristics:
• E1 Commitment to Environmental Risk Monitoring
• E2 Contribution to Positive Environmental Action
• S1 Supporting Social Wellbeing
Qualifying Investments must achieve a score of 3 or higher on at least one of
the Target Characteristics.
The ultimate aim is to align the Investment Manager's principles with industry
recognised benchmark standards to identify a minimum ESG standard needed
across RECI's portfolio. The move to a more qualitative system has
significantly helped the Investment Manager identify and understand ESG based
risks in its portfolio more easily, and not only assist with lowering risk and
increasing quality, but also helped collate and measure the data required to
track progress in what is a fast moving but increasingly important area of
focus. The Investment Manager has now fully embedded the ESG framework within
its investment process, which includes regular training for the Real Estate
team and wider Cheyne employees.
Additionally, the Company has decided to purchase carbon offsets for all
flights that may be required by the Directors and the Investment Manager,
thereby facilitating a carbon neutral position, as pertains to travel. The
Company recognises that this action is the first step in an evolving climate
strategy, that should encompass carbon removal as well as carbon offsets.
To further reduce its carbon footprint, Shareholder communications will be
electronic only to all Shareholders on the share register. Accordingly, the
Company's website is now the default method of communication for Shareholder
publications. Currently approximately 81% of the Company's Shareholder
register receive documents and other communications electronically.
Service Providers
Why they are important
Effective relationships with service providers help the Company achieve its
objectives, including its investment objectives, and to operate in an
efficient and compliant manner.
Commercial service providers: Investment Manager, Administration agent,
Corporate broker, Legal advisers, Auditor and Key service providers are
retained, providing continuity of service and familiarity with the objectives
of the Company.
The Audit and Risk Committee receives information from the Company's service
providers with the majority of information being directly sourced from the
Company Secretary, Administrator, the Investment Manager and the external
auditor.
How the Board engages
The Management Engagement Committee meets at least once a year for the purpose
of evaluating the performance of the Company's service providers, the review
of service agreements and service level statements and the level and method of
their remuneration. The Audit and Risk Committee considers the nature, scope
and results of the auditor's work and reviews its performance annually prior
to providing a recommendation to the Board on the reappointment or removal of
the auditor.
Key activities during the year
The Board has detailed and constructive discussions with some service
providers regarding service provision and fees. Details of the
responsibilities of the Investment Manager, Investment Advisor, Link Market
Services (Guernsey) Limited (Registrar), and Aztec Financial Services
(Guernsey) Limited (Company Secretary) can be found on page 101. Other service
providers include our corporate broker, lenders, auditors, counsel and other
advisors.
Business and Strategy Review
Sustainability Report
RECI's Approach To Sustainability
RECI aims to operate in a responsible and sustainable manner over the long
term. The Company prioritises continuous enhancement of ESG credentials across
the portfolio, and its success is aligned with the delivery of positive
outcomes for all its stakeholders, not least the communities in which the
buildings that it finances, live, work and enjoy.
The Company's main activities are carried out by Cheyne, the Investment
Manager, and as such the Company adopts the Investment Manager's policy and
approach to sustainability and integrating ESG principles.
The Investment Manager was one of the initial signatories to the Standards
Board for Alternative Investments (formerly known as the Hedge Fund Standards
Board) and is a signatory to the United Nations-supported Principles for
Responsible Investment ("PRI").
Several standards and codes have received prominence as metrics for investment
managers. These include, for example, the UN Principles for Responsible
Investment, the Task Force on Climate-related Financial Disclosures ("TCFD"),
the Financial Reporting Council's Stewardship Code, and the FCA's
Sustainability Disclosure Requirements ("SDR"). The TCFD was disbanded on 15
December 2023, with the International Financial Reporting Standards ("IFRS")
now responsible for monitoring the climate related disclosures. The UK
government has started the process of how to endorse the IFRS Sustainability
Disclosure Standards for use in the UK. This reporting framework will be known
as the UK Sustainability Reporting Standards and is not expected to be
effective until January 2026 at the earliest.
The Investment Manager's Stewardship Committee provides firmwide oversight
over its processes, seeking to ensure compliance with existing Responsible
Investment and ESG policies and procedures, and creates a direct communication
channel for all ideas and concerns around ESG. In addition, the ESG
Implementation Forum acts as a conduit for the streamlining of various
initiatives across investment lines and ensures that it continuously improves
its ESG standards.
Cheyne's Partnership with Evora Global
ESG considerations have formed a key part of Cheyne's approach to investments
in real estate for many years. In February 2022, Cheyne partnered with Evora,
widely recognised as one of the leading sustainability consultancy specialists
to the real estate industry, to formalise its approach to the incorporation of
sustainability considerations into the investment process.
The ongoing partnership with a leading external specialist is expected to
enable Cheyne to remain at the forefront of the rapidly evolving ESG agenda
and provide an independent checkpoint to challenge their ESG investment
process and ensure robustness.
Cheyne Real Estate Core ESG Principles
Cheyne believes that an overarching focus on ESG considerations is entirely
aligned with our investment goals.
· Sustainability credentials directly support real estate
valuations
· Sustainable, energy efficient buildings are more valuable to
asset owners by:
o Supporting higher rents, lower vacancies and lower operating costs
o Supporting exit valuations.
ESG considerations in our investments are not merely a passive analysis but
rather the opportunity to effect positive change.
· Cheyne is a key stakeholder in our investments, frequently the
sole lender to a real estate asset
· This provides the ability to directly engage with all new
sponsors to help drive the ESG agenda directly and seek to address any
deficiencies and opportunities to improve sustainability credentials of the
asset
· This is particularly relevant in development, value add and
transitional financing, which represents a core focus for Cheyne.
Incorporating Sustainability into the Investment Process
Due Diligence
RECI is primarily invested in real estate loans and other real estate based
debt investments. Key factors taken into consideration, where appropriate and
possible, are best-in-class environmental, design and construction standards,
a focus on Building Research Establishment Environmental Assessment ("BREEAM")
ratings, governance rights and engagement with sponsors. Sustainability risks
are considered during the Investment Manager's initial due diligence in
respect of an investment opportunity, including as part of the external
valuations of the real estate being financed (such valuations typically
consider any environmental and/or social risks) and early engagement with
potential borrowers or issuers through a data gathering exercise.
The Investment Manager's analysts also compile reports using data gathered
from their own due diligence and external reports, environmental performance
indicators (including BREEAM ratings and Energy Performance Certificates) and
investigations (including through the use of forensic accountants and other
third-party consultants). This information is included in the investment
committee memorandum, which is considered by the Investment Manager's
investment committee prior to an investment being made.
Decision-Making Process
Sustainability risks are considered as part of the investment decision-making
process for RECI. In particular, the following sustainability risks are
typically considered, both in respect of the real estate being financed and/or
the relevant borrower or issuer:
· Environmental: power generation (including its sustainability),
construction standards, water capture, energy efficiency, land use and ecology
and pollution.
· Social: affordable housing provisions, community interaction and
health and safety conditions.
· Governance: management experience and knowledge and anti-money
laundering, corruption, and bribery practice.
Ongoing Management
Sustainability risks also form part of the ongoing monitoring of RECI's
investments, with regular reports and ongoing engagement from borrowers and
issuers incorporating information related to sustainability risks provided to
the Investment Manager. Where appropriate, the investment team will assist
borrowers and issuers in addressing ESG-related issues and support its
borrowers' and issuers' efforts to report externally and internally on their
ESG approach and performance in relation to material sustainability risks.
Exit
ESG considerations are already having an impact on underlying real estate
values and whilst clear data driven evidence is in its infancy, the Investment
Manager is acutely aware that during the life of the loans that RECI is
writing, this will become much clearer. As such this is an important
consideration regarding risk analysis now; hence the approach above is an
integral tool when calculating, managing and measuring risk.
Cheyne has taken a staged approach in developing its ESG strategy, with its
philosophy drawing on the following four drivers:
• The Greater Good
• Value Enhancement/Risk Management
• Regulation
• Investor Expectations
Cheyne has worked with Evora to prepare customised ESG questionnaires for each
of the real estate asset types the Cheyne real estate lending funds finance:
standing, refurbishment and development assets, together with a borrower
questionnaire. An ESG data template has also been prepared (one template for
all asset types).
The questionnaires seek to quantify each investment's performance against key
ESG criteria, utilising a consistent approach to enable aggregation across the
assets within the relevant Cheyne fund. The score is set at a stringent enough
level to effect a conversation about enhancing the ESG characteristics if they
are not up to Cheyne's standards.
The questionnaires are used by Cheyne's analysts to undertake a broad based
ESG evaluation of a proposed investment - focusing on both the sponsor and the
asset itself.
Standards and Guidance
A range of external guidance and best practice standards have been used to
inform the development of the ESG questionnaires, including:
• Global Real Estate Sustainability Benchmark
("GRESB")
• Building Research Establishment Environmental
Assessment Method ("BREEAM")
• EU Taxonomy
• Sustainable Finance Disclosure Regulations
("SFDR")
• Minimum Energy Efficiency Standards ("MEES")
Outlook and Focus Areas 2024 and Beyond
The Company knows that its Shareholders, including the Directors of the
Company, see attention to ESG factors as critical in its assessment of Cheyne
as the Investment Manager. The Company expects ESG to remain a dominant theme
within the financial services industry going forward; the course being taken
by regulators suggests that its importance will only increase in years to
come; the research process and the investment judgements the Company makes
will continue to reflect that and to evolve as necessary.
The continuing evolution is demonstrated through the Investment Manager in
completing and implementing its ESG framework which now forms the basis of an
evaluation tool to influence investment decisions from an ESG perspective for
new projects.
The next phase of its ESG evolution will involve the engagement of a leading
ESG asset level consultant to capture more defined asset level metrics in
terms of carbon emissions, the goal being to develop a net zero carbon
strategy and action plan. This commitment reflects the Investment Manager's
dedication to environmental stewardship, sustainability, and the wellbeing of
the communities it serves. As part of its involvement with this project, the
Investment Manager will assess potential new frameworks (e.g. CRREM) to secure
its assets and reduce the risk of stranding.
The Investment Manager firmly believes that adopting this approach will:
• Enhance the quality of the portfolio and help
to protect value;
• Stay ahead of investor demand to invest in
sponsors that have a plausible and demonstrable ESG strategy;
• Use capital to drive/accelerate change in the
Real Estate arena in regard to ESG; and
• Provide a measurable approach to understanding
the ESG dynamics of our portfolio.
These efforts are being fully incorporated into the investment process and
allow the Investment Manager to influence borrowers and to improve the ESG
standards of projects which they fund.
Looking ahead, one of the main focuses will be on new regulatory requirements.
This year the Investment Manager will advance its reporting and produce its
inaugural FCA TCFD entity report. Cheyne will also be producing a publicly
available FCA TCFD product level report for RECI, due to its role as
Investment Manager.
In addition, the UK's regulatory framework SDR comes into force in stages from
later this year. As a non-UK domiciled company, the existing scope of the SDR
has very little impact on RECI, with no additional reporting or product
labelling requirements imposed. Nonetheless, RECI will continue to monitor the
regulatory landscape as well as consider best practices as pertains to SDRs
and other such frameworks. Effective 31 May 2024, the Investment Manager will
be in scope of the FCA's Anti-Greenwashing Rule and is working closely with
relevant parties to ensure that it is meeting the necessary regulatory
requirements.
ESG subsequent covenants/conditions may well also be included in time, driven
by risk management principles.
Further details on Cheyne's ESG policy can be found on its website:
cheynecapital.com/esg-responsible-investment/
Responsible Investment Highlights 2024
Investment example 1
Taxi House - Co-Living Scheme (United Kingdom)
Environmental
· The co-living development will be a car-free development, and
residents will be encouraged to use sustainable modes of transport and the
scheme will have dedicated cycle parking
· The Sponsor is dedicated to deliver as BREEAM Outstanding
utilising a range of green and sustainable technologies and measures
· The Sponsor will also ensure 100% of electricity and gas supplies
are from renewable energy sources
· The Sponsor will strive to achieve a recycling rate of 90% and
zero waste to landfill.
Social
· The Sponsor will aim to provide rental levels for studio
apartments which are 10% lower than the comparable rents in the area
· The scheme will be devoted to tackling the issue of loneliness
and isolation through communal spaces and on-site events
· The co-living concept provides high-quality community-focused
accommodation. Ample amenity spaces are dedicated for the residents to
socialise and form a community
· The scheme will provide local employment opportunities through
apprenticeships and training at the site.
Governance
· Cheyne has a firm grasp over the governance of the structure and
continues to oversee management initiatives
· Cheyne will retain control rights through its JV participation
and will therefore ensure the Sponsorship upholds the highest quality of due
diligence and governance in its investments.
Investment example 2
Fulton Road - Residential Development (United Kingdom)
Environmental
· Air source heat pump technology will provide heating and hot
water
· 50% carbon reduction, 41 photovoltaic panels, 2,037 square metres
of new public planning, 51 new trees and 2,500 square metres of biodiverse
green roofs
· Biodiversity net gain and BREEAM Excellent rating.
Social
· The project has helped create up to 925 construction jobs and 205
permanent jobs
· Regal will establish on site training and construction academies
at its developments to support and give back to local communities in an
exclusive relationship with Building Heroes
· Two new pedestrian raised table crossings and a new bus shelter
· New cycle connections and four new public spaces including 3,192
square metres of new play spaces.
Governance
· Regal are a strongly governed business with environmental,
anti-slavery and human trafficking, modern slavery and health and safety
policies in place and followed
· They are in the process of creating their Diversity and Inclusion
policy.
Annual Report and Accounts 2024
Governance
In this section
Board of Directors
Management Team
Directors' Report
Remuneration Committee Report
Corporate Governance Statement
Audit and Risk Committee Report
Directors' Responsibility Statement
Board of Directors
Bob Cowdell
Chairman (UK resident)
Bob Cowdell is an independent non-executive director who has focused on the
financial sector throughout his career; initially as a solicitor and then as a
corporate broker and adviser. He was previously co-founder and Head of the ABN
AMRO Global Investment Funds Team and then Head of Financials at RBS Hoare
Govett.
He is currently the Senior Independent Director of Thomas Miller Holdings
Limited, the former chairman of Castel Underwriting Agencies 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. He is a Freeman of the City
of London and a member of the Institute of Directors and the Chartered
Insurance Institute. He has been a member of the Board since June 2015.
Susie Farnon
Chairman of the Audit and Risk Committee and Senior Independent
Director from 12 June 2024 (Guernsey resident)
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.
John Hallam
Senior Independent Director until 12 June 2024 (Guernsey resident)
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.
Colleen McHugh
Independent Director (Guernsey resident)
Mrs McHugh is acting Chief Investment Officer of Wealthify (part of the Aviva
PLC group) a UK regulated digital investment manager. Prior to this she was
managing director of 1818 Venture Capital, a licensed asset manager based in
Guernsey. She is currently a non-executive director of Ruffer Investment
Company Limited.
Colleen has over 25 years' experience in the investment and financial services
industry having worked predominantly as an Investment Manager and Private
Banker for publicly listed banks such as HSBC, Barclays and Butterfield Bank,
across several regions, but with a focus on international financial centres.
She holds an economics degree from the University of Ireland (Galway) and a
MBA from the University of London. Colleen is a Chartered Wealth Manager and a
fellow of the Chartered Institute of Securities and Investment. She recently
obtained her ESG certification from the CFA Institute. She has been a member
of the Board since March 2021.
Andreas Tautscher
Independent Director (Guernsey Resident)
Mr Tautscher is an experienced Financial Services former executive who now
focuses on acting as an Independent Director on Listed and Private Funds as
well as other regulated businesses. He is currently a Director and Chairman of
Audit Committee for two AIM Listed Boards, a LSE listed Aircraft Leasing
platform as well as a local Bank and Asset Manager.
From 1994 until 2018 Andreas was a senior executive at Deutsche Bank and was
most recently CEO Channel Islands and Head of Financial Intermediaries for
EMEA and LATAM. He also sat on the UK Regional Governance Board of Deutsche
and the EMEA Wealth Management Exco. He has also served on Local Government
advisory committees and was for 6 years a non-executive director on the Virgin
Group Board. Andreas' first career was in the oil industry as a geologist
before moving to PricewaterhouseCoopers where he qualified as a Chartered
Accountant in 1994. He has been a member of the Board since May 2024.
Management Team
Ravi Stickney
Head of Cheyne Real Estate/Portfolio Manager
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.
Andrew Sergeant
Head of Operations, Real Estate
Andrew has 16 years' experience with Cheyne, having joined in 2007. He is
responsible for the daily operations of the Real Estate business including
cash management, securitisations, loan drawdowns, hedging, tax compliance and
corporate governance. Andrew is an approved director in Jersey under the JFSC
and holds several UK directorships. Prior to Cheyne, Andrew held trading
support positions at Deutsche Bank, JP Morgan, and Citibank. Andrew earned a
First Class BA from the University of Leicester in 2003 and holds the CFA
Certificate in Investment Management (IMC).
