Starwood European Real Estate Finance has published results for the year ended 31 December 2015. The NAV and share price total return in the period were 7.58% and 8.22% respectively. At the year end, the shares were quoted at 107.63 pence per share, being a premium of 7.17% to the net asset value per share of 100.43 pence. They paid dividends totalling 7p for the period. During the year the Board communicated that it believed it would be prudent to lower the target portfolio yield and as a consequence the dividend target by 0.5 pence to a dividend target of 6.5 pence from 2016 onwards.
Eight new loans and refinancings were made during the period, for a total investment of approximately£108 million and three loans were repaid in full during the year for a total amount of approximately £39 million.
At present the revolving credit facility is in place for the purpose of bridging, financing repurchases of shares or managing working capital requirements. Currently the amount of this facility is limited to 20 per cent of the NAV at the time of drawdown (ignoring FX hedging positions). Whilst this facility has already been extremely useful, the Board believes that, if restructured appropriately, it could offer additional investment and operational flexibility and risk mitigation. The Board is considering an amendment to the investment policy which would provide these advantages, subject to approval by shareholders at the forthcoming Annual General Meeting.
By way of background, whole loan investment opportunities identified by the Investment Adviser may already fall within the Group’s return targets or may require the sale or syndication of a senior tranche to a third party investor in order to achieve the return targets. Such syndication may occur at the time the loan is entered into, where a senior loan provider has been identified that will close the investment alongside the Group’s mezzanine position, or alternatively, the Group may be comfortable in underwriting the whole loan with a view to subsequent senior syndication. Historically, the Group has originated investments which reflect all three scenarios.
Whilst the first and second approaches, described above, do not carry risks associated with having to sell down part of the loan, the Group has, as a result of its prudent approach, not originated many loans where it takes the risk of subsequent syndication. A conservative policy, particularly during the early phase of the Group’s life, of not wanting to be left with a whole loan if syndication is not possible, was justifiable in the short term but does impact returns – even when the underlying collateral is excellent. It is the Board’s view that the Group has reached a point in its development where the policy can be relaxed without undue risk to shareholders, recognising that the current conservative approach may have impeded additional business creation.
With the market continuing to shift towards the provision of whole loans to real estate owners, with structures comprising separate senior and mezzanine tranches becoming less popular, the Board believes it is now appropriate to consider adjusting the Company’s policy on borrowings. It is proposed that, subject to approval by shareholders, the Company should be permitted to have borrowings of up to 30 per cent of NAV, of which up to 20 per cent of NAV may be for longer term investment purposes, such as bridging to syndication or buying to hold.
The change would permit the Group to invest with greater confidence in the right transactions; a whole loan could be underwritten with the expectation that a portion of the senior would be sold down but, should this not prove possible then the whole investment could be retained by the Group without impacting returns. It should be recognised that the Group’s leverage levels are expected to remain cautious given the nature and composition of the overall portfolio. The Board believes that a renewed approach to leverage will permit the Group to source more accretive investments with greater confidence, and without significantly increased investment or operational risk.
SWEF : Starwood European wants to introduce longer term gearing