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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DJ SWEF: Annual Audited Accounts 2018 -8-
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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may determine by ordinary resolution; to not exceed the aggregate overall
limit of GBP200,000. Subject to this limit, it is the Company's policy to
determine the level of Directors' fees, having regard for the level of fees
payable to non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of responsibilities related to the
Board, Management Engagement Committee and Audit Committee and the time
dedicated by each Director to the Company's affairs. Base fees are set out
below.
As outlined in the Articles of Association, the Directors may also be paid
for all reasonable travelling, accommodation and other out-of-pocket
expenses properly incurred in the attendance of Board or Committee meetings,
general meetings, or meetings with shareholders or debentures of the Company
or otherwise in discharge of their duties; and all reasonable expenses
properly incurred by them seeking independent professional advice on any
matter that concerns them in the furtherance of their duties as Directors of
the Company.
No Director has any entitlement to pensions, paid bonuses or performance
fees, has been granted share options or been invited to participate in
long-term incentive plans. No loans have been originated by the Company for
the benefit of any Director.
None of the Directors have a service contract with the Company. Each of the
Directors has entered into a letter of appointment with the Company dated 22
November 2012, and then prior to the May 2019 AGM, subject to re-election
every three years thereafter at the AGM. It has been decided that from the
May 2019 AGM each Director is subject to annual re-election.
Total Fee 2018 Total Fee 2017
Director GBP GBP
Stephen Smith 50,000 47,500
John Whittle 45,000 40,000
Jonathan Bridel 42,500 35,000
Aggregate fees 137,500 122,500
Aggregate expenses 4,321 2,916
Total 141,821 125,416
The Directors do not have any interests in contractual arrangements with the
Company or its investments during the year under review, or subsequently.
Each appointment can be terminated in accordance with the Company's Articles
and without compensation. As outlined in the letters of appointment, each
appointment can be terminated at the will of both parties with one month's
notice either by (i) written resignation; (ii) unauthorised absences from
Board meetings for 12 months or more; (iii) written request of the other
Directors; or (iv) a resolution of the shareholders.
Directors' and Officers' liability insurance cover is maintained by the
Company but is not considered a benefit in kind nor constitutes a part of
the Directors' remuneration. The Company's Articles indemnify each Director,
Secretary, agent and officer of the Company, former or present, out of
assets of the Company in relation to charges, losses, liabilities, damages
and expenses incurred during the course of their duties, in so far as the
law allows and provided that such indemnity is not available in
circumstances of fraud, wilful misconduct or negligence.
By order of the Board
John Whittle | Director
25 March 2019
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium Listing on the
Official List and admission to trading on the Main Market for Listed
Securities of the London Stock Exchange, the Company is required to comply
with the principles of the UK Corporate Governance Code dated April 2016
("UK Code") (the UK Corporate Governance Code dated July 2018 will apply for
the period beginning 1 January 2019).
As an AIC member, the Board has also considered the principles and
recommendations of the AIC Code of Corporate Governance dated July 2016
("AIC Code") by reference to the AIC Corporate Governance Guide for
Investment Companies ("AIC Guide"). The AIC Code addresses all the
principles set out in the UK Code, as well as setting out additional
principles and recommendations on issues of specific relevance to the
Company. The AIC Code has been endorsed by the Financial Reporting Council
as ensuring investment company boards fully meet their obligations to the UK
Code and LR 9.8.6 of the Listing Rules. Having adopted the AIC Code with
effect from Admission (17 December 2012), the Board has therefore assessed
itself, the Committees and performance of the Directors during the year.
Except as disclosed within the report, the Board is of the view that
throughout the year ended 31 December 2018, the Company complied with the
recommendations of the AIC Code and the relevant provisions of the UK Code.
Key issues affecting the Company's corporate governance responsibilities,
how they are addressed by the Board and application of the AIC Code are
presented below.
The AIC Code includes provisions relating to: the role of the chief
executive; executive Directors' remuneration; and the need for an internal
audit function which are not considered by the Board to be relevant to the
Company, being an externally managed investment company. The Company has
therefore not reported further in respect of these provisions.
The Guernsey Financial Services Commission Finance Sector Code of Corporate
Governance ("GFSC Code") came into force in Guernsey on 1 January 2012 and
was amended in February 2016. The Company is deemed to satisfy the GFSC Code
provided that it continues to conduct its governance in accordance with the
requirements of the UK Code.
CHAIRMAN
Appointed to the permanent position of Chairman of the Board on 22 November
2012, Stephen Smith is responsible for leading the Board in all areas,
including determination of strategy, organising the Board's business and
ensuring the effectiveness of the Board and individual Directors. He also
endeavours to produce an open culture of debate within the Board.
Prior to the Chairman's appointment, a job specification was prepared which
included an assessment of the time commitment anticipated for the role.
Discussions were undertaken to ensure the Chairman was sufficiently aware of
the time needed for his role, and agreed to upon signature of his letter of
appointment. Other significant business commitments of the Chairman were
disclosed to the Company prior to appointment to the Board, and were
publicly disclosed in the Company's Prospectus dated 28 November 2012. Any
subsequent changes have been declared. Certain of these commitments, and
their subsequent changes, can be identified in his biography.
The effectiveness and independence of the Chairman is evaluated on an annual
basis as part of the Board's performance evaluation; the Management
Engagement Committee Chairman is tasked with collating feedback and
discussing with the Chairman on behalf of the rest of the Board.
As per the Company's Articles, all Directors, including the Chairman, must
disclose any interest in a transaction that the Board and Committees will
consider. To ensure all Board decisions are independent, the said conflicted
Director is not entitled to vote in respect of any arrangement connected to
the interested party, but may be counted in the quorum.
STEPHEN SMITH | Chairman
BOARD
Independence and Disclosure
The Board and Chairman confirm that they were selected prior to the
Company's launch and were able to assume all responsibilities at an early
stage, independent of the Investment Manager and Investment Adviser. The
Board is composed entirely of non-executive Directors, who meet as required
without the presence of the Investment Manager or service providers to
scrutinise the achievement of agreed goals and objectives, and monitor
performance. Through the Audit Committee and the Management Engagement
Committee they are able to ascertain the integrity of financial information
and confirm that all financial controls and risk management systems are
robust, and analyse the performance of the Investment Manager and other
service providers on a regular basis.
Following the annual performance evaluation, it was deemed that the
Directors had been proven to challenge the Investment Manager throughout the
year under review, as minuted and recorded, therefore for the purposes of
assessing compliance with the AIC Code, the Board as a whole considers that
each Director is independent of the Investment Manager and free from any
business or other relationship that could materially interfere with the
exercise of his independent judgment. If required, the Board is able to
access independent professional advice. The Investment Manager is also
requested to declare any potential conflicts surrounding votes, share
dealing and soft commissions on an annual basis to the Board to help with
the assessment of investments.
Open communication between the Investment Manager and the Board is
facilitated by regular Board meetings, to which the Investment Manager is
invited to attend and update the Board on the current status of the
Company's investments, along with ad hoc meetings as required.
Coming to mutual agreement on all decisions, it was agreed the Board had
acted in the best interests of the Company to the extent that, if deemed
appropriate, a Director would abstain or have his objection noted, which
would be reflected within the minutes.
Similar to the process outlined above for the appointment of the Chairman, a
job specification was prepared for each directorship which included an
assessment of the time commitment anticipated for the role to ensure each
Director was aware of the time commitment needed for the role. The
Directors' other significant business commitments were disclosed to the
Company prior to appointment to the Board, and were publicly disclosed in
the Company's Prospectus dated 28 November 2012. Any subsequent changes have
been declared. Certain of these commitments can be identified in each
Director's biography in Board of Directors section. Details of the skills
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and experience provided by each Director can also be found in their
biographies, alongside identification of the role each Director currently
holds in the Company.
The terms and conditions of appointment for non-executive Directors are
outlined in their letters of appointment, and are available for inspection
by any person at the Company's registered office during normal business
hours and at the AGM for fifteen minutes prior to and during the meeting.
There is no executive Director function in the Company; all day-to-day
functions are outsourced to external service providers.
Development
The Board believes that the Company's Directors should develop their skills
and knowledge through participation at relevant courses. The Chairman is
responsible for reviewing and discussing the training and development of
each Director according to identified needs. Upon appointment, all Directors
participate in discussions with the Chairman and other Directors to
understand the responsibilities of the Directors, in addition to the
Company's business and procedures. The Company also provides regular
opportunities for the Directors to obtain a thorough understanding of the
Company's business by regularly meeting members of the senior management
team from the Investment Manager, Investment Adviser and other service
providers, both in person and by phone.
Balance of the Board and Diversity Policy
It is perceived that the Board is well-balanced, with a wide array of
skills, experience and knowledge that ensures it functions correctly and
that no single Director may dominate the Board's decisions. Having three
Directors appointed ensures that during any transition period, there are at
least two Directors to provide stability.
The Board's position on diversity can be seen in the Strategic Report. All
Directors currently sit on all the Committees, with the exception of the
Chairman, who resigned from the Audit Committee during the year (effective
12 November 2018); each Director also fills one Committee chairmanship post
only.
