REG-Starwood European Real Estate Finance Ltd SWEF: Quarterly Portfolio Update
20/01/2023 07:15
============
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Quarterly Portfolio Update
20-Jan-2023 / 07:01 GMT/BST
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.
══════════════════════════════════════════════════════════════════════════
Starwood European Real Estate Finance Limited
Quarterly Portfolio Update
Annualised dividend yield of 6.2 per cent, fully covered by income;
Portfolio 79 per cent contracted at floating interest rates
Starwood European Real Estate Finance Limited (“SEREF” or the “Group”), a
leading investor originating, executing and managing 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 December 2022.
Highlights
• 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 6.2 per cent on the share price
as at 31 December 2022
• Regular and Consistent Dividend - £201 million of dividends paid since
inception
• Inflation protection – 79 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 reduced this quarter to 58.6 per cent from 59.9 per cent
last quarter
• 51 per cent share price total return since inception in December 2012
John Whittle, Chairman of SEREF, said:
“In these turbulent times we are reassured by the highly defensive nature
of the Group’s portfolio, the quality and resilience of which has again
been proven in a testing macro environment. As evidence of this, once
again all interest payments have been received in full, with the ongoing
strong cash generation supporting our annual dividend target distribution
of 5.5 pence per share and a fully covered yield of 6.2 per cent on the
share price as at 31 December 2022. Further, portfolio income has
continued to increase in part as a consequence of the 79 per cent floating
rate loan book. This has resulted in an increase in the Invested Loan
Portfolio unlevered annualised total return by 90 basis points over 2022.
Importantly, we remain satisfied with our average portfolio LTV which has
further fallen during this quarter to 58.6 per cent, representing a very
significant cushion to the Group’s loans.
Despite strong portfolio performance, due to a near term likelihood that
the Group would no longer be of a viable size to provide shareholders with
sufficient liquidity and scale, and following a review of the Group’s
strategy and advice sought from its advisers, the Board announced on 31
October 2022 that it intended to recommend to shareholders that the
investment objective and policy of the Group are amended, such that the
Board can pursue a strategy of orderly realisation and the return of
capital over time to shareholders. On 28 December 2022, the Group
published a Circular containing a Notice of Extraordinary General Meeting
to this effect and the EGM will be held on 27 January 2023.”
The factsheet for the period is available at:
1 www.starwoodeuropeanfinance.com
Share Price / NAV at 31 December 2022
Share price (p) 89.0
NAV (p) 105.2
Discount 15.4%
Dividend yield (on share price) 6.2%
Market cap £352m
Key Portfolio Statistics at 31 December 2022
Number of investments 20
Percentage of currently invested portfolio in floating rate 78.6%
loans
Invested Loan Portfolio unlevered annualised total return (1) 7.8%
Portfolio levered annualised total return (2) 7.9%
Weighted average portfolio LTV – to Group first £ (3) 13.2%
Weighted average portfolio LTV – to Group last £ (3) 58.6%
Average loan term (based on current contractual maturity) 5.0 years
Average remaining loan term 1.7 years
Net Asset Value £416.1m
Amount drawn under Revolving Credit Facilities (including £19.2m
accrued interest)
Loans advanced (including accrued interest) £432.5m
Cash £3.6m
Other net liabilities (including hedges) £0.8m
Remaining years to contractual Value of loans % of invested
maturity* (£m) portfolio
0 to 1 years £172.6 40.5%
1 to 2 years £107.4 25.2%
2 to 3 years £86.7 20.4%
3 to 5 years £59.2 13.9%
*excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity.
Country % of invested assets
UK 63.1%
Republic of Ireland 17.6%
Spain 16.5%
Netherlands 2.2%
Germany 0.6%
Sector % of invested assets
Hospitality 38.7%
Office 20.8%
Retail 11.4%
Residential 10.6%
Light Industrial 6.5%
Healthcare 5.9%
Life Sciences 4.6%
Logistics 1.1%
Other 0.4%
Loan type % of invested assets
Whole loans 70.0%
Mezzanine 30.0%
Currency % of invested assets*
Sterling 63.1%
Euro 36.9%
*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.
