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Highly-rated, high-yield property debt funds seek cash

9 May 2019

Real Estate Credit Investments and Starwood European Real Estate Finance are going head-to-head in a bid to raise more money from investors with placings of new shares.

Property-backed loan companies Real Estate Credit Investments (RECI) and Starwood European Real Estate Finance (SWEF) are going head-to-head in a bid to raise more money from investors.

Shares in the high-yielding alternative income funds trade at respective premiums of around 6% and 4% over their net asset values (NAV). They are taking advantage of the high stock ratings, which indicate investor demand with proposed new share issues. They will use the money they raise to make new investments in loans, bonds and bundles of mortgages secured against commercial and residential real estate and reduce their borrowings.

RECI plans to issue up to 100 million new shares, which would raise £170 million at a placing price of 170p. This represents a 2% premium over NAV - and thus avoids diluting existing shareholders - and a discount of 2.9% to the share’s closing price on Tuesday, offering new investors a bit of a bargain.

Starwood is aiming for a smaller £40 million placing, using shares at a price of 104.75p, or a 2.7% premium to NAV. The shares are currently trading at 106.9p.

The £268 million RECI trust, which offers a 6.9% dividend yield, plans to fund new investments in the UK and western Europe with the proceeds of the raise. It said the new assets may be ‘secured senior real estate loans and securitised tranches of secured real estate-related debt securities, such as commercial mortgage-backed securities’.

Last month, trust managers Cheyne Capital invested £15 million in a new loan secured against a portfolio of central London hotels.

The £400 million Starwood closed-end fund currently yields just over 6%. It will use most of the money it raises to repay its credit facility, which is currently £31.6 million drawn, in advance of making new investments.

Stephen Smith, chairman of Starwood, said the company had ‘identified a strong short-term pipeline of assets’ and the issue will ‘meet the company’s strategy of incrementally growing the size of the company through an efficient capital structure which minimises cash drag from payments’.

RECI’s portfolio of 49 loans is 69.4% invested in the UK. It uses gearing - or borrowing - of 35% to the amount it has to invest in income-generating assets. Over the past three years it has returned 25.1% to shareholders, just ahead of the 25% for the Association of Investment Companies (AIC) specialist debt sector.

Over the same period, Starwood – which focused on the more established EU property markets - has returned 26.4%. Manager Starwood Capital Group is best known for the hotel group that carries its brand. It had plans to launch a £300 million fund in 2017 that would invest in European hotels but it never materialised.

Meanwhile Hadrian’s Wall Secured Investments (HWSL), which invests in secured loans to UK small and medium-sized businesses, floated in June 2016 but failed to hit its £100 million target, only making up numbers with a £45.2 million issue of C-shares, or conversion shares, in 2017.

However, it may now be time for it to come back to market. In its quarterly update, it said that a strong means it is monitoring its liquidity requirements, ‘which may include raising further equity capital’.

In the first quarter it reported deploying £36 million into new investments and has now fully drawn its £25 million debt facility with Shawbrook Bank. The £141 million listed fund currently yields 6.2% and trades on a slight premium of 0.1%.

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