Annual Performance Evaluation
The Board's balance is reviewed on a regular basis as part of a performance
evaluation review. Using a pre- determined template based on the AIC Code's
provisions as a basis for review, the Board undertook an evaluation of its
performance, and in addition, an evaluation focusing on individual
commitment, performance and contribution of each Director was conducted. The
Chairman then met with each Director to fully understand their views of the
Company's strengths and to identify potential weaknesses. If appropriate,
new members are proposed to resolve any perceived issues, or a resignation
is sought. Following discussions and review of the Chairman's evaluation by
the other Directors, the Management Engagement Committee Chairman reviewed
the Chairman's performance. Training and development needs are identified as
part of this process, thereby ensuring that all Directors are able to
discharge their duties effectively.
Given the Company's size and the structure of the Board, no external
facilitator or independent third party was used in the performance
evaluation.
Re-election and Board Tenure
There is currently no Nominations Committee for the Company as it is deemed
that the size, composition and structure of the Company would mean the
process would be inefficient and counter-productive. The Board therefore
undertakes a thorough process of reviewing the skill set of the individual
Directors, and proposes new, or renewal of current, appointments to the
Board.
During the year the Board took the decision to submit all Directors for
re-election annually going forward. Mr John Whittle, Mr Stephen Smith and Mr
Jonathan Bridel are therefore submitting themselves for re-election at the
AGM on 15 May 2019. Furthermore, beginning from the May 2019 AGM each
Director is subject to annual re-election.
The Audit Committee Members and the Board confirm that all Directors have
proven their ability to fulfil all legal responsibilities and to provide
effective independent judgment on issues of strategy, performance, resources
and conduct. The Board therefore has no hesitation in recommending to
Shareholders that all Directors are re-elected.
Appointment Process
As no new Director has been appointed since the Company's launch and the
Board believes there is no gap that currently needs to be filled, no
appointment process has been formalised. It is anticipated, however, that
the process will involve identifying gaps and needs in the Board's
composition, then reviewing the skill set of potential candidates. For
renewal of current appointments, all Directors except the individual in
question are entitled to vote at the meeting. Similarly, no new nominations
have been made for the role of Chairman or Director of the Board since prior
to launch.
Succession Planning
The Board is mindful of the need to plan for succession and to implement in
a constructive fashion that supports and builds on the cohesive Board. In
view of the approaching 9th year anniversary of the Company's IPO, the
retirement process for the existing Directors, as currently envisaged, is
anticipated to commence at the AGM of the Company in May 2020. Replacements
should be sought approximately six months before each rotation date allowing
for a substantive handover period. In the Directors' opinion this would
allow the Board to ensure that there is depth of knowledge, skills and
experience and the right individuals are in place to lead the company into
the future. Replacement Directors, in particular the exact order of
retirements might vary subject to the selection of a new Chairman, which is
seen as a critical appointment.
The Board will keep this succession plan under review and monitor its
progress with a particular focus on ensuring over time that each new
Director is equipped with the necessary skills, experience and knowledge.
BOARD AND COMMITTEES
Board
Matters reserved for the Board include review of the Company's overall
strategy and business plans; approval of the Company's half-yearly and
annual report; review and approval of any alteration to the Group's
accounting policies or practices and valuation of investments; approval of
any alteration to the Company's capital structure; approval of dividend
policy; appointments to the Board and constitution of Board Committees;
observation of relevant legislation and regulatory requirements; and
performance review of key service providers. The Board also retains ultimate
responsibility for Committee decisions; every Committee is required to refer
to the Board, who will make the final decision.
Terms of reference that contain a formal schedule of matters reserved for
the Board of Directors and its duly authorised Committee for decision has
been approved and can be reviewed at the Company's registered office.
The meeting attendance record is displayed in the Board and Committee
Meeting Attendance sections of the Corporate Governance statement. The
Directors confirm that they have devoted sufficient time and commitment to
meet their board responsibilities. The Company Secretary acts as the
Secretary to the Board.
Audit Committee
The Board has established an Audit Committee composed of all the independent
members of the Board. Effective 12 November 2018, the Chairman of the Board
is not included as a Committee member, but may attend the meetings upon
invitation by the Audit Committee Chairman. The Audit Committee, its
membership and its terms of reference are kept under regular review by the
Board, and it is confident all members have sufficient financial skills and
experience, and competence relevant to the Company's Sector. Mr John Whittle
is Audit Committee Chairman.
The Audit Committee met three times during 2018 (2017: three times); the
meeting attendance record is displayed in Board and Committee Meeting
Attendance section of the Corporate Governance statement. The Company
Secretary acts as the Secretary to the Audit Committee.
Owing to the size and structure of the Company, there is no internal audit
function. The Audit Committee has reviewed the need for an internal audit
function, and perceived that the internal financial and operating control
systems in place within the Company and its service providers, for example
as evidenced by the Audit and Assurance Faculty Report ("AAF 01/06 Assurance
Report") on the internal procedures of the Administrator, give sufficient
assurance that a sound system of internal control is maintained that
safeguards shareholders' investment and Company assets.
The Audit Committee is intended to assist the Board in discharging its
responsibilities for the integrity of the Company's consolidated financial
statements, as well as aiding the assessment of the Company's internal
control effectiveness and objectivity of the external Auditors. Further
information on the Audit Committee's responsibilities is given in the Report
of the Audit Committee.
Formal terms of reference for the Audit Committee are available at the
registered office and on the Company's website, and are reviewed on a
regular basis.
Management Engagement Committee
The Company has established a Management Engagement Committee which
comprises all the Directors, with Mr Jonathan Bridel as the Chairman of the
Committee. The Management Engagement Committee's main function is to review
and make recommendations on any proposed amendment to the Investment
Management Agreement and keep under review the performance of the Investment
Manager; and undertake an assessment of the Investment Manager's scope and
responsibilities as outlined in the service agreement and prospectus on a
formal basis every year. Discussions on the Investment Manager's performance
are also conducted regularly throughout the year by the Board. Reviews of
engagements with other service providers, such as the Administrator, to
ensure all parties are operating satisfactorily are also undertaken by the
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Management Engagement Committee so as to ensure the safe and accurate
management and administration of the Company's affairs and business and that
they are competitive and reasonable for Shareholders.
The Management Engagement Committee met once during 2018 (2017: once) and
undertook a review of the key service providers to the Group and the
Company, utilising a service provider questionnaire. No material weaknesses
were identified and the recommendation to the Board was that the current
arrangements were appropriate and provided good quality services and advice
to the Company and the Group.
Formal terms of reference for the Management Engagement Committee are
available at the registered office and the Company's website, and are
reviewed on a regular basis.
The Company Secretary acts as the secretary to the Management Engagement
Committee.
Board and Committee Meeting Attendance
In addition to the scheduled quarterly and additional ad hoc meetings, the
Directors and the Investment Manager have been provided with a number of
telephone and face to face investment briefings by the Investment Adviser in
order to keep the Directors and the Investment Manager fully apprised and up
to date with the current investment status and progress. During the year, a
committee of one Director was appointed to approve dividends.
BOARD REMUNERATION
As outlined in the Prospectus, Directors are paid in accordance with agreed
principles aimed at focusing on long-term performance of the Company.
Further information can be found in the Directors' Remuneration Report.
Individual attendance at Board and Committee meetings is set out below:
Management
Scheduled Ad hoc Audit Engagement
Board Board1 Committee Committee
Stephen Smith1 4 1 3 1
John Whittle 4 5 3 1
Jonathan Bridel 4 6 3 1
Total Meetings for year 4 6 3 1
1 The ad hoc Board meetings are convened at short notice to deal with
administrative matters. It is not therefore always logistically feasible, or
a necessity, for the Chairman of the Board to attend such meetings.
COMPANY SECRETARY
Reports and papers, containing relevant, concise and clear information, are
provided to the Board and Committees in a timely manner to enable review and
consideration prior to both scheduled and ad-hoc specific meetings. This
ensures that Directors are capable of contributing to, and validating, the
development of Company strategy and management. The regular reports also
provide information that enables scrutiny of the Company's Investment
Manager and other service providers' performance. When required, the Board
has sought further clarification of matters with the Investment Manager and
other service providers, both by means of further reports and in-depth
discussions, in order to make more informed decisions for the Company.
Under the direction of the Chairman, the Company Secretary facilitates the
flow of information between the Board, Committees, Investment Manager and
other service providers through the development of comprehensive, detailed
meeting packs, agendas and other media. These are circulated to the Board
and other attendees in sufficient time to review the data.
Full access to the advice and services of the Company Secretary is available
to the Board; in turn, the Company Secretary is responsible for advising on
all governance matters through the Chairman. The Articles and schedule of
matters reserved for the Board indicate the appointment and resignation of
the Company Secretary is an item reserved for the full Board. A review of
the performance of the Company Secretary is undertaken by the Board on a
regular basis.
FINANCIAL AND BUSINESS INFORMATION
An explanation of the Directors' roles and responsibilities in preparing the
Annual Report and Audited Consolidated Financial Statements for the year
ended 31 December 2018 is provided in the Statement of Directors'
Responsibilities.
For the purposes solely of the audit of the consolidated financial
statements, the Auditors have reviewed the Company's compliance with certain
of the AIC Code's provisions, the UK Listing Authority's Listing Rules and
other applicable rules of the Financial Conduct Authority as reported in the
Independent Auditor's Report.
Further information enabling shareholders to assess the Company's
performance, business model and strategy can be sourced in the Chairman's
Statement, the Strategic Report and the Report of the Directors.
