Fund Profile

Starwood European Real Estate Finance 12 August 2020

Disclaimer

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.

Overview
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Overview

Starwood European Real Estate Finance (SWEF) lends against commercial property in Europe and the UK, aiming to find attractive investments from a risk/reward perspective in areas of the market that are less well served by the bank market (which has remained constrained in the post-global financial crisis environment).

SWEF is managed by a subsidiary of Starwood Capital Group, one of the world’s largest real-estate investors, which brings a huge origination platform, specialist knowledge and strong industry relationships. These are an advantage in identifying inefficiencies in the market to provide value-add lending solutions to financially strong borrowers (mainly in the UK, Spain and Ireland).

SWEF pays a 6.5p dividend quarterly, to be rebased to 5.5p from 2021 due to the continued decline in interest rates, off which SWEF’s lending is priced. On the current share price, this would amount to a yield of 6.4%. As it invests in senior and subordinated debt, SWEF’s interest sits high up the capital structure, with less exposure to market values than the equity REITs do. Nevertheless, SWEF has fallen into a discount of 15.5%, wider than the 13% average discount of the equity REITs in the AIC UK Commercial Property sector. From 10 August Jefferies has been employed as an independent buyback agent with discretion as to timing until 31 December 2020.

Despite the significant exposure to the hospitality sector, SWEF has suffered no impairments in the crisis so far and no missed interest payments. The loan to value on the portfolio is just 63%, giving a substantial equity cushion, and SWEF has modest gearing at the portfolio level of just 3.5% of NAV.

Analyst's View

In our view SWEF is an attractive way to invest in real estate for a high income with reduced risk to capital values, although with correspondingly limited prospects for capital growth. Even after the rebasing of the dividend, we think the prospective returns are attractive both in absolute terms and relative to likely returns in commercial-property equity. The future for commercial-property equity investors looks problematic, given the impact of the pandemic and lockdowns on mobility and commerce. Capital values are therefore likely to be weak in the coming months and years, while dividend cuts have been generally quite significant across the sector already, with the potential for more to come. Investing higher up the capital structure seems attractive in the current environment, as does taking commercial-property exposure without taking exposure to the operational performance of the tenants.

We think the discount is pricing in the fear of impairments, and reflects nervousness about the exposure to the hospitality industry in particular. However, we note the conservative starting loan to value of 63%, as well as the fact there have been no missed interest payments so far and no amendments made to interest-payment schedules. Although we recognise the full impact of the pandemic is yet to be clear, we don’t see any indication yet that impairments are on the horizon (indeed the managers are confident there will be none), and we think the discount is inappropriately pricing in equity-like risk.

bull bear
Scale and strength of the Starwood origination platform allow access to a large, diverse pipeline
High reinvestment risk, requiring stream of new investments to maintain income
Modest LTV on the underlying loans reduces risk of impairments
Further lockdowns or movement restrictions could lead to pressure on hospitality and retail borrowers, while operating performance will remain under pressure for some months
Loans are high up the capital structure, and so are less sensitive to market valuations than equities are
Concentrated portfolio increases risk if one of the largest loans is impaired
Continue to Portfolio

Fund History

21 Jun 2023 Ça plane pour moi
Some of the world's biggest companies are doing just fine in Europe, yet investors shun the region. Time for a rethink...
21 Sep 2022 Results analysis: Starwood European Real Estate Finance
SWEF offers an attractive yield from a stable portfolio with limited price risk…
06 Apr 2022 Private markets: A closer look at the expanding private debt opportunity
We look at the attractions of the private debt market, historically the hunting ground of the institutional investor…
29 Mar 2022 Results analysis: Starwood European Real Estate Finance
SWEF offers a high yield from an asset class which has demonstrated resiliency through the pandemic…
07 Sep 2021 Results analysis: Starwood European Real Estate Finance
SWEF’s managers describe ‘the strongest pipeline of opportunities since inception'...
26 Mar 2021 Results analysis: Starwood European Real Estate Finance
The results for the year ending 31/12/2020 show resilience during the pandemic and the shares look good value at an 18% discount to NAV…
10 Mar 2021 Spring Conference '21
Audio and presentations from 21 of the UK’s leading investment trust managers…
04 Mar 2021 Slides and Audio: Starwood European Real Estate Finance
Download the presentation and listen to the audio from our 'Ideas for your ISA' Spring Conference on 03 March...
04 Mar 2021 Fund Analysis
SWEF offers a 6% yield and a discount that could close in a recovery…
24 Feb 2021 Dire Straits or Money for Nothing?
As discounts reach historically narrow levels across the board – our analysts debate whether a premium is a price worth paying…
20 Jan 2021 Kepler's top-rated investment trusts for 2021
We update our annual quantitative ratings for investment trusts…
12 Aug 2020 Fund Analysis
SWEF offers a more secure way to invest in commercial property with a dividend less dependent on tenant performance…
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