Is there money to be made from the baffling world of real estate credit?

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Conventional wisdom dictates that if you don’t understand something it’s better to stand aside. I had better get out of the stock market then!

Real Estate Credit Investment PCC (RECI) is a company I really don’t understand. I think it buys asset backed property loans and bonds and then sells them at a profit.

In their latest factsheet they say they have invested in a £10m mezzanine loan backed by a London office property at 66% LTV. I wish I knew what that meant. They go on to say that they have invested £9m in the Annington Finance bond at a 62% LTV and a yield of 13%. Sounds dangerous. And lastly they say that sales in the month have crystallised gains in the portfolio, average sale price 75% of par versus and average price of 59% of par. What I think that’s saying is that they bought some distressed debt/bonds and sold them on when still pretty distressed but for a profit. Profit, I like the sound of that.

They estimate NAV at 1.38p per share, up from their previous NAV two weeks ago and nearly 40% up from the start of the year. The share price is £1.10, so trading at a healthy discount, assuming one is prepared to believe their valuation estimates.

Everything depends on whether their debt/bond portfolio pays out or they can sell on. I don’t understand the market well enough to know whether this will have a happy outcome but I was able to tune into their statement that they have recorded three consecutive quarters of profit and NAV growth.

RECI pays a dividend of 6% of NAV, which gives a yield of about 7.5%.

There are also some preference shares (RECP). They pay 8%, redeem in 2017 and are currently priced at 102 to buy. To catch up with the redemption yields on similar preference shares the price would need to rise to something closer to £1.10. No saying they will get there, it rather depends on the economy and on their portfolio.

Some say there’s a bubble in Bonds and maybe that’s correct, although on the face of it yields are still falling across the board so the bubble is still nicely in play but quite honestly I’m quite happy making money from whatever bubble comes along because I know that I will get out as when the party is over. As for RECI, well..it’s not just bonds, it’s loans as well! What could be more appealing (irnony intended)!

Disclosure: at the time of writing the author holds both RECI and RECP

Susan Marmor has been trading her ISA and SIPP full time for 7 years. She has made money every year, including 2008. She believes that making money is about picking the right shares at the right time and using sound money management techniques to manage risk.

For her trading she uses a combination of sound fundamental data and technical analysis (which involves using price charts and some of the fancy bits and pieces that go with them). She runs the occasional seminar to show people what she does and how she does it.

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Comments

  1. Susan Marmor says:

    An interesting read here:

    http://en.netlog.com/capitalcheyne/blog/blogid=15201483

    (with thanks to the RECI thread on ADVFN)

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