Starwood European Real Estate Finance Ltd (SWEF)
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:
Investment Portfolio at 31 December 2020
As at 31 December 2020, the Group had 18 investments and commitments of £490.1 million as follows:
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)
Retail (12.9 per cent of Investment Portfolio)
Construction & Heavy Refurbishment (21.2 per cent of Investment Portfolio)
Office, Industrial, Logistics & Residential (45.5 per cent of Investment Portfolio)
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.
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:
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:
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.
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.
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. No assets have received updated valuations during the current quarter. Updated valuations have been instructed but not yet received for the Spanish retail assets but these valuations will be subject to material uncertainty clauses in the current environment.
On the basis of the methodology previously outlined, at 31 December 2020 the Group has an average last LTV of 61.8 per cent (30 September 2020: 62.6 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 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 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. Share buy backs are subject to available cash.
During the fourth quarter, the Company's shares returned 7.6 per cent on a total return basis. Despite market dislocation and volatility, the share price has been less volatile than in the first half of the year, trading in the range between 84.8 pence and 94.0 pence, ending the period at 90.0 pence. This price stability has been supported by the share buy-back programme which commenced at the end of the second quarter.
Over the three months ended 31 December, the share price traded at an average discount to the cum-div NAV of 15 per cent which has improved from the 17 per cent 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.
Market Commentary and Outlook
Many people are happy to wave good-bye to 2020's troubles as we enter the New Year, but we should not be surprised if 2021 delivers its own shocks. There have been many significant world events since our last quarterly factsheet. Some news has spurred markets, with better than expected vaccine timing and efficacy, a clear result in the US Presidential election and finally the agreement of a Brexit deal. On the other hand, the new faster spreading mutant of Covid-19 and the resulting rise in cases, hospitalisations and deaths, a new lockdown and unrest on the streets of Washington have created new uncertainties. Markets are signalling that taken altogether the outlook is better than a quarter ago. Following news of the first vaccine the iShares UK Property ETF jumped 10 per cent in a few days at the beginning of November and it has remained stable at similar levels since. The US Presidential election result and more recently the Democrats' wins in Georgia have spurred equities further with the expectation of a more substantial fiscal stimulus in the U.S. as a result. The UK FTSE 100 has further been buoyed by the conclusion of the Brexit deal with the FTSE 100 closing 15 per cent higher at the time of writing than at the last factsheet.
Uncertainties remain, including how fast the new variant of Covid-19 will spread and the toll it will take, whether it will mutate further and if the vaccines will be effective against further mutations. While there are some voices criticising a slow pace, the UK is ahead of most countries with one in four over eighty year olds already vaccinated in early January and an ambitious vaccination plan is cause for optimism. If the UK is successful in the target of having 13 million people vaccinated by mid-February a very large proportion of the higher risk older population will have been covered which will enormously reduce hospitalisations and deaths from the virus.
Brexit so far has played out along the common rules of EU history. It has taken longer than expected, the deal was delivered at the last minute, there are some uncomfortable compromises and there are tricky levels of details involved in the final agreement. The end of the transition period and the agreement of the trade deal with Europe is a landmark in the Brexit process which does deliver some elements of certainty but it will take longer to understand the full impacts of the UK leaving the EU. In particular details around financial services have been delayed. While equivalence arrangements are likely to simplify matters significantly, the devil is often in the detail. Tariff free trade appears to be a success in principle but it also remains to be seen whether the red-tape introduced for trade between Europe and the UK creates its own barriers.
In the real estate markets, big box and last mile logistics and residential have been the clear winners of 2020. Office and student accommodation have been subject to more nuanced case by case effects and hospitality and retail have faced the biggest challenges. The struggle is not over for hospitality with a particularly tricky outlook over the remainder of the winter season with lockdowns in place. The recovery will be uneven with a pent up leisure demand arriving first. Unspent holiday and leisure budgets mean people keen to go on holidays, concerts and events will have the savings to pay. This demand will likely first focus domestically and then internationally as practicalities allow. Corporate and conference business are likely to take longer to resume. While the 2020 sector themes are likely to continue in 2021, taking the longer view there are likely to be opportunities for the right assets with well thought out and well capitalised business plans in all sectors.
Interest rates remain as they have for some quarters practically unchanged since the previous factsheet with Sterling Libor at 0.03 per cent and the curve remaining extremely flat with the Sterling 5-year swap rate at only 0.11 per cent. With rates so low investors are keen to find yield which has supported record European issuance in both investment grade and non-investment grade credit in 2020. Yields in the high yield market are near all-time lows with spreads having recovered to pre-Covid-19 levels and strong new issuance in the first week of 2021 from real estate names with final pricing significantly inside of initial price talk.
In real estate lending while the data is not yet available, volumes will be down significantly in 2020. As we move in to 2021 we expect market conditions to become somewhat more liquid as the market adjusts to the Covid-19 and post Covid-19 environments. Some of that adjustment has already taken place and in particular the investment bank inventory of loans originated in the fourth quarter of 2019 and first quarter of 2020 which had weighed on new business during 2020 has largely been cleared during the second half of 2020 and with little incentives provided. While we expect dislocations to remain in the market during 2021, we are seeing willingness from the market to engage on all asset classes and more recently also including hotels and retail again. The lending appetite is coming from diverse sources reflecting an increasingly fragmented market. There continues to be a significantly lower participation from balance sheet bank lenders particularly for development financing and for financing other non-vanilla business plans and asset classes. We expect this pattern to continue as a long term theme that will support the Group's strategy of sourcing attractive new investment opportunities in 2021 and beyond.
Share Price / NAV at 31 December 2020
Key Portfolio Statistics at 31 December 2020
(1) The unlevered annualised total return is calculated on amounts outstanding at the reporting date, excluding undrawn commitments, and assuming all drawn loans are outstanding for the full contractual term. 15 of the loans are floating rate (partially or in whole and some with floors) and returns are based on an assumed profile for future interbank rates but the actual rate received may be higher or lower. Calculated only on amounts funded at the reporting date and excluding committed amounts (but including commitment fees) and excluding cash un-invested. The calculation also excludes the origination fee payable to the Investment Manager.
(2)The levered annualised total return is calculated as per the unlevered return but takes into account the amount of net leverage in the Group and the cost of that leverage at current LIBOR/EURIBOR.
(3) LTV to Group last £ means the percentage which the total loan drawn less any deductible lender controlled cash reserves and less any amortisation received to date (when aggregated with any other indebtedness ranking alongside and/or senior to it) bears to the market value determined by the last formal lender valuation received by the reporting date. LTV to first Group £ means the starting point of the loan to value range of the loans drawn (when aggregated with any other indebtedness ranking senior to it). For development projects the calculation includes the total facility available and is calculated against the assumed market value on completion of the relevant project.
*excludes any permitted extensions. Note that borrowers may elect to repay loans before contractual maturity.
*the currency split refers to the underlying loan currency, however the capital on all non-sterling exposure is hedged back to sterling.
For further information, please contact:
Starwood European Real Estate Finance Limited is an investment company listed on the premium segment of 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 Company 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.
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