GOING CONCERN
The Directors also considered it appropriate to prepare the financial
statements on the going concern basis, as explained in the Basis of
preparation paragraph in Note 2 of the financial statements.
IFRS 9 ADOPTION
IFRS 9 "Financial Instruments" became effective for annual periods beginning
on or after 1 January 2018. It addresses the classification, measurement and
derecognition of financial assets and liabilities and replaces the multiple
classification and measurement models in IAS 39. IFRS 9 has been applied
retrospectively by the Group and did not result in a change to the
classification or measurement of financial instruments as outlined in Note
2(b)(i) of the financial statements.
The Group's investment portfolio of credit linked notes continue to be
classified as fair value through profit or loss, and other financial assets
which are held for collection continue to be measured at amortised cost.
In assessing those financial assets designated as debt instruments (held for
collection), no expected credit losses were deemed to be necessary because
of the significant loan to value headroom and strong security packages in
place at adoption, and hence there was no material impact on adoption when
compared to the prior impairment policy of the Group. However, all new loans
are assessed with respect to the determination of the appropriate level of
expected credit loss required to be presented in the financial statements,
if any, and all outstanding debt instruments held are assessed regularly
with the assistance of the Investment Adviser to determine whether any are
underperforming or have had a significant credit risk deterioration, which
may warrant a lifetime expected credit loss being recognised.
RISK CONTROL
In addition to the earlier assessment of principal risks and uncertainties
contained within the Strategic Report, the Board is required annually to
review the effectiveness of the Group's key internal controls such as
financial, operational and compliance controls and risk management. The
controls are designed to ensure that the risk of failure to achieve business
objectives is minimised, and are intended to provide reasonable assurance
against material misstatement or loss. This is not absolute assurance that
all risks are eliminated.
Through regular meetings of the Audit Committee, the Board seeks to maintain
full and effective control over all strategic, financial, regulatory and
operational issues. The Board maintains an organisational and committee
structure with clearly defined lines of responsibility and delegation of
authorities.
RISK MANAGEMENT
As part of the compilation of the risk register for the Company, appropriate
consideration has been given to the relevant control processes and that risk
is considered, assessed and managed as an integral part of the business. The
Company's system of internal control includes inter alia the overall control
exercise, procedures for the identification and evaluation of business risk,
the control procedures themselves and the review of these internal controls
by the Audit Committee on behalf of the Board. Each of these elements that
make up the Company's system of internal financial and operating control is
explained in further detail as below.
(i) Control Environment
The Company is ultimately dependent upon the quality and integrity of the
staff and management of the Investment Manager, the Investment Adviser and
its Fund Administration & Company Secretarial service provider. In each
case, qualified and able individuals have been selected at all levels. The
staff of both the Investment Manager and Administrator are aware of the
internal controls relevant to their activities and are also collectively
accountable for the operation of those controls. Appropriate segregation and
delegation of duties is in place.
The Audit Committee undertakes a review of the Company's internal financial
and operating controls on a regular basis. The Auditors of the Company
consider internal controls relevant to the Company's preparation and fair
presentation of the consolidated financial statements in order to design
their audit procedures, but not for the purpose of expressing an audit
opinion on the effectiveness of the Company's internal controls.
In its role as a third-party fund administration services provider, Ipes
(Guernsey) Limited produces an annual AAF 01/06 Assurance Report on the
internal control procedures in place within Ipes (Guernsey) Limited and this
is subject to review by the Audit Committee and the Board.
(ii) Identification and Evaluation of Business Risks
Another key business risk is the performance of the Company's investments.
This is managed by the Investment Manager, which undertakes regular analysis
and reporting of business risks in relation to the loan portfolio, and then
proposes appropriate courses of action to the Board for their review.
(iii) Key Procedures
In addition to the above, the Audit Committee's key procedures include a
comprehensive system for reporting financial results to the Board regularly,
as well as quarterly impairment reviews of loans conducted by the Board as a
whole (including reports on the underlying investment performance).
Although no system of internal control can provide absolute assurance
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against material misstatement or loss, the Company's system is designed to
assist the Directors in obtaining reasonable assurance that problems are
identified on a timely basis and dealt with appropriately. The Company,
given its size, does not have an internal audit function. It is the view of
the Board that the controls in relation to the Company's operating,
accounting, compliance and IT risks performed robustly throughout the year.
In addition, all have been in full compliance with the Company's policies
and external regulations, including:
* Investment policy, as outlined in the IPO documentation, and subsequently
amended by EGM's held on 2 May 2014, 9 March 2015 and 6 May 2016;
* Personal Account Dealing, as outlined in the Model Code;
* Whistleblowing Policy;
* Anti-Bribery Policy;
* Applicable Financial Conduct Authority Regulations;
* Listing Rules, and Disclosure and Transparency Rules;
* Treatment and handling of confidential information;
* Conflicts of interest;
* Compliance policies; and
* Anti-Money Laundering Regulations.
There were no protected disclosures made pursuant to the Company's
whistleblowing policy, or that of service providers in relation to the
Company, during the year to 31 December 2018.
In summary, the Board considers that the Company's existing internal
financial and operating controls, coupled with the analysis of risks
inherent in the business models of the Company and its subsidiaries,
continue to provide appropriate tools for the Company to monitor, evaluate
and mitigate its risks.
BREXIT
When and if the UK leaves Europe as a result of the referendum held on 23
June 2016 and the consequential uncertainty surrounding the UK and EU
economy, the Directors considered the impact this decision will have on the
Group in the short and longer term. There is still no certainty around
Brexit which means that proper planning for it seems impossible.
The Directors believe Brexit is likely to have a limited effect on the
Group's financial and operating prospects. The most relevant impact of
Brexit since the referendum vote on 23 June 2016 was a reduction in UK
interest rates and a slight devaluation of the sterling against the US
Dollar and the Euro. Further implications of Brexit on the Group are not
identifiable at present. This risk is beyond the control of the Group, but
the Group closely monitors Brexit developments and their impact on the
financial industry.
The Directors consider that the Group's main impact of Brexit would come
from the below factors:
* Macro-economic uncertainty or downturn in the UK economy;
* Global political uncertainty;
* Exchange rate volatility and the devaluation of sterling; and
* Decline in the debt market and borrower ability to repay.
The above risks are already identified as principal risks to the Group which
could threaten the ongoing viability of the Group. The potential impact on
Group's performance and how associated principal risks are managed by the
Board are described in the Strategic Report.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE ("AIFMD")
The AIFMD, which was implemented across the EU on 22 July 2013 with the
transition period ending 22 July 2014, aims to harmonise the regulation of
Alternative Investment Fund Managers ("AIFMs") and imposes obligations on
managers who manage or distribute Alternative Investment Funds ("AIFs") in
the EU or who market shares in such funds to EU investors.
After seeking professional regulatory and legal advice, the Company was
established in Guernsey such that, upon implementation of AIFMD it would be
a Non-EU AIF, with Starwood European Finance Partners Limited appointed to
act as the Non-EU AIFM.
In accordance with AIFMD disclosure obligations, note 6 provides a summary
of realised and unrealised gains and losses.
The Investment Manager does not receive an additional fee, to that stated in
note 22, as a result of acting as the AIFM. The Board of the Investment
Manager received an aggregate fee of GBP62,500 for the year ended 31 December
2018.
The marketing of shares in AIFs that are established outside the EU (such as
the Company) to investors in an EU member state is prohibited unless certain
conditions are met. Certain of these conditions are outside the Company's
control as they are dependent on the regulators of the relevant third
country (in this case Guernsey) and the relevant EU member state entering
into regulatory co-operation agreements with one another.
The AIFM has given written notification to the United Kingdom Financial
Conduct Authority ("FCA"), pursuant to Regulation 59 of the Alternative
Investment Fund Managers Regulations 2013 (SI 1773/2013) (the "AIFM
Regulations") of its intention to market the shares to investors in the
United Kingdom in accordance with the AIFM Regulations and the rules and
guidance of the FCA.
The AIFM has given written notification to the Netherlands Authority for the
Financial Markets ("AFM") pursuant to Article 1:13b section 1 and 2 of the
Act on the Financial Supervision (Wet op het financieel toezicht) (the
"AFS") of its intention to market the shares to investors in the Netherlands
in accordance with the AFS, any rules and regulations promulgated pursuant
thereto and the rules and guidance of the AFM.
On 12 February 2016, the AIFM obtained a marketing licence in Sweden in
accordance with Chapter 5, Section 10 of the Swedish Alternative Investment
Fund Managers Act (Sw. lag (2013:561) om förvaltare av alternativa
investeringsfonder). This enables shares in the Company to be marketed to
professional investors in Sweden. Currently, the National Private Placement
Regime ("NPPR") provides a mechanism to market Non-EU AIFs that are not
allowed to be marketed under the AIFMD domestic marketing regimes. The Board
is utilising NPPR in order to market the Company, specifically in the UK,
Sweden and the Netherlands. The Board works with the Company's advisers to
ensure the necessary conditions are met, and all required notices and
disclosures are made under NPPR.
Any regulatory changes arising from implementation of the AIFMD (or
otherwise) that limit the Company's ability to market future issues of its
shares may adversely affect the Company's ability to carry out its
investment policy successfully and to achieve its investment objective,
which in turn may adversely affect the Company's business, financial
condition, results of operations, NAV and/or the market price of the
Ordinary Shares.
