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.
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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 perOrdinary 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 - GBP201 million of dividends
paid since inception
-- Inflation protection - 79 per cent of the portfolio is
contracted at floating interest rates (withfloors)
-- Robust portfolio - the loan book is performing in line with
expectations with its defensive qualitiesreflected in the Group's
continued NAV stability
-- Significant equity cushion - the weighted average Loan to
Value for the portfolio reduced this quarter to58.6 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:
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 GBP352m
Key Portfolio Statistics at 31 December 2022
Number of investments 20
Percentage of currently invested portfolio in floating rate loans 78.6%
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 GBP (3) 13.2%
Weighted average portfolio LTV - to Group last GBP (3) 58.6%
Average loan term (based on current contractual maturity) 5.0 years
Average remaining loan term 1.7 years
Net Asset Value GBP416.1m
Amount drawn under Revolving Credit Facilities (including accrued interest) GBP19.2m
Loans advanced (including accrued interest) GBP432.5m
Cash GBP3.6m
Other net liabilities (including hedges) GBP0.8m
Remaining years to contractual maturity* Value of loans (GBPm) % of invested portfolio
0 to 1 years GBP172.6 40.5%
1 to 2 years GBP107.4 25.2%
2 to 3 years GBP86.7 20.4%
3 to 5 years GBP59.2 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 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.
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 GBP25.8 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, GBP63 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 GBP49
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:
-- EUR11.4 million, Office and Industrial Portfolio, The
Netherlands
-- EUR7.2 million, Office Portfolio, Dublin
-- EUR5.1 million, Hotel, Dublin
-- EUR4.5 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 GBP474.9 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, London GBP19.0 m GBP1.5 m GBP20.5 m
Hotel, Oxford GBP23.0 m GBP23.0 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 GBP11.5 m GBP11.5 m
Ireland
Hotels, United Kingdom GBP32.0 m GBP18.6 m GBP50.6 m
Office and Industrial GBP5.5 m GBP5.5 m
Portfolio, UK
Industrial Estate, UK GBP27.2 m GBP19.0 m GBP46.2 m
Total Sterling Loans GBP270.2 m GBP46.2 m GBP316.4 m
Three Shopping Centres, GBP30.3 m GBP30.3 m
Spain
Shopping Centre, Spain GBP15.1 m GBP15.1 m
Hotel, Dublin GBP42.0 m GBP42.0 m
Office, Madrid, Spain GBP16.4 m GBP0.9 m GBP17.3 m
Mixed Portfolio, Europe GBP7.8 m GBP7.8 m
Mixed Use, Dublin GBP11.2 m GBP1.8 m GBP13.0 m
Office Portfolio, Spain GBP8.5 m GBP0.1 m GBP8.6 m
Office Portfolio, Ireland GBP21.7 m GBP21.7 m
Logistics Portfolio, Germany GBP2.7 m GBP2.7 m
Total Euro Loans GBP155.7 m GBP2.8 m GBP158.5 m
Total Portfolio GBP425.9 m GBP49.0 m GBP474.9 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 GBP 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 GBP3.9 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. 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.: 217085
EQS News ID: 1539595
End of Announcement EQS News Service
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