DJ SWEF: Annual Audited Accounts 2018
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Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Annual Audited Accounts 2018
26-March-2019 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
26 March 2019
Starwood European Real Estate Finance Limited
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2018
The Company has today published its annual financial report for the year
ended 31 December 2018 and has made it available online at
www.starwoodeuropeanfinance.com [1].
Starwood European Real Estate Finance Limited is an investment company
listed on the main market of the London Stock Exchange with an investment
objective to provide Shareholders with regular dividends and an attractive
total return while limiting downside risk, through the origination,
execution, acquisition and servicing of a diversified portfolio of real
estate debt investments in the UK and the wider European Union's internal
market.
The Group is the largest London-listed vehicle to provide investors with
pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners
Limited, an indirect wholly-owned subsidiary of the Starwood Capital Group.
Key Highlights Year ended Year ended
31 December 2018 31 December 2017
NAV per Ordinary Share 102.66 p 102.17 p
Share Price 102.00 p 109.50 p
NAV total return(1) 7.1% 7.2%
Share Price total return(1) (1.0%) 7.6%
Total Net Assets GBP385.0 m GBP383.1 m
Loans advanced at amortised GBP413.4 m GBP370.0 m
cost (including accrued
income)
Financial assets held at fair GBP21.9 m GBP22.1 m
value through profit or loss
(including associated accrued
income)
Cash and Cash Equivalents GBP28.2 m GBP11.8 m
Amount drawn under Revolving GBP68.8 m GBP13.3 m
Credit Facility (excluding
accrued interest)
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio 7.4% 7.5%
unlevered annualised total
return(1)
Invested Loan Portfolio 8.0% 7.7%
levered annualised total
return(1)
Ongoing charges percentage(1) 1.1% 1.0%
Weighted average portfolio LTV 16.7% 14.5%
to Group first GBP(1)
Weighted average portfolio LTV 64.1% 63.2%
to Group last GBP(1)
(1) Further explanation and definitions of the calculation is contained in
the section "Alternative Performance Measures" at the end of this financial
report.
For further information, please contact:
Duncan MacPherson - Starwood Capital - 020 7016 3655
Full text of annual financial report for the year ended 31 December 2018
Objective and Investment Policy
INVESTMENT OBJECTIVE
The investment objective of Starwood European Real Estate Finance Limited
(the "Company"), together with its wholly owned subsidiaries Starfin Public
Holdco 1 Limited, Starfin Public Holdco 2 Limited, Starfin Lux S.à.r.l,
Starfin Lux 3 S.à.r.l, and Starfin Lux 4 S.à.r.l, (collectively the
"Group"), is to provide its shareholders with regular dividends and an
attractive total return while limiting downside risk, through the
origination, execution, acquisition and servicing of a diversified portfolio
of real estate debt investments (including debt instruments) in the UK and
the wider European Union's internal market.
INVESTMENT POLICY
The Company invests in a diversified portfolio of real estate debt
investments (including debt instruments) in the UK and the wider European
Union's internal market. Whilst investment opportunities in the secondary
markets will be considered from time to time, the Company's predominant
focus is to be a direct primary originator of real estate debt investments
on the basis that this approach is expected to deliver better pricing,
structure and execution control and a client facing relationship that may
lead to further investment opportunities.
The Company will attempt to limit downside risk by focusing on secured debt
with both quality collateral and contractual protection.
The Company anticipates that the typical loan term will be between three and
seven years. Whilst the Company retains absolute discretion to make
investments for either shorter or longer periods, at least 75 per cent of
total loans by value will be for a term of seven years or less.
The Company's portfolio is intended to be appropriately diversified by
geography, real estate sector type, loan type and counterparty.
The Company will pursue investments across the commercial real estate debt
asset class through senior loans, subordinated loans and mezzanine loans,
bridge loans, selected loan-on-loan financings and other debt instruments.
The split between senior, subordinated and mezzanine loans will be
determined by the Investment Manager in its absolute discretion having
regard to the Company's target return objectives. However, it is anticipated
that whole loans will comprise approximately 40-50 per cent of the
portfolio, subordinated and mezzanine loans approximately 40-50 per cent and
other loans (whether whole loans or subordinated loans) between 0-20 per
cent (including bridge loans, selected loan-on-loan financings and other
debt instruments). Pure development loans will not, in aggregate, exceed 25
per cent of the Company's Net Asset Value ("NAV") calculated at the time of
investment. The Company may originate loans which are either floating or
fixed rate.
The Company may seek to enhance the returns of selected loan investments
through the economic transfer of the most senior portion of such loan
investments which may be by way of syndication, sale, assignment,
sub-participation or other financing (including true sale securitisation) to
the same maturity as the original loan (i.e. "matched funding") while
retaining a significant proportion as a subordinate investment. It is
anticipated that where this is undertaken it would generate a positive net
interest rate spread and enhance returns for the Company. It is not
anticipated that, under current market conditions, these techniques will be
deployed with respect to any mezzanine or other already subordinated loan
investments. The proceeds released by such strategies will be available to
the Company for investment in accordance with the investment policy.
Loan to Value ("LTV")
The Company will typically seek to originate debt where the effective loan
to real estate value ratio of any investment is between 60 per cent and 80
per cent at the time of origination or acquisition. In exceptional
circumstances that justify it, the ratio may be increased to an absolute
maximum of 85 per cent. In any event, the Company will typically seek to
achieve a blended portfolio LTV of no more than 75 per cent (based on the
initial valuations at the time of loan origination or participation
acquisition) once fully invested.
Geography
The Company's portfolio will be originated from the larger and more
established real estate markets in the European Union's internal market. UK
exposure is expected to represent the majority of the Company's portfolio.
Outside of the UK, investment in the European Union's internal market will
mainly be focussed on Northern and Southern Europe. Northern European
markets include Germany, France, Scandinavia, Netherlands, Belgium, Poland,
Switzerland, Ireland, Slovakia and the Czech Republic. Southern European
markets include Italy and Spain. The Company may however originate
investments in other countries in the European Union's internal market to
the extent that it identifies attractive investment opportunities on a risk
adjusted basis.
The Company will not invest more than 50 per cent of the Company's NAV
(calculated at the time of investment) in any single country save in
relation to the UK, where there shall be no such limit.
When and if the UK ceases to be a member of the European Union or in the
event that any other member state ceases to be a member of the European
Union's internal market, it will not automatically cease to be eligible for
investment.
Real Estate Sector and Property Type
The Company's portfolio will focus on lending into commercial real estate
sectors including office, retail, logistics, light industrial, hospitality,
student accommodation, residential for sale and multi-family rented
residential. Investments in student accommodation and residential for sale
are expected to be limited primarily to the UK, while multi-family
investments are expected to be limited primarily to the UK, Germany and
Scandinavia. Further, not more than 30 per cent, in aggregate, of the
Company's NAV, calculated at the time of investment, will be invested in
loans relating to residential for sale. No more than 50 per cent of the
Company's NAV will be allocated to any single real estate sector of the UK,
except for the UK office sector which is limited to 75 per cent of the
Company's NAV.
Counterparty and Property Diversification
No more than 20 per cent of the Company's NAV, calculated at the time of
investment, will be exposed to any one borrower legal entity.
No single investment, or aggregate investments secured on a single property
or group of properties, will exceed 20 per cent of the Company's Net Asset
Value, calculated at the time of investment.
Corporate Borrowings
Company or investment level recourse borrowings may be used from
time-to-time on a short term basis for bridging investments, financing
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repurchases of shares or managing working capital requirements, including
foreign exchange hedging facilities and on a longer term basis for the
purpose of enhancing returns to Shareholders and/ or to facilitate the
underwriting of whole loans with a view to syndication at a later point. In
this regard, the Company is limited to aggregate short and long term
borrowings at the time of the relevant drawdown in an amount equivalent to a
maximum of 30 per cent of NAV but longer term borrowings will be limited to
20 per cent of NAV in any event.
