Starwood European Real Estate Finance Ltd (SWEF) SWEF: Portfolio
Update 21-Apr-2023 / 07:01 GMT/BST
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Starwood European Real Estate Finance Limited
Quarterly Portfolio Update
Annualised dividend yield of 6.1 per cent, fully covered by
income;
Portfolio 77 per cent contracted at floating interest rates
Starwood European Real Estate Finance Limited ("SEREF" or the
"Group"), a leading investor managing and realising a diverse
portfolio of high quality senior and mezzanine real estate debt in
the UK and Europe, is pleased to announce a strong performance for
the quarter ended 31 March 2023.
Highlights
-- Positive realisation progress - during the quarter:? A total
of GBP35.9 million, almost 8.5 per cent of the Group's December
2022 total funded loanportfolio, has been repaid across seven
investments ? This included the full repayment of a loan on a hotel
in Oxford of GBP23.0 million, a further smallfull repayment and
five partial repayments ? Proceeds were used in the quarter to
repay the outstanding bank debt as at 31 December 2022 leavingcash
balances at GBP22.6 million as at 31 March 2023 (of which GBP13.4
million will be used to pay the additionaldividend declared in
March and the Q1 2023 dividend declared in April)The average
remaining loan term of theportfolio is 1.5 years
-- 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 6.1 per cent
on the share price as at 31March 2023
-- Regular and Consistent Dividend - GBP206 million of dividends
paid since inception (not including thedividend of 2p per share
declared in March, payable in April and the dividend of 1.375p per
share declared inApril, payable in May)
-- Inflation protection - 77 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 of 58.3 per cent
-- 4.9 per cent share price total return for the quarter ended
31 March 2023
John Whittle, Chairman of SEREF, said:
"We remain pleased with the continued strong ongoing robust
performance of the Group's portfolio with loans performing robustly
leading to an enduringly strong valuation of the underlying
collateral and all interest and scheduled amortisations being
received as expected. The Group's overall LTV remains highly
comfortable at 58.3 per cent.
As a result of this strong performance over the year ended
December 2022, partly as a result of the high floating rate element
of the portfolio (currently 77 per cent), the Group was not only
able to meet its dividend target of 5.5 pence per share but also
declared a special dividend of 2.0 pence per share in March leading
to a total dividend distribution of 7.5 pence per share for 2022.
In our view, this is a highly attractive income proposition.
It is also pleasing to report positive realisation progress on
the Group's portfolio with GBP35.9m repaid during the quarter and
used to repay the Group's outstanding bank debt. We look forward to
updating shareholders with further realisation progress and the
first anticipated distribution to shareholders in due course."
The factsheet for the period is available at:
www.starwoodeuropeanfinance.com
Share Price / NAV at 31 March 2023
Share price (p) 89.9
NAV (p) 103.82
Discount 13.4%
Dividend yield (on share price) 6.1%
Market cap GBP356m
Key Portfolio Statistics at 31 March 2023
Number of investments 18
Percentage of currently invested portfolio in floating rate loans 76.6%
Invested Loan Portfolio unlevered annualised total return (1) 7.9%
Portfolio levered annualised total return (2) 7.9%
Weighted average portfolio LTV - to Group first GBP (3) 14.2%
Weighted average portfolio LTV - to Group last GBP (3) 58.3%
Average loan term (based on current contractual maturity) 5.2 years
Average remaining loan term 1.5 years
Net Asset Value GBP410.7m
Amount drawn under Revolving Credit Facilities (including accrued interest) GBP0.0m
Loans advanced (including accrued interest) GBP395.5m
Cash GBP22.6m
Other net liabilities (including hedges and dividend declared in March 2023) GBP7.4m
Remaining years to contractual maturity* Value of loans (GBPm) % of invested portfolio
0 to 1 years GBP129.3 33.2%
1 to 2 years GBP134.6 34.6%
2 to 3 years GBP66.0 17.0%
3 to 5 years GBP59.2 15.2%
*excludes any permitted extensions. Note that borrowers may
elect to repay loans before contractual maturity.
