DJ SWEF: March 2021 Fact Sheet
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: March 2021 Fact Sheet
23-Apr-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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23 April 2021
Starwood European Real Estate Finance Limited: Quarterly Factsheet Publication
Starwood European Real Estate Finance Limited (the "Company" and, together with its subsidiaries, the "Group")
announces that the factsheet for the quarter ended on 31 March 2021 is available at:
www.starwoodeuropeanfinance.com
Investment Portfolio at 31 March 2021
As at 31 March 2021, the Group had 18 investments and commitments of GBP442.2 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 GBP4.9 m GBP0.1 m GBP5.0 m
Office, London GBP13.4 m GBP7.1 m GBP20.5 m
Residential, London GBP2.6 m GBP1.1 m GBP3.7 m
Hotel, Oxford GBP16.7 m GBP6.3 m GBP23.0 m
Hotel, Scotland GBP35.1 m GBP7.5 m GBP42.6 m
Hotel, Berwick GBP10.5 m GBP4.5 m GBP15.0 m
Logistics Portfolio, UK GBP4.2 m GBP4.2 m
(2)
Total Sterling Loans GBP162.3 m GBP26.6 m GBP188.9 m
Three Shopping Centres, GBP31.2 m GBP31.2 m
Spain
Shopping Centre, Spain GBP14.5 m GBP14.5 m
Hotel, Dublin GBP51.3 m GBP51.3 m
Hotel, Spain GBP46.3 m GBP46.3 m
Office, Madrid, Spain GBP15.8 m GBP0.9 m GBP16.7 m
Mixed Portfolio, Europe GBP25.5 m GBP25.5 m
Mixed Use, Dublin GBP3.3 m GBP9.3 m GBP12.6 m
Office Portfolio, Spain GBP18.3 m GBP1.9 m GBP20.2 m
Office Portfolio, Ireland GBP30.0 m GBP30.0 m
Logistics Portfolio, GBP5.0 m GBP5.0 m
Germany (2)
Total Euro Loans GBP241.2 m GBP12.1 m GBP253.3 m
Total Portfolio GBP403.5 m GBP38.7 m GBP442.2 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.
New Loan
On 22 April 2021 the Group announced that it had closed a GBP26.6 million floating rate whole loan secured by a portfolio of four properties. The properties being secured against consist of laboratory and office spaces let to a diverse range of life science occupiers in the UK. The financing has been provided in the form of an initial advance along with a smaller capex facility to support the borrower's value-enhancing capex initiatives. The loan term is 4 years, and the Group expects to earn an attractive risk-adjusted return in line with its stated investment strategy.
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 remains 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 various lockdown measures continuing into the second quarter, with realistic pandemic related business plans in place to deal with any underlying income displacement being experienced.
Key updates are outlined below:
Hospitality (40.1 per cent of funded Investment Portfolio) - The largest hotel exposure (Hotel, Dublin), at 25.4 per cent of hospitality exposure, continues to benefit from a
licence in place to the Irish Government's Health Service Executive, while hotels in Ireland remain closed for
leisure in line with government guidelines. This licence has assisted in de-risking the impact of the pandemic in
the medium term. In addition, the sponsor continues to work on complimentary asset management initiatives which are
projected to add value to the overall loan collateral. This includes the successful achievement of a planning grant
for 220 residential units on a separately owned site close to the hotel lands, and following a strategic capex
investment, the ability to generate additional income on over 200 keys owned in a separate aparthotel building.
These initiatives are considered to have enhanced the value of the Group's security. - The UK hotel exposures predominately comprise of three hotels (Hotel Oxford, Scotland and North Berwick, accounting
for 38.5 per cent of hotels in the portfolio). These hotels have all closed in line with business plan in order for
comprehensive refurbishment works to be carried out. The hotels will re-open in summer 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. Remaining UK hotel exposure comprises a 50-key hotel ground up development within the Hotel
and Residential loan. Construction is progressing well, with completion forecast in 2022. This loan is
residential-led and the value of pre-sold residential units is now higher than the total loan commitment (inclusive
of the hotel), which very significantly reduces hospitality exposure on this loan. - Hotel, Spain (accounting for 28.6 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. Re-opening is planned for May 2021 and the volume of forward bookings and average room rates are
considered strong. The sponsor remains well capitalised to fund any operational cash shortfalls in the event of
further delays to opening. - All hospitality loans have adequate resources to meet their cash needs in the medium term.