Kirran Sky
Deputy Portfolio Manager, Real Estate
Kirran joined Cheyne in 2022 from a subsidiary of Oaktree Capital where he
worked with the flagship Opportunities Funds since 2016 in Portfolio
Management, Origination/UW, and modelling/systems development. Prior to this
he worked for Apollo Global Management's European Principal Finance funds in
Portfolio Management, and Nationwide Building Society's
Management Development Programme in Non-Performing Loans, and Commercial
Credit Risk. Kirran has a BSc in Mathematics from Loughborough University.
Arron Taggart
Head of UK
Arron has over 25 years' experience in the real estate markets. He joined
Cheyne in August 2012 to originate real estate loans in the UK and Northern
Europe. Prior to Cheyne, Arron was a Property Specialist and Partner at
Clydesdale Bank responsible for the origination and execution of real estate
loans in London and the South of England. He was also responsible for the
management of the loan portfolio and setting regional strategy. Prior to
Clydesdale Bank, he was at Bank of Scotland and Hitachi Capital.
Raphael Smadja
French Origination
Raphael joined Cheyne in January 2014 and has 20 years' experience. Prior to
Cheyne, he was an Associate Director in Real Estate Finance at Deutsche
Pfandbriefbank, responsible for sourcing and structuring commercial real
estate loans across Europe. Prior to that, he held positions within the Real
Estate Finance and CMBS space at Moody's, UBS and Morgan Stanley.
Daniel Schuldes
European Origination
Daniel has over 18 years' experience in the European real estate debt and ABS
markets. He joined Cheyne in 2007 and specialises in the origination,
structuring, negotiation and execution of German real estate credit
transactions. He was previously an associate on Credit Suisse's asset finance
team in London, which was responsible for originating and structuring the
bank's European securitisations. He focused on fundamental analysis of RMBS
collateral.
Sa'ad Malik
Structured Credit
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.
Lydia Boos
Legal Counsel
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.
Sophie Turner
Business Manager
Sophie is a Business Manager for the Real Estate Team focusing on Investor
Relations for RECI. Prior to this, Sophie worked at Cheyne in Investor
Relations as Client Services Manager and Product Specialist for Convertible
Bonds, and before that, as Assistant Business Manager for the Real Estate
Team. Prior to joining Cheyne in 2008, she worked at the University of
Exeter's Business School, co-ordinating executive education programmes for
corporates such as 3i plc. Sophie earned her BSc in Business Administration
from Cardiff University.
Directors' Report
The Directors present their report and the audited financial statements for
the year ended 31 March 2024.
General Information
The Company was incorporated in Guernsey on 6 September 2005 with registered
number CMP43634.
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-today investment operations, subject to
supervision by the Company's Board of Directors. The Company is an Alternative
Investment Fund ("AIF") within the meaning of the Alternative Investment Fund
Managers Directive ("AIFMD") and accordingly the Investment Manager has been
appointed and registered as the AIFM of the Company.
Principal Activity and Business Review
The principal activity of the Company during the year was that of an
investment company investing in real estate credit investments. For full
details of the Investment Policy of the Company see page 6.
Results and Dividends
The results for the year and the Company's financial position as at year end
are shown on pages 67 and 68. Dividends per share remained at 3 pence per
share, with dividends totalling £27.4 million (31 March 2023: £27.5
million).
A fourth interim dividend for the year ended 31 March 2024 of 3 pence per
share (31 March 2023: 3 pence per share) was declared by the Directors on 19
June 2024 and is payable on 26 July 2024. This fourth interim dividend has not
been included as a liability in these financial statements.
The Company purchased 4.1 million (31 March 2023: Nil) shares in the market
during the year. The total amount paid to purchase the shares was £5.0
million (31 March 2023: £Nil) and this was presented as a reduction from
total equity.
Capital Structure
Details of the authorised, issued and fully paid share capital, together with
details of the movements in the Company's issued share capital during the
current and prior year, are shown in Note 14 to the financial statements.
The Company has one class of shares which carry no right to fixed dividends.
Each share carries the right to one vote at general meetings of the Company.
No person has any special rights of control over the Company's share capital.
Board of Directors
The Board appoints all Directors on merit. When the Nomination Committee
considers Board succession planning and recommends appointments to the Board,
it takes into account a variety of factors. Knowledge, experience, skills,
personal qualities, residency and governance credentials play an important
part.
The Directors of the Company who served during the year and to the date of
this report were:
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Andreas Tautscher (appointed 7 May 2024)
The following summarises the Directors' directorships in other public
companies listed on the London Stock Exchange:
Director Company Name
Susie Farnon Apax Global Alpha Limited
Ruffer Investment Company Limited
Colleen McHugh Ruffer Investment Company Limited
John Hallam NB Distressed Debt Investment Fund Ltd
Andreas Tautscher Doric Nimrod Air Three Limited
Doris Nimrod Air Two Limited
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.
Beyond June 2024, Mr Cowdell will have served on the Board in excess of nine
years, but his skillset, experience and contribution, which clearly
demonstrate his independence, should be and remain of considerable value to
the Board and the Company.
Mrs Farnon and Mrs McHugh are both on the board of Ruffer Investment Company
Limited but the Company believes that this does not impact their ability to be
considered independent.
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 (as amended). The Articles themselves may be amended by
special resolution of the Shareholders. The powers of Directors are described
in the Articles and in the financial statements in the Corporate Governance
Statement. Under its Articles, the Company has authority to issue an unlimited
number of shares of no par value.
The Directors' interests in the share capital of the Company
(some of which are held directly or by entities in which the Directors may
have a beneficial interest) as at the publication date are:
Number of % of
Shares
Company
Bob Cowdell (Chairman) 260,000 0.12
Susie Farnon 45,250 0.02
John Hallam 150,000 0.07
Colleen McHugh 62,000 0.03
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
three notifications of such transactions (31 March 2023: one notification).
Since 1 April 2024, there were four notifications.
List of major Shareholders as at 31 March 2024:
Name Total Shares Held % Shares Held
Close Brothers Group 21,059,141 9.35
Bank Leumi Le Israel 18,054,468 8.02
Hargreaves Lansdown Asset Mgt 14,453,888 6.42
Canaccord Genuity Group Inc 13,315,151 5.91
Tilney Smith & Williamson 13,288,277 5.90
Fidelity Worldwide Investment (FIL) 11,871,829 5.27
Issued Share Capital
The issued share capital of the Company was 229.3 million shares, consisted of
225.2 million outstanding shares and 4.1 million treasury shares (31 March
2023: 229.3 million issued and outstanding shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and was renewed on 6
July 2023
Listing Information
The shares are currently listed on the premium segment of the Official List of
the UK Listing Authority and trade on the Main Market of the London Stock
Exchange.
Website
The Directors are responsible for the oversight of the website and delegate to
Cheyne responsibility for the maintenance and integrity of the financial and
corporate information included on it.
The Investment Manager
Having reviewed the performance of the Investment Manager, the Directors are
satisfied that the continued appointment of the Investment Manager on the
terms agreed is in the best interests of the Shareholders and the Company. The
Company has entered into the Investment Management Agreement under which the
Investment Manager manages its day-to-day investment operations. Details of
the Investment Management Agreement can be found in Note 18 to the financial
statements.
Auditor
Deloitte LLP has been the Company's external auditor since the Company's
incorporation on 6 September 2005 and as a requirement under Financial
Reporting Council ("FRC") Public Interest Entities ("PIE") rules, the
Company's lead audit partner is required to rotate off after five years of
service. There will be a tender process in the second half of this year to
appoint new auditors for the financial year ending 31 March 2026. Further
information on the work of the auditor is set out in the Audit and Risk
Committee Report.
The Audit and Risk Committee reviews the appointment of the auditor on an
annual basis.
Principal Risks and Uncertainties
Principal risks and uncertainties are detailed in the Strategic Report.
Related Party Transactions
Related party transactions are disclosed in Note 18 to the financial
statements. There have been no material changes in the related party
transactions described in the last annual report.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in
preparing the financial statements as, after due consideration, they consider
that the Company has adequate resources to continue in operational existence
for a period of at least 12 months from the date of signing the audited
financial statements.
As highlighted in the long-term viability section in the
Strategic Report, the Investment Manager performed an evaluation of each of
its positions, taking into account all relevant geopolitical and macroeconomic
risks, on its operating models and valuations, and performed a granular
analysis of the future liquidity profile of the Company. A detailed cash flow
profile of each investment was completed, incorporating the probability of
likely delays to repayments, other stress tests (and additional cash needs).
Stress testing is then performed on this cash flow forecast against a number
of adverse scenarios, such as the fair value write down of the investments, or
reduced cash flows from the investment portfolio. The fair value stress test
was considered relevant to factor in any potential events affecting the
underlying assets or credit concerns about the borrowers which potentially
could impact on the fair value. The reduced cash flow stress test was
considered relevant in the event of potential defaults arising on the loan
portfolio and the inability to recover the interest or principal back in full.
Taking account of the updated forecasting, the Directors consider that the
cash resources available as at 31 March 2024 of £18.3 million, together with
the cash held at the broker of £4.5 million, the liquidity of the market bond
portfolio and the financing available through activities such as repurchase
agreements and off-balance sheet financing 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 2024 was 1.5%. 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 18
September 2024 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 19 June 2024.
Bob
Cowdell
Susie Farnon
Director
Director
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. Although the Company is not incorporated in England
and Wales it is mindful of the regulations that apply to such companies in the
context of remuneration and will seek to make appropriate disclosures. All
Directors are non-executive and are not eligible for bonuses, pension
benefits, share options, long-term incentive schemes or other benefits,
performance related or otherwise. Directors do not have service contracts and
there is no provision for compensation for loss of office. All Directors are
entitled to be repaid all expenses reasonably incurred in the performance of
their duties and have signed a letter of appointment setting out the terms of
such appointment.
The prime purpose of the Committee is to determine the Company's remuneration
policy within the limits set by the Articles of Incorporation which currently
state that the remuneration paid to each Director by way of fees shall not
exceed €160,000 in any financial year. Additionally, they provide that if
any Director performs any special duties, or renders services, outside of the
ordinary duties of a Director, that Director shall be paid such reasonable
additional remuneration as the Board may determine.
The Committee is authorised by the Board to seek, subject to a financial
limit, such independent advice as it may deem necessary in the discharge of
its responsibilities.
Composition of the Committee
The Committee is chaired by John Hallam, the Company's Senior Independent
Director and is composed of all the Directors including the Chairman of the
Company, who was deemed independent at the time of his appointment. This
membership is considered appropriate as, collectively, its members are
believed to have the necessary experience and knowledge to fairly determine
remuneration.
Remuneration Policy
The current policy adopted by the Committee is set out below and will be
tabled at the next AGM for approval by shareholders along with this Report.
The Company's Remuneration Policy is that fees payable to the Directors should
reflect the experience and expertise of and the responsibilities borne by the
Directors and the time spent on the Company's affairs and be sufficient to
attract, retain and motivate individuals of high calibre with suitable skills,
experience and knowledge and to ensure that their remuneration is set at a
reasonable level commensurate with their duties and responsibilities. No
element of the Directors' remuneration is performance related.
In determining the level of these fees, the Committee obtains and takes
account of reliable, up-to-date information about remuneration in other
companies of comparable scale and complexity together with general economic
conditions. To help it fulfil its obligations, the Committee shall have full
authority to appoint remuneration consultants and to commission or purchase
any reports, surveys or other information which it deems necessary.
Implementation of the policy
The last major review of Board remuneration took place in 2022 and it is
anticipated that the next will be in 2025. In the interim, the Committee notes
that during the year ended 31 December 2023, Guernsey RPIX increased by 5.5%
and therefore has recommended that the Chairman's fee be increased from
£86,800 to £91,000 (an increase of 4.84%) and the base fee for other
Directors move from £41,750 to £44,000 (an increase of 5.39%) to reflect
this.
As a consequence of these recommendations, the following table sets out the
remuneration of Board members for the financial year ending 31 March 2025 as
compared to the two previous years; it should be noted that the additional
fees set last year, and which remain unchanged, relate to the roles performed
and not to specific individuals while the table assumes that the named
individuals will discharge the roles indicated throughout the coming year.
Year ended Year ended Year ended
31 March
31 March 2024
31 March
GBP
2025 2023
GBP
GBP
Bob Cowdell (Chairman and Nomination Committee Chair) 91,000 86,800 80,000
Susie Farnon (Audit and Risk Committee Chair and Senior Independent 56,500 56,250 53,000
Director)(1, 2)
John Hallam (Remuneration Committee Chair) 46,500 44,250 41,000
Colleen McHugh (Management Executive Committee Chair and ESG Lead)(2) 49,000 44,250 41,000
Andreas Tautscher (Independent Director)(3) 44,000 - -
1 Susie Farnon was appointed to succeed John Hallam
as Senior Independent Director with effect from 12 June 2024.
2 Colleen McHugh took over from Susie Farnon as
Management Engagement Committee chair in the year ended 31 March 2024.
3 Andreas Tautscher was appointed with effect from
07 May 2024.
Furthermore, the 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 Committee's recommendation
that should a prospectus be issued during the financial year ending 31 March
2025, additional fees of the same amount should be paid.
Statement of Shareholder Voting
At the last AGM held on 15 September 2023, a resolution to approve the
Remuneration Committee Report and Remuneration Policy was passed with
96,942,807 votes (99.02%) being cast in favour and 960,807 votes (0.98%)
against reflecting the same very high level of approval as the previous AGM.
Relevant Performance Information
The graph below shows the Total Shareholder Return ("TSR") (share price and
dividends) from the redemption of the preference shares in 16 September 2017
until 31 March 2024 compared with an investment in the FTSE 250 over the same
period. The TSR has averaged 2.74% per annum during that period as compared to
3.05% for the index.
To assist shareholders is assessing the relative importance of Directors'
remuneration, the table below compares the cost per share of the remuneration
with both the earnings per share and the dividend per share paid to
shareholders.
Year Remuneration Earnings Dividend
per share
per share
per share
2023/24 0.103p 9.6p 12.0p
2022/23 0.094p 9.0p 12.0p
2021/22 0.093p 10.7p 12.0p
2020/21 0.085p 16.2p 12.0p
Future Reviews
It is anticipated that full reviews will not take place at less than three
yearly intervals but that the Committee will, in the early part of each year,
review the changes in Guernsey RPIX to determine if it is appropriate to
increase the Chairman's fee and the base fee for other Directors.
John Hallam
Remuneration Committee Chair
19 June 2024
Corporate Governance Statement
Statement of Compliance with Corporate Governance
The Company is a member of the AIC and by complying with the February 2019
edition of the AIC Code is deemed to comply with both the UK and the GFSC Code
where relevant.
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, provisions and recommendations of the
AIC Code and considers that reporting against these will provide appropriate
information to Shareholders. To ensure ongoing compliance with these
principles the Board reviews a report from the Company Secretary identifying
how the Company is in compliance and identifying any changes that might be
necessary.
The Company has complied with the recommendations of the AIC Code throughout
the accounting period, except as set out below.
The AIC Code includes provisions relating to:
· the role of the chief executive;
· executive directors' remuneration; and
· the whistle-blowing policy.
The Board considers some of these provisions are not relevant to the position
of the Company as it is an externally managed investment company. The
Directors are non-executive and the Company does not have employees and the
Board is satisfied that any relevant issues that arise can be properly
considered by the Board or by Shareholders at AGMs. The Remuneration Committee
considers matters relating to Directors' remuneration. An external assessment
of Directors' remuneration has not been undertaken. The Company's.
Remuneration policy is that fees payable to the Directors should reflect the
experience and expertise of and the responsibilities borne by the Directors
and the time spent on the Company's affairs and be sufficient to attract,
retain and motivate Directors of a quality required to run the Company
successfully. Please refer to the Remuneration Committee Report on pages 44
and 45.
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 the Investment Manager due diligence
visits, when the Board attends the offices of the Investment Manager and meets
with senior executives. Further, the Board requires that it is supplied in a
timely manner with information by the Investment Manager, the Company
Secretary and other advisers in a form and of a quality appropriate to enable
it to discharge its duties.
Duties and Responsibilities
The Board has overall responsibility for optimising the Company's performance
by directing and supervising the affairs of the business and meeting the
appropriate interests of Shareholders and relevant stakeholders, while
enhancing the value of the Company and also ensuring the protection of
investors. A summary of the Board's responsibilities is as follows:
· statutory obligations and public disclosure;
· strategic matters and financial reporting;
· risk assessment and management including reporting, compliance,
governance, monitoring and control; and
· other matters having a material effect on the Company.