Country % of invested assets
UK 62.1%
Republic of Ireland 17.9%
Spain 17.8%
Netherlands 1.6%
Germany 0.6%
Sector % of invested assets
Hospitality 35.3%
Office 21.5%
Retail 12.2%
Residential 11.3%
Light Industrial 7.1%
Healthcare 6.4%
Life Sciences 5.0%
Logistics 0.7%
Other 0.5%
Loan type % of invested assets
Whole loans 67.6%
Mezzanine 32.4%
Currency % of invested assets*
Sterling 62.1%
Euro 37.9%
*the currency split refers to the underlying loan currency,
however the capital on all non-sterling exposure is hedged back to
sterling.
(1) The unlevered annualised total return is calculated on
amounts outstanding at the reporting date, excluding undrawn
commitments, and assuming all drawn loans are outstanding for the
full contractual term. 15 of the loans are floating rate (partially
or in whole and all with floors) and returns are based on an
assumed profile for future interbank rates, but the actual rate
received may be higher or lower. Calculated only on amounts funded
at the reporting date and excluding committed amounts (but
including commitment fees) and excluding cash uninvested. The
calculation also excludes the origination fee payable to the
Investment Manager.
(2) The levered annualised total return is calculated as per the
unlevered return but takes into account the amount of net leverage
in the Group and the cost of that leverage at current
SONIA/Euribor.
(3) LTV to Group last 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 (EGM) was published on 28
December 2022. The proposals were approved by Shareholders at the
EGM in January 2023 and the Company is now seeking to return cash
to Shareholders in an orderly manner as soon as reasonably
practicable following the repayment of loans, while retaining
sufficient working capital for ongoing operations and the funding
of committed but currently unfunded loan commitments.
Dividend
On 21 April 2023, the Directors declared a dividend, to be paid
in May, in respect of the first quarter of 2023 of 1.375 pence per
Ordinary Share, equating to an annualised income of 5.5 pence per
annum. This is in addition to the additional 2022 special dividend
declared on 23 March 2023 of 2.0 pence per Ordinary Share, which
will be paid in April.
Portfolio Update
The portfolio continues to perform robustly and in line with
expectations. All interest and scheduled amortisation has been paid
in line with contractual obligations. Borrowers are also continuing
to make progress on underwritten business plans including executing
strategic asset sales and paying down the loans. None of the
Company's borrowers had direct exposure to Silicon Valley Bank or
Credit Suisse in relation to either bank accounts or counterparty
risk (for example interest rate hedging) in relation to any of the
cash or assets secured to the Company under the loans. There are
existing minimum credit rating requirements for all counterparty
banks in the loan agreements and the status of counterparties are
monitored to ensure ongoing compliance.
During Q1 2023, a total of GBP35.9 million, equivalent to almost
8.5 per cent of the December 2022 total closing loan balance
outstanding, has been repaid across seven investments. 79 per cent
of these repayments (GBP28.5 million) relate to the full repayment
of two loans with the remainder following strategic underlying
property sales, regular quarterly loan amortisation or borrowers
electing to voluntarily pay down loan balances with surplus
cash.
The Group's exposure to development and heavy refurbishment
projects continues to decrease as current developments reach
completion. As at 31 March 2023, the portfolio includes only one
construction project of a residential plus hotel development, with
a loan commitment of GBP49.9 million or 11 per cent of total loan
commitments. Residential units are completing one-by-one over the
second quarter of 2023, with the hotel set to be the final
completion at the end of the quarter. The majority of the
residential for-sale units have been pre-sold and we forecast the
loan to be fully repaid during 2023 from the proceeds of these unit
completions.
The Group continues to closely monitor its loan exposures. Asset
classes representing more than 10 per cent of total investments
include Hospitality (35 per cent), Office (21 per cent), Retail (12
per cent) and Residential (11 per cent).
The Hospitality exposure is diversified across six different
loan investments. Two benefit from State/Government licences in
place at accretive rents with structural amortisation set to reduce
these by a minimum of GBP4 million (8.5 per cent of these two
commitments) over the remainder of 2023. The other trading hotel
exposures have either been recently refurbished or will be on a
rolling basis from mid-2023. All trading assets outperformed the
Group's underwritten ADR (Average Daily Rate) assumptions in 2022,
demonstrating ability to push rates despite wider inflationary
pressures. This has assisted in mitigating margin erosion from cost
inflation.
