SWEF: Portfolio Update

Starwood European Real Estate Finance Limited

Quarterly Portfolio Update

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, junior and mezzanine real estate debt in the UK and Europe, presents its performance for the quarter ended 31 March 2025.

Highlights

• Orderly Realisation of the portfolio is progressing at pace – this quarter, following the repayment in full (£47.3 million) of the Hotels, UK loan asset, the Company has returned £46.0 million to Shareholders in Compulsory Redemptions in accordance with its orderly realisation strategy adopted on 27 January 2023. Following this latest redemption the Company has now returned £256.0 million to Shareholders, equating to 61.9 per cent of the Company’s NAV as of 31 January 2023.   In addition, during the quarter, a partial repayment of £1.4 million was received related to one other loan asset
• All assets are constantly monitored for changes in their risk profile – the current risk status of the investments is listed below:
  • Three loan investments equivalent to 54 per cent of the funded portfolio as of 31 March 2025 are classified in the lowest risk profile, Stage 1.
  • Two loan investments equivalent to 26 per cent of the funded portfolio as of 31 March 2025 are classified as Stage 2.
  • One loan investment equivalent to 20 per cent of the funded portfolio (before impairment) as of 31 March 2025 is classified as Stage 3.  An impairment provision of €12.9 million was made against this loan investment in October 2024.
• Impaired loan investment – since announcing a €12.9 million impairment provision against one loan in October 2024, no material changes to the value of this loan are considered to have occurred.
• Cash balances – As of 31 March 2025 the Group held cash balances of circa £48.8 million.  These cash balances include a cash reserve of £19.0 million to cover the Group’s unfunded loan commitments as of the same date.
• Dividend – on 24 April 2025, the Directors announced a dividend, to be paid in May 2025, in respect of the first quarter of 2025 of 1.375 pence per share in line with the 2025 dividend target of 5.5 pence per share.
• Strong cash generation – the portfolio is expected to continue to support the annual dividend payment- of 5.5 pence per share, paid quarterly.
• The weighted average remaining loan term of the portfolio is 0.7 years - albeit the final loan is not due to repay until the end of 2026.
• Inflation protection – 77.5 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 68.1 per cent.

John Whittle, Chairman of SEREF, said:

“We are pleased to be progressing at pace with our orderly realisation strategy. This quarter the Company returned £46 million to Shareholders in February, following the full repayment of one loan, and the weighted average remaining loan term of the portfolio is now just 0.7 years.

The remaining six investments continue to perform within our expectations and the portfolio is also expected to continue to support the annual dividend of 5.5 pence per share.  Accordingly, we look forward to issuing additional updates on our progress for the Company’s orderly realisation strategy during 2025.”

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

Share Price / NAV as of 31 March 2025

Key Portfolio Statistics as of 31 March 2025

(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.  Five 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 (Loan to Value) 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.  Loan to Value 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 an Extraordinary General Meeting (the “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.

Since then the Company has returned circa £256.0 million to Shareholders (including £46.0 million in the first quarter of 2025), equating to 61.9 per cent of the Company’s NAV as of 31 January 2023.  As of the date of the issuance of this factsheet the Company had 148,039,803 shares in issue and the total number of voting rights was 148,039,803.

Liquidity and credit facilities

The Company continues to maintain a cash reserve sufficient to cover its unfunded commitments which amounted to £19.0 million as of 31 March 2025.  This cash reserve is included in the £48.8 million of cash held as of 31 March 2025. 

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

Dividend

On 24 April 2025, the Directors announced a dividend, to be paid in May, in respect of the first quarter of 2025 of 1.375 pence per Ordinary Share in line with the 2025 dividend target of 5.5 pence per Ordinary Share.  The dividend will be paid on Ordinary Shares in issue as of 2 May 2025.

The unaudited 31 March 2025 financial statements of the Company show modest income reserves.  Given the current level of cash flow generated by the portfolio, the Company intends to maintain its annual dividend target of 5.5 pence per share.  Dividend payments can continue to be made by the Company (as a Guernsey registered limited company) as long as it passes the solvency test (i.e. it 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. 

The Group’s exposure is spread across six investments. The number of investments has reduced from seven investments as of 31 December 2024, following the repayment of the Hotels, UK loan in the quarter to 31 March 2025.  99 per cent of the total funded loan portfolio as of 31 March 2025 is spread across five asset classes; Office (26 per cent), Light Industrial (24 per cent), Healthcare (23 per cent), Hospitality (13 per cent), and Life Sciences (13 per cent). The potential impact of recently announced US trade tariffs is in the very early stages of being understood and quantified. To-date, no material adverse impacts have been reported by underlying loan borrowers and it is expected that any impact, positive or negative will be secondary in nature. The Board, the Investment Manager and the Investment Advisor are monitoring the situation closely. 