17 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 was published on 28 December 2022. If approved by the
shareholders, the Company will seek 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 20 January 2023, the Directors declared a dividend in respect of the
fourth quarter of 2022 of 1.375 pence per Ordinary Share, equating to an
annualised income of 5.5 pence per annum.
The Invested Loan Portfolio unlevered annualised total return has been
increasing steadily as interest rates curves have moved upwards. The
year-on-year increase is 90 basis points (i.e. now 7.8 per cent, up from
6.9 per cent in December 2021). As interest rates increase there is
additional support for dividend cover.
Portfolio Update
The portfolio continues to perform 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.
During Q4 2022, a total of £25.8 million, equivalent to almost 6 per cent
of the September 2022 total closing loan outstanding balance, has been
repaid across six investments. Approximately 79 per cent of these
repayments were related to strategic underlying property sales executed by
borrowers in line with business plan and typically following the
completion of underwritten asset management initiatives, with the
remainder representing 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
December 2022, £63 million or 13 per cent of total loan commitments
represented loans funding two construction projects. Both of these
projects are expected to have reached substantial completion during the
first quarter of 2023. The larger of these projects (with a total Group
loan commitment of £49 million) has pre-sold the majority of its
residential for-sale product and we are forecasting the loan to be fully
repaid during 2023 from the proceeds of pre-sold unit completions.
The Group continues to closely monitor all of its loan exposures. Asset
classes representing more than 10 per cent of total investments include
Hospitality (39 per cent), Office (21 per cent), Retail (11 per cent) and
Residential (11 per cent). The Hospitality exposure is diversified across
seven different loan investments. Hotel performance on the trading hotel
assets has continued to improve and recovered from the pandemic very well
during 2022. Despite the potential that trading may be impacted from lower
discretionary consumer spending related to inflationary pressures, the
Groups borrowers on trading assets such as hotels have generally indicated
a positive end to 2022 and the outlook for Q1 2023 is cautiously
optimistic based on forward sales activity as at year end. Office exposure
(21 per cent) is spread across eight 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. The Retail exposure (11 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 during the first half 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 58.6 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. While the average age of
valuations is just over one year for income producing assets and we
recognise that interest rate increases within the last twelve months 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. On loans where new valuations were instructed in the
second half of 2022, average values did not change materially as in many
cases increased rents and asset management initiatives being achieved by
sponsors outweighed or offset any increase in discount or capitalisation
rates.
Partial repayments
During the quarter, despite lower transaction volumes across the markets
because of the cautionary approach being adopted by investors, borrowers
in the portfolio successfully executed a number of disposals ahead of
business plan that resulted in the following partial repayments of loan
obligations:
• €11.4 million, Office and Industrial Portfolio, The Netherlands
• €7.2 million, Office Portfolio, Dublin
• €5.1 million, Hotel, Dublin
• €4.5 million, Mixed Portfolio, Europe
These repayments were used in the quarter to repay some of the outstanding
bank debt and to fund the share buybacks referred to below.
Market commentary and outlook
After decades of declining interest rates and a long period of benign
inflation, 2022 saw a sea change in inflation and a knock on effect into
interest rates across the globe.
Rising inflation was driven by two key factors. First as a consequence of
the COVID-19 pandemic global supply chains and shipments slowed in 2020
and 2021 causing worldwide shortages and affecting consumer patterns. The
causes of the economic slowdown included workers becoming sick with
COVID-19 as well as mandates and restrictions affecting the availability
of staff resulting in production disruption and logistics issues in cargo
shipping, where goods remained at port due to staffing shortages. The
related global chip shortage also contributed to the supply chain crisis,
particularly in the automobile and electronics sectors. During the
Christmas and holiday season of 2021, an increase in spending in North
America, combined with the spread of the Omicron variant of COVID-19,
further exacerbated already tight supplies.