Office exposure (21 per cent) is spread across seven loan
investments. Occupancy across the leased office portfolio has held
up well, with the vast majority of the underlying tenants renewing
leases and staying in occupation. We also continue to see
prospective new tenants being attracted particularly to newly
refurbished, high quality buildings such as the Office, London
exposure which will reach formal completion in April 2023 and was
fully pre-let 11 per cent ahead of the Group's underwrite.
The Retail exposure (12 per cent) has continued to perform in
line with expectations; occupancy continues to remain robust and
footfall continues its post pandemic recovery. Our retail loan
borrowers continue their active asset management and are signing
new leases where tenants wish to expand and renew existing
leases.
Residential exposure (11 per cent) is predominantly related to
the successfully pre-sold residential for sale development project
that is due to complete by the end of the second quarter of 2023,
with the loan projected to be fully repaid this year. In general
market outlook for residential product remains high as rents have
trended upwards with inflation over the prior year and many markets
remain supply challenged.
Across all loans we continue to benefit from material headroom
in underlying collateral value against the loan basis, with a
current weighted average LTV of 58.3 per cent across the portfolio.
These metrics are based on independent third party appraisals which
are typically updated annually for income producing assets and
following completion on newly constructed or refurbished assets.
The weighted average age of valuations is 1.2 years for income
producing assets and seven of these will be updated in the next
quarter. The only other valuations over a year old either relate to
assets that are undergoing refurbishment or loans which we are
forecasting to be repaid in the next six months. While we recognise
that interest rate increases within the last year are expected to
place downward pressure on valuation inputs, we are confident in
the very significant buffer to absorb any negative valuation impact
of the current market.
Partial repayments
During the quarter, despite lower transaction volumes across the
markets because of the cautionary approach being adopted by
investors, borrowers repaid the following loan obligations:
-- GBP5.5 million, Office and Industrial Portfolio, UK
(repayment of loan in full)
-- GBP23.0 million, Hotel, Oxford (repayment of loan in
full)
-- EUR5.5 million, Hotel, Dublin (partial repayment of loan)
-- EUR1.5 million, Mixed Portfolio, Europe (partial repayment of
loan)
-- GBP1.0 million, Hotel and Office, Northern Ireland (partial
repayment of loan)
-- EUR0.4 million, Three Shopping Centres, Spain (scheduled
amortisation)
-- EUR0.04 million, Mixed Use, Dublin (partial repayment of
loan)
These repayments were used in the quarter to repay the bank debt
outstanding as at 31 December 2022. Cash balances were GBP22.6
million as at 31 March 2023 (of which GBP13.4 million will be used
to pay the additional dividend declared in March and the Q1 2023
dividend declared in April).
Market commentary and outlook
Energy costs spiked in February 2022 when Russia invaded
Ukraine. Now that we have passed the anniversary of the beginning
of the war, we can see inflation from energy is beginning to
subside. Headline annual inflation within the Eurozone has fallen
to its lowest level in over a year, having dropped to 6.9 per cent
in March, down from 8.5 per cent the previous month. This was a
bigger than expected drop driven by a 0.9 per cent decline in
energy in March compared with an increase of 13.7 per cent in the
previous month. A decline in core inflation which excludes energy
and food costs will lag overall inflation as the impact of higher
input prices may take some time to filter through. Core CPI hit a
new Eurozone high of 5.7 per cent in March, up from 5.6 per cent in
the previous month. We have seen the same pattern in the data from
the US with annual CPI reaching its lowest level since May 2021 and
having fallen to 5 per cent in March from 6 per cent in the
previous month. US core CPI is now higher than headline CPI at 5.6
per cent.
There has been some moderation in interest rate expectations
driven by the knock on effects from the recent bank market issues
around Silicon Valley Bank, Credit Suisse and others which has led
to expectations of lower loan availability at higher pricing and so
a less expansionary environment. In the second week of March the
expectations for the end of year rates for US SOFR declined by a
remarkable 1.1 per cent in the week from 5.3 per cent to 4.2 per
cent. However, we continue to expect central banks to be hawkish
around concerns around the persistence of inflation.
The recent events in the bank market provide a keen reminder of
the importance of confidence for banks. Generally the banking
system is in a robust position with equity ratios having been
significantly bolstered over recent years. The issues with Silicon
Valley Bank were somewhat idiosyncratic and in retrospect could
also have been avoided in a number of ways. The bank had a unique
business profile given the nature of its client base and
accordingly had an unusually large number of uninsured deposits.
