Starwood European Real Estate Finance Ltd (SWEF) SWEF: Quarterly
Portfolio Update 21-Jan-2022 / 07:00 GMT/BST Dissemination of a
Regulatory Announcement that contains inside information according
to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The
issuer is solely responsible for the content of this
announcement.
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21 January 2022 Starwood European Real Estate Finance Limited
Quarterly Portfolio Update 11.1 per cent Share Price Total Return
During 2021; Annual dividend yield of 5.9 per cent 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 portfolio update for
the quarter ended 31 December 2021. Highlights . Strong cash
generation - the portfolio as a whole continues to support annual
dividend payments of 5.5pence per Ordinary Share, paid quarterly,
and generates an annual dividend yield of 5.9 per cent on the share
priceas at 31 December 2021 . Income stability - all loan interest
and scheduled amortisation payments paid in full and on time . 78
per cent of the portfolio is contracted at floating interest rates
(with floors) which may benefit theGroup if higher inflation
results in higher interest rates . Portfolio robust - despite
pandemic-related disruption, the portfolio continues to perform
fully in linewith expectations . Borrowers remain adequately
capitalised and are expected to continue to pay loan interest and
capitalrepayments in line with contractual obligations . Further
strategic progress - In November 2021 the Group announced that it
had closed aGBP76 million floating rate whole loan secured by two
hotels in the United Kingdom . 11.1 per cent - Share price total
return for the year ended 31 December 2021 . 50.7 per cent - Share
price total return since inception in December 2012 . 6.6 per cent
- Annualized net asset value total return since inception in
December 2012 . Strong pipeline of opportunities - The Investment
Advisor and Manager believes the current investmentpipeline is the
strongest since the Group was established John Whittle, Chairman of
SEREF, said: "We are pleased and encouraged by SEREF's 2021
performance, which demonstrates the high quality of our portfolio.
The portfolio has continued to perform well despite the challenges
of Covid-19 to certain property sectors. The 11.1 per cent share
price total return and strong cash generation achieved during 2021
is a testament to the Investment Manager's ability to manage our
portfolio in such a way as to optimise value and returns for
shareholders regardless of the macro economic environment. In this
vein, we are pleased to note that the portfolio continues to
support annual dividend payments of 5.5 pence, yielding 5.9 per
cent on the share price as at 31 December 2021. An increasing key
area of focus for investors is, as it should be, the looming shadow
of inflation with the additional potential for interest rate rises.
Here the asset backed element of the portfolio's loans and an
impressive 78 per cent of the portfolio invested in floating rate
investments should provide enduring strong relative performance in
this environment. Our Investment Adviser and Manager continue to be
active in origination and execution as well as active management.
The Manager believes that the current investment pipeline is at its
strongest since the Company was established, and sees attractive
opportunities to create further shareholder value. Therefore I, and
the Board, look forward to the future with confidence." The
factsheet for the period is available at:
www.starwoodeuropeanfinance.com Share Price / NAV at 31 December
2021
Share price (p) 94.0
NAV (p) 103.09
Discount 8.8%
Dividend yield 5.9%
Market cap GBP384m Key Portfolio Statistics at 31 December 2021
Number of investments 19
Percentage of currently invested 78.0%
portfolio in floating rate loans
Invested Loan Portfolio unlevered 6.9%
annualised total return ^(1)
Portfolio levered annualised 7.0%
total return ^(2)
Weighted average portfolio LTV - 16.4%
to Group first GBP ^(3)
Weighted average portfolio LTV - 61.9%
to Group last GBP ^(3)
Average loan term (based on 4.9
current contractual maturity) years
Average remaining loan term 2.3
years
Net Asset Value GBP421.6m
Amount drawn under Revolving GBP8.5m
Credit Facilities (including
accrued interest)
Loans advanced (including accrued GBP414.6m
interest)
Cash GBP3.0m
Other net assets (including GBP12.5m
hedges)
Remaining years to Value of % of
contractual loans invested
maturity* (GBPm) portfolio
0 to 1 years 104.6 25.4%
1 to 2 years 85.3 20.7%
2 to 3 years 106.5 25.8%
3 to 5 years 115.6 28.1% maturity.
