SWEF: Portfolio Update

Starwood European Real Estate Finance Limited

Quarterly Portfolio Update

During the quarter the sixth capital redemption returned £80 million and

 £7 million was received in full repayment of one investment.

In October, after quarter end, a €12.9 million impairment provided against one loan investment.

Starwood European Real Estate Finance Limited (“SEREF”, the “Company” or the “Group”), a leading investor managing and realising a diverse portfolio of high quality senior and mezzanine real estate debt in the UK and Europe, is pleased to present its performance for the quarter ended 30 September 2024.

Highlights

• £80.0 million returned to Shareholders - during the quarter:
  • A total of £80.0 million was returned to Shareholders through the compulsory redemption of a further 76,248,573 shares.  As at the date of the issuance of this factsheet the Company had 193,929,633 shares in issue and the total number of voting rights was 193,929,633.
  • To date, the Company has returned £210.0 million to shareholders in Compulsory Redemptions in accordance with its orderly realisation strategy adopted on 27 January 2023. This is equivalent to 50.8 per cent of NAV as of 31 January 2023.

• Further progress on portfolio realisation - during the quarter a total of £7.3 million, over 4 per cent of the Group’s 30 June 2024 total funded loan portfolio, has been repaid on one investment (now fully repaid).  The remaining portfolio now consists of seven investments.

• Impairment – after the quarter end one investment was reclassified and an impairment provision made:
  • As announced on 21 October an impairment provision of €12.9 million, equating to 5.3 per cent of the Group’s 30 September 2024 net assets, has been provided, in October, against one investment, Office Portfolio, Ireland.  At the same time this investment has been reclassified as a Stage 3 loan (previously classified as Stage 2).  See Credit Risk Analysis section below for more information.
• All assets are constantly monitored for changes in their risk profile – the current risk status of the investments is listed below:
  • Following the repayment of one loan during the quarter four loan investments equivalent to 67 per cent of the funded portfolio as at 30 September 2024 are classified in the lowest risk profile, Stage 1.
  • Following the reclassification of one asset from Stage 2 to Stage 3, two loan investments equivalent to 19 per cent of the funded portfolio as at 30 September 2024 are classified as Stage 2.
  • One loan (equivalent to 14 per cent of the funded portfolio as at 30 September 2024) has been reclassified from Stage 2 to Stage 3 in October and an impairment provision has been made against this loan investment as detailed above.
• Dividend – on 29 October 2024, the Directors announced a dividend, to be paid in November, in respect of the third quarter of 2024 of 1.375 pence per share in line with the 2024 dividend target of 5.5 pence per share.
• Strong cash generation – going forward the portfolio is expected to continue to support annual dividend payments of 5.5 pence per share, paid quarterly.
• The weighted average remaining loan term of the portfolio is 1.4 years.
• Inflation protection – 84 per cent of the portfolio is contracted at floating interest rates (with floors).
• Significant equity cushion - the weighted average Loan to Value for the portfolio is 63 per cent.

John Whittle, Chairman of SEREF, said:

“The third quarter marked further positive progress in our orderly realisation strategy, with a sixth capital redemption of £80 million implemented during the quarter. This milestone means that the Company has now returned £210 million to Shareholders, equating to 50.8 per cent of the Company’s NAV prior to the adoption of the orderly realisation strategy. Further, we have registered a successful full repayment of one loan investment of £7.3 million during the quarter, equating to 4 per cent of our 30 June 2024 total funded portfolio. Current cash levels remain healthy at £44.6 million.

After the quarter end, the Company saw an impairment on one investment, Office Portfolio, Ireland, equating to €12.9 million. As a result of new operational updates received in October 2024, the Board has impaired the investment’s valuation but, as previously guided, there are a range of possible outcomes whereby the loan may have a lesser or greater degree of recovery. The Investment Adviser is actively advising on the position to maximise the opportunity for a positive value recovery scenario.

The remaining portfolio continues to perform to expectations. We remain on track to meet our aim of paying a dividend of 5.5 pence per share for 2024. We look forward to providing Shareholders with further updates on progress in due course.”

The factsheet for the period is available at: www.starwoodeuropeanfinance.com

Share Price / NAV at 30 September 2024

*The 30 September 2024 NAV shown here has been calculated before taking into account the €12.9 million provision related to Office Portfolio, Ireland and the dividend of 1.375 pence per share, both of which were announced by the Company in October 2024 and will be reflected in the October 2024 NAV. 

Key Portfolio Statistics at 30 September 2024

(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.  Six of the loans are floating rate (partially or in whole and all 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 uninvested.  The calculation also excludes the origination fee paid to the Investment Manager.

(2) 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 its value determined by the last independent third party appraisals for loans classified as Stage 1 and Stage 2 and on the marked down value per the recently announced loan impairment for the loan classified as Stage 3 in October 2024.  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).

*Remaining loan term to current contractual loan maturity excluding any permitted extensions. Note that borrowers may elect to repay loans before contractual maturity or may elect to exercise legal extension options, which are typically one year of additional term subject to satisfaction of credit related extension conditions. The Group, in limited circumstances, may also elect to extend loans beyond current legal maturity dates if that is deemed to be required to affect an orderly realisation of the loan.

*The currency split refers to the underlying loan currency, however the capital on all non-sterling exposure is hedged back to sterling.

Orderly Realisation and Return of Capital

On 31 October 2022, the Board announced the Company’s Proposed Orderly Realisation and Return of Capital to Shareholders. A Circular relating to the Proposed Orderly Realisation, containing a Notice of Extraordinary General Meeting (EGM) was published on 28 December 2022. The proposals were approved by Shareholders at the EGM in January 2023 and the Company is now seeking to return cash to Shareholders in an orderly manner as soon as reasonably practicable following the repayment of loans, while retaining sufficient working capital for ongoing operations and the funding of committed but currently unfunded loan commitments.