The Group’s office exposure (26 per cent) comprises two loan investments. The weighted average Loan to Value of loans with office exposure is 94 per cent. The elevated level of the office exposure Loan to Value is driven by Office Portfolio, Ireland loan which is a risk rated Stage 3 loan. The value used to calculate the Loan to Value for the Stage 1 office loan uses the latest independent lender instructed valuation. The value used for the Stage 3 office loan Loan to Value calculation (which was downgraded from a Stage 2 asset in October 2024) is the marked down value as per the loan impairment recognised in October 2024. The higher Loan to Value of this sector exposure reflects the wider decrease in market sentiment driven by post pandemic trends, higher interest rates and high costs attached to upgrading older office stock.

The largest office investment is a mezzanine loan which represents 74 per cent of this exposure and is classified as a Stage 3 risk rated loan. As outlined in previous factsheets, the underlying assets 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 impairment provision of the 30 September 2024 loan balance 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 Manager and the Investment Adviser continue to actively advise on this position to maximise recovery. No material changes to the value of this loan are considered to have occurred since October 2024 and therefore the loan risk classification and impairment provision remain unchanged. This remains under frequent review and the Company will provide updates as appropriate.

The remaining 73 per cent of the total funded portfolio (excluding Residential (1 per cent)) is split across Light Industrial (24 per cent), Healthcare (23 per cent), Hospitality (13 per cent), and Life Sciences (13 per cent).  These sectors provide good diversification. The weighted average Loan to Value of these exposures is 59 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 of the date of this factsheet, assigned classifications are:

• Stage 1 loans – three loan investments totalling £60 million, equivalent to 54 per cent of the funded portfolio as of 31 March 2025 are classified in the lowest risk profile, Stage 1.

• Stage 2 loans – two loan investments totalling £29 million, equivalent to 26 per cent of the funded portfolio as of 31 March 2025 are classified as Stage 2.  The average Loan to Value of these exposures is 58 per cent. The weighted average age of valuation report dates used in the Loan to Value calculation is just under one year. While these loans are higher risk than at initial recognition, no loss has been recognised on a twelve-month and lifetime expected credit losses basis. Therefore, no impairment in the value of these loans has been recognised. The drivers for classifying these deals as Stage 2 are typically either one or a combination of the below factors:
  • lower underlying property values following receipt of updated formal appraisals by independent valuers or agreed and in exclusivity sale values;
  • sponsor business plans progressing more slowly than originally underwritten meaning that trading performance has lagged expectations and operating financial covenants under the facility agreements have been breached; and
  • additional equity support is required to cover interest or operating shortfalls as a result of slower lease up or operations taking longer to ramp up.

The Stage 2 loans continue to benefit from headroom to the Group’s investment basis. The Group has a strategy for each of these deals which targets full loan repayment over a defined period of time. Under each of the existing Stage 2 loans, the underlying sponsors are progressing strategies to repay the loans in full by refinancing with third party lenders.

• Stage 3 loans – during October 2024, one loan (with a funded balance amounting to £22 million as of 31 March 2025) was reclassified as Stage 3. As of 31 March 2025, the balance of this loan represented 20 per cent of the total funded portfolio. As outlined above, a 50 per cent impairment of the 30 September 2024 loan balance has been provided for as per the Company’s announcement dated 21 October 2024. The position is being monitored and managed closely, and updates will be provided as appropriate and when practically available.

This assessment has been made based on information in our possession at the date of publishing this factsheet, our assessment of the risks of each loan and certain estimates and judgements around future performance of the assets. 

Market commentary and outlook

The United States’ (“US”) tariff policy moves have dominated markets since the beginning of April.   While Trump has been talking about tariffs for a long time, the market was taken by surprise by the scope and size of the “Liberation Day” announcements and immediately sold off sharply in reaction.  Markets had to try to price the implications of a new approach to negotiating trade agreements and the impact that tariff scenarios will have on individual stocks, countries and growth in general.  As further news emerged stock markets had a roller coaster ride and the VIX which measures the volatility of the S&P 500 index and is the benchmark for equity volatility hit over 60 on April 7th having been less than a third of that level a week earlier.   The equity markets saw some of the biggest one day moves of all time comparable only to the worst days of the Great Financial Crisis, Black Monday in 1987 and the COVID pandemic.  

Credit markets also reacted quickly with a sharp slowdown in new issuance activity.   The itraxx Main which is the corporate investment grade benchmark increased by 20 basis points (“bps”) from 65 bps to 85 bps and has subsequently settled in the middle of that range.