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 Nomination Audit and Risk Management Remuneration
Board Committee Committee Engagement Committee
Meetings Meeting Meeting Committee Meeting
Attendance(1) Attendance Attendance Meeting Attendance
Attendance
Attendance by:
Bob Cowdell (Chairman) 4/4 3/3 3/3 1/1 1/1
Susie Farnon 4/4 3/3 3/3 1/1 1/1
John Hallam 4/4 3/3 3/3 1/1 1/1
Colleen McHugh 4/4 3/3 3/3 1/1 1/1
1 Post RECI's financial year end, Andreas Tautscher was appointed as a new
independent non-executive director of the Company. He was appointed with
effect from 07 May 2024
The previous table is an extract of the various Directors' attendance at Board
and Committee meetings for the financial year compared against those for which
they were eligible to attend.
Additionally, six ad-hoc meetings and a further two informal meetings were
held during the year which, as they dealt primarily with administrative and
transaction matters, were attended by those Directors available at the time.
Chairman
The Chairman, Mr Cowdell, is responsible for leadership of the Board, ensuring
its effectiveness on all aspects of its role and setting its agenda. The
Chairman is also responsible for ensuring that the Directors receive accurate,
timely and clear information. The Chairman is responsible for effective
communication with Shareholders and can be contacted through the Company
Secretary.
Senior Independent Director ("SID")
Mr Hallam was Senior Independent Director ("SID") during the year and stepped
down from the role on 12 June 2024 and Mrs Farnon was appointed in his place.
The 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, Mrs McHugh and Mr Tautscher. The terms of reference
of the Audit and Risk Committee state that it will meet not less than three
times in each financial year. In the year ended 31 March 2024, the Audit and
Risk Committee met at four informal meetings. The Audit and Risk Committee
Report on pages 52 to 55 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, Mrs McHugh and Mr Tautscher. 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 McHugh, with its other members being Mr Hallam, Mr Cowdell, Mrs Farnon and
Mr Tautscher. 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, Mrs McHugh and Mr Tautscher. The Committee will
meet at least once a year for the purpose of determining Directors'
remuneration and setting the Company's remuneration policy.
Director Re-Election Tenure and Induction
The Nomination Committee has considered the question of a policy on Board
tenure. It is strongly committed to striking the correct balance between the
benefits of continuity and those that come from the introduction of new
perspectives to the Board. As provided for in the AIC guidelines and in order
to phase future retirements and appointments the Board has not, at this stage,
adopted any specific limits to terms, but expects to refresh the Board at
appropriate intervals.
The Board regards all Directors as being independent. Andreas Tautscher, who
was appointed to the Board on 7 May 2024, will stand for election at the
September 2024 AGM. The Board has adopted a policy whereby all Directors will
be proposed for re-election each year and so, save for John Hallam who has
notified the Board of his intention not to stand and retire from the Board,
all other Directors will be proposed for re-election at the forthcoming AGM.
Details of Directors' tenure are disclosed on pages 36 and 37.
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 the
Investment Manager, including their own internal controls and procedures,
provide sufficient assurance that a sound system of risk management and
internal control, which safeguards Shareholders' investment and the Company's
assets, is maintained. An internal audit function specific to the Company is
therefore considered unnecessary.
Corporate Social Responsibility
The Board keeps under review developments involving social and environmental
issues, and will report on those to the extent they are considered relevant to
the Company's operations. The Company's ESG strategy is outlined on page 26 of
the Stakeholder Engagement section and in the Sustainability Report on pages
28 to 33.
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's Modern Slavery and Human Trafficking Statement is available on
the Company's website and is reviewed by the Board on an annual basis.
Gender Metrics
The Company, in conjunction with the Investment Manager, strives to achieve a
diverse workforce that embraces individuals of all gender, race, nationality,
religion, age and orientation and to develop a unique workplace to come
together and grow professionally and personally.
Cheyne is committed to supporting diversity, equality and inclusion through
implementing change and supporting initiatives, partnerships and programmes
across the firm and the industry, under the oversight of Cheyne's DE&I
Committee. Cheyne is comprised of a diverse range of employees and is
committed to providing equal employment opportunities to all colleagues and
applicants without regard to gender, race, nationality, religion, age,
orientation or disability. To this end, Cheyne has implemented reporting tools
within its HR system to enable a more granular measurement of gender and
ethnicity, using the AIMA/Albourne classifications within their DE&I
Questionnaire, that is compliant with data privacy considerations. The ongoing
evolution and monitoring of this data will allow the Investment Manager to
assess how its DE&I Policy and supporting action plans are working in
practice, while enabling the DE&I Committee to identify areas for
improvement and target its efforts to effect change. The business case behind
the data collection has been communicated to all employees.
Number of % of Number of
Board
Board
senior positions
members
members
on the Board (CEO, CFO, SID, Chair)
Male 3 60.0 Not applicable - see note(1)
Female 2 40.0
Minority ethnic background - -
1 This column is inapplicable as the
Company is externally managed and does not have executive management
functions, specifically it does not have a CEO or CFO. The chair of the Board
and the SID are both men. However, the Company considers that chairing the
permanent sub-committees of the Board are senior roles in an investment
company context. The positions of chair of the Audit and Risk Committee and
Management Engagement Committee are held by women.
The Board acknowledges the importance of diversity for the effective
functioning of the Board which helps create an environment for successful and
effective decision making. The Board currently comprises of 40% women with
Susie Farnon acting as the SID and the Chair of the Audit and Risk Committee
and Colleen McHugh chairing the Management Engagement Committee; but will
revert to equal representation of men and women upon John Hallam's retirement
in September 2024. The Company does not currently comply with the ethnic
diversity target set out in the Listing Rules. However, the Board continues to
keep this under review in the context of planned Board succession
opportunities. In view of the nature, scale and complexity of the Company, the
Board believes a formal diversity policy for the Company is not necessary at
this time. Diversity of the Board is further considered on at least an annual
basis through the Board evaluation process.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify the emerging and
principal risks that could affect the Company, including those that would
threaten its business model, future performance, solvency or liquidity. It has
adopted a controls based approach to its risk monitoring requiring each of the
relevant service providers, including the Investment Manager, to establish the
necessary controls to ensure that all known risks are monitored and controlled
in accordance with agreed procedures. The Directors receive periodic updates
at their Board meetings on key risks and have adopted their own control review
to ensure, where possible, risks are monitored appropriately.
Each Director is aware of the principal risks and uncertainties inherent in
the Company's business and understands the importance of identifying,
evaluating and monitoring these risks. The Board has established a Risk
Framework that enables it to manage these principal risks and uncertainties
within acceptable limits and to meet all of its legal and regulatory
obligations.
The Board considers the process for identifying, evaluating and managing these
principal risks and uncertainties faced by the Company on an ongoing basis and
these principal risks and uncertainties are reported and discussed at Board
meetings. It ensures that effective controls are in place to mitigate these
risks and that a satisfactory compliance regime exists to ensure all
applicable local and international laws and regulations are upheld.
The Company's principal risks are discussed in the Strategic Report of these
financial statements and in the Company's Prospectus, available on the
Company's website (www.realestatecreditinvestments.com) while those
specifically relating to financial reporting are discussed in the Audit and
Risk Committee Report and Note 15 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation as it impacts the
Company and its policies.
Audit and Risk Committee Report
Dear Shareholders,
On the following pages, we present the Audit and Risk Committee's report for
2024, setting out the responsibilities of the Audit and Risk Committee and its
key activities during the year ended 31 March 2024. 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.
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, Mrs McHugh and Mr Tautscher. 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, Mr Hallam and Mr Tautscher
being chartered accountants who also sit or have sat on other audit
committees.
Responsibilities
The Audit and Risk Committee has regard to the AIC Code and examines the
effectiveness of the Company's internal control systems, the integrity of the
annual and half-yearly reports and financial statements and ensures that they
are fair, balanced and understandable and provide the necessary information.
It also considers the external auditor's remuneration and engagement, as well
as the external 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 external
auditor and other ad-hoc meetings as considered necessary.
The Audit and Risk Committee operates within clearly defined terms of
reference and provides a forum through which the Company's external auditor
reports to the Board. The terms of reference of the Audit and Risk Committee
are available from the Company's registered office. The Audit and Risk
Committee receives information from the Company's service providers with the
majority of information being directly sourced from the Company Secretary,
Administrator, the Investment Manager and the external auditor. The Audit and
Risk Committee considers the nature, scope and results of the external
auditor's work and reviews their performance annually prior to providing a
recommendation to the Board on the reappointment or removal of the external
auditor.
Significant Issues Considered over Financial Reporting
The Audit and Risk Committee has determined that the key risks of misstatement
of the Company's financial statements relate to the judgements in respect of
the fair value of the Company's portfolio and income recognition.
Additional information regarding principal risks and uncertainties is provided
in the Strategic Report and in Note 15 to the financial statements.
The Board considers a report from the Investment Manager at each Board meeting
which sets out a review of the portfolio and its performance. The report also
details earnings forecasts and asset class analysis. As a result, the Board is
able to interrogate the Investment Manager on the basis of the assumptions
made and the validity of the expected forecasts.
Valuation of Portfolios
The Audit and Risk Committee conducted a detailed review of each bilateral
loan and bond position through discussions with the AIFM's relevant individual
asset managers challenging them as appropriate. Such discussions covered
aspects such as:
· Available and recent professional valuations of the underlying
collateral;
· Credit quality of the individual borrower;
· Quality of the underlying collateral;
· Operational and financial performance of the borrower;
· Status of development schedules compared to original plans;
· Planning or other disputes;
· Comparison between effective and actual yields; and
· Whether or not any value should be ascribed to contingent fees
and potential profit participations provided for in contractual arrangements.
When considering the bilateral bond investments, the Audit and Risk Committee
considered a number of factors including, but not restricted to:
· The key valuation judgement whereby the effective yield
calculated is used as proxy for the market yield at the valuation date;
· Pricing sources;
· The valuation approach used to value certain bonds by the
independent pricing adviser and challenging the AIFM's assessment of the
comparable securities and sector analysis used in determining the valuation of
these bonds;
· The range of valuations determined by the independent pricing
adviser in light of the approaches used and the weighting applied by the
Investment Manager to derive 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
external auditor and the Investment Manager in respect of valuations.
Income Recognition
The Audit and Risk Committee and the Board as a whole considered and
challenged the Investment Manager's expected realisation or maturity dates and
the resultant expected cash flows. The Committee found that the assumptions
used were reasonable and that whilst it is possible that the expected
realisation dates may change over time the Committee and the Board are
satisfied that the assumed realisation dates and the Investment Manager's
methods of calculating income are reasonable and in line with International
Financial Reporting Standards ("IFRS").
As highlighted in the long-term viability section in the Strategic Report, the
Investment Manager performed an evaluation of each of its positions, taking
into account all relevant geopolitical and macroeconomic risks, on its
operating models and valuations. A detailed cash flow profile of each
investment was completed, incorporating the probability of likely delays to
repayments, other stress tests (and additional cash needs); these were taken
into account in the modelled expected cash flows for 31 March 2024.
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 Risk
Framework and the assessment of its principal risks and uncertainties as set
out in the Strategic Report and in Note 15 to the financial statements, and it
receives reports from the Investment Manager on the Company's risk evaluation
process and reviews changes to significant risks identified.
Internal Audit
The Committee considers at least once a year whether or not there is a need
for an internal audit function. Currently, the Committee believes that, given
the Company has no employees, the SOC 1 internal control report provided by
the Administrator and the reporting provided by the Investment Manager are
sufficient and has made a recommendation to the Board to this effect.
External Audit
Deloitte LLP has been the Company's external auditor since the Company's
inception. There will be a tender process in the second half of 2024 to
appoint new external auditors.
The objectivity of the external auditor is reviewed by the Committee which
also reviews the terms under which the external auditor may be appointed to
perform non-audit services. Auditor independence is maintained through
limiting non-audit services to audit-related work that falls within defined
categories. All engagements with the auditor are subject to pre-approval from
the Audit and Risk Committee and fully disclosed within the Annual Report for
the relevant period. A new lead audit partner is appointed every five years
and the Audit and Risk Committee ensures the external 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 review by a member of the Independent
Professional Standard Review Team.
The Committee reviews the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the external auditor,
with particular regard to the level of non-audit fees. During the year,
Deloitte charged non-audit fees of £39,500 for the 30 September 2023 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.
The auditors will have been in place for 20 years after the year ending 31
March 2025. Therefore a tender exercise will take place in the autumn to
appoint new auditors for the year ended 31 March 2026 to maintain auditor
independence.
Annual Report
The Audit Committee members have each reviewed the Annual Report and earlier
drafts in detail, comparing its content with their own knowledge of the
Company, reporting requirements and Shareholders' expectations. Formal
meetings of the Audit Committee have also reviewed reports and explanations
from its service providers about the details and the financial results.
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 external auditor and their handling of key accounting
and audit judgements.
To assess the effectiveness of the external 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 external 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 2024, the external auditor had three meetings
with the Audit and Risk Committee and met with the Chairman of the Audit and
Risk Committee on other occasions when necessary.
On behalf of the Audit and Risk Committee.
Susie Farnon
Chairman of the Audit and Risk Committee
19 June 2024
Directors' Responsibility Statement
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 (as amended) 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 Companies 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 (as amended). They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
(i) The financial statements, prepared in accordance with IFRS, give a
true and fair view of the assets, liabilities, financial position and profit
or loss of the Company;
(ii) The Chairman's Statement, the Strategic Report and the Investment
Manager's Report include a fair review of the development and performance of
the business and the position of the Company together with a description of
the principal risks and uncertainties they face; and
(iii) So far as each Director is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps that he/she ought to have taken as a Director in order to
make himself/herself aware of any relevant audit information and to establish
that the Company's external 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, is 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
19 June 2024
Annual Report and Accounts 2024
Financial Statements
In this section
Independent Auditor's Report
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
Appendix I - AIFM Remuneration Policy (Unaudited)
Appendix II - AIFM Leverage (Unaudited)
Directors and Advisers
Glossary
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 2024 and of its profit for the year then ended;
· have been properly prepared in accordance with International
Financial Reporting Standards ("IFRSs") as issued by the International
Accounting Standards Board
· ("IASB"); and
· have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
· the statement of comprehensive income;
· the statement of financial position;
· the statement of changes in equity;
· the statement of cash flows; and
· the related Notes 1 to 22.
The financial reporting framework that has been applied in their preparation
is applicable law and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) ("ISAs (UK)") and applicable law. Our responsibilities under those
standards are further described in the auditor's responsibilities for the
audit of the financial statements section of our report.
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the UK,
including the Financial Reporting Council's (the "FRC's") Ethical Standard as
applied to listed public interest entities, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. The non-audit
services provided to the Company for the year are disclosed in Note 5 to the
financial statements. We confirm that we have not provided any non-audit
services prohibited by the FRC's Ethical Standard to the Company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matter that we identified in the current year was:
· Key judgement in the valuation of bilateral loan and bond
portfolio
Within this report, key audit matters are identified as follows:
· Newly identified
· Increased level of risk
· Similar level of risk
· Decreased level of risk
Materiality
The materiality that we used in the current year was £6.5 million which was
determined on the basis of approximately 2% of the 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.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors'
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
Our evaluation of the Directors' assessment of the Company's ability to
continue to adopt the going concern basis of accounting included:
· Evaluating management's going concern paper, identifying the
assumptions applied in the going concern assessment particularly the
considerations of the current macroeconomic challenges and testing the
mechanical accuracy of the underlying forecasts;
· Performing stress testing on the key assumptions applied to
understand those that could potentially give rise to a material uncertainty in
respect of the use of the going concern basis;
· Checking consistency of the forecast assumptions applied in the
going concern assessment with other forecasts, including asset maturity and
valuation assumptions;
· Assessing the liquidity position of the Company including its
ability to meet its undrawn commitments by evaluating the impact of repayment
of the Company's financing agreements at maturity without renewal and
considering the mitigating actions identified by the Directors as available
responses to liquidity risks; and
· Assessing the financial statements related disclosures to
evaluate whether they appropriately explain assumptions made by management and
the key mitigations.
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.
5.1. Key judgement in the valuation of bilateral loan and bond portfolio
Key audit matter description The bilateral loan and bond investments of £305.0 million (2023: £341.5
million) make up 87% (2023: 82%) of total assets and are a key value driver
for the Company's Net Asset Value (NAV).
As the Company's investments are measured at fair value, the discount rate
that should be used to calculate the present value of future cash flows should
be the market yield prevailing at the valuation date.
Management has made a judgement that for these instruments that are highly
bespoke and are not adequately comparable to other market positions, the
effective yield of investment is considered an appropriate representative of
the current market yield at the valuation date. This is the key judgement made
by management in the valuation of the investment portfolio.
This has contributed to a risk of fraud and error associated with the
valuation approach applied particularly around the fixed income investments.
This has become of more importance as a result of the changes in the
macroeconomic environment and the movement in market yield during the year.
This judgement is described as one of the key sources of estimation
uncertainty in Notes 3 and 15 to the financial statements. This is further
described in the Audit and Risk Committee Report on pages 52 to 55.
