DJ SWEF June 2020 Fact Sheet
Starwood European Real Estate Finance Ltd (SWEF)
SWEF June 2020 Fact Sheet
24-Jul-2020 / 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.
24 July 2020
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 30 June 2020 is available at:
www.starwoodeuropeanfinance.com [1]
The Company will be hosting an investor call at 10.00am on Thursday 30 July
2020. Investors who wish to listen into the call can register their interest
by contacting Starwood on swef@starwood.com and dial in details will be
provided directly to the participants. Investors are also being invited to
submit questions to the Company in advance of the call through the same
email address. A transcript of the call will be made available on the
website. Please note the conference call is not open to the media or their
third party representatives.
Extracted text of the commentary is set out below:
Update Summary
· All of the loans in the investment portfolio are paying their interest
on time
· There are no required impairments in the investment portfolio
· The Group expects a favourable environment for future investments in the
long term
· The Group has strong liquidity with net debt of GBP15.1 million at 30 June
2020 and undrawn revolving credit facilities of GBP101.9 million to fund
existing commitments
· The average loan to value across the portfolio remained at approximately
63 per cent representing a strong equity cushion
· In light of the lower interest rate environment the Group has
re-evaluated its dividend policy to create a stable, sustainable and
covered dividend level for the long term
· The Group will continue to pay a dividend of 6.5 pence per share through
2020 and will target to pay 5.5 pence per share thereafter. More
information on the dividend can be found below and in the accompanying
investor update presentation, which is available on the Company's website
at: www.starwoodeuropeanfinance.com
Investment Portfolio at 30 June 2020
As at 30 June 2020, the Group had 18 investments and commitments of GBP514.7
million as follows:
Sterling equivalent Sterling equivalent
balance (1) unfunded commitment
(1)
Hospitals, UK GBP25.0m -
Hotel & Residential, UK GBP49.9m -
Office, Scotland GBP4.6m GBP0.4m
Office, London GBP13.0m GBP7.6m
Residential, London GBP37.0m GBP2.7m
Hotel, Oxford GBP16.7m GBP6.3m
Hotel, Scotland GBP25.9m GBP15.5m
Hotel, North Berwick GBP10.5m GBP4.5m
Logistics Portfolio, GBP12.0m -
UK(2)
Total Sterling Loans GBP194.6m GBP37.0m
Three Shopping Centres, GBP34.1m GBP5.9m
Spain
Shopping Centre, Spain GBP15.6m -
Hotel, Dublin, Ireland GBP55.0m -
Hotel, Spain GBP40.1m GBP9.5m
Office & Hotel, Madrid GBP17.0m GBP0.9m
Mixed Portfolio, Europe GBP31.3m -
Mixed Use, Dublin GBP2.0m GBP11.5m
Office Portfolio, Spain GBP19.6m GBP2.4m
Office Portfolio, GBP32.2m -
Dublin
Logistics Portfolio, GBP6.0m -
Germany(2)
Total Euro Loans GBP252.9m GBP30.2m
Total Portfolio GBP447.5m GBP67.2m
1) Euro balances translated to sterling at period end exchange rate.
2) Logistics Portfolio, UK and Logistics Portfolio, Germany is one single
loan agreement with sterling and Euro tranches.
Second Quarter Portfolio Activity
The following portfolio activity occurred in the quarter:
New Loan, Logistics, UK and Germany: On 17 June 2020, the Group closed an
investment in the funding of a EUR 71.9 million, 36 month floating rate
senior loan secured by a portfolio of industrial/logistics assets in the UK
and Germany. The investment has been made alongside Starwood Property Trust,
Inc (through a wholly owned subsidiary) with the Group participating in
EUR 20 million (27.8 per cent) of the senior loan amount. The Group expects
the transaction to generate attractive risk-adjusted returns, in line with
its stated investment strategy.
Loan Repayments & Amortisation: the following loan repayments and material
amortisation was received during the quarter:-
· Credit Linked notes: a full and final repayment of the GBP21.8 million
loan;
· Mixed Portfolio, Europe: EUR 4.3 million of unscheduled amortisation
following asset sales; and
· Residential, London: GBP3.5 million of amortisation following the sale of
residential units.
Following the activity noted above, in addition to drawdowns on existing
commitments of GBP6.9 million, the Group had approximately GBP447.5 million of
total loans advanced across 18 investments with GBP67.2 million of unfunded
commitments. The average loan to value across the portfolio remained at
approximately 63 per cent representing a strong equity cushion.
Liquidity
The Group is very modestly levered with net debt of GBP15.1 million (3.5 per
cent of NAV) at 30 June 2020, has no repo facilities outstanding and
significant liquidity available with undrawn revolving credit facilities of
GBP101.9 million to fund existing commitments as summarised below.
