DJ SWEF: Annual Audited Accounts 2020
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Annual Audited Accounts 2020
26-March-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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Starwood European Real Estate Finance
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2020
The Company has today published its annual financial report for the year ended 31 December 2020 and has made it
available online at www.starwoodeuropeanfinance.com.
Starwood European Real Estate Finance Limited is an investment company listed on 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.
The Group's assets are managed by Starwood European Finance Partners Limited, an indirect wholly-owned subsidiary of
the Starwood Capital Group.
Financial Highlights
Year ended Year ended
Key Highlights
31 December 2020 31 December 2019
NAV per Ordinary Share 104.18 p 103.23 p
Share Price 90.0 p 104.50 p
NAV total return (1) 6.3% 7.1%
Share Price total return (1) -7.5% 9.1%
Total Net Assets GBP426.7 m GBP426.6 m
Loans advanced at amortised cost (including accrued income) GBP442.7 m GBP390.6 m
Financial assets held at fair value through profit or loss GBP0.9 m GBP30.5 m
(including associated accrued income)
Cash and Cash Equivalents GBP2.9 m GBP36.8 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP19.5 m GBP29.7 m
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered annualised total return (1) 6.7% 7.1%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Ongoing charges percentage (1) 1.0% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 18.2% 18.4%
Weighted average portfolio LTV to Group last GBP (1) 61.8% 63.0%
(1) Further explanation and definitions of the calculation is contained in the section "Alternative Performance Measures" at the end of this financial report.
Full text of annual financial report for the year ended 31 December 2020
Overview
Objective and Investment Policy
INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate Finance Limited (the "Company"), together with its 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 in the UK and the European Union's internal market.
INVESTMENT POLICY
The Company invests in a diversified portfolio of real estate debt investments in the UK and the European Union's internal market. Whilst investment opportunities in the secondary markets will be considered from time to time, the Company's predominant focus is to be a direct primary originator of real estate debt investments on the basis that this approach is expected to deliver better pricing, structure and execution control and a client facing relationship that may lead to further investment opportunities.
The Company will attempt to limit downside risk by focusing on secured debt with both quality collateral and contractual protection.
The Company anticipates that the typical loan term will be between three and seven years. Whilst the Company retains absolute discretion to make investments for either shorter or longer periods, at least 75 per cent of total loans by value will be for a term of seven years or less.
The Company's portfolio is intended to be appropriately diversified by geography, real estate sector type, loan type and counterparty.
The Company will pursue 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. The split between senior, subordinated and mezzanine loans will be determined by the Investment Manager in its absolute discretion having regard to the Company's target return objectives. However, it is anticipated that whole loans will comprise approximately 40-50 per cent of the portfolio, subordinated and mezzanine loans approximately 40-50 per cent and other loans (whether whole loans or subordinated loans) between 0-20 per cent (including bridge loans, selected loan-on-loan financings and other debt instruments). Pure development loans will not, in aggregate, exceed 25 per cent of the Company's Net Asset Value ("NAV") calculated at the time of investment. The Company may originate loans which are either floating or fixed rate.
The Company may seek to enhance the returns of selected loan investments through the economic transfer of the most senior portion of such loan investments which may be by way of syndication, sale, assignment, sub-participation or other financing (including true sale securitisation) to the same maturity as the original loan (i.e."matched funding") while retaining a significant proportion as a subordinate investment. It is anticipated that where this is undertaken it would generate a positive net interest rate spread and enhance returns for the Company. It is not anticipated that, under current market conditions, these techniques will be deployed with respect to any mezzanine or other already subordinated loan investments. The proceeds released by such strategies will be available to the Company for investment in accordance with the investment policy.
Loan to Value ("LTV")
The Company will typically seek to originate debt where the effective loan to real estate value ratio of any investment is between 60 per cent and 80 per cent at the time of origination or acquisition. In exceptional circumstances that justify it, the ratio may be increased to an absolute maximum of 85 per cent. In any event, the Company will typically seek to achieve a blended portfolio LTV of no more than 75 per cent (based on the initial valuations at the time of loan origination or participation acquisition) once fully invested.