Country % of invested assets
UK 56.8%
Republic of Ireland 19.9%
Spain 16.9%
Netherlands 2.9%
Germany 2.6%
Finland 0.9%
Sector % of invested assets
Hospitality 40.8%
Office 22.1%
Retail 12.4%
Residential 11.3%
Healthcare 6.1%
Life Sciences 4.7%
Light Industrial 1.2%
Logistics 1.2%
Other 0.2%
Loan type % of invested assets
Whole loans 64.4%
Mezzanine 35.6%
Currency % of invested assets*
Sterling 56.8%
Euro 43.2% 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. 16 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/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. Portfolio changes during the quarter ended 31 December 2021 In November 2021 the Group announced that it closed a GBP76 million floating rate, acquisition and capital expenditure whole loan secured on a portfolio of two UK based hotel assets. This loan was closed in conjunction with Starwood European Real Debt Finance I and its subsidiaries, a newly launched, Guernsey domiciled, private debt fund acting as co lender. SEREF has taken on two thirds of the GBP76 million commitment, with the private debt fund taking the other third. The loan term is five years and the Group expects to earn an attractive risk-adjusted return in line with its stated investment strategy. The portfolio consists of two hotels in attractive city centre locations in Manchester and Edinburgh. The hotels will be rebranded, targeting domestic and international visitors in two of Europe's best performing markets in 2021. Dividend On 21 January 2022, the Directors declared a dividend in respect of the fourth quarter of 1.375 pence per Ordinary Share, equating to an annualised income of 5.5 pence per annum. The Board is targeting a dividend of 5.5 pence per annum (payable quarterly) which it considers to be sustainable. Largely as a result of the early repayment of the Group's large position in the "Hotel, Spain" in July 2021 and as anticipated in the last factsheet the current year earnings did not fully cover the target dividend (but did cover over 98% of the target dividend) but the Group has a modest dividend reserve which was utilised to ensure that the target dividend was met. Given the extremely attractive environment for the Group's investment strategy it is anticipated that the dividend will swiftly return to full coverage from earnings during the course of 2022 with any excess cash generated being used to replenish dividend reserves. Portfolio Update The portfolio continues to perform robustly despite the backdrop of the ongoing pandemic. All loan interest and scheduled amortisation payments up to the date of this factsheet have been paid in full and on time in line with expectations. There have been no new closures of trading assets, construction or refurbishment projects as a result of the Omicron variant related disruption which emerged in late Q4 2021. The office portfolio also continues to perform very satisfactorily and we have seen positive instances of borrowers successfully leasing refurbished office space above underwritten projections and completing strong sales processes where business plans have been executed. All loans remain adequately capitalised by sponsors. All income producing assets securing the loans undergo regular third party valuations, with assets under development or heavy refurbishment typically
being valued prior to commencement of projects and upon
achieving completion. The current weighted average age of the
valuations for the income producing portfolio (i.e. excluding loans
for development or heavy refurbishment) is 1.04 years. The Group
has an average last GBP LTV of 61.9 per cent across the total loan
portfolio (see Loan to Value section below also). Key updates in
relation to pandemic impacted sectors are outlined below:
Hospitality (41 per cent of funded investment portfolio) . The
Group's hospitality exposure is currently weighted to
leisure-dominated assets located in the UK.Approximately 72 per
cent of the Group's hotel exposure is secured on assets that are
leisure focused rather thancorporate or meeting and events driven
assets. 75 per cent of the Group's hospitality exposure is located
in theUK, where over the past six months, there have been
significantly fewer restrictions on the hospitality trade thanin
other jurisdictions and these UK markets have seen strong domestic
led demand following re-opening of hotels inlate Q2 2021. .
