Interim Management Statement

RNS Number : 2739W

Starwood European Real Estate Finan

06 November 2014

 



6 November 2014

Starwood European Real Estate Finance Limited

Unaudited Interim Management Statement for the Second Half of the Financial Year ending 31 December 2014

Starwood European Real Estate Finance Limited (the "Company") is publishing this Interim Management Statement in accordance with DTR 4.3 of the FCA Handbook. The statement relates to the period from 30 June 2014 to 5 November 2014.

Unless otherwise noted herein, the financial information provided in this Interim Management Statement, and the asset valuations underlying that financial information, are as at 30 September 2014 and are unaudited.  Terms used but not defined in this Interim Management Statement shall have the same meaning as defined in the Company's prospectus dated 28 November 2012.

Background information

The Company is registered with the Guernsey Financial Services Commission as a closed-ended collective investment scheme. The Company's ordinary share capital is listed on the Official List of the UK Listing Authority and admitted to trading on the main market of the London Stock Exchange, under the ticker "SWEF". The Company is managed by the Guernsey-incorporated Starwood European Finance Partners Limited, which has delegated certain functions to the Investment Adviser, Starwood Capital Europe Advisers, LLP.  Both the Investment Manager and the Investment Adviser are indirectly wholly-owned subsidiaries of Starwood Capital Group Global, L.P..

The Company's share capital consists of Ordinary Shares denominated in Sterling.

Investment Objective

The investment objective of the Company is to provide Shareholders with regular dividends and an attractive total return whilst limiting downside risk, through the origination, execution, acquisition and servicing of a diversified portfolio of real estate debt investments in the UK and Continental European markets.    

Market Summary & Outlook

The following commentary is extracted from the Company's factsheet of 30 September 2014 without amendment.

The Group is currently adopting a more cautious stance given recent market uncertainty and our market theme remains a fundamental real estate dichotomy.

On the positive to "warm" side was that the on-going low interest and regulatory environment has unquestionably triggered yet another tiresome hunt for yield. This actually includes the banking sector - an interesting statistic the Group recently noted was that UK SME lending from the banking sector was approximately £80 billion  (down from £120 billion at the peak) whilst commercial real estate lending remained at approximately £220 billion (down from £250-260 billion at the peak). The relative scale and lack of CRE loan deleveraging observed is not only testament to the issues noted below but also that SME lending is very capital intensive and that it remains much easier to deploy multi-million loans in a single transaction on property. Investment deals of low to reasonable leverage in core sectors and with good sponsors now attract excess liquidity which has resulted in substantial pricing decline. It should be noted however that most "take and hold" banks remain very risk focussed and competition is much more about pricing - lessons seem to be learnt. Special mention is made of the UK Clearing banks which are subject to standardised capital treatment (the so-called "Slotting" approach) which does put them at a regulatory disadvantage to other banks permitted to utilise advanced capital treatment methodologies that allow them to allocate their own capital per loan. That said most of the UK banks are Globally Systematically Important Banks ("G-SIBs") and the combination of this regulatory regime and their own internal credit discipline does appear to be having a positive effect of steering them to do solid well thought through business. Where there are potential dangers in the market are those lenders focussed on a more fuller distribution model - the Financial Crisis firmly taught us that the incentivisation structures within such lenders need to discourage looser lending (e.g. minimum retention requirements). 

This however does not imply that in totality markets have fully recovered.  Indeed over the year as the reality of the on-going Asset Quality Review started to seep through, the markets were reminded that the "cool" side of the equation remained prevalent. The continuing requirement for European banks to further face the implications of both non-performing and simply non-core loans is still one of the largest issues of the global economy.  In a recent report Cushman & Wakefield estimate there remains nearly €600 billion of non-core real estate loans on banks' balance sheets, with a sizeable element impaired and arguably not fully written down to appropriate levels. The strong acceleration of loan divestment observed over 2014 is evidence of both the scale of the issue and the ever greater need to address. The accession of the European Central Bank as Eurozone bank regulator in November 2014 is welcomed as a positive step towards a firm and robust reality check on the banks' true positions.

