DJ SWEF: Half Yearly Report 30 June 2021
Starwood European Real Estate Finance Ltd (SWEF) SWEF: Half Yearly Report 30 June 2021 07-Sep-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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7 September 2021
Starwood European Real Estate Finance Limited
Half Yearly Report 30 June 2021
Another Period of Robust Income Generation
Fully Covered Quarterly Dividend Totalling 5.5 Pence Annually; 8 per cent Share Price Total Return in the Period
Starwood European Real Estate Finance Limited and its subsidiaries ("the Group"), a leading investor originating, executing and managing a diverse portfolio of high-quality real estate debt investments in the UK and Europe, announces its Half Year Results for the six month period ended 30 June 2021.
Highlights over the six months to 30 June 2021
-- Income stability - all loan interest and scheduled amortisation payments received in full and on time
-- Strong cash generation - the portfolio continues to support annual dividend payments of 5.5 pence pershare, paid quarterly, and generates an annual dividend yield of 5.9 per cent on the share price as at 30 June 2021
-- Robust portfolio - despite pandemic-related disruption, the portfolio continues to perform in line withexpectations? Borrowers remain adequately capitalised and are expected to continue to pay loan interest and capitalrepayments in line with contractual obligations - Entry into life sciences sector - On 22 April 2021 the Group announced that it has closed a GBP26.6mfloating rate whole loan secured by a portfolio of four UK life science properties - On 21 July 2021 the Group announced that it had closed a GBP13.5m floating rate whole loan secured by aportfolio of a hotel and office complex in Northern Ireland
-- 8 per cent - Share price total return during the six months ended 30 June 2021
-- 46.5 per cent - Share price total return since inception in December 2012
-- The Investment Manager believes the current investment pipeline is the strongest since the Company wasestablished
Portfolio Statistics - diverse, 78.3% floating rate, LTV maintained
As at 30 June 2021, the portfolio was invested in line with the Group's investment policy. The key portfolio statistics are summarised below.
30 June 2021 30 June 2020 Number of investments 18 18 Percentage of currently invested portfolio in floating rate loans 78.3% 79.5% Invested Loan Portfolio unlevered annualised total return* 6.6% 6.7% Portfolio levered annualised total return* 6.8% 7.0% Weighted average portfolio LTV - to Group first GBP* 18.0% 18.4% Weighted average portfolio LTV - to Group last GBP* 63.5% 62.9% Average loan term (stated maturity at inception) 4.7 years 4.4 years Average remaining loan term 2.2 years 2.8 years Net Asset Value GBP423.7m GBP430.1m Amount drawn under Revolving Credit Facilities (excluding accrued interest) (GBP11.0m) (GBP24.1m) Loans advanced GBP420.8m GBP448.9m Cash GBP1.4m GBP9.0m Other net assets (including hedges) GBP12.5m GBP3.8m
*Alternative performance measure
NAV Performance - as anticipated and stable demonstrating resilience of portfolio
The table below shows the NAV per share achieved over the 6 months to 30 June 2021:
January February March April May June Cum-dividend NAV per share (pence) 103.91 104.42 103.56 103.59 104.25 103.63
Stephen Smith, Chairman of the Company commented:
"During the past six months the Company has yet again proven its credentials as a highly stable source of robust dividends for shareholders. In contrast to many equity REITs, there has not been a single missed payment across the portfolio for the entire duration of the Covid-19 pandemic. This has ensured total continuity of income supporting the annual 5.5 pence dividend yield paid quarterly to shareholders, which remains fully covered. Further, the underlying risk of the portfolio has not shifted with LTVs maintained in the low 60% historical range that the manager has skilfully maintained since the Company's inception in 2012 across even the most volatile recent environment.
"At the outset of the Covid-19 period, in a time of famously turbulent equity market volatility, the Company's share price fell to a persistent discount to NAV for the first time since inception, albeit this has been gradually reducing over the past six-month period under review. Given the extremely robust performance of the portfolio through even the most hostile of market tests and the ongoing uncertainty around many traditional forms of dividend income, it is our belief that the Company's current share price discount to NAV represents compelling risk adjusted value."
