DJ SWEF: June 2019 Fact Sheet
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: June 2019 Fact Sheet
25-Jul-2019 / 07:00 GMT/BST
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25 July 2019
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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 second quarter ended on 30 June 2019 is available at:
www.starwoodeuropeanfinance.com [1]
Extracted text of the commentary is set out below:
Investment Portfolio at 30 June 2019
As at 30 June 2019, the Group had 17 investments and commitments of GBP478.9
million as follows:
Sterling equivalent Sterling equivalent
balance (1) unfunded commitment
(1)
Hospitals, UK GBP25.0m -
Mixed use development, GBP11.1m GBP1.2m
South East UK
Regional Hotel GBP45.9m -
Portfolio, UK
Credit Linked Notes, UK GBP21.8m -
real estate
Hotel & Residential, UK GBP39.9m -
Office, Scotland GBP4.3m GBP0.7m
Total Sterling Loans GBP148.0m GBP1.9m
Logistics, Dublin, GBP13.0m -
Ireland
Hotel, Barcelona, Spain GBP41.3m -
Industrial Portfolio, GBP37.0m -
Central and Eastern
Europe
Three Shopping Centres, GBP33.0m GBP6.7m
Spain
Shopping Centre, Spain GBP15.2m -
Hotel, Dublin, Ireland GBP53.8m -
Residential, Dublin, GBP2.0m -
Ireland
Office, Paris, France GBP14.3m -
Hotel, Spain GBP26.2m GBP22.4m
Office & Hotel, Madrid GBP16.6m GBP0.9m
Mixed Portfolio, Europe GBP46.6m
Total Euro Loans GBP299.0m GBP30.0m
Total Portfolio GBP447.0m GBP31.9m
1) Euro balances translated to sterling at period end exchange rates.
Dividend
On 24 July 2019 the Directors declared a dividend in respect of the second
quarter of 1.625 pence per Ordinary Share payable on 30 August 2019 to
shareholders on the register at 2 August 2019.
Placing
On 7 May 2019, the Company announced that it was seeking to issue up to
38,200,000 new ordinary shares of no par value at 104.75 pence per share. On
13 May 2019 the Company announced that the Placing was oversubscribed and a
scaling back exercise was undertaken such that the targeted gross proceeds
of GBP40.0 million were raised.
Second Quarter Portfolio Activity
The following portfolio activity occurred in the second quarter of 2019:
· New Loan - Office Scotland: On 24 April 2019 the Group committed to
provide a GBP5 million whole loan on an office in Scotland of which GBP4.3
million has been funded to date.
· New Loan - Diversified portfolio, Europe: On 10 May 2019 the Group
committed to participate in the funding of a EUR104 million mezzanine loan
secured by a diversified portfolio of assets located in the Netherlands,
Germany and Finland. Starwood Property Trust, Inc (through a wholly owned
subsidiary) is participating in 50 per cent of the mezzanine loan amount,
with the Group funding the balance amounting to a net commitment of EUR52
million. The portfolio is comprised of 165 assets and provides strong
diversification in terms of tenant base, location and asset class. The
loan has a term of 3 years with two, 1 year extension options and the
Group expects to earn an attractive risk-adjusted return in line with its
stated investment strategy.
· Final Repayment: Irish School: On 8 May 2019 the Group received full
repayment of EUR18.85 million on the loan to an Irish School following
completion of the borrower's business plan.
The Group also received GBP29.6 million of partial loan prepayments as a
result of asset sales within the respective property portfolios. The Group
used the proceeds of amortisation, the Irish School repayment and available
cash and further drawings on its revolving credit facility to fund the new
loans. The proceeds of the placing of new equity were used to partially
repay the Group's revolving credit facilities.
Following this portfolio activity, the Group remained substantially fully
invested at 30 June 2019 with drawings of GBP18.0 million (net of cash) on its
GBP114 million credit facilities and GBP31.9 million of unfunded commitments.
Review of first half investment activity
The table below summarises the new commitments made and repayments received
in the first six months of 2015 to 2019.
H1 2015 H1 2016 H1 2017 H1 2018 H1 2019
New Commitments GBP31.3 m GBP98.9m GBP115.5m GBP147.5m GBP49.9m
Repayments & -GBP21.9 m -GBP92.1m -GBP85.2m -GBP74.1m -GBP45.9m
Amortisation
Net Increase in GBP9.4m GBP6.8m GBP30.3m GBP73.4m GBP4.0m
Commitments
The net increase in commitments during the first half of 2019, whilst still
positive, has been lower than the last two years. The explanation for the
lower than previous years increase in net commitments is seen to be one of
timing of transactions rather than an overall reduction in activity for the
reasons explained below.
