DJ SWEF: Half Yearly Report 30 June 2019
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Half Yearly Report 30 June 2019
10-Sep-2019 / 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.
Starwood European Real Estate Finance Limited
Interim Financial Report and Unaudited Condensed Consolidated Financial
Statements
for the six-month period from 1 January 2019 to 30 June 2019
Overview
Corporate Summary
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate Finance Limited
(the "Company"), together with its wholly owned subsidiaries Starfin Public
Holdco 1 Limited, Starfin Public Holdco 2 Limited, Starfin Lux S.à.r.l,
Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l (collectively the "Group")
is to provide its 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 (including debt instruments) in the UK and the wider
European Union's internal market, focusing on Northern and Southern Europe.
Whilst investment opportunities in the secondary market are considered, the
Group's main focus is to originate direct primary real estate debt
investments.
The Group seeks to limit downside risk by focusing on secured debt with both
quality collateral and contractual protection. The typical loan term is
between three and seven years.
The Group aims to be appropriately diversified by geography, real estate
sector, loan type and counterparty. The Group pursues investments across the
commercial real estate debt asset class through senior loans, subordinated
loans and mezzanine loans, bridge loans, selected loan-on-loan financings
and other debt instruments.
STRUCTURE
The Company was incorporated with limited liability in Guernsey under the
Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with
registered number 55836, and has been authorised by the Guernsey Financial
Services Commission ("GFSC") as a registered closed-ended investment
company. The Company's ordinary shares were first admitted to the premium
segment of the UK Listing Authority's Official List and to trading on the
Main Market of the London Stock Exchange as part of its initial public
offering which completed on 17 December 2012. Further issues took place in
March 2013, April 2013, July 2015, September 2015, August 2016 and May 2019.
The issued capital during the period comprises the Company's Ordinary Shares
denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l (indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 1 Limited),
Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l (both indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 2 Limited).
The Investment Manager is Starwood European Finance Partners Limited (the
"Investment Manager"), a company incorporated in Guernsey with registered
number 55819 and regulated by the GFSC. The Investment Manager has appointed
Starwood Capital Europe Advisers, LLP (the "Investment Adviser"), an English
limited liability partnership authorised and regulated by the Financial
Conduct Authority, to provide investment advice, pursuant to an Investment
Advisory Agreement.
Chairman's Statement
Dear Shareholder,
I am delighted to present the Interim Financial Report and Unaudited
Condensed Consolidated Financial Statements of Starwood European Real Estate
Finance Limited (the "Group") for the period from 1 January 2019 to 30 June
2019.
INVESTMENT MOMENTUM
The table below summarises the new commitments made and repayments received
in the first six months of 2015 to 2019.
New Repayments & Net Increase in
Commitments Amortisation Commitments
H1 2015 GBP31.3m (GBP21.9m) GBP9.4m
H1 2016 GBP98.9m (GBP92.1m) GBP6.8m
H1 2017 GBP115.5m (GBP85.2m) GBP30.3m
H1 2018 GBP147.5m (GBP74.1m) GBP73.4m
H1 2019 GBP49.9m (GBP45.9m) GBP4.0m
The net increase in commitments during the first half of 2019, whilst still
positive, has been significantly lower than the last two years. The reason
for this is seen to be one of timing of transactions rather than an overall
reduction in activity for the reasons explained below.
- 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 were then delayed. This year, no deals rolled over from
2018 and the first quarter was relatively subdued as a result.
- The Group has a number of transactions under review and two transactions
in execution which it hopes to close 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 - GBP8.8 million amortisation following the sale
of one of the properties in line with the business plan.
? Industrial Europe - EUR26.3 million amortisation 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 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.
NAV AND SHARE PRICE PERFORMANCE
The Group's performance has been stable. The Company's shares have generally
traded at a premium to its Net Asset Value, which averaged 2.6 per cent over
the past six months. Over the first half of this financial year, and after
the payment of dividends of 3.25 pence per share, the Company's Net Asset
Value per share has increased modestly from 102.66 pence to 102.82 pence per
share.
Towards the end of the first half, the Company's shares traded for a short
period of time at a small discount but, subsequent to that period, the
shares returned to trade at a small premium to NAV. The Board will continue
to monitor the price rating of the Company's shares to NAV.
OUTLOOK
The Investment Adviser has a number of opportunities currently under review
and the Company will continue to update Shareholders by way of the quarterly
fact sheets and investment updates when deals are completed.
The Company continues to target a dividend at an annualised rate of 6.5
pence per Ordinary Share and has declared a dividend of 1.625 pence per
Ordinary Share (6.5 pence annualised) for each of the first two quarters of
2019.
