Starwood European Real Estate Finance

SWEF offers a 6% yield and a discount that could close in a recovery…

Add to watchlist Request a meeting Download View key data

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Starwood European Real Estate Finance. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Starwood European Real Estate Finance
2021 Kepler Alternative Income Rated Fund

This trust has been awarded a rating by Kepler for alternative income... Find out more

Starwood European Real Estate Finance (SWEF) lends against commercial property in Europe and the UK. As a provider of debt financing, SWEF sits further up the capital structure than equity investors, such as most trusts in the AIC UK Commercial Property sector. This means its track record of steady returns has not been disrupted by the pandemic, as we discuss in the performance section.

SWEF has been able to maintain its dividend payments over 2020 and also not seen falls to its portfolio valuation. Despite displaying resilience throughout the pandemic, the shares have not fully recovered from the March 2020 crash, and trade on a 12.4% discount to NAV.

SWEF mostly lends at floating rates. Although it has paid a 6.5p dividend each year since 2015, from 2021 the payment will be rebased to 5.5p as a consequence of the relentless march downwards in the interest rates off which its loans are priced. On a forward-looking basis we estimate that the share price yield is currently 6.1%.

SWEF has exposure to sectors which have been operationally affected by COVID such as hospitality (36% of NAV) and retail (13%). However, it has seen no missed interest payments through the crisis, nor taken impairments for expected losses. The loan to value on the portfolio is just 61.8%, giving a substantial equity cushion, and SWEF has modest gearing at the portfolio level of just 3.7% of NAV.

SWEF is managed by a subsidiary of Starwood Capital Group, one of the largest real-estate investors in the world, which brings a huge origination platform, specialist knowledge and strong relationships in the industry.

Kepler View

SWEF seems like one of the relatively few trusts to have been left behind by the reflationary wave of Q4 2020. Most discounts have narrowed while markets have rallied, but SWEF’s discount remains relatively wide. In our view this could be an opportunity. The vaccines offer a path to normalisation of economic activity which should support the cashflow of SWEF’s borrowers. While we accept the path could yet be rocky, it seems anomalous to us that investors are demanding a 12.4% discount for SWEF compared to just 2% for its closest peer (see discount section).

Meanwhile the dividend yield of 6.1% compares to the 4.5% offered on average by the generalist UK commercial property equity trusts, which in our view have much more realistic chances of seeing their capital values written down in 2021. It is also worth noting the 2.5% yield on the ICE BofA Euro High Yield Index – a 6.1% yield is rare in today’s environment.

We think the discount must be compensating for perceived default risk. However, as we discuss in the performance section, the managers have not taken any impairments to their loan book, and believe they will not see any credit losses as a result of the pandemic. Borrowers are incentivised to maintain their interest payments as any renegotiation would class as a default, giving lenders power over the assets. This is very different from the equity sector which has seen a lot of rent renegotiations (down, chiefly). In our view SWEF offers a higher yield than the equity REITs with lower risk to capital values. Investors do have to take significant exposure to the retail and hospitality sectors though, which adds some uncertainty.

bull bear
High yield relative to equity markets and equity commercial property trusts
High reinvestment risk over the medium term, requiring stream of new investments to maintain income
Modest LTV on the underlying loans reduces risk of impairments
Hospitality and retail will face operational pressures even while restrictions and lockdowns loosen
Loans are high up the capital structure, reducing likelihood of borrowers missing payments
Concentrated portfolio increases risk if one of the largest loans is impaired
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

Fund History

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.

The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.  

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.



Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.