The beginning of the unwind came as these deposits were gradually
withdrawn to meet clients' needs, but the bank's strategy of having
tied those deposits up in longer term fixed rate assets led to the
realisation of a mark to market issue when those investments were
realised to meet declining deposits. This could have been avoided
by the bank holding shorter dated assets or by interest rate
hedging of these longer dated fixed rate assets which would have
mitigated the loss realised. Subsequently the effort to raise
capital to bolster the equity ratio could also have been handled
better. Once it failed the consequence was the uninsured depositors
created the fastest withdrawal of deposits of all time as
technology allowed them to move cash out faster than in any
previous bank run.
After the Silicon Valley Bank failure, the market tested other
potentially weak players and in Europe it was Credit Suisse that
failed the test as it also quickly lost deposits. Credit Suisse on
the face of it was well capitalised but had suffered a series of
recent issues that meant it was already suffering from low client
and market confidence. The way the deal with UBS was structured
further spooked markets due to the treatment of conditional
convertible bonds. While this was allowed for in the documentation,
the failure to fully respect the priority between the equity and
the conditional convertibles was not what markets expected. Bank
regulators in Europe distanced themselves from this approach which
provided some reassurance to conditional convertible investors. The
long term implications are that investors may demand higher returns
for these bonds making banks' cost of capital higher.
The fallout from the bank market turbulence is yet to be fully
realised but what we can see already is the move from bank
deposits, particularly from smaller Americans banks to both larger
banks and money market funds. This will reduce the ability of these
banks, who have provided a substantial proportion of historical
real estate lending, to continue to make new loans. We are also
seeing some market commentators calling for yet higher capital
requirements and further increased regulation for banks. These
factors are all likely to contribute to an increasing portion of
real estate lending from non-bank lenders.
In the real estate markets we have seen decreased investment
volumes. Overall Europe saw an 18 per cent reduction in investment
volumes in 2022 versus 2021 with the fourth quarter down 58 per
cent versus the previous year. However, there is significant
differentiation between markets. For example German multifamily
residential transactions declined by 73 per cent in 2022 versus
2021 but German industrial volumes were up by 5 per cent in the
same period and UK multifamily was up by 14 per cent. These
statistics are driven by investor sentiment toward which asset
classes and markets are benefiting from the best ability to drive
rental growth. Industrial, residential in growth markets and
operationally geared assets such as student accommodation and
hospitality continue to be particularly in favour and are
attracting the highest level of both investor and lending
interest.
On the office side we are seeing a high level of differentiation
between markets due to a number of key drivers. For example, US
office workers have been much stickier in continuing to work from
home than in Europe and Asia. Work from home combined with
reductions in headcount in the technology sector has led to some
markets experiencing big increases in vacancy and a cautious
approach by lenders to new lending for office in the US will lead
to issues for some investments.
In Europe office vacancy rates have tended to be lower generally
and return to work has been stronger. We are however continuing to
see the bifurcation between the best assets with high ESG ratings
where there is good tenant demand, which are commanding good rents,
and lower quality legacy stock where tenant interest is lagging. A
recent example of this is Great Portland Estates leasing for the
year ending March 2023. Great Portland signed GBP55.5 million of
new leases in the period, which was a 44 per cent increase on the
previous period and notably average rents were 3.3 per cent higher
than the estimated rental value at the beginning of the period
reflecting the high level of demand for high quality office in
prime locations.
There will be continued focus in inflation and interest rate
moves and expectations which have been a key driver for real estate
markets over the past several quarters. Until the outlook settles
further market volumes are likely to remain lower and we anticipate
conditions will be favourable for investing in real estate
credit.
No Credit Losses Recognised
All loans within the portfolio are classified and measured at
amortised cost less impairment. The Group closely monitors all the
loans in the portfolio for any deterioration in credit risk. There
are some loans for which credit risk has increased since initial
recognition. However, we have considered a number of scenarios for
these cases and do not currently expect to realise a loss in the
event of a default. Therefore no expected credit losses have been
recognised.
This assessment has been made based on information in our
possession at the date of reporting, our assessment of the risks of
each loan and certain estimates and judgements around future
performance of the assets.