Three redemptions were announced and implemented in 2023 returning circa £85.0 million in total to Shareholders. During the first quarter of 2024, the Company announced and implemented its fourth and fifth capital redemptions, returning, in total, circa £45.0 million to Shareholders through the compulsory redemption of 43,512,736 shares. 

During the third quarter of 2024 the Company announced the sixth capital redemption, which returned, circa £80.0 million to Shareholders in July 2024 through the compulsory redemption of a further 76,248,573 Ordinary Shares.  As at the date of the issuance of this factsheet the Company had 193,929,633 shares in issue and the total number of voting rights was 193,929,633.

Liquidity and credit facilities

During 2023 the Company built up a cash reserve sufficient to cover its unfunded commitments (which at 30 September 2024 amounted to £23.0 million).  This cash reserve is included in the £44.6 million of cash held as at 30 September 2024. 

The Company holds sufficient cash to meet its commitments, including unfunded loan commitments.

Dividend

On 29 October 2024, the Directors announced a dividend, to be paid in November, in respect of the third quarter of 2024 of 1.375 pence per Ordinary Share in line with the 2024 dividend target of 5.5 pence per Ordinary Share.  The dividend will be paid on Ordinary Shares in issue as 8 November 2024.

Following the impairment recognised in October, the year end 2024 financial statements of the Company will show modest income reserves which will be lower than the targeted quarterly dividends.  However, given the current level of cash flow generated by its’ portfolio, the Company intends to maintain its annual dividend target of 5.5 pence per share.  Dividend payments may be made by the Company (as a Guernsey registered limited company) as long as it passes the solvency test (i.e. is able to pay its debts as they come due).

Portfolio Update

The Group continues to closely monitor and manage the credit quality of its loan exposures and repayments. A repayment of £7.3 million, which related to the full repayment of one loan investment, was received in the quarter to 30 September 2024, equivalent to over four per cent of the 30 June 2024 total funded portfolio. This repayment marked a successful execution of an underlying borrower business plan to sell one of their assets. The Group’s loan was fully repaid and the sponsor now holds the remainder of the portfolio unlevered.

Following new operational information received from the borrower subsequent to 30 September 2024 under the Office Portfolio, Ireland loan, together with a detailed analysis of scenarios and potential future outcomes, the Group impaired 50 per cent, equivalent to €12.9 million, of this loan in October.

The Group’s exposure is spread across seven investments. 99 per cent of the total funded loan portfolio as of 30 September 2024 is spread across five asset classes; Hospitality (39 per cent), Office (17 per cent), Light Industrial (17 per cent), Healthcare (16 per cent) and Life Sciences (10 per cent).

Hospitality exposure (39 per cent) is diversified across two loan investments. One loan (76 per cent of hospitality exposure) has two underlying key UK gateway city hotel assets, both of which are undergoing refurbishment programmes. One hotel recently completed its refurbishment and the second is due to complete in the fourth quarter of 2024. Both hotels are rebranding to a major internationally recognised hotel brand. The second hospitality loan (24 per cent of hospitality exposure) has also been recently refurbished and is slowly increasing operating performance metrics post refurbishment. The weighted average loan to value of the hospitality exposure is 57 per cent.

The Group’s office exposure (17 per cent) is spread across two loan investments. The weighted average loan to value of loans with office exposure is 95 per cent. The value used to calculate the LTV for the Stage 1 loan uses the latest independent lender instructed valuation. The value used for the October 2024 reclassified Stage 3 office loan is the marked down value as per the recently announced loan impairment. The higher loan to value of this sector exposure reflects the wider decrease in market sentiment driven by post pandemic trends and higher interest rates. These factors have resulted in reduced investor appetite for office exposure and a decline in both transaction volumes and values. We note however, a more positive recent outlook for real estate given interest rates have begun to reduce.

The largest office investment is a mezzanine loan which represents 74 per cent of this exposure and in October has been reclassified as a Stage 3 risk rated loan (previously Stage 2). As outlined in previous factsheets, the underlying assets now comprise seven well located European city centre CBD buildings and have historically been well tenanted, albeit certain assets are expected to require capital expenditure to upgrade to Grade-A quality to retain existing tenants upon future lease expiry events. A 50 per cent loan impairment provision related to this asset was announced on 21 October 2024 as a result of new operational information received from the borrower. Following an analysis of potential future scenarios and outcomes, the Board decided to make this provision. As noted in the announcement, the potential outcomes could recover a greater or lesser amount of the loan. The Investment Adviser is actively advising on this position to maximise recovery and the Company will provide updates as appropriate.

Light Industrial and Healthcare exposures comprise 17 per cent and 16 per cent each respectively, totalling 33 per cent of the total funded portfolio (across two investments) and provide good diversification into asset classes that continue to have very strong occupational and investor demand. The weighted average LTV of these exposures is 57 per cent.

Credit Risk Analysis

All loans within the portfolio are classified and measured at amortised cost less impairment. 

The Group follows a three-stage model for impairment based on changes in credit quality since initial recognition as summarised below:

• A financial instrument that is not credit-impaired on initial recognition is classified as Stage 1 and has its credit risk continuously monitored by the Group. The expected credit loss (“ECL”) is measured over a 12-month period of time.
• If a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to Stage 2 but is not yet deemed to be credit-impaired. The ECL is measured on a lifetime basis.
• If the financial instrument is credit-impaired it is then moved to Stage 3. The ECL is measured on a lifetime basis.

The Group closely monitors all loans in the portfolio for any deterioration in credit risk. As at the date of this factsheet, assigned classifications are: