REG-Starwood European Real Estate Finance Ltd SWEF: Portfolio Update
20/10/2023 07:15
============
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Portfolio Update
20-Oct-2023 / 07:01 GMT/BST
══════════════════════════════════════════════════════════════════════════
Starwood European Real Estate Finance Limited
Quarterly Portfolio Update
Annualised dividend yield of 6.3 per cent, fully covered by income;
two capital redemptions undertaken year to date and more expected in next
few quarters
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 present its performance for the quarter ended 30 September
2023.
Highlights
• Further realisation progress - during the quarter:
◦ A total of £74.6 million, 19.6 per cent of the Group’s 30 June
2023 total funded loan portfolio, has been repaid across seven
investments
◦ This included the full repayment of two loans and five partial
repayments
◦ Proceeds were used in the quarter to fund the second return of
capital to shareholders of £30.0 million and to create a cash
reserve for unfunded loan cash commitments which amount to £44.5
million as at 30 September 2023
• The average remaining loan term of the portfolio is 1.4 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 6.3 per cent on the share price
as at 30 September 2023
• Inflation protection – 86.6 per cent of the portfolio is contracted at
floating interest rates (with floors)
• Robust portfolio - the loan book is performing broadly in line with
expectations with its defensive qualities reflected in the Group’s
continued NAV stability in a challenging macro environment
• Significant equity cushion - the weighted average Loan to Value for
the portfolio is 58.3 per cent
John Whittle, Chairman of SEREF, said:
“Our real estate debt portfolio has continued to deliver results against a
difficult market backdrop, providing a regular, consistent and fully
covered dividend and substantial inflation protection. Our high quality
loan book has performed broadly in line with expectations and there have
been no changes to the credit risk levels applied to any of the loan
investments during the quarter.
In accordance with the amendments to the Company’s articles of
incorporation approved by shareholders at the EGM on 27 January 2023, we
are working 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. We have made good
progress on this objective so far this year with £40.0 million being
returned to shareholders and a cash reserve of £44.5 million being created
to fund the currently unfunded loan cash commitments. The average
remaining loan term of the portfolio has now reduced to 1.4 years and as
such we look forward to updating shareholders on this objective in due
course.”
The factsheet for the period is available at:
1 www.starwoodeuropeanfinance.com
Share Price / NAV at 30 September 2023
Share price (p) 87.8p
NAV (p) 104.46
Discount 15.9%
Dividend yield (on share price) 6.3%
Market cap £313m
Key Portfolio Statistics at 30 September 2023
Number of investments 15
Percentage of currently invested portfolio in floating rate 86.6%
loans
Invested Loan Portfolio unlevered annualised total return (1) 8.1%
Weighted average portfolio LTV – to Group first £ (2) 11.9%
Weighted average portfolio LTV – to Group last £ (2) 58.3%
Average remaining loan term 1.4 years
Net Asset Value £372.8
Amount drawn under Revolving Credit Facilities (including £0.0m
accrued interest)
Loans advanced (including accrued interest and net of £311.2m
impairment)
Cash £60.7m
Other net assets (including hedges) £0.9m
Remaining years to contractual Value of loans % of invested
maturity* (£m) portfolio
0 to 1 years £123.2 40.1%
1 to 2 years £102.1 33.3%
2 to 3 years £48.4 15.8%
3 to 5 years £33.2 10.8%
*excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity.
Country % of invested assets
UK 62.7%
Spain 21.6%
Republic of Ireland 14.7%
Netherlands 1.0%
Sector % of invested assets
Hospitality 38.3%
Office 22.9%
Retail 14.1%
Light Industrial & Logistics 9.1%
Healthcare 8.1%
Life Sciences 6.4%
Residential 1.1%
Loan type % of invested assets
Whole loans 76.9%
Mezzanine 23.1%
Currency % of invested assets*
Sterling 62.7%
Euro 37.3%
*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.
13 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) 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 setting out
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.
In August 2023, the Company announced its second capital distribution,
returning circa £30.0 million to shareholders through the compulsory
redemption of 29,092,218 shares at a price of £1.0312 per share. The
first redemption, in June 2023, returned circa £10.0 million to
shareholders through the compulsory redemption of 9,652,350 shares at a
price of £1.0363 per share.