The Board, in conjunction with the Company's advisers, will continue to
monitor the development of the AIFMD and its impact on the Company. The
Company will continue to use NPPR pending further consultation from the
European Securities and Marketing Authority ("ESMA").
The Board has considered the disclosure obligations under Articles 22 and 23
and can confirm that the Company complies with the various organisational,
operational and transparency obligations.
FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA") AND THE OECD COMMON REPORTING
STANDARDS ("CRS")
FATCA became effective on 1 January 2013 and is being gradually implemented
internationally. The legislation is aimed at determining the ownership of US
assets in foreign accounts and improving US Tax compliance with respect to
those assets.
More than 90 jurisdictions, including all 34 member countries of the
Organisation for Economic Co-operation and Development ("OECD") and the G20
members, have committed to implement the Common Reporting Standard for
automatic exchange of tax information ("CRS"). Building on the model created
by FATCA, the CRS creates a global standard for the annual automatic
exchange of financial account information between the relevant tax
authorities.
The Board in conjunction with the Company's service providers and advisers
have ensured that the Company complies with FATCA and CRS's requirements to
the extent relevant to the Company.
DIALOGUE WITH SHAREHOLDERS
The Directors place a great deal of importance on communication with
shareholders. The Company's Chairman, Investment Manager and the Brokers,
aim to meet with large shareholders at least annually, together with the
Investment Adviser, and calls are undertaken on a regular basis with
shareholders. The Board also receives regular reports from the Brokers on
shareholder issues. Publications such as the Annual Report and Consolidated
Financial Statements and quarterly factsheets are reviewed and approved by
the Board prior to circulation, and are widely distributed to other parties
who have an interest in the Company's performance, and are available on the
Company's website.
All Directors are available for discussions with the shareholders, in
particular the Chairman and the Audit Committee Chairman, as and when
required.
CONSTRUCTIVE USE OF AGM
The Notice of AGM is sent out at least 20 working days in advance of the
meeting. All shareholders have the opportunity to put questions to the Board
or Investment Manager, either formally at the Company's AGM, informally
following the meeting, or in writing at any time during the year via the
Company Secretary. The Company Secretary is also available to answer general
shareholder queries at any time throughout the year.
SIGNIFICANT VOTE AGAINST EGM RESOLUTIONS
As announced by the Company on 15 May 2018, the Board is aware that a
significant number of votes (approximately 56.8 million shares or 21.7% of
those voting) was received against Resolution 2 at the 2018 EGM. Resolution
2 at the 2018 EGM requested authority from shareholders to disapply
Pre-Emption Rights on the allotment of equity securities for up to 10 per
cent of the Ordinary Shares in issue, in addition to the 10% already
approved at the May 2018 AGM.
The vast majority of the votes against the resolution were attributable to
one institutional investor. For the purpose of good corporate governance and
best practice, the Board can confirm that it has engaged with the relevant
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shareholder following the 2018 EGM and provided an explanation as to why the
Board was of the view that the relevant resolution was in the best interests
of shareholders. The Board has taken their feedback into account in
considering the justification for the future related resolutions.
By order of the Board
John Whittle | Director
25 March 2019
Report of the Audit Committee
The Board is supported by the Audit Committee, which until 12 November 2018
comprised all the Directors during the year under review (the Chairman of
the Board, stepped down as a committee member following the release of the
2018 UK Corporate Governance Code on 12 November 2018). The Board has
considered the composition of the Audit Committee and is satisfied it has
sufficient recent and relevant skills and experience, in particular the
Board has considered the requirements of the UK Code that the Audit
Committee should have at least one Member who has recent and relevant
financial experience and that the Audit Committee as a whole has competence
relevant to the sector in which the Company invests. The Board considers all
of the relevant requirements to have been met.
ROLE AND RESPONSIBILITIES
The primary role and responsibilities of the Audit Committee are outlined in
the Audit Committee's terms of reference, available at the registered
office, including:
* Monitoring the integrity of the consolidated financial statements of the
Group and any formal announcements relating to the Group's financial
performance, and reviewing significant financial reporting judgements
contained within said statements and announcements;
* Reviewing the Group's internal financial controls, and the Group's
internal control and risk management systems;
* Monitoring the need for an internal audit function annually;
* Monitoring and reviewing the scope, independence, objectivity and
effectiveness of the external Auditor, taking into consideration relevant
regulatory and professional requirements;
* Making recommendations to the Board in relation to the appointment,
re-appointment and removal of the external Auditor and approving their
remuneration and terms of engagement, which in turn can be placed before the
shareholders for their approval at the AGM;
* Development and implementation of the Group's policy on the provision of
non-audit services by the external Auditor, as appropriate;
* Reviewing the arrangements in place to enable Directors and staff of
service providers to, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters insofar as
they may affect the Group;
* Providing advice to the Board on whether the consolidated financial
statements, taken as a whole, are fair, balanced and understandable and
provide the information necessary for shareholders to assess the Group's
performance, business model and strategy; and
* Reporting to the Board on how the Committee discharged all relevant
responsibilities at each Board meeting.
Financial Reporting
The primary role of the Audit Committee in relation to the financial
reporting is to review with the Administrator, Investment Manager and the
Auditor the appropriateness of the Annual Report and Audited Consolidated
Financial Statements and Interim Condensed Consolidated Financial
Statements, concentrating on, amongst other matters:
* The quality and acceptability of accounting policies and practices;
* The clarity of the disclosures and compliance with financial reporting
standards and relevant financial and governance reporting requirements;
* Material areas in which significant judgements have been applied or there
has been discussion with the Auditor;
* Whether the Annual Report and Audited Consolidated Financial Statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for the shareholders to assess the Group's
performance, business model and strategy; and
* Any correspondence from regulators in relation to the Group's financial
reporting.
To aid its review, the Audit Committee considers reports from the
Administrator and Investment Manager and also reports from the Auditor on
the outcomes of their half-year review and annual audit. The Audit Committee
supports PricewaterhouseCoopers CI LLP ("PwC") in displaying the necessary
professional scepticism their role requires.
The Audit Committee met three times during the year under review; individual
attendance of Directors is outlined in the Board and Committee Meeting
Attendance section of the Corporate Governance statement. The main matters
discussed at those meetings were:
* Review and approval of the annual audit plan of the external Auditor;
* Discussion and approval of the fee for the external audit;
* Detailed review of the Annual Report and Audited Consolidated Financial
Statements Accounts and recommendation for approval by the Board;
* Review and approval of the interim review plan of the external Auditor;
* Detailed review of the Interim Condensed Consolidated Financial Statements
and recommendation for approval by the Board;
* Discussion of reports from the external Auditor following their interim
review and annual audit;
* Adoption and impact of IFRS 9 and expected credit loss model;
* Assessment of the effectiveness of the Auditor as described below;
* Assessment of the independence of the external Auditor;
* Review of the Group's key risks and internal controls;
* Consideration of the 2016 and 2018 UK Corporate Governance Code, Guidance
on Audit Committees and other regulatory guidelines, and the subsequent
impact upon the Company; and
* The rotation of Group's previous Lead Audit Partner ("LAP") John Roche in
line with the requirements of the FRC Ethical Standards, and replacement
with a new LAP with significant experience and expertise, Roland Mills.
The Committee has also reviewed and considered the whistleblowing policy in
place for the Administrator and other service providers, and is satisfied
the relevant staff can raise concerns in confidence about possible
improprieties in matters of financial reporting or other matters insofar as
they may affect the Company.
Annual General Meeting
The Audit Committee Chairman, or other members of the Audit Committee
appointed for the purpose, shall attend each AGM of the Company, prepared to
respond to any shareholder questions on the Audit Committee's activities.
Internal Audit
The Audit Committee considers at least once a year whether or not there is a
need for an internal audit function. Currently, the Audit committee does not
consider there to be a need for an internal audit function, given that there
are no employees in the Group and all outsourced functions are with parties
/ administrators who have their own internal controls and procedures. This
is evidenced by the annual 01/06 AAF Assurance Report provided by the
Administrator, which gives sufficient assurance that a sound system of
internal control is maintained at the Administrator.
SIGNIFICANT ISSUES IN RELATION TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year, the Audit Committee considered a number of significant
issues in respect of the Annual Report and Audited Consolidated Financial
Statements. The Audit Committee reviewed the external audit plan at an early
stage and concluded that the appropriate areas of audit risk relevant to the
Group had been identified and that suitable audit procedures had been put in
place to obtain reasonable assurance that the consolidated financial
statements as a whole would be free of material misstatements. The table
below sets out the Audit Committee's view of the key areas of risk and how
they have addressed the issues.
Significant Issues Actions to Address Issue
Carrying amount and The Audit Committee reviews
impairment/expected credit loss the investment process of the
allowance of loans advanced Investment Manager and
Investment Adviser including
the controls in place around
deal sourcing, investment
analysis, due diligence and
the role of the Investment
Adviser's Investment
Committee and the Investment
Manager's Board. The Audit
Committee also reviews the
controls in place around the
effective interest loan
models and is notified
regularly by the Investment
Manager of any changes to
underlying assumptions made
in the loan models.
The Audit Committee receives
regular updates on the
performance of each loan and
discusses with Investment
Manager and Investment
Adviser whether there are any
indicators of significant
increase in credit risk,
impaired or defaulted loans.