Investment Portfolio at 31 March 2023
As at 31 March 2023, the Group had 18 investments and
commitments of GBP437.6 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 GBP19.5 m GBP1.1 m GBP20.6 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 GBP10.5 m GBP10.5 m
Ireland
Hotels, United Kingdom GBP32.0 m GBP18.6 m GBP50.6 m
Industrial Estate, UK GBP27.2 m GBP19.0 m GBP46.2 m
Total Sterling Loans GBP241.2 m GBP45.8 m GBP287.0 m
Three Shopping Centres, GBP29.7 m GBP29.7 m
Spain
Shopping Centre, Spain GBP14.9 m GBP14.9 m
Hotel, Dublin GBP36.8 m GBP36.8 m
Office, Madrid, Spain GBP16.3 m GBP0.9 m GBP17.2 m
Mixed Portfolio, Europe GBP6.4 m GBP6.4 m
Mixed Use, Dublin GBP11.2 m GBP1.7 m GBP12.9 m
Office Portfolio, Spain GBP8.4 m GBP0.1 m GBP8.5 m
Office Portfolio, Ireland GBP21.5 m GBP21.5 m
Logistics Portfolio, Germany GBP2.7 m GBP2.7 m
Total Euro Loans GBP147.9 m GBP2.7 m GBP150.6 m
Total Portfolio GBP389.1 m GBP48.5 m GBP437.6 m 1. Euro balances translated to sterling at period end exchange rate.
Loan to Value
All assets securing the loans undergo third party valuations
before each investment closes and periodically thereafter at a time
considered appropriate by the lenders. The current weighted average
age of the dates of these third party valuations for the whole
portfolio is just 1.7 years while the current weighted average age
of the valuations for the income producing portfolio (i.e.
excluding loans for development or heavy refurbishment) is 1.2
years.
On the basis of the methodology and valuation processes
previously disclosed (see 30 June 2020 factsheet) at 31 March 2023
the Group has an average last GBP LTV of 58.3 per cent (31 December
2022: 58.6 per cent).
The table below shows the sensitivity of the loan to value
calculation for movements in the underlying property valuation and
demonstrates that the Group has considerable headroom within the
currently reported last LTVs.
Change in Valuation Hospitality Retail Residential Other Total
-15% 65.4% 80.9% 66.7% 68.2% 68.6%
-10% 61.8% 76.4% 63.0% 64.4% 64.8%
-5% 58.5% 72.4% 59.7% 61.1% 61.4%
0% 55.6% 68.8% 56.7% 58.0% 58.3%
5% 52.9% 65.5% 54.0% 55.2% 55.5%
10% 50.5% 62.5% 51.5% 52.7% 53.0%
15% 48.3% 59.8% 49.3% 50.4% 50.7%
Share Price performance
The Company's shares closed on 31 March 2023 at 89.9 pence,
resulting in a share price total return for the first quarter of
2023 of 4.9 per cent. As at 31 March 2023, the discount to NAV
stood at 13.4 per cent, with an average discount to NAV of 13.2 per
cent over the quarter.
Note: the 31 March 2023 discount to NAV is based off the current
31 March 2023 NAV as reported in this factsheet. All average
discounts to NAV are calculated as the latest cum-dividend NAV
available in the market on a given day, adjusted for any dividend
payments from the ex-dividend date onwards.
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company Secretary
Duke Le Prevost
+44 (0)20 3530 3630
Starwood Capital
Duncan MacPherson +44 (0) 20 7016 3655
Jefferies International Limited
Gaudi Le Roux
Harry Randall
+44 (0) 20 7029 8000
Ollie Nott
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 7788 528 143
Henry Wilson
Hannah Ratcliff
Notes:
Starwood European Real Estate Finance Limited is an investment
company listed on the premium segment of the main market of the
London Stock Exchange with an investment objective to conduct an
orderly realisation of the assets of the Company.
www.starwoodeuropeanfinance.com.
The Company is the largest London-listed vehicle to provide
investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance
Partners Limited, an indirect wholly owned subsidiary of the
Starwood Capital Group.
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group. The issuer is solely responsible for the
content of this announcement.
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ISIN: GG00B79WC100
Category Code: PFU
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 238489
EQS News ID: 1613341
End of Announcement EQS News Service
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