Furthermore, approximately 72 per cent of the Group's hospitality
exposure is secured on assets that haveeither been comprehensively
refurbished during 2021, or are in a phase of refurbishment or
construction with thecapital in place to complete the projects.
These assets will therefore have a strong new product with which
tocompete and are expected to perform well in their respective
markets. . The Group's only exposure to a large meeting and event
driven hotel is "Hotel, Dublin" (approximately 25per cent of the
total hospitality exposure) which has remained subject to an
occupational contract with the IrishHealth Executive. It is
expected that this hotel will recover well once the Health
Executive vacates as the hotelis domestic market focused, with a
strong order book of customers wishing to run annual events that
have beenpostponed for up to two years. Retail (12 per cent of
funded investment portfolio) . All retail loans have continued to
pay interest and scheduled amortisation since the onset of
thepandemic. . The Group's exposure to retail is predominantly
comprised of the "Three Shopping Centres, Spain" and"Shopping
Centre, Spain" loans. These are the only stand-alone retail loans
in the portfolio and comprise 11 percent of the Group's total
funded investment portfolio and 87 per cent of total retail
exposure. All other retailexposure is contained in a limited number
of mixed use portfolios. . As previously reported, with
restrictions being eased over the second and third quarters of 2021
inEurope, along with high vaccination rates, retail footfall
traffic had recovered on average to over 70 per cent ofthe
comparable period in 2019 and this trajectory continued into mid Q4
2021 based on the latest data received upto November 2021. While
the rise of the Omicron variant is projected to have impacted
footfall in December 2021 andJanuary 2022, we generally consider
that this is likely to be a temporary setback and that footfall
will againrecover as evidenced in the second half of 2021. . The
sponsor continues active asset management of the centres, having
executed a number of new lettings tostrong tenants during 2021 and
deployed additional equity to support tenant fit out and incentives
where warranted.Tenant occupancy in the centres has continued to be
robust and is on average higher than pre-pandemic levels. Office
(22 per cent of funded investment portfolio) . There has been much
debate about the future of the office and what the quantum and
shape of demand willbe going forward. There is, however, an
established consensus that having good quality office space for
employeesto gather and collaborate is of vital importance to
business successes. The Group's exposure to office isconsidered to
be well placed and is highly diversified across eight loan
investments which comprise many underlyingindividual properties
located in eight different countries across Europe. The office
portfolios have performed wellon rent collection and occupation
during the pandemic, with all loans continuing to pay interest and
any scheduledamortization throughout. . Just under 50 per cent of
the Group's office exposure are loans where refurbishment or
constructionfacilities are in place which will result in these
assets being either brand new attractive office buildings ornewly
refurbished space upon completion of their respective projects. An
example of this was realized in Q4 2021,where the office building
secured under the "Office, London" loan, representing approximately
15 per cent of thetotal office exposure, has been successfully
pre-let to a strong tenant. The office building is located in
CentralLondon and is currently under heavy refurbishment. The rent
agreed was in line with market and ahead of thepre-pandemic
underwritten level. This letting has substantially de-risked the
Group's exposure on this loan, evenin advance of the refurbishment
project completing. The pre-letting has further demonstrated that
demand for goodquality office space remains. Market commentary and
outlook 2021 was a very active year in many markets and
transactional activity in 2022 is already high. 2021 was also a
record year for Starwood's European real estate credit business
with new business of GBP 2.8 billion and a pipeline that continues
to be at record volumes. We saw similar trends in other areas of
non-bank lending to real estate. European CMBS volume in 2021 was
three times higher than in 2020 and over twice the past 5 year
average with EUR7.2 billion of new issuance. It was a
record-breaking year in the real estate corporate bond space with
issuance in the unsecured market growing approximately50 per cent
compared to 2020. There was over EUR66 billion of new issuance in
2021 driven both by new issuers making their debut in the unsecured
market and by M&A financing. For 2021, real estate primary
supply has represented 18 per cent of total corporate supply and so
far in 2022 the trend has continued with real estate contributing
30 per cent of corporate supply year to date. In the equity markets
there were also healthy levels of activity in the real estate
sector during 2021. While full year data is not yet available,
total transaction volumes through Q3 of 2021 reported by CBRE are
at the same level as pre-pandemic data from 2019 at EUR210 billion.