The Audit Committee also
assesses the ECL methodology
focussing on the estimation
of probability of default,
exposure at default and loss
given default.
Formal loan performance
reviews and credit risk
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assessments are also prepared
by the Investment Adviser and
Investment Manager which are
reviewed at each Audit
Committee meeting and the
Audit Committee considers
whether there are any
indicators that would warrant
a change to the original
expected credit loss assessed
for each loan advanced. For
all new loans advanced, the
Investment Manager presents,
as part of the investment
recommendation process, their
assessment of any expected
credit loss required at
inception of the loan
arrangement.
On adoption of IFRS 9, all
existing loans advanced at
1January 2018 were assessed
so as to ensure compliance
with IFRS 9, however this
resulted in no adjustments to
the Consolidated Financial
Statements as no expected
credit losses were considered
necessary based on the loan
to value ratios at that time
and strong security packages
in place.
Valuation of credit linked notes The fair value of the CLNs is
("CLNs") determined by the Investment
Adviser using a valuation
model. The main inputs into
the valuation model for the
CLNs are discount rates,
market risk premium
adjustments to the discount
rate, probabilities of
default and cash flow
forecasts. The Investment
Adviser also performs a full
analysis of the performance
of each underlying loan and
with reference to other
inputs such as third party
valuations of the underlying
collateral.
At 31 December 2018 the Group
considers the fair value of
the CLNs at the year end
approximates GBP21,886,335. The
Audit Committee has discussed
the valuation model and made
appropriate enquires of the
Investment Manager and
Investment Adviser and
considers the approach
reasonable.
Risk of fraud in income from Income from loans advanced is
loans advanced measured in accordance with
the effective interest rate
method. The requirement to
estimate the expected cash
flows when forming an
effective interest rate model
is subject to significant
management judgements and
estimates.
The Audit Committee discusses
with the Investment Manager
and Investment Adviser the
reasons for the changes in
key assumptions made in the
loan models such as changes
to expected drawdown or
repayment dates or other
amendments to expected cash
flows such as changes in
interbank rates on floating
loans. The Audit Committee
ensures that any changes made
to the models are justifiable
based on the latest available
information.
A separate income
rationalisation which is
prepared outside of the
detailed loan models is
provided to the Board on a
quarterly basis as a
secondary check on the
revenue being recognised in
the loan models. This is also
reviewed by the Audit
Committee and questions
raised where appropriate.
REVIEW OF EXTERNAL AUDIT PROCESS EFFECTIVENESS
The Audit Committee communicated regularly with the Investment Manager,
Investment Adviser and Administrator to obtain a good understanding of the
progress and efficiency of the audit process. Similarly, feedback in
relation to the efficiency of the Investment Manager, Investment Adviser and
other service providers in performing their relevant roles was sought from
relevant involved parties, including the audit partner and team. The
external Auditor is invited to attend the Audit Committee meetings at which
the semi-annual and annual consolidated financial statements are considered,
also enabling the Auditor to meet and discuss any matters with the Audit
Committee without the presence of the Investment Manager or the
Administrator.
During the year, the Audit Committee reviewed the external Auditor's
performance, considering a wide variety of factors including:
* The quality of service, the Auditor's specialist expertise, the level of
audit fee, identification and resolution of any areas of accounting
judgement, and quality and timeliness of papers analysing these judgements;
* Review of the audit plan presented by the Auditor, and when tabled, the
final audit findings report;
* Meeting with the Auditor regularly to discuss the various papers and
reports in detail;
* Furthermore, interviews of appropriate staff in the Investment Manager,
Investment Adviser and Administrator to receive feedback on the
effectiveness of the audit process from their perspective; and
* Compilation of a checklist with which to provide a means to objectively
assess the Auditor's performance.
The Audit Committee is satisfied with the effectiveness of the audit process
and therefore does not consider it necessary to require the Auditor to
tender for the audit work.
AUDITOR'S TENURE AND OBJECTIVITY
The Group has developed an audit tender policy which the Board will
re-consider after five years from the appointment date of the current
Auditor. The Board re-considered this during 2017 and it was deemed to still
be applicable.
The Group's current Auditor, PwC, have acted in this capacity since the
Company's inaugural meeting on 22 November 2012. The Committee reviews the
Auditor's performance on a regular basis to ensure the Group receives an
optimal service. Subject to annual appointment by shareholder approval at
the AGM, the appointment of the Auditor is formally reviewed by the Audit
Committee on an annual basis. PwC follows the FRC Ethical Standards and
their rotation rules now require the lead audit partner to rotate every 5
years, key partners involved in an audit every 7 years and PwC's own
internal policy would generally expect senior staff to rotate after 10
years. Rotation ensures a fresh look without sacrificing institutional
knowledge.
Rotation of audit engagement partners, key partners involved in the audit
and other staff in senior positions is reviewed on a regular basis by the
lead audit engagement partner. During the year, John Roche rotated from the
position of audit engagement partner to be replaced by Roland Mills.
PwC regularly updates the Audit Committee on the rotation of audit partners,
staff, level of fees, details of any relationships between the Auditor and
the Group, and also provides overall confirmation of its independence and
objectivity. There are no contractual obligations that restrict the Group's
choice of Auditor. Any non-audit work would be reviewed by the Audit
Committee and approved by the Audit Committee Chairman prior to the Auditor
undertaking any work, if the fees are over GBP12,500. This threshold is
reviewed periodically to ensure it is set at an appropriate value.
As a result of its review, the Audit Committee is satisfied that PwC remains
independent of the Group, the Investment Manager and other service providers
and the Audit Committee has no current plans for re-tendering for the
position of auditor to the Company. The Audit Committee therefore recommends
the continuing appointment of PwC by the Board.
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CONCLUSIONS IN RESPECT OF THE CONSOLIDATED FINANCIAL STATEMENTS
The production and the audit of the Annual Report and Audited Consolidated
Financial Statements is a comprehensive process requiring input from a
number of different contributors. In order to reach a conclusion on whether
the Group's consolidated financial statements are fair, balanced and
understandable, as required under the UK Code and the AIC Code, the Board
has requested that the Audit Committee advise on whether it considers that
the Annual Report and Consolidated Financial Statements fulfils these
requirements. In outlining its advice, the Audit Committee has considered
the following:
* The comprehensive documentation that is in place outlining the controls in
place for the production of the Annual Report and Audited Consolidated
Financial Statements, including the verification processes in place to
confirm the factual content;
* The detailed reviews undertaken at various stages of the production
process by the Investment Manager, Investment Adviser, Administrator,
Auditor and the Audit Committee that are intended to ensure consistency and
overall balance;
* Controls enforced by the Investment Manager, Investment Adviser,
Administrator and other third party service providers to ensure complete and
accurate financial records and security of the Group's assets; and
* The existence and content of a satisfactory control report produced by the
Ipes Group that has been reviewed and reported upon by the Administrator's
service Auditor to verify the effectiveness of the internal controls of the
Administrator, such as the AAF 01/06 Assurance Report.
As a result of the work performed, the Audit Committee has concluded that it
has acted in accordance with its' terms of reference and has ensured the
independence and objectivity of the external Auditor. It has reported to the
Board that the Annual Report for the year ended 31 December 2018, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group's performance, business model
and strategy. The Board's conclusions in this respect are set out in the
Statement of Directors' Responsibilities.
The Audit Committee has recommended to the Board that the external auditor
is re-appointed.
John Whittle | Audit Committee Chairman
25 March 2019
Statement of Directors' Responsibilities
The Directors are responsible for preparing consolidated financial
statements for each financial year which give a true and fair view, in
accordance with applicable laws and regulations, of the state of affairs of
the Company and of the profit or loss of the Company for that year.
Company law requires the Directors to prepare financial statements for each
financial year. The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"). In preparing the consolidated financial
statements, the Directors are required to:
* Select suitable accounting policies and apply them consistently;
* Make judgments and estimates that are reasonable and prudent;
* State whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the consolidated
financial statements; and
* Prepare the consolidated financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The maintenance and integrity of the Company's website is the responsibility
of the Directors; the work conducted by the Auditor does not involve
consideration of the maintenance and integrity of the website and,
accordingly, the Auditor accepts no responsibility for any changes that may
have occurred to the consolidated financial statements since they are
initially presented on the website. Legislation in Guernsey governing the
preparation and dissemination of the consolidated financial statements may
differ from legislation in other jurisdictions.
The Directors are responsible for keeping proper accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
the Group and enable them to ensure that the consolidated financial
statements comply with the Companies (Guernsey) Law, 2008, as amended. They
are also responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Each of the Directors confirms that, to the best of their knowledge:
* They have complied with the above requirements in preparing the
consolidated financial statements;
* There is no relevant audit information of which the Company's Auditor is
unaware;
* All Directors have taken the necessary steps that they ought to have taken
to make themselves aware of any relevant audit information and to establish
that the Auditor is aware of said information;
* The consolidated financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company
and Group; and
* The Chairman's Statement, Strategic Report, Investment Manager's Report,
Report of the Directors and Corporate Governance Statement include a fair
review of the development and the position of the Company and the Group,
together with a description of the principal risks and uncertainties that
they face.