Recent market turbulence is perhaps in fact welcomed. The sense that markets were ahead of themselves was prevalent and, indeed, repetition of mid 2000's anecdotes of "ever harder to find value" were a reminder that all things are a cycle. Removing a degree of exuberance is no bad thing and may well create tempered opportunity.

The Asset Quality Review / Stress Test results, perhaps unsurprisingly, were a careful balancing act.  Out of 130 banks, 25 technically failed as at the cut-off date but most subsequently passed as a result of the €56 billion of capital raised between January and September.  Thirteen still failed as at today, four of which were Italian.  Of €136 billion of newly uncovered NPL's, €55 billion were from definitional harmonisation.  More interestingly, there is some scepticism the approach was really rigorous rather than just rigorous, for example in shipping finance, an area important for German banks, or indeed the cornerstone assumption that sovereign defaults cannot occur.  Also fully loaded implementation of Basel III would have led to substantial failures including four German banks.  Overall harmonisation of rules and supervision is a good thing but the process reflects the fact the banking system still has a long way to go not least dealing with their still high absolute leverage levels. The ECB in any case could not afford a material failure which is why there appears to be an almost perverse collective sigh of relief from an already volatile market.  Italy has been hit and indeed this may further encourage speedier resolutions such as bank mergers or bad bank creation.  It also supports the Group's cautious wait and see on this market and the on-going prohibition of Italian investing.

In summary, the market recovery inevitably requires us to strike a balance between the continuing opportunity and taking an increasingly prudent approach to new business and portfolio management.

Portfolio Summary - Key Statistics

Number of borrowers	10
Number of investments	10
Percentage of currently invested portfolio in floating rate loans (1)	48.9%
Invested Loan Portfolio annualised total return (2)	8.8%
Weighted average portfolio LTV - to Group first £ (3)	11.3%
Weighted average portfolio LTV - to Group last £ (3)	59.9%
Average loan term	4.1 years
Percentage of NAV in cash	12.4%
Percentage of NAV invested in senior and whole loans (1)	65.3%
Percentage of NAV  invested in second lien and mezzanine loans (1)	15.5%
Percentage of NAV invested in other debt instruments (1)	6.6%
Percentage currently invested in GBP (1)	51.5%
Percentage currently invested in Euro (1)	48.5%

Portfolio News

The following transactions were closed since 30 June 2014:

W Hotel, Amsterdam:  The group has committed to provide €25 million out of a total of €99 million for the refinancing and refurbishment of a new W branded hotel located in the centre of Amsterdam. The sponsor is Liran Wizman, a highly experienced hotel owner and key shareholder in Grand City Hotels, a highly rated pan-European hotel management company. Expected to be completed in the third quarter of 2015, the refurbished hotel is based on Spuistraat, a prime location within the city and providing easy access to transport links and attractions including the Royal Palace and Dam Square, which the hotel adjoins.

On 15^th September, the group completed the syndication of a £13.5 million senior note on FC200 to a UK clearer.

Following the investment activity outlined above and as at 30 September 2014 the group was invested / committed as shown below: 

	Balance  as at 30 September 2014	Unfunded Commitments
Maybourne Hotel Group, London	£19.0 m	-
West End Development, London	£10.0 m	-
Lifecare Residences, London	£13.2 m	£1.3 m
Heron Tower, London	£15.7 m	-
Centre Point, London	£40.0 m	-
FC200, London	£  8.6 m	£4.9 m
Total Sterling Loans	£106.5 m	£6.2 m
Retail Portfolio, Finland	€40.8 m	-
Industrial Portfolio, Netherlands	€55.9 m	-
Office, Netherlands	€14.2 m	-
W Hotel, Netherlands	€  9.9 m	€15.1 m
Total Euro Loans	€120.8 m	€15.1 m

The group is in documentation with a credit approved acquirer for the syndication of a further €35.9 million in respect of the Industrial Portfolio, Netherlands and expects to complete the syndication of the senior note before the end of 2014.