Retail (12.9 per cent of funded Investment Portfolio) - The Group's exposure to retail is predominantly comprised of the Three Shopping Centres, Spain and Shopping Centre,
Spain loans. These are the only stand-alone retail loans in the portfolio and comprise 88 per cent of the Group's
total retail exposure. All other retail exposure is contained in a limited number of mixed use portfolios where the
retail sector represents less than 25 per cent of the total loan balance. - The Group has updated its independent valuations of the two Spanish shopping centre loans. Compared to the
valuations dated Q1 2019, values have declined on a weighted average basis of 15 per cent. This movement is in line
with expectation and the decline is predominantly driven by an increase in investment yields expected to be
demanded by investors for taking on exposure to retail at a time that the sector faces increased competition from
on-line purchasing and uncertainty given pandemic related lockdown measures imposed by local governments. - The impact of the valuation decline is not considered to have impacted the value of the loans secured against those
assets or have a material adverse impact on the Group's overall portfolio; as a result no impairments to the value
of the Group's loans are being recognised. Weighted average LTV of these two loans is now 82 per cent on gross
basis and 79 per cent net of deductible reserves controlled by the lenders and there continues to be adequate
headroom against the loan basis. The overall impact on the Portfolio LTV is marginal at just 1.3 percentage point
negative movement. The loan sponsor continues to be very actively engaged in the asset management of the portfolio,
including investing new equity to fund capex and tenant incentives related to new leasing. Despite the headwinds
experienced during the pandemic, footfall had encouraging signs of recovery in September 2020, a time where some of
the pandemic related restrictions had been temporarily eased. On the Group's two Spanish shopping centre loans,
footfall in September had recovered on a weighted average basis to approximately 92 per cent of the prior year
comparable month. This was at a time when considerable uncertainty was prevalent and therefore there is a positive
expectation that footfall will recover during 2021 once pandemic restrictions are lifted, the centres and cinemas
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DJ SWEF: March 2021 Fact Sheet -2-
can trade normally and vaccination deployment is high. - Across the Investment Portfolio, 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 (25.2 per cent of funded Investment Portfolio) - 96.8 per cent of the Group's construction and heavy refurbishment loans are located in the UK. These projects have
continued to operate on site throughout the period since the outbreak of the pandemic. This is very positive as it
has allowed these projects to continue to progress toward completion even if on-site capacity has been impacted by
pandemic-adapted working measures. - Non-essential construction sites in the Republic of Ireland were mandated by the government to close from 8 January
2021, however we note that the Group's exposure to Irish construction loans is limited to under 1 per cent of total
loans invested as of 31 March 2021. 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
Hospitality and in Office, Industrial, Logistics & Residential.
Office, Industrial, Logistics & Residential (40.6 per cent of funded Investment Portfolio) - These sectors continue to display resilient characteristics in terms of rent collection and overall performance. - 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 at
prices ahead of underwritten levels.
Dividend
On 23 April 2021, the Directors declared a dividend in respect of the first quarter of 1.375 pence per Ordinary Share, equating to an annualised 5.5 pence per annum. 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 sustainable level of dividend which should be fully covered by earnings over the year whilst ensuring the Group maintains strong credit discipline. The Company maintains a modest dividend reserve which can be utilised if required.
Expected Credit Losses & Fair Values
All loans within the portfolio are classified and measured at amortised cost less impairment. The Group closely monitors the loans in the portfolio for deterioration in credit risk. There are some loans for which credit risk has increased since initial recognition. However, we have considered a number of scenarios and do not currently expect to realise a loss in the event of a default and therefore no credit losses have been recognised.