Initially these issues were thought to be transitory, and the expectation
was that inflation would settle back as an equilibrium in supply chains
was restored. As a result central banks were initially cautious about
raising rates which could stall the fragile economic recovery.
Concerns began to rise about more persistent inflation in the later part
of 2021, but the second driver that compounded the issues was the war in
Ukraine that further disrupted supply of energy, commodities and food.
The result was an unprecedented rise in inflation in almost every country
in the world and a huge policy response. Subsequently the US, UK and
Eurozone inflation have peaked at 9.1 per cent, 11.1 per cent and 10.6 per
cent and in response the central banks have acted rapidly with the US Fed
Funds rate, UK Bank of England Base Rate and the ECB deposit policy rate
leaping from 0-0.25 per cent, 0.25 per cent and -0.5 per cent to 4.25-4.5
per cent, 3.5 per cent and 2.0 per cent respectively between the end of
2021 and the end of 2022. The knock on effect for longer rates is that
benchmarks such as the 5 year swap which are typically the benchmark for
commercial real estate loans have also risen significantly. The US, UK and
Euro 5 year swaps grew from 1.11 per cent, 1.05 per cent and -0.02 per
cent to 3.70 per cent, 4.10 per cent and 3.18 per cent respectively during
the year.
Most economists are now seeing inflation having peaked and the
expectations of future interest rises having peaked too. Goldman Sachs
now see UK rates peaking at 4.5 per cent in May 2023 versus expectations
by some economists that they might rise as far as 5 per cent or even 6 per
cent previously.
Inflation and interest rates impact hard assets in a number of ways. For
example, higher inflation in labour and construction materials and higher
interest rates for the financing of development all lead to a higher
overall construction cost which can lead to reduced supply that benefits
existing stock. Higher rates generally can also put pressure on real
estate yields that may look less desirable versus other forms of long
income such as long dated bonds and higher financing costs will leave
levered real estate buyers with less free cash after debt. On the other
side of the coin, real estate incomes are often strongly linked to
inflation either through direct linking within lease terms or through the
correlation of revenue with inflation.
In markets such as logistics and residential to rent, low levels of
vacancy combined with high demand have seen rents increase and this trend
is likely to continue in a number of areas where there is insufficient new
supply delivered although a bad recession could reset demand and / or the
tenants’ ability to pay. Rising rents will be supportive of values in
these asset classes even while yields are softening.
Real estate and leveraged finance volumes have fallen significantly in
2022 while liquidity continues to be lower and pricing higher. A large
share of the increase in costs has been the base interest rate component
mentioned earlier, but spreads having widened as well. Larger loans that
require distributions through syndication CMBS or CLOs are largely stalled
where spreads are at highs and new liquidity is very low. However we do
continue to see steady underlying activity in bilateral and small club
deals with spreads in Europe having changed much less than in the bond
markets since 2021 albeit with more conservative risk metrics and
structures. As is common in slower markets there has been an increased gap
in appetite between prime and secondary assets and stock selection through
a combination of asset class, sponsor and business plan is absolutely
key. Where rates settle is still uncertain and it is likely that until
the equilibrium is met, we will still see smaller volumes both in
transaction and financing volumes.
We are also continuing to see these existing themes in the bank lending
market. There is a focus on stress tests, capital treatment and managing
risk weighted assets. As a result the trend towards banks working together
with non-banks in co-origination or financing of loans as opposed to
providing direct loans is persisting. This is evident in the latest Bayes
lending survey which tracks the UK commercial real estate lending market.
The most recent report shows that alternative lenders now provide 24 per
cent of new origination from almost none a decade ago and we see that
trend continuing to the benefit of non-bank lenders.
