SWEF: Portfolio Update

Starwood European Real Estate Finance Limited

Quarterly Portfolio Update

Annualised dividend yield of 6.2 per cent, fully covered by income;

First capital redemption undertaken and more expected in 2023

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 present its factsheet for the quarter ended 30 June 2023.

Highlights

•  Positive realisation progress - during the quarter:
  • A total of £7.6 million, 2.0 per cent of the Group’s 31 March 2023 total funded loan portfolio, has been repaid across 6 investments
  • This included the full repayment of a loan on the Logistics Portfolio, Germany of €3.0 million and 5 partial repayments
  • Proceeds were used in the quarter to fund the first return of capital to shareholders of £10.0 million
• All assets are constantly monitored for changes in their risk profile - during the quarter to 30 June 2023, the following changes to risk classification were made: 
  • four assets moved from Stage 1 to Stage 2 indicating  a change in their credit risk since origination but no impairments in value anticipated; and
  • one asset moved from Stage 2 to Stage 3 and a small credit loss of £1.7 million was recognised – this minor impairment represents 0.5% of the funded portfolio and is the result of the Group prudently applying sensitivities to net proceeds from an agreed asset sale which is subject to contract and is currently progressing through exclusivity
• The average remaining loan term of the portfolio is 1.4 years
• Strong cash generation - the portfolio continues to support annual dividend payments of 5.5 pence per Ordinary Share, paid quarterly, and generates an annual dividend yield of 6.2 per cent on the share price as at 30 June 2023
• Regular and Consistent Dividend - £219 million of dividends paid since inception (including the dividend of 2p per share declared in March, paid in April and the dividend of 1.375p per share declared in April, paid in May)
• Inflation protection – 76.1 per cent of the portfolio is contracted at floating interest rates (with floors)
• Robust portfolio - the loan book is performing broadly in line with expectations with its defensive qualities reflected in the Group’s continued NAV stability
• Significant equity cushion - the weighted average Loan to Value for the portfolio is 56.0 per cent

John Whittle, Chairman of SEREF, said:

“Despite highly challenging market conditions which are reflected in low equity valuations across the investment company sector, we are reassured by our high quality real estate debt portfolio, which continues to provide a regular and consistent dividend from a robust portfolio which offers substantial protection against inflation. Our loan book is highly defensive and continues to perform broadly in line with expectations.

“In accordance with the amendments to the Company’s articles of incorporation approved by shareholders at the EGM on 27 January 2023, we are 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. We have made good progress on this objective in the quarter under review, with proceeds from loan repayments being used to fund the first return of capital to shareholders of £10.0 million. We anticipate further capital returns in the second half of the year, and we look forward to updating shareholders in due course.”

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

Share Price / NAV at 30 June 2023

Key Portfolio Statistics at 30 June 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.  14 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.

In June 2023, the Company announced its first capital distribution, returning circa £10 million to shareholders through the compulsory redemption of 9,652,350 shares at a price of £1.0363 per share.

Dividend

On 21 July 2023, the Directors declared a dividend, to be paid in August, in respect of the second quarter of 2023 of 1.375 pence per Ordinary Share, equating to an annualised income of 5.5 pence per annum. 

Portfolio Update

The Group continues to closely monitor its loan exposures, underlying collateral performance and repayments. The Group has prudently assessed key risk indicators impacting all investments and has increased the number of loans classified as Stage 2 and moved one loan from a Stage 2 classification to a Stage 3 classification. This is outlined in detail under the Credit Risk Analysis section of this factsheet. Despite increased risk around higher interest rates and lower transaction volumes, the portfolio has continued to perform well.

During Q2 2023, a total of £7.6 million, equivalent to 2.0 per cent of the 31 March 2023 total funded loan portfolio, has been repaid across six investments. Repayments are originating from strategic underlying property sales, regular quarterly loan amortisation or borrowers electing to voluntarily pay down loan balances with surplus cash. The Group continues to project near term repayments and two loans (Hotel & Residential UK and Mixed Use Dublin) totalling approximately £61 million / 16 per cent of the total funded loan portfolio are expected to fully repay in the coming weeks following the receipt of refinance proceeds and contracted pre-sales which are forecast to fully repay the loans.  These repayments will be used to provide a reserve of cash to fund committed to but as yet unfunded loan commitments (see investment portfolio table below) of £47.3 million and the remainder will be used in the second half of the year to fund further returns of capital to Shareholders.

The Group’s exposure to development and heavy refurbishment projects will reduce to zero upon final repayment of the Hotel & Residential UK loan which is expected to occur during Q3 2023. Since last quarter, this project has substantially completed and a number of pre-sold residential units have achieved financial completion, which has significantly reduced the Group’s loan basis.

Four asset classes represent 80 per cent of the total funded loan portfolio as at 30 June 2023; these are Hospitality (38 per cent), Office (21 per cent), Retail (12 per cent) and Residential (9 per cent).

The Hospitality exposure is diversified across six different loan investments. Two (25 per cent of hospitality exposure) benefit from State/Government licences in place at accretive rents with structural amortisation continuing to decrease loan exposures on these assets. The other trading hotel exposures either have been recently refurbished or will be on a rolling basis from mid-2023. All trading assets continue to have strong revenue performance driven by higher rates being achieved. Sponsors are keenly focussed on costs to ensure that dilution of strong top line perform due to higher costs is minimised. The weighted average Loan to Value of the Hospitality exposure is 49 per cent.

The 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. The Group’s office exposure is predominantly weighted (over 65 per cent) toward strong city centre locations which is widely documented as being the most defensive, alongside buildings which have high quality, ESG credentials. 66 per cent of the Group’s current office exposure is against underlying office collateral that is either newly constructed or has undergone recent refurbishment projects. The weighted average Loan to Value of loans with office exposure is 63 per cent. The average age of these independently instructed valuation reports is under one year and hence there continues to be significant headroom to the Groups basis on these loans. As a precaution however, two of the office loans have this quarter been classified in the higher risk Stage 2 category due to slower lease up of newly refurbished space than expected or a materially lower valuation level upon receipt of a revised appraisal.

The Retail exposure (12 per cent) has continued to perform strongly from an operational perspective, with occupancies across the shopping centre exposures fully recovered to pre-pandemic levels and in the high eighties or nineties per cent. The sponsor of the shopping centre loans has launched a comprehensive sale process and bids have been received on the assets. The Group is prudently reclassifying one of the retail loan exposures to a Stage 3 loan given a tight bid level versus the Groups loan level. This is further detailed in the Credit Risk Analysis section in this factsheet. The weighted average Loan to Value of the Retail exposure is 74 per cent.

Residential exposure (9 per cent) is predominantly related to the successfully pre-sold residential for sale development project (Hotel & Residential UK) that has now substantially complete with the loan projected to be fully repaid during Q3 2023. The weighted average Loan to Value of the Residential exposure is 38 per cent.

On a portfolio level we continue to benefit from material headroom in underlying collateral value against the loan basis, with a current weighted average LTV of 56.0 per cent. These metrics are based on independent third party appraisals (with the exception of two loans that have been marked against a lower sale process bid level). These appraisals are typically updated annually for income producing assets and following completion on newly constructed or refurbished assets. The weighted average age of valuations is just under seven months for income producing assets and just over one year including all loans.

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 prior quarter end (31 March 2023), all but two of the Group’s loan investments were categorised as Stage 1, with two loans (£44.6 million / 11 per cent of total funded loan portfolio) categorised as Stage 2 loans. As at the current quarter end, the Group have prudently reassessed assigned classifications and has made the following reclassifica