SWEF: Portfolio Update

24 July 2024

Starwood European Real Estate Finance Limited

Quarterly Portfolio Update

£64 million repaid across four investments during the quarter

Sixth capital redemption totalling £80 million to be implemented in July

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 performance for the quarter ended 30 June 2024.

Highlights

•  Further progress on portfolio realisation - during the quarter:
  • A total of £64.1 million, over 28 per cent of the Group’s 31 March 2024 total funded loan portfolio, has been repaid across four investments
  • This included the full repayment of three loans ((i) Three Shopping Centres, Spain, which had been classified as a Stage-2 loan, (ii) Hotel, Dublin and (iii) Hotel, Scotland) and one partial repayment (Hotel and Office, Northern Ireland)
  • The proceeds of these repayments, along with some of the additional cash available at 30 June 2024, will be used to fund the sixth return of capital to shareholders totalling £80.0 million which will take place in July 2024
• Dividend - on 24 July 2024, the Directors announced a dividend, to be paid in August, in respect of the second quarter of 2024 of 1.375 pence per Ordinary Share (for shares still in issue following the sixth redemption) in line with the 2024 dividend target of 5.5 pence per Ordinary Share in total
• Strong cash generation – going forward the portfolio is expected to continue to support annual dividend payments of 5.5 pence per Ordinary Share, paid quarterly
• All assets are constantly monitored for changes in their risk profile – no investments have been downgraded during the quarter and the current risk status of the investments is listed below:
  • Five loan investments equivalent to 69 per cent of the funded portfolio are classified in the lowest risk profile, Stage-1
  • Following the full repayment of Three Shopping Centres, Spain, three loan investments equivalent to 31 per cent of the funded portfolio are classified as Stage-2
  • There are no loans classified as Stage-3. 
• The weighted average remaining loan term of the portfolio is 1.5 years
• Inflation protection – 85 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 in a challenging macro environment
• Significant equity cushion - the weighted average Loan to Value for the portfolio is 58 per cent

John Whittle, Chairman of SEREF, said:

“We are pleased with the ongoing positive progress in our orderly realisation strategy with £64.1 million being realised in Q2 2024, following £37.9 million in realisations in Q1 2024. These realisations have enabled us to pledge to return £125.0 million to shareholders via capital redemptions in 2024 to date of which £80.0 million will be paid this month.

In particular, the full repayment of Three Shopping Centres, Spain in the second quarter of 2024, means that the Group no longer has any exposure to the retail sector.

The remaining portfolio loans continue to perform well and we remain on track to meet our aim of paying out a dividend of 5.5 pence per share for 2024. We look forward to updating shareholders on further progress in our orderly realisation strategy in due course.”

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

Share Price / NAV at 30 June 2024

Key Portfolio Statistics at 30 June 2024

*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.

(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.  Seven 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 the market value determined by the last formal lender valuation received, reviewed in detail and approved 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 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.

The redemptions announced and implemented in 2023 returned 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.  Following the fifth redemption, the Company has 270,178,206 shares in issue and the total number of voting rights is 270,178,206.

There were no compulsory share redemptions in the second quarter of 2024.

On 24 July 2024 the Company announced the sixth capital redemption, which will return, in July 2024, circa £80.0 million to shareholders through the compulsory redemption of shares. 

Liquidity and credit facilities

During 2023 the Company built up a cash reserve sufficient to cover its unfunded commitments (which as at 30 June 2024 amounted to £24.1 million).  This cash reserve is included in the £117.1 million of cash held as at 30 June 2024. 

The Company holds sufficient cash to meet its commitments and so did not pursue extending its credit facilities earlier in the year in order to reduce costs.

Dividend

On 24 July 2024, the Directors announced a dividend, to be paid in August, in respect of the second 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 at 2 August 2024 (i.e. post the sixth capital redemption which is being implemented in July 2024).  

