REG-Starwood European Real Estate Finance Ltd SWEF: Portfolio Update
21/04/2023 07:15
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Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Portfolio Update
21-Apr-2023 / 07:01 GMT/BST
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Starwood European Real Estate Finance Limited
Quarterly Portfolio Update
Annualised dividend yield of 6.1 per cent, fully covered by income;
Portfolio 77 per cent contracted at floating interest rates
Starwood European Real Estate Finance Limited (“SEREF” or the “Group”), a
leading investor managing and realising a diverse portfolio of high
quality senior and mezzanine real estate debt in the UK and Europe, is
pleased to announce a strong performance for the quarter ended 31 March
2023.
Highlights
• Positive realisation progress - during the quarter:
◦ A total of £35.9 million, almost 8.5 per cent of the Group’s
December 2022 total funded loan portfolio, has been repaid across
seven investments
◦ This included the full repayment of a loan on a hotel in Oxford
of £23.0 million, a further small full repayment and five partial
repayments
◦ Proceeds were used in the quarter to repay the outstanding bank
debt as at 31 December 2022 leaving cash balances at £22.6
million as at 31 March 2023 (of which £13.4 million will be used
to pay the additional dividend declared in March and the Q1 2023
dividend declared in April)The average remaining loan term of the
portfolio is 1.5 years
• Strong cash generation - the portfolio continues to support annual
dividend payments of 5.5 pence per Ordinary Share, paid quarterly, and
generates an annual dividend yield of 6.1 per cent on the share price
as at 31 March 2023
• Regular and Consistent Dividend - £206 million of dividends paid since
inception (not including the dividend of 2p per share declared in
March, payable in April and the dividend of 1.375p per share declared
in April, payable in May)
• Inflation protection – 77 per cent of the portfolio is contracted at
floating interest rates (with floors)
• Robust portfolio - the loan book is performing in line with
expectations with its defensive qualities reflected in the Group’s
continued NAV stability
• Significant equity cushion - the weighted average Loan to Value for
the portfolio of 58.3 per cent
• 4.9 per cent share price total return for the quarter ended 31 March
2023
John Whittle, Chairman of SEREF, said:
“We remain pleased with the continued strong ongoing robust performance of
the Group’s portfolio with loans performing robustly leading to an
enduringly strong valuation of the underlying collateral and all interest
and scheduled amortisations being received as expected. The Group’s
overall LTV remains highly comfortable at 58.3 per cent.
As a result of this strong performance over the year ended December 2022,
partly as a result of the high floating rate element of the portfolio
(currently 77 per cent), the Group was not only able to meet its dividend
target of 5.5 pence per share but also declared a special dividend of 2.0
pence per share in March leading to a total dividend distribution of 7.5
pence per share for 2022. In our view, this is a highly attractive income
proposition.
It is also pleasing to report positive realisation progress on the Group’s
portfolio with £35.9m repaid during the quarter and used to repay the
Group’s outstanding bank debt. We look forward to updating shareholders
with further realisation progress and the first anticipated distribution
to shareholders in due course.”
The factsheet for the period is available at:
1 www.starwoodeuropeanfinance.com
Share Price / NAV at 31 March 2023
Share price (p) 89.9
NAV (p) 103.82
Discount 13.4%
Dividend yield (on share price) 6.1%
Market cap £356m
Key Portfolio Statistics at 31 March 2023
Number of investments 18
Percentage of currently invested portfolio in floating rate 76.6%
loans
Invested Loan Portfolio unlevered annualised total return (1) 7.9%
Portfolio levered annualised total return (2) 7.9%
Weighted average portfolio LTV – to Group first £ (3) 14.2%
Weighted average portfolio LTV – to Group last £ (3) 58.3%
Average loan term (based on current contractual maturity) 5.2 years
Average remaining loan term 1.5 years
Net Asset Value £410.7m
Amount drawn under Revolving Credit Facilities (including £0.0m
accrued interest)
Loans advanced (including accrued interest) £395.5m
Cash £22.6m
Other net liabilities (including hedges and dividend declared in £7.4m
March 2023)
Remaining years to contractual Value of loans % of invested
maturity* (£m) portfolio
0 to 1 years £129.3 33.2%
1 to 2 years £134.6 34.6%
2 to 3 years £66.0 17.0%
3 to 5 years £59.2 15.2%
*excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity.