How the scope of our audit responded to the key audit matter To respond to the key audit matter, we have performed the following audit
procedures:
· Obtained an understanding of and tested the relevant controls
around the valuation process;
· Challenged management's use of the bond or loan's effective yield
as a representative of market yield by performing management enquiries and
assessing the assumptions used, including considering potentially
contradictory evidence;
· Analysed the bilateral loans and bonds investment portfolio by
comparing the yield of each fixed interest rate loan or bond with the relevant
range of market yields at the valuation date using independent expert
third-party data;
· Analysed the yields implicit in loans and bonds issued during the
year and compared with the yields of more seasoned loans to evaluate
management's assertion that the yield of the Company's assets is dislocated
from the movement in market yields;
· Searched for potentially contradictory evidence by assessing the
consistency of management's judgements with a number of data points including
the realisation of loans and bonds during the year and the pricing of bonds
and loans valued using market comparables; and
· Assessed the financial statements related disclosures to evaluate
whether they appropriately explain judgements made by management, including
the associated assumptions, and highlight the sensitivity to changes in those
assumptions.
Key observations We concluded that the judgement applied by management, in arriving at the fair
value of the Company's self-originated bonds and loans investments is
reasonable, and that the resulting valuations are not materially misstated. We
also concluded that the related disclosures are appropriate.
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 £6.5 million (2023: £6.7 million)
Basis for determining materiality 2% (2023: 2%) of the Net Asset Value as at 31 March
Rationale for the benchmark applied Net Asset Value is the most appropriate benchmark as it is considered one of
the principal considerations for members of the Company in assessing financial
performance and represents total shareholders' interest.
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 2024 audit (2023: 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, including the nature and volume
of corrected and uncorrected misstatements.
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 £326,000 (2023: £336,000), 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.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Company and its
environment, including internal control, and assessing the risks of material
misstatement. Audit work to respond to the risks of material misstatement was
performed directly by the audit engagement team.
7.2. Our consideration of the control environment
The accounting function for the Company is provided by a third-party
administrator. In performing our audit, we obtained an understanding of
relevant controls at the administrator that are relevant to the business
processes of the Company. We have tested the relevant controls at the
investment manager level around the key valuation judgement used in the
valuation but we have not placed reliance on those controls in performing our
audit.
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 28.
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 the climate related
disclosures 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: frc.org.uk/auditors
responsibilities. This description forms part of our auditor's report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of
irregularities, including fraud and non-compliance with laws and regulations,
we considered the following:
· the nature of the industry and sector, control environment and
business performance including the design of the Company's remuneration
policies, key drivers for the investment manager and directors' remuneration
and performance targets;
· the Company's own assessment of the risks that irregularities may
occur either as a result of fraud or error that was last approved by the Board
on 19 June 2024;
· results of our enquiries of management and the audit and risk
committee about their own identification and assessment of the risks of
irregularities, including those that are specific to the Company's sector;
· any matters we identified having obtained and reviewed the
Company's documentation of their policies and procedures relating to:
- identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
- detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
· the matters discussed among the audit engagement team and
relevant internal specialists, including tax, valuations and industry
specialists regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and
incentives that may exist within the organisation for fraud and identified the
greatest potential for fraud in the following area:
· Key judgement in the valuation of bilateral loan and bond
portfolio
In common with all audits under ISAs (UK), we are also required to perform
specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that
the Company operates in, focusing on provisions of those laws and regulations
that had a direct effect on the determination of material amounts and
disclosures in the financial statements. The key laws and regulations we
considered in this context included the Companies (Guernsey) Law, 2008, the
Listing Rules and relevant tax legislation.
In addition, we considered provisions of other laws and regulations that do
not have a direct effect on the financial statements but compliance with which
may be fundamental to the Company's ability to operate or to avoid a material
penalty. These included the Company's regulatory licences under The Protection
of Investors (Bailiwick of Guernsey) Law, 2020.
11.2. Audit response to risks identified
As a result of performing the above, we identified the key judgement in the
valuation of bilateral loan and bond portfolio as a key audit matter related
to the potential risk of fraud. The key audit matters section of our report
explains the matter in more detail and also describes the specific procedures
we performed in response to that key audit matter.
In addition to the above, our procedures to respond to risks identified
included the following:
· reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of relevant laws
and regulations described as having a direct effect on the financial
statements;
· enquiring of management and the Audit 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 and
reviewing correspondence with the Guernsey Financial Services Commission; and
· in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting
estimates are indicative of a potential bias; and evaluating the business
rationale of any significant transactions that are unusual or outside the
normal course of business.
We also communicated relevant identified laws and regulations and potential
fraud risks to all engagement team members including internal specialists, and
remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
12. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to
going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the Company's compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements and our knowledge obtained during the
audit:
· the directors' statement with regards to the appropriateness of
adopting the going concern basis of accounting and any material uncertainties
identified set out on page 42;
· 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 56;
· the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks set out on page 50;
· the section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems set out on page
48; and
· the section describing the work of the Audit and Risk Committee
set out on pages 52 to 55.
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
We were appointed by the Company upon inception on 6 September 2005 to audit
the financial statements of the Company for the period ending 31 March 2006
and subsequent financial periods. Following a competitive tender process, we
were reappointed 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 19 years, covering the
years ending 31 March 2006 to 31 March 2024.
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 will form part
of the European Single Electronic Format ("ESEF") prepared Annual Financial
Report filed on the National Storage Mechanism of the UK FCA in accordance
with the ESEF Regulatory Technical Standard ("ESEF RTS"). This auditor's
report provides no assurance over whether the annual financial report has been
prepared using the single electronic format specified in the ESEF RTS.
John Clacy, FCA
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
19 June 2024
Statement of Comprehensive Income
For the year ended 31 March 2024
Note 31 Mar 2024 31 Mar 2023
GBP
GBP
Interest income 6 30,341,179 31,922,543
Net gains on financial assets and liabilities at fair value through profit or 4 634,788 806,708
loss
Net foreign currency gains/(losses) 259,847 (2,070,857)
Other income 123,121 7,940
Operating income 31,358,935 30,666,334
Operating expenses 5 (5,989,327) (6,143,662)
Profit before finance costs 25,369,608 24,522,672
Finance costs 6 (3,514,078) (3,972,353)
Net profit 21,855,530 20,550,319
Other comprehensive income - -
Total comprehensive income 21,855,530 20,550,319
Earnings per share
Basic and diluted 8 9.6p 9.0p
Weighted average shares outstanding Number Number
Basic and diluted 8 228,777,629 229,332,478
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the financial statements.
Statement of Financial Position
As at 31 March 2024
Note(s) 31 Mar 2024 31 Mar 2023
GBP
GBP
Non-current assets
Financial assets at fair value through profit or loss 9,15 329,368,799 400,741,910
329,368,799 400,741,910
Current assets
Cash and cash equivalents 9 18,289,567 14,081,343
Cash collateral at broker 9,17 4,489,272 2,383,962
Derivative financial assets 9,10 - 1,756,118
Other assets 9 104,298 27,345
22,883,137 18,248,768
Total assets 352,251,936 418,990,678
Equity and liabilities
Equity
Share capital 14 331,405,039 336,965,907
Treasury shares 14 (5,023,350) -
Total equity 326,381,689 336,965,907
Current liabilities
Financing agreements 9,13 23,789,792 80,441,157
Cash collateral due to broker 9 14,400 -
Derivative financial liabilities 9,10 87,967 -
Other liabilities 9,11 1,978,088 1,583,614
25,870,247 82,024,771
Total liabilities 25,870,247 82,024,771
Total equity and liabilities 352,251,936 418,990,678
Shares outstanding 14 225,237,478 229,332,478
Net asset value per share £1.45 £1.47
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
19 June 2024
Statement of Changes in Equity
For the year ended 31 March 2024
Note Share capital Treasury shares Total equity
GBP
GBP
GBP
Balance as at 31 March 2023 336,965,907 - 336,965,907
Total comprehensive income 21,855,530 - 21,855,530
Dividends 7 (27,416,398) - (27,416,398)
Treasury shares purchased 14 - (5,023,350) (5,023,350)
Balance as at 31 March 2024 331,405,039 (5,023,350) 326,381,689
Note Share capital Treasury shares Total equity
GBP
GBP
GBP
Balance as at 31 March 2022 343,935,484 - 343,935,484
Total comprehensive income 20,550,319 - 20,550,319
Dividends 7 (27,519,896) - (27,519,896)
Balance as at 31 March 2023 336,965,907 - 336,965,907
The accompanying notes form an integral part of the financial statements.
Statement of Cash Flows
For the year ended 31 March 2024
Note 31 Mar 2024 31 Mar 2023
GBP
GBP
Net profit 21,855,530 20,550,319
Purchases of investment portfolio (81,363,953)(1) (158,644,471)
Repayments/sales proceeds on investment portfolio 155,247,148 158,975,081
Movement in realised and unrealised losses/(gains) on investment portfolio 4 5,980,571 (4,466,341)
Net movement on derivative financial assets and liabilities 1,844,085 (2,828,910)
Interest income (30,341,179) (31,922,543)
Finance costs 3,514,078 3,972,353
Operating cash flows before movement in working capital 76,736,280 (14,364,512)
(Increase)/decrease in cash collateral at broker (2,105,310) 2,820,730
Increase in other assets (76,953) (4,637)
Increase in cash collateral due to broker 14,400 -
Increase in other liabilities 394,474 200,882
Movement in working capital (1,773,389) 3,016,975
Interest received 21,850,524(1) 29,657,468
Net cash inflow from operating activities 96,813,415 18,309,931
Financing activities
Dividends paid to Shareholders 7 (27,416,398) (27,519,896)
Payments under financing agreements 13 (297,180,747) (689,398,896)
Proceeds under financing agreements 13 240,694,426 666,877,816
Finance costs paid 13 (3,679,122) (1,572,750)
Payments on treasury shares purchased 14 (5,023,350) -
Net cash outflow from financing activities (92,605,191) (51,613,726)
Net increase/(decrease) in cash and cash equivalents 4,208,224 (33,303,795)
Cash and cash equivalents at the start of the year 14,081,343 47,385,138
Cash and cash equivalents at the end of the year 18,289,567 14,081,343
1 Excludes payment-in-kind amounting to £13,800,493 for the year ended 31
March 2024.
The accompanying notes form an integral part of the financial statements.
Notes to the Financial Statements
For the year ended 31 March 2024
1. General Information
Real Estate Credit Investments Limited ("RECI" or the "Company") was
incorporated in Guernsey, Channel Islands on 6 September 2005 with registered
number 43634. The Company commenced its operations on 8 December 2005.
The Company invests in real estate debt secured by commercial or residential
properties in the United Kingdom and Western Europe, focusing primarily on
those countries where it sees the changing dynamics in the real estate debt
market offering a sustainable deal flow for the foreseeable future. The
Company has adopted a long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments, the
Company uses the expertise and knowledge of its Alternative Investment Fund
Manager ("AIFM"), Cheyne Capital Management (UK) LLP ("Cheyne" or the
"Investment Manager").
The Company's shares are currently listed on the premium segment of the
Official List of the UK Listing Authority and trade on the Main Market of the
London Stock Exchange. The shares offer investors a levered exposure to a
portfolio of real estate credit investments and aim to pay a quarterly
dividend.
The Company's investment management activities are managed by the Investment
Manager, who is also the AIFM. The Company has entered into an Investment
Management Agreement (the "Investment Management Agreement") under which the
Investment Manager manages its day-to-day investment operations, subject to
the supervision of the Company's Board of Directors. The Company is an
Alternative Investment Fund ("AIF") within the meaning of the Alternative
Investment Fund Managers Directive ("AIFMD") and accordingly the Investment
Manager has been appointed as the AIFM of the Company, which has no employees
of its own. For its services, the Investment Manager receives a monthly
Management Fee, expense reimbursements and accrues a Performance Fee (see Note
18). The Company has no ownership interest in the Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and provides all
administration services to the Company in this capacity. The Bank of New York
Mellon (International) Limited is the Depositary and undertakes the custody of
assets. Aztec Financial Services (Guernsey) Limited is the Company Secretary.
2. Material 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"), International Accounting Standards ("IAS") 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 2023.
New Standards, Amendments and Interpretations Issued and Effective for the
Financial Year Beginning 1 April 2023
Amendments to IFRS 17 - Insurance contracts
In June 2020, the IASB issued amendments to IFRS 17 Insurance Contracts to
provide three additional transition reliefs relating to: (1) contracts
acquired before transition, (2) the risk mitigation option at transition, and
(3) investment contracts with discretionary participation features. Issued in
May 2017, IFRS 17 sets out the requirements for an entity reporting
information about insurance contracts it issues and reinsurance contracts it
holds. IFRS 17 replaces an interim Standard - IFRS 4 Insurance Contracts -
from annual reporting periods beginning on or after 1 January 2023. Entities
have been required to apply IFRS 9 Financial Instruments since annual
reporting periods beginning on or after 1 January 2018. However, IFRS 4 has
allowed the temporary deferral of the application of IFRS 9. Entities that
have elected to defer IFRS 9 application have instead continued to apply IAS
39 Financial Instruments: Recognition and Measurement. The IASB extended the
fixed expiry date for the temporary deferral to annual reporting periods
beginning on or after 1 January 2023. The amendments have no material impact
on the financial statements of the Company.
Amendments to IAS 8 - Definition of Accounting Estimates
In February 2021, the IASB issued amendments to IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, in which it introduced a new
definition of 'accounting estimates'. The amendments are intended to provide
preparers of financial statements with greater clarity as to the definition of
accounting estimates, particularly in terms of the difference between
accounting estimates and accounting policies. The amendments should provide
helpful guidance for entities in determining whether changes are to be treated
as changes in estimates, changes in policies, or errors. The amendments to IAS
8 are effective for annual periods beginning on or after 1 January 2023. The
amendments have no material impact on the financial statements of the Company.
Amendments to IAS 1 and IFRS Practice Statement 2 - Disclosure of Accounting
Policies
In February 2021, the IASB issued amendments to IAS 1 Presentation of
Financial Statements and IFRS Practice Statement 2 Making Materiality
Judgements, in which it provided guidance and examples to help entities apply
materiality judgements to accounting policy disclosures. The amendments aim to
help entities provide accounting policy disclosures that are more useful by
(i) replacing the requirement for entities to disclose their 'significant'
accounting policies with a requirement to disclose their 'material' accounting
policies and (ii) adding guidance on how entities apply the concept of
materiality in making decisions about accounting policy disclosures.
Determining whether accounting policies are material or not requires use of
judgement. Therefore, entities are encouraged to revisit their accounting
policy information disclosures to ensure consistency with the amended
standard. Entities should carefully consider whether 'standardised
information, or information that only duplicates or summarises the
requirements of the IFRSs' is material information and, if not, whether it
should be removed from the accounting policy disclosures to enhance the
usefulness of the financial statements. The amendments to IAS 1 and IFRS
Practice Statement 2 are effective for annual periods beginning on or after 1
January 2023. The amendments have no material impact on the financial
statements of the Company as the accounting policies disclosed are considered
material.
Amendments to IAS 12 - Deferred Tax Related to Assets and Liabilities Arising
from a Single Transaction In May 2021, the IASB issued amendments to IAS 12
Income Taxes, which narrowed the scope of the initial recognition exception
under IAS 12, so that it no longer applied to transactions that give rise to
equal taxable and deductible temporary differences. The amendments clarify
that where payments that settle a liability are deductible for tax purposes,
it is a matter of judgement (having considered the applicable tax law) whether
such deductions are attributable for tax purposes to the liability recognised
in the financial statements (and interest expense) or to the related asset
component (and interest expense). This judgement is important in determining
whether any temporary differences exist on initial recognition of the asset
and liability. The amendments to IAS 12 are effective for annual periods
beginning on or after 1 January 2023. The amendments have no material impact
on the financial statements of the Company.
Amendments to IAS 12 - International Tax Reform - Pillar Two Model Rules
In May 2023, the IASB issued amendments to IAS 12, in response to the
Organisation for Economic Co-operation and Development's Base Erosion and
Profit Shifting Pillar Two rules and include:
A mandatory temporary exception to the recognition and disclosure of deferred
taxes arising from the jurisdictional implementation of the Pillar Two model
rules; and
Disclosure requirements for affected entities to help users of the financial
statements better understand an entity's exposure to Pillar Two income taxes
arising from that legislation, particularly before its effective date.
The mandatory temporary exception, the use of which is required to be
disclosed, applies immediately. The remaining disclosure requirements apply
for annual reporting periods beginning on or after 1 January 2023, but not for
any interim periods ending on or before 31 December 2023. The amendments have
no material impact on the financial statements of the Company.
New Standards, Amendments and Interpretations Issued but not Effective for the
Financial Year Beginning 1 April 2023 and not Early Adopted
Title Effective for periods beginning on or after
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current 1 January 2024
Amendments to IAS 7 and IFRS 7 - Supplier Finance Arrangements 1 January 2024
Amendments to IFRS 16 - Lease Liability in a Sale and Leaseback 1 January 2024
Amendments to IAS 1 - Non-current Liabilities with Covenants 1 January 2024
Amendments to IAS 21 - Lack of Exchangeability 1 January 2025
Amendments to IAS 1 - Classification of Liabilities as Current or Non-current
affect only the presentation of liabilities in the Statement of Financial
Position and not the amount or timing of recognition of any asset, liability
income or expenses, or the information that the Company discloses about those
items.
