Starwood European Real Estate Finance Ltd (SWEF)
SWEF: March 2020 Factsheet
24-Apr-2020 / 07:00 GMT/BST
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24 April 2020
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Starwood European Real Estate Finance Limited: Quarterly Factsheet
Publication
Starwood European Real Estate Finance Limited (the "Company") announces that
the factsheet for the quarter ended on 31 March 2020 is available at:
www.starwoodeuropeanfinance.com [1]
Extracted text of the commentary is set out below:
Investment Portfolio at 31 March 2020
As at 31 March 2020, the Group had 18 investments and commitments of GBP517.6
million as follows:
Sterling equivalent Sterling equivalent
balance (1) unfunded commitment
(1)
Hospitals, UK GBP25.0m -
Credit Linked Notes, UK GBP21.8m -
real estate
Hotel & Residential, UK GBP49.9m -
Office, Scotland GBP4.5m GBP0.5m
Office, London GBP12.8m GBP7.8m
Residential, London GBP39.0m GBP4.2m
Hotel, Oxford GBP16.7m GBP6.3m
Hotel, Scotland GBP25.9m GBP15.5m
Hotel, Berwick GBP10.5m GBP4.5m
Total Sterling Loans GBP206.1m GBP38.8m
Three Shopping Centres, GBP33.2m GBP5.7m
Spain
Shopping Centre, Spain GBP15.1m -
Hotel, Dublin, Ireland GBP53.3m -
Hotel, Spain GBP34.1m GBP14.1m
Office & Hotel, Madrid GBP16.4m GBP0.9m
Mixed Portfolio, Europe GBP34.2m -
Mixed Use, Dublin GBP1.7m GBP11.4m
Office Portfolio, Spain GBP18.9m GBP2.4m
Office Portfolio, GBP31.3m
Dublin
Total Euro Loans GBP238.2m GBP34.5m
Total Portfolio GBP444.3m GBP73.3m
1) Euro balances translated to sterling at period end exchange rates.
First Quarter Portfolio Activity
The following portfolio activity occurred in the first quarter of 2020:
New Loan, Office Portfolio, Ireland: on 2 January 2020, the Group committed
to an investment in a c. 6 year floating rate loan secured by a portfolio of
assets in Ireland, together with Starwood Property Trust, Inc (through a
wholly owned subsidiary) participating in 50 per cent of the mezzanine loan
amount, providing the Group with a net commitment of &euro35.15 million. The
portfolio consists of 12 properties in Central Dublin with primarily office
and some small amounts of retail and residential space totalling over
600,000 sqf in total. The portfolio currently has 98.8 per cent occupancy.
New Loan: Hotel, North Berwick, Scotland: On 12th February 2020, the Group
committed to fund a hotel acquisition financing for a total commitment of
GBP15.0 million. The sponsor is a repeat borrower for the Group. The
financing, which has been provided in the form of a significant initial
advance to finance an asset acquisition together with a smaller capex
facility, will support the sponsor's capital expenditure for improvement and
rebranding of the hotel. The day one advance amount is GBP10.5 million whilst
the total commitment is GBP15.0 million. The loan is for a term of 5 years.
Loan Upsize: Hotel & Residential, UK: On 27th February 2020 the Group also
committed to fund a GBP20.0 million upsize to an existing fixed rate mezzanine
loan to support the development of a mixed-use scheme in London. Starwood
Property Trust, Inc (through a wholly owned subsidiary) is participating in
50 per cent of the loan amount, providing the Group with a net commitment of
GBP10.0 million. The remaining loan term is 1.75 years with a 1 year extension
option.
Loan Repayments & Amortisation: the following loan repayments and material
amortisation were received during the first quarter:-
· a full and final repayment of the &euro16 million loan on an office in
Paris;
· &euro11.9 million of unscheduled amortisation on the loan on the mixed
portfolio in Europe, following a portfolio of asset sales which was in
line with the borrower's business plan; and
· Full and final repayment of the mixed use development, South East UK
loan as the borrower completed their business plan.
Liquidity
The Group is very modestly levered with net debt of just GBP18.8 million at 31
March (equal to 4.4 per cent of NAV), has no repo facilities outstanding and
significant available but undrawn revolving credit facilities of GBP102
million to fund existing commitments of GBP74.8 million and carefully selected
new opportunities.