Analyst Call
A conference call for analysts will be held remotely at 9:30am, to receive details please contact henryw@buchanan.uk.com
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company Secretary
01481 735814
Magdala Mullegadoo
Starwood Capital +44 (0) 20 7016 3655
Duncan MacPherson
Jefferies International Limited +44 (0) 20 7029 8000
Stuart Klein
Neil Winward
Gaudi Le Roux
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Hannah Ratcliff
Notes:
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.
www.starwoodeuropeanfinance.com.
The Group is the largest London-listed vehicle to provide investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners Limited, an indirect wholly owned subsidiary of the Starwood Capital Group.
Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements
for the six-month period from 1 January 2021 to 30 June 2021
CONTENTS
Overview Corporate Summary Chairman's Statement Investment Manager's Report Principal Risks Governance Board of Directors Statement of Directors' Responsibilities Interim Financial Statements Independent Review Report Unaudited Condensed Consolidated Statement of Comprehensive Income Unaudited Condensed Consolidated Statement of Financial Position Unaudited Condensed Consolidated Statement of Changes in Equity Unaudited Condensed Consolidated Statement of Cash Flows Notes to the Unaudited Condensed Consolidated Financial Statements Further Information Alternative Performance Measures Corporate Information
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 in the UK and the European Union's internal market.
The Company seeks 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 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's Financial Conduct 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.
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The Company received authority at the 2020 Annual General Meeting ("AGM"), to purchase up to 14.99 per cent of the Ordinary Shares in issue on 8 June 2020 and since then, 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 the Company bought back 3,648,125 shares at an average cost per share of 86.9 pence per share and these shares are held in treasury. During January 2021 the Company bought back 660,000 Ordinary Shares at an average price of 89.54 pence per share. Ordinary shares bought back are held in treasury. Share buy backs are subject to sufficient cash being available. This authority was renewed at the 2021 AGM with the Company receiving authority to purchase up to 14.99 per cent of Ordinary Shares in issue on 15th June 2021 (which was 408,911,273 Ordinary Shares), as 4,308,125 Ordinary Shares have already been bought back as described above and are being held in treasury.
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 I January 2021 to 30 June 2021.
This half year has been a period of consolidation following a turbulent period in the market and for the share price of the Company, although not, it must be said, a turbulent time for the Group's NAV which has once again remained stable throughout. Ultimately, the period under discussion demonstrated the positive fundamentals of the Group's portfolio as an exceptionally attractive risk-adjusted source of alternative income tested in the harshest of market environments. Against these market challenges, the Group not only maintained a stable NAV but also met its dividend targets, delivering an annualised 5.5 pence per share to shareholders. The Board continues to monitor share price moves and has been pleased recently with the reaction to the "back to work" agenda. In the earlier part of the period however, share buybacks had been used on occasion to correct shorter term demand and supply imbalances. Investors now have more clarity that economies are working their way out of Covid-19, and they are gradually recognising the value in the portfolio currently. At the same time, the Investment Manager is seeing the strongest pipeline of available transactions since the Group's inception (partially as a result of post Covid-19 opportunities) providing compelling opportunities for value creation.HIGHLIGHTS OVER THE SIX MONTHS TO 30 JUNE 2021
-- Income stability - all loan interest and scheduled amortisation payments received in full and on time
-- Strong cash generation - the portfolio continues to support annual dividend payments of 5.5 pence pershare, paid quarterly, and generates an annual dividend yield of 5.9 per cent on the share price as at 30 June 2021
-- Robust portfolio - despite pandemic-related disruption, the portfolio continues to perform in line withexpectations
-- Borrowers remain adequately capitalised and are expected to continue to pay loan interest and capitalrepayments in line with contractual obligations
-- On 22 April 2021 the Group announced that it had closed a GBP26.6 million floating rate whole loan securedby a portfolio of four UK life science properties
-- 8 per cent - Share price total return during the six months ended 30 June 2021
-- 46.5 per cent - Share price total return since inception in December 2012
-- The Investment Manager believes the current investment pipeline is the strongest since the Company wasestablished
Post 30 June 2021 the Group announced that it had closed a GBP13.5 million floating rate whole loan secured by a portfolio of a hotel and office complex in Northern Ireland.