1) As we have reported in previous years, the first quarter is frequently
quiet in the real estate market and we have only tended to see high levels
of activity in the first quarter when deals which were in execution during
the previous year did not complete then. This year, no deals rolled over
from 2018 and the first quarter was relatively subdued as a result.
2) The Group has a number of transactions under review and two
transactions in execution which it hopes to close early in the third
quarter. If both transactions close, this would mean that the level of
commitments made would be similar to the first half of 2018.
The Group also received a relatively low amount of repayments in the first
half of 2019. However, since the end of the second quarter, the following
repayments have been received:
· Mixed Use Development, UK - GBP8.1 million amortization following the sale
of one of the properties in line with the business plan.
· Industrial Europe - EUR26.3 million amortization following the sale of
one of the properties.
· Hotel, Barcelona, Spain - full repayment of EUR46 million following the
sale of the hotel.
·
With these repayments factored in, the repayment percentage for the first
seven months of the year is approximately 27 per cent of the loan book at
the beginning of the year. In a normal year, we expect 30-40 per cent of the
portfolio to repay on average but some years may be materially higher or
lower than the average. It is difficult to accurately predict the repayment
intention of borrowers as they execute on their business plans but we will
continue to closely monitor this throughout the second half in order to try
to minimise any potential cash drag from repayments.
The Group continues to see strong opportunities to deploy capital in our
target markets. The Investment Adviser has a number of transactions under
review which present solid risk adjusted returns.
Reported Returns
Reported returns have fallen in the second quarter from 7.3 per cent to 7.2
per cent unlevered, and from 7.8 per cent to 7.4 per cent levered. We would
expect the levered returns to increase as the loans in execution are funded
and further leverage is used for the loan portfolio.
In addition to this and as previously explained, the simplified way in which
the annual return is presented does lead to the returns being a conservative
estimate at any point in time. The following items enhance the actual
returns achieved:
· In the quoted return, we amortise all one off fees (such as arrangement
and exit fees) over the contractual life of the loan which is currently
four years for the portfolio. However, it has been our experience that
loans tend to repay after approximately 2.5 years and as such these fees
are actually amortised over a shorter period.
· Many loans benefit from prepayment provisions which mean that if they
are repaid before the end of the protected period, additional interest or
fees become due. As we quote the return based on the contractual life of
the loan, these returns cannot be forecast in the return.
· The quoted return excludes the benefit of any foreign exchange gains on
Euro loans. We do not forecast this as the loans are often repaid early
and the gain may be lower than this once hedge positions are settled.
The above three upsides to quoted returns are not incorporated in the gross
levered yield of 7.4 per cent as they are not guaranteed to occur, are
difficult to forecast accurately and to incorporate them could overstate the
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expected return. However, we expect these to continue to provide an
enhancement to the quoted levels of return going forward although the levels
of this enhancement may vary depending on when the loans repay versus
contractual maturity, the level of prepayment protection and the shape of
the sterling-euro forward curve. Over the life of the Company to date, we
have experienced, on average, an enhancement of 0.63 percentage points from
prepayments and one-off fees when loans repay and we expect the pick up on
foreign exchange to be in excess of 1 percentage point.
Finally, the Group maintains a dividend reserve to ensure that it can
maintain a stable dividend during periods where modest leverage or cash drag
can temporarily lower returns due to the timing of new loans and repayments.
Market Commentary
2019 has seen slower volumes in the commercial real estate market in Europe.
According to BNP Real Estate total investment volumes for the first quarter
of 2019 were EUR43 billion which is 21 per cent lower than in the same
period in 2018. The average hides different situations across the different
cities. In London, Brexit uncertainties have not hit volumes much more than
the average with London volume broadly in line with the European average at
23 per cent lower than last year. Germany's big markets outside of Berlin
were down significantly with Munich, Frankfurt and Hamburg down 77 per cent,
67 per cent and 61 per cent respectively. Hot markets included Milan, Berlin
and Madrid where investors are anticipating tight markets and strong rental
growth potential were up 91 per cent, 78 per cent and 12 per cent
respectively. Volume data for the second quarter was not available at the
time of writing but discussions with a number of market participants suggest
a similar trend is expected for the second quarter.
Increased expectations of further rate cuts and quantitative easing has
driven asset pricing across the board. Investors were already expecting the
ECB to supply fresh monetary stimulus to help alleviate the ongoing economic
stress within the region and the nomination of the International Monetary
Fund's Christine Lagarde to be the next ECB president has raised
expectations of continued loosening monetary policy. The EUR interest rate
curve has significantly flattened so now the 5 year swap is now in line with
3 month EURIBOR at -33 basis points. Government bond yields have continued
to push down with all European 2 year sovereign debt now yielding negative
returns and with German 10 year bonds having yielded as low as -0.4 per cent
in recent days. Even peripheral European debt such as Portugal and Greece is
trading at significantly lower yields than in recent years. Greek 10 year
bonds have priced almost as tight as at 2 per cent having been almost 20 per
cent in 2016 and Portugal is now at 0.3 per cent versus over 4.4 per cent
just 18 months ago.