Hedging
The Company will not enter into derivative transactions for purely
speculative purposes. However, the Company's investments will typically be
made in the currency of the country where the underlying real estate assets
are located. This will largely be in Sterling and Euros. However,
investments may be considered in other European currencies, and the Company
may implement measures designed to protect the investments against material
movements in the exchange rate between Sterling, being the Company's
reporting currency, and the currency in which certain investments are made.
The analysis as to whether such measures should be implemented will take
into account periodic interest, principal distributions or dividends, as
well as the expected date of realisation of the investment. The Company may
bear a level of currency risk that could otherwise be hedged where it
considers that bearing such risk is advisable. The Company will only enter
into hedging contracts, such as currency swap agreements, futures contracts,
options and forward currency exchange and other derivative contracts when
they are available in a timely manner and on terms acceptable to it. The
Company reserves the right to terminate any hedging arrangement in its
absolute discretion.
The Company may, but shall not be obliged to, engage in a variety of
interest rate management techniques, particularly to the extent the
underlying investments are floating rate loans which are not fully hedged at
the borrower level (by way of floating to fixed rate swap, cap or other
instrument). Any instruments chosen may seek on the one hand to mitigate the
economic effect of interest rate changes on the values of, and returns on,
some of the Company's assets, and on the other hand help the Company achieve
its risk management objectives. The Company may seek to hedge its
entitlement under any loan investment to receive floating rate interest.
Cash Strategy
Cash held by the Company pending investment or distribution will be held in
either cash or cash equivalents, or various real estate related instruments
or collateral, including but not limited to money market instruments or
funds, bonds, commercial paper or other debt obligations with banks or other
counterparties having a A- or higher credit rating (as determined by any
reputable rating agency selected by the Company), Agency RMBS (residential
mortgage backed securities issued by government-backed agencies) and AAA
rated CMBS (commercial mortgage-backed securities).
Transactions with Starwood Capital Group or Other Accounts
Without prejudice to the pre-existing co-investment arrangements described
below, the Company may acquire assets from,
or sell assets to, or lend to, companies within the Starwood Capital Group
or any fund, company, limited partnership or other account managed or
advised by any member of the Starwood Capital Group ("Other Accounts"). In
order to manage the potential conflicts of interest that may arise as a
result of such transactions, any such proposed transaction may only be
entered into if the independent Directors of the Company have reviewed and
approved the terms of the transaction, complied with the conflict of
interest provisions in the Registered Collective Investment Scheme Rules
2015 issued by the Guernsey Financial Services Commission (the "Commission")
under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as
amended, and, where required by the Listing Rules, Shareholder approval is
obtained in accordance with the listing rules issued by the UK Listing
Authority. Typically, such transactions will only be approved if: (i) an
independent valuation has been obtained in relation to the asset in
question; and (ii) the terms are at least as favourable to the Company as
would be any comparable arrangement effected on normal commercial terms
negotiated at arms' length between the relevant person and an independent
party, taking into account, amongst other things, the timing of the
transaction.
Co-investment Arrangements
Starwood Capital Group and certain Other Accounts are party to certain
pre-existing co-investment commitments and it is anticipated that similar
arrangements may be entered into in the future. As a result, the Company may
invest alongside Starwood Capital Group and Other Accounts in various
investments. Where the Company makes any such co-investments they will be
made at the same time, and on substantially the same economic terms, as
those offered to Starwood Capital Group and the Other Accounts.
UK Listing Authority Investment Restrictions
The Company currently complies with the investment restrictions set out
below and will continue to do so for so long as they remain requirements of
the UK Listing Authority:
* neither the Company nor any of its subsidiaries will conduct any trading
activity which is significant in the context of its group as a whole;
* the Company will avoid cross-financing between businesses forming part of
its investment portfolio;
* the Company will avoid the operation of common treasury functions as
between the Company and investee companies;
* not more than 10 per cent, in aggregate, of the Company's NAV will be
invested in other listed closed-ended investment funds; and
* the Company must, at all times, invest and manage its assets in a way
which is consistent with its object of spreading investment risk and in
accordance with the published investment policy. The Directors do not
currently intend to propose any material changes to the Company's investment
policy, save in the case of exceptional or unforeseen circumstances. As
required by the Listing Rules, any material change to the investment policy
of the Company will be made only with the approval of shareholders.
Financial Highlights
Key Highlights Year ended Year ended
31 December 2018 31 December 2017
NAV per Ordinary Share 102.66 p 102.17 p
Share Price 102.00 p 109.50 p
NAV total return(1) 7.1% 7.2%
Share Price total return(1) (1.0%) 7.6%
Total Net Assets GBP385.0 m GBP383.1 m
Loans advanced at amortised GBP413.4 m GBP370.0 m
cost (including accrued
income)
Financial assets held at fair GBP21.9 m GBP22.1 m
value through profit or loss
(including associated accrued
income)
Cash and Cash Equivalents GBP28.2 m GBP11.8 m
Amount drawn under Revolving GBP68.8 m GBP13.3 m
Credit Facility (excluding
accrued interest)
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio 7.4% 7.5%
unlevered annualised total
return(1)
Invested Loan Portfolio 8.0% 7.7%
levered annualised total
return(1)
Ongoing charges percentage(1) 1.1% 1.0%
Weighted average portfolio LTV 16.7% 14.5%
to Group first GBP(1)
Weighted average portfolio LTV 64.1% 63.2%
to Group last GBP(1)
(1) Further explanation and definitions of the calculation is contained in
the section "Alternative Performance Measures" at the end of this financial
report.
SHARE PRICE PERFORMANCE
As at 31 December 2018 the NAV was 102.66 pence per Ordinary Share (2017:
102.17 pence) and the share price was 102.00 pence (2017: 109.50 pence).
Source: Thomson Reuters
Chairman's Statement
STEPHEN SMITH | Chairman
25 March 2019
Dear Shareholder,
It is my pleasure to present the Annual Report and Audited Consolidated
Financial Statements of Starwood European Real Estate Finance Limited for
the year ended 31 December 2018.
OVERVIEW
The Group had another successful origination year in 2018 with GBP208 million
of new commitments made to borrowers. With repayments and amortisation at a
more typical level than in 2017, net commitments increased by GBP70.8 million
during the year.
The Group declared an aggregate dividend for the year of 6.5 pence per
Ordinary Share. The Group's NAV for the year remained stable and NAV total
return (including dividends) was 7.0 per cent. The Company's share price
total return across the financial year was 1.0 per cent downward, reflecting
weaker equity market sentiment generally across several asset classes in
late 2018.
As at 31 December 2018, the Group had investments and commitments of GBP477.2
million (of which GBP45.5 million was committed but unfunded at the end of the
year). The average maturity of the Group's loan book was 2.8 years. The
Group had net debt of GBP40.6 million leaving unused liquidity facilities of
GBP73 million, available to fund undrawn commitments and new lending. The
gross annualised levered total return of the invested loan portfolio was 8.0
per cent. The Net Asset Value ("NAV") was GBP385.0 million, being 102.66 pence
per Ordinary Share.
The table below shows the loan commitment and repayment profile over the
last five years.
2014 2015 2016 2017 2018
New loans to GBP143.2m GBP118.7m GBP175.9m GBP245.8m GBP208.0m
borrowers
(commitment)
Loan repayments and -GBP48.8m -GBP49.0m -GBP129.3m -GBP213.1m -GBP137.2m
amortisation
Net Investment GBP94.4m GBP69.7m GBP46.6m GBP32.7m GBP70.8m
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The Group continues to see good opportunities to deploy capital in the
target markets. The origination pipeline is healthy, with a number of
transactions under review which present attractive risk adjusted returns.