Dividend
On 20 October 2023, the Directors declared a dividend, to be paid in
November, in respect of the third quarter of 2023 of 1.375 pence per
Ordinary Share, equating to an annualised income of 5.5 pence per annum.
Portfolio Update
The Group continues to closely monitor its loan exposures, underlying
collateral performance and repayments. Despite continued heightened risk
around high interest rates, economic conditions and lower transaction
volumes, the portfolio has continued to perform well.
Significant loan repayments totalling £74.6 million, equivalent to 19.6
per cent of the 30 June 2023 total funded loan balances were received
during the quarter to 30 September 2023. This included full repayment of
two loan investments; the £49.9 million Hotel & Residential UK loan and
the €12.7 million Mixed Use, Dublin loan. These investments were ground up
construction projects which had reached substantial construction
completion and were successfully refinanced. As a result of this, the
Group has no remaining exposure to ground up construction risk and the
Group’s exposure to the residential sector has dropped to 1.1 per cent.
The Group’s remaining exposure is spread across 15 investments. Four asset
classes represent 84 per cent of the total funded loan portfolio as at 30
September 2023; these are hospitality (38 per cent), office (23 per cent),
retail (14 per cent) and light industrial & logistics (9 per cent).
Hospitality exposure is diversified across five loan investments. Two
loans (23 per cent of hospitality exposure) benefit from State/Government
licences in place at the properties and benefit from significant
structural amortisation that continues to decrease these loan exposures.
The other trading hotel exposures have either been recently refurbished or
are currently under refurbishment. Refurbished assets are expected to be
more defensive should consumer spending on leisure decrease in the future.
All trading assets currently continue to have strong revenue performance.
The weighted average loan to value of the hospitality exposure is 51 per
cent.
The office exposure (23 per cent) is spread across six loan investments.
This exposure is expected to further reduce during the fourth quarter as
the Office London loan (29 per cent of office exposure) is under contract
to sell. Occupancy across the leased office portfolio has held up well,
with the vast majority of the underlying tenants renewing leases and
staying in occupation. The Group’s office exposure is predominantly
weighted towards substantially Grade A product (52 per cent of office
exposure) and well-located city centre Grade B product (34 per cent). Only
13 per cent of office exposure or 3 per cent of the total invested
portfolio is Grade B located in city periphery sub-markets. The weighted
average loan to value of loans with office exposure is 60 per cent. The
average age of these independently instructed valuation reports is less
than one year and hence there continues to be significant headroom to the
Group’s loan basis on these loans.
The retail exposure (14 per cent) is spread over three investments and has
continued to perform strongly from an operational perspective, with
occupancies across the shopping centre exposures fully recovered to
pre-pandemic levels and in the high eighties or nineties per cent. The
sponsor of the shopping centre loans has granted exclusivity to a credible
potential purchaser who is currently conducting due diligence. The sponsor
is targeting a sale by year end. The weighted average loan to value of the
Retail exposure is 76 per cent.
Light industrial & logistics exposure comprises 9 per cent of the total
funded portfolio (in two investments) and provides good diversification
into an asset class that continues to have very strong occupational and
investor demand. Weighted average loan to value of this asset class is 65
per cent.
On a portfolio level we continue to benefit from material headroom in
underlying collateral value against the loan basis, with a current
weighted average loan to value of 58 per cent. These metrics are based on
independent third party appraisals (with the exception of two loans that
have been marked against a sale process bid level). These appraisals are
typically updated annually for income producing assets. The weighted
average age of valuations is just under ten months.
Credit Risk Analysis
All loans within the portfolio are classified and measured at amortised
cost less impairment.
During the quarter there have been no changes to the existing credit risk
levels for any of the loans in the portfolio.
The Group follows a three-stage model for impairment based on changes in
credit quality since initial recognition as summarised below:
• A financial instrument that is not credit-impaired on initial
recognition is classified as Stage 1 and has its credit risk
continuously monitored by the Group. The expected credit loss (“ECL”)
is measured over a 12-month period of time.