Portfolio Update

The Group continues to closely monitor and manage the credit quality of its loan exposures and repayments. The portfolio has continued to perform well, with total repayments of £64.1 million in the quarter to 30 June 2024, equivalent to 28 per cent of the 31 March 2024 total funded portfolio. These repayments marked successful execution of underlying borrower business plans to refinance or sell assets upon stabilisation. The repayments during the quarter included final repayment of the Three Shopping Centres, Spain loan which results in the Group’s exposure to underlying retail assets reducing to zero.

On an aggregate portfolio level, the Group continues to benefit from material headroom in underlying collateral value against the loan basis, with a weighted average loan to value of 58 per cent. These metrics are based on independent third party appraisals. These appraisals are typically updated annually for income producing assets. The weighted average age of valuations is just over ten months.

The Group’s remaining exposure is spread across eight investments. 99 per cent of the total funded loan portfolio as of 30 June 2024 is spread across five asset classes; Hospitality (40 per cent), Office (19 per cent), Light Industrial (16 per cent), Healthcare (15 per cent) and Life Sciences (9 per cent).

Hospitality exposure (40 per cent) is diversified across three loan investments.  This exposure has decreased from 50 per cent as of 31 March 2024 as a result of the full repayment of Hotel, Scotland and Hotel, Dublin during the quarter.  One loan (71 per cent of hospitality exposure) has two underlying key UK gateway city hotel assets, both of which are undergoing comprehensive refurbishment programmes due to complete during 2024. Both hotels are also rebranding to a major internationally recognised hotel brand. The second largest hospitality loan (23 per cent of hospitality exposure) has also been recently refurbished and is slowly increasing operating performance metrics post refurbishment. One loan (6 per cent of hospitality exposure) benefits from a State/Government licence in place at the property and has structured amortisation that continues to decrease this loan exposure. This loan is expected to be fully repaid before year end 2024. The weighted average loan to value of the hospitality exposure is 56 per cent.

The Group’s office exposure (19 per cent) is spread across three loan investments. The weighted average loan to value of loans with office exposure is 73 per cent and the average age of these independently instructed valuation reports is just over a year. 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. The largest office investment is a mezzanine loan which represents 65 per cent of this bucket and is classified as a Stage-2 risk rated loan. The underlying assets comprise seven well located European city centre CBD buildings and are 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. The loan remains in compliance of its third-party senior loan facility and the Group’s mezzanine loan facility, however given the persisting challenging market dynamics, the Group is working closely with the sponsor, a very large institutional asset manager, and a leading global valuation and advisory firm to identify future capital expenditure needs, funding sources, exit values and the business plan to exit.

Light Industrial and Healthcare exposures comprise 16 per cent and 15 per cent each respectively, totalling 31 per cent of the total funded portfolio (across two investments) and provides good diversification into asset classes that continue to have very strong occupational and investor demand. The weighted average loan to value of these exposures is 56 per cent.

Credit Risk Analysis

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

During the quarter there have been no changes to the existing credit risk levels for any of the investments, however following the successful repayment of one of the remaining Stage-2 loans during the quarter, there has been an £11 million, equivalent to a 17.5 per cent decrease in the Stage-2 category loans, as of 30 June 2024 compared to 31 March 2024.

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 30 June 2024, assigned classifications are:

• Stage-1 loans – five loan investments totalling £113.3 million, equivalent to 69 per cent of the funded portfolio are classified in the lowest risk profile, Stage-1.

• Stage-2 loans – three loan investments totalling £51.8 million, equivalent to 31 per cent of the funded portfolio are classified as Stage-2.  The average loan to value of these exposures is 67 per cent. The weighted average age of valuation report dates used in the loan to value calculation is 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 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. Timing of repayment will vary depending on the level of equity support from sponsors. Typically, where sponsors are willing to inject additional equity to partially pay down the loans and support their business plan execution, then the Group will grant some temporary financial covenant headroom. Otherwise, sponsors are running sale processes to sell assets and repay their loans.