Geography
The Company's portfolio will be originated from the larger and more established real estate markets in the UK and European Union's internal market. UK exposure is expected to represent the majority of the Company's portfolio. Investment in the European Union's internal market will mainly be focused on Northern and Southern Europe. Northern European markets include Germany, France, Scandinavia, Netherlands, Belgium, Poland, Switzerland, Ireland, Slovakia and the Czech Republic. Southern European markets include Italy and Spain. The Company may however originate investments in other countries in the European Union's internal market to the extent that it identifies attractive investment opportunities on a risk adjusted basis.
The Company will not invest more than 50 per cent of the Company's NAV (calculated at the time of investment) in any single country save in relation to the UK, where there shall be no such limit.
In the event that a member state ceases to be a member of the European Union's internal market, it will not automatically cease to be eligible for investment.
Real Estate Sector and Property Type
The Company's portfolio will focus on lending into commercial real estate sectors including office, retail, logistics, light industrial, hospitality, student accommodation, residential for sale and multi-family rented residential. Investments in student accommodation and residential for sale are expected to be limited primarily to the UK, while multi-family investments are expected to be limited primarily to the UK, Germany and Scandinavia. Further, not more than 30 per cent, in aggregate, of the Company's NAV, calculated at the time of investment, will be invested in loans relating to residential for sale. No more than 50 per cent of the Company's NAV will be allocated to any single real estate sector of the UK, except for the UK office sector which is limited to 75 per cent of the Company's NAV.
Counterparty and Property Diversification
No more than 20 per cent of the Company's NAV, calculated at the time of investment, will be exposed to any one borrower legal entity.
No single investment, or aggregate investments secured on a single property or group of properties, will exceed 20 per cent of the Company's Net Asset Value, calculated at the time of investment.
Corporate Borrowings
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Company or investment level recourse borrowings may be used from time-to-time on a short term basis for bridging investments, financing repurchases of Shares or managing working capital requirements, including foreign exchange hedging facilities and on a longer term basis for the purpose of enhancing returns to Shareholders and/or to facilitate the underwriting of whole loans with a view to syndication at a later point. In this regard, the Company is limited to aggregate short and long term borrowings at the time of the relevant drawdown in an amount equivalent to a maximum of 30 per cent of NAV but longer term borrowings will be limited to 20 per cent of NAV in any event.
Hedging
The Company will not enter into derivative transactions for purely speculative purposes. However, the Company's investments will typically be made in the currency of the country where the underlying real estate assets are located. This will largely be in Sterling and Euros. However, investments may be considered in other European currencies, and the Company may implement measures designed to protect the investments against material movements in the exchange rate between Sterling, being the Company's reporting currency, and the currency in which certain investments are made. The analysis as to whether such measures should be implemented will take into account periodic interest, principal distributions or dividends, as well as the expected date of realisation of the investment. The Company may bear a level of currency risk that could otherwise be hedged where it considers that bearing such risk is advisable. The Company will only enter into hedging contracts, such as currency swap agreements, futures contracts, options and forward currency exchange and other derivative contracts when they are available in a timely manner and on terms acceptable to it. The Company reserves the right to terminate any hedging arrangement in its absolute discretion.
The Company may, but shall not be obliged to, engage in a variety of interest rate management techniques, particularly to the extent the underlying investments are floating rate loans which are not fully hedged at the borrower level (by way of floating to fixed rate swap, cap or other instrument). Any instruments chosen may seek on the one hand to mitigate the economic effect of interest rate changes on the values of, and returns on, some of the Company's assets, and on the other hand help the Company achieve its risk management objectives. The Company may seek to hedge its entitlement under any loan investment to receive floating rate interest.
Cash Strategy
Cash held by the Company pending investment or distribution will be held in either cash or cash equivalents, or various real estate related instruments or collateral, including but not limited to money market instruments or funds, bonds, commercial paper or other debt obligations with banks or other counterparties having a A- or higher credit rating (as determined by any reputable rating agency selected by the Company), Agency RMBS (residential mortgage backed securities issued by government-backed agencies) and AAA rated CMBS (commercial mortgage-backed securities).