• If a significant increase in credit risk since initial recognition is
identified, the financial instrument is moved to Stage 2 but is not
yet deemed to be credit-impaired. The ECL is measured on a lifetime
basis.
• If the financial instrument is credit-impaired it is then moved to
Stage 3. The ECL is measured on a lifetime basis.
The Group closely monitors all loans in the portfolio for any
deterioration in credit risk. As at the date of this factsheet, no
additional downgrades or impairments have been recognised since the prior
quarter end. As at 30 September 2023, assigned classifications are:
• Stage 1 loans – nine loan investments equivalent to 63% of the funded
portfolio are classified in the lowest risk profile, Stage 1.
• Stage 2 loans – five loan investments equivalent to 33% of the funded
portfolio have remained in Stage 2. The average loan to value of these
exposures is 68 per cent. The average age of valuation report dates
used in the loan to value calculation is eight months old. While these
loans are considered to be higher risk than at initial recognition, no
loss has been recognised on a 12-month and lifetime expected credit
losses basis. Therefore, no impairment in the value of these loans has
been recognised. The drivers for classifying these deals as Stage 2
are typically either one or a combination of the below factors:
◦ lower underlying property values following receipt of updated
formal appraisals by independent valuers or agreed and in
exclusivity sale values;
◦ sponsor business plans progressing more slowly than originally
underwritten meaning that trading performance has lagged
expectation and operating financial covenants under the facility
agreements have breached; and
◦ additional equity support is required to cover interest or
operating shortfalls as a result of slower lease up or operations
taking longer to ramp up.
The Stage 2 loans continue to benefit from headroom to the Group’s
investment basis. The Group has a strategy for each of these deals which
targets full loan repayment over a defined period of time. Timing of
repayment will vary depending on the level of equity support from
sponsors. Typically, where sponsors are willing to inject additional
equity to partially pay down the loans and support their business plan
execution, then the Group will grant some temporary financial covenant
headroom. Otherwise, sponsors are running sale processes to sell assets
and repay their loans.
• Stage 3 loan – one loan equivalent to 4 per cent of the funded
portfolio is classified as Stage 3. This investment has a loan to
value of 92 per cent. This value is based on the projected net
proceeds which are expected to be available for loan repayment upon
sale of the underlying loan collateral. The sponsor has run a
comprehensive competitive sale process through a global advisory firm
with oversight by the lenders and the bidder has a proven execution
track record in the same asset class and deal size and intends to
close with all equity with no reliance on debt. Given continued
capital markets volatility, materially lower transaction volumes and
uncertainty regarding interest rates, the Group has approved the sale
and the buyer is in exclusivity while undertaking standard purchaser
due diligence.
While the current projected net sale proceeds on the stage 3 loan would
fully pay down the Group’s loan balance, the Group has applied
sensitivities to the expected net proceeds and, on that basis, has
accounted for a credit impairment of £1.7 million / circa 0.5 per cent of
total funded loan portfolio as at 30 September 2023. We note that despite
the impairment, this loan investment is projected to achieve local
currency returns of over 1.4 times the Group’s capital invested.
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.
Repayments
During the quarter borrowers repaid the following loan obligations:
• £49.9 million, Hotel & Residential, UK (repayment of loan in full)
• €12.7 million, Mixed Use, Dublin (repayment of loan in full)
• €10.0 million, Hotel, Dublin (partial repayment of loan)
• €3.0 million, Mixed Portfolio, Europe (partial repayment of loan)
• £1.2 million, Hotel and Office, Northern Ireland (partial repayment of
loan)
• €0.8 million, Shopping Centre, Spain (partial repayment of loan)
• €0.3 million, Three Shopping Centres, Spain (scheduled amortisation)
These repayments were used in the quarter to fund the creation of a cash
reserve to cover the unfunded cash loan commitments (which were £44.5
million at the end of September 2023) and the second return of capital to
Shareholders (which amounted to circa £30.0 million).
