Thomas McMahon
View profile
Updated 21 Sep 2022
Save Article Download

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.

  • Starwood European Real Estate Finance (SWEF) has delivered strong performance through a volatile economic environment, and paid two quarterly dividends in the half in line with its 5.5p target. These dividends were covered by net income (with some adjustments made for currency movements which are not expected to persist). They amount to an annualised yield of 5.6% on the share price at the time of writing.
  • Cover has been boosted by a rise in interest rates which has fed through into SWEF’s majority floating rate portfolio (78% floating as of 30/06/2022). The unlevered portfolio return rose from 6.6% to 7.1% during the first half of 2022 thanks to this dynamic.
  • Meanwhile the loan portfolio has displayed resilience, with all loan interest and scheduled amortization paid in full and on time. SWEF’s NAV has been stable, moving from 103.1p to 103.4p over the half. The loan to value position of the whole portfolio has improved from 61.9% to 60.5%.
  • Despite the strong performance, the discount widened over the period, moving from 8.8% to 11.4% as of 30/06/2022. The board has reinitiated a buyback programme since the period end, and this has helped bring the discount in to 4.2% at the time of writing.
  • In the event that the discount is 5% or wider in the six months to 31/12/2022, the board, “May put forward a realisation offer to Shareholders (‘Realisation Offer’). The terms of such Realisation Offer would provide, broadly, that Shareholders may request for up to 75% of the Ordinary Shares in issue to be realised for cash. If this mechanism is not activated, the Directors shall exercise the discretion afforded to them under the Articles to put forward a realisation vote (as an ordinary resolution) (“Realisation Vote”) to Shareholders by no later than 28 February 2023. The Board is actively investigating and considering the options available to them in the best interests of Shareholders. This process is ongoing and the outcome uncertain at the current time.”
  • SWEF’s managers continue to highlight a strong investment pipeline which represents attractive risk adjusted returns. In the first half they made a new loan against a portfolio of offices and industrial property in the Netherlands and the UK. This was facilitated by a number of disposals and partial repayments.
  • As of 30/06/2022, 34% of the book was to mature in less than one year. The managers have £70.7m of available funds to put to work, accounting for undrawn commitments.
  • Chairman of the board John Whittle said: “[SWEF’s]’s NAV stability demonstrates the positive fundamentals of the … portfolio as an exceptionally attractive risk-adjusted source of alternative income tested in the harshest of market environments.”

Kepler View

This is another set of strong results for Starwood European Real Estate Finance (SWEF). The loans have performed well and income has been boosted by rising base rates feeding through into the coupons received. Given market expectations of further rate rises to come, this should improve the income cover situation further and in due time, if sustained, maybe lead the board to consider an increased payout. We think the discount narrowing is likely to reflect the market recognising the uncertainty stemming from the pandemic is now in the past, as well as the active buyback programme. With the discount window now open for triggering a tender offer or continuation vote, this should provide strong support for the share price adding to the attractions of the shares in a troubled market.

We note the disposals achieved during the period have contributed to an improvement in quality in the portfolio, with a lower LTV. Meanwhile one of the three loans classified as stage 2 for IFRS purposes (reflecting an increased risk of impairment) has been upgraded, reflecting strong trading after the completion of a refurbishment programme. The managers report the pipeline for new investments is strong, and we note they will need to reinvest around 1/3 of the portfolio over the next twelve months. We think widening credit spreads mean this could be a good time to make new loans, although the current economic uncertainty does seem likely to lead to a recession which means stock selection and diligent fundamental analysis will remain highly important.

SWEF’s dividend yield of 5.6% is on offer without the substantial interest rate risk which high yield bonds bring. Loans typically sit high up the capital structure, and the LTV of 60.5% provides a substantial margin of safety. As the share price is supported by the potential tender or continuation vote, we think this is likely to reduce discount risk too, and so SWEF looks like an interesting source of stable returns in a highly uncertain environment.

Login to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

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.
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.