The UK Code, as adopted through the AIC Code by the Company, also requires
Directors to ensure that the Annual Report and Consolidated Financial
Statements are fair, balanced and understandable. In order to reach a
conclusion on this matter, the Board has requested that the Audit Committee
advise on whether it considers that the Annual Report and Consolidated
Financial Statements fulfil these requirements. The process by which the
Committee has reached these conclusions is set out in the report of the
Audit Committee. Furthermore, the Board believes that the disclosures set
out in Financial Highlights, Chairman's Statement, Strategic Report and
Investment Manager's Report of the Annual Report provide the information
necessary for shareholders to assess the Company's performance, business
model and strategy.
Having taken into account all the matters considered by the Board and
brought to the attention of the Board during the year ended 31 December
2018, as outlined in the Chairman Statement, Investment Manager's Report,
Corporate Governance Statement, Strategic Report and the Report of the Audit
Committee, the Board has concluded that the Annual Report and Audited
Consolidated Financial Statements for the year ended 31 December 2018, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's performance,
business model and strategy.
For Starwood European Real Estate Finance Limited
Stephen Smith | Chairman
25 March 2019
Financial Statements
Independent Auditor's Report to the Members of Starwood European Real Estate
Finance Limited
Report on the audit of the consolidated financial statements
OUR OPINION
In our opinion, the consolidated financial statements give a true and fair
view of the consolidated financial position of Starwood European Real Estate
Finance Limited (the "Company") and its subsidiaries (together "the Group")
as at 31 December 2018, and of their consolidated financial performance and
their consolidated cash flows for the year then ended in accordance with
International Financial Reporting Standards as adopted by the European Union
and have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
WHAT WE HAVE AUDITED
The Group's consolidated financial statements comprise:
* the Consolidated Statement of Financial Position as at 31 December 2018;
* the Consolidated Statement of Comprehensive Income for the year then
ended;
* the Consolidated Statement of Changes in Equity for the year then ended;
* the Consolidated Statement of Cash Flows for the year then ended; and
* the notes to the consolidated financial statements, which include a
summary of significant accounting policies.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on
Auditing ("ISAs"). Our responsibilities under those standards are further
described in the Auditor's responsibilities for the audit of the
consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
INDEPENDENCE
We are independent of the Group in accordance with the ethical requirements
that are relevant to our audit of the consolidated financial statements of
the Group, as required by the Crown Dependencies' Audit Rules and Guidance,
and at the request of the directors with SEC Independence Rules. We have
fulfilled our other ethical responsibilities in accordance with these
requirements.
OUR AUDIT APPROACH
Overview
MATERIALITY
* Overall Group materiality was GBP7.7 million which represents 2.0% of
consolidated net assets.
AUDIT SCOPE
* The Company is based in Guernsey, has underlying subsidiaries located in
Guernsey and Luxembourg and engages Starwood European Finance Partners
Limited (the "Investment Manager") to manage its assets. The consolidated
financial statements are a consolidation of the Company and all of the
underlying subsidiaries.
* We conducted our audit of the consolidated financial statements from
information provided by Ipes (Guernsey) Limited (the "Administrator") to
whom the board of directors has delegated the provision of certain
functions. We also had significant interaction with Starwood Capital Europe
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Advisers, LLP (the "Investment Adviser") in completing aspects of our
overall audit work.
* We conducted our audit work in Guernsey and we tailored the scope of our
audit taking into account the types of investments within the Group, the
involvement of the third parties referred to above, and the industry in
which the Group operates.
* We performed an audit of the complete financial information of the
Guernsey and Luxembourg components of the Group.
* The components of the Group where we performed full scope audit procedures
accounted for 100% of total net assets and total operating profit.
KEY AUDIT MATTERS
* Carrying amount and impairment/expected credit losses of loans advanced
* Valuation of credit linked notes
* Risk of fraud in income from loans advanced
AUDIT SCOPE
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the consolidated financial statements. In
particular, we considered where the directors made subjective judgments; for
example, in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As
in all of our audits, we also addressed the risk of management override of
internal controls, including among other matters, consideration of whether
there was evidence of bias that represented a risk of material misstatement
due to fraud.
We tailored the scope of our audit in order to perform sufficient work to
enable us to provide an opinion on the consolidated financial statements as
a whole, taking into account the structure of the Group, the accounting
processes and controls, and the industry in which the Group operates.
The Company is based in Guernsey with two subsidiaries located in Guernsey
and three underlying subsidiaries located in Luxembourg. The consolidated
financial statements are a consolidation of the Company and all of the
underlying subsidiaries.
Scoping was performed at the Group level, irrespective of whether the
underlying transactions took place within the Company or within the
subsidiaries. The Group audit was led, directed and controlled by
PricewaterhouseCoopers CI LLP and all audit work for material items within
the consolidated financial statements was performed in Guernsey by
PricewaterhouseCoopers CI LLP.
The transactions relating to the Company and the subsidiaries are maintained
by the Administrator and therefore we were not required to engage with
component auditors from another PwC global network firm operating under our
instructions. Our testing was therefore performed on a consolidated basis
using thresholds which are determined with reference to the overall Group
materiality and the risks of material misstatement identified.
As noted in the overview, the components of the Group for which we performed
full scope audit procedures accounted for 100% of total net assets and total
operating profit.
MATERIALITY
The scope of our audit was influenced by our application of materiality. An
audit is designed to obtain reasonable assurance whether the consolidated
financial statements are free from material misstatement. Misstatements may
arise due to fraud or error. They are considered material if individually or
in aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the consolidated financial
statements.
Based on our professional judgment, we determined certain quantitative
thresholds for materiality, including the overall Group materiality for the
consolidated financial statements as a whole as set out in the table below.
These, together with qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent of our audit procedures
and to evaluate the effect of misstatements, both individually and in
aggregate on the consolidated financial statements as a whole.
Overall group materiality GBP7.7 million (2017: GBP7.7
million)
How we determined it 2.0% of consolidated net
assets
Rationale for the materiality We believe consolidated net
benchmark assets to be the appropriate
basis for determining
materiality since this is a
key consideration for
investors when assessing
financial performance. It is
also a generally accepted
measure used for companies in
this industry.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above GBP0.4 million, as well as
misstatements below that amount that, in our view, warranted reporting for
qualitative reasons.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgment, were
of most significance in our audit of the consolidated financial statements
of the current period. These matters were addressed in the context of our
audit of the consolidated financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these
matters.
Key audit matter How our audit addressed the
Key audit matter
Carrying amount and We evaluated management's
impairment/expected credit losses processes and assumptions
of loans advanced used to measure the loans at
amortised cost and used to
determine the level of
impairment (if any) required
Loans advanced at the year-end of on the loans advanced, either
GBP413.4 million (Note 10) are at inception, or on an
measured at amortised cost and ongoing basis, using the
comprise of both fixed and expected credit loss model.
floating rate loans. Our procedures included:
Loans advanced make up a * Detailed testing over the
significant part of the effective interest models
consolidated statement of used by management to value
financial position and due to the the loans at amortised cost
nature of these transactions their using the effective interest
ongoing recoverability and rate method;
impairment is subject to judgment
and estimation, including the
calculation of expected credit
losses ("ECL"). * Validating the assumptions
and inputs into the amortised
cost models and reading the
associated agreements and
other legal documentation;
The judgments exercised in * Detailed back-testing
determining the potential for ECL procedures were also
could significantly impact the net performed to assist in our
asset value of the Group and this conclusions as to the cash
is considered to be a key source flow forecasting reliability
of estimation uncertainty as applied by the Investment
described in note 2c of the Adviser;
consolidated financial statements.
* Understood and evaluated
the assumptions and judgments
made by the Investment
Adviser in respect of the ECL
for each loan advanced
The specific areas of judgment including;
include:
* assessing the ECL
methodology focussing on the
estimation of probability of
default, exposure at default
and loss given default, and
* How management determine the how forward looking
underlying assumptions when information was considered in
preparing impairment/ECL review this regard;
analyses such as significant
changes in the credit risk of a
borrower, changes in the
probability of default of a * evaluating the consistency
borrower, changes in valuation of and appropriateness of the
underlying collateral, the ability Investment Adviser's
of the borrowers to deliver on assumptions applied in
their business plans and projected determining whether any loan
financial performance figures; and advanced was performing,
underperforming or
non-performing, including
consideration as to whether a
* The impact of changes in the significant increase in
expected cash flows for each loan credit risk of each borrower
on the carrying amount of the had occurred;
loans measured at amortised cost.
* obtaining evidence to
support any significant
assumptions presented in the
assessment of the ECL
including consideration of
the financial information on
the borrower and the
collateral in place to assess
their ability to meet future
payment commitments, and
progress against business
plans; and
* inspecting a sample of
compliance certificates
signed by each respective
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underlying borrower which
confirmed compliance with any
covenants as at the year-end.
We did not identify any
material issues from our
procedures.
Valuations of credit linked notes Given the complexity and
subjectivity of the model, we
engaged with valuation
experts from
The Group's investments in credit PricewaterhouseCoopers LLP,
linked notes ("CLNs") of GBP21.9 London office to assist with
million (Note 11) held as at the the following audit
year- end are measured at fair procedures:
value through profit or loss.