The way in which the Group's borrowing facilities are structured means that
it does not need to fund spread mark margin calls. The Group does have the
obligation to post cash collateral under its hedging facilities. However,
cash would not need to be posted until the hedges were more than GBP20 million
out of the money. The mark to market of the hedges at 31 March 2020 was just
GBP1.3 million (out of the money) and with the robust hedging structure
employed by the Group, post cash collateral has never been required since
inception.
Portfolio Overview in Light of COVID-19
The Investment Adviser is in regular dialogue with all of the borrowers in
the Group's portfolio and is working alongside them to navigate this
currently disrupted market. In the current market, the Group is particularly
focussed on its exposure to hospitality, retail and on construction and
renovation projects. Outside of these areas, whilst there is clearly
disruption in all markets and we monitor all loans closely, borrowers have
either collected the majority of rent, are expected to, and/or have adequate
interest reserves available for the short to medium term and therefore are
not discussed in further detail.
Hospitality
Hospitality was 34.1 per cent of invested assets as at 31 March 2020. Given
local requirements to close hotels in many jurisdictions and the temporary
cessation of almost all leisure and business travel, we expect to see a
significant negative impact in operational performance generally across the
hospitality sector for 2020 as a whole.
Whilst this negative impact is expected across the hospitality sector in the
near term, the Group's Investment Adviser is confident in the fundamentals
of the markets in which the assets are located and the borrower's business
plans for the assets over the medium to long term. The Group's hospitality
exposure has been structured defensively by the Investment Adviser by
conducting thorough due diligence, working with strong sponsors and
implementing robust loan structures combined with significant
diversification by jurisdiction and asset type. Each investment has a
significant cushion to real estate collateral value protecting the lender's
position.
The Group's hospitality exposure at 31 March 2020 can be further categorised
as follows:
Percentage of invested Percentage of total
assets in hospitality invested assets
Three UK hotels 35.0% 11.8%
currently closed
but with interest
reserves in place
Irish asset under 28.1% 9.6%
contract to Irish
HSE
Hotel under 22.4% 7.7%
construction with
interest
capitalised during
construction
Hotels under 7.5% 2.6%
construction but
interest paid
current
Other hotels (part 6.9% 2.4%
of mixed
portfolios)
The largest single hotel exposure is the hotel in Dublin, Ireland,
representing 28.1% of hospitality exposure at 31 March. As previously
announced, the borrower has granted a licence to the Health Service
Executive ("HSE"), Ireland's public healthcare provider, which allows the
HSE to use the Hotel and Convention Centre for accommodation and the
provision of healthcare and other important services to the Irish public.
This licence will assist the HSE with delivering significant additional
accommodation capacity and in its efforts to manage the expected increased
demand for accommodation related to the coronavirus outbreak. The contract
was effective from 26 March 2020. The Group considers that this has
significantly de-risked its hospitality exposure.
The table above also shows that 29.9 per cent of the hospitality exposure
relates to hotels which are currently under construction and therefore not
expected to be income generating during this period. The interest on the
largest loan, representing 22.4 per cent of hospitality exposure, was always
expected to capitalise during this period and has therefore had no impact on
the operating cash flows of the Group. The interest on the other hotel under
construction, representing 7.5 per cent of hospitality exposure, is paid
current and was received in full and on time at the end of March. An
interest reserve is also in place for this loan. There may of course be an
impact on the completion and opening dates of these assets in due course as
a result of the disruption to construction during this period and we
continue to monitor this closely.
The final material category relates to the three UK hotels which are
currently required to be closed by the government and represent 35 per cent
of the Group's hospitality exposure. We have been working closely with the
borrowers during this period with regards to asset safeguarding and cost
management. All loans have lender controlled cash reserves in place which
will enable interest to remain current in the near term.
Construction and renovation projects
The final major area of focus has been construction and renovation projects.