Transactions with Starwood Capital Group or Other Accounts
Without prejudice to the pre-existing co-investment arrangements described below, the Company may acquire assets from, or sell assets to, or lend to, companies within the Starwood Capital Group or any fund, company, limited partnership or other account managed or advised by any member of the Starwood Capital Group ("Other Accounts"). In order to manage the potential conflicts of interest that may arise as a result of such transactions, any such proposed transaction may only be entered into if the independent Directors of the Company have reviewed and approved the terms of the transaction, complied with the conflict of interest provisions in the Registered Collective Investment Scheme Rules 2018 issued by the Guernsey Financial Services Commission (the "Commission") under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and, where required by the Listing Rules, Shareholder approval is obtained in accordance with the listing rules issued by the UK Listing Authority. Typically, such transactions will only be approved if: (i) an independent valuation has been obtained in relation to the asset in question; and (ii) the terms are at least as favourable to the Company as would be any comparable arrangement effected on normal commercial terms negotiated at arms' length between the relevant person and an independent party, taking into account, amongst other things, the timing of the transaction.
Co-investment Arrangements
Starwood Capital Group and certain Other Accounts are party to certain pre-existing co-investment commitments and it is anticipated that similar arrangements may be entered into in the future. As a result, the Company may invest alongside Starwood Capital Group and Other Accounts in various investments. Where the Company makes any such co-investments they will be made at the same time, and on substantially the same economic terms, as those offered to Starwood Capital Group and the Other Accounts.
UK Listing Authority Investment Restrictions
The Company currently complies with the investment restrictions set out below and will continue to do so for so long as they remain requirements of the UK Listing Authority: - neither the Company nor any of its subsidiaries will conduct any trading activity which is significant in the
context of its group as a whole; - the Company will avoid cross-financing between businesses forming part of its investment portfolio; - the Company will avoid the operation of common treasury functions as between the Company and investee companies; - not more than 10 per cent, in aggregate, of the Company's NAV will be invested in other listed closed-ended
investment funds; and - the Company must, at all times, invest and manage its assets in a way which is consistent with its object of
spreading investment risk and in accordance with the published investment policy. The Directors do not currently
intend to propose any material changes to the Company's investment policy, save in the case of exceptional or
unforeseen circumstances. As required by the Listing Rules, any material change to the investment policy of the
Company will be made only with the approval of shareholders.
Financial Highlights
Year ended Year ended
Key Highlights
31 December 2020 31 December 2019
NAV per Ordinary Share 104.18 p 103.23 p
Share Price 90.0 p 104.50 p
NAV total return (1) 6.3% 7.1%
Share Price total return (1) -7.5% 9.1%
Total Net Assets GBP426.7 m GBP426.6 m
Loans advanced at amortised cost (including accrued income) GBP442.7 m GBP390.6 m
Financial assets held at fair value through profit or loss GBP0.9 m GBP30.5 m
(including associated accrued income)
Cash and Cash Equivalents GBP2.9 m GBP36.8 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) GBP19.5 m GBP29.7 m
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio unlevered annualised total return (1) 6.7% 7.1%
Invested Loan Portfolio levered annualised total return (1) 7.0% 7.0%
Ongoing charges percentage (1) 1.0% 1.0%
Weighted average portfolio LTV to Group first GBP (1) 18.2% 18.4%
Weighted average portfolio LTV to Group last GBP (1) 61.8% 63.0%
(1) Further explanation and definitions of the calculation is contained in the section "Alternative Performance Measures" at the end of this financial report.
SHARE PRICE PERFORMANCE
As at 31 December 2020 the NAV was 104.18 pence per Ordinary Share (2019: 103.23 pence) and the share price was 90.0 pence (2019: 104.50 pence).
The Company's share price has been volatile since March 2020. This volatility has been driven by market conditions and trading flows rather than a change in the Company's NAV.
Chairman's Statement
STEPHEN SMITH | Chairman
25 March 2021
Dear Shareholder,
It is my pleasure to present the Annual Report and Audited Consolidated Financial Statements of Starwood European Real Estate Finance Limited for the year ended 31 December 2020. The last year has seen a great deal of turmoil and has placed a considerable burden on all of us, in both our professional and private lives. Our focus throughout the pandemic has been on the health and wellbeing of everyone associated with the Group while ensuring that our systems have remained fully functional throughout this period of intense disruption. My thanks to the Investment Adviser and all of our service providers for their perseverance in extraordinarily difficult times.