Market commentary and outlook
The US Federal Reserve has been consistently messaging that it will do
whatever it takes to bring inflation under control. Now it seems that the
Fed has succeeded in convincing the market that rates will remain “higher
for longer” with this phrase being one of the most commonly used in the
media and in discussions in the markets over the past few weeks. “Higher
for longer” has impacted longer dated debt pricing. UK bond yields have
hit a 30-year high and US Treasury yields a 16-year high.
U.S. CPI had dropped as low as 3 per cent in June but both July and August
data showed rises with higher petrol and residential occupancy costs
largely responsible for the increase back to 3.7 per cent. Oil prices had
risen sharply following Russia’s invasion of Ukraine in 2022 and
subsequently fell back between mid 2022 and mid 2023 from a peak of over
120 dollars a barrel to as low as 64 dollars. Since that trough, prices
have since risen as high as 95 dollars a barrel with lower supply from
Saudi Arabia and Russia helping push prices higher. Tension and conflict
are likely to further exacerbate oil price volatility.
Despite the slight uptick in inflation, the resolute Fed position of
doing whatever it takes and after 5.25 per cent of increases in the
preceding eleven meetings, the September Federal Open Market Committee
meeting was the first since early 2022 where the Fed did not raise rates.
Similarly, the Bank of England also held rates in September. The Bank of
England only raised rates once by 25 basis points in the third quarter
versus two increases for a total of 75 basis points in the second
quarter. The ECB, which started raising rates later than the Bank of
England and the Fed, hiked rates for the tenth consecutive time in
September; however, it also signalled that policy tightening is likely
finished as inflation has started to moderate.
Transaction volumes in commercial real estate remain low and the summer
was perceived to be a particularly quiet one. Despite that perception
there are a number of notable recent headlines particularly in favoured
asset classes. In prime London offices we saw Great Portland Estates
report new rentals signed at 13 percent higher than March rental values
and reporting that it had committed to a 66,600 square foot, office-led
redevelopment at Jermyn Street in London’s West End. Land Securities
presented similar themes at its capital markets day with new leases 3 per
cent ahead of estimated rental values and strong and increased occupancy.
Land Securities also signalled a show of confidence in London’s office
market committing to delivering their latest net zero development, Timber
Square, a 380,000 square foot project in Southwark. Their announcement
was a showcase of all the key themes that occupiers, investors and lenders
are looking for in best in class office space. Sustainability, net zero,
top certifications, occupier well-being, amenities, integration of the
public realm and a vibrant mix of retail, leisure and food and beverage
all feature. Location remains a top priority for occupiers with the
announcement highlighting the proximity to three of London’s key transport
hubs of Waterloo, London Bridge and Blackfriars.
An asset class area we have highlighted as being in favour is “beds” where
there are strong occupational dynamics in many markets. Despite the
slower summer period and the fact that real estate financing is typically
private and opaque, a number of recent headlines show the popularity of
the sector with public announcements on over £2 billion of new financings
that closed in this sector over the summer. The lending has been from a
mixture of banks and alternative lenders and covers both development and
investment loans across all of residential, student and hotels.
With a limited number of acquisitions, we are seeing healthy levels of
competition for new acquisition financing. Leverage levels are lower than
in recent years due to constraints on interest coverage caused by higher
base rates. Development financing also remains healthy for well
capitalised borrowers with the right projects. A key benefit of prime
developments is that they deliver buildings that are completely up to date
with sought after ESG credentials and certifications. With lower
transaction volumes providing less market evidence, refinancings are less
in favour. Lenders tend to prefer the benefit of the validation on
valuation that the new equity in an acquisition brings.
The European banks remain well capitalised and commercial real estate loan
to values are much more conservative than during the GFC. However, there
are some stresses coming through for European banks that had invested in
the more difficult US office markets; on older, browner buildings and in
some over-levered pockets of the German development market. Despite
cracks in these areas, banks as a whole are still well positioned to
continue to play a meaningful part in the market but will not be the right
lender for all types of loans. We have seen and expect to continue to see
the share of alternative lenders growing and often with banks and
alternative lenders working together creating solutions for commercial
real estate financing requirements.