This can be further categorised as follows:
Percentage of Percentage of total
invested assets in invested assets
construction /
renovation
UK Hotel and 50.7% 11.2%
Residential under
construction - paid
current
Hotel under 34.6% 7.7%
construction -
interest capitalised
Non-hotel under 13.0% 2.9%
renovation -
interest capitalised
Non-hotel under 1.7% 0.4%
construction -
interest capitalised
The hotel under construction is discussed above. Interest on the largest
construction project, representing 50.7 per cent of construction and
renovation assets, is paid current and was paid in full and on time at the
end of March. An interest reserve is also in place for this loan. Interest
on the other projects is capitalised and therefore group cash flow is not
impacted by the current disruption.
Some sites have been required by local laws to close, others have had
progress disrupted due to social distancing measures. Whilst this will lead
to some opening delays, our underwriting on these types of loans tends to be
conservative such that we do not anticipate any material adverse impacts in
the medium term against our underwriting.
Expected Credit Losses (Impairment)
With the exception of the credit linked notes, all loans within the
portfolio are classified and measured at amortised cost as they meet the
following criteria:
· They are held within a business model whose objective is to hold the
asset in order to collect contractual cash flows; and
· The contractual terms give rise to cash flows that are solely payment of
principal and interest on principal on a specified date.
The adoption of IFRS 9 in 2018 changed the basis of impairment from an
incurred loss to an expected credit loss basis and established a three stage
approach for recognition of impairment, based on whether there has been a
significant deterioration in the credit risk of a financial asset since
initial recognition. These three stages then determine the amount of
impairment provision recognised.
At Initial Recognition Recognise a loss allowance equal to 12
months expected credit losses resulting
from default events that are possible
within 12 months.
After initial recognition:
Stage 1 Credit risk has not increased
significantly since initial recognition.
Recognise 12 months expected credit
losses.
Stage 2 Credit risk has increased significantly
since initial recognition.
Recognise lifetime expected losses .
Interest revenue recognised on a gross
basis.
Stage 3 Credit impaired financial asset.
Recognise lifetime expected losses.
Interest revenue recognised on a net
basis (i.e. losses are "above the line"
and impact P&L and NAV).
The Group has not recognised expected credit losses at initial recognition
on any of its loans.
For the purposes of classifying between stages 1 to 3 after initial
recognition, the Group considers a change in credit risk based on a
combination of the following factors:
· Underlying income performance is at a greater than 10 per cent variance
to the underwritten loan metrics;
· Loan to Value is greater than 75-80 per cent;
· Loan to Value or income covenant test results are at a variance of
greater than 5-10 per cent of loan default covenant level;
· Late payments have occurred and not been cured;
· Loan maturity date is within six months and the borrower has not
presented an achievable refinance or repayment plan;
· Covenant and performance milestones criteria under the loan have
required more than two waivers;
· Increased credit risk has been identified on tenants representing
greater than 25 per cent of underlying asset income;
· Income rollover / tenant break options exist such that a lease up of
more than 30 per cent of underlying property will be required within 12
months in order to meet loan covenants and interest payments; and
· Borrower management team quality has adversely changed.
At the end of 2019 it was considered that all loans were Stage 1. It is
likely in the current circumstances that many loans will move to stage 2
based on the criteria above. However, it is important to note that this will
not automatically mean that an expected credit loss will be recognised. This
is because the formula for calculating the expected credit loss is:
"Present Value of loan" x "probability of default" x "value of expected
loss".
The Group considers it very likely that the third part of the formula "value
of expected loss" is likely to remain as nil for most if not all loans, even
if they move from Stage 1 to Stage 2, due to the significant headroom the
Group has with an average loan to value (based on the last third party
valuations) of 62.1 per cent.
Dividend
On 23 April 2020, the Directors declared a dividend in respect of the first
quarter of 1.625 pence per Ordinary Share. This was covered 0.89x excluding
unrealised FX gains and 0.99x covered including unrealised FX gains.
The Board and Investment Adviser recognise the importance of dividends for
our shareholders. We hold a dividend reserve built up over several years
which we currently expect will enable us to maintain the dividend at 6.5
pence per annum in the short to medium term, even if the dividend is
uncovered by earnings in any quarter. As a result, dividends would therefore
not be paid out of capital reserves. The Company will keep the level of
dividend under review as the situation evolves and update shareholders as
appropriate.