Country % of invested assets
UK 62.1%
Republic of Ireland 17.9%
Spain 17.8%
Netherlands 1.6%
Germany 0.6%
Sector % of invested assets
Hospitality 35.3%
Office 21.5%
Retail 12.2%
Residential 11.3%
Light Industrial 7.1%
Healthcare 6.4%
Life Sciences 5.0%
Logistics 0.7%
Other 0.5%
Loan type % of invested assets
Whole loans 67.6%
Mezzanine 32.4%
Currency % of invested assets*
Sterling 62.1%
Euro 37.9%
*the currency split refers to the underlying loan currency, however the
capital on all non-sterling exposure is hedged back to sterling.
(1) The unlevered annualised total return is calculated on amounts
outstanding at the reporting date, excluding undrawn commitments, and
assuming all drawn loans are outstanding for the full contractual term.
15 of the loans are floating rate (partially or in whole and all with
floors) and returns are based on an assumed profile for future interbank
rates, but the actual rate received may be higher or lower. Calculated
only on amounts funded at the reporting date and excluding committed
amounts (but including commitment fees) and excluding cash uninvested.
The calculation also excludes the origination fee payable to the
Investment Manager.
(2) The levered annualised total return is calculated as per the unlevered
return but takes into account the amount of net leverage in the Group and
the cost of that leverage at current SONIA/Euribor.
(3) LTV to Group last £ means the percentage which the total loan drawn
less any deductible lender controlled cash reserves and less any
amortisation received to date (when aggregated with any other indebtedness
ranking alongside and/or senior to it) bears to the market value
determined by the last formal lender valuation received by the reporting
date. LTV to first Group £ means the starting point of the loan to value
range of the loans drawn (when aggregated with any other indebtedness
ranking senior to it). For development projects the calculation includes
the total facility available and is calculated against the assumed market
value on completion of the relevant project.
Orderly Realisation and Return of Capital
On 31 October 2022, the Board announced the Company’s Proposed Orderly
Realisation and Return of Capital to Shareholders. A Circular relating the
Proposed Orderly Realisation, containing a Notice of Extraordinary General
Meeting (EGM) was published on 28 December 2022. The proposals were
approved by Shareholders at the EGM in January 2023 and the Company is now
seeking to return cash to Shareholders in an orderly manner as soon as
reasonably practicable following the repayment of loans, while retaining
sufficient working capital for ongoing operations and the funding of
committed but currently unfunded loan commitments.
Dividend
On 21 April 2023, the Directors declared a dividend, to be paid in May, in
respect of the first quarter of 2023 of 1.375 pence per Ordinary Share,
equating to an annualised income of 5.5 pence per annum. This is in
addition to the additional 2022 special dividend declared on 23 March 2023
of 2.0 pence per Ordinary Share, which will be paid in April.
Portfolio Update
The portfolio continues to perform robustly and in line with expectations.
All interest and scheduled amortisation has been paid in line with
contractual obligations. Borrowers are also continuing to make progress on
underwritten business plans including executing strategic asset sales and
paying down the loans. None of the Company’s borrowers had direct exposure
to Silicon Valley Bank or Credit Suisse in relation to either bank
accounts or counterparty risk (for example interest rate hedging) in
relation to any of the cash or assets secured to the Company under the
loans. There are existing minimum credit rating requirements for all
counterparty banks in the loan agreements and the status of counterparties
are monitored to ensure ongoing compliance.
During Q1 2023, a total of £35.9 million, equivalent to almost 8.5 per
cent of the December 2022 total closing loan balance outstanding, has been
repaid across seven investments. 79 per cent of these repayments (£28.5
million) relate to the full repayment of two loans with the remainder
following strategic underlying property sales, regular quarterly loan
amortisation or borrowers electing to voluntarily pay down loan balances
with surplus cash.
The Group’s exposure to development and heavy refurbishment projects
continues to decrease as current developments reach completion. As at 31
March 2023, the portfolio includes only one construction project of a
residential plus hotel development, with a loan commitment of £49.9
million or 11 per cent of total loan commitments. Residential units are
completing one-by-one over the second quarter of 2023, with the hotel set
to be the final completion at the end of the quarter. The majority of the
residential for-sale units have been pre-sold and we forecast the loan to
be fully repaid during 2023 from the proceeds of these unit completions.
The Group continues to closely monitor its loan exposures. Asset classes
representing more than 10 per cent of total investments include
Hospitality (35 per cent), Office (21 per cent), Retail (12 per cent) and
Residential (11 per cent).