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. As referred to above in the portfolio update, during the quarter, we have received independent, external valuations of the underlying assets secured against the Spanish loans. This information did not change our analysis on the Spanish loan and we note that valuation headroom remains on these loans. The updated valuations are reflected in the sector and portfolio LTV table below.
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 recognised at fair value (the credit linked notes which repaid in 2020). 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 424.9 m 104.7% 5.3% GBP 420.0 m 103.5% 5.8% GBP 415.1 m 102.3% 6.3% GBP 410.4 m 101.1% 6.8% GBP 405.7 m = book value 100.0% 7.3% GBP 401.2 m 98.9% 7.8% GBP 396.7 m 97.8% 8.3% GBP 392.2 m 96.7% 8.8% GBP 387.9 m 95.6%
The effective interest rate ("EIR") - i.e. the discount rate at which future cash flows equal the amortised cost, is 6.8 per cent. We have sensitised the cash flows at EIR intervals of 0.5 per cent up to +/- 2.0 per cent. The table reflects how a change in market interest rates or credit risk premiums may impact the fair value of the portfolio versus the amortised cost. Further, the Group considers the EIR of 6.8 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 (for example the Hotel, Spain). The volatility of the fair value to movements in discount rates is low due to the low remaining duration of most loans.
Loan to Value
Please refer to the 30 September 2020 factsheet for details on the methodology for calculating LTV and the valuation processes. During the quarter, we have received independent, external valuations of the underlying assets secured against the Spanish loans and they are reflected in the sector and portfolio LTV table below.
On the basis of the methodology previously outlined and including the new valuations received and referred to above, at 31 March 2021 the Group has an average last GBP LTV of 63.6 per cent (31 December 2020: 61.8 per cent).
The table below shows the sensitivity of the loan to value calculation for movements in the underlying property valuation and demonstrates that the Group has considerable headroom within the currently reported last LTVs.
Share Buy Backs and share price performance
The Company received authority at the most recent AGM to purchase up to 14.99 per cent of the Ordinary Shares in issue on 8 June 2020 and in August 2020 the Board engaged Jefferies International Limited as buy-back agent to effect share buy backs on behalf of the Company. During the third and fourth quarters of 2020 and the first quarter of 2021, the Company bought back 4,308,125 shares at an average cost per share of 87.3 pence per share and these shares are held in Treasury.
During the first quarter of 2021, the Company's shares returned -4.3 per cent on a total return basis with the share price trading between 84.2 pence and 92.0 pence and ending the quarter at 84.6 pence. The Board made use of the share buy-back programme selectively where it was deemed necessary to address the imbalance in the demand and supply for shares and will continue to do so going forward where appropriate.
Over the three months ended 31 March 2021, the share price traded at an average discount to the cum-div NAV of 9.6 per cent which has improved marginally from the discount of 10.0 per cent to NAV on average seen in the previous quarter. The Board and the Investment Adviser continue to believe that the shares represent very attractive value at this level demonstrated by Shelagh Mason, a member of the Board, who bought 95,131 shares during the quarter and Duncan MacPherson and Lorcain Egan of Starwood Capital Europe Advisers LLP, the Investment Adviser, who purchased 116,667 and 22,585 ordinary shares respectively over the same period.
Market Commentary and Outlook
Following an unprecedented level of scientific collaboration and achievement there are now eight COVID-19 vaccines available for use around the world. Over 80 more are in clinical trials. Scaling up manufacturing from zero to billions of doses was always going to be a considerable challenge as to fully immunise the world population would require three times the doses produced each year for all other vaccines combined. Notwithstanding this, vaccination progress has moved very fast in the first quarter of 2021. The UK and the US in particular have been top performers and have set a standard that citizens of other countries will demand of their politicians. While there have been some glitches in deliveries and a cautious approach to a small number of serious side effects caused by the mass roll-out of vaccines, the positive impacts have been huge in reduction of death and serious disease and the steps forward in production and supply chain have been very fast and continue to ramp up.
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