The Group is cautious about raising equity until it is confident that
appropriate transactions may be closed in sufficient volume to at least
match an underlying repayment trend averaging 35 to 40 per cent of the loan
book per annum. New loan closings and repayments tend to be irregular and
are often dependent on factors outside the Group's control, though there is
a trend towards greater activity pre-holidays in Easter, summer and
Christmas. The Group will continue to closely monitor markets and will
adjust its capital structure and its appetite for new loans consistent with
the availability of suitable investment opportunities.
SHARE ISSUANCE AND SHARE PRICE PERFORMANCE
The year end share price was 102 pence reflecting a 0.7 per cent discount to
NAV. The Company has typically traded at around a 4 to 8 per cent premium in
the last few years. We believe this recent downward movement is a reflection
of general market sentiment, particularly towards the end of the year, and
we note that the share price has moved back to a premium in early 2019.
At the last Annual General Meeting ("AGM"), the Company sought and received
authority to disapply Pre- Emption Rights on the allotment of equity
securities for up to 10 per cent of the Ordinary Shares in issue and, at an
Extraordinary General Meeting ("EGM") convened shortly thereafter, for a
further 10 per cent. As at the date of this report, this authority has not
been utilised.
The Company intends to seek approval to renew these authorities at the
upcoming AGM and EGM. As noted above, the Company is currently GBP40.6 million
drawn on its revolving credit facilities of GBP114 million (net of cash), with
GBP45.5 million of commitments unfunded, meaning it has approximately GBP28
million of available capacity which is undrawn on its revolving credit
facilities (absent of any repayments). If the net investment in 2019 is at a
similar level to 2018 (GBP70.8 million) then the Company would need to issue
more than 10 per cent of existing Ordinary Shares to fund the additional
commitments.
The Directors believe that having access to capital within a short time
frame is important to maintaining access to attractive investment
opportunities while at the same time ensuring that the Company does not
unnecessarily incur cash drag by raising equity in advance of deployment
opportunities (which could negatively impact the Company's dividend target).
The Directors believe that such access to capital will also have the
following benefits for the Company and the shareholders:
* to enable the Company to pursue larger investment opportunities and hence
broaden the range of lending that can be undertaken;
* to enable the Company to further increase the diversification of the
Company's portfolio of investments;
* increasing the size of the Company should help to make the Company more
attractive to a wider investor base;
* having a greater number of Shares in issue is likely to provide
shareholders with increased secondary market liquidity; and
* the Company's fixed running costs would be spread across a larger equity
capital base, thereby reducing the Company's ongoing expenses per Share.
In order to take advantage of such opportunities, the Directors believe it
is appropriate for the Company to renew these existing authorities at the
forthcoming AGM, in respect of issuance of up to 10 per cent of the Ordinary
Shares in issue, and at a separate EGM, to be convened for shortly after the
AGM, in respect of issuance of a further 10 per cent. Any new Shares issued
will be issued at a minimum issue price equal to the prevailing NAV per
ordinary Share at the time of allotment together with a premium intended to
cover the costs and expenses of the relevant issue.
The explanation of the advantages for the Company and its shareholders of
granting such authorities is set out in the Notice of the AGM and in a
notice of EGM which is intended to be published shortly.
DIVIDENDS
Total dividends of 6.5 pence per Ordinary Share were declared in relation to
the year ended 31 December 2018.
Dividend Payment Amount
Period declared date per share
1 January 2018 to 31 March 2018 16 Apr 2018 17 May 1.625p
2018
1 April 2018 to 30 June 2018 27 Jul 2018 31 Aug 1.625p
2018
1 July 2018 to 30 September 23 Oct 2018 16 Nov 1.625p
2018 2018
1 October 2018 to 31 December 23 Jan 2018 22 Feb 1.625p
2018 2019
Total 6.5p
NEW ACCOUNTING STANDARDS
IFRS 9 "Financial Instruments" became effective for annual periods beginning
on or after 1 January 2018. The Group has applied IFRS 9 retrospectively
which did not result in a change to the classification or measurement of
financial instruments. A detailed description of IFRS 9 adoption is provided
in Note 2(b)(i) of these consolidated financial statements.
BREXIT AND MACRO-ECONOMIC OUTLOOK
The United Kingdom's imminent departure from the European Union, with or
without an agreement, represents a potential threat to the UK economy as
well as wider Europe. On a cyclical view, national economies across Europe
appear to be heading at best towards lower growth and in some cases towards
recession. The potential impact of Brexit could have a further destabilising
effect.
To some extent the potential impact of an unsatisfactory UK exit from the EU
has already been priced into markets and forecasts, but significant
headwinds could arise should there be an unstructured settlement. It is
extremely difficult in the circumstances to anticipate the potential impact
on markets, so your Board is keeping a particularly watchful eye on the
macro position.
PORTFOLIO OUTLOOK
The strategy to incrementally grow the overall size of the Group, to
minimise cash drag from repayments and to use the revolving credit facility
where appropriate, will continue to be our focus during 2019.
We anticipate that we will build on the successes of the recent past and the
Directors remain optimistic about the prospects and opportunities for the
Group in the year ahead.
The Board will continue to inform you of progress by way of the quarterly
fact sheets and investment updates as deals are signed. On behalf of the
Board, I would like to close by thanking Shareholders for your commitment
and I look forward to briefing you on the Group's progress later this year.
Stephen Smith | Chairman
25 March 2019
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and details the
principal risks and uncertainties associated with its activities.
OBJECTIVE, INVESTMENT POLICY AND BUSINESS MODEL
The Objective and Investment Policy describes the Group's strategy and
business model.
The Investment Manager is Starwood European Finance Partners Limited, a
Company incorporated in Guernsey with registered number 55819 and regulated
by the Guernsey Financial Services Commission (the "Commission"). The
Investment Manager has appointed Starwood Capital Europe Advisers, LLP (the
"Investment Adviser"), an English limited liability partnership authorised
and regulated by the Financial Conduct Authority, to provide investment
advice, pursuant to an Investment Advisory Agreement.
CURRENT AND FUTURE DEVELOPMENT
A review of the year and outlook is contained in the Investment Highlights
and Portfolio Review sections of the Investment Manager's Report and within
the Chairman's Statement.
PERFORMANCE
A review of performance is contained in the Investment Highlights and
Portfolio Review sections of the Investment Manager's Report.
A number of performance measures are considered by the Board, the Investment
Manager and Investment Adviser in assessing the Company's success in
achieving its objectives. The Key Performance Indicators ("KPIs") used are
established industry measures to show the progress and performance of the
Group and are as follows:
* The portfolio yield, both levered and unlevered;
* The payment of targeted dividends;
* The movement in NAV per Ordinary Share;
* The movement in share price and the discount / premium to NAV;
* Ongoing charges as a percentage of undiluted NAV; and
* Weighted average loan to value for the portfolio.
Details of the KPIs are shown in Financial Highlights section.
RISK MANAGEMENT
It is the role of the Board to review and manage all risks associated with
the Group, both those impacting the performance and the prospects of the
Group and those which threaten the ongoing viability. It is the role of the
Board to mitigate these either directly or through the delegation of certain
responsibilities to the Audit Committee and Investment Manager. The Board
performs a review of a risk matrix at each Board meeting.
The Board considers the following principal risks could impact the
performance and prospects of the Group but do not threaten its ability to
continue in operation and meet its liabilities. Consequently, it has put in
place mitigation plans to manage those identified risks.
Long Term Strategic Risk
The Group's targeted returns are based on estimates and assumptions that are
inherently subject to significant business and economic uncertainties and
contingencies and, consequently, the actual rate of return may be materially
lower than the targeted returns. In addition, the pace of investment has in
the past and may in the future be slower than expected or the principal on
loans may be repaid earlier than anticipated, causing the return on affected
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investments to be less than expected. Furthermore, if repayments are not
promptly re- invested this may result in cash drag, which may lower
portfolio returns. As a result, the level of dividends to be paid by the
Company may fluctuate and there is no guarantee that any such dividends will
be paid. The shares may, therefore, trade at a discount to NAV per share and
shareholders may be unable to realise their investments through the
secondary market at NAV per share.