The Hospitality exposure is diversified across six different loan
investments. Two benefit from State/Government licences in place at
accretive rents with structural amortisation set to reduce these by a
minimum of £4 million (8.5 per cent of these two commitments) over the
remainder of 2023. The other trading hotel exposures have either been
recently refurbished or will be on a rolling basis from mid-2023. All
trading assets outperformed the Group’s underwritten ADR (Average Daily
Rate) assumptions in 2022, demonstrating ability to push rates despite
wider inflationary pressures. This has assisted in mitigating margin
erosion from cost inflation.
Office exposure (21 per cent) is spread across seven loan investments.
Occupancy across the leased office portfolio has held up well, with the
vast majority of the underlying tenants renewing leases and staying in
occupation. We also continue to see prospective new tenants being
attracted particularly to newly refurbished, high quality buildings such
as the Office, London exposure which will reach formal completion in April
2023 and was fully pre-let 11 per cent ahead of the Group’s underwrite.
The Retail exposure (12 per cent) has continued to perform in line with
expectations; occupancy continues to remain robust and footfall continues
its post pandemic recovery. Our retail loan borrowers continue their
active asset management and are signing new leases where tenants wish to
expand and renew existing leases.
Residential exposure (11 per cent) is predominantly related to the
successfully pre-sold residential for sale development project that is due
to complete by the end of the second quarter of 2023, with the loan
projected to be fully repaid this year. In general market outlook for
residential product remains high as rents have trended upwards with
inflation over the prior year and many markets remain supply challenged.
Across all loans we continue to benefit from material headroom in
underlying collateral value against the loan basis, with a current
weighted average LTV of 58.3 per cent across the portfolio. These metrics
are based on independent third party appraisals which are typically
updated annually for income producing assets and following completion on
newly constructed or refurbished assets. The weighted average age of
valuations is 1.2 years for income producing assets and seven of these
will be updated in the next quarter. The only other valuations over a year
old either relate to assets that are undergoing refurbishment or loans
which we are forecasting to be repaid in the next six months. While we
recognise that interest rate increases within the last year are expected
to place downward pressure on valuation inputs, we are confident in the
very significant buffer to absorb any negative valuation impact of the
current market.
Partial repayments
During the quarter, despite lower transaction volumes across the markets
because of the cautionary approach being adopted by investors, borrowers
repaid the following loan obligations:
• £5.5 million, Office and Industrial Portfolio, UK (repayment of loan
in full)
• £23.0 million, Hotel, Oxford (repayment of loan in full)
• €5.5 million, Hotel, Dublin (partial repayment of loan)
• €1.5 million, Mixed Portfolio, Europe (partial repayment of loan)
• £1.0 million, Hotel and Office, Northern Ireland (partial repayment of
loan)
• €0.4 million, Three Shopping Centres, Spain (scheduled amortisation)
• €0.04 million, Mixed Use, Dublin (partial repayment of loan)
These repayments were used in the quarter to repay the bank debt
outstanding as at 31 December 2022. Cash balances were £22.6 million as at
31 March 2023 (of which £13.4 million will be used to pay the additional
dividend declared in March and the Q1 2023 dividend declared in April).
Market commentary and outlook
Energy costs spiked in February 2022 when Russia invaded Ukraine. Now
that we have passed the anniversary of the beginning of the war, we can
see inflation from energy is beginning to subside. Headline annual
inflation within the Eurozone has fallen to its lowest level in over a
year, having dropped to 6.9 per cent in March, down from 8.5 per cent the
previous month. This was a bigger than expected drop driven by a 0.9 per
cent decline in energy in March compared with an increase of 13.7 per cent
in the previous month. A decline in core inflation which excludes energy
and food costs will lag overall inflation as the impact of higher input
prices may take some time to filter through. Core CPI hit a new Eurozone
high of 5.7 per cent in March, up from 5.6 per cent in the previous
month. We have seen the same pattern in the data from the US with annual
CPI reaching its lowest level since May 2021 and having fallen to 5 per
cent in March from 6 per cent in the previous month. US core CPI is now
higher than headline CPI at 5.6 per cent.
There has been some moderation in interest rate expectations driven by the
knock on effects from the recent bank market issues around Silicon Valley
Bank, Credit Suisse and others which has led to expectations of lower loan
availability at higher pricing and so a less expansionary environment.
In the second week of March the expectations for the end of year rates for
US SOFR declined by a remarkable 1.1 per cent in the week from 5.3 per
cent to 4.2 per cent. However, we continue to expect central banks to be
hawkish around concerns around the persistence of inflation.