The United Kingdom's imminent departure from the European Union, with or
without an agreement may represent a potential threat to the UK economy as
well as wider Europe. On a cyclical view, national economies across Europe
appear to be heading at best towards lower growth and in some cases towards
recession. The potential impact of Brexit could have a further destabilising
effect.
To some extent the impact of an unsatisfactory UK exit from the EU has
already been priced into markets and forecasts, but significant headwinds
could arise should there be an unstructured settlement. It is extremely
difficult in the circumstances to anticipate the potential impact on
markets, so your Board is keeping a particularly watchful eye on the macro
position.
GOING CONCERN
Under the UK Corporate Governance Code and applicable regulations, the
Directors are required to satisfy themselves that it is reasonable to assume
that the Group is a going concern.
The Directors have undertaken a rigorous review of the Group's ability to
continue as a going concern including a review of the ongoing cash flows and
the level of cash balances as of the reporting date as well as forecasts of
future cash flows. After making enquiries of the Investment Manager and the
Administrator and having reassessed the principal risks, the Directors
considered it appropriate to adopt the going concern basis of accounting in
preparing the Interim Financial Report and Unaudited Condensed Consolidated
Financial Statements.
BOARD COMPOSITION AND DIVERSITY
The Board previously mentioned in the 2018 annual report that it is mindful
of the need to plan for succession and to implement it in a constructive
fashion that supports and builds on a cohesive Board. In view of the
approaching 9th year anniversary of the Company's IPO, the retirement
process for the existing Directors continues to be on track and as currently
envisaged, is anticipated to commence at the AGM of the Company in May 2020.
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The Board will keep this succession plan under review and monitor its
progress with a particular focus on ensuring over time that each new
Director is equipped with the necessary skills, experience and knowledge.
The Board believes in the value and importance of diversity in the boardroom
and it continues to consider the recommendations of the Davies Report which
will be a key factor in its succession planning.
On behalf of the Board, I would like to close by thanking my fellow
Shareholders for their commitment and I look forward to updating you on the
Group's progress early next year.
Stephen Smith
Chairman
9 September 2019
Investment Manager's Report
CONTINUED INVESTMENT DEPLOYMENT
As at 30 June 2019, the Group had 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, Central GBP46.6m -
and Northern Europe
Total Euro Loans GBP299.0m GBP30.0m
Total Portfolio GBP447.0m GBP31.9m
(1) Euro balances translated to sterling at period-end exchange rates.
Between 1 January 2019 to 30 June 2019, the following significant investment
activity occurred (included in the table above):
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: MIXED PORTFOLIO, CENTRAL AND NORTHERN 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.
REPAYMENT: VARDE PARTNERS MIXED PORTFOLIO, UK:
The remaining balance of GBP1.0 million was repaid at the January 2019
interest payment date following completion of the borrower's business plan.
REPAYMENT: STUDENT ACCOMMODATION, DUBLIN, IRELAND:
The loan of EUR10.6 million was repaid on 1 March 2019 following successful
completion of the borrower's business plan.
FINAL REPAYMENT: SCHOOL, DUBLIN, IRELAND:
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.
During the period the Group continued to receive unscheduled amortisation on
other loans as borrowers continue to execute their business plans, in
particular on the following loans:
- Mixed Use Development, South East UK - GBP3.1 million
- Industrial Portfolio, Central and Eastern Europe - EUR9.4 million
- Residential, Dublin, Ireland - EUR7.5 million
- Hotel & Residential, UK - GBP1.3 million
The Group also advanced GBP14.6 million to borrowers to which it has
outstanding commitments.
PORTFOLIO STATISTICS
As at 30 June 2019, the portfolio was invested in line with the Group's
investment policy. The key portfolio statistics are as summarised below.
Number of investments 17
Percentage of portfolio currently invested 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 (including accrued income) GBP428.6m
Financial assets held at fair value through profit or GBP21.9m
loss (including associated accrued income)
Cash GBP28.0m
Other net assets/ (liabilities) (including hedges) (GBP7.7m)
Origination Fees - first 6 months GBP0.4m
Origination Fees - last 12 months GBP0.8m
Management Fees - first 6 months GBP1.4m
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 uninvested cash. The calculation is stated
after deducting 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.
Reported returns have fallen from the year end from 7.4 per cent to 7.2 per
cent unlevered, and from 8.0 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, the simplified way in which the annual return is
presented does lead to the returns being an 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 an
average of 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 impact of any foreign exchange gains /
losses on Euro loans. We do not forecast this as the loans are often repaid
early and the gain / loss may be different 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
expected return. However, these have and we expect these to continue to
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