DJ SWEF: December 2020 Fact Sheet
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: December 2020 Fact Sheet
22-Jan-2021 / 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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22 January 2021
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
December 2020 is available at:
www.starwoodeuropeanfinance.com
Investment Portfolio at 31 December 2020
As at 31 December 2020, the Group had 18 investments and commitments of GBP490.1 million as follows:
Sterling equivalent Sterling equivalent unfunded Sterling Total (Drawn and
balance (1) commitment (1) Unfunded)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel & Residential, UK GBP49.9 m GBP49.9 m
Office Scotland GBP4.8 m GBP0.2 m GBP5.0 m
Office, London GBP13.3 m GBP7.3 m GBP20.6 m
Residential, London GBP24.5 m GBP1.1 m GBP25.6 m
Hotel, Oxford GBP16.7 m GBP6.3 m GBP23.0 m
Hotel, Scotland GBP27.2 m GBP15.5 m GBP42.7 m
Hotel, Berwick GBP10.5 m GBP4.5 m GBP15.0 m
Logistics Portfolio, UK GBP12.0 m GBP12.0 m
(2)
Total Sterling Loans GBP183.9 m GBP34.9 m GBP218.8 m
Three Shopping Centres, GBP33.3 m GBP33.3 m
Spain
Shopping Centre , Spain GBP15.4 m GBP15.4 m
Hotel, Dublin GBP54.2 m GBP54.2 m
Hotel, Spain GBP47.7 m GBP1.3 m GBP49.0 m
Office & Hotel, Madrid, GBP16.7 m GBP0.9 m GBP17.6 m
Spain
Mixed Portfolio, Europe GBP29.5 m GBP29.5 m
Mixed Use, Dublin GBP3.2 m GBP10.1 m GBP13.3 m
Office Portfolio, Spain GBP19.3 m GBP2.0 m GBP21.3 m
Office Portfolio, Ireland GBP31.8 m GBP31.8 m
Logistics Portfolio, GBP5.9 m GBP5.9 m
Germany (2)
Total Euro Loans GBP257.0 m GBP14.3 m GBP271.3 m
Total Portfolio GBP440.9 m GBP49.2 m GBP490.1 m 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.
Portfolio Update
All loan interest and scheduled amortisation payments up to the date of this factsheet have been paid in full and on time.
Notwithstanding the pandemic-related disruption continuing to be experienced, the portfolio continues to be robust and portfolio performance is in line with expectations. In the sectors that are most impacted, hospitality and retail, borrowers remain adequately capitalised and are projecting to continue to pay loan interest and capital repayments despite the latest lockdown measures, with realistic pandemic related business plans in place to deal with any underlying income displacement being experienced.
Key updates are outlined below;
Hospitality (35.7 per cent of Investment Portfolio) - The largest hotel exposure (Hotel, Dublin), at 27 per cent of hospitality exposure, continues to benefit from a
licence in place to the Irish Government's Health Service Executive. This has de-risked the impact of the pandemic
in the medium term. In addition, the sponsor has continued to work on their wider business plan in relation to the
extensive land adjacent to the hotel that also forms part of the loan's collateral. In the last quarter, the
sponsor has been successful in achieving planning permission for a residential scheme of over 220 apartments on a
small island site that forms part of the wider land collateral. This has enhanced the value and future liquidity of
this site. - The UK hotel exposures (Hotel Oxford, Scotland and North Berwick, accounting for 35 per cent of hotels in the
portfolio) all successfully re-opened during the summer following the lifting of domestic travel restrictions.
