Starwood European Real Estate Finance Ltd (SWEF) SWEF: Quarterly
Portfolio Update 22-Apr-2022 / 07:00 GMT/BST Dissemination of a
Regulatory Announcement that contains inside information according
to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The
issuer is solely responsible for the content of this
announcement.
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22 April 2022
Starwood European Real Estate Finance Limited
Quarterly Portfolio Update
4.5 per cent Share Price Total Return During the Quarter;
Annualised dividend yield of 5.7 per cent
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 March 2022.
Highlights
-- Strong cash generation - the portfolio continues to support
annual dividend payments of 5.5 pence perOrdinary Share, paid
quarterly, and generates an annual dividend yield of 5.7 per cent
on the share price as at 31March 2022
-- Income stability - all loan interest and scheduled
amortisation payments paid in full and on time
-- Inflation protection - 78.2 per cent of the portfolio is
contracted at floating interest rates (withfloors) which will
provide an increase in revenue if higher inflation results in
higher interest rates
-- Robust portfolio - the loan book is performing in line with
expectations with its defensive qualitiesreflected in the Group's
continued stable NAV, the weighted average Loan to Value for the
portfolio reduced thisquarter to 61.4 per cent from 61.9 per cent
last quarter
-- Borrowers remain adequately capitalised and are expected to
continue to pay loan interest and capitalrepayments in line with
contractual obligations
-- 4.5 per cent - Share price total return for the quarter ended
31 March 2022
-- 57.4 per cent - Share price total return since inception in
December 2012
-- Strong pipeline of opportunities - The Investment Adviser and
Manager continue to see a strong investmentpipeline which
represents strong risk adjusted returns
John Whittle, Chairman of SEREF, said:
"SEREF offers a valuable source of income uncorrelated to equity
market movements and an exceptional defensive instrument for
portfolio diversification in inflationary times.
We are pleased and encouraged by our Q1 performance, which, once
again, demonstrates the high quality and resilience of our
portfolio, and the abilities of the Investment Manager and Adviser.
The portfolio has continued to perform well despite
well-documented, ongoing economic and geopolitical challenges.
Meanwhile, the 4.5 per cent share price total return and strong
cash generation achieved during the first quarter of 2022 is a
testament to the Manager's ability to manage our portfolio in such
a way as to optimise returns for shareholders regardless of the
macro economic environment. The portfolio continues to support an
annual dividend of 5.5 pence, paid in quarterly instalments,
yielding 5.7 per cent on the share price as at 31 March 2022.
An increasing key area of focus for investors is the global
inflationary environment with the additional potential for interest
rate rises looking increasingly likely. Here the asset backed
element of the portfolio's loans (with a 61.4 per cent weighted
average loan to value) and an impressive 78.2 per cent of the
portfolio invested in floating rate investments should provide
enduring strong relative performance in this environment, which may
in time further increase portfolio income.
Our Investment Adviser and Manager continue to be active in
origination and execution, identifying a strong pipeline of
opportunities, as well as active management. The Manager sees
attractive opportunities to create further shareholder value. I,
and the Board, continue to look forward to the future with
confidence."
The factsheet for the period is available at:
www.starwoodeuropeanfinance.com
Share Price / NAV at 31 March 2022
Share price (p) 96.8
NAV (p) 103.13
Discount 6.1%
Dividend yield 5.7%
Market cap GBP396m
Key Portfolio Statistics at 31 March 2022
Number of investments 19
Percentage of currently invested portfolio in floating rate loans 78.2%
Invested Loan Portfolio unlevered annualised total return (1) 7.0%
Portfolio levered annualised total return (2) 7.1%
Weighted average portfolio LTV - to Group first GBP (3) 16.2%
Weighted average portfolio LTV - to Group last GBP (3) 61.4%
Average loan term (based on current contractual maturity) 4.9 years
Average remaining loan term 2.0 years
Net Asset Value GBP421.7m
Amount drawn under Revolving Credit Facilities (including accrued interest) GBP8.5m
Loans advanced (including accrued interest) GBP419.3m
Cash GBP1.1m
Other net assets (including hedges) GBP9.8m
Remaining years to contractual maturity* Value of loans (GBPm) % of invested portfolio
0 to 1 years 162.2 39.0%
1 to 2 years 30.2 7.3%
2 to 3 years 121.9 29.3%
3 to 5 years 101.6 24.4%
*excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
Country % of invested assets
UK 56.9%
Republic of Ireland 20.1%
Spain 16.7%
Netherlands 2.9%
Germany 2.5%
Finland 0.9%
Sector % of invested assets
Hospitality 40.8%
Office 22.4%
Retail 12.2%
Residential 11.2%
Healthcare 6.0%
Life Sciences 4.7%
Light Industrial 1.2%
Logistics 1.2%
Other 0.3%
Loan type % of invested assets
Whole loans 64.7%
Mezzanine 35.3%
Currency % of invested assets*
Sterling 56.9%
Euro 43.1%
*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. 16 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 GBP 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 GBP 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.