The Board monitors the level of premium or discount of share price to NAV
per share. While the Directors may seek to mitigate any discount to NAV per
share through the discount management mechanisms set out in this Annual
Report, there can be no guarantee that they will do so or that such
mechanisms will be successful. Please see Report of the Directors for
further information on the discount management mechanisms.
The Investment Adviser provides the Investment Manager and the Board with a
weekly report on pipeline opportunities, which includes an analysis of the
strength of the pipeline and the returns available. The Directors also
regularly receive information on the performance of the existing loans,
including the performance of the underlying assets and the likelihood of any
early repayments, which may impact returns.
The Board monitors investment strategy and performance on an ongoing basis
and regularly reviews the Investment Objective and Investment Policy in
light of prevailing investor sentiment to ensure the Company remains
attractive to its shareholders.
Interest Rate Risk
The Group is subject to the risk that the loan income and income from the
cash and cash equivalents will fluctuate due to movements in interbank
rates.
The loans in place at 31 December 2018 have been structured so that 19.9 per
cent of the loans are fixed rate, which provides protection from downward
interest rate movements to the overall portfolio (but also prevents the
Group from benefitting from any interbank rate rises on these positions). In
addition, whilst the remaining 80.1 per cent is classified as floating, 93.7
per cent of these loans are subject to interbank rate floors such that the
interest cannot drop below a certain level, which offers some protection
against downward interest rate risk. When reviewing future investments, the
Investment Manager will continue to review such opportunities to protect
against downward interest rate risk.
The Board considers that the following principal risks could impact both the
performance and prospects of the Group and could also threaten its ability
to continue its operations and meet its liabilities but has identified the
mitigating actions in place to manage them.
Foreign Exchange Risk
The majority of the Group's investments are Euro denominated. The Group is
subject to the risk that the exchange rates move unfavourably and that a)
foreign exchange losses on the loan principal are incurred and b) that
interest payments received are lower than anticipated when converted back to
Sterling and therefore returns are lower than the underwritten returns.
The Group manages this risk by entering into forward contracts to hedge the
currency risk. All non-Sterling loan principal is hedged back to Sterling to
the maturity date of the loan. Interest payments are hedged for the period
for which prepayment protection is in place. However, the risk remains that
loans are repaid earlier than anticipated and forward contracts need to be
broken early. In these circumstances, the forward curve may have moved since
the forward contracts were placed which can impact the rate received. In
addition, if the loan repays after the prepayment protection, interest after
the prepayment-protected period may be received at a lower rate than
anticipated leading to lower returns for that period. Conversely, the rate
could have improved and returns may increase.
As a consequence of the hedging strategy employed as outlined above, the
Group is subject to the risk that it will need to post cash collateral
against the mark to market on foreign exchange hedges which could lead to
liquidity issues or leave the Group unable to hedge new non-Sterling
investments.
The Company had approximately GBP264.8 million of hedged notional exposure
with two UK banks at 31 December 2018 (converted at 31 December 2018 foreign
exchange ("FX") rates).
As at 31 December 2018 the hedges with one of the counterparties was out of
the money in an amount of GBP8.8 million. If at any time this mark to market
exceeds GBP15 million, the Company is required to post collateral, subject to
a minimum transfer amount of GBP1 million. This situation is monitored
closely, however, and as at 31 December 2018, the Company had sufficient
liquidity and credit available on the revolving credit facility to meet any
cash collateral requirements.
Market Deterioration Risk
As mentioned earlier Brexit might have a destabilising impact on the UK
economy and wider European economy as well.
The Group's investments are comprised principally of debt investments in the
UK, and the wider European Union's internal market and it is therefore
exposed to economic movements and changes in these markets. Any
deterioration in the global, UK or European economy could have a significant
adverse effect on the activities of the Group and may result in significant
loan defaults or impairments.
In the event of a loan default in the portfolio, the Group is generally
entitled to accelerate the loan and enforce security, but the process may be
expensive and lengthy and the outcome is dependent on sufficient recoveries
being made to repay the borrower's obligations and associated costs. Some of
the investments held would rank behind senior debt tranches for repayment in
the event that a borrower defaults, with the consequence of greater risk of
partial or total loss. In addition, repayment of loans by the borrower at
maturity could be subject to the availability of refinancing options,
including the availability of senior and subordinated debt and is also
subject to the underlying value of the real estate collateral at the date of
maturity.
In mitigation, the average weighted loan to value of the portfolio is 64.1
per cent. Therefore, the portfolio should be able to withstand a significant
level of deterioration before credit losses are incurred.
The Investment Adviser also mitigates the risk of credit losses by
undertaking detailed due diligence on each loan. Whilst the precise scope of
due diligence will depend on the proposed investment, such diligence will
typically include independent valuations, building, measurement and
environmental surveys, legal reviews of property title and key leases, and,
where necessary, mechanical and engineering surveys, accounting and tax
reviews and know your customer checks.
The Investment Adviser, Investment Manager and Board also manage these risks
by ensuring a diversification of investments in terms of geography, market
and type of loan. The Investment Manager and Investment Adviser operate in
accordance with the guidelines, investment limits and restrictions policy
determined by the Board. The Directors review the portfolio against these
guidelines, limits and restrictions on a regular basis.
The Investment Adviser meets with all borrowers on a regular basis to
monitor developments in respect of each loan and reports to the Investment
Manager and the Board periodically and on an ad hoc basis where considered
necessary.
The majority of the Group's loans are held at amortised cost with only one
investment (the credit linked notes) held at fair value through profit or
loss at the reporting period end. The performance of each loan is reviewed
quarterly by the Investment Adviser for any indicators of significant
increase in credit risk, impaired or defaulted loans. The Investment Adviser
also provides their assessment of any expected credit loss for each loan
advanced. The results of the performance review and allowance for expected
credit losses are discussed with the Investment Manager and the Board.
Risk of Default Under the Revolving Credit Facilities
The Group is subject to the risk that a borrower could be unable or
unwilling to meet a commitment that it has entered into with the Group as
outlined above under market deterioration risk. As a consequence of this,
the Group could breach the covenants of its revolving credit facilities, and
fall into default itself.
A number of the measures the Group takes to mitigate market deterioration
risk as outlined above, such as portfolio diversification and rigorous due
diligence on investments and monitoring of borrowers, will also help to
protect the Group from the risk of default under the revolving credit
facility as this is only likely to occur as a consequence of borrower
defaults or loan impairments.
The Board regularly reviews the balances drawn under the credit facility
against commitments and pipeline and reviews the performance under the
agreed covenants. The loan covenants are also stress tested to test how
robust they are to withstand default of the Group's investments.
ASSESSMENT OF PROSPECTS
The Group's strategy is central to an understanding of its prospects. The
Group's focus is particularly on managing expected repayments in order to
minimise any potential for cash drag and continuing to grow the Group by
sourcing investments with good risk adjusted returns. The Group's prospects
are assessed primarily through its strategic review process, which the Board
participates fully in. The Directors' have assessed the prospect of the
Group over a period of three years which has been selected because the
strategic review covers a three-year period and this is also the approximate
average remaining loan term. The Group updates its plan and financial
forecasts on a monthly basis and detailed financial forecasts are maintained
and reviewed by the Board regularly.
ASSESSMENT OF VIABILITY
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Although the strategic plan reflects the Directors' best estimate of the
future prospects of the business, they have also tested the potential impact
on the Group of a number of scenarios over and above those included in the
plan, by quantifying their financial impact. These scenarios are based on
aspects of the following selected principal risks, which are detailed in
this Strategic Report, and as described below:
* Foreign exchange risk;
* Market deterioration risk (including impact of Brexit); and
* Risk of default under the revolving credit facilities.