I am delighted to welcome Shelagh Mason and Charlotte Denton to the Board (Shelagh joined the Board on 1 September 2020 and Charlotte on 1 January 2021). Shelagh and Charlotte bring considerable experience to the Board as well as a range of skills that we believe will be both additive and complementary.
I would like to thank Jon Bridel, who left the Board in December 2020, for his contribution to the establishment and success of the Group. Jon's departure is in line with the Company's succession planning process for the phased retirement of Board members. Jon leaves with our very best wishes.
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OVERVIEW
As at 31 December 2020, the Group had investments and commitments of GBP490.1 million (of which GBP49.2 million was committed but unfunded at the end of the year). The average remaining maturity of the Group's loan book was 2.4 years. The Group had net debt of GBP16.6 million and unused debt facilities of GBP106.5 million, available to fund the undrawn commitments of GBP49.2 million and new lending. The gross annualised levered total return at the year end was 7.0 per cent. The Net Asset Value ("NAV") was GBP426.7 million, being 104.18 pence per Ordinary Share.
INVESTMENT ACTIVITY
The Group started 2020 with a strong first quarter, making new commitments of GBP54.9 million. Loan origination is often slow in the first quarter and this was a promising start to the year. However, from March onwards, as the general level of economic activity spiralled downwards due to the Covid-19 pandemic, the focus of the Group understandably shifted to the management of the existing portfolio. In parallel, even though the pipeline at the time was healthy, the Group took a cautious approach to origination closing just one loan of GBP17.9 million in the second quarter. During the third quarter, the Group committed to fund an upsize of GBP1.3 million to an existing loan. There was no origination in the fourth quarter.
As activity in the investment and financing markets slowed, there was in the market, in general, a significant reduction in the volume of early repayments. As might be expected, borrowers who had previously decided to refinance or sell, were unable or became reluctant to do so.
We received repayment in full of two loans prior to the pandemic totalling GBP14.1 million and a repayment in full of the credit linked notes totalling GBP21.8 million in June 2020. During the year to 31 December 2020, we received a further GBP45.5 million of partial loan repayments.
The Group funded a further GBP23.9 million in relation to loan commitments made in prior years so net cash invested in the year increased by GBP16.6 million. This was primarily due to the redevelopment of the Hotel, Spain.
2017 2018 2019 2020 New loans to borrowers (commitment) GBP245.8m GBP208.0m GBP224.7m GBP74.1m Loan repayments and amortisation -GBP213.1m -GBP137.2m -GBP198.3m -GBP81.4m Net Commitment GBP32.7m GBP70.8m GBP26.4m -GBP7.3m
PORTFOLIO PERFORMANCE
All loan interest and scheduled amortisation payments up to 31 December 2020 have been paid in full and on time, in accordance with their respective initial or amended terms, as applicable.
In the Board's opinion the Investment Manager and Investment Adviser have performed well during this period of disruption. Robust underwriting, detailed due diligence and considered loan structuring and restructuring have been combined to produce a resilient portfolio which continues to perform in spite of very considerable and obviously stressed market conditions.
In some instances, the Investment Manager and Investment Adviser have worked closely with borrowers to agree loan amendments and changes to business plans, where appropriate, to ensure loan compliance and to maintain adequate capitalisation (if needed). 49.1 per cent of loans were subject to no modification, as a result of Covid-19, in 2020, a testament to the quality of underwriting standards and loan structuring. All economic modifications to date have been neutral to returns with no interest deferrals. In asset classes subject to greater Covid-19 impact we have sought additional sponsor equity, amortisation and / or deleveraging. The loan performance has been resilient. In the sectors that are most affected by the Covid-19 pandemic, hospitality and retail, borrowers continue to meet their obligations including regular interest and capital repayments in line with the agreed revised business plans. At 31 December 2020 six loans with exposure predominantly to hospitality and retail with a value of 35.3 per cent of NAV are classified as Stage 2 and the remaining loans are still classified as Stage 1 in accordance with the Group's credit risk assessment in determining expected credit losses.
