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Results analysis: Starwood European Real Estate Finance

SWEF’s managers describe ‘the strongest pipeline of opportunities since inception'...
Thomas McMahon
Last update 07 September 2021

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 (SWEF), which invests in pan-European property loans, has again reported a stable NAV for the half-year to 30 June 2021, while meeting all its dividend targets. The portfolio has therefore once again shown its resilience through a period of disruption, as the recovery from the pandemic starts to build.

  • SWEF paid two dividends of 1.375p in respect of the first two quarters of the year, equating to a 5.5p annualised payout. As of 03/09/2021, the share price yield is 5.8%.

  • NAV per share was 103.63p at the end of June, compared to 104.18p at the end of December 2020.

  • SWEF has missed no dividend payments during the pandemic, the board and manager expect future interest payments from the portfolio to continue to be paid in full, and the board has reaffirmed its commitment to meet its dividend target in the coming quarters. To that end it highlights a revenue reserve of £2.9m which could be used if required.

  • SWEF’s discount did narrow during the reporting period, from c. 14% to c. 8%. Since the period end it has come in further to 7.1% (as of 03/09/2021). Members of the management team and board bought shares during the half year, indicating their belief in the value in the price.

  • With economies now clearly recovering from the pandemic and investment activity in their sector picking up, the investment manager describes the current opportunity set as, “The strongest pipeline of available opportunities since the group’s inception.”

  • SWEF’s managers have c. £70m of capacity for fresh loans. This is available via a revolving credit facility of £115m of which just £11m is drawn down – meaning net gearing is just 2.6% of NAV.

Kepler View

Possibly the most positive news in SWEF’s latest results is that the trust has still not recorded any missed interest payments or any impairments to the value of its loans, over a year into the pandemic. With the recovery now clearly underway in the UK and Western Europe, it looks increasingly like the portfolio with emerge materially unscathed, despite the significant exposure to the hotel and retail sectors. This supports what has always been the manager’s contention: that their stock selection, conservative underwriting and management meant the risks to NAV and to the income account were limited.

It looks like the market is starting to price in a more positive outlook for SWEF, with the discount narrowing considerably since the start of the year. In the underlying markets, the managers report some evidence of returning risk appetite and an improving outlook. They highlight that second quarter investment volumes in the European hotel market provisionally look like coming in at 70% higher than the same period last year – although they are only roughly half the level they were in 2019. They report that high demand and low supply is generating a very strong pricing environment. The managers also report a shift in attitudes to working from home which is feeding into a correction from the earlier stages of the pandemic in office occupational sentiment. Whereas 69% of CEOs reported they expected to reduce office space when asked in Q3 2020, by the first quarter of 2021 it was only 17% and in the second quarter of 2021 London leasing brokers are reporting a decline in the amount of tenant controlled space in the market. SWEF’s investment advisor, Starwood Capital Europe Advisers, is a subsidiary of US company Starwood Capital Group (SCG), one of the world’s largest real-estate managers. This should put the company in a strong position to get access to new deals as the market picks up.

One very positive piece of news is the successful opening of a luxury hotel in Spain, which accounted for 11.1% of the total funded investment portfolio. SWEF’s loan funded a heavy refurbishment programme, and the property opened in May as a five-star destination. The loan has been repaid in full since the end of the half-year period, reducing the overall exposure to this sector to 33%. The second largest exposure to this sector was via a Dublin hotel. So successful have the asset management activities of the sponsor been, that a recent valuation saw the LTV on SWEF’s investment decrease by 2.6%. We think the positive news is particularly notable given the hospitality sector was likely the focus of investor concern.

While the board did employ buybacks in the past, these ceased in January 2021, with the expectation being that sentiment to the market and the recovery would drive the discount rather than repurchases. This has been a successful strategy year-to-date. SWEF was trading on a discount of 7.1% as at COB on Friday 3 September 2021, significantly tighter than the 13.6% at which it was trading on January 1.

To our mind the 5.8% yield on initial investment (on the share price as of 03/09/2021) is highly attractive compared to what is on offer elsewhere in the market, even after this partial discount recovery, and we think it plausible the trust could trade on a premium once more as it did prior to the pandemic.

The low interest rate environment has made achieving a yield more difficult across markets. In particular, SWEF’s yield looks attractive compared to what is on offer from property equity trusts and from the infrastructure sector, while it is in line with the sort of yield on offer in the renewables sector. As such we think the trust could be an attractive diversifier for income investors while potentially boosting the yield too. SWEF’s rock solid NAV during the pandemic also contrasts with the experience of the renewables sector, which has seen write downs due partly to volatility in the power price.

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