These scenarios represent 'severe but plausible' circumstances that the
Group could experience. The scenarios tested included:
* A high level of loan default meaning that the Group stopped receiving
interest on a substantial part of the portfolio; and
* An analysis of the robustness of the covenants under the revolving credit
facility to withstand default of the underlying investments.
The results of this stress testing showed that the Group would be able to
withstand a high level of underlying loan default or impairment resulting
from either of the risks identified over the period of the financial
forecasts.
VIABILITY STATEMENT
Based on the assessment of prospects and viability as set out above, the
Directors confirm they have a reasonable expectation that the Group will
continue in operation and meet its liabilities as they fall due over the
three-year period ending 31 December 2021, which is also the approximate
average remaining loan term.
In connection with the viability statement, the Board confirm that they have
carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance,
solvency or liquidity.
COMMUNITY, SOCIAL, EMPLOYEE, HUMAN RIGHTS AND ENVIRONMENTAL ISSUES
In carrying out its activities and in its relationship with the community,
the Group aims to conduct itself responsibly, ethically and fairly,
including in relation to social and human rights issues. The Group has no
employees and the Board is composed entirely of non-executive Directors. As
an investment company, the Group has no direct impact on the environment.
However, the Group believes that it is in shareholders' interests to
consider environmental, social and ethical factors when selecting and
retaining investments.
BOARD DIVERSITY
The Directors consider that the Board is of an appropriate size and that its
members have a balance of skills, qualifications and experience which are
relevant to the Company. The Board supports the recommendations of the
Davies Report and believes in the value and importance of diversity in the
boardroom and it continues to consider the recommendations of the Davies
Report which will be a key consideration as part of its succession planning.
The Company has no employees and therefore has no disclosures to make in
this regard.
Stephen Smith | Chairman
25 March 2019
Investment Manager's Report - Investment Highlights
The Investment Manager and Investment Adviser are both part of the Starwood
Capital Group, a leading global real estate investment group.
PORTFOLIO STATISTICS
The Investment Manager and the Board of the Company considers that the Group
is engaged in a single segment of business, being the provision of a
diversified portfolio of real estate backed loans. The analysis presented in
this report is presented to demonstrate the level of diversification
achieved within that single segment. The Board does not believe that the
Group's investments constitute separate operating segments.
As at 31 December 2018, the portfolio was invested in line with the Group's
investment policy and is summarised below.
31 December 31 December
2018 2017
Number of investments 18 16
Percentage of invested portfolio in 80.1% 75.2%
floating rate loans(1)
Invested Loan Portfolio unlevered 7.4% 7.5%
annualised total return(1)
Invested Loan Portfolio levered 8.0% 7.7%
annualised total return(1)
Weighted average portfolio LTV - to 16.7% 14.5%
Group first GBP(1)
Weighted average portfolio LTV - to 64.1% 63.2%
Group last GBP(1)
Average loan term (stated maturity at 4.0 years 4.2 years
inception)
Average remaining loan term 2.8 years 3.1 years
Net Asset Value GBP385.0 m GBP383.1 m
Amount drawn under Revolving Credit (GBP68.8 m) (GBP13.3 m)
Facility (excluding accrued interest)
Loans advanced at amortised cost GBP413.4 m GBP370.0 m
(including accrued income)
Financial assets held at fair value GBP21.9 m GBP22.1 m
through profit or loss (including
associated accrued income)
Cash GBP28.2 m GBP11.8 m
Other net assets / (liabilities) (GBP9.6 m) (GBP7.5 m)
(including the value of FX hedges)
(1) Further explanation and definitions of the calculation is contained in
the section "Alternative Performance Measures" at the end of this financial
report.
PORTFOLIO DIVERSIFICATION
% of invested
Country assets
Spain 29.9
Republic of Ireland 23.3
UK - Regional England 22.4
UK - Central London 10.5
Hungary 10.3
France 3.3
Czech Republic 0.3
% of invested
Sector assets
Hospitality 40.9
Retail 12.8
Light Industrial 10.6
Residential for sale 9.0
Office 8.2
Healthcare 5.8
Education 3.9
Logistics 3.6
Residential for rent 2.3
Student Accommodation 2.2
Other 0.7
% of invested
Loan type assets
Whole loans 66.8
Mezzanine 28.2
Other debt instruments 5.0
% of invested
Loan currency assets*
Sterling 32.9
Euro 67.1
* The currency split refers to the underlying loan currency; however, the
capital and interest during protected periods on all non-sterling exposure
is hedged back to sterling.
ANNUALISED RETURNS
One of the key alternative performance measures of the Group is the gross
levered return. A definition of how this is calculated is included in the
Alternative Performance Measures section of this report. The levered return
on the invested loan portfolio was 8.0 per cent per annum at the end of 31
December 2018, which has increased from 7.7 per cent at 31 December 2017.
With the benefit of a few years of normalised repayment activity, the Group
has assessed the impact of the repayments on the quoted annualised return
and it is worth noting that the calculation of annualised returns quoted in
this report and our quarterly factsheets excludes a number of potential
upsides that are not incorporated in the returns figures quoted.
* In the quoted return, we amortise all one off fees (such as arrangement
and exit fees) over the contractual life of the loan, which is currently at
an average of four years for the portfolio. However, it has been our
experience that loans tend to repay after approximately 2.5 years and as
such, these fees are actually amortised over a shorter period.
* Origination fees are excluded from the annualised returns and these are
accounted for within the interest line in the consolidated financial
statements.
* Many loans benefit from prepayment provisions, which means that if they
are repaid before the end of the protected period, additional interest or
fees become due. As we quote the return based on the contractual life of the
loan these returns cannot be forecast in the return.
* The quoted return excludes the benefit of any foreign exchange gains on
Euro loans. We do not forecast this as the loans are often repaid early and
the gain may be lower than this once hedge positions are settled.
The above three possible upsides to quoted return targets are not
incorporated in the gross levered yield of 8.0 per cent as they are not
guaranteed to occur, are difficult to forecast accurately and to incorporate
them could overstate the expected return. However, we expect these to
continue to provide an enhancement to the quoted levels of return going
forward although the levels of this enhancement may vary depending on when
the loans repay versus contractual maturity and prepayment protection, as
well as the shape of the Sterling-Euro forward curve. Over the life of the
Group to date, we have experienced on average an enhancement of 0.66
percentage points from prepayments and one off fees when loans repay and for
the most recent Euro loan originated we are forecasting a pick-up of 1.3
percentage points if held to maturity.
FOREIGN EXCHANGE
The Group continues to recognise unrealised foreign exchange gains or losses
relating to investment activity. The Group has fully hedged the principal of
each individual non-Sterling denominated loan with forward contracts,
together with interest receipts during the period of prepayment protection.
If the loans repay at their scheduled repayment date, the Group would expect
that this policy would be effective in protecting against realising FX
losses on capital invested.
However, the accounting treatment for the non-Sterling denominated loans is
to value the loan at the foreign exchange rate at the relevant valuation
date, and to value the hedge based on the market forward rates at the
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valuation date to the maturity date of the relevant hedge (discounted back
to present value). As a result of this accounting treatment, whilst the loan
principal is economically fully hedged (if held to loan maturity),
unrealised foreign exchange gains or losses are recognised in the accounts
during the life of the loan due to changes in the shape of the relevant
forward curves. For this reason, the Group disregards unrealised foreign
exchange gains and losses when declaring dividends.
It is important to note that should any of the non-Sterling denominated
loans repay early, and the Group has no alternative use for the funds repaid
and therefore breaks the hedges early, foreign exchange gains or losses
could be realised at that point. The size of this will depend on the shape
of the relevant forward curve at the point at which the relevant hedge is
broken. In general, a steeper curve would result in greater gains/losses.