As at 30 June 2020 GBP million
Drawn on Group debt facilities (24.1)
Cash at hand 9.0
Net Debt (15.1)
Undrawn Debt Facilities available to Group 101.9
Undrawn Commitments to Borrowers (67.2)
Available Capacity (cash + undrawn facilities - 43.7
commitments to borrowers)
As described in our last factsheet, the way in which the Group's borrowing
facilities are structured means that it does not need to fund mark to market
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 30 June 2020 was just GBP4.5 million (out of the
money) and with the robust hedging structure employed by the Group, cash
collateral has never been required to be posted since inception.
Current and Future Dividend
On 23 July 2020, the Directors declared a dividend in respect of the second
quarter of 1.625 pence per Ordinary Share, equating to an annualised 6.5
pence per annum. This was covered 0.95x by earnings excluding unrealised FX
gains. We expect the dividend cover to reduce to approximately 0.87x during
the second half of the year following the repayment and amortisation
received in the second quarter.
The Board and Investment Adviser recognise the importance of stable and
predictable dividends for our shareholders. Accordingly, we hold a dividend
reserve built up over several years which we have been using to maintain the
annual dividend at 6.5 pence per share over the last eighteen months even
though the dividend has been uncovered by earnings more recently. As a
result of this reserve, dividends have not therefore been paid out of
capital reserves. The Company intends to continue to use the remaining
reserve to maintain the annual dividend at 6.5 pence per share for the rest
of 2020 which will leave a small reserve remaining.
In the period since the Group's inception, the Bank of England base rate has
reduced from 0.50 per cent to 0.10 per cent. The average 5 year GBP swap
rate from inception to year end 2019 was 1.16 per cent, compared to 0.13 per
cent at 30 June 2020 representing a fall of over 1 per cent on the average.
At inception LIBOR / EURIBOR might have contributed up to 10 per cent of the
company's underlying return profile, today it makes up less than 1 per cent.
In light of the declining interest rate environment, from 1 January 2021 the
Group intends to reduce the dividend target to 5.5 pence per annum (payable
quarterly) which, in the Board and the Investment Adviser's view, is a more
sustainable level of dividend which should be fully covered by earnings
whilst ensuring we maintain our strong credit discipline whilst managing
risk. On the share price at 30 June 2020, a dividend of 5.5 pence per annum
represents an attractive 6.4 per cent dividend yield.
Portfolio Overview in Light of Covid-19
All loan interest up to the date of this factsheet has been paid in full and
on time and future interest payments are expected to be paid in full based
on the forecast gradual continued easing of lockdowns across the UK and
Europe.
On 19 June 2020 the Group published an update on the performance of the
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loans during Covid-19. The key points are summarised below by sector.
Hospitality (34.7 per cent of Investment Portfolio)
· The hospitality industry has been most affected by the Covid-19
pandemic.
· The largest hotel exposure (Hotel, Dublin) has granted a licence to the
Health Service Executive which has significantly de-risked its hospitality
exposure.
· Four hotels, which equates to 40 per cent of hotels in the portfolio had
to close during the pandemic.
· All hotels are now open and operational, aside from the Spanish hotel
which remains under construction and is due to achieve practical
completion in Q3 2020.
· Every hospitality loan within the Group's loan book continued to pay
interest on time.
· All hospitality loans have adequate resources to meet their cash needs
for the medium term.
Retail (12.7 per cent of Investment Portfolio)
· The retail sector has also been hard hit by the Covid-19 pandemic. This
is on the back of a number of difficult trading years for the retail
"bricks and mortar" sector as a whole.
· Across Europe almost all non-essential retail assets were shut for a
number of months. These retail assets are now beginning to open once again
and start to become operational.
· In some parts of the retail market we have witnessed footfall return to
as much as 70 per cent of its pre-Covid level. However, we do expect to
see more insolvencies across the sector as 2020 continues.
· The Group's retail investments are either a small part of a large
portfolio of mixed assets or benefit from robust loan structures including
interest / cash reserves which will enable the borrower to weather the
storm over the medium term.
Construction (29 per cent of Investment Portfolio)
· Construction sites have continued to make progress during the Covid-19
pandemic.
· In the UK construction sites were able to remain open at all times. In
Spain and Ireland, construction sites were closed for 14 and 52 days
respectively.
· We expect to see more moderate delays to final completion in our
construction deals as a result of Covid-19.
· However, every deal remains fully funded by debt and equity with ample
contingencies and cost overrun protections to enable borrowers to mitigate
any Covid-19 impacts.