In public markets 2021 volumes are significantly higher than recent
years at EUR111 billion (versus EUR51 billion, EUR72 billion and
EUR53 billion for 2018, 2019 and 2020 respectively). For the full
year real estate equities have out-performed UK equities as a
whole. The iShares UK Property ETF has increased by 25.5 per cent
versus an increase in the FTSE All-Share of 14.6 per cent. In the
early days of 2022 the markets have been dominated by inflation
considerations. New record inflation levels continue month to month
with December headline inflation for the Eurozone coming in at the
highest recorded figure since the inception of the Euro currency at
5.0 per cent. The December UK CPI rate was 5.4 per cent and in the
US the latest December CPI level at was 7.0 per cent. Much of the
increase in these inflation numbers comes from increased energy
costs, which are likely to plateau at some point. Energy prices
were up 26 per cent compared to a year earlier for the Eurozone and
29 per cent for the US. After stripping out energy and food, core
inflation was 2.6 per cent for the Eurozone and at a concerningly
elevated level of 5.5 per cent for the US. This has been reflected
in treasuries where yields for the 10-year US Treasury note were at
1.771 per cent on 14th January 2022. Yields in these treasury notes
have climbed 26 basis points in the first 10 trading days of the
year, which is the fastest rise in this period for 30 years. The
knock on effect of higher interest rates is being felt in growth
stocks with non-profitable tech in particular being negatively
impacted. Overall indices values are hiding some big differences
between winners and losers. The number of Nasdaq stocks down 50 per
cent or more is almost at a record with 40 per cent of the index's
firms having fallen by half from one-year highs. Our portfolio is
78 per cent floating rate so our returns will benefit if higher
inflation results in higher interest rates. Last week the
Investment Adviser spent time with PWC discussing their Emerging
Trends in Real Estate 2022 report where many themes resonated and
it is well worth a read. PWC found sentiment in the industry at a
high level with business confidence, profitability and headcount
indices at some of the highest levels of the last ten years. The
top four real estate business risks stated were construction costs
and resource availability, availability of suitable assets,
sustainability / decarbonisation and government intervention. It
was interesting that only a relatively low 61 per cent of
respondents were concerned about sustainability / decarbonisation.
As a rapidly changing area it will require even best in class
businesses to evolve with maturing approaches to this important
area. We can see all four of these top risks at play in the
pipeline and our loan underwriting is tailored to consider the
specific risks. For example we are seeing good opportunities for
lending in the residential development space but amongst other
things we will be particularly focussed on areas such as
appropriate cost overrun protections, understanding the carbon
impact of the project and regulatory uncertainties such as the
potential burden of new levies on developers to address historical
cladding issues in the UK. London regained the top spot from Berlin
for overall investment and development prospects in the PWC report
this year with Paris retaining third place. UK and German volumes
taken together are greater than the rest of Europe altogether. The
dynamism, volume and liquidity of the UK investment market are some
of the reasons that the UK makes up the highest proportion of our
European loan book. Furthermore, PWC's report highlights strong
investor sentiment to alternate real estate asset classes. This
is an area where we continue to see good opportunities for the
Group with investments in life sciences, healthcare, student,
leisure and hospitality already having featured. Working with high
quality operators in these specialist areas is key and the
Investment Adviser's experience and hands-on approach to
underwriting operational real estate and the operating partners
continues to position us well to serve borrowers in these markets
while achieving excellent risk adjusted returns for the Group. No
Credit Losses Recognised 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. 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.
