TIDMSWEF
RNS Number : 2739W
Starwood European Real Estate Finan
06 November 2014
6 November 2014
Starwood European Real Estate Finance Limited
Unaudited Interim Management Statement for the Second Half of
the Financial Year ending 31 December 2014
Starwood European Real Estate Finance Limited (the "Company") is
publishing this Interim Management Statement in accordance with DTR
4.3 of the FCA Handbook. The statement relates to the period from
30 June 2014 to 5 November 2014.
Unless otherwise noted herein, the financial information
provided in this Interim Management Statement, and the asset
valuations underlying that financial information, are as at 30
September 2014 and are unaudited. Terms used but not defined in
this Interim Management Statement shall have the same meaning as
defined in the Company's prospectus dated 28 November 2012.
Background information
The Company is registered with the Guernsey Financial Services
Commission as a closed-ended collective investment scheme. The
Company's ordinary share capital is listed on the Official List of
the UK Listing Authority and admitted to trading on the main market
of the London Stock Exchange, under the ticker "SWEF". The Company
is managed by the Guernsey-incorporated Starwood European Finance
Partners Limited, which has delegated certain functions to the
Investment Adviser, Starwood Capital Europe Advisers, LLP. Both the
Investment Manager and the Investment Adviser are indirectly
wholly-owned subsidiaries of Starwood Capital Group Global,
L.P..
The Company's share capital consists of Ordinary Shares
denominated in Sterling.
Investment Objective
The investment objective of the Company is to provide
Shareholders with regular dividends and an attractive total return
whilst limiting downside risk, through the origination, execution,
acquisition and servicing of a diversified portfolio of real estate
debt investments in the UK and Continental European markets.
Market Summary & Outlook
The following commentary is extracted from the Company's
factsheet of 30 September 2014 without amendment.
The Group is currently adopting a more cautious stance given
recent market uncertainty and our market theme remains a
fundamental real estate dichotomy.
On the positive to "warm" side was that the on-going low
interest and regulatory environment has unquestionably triggered
yet another tiresome hunt for yield. This actually includes the
banking sector - an interesting statistic the Group recently noted
was that UK SME lending from the banking sector was approximately
GBP80 billion (down from GBP120 billion at the peak) whilst
commercial real estate lending remained at approximately GBP220
billion (down from GBP250-260 billion at the peak). The relative
scale and lack of CRE loan deleveraging observed is not only
testament to the issues noted below but also that SME lending is
very capital intensive and that it remains much easier to deploy
multi-million loans in a single transaction on property. Investment
deals of low to reasonable leverage in core sectors and with good
sponsors now attract excess liquidity which has resulted in
substantial pricing decline. It should be noted however that most
"take and hold" banks remain very risk focussed and competition is
much more about pricing - lessons seem to be learnt. Special
mention is made of the UK Clearing banks which are subject to
standardised capital treatment (the so-called "Slotting" approach)
which does put them at a regulatory disadvantage to other banks
permitted to utilise advanced capital treatment methodologies that
allow them to allocate their own capital per loan. That said most
of the UK banks are Globally Systematically Important Banks
("G-SIBs") and the combination of this regulatory regime and their
own internal credit discipline does appear to be having a positive
effect of steering them to do solid well thought through business.
Where there are potential dangers in the market are those lenders
focussed on a more fuller distribution model - the Financial Crisis
firmly taught us that the incentivisation structures within such
lenders need to discourage looser lending (e.g. minimum retention
requirements).
This however does not imply that in totality markets have fully
recovered. Indeed over the year as the reality of the on-going
Asset Quality Review started to seep through, the markets were
reminded that the "cool" side of the equation remained prevalent.
The continuing requirement for European banks to further face the
implications of both non-performing and simply non-core loans is
still one of the largest issues of the global economy. In a recent
report Cushman & Wakefield estimate there remains nearly EUR600
billion of non-core real estate loans on banks' balance sheets,
with a sizeable element impaired and arguably not fully written
down to appropriate levels. The strong acceleration of loan
divestment observed over 2014 is evidence of both the scale of the
issue and the ever greater need to address. The accession of the
European Central Bank as Eurozone bank regulator in November 2014
is welcomed as a positive step towards a firm and robust reality
check on the banks' true positions.
