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SWEF: Portfolio Update
Starwood European Real Estate Finance Ltd (SWEF)
Starwood European Real Estate Finance Limited
Quarterly Portfolio Update Annualised dividend yield of 6.1 per cent, fully covered by income; Portfolio 77 per cent contracted at floating interest rates
Starwood European Real Estate Finance Limited (“SEREF” 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 announce a strong performance for the quarter ended 31 March 2023.
Highlights
John Whittle, Chairman of SEREF, said:
“We remain pleased with the continued strong ongoing robust performance of the Group’s portfolio with loans performing robustly leading to an enduringly strong valuation of the underlying collateral and all interest and scheduled amortisations being received as expected. The Group’s overall LTV remains highly comfortable at 58.3 per cent.
As a result of this strong performance over the year ended December 2022, partly as a result of the high floating rate element of the portfolio (currently 77 per cent), the Group was not only able to meet its dividend target of 5.5 pence per share but also declared a special dividend of 2.0 pence per share in March leading to a total dividend distribution of 7.5 pence per share for 2022. In our view, this is a highly attractive income proposition.
It is also pleasing to report positive realisation progress on the Group’s portfolio with £35.9m repaid during the quarter and used to repay the Group’s outstanding bank debt. We look forward to updating shareholders with further realisation progress and the first anticipated distribution to shareholders in due course.”
The factsheet for the period is available at: www.starwoodeuropeanfinance.com
Share Price / NAV at 31 March 2023
Key Portfolio Statistics at 31 March 2023
*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. 15 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 (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.
Dividend
On 21 April 2023, the Directors declared a dividend, to be paid in May, in respect of the first quarter of 2023 of 1.375 pence per Ordinary Share, equating to an annualised income of 5.5 pence per annum. This is in addition to the additional 2022 special dividend declared on 23 March 2023 of 2.0 pence per Ordinary Share, which will be paid in April.
Portfolio Update
The portfolio continues to perform robustly and 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. None of the Company’s borrowers had direct exposure to Silicon Valley Bank or Credit Suisse in relation to either bank accounts or counterparty risk (for example interest rate hedging) in relation to any of the cash or assets secured to the Company under the loans. There are existing minimum credit rating requirements for all counterparty banks in the loan agreements and the status of counterparties are monitored to ensure ongoing compliance.
During Q1 2023, a total of £35.9 million, equivalent to almost 8.5 per cent of the December 2022 total closing loan balance outstanding, has been repaid across seven investments. 79 per cent of these repayments (£28.5 million) relate to the full repayment of two loans with the remainder following strategic underlying property sales, 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 March 2023, the portfolio includes only one construction project of a residential plus hotel development, with a loan commitment of £49.9 million or 11 per cent of total loan commitments. Residential units are completing one-by-one over the second quarter of 2023, with the hotel set to be the final completion at the end of the quarter. The majority of the residential for-sale units have been pre-sold and we forecast the loan to be fully repaid during 2023 from the proceeds of these unit completions.
The Group continues to closely monitor its loan exposures. Asset classes representing more than 10 per cent of total investments include Hospitality (35 per cent), Office (21 per cent), Retail (12 per cent) and Residential (11 per cent).
The Hospitality exposure is diversified across six different loan investments. Two benefit from State/Government licences in place at accretive rents with structural amortisation set to reduce these by a minimum of £4 million (8.5 per cent of these two commitments) over the remainder of 2023. The other trading hotel exposures have either been recently refurbished or will be on a rolling basis from mid-2023. All trading assets outperformed the Group’s underwritten ADR (Average Daily Rate) assumptions in 2022, demonstrating ability to push rates despite wider inflationary pressures. This has assisted in mitigating margin erosion from cost inflation.
Office exposure (21 per cent) is spread across seven 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 such as the Office, London exposure which will reach formal completion in April 2023 and was fully pre-let 11 per cent ahead of the Group’s underwrite.
The Retail exposure (12 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 by the end of the second quarter 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 58.3 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. The weighted average age of valuations is 1.2 years for income producing assets and seven of these will be updated in the next quarter. The only other valuations over a year old either relate to assets that are undergoing refurbishment or loans which we are forecasting to be repaid in the next six months. While we recognise that interest rate increases within the last year 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.
Partial repayments
During the quarter, despite lower transaction volumes across the markets because of the cautionary approach being adopted by investors, borrowers repaid the following loan obligations:
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