DIVIDEND POLICY
The Company declared dividends of 6.5 pence per Ordinary Share in respect of
the year ended 3 December 2018 (2017: 6.5 pence per Ordinary Share). These
dividends are recognised in the Consolidated Statement of Changes in Equity
when declared, which is usually within one month after the end of the
financial period to which they relate. Dividends are usually paid within one
month of the declaration date.
The Company may pay dividends out of reserves provided that the Board of
Directors is satisfied on reasonable grounds that the Company will,
immediately after payment, satisfy the solvency test (as defined in the
Companies (Guernsey) Law, 2008, as amended), and satisfy any other
requirement in its memorandum and articles.
INVESTMENT OUTLOOK AND MARKET SUMMARY
2018 numbers from Cushman and Wakefield show that the real estate market in
London has been resilient despite the uncertainties of Brexit. Preliminary
figures revealed a total office take-up of 12.1 million square feet which
was 3 per cent higher than 2017 and 18 per cent higher than 2016. From an
investment point of view, total spend reached GBP19.7 billion, slightly down
on the GBP20 billion from 2017 but above the GBP16 billion of 2016. The latest
INREV investment intentions survey shows that the UK is still high up on
investors' targets with 64.6 per cent of investors in the survey looking to
invest in the UK, which is behind only Germany at 66.7 per cent. Overall,
the commercial real estate lending market still has a high level of
liquidity, however, we have seen a repricing for UK loans by some German
lenders who are affected by the uncertainties around how UK loans with be
treated for Pfandbrief (covered bond financing) purposes when the UK leaves
the EU. In addition, there has been a slight pullback for financing more
transitional business plans in London, which may present opportunities for
lending on good risk adjusted returns.
UK retail continues to fare less well and this is clearly reflected in
investment volumes and a lack of appetite from investors and lenders to take
on new retail exposure. In Q4 2018, according to data from CBRE Research and
Property Data, year-to-date shopping centre transaction volumes stood at
GBP878.1 million, significantly down from a peak of GBP5.5 billion in 2014. We
expect to see a larger number of shopping centres in distress as a result of
loan maturities coming due where lenders are keen to be repaid but the
owners will find it difficult to find replacement debt or liquidity to sell
the property. The retail occupational market will continue to be tough in
many places and it still appears to be too early to judge where the new
equilibrium will settle for retail income.
In the wider credit markets, we have seen widening of spreads during 2018,
which accelerated toward the end of the year. In CMBS EUR AAA and BBB
pricing reached a low in Q2 2018 of 70 bps and 230 bps respectively but
ended the year around 40 bps wider on each. While that has added to blended
pricing of CMBS financing during the year this is not a huge move and BBB
spreads were higher than this as recently as Q3 2017. There has been a
larger move in the high yield market with the Markit iTraxx Europe Crossover
index, which is made up of the 75 most liquid sub-investment grade entities,
having started the year at 233 bps and ending at 326 bps. After similar
volumes to 2017 for the first three quarters of the year, there was a
sharply subdued level of new issuance of leveraged loans and high yield
bonds in Q4 2018 with only EUR18 billion of new issuance versus EUR65
billion in Q4 2017. One big contrast between the commercial real estate and
corporate credit markets is the growth in size of the markets since the
global financial crisis. The volume of outstanding non-financial BBB
corporate debt has grown by 181 per cent since 2007 whereas according to the
Cass business school the total outstanding CRE debt in the UK is 35 per cent
lower than the 2007 peak.
In the Group's other key markets of Spain and Ireland growth remains
significantly ahead of the rest of Europe. In Dublin, there is low vacancy
in prime office, hotels are running at the top occupancy of all cities in
Europe and there is a shortage of residential and student stock. This year
the Group has financed the development of new student accommodation in
central Dublin, residential housing in commuter areas and one of the largest
investments of the year for the Group was a loan made to support the
acquisition of an Irish hotel. In Spain, unemployment has continued falling
and GDP growth remains strong. In the Madrid market, we are seeing a similar
pattern in the real estate metrics with a decreasing vacancy rate and rents
increasing from a low base as a result. At this stage, we are able to lend
against capital values per square metre which are significantly below the
previous peak and which represents a discount to replacement cost.
Across the eight new loans the Group made in 2018, seven were in our key
target markets of the UK, Ireland and Spain. We see these dynamics
continuing into 2019 and a similar mix of geographical split going forward.
Investment Manager's Report - Portfolio Review
INVESTMENT DEPLOYMENT
As at 31 December 2018, the Group had investments and commitments of GBP477.2
million (Sterling equivalent at year-end exchange rates) as follows:
Sterling Sterling
equivalent equivalent unfunded
Transaction balance(1) commitment(1)
Hospitals, UK GBP25.0m -
Varde Partners Mixed Portfolio, GBP1.0m -
UK
Mixed Use Development, South East GBP13.8m GBP1.6m
UK
Regional Hotel Portfolio, UK GBP45.9m -
Credit Linked Notes, UK Real GBP21.8m -
Estate
Hotel & Residential, UK GBP34.5m GBP6.7m
Total Sterling Loans GBP142.0m GBP8.3m
Logistics, Dublin, Ireland GBP13.2m -
Hotel, Barcelona, Spain GBP41.5m -
School, Dublin, Ireland GBP17.0m -
Industrial Portfolio, Central and GBP45.7m -
Eastern Europe
Three Shopping Centres, Spain GBP31.8m GBP8.4m
Shopping Centre, Spain GBP15.3m GBP0.1m
Hotel, Dublin, Ireland GBP54.1m -
Residential, Dublin, Ireland GBP6.8m GBP1.3 m
Office, Paris, France GBP14.4m -
Student Accommodation, Dublin GBP9.5m GBP0.6m
Hotel, Spain GBP23.7m GBP25.9m
Office & Hotel, Madrid GBP16.7m GBP0.9m
Total Euro Loans GBP289.7m GBP37.2m
Total Portfolio GBP431.7m GBP45.5m
(1) Euro balances translated to sterling at period end exchange rates.
During the financial year, the following significant investment activity
occurred (included in the table above):
New Loans
Student Accommodation, Dublin (EUR11.25 million): On 5 February 2018 the
Group committed to a EUR11.25 million whole loan facility to finance a
127-bed purpose built student development scheme in central Dublin. The
Dublin student market suffers from a severe structural undersupply of
purpose built student accommodation, and the borrower's aim is to deliver
high quality schemes in strong locations across Ireland in order to address
this shortage. The initial facility advance was made on 5 February 2018, and
the remaining development costs were funded monthly until completion in the
summer of 2018. The facility has a term of two years.
Residential, Dublin, Ireland (EUR9 million): On 16 February 2018, the Group
committed to a EUR9 million floating rate whole loan to finance the
conversion of 84 apart-hotels to residential use on a site adjacent to the
Hotel, Dublin (described below). The financing has been provided in the form
of an initial advance along with a capex facility to fund the refurbishment
works for a period of 18 months with a six-month extension option.
Hotel, Dublin, Ireland (EUR60 million): On 21 February 2018, the Group
closed a EUR60 million floating rate whole loan to finance the acquisition
of a 764 key hotel, 27 apart-hotel units and ancillary development land in
Dublin. The financing has been provided in the form of a single advance for
a four-year term with a one-year extension option.
Shopping Centre, Spain (EUR17 million): On 23 February 2018, the Group
closed a EUR17 million floating rate mezzanine loan secured by a shopping
centre in Spain. The property is well anchored, dominates its catchment and
is positioned to benefit from the sponsors' active asset management
strategy. The financing has been provided in the form of an initial advance
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along with a capex facility to implement further value enhancing
initiatives. The Group's loan complements an existing senior facility
provided by Spanish banks, a structure that the Group sees potential to
replicate further in Spain. The loan term is 30 months with two one-year
extension options.