* Discussions with the
The fair valuation of the CLNs Investment Adviser on the due
represents a significant risk that diligence performed,
we have focused on as the fair continuous monitoring
value is determined by the processes and the model
Investment Adviser using an functionality;
internal model with inputs and
assumptions that are subjective
and therefore judgmental. In
determining the fair value, the * Determined whether the
Investment Adviser considers model was fit for purpose and
relevant general market movements whether the use of a
and recent market transactions for discounted cash flow
comparable instruments (where methodology was appropriate;
available) and adjusts the
valuation model where deemed
necessary.
* Assessment of the
reasonableness of assumptions
used which feed into the
CLNs' fair value model such
as portfolio default rates,
portfolio prepayment levels
and the internal rate of
return;
* Sensitivity analysis
through quantifying the
impact of certain changes to
the key assumptions on the
overall fair value of the
CLNs;
* Consideration of the
underlying loans' credit
quality and the loan-to-value
ratios ("LTVs");
* Detailed testing was
performed over the fair value
model used by management to
value the credit linked notes
at fair value, including
reviewing the model mechanics
and formulae and ensuring
internal consistency
throughout the model;
* Assessed the appropriate
classification of cash
received between interest
income versus capital
repayments.
We did not identify any
material issues from our
procedures.
Risk of fraud in income from loans Our procedures included:
advanced
Income from loans advanced for the
year was GBP30.1 million (Note 10)
and was measured in accordance
with the effective interest rate * Assessing the judgments
method. The Group has a key made in respect of the
investment objective to provide estimated cash flows
shareholders with regular including arrangement,
dividends through investment in origination and commitment
debt instruments and therefore we fees, through testing of the
focussed on this risk. amortised cost models for
each loan;
* Recalculating interest
income using the original
effective interest rate,
The requirement to estimate the paying due consideration to
expected cash flows when forming any early, partial or full
an effective interest rate model prepayments;
is subject to significant
management judgments and
estimates, and as such could be
open to manipulation by management * Inspecting supporting
of factors including: documents, such as
correspondence with the
underlying borrower and
timing of cash receipts, as
part of our assessment of
management's estimates and
assumptions; and
* Timing of repayments;
* For those debt investments
also held at 31 December
* Expectations of partial or full 2017, comparing the estimated
prepayments; and cash flows in the amortised
cost models as at 31 December
2018 and evaluating the
rationale behind any
* Associated exit fees and significant changes to those
make-whole payments. cash flows from the 31
December 2017 models.
Changes to the estimated timings
of cash flows can have a We did not identify any
significant impact on the material issues from our
recognition of income from loans procedures.
advanced and is considered to be a
key source of estimation
uncertainty as described in note
2c of the consolidated financial
statements.
OTHER INFORMATION
The directors are responsible for the other information. The other
information comprises all the information included in the Annual Report and
Audited Consolidated Financial Statements but does not include the
consolidated financial statements and our auditor's reports thereon.
Our opinion on the consolidated financial statements does not cover the
other information and we do not express any form of assurance conclusion
thereon.
In connection with our audit of the consolidated financial statements, our
responsibility is to read the other information identified above and, in
doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If, based on the
work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing
to report in this regard.
RESPONSIBILITIES OF DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS
The directors are responsible for the preparation of the consolidated
financial statements that give a true and fair view in accordance with
International Financial Reporting Standards as adopted by the European
Union, the requirements of Guernsey law and for such internal control as the
directors determine is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due
to fraud or error.
In preparing the consolidated financial statements, the directors are
responsible for assessing the Group's ability to continue as a going
concern, disclosing, as applicable, matters relating to going concern and
using the going concern basis of accounting unless the directors either
intend to liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL
STATEMENTS
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's
report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with
ISAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if,
individually or in aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with ISAs, we exercise professional
judgment and maintain professional scepticism throughout the audit. We also:
* Identify and assess the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that
is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal
control.
* Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Group's internal control.
* Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
directors.
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* Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group and the wider economy. * Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion: * we have not received all the information and explanations we require for our audit; * proper accounting records have not been kept; or * the consolidated financial statements are not in agreement with the accounting records. We have no exceptions to report arising from this responsibility. We have nothing to report in respect of the following matters which we have reviewed: * the directors' statement set out in Corporate Governance statement in relation to going concern. As noted in the directors' statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the consolidated financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the consolidated financial statements were signed. As part of our audit we have concluded that the directors' use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group's ability to continue as a going concern; * the directors' statement that they have carried out a robust assessment of the principal risks facing the Group and the directors' statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit; and * the part of the Corporate Governance Statement relating to the parent Company's compliance with the ten further provisions of the UK Corporate Governance Code specified for our review. This report, including the opinion, has been prepared for and only for the members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other matter As explained in note 21 to the consolidated financial statements, in addition to our responsibility to audit and express an opinion on the consolidated financial statements in accordance with ISAs and Guernsey law, we have been requested by the directors to express an opinion on the financial statements in accordance with auditing standards generally accepted in the United States of America as issued by the AICPA, in order to meet the requirements of Rule 206(4)-2 under the Investment Advisers Act (the "Custody Rule"). We have reported separately in this respect below. Roland Mills For and on behalf of PricewaterhouseCoopers CI LLP Chartered Accountants and Recognised Auditor, Guernsey, Channel Islands 25 March 2019 Independent Auditor's Report to the Members of Starwood European Real Estate Finance Limited (US GAAS) We have audited the accompanying consolidated financial statements of Starwood European Real Estate Finance Limited and its subsidiaries (the "Group"), which comprise the Consolidated Statements of Financial Position as of 31 December 2018 and 2017, and the related Consolidated Statements of Comprehensive Income, the Consolidated Statements of Changes in Equity, the Consolidated Statements of Cash Flows for the years then ended, and the notes to the consolidated financial statements, which include a summary of significant accounting policies. MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR'S RESPONSIBILITY Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Group's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Starwood European Real Estate Finance Limited and its subsidiaries as of 31 December 2018 and 2017, and the results of their operations, changes in their net assets, and their cash flows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union. OTHER MATTER Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The other items listed in the Index to the Annual Report and Audited Consolidated Financial Statements, other than the consolidated financial statements and our auditor's reports thereon are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. The information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to
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the underlying accounting and other records used to prepare the consolidated
financial statements or to the consolidated financial statements themselves
and other additional procedures, in accordance with auditing standards
generally accepted in the United States of America. In our opinion, the
information is fairly stated, in all material respects, in relation to the
consolidated financial statements taken as a whole.
This report, including the opinion, has been prepared for and only for the
members as a body and for no other purpose. We do not, in giving this
opinion, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
25 March 2019
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018
1 January 2018 1 January 2017
to to
Notes 31 December 31 December 2017
2018
GBP GBP
Income
Income from loans 10 30,137,174 31,969,225
advanced
Net changes in fair value 2,018,771 -
of financial assets at
fair value through profit
or loss
Income from cash and cash 21,205 19,535
equivalents
Total income 32,177,150 31,988,760
Expenses
Investment management 22 2,858,556 2,844,140
fees
Credit facility interest 1,074,308 72,834
Credit facility 470,700 359,000
commitment fees
Credit facility 439,950 195,327
amortisation of fees
Administration fees 3(b) 356,409 335,048
Audit and non-audit fees 5 249,500 204,609
Other expenses 287,663 236,529
Legal and professional 196,806 239,999
fees
Directors' fees and 4, 22 141,821 125,416
expenses
Broker's fees and 3(d) 75,749 76,525
expenses
Agency fees 16,506 -
Net foreign exchange 6 (234,453) 734,926
losses (gains) / losses
Total operating expenses 5,933,515 5,424,353
Operating profit for the 26,243,635 26,564,407
year before tax
Taxation 20 68,068 2,120
Operating profit for the 26,175,567 26,562,287
year
Other comprehensive
income
Items that may be
reclassified to profit or
loss
Exchange differences on 54,740 2,484
translation of foreign
operations
Other comprehensive 54,740 2,484
income for the year
Total comprehensive 26,230,307 26,564,771
income for the year
Weighted average number 7 375,019,398 375,019,398
of shares in issue
Basic and diluted 7 6.98 7.08
earnings per Ordinary
Share (pence)
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Financial Position
as at 31 December 2018
Notes 31 December 2018 31 December 2017
GBP GBP
Assets
Cash and cash 8 28,248,515 11,750,356
equivalents
Other receivables and 9 28,935 378,103
prepayments
Credit facilities 12 1,212,271 1,433,462
capitalised costs
Financial assets at fair 11 21,886,335 22,112,820
value through profit or