INVESTMENT PERFORMANCE
INTEREST & AMORTISATION PAYMENTS
All loan interest and scheduled amortisation payments to date have been received in full and on time. This includes loans in sectors that have been most impacted by the pandemic, namely, hospitality and retail assets, where borrowers continue to remain adequately capitalised as previously reported.
STRONG CASH GENERATION
The portfolio performance continues to support the targeted annual dividend payments of 5.5 pence per share, paid quarterly.
INVESTMENT MOMENTUM
The table below summarises the new commitments made and repayments received in the first six months of each year from 2017 to 2021.
H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 New Commitments GBP115.5m GBP147.5m GBP49.9m GBP72.7m GBP26.6m Repayments & Amortisation (GBP85.2m) (GBP74.1m) (GBP45.9m) (GBP65.3m) (GBP45.8m) Net Increase / (Decrease) in Commitments GBP30.3m GBP73.4m GBP4.0m GBP7.4m (GBP19.2m)
The net change in commitments during the first half of 2021 have fallen for the first time. This is not surprising as activity in the Company's investment markets dropped during the Covid-19 pandemic and is only now recovering. Repayments in 2020 in total were significantly lower than in most previous years as it took borrowers longer to sell or execute their business plans and the opportunities to refinance following completion of business plans were much more limited and continue to be a little subdued as shown above. Importantly, the Group remains close to fully invested, with an outstanding pipeline of new loans, all of which supports the Company's income generation going forward.
As at 30 June 2017 to 2021 the Group had commitments as shown in the table below.
June 2017 June 2018 June 2019 June 2020 June 2021 Funded loans GBP390.7m GBP429.9m GBP447.0m GBP447.5m GBP418.5m Unfunded Commitments GBP5.4m GBP42.2m GBP31.9m GBP67.2m GBP36.8m Total Commitments GBP396.1m GBP472.1m GBP478.9m GBP514.7m GBP455.3m
Subsequent to 30 June 2021 to the date of these Interim Financial Statements the following two significant changes to the portfolio were made:
NEW LOAN: OFFICE AND HOTEL, NORTHERN IRELAND
On 21 July 2021 the Group announced that it had closed a GBP13.5 million floating rate whole acquisition loan secured by a portfolio of a mixed use hotel and office property.
REPAYMENT OF LOAN: HOTEL, SPAIN
On 11th August 2021 the Group announced that during July 2021 it received the full and final repayment of its EUR54.2m loan on a resort hotel in Spain.
NAV PERFORMANCE
The table below shows the NAV per share achieved over the 6 months to 30 June 2021.
January February March April May June Cum-dividend NAV per share (pence) 103.91 104.42 103.56 103.59 104.25 103.63
As anticipated, as shown above and as in the past, we are pleased to report that the Group's NAV has once again remained stable over the first half of the year demonstrating the highly resilient credentials of the asset class that contributes to its success as a reliable source of alternative income. We do not expect to see significant movements in NAV as the Group's loans are held at amortised cost and Euro exposures are hedged.
The NAV would be materially impacted if an impairment in the value of a loan was required but, despite the disruption to markets in general caused by the Covid-19 pandemic, no such impairment has been needed. Please refer to the Investment Manager's report for detailed sector performance reporting, information on the accounting for our loans and the current loan to value position for the portfolio as a whole and for each sector.
SHARE PRICE PERFORMANCE
During the first half of 2021, the Company's shares returned 8.0 per cent on a total return basis with the share price trading between 84.2 pence and 94.0 pence and ending the half year at 94.0 pence, a 12-month high for the Company. Despite the Company having bought back 4,308,125 shares in the last twelve months to 30 June 2021, and the Board's regular deliberations about the use and appropriateness of share buybacks, it was decided that the general improvement in market sentiment and "return to work" theme was driving more positive investor sentiment resulting in no share buybacks since January 2021. Notwithstanding this, the Company renewed its authority to purchase up to 14.99 per cent of the Ordinary Shares in issue and may use this authority to address the imbalance in the demand and supply for shares where appropriate going forward.