The recent events in the bank market provide a keen reminder of the
importance of confidence for banks. Generally the banking system is in a
robust position with equity ratios having been significantly bolstered
over recent years. The issues with Silicon Valley Bank were somewhat
idiosyncratic and in retrospect could also have been avoided in a number
of ways. The bank had a unique business profile given the nature of its
client base and accordingly had an unusually large number of uninsured
deposits. The beginning of the unwind came as these deposits were
gradually withdrawn to meet clients’ needs, but the bank's strategy of
having tied those deposits up in longer term fixed rate assets led to the
realisation of a mark to market issue when those investments were realised
to meet declining deposits. This could have been avoided by the bank
holding shorter dated assets or by interest rate hedging of these longer
dated fixed rate assets which would have mitigated the loss realised.
Subsequently the effort to raise capital to bolster the equity ratio could
also have been handled better. Once it failed the consequence was the
uninsured depositors created the fastest withdrawal of deposits of all
time as technology allowed them to move cash out faster than in any
previous bank run.
After the Silicon Valley Bank failure, the market tested other potentially
weak players and in Europe it was Credit Suisse that failed the test as it
also quickly lost deposits. Credit Suisse on the face of it was well
capitalised but had suffered a series of recent issues that meant it was
already suffering from low client and market confidence. The way the deal
with UBS was structured further spooked markets due to the treatment of
conditional convertible bonds. While this was allowed for in the
documentation, the failure to fully respect the priority between the
equity and the conditional convertibles was not what markets expected.
Bank regulators in Europe distanced themselves from this approach which
provided some reassurance to conditional convertible investors. The long
term implications are that investors may demand higher returns for these
bonds making banks' cost of capital higher.
The fallout from the bank market turbulence is yet to be fully realised
but what we can see already is the move from bank deposits, particularly
from smaller Americans banks to both larger banks and money market funds.
This will reduce the ability of these banks, who have provided a
substantial proportion of historical real estate lending, to continue to
make new loans. We are also seeing some market commentators calling for
yet higher capital requirements and further increased regulation for
banks. These factors are all likely to contribute to an increasing
portion of real estate lending from non-bank lenders.
In the real estate markets we have seen decreased investment volumes.
Overall Europe saw an 18 per cent reduction in investment volumes in 2022
versus 2021 with the fourth quarter down 58 per cent versus the previous
year. However, there is significant differentiation between markets.
For example German multifamily residential transactions declined by 73 per
cent in 2022 versus 2021 but German industrial volumes were up by 5 per
cent in the same period and UK multifamily was up by 14 per cent. These
statistics are driven by investor sentiment toward which asset classes and
markets are benefiting from the best ability to drive rental growth.
Industrial, residential in growth markets and operationally geared assets
such as student accommodation and hospitality continue to be particularly
in favour and are attracting the highest level of both investor and
lending interest.
On the office side we are seeing a high level of differentiation between
markets due to a number of key drivers. For example, US office workers
have been much stickier in continuing to work from home than in Europe and
Asia. Work from home combined with reductions in headcount in the
technology sector has led to some markets experiencing big increases in
vacancy and a cautious approach by lenders to new lending for office in
the US will lead to issues for some investments.
In Europe office vacancy rates have tended to be lower generally and
return to work has been stronger. We are however continuing to see the
bifurcation between the best assets with high ESG ratings where there is
good tenant demand, which are commanding good rents, and lower quality
legacy stock where tenant interest is lagging. A recent example of this
is Great Portland Estates leasing for the year ending March 2023. Great
Portland signed £55.5 million of new leases in the period, which was a 44
per cent increase on the previous period and notably average rents were
3.3 per cent higher than the estimated rental value at the beginning of
the period reflecting the high level of demand for high quality office in
prime locations.
There will be continued focus in inflation and interest rate moves and
expectations which have been a key driver for real estate markets over the
past several quarters. Until the outlook settles further market volumes
are likely to remain lower and we anticipate conditions will be favourable
for investing in real estate credit.
No Credit Losses Recognised
All loans within the portfolio are classified and measured at amortised
cost less impairment. The Group closely monitors all the loans in the
portfolio for any deterioration in credit risk. There are some loans for
which credit risk has increased since initial recognition. However, we
have considered a number of scenarios for these cases and do not currently
expect to realise a loss in the event of a default. Therefore no expected
credit losses have been recognised.
This assessment has been made based on information in our possession at
the date of reporting, our assessment of the risks of each loan and
certain estimates and judgements around future performance of the assets.