In light of the considerable disruption from Covid-19 the Board has sought to provide more detailed updates and disclosure to our shareholders during the year through its quarterly factsheets, which are available on the Company's website. Please refer to the Investment Manager's report on page 27 for detailed updates on portfolio performance.
STABILITY OF NET ASSET VALUE ("NAV")
Loans made by the Group are measured at amortised cost in line with the requirements of IFRS 9 with which we are obliged to comply. As our business model is to invest for interest and hold loans to maturity we do not follow fair value accounting for the vast majority of our loans. In our eight year history only one position has been recognised 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.
Had the underwriting, including loan to value ("LTV") headroom, on the Group's loans not been as strong as it is, the Group may well have faced more volatility in its NAV as the Group might have had to recognise expected credit losses ("ECLs"). However, after taking into consideration the current market conditions, independent valuations of the underlying assets secured against the Group's loans, the receipt of expected cash flows and the credit worthiness of the counter parties to the loans, the Group sees no need to recognise any ECLs in any of the Group's loans. The reasons, estimates and judgements supporting our current assessment are described on page 19 of the Investment Manager's report.
BOARD COMPOSITION AND DIVERSITY
As the Company approaches its ninth year of existence, as articulated in previous reports, the Board has been mindful of the need to plan for succession accordingly. The Company is using this moment as an opportunity to promote new talent and diversity, whilst being mindful of passing on the experience that the Board has gained since IPO. The succession plan began late last year with the retirement of the first Director, as well as the excellent replacement found in Shelagh Mason. Additionally, we are delighted that Charlotte Denton has joined the Board recently to further help with the Company's development. Further details of the Board's succession planning can be found in the Corporate Governance Statement on page 37.
SUCCESSION PLANNING
The Company enters its ninth year in 2021 and the Board has been mindful that a succession plan needs to be implemented for a lengthy period of time. During Q4 2019, the Directors devised a Succession Planning Memorandum. The Memo states that a new Director will be appointed to the Board during the second half of 2020 giving them time to embed themselves in the role prior to Jonathan Bridel standing down from the Board in December 2020. Shelagh Mason was duly appointed on 1 September 2020. In addition, the Company has decided that it is appropriate to appoint an additional Director to the Board to further improve the Company's skills, experience and diversity as well as to assist in the succession process. To that end, Charlotte Denton was duly appointed on 1 January 2021.
The Boards intention remains that Stephen Smith will retire from the Board in December 2021. At the point of Stephen Smith's retirement, only John Whittle would have served as a Director of the Company since its IPO. In context of John Whittle's familiarity with the Company, he will probably be appointed as Chairman until his own departure from the Board. In light of (i) John Whittle's extensive familiarity with the Company; (ii) the current challenging market circumstances facing the Company and; (iii) the extensive rotation of the Board in recent years, the Board are of the view that it is in shareholders best interests that John Whittle remains on the Board until December 2023, a year longer than originally envisaged under the Succession Planning Memorandum. This will ensure that there is a phased and orderly succession of the Board which allows new Directors the opportunity to benefit from the significant experience John Whittle has developed since the Company's IPO.
In terms of the new appointments, the Directors believe that the current composition of three Guernsey Directors and one Director from the United Kingdom works well in terms of satisfying the Company's requirements. The Board also intend to consider diversity when making the new appointments to the Board.
SHARE BUYBACKS AND SHARE PRICE PERFORMANCE
The year end share price was 90 pence reflecting a 13.6 per cent discount to NAV. Despite continued market dislocation and fluctuation, the share price was starting to look less volatile in the second half of 2020 (compared to the first half of 2020), trading in a range between 83.6 pence and 94.0 pence and ending the period at 90.0 pence, although there is still certainly inherent value which is not being recognised in the market at this time. This price stability has been supported by the share buy-back programme which commenced at the end of the second quarter. The Board continue to believe that the shares represent very attractive value at this level and certain members of the Board and individuals at the Investment Adviser have made personal purchases during the year, as previously disclosed, and as referenced in note 22. We believe this reflects not only strong corporate governance demonstrating our alignment with our shareholders, but it also demonstrates the strong belief in the valuation of the portfolio.
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