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SWEF: Quarterly Portfolio Update
Starwood European Real Estate Finance Ltd (SWEF)
Starwood European Real Estate Finance Limited
Quarterly Portfolio Update Annualised dividend yield of 6.2 per cent, fully covered by income; Portfolio 79 per cent contracted at floating interest rates
Starwood European Real Estate Finance Limited (“SEREF” or the “Group”), a leading investor originating, executing and managing a diverse portfolio of high quality senior and mezzanine real estate debt in the UK and Europe, is pleased to announce a strong performance for the quarter ended 31 December 2022.
Highlights
John Whittle, Chairman of SEREF, said:
“In these turbulent times we are reassured by the highly defensive nature of the Group’s portfolio, the quality and resilience of which has again been proven in a testing macro environment. As evidence of this, once again all interest payments have been received in full, with the ongoing strong cash generation supporting our annual dividend target distribution of 5.5 pence per share and a fully covered yield of 6.2 per cent on the share price as at 31 December 2022. Further, portfolio income has continued to increase in part as a consequence of the 79 per cent floating rate loan book. This has resulted in an increase in the Invested Loan Portfolio unlevered annualised total return by 90 basis points over 2022.
Importantly, we remain satisfied with our average portfolio LTV which has further fallen during this quarter to 58.6 per cent, representing a very significant cushion to the Group’s loans.
Despite strong portfolio performance, due to a near term likelihood that the Group would no longer be of a viable size to provide shareholders with sufficient liquidity and scale, and following a review of the Group’s strategy and advice sought from its advisers, the Board announced on 31 October 2022 that it intended to recommend to shareholders that the investment objective and policy of the Group are amended, such that the Board can pursue a strategy of orderly realisation and the return of capital over time to shareholders. On 28 December 2022, the Group published a Circular containing a Notice of Extraordinary General Meeting to this effect and the EGM will be held on 27 January 2023.”
The factsheet for the period is available at: www.starwoodeuropeanfinance.com
Share Price / NAV at 31 December 2022
Key Portfolio Statistics at 31 December 2022
*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.
(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. 17 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 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 SONIA/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.
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 the Proposed Orderly Realisation, containing a Notice of Extraordinary General Meeting was published on 28 December 2022. If approved by the shareholders, the Company will seek 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.
Dividend
On 20 January 2023, the Directors declared a dividend in respect of the fourth quarter of 2022 of 1.375 pence per Ordinary Share, equating to an annualised income of 5.5 pence per annum.
The Invested Loan Portfolio unlevered annualised total return has been increasing steadily as interest rates curves have moved upwards. The year-on-year increase is 90 basis points (i.e. now 7.8 per cent, up from 6.9 per cent in December 2021). As interest rates increase there is additional support for dividend cover.
Portfolio Update
The portfolio continues to perform in line with expectations. All interest and scheduled amortisation has been paid in line with contractual obligations. Borrowers are also continuing to make progress on underwritten business plans including executing strategic asset sales and paying down the loans.
During Q4 2022, a total of £25.8 million, equivalent to almost 6 per cent of the September 2022 total closing loan outstanding balance, has been repaid across six investments. Approximately 79 per cent of these repayments were related to strategic underlying property sales executed by borrowers in line with business plan and typically following the completion of underwritten asset management initiatives, with the remainder representing regular quarterly loan amortisation or borrowers electing to voluntarily pay down loan balances with surplus cash.
The Group’s exposure to development and heavy refurbishment projects continues to decrease as current developments reach completion. As at 31 December 2022, £63 million or 13 per cent of total loan commitments represented loans funding two construction projects. Both of these projects are expected to have reached substantial completion during the first quarter of 2023. The larger of these projects (with a total Group loan commitment of £49 million) has pre-sold the majority of its residential for-sale product and we are forecasting the loan to be fully repaid during 2023 from the proceeds of pre-sold unit completions.
The Group continues to closely monitor all of its loan exposures. Asset classes representing more than 10 per cent of total investments include Hospitality (39 per cent), Office (21 per cent), Retail (11 per cent) and Residential (11 per cent). The Hospitality exposure is diversified across seven different loan investments. Hotel performance on the trading hotel assets has continued to improve and recovered from the pandemic very well during 2022. Despite the potential that trading may be impacted from lower discretionary consumer spending related to inflationary pressures, the Groups borrowers on trading assets such as hotels have generally indicated a positive end to 2022 and the outlook for Q1 2023 is cautiously optimistic based on forward sales activity as at year end. Office exposure (21 per cent) is spread across eight loan investments. Occupancy across the leased office portfolio has held up well, with the vast majority of the underlying tenants renewing leases and staying in occupation. We also continue to see prospective new tenants being attracted particularly to newly refurbished, high quality buildings. The Retail exposure (11 per cent) has continued to perform in line with expectations; occupancy continues to remain robust and footfall continues its post pandemic recovery. Our retail loan borrowers continue their active asset management and are signing new leases where tenants wish to expand and renew existing leases. Residential exposure (11 per cent) is predominantly related to the successfully pre-sold residential for sale development project that is due to complete during the first half of 2023, with the loan projected to be fully repaid this year. In general market outlook for residential product remains high as rents have trended upwards with inflation over the prior year and many markets remain supply challenged.
Across all loans we continue to benefit from material headroom in underlying collateral value against the loan basis, with a current weighted average LTV of 58.6 per cent across the portfolio. These metrics are based on independent third party appraisals which are typically updated annually for income producing assets and following completion on newly constructed or refurbished assets. While the average age of valuations is just over one year for income producing assets and we recognise that interest rate increases within the last twelve months are expected to place downward pressure on valuation inputs, we are confident in the very significant buffer to absorb any negative valuation impact of the current market. On loans where new valuations were instructed in the second half of 2022, average values did not change materially as in many cases increased rents and asset management initiatives being achieved by sponsors outweighed or offset any increase in discount or capitalisation rates.
Partial repayments
During the quarter, despite lower transaction volumes across the markets because of the cautionary approach being adopted by investors, borrowers in the portfolio successfully executed a number of disposals ahead of business plan that resulted in the following partial repayments of loan obligations:
These repayments were used in the quarter to repay some of the outstanding bank debt and to fund the share buybacks referred to below.
Market commentary and outlook
After decades of declining interest rates and a long period of benign inflation, 2022 saw a sea change in inflation and a knock on effect into interest rates across the globe.
Rising inflation was driven by two key factors. First as a consequence of the COVID-19 pandemic global supply chains and shipments slowed in 2020 and 2021 causing worldwide shortages and affecting consumer patterns. The causes of the economic slowdown included workers becoming sic |