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
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
For further information please
contact:
Investment Manager:
|
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
£326.4m
(31 March 2023: £337.0m)
£1.45
(31 March 2023: £1.47)
£352.3m
(31 March 2023: £419.0m)
£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
7.0%
(31 March 2023: 6.2%)
£1.15
(31 March 2023: £1.34)
10.4%
(31 March 2023: 9.0%)
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
|
Country
|
Allocation
March 2024
%
|
Change since
March 2023
%
|
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 Return1
|
|
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
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 months1.
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
Highlights1
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 year1
|
(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)
annualised1
|
7.0%
|
6.2%
|
* Assumes re-investment of dividends.
Financial Highlights
|
31 Mar 2024
£m
|
31 Mar 2023
£m
|
Balance Sheet
|
|
|
Cash, cash equivalents and cash held by
brokers
|
22.8
|
16.5
|
Net assets
|
326.4
|
337.0
|
|
31 Mar 2024
£m
|
31 Mar 2023
£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)
£27.4m
(as at 31 March 2024)
£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
The Directors believe that the AGM
provides an appropriate forum for Shareholders to communicate with
the Board and encourages participation. There is an opportunity for
individual Shareholders to question the Chairmen of the Board
and the Audit and Risk Committee at the AGM. The Board assesses the
results of AGMs considering whether the number of votes against or
withheld in respect of resolutions are such as to require
discussion in the subsequent Annual Report.
|
|
Publications
The Company reports to Shareholders
with both monthly fact sheets and quarterly update presentations,
along with the Annual and interim reports.
These are available on the Company's
website:
realestatecreditinvestments.com
In accordance with the EU Packaged
Retail and Insurance-based Investment Products Directive on 1
January 2018, a Key Information Document is available on the
Company's website.
|
|
Events
Throughout the last financial year,
the Investment Manager continued to provide a detailed and
comprehensive review of RECI's portfolio as part of our programme
of enhanced investor communication. A number of online events and
meetings were held to maintain a regular dialogue with our
Shareholders and potential new investors. In addition, the Board
continues to work with its service providers to enhance the
Company's website and fact sheet.
|
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
Shares
|
% of
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
31 March
2025
GBP
|
Year ended
31 March 2024
GBP
|
Year ended
31 March
2023
GBP
|
Bob Cowdell (Chairman and Nomination Committee
Chair)
|
91,000
|
86,800
|
80,000
|
Susie Farnon (Audit and Risk Committee Chair
and Senior Independent Director)1, 2
|
56,500
|
56,250
|
53,000
|
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
per share
|
Earnings
per share
|
Dividend
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
Board
Meetings
Attendance1
|
Nomination
Committee
Meeting
Attendance
|
Audit and Risk
Committee
Meeting
Attendance
|
Management
Engagement
Committee
Meeting
Attendance
|
Remuneration
Committee
Meeting
Attendance
|
Attendance by:
|
|
|
|
|
|
Bob Cowdell (Chairman)
|
4/4
|
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
Board
members
|
% of
Board
members
|
Number of
senior positions
on the Board (CEO, CFO, SID, Chair)
|
Male
|
3
|
60.0
|
Not applicable - see
note1
|
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
GBP
|
31 Mar 2023
GBP
|
Interest income
|
6
|
30,341,179
|
31,922,543
|
Net gains on financial assets and liabilities
at fair value through profit or loss
|
4
|
634,788
|
806,708
|
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
GBP
|
31 Mar 2023
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
GBP
|
Treasury shares
GBP
|
Total equity
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
GBP
|
Treasury shares
GBP
|
Total equity
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
GBP
|
31 Mar 2023
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
|
|
21,850,5241
|
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
GBP
|
31 Mar 2023
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 loss
|
634,788
|
806,708
|
5. Operating Expenses
|
Note
|
31 Mar 2024
GBP
|
31 Mar 2023
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
GBP
|
31 Mar 2023
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
GBP
|
31 Mar 2023
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 earnings per
share1
|
228,777,629
|
229,332,478
|
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
GBP
|
31 Mar 2023
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
GBP
|
31 Mar 2023
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
Name
|
Fair value
of loans1
GBP
|
Undrawn
commitment
GBP
|
Carrying value
GBP
|
Nature and purpose
of the entity
|
Location
|
Equity
held
|
Percentage
held2 %
|
Other
exposure3
|
RELF4
Fulton Road
|
15,261,761
|
17,463,239
|
452,856
|
To invest in Fulton Road real estate
|
United Kingdom
|
No
|
-
|
No
|
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
Sub-Fund 3 real estate
|
France
|
No
|
-
|
No
|
Cheyne French Funding Sub-Fund 8
|
24,477,358
|
5,202,294
|
24,477,370
|
To invest in Cheyne French
Funding
Sub-Fund 8 real estate
|
France
|
No
|
-
|
No
|
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
Name
|
Fair value
of loans1
GBP
|
Undrawn
commitment
GBP
|
Carrying value
GBP
|
Nature and purpose
of the entity
|
Location
|
Equity
held
|
Percentage
held2 %
|
Other
exposure3
|
RELF4
|
|
|
|
|
|
|
|
|
Earlsfield
|
12,612,167
|
707,833
|
6,530,846
|
To invest in
Earlsfield real estate
|
United Kingdom
|
No
|
-
|
No
|
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
Lifestory real estate
|
United Kingdom
|
No
|
-
|
No
|
Pamplona
|
3,084,772
|
1,469,228
|
1,729,737
|
To invest in
Pamplona real estate
|
Luxembourg
|
No
|
-
|
No
|
Ruby
|
2,807,680
|
8,577,320
|
1,833,373
|
To invest in
Ruby real estate
|
Luxembourg
|
No
|
-
|
No
|
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
Cheyne French Funding Sub-Fund 3 real estate
|
France
|
No
|
-
|
No
|
Cheyne French Funding Sub-Fund 8
|
22,663,417
|
7,788,478
|
22,666,471
|
To invest in
Cheyne French Funding Sub-Fund 8
real estate
|
France
|
No
|
-
|
No
|
Cheyne French Funding Sub-Fund 9
|
8,470,707
|
2,477,156
|
8,471,940
|
To invest in
Cheyne French Funding Sub-Fund 9 real estate
|
France
|
No
|
-
|
No
|
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
GBP
|
31 Mar 2023
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
Number of Shares
|
31 Mar 2023
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
Number of Shares
|
31 Mar 2023
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
Assets
GBP
|
Monetary
Liabilities
GBP
|
Forward Foreign
Exchange
Contracts
GBP
|
Net
currency
exposure
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
Assets
GBP
|
Monetary
Liabilities
GBP
|
Forward Foreign
Exchange
Contracts
GBP
|
Net
currency
exposure
GBP
|
Currency
|
|
|
|
|
GBP
|
242,499,869
|
(60,997,713)
|
163,823,152
|
345,325,308
|
EUR
|
174,728,260
|
(21,027,058)
|
(162,067,034)
|
(8,365,832)
|
USD
|
6,431
|
-
|
-
|
6,431
|
|
417,234,560
|
(82,024,771)
|
1,756,118
|
336,965,907
|
As at 31 March 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
GBP
|
31 Mar 2023
GBP
|
EUR
|
(237,926)
|
(418,292)
|
USD
|
324
|
322
|
Total
|
(237,602)
|
(417,970)
|
By 10%
|
31 Mar 2024
GBP
|
31 Mar 2023
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
GBP
|
Floating
GBP
|
Non-interest bearing
GBP
|
Total
GBP
|
Financial assets at fair value through profit
or loss
|
195,849,055
|
108,201,524
|
25,318,2201
|
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
GBP
|
One to five years
GBP
|
Over five years
GBP
|
Total
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
GBP
|
Floating
GBP
|
Non-interest bearing
GBP
|
Total
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
GBP
|
One to five years
GBP
|
Over five
years
GBP
|
Total
GBP
|
Financial assets at fair value through profit
or loss
|
81,576,013
|
150,257,260
|
168,908,637
|
400,741,910
|
Cash and cash equivalents
|
14,081,343
|
-
|
-
|
14,081,343
|
Cash collateral at broker
|
2,383,962
|
-
|
-
|
2,383,962
|
Derivative financial assets
|
|
-
|
-
|
|
- forward foreign exchange contracts
|
1,756,118
|
-
|
-
|
1,756,118
|
Other assets
|
27,345
|
-
|
-
|
27,345
|
Financing agreements
|
(80,441,157)
|
-
|
-
|
(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
GBP
|
31 Mar 2023
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
|
20241
|
20231
|
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
derivative
liabilities
GBP
|
Collateral
received
GBP
|
Collateral
pledged1
GBP
|
Net (if greater
than zero)
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
derivative
assets
GBP
|
Collateral
received
GBP
|
Collateral
pledged
GBP
|
Net (if greater
than zero)
GBP
|
Forward foreign exchange contracts
|
The Bank of New York Mellon
|
1,756,118
|
-
|
-
|
1,756,118
|
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
GBP
|
1-3 months
GBP
|
3 months to 1 year
GBP
|
Greater than 1 year
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
GBP
|
1-3 months
GBP
|
3 months to 1 year
GBP
|
Greater than 1 year
GBP
|
Financial liabilities excluding derivatives
|
|
|
|
|
Financing agreements
|
26,808,659
|
41,899,322
|
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:
As at 31 March 2024
|
Level 1
GBP
|
Level 2
GBP
|
Level 3
GBP
|
Total
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
GBP
|
Level 2
GBP
|
Level 3
GBP
|
Total
GBP
|
Current assets
|
|
|
|
|
Forward foreign exchange contracts
|
-
|
1,756,118
|
-
|
1,756,118
|
Non-current
assets
|
|
|
|
|
Real Estate Credit Investments - market bond
portfolio
|
-
|
29,763,268
|
19,479,919
|
49,243,187
|
Real Estate Credit Investments - bilateral loan
and bond portfolio
|
-
|
-
|
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:
As at 31 March 2024
|
Fair value
GBP
|
Valuation
technique
|
Unobservable
input
|
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
|
|
|
|
|
As at 31 March 2023
|
Fair value
GBP
|
Valuation
technique
|
Unobservable
input
|
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
31 Mar 2024
GBP
|
Level 3
31 Mar 2023
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 the year
|
(6,381,030)
|
10,170,687
|
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
GBP
|
Interest income
|
1,482,514
|
28,412,548
|
-
|
29,895,062
|
Net gains/(losses) on financial assets and
liabilities at fair value through profit or loss
|
1,807,597
|
(2,512,410)
|
(5,275,758)
|
(5,980,571)
|
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
GBP
|
Interest income
|
4,960,473
|
26,747,271
|
-
|
31,707,744
|
Net (losses)/gains on financial assets and
liabilities at fair value through profit or loss
|
(8,155,580)
|
10,101,376
|
2,520,545
|
4,466,341
|
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
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
GBP
|
31 Mar 2023
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
GBP
|
31 Mar 2023
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
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
GBP
|
Bilateral Loan and
Bond Portfolio
GBP
|
Equity Securities
GBP
|
Total
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
GBP
|
31 Mar 2023
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
Code Staff
|
AIFM Total
Remuneration
(all variable)
|
Code Staff
relevant to
the AIF
|
Remuneration
derived from the
AIF (all variable)
|
Deferred Remuneration
derived from
the AIF
|
Portfolio Management
|
29
|
£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