Office, Industrial (including logistics) & Residential (47 per cent of
Investment Portfolio)
· These three sectors have been the most resilient sectors during the
Covid-19 pandemic.
· Underlying office rent collections for loans with greater than 75 per
cent exposure to office remain strong at 96 per cent year to date.
· Residential sales have continued to progress well during the Covid-19
related disruption with a number of units being sold since 1 March 2020 at
premiums to underwritten values. The LTV for this segment is 59.3 per
cent.
· Underlying industrial loan rent collections remain strong at 100 per
cent year to date.
Expected Credit Losses (Impairment)
As described in our last factsheet, all loans within the portfolio are
classified and measured at amortised cost less impairment.
Under IFRS 9 a three stage approach for recognition of impairment was
introduced, 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).
Please refer to the March factsheet for details on the factors the Group
considers when classifying loans between Stages 1 to 3.
At the end of 2019 all loans were classified as Stage 1. The position as at
the end of June will be finalised once quarterly borrower reporting is
received during the course of July. Some loans may move to Stage 2 as a
result but we do not expect any loan to move to Stage 3. It is important to
note that classification to Stages 2 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 Investment Adviser has closely analysed all available information on the
value of the Group's assets as at 30 June 2020 and considers that it is
still very likely that the third part of the formula "value of expected
loss" will remain as nil for 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 approximately 63 per
cent.
The Group is unable to record the loans at fair value as the loans do not
qualify for this accounting treatment. However, we have calculated the fair
value of the loans based on a discounted cash flow basis at different
discount rates with the assumption all loans run to full maturity and the
results are shown below.
Discount Rate Fair Value % of book value
4.7% GBP473.3 m 105.4%
5.2% GBP467.0 m 104.0%
5.7% GBP460.8 m 102.7%
6.2% GBP454.8 m 101.3%
6.7% GBP448.9 m (= book value) 100.0%
7.2% GBP443.1 m 98.7%
7.7% GBP437.4 m 97.5%
8.2% GBP431.9 m 96.2%
8.7% GBP426.5 m 95.0%
The effective interest rate ("EIR") - i.e. the discount rate at which future
cash flows equal the amortised cost, is 6.7 per cent. We have sensitised the
cash flows at intervals of 0.5 per cent up to +/- 2.0 per cent of the EIR.
The table above shows that even if the Group did mark the assets to fair
value, the movement would not be significant. Further, the Group considers
the EIR of 6.7 per cent to be conservative as many of these loans were part
of a business plan which involved transformation and many of these business
plans are advanced in the execution and therefore significantly de-risked
from the original underwriting and pricing.
Share Price Performance
At the end of the quarter, the share price traded at a significant discount
to NAV of 17 per cent which has improved from a 26.4 per cent discount at
the end of the first quarter. The Board and the Investment Adviser consider
the shares to represent very attractive value at this level and individuals
at the Investment Adviser have made personal purchases during the quarter,
as disclosed by the Group.
The Company received authority at the recent AGM to purchase up to 14.99 per
cent of the Ordinary Shares in issue on 8 June 2020. The directors continue
to closely and regularly monitor the discount to NAV and will give
consideration to repurchasing Shares under this authority if appropriate.
Any share buyback would be subject to available cash not otherwise required
for commitments to borrowers, working capital purposes or the payment of
dividends.
Market Commentary and Outlook
Markets have continued to be reasonably volatile but have stabilised since
our last factsheet in April. The VIX is down from 38.2 to 27.2 having peaked
at 82.7 in March 2020. The iShares UK Property ETF is almost completely
unchanged at 495.15p on 17 July versus 495.85p three months earlier. This
more stable picture is the result of an effective campaign of unprecedented
monetary and fiscal stimulus. Overall one of the largest drivers of the
market will be the balance of these stimulus measures versus the long-term
economic effects of the disruption caused by Covid-19.
We have also seen more clarity in real estate valuation. In April real
estate valuers had been caveating their work with material uncertainty
clauses however the RICS Material Valuation Uncertainty Leaders Forum have
now recommended that central London offices, as well as all industrial and
logistics assets, no longer need a material uncertainty clause in
valuations.
The stimulus has had a great effect on the outlook for interest rates. At
the end of June the FT reported that the UK 30 year gilt was trading below
the Japanese 30 year bond. Since the Company launched in December 2012 the
30-year rate has decreased by 2.5 per cent in total. Shorter rates have
plummeted since Covid-19 with GBP Libor declining by 0.69 per cent to 0.08
per cent over the last six months. The curve is also extremely flat with the
UK 5-year swap rate also at only 0.08 per cent. Overall the lower interest
rate environment is likely to be supportive of property values with an
increasing lack of yield in the fixed income world.
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