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Starwood European Real Estate Finance Ltd (SWEF)
23 April 2021
Starwood European Real Estate Finance Limited: Quarterly Factsheet Publication
Starwood European Real Estate Finance Limited (the "Company" and, together with its subsidiaries, the "Group") announces that the factsheet for the quarter ended on 31 March 2021 is available at:
Investment Portfolio at 31 March 2021
As at 31 March 2021, the Group had 18 investments and commitments of £442.2 million as follows:
On 22 April 2021 the Group announced that it had closed a £26.6 million floating rate whole loan secured by a portfolio of four properties. The properties being secured against consist of laboratory and office spaces let to a diverse range of life science occupiers in the UK. The financing has been provided in the form of an initial advance along with a smaller capex facility to support the borrower's value-enhancing capex initiatives. The loan term is 4 years, and the Group expects to earn an attractive risk-adjusted return in line with its stated investment strategy.
All loan interest and scheduled amortisation payments up to the date of this factsheet have been paid in full and on time.
Notwithstanding the pandemic-related disruption continuing to be experienced, the portfolio continues to be robust and portfolio performance remains in line with expectations. In the sectors that are most impacted, hospitality and retail, borrowers remain adequately capitalised and are projecting to continue to pay loan interest and capital repayments despite the various lockdown measures continuing into the second quarter, with realistic pandemic related business plans in place to deal with any underlying income displacement being experienced.
Key updates are outlined below:
Hospitality (40.1 per cent of funded Investment Portfolio)
Retail (12.9 per cent of funded Investment Portfolio)
Construction & Heavy Refurbishment (25.2 per cent of funded Investment Portfolio)
Office, Industrial, Logistics & Residential (40.6 per cent of funded Investment Portfolio)
On 23 April 2021, the Directors declared a dividend in respect of the first quarter of 1.375 pence per Ordinary Share, equating to an annualised 5.5 pence per annum. From 1 January 2021 the Board intends to target a dividend of 5.5 pence per annum (payable quarterly) which reflects the broader lower interest rate environment. This will provide a sustainable level of dividend which should be fully covered by earnings over the year whilst ensuring the Group maintains strong credit discipline. The Company maintains a modest dividend reserve which can be utilised if required.
Expected Credit Losses & Fair Values
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 and therefore no credit losses have been recognised.
This assessment has been made, despite the continued pressure on the hospitality and retail markets from Covid-19, 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. The position on any potential ECLs on the Spanish retail assets in particular continues to be closely monitored and analysed, and we have sought input, analysis and commentary from Spanish market advisers in this regard, to supplement our own information. As referred to above in the portfolio update, during the quarter, we have received independent, external valuations of the underlying assets secured against the Spanish loans. This information did not change our analysis on the Spanish loan and we note that valuation headroom remains on these loans. The updated valuations are reflected in the sector and portfolio LTV table below.
The amortised cost loan recognition is governed by IFRS9 and we do not have a choice of methodology to follow - we are not eligible to follow fair value accounting for the vast majority of our loans, and in our eight year history only one loan has ever been eligible to be recognised at fair value (the credit linked notes which repaid in 2020). Therefore our NAV does not show significant fluctuations during periods of market volatility.
The table below represents the fair value of the loans based on a discounted cash flow basis using different discount rates.
The effective interest rate ("EIR") - i.e. the discount rate at which future cash flows equal the amortised cost, is 6.8 per cent. We have sensitised the cash flows at EIR intervals of 0.5 per cent up to +/- 2.0 per cent. The table reflects how a change in market interest rates or credit risk premiums may impact the fair value of the portfolio versus the amortised cost. Further, the Group considers the EIR of 6.8 per cent to be conservative as many of these loans were part of a business plan which involved transformation and many of these business plans are advanced in the execution and therefore significantly de-risked from the original underwriting and pricing (for example the Hotel, Spain). The volatility of the fair value to movements in discount rates is low due to the low remaining duration of most loans.
Loan to Value
Please refer to the 30 September 2020 factsheet for details on the methodology for calculating LTV and the valuation processes. During the quarter, we have received independent, external valuations of the underlying assets secured against the Spanish loans and they are reflected in the sector and portfolio LTV table below.
On the basis of the methodology previously outlined and including the new valuations received and referred to above, at 31 March 2021 the Group has an average last £ LTV of 63.6 per cent (31 December 2020: 61.8 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.
Share Buy Backs and share price performance
The Company received authority at the most recent AGM to purchase up to 14.99 per cent of the Ordinary Shares in issue on 8 June 2020 and in August 2020 the Board engaged Jefferies International Limited as buy-back agent to effect share buy backs on behalf of the Company. During the third and fourth quarters of 2020 and the first quarter of 2021, the Company bought back 4,308,125 shares at an average cost per share of 87.3 pence per share and these shares are held in Treasury.
During the first quarter of 2021, the Company's shares returned -4.3 per cent on a total return basis with the share price trading between 84.2 pence and 92.0 pence and ending the quarter at 84.6 pence. The Board made use of the share buy-back programme selectively where it was deemed necessary to address the imbalance in the demand and supply for shares and will continue to do so going forward where appropriate.
Over the three months ended 31 March 2021, the share price traded at an average discount to the cum-div NAV of 9.6 per cent which has improved marginally from the discount of 10.0 per cent to NAV on average seen in the previous quarter. The Board and the Investment Adviser continue to believe that the shares represent very attractive value at this level demonstrated by Shelagh Mason, a member of the Board, who bought 95,131 shares during the quarter and Duncan MacPherson and Lorcain Egan of Starwood Capital Europe Advisers LLP, the Investment Adviser, who purchased 116,667 and 22,585 ordinary shares respectively over the same period.