Amendments to IAS 7 and IFRS 7 have no material impact on the financial
statements as the Company does not have supplier finance arrangements.
Amendments to IFRS 16 have no material impact on the financial statements as
the Company does not have sale and leaseback transactions.
Amendments to IAS 1 - Non-current Liabilities with Covenants improve the
information an entity provides when its right to defer settlement of a
liability for at least twelve months is subject to compliance with covenants.
The amendments also respond to stakeholders' concerns about the classification
of such a liability as current or non-current. Earlier application is
permitted. The Company did not early adopt these amendments and expects that
the amendments will have no material impact on the financial statements.
Amendments to IAS 21 provide guidance to specify when a currency is
exchangeable and how to determine the exchange rate when it is not. Earlier
application is permitted. The Company did not early adopt these amendments and
expects that the amendments will have no material impact on the financial
statements.
Basis of Preparation
The financial statements of the Company are prepared under IFRS on the
historical cost or amortised cost basis except for financial assets and
liabilities classified at fair value through profit or loss which have been
measured at fair value.
The functional and presentation currency of the Company is British Pounds
("GBP" or "£") which the Board considers best represents the economic
environment in which the Company operates.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in
preparing the financial statements as, after due consideration, they consider
that the Company has adequate resources to continue in operational existence
for a period of at least twelve months from the date of signing the audited
financial statements.
The Investment Manager performed an evaluation of each of its positions in
light of all geopolitical and macroeconomic factors on operating models and
valuations, and performed a granular analysis of the future liquidity profile
of the Company. A detailed cash flow profile of each investment was completed,
incorporating the probability of likely delays to repayments, other stress
tests (and additional cash needs).
Taking account of the updated forecasting, the Directors consider that the
cash resources available as at 31 March 2024 of £18.3 million (31 March 2023:
£14.1 million), together with the cash collateral at broker of £4.5 million
(31 March 2023: £2.4 million), the liquidity of the market bond portfolio and
the financing available through activities such as repurchase agreements as
described in Note 13, are sufficient to cover normal operational costs and
current liabilities, including the proposed dividend, and the expected funding
of loan commitments as they fall due for a period of at least twelve months
from the date of signing the audited financial statements. The Directors note
that a key assumption adopted in the going concern analysis is that leverage
through repurchase agreements is not withdrawn. Net debt (leverage minus cash)
as at 31 March 2024 was 1.5% (31 March 2023: 19.1%).
As disclosed in Note 19, as at 31 March 2024, the Company had committed
£489.0 million into the loan and bond portfolio of which £352.1 million had
been funded (31 March 2023: £572.0 million commitment of which £367.8
million had been funded). The Investment Manager models these expected
commitments and only funds if the borrowers meet specific business plan
milestones.
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 cessation or delay of any future dividends, obtaining
longer-term and non-recourse financing, and further sales of assets within the
bond portfolio.
In carrying out the Company's strategy, the Investment Manager undertakes the
following measures:
• An initial and continuing detailed evaluation of each of its
positions in light of the various impacts of changing economic circumstances
on operating models and valuations;
• Positive engagement with all borrowers and counterparties; and
• Continued granular analysis of the future liquidity profile of
the Company.
In consideration of this additional stressed scenario and mitigations
identified, the Directors consider that the Company has adequate resources to
continue in operational existence for a period of at least twelve months from
the date of signing the financial statements.
Financial Assets at Fair Value Through Profit or Loss
The Company classifies its investments based on both the Company's business
model for managing those financial assets and the contractual cash flow
characteristics of the financial assets. The portfolio of financial assets is
managed and performance is evaluated on a fair value basis. The Company is
primarily focused on fair value information and uses that information to
assess the assets' performance and to make decisions. The Company has not
taken the option to irrevocably designate any equity securities at fair value
through other comprehensive income. The contractual cash flows of the
Company's debt securities are not solely principal and interest. The
collection of contractual cash flows is only incidental to achieving the
Company's business model's objective. Consequently, all investments are
measured at fair value through profit or loss. The gain or loss on
reassessment of fair value is recognised immediately in the Statement of
Comprehensive Income.
The interest receivable from loans and bonds are reported as part of financial
assets at fair value through profit or loss. The related interest income and
finance costs were included under interest income and finance costs accounts
in the Statement of Comprehensive Income.
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient portfolio
management are measured at fair value through profit or loss. The gain or loss
on reassessment of fair value is required to be split into the amount of
change in fair value attributable to changes in credit risk of the liability,
presented in other comprehensive income, and the remaining amount presented in
profit or loss. The Company's gain or loss on reassessment of fair value is
recognised immediately in the Statement of Comprehensive Income.
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
Financial liabilities at amortised cost include all other liabilities not
measured at fair value through profit or loss.
This includes cash collateral due to broker and other liabilities.
Initial Measurement
Financial assets and liabilities at fair value through profit or loss are
measured initially at fair value, with transaction costs for such financial
assets and liabilities being recognised directly in the Statement of
Comprehensive Income.
Financial assets and liabilities at amortised cost are measured initially at
their fair value plus any directly attributable incremental costs of
acquisition or issue.
Purchases and sales of financial assets and liabilities at fair value through
profit or loss are accounted for at trade date. Realised gain/(loss) on
disposals of financial assets and liabilities is calculated using the
first-in, first-out ("FIFO") method.
Subsequent Measurement
After initial measurement, the Company measures financial assets which are
classified as at fair value through profit or loss, at fair value.
Financial liabilities held for trading are measured at fair value through
profit or loss, and all other financial liabilities are measured at amortised
cost, unless the fair value option is applied. The Company classifies its
financing agreements as at fair value through profit or loss.
After initial measurement, the Company measures financial assets and
liabilities which are classified as at amortised cost, at amortised cost using
effective interest method less expected credit losses.
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.
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
and are used for cash management purposes.
Derivative Financial Instruments
Derivative financial instruments used by the Company to manage its exposure to
foreign exchange arising from operational, financing and investment activities
are accounted for as financial assets or liabilities at fair value through
profit or loss.
Subsequent to initial recognition, derivative financial instruments are stated
at fair value. The gain or loss on revaluation of fair value is recognised
immediately in the Statement of Comprehensive Income.
The fair value of an open forward foreign exchange contract is calculated as
the difference between the contracted rate and the current forward rate that
would close out the contract on the reporting date. The change in value is
recorded in net gains on financial assets and liabilities through profit or
loss in the Statement of Comprehensive Income. Realised gains and losses are
recognised in the Statement of Comprehensive Income on the maturity of a
contract, or when the contract is closed out.
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 new 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 Share capital 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 net
foreign currency gains/(losses) in the Statement of Comprehensive Income.
Foreign currency denominated non-monetary assets and liabilities that are
measured in terms of historical cost in a foreign currency are translated
using the exchange rate at the date of transaction.
Non-monetary assets and liabilities denominated in foreign currencies that are
stated at fair value are translated to GBP at foreign exchange rates ruling at
the reporting date. Differences arising on translation of these non-monetary
assets and liabilities between valuation points are recognised in the
Statement of Comprehensive Income.
Interest Income
Interest income from financial assets at fair value through profit or loss are
recognised within interest income in the Statement of Comprehensive Income
using the effective interest method.
Expenses
All expenses are included in the Statement of Comprehensive Income on an
accrual basis.
Taxation
The Company is a tax-exempt Guernsey limited company and accordingly, no
provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short term in nature and
are accordingly stated at their nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
Equity Instruments
An equity instrument is any contract that evidences a residual interest in the
assets of the Company after deducting all of its liabilities. Equity
instruments issued by the Company are recognised at the proceeds received, net
of direct issue costs.
Treasury shares
Shares that are reacquired (treasury shares) are recognised at cost and
deducted from equity. No gain or loss is recognised in profit or loss on the
purchase, sale, issue or cancellation of the Company's shares. Any difference
between the carrying amount and the consideration, if reissued, is recognised
in the share premium. Treasury shares are not entitled to dividends, and thus,
they are also not included in the calculation of earnings per share.
Other Liabilities
Other liabilities are not interest bearing and are stated at their accrued
value.
Segment Information
The Company has three reportable segments, being the Market Bond Portfolio,
Bilateral Loan and Bond Portfolio and Equity Securities. The real estate debt
investment strategy of the Company focuses on secured commercial and
residential debt in the United Kingdom and Western Europe. Each segment
engages in separate business activities and the results of each segment are
regularly reviewed by the Board of Directors which fulfils the role of Chief
Operating Decision Maker for performance assessment purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of efficient
portfolio management. There are no material revenues arising from the use of
repurchase agreements and transaction costs are embedded in the price of the
investments and are not separately identifiable. Securities purchased under
agreements to resell are valued at fair value and adjusted for any movements
in foreign exchange rates. Interest rates vary for each repurchase agreement
and are set at the initiation of each agreement. It is the lender's policy to
take custody of securities purchased under repurchase agreements and to value
the securities on a daily basis to protect the lender in the event the
securities are not repurchased by the Company. The Company will generally post
additional collateral if the market value of the underlying securities decline
and are less than the face value of the repurchase agreements plus any accrued
interest. In the event of default on the obligation to repurchase, the lender
has the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. In the event of default or bankruptcy by the
counterparty to the agreement, realisation and/or retention of the collateral
or proceeds may be subject to legal proceedings.
Financial Guarantees
Financial guarantees require the Company to make specified payments to
reimburse the holder of the guarantee for a loss it incurs because a specified
debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument. Financial guarantees are initially
recognised at their fair value, which is normally evidenced by the amount of
fees received. This amount is amortised on a straight line basis over the life
of the guarantee. At the end of each reporting period, the guarantees are
measured at the higher of (i) the amount of the loss allowance for the
guaranteed exposure determined based on the expected loss model and (ii) the
remaining unamortised balance of the amount at initial recognition.
3. Critical Accounting Judgements and Key Sources of Estimation Uncertainty
In the process of applying the Company's accounting policies (described in
Note 2), the Company has determined that the following judgements and
estimates have the most significant effect on the amounts recognised in the
financial statements:
Critical Accounting Judgements
Classification of Bilateral Loan and Bonds as Financial Assets at Fair Value
Through Profit or Loss
As described on page 74, 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.
In making the judgement regarding Stornoway Finance S.à r.l., ENIV S.à r.l.
and Real Estate Loan Funding ("RELF"), 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 as 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.
As further described on page 74, 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., ENIV S.à r.l. and RELF, 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.
Despite the foregoing, the Company may irrevocably designate a debt investment
that meets the amortised cost criteria as measured at fair value through
profit or loss. if doing so eliminates or significantly reduces a measurement
or recognition inconsistency (so called 'accounting mismatch') that would
arise from measuring assets or liabilities or recognising the gains and losses
on them on different bases.
Key Sources of Estimation Uncertainty
Valuation of Bilateral Loans and Bonds at Fair Value Through Profit or Loss
The Company has made loans and bonds into structures to gain exposure to real
estate secured debt in, but not limited to, the United Kingdom and Western
Europe. These loans are not traded in an active market and there are no
independent quotes available for these loans. The fair values of financial
instruments that are not traded in an active market are determined using
valuation techniques such as discounted cash flows models. The rate used to
discount future cash flows represents key source of estimation uncertainty
that has material impact on the valuation of the investment portfolio. In the
absence of market observable inputs, this uncertainty translates into a wide
range of appropriate discount rates. The Investment Manager believes that the
loan or bond's own effective yield represents the most appropriate point
estimate within that range.
The Investment Manager has considered relevant geopolitical and macroeconomic
factors including the rise of market interest rate and continues to believe
that this key judgement remains appropriate due to the bespoke nature of the
investment portfolio and the dislocation between the yield of these assets and
the market interest rate. The fair value of these loans is linked directly to
the value of the real estate loans in the underlying structure the Company
invests in, which are determined based on modelled expected cash flows
(drawdown principal and interest repayments, and maturity dates) with
effective yields ranging from 6.2% to 13.2% (31 March 2023: 6.2% to 13.2%).
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 increased interest
rates, heightened inflation, supply chain disruption, the continuing impact of
conflicts around the world; and the effects of climate change and cyber
security, 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 2024. Future valuation might change
significantly in the future.
Further details relating to the Company's valuation of bilateral loans and
bonds and sensitivity analysis is disclosed in Notes 15(a) and 15(d).
4. Net Gains on Financial Assets and Liabilities at Fair Value Through Profit
or Loss
31 Mar 2024 31 Mar 2023
GBP
GBP
Net gains/(losses)
Net gains/(losses) on market bond portfolio 1,807,597 (8,155,580)
Net (losses)/gains on bilateral loan and bond portfolio (2,512,410) 10,101,376
Net (losses)/gains on equity securities (5,275,758) 2,520,545
Net gains/(losses) on foreign exchange instruments 6,615,359 (3,659,633)
Net gains on financial assets and liabilities at fair value through profit or 634,788 806,708
loss
5. Operating Expenses
Note 31 Mar 2024 31 Mar 2023
GBP
GBP
Investment management, administration and depositary fees
Investment management fees 18 4,204,910 4,296,688
Administration fees 18 278,720 276,595
Depositary fees 18 64,126 65,137
4,547,756 4,638,420
Other operating expenses
Directors' fees 231,550 215,000
Legal fees 220,875 456,542
Audit fees 155,375 140,775
Research fees 137,467 35,000
Corporate secretary fees 105,048 96,214
Registration fees 60,000 60,000
Fees to auditor for non-audit services 42,500 39,500
Directors and Officers' insurance fees 19,991 24,547
Regulatory body expenses 18,888 23,732
Other expenses 449,877 413,932
1,441,571 1,505,242
Total operating expenses 5,989,327 6,143,662
The ongoing costs of the Company are shown in the Key Information Document
("KID") published on the Company's website. The total figure of 2.94% (31
March 2023: 2.23%) is made up of the Investment Manager's fee of 1.25% (31
March 2023: 1.25%), other ongoing costs of 0.54% (31 March 2023: 0.42%), and
finance costs (which are disclosed separately in the financial statements) of
1.15% (31 March 2023: 0.56%). The finance costs may vary and are only incurred
to increase the overall returns to investors.
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 2024 31 Mar 2023
GBP
GBP
Interest income on financial assets at fair value through profit or loss
Real Estate Credit Investments - market bond portfolio 1,482,514 4,960,473
Real Estate Credit Investments - bilateral loan and bond portfolio 28,412,548 26,747,271
29,895,062 31,707,744
Interest income on financial assets at amortised cost
Cash and cash equivalents and other receivables 446,117 214,799
Total interest income 30,341,179 31,922,543
Finance costs
Cost of financing agreements (3,514,078) (3,972,353)
Total finance costs (3,514,078) (3,972,353)
7. Dividends
31 Mar 2024 31 Mar 2023
GBP
GBP
Share dividends
Fourth dividend for the year ended 31 March 2023/31 March 2022 6,879,974 6,879,974
First dividend for the year ended 31 March 2024/31 March 2023 6,879,974 6,879,974
Second dividend for the year ended 31 March 2024/31 March 2023 6,879,974 6,879,974
Third dividend for the year ended 31 March 2024/31 March 2023 6,776,476 6,879,974
Dividends paid to Shareholders 27,416,398 27,519,896
The total dividends paid during the financial year ended 31 March 2024
amounted to 12.0 pence per share (31 March 2023:
12.0 pence per share).
Under Guernsey Law, companies can pay dividends provided they satisfy the
solvency test prescribed under the Companies (Guernsey) Law, 2008 (as
amended), which considers whether a company is able to pay its debts when they
become due and whether the value of a company's assets is greater than its
liabilities.
The Directors considered that the Company satisfied the solvency test for all
dividend payments during the period from 1 April 2023 to 31 March 2024.
8. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
31 Mar 2024 31 Mar 2023
Net earnings attributable to shares (GBP) 21,855,530 20,550,319
Weighted average number of shares for the purposes of basic and diluted 228,777,629 229,332,478
earnings per share(1)
Earnings per share
Basic and diluted (pence) 9.6 9.0
1 The weighted average number of shares takes into account the weighted
average effect of changes in treasury shares during the year.