Investment Portfolio at 31 March 2023
As at 31 March 2023, the Group had 18 investments and commitments of
£437.6 million as follows:
Sterling Sterling equivalent unfunded Sterling Total
equivalent commitment (1) (Drawn and
balance (1) Unfunded)
Hospitals, UK £25.0 m £25.0 m
Hotel & £49.9 m £49.9 m
Residential, UK
Office, London £19.5 m £1.1 m £20.6 m
Hotel, Scotland £42.6 m £42.6 m
Hotel, North £15.0 m £15.0 m
Berwick
Life Science, UK £19.5 m £7.1 m £26.6 m
Hotel and Office, £10.5 m £10.5 m
Northern Ireland
Hotels, United £32.0 m £18.6 m £50.6 m
Kingdom
Industrial Estate, £27.2 m £19.0 m £46.2 m
UK
Total Sterling £241.2 m £45.8 m £287.0 m
Loans
Three Shopping £29.7 m £29.7 m
Centres, Spain
Shopping Centre, £14.9 m £14.9 m
Spain
Hotel, Dublin £36.8 m £36.8 m
Office, Madrid, £16.3 m £0.9 m £17.2 m
Spain
Mixed Portfolio, £6.4 m £6.4 m
Europe
Mixed Use, Dublin £11.2 m £1.7 m £12.9 m
Office Portfolio, £8.4 m £0.1 m £8.5 m
Spain
Office Portfolio, £21.5 m £21.5 m
Ireland
Logistics £2.7 m £2.7 m
Portfolio, Germany
Total Euro Loans £147.9 m £2.7 m £150.6 m
Total Portfolio £389.1 m £48.5 m £437.6 m
1. Euro balances translated to sterling at period end exchange rate.
Loan to Value
All assets securing the loans undergo third party valuations before each
investment closes and periodically thereafter at a time considered
appropriate by the lenders. The current weighted average age of the dates
of these third party valuations for the whole portfolio is just 1.7 years
while the current weighted average age of the valuations for the income
producing portfolio (i.e. excluding loans for development or heavy
refurbishment) is 1.2 years.
On the basis of the methodology and valuation processes previously
disclosed (see 30 June 2020 factsheet) at 31 March 2023 the Group has an
average last £ LTV of 58.3 per cent (31 December 2022: 58.6 per cent).
The table below shows the sensitivity of the loan to value calculation for
movements in the underlying property valuation and demonstrates that the
Group has considerable headroom within the currently reported last LTVs.
Change in Valuation Hospitality Retail Residential Other Total
-15% 65.4% 80.9% 66.7% 68.2% 68.6%
-10% 61.8% 76.4% 63.0% 64.4% 64.8%
-5% 58.5% 72.4% 59.7% 61.1% 61.4%
0% 55.6% 68.8% 56.7% 58.0% 58.3%
5% 52.9% 65.5% 54.0% 55.2% 55.5%
10% 50.5% 62.5% 51.5% 52.7% 53.0%
15% 48.3% 59.8% 49.3% 50.4% 50.7%
Share Price performance
The Company's shares closed on 31 March 2023 at 89.9 pence, resulting in a
share price total return for the first quarter of 2023 of 4.9 per cent. As
at 31 March 2023, the discount to NAV stood at 13.4 per cent, with an
average discount to NAV of 13.2 per cent over the quarter.
Note: the 31 March 2023 discount to NAV is based off the current 31 March
2023 NAV as reported in this factsheet. All average discounts to NAV are
calculated as the latest cum-dividend NAV available in the market on a
given day, adjusted for any dividend payments from the ex-dividend date
onwards.
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited
as Company Secretary
Duke Le Prevost
+44 (0)20 3530 3630
Starwood Capital
Duncan MacPherson +44 (0) 20 7016 3655
Jefferies International Limited
Gaudi Le Roux
Harry Randall
+44 (0) 20 7029 8000
Ollie Nott
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 7788 528 143
Henry Wilson
Hannah Ratcliff
Notes:
Starwood European Real Estate Finance Limited is an investment company
listed on the premium segment of the main market of the London Stock
Exchange with an investment objective to conduct an orderly realisation of
the assets of the Company. 2 www.starwoodeuropeanfinance.com.
The Company is the largest London-listed vehicle to provide investors with
pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners
Limited, an indirect wholly owned subsidiary of the Starwood Capital
Group.
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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ISIN: GG00B79WC100
Category Code: PFU
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 3.1. Additional regulated information required to be
disclosed under the laws of a Member State
Sequence No.: 238489
EQS News ID: 1613341
End of Announcement EQS News Service
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