Hotel, Spain (EUR55 million): On 15 March 2018, the Group closed a EUR110
million floating rate whole loan secured by a hotel in Spain with Starwood
Property Trust, Inc. (through a wholly owned subsidiary) participating in 50
per cent of the loan amount, provided the Group with a net commitment of
EUR55 million. The financing has been provided in the form of an initial
advance along with a capex facility to support the sponsor's repositioning
strategy. The loan term is five years, and the Group expects to earn an
attractive risk-adjusted return in line with its stated investment strategy.
Industrial, Paris (EUR14.77 million): On 4 May 2018, the Group arranged and
subscribed to a EUR14.77 million note issuance, the proceeds of which were
used to finance the acquisition of a light industrial asset in the Parisian
region of France.
Office & Hotel, Madrid (EUR19.5 million):
On 12 November 2018 the Group closed a EUR19.5 million fixed rate whole loan
secured by a mixed-use office and hotel property located in Madrid, Spain.
The financing was primarily provided in the form of an initial advance along
with a smaller capex facility to support the borrower's value-enhancing,
light capex initiatives. The loan term is 5 years, and the Group expects to
earn an attractive risk-adjusted return in line with its stated investment
strategy.
Hotel & Residential, UK (GBP62.5 million):
On 18th December 2018 the Group committed to fund a GBP62.5 million fixed rate
mezzanine loan to support the development of a prime mixed-use scheme in
Central London with Starwood Property Trust, Inc. (through a wholly owned
subsidiary), participating in 66 per cent of the loan amount, providing the
Group with a net commitment of GBP41.25 million. The loan term is 3 years with
a one-year extension option, and the Group expects to earn an attractive
risk-adjusted return in line with its stated investment strategy. The loan
partially funded on 21 December 2018 with the remaining balance expected to
be funded in early 2019.
Repayments
Centre Point, London: The Group received full repayment on 16 February 2018
following successful completion of the borrower's business plan.
Residential Portfolio, Cork: The Group received full repayment of the loan
on 13 March 2018 following successful completion of the borrower's business
plan.
Hotel, Channel Islands: The Group received full repayment of the on 18 May
2018 following a refinancing by the borrower.
Residential Portfolio, Dublin: The Group received full repayment on 29
November 2018 following a sale of the portfolio.
Industrial, UK: The Group received full repayment of the on 20 December 2018
following a refinancing by the borrower.
Industrial, Paris: The Group received full repayment on 21 December 2018
following a sale of the property.
In addition to the above repayments, the Group continued to receive
unscheduled amortisation on other loans as borrowers continue to execute
their business plans, in particular on the Varde Partners Mixed Portfolio,
the Industrial Portfolio (Europe) and Office (Paris) loans. The Group also
advanced GBP3.6 million of proceeds to borrowers to which it has outstanding
commitments from loans originated in prior years.
The average remaining term of the loans is 2.8 years, which is split as
shown in the table below.
Value of % of
loans invested
Remaining years to contractual maturity* (GBPm) portfolio
0 to 1 years 21.6 5.0
1 to 2 years 101.9 23.6
2 to 3 years 135.1 31.3
3 to 5 years 148.0 34.3
5 to 10 years 25.0 5.8
* excludes any permitted extensions. Note that borrowers may elect to repay
loans before contractual maturity.
EVENTS AFTER THE REPORTING PERIOD
The following amounts have been drawn under existing commitments, up to 25
March 2019:
Local
Currency
Hotel and Residential, UK GBP6,703,125
Hotel, Spain EUR2,519,265
Residential, Dublin, Ireland EUR1,390,169
Mixed Use Development, South East UK GBP151,764
Shopping Centre, Spain EUR72,526
Subsequently to reporting date, the Company repaid EUR15 million under
Morgan Stanley credit facility and GBP11 million under Lloyds credit facility
and has drawn additional funds of EUR2 million under Lloyds facility. At 25
March 2019 the amounts drawn under each facility are:
* Morgan Stanley - EUR34 million
* Lloyds - EUR17 million
The following loan amortisation (both scheduled and unscheduled) has been
received since the year-end up to 25 March 2019:
Local
Currency
Industrial Portfolio, Central and Eastern Europe EUR938,496
Three Shopping Centres, Spain EUR167,344
Logistics, Dublin, Ireland EUR38,967
The following loans have been repaid in full since the year end:
Local
Currency
Student Accommodation, Dublin EUR10,569,039
Varde Partners Mixed Portfolio, UK GBP968,003
On 23 January 2019, the Company declared a dividend of 1.625 pence per
Ordinary Share payable to shareholders on the register on 22 February 2019.
Starwood European Finance Partners Limited
Investment Manager
25 March 2019
Governance
Board of Directors
STEPHEN SMITH | Non-executive Chairman - Chairman of the Board
Stephen is Chairman of The PRS REIT which currently trades on the SFS of the
London Stock Exchange. He is also Chairman of AEW UK Long Lease REIT plc
which trades on the Main Market of the London Stock Exchange. Previously, he
was the Chief Investment Officer of British Land Company PLC, the FTSE 100
real estate investment trust from January 2010 to March 2013 with
responsibility for the group's property and investment strategy. He was
formerly Global Head of Asset Management and Transactions at AXA Real Estate
Investment Managers, where he was responsible for the asset management of a
portfolio of more than EUR40 billion on behalf of life funds, listed
property vehicles, unit linked and closed end funds. Prior to joining AXA in
1999 he was Managing Director at Sun Life Properties for five years. Stephen
is a UK resident.
JONATHAN BRIDEL | Non-executive Director - Management Engagement Committee
Chairman
Jonathan acts as a non-executive Chairman or Director of listed and unlisted
companies comprised mainly of investment funds and investment managers.
These include The Renewables Infrastructure Group Limited (FTSE 250),
Alcentra European Floating Rate Income Fund Limited (until 30 June 2019),
Sequoia Economic Infrastructure Income Fund Limited (FTSE 250) and Funding
Circle SME Income Fund Limited which are listed on the main market of the
London Stock Exchange, DP Aircraft I Limited and Fair Oaks Income Fund
Limited. He was previously Managing Director of Royal Bank of Canada's
investment business in the Channel Islands. Prior to this, after working at
PriceWaterhouse Corporate Finance in London, Jonathan served in senior
management positions in the British Isles and Australia in banking,
specialising in credit and in private businesses as Chief Financial Officer.
Graduating from the University of Durham with a degree of Master of Business
Administration in 1988, Jonathan also holds qualifications from the
Institute of Chartered Accountants in England and Wales where he is a
Fellow, the Chartered Institute of Marketing and the Australian Institute of
Company Directors. Jonathan is a Chartered Marketer and a member of the
Chartered Institute of Marketing, a Chartered Director and Fellow of the
Institute of Directors and a Chartered Fellow of the Chartered Institute for
Securities and Investment. Jonathan is a resident of Guernsey.
JOHN WHITTLE | Non-executive Director - Audit Committee Chairman
John is a Fellow of the Institute of Chartered Accountants in England and
Wales and holds the Institute of Directors Diploma in Company Direction. He
is a non-executive Director of International Public Partnerships Limited
(FTSE 250), India Capital Growth Fund which is listed on the main market of
London Stock Exchange, Globalworth Real Estate Investments Limited, GLI
Finance Ltd and Aberdeen Frontier Markets Investment Company Limited (all
listed on AIM), Toro Limited (listed on SFM), and also acts as non-executive
Director to several other Guernsey investment funds. He was previously
Finance Director of Close Fund Services, a large independent fund
administrator, where he successfully initiated a restructuring of client
financial reporting services and was a key member of the business transition
team. Prior to moving to Guernsey he was at PriceWaterhouse in London before
embarking on a career in business services, predominantly telecoms. He
co-led the business turnaround of Talkland International (which became
Vodafone Retail) and was directly responsible for the strategic shift into
retail distribution and its subsequent implementation; he subsequently
worked on the private equity acquisition of Ora Telecom. John is also a
resident of Guernsey.