Trading was generally positive despite the backdrop of the wider market uncertainty. This reflected the domestic
demand for staycation breaks in the UK, particularly for leisure destinations with nearby outdoor facilities such
as golf which is offered by the Hotel Scotland and North Berwick. This trend is expected to continue into 2021 with
market commentators such as VisitBritain.org forecasting that the recovery of domestic tourism in 2021 will be
significantly stronger than inbound tourism. While 2021 is not expected to recover to pre-Covid-19 levels,
VisitBritain.org (as of mid December 2020) forecast that the value of domestic tourism spending could reach up to
84 per cent of 2019 levels by December 2021. All three of these UK hotels have comprehensive re-positioning capex
plans in place, which sees each sponsor injecting material additional equity into the properties. In line with the
underwritten capex plan, each hotel has now closed and refurbishment projects are underway as planned, thereby any
planned revenue from these sites are not impacted by the current Covid-19 restrictions in the UK. The hotels will
re-open during 2021 with attractive new brands and a fully refurbished offering which is expected to be well placed
to benefit from pent up UK domestic leisure travel demand. - Hotel, Spain (accounting for 30 per cent of hospitality exposure) completed a heavy refurbishment project in late
summer 2020 and opened for a very successful short marketing period before closing for winter 2020/21. The
underwritten business plan and hotel operating model sees this hotel closing annually during the winter months in
any event. Ordinarily the hotel would open in April 2021, however contingency plans are in place to delay this
should substantial travel restrictions remain in place by that time. The sponsor remains well capitalised to fund
any operational cash shortfalls in the event of further delays to opening. Forward customer bookings for summer
2021 are strong and the hotel is expected to trade well once the pandemic restrictions are lifted. - All hospitality loans have adequate resources to meet their cash needs in the medium term.
Retail (12.9 per cent of Investment Portfolio) - Retail re-opened across Europe during summer 2020 following the lifting of local restrictions, before new measures
to reduce the autumn / winter virus infection rates were re-introduced. By September 2020 we saw encouraging signs
of footfall and sales recovery, whereby on the Group's largest retail loan exposure (a portfolio of three shopping
centres), footfall had recovered on a weighted average basis to approximately 92 per cent of the prior year
comparable month. - While new restrictions introduced in late Q4 2020 and early 2021 have meant that footfalls and sales have again
materially reduced, the sponsors have worked intensively to support tenants by signing specific pandemic related
discounts in line with wider industry practice. As part of these pandemic related tenant measures, the sponsors
have also extended the term certain under leases, which is advantageous and provides greater certainty of future
income. The impact of supporting tenants during the pandemic has meant that occupancy has remained robust, with a
weighted average occupancy decline across the four centres of only 1% since mid-2020. - Loans with retail exposure continue to have adequate cash reserves to pay interest, with detailed business plans in
place to deal with any underlying income displacement related to granting tenants concessions during shutdown and
recovery periods.
Construction & Heavy Refurbishment (21.2 per cent of Investment Portfolio) - The Group's construction and heavy refurbishment exposure has decreased by 28 per cent since mid-2020 with the
successful completion of the Hotel, Spain project in late summer and completion of the London Residential project. - While some construction programme disruption has been experienced by mandated site shutdowns and the adjustment of
work practices to new Covid-19 related industry regulations, all sites re-opened in summer 2020. Despite the latest
restrictive measures introduced in December 2020, construction sites in the UK remain open. Construction sites in
the Republic of Ireland were mandated by the government to close on 8th January 2021, however we note that the
Group's exposure to Irish construction loans is limited to under 1 per cent of loans invested as of 31 December
2020. In any event all construction loans remain adequately capitalised with funding in place to complete projects. - Please note that the construction & heavy refurbishment exposure noted above will include assets also included in
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DJ SWEF: December 2020 Fact Sheet -2-
Hospitality and in Office, Industrial, Logistics & Residential.
Office, Industrial, Logistics & Residential (45.5 per cent of Investment Portfolio) - These sectors continue to display resilient characteristics in terms of rent collection. - All of the Group's material exposure to residential is either under construction or newly completed, held for-sale
product. Residential sales of both completed and under construction units have continued throughout the pandemic.
Factors such as stamp duty reductions, weak Sterling and continued foreign investor interest in the capital have
assisted in incentivising purchasers to transact. Average selling prices continue to track ahead of underwritten
values on the residential portfolio. - The Logistics and Industrial portfolios are proving to be very robust with property sales continuing to transact
during the second half of 2020 at prices ahead of underwritten levels.
Current and Future Dividend
On 21 January 2021, the Directors declared a dividend in respect of the fourth quarter of 1.625 pence per Ordinary Share, equating to an annualised 6.5 pence per annum. As announced on 24 July 2020, from 1 January 2021 the Board intends to target a dividend of 5.5 pence per annum (payable quarterly) which reflects the broader lower interest rate environment. This will provide a more sustainable level of dividend which should be fully covered by earnings whilst ensuring the Company maintains strong credit discipline. For the year ended December 2020 6.5 pence was paid out in dividends which was covered 0.9x by earnings (excluding unrealised FX gains). The Company maintains a dividend reserve which was partially utilised to ensure dividends were not paid out of capital. .