Market Commentary and Outlook
Following an unprecedented level of scientific collaboration and achievement there are now eight COVID-19 vaccines available for use around the world. Over 80 more are in clinical trials. Scaling up manufacturing from zero to billions of doses was always going to be a considerable challenge as to fully immunise the world population would require three times the doses produced each year for all other vaccines combined. Notwithstanding this, vaccination progress has moved very fast in the first quarter of 2021. The UK and the US in particular have been top performers and have set a standard that citizens of other countries will demand of their politicians. While there have been some glitches in deliveries and a cautious approach to a small number of serious side effects caused by the mass roll-out of vaccines, the positive impacts have been huge in reduction of death and serious disease and the steps forward in production and supply chain have been very fast and continue to ramp up.
Despite the UK having been one of the countries hardest hit by the COVID-19 pandemic, its vaccination success has set up a steady route to ease lockdown. In England, since March 8 schools have returned and since April 12 self-catering holidays, non-essential retail and outdoor hospitality have reopened. The third step is expected to happen on May 17 when indoor mixing will be allowed up to groups of six people and pubs and restaurants will be allowed to open indoors. Hotels, cinemas and other indoor venues will also reopen at this point (with the rule of six still in place). Sports stadiums will be allowed to reopen to fans, with the largest stadiums allowed to have 10,000 people in at once. It is also expected that short haul international tourism will be possible during the third quarter.
Since these steps were announced in February the plan has remained stable and the outlook for domestic tourism in the UK is very strong. Between March 2020 and January 2021 UK consumers accumulated £160 billion in savings and UK consumer confidence measured by GfK in March 2021 rose to the highest level since the start of lockdowns and the difference in the reading versus the previous level was the largest monthly increase in almost a decade. As such the short term operational outlook for the UK hotels that represent the largest part of the Group's hotel exposure is particularly strong.
The capital markets are reflecting the outlook for hotels. Marriot is the largest global public hotel company and its stock touched $152 in March 2021 matching its previous high from December 2019. After a year of subdued transaction activity, investor interest in hospitality on the equity and the debt side in the private markets has come back strongly across Europe in 2021. As is typical when activity ramps up, single asset transactions are leading with portfolio transactions following. A landmark transaction that closed in March 2021 was Blackstone's £3.2 billion acquisition of Butlin's and Haven owner Bourne Leisure.
On the office side, future trends in occupational requirements continue to benefit from fresh thinking about how occupiers will use office space over the longer term. It was a default last year for large corporate occupiers to announce office requirement reviews as lockdowns changed the way they had to work. We do expect in some cases structural changes are likely to take place. Shareholders are keen to see cost cutting initiatives in difficult times and banks in particular have sent some clear messages to the market about efficiency possibilities in global real estate requirements. There will definitely be potential for reform and rationalisation of office use for some roles but there is doubt that the scale of reductions mentioned by some banks will be practical. Considerations around supervision, compliance, culture, morale, collaboration, creative interaction, training, workplace health and safety, the availability of employee home office space and the costs of investing in the home working environment are some of the considerations that will need to be taken into account. Outside of the banking sector we have seen some change in sentiment as occupiers plan for the return to office. According to a survey by KPMG most major global companies no longer plan to reduce their use of office space after the coronavirus pandemic. In the most recent survey just 17 per cent of chief executives say they plan to cut back on offices, down from 69 per cent in the last survey in August 2020. The survey covered 500 firms with sales of over $500 million based in 11 countries including the United States, China, Japan, Germany and Britain, and took place between 29 January 2021 and 4 March 2021.
Investor sentiment towards the office space is varied but there is no shortage of supply of capital with real estate being an attractive investment in a low yield environment and providing for an element of inflation hedge. According to global real estate company CBRE, as much as £45 billion of global capital is targeting the London office market - the largest volume since the company started tracking investment in 2012, and representing far more than the amount of available stock.
Capital markets more generally have continued a positive trajectory. The FTSE 100, FTSE 250 and the iShares UK Property ETF are up 3.9 per cent, 5.0 per cent and 2.8 per cent respectively during the first quarter of 2021. While CMBS had initially lagged the recovery in some other areas of asset backed financing at the end of 2020, the European CMBS market is now fully reopened and rerated with Bank of America reporting six primary transactions totalling €2.1bn sold in the first quarter of 2021, compared to seven deals totalling €2.8bn in all of 2020, and with spreads having tightened to be near or at pre-pandemic levels at all points in the capital structure. The European leveraged finance market which has led the CMBS market continues to perform strongly with yields now approaching all-time lows across the credit spectrum. The market has set several new records in 2021 already with the busiest quarter ever across EMEA high yield bond and leverage loan issuance, the largest ever GBP high yield bond and the tightest CCC bond ever all happening in the first quarter of 2021.
In the private lending market we continue to see an increased share of non-bank lenders in the market in Europe. A prime recent example was for the financing of the acquisition financing for Bourne Leisure mentioned above. Starwood Capital Group led the execution of the deal as Mandated Lead Arranger with Starwood Capital Group affiliates, Starwood Property Trust and Starwood Real Estate Income Trust providing £720 million of the £1.8 billion acquisition loan and the remainder of the debt also being provided by non-bank lenders. Starwood has benefitted from being an early mover in the non-bank commercial property lending space and the total loan book managed by Starwood in Europe is now in excess of £3 billion. The Investment Adviser has an attractive pipeline of further opportunities and is well positioned to support further growth in European lending for the Group and the other funds it advises.
Share Price / NAV at 31 March 2021
Key Portfolio Statistics at 31 March 2021
(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 LIBOR/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.
*excludes any permitted extensions. Note that borrowers may elect to repay loans before contractual maturity.
*the currency split refers to the underlying loan currency, however the capital on all non-sterling exposure is hedged back to sterling.
For further information, please contact:
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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