Dividend
On 22 April 2022, the Directors declared a dividend in respect
of the first quarter of 2022 of 1.375 pence per Ordinary Share,
equating to an annualised income of 5.5 pence per annum. The Board
is targeting a dividend of 5.5 pence per annum (payable quarterly)
which it considers to be sustainable and covered by earnings during
the course of 2022 with any excess cash generated being used to
replenish a modest dividend reserve.
Portfolio Update
The portfolio continues to perform robustly. Since last quarter
the Russian / Ukrainian crisis has fully emerged, however up to the
date of this report, there are no direct adverse impacts on the
portfolio (as we have no exposure in those jurisdictions) and we
will be monitoring closely any indirect impact related to matters
such as energy cost inflation, supply chain disruption, impacts on
global travel, liquidity flows etc. All loan interest and scheduled
amortisation payments up to the date of this factsheet have been
paid in full and on time in line with expectations. Pandemic
impacted sectors, notably hospitality and retail assets, are now
recovering with occupancy, rate and footfalls ramping back up
following the lifting of Omicron related restrictions across Europe
in Q1 2022. We continue to closely monitor any potential adverse
impacts for borrowers related to current headwinds as a result of
cost inflation and rising interest rates. We note that all loan
structures have interest rate hedging requirements which assist in
limiting the cash flow impact for borrowers of increased loan
interest payments if interest rates continue to rise in line with
current forward curve predictions.
Key Exposure Updates:
Hospitality (41 per cent of funded investment portfolio)
-- The Group's hospitality exposure is currently weighted to
leisure-dominated assets located in the UK. Aspreviously
highlighted, approximately 72 per cent of the Group's hotel
exposure is secured on assets that areleisure focused rather than
corporate or meeting and events driven assets. There has been a
well-documented reboundof leisure activity in the UK and we are
seeing strong occupancy for peak nights. Average rates for peak
nights arein many cases exceeding pre-pandemic levels. Market
expectations indicate a strong performance this summer forleisure
focused assets and the assets in our portfolio are expected to
benefit from this.
-- Furthermore, this quarter we instructed updated independent
RICS red book valuations in the normal courseof business for three
newly refurbished UK leisure hotels which comprise approximately 47
per cent of the Group'scurrent hospitality exposure. The valuer's
view of post completion, stabilized values has increased on a
weightedaverage basis by approximately 5 per cent which is
indicative of the quality of the refurbished product and thestrong
average daily rates being achieved following completion of the
refurbishment.
Retail (12 per cent of funded investment portfolio)
-- The Group's exposure to retail is unchanged from last quarter
and is predominantly comprised of the"Three Shopping Centres,
Spain" and "Shopping Centre, Spain" loans. These are the only
stand-alone retail loans inthe portfolio and comprise 11 per cent
of the Group's total funded investment portfolio and 87 per cent of
totalretail exposure. All other retail exposure is contained in a
limited number of mixed use portfolios.
-- All retail loans continue to pay interest and scheduled
amortisation in line with their contractualobligations, as they
have done throughout the pandemic.
-- Retail footfall traffic has continued to recover overall
despite disruptions in Q1 2022 driven by theOmicron variant. For
the first two months of 2022, average retail footfall in the four
Spanish centres hasrecovered to over 80 per cent compared with the
same months in 2019.
-- The sponsors continue active asset management of the centres
and deployment of strategic equitypredominantly related to leasing
and occupational activity. Tenant occupancy in the centres has
continued to berobust and is on average higher than pre-pandemic
levels.
-- Retail asset transactional activity has increased in Spain
since the low seen during the pandemic crisis,including sales of
shopping centres occurring within the last six months. A return of
investment activity is verypositive for the market.
Construction (14 per cent of funded investment portfolio)
-- The Group's exposure to ground up construction is
approximately 14 per cent of total funded investments,with a
further 4 per cent of the total invested portfolio exposure to
heavy refurbishment projects. While inflationis persisting in the
market for construction materials and fuel, we note that the
projects funded by the Group, aresubject to fixed price
construction contracts with experienced sponsors and
well-established contractors.Additionally, all of the ground up and
heavy refurbishment projects underway are currently expected
tosubstantially complete by the end of this year.