Following this syndication the group is expected to have approximately £37 million cash available for investment after approximately £18 million of unfunded commitments on Lifecare, FC200 and W Hotel (as shown above).

The key priority of the group is to ensure that cash drag is minimised and that a stable current return is delivered to shareholders. The subsequent swift reinvestment of these syndication proceeds therefore is a key business focus for the group.

Pipeline

The following commentary is extracted from the Company's factsheet of 30 September 2014 without amendment.

A foundation stone of the formation of the group was the emphasis on relative risk/return.  It is incumbent on the group to continue to focus on this and not simply absolute return.

The Company and Investment Manager are conscious of the desire of investors to receive guidance on timing of surplus cash deployment. The group's pipeline remains active and constantly evolves. Indications on the timing of closing transactions has always been difficult and rather than provide precise guidance,  the Company and the Investment Manager wish to reiterate their constant focus on the balance of deployment of surplus cash whilst maintaining a desired level of portfolio risk and diversification.

The pipeline flexes and adapts to the changing market dynamics. We have previously highlighted a sense that "proactive" origination should focus on continental European markets where banking market dislocation remains more prevalent (and is, arguably, increasing again) balanced with the reasons that dislocation exists in the first place. The UK offers a scale for "reactive" origination where requests for finance are made to the Group given its market position but balanced with the reality that a recovered market by definition starts to offer more limited risk cushions in certain lending scenarios.

The Investment Adviser has continued to build out its presence in Holland due to the lack of a thriving domestic banking sector for real estate finance. There is a sense that bank deleveraging is offering up more CEE lending opportunities as banks look to restructure or exit atypical deals. The Nordics continue to throw up one-off opportunities to examine - the banking sector is extremely healthy but still shies away from transactions with more volatile income or where speed and/or scale are important.  Finland also is less well banked than the other Scandinavian countries. Spain is exciting with positive economic indicators and a hunger for capital - recent reforms are also a big positive, certainly relative to Italy which has to date lacked the evident Spanish focus on fundamental banking reform, legal and insolvency framework reform, labour and market competitiveness reform and a resulting ability for the bid/ask to be met. Starwood Capital Group's equity business has recently purchased approximately €800 million of real estate related non-performing loans ("NPLs") in Spain and the investment has brought great insight into where a performing lending business is required namely not just in new or current projects but also assisting in the second stage of such NPL loan pool purchases - the Investment Adviser can envisage for example assisting borrowers to recapitalise investments being bought out from loan pool purchasers at a discount.  Indeed the Investment Adviser sees a solid source of business opportunity coming from Starwood's normal competitors in the NPL space by this approach. Ireland has to some extent disappointed those seeking to exploit a dislocated lending market, due to the unbelievably rapid revitalisation of that market, evident, for example, by capital raised by listed REITs. That said we continue to work on several Irish transaction leads. All in all the Investment Adviser has observed a marginal encroachment in the UK of its structured finance patch by more traditional lenders but sees that the original risk/return argument can be still employed by slight geographical refocusing.

Whilst the proportion of whole loans is high at 75 per cent of the current loan book it is expected to fall.  The Group's key access to deal flow is through the provision of whole loans but it is now more active in the subsequent syndication of senior positions to enhance returns through the retention of mezzanine, especially in the UK. It would not be surprising to see a more balanced mix of whole loans and end mezzanine emerge, as envisaged at IPO.

Material Events and Transactions

Other than as set out above, there were no material events or transactions to report for the period under review.

Financial Highlights

As described in the Company's prospectus, the net asset value ("NAV") and the NAV per share are both calculated monthly by the Company's administrator.