Investment Portfolio at 31 December 2021 As at 31 December 2021,
the Group had 19 investments and commitments of GBP456.5 million as
follows:
Sterling Sterling Sterling
equivalent equivalent Total (Drawn
balance ^ unfunded and
(1) commitment ^(1) Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office, Scotland GBP5.0 m GBP5.0 m
Office, London GBP13.9 m GBP6.6 m GBP20.5 m
Hotel, Oxford GBP21.5 m GBP1.5 m GBP23.0 m
Hotel, Scotland GBP42.6 m GBP42.6 m
Hotel, North Berwick GBP14.1 m GBP0.9 m GBP15.0 m
Life Science, UK GBP19.5 m GBP7.1 m GBP26.6 m
Hotel and Office, Northern Ireland GBP12.5 m GBP12.5 m
Hotels, United Kingdom GBP30.4 m GBP20.3 m GBP50.7 m
Total Sterling Loans GBP234.4 m GBP36.4 m GBP270.8 m
Three Shopping Centres, Spain GBP29.9 m GBP29.9 m
Shopping Centre , Spain GBP14.3 m GBP14.3 m
Hotel, Dublin GBP50.3 m GBP50.3 m
Hotel, Spain GBP0.0 m GBP0.0 m
Office, Madrid, Spain GBP15.5 m GBP0.8 m GBP16.3 m
Mixed Portfolio, Europe GBP21.5 m GBP21.5 m
Mixed Use, Dublin GBP5.1 m GBP7.2 m GBP12.3 m
Office Portfolio, Spain GBP9.5 m GBP0.1 m GBP9.6 m
Office Portfolio, Ireland GBP26.6 m GBP26.6 m
Logistics Portfolio, Germany GBP4.9 m GBP4.9 m
Total Euro Loans GBP177.6 m GBP8.1 m GBP185.7 m
Total Portfolio GBP412.0 m GBP44.6 m GBP456.5 m 1. Euro balances translated to sterling at period end exchange rate. Loan to Value All assets securing the loans undergo third party valuations (as detailed above in Portfolio Update section) the current weighted average age of the valuations for the whole portfolio is 1.24 years and the current average weighted average age of the valuations for the income producing portfolio (i.e. excluding loans for development or heavy refurbishment) is 1.04 years. On the basis of the methodology and valuation processes previously disclosed (see 30 June 2020 factsheet) and including new valuations received, at 31 December 2021 the Group has an average last GBP LTV of 61.9 per cent (30 September 2021: 64.2 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
-25% 81.9% 99.5% 79.3% 78.5% 82.6%
-20% 76.8% 93.3% 74.3% 73.6% 77.4%
-15% 72.3% 87.8% 69.9% 69.2% 72.9%
-10% 68.3% 82.9% 66.1% 65.4% 68.8%
-5% 64.7% 78.6% 62.6% 62.0% 65.2%
0% 61.4% 74.6% 59.4% 58.9% 61.9%
5% 58.5% 71.1% 56.6% 56.1% 59.0%
10% 55.8% 67.9% 54.0% 53.5% 56.3%
15% 53.4% 64.9% 51.7% 51.2% 53.8% Share Price performance During the fourth quarter of 2021, the Company's share price total return of -2.7 per cent resulted in a share price total return for 2021 of 11.1%, with the share price trading between 93.3 pence and 98.8 pence and ending the quarter at 94.0 pence. As at 31 December 2021, the discount to NAV stood at 8.8 per cent, with an average discount to NAV of 6.7 per cent over the quarter, a further narrowing of the discount to NAV, from an average of 7.0 per cent in the previous quarter. The Board, the Investment Manager and Adviser continue to believe that the shares represent attractive value at this level. Note: the 31 December 2021 discount to NAV is based off the current 31 December 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)203 5303 630
Starwood Capital
Duncan MacPherson +44 (0) 20 7016
3655
Jefferies International Limited
Stuart Klein +44 (0) 20 7029
Neil Winward 8000
Gaudi Le Roux
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
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: MSCM
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.: 137973
EQS News ID: 1271143
End of Announcement EQS News Service
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