Investment Portfolio at 30 September 2023
As at 30 September 2023, the Group had 15 investments and commitments of
£351.4 million as follows:
Sterling Sterling equivalent Sterling Total
equivalent funded unfunded commitment (Drawn and
balance (1). (2) (1), (3) Unfunded)
Hospitals, UK £25.0 m £25.0 m
Office, London £20.5 m £20.5 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, £9.3 m £9.3 m
Northern Ireland
Hotels, United £33.2 m £17.4 m £50.6 m
Kingdom
Industrial Estate, £27.2 m £19.0 m £46.2 m
UK
Total Sterling £192.3 m £43.5 m £235.8 m
Loans
Three Shopping £28.7 m £28.7 m
Centres, Spain
Shopping Centre , £14.1 m £14.1 m
Spain (2)
Hotel, Dublin £23.8 m £23.8 m
Office, Madrid, £16.0 m £0.9 m £16.9 m
Spain
Mixed Portfolio, £3.2 m £3.2 m
Europe
Office Portfolio, £7.6 m £0.1 m £7.7 m
Spain
Office Portfolio, £21.2 m £21.2 m
Ireland
Total Euro Loans £114.6 m £1.0 m £115.6 m
Total Portfolio £306.9 m £44.5 m £351.4 m
1. Euro balances translated to sterling at period end exchange rate.
2. Balances shown are funded balances before any impairments.
3. These amounts exclude interest which may be capitalised.
Loan to Value (LTV)
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 LTVs shown below are based on independent
third party appraisals with the exception of two loans that have been
marked against a sale process bid level. The current weighted average age
of the dates of these valuations for the whole portfolio is just under ten
months.
On the basis of the methodology and valuation processes previously
disclosed (see 30 September 2020 factsheet with the exceptions as noted
above) at 30 September 2023 the Group has an average last £ LTV of 58.3
per cent (30 June 2023: 56.0 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 Hospitality Office Retail Light Industrial & Other Total
Valuation Logistics
-15% 59.8% 70.8% 89.2% 76.5% 63.6% 68.6%
-10% 56.5% 66.9% 84.2% 72.3% 60.1% 64.8%
-5% 53.5% 63.4% 79.8% 68.5% 56.9% 61.4%
0% 50.9% 60.2% 75.8% 65.0% 54.1% 58.3%
5% 48.4% 57.3% 72.2% 61.9% 51.5% 55.5%
10% 46.2% 54.7% 68.9% 59.1% 49.1% 53.0%
15% 44.2% 52.4% 65.9% 56.6% 47.0% 50.7%
Share Price performance
The Company's shares closed on 30 September 2023 at 87.8 pence, resulting
in a share price total return for the third quarter of 2023 of 0.7 per
cent. As at 30 September 2023, the discount to NAV stood at 15.9 per cent,
with an average discount to NAV of 16.5 per cent over the quarter.
Note: the 30 September 2023 discount to NAV is based off the current 30
September 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
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 Group's assets are managed by Starwood European Finance Partners
Limited, an indirect wholly owned subsidiary of the Starwood Capital
Group.
══════════════════════════════════════════════════════════════════════════
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.
══════════════════════════════════════════════════════════════════════════
ISIN: GG00BPGJYV48
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.: 279323
EQS News ID: 1753289
End of Announcement EQS News Service
══════════════════════════════════════════════════════════════════════════
3 fncls.ssp?fn=show_t_gif&application_id=1753289&application_name=news&site_id=refinitiv
References
Visible links
1. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=becc5c83790358f02808a7970e9d8d13&application_id=1753289&site_id=refinitiv&application_name=news
2. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=becc5c83790358f02808a7970e9d8d13&application_id=1753289&site_id=refinitiv&application_name=news
============Recent news on Starwood European Real Estate Finance
See all newsREG-Starwood European Real Estate Finance Ltd SWEF: Portfolio Update
AnnouncementREG-Starwood European Real Estate Finance Ltd SWEF: March 2025 NAV
AnnouncementREG-Starwood European Real Estate Finance Ltd SWEF: Dividend Declaration
AnnouncementREG-Starwood European Real Estate Finance Ltd SWEF: Full Year Results for the Year Ended 31 December 2024
AnnouncementREG-Starwood European Real Estate Finance Ltd SWEF: February 2025 NAV
Announcement