Report of the Directors
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The Principal Activities and Investment Objective are fully detailed in the
Objective and Investment Policy.
STRUCTURE
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The Company was incorporated with limited liability in Guernsey under the
Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with
registered number 55836, and has been authorised by the Guernsey Financial
Services Commission as a registered closed-ended investment company. The
Company's Ordinary Shares were admitted to the premium segment of the UK
Listing Authority's Official List and to trading on the Main Market of the
London Stock Exchange as part of its IPO which completed on 17 December
2012. Further issues have taken place since IPO and are listed under
"Capital" below. The issued capital during the year comprises the Company's
Ordinary Shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l (indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 1 Limited),
Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l. (both indirectly
wholly-owned via a 100% shareholding in Starfin Public Holdco 2 Limited).
References to the Group refer to the Company and its subsidiaries.
DIVIDEND POLICY
The Company has a target dividend of 6.5 pence per Ordinary Share per annum,
based on quarterly dividend payments.
DIVIDENDS PAID
The Company declared dividends of 1.625 pence for each of the calendar
quarters of 2018. The Company paid a total of GBP24,376,261 in respect of 2018
(6.5 pence per Ordinary share) (2017: GBP24,376,261: 6.5 pence per Ordinary
Share).
BUSINESS REVIEW
The Group's performance during the year to 31 December 2018, its position at
that date and the Group's future developments are detailed in the Chairman's
Statement, the Strategic Report and the Investment Manager's Report.
CAPITAL
As part of the Company's IPO completed on 17 December 2012, 228,500,000
Ordinary Shares of the Company, with an issue price of 100 pence per share,
were admitted to the premium segment of the UK Listing Authority's Official
List and to trading on the Main Market of the London Stock Exchange.
The following issues have been made since IPO:
Number of Price (pence per
Admission Date Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
Following these issues, the Company now has issued share capital consisting
of 375,019,398 Ordinary Shares. There have been no further issues during
2018.
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders pursuant to the
FCA's Disclosure and Transparency Rules ("DTR") is published via a
Regulatory Information Service and is available on the Company's website.
The Company has been notified under Rule 5 of the DTR of the following
holdings of voting rights in its shares as at 31 December 2018 and as at the
date of this report.
% holding of % holding of
Ordinary Ordinary
Shares at 31 Shares at the date
December of
Name 2018 this report
Quilter Cheviot 9.11 9.11
Investment Management
SG Private Banking 8.98 8.98
Schroder Investment 8.61 13.66
Management
Quilter Investors 7.11 7.91
Fidelity International 5.41 5.39
BlackRock 5.41 5.41
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown below:
Ordinary Shares at Ordinary Shares at
Name 31 December 2018 31 December 2017
Stephen Smith 78,929 78,929
John Whittle 11,866 11,866
Jonathan Bridel and Spouse 11,866 11,866
The Directors have adopted a code of Directors' dealings in Ordinary Shares,
which is based on EU Market Abuse Regulation ("MAR"). MAR came into effect
across the EU (including the UK) on 3 July 2016. The Board is responsible
for taking all proper and reasonable steps to ensure compliance with MAR by
the Directors, and reviews such compliance on a regular basis.
EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting period are contained in note 23 to the
consolidated financial statements.
INDEPENDENT AUDITOR
The Board of Directors elected to appoint PricewaterhouseCoopers CI LLP as
Auditor to the Company at the inaugural meeting of the Company on 22
November 2012 and they have been re-appointed at each AGM held since.
PricewaterhouseCoopers CI LLP has indicated their willingness to continue as
Auditor. The Directors will place a resolution before the AGM to re-appoint
them as independent Auditor for the ensuing year, and to authorise the
Directors to determine their remuneration.
Report of the Directors
INVESTMENT MANAGER AND SERVICE PROVIDERS
The Investment Manager during the year was Starwood European Finance
Partners Limited (the "Investment Manager"), incorporated in Guernsey with
registered number 55819 and regulated by the GFSC and Alternative Investment
Fund Management Directive. The Investment Manager has appointed Starwood
Capital Europe Advisers, LLP ("the Investment Adviser"), an English limited
liability partnership authorised and regulated by the Financial Conduct
Authority ("FCA"), to provide investment advice pursuant to an Investment
Advisory Agreement.
The administration of both the Company and Investment Manager was delegated
to Ipes (Guernsey) Limited (the "Administrator") during the year.
DISCOUNT CONTROL
The Company maintains share repurchase powers that allow the Company to
repurchase Ordinary Shares in the Market up to 14.99 per cent of the share
capital, subject to annual renewal of the Shareholder authority. In addition
the Company may raise fresh capital including through a placing programme
(subject to the publication of a prospectus of the Company) and through
opportunistic tap issues. This enables issuers such as the Company (subject
to obtaining the requisite Shareholder authorities) to issue up to 20 per
cent of the securities already listed by way of such issues over 12 months
without any requirement to publish a prospectus.
DISCOUNT-TRIGGERED REALISATION
Following the approval of the amendment to the Articles, the provisions
relating to the Realisation Offer will now first apply by reference to the
last six months of the financial year ending 31 December 2022 and that the
Realisation Vote mechanism would apply (where the discount-triggered
realisation mechanism has not been activated) by no later than 28 February
2023 and in each case on successive five year anniversaries of such dates.
REALISATION VOTE
In the event that the discount-triggered realisation mechanism is not
activated, the Directors shall exercise their discretion under the Articles
to put forward a realisation vote (as an ordinary resolution) to
Shareholders by no later than 28 February 2023. If Shareholders vote in
favour of this resolution then the Company will procure that a Realisation
Offer on substantially the same terms as that described above is offered to
Shareholders. Following the receipt of all elections, if either: (i) more
than 75 per cent of the Ordinary Shares then in issue were elected for
realisation; or (ii) the NAV of the Company following the realisation would
be less than GBP100 million, the Directors may exercise their discretion not
to proceed with the Realisation Offer and instead put forward alternative
proposals which are no less favourable to electing Shareholders and which
may include the reorganisation or winding up of the Company.
If Shareholders vote against the realisation vote then the Company will
continue in existence as it is then constituted without any liquidity event
for Shareholders.
SHARE BUYBACKS
At the AGM held on 15 May 2018, the Company renewed the authority received
at the AGM held on 11 May 2017 to purchase in the market up to 14.99 per
cent of the Ordinary Shares in issue on 15 May 2018 at a price not
exceeding: (i) five per cent above the average of the mid-market values of
the Ordinary Shares for the five Business Days before the purchase is made;
or (ii) the higher of the last independent trade or the highest current
independent bid for the Ordinary Shares.
The Directors will give consideration to repurchasing Shares under this
authority, but are not bound to do so, where the market price of an Ordinary
Share trades at more than 7.5 per cent below the Net Asset Value per Share
for more than 3 months, subject to available cash not otherwise required for
working capital purposes or the payment of dividends in accordance with the
Company's dividend policy.
If not previously used, this authority shall expire at the conclusion of the
Company's AGM in 2019. The Directors intend to seek annual renewal of this
buyback authority from Shareholders each year at the Company's AGM.
John Whittle | Director
25 March 2019
Directors' Remuneration Report
REMUNERATION POLICY & COMPONENTS
The Board endeavours to ensure the remuneration policy reflects and supports
the Company's strategic aims and objectives throughout the year under
review. It has been agreed that, due to the small size and structure of the
Company, a separate Remuneration Committee would be inefficient; therefore
the Board as a whole is responsible for discussions regarding remuneration.
As per the Company's Articles of Association, all Directors are entitled to
such remuneration as is stated in the Company's Prospectus or as the Company
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