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 2024 31 Mar 2023
GBP
GBP
Assets
Financial assets at fair value through profit or loss:
Real Estate Credit Investments - market bond portfolio 7,893,959 49,243,187
Real Estate Credit Investments - bilateral loan and bond portfolio 305,036,801 341,474,617
Real Estate Credit Investments - equity securities 16,438,039 10,024,106
Financial assets at fair value through profit or loss 329,368,799 400,741,910
Derivative financial assets:
Forward foreign exchange contracts - 1,756,118
Financial assets at amortised cost:
Cash and cash equivalents 18,289,567 14,081,343
Cash collateral at broker 4,489,272 2,383,962
Other assets 104,298 27,345
Total assets 352,251,936 418,990,678
Liabilities
Financial liabilities at fair value through profit or loss:
Financing agreements 23,789,792 80,441,157
Derivative financial liabilities:
Forward foreign exchange contracts 87,967 -
Financial liabilities at amortised cost:
Cash collateral due to broker 14,400 -
Other liabilities 1,978,088 1,583,614
Total liabilities 25,870,247 82,024,771
The value of the market bond was £7.8 million as at 31 March 2024, excluding
accrued interest of £0.1 million (31 March 2023: £48.9 million, excluding
accrued interest of £0.3 million); and the value of the bilateral loan and
bond portfolio were £296.0 million as at 31 March 2024, excluding accrued
interest of £9.0 million (31 March 2023: £327.4 million, excluding accrued
interest of £14.1 million).
See Note 16 for a summary of the movement in fair value in the Company's
investments for the year.
10. Derivative Contracts
Forward Foreign Exchange Contracts
The following forward foreign exchange contracts were open as at 31 March
2024:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised loss
GBP
The Bank of New York Mellon 16 May 2024 GBP 153,069,538 EUR (178,830,000) (87,967)
Unrealised loss on forward foreign exchange contracts (87,967)
The following forward foreign exchange contracts were open as at 31 March
2023:
Counterparty Settlement date Buy currency Buy amount Sell currency Sell amount Unrealised gain
GBP
The Bank of New York Mellon 19 May 2023 GBP 163,823,152 EUR (184,070,000) 1,756,118
Unrealised gain on forward foreign exchange contracts 1,756,118
11. Other Liabilities
31 Mar 2024 31 Mar 2023
GBP
GBP
Investment management, depositary and administration fees payable
Investment management fees payable 317,221 358,118
Depositary fees payable 66,708 33,090
Administration fees payable 37,548 41,939
421,477 433,147
Other operating payables
Registration fees payable 148,917 88,917
Legal fees payable 86,436 73,800
Audit fees payable 85,375 30,775
Directors' fees payable 57,887 53,750
Corporate Secretary fees payable 37,500 18,750
Research fees payable 35,144 17,644
Other expense accruals 1,105,352 866,831
1,556,611 1,150,467
Total other liabilities 1,978,088 1,583,614
12. Structured Entities Not Consolidated
A structured entity is an entity that has been designed so that voting or
similar rights are not the dominant factor in deciding who controls the
entity, such as when any voting rights relate to administrative tasks only and
the relevant activities are directed by means of contractual arrangements. A
structured entity often has some or all of the following features or
attributes:
· restricted activities;
· a narrow and well defined objective, such as to effect a
tax-efficient lease, carry out research and development activities, provide a
source of capital or funding to an entity or provide investment opportunities
for investors by passing on risks and rewards associated with the assets of
the structured entity to investors;
· insufficient equity to permit the structured entity to finance
its activities without subordinated financial support; and
· financing in the form of multiple contractually linked
instruments to investors that create concentrations of credit or other risks
(tranches).
The Company has concluded that the unlisted entities in which it invests, but
does not consolidate, meet the definition of structured entities. Cheyne
utilises structured entities in order to obtain leverage, whilst limiting
recourse to the underlying funds. Cheyne implements an off-balance sheet
funding structure by establishing an orphan SPV ("LOL Vehicle") to own and
manage a discrete, diversified pool of repackaged senior debt exposures
financed pro rata by Cheyne funds and a bank. The Sponsors who will fund the
Orphan SPV will be a combination of Cheyne managed funds, of which RECI is
one. The bank lender faces RELF (an orphan SPV established for the purpose of
holding and financing a discrete pool of senior mortgage exposures, held in
listed/cleared bond format). RECI, alongside other participating Cheyne funds,
holds asset-linked notes issued by RELF. The recourse is either to the RELF
only, or via certain limited recourse fund guarantees (i.e. maximum 25% of
amounts borrowed). Financing is "off-balance sheet" and all other assets in
RECI are unencumbered, except insofar as a limited recourse guarantee is
provided. This arrangement limits RECI's exposure to the underlying credit(s)
and financing. This conclusion will be reassessed on an annual basis, if any
of these criteria or characteristics change.
As a result, the Company recognises its interests in structured entities as
investments at fair value through profit or loss in accordance with IFRS 10
Consolidated Financial Statements and therefore there is no requirement to
consolidate in full. However, in line with IFRS 12 Disclosure of Interest in
Other Entities, the details of the interests in the unconsolidated structured
entities are disclosed on the next page. The maximum exposure to loss is the
carrying amount of the financial assets held as at 31 March 2024 and 31 March
2023.
31 March 2024 Fair value Undrawn Carrying value Nature and purpose Location Equity Percentage Other
of loans(1)
commitment
GBP
of the entity
held
held(2
exposure(3)
Name
GBP
GBP ) %
RELF(4) 15,261,761 17,463,239 452,856 To invest in Fulton Road real estate United Kingdom No - No
Fulton Road
Kensington 17,550,039 235,920 8,035,371 To invest in Kensington real estate United Kingdom No - No
Lifestory 12,650,000 - 4,162,723 To invest in Lifestory real estate Luxembourg No - No
Ruby 8,193,829 1,559,872 4,166,958 To invest in Ruby real estate Luxembourg No - No
Sabina 15,868,950 6,562,102 8,865,264 To invest in Sabina real estate Luxembourg No - No
Cheyne French Funding Sub-Fund 3 10,371,910 3,298,879 10,371,911 To invest in Cheyne French Funding France No - No
Sub-Fund 3 real estate
Cheyne French Funding Sub-Fund 8 24,477,358 5,202,294 24,477,370 To invest in Cheyne French Funding France No - No
Sub-Fund 8 real estate
1 This amount excludes interest receivables.
2 RECI has interest in the structured entities through loan notes instruments
and hence the equity percentage held is nil.
3 Other exposure indicates if the investment in the structured entity comes
with any associated potential valuation uplift. These can include, but are not
limited to: profit share, variable exit fees, and
exposure to enterprise value uplift.
4 The total loan exposure on RELF will not equal the carrying value disclosed
above due to financing within the RELF structure.
31 March 2023 Fair value Undrawn Carrying value Nature and purpose Location Equity Percentage Other
of loans(1)
commitment
GBP
of the entity
held
held(2
exposure(3)
Name
GBP
GBP ) %
RELF(4)
Earlsfield 12,612,167 707,833 6,530,846 To invest in United Kingdom No - No
Earlsfield real estate
Kensington 8,896,085 10,737,000 4,143,684 To invest in Kensington real estate United Kingdom No - No
Lifestory 8,215,843 4,434,157 4,713,773 To invest in United Kingdom No - No
Lifestory real estate
Pamplona 3,084,772 1,469,228 1,729,737 To invest in Luxembourg No - No
Pamplona real estate
Ruby 2,807,680 8,577,320 1,833,373 To invest in Luxembourg No - No
Ruby real estate
Sabina - - 6,465,322 To invest in Sabina real estate Luxembourg No - No
Cheyne French Funding Sub-Fund 3 11,650,667 3,630,876 11,650,667 To invest in France No - No
Cheyne French Funding Sub-Fund 3 real estate
Cheyne French Funding Sub-Fund 8 22,663,417 7,788,478 22,666,471 To invest in France No - No
Cheyne French Funding Sub-Fund 8
real estate
Cheyne French Funding Sub-Fund 9 8,470,707 2,477,156 8,471,940 To invest in France No - No
Cheyne French Funding Sub-Fund 9 real estate
1 This amount excludes interest receivables.
2 RECI has interest in the structured entities through loan notes
instruments and hence the equity percentage held is nil.
3 Other exposure indicates if the investment in the structured entity comes
with any associated potential valuation uplift. These can include, but are not
limited to: profit share, variable exit fees, and exposure to enterprise value
uplift.
4 The total loan exposure on RELF will not equal the carrying value
disclosed above due to financing within the RELF structure.
13. Financing Agreements
The Company enters into repurchase agreements with several banks to provide
leverage. This financing is collateralised against certain of the Company's
bond portfolio assets with a fair value totalling £39.5 million (31 March
2023: £139.9 million) and a weighted average cost of 7.73% (31 March 2023:
5.86%) per annum. The contractual maturity period of the repurchase
arrangements is 3 to 6 months (31 March 2023: 3 to 6 months).
This short-term financing is shown as a current liability in the Statement of
Financial Position whereas the collateralised assets are shown as non-current.
The movement in financing agreements amounting to £56.5 million (31 March
2023: £22.5 million) and finance costs paid amounting to £3.7 million (31
March 2023: £1.6 million) are shown as financing activity in the Statement of
Cash Flows.
The following table summarises movements under financing agreements as at 31
March 2024 and 31 March 2023.
31 Mar 2024 31 Mar 2023
GBP
GBP
Balance as at 1 April 80,441,157 100,562,634
Proceeds under financing agreements 240,694,426 666,877,816
Payments under financing agreements (297,180,747) (689,398,896)
Finance costs 3,514,078 3,972,353
Finance costs paid (3,679,122) (1,572,750)
23,789,792 80,441,157
During the financial year ended 31 March 2024, the Company continued to
maintain some off-balance sheet financing agreements. These facilities entered
into during the previous financial year do not have recourse to the Company,
and the lending is structured using off-balance entities, and secured against
the specific loans involved. The aggregate amount of these off-balance sheet
loans as at 31 March 2024 was £33.9 million (31 March 2023: £20.6 million).
During the financial year ended 31 March 2024, the Company continued to
maintain an off-balance sheet financing agreement which does have partial
recourse to the Company. The amount of partial recourse commitment as at 31
March 2024 was £3.9 million (31 March 2023: £2.9 million). No expected loss
from providing this guarantee has been recognised in these financial
statements and no additional collateralisation has been paid as of year end.
14. Share Capital
The issued share capital of the Company consists of shares and its capital as
at the year end is represented by the net proceeds from the issuance of shares
and profits retained up to that date. The Company does not have any externally
imposed capital requirements. As at 31 March 2024, the Company had capital of
£326.4 million (31 March 2023: £337.0 million).
Authorised Share Capital 31 Mar 2024 31 Mar 2023
Number of Shares
Number of Shares
Shares of no par value each Unlimited Unlimited
Shares issued and fully paid
Shares at the start of the year 229,332,478 229,332,478
Shares repurchased and held in treasury (4,095,000) -
Shares at the end of the year 225,237,478 229,332,478
The below table provides a reconciliation of the impact of the shares
repurchased and held in treasury versus the data presented in the original
March 2024 Fact Sheet which did not account correctly for the buybacks. The
March 2024 Fact Sheet was subsequently re-published.
Fact Sheet Financial Statements Difference Description
Shares 229,332,478 225,237,478 4,095,000 Shares repurchased and held in treasury
AUM £331,405,039 £326,381,689 £5,023,350 Cost of buyback
NAV per share £1.45 £1.45 -
Treasury Shares 31 Mar 2024 31 Mar 2023
Number of Shares
Number of Shares
Shares repurchased and held in treasury 4,095,000 -
Pursuant to the share buyback authority approved by the Company's Shareholders
at the AGM on 15 September 2023, the Board has granted authority to the
Company's broker, Liberum Capital Limited, to purchase the Company's shares in
the market, subject to pre-agreed parameters. All shares purchased during the
year are held in treasury.
The Company purchased 4.1 million (31 March 2023: Nil) shares in the market
during the year. The total amount paid to purchase the shares was £5.0
million (31 March 2023: £Nil) and this was presented as a reduction from the
total equity.
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 is a
closed-ended listed investment company and, as such, Shareholders in the
Company have no right to redeem their shares. Any redemption offered to
Shareholders shall be at the discretion of the Directors of the Company.
The Company currently conducts its affairs so that the shares issued by the
Company can be recommended by Independent Financial Advisers to ordinary
retail investors in accordance with the FCA rules in relation to
non-mainstream pooled investment products and intends to continue to do so for
the foreseeable future. The shares are excluded from the FCA's restrictions
which apply to non-mainstream investment products because they are shares in
an investment company, which if it were domiciled in the United Kingdom, would
currently qualify as an investment trust.
There were no changes in the policies and procedures during the year ended 31
March 2024 with respect to the Company's approach to its share capital
management.
15. Financial Instruments and Associated Risks
The Company's investment activities expose it to various types of risk which
are associated with the financial instruments and markets in which it invests.
The Company's risk management policies seek to minimise the potential adverse
effects of these risks on the Company's financial performance.
The financial risks to which the Company is exposed include market risk
(including currency risk and interest rate risk), credit risk, liquidity risk
and prepayment and re-investment risks. 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 currency risk, interest rate 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. The sensitivity analyses are based on the Investment
Manager's best estimate of reasonably possible changes in interest rates,
foreign currency rates and market prices. In practice the actual trading
results may differ from the sensitivity analyses in the following pages and
the differences may be material.
(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 primary purpose of the Company's foreign currency economic hedging
activities is to protect against the volatility associated with investments
denominated in foreign currencies and other financial assets and liabilities
created in the normal course of business.
The Company is exposed to risks that the exchange rate of its currency
relative to other foreign currencies may change in a manner that has an
adverse effect on the value of that portion of the Company's financial assets
or liabilities denominated in currencies other than GBP.
The Company may enter into spot currency transactions or utilise derivatives
such as forwards to hedge against currency fluctuations.
The Company manages its foreign exchange exposure with forward foreign
exchange contracts. These instruments are detailed in Note 10.
The currency profile of the Company, including derivatives at fair value, at
the year end date was as follows:
As at 31 March 2024: Monetary Forward Foreign Net
Monetary
Liabilities Exchange currency
Assets
GBP Contracts exposure
GBP
GBP GBP
Currency
GBP 195,176,694 (17,112,488) 153,069,538 331,133,744
EUR 157,068,770 (8,669,792) (153,157,505) (4,758,527)
USD 6,472 - - 6,472
352,251,936 (25,782,280) (87,967) 326,381,689
As at 31 March 2023: Monetary Forward Foreign Net
Monetary
Liabilities Exchange currency
Assets
GBP Contracts exposure
GBP
GBP GBP
Currency
GBP 242,499,869 (60,997,713) 163,823,152 345,325,308
EUR 174,728,260 (21,027,058) (162,067,034) (8,365,832)
USD 6,431 - - 6,431
417,234,560 (82,024,771) 1,756,118 336,965,907
As at 31 March 2024, 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 2023.
By 5% 31 Mar 2024 31 Mar 2023
GBP
GBP
EUR (237,926) (418,292)
USD 324 322
Total (237,602) (417,970)
By 10% 31 Mar 2024 31 Mar 2023
GBP
GBP
EUR (475,853) (836,583)
USD 647 643
Total (475,206) (835,940)
A 5% or 10% weakening of the GBP against the above currencies would have
resulted in an equal but opposite effect on the equity of the Company and net
profit/(loss) per the Statement of Comprehensive Income to the amounts shown
above, on the basis that all other variables remained constant.
The sensitivity analysis reflects how the equity of the Company would have
been affected by changes in the relevant risk variable that were reasonably
possible at the reporting date. Management has determined that a fluctuation
of 5% in foreign exchange rates is reasonably possible, considering the
environment in which the Company operates.
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value and future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
The Company's interest rate risk is managed by the Investment Manager in
accordance with policies and procedures detailed below.
The Company invests in fixed and floating rate real estate related debt assets
(which includes loans and bonds). The decision to enter into a fixed or a
floating rate deal is agreed with the borrower on a loan by loan basis.
Interest rate risk arises from the effects of fluctuations in the prevailing
rates on the fair of financial assets and liabilities and future cash flow.
A fundamental principle of bond investing is that market interest rates and
bond prices generally move in opposite directions. When market interest rates
rise, prices of fixed-rate bonds fall. However, as explained under the key
sources of estimation uncertainty in Note 3, the Investment Manager believes
that the loan or bond's own effective yield represents the most appropriate
rate to discount future cash flows. The use of this judgement limits the
impact of the fluctuations in market interest rates on the valuation of the
bilateral bonds and loans portfolio.
The Investment Manager has considered relevant geopolitical and macroeconomic
factors including the rise of market interest rate during the year and
continues to believe that this key judgement remains appropriate due to the
bespoke nature of the investment portfolio and the dislocation between the
yield of these assets and the market interest rate.
Had movement in market interest rates been fully reflected in the valuation of
fixed-rate assets held by the Company, the estimated impact of a rise of 1%
(100 basis points) or 5% (500 basis points) (31 March 2023: 1% (100 basis
points) or 5% (500 basis points)) on the NAV of the Company, is a decrease of
£4.4 million or £22.1 million (31 March 2023: £6.3 million or £31.7
million), respectively. A decrease in interest rates by 1% (100 basis points)
or 5% (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 2024 and 31 March 2023, and their weighted average
lives.