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 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 December 2022
As at 31 December 2022, the Group had 20 investments and commitments of
£474.9 million as follows:
Sterling Sterling equivalent Sterling Total
equivalent unfunded commitment (1) (Drawn and
balance (1) Unfunded)
Hospitals, UK £25.0 m £25.0 m
Hotel & Residential, £49.9 m £49.9 m
UK
Office, London £19.0 m £1.5 m £20.5 m
Hotel, Oxford £23.0 m £23.0 m
Hotel, Scotland £42.6 m £42.6 m
Hotel, North Berwick £15.0 m £15.0 m
Life Science, UK £19.5 m £7.1 m £26.6 m
Hotel and Office, £11.5 m £11.5 m
Northern Ireland
Hotels, United £32.0 m £18.6 m £50.6 m
Kingdom
Office and
Industrial £5.5 m £5.5 m
Portfolio, UK
Industrial Estate, £27.2 m £19.0 m £46.2 m
UK
Total Sterling Loans £270.2 m £46.2 m £316.4 m
Three Shopping £30.3 m £30.3 m
Centres, Spain
Shopping Centre, £15.1 m £15.1 m
Spain
Hotel, Dublin £42.0 m £42.0 m
Office, Madrid, £16.4 m £0.9 m £17.3 m
Spain
Mixed Portfolio, £7.8 m £7.8 m
Europe
Mixed Use, Dublin £11.2 m £1.8 m £13.0 m
Office Portfolio, £8.5 m £0.1 m £8.6 m
Spain
Office Portfolio, £21.7 m £21.7 m
Ireland
Logistics Portfolio, £2.7 m £2.7 m
Germany
Total Euro Loans £155.7 m £2.8 m £158.5 m
Total Portfolio £425.9 m £49.0 m £474.9 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 1.4 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 just over one year.
On the basis of the methodology and valuation processes previously
disclosed (see 30 June 2020 factsheet) at 31 December 2022 the Group has
an average last £ LTV of 58.6 per cent (30 September 2022: 59.9 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% 67.5% 81.5% 67.6% 67.2% 69.0%
-10% 63.7% 77.0% 63.8% 63.5% 65.1%
-5% 60.4% 72.9% 60.5% 60.1% 61.7%
0% 57.3% 69.3% 57.4% 57.1% 58.6%
5% 54.6% 66.0% 54.7% 54.4% 55.8%
10% 52.1% 63.0% 52.2% 51.9% 53.3%
15% 49.9% 60.2% 49.9% 49.7% 51.0%
Share Price performance and Share buyback programme
The Company's shares closed on 31 December 2022 at 89.0 pence, resulting
in a share price total return since for 2022 of 0.5 per cent. As at 31
December 2022, the discount to NAV stood at 15.4 per cent, with an average
discount to NAV of 13.9 per cent over the quarter.
Note: the 31 December 2022 discount to NAV is based off the current 31
December 2022 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.
The Company received authority at the most recent AGM to purchase up to
14.99 per cent of the Ordinary Shares in issue on 10 June 2022. On 19
July 2022 the Board announced that it had engaged Jefferies International
Limited as buy-back agent to effect share buy backs on behalf of the
Company. During the quarter to 31 December 2022, the Company bought back
4.3 million shares for a total consideration of £3.9 million.
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 provide Shareholders with regular
dividends and an attractive total return while limiting downside risk,
through the origination, execution, acquisition and servicing of a
diversified portfolio of real estate debt investments in the UK and the
wider European Union's internal market.
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.
══════════════════════════════════════════════════════════════════════════
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.: 217085
EQS News ID: 1539595
End of Announcement EQS News Service
══════════════════════════════════════════════════════════════════════════
3 fncls.ssp?fn=show_t_gif&application_id=1539595&application_name=news&site_id=reuters9
References
Visible links
1. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=becc5c83790358f02808a7970e9d8d13&application_id=1539595&site_id=reuters9&application_name=news
2. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=becc5c83790358f02808a7970e9d8d13&application_id=1539595&site_id=reuters9&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