Share Price Performance
At the end of the quarter, the share price traded at a significant discount
to NAV of (26.4) per cent, having started the quarter at a premium of 1.2
per cent. The discount manifested itself as a direct consequence of weak
market sentiment following the COVID-19 crisis as equity markets experienced
substantial declines. The Company's NAV has however not moved in tandem with
the share price and remained stable during the quarter, having started the
quarter at 103.24 pence and moving only marginally to 103.22 pence as at 31
March 2020. The Company has over the last financial year typically traded at
around a 2 per cent premium to NAV, and post-period has rebounded somewhat
to trade at a 9.7 per cent discount to NAV as at close of business on 23rd
April 2020.
Market Commentary and Outlook
Global markets have seen unprecedented disruption since the spread of
COVID-19 to Europe and the U.S. from early March onwards. Real estate has
been no exception with the iShares UK Real Estate ETF trading as low as
414.15 pence per share on 19 March, a decrease of 38 per cent from the start
of the year, and has subsequently recovered to 517.7 pence per share on 9
April. Due to isolation measures in place around the world, real estate
transactional and occupancy markets have both been highly impacted. On the
private transaction side, a very small number of transactions which were
already far along the closing process continue to be completed but otherwise
new transactional and financing activity has slowed to practically zero in
Europe. In addition to the issues of market uncertainties, executing real
estate transactions with a lockdown in place provides a number of practical
challenges. Considerations include the ability to visit and access the
physical real estate for inspections, surveys and appraisals, the challenges
of coordinating teams of lawyers, diligence providers, buyers, sellers and
financing parties all working remotely and in some jurisdictions the need
for physical closing meetings. For transactions that are closing, valuation
reports are currently being issued with material uncertainty caveats
reflecting the market environment.
Disruption to real estate cashflows have come through quickly. This has
appeared most immediately on the hospitality side where the income is mainly
driven by daily operational cashflows rather than longer term rents seen in
office, logistics and retail. Large parts of the world's hotel stock has
been forced to close for practical or legal reasons, although we do still
see some continuing operations, for example for healthcare related uses and
key worker isolation housing. Retail and student accommodation will also be
hit swiftly on the cashflow disruption side. Non-essential retail has been
shut down and some tenants will not be able to pay rent on time. In student
accommodation, the bulk of the major operators have provided flexibility for
the final term for students who are not in occupation as a result of
COVID-19. The disruption will not be fully contained to these asset classes
as there will also be office and industrial tenants that have issues in
income generation during the shutdown. The UK REITs provide some interesting
data as to levels of collection across the asset classes at the March rent
date with Intu reporting 29 per cent of rent collected on its retail
portfolio for the March rent date versus 77 per cent at the same time last
year; Land Securities reporting 86 per cent of rent collected on its office
portfolio for the March rent date versus 98 per cent at the same time last
year; and Segro reporting 71 per cent of rent collected on its shed
portfolio for the March rent date versus 96 per cent at the same time last
year.
On the other hand, government action to support affected industry has
equally been very rapid with over $7 trillion of fiscal policy stimulus
announced globally. Responses have varied country to country but with some
common themes around enhanced access to liquidity for banks, loan support
programs for disrupted business, business rates relief and income support
for furloughed employees. Government fiscal policies, combined with the
success and method of easing isolation measures, balanced against how
extensive the period of income disruption will be, are all factors which
will drive the final outcomes for businesses and industries. Governments
have shown they will do whatever it takes it is still too early to fully
predict the outcomes across the real estate or any other industry as to
exactly how effective this balance will be.
From a financing perspective specifically, dealing with immediate
consequences of the income disruption is taking up the vast majority of
lenders' time. The level of simultaneous income disruption is unprecedented,
thus the volume of loan actions is also on a scale beyond normal capacities.
With such a high volume of borrower requests, many origination teams are
assisting portfolio management colleagues in analysing and processing the
required amendments and waivers to allow operating assets to close and to
deal with income based and other covenant issues which have arisen due to
the effects of the lockdown. Capital markets have been disrupted with the
usually deep and liquid US CMBS market effectively closed for new issuance.
There has been a limited amount of new issuance in the real estate corporate
bond market with both Vonovia and Grand City Properties succeeding with new
issuance in early April.