With low asset yields we have seen increased formation of lower priced debt
funds and direct investing by insurance companies and pension funds in more
vanilla senior commercial real estate debt as an alternative for sovereign
and corporate bonds. Insurance companies such as Axa and Allianz have been
expanding their senior commercial real estate lending strategies and we are
seeing some new players with similar mandates emerging. We have also seen
good pricing on the two recent CMBS issuances with Morgan Stanley's Eos
(European Loan Conduit No. 35) pricing at a blended 137 bps over EURIBOR for
a 58.7 per cent Note to Value ("NTV") and Goldman and CA-CIB's cold storage
securitisation pricing at 184 bps over LIBOR for a 65.2 per cent NTV.
For other types of alternate lenders there have been a mixed bag of results.
Lendy, a peer to peer lender making small property loans was put into
administration in May after issues on its loan book including a reported 66
per cent of loans past due as of late 2018. Funding Circle, which makes
small business loans, recently reported the tougher lending criteria it was
imposing would halve its expected revenue growth for 2019. The FCA has
increased regulation in the space with investors no longer be able to put
more than 10 per cent of their investable assets into peer to peer lending
and another part of the new rules is the introduction of an appropriateness
test for investors that considers a client's knowledge and experience of
peer to peer lending. In better news, Lendinvest which provides a variety of
property finance has successfully completed its first securitisation. We
have also seen varied fortunes for the challenger banks. Oaknorth appears to
be doing well having grown its total loan book 160 per cent in a year to
GBP2.2 billion and with new commercial development loans as large as GBP60
million reported. Meanwhile fellow challenger bank Metro has had issues with
its loan book having announced it had been miscategorising the
risk-weightings for a large numbers of its loans when working out how much
capital it needed to protect against losses, which has led to reports of
weakened investor and customer confidence and a new capital raise in May.
On the UK residential side, London peaked in 2014 and according to Savills
as a whole the prime central London market has fallen 19.4 per cent in
sterling terms between June 2014 and the end of the first quarter of 2019.
The second quarter saw a return to positive house price appreciation in
London with the Nationwide reporting a 0.6 per cent quarter on quarter
growth in the second quarter of 2019. Across the market as a whole, the
number of surveyors reporting rises in the amount of new enquiries and new
instructions both increased significantly in May. This has reversed a
downward trend seen since the summer of last year. Both metrics are still
negative meaning that the majority of surveyors are still reporting falling
numbers of enquiries and instructions but with a smaller majority this
month. For the parts of the market that attract high proportions of
international buyers the continued devaluation of sterling means that
foreign buyers denominated in USD, EUR and RMB currencies are viewing the
all-in discount from peak as especially attractive in their domestic
currency basis.
As we have commented in recent factsheets, the market for UK retail debt is
yet to settle. According to Property Week the market will be tested with two
of the largest and highest quality retail assets in the UK a refinancing of
the GBP750 million Westfield Stratford CMBS coming due in November this year
and Intu reported to be looking at a refinancing of GBP1 billion of debt
secured by the Trafford Centre. It will be an interesting test of sentiment
to the sector to follow the progress of the refinancing of these very high
profile assets over the coming months.
Share Price / NAV at 30 June 2019
Share price (p) 102.00
NAV (p) 102.82
Premium/ (discount) (0.3%)%
Dividend yield 6.4%
Market cap GBP421.5 m
Key Portfolio Statistics at 30 June 2019
Number of investments 17
Percentage of currently invested portfolio in floating 81.8%
rate loans
Invested Loan Portfolio unlevered annualised total 7.2%
return (1)
Invested Loan Portfolio levered annualised total 7.4%
return (2)
Weighted average portfolio LTV - to Group first GBP (3) 23.0%
Weighted average portfolio LTV - to Group last GBP (3) 64.7%
Average loan term (stated maturity at inception) 4.0 years
Average remaining loan term 2.8 years
Net Asset Value GBP424.9m
Amount drawn under Revolving Credit Facilities (GBP45.9m)
(excluding accrued interest)
Loans advanced GBP428.6m
Financial assets held at fair value (including accrued GBP21.9m
income)
Cash GBP28.0m
Other net assets/ (liabilities) (including hedges) (GBP7.7m)
Origination Fees - current quarter GBP0.4m
Origination Fees - last 12 months GBP0.8m
Management Fees - current quarter GBP0.8m
Management Fees - last 12 months GBP2.9m
(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. 14
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
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