-- Each of the construction and heavy refurbishment loans have
structured budget contingencies and costoverrun regimes in place
which require sponsors to inject additional equity should costs
increase. Budgets andon-site project progress are closely monitored
by independent lender appointed construction experts who
providemonthly formal sign off on budgets and costs in advance of
loans being funded.
Market commentary and outlook
In our last factsheet we highlighted a number of key themes that
were emerging in 2022 including inflationary pressures and the
impact of inflation on interest rates and investor preferences for
alternate real estate sectors. Following the invasion of Ukraine by
Russia, the implications for oil, gas, commodities and food prices
of taking Ukrainian and Russian supply out of many markets has
compounded a number of these themes. In addition to the broad
market reaction, the rapid and decisive high levels of coordinated
sanctions imposed on Russia have led to especially sharp moves in
companies with exposure to Russia (which does not include SEREF).
Oil rose to its highest level for 14 years and at its peak of
USD140 a barrel in early March it almost touched all-time highs.
Persistently higher commodity prices will compound inflationary
pressures further.
New record inflation levels continue month to month with
estimated March headline inflation for the Eurozone coming in at
the highest recorded figure since the inception of the Euro
currency at 7.5 per cent. The March UK CPI rate was 7.0 per cent
and in the US the latest March CPI level was 8.5 per cent. One of
the major contributors in the inflation numbers continues to be
increased energy costs. Energy prices were estimated to be up 44.7
per cent compared to a year earlier for the Eurozone and up 32.0
per cent for the US. After stripping out energy and food, core
inflation was 3.0 per cent for the Eurozone and 6.5 per cent for
the US.
After two years of very low interest rates driven by global
policy-makers' responses to the economic shock from Covid-19, we
are now seeing a step change in interest rate expectations in
reaction to the persistence of the inflationary pressures. While
base rates are still relatively low with the Bank of England base
rate at 0.75 per cent and the ECB rate at negative 0.5 per cent,
the market expects significant policy rate tightening by the end of
the year. The Bank of England has already implemented three rate
hikes and is expected to move at a rapid pace with a series of rate
rises and the base rate projected to hit over 2 per cent by the end
of 2022. The ECB so far has not moved interest rate levels but has
been relatively hawkish in announcing reductions in its stimulus
program with a tapering down of bond purchases to zero by the third
quarter of 2022.
These rate expectations are feeding into the SONIA, Euribor and
swap rates that most of the Group's investments are linked to.
Mirroring the picture on base rates we have a smaller movement so
far in SONIA and Euribor which reflect short term rates but swap
rates which reflect longer term future rate expectations have moved
significantly. As at 8 April 2022 3 month (forward looking) SONIA
and Euribor currently stands at 0.95 per cent and negative 0.45 per
cent respectively versus 0.05 per cent and negative 0.55 per cent
respectively this time last year. The 5 year sterling swap and 5
year Euro swap currently stands at 2.00 per cent and 1.14 per cent
respectively versus 0.42 per cent and negative 0.41 per cent
respectively this time last year. Much of this change has occurred
since the beginning of 2022. In the case of the 1.58 per cent
increase in the 5 year sterling swap, the majority of the move
(0.95 per cent) has been in the first months of 2022. While the
market predicts a steep interest rate curve over the coming
quarters for Sterling, interestingly the interest rate forward
curve inverts in late 2023 suggesting the market expects rate rises
to potentially overshoot and then to be partially reversed. The
Group continues to follow the implications of the inflation and
interest rate environment closely.
We had noted last time that 2021 was a very active year in many
markets including for Starwood's European real estate credit
business with new business of GBP2.8 billion and also in CMBS
markets with European volume in 2021 over twice the past 5 year
average with EUR7.2 billion of new issuance. This year the pace of
new securitisation issuance, including CMBS, both in Europe and the
United States has slowed significantly and pricing has increased as
investors are more cautious in taking new exposure in the short
term as they digest the implications of a rising rate environment
and the implications of the war in Ukraine. While reduced capacity
in capital markets will have some impact on investment bank
distribution strategies and pricing for loans where the primary
route for distribution was CMBS, we continue to see high levels of
appetite for real estate credit in the bank, insurance and debt
fund sector nonetheless. An indicator of high levels of market
activity is that we are seeing pressure on resources across the
board with banks, debt funds, lawyers and other advisors having to
prioritise their most valued clients as human resource is
tight.