The interest rate profile of the Company as at 31 March 2024 was as follows:
Fixed Floating Non-interest bearing Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 195,849,055 108,201,524 25,318,220(1) 329,368,799
Cash and cash equivalents - 18,289,567 - 18,289,567
Cash collateral at broker - 4,489,272 - 4,489,272
Other assets - - 104,298 104,298
Financing agreements - (23,667,814) (121,978)(2) (23,789,792)
Cash collateral due to broker - (14,400) - (14,400)
Derivative financial liabilities
- forward foreign exchange contracts - - (87,967) (87,967)
Other liabilities - - (1,978,088) (1,978,088)
Total 195,849,055 107,298,149 23,234,485 326,381,689
1 Accrued interest and equity securities related to financial assets at fair
value through profit or loss.
2 Interest payable related to financing agreements.
The maturity profile of the Company as at 31 March 2024 was as follows:
Within one year One to five years Over five years Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 105,966,061 223,365,548 37,190 329,368,799
Cash and cash equivalents 18,289,567 - - 18,289,567
Cash collateral at broker 4,489,272 - - 4,489,272
Other assets 104,298 - - 104,298
Financing agreements (23,789,792) - - (23,789,792)
Cash collateral due to broker (14,400) - - (14,400)
Derivative financial liabilities
- forward foreign exchange contracts (87,967) - - (87,967)
Other liabilities (1,978,088) - - (1,978,088)
Net Assets 102,978,951 223,365,548 37,190 326,381,689
The interest rate profile of the Company as at 31 March 2023 was as follows:
Fixed Floating Non-interest bearing Total
GBP GBP GBP GBP
Financial assets at fair value through profit or loss 277,244,059 99,067,135 24,430,716 1 400,741,910
Cash and cash equivalents - 14,081,343 - 14,081,343
Cash collateral at broker - 2,383,962 - 2,383,962
Derivative financial assets
- forward foreign exchange contracts - - 1,756,118 1,756,118
Other assets - - 27,345 27,345
Financing agreements - (80,154,135) (287,022)(2) (80,441,157)
Other liabilities - - (1,583,614) (1,583,614)
Total 277,244,059 35,378,305 24,343,543 336,965,907
1 Accrued interest and equity securities related to financial assets at fair
value through profit or loss.
2 Interest payable related to financing agreements.
The maturity profile of the Company as at 31 March 2023 was as follows:
Within one year One to five years Over five years GBP Total
GBP GBP GBP
Financial assets at fair value through profit or loss 81,576,013 150,257,260 168,908,637 400,741,910
Cash and cash equivalents 14,081,343 - - 14,081,343
Cash collateral at broker 2,383,962 - - 2,383,962
Derivative financial assets - -
- forward foreign exchange contracts 1,756,118 - - 1,756,118
Other assets 27,345 - - 27,345
Financing agreements (80,441,157) - - (80,441,157)
Other liabilities (1,583,614) - - (1,583,614)
Net Assets 17,800,010 150,257,260 168,908,637 336,965,907
The value of the asset-backed securities will fluctuate as a result of changes
in market prices (other than those arising from currency risk or interest rate
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. (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.
The Company has credit exposure in relation to its financial assets. The
Company invested in financial assets with The Bank of New York Mellon with the
credit quality of AA- (31 March 2023: AA-) according to Standard and Poor's.
The Company's maximum exposure to credit risk for financial assets is as
follows:
31 Mar 2024 31 Mar 2023
GBP
GBP
Instrument
Real Estate Credit Investments - market bond portfolio 7,893,959 49,243,187
Real Estate Credit Investments - bilateral loan and bond portfolio 305,036,801 341,474,617
Cash and cash equivalents 18,289,567 14,081,343
Cash collateral at broker 4,489,272 2,383,962
Derivative financial assets - 1,756,118
Total 335,709,599 408,939,227
Market Bond Portfolio
The Company is subject to the risk that issuers of asset-backed securities in
which it invests may default on their obligations and that certain events may
occur which have an immediate and significant adverse effect on the value of
such instruments. There can be no assurance that an issuer of an instrument in
which the Company invests will not default or that an event which has an
immediate and significant adverse effect on the value of such instruments will
not occur, and that the Company will not sustain a loss on the transaction as
a result. The Company seeks to mitigate this risk by monitoring its portfolio
of investments, reviewing the underlying credit quality of its counterparties,
on a monthly basis.
Bilateral Loan and Bond Portfolio
The Company is subject to the risk that the underlying borrowers to the loans
and bonds in which it invests may default on their obligations and that
certain events may occur which have an immediate and significant adverse
effect on the value of such instruments. Any loan and bond may become a
defaulted obligation for a variety of reasons, including non-payment of
principal or interest, as well as covenant violations by the borrower in
respect of the underlying loan and bond documents. In the event of any default
on the Company's investment in a loan and bond by the borrower, the Company
will bear a risk of loss of principal and accrued interest on the loan and
bond, which could have a material adverse effect on the Company's investment.
There can be no assurance that a borrower will not default, that there will
not be an issue with the underlying real estate security or that an event
which has an immediate and significant adverse effect on the value of these
loans and bonds will not occur, and that the Company will not sustain a loss
on the transaction as a result. The Company seeks to mitigate this risk by
performing due diligence and monitoring its portfolio of investments,
reviewing the underlying credit quality of its borrowers, performance of the
underlying asset, and loan and bond covenants compliance against financial
information received and the performance of the security, on a quarterly
basis.
The Company's total investment in bilateral loan and bond portfolio as at 31
March 2024 amounted to £305.0 million (31 March 2023: £341.5 million) which
includes accrued interest on loans and bonds of £9.0 million (31 March 2023:
£14.1 million) at this date.
A monthly Watch List review process is implemented for all defaulted
positions. Recovery probability and estimated recovery value are reviewed
together by Risk Management and investment analysts. The below table splits
the investment portfolio into buckets based on a grading system in place as
part of the Company's performance evaluation.
Simplified Company risk grade Equivalent Rating 2024(1) 2023(1)
Low Risk 1 AAA - 1,484,666
2 AA - 7,783,939
3 A - 11,460,219
Moderate Risk 4 BBB 174,880, 133 294,722,536
Substantial Risk 5 BB 40,902,821 8,859,812
High Risk 6 B 91,429,447 54,304,342
Default Risk 7 CCC - -
8 CC 142,220 -
9 C 10,371,911 -
10 D 2,545,495 7,719,786
1 Excludes interest receivables
Derivative Contracts
Transactions involving derivative instruments are usually with counterparties
with whom the Company has signed master netting agreements. Master netting
agreements provide for the net settlement of contracts with the same
counterparty in the event of default. The impact of the master netting
agreements is to reduce credit risk from the amounts shown as derivative
financial assets in 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 in the Statement of Financial Position.
Below are the derivative liabilities by counterparty and details of the
collateral received and pledged by the Company as at 31 March 2024:
Derivative Type Counterparty Value of Collateral Collateral Net (if greater
derivative
received
pledged(1) than zero)
liabilities GBP
GBP GBP
GBP
Forward foreign exchange contracts The Bank of New York Mellon (87,967) - 87,967 -
1 Over collateralisation is not presented in this table. The amount of
collateral reflected is limited to the amount of the derivative liabilities.
Below are the derivative assets by counterparty and details of the collateral
received and pledged by the Company as at 31 March 2023:
Derivative Type Counterparty Value of Collateral Collateral Net (if greater
derivative
received
pledged than zero)
assets GBP
GBP GBP GBP
Forward foreign exchange contracts The Bank of New York Mellon 1,756,118 - - 1,756,118
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered
small due to the short settlement period involved and the high credit quality
of the brokers used. The Company monitors the credit quality and financial
positions of the brokers used to further mitigate this risk.
Custody
The Company monitors its credit risk by monitoring the credit quality of The
Bank of New York Mellon (International) Limited, as reported by Standard 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
quality of Aa2 at the reporting date (31 March 2023: Aa2) according to
Moody's.
(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
policy and the Investment Manager's approach to managing liquidity is to
ensure, as far as possible, that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and stress conditions,
without incurring unacceptable losses or risking damage to the Company's
reputation. In managing the Company's assets therefore, the Investment Manager
seeks to ensure that the Company holds at all times a sufficient portfolio of
assets listed on recognised investment exchanges to enable it to discharge its
payment obligations. The Investment Manager monitors the Company's liquidity
position on a daily basis. Where needed, the Investment Manager will liquidate
positions to increase cash or reduce leverage. The financing agreements are on
a short 1-3 month term and it is the expectation of the Company that this
financing is rolled and therefore there is no need to manage liquidity for the
financing agreements.
The following tables detail the current and long-term financial liabilities of
the Company at the year end date:
As at 31 March 2024: Less than 1 month 1-3 months 3 months to 1 year Greater than 1 year
GBP GBP GBP GBP
Financial liabilities excluding derivatives
Financing agreements - 22,432,630 1,357,162 -
Cash collateral due to broker - 14,400 - -
Other liabilities - 1,978,088 - -
- 24,425,118 1,357,162 -
As at 31 March 2023: Less than 1 month 1-3 months 3 months to 1 year Greater than 1 year
GBP GBP GBP GBP
Financial liabilities excluding derivatives
Financing agreements 26,808,659 41,899,322 11,733,176 -
Other liabilities - 1,583,614 - -
26,808,659 43,482,936 11,733,176 -
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 financial assets and liabilities measured in the Statement of
Financial Position. The determination of the fair value for financial assets
and liabilities for which there is no observable market price requires the use
of valuation techniques as described in Note 2, Material 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; and
Level 3 - Valuation techniques using significant unobservable inputs. This
category includes all instruments where the valuation technique includes
inputs not based on observable data and the unobservable inputs could have a
significant impact on the instrument's valuation. This category includes
instruments that are valued based on quoted prices for similar instruments
where significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of the Company's
financial assets and liabilities measured at fair value at the year end date:
Level 1 Level 2 Level 3 Total
As at 31 March 2024 GBP GBP GBP GBP
Non-current assets
Real Estate Credit Investments - market bond portfolio - 100,405 7,793,554 7,893,959
Real Estate Credit Investments - bilateral loan and bond portfolio - - 305,036,801 305,036,801
Real Estate Credit Investments - equity securities - - 16,438,039 16,438,039
Total non-current assets - 100,405 329,268,394 329,368,799
Current liabilities
Real Estate Credit Investments - repurchase agreements - (23,789,792)(1) - (23,789,792)
Forward foreign exchange contracts - (87,967) - (87,967)
Total current liabilities - (23,877,759) - (23,877,759)
- (23,777,354) 329,268,394 305,491,040
1 Includes repurchase agreements related to Level 3 investments.
As at 31 March 2023: Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Current assets
Forward foreign exchange contracts - 1,756,118 - 1,756,118
Non-current assets
Real Estate Credit Investments - market bond portfolio - 29,763,268 19,479,919 49,243,187
Real Estate Credit Investments - bilateral loan and bond portfolio - - 341,474,617 341,474,617
Real Estate Credit Investments - equity securities - 10,024, 106 10,024,106
Total non-current assets - 29,763,268 370,978,642 400,741,910
Current liabilities
Real Estate Credit Investments - repurchase agreements - (80,441,157)(1) - (80,441,157)
- (48,921,771) 370,978,642 322,056,871
1 Includes repurchase agreements related to Level 3 investments.
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
The fair value of forward foreign exchange contracts is the difference between
the contracts price and reported market prices of the underlying contract
variables. These are included in Level 2 of the fair value hierarchy.
The fair value of the repurchase agreements is valued at cost or principal and
is included in Level 2 of the fair value hierarchy.
The fair value of investments that trade in markets that are not considered to
be active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within Level 2. These include investment-grade corporate bonds ("Real Estate
Credit Investments").
As Level 2 investments include positions that are not traded in active markets
and/or are subject to transfer restrictions, valuations may be adjusted to
reflect illiquidity and/or non-transferability, which are generally based on
available market information. In cases where material discounts are applied,
the positions will be valued as Level 3.
The Company makes loans into structures to gain exposure to real estate
secured debt primarily in the United Kingdom and Western Europe. These loans
are not traded in an active market and there are no independent quotes
available for these loans. Such holdings are classified as Level 3
investments. The fair value of these loans is linked directly to the value of
the real estate loans that the underlying structures invests in, which are
determined based on modelled expected cash flows (drawdown principal and
interest repayments, and maturity dates) with effective yields ranging from
6.2% to 13.2% (31 March 2023: 6.2% to 13.2%) (the unobservable input).
Fair value of the real estate loans is adjusted for changes in the credit
quality of both the borrower and the underlying property collateral, and
changes in the market rate on similar instruments where changes are material.
No material movements on the fair value of the real estate loans have been
identified and the par value of the loans was used. On origination of the
loan, the Investment Manager performs due diligence on the borrower and
related security/property. This includes obtaining a valuation of the
underlying property (to assess loan-to-value of the investment). In most
instances, the terms of the loan require periodic revaluation of the
underlying property to check against loan-to-value covenants. All the fees
associated with the investments (arrangement fees, exit fees, etc.) are paid
directly to the Company and not paid to the Investment Manager.
RECI may invest in equity securities which are not quoted in an active market
and which may be subject to restrictions on redemptions such as lock up
periods, redemption gates and side pockets. Transactions in the shares of the
funds occur on a regular basis. Equity securities are valued using discounted
cash flow.
In determining the level, RECI considers the length of time until the
investment is redeemable, including notice and lock-up periods or any other
restriction on the disposition of the investment. If RECI has the ability to
redeem its investment at the reported net asset valuation as of the
measurement date, the investment is generally categorised in Level 2 of the
fair value hierarchy. If RECI does not know when it will have the ability to
redeem the investment or it does not have the ability to redeem its investment
in the near term, the investment is categorised in Level 3 of the fair value
hierarchy. Equity securities are categorised in Level 3 of the fair value
hierarchy.
The following tables set out information about significant unobservable inputs
used as at 31 March 2024 and 31 March 2023 in measuring financial assets
categorised as Level 3:
Fair value Valuation Unobservable
technique
input
As at 31 March 2024 GBP
Market bond portfolio 7,793,554 Priced via external pricing source Comparable set used
Bilateral loan and bond portfolio 305,036,801 Discounted cash flow Risk-adjusted discount rate and sector based yields
Equity securities 16,438,039 Discounted cash flow Risk-adjusted discount rate and sector based yields
Fair value Valuation Unobservable
technique
input
As at 31 March 2023 GBP
Market bond portfolio 19,479,919 Priced via external pricing source Comparable set used
Bilateral loan and bond portfolio 341,474,617 Discounted cash flow Risk-adjusted discount rate and sector based yields
Equity securities 10,024,106 Discounted cash flow Risk-adjusted discount rate and sector based yields
Although management believes that its estimates of fair value are appropriate,
the use of different methodologies or assumptions could lead to different
measurements of fair value. Changes in unobservable inputs, such as discount
rates used in loans and bonds valuation and sector-based yields used in
collateral valuation can have a negative or positive impact on fair value.
Sensitivities around the discount rates are discussed in detail in the
interest rate risk note while sensitivity around expected future cash flows
including collateral valuation is explained below. Sensitivities range from
15% to 20% for external valuations dated prior to the end of 30 September
2023. The higher percentage of 20% is applicable to office assets, which have
been historically demonstrated and are expected to continue to be more
sensitive (+5%) compared to other asset classes. For valuations after 30
September 2023, the sensitivities are set from 5% to 10% with the higher
percentage of 10% being assigned to the office sector (2023: 5% or 15% with
15% used if the valuation is dated before November 2022). This represents
management's assessment of a reasonable possible change and would have a
negative or positive effect on the fair value measurements for the Level 3
assets of £7,212,730 (2023: £904,339).
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., and RELF 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 2024, the Investment Manager has taken into account movements
in market rates, any indications of impairment, significant credit events or
significant negative performance of the underlying property structures, which
might affect the fair value of the loans and bonds. Please refer to page 86
for the effects of movement in market rates.
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 Level 3
31 Mar 2024 31 Mar 2023
GBP GBP
Financial assets at fair value through profit or loss
Opening balance 370,978,642 295,890,549
Total (losses)/gains recognised in the Statement of Comprehensive Income for (6,381,030) 10,170,687
the year
Purchases 95,164,446 167,591,125
Sales (125,398,359) (118,994,111)
(Decrease)/increase in interest receivable (5,095,305) 2,619,692
Transfer into Level 3 - 13,700,700
Closing balance 329,268,394 370,978,642
Unrealised (losses)/gains on investments classified as Level 3 at year end (3,267,385) 3,840,715
(e) Prepayment and Re-Investment Risks
The Company's real estate loans have the facility for prepayment. The
Company's exposure to real estate debt securities also has exposure to
potential prepayment risk which may have an impact on the value of the
Company's portfolio. Prepayment rates are influenced by changes in interest
rates and a variety of economic, geographic and other factors beyond the
Company's control and consequently cannot be predicted with certainty.
The level and timing of prepayments made by borrowers in respect of the
mortgage loans that collateralise certain of the Company's investments may
have an adverse impact on the income earned by the Company from those
investments.