Recent market turbulence is perhaps in fact welcomed. The sense
that markets were ahead of themselves was prevalent and, indeed,
repetition of mid 2000's anecdotes of "ever harder to find value"
were a reminder that all things are a cycle. Removing a degree of
exuberance is no bad thing and may well create tempered
opportunity.
The Asset Quality Review / Stress Test results, perhaps
unsurprisingly, were a careful balancing act. Out of 130 banks, 25
technically failed as at the cut-off date but most subsequently
passed as a result of the EUR56 billion of capital raised between
January and September. Thirteen still failed as at today, four of
which were Italian. Of EUR136 billion of newly uncovered NPL's,
EUR55 billion were from definitional harmonisation. More
interestingly, there is some scepticism the approach was really
rigorous rather than just rigorous, for example in shipping
finance, an area important for German banks, or indeed the
cornerstone assumption that sovereign defaults cannot occur. Also
fully loaded implementation of Basel III would have led to
substantial failures including four German banks. Overall
harmonisation of rules and supervision is a good thing but the
process reflects the fact the banking system still has a long way
to go not least dealing with their still high absolute leverage
levels. The ECB in any case could not afford a material failure
which is why there appears to be an almost perverse collective sigh
of relief from an already volatile market. Italy has been hit and
indeed this may further encourage speedier resolutions such as bank
mergers or bad bank creation. It also supports the Group's cautious
wait and see on this market and the on-going prohibition of Italian
investing.
In summary, the market recovery inevitably requires us to strike
a balance between the continuing opportunity and taking an
increasingly prudent approach to new business and portfolio
management.
Portfolio Summary - Key Statistics
Number of borrowers 10
Number of investments 10
----------
Percentage of currently invested portfolio
in floating rate loans (1) 48.9%
----------
Invested Loan Portfolio annualised total return
(2) 8.8%
----------
Weighted average portfolio LTV - to Group
first GBP (3) 11.3%
----------
Weighted average portfolio LTV - to Group
last GBP (3) 59.9%
----------
Average loan term 4.1 years
----------
Percentage of NAV in cash 12.4%
----------
Percentage of NAV invested in senior and whole
loans (1) 65.3%
----------
Percentage of NAV invested in second lien
and mezzanine loans (1) 15.5%
----------
Percentage of NAV invested in other debt instruments
(1) 6.6%
----------
Percentage currently invested in GBP (1) 51.5%
----------
Percentage currently invested in Euro (1) 48.5%
----------
Portfolio News
The following transactions were closed since 30 June 2014:
W Hotel, Amsterdam: The group has committed to provide EUR25
million out of a total of EUR99 million for the refinancing and
refurbishment of a new W branded hotel located in the centre of
Amsterdam. The sponsor is Liran Wizman, a highly experienced hotel
owner and key shareholder in Grand City Hotels, a highly rated
pan-European hotel management company. Expected to be completed in
the third quarter of 2015, the refurbished hotel is based on
Spuistraat, a prime location within the city and providing easy
access to transport links and attractions including the Royal
Palace and Dam Square, which the hotel adjoins.
On 15(th) September, the group completed the syndication of a
GBP13.5 million senior note on FC200 to a UK clearer.
Following the investment activity outlined above and as at 30
September 2014 the group was invested / committed as shown
below:
Balance as at Unfunded
30 September Commitments
2014
Maybourne Hotel Group, London GBP19.0 m -
-------------- -------------
West End Development, London GBP10.0 m -
-------------- -------------
Lifecare Residences, London GBP13.2 m GBP1.3 m
-------------- -------------
Heron Tower, London GBP15.7 m -
-------------- -------------
Centre Point, London GBP40.0 m -
-------------- -------------
FC200, London GBP 8.6 m GBP4.9 m
-------------- -------------
Total Sterling Loans GBP106.5 m GBP6.2 m
-------------- -------------
Retail Portfolio, Finland EUR40.8 m -
-------------- -------------
Industrial Portfolio, Netherlands EUR55.9 m -
-------------- -------------
Office, Netherlands EUR14.2 m -
-------------- -------------
W Hotel, Netherlands EUR 9.9 m EUR15.1 m
-------------- -------------
Total Euro Loans EUR120.8 m EUR15.1 m
-------------- -------------
The group is in documentation with a credit approved acquirer
for the syndication of a further EUR35.9 million in respect of the
Industrial Portfolio, Netherlands and expects to complete the
syndication of the senior note before the end of 2014.