We also highlighted the attractiveness of alternate real asset
classes to investors and expect that inflationary pressures will
continue to add to the growing appetite for operational real estate
asset classes where revenues and income rapidly adjust to inflation
in the rates end users can be charged. We can see many examples of
this in the UK hotel and leisure space with Park Holidays, a
leading UK caravan park operator and the Pig Hotel group which
operates food-led leisure focussed hotels both recently changing
hands and a number of other UK leisure businesses expected to be
sold this year. We are aware that there are assets on the market
that are being sold with cash flows and aspirations of valuation
metrics in excess of pre-covid levels. As referred to in the
portfolio update section above we have also seen that retail asset
transactional activity has increased in Spain since the low seen
during the pandemic crisis, including sales of shopping centres
occurring within the last six months. The ability to benefit from
inflation in the top line will present opportunities to businesses
like these and other operational real estate.
We continue to see activity in private equity driven public to
private transactions across Europe, combined with low cap rates in
core European cities, this is evidence of continued demand in real
estate as an asset class for private investors.
No Credit Losses Recognised
All loans within the portfolio are classified and measured at
amortised cost less impairment. The Group closely monitors 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 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 on the basis of 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 2022
As at 31 March 2022, the Group had 19 investments and
commitments of GBP456.8 million as follows:
Sterling equivalent Sterling equivalent unfunded Sterling Total (Drawn and
balance (1) commitment (1) Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office, Scotland GBP5.0 m GBP5.0 m
Office, London GBP14.7 m GBP5.8 m GBP20.5 m
Hotel, Oxford GBP22.2 m GBP0.7 m GBP22.9 m
Hotel, Scotland GBP42.6 m GBP42.6 m
Hotel, North Berwick GBP15.0 m GBP15.0 m
Life Science, UK GBP19.5 m GBP7.1 m GBP26.6 m
Hotel and Office, Northern GBP12.5 m GBP12.5 m
Ireland
Hotels, United Kingdom GBP30.4 m GBP20.3 m GBP50.7 m
Total Sterling Loans GBP236.8 m GBP33.9 m GBP270.7 m
Three Shopping Centres, GBP29.6 m GBP29.6 m
Spain
Shopping Centre , Spain GBP14.3 m GBP14.3 m
Hotel, Dublin GBP50.6 m GBP50.6 m
Office, Madrid, Spain GBP15.6 m GBP0.8 m GBP16.4 m
Mixed Portfolio, Europe GBP21.4 m GBP21.4 m
Mixed Use, Dublin GBP6.3 m GBP6.1 m GBP12.4 m
Office Portfolio, Spain GBP9.6 m GBP0.1 m GBP9.7 m
Office Portfolio, Ireland GBP26.7 m GBP26.7 m
Logistics Portfolio, Germany GBP5.0 m GBP5.0 m
Total Euro Loans GBP179.1 m GBP7.0 m GBP186.1 m
Total Portfolio GBP415.9 m GBP40.9 m GBP456.8 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 1.09 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 0.79 years.
On the basis of the methodology and valuation processes
previously disclosed (see 30 June 2020 factsheet) and including new
valuations received, at 31 March 2022 the Group has an average last
GBP LTV of 61.4 per cent (31 December 2021: 61.9 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
-25% 80.7% 98.8% 79.5% 78.3% 81.9%
-20% 75.7% 92.6% 74.5% 73.4% 76.8%
-15% 71.2% 87.2% 70.1% 69.1% 72.3%
-10% 67.3% 82.3% 66.2% 65.3% 68.3%
-5% 63.7% 78.0% 62.7% 61.8% 64.7%
0% 60.5% 74.1% 59.6% 58.7% 61.4%
5% 57.7% 70.6% 56.8% 55.9% 58.5%
10% 55.0% 67.4% 54.2% 53.4% 55.9%
15% 52.6% 64.4% 51.8% 51.1% 53.4%
Share Price performance
The Company's shares closed on 31 March 2022 at a quarter high
of 96.8 pence, resulting in a share price total return for the
first three months of 2022 of 4.5%. As at 31 March 2022, the
discount to NAV stood at 6.1 per cent, with an average discount to
NAV of 7.2 per cent over the quarter. The Board, the Investment
Manager and Adviser continue to believe that the shares represent
attractive value at this level.
Note: the 31 March 2022 discount to NAV is based off the current
31 March 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.
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company Secretary
Duke Le Prevost
+44 (0)203 5303 630
Starwood Capital
Duncan MacPherson +44 (0) 20 7016 3655
Jefferies International Limited
Stuart Klein
Neil Winward
+44 (0) 20 7029 8000
Gaudi Le Roux
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
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. 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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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.: 156840
EQS News ID: 1332449
End of Announcement EQS News Service
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