Looking forwards, there are a number of uncertainties as to how the
financing market will look as and when the market reopens. On the credit
side, many lenders will look to the transaction market to provide some
stability over a number of transactions and a period of time before their
terms will be extended back to the full levels allowable under their
mandates. As such, the initial loans made by banks will likely have five to
ten per cent lower LTVs than the previous maximums they were offering. There
is uncertainty on the pricing side with CMBS new issuance markets closed and
banks still not clear as to how their term financing costs will stabilise
over the coming months. We anticipate that lenders will also experience a
lower number of repayments due to less property sales and refinancings over
the coming months which will reduce the natural churn of assets on their
books and the need to replace repaying loans with new originations to
maintain portfolio size. In addition typically after a crisis there is often
a pullback of less experienced real estate lenders who have come to the
market late.
While there is a lot of uncertainty and short term disruption, real estate
provides a long-term, robust income stream from a tangible asset with
significant capital cost to replace. The fundamental long term ability of
real estate assets to generate cashflows will remain post the disrupted
period, supporting the fundamental value of the real estate asset. The Group
has entered into the COVID-19 disrupted phase with strong credit metrics and
as such the portfolio is expected to be resilient to significant stresses.
The outlook for new investment opportunities for lenders with a flexible
mandate should be strong, however the Group will be patient in evaluating
and making new investments.
Share Price / NAV at 31 March 2020
Share price (p) 76.0
NAV (p) 103.22
Discount 26.4%
Dividend yield 8.6%
Market cap GBP314 m
Key Portfolio Statistics at 31 March 2020
Number of investments 18
Percentage of currently invested portfolio in floating 79.1%
rate loans
Invested Loan Portfolio unlevered annualised total 7.0%
return (1)
Portfolio levered annualised total return (2) 7.3%
Weighted average portfolio LTV - to Group first GBP (3) 20.8%
Weighted average portfolio LTV - to Group last GBP (3) 62.1%
Average loan term (stated maturity at inception) 4.3 years
Average remaining loan term 2.9 years
Net Asset Value GBP426.5m
Amount drawn under Revolving Credit Facilities (GBP24.1m)
(excluding accrued interest)
Loans advanced GBP424.7m
Financial assets held at fair value (including accrued GBP21.9m
income)
Cash GBP5.3m
Other net assets/ (liabilities) (including hedges) (GBP1.3m)
Origination Fees - current quarter GBP0.4m
Origination Fees - last 12 months GBP2.1m
Management Fees - current quarter GBP0.8m
Management Fees - last 12 months GBP3.2m
(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. 13
of the loans are floating rate (partially or in whole and some 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 un-invested. 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 GBP means the percentage which the total loan drawn 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.
Remaining years to Value of loans % of invested
contractual maturity* (GBPm) portfolio
0 to 1 years 15.1 3.4%
1 to 2 years 146.7 33.0%
2 to 3 years 137.8 31.0%
3 to 5 years 88.4 19.9%
5 to 10 years 56.3 12.7%
*excludes any permitted extensions. Note that borrowers may elect to repay
loans before contractual maturity.
Country % of invested assets
Spain 26.5%
UK - Central London 26.0%
Republic of Ireland 19.4%
UK - Regional England 13.5%
UK - Scotland 6.9%
Netherlands 4.2%
Germany 2.4%
Finland 1.1%
Sector % of invested assets
Hospitality 34.1%
Office 23.1%
Residential for sale 18.9%
Retail 13.3%
Healthcare 5.6%
Light Industrial 1.9%
Other 1.5%
Logistics 1.0%
Residential for rent 0.6%
Loan type % of invested assets
Whole loans 55.8%
Mezzanine 39.3%
Other debt instruments 4.9%
Currency % of invested assets*
Sterling 46.4%
Euro 53.6%
*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:
Apex Fund and Corporate Services (Guernsey) Limited as Company Secretary -
01481 735878
Vania Santos
Starwood Capital - 020 7016 3655
Duncan MacPherson
Stifel Nicolaus Europe Limited - 020 7710 7600
Mark Bloomfield
Mark Young
Nick Donovan
Maarten Freeriks
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 [1].
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.
ISIN: GG00B79WC100
Category Code: MSCM
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
Sequence No.: 60148
EQS News ID: 1028811
End of Announcement EQS News Service
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