Following this syndication the group is expected to have
approximately GBP37 million cash available for investment after
approximately GBP18 million of unfunded commitments on Lifecare,
FC200 and W Hotel (as shown above).
The key priority of the group is to ensure that cash drag is
minimised and that a stable current return is delivered to
shareholders. The subsequent swift reinvestment of these
syndication proceeds therefore is a key business focus for the
group.
Pipeline
The following commentary is extracted from the Company's
factsheet of 30 September 2014 without amendment.
A foundation stone of the formation of the group was the
emphasis on relative risk/return. It is incumbent on the group to
continue to focus on this and not simply absolute return.
The Company and Investment Manager are conscious of the desire
of investors to receive guidance on timing of surplus cash
deployment. The group's pipeline remains active and constantly
evolves. Indications on the timing of closing transactions has
always been difficult and rather than provide precise guidance, the
Company and the Investment Manager wish to reiterate their constant
focus on the balance of deployment of surplus cash whilst
maintaining a desired level of portfolio risk and
diversification.
The pipeline flexes and adapts to the changing market dynamics.
We have previously highlighted a sense that "proactive" origination
should focus on continental European markets where banking market
dislocation remains more prevalent (and is, arguably, increasing
again) balanced with the reasons that dislocation exists in the
first place. The UK offers a scale for "reactive" origination where
requests for finance are made to the Group given its market
position but balanced with the reality that a recovered market by
definition starts to offer more limited risk cushions in certain
lending scenarios.
The Investment Adviser has continued to build out its presence
in Holland due to the lack of a thriving domestic banking sector
for real estate finance. There is a sense that bank deleveraging is
offering up more CEE lending opportunities as banks look to
restructure or exit atypical deals. The Nordics continue to throw
up one-off opportunities to examine - the banking sector is
extremely healthy but still shies away from transactions with more
volatile income or where speed and/or scale are important. Finland
also is less well banked than the other Scandinavian countries.
Spain is exciting with positive economic indicators and a hunger
for capital - recent reforms are also a big positive, certainly
relative to Italy which has to date lacked the evident Spanish
focus on fundamental banking reform, legal and insolvency framework
reform, labour and market competitiveness reform and a resulting
ability for the bid/ask to be met. Starwood Capital Group's equity
business has recently purchased approximately EUR800 million of
real estate related non-performing loans ("NPLs") in Spain and the
investment has brought great insight into where a performing
lending business is required namely not just in new or current
projects but also assisting in the second stage of such NPL loan
pool purchases - the Investment Adviser can envisage for example
assisting borrowers to recapitalise investments being bought out
from loan pool purchasers at a discount. Indeed the Investment
Adviser sees a solid source of business opportunity coming from
Starwood's normal competitors in the NPL space by this approach.
Ireland has to some extent disappointed those seeking to exploit a
dislocated lending market, due to the unbelievably rapid
revitalisation of that market, evident, for example, by capital
raised by listed REITs. That said we continue to work on several
Irish transaction leads. All in all the Investment Adviser has
observed a marginal encroachment in the UK of its structured
finance patch by more traditional lenders but sees that the
original risk/return argument can be still employed by slight
geographical refocusing.
Whilst the proportion of whole loans is high at 75 per cent of
the current loan book it is expected to fall. The Group's key
access to deal flow is through the provision of whole loans but it
is now more active in the subsequent syndication of senior
positions to enhance returns through the retention of mezzanine,
especially in the UK. It would not be surprising to see a more
balanced mix of whole loans and end mezzanine emerge, as envisaged
at IPO.
Material Events and Transactions
Other than as set out above, there were no material events or
transactions to report for the period under review.
Financial Highlights
As described in the Company's prospectus, the net asset value
("NAV") and the NAV per share are both calculated monthly by the
Company's administrator.