Expected Credit Losses (ECLs)
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 Recognise a loss allowance equal to 12 months expected credit losses resulting from default events
Recognition that are possible within 12 months.
After initial recognition:
Credit risk has not increased significantly since initial recognition.
Stage 1
Recognise 12 months expected credit losses.
Credit risk has increased significantly since initial recognition.
Stage 2 Recognise lifetime expected losses.
Interest revenue recognised on a gross basis.
Credit impaired financial asset.
Stage 3 Recognise lifetime expected losses.
Interest revenue recognised on a net basis (i.e. losses are "above the line" and impact P&L and NAV).
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 31 December 2020 six loans with a value of 35.3 per cent of NAV are classified as Stage 2 (the six loans are unchanged since 30 June 2020 and 30 September 2020 when they represented 33 per cent and 35.2 per cent of NAV respectively and are as disclosed in the Group's interim reporting dated 30 June 2020) and the remaining loans are still classified as Stage 1. The loans classified to Stage 2 are predominantly in the retail and hospitality sectors (but not all hospitality loans are in Stage 2). The main reason for moving the loans to Stage 2 in the second quarter was expected income covenant breaches due to the disruption from Covid-19 and there has been no material update to our analysis in this respect during the last six months.
It is important to note that although these six loans have been classified as Stage 2 no ECLs have been recognized. 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".
Although credit risk has increased for these loans we have considered a number of scenarios and as a result of these do not currently expect to realise a loss in the event of a default (i.e. the last part of the formula above is considered to be zero for all loans).
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. The position on any potential ECLs on the Spanish retail assets in particular continues to be closely monitored and analysed, and we have sought input, analysis and commentary from Spanish market advisers in this regard, to supplement our own information. Although we continue to update the information available and have yet to receive the Company's external valuation appraisal of certain underlying assets secured against the Company's respective loans, at this point in time we have no reason to believe that any ECLs should be recognised against any of the loans determined to be Stage 2. The reasons, estimates and judgements supporting our current assessment are as follows: - Significant headroom on the loans based on the last independent valuations received with an LTV of 67.9 per cent.
These valuations were received in the first quarter of 2019 and are currently being updated (although we have
worked with local market experts to revise our own estimates to date); - The performance of the centers where local restrictions were lifted following the first wave of Covid-19 was very
encouraging for future recovery with the sites on average in September 2020 reaching 92 per cent of comparable
month prior year footfall and we expect this will re-occur; - We have determined that although there is pressure in this market, it is unlike the UK retail market as we are
currently seeing no evidence of significant liquidations in the Spanish retail market; - We believe that following the rollout of the vaccine and the loosening of lockdown restrictions, income in the
centers is well positioned to recover as a result of the above; and - We have reviewed valuations of listed peers of the borrower and valuations have not moved materially and therefore
currently judge that the revised valuation on these assets, which is being appraised by the same market experts, is
unlikely to result in an ECL being recognized.
As ordinary course, the Company is currently seeking to update its independent valuations on its Spanish retail assets which, together with the borrower reporting due to be received during January, will form part of the information we use in our assumptions and estimates as we continue to keep the ECLs under review and consider the NAV production for the financial statements as at 31 December 2020. In addition to helping ensure the valuation encompasses more recent comparable market movements and for changes in the underlying cash flows and forecasts, such independent valuations aid the Company in ensuring accurate testing of the LTV covenant.
Fair Value
The amortised cost loan recognition is governed by IFRS9 and we do not have a choice of methodology to follow - we are not eligible to follow fair value accounting for the vast majority of our loans, and in our eight year history only one loan has ever been eligible to be recognized at fair value (the credit linked notes which repaid in the second quarter of this year). Therefore our NAV does not show significant fluctuations during periods of market volatility.
The table below represents the fair value of the loans based on a discounted cash flow basis using different discount rates.
Discount Rate Value Calculated % of book value 4.8% GBP 464.6 m 104.9% 5.3% GBP 458.9 m 103.7% 5.8% GBP 453.4 m 102.4% 6.3% GBP 448.0 m 101.2% 6.8% GBP 442.7 m = book value 100.0% 7.3% GBP 437.4 m 98.8% 7.8% GBP 432.3 m 97.7% 8.3% GBP 427.3 m 96.5% 8.8% GBP 422.4 m 95.4%
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