As at 30 June 2021, the share price discount to the cum-dividend NAV was 9.3 per cent with an average discount to the cum-dividend NAV of 13.2 per cent over the half year. The Board and the Investment Manager and Adviser continue to believe that the shares represent very attractive value at this level as demonstrated by the previously disclosed personal purchases of shares by one of the Directors of the Company and by two senior employees of the Investment Adviser during the period.
DIVIDENDS
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The Directors declared dividends in respect of the first two quarters of 2021 of 1.375 pence per Ordinary Share, equating to an annualised 5.5 pence per annum. This was covered by earnings excluding unrealised foreign exchange movements. With the current portfolio and pipeline, and based on current forecasts, we expect the dividend to continue to be covered by earnings over the 12 months to 31 December 2021.
The Board and Investment Manager and Adviser recognise the importance of stable and predictable dividends for our shareholders. Accordingly, we hold a small dividend reserve (within retained earnings) of circa GBP2.9 million built up over several years which, if necessary, we will use to maintain the annual dividend at 5.5 pence per share for the foreseeable future. As a result of this, dividends have not been, and are not anticipated to be, paid out of capital reserves.
On the share price at 30 June 2021, a dividend of 5.5 pence per annum represents a 5.9 per cent dividend yield.
BOARD COMPOSITION AND DIVERSITY
In the full year financial statements to 31 December 2020 published in March the Board set out the next steps in the succession plans which I am pleased to report are now concluded with the appointment today of Gary Yardley (see note 16). In March we outlined that we envisaged a new director being appointed during the second half of 2021, my retirement from the Board in December 2021 and, having allowed for a period of handover to the new Board members, John Whittle's retirement from Board in December 2023. We sought independent recommendations on the best candidates.
The Board believes in the value and importance of diversity in the boardroom and it continues to consider the recommendations of the Davies, Hampton Alexander and Parker Reports and these recommendations were taken into account in its recruitment process for the appointment of a new director.
Having recently appointed Shelagh Mason and Charlotte Denton to the Board, secured John Whittle's involvement until December 2023 and with Gary Yardley now joining the Board the Company believes that the Board is, and will continue to be, fully equipped with the necessary skills, experience, knowledge and diversity to facilitate the Board's succession process over the coming years.
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 comprehensive review of the Group's ability to continue as a going concern including assessing the possible impact of the COVID-19 pandemic on the Group's portfolio, reviewing the ongoing cash flows and the level of cash balances and available liquidity facilities as of the reporting date as well as taking forecasts of future cash flows into consideration. After making enquiries of the Investment Manager and the Administrator, reviewing the going concern analysis prepared by the Investment Adviser and having reassessed the principal risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least one year from the date the unaudited condensed consolidated financial statements were signed. A range of scenarios have been evaluated as part of this analysis. The worst case scenario evaluated was an interest payment default on all hotel and retail loans. In this scenario the Company was still able to meet its liabilities as they fall due although the dividend would need to be reduced to reflect the reduced cash received. Accordingly, the Directors continue to adopt a going concern basis in preparing these Unaudited Condensed Consolidated Financial Statements.
COVID-19 AND OUTLOOK
The Board is pleased that the diligent underwriting, loan structuring and active asset management of the Investment Manager and Adviser during this last turbulent 18 months has led to very robust performance of the loans during the period, meaning that all interest has been received in full and on time and no impairments have been required. Importantly, future interest payments continue to be expected to be received in full based on the forecast gradual continued easing of lockdowns across the UK and Europe. For further information on the performance of the various components of the portfolio during the last six months please refer to the Investment Manager's report.