	30 June 2014	31 July 2014	31 August 2014	30 September 2014
Estimated NAV per Ordinary share	98.91	97.98	98.91	99.28
Share price	103.00	103.00	104.00	104.50
Premium / (discount)	4.1%	5.1%	5.1%	5.3%
Market Capitalisation	£245.2m	£245.2m	£247.6m	£248.8m

Unaudited Consolidated Statement of Financial Position

As at 30 September 2014

	£ m
Assets
Cash and cash equivalents	29.4
Other receivables and prepayments	0.4
Financial assets at fair value through profit and loss	4.4
Loans advanced	203.1
Total assets	237.3
Liabilities
Trade and other payables	(0.9)
Total liabilities
Net assets	236.4
Capital and reserves
Share capital	233.8
Retained earnings	2.6
Total equity	236.4

Dividends

The following commentary is extracted from the Company's factsheet of 30 September 2014 without amendment.

The Company declared a dividend of 1.25 pence per Ordinary Share for the first quarter of the year and 1.35 pence per Ordinary Share for the second quarter, a total of 2.6 pence per Ordinary Share for the first half of the year.

On 24 October 2014 the Company declared a dividend for the period from 1 July 2014 to 30 September 2014 of 1.5 pence per Ordinary Share, being an increase to 6.0 pence per Ordinary Share on an annualised basis. 

Based on the current syndication plans and subsequent re-investment of those proceeds the Company remains comfortable that it will be able to pay an annualised 7.0 pence dividend upon completion of such syndication and reinvestment programme.

The directors place primary importance now on maintaining a consistent dividend and ensuring, as much as possible, that cash drag does not materially impact this aim.  Any future plans to raise additional equity will be considered against this objective.

Reports and Accounts

The Company's annual report and accounts for the financial year ending 31 December 2014 will be made public within four months following the period end.

The Board is not aware of any other significant events or transactions that have occurred since 30 June 2014 and the publication date of this interim management statement which would have a material impact on the financial position of the Company.

Starwood European Real Estate Finance Limited

NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, DIRECTLY OR INDIRECTLY, TO U.S. PERSONS OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN.

This document is only directed at persons in the United Kingdom who are investment professionals as defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, high net worth companies, unincorporated associations and other persons as defined in Article 49 of that Order or others to whom this document can lawfully be distributed or given, inside the United Kingdom, without approval of an authorised person. Any other person should not rely on it or act on it and any investment or investment activity to which it relates will not be engaged in with them.

This document is not for release, publication, or distribution, directly or indirectly, in whole or in part, to US Persons (as defined in Regulation S under the Securities Act of 1933, as amended) or into or within the United States (including its territories and possessions, any state of the United States and the District of Columbia), Australia, Canada, Japan, or any other jurisdiction where to do so would constitute a violation of the relevant laws or regulations of such jurisdiction.

Past performance is no guide to the future. The value of investments and the income from them may go down as well as up and investors may not get back the full amount they originally invested.  The target return and target dividend yield should not be taken as an indication of the Company's expected future performance or results. The target return and target dividend yield are targets only and there is no guarantee that they can or will be achieved and they should not be seen as an indication of the Company's actual or expected return. Statements contained herein, including statements about market conditions and the economic environment, are based on current expectations, estimates, projections, opinions and/or beliefs of the Company and its investment manager. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Such statements are necessarily speculative in nature, as they are based on certain assumptions. It can be expected that some or all of the assumptions underlying such statements will not reflect actual conditions. Accordingly, there can be no assurance that any projections, forecast or estimates will be realised. The information presented has been obtained from sources believed to be reliable but no representation or warranty is given or may be implied that it is accurate or complete.

The information presented on this interim management statement is solely for information purposes and is not intended to be, and should not be construed as, an offer or recommendation to buy and sell investments. If you are in any doubt as to the appropriate course of action, we would recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser.

 

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