30 June 2014 31 July 2014 31 August 30 September
2014 2014
Estimated NAV
per Ordinary share 98.91 97.98 98.91 99.28
------------- ------------- ---------- -------------
Share price 103.00 103.00 104.00 104.50
------------- ------------- ---------- -------------
Premium / (discount) 4.1% 5.1% 5.1% 5.3%
------------- ------------- ---------- -------------
Market Capitalisation GBP245.2m GBP245.2m GBP247.6m GBP248.8m
------------- ------------- ---------- -------------
Unaudited Consolidated Statement of Financial Position
As at 30 September 2014
GBP m
Assets
Cash and cash equivalents 29.4
Other receivables and prepayments 0.4
Financial assets at fair value through profit and
loss 4.4
Loans advanced 203.1
Total assets 237.3
Liabilities
Trade and other payables (0.9)
Total liabilities
Net assets 236.4
--------------------------------------------------- ------
Capital and reserves
Share capital 233.8
Retained earnings 2.6
--------------------------------------------------- ------
Total equity 236.4
--------------------------------------------------- ------
Dividends
The following commentary is extracted from the Company's
factsheet of 30 September 2014 without amendment.
The Company declared a dividend of 1.25 pence per Ordinary Share
for the first quarter of the year and 1.35 pence per Ordinary Share
for the second quarter, a total of 2.6 pence per Ordinary Share for
the first half of the year.
On 24 October 2014 the Company declared a dividend for the
period from 1 July 2014 to 30 September 2014 of 1.5 pence per
Ordinary Share, being an increase to 6.0 pence per Ordinary Share
on an annualised basis.
Based on the current syndication plans and subsequent
re-investment of those proceeds the Company remains comfortable
that it will be able to pay an annualised 7.0 pence dividend upon
completion of such syndication and reinvestment programme.
The directors place primary importance now on maintaining a
consistent dividend and ensuring, as much as possible, that cash
drag does not materially impact this aim. Any future plans to raise
additional equity will be considered against this objective.
Reports and Accounts
The Company's annual report and accounts for the financial year
ending 31 December 2014 will be made public within four months
following the period end.
The Board is not aware of any other significant events or
transactions that have occurred since 30 June 2014 and the
publication date of this interim management statement which would
have a material impact on the financial position of the
Company.
Starwood European Real Estate Finance Limited
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, DIRECTLY OR
INDIRECTLY, TO U.S. PERSONS OR INTO THE UNITED STATES, AUSTRALIA,
CANADA OR JAPAN.
This document is only directed at persons in the United Kingdom
who are investment professionals as defined in Article 19 of the
Financial Services and Markets Act 2000 (Financial Promotion) Order
2005, high net worth companies, unincorporated associations and
other persons as defined in Article 49 of that Order or others to
whom this document can lawfully be distributed or given, inside the
United Kingdom, without approval of an authorised person. Any other
person should not rely on it or act on it and any investment or
investment activity to which it relates will not be engaged in with
them.
This document is not for release, publication, or distribution,
directly or indirectly, in whole or in part, to US Persons (as
defined in Regulation S under the Securities Act of 1933, as
amended) or into or within the United States (including its
territories and possessions, any state of the United States and the
District of Columbia), Australia, Canada, Japan, or any other
jurisdiction where to do so would constitute a violation of the
relevant laws or regulations of such jurisdiction.
Past performance is no guide to the future. The value of
investments and the income from them may go down as well as up and
investors may not get back the full amount they originally
invested. The target return and target dividend yield should not be
taken as an indication of the Company's expected future performance
or results. The target return and target dividend yield are targets
only and there is no guarantee that they can or will be achieved
and they should not be seen as an indication of the Company's
actual or expected return. Statements contained herein, including
statements about market conditions and the economic environment,
are based on current expectations, estimates, projections, opinions
and/or beliefs of the Company and its investment manager. Such
statements involve known and unknown risks, uncertainties and other
factors, and undue reliance should not be placed thereon. Such
statements are necessarily speculative in nature, as they are based
on certain assumptions. It can be expected that some or all of the
assumptions underlying such statements will not reflect actual
conditions. Accordingly, there can be no assurance that any
projections, forecast or estimates will be realised. The
information presented has been obtained from sources believed to be
reliable but no representation or warranty is given or may be
implied that it is accurate or complete.
The information presented on this interim management statement
is solely for information purposes and is not intended to be, and
should not be construed as, an offer or recommendation to buy and
sell investments. If you are in any doubt as to the appropriate
course of action, we would recommend that you consult your own
independent financial adviser, stockbroker, solicitor, accountant
or other professional adviser.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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