Early prepayments also give rise to increased re-investment risk. If the
Company is unable to reinvest such cash in a new investment with an expected
rate of return at least equal to that of the loan repaid, the Company's net
income will be lower and, consequently, could have an adverse impact on the
Company's ability to pay dividends.
The Investment Manager reviews the prepayment assumptions each quarter and
will update as required. These assumptions are considered through a review of
the underlying loan performance information of the securitisations.
16. Segmental Reporting
The Company has adopted IFRS 8 Operating Segments. The standard requires a
"management approach", under which segment information is presented on the
same basis as that used for internal reporting purposes.
Whilst the Investment Manager may make the investment decisions on a
day-to-day basis regarding the allocation of funds to different investments,
any changes to the investment strategy or major allocation decisions have to
be approved by the Board, even though they may be proposed by the Investment
Manager. The Board retains full responsibility as to the major allocation
decisions made on an ongoing basis and is therefore considered the "Chief
Operating Decision Maker" under IFRS 8.
The Company invests in Real Estate Credit Investments. The Real Estate Credit
Investments may take different forms but are likely to be: (i) secured real
estate loans; (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"); and (iii) equity securities. The real
estate debt strategy focuses on secured residential and commercial debt in the
United Kingdom and Western Europe, seeking to exploit opportunities in
publicly traded securities and real estate loans.
The Company has three reportable segments, being the Market Bond Portfolio,
Bilateral Loan and Bond Portfolio and Equity Securities.
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, Bilateral
Loan and Bond Portfolio and Equity Securities separately; thus three
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 2024: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Interest income 1,482,514 28,412,548 - 29,895,062
Net gains/(losses) on financial assets and liabilities at fair value through 1,807,597 (2,512,410) (5,275,758) (5,980,571)
profit or loss
Reportable segment profit/(loss) 3,290,111 25,900,138 (5,275,758) 23,914,491
Finance costs (988,855) (2,525,223) - (3,514,078)
Year ended 31 March 2023: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Interest income 4,960,473 26,747,271 - 31,707,744
Net (losses)/gains on financial assets and liabilities at fair value through (8,155,580) 10,101,376 2,520,545 4,466,341
profit or loss
Reportable segment (loss)/profit (3,195,107) 36,848,647 2,520,545 36,174,085
Finance costs (1,783,805) (2,188,548) - (3,972,353)
Year ended 31 March 2024: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Reportable segment assets 7,893,959 305,036,801 16,438,039 329,368,799
Non-segmental assets 22,883,137
Financing agreements (4,732,841) (19,056,951) - (23,789,792)
Non-segmental liabilities (2,080,455)
Net assets 326,381,689
Year ended 31 March 2023: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Reportable segment assets 49,243,187 341,474,617 10,024,106 400,741,910
Non-segmental assets - - 18,248,768
Financing agreements (36,015,630) (44,425,527) - (80,441,157)
Non-segmental liabilities (1,583,614)
Net assets 336,965,907
Information regarding the basis of geographical segments is presented in the
Investment Manager's Report and is based on the countries of the underlying
collateral.
All segment revenues are from external sources. There are no inter-segment
transactions between the reportable segments during the year. Certain income
and expenditure is not considered part of the performance of either segment.
This includes gains/(losses) on net foreign exchange and derivative
instruments, expenses and interest on borrowings.
The following table provides a reconciliation between reportable segment
profit and net profit.
31 Mar 2024 31 Mar 2023
GBP
GBP
Reportable segment profit 23,914,491 36,174,085
Net gains/(losses) on foreign exchange instruments 6,615,359 (3,659,633)
Interest income on financial assets at amortised cost 446,117 214,799
Net foreign currency gains/(losses) 259,847 (2,070,857)
Other income 123,121 7,940
31,358,935 30,666,334
Operating expenses (5,989,327) (6,143,662)
Finance costs (3,514,078) (3,972,353)
Net profit 21,855,530 20,550,319
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 reportable segment
assets and total assets.
31 Mar 2024 31 Mar 2023
GBP
GBP
Reportable segment assets 329,368,799 400,741,910
Cash and cash equivalents 18,289,567 14,081,343
Cash collateral at broker 4,489,272 2,383,962
Derivative financial assets - 1,756,118
Other assets 104,298 27,345
Total assets 352,251,936 418,990,678
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios and Equity Securities for the year
ended 31 March 2024:
Year ended 31 March 2024: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Financial assets at fair value through profit or loss
Opening fair value 49,243,187 341,474,617 10,024,106 400,741,910
Transfer - (11,650,667) 11,650,667 -
Purchases - 94,866,164 298,282 95,164,446
Repayments/sales proceeds (42,942,292) (112,045,599) (259,257) (155,247,148)
Decrease in interest receivable (214,533) (5,095,305) - (5,309,838)
Realised (losses)/gains on sales (4,232,205) 1,337,147 (485) (2,895,543)
Net movement in unrealised gains/(losses) 6,039,802 (3,849,556) (5,275,274) (3,085,028)
Closing fair value 7,893,959 305,036,801 16,438,039 329,368,799
The following is a summary of the movements in the Company's investments
analysed by the Loan and Bond Portfolios and Equity Securities for the year
ended 31 March 2023:
Year ended 31 March 2023: Market Bond Portfolio Bilateral Loan and Equity Securities Total
GBP Bond Portfolio GBP GBP
GBP
Financial assets at fair value through profit or loss
Opening fair value 98,450,555 288,968,898 6,921,651 394,341,104
Purchases - 157,387,510 1,256,961 158,644,471
Repayments/sales proceeds (40,697,172) (117,602,858) (675,051) (158,975,081)
(Decrease)/increase in interest receivable (354,617) 2,619,692 - 2,265,075
Realised (losses)/gains on sales (4,547,798) (5,491,225) 82,453 (9,956,570)
Net movement in unrealised (losses)/gains (3,607,781) 15,592,600 2,438,092 14,422,911
Closing fair value 49,243,187 341,474,617 10,024,106 400,741,910
17. Cash Collateral
The Company manages some of its financial risks through the use of financial
derivative instruments and repurchase agreements which are subject to
collateral requirements. As at 31 March 2024, a total of £4.5 million (31
March 2023: £2.4 million) was due from various financial institutions under
the terms of the relevant arrangements. The cash held by brokers is restricted
and is shown as Cash collateral at broker in the Statement of Financial
Position.
18. Material Agreements and Related Party Transactions
Loan Investments
Previously, many of the Company's investments in loans were made through a
Luxembourg based entity, Stornoway Finance S.à r.l. via loan note
instruments. The loan investments are now made through another Luxembourg
based entity, ENIV S.à r.l., and RELF via separate note instruments. This
entity has separate compartments for each loan deal which effectively
ringfences each loan deal. Other funds managed by the Investment Manager may
invest pari passu in these compartments.
Investment Manager
The Company is party to an Investment Management Agreement with the Investment
Manager, dated 22 February 2017, pursuant to which the Company has appointed
the Investment Manager to manage its assets on a day-to-day basis in
accordance with its investment objectives and policies, subject to the overall
supervision and direction of the Board of Directors.
The Company pays the Investment Manager a Management Fee and a Performance
Fee.
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company an annual Management Fee of 1.25% on
an adjusted NAV, being the NAV of the shares.
During the year ended 31 March 2024, the Management Fee totalled £4.2 million
(31 March 2023: £4.3 million), of which £0.3 million (31 March 2023: £0.4
million) was outstanding at the year end.
Performance Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive from the Company a Performance Fee calculated as ((A-B)
x 20% x C) where:
A = the Adjusted Performance
NAV per share, as defined in the Prospectus.
B = the NAV per share as at
the first business day of the Performance Period increased by a simple annual
rate of return of 7% over the Performance Period or, if no Performance Fee was
payable in the previous Performance Period, the NAV per share on the first
business day of the Performance Period immediately following the last
Performance Period in which a Performance Fee was paid (the "Starting Date")
increased by a simple annual rate of return of 7% over the period since the
Starting Date ("Hurdle Assets").
C = the time weighted average
number of shares in issue in the period since the Starting Date.
On 1 October 2021, the Company entered a new Performance Period which is
expected to run until the end date of the quarter in which the next
continuation resolution is passed. As no Performance Fee was payable in the
previous Performance Period, the NAV on which the Hurdle Assets will be
determined in accordance with the above formula was the NAV per share of
£1.63 as at 2 October 2017 (being the Starting Date of the Performance Period
immediately following the last Performance Period in which a Performance Fee
was paid).
During the years ended 31 March 2024 and 31 March 2023, there were no
performance fees accrued.
Administration Fee
Under the terms of the Administration Agreement, the Administrator is entitled
to receive from the Company a monthly administration fee based on the prior
month gross assets of the Company adjusted for current month subscriptions and
redemptions of the Company at the relevant basis points per annum rate,
subject always to a minimum monthly fee of £10,000.
During the year ended 31 March 2024, the administration fee totalled £278,720
(31 March 2023: £276,595), of which £37,548 (31 March 2023: £41,939) 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 2023:
0.02%) of the NAV of the Company. During the year ended 31 March 2024, the
Depositary fee totalled £64,126 (31 March 2023: £65,137). The Company owed
£66,708 (31 March 2023: £33,090) to the Depositary at the year end date.
19. Contingencies and Commitments
As at 31 March 2024, the Company had committed £489.0 million into bilateral
loans and bonds of which £352.1 million had been funded (31 March 2023:
£572.0 million into bilateral loans and bonds of which £367.8 million had
been funded).
During the financial year ended 31 March 2024, the Company entered into some
off-balance sheet financing agreements which have partial recourse to the
Company. The amount of partial recourse commitment as at 31 March 2024 was
£3.9 million (31 March 2023: £2.9 million). This represents a financial
guarantee, and the Company recognises that there's no need for provision on
assets at reporting date.
20. Subsequent Events
The Directors declared a dividend of 3 pence per share on 19 June 2024.
Since 1 April 2024, RECI received a total of £16.7 million from two loans
that have repaid.
Since 1 April 2024, RECI has committed to invest in one new deal, totalling
£18.5 million.
Since 1 April 2024, RECI has bought back 1.8 million amount of shares.
There have been no other significant events affecting the Company since the
year end date that require amendment to or disclosure in the financial
statements.
21. Foreign Exchange Rates Applied to Combined Totals Used in the Preparation
of the Financial Statements
The following foreign exchange rates relative to the GBP were used as at the
year end date:
Currency 31 Mar 2024 31 Mar 2023
GBP
GBP
EUR 1.17 1.14
USD 1.26 1.24
22. Approval of the Financial Statements
The Annual Report and audited financial statements of the Company were
approved by the Directors on 19 June 2024.
Appendix I - AIFM Remuneration Policy (Unaudited)
Annual Remuneration Disclosure for the Year to 31 March 2024
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 2024, in
respect of remuneration derived from the AIF are as follows:
Business Area Number of AIFM Total Code Staff Remuneration Deferred Remuneration
Code Staff Remuneration relevant to derived from the derived from
(all variable) the AIF AIF (all variable) the AIF
Portfolio Management 29 £23,565,283 6 £1,013,727 £223,385
Senior Management 7 £19,528,002 7 £876,284 £243,989
Total 36 £43,093,285 13 £1,890,011 £467,374
Remuneration Code information is provided as required under the FCA Rules.
Appendix II - AIFM Leverage (Unaudited)
For the purposes of this disclosure, leverage is any method by which a fund's
exposure is increased. A fund's exposure may be increased by using
derivatives, by reinvesting cash borrowings, through positions within
repurchase or reverse repurchase agreements, through securities lending or
securities borrowing arrangements, or by any other means (such increase
referred to herein as the "Incremental Exposure"). The AIFMD prescribes two
methodologies for calculating overall exposure of a fund: the "gross
methodology" and the "commitment methodology". These methodologies are briefly
summarised below.
The commitment methodology takes account of the hedging and netting
arrangements employed by a fund at any given time (purchased and sold
derivative positions will be netted where both relate to the same underlying
asset). This calculation of exposure includes all Incremental Exposure as well
as a fund's own physical holdings; and cash. By contrast, the gross
methodology does not take account of the netting or hedging arrangements
employed by a Company. This calculation of exposure includes all Incremental
Exposure as well as the Company's own physical holdings; cash is excluded.
The AIFMD requires that each leverage ratio be expressed as the ratio between
a fund's total exposure (including any Incremental Exposure) and its NAV.
Using the methodologies prescribed under the AIFMD and implementing
legislation, the Company has set a maximum level of leverage, taking into
account atypical and volatile market conditions. Leverage will not exceed the
ratio of 5:1 using the commitment methodology and 5:1 using the gross
methodology.
The use of leverage, including borrowings, may increase the volatility of the
Company's NAV per share and also amplify any loss in the value of the
Company's assets.
While the use of borrowing should enhance the total return on the shares where
the return on the Company's underlying assets is rising and exceeds the cost
of borrowing, it will have the opposite effect where the return on the
Company's underlying assets is falling or rising at a lower rate than the cost
of borrowing, reducing the total return on the shares. As a result, the use of
borrowing by the Company may increase the volatility of the NAV per share.
Any reduction in the value of the Company's investments may lead to a
correspondingly greater percentage reduction in its NAV (which is likely to
adversely affect the price of a share). Any reduction in the number of shares
in issue (for example, as a result of buybacks or tender offers) will, in the
absence of a corresponding reduction in borrowing, result in an increase in
the Company's level of gearing.
To the extent that a fall in the value of the Company's investments causes
gearing to rise to a level that is not consistent with the Company's gearing
policy or borrowing limits, the Company may have to sell investments in order
to reduce borrowing.
The Company will pay interest on its borrowing. As such, the Company is
exposed to interest rate risk due to fluctuations in the prevailing market
rates. The Company may employ hedging techniques designed to reduce the risk
of adverse movements in interest rates. However, such strategies may also
result in losses and overall poorer performance than if the Company had not
entered into such hedging transactions.
The risks associated with the derivatives used by the Company and that may
contribute to the leverage of the Company are set out earlier.
Leverage is limited to 500% of NAV of the Company under both the Gross and
Commitment approaches. Up to 31 March 2024, the maximum leverage calculated
has been 146.87% for the Gross Approach and 107.90% for the Commitment
Approach. In the year ended 31 March 2023, the maximum leverage calculated has
been 166.91% for the Gross Approach and 123.99% for the Commitment Approach.
Directors and Advisers
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Colleen McHugh
Andreas Tautscher (appointed 07 May 2024)
Secretary of the Company
Aztec Financial Services (Guernsey) Limited
PO Box 656
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Corporate Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London, EC2Y 9LY
Registrar
Link Market Services (Guernsey) Limited
Mount Crevelt House
Bulwer Avenue
St. Sampson
Guernsey, GY2 4LH
Depositary
The Bank of New York Mellon (International) Limited
One Canada Square
London, E14 5AL
Registered Office
East Wing
Trafalgar Court
Les Banques, St. Peter Port
Guernsey, GY1 3PP
Alternative Investment Fund Manager
Cheyne Capital Management (UK) LLP
Stornoway House
13 Cleveland Row
London, SW1A 1DH
Independent Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey, GY1 3HW
UK Transfer Agent
Link Group Limited
Central Square
29 Wellington Street
Leeds, LS1 4DL
Administrator
Citco Fund Services (Guernsey) Limited
PO Box 273
Frances House
Sir William Place
St. Peter Port
Guernsey, GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza
Block 6
International Financial Services Centre
Ireland
Dublin 1
Glossary
Asset Strategy definitions
Core
Assets that benefit from having long-term income.
Core
+
Assets that benefit from having strong current income, but do require some
measure of asset management to optimise their income profile and term.
Development
De-Risked
Development assets which benefit from being substantially pre-sold or pre-let.
Development
Fit-Out
Assets that have either been built from the ground up and have reached the
completion of the superstructure ("topped out"), or assets which are in need
of substantial refurbishment works. These typically already benefit from the
requisite consent to develop.
Development Groundworks/Superstructure Assets that are to be built from the
ground up and are in the groundworks stage or building the superstructure has
commenced. These typically already benefit from the requisite consent to
develop.
Real Estate Op-Co/Prop-Co Loan Loan
secured by both the operating company as well as all of the Company's real
assets.
Value
add/transitional
Assets that require asset management (typically refurbishment) and re-letting
to secure a core income profile.
Alternative Performance Measures
Dividend
Yield
The total dividends paid in the reporting period (per share) divided by the
quoted price of each share as at the relevant reporting date.
Market
Capitalisation
The number of shares in issuance at the relevant reporting date multiplied by
the share price at the relevant reporting date.
NAV per
share
The net asset value of the Company divided by the number of shares in issuance
at the relevant reporting date.
Share Price Premium/Discount The
percentage difference between the NAV per share and the quoted price of each
share as at the relevant reporting date.
Total NAV Return
The return on the movement in the NAV per share at the end of the period
together with all the dividends paid during the period, divided by the NAV per
share at the beginning of the period/year.
Real Estate Credit Investments Limited
East Wing
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3PP
www.realestatecreditinvestments.com
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