The Investment Adviser is seeing a strong pipeline of opportunities as the markets continue to stabilise and will continue to apply its rigorous approach to the selection of appropriate opportunities as it re-invests capital into new opportunities. At 30 June 2021, the Group was very modestly levered with net debt of GBP9.6 million (2.3 per cent of NAV) and undrawn revolving credit facilities (see note 3.g) of the 2020 Annual Report for further information) of GBP115.0 million to fund existing commitments of circa GBP37 million. If the Group does not receive any further repayments this year, it means the Group has approximately GBP70 million of capacity for new loans.
The Board believes that the Company is well placed and that its portfolio and investment pipeline should, over the long term, continue to deliver an attractive risk-adjusted return led by a high level of income supported by a resilient asset class with a relatively low correlation to the broader financial markets. I would like to close by thanking you for your commitment and support.
Stephen Smith
Chairman
6 September 2021
Investment Manager's Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
The largest vaccination campaign in history is underway. According to Bloomberg more than 4.95 billion doses have been administered across 183 countries as at 22 August 2021. The UK had been one of the clear leaders in vaccinations and for the reopening of the economy and society. As of 21st August 2021, in the UK 132 doses have been administered per 100 people, with 70 per cent of people having received a first dose, putting the UK ahead of the US, France and Germany. Ireland and Spain, however, are ahead of the UK. Ireland is at 134 doses per 100 people with 73 per cent having received a first dose and Spain is at 135 doses per 100 people with 76 per cent having received a first dose. The current pace of vaccination in Ireland is also ahead of the other European nations at 0.70 doses per 100 people per day compared with 0.66 for Spain, 0.64 for France, 0.33 for Germany, 0.31 for UK and only 0.27 for the US.
The UK reopening plan post pandemic restrictions that was set out in February has remained almost entirely on schedule. Earlier in the year we expected crowds of 10,000 people at mass events and the opening of short-haul travel later in the year. In sports we have seen progress to more than 60,000 people attending football's Euros final and a capacity crowd of 15,000 for the final weekend on centre court at Wimbledon. This has been enabled by checks on negative test results or vaccination status. In the hotel market we have seen the anticipated performance for UK leisure driven markets coming through as hotels were able to more fully open over the last weeks. One example of a strong leisure performance is the Bath market, where occupancy rates had been running lower than 30 per cent all year to May, which achieved occupancy percentage rates in the 80s during the half term week. While there will be some bumps in the road the general pace of opening for international travel is likely to be similarly facilitated by high levels of vaccination and advances in the tracking of testing and vaccination status.
Previously we commented on a change in sentiment back toward working from the office with a reduction from 69 per cent of CEOs of major companies to 17 per cent expecting to reduce office space between the third quarter of 2020 and the first quarter of 2021. Property Week now reports that the amount of office space available for sub-leasing in London has turned a corner as occupiers begin to U-turn on "knee-jerk" decisions made during the pandemic to sublet space. Savills' data shows that May saw the largest monthly decline in the total amount of tenant-controlled space on the market since March 2020, falling 7 per cent to 5.88 million square feet, although this figure is still 45 per cent higher than the long-term average. Savills' July data also shows West End investment market cumulative annual turnover of GBP2.1 billion is 38 per cent down on the five year average but comments that with over GBP2.5 billion of assets under offer it bodes well for a busy second half of the year. In the West End occupier market, while leasing pace is still off historical averages, the available supply in May dropped for the first time since August 2020 and Savills report that leasing activity is picking up. Following on from May, total available supply decreased further in June, reaching 7.8m sq ft, equating to a vacancy rate of 6.8 per cent.
We also commented previously on the leading indicators we were seeing in the hotel investment market in the last few months. Early indications for European second quarter hotel investment volumes are more than a 70 per cent increase quarter on quarter to over EUR3 billion. This is also over 70 per cent higher than the second quarter of 2020. There is still further to go to get back to the pre-pandemic level of EUR6 billion in the second quarter of 2019. Other positive indications are the number of large transactions in the market agreed in the second quarter which are likely to close in the third quarter, and, as with many other real estate markets, there is currently very strong demand and relatively low supply of product for sale.
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