loss
Loans advanced 10 413,444,410 369,955,983
Total assets 464,820,466 405,630,724
Liabilities
Financial liabilities at 11 8,781,432 6,726,268
fair value through
profit or loss
Credit facilities 12 68,977,214 13,338,329
Trade and other payables 13 2,068,238 2,426,591
Total liabilities 79,826,884 22,491,188
Net assets 384,993,582 383,139,536
Capital and reserves
Share capital 15 371,929,982 371,929,982
Retained earnings 13,006,376 11,207,070
Translation reserve 57,224 2,484
Total equity 384,993,582 383,139,536
Number of Ordinary 15 375,019,398 375,019,398
Shares in issue
Net asset value per 102.66 102.17
Ordinary Share (pence)
These consolidated financial statements were approved and authorised for
issue by the Board of Directors on 25 March 2019, and signed on its behalf
by:
Chairman Director
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018
Year ended 31 December 2018
Retained Translation
Share earnings reserves Total
capital Equity
GBP GBP GBP GBP
Balance at 1 371,929,982 11,207,070 2,484 383,139,536
January 2018
Dividends paid - (24,376,261) - (24,376,261
)
Operating - 26,175,567 - 26,175,567
profit for the
year
Other
comprehensive
income:
Other - - 54,740 54,740
comprehensive
income for the
year
Balance at 31 371,929,982 13,006,376 57,224 384,993,582
December 2018
Year ended 31 December 2017
Retained Translation
Share earnings reserves Total
capital Equity
GBP GBP GBP GBP
Balance at 1 371,929,982 9,021,044 - 380,951,026
January 2017
Dividends paid - (24,376,261) - (24,376,261
)
Operating - 26,562,287 - 26,562,287
profit for the
year
Other
comprehensive
income:
Other - - 2,484 2,484
comprehensive
income for the
year
Balance at 31 371,929,982 11,207,070 2,484 383,139,536
December 2017
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2018
1 January 2018 to 1 January 2017 to
31 December 2018 31 December 2017
GBP GBP
Operating activities:
Operating profit for the 26,175,567 26,562,287
year
Adjustments:
Net interest income (30,137,174) (31,969,225)
Interest income on cash and (21,205) (19,535)
cash equivalents
Net changes in fair value of (2,018,771) -
financial assets at fair
value through profit or loss
(Increase) / decrease in (152,366) 21,871
prepayments, receivables and
capitalised costs
Increase in trade and other 50,302 57,354
payables
Net unrealised losses / 2,055,164 (2,429,820)
(gains) on foreign exchange
derivatives
Net foreign exchange gains (4,750,126) (5,104,358)
Credit facility interest 1,074,308 72,834
Credit facility amortisation 439,950 195,327
of fees
Credit facility commitment 470,700 359,000
fees
Corporate taxes paid (4,217) (2,120)
(6,817,868) (12,256,385)
Loans advanced1 (172,359,770) (215,175,030)
Loan repayments and 137,158,115 213,114,663
amortisation
Arrangement fees received 347,490 -
(not withheld from proceeds)
Origination fees paid2 (1,509,923) (1,668,811)
Origination expenses paid - (23,273)
Interest, commitment and 29,398,155 30,171,530
exit fee income from loans
advanced
Interest received on Credit 2,245,256 -
Linked Notes
Acquisition of financial - (21,773,000)
assets at fair value through
profit or loss
Net cash outflow from (11,538,545) (7,610,306)
operating activities
Cash flows from investing
activities
Interest income from cash 21,205 19,535
and cash equivalents
Net cash inflow from 21,205 19,535
investing activities
Cash flows from financing
activities
Credit facility arrangement (420,567) (451,632)
fees and expenses paid
Proceeds under credit 129,546,670 34,784,000
facility
Repayments under credit (75,603,281) (21,500,000)
facility
Credit facility interest (924,480) (65,005)
paid
Credit facility commitment (494,779) (281,939)
fees paid
Dividends paid (24,376,261) (24,376,261)
Net cash inflow / (outflow) 27,727,302 (11,890,837)
from financing activities
Net increase / (decrease) in 16,209,962 (19,481,608)
cash and cash equivalents
Cash and cash equivalents at 11,750,356 31,018,181
the start of the year
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Net foreign exchange gains 288,197 213,783
on cash and cash equivalents
Cash and cash equivalents at 28,248,515 11,750,356
the end of the year
1 Net of arrangement fees of GBP2,396,173 (2017: GBP2,679,765) withheld.
2 Including CLNs origination fees of GBPnil (2017: GBP288,150).
The accompanying notes form an integral part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2018
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (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 an authorised closed-ended investment company. The registered office and
principal place of business of the Company is 1, Royal Plaza, Royal Avenue,
St Peter Port, Guernsey, Channel Islands, GY1 2HL.
On 12 December 2012, the Company announced the results of its IPO, which
raised net proceeds of GBP223.9 million. 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. A further GBP9.9 million of net
proceeds was raised via tap issues throughout the period ended 31 December
2013 and GBP66.6 million for the year ended 31 December 2015. On 10 August
2016 the Company issued a further 70,839,398 Ordinary Shares raising net
proceeds of GBP71.5 million.
The consolidated financial statements comprise the financial statements of
the Company, Starfin Public Holdco 1 Limited (the "Holdco 1"), Starfin
Public Holdco 2 Limited (the "Holdco 2"), Starfin Lux S.à.r.l ("Luxco"),
Starfin Lux 3 S.à.r.l ("Luxco 3") and Starfin Lux 4 S.à.r.l ("Luxco 4")
(together the "Group") as at 31 December 2018.
The Company's investment objective 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 wider European Union's internal market. To pursue
its investment objective, the Company, through the Holdco 1 and Holdco 2
(the "Holdcos"), invests in the Luxco, Luxco 3 and Luxco 4 (the "Luxcos")
through both equity and profit participation instruments or other funding
instruments. The Luxcos then grant or acquire loans (or other debt
instruments) to borrowers in accordance with the Group's investment policy.
The Group expects all of its investments to be debt obligations of corporate
entities domiciled or with significant operations in the United Kingdom and
wider European Union's internal market.
The Company has appointed Starwood European Finance Partners Limited as the
Investment Manager (the "Investment Manager"), a company incorporated in
Guernsey and regulated by the GFSC. 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. The administration of the Company is delegated to Ipes
(Guernsey) Limited (the "Administrator").
2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these
financial statements are set out below. These policies have been
consistently applied to the years presented, unless otherwise stated.
a) Going Concern
Note 17 includes the Group's objectives, policies and processes for managing
its capital, its financial risk management objectives, details of financial
instruments and exposure to credit risk and liquidity risk. The Directors
have undertaken a rigorous review of the Group's ability to continue as a
going concern including reviewing the ongoing cash flows and the level of
cash balances and available liquidity facilities as of the reporting date as
well as taking forecasts of future cash flows into consideration.
After making enquiries of the Investment Manager and the Administrator, the
Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for at least one year from
the date the consolidated financial statements were signed. Accordingly, the
Directors continue to adopt a going concern basis in preparing these
consolidated financial statements.
b) Statement of compliance
The Company has prepared its consolidated financial statements in accordance
with the Companies (Guernsey) Law, 2008 (as amended) and International
Financial Reporting Standards as adopted by the European Union ("IFRS"),
which comprise standards and interpretations approved by the International
Accounting Standards Boards ("IASB") together with the interpretations of
the IFRS Interpretations Committee ("IFRIC") as approved by the
International Accounting Standards Committee ("IASC") which remain in
effect. The Directors of the Company have taken the exemption in Section 244
of The Companies (Guernsey) Law, 2008 (as amended) and have therefore
elected to only prepare consolidated and not separate financial statements
for the year.
(i) Standards and amendments to existing standards effective 1 January 2018
IFRS 15 "Revenue from Contracts with Customers" became effective for annual
periods beginning on or after 1 January 2018. The new standard is based on
the principle that revenue is recognised when control of a good or service
transfers to a customer, so the notion of control replaces the existing
notion of risks and rewards. Also, the revenue from financial instruments
and other contractual rights or obligations within the scope of IFRS 9
"Financial Instruments" are scoped out from IFRS 15. Adoption of this
standard did not have a material impact on the Group's consolidated
financial statements.
IFRS 9 "Financial Instruments" became effective for annual periods beginning
on or after 1 January 2018. It addresses the classification, measurement and
derecognition of financial assets and liabilities and replaces the multiple
classification and measurement models in IAS 39.
IFRS 9 has been applied retrospectively by the Group and did not result in a
change to the classification or measurement of financial instruments as
outlined in note 2(g). The Group's investment portfolio continues to be
classified as fair value through profit or loss and other financial assets
which are held for collection continue to be measured at amortised cost. In
assessing those financial assets designated as debt instruments (held for
collection), no expected credit losses were deemed to be necessary because
of the loan to value ratios and strong collateral packages in place at
adoption, and hence there was no material impact on adoption when compared
to the prior impairment policy of the Group. However, all new loans are
assessed with respect to the determination of the appropriate level of
expected credit losses required to be presented in the financial statements,
if any, and all outstanding debt instruments held are assessed regularly
with the assistance of the Investment Adviser to determine whether any are
under performing or have had a significant credit risk deterioration, which
may warrant a lifetime expected credit loss being recognised.
There are no other standards, amendments to standards or interpretations
that are effective for annual periods beginning on 1 January 2018 that have
a material effect on the financial statements of the Group.
(ii) New standards, amendments and interpretations effective after 1 January
2018 and have not been early adopted
A number of new standards, amendments to standards and interpretations are
effective for annual periods beginning after 1 January 2018, and have not
been early adopted in preparing Group's consolidated financial statements.
None of these are expected to have a material effect on the consolidated
financial statements of the Group.
c) Basis of preparation
These consolidated financial statements have been prepared on a going
concern basis and under the historical cost convention as modified by the
revaluation of certain assets and liabilities to fair value.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group's accounting
policies. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated
financial statements relate to:
(i) Critical accounting estimates and assumptions
* Models used for loans accounted at amortised cost use as assumptions and
estimate the receipt of and expected timing of scheduled and unscheduled
pre-payments of loans advanced. Changes in these assumptions and estimates
could impact on liquidity risk and the interest income (see note 17).
* The discounted cash flow models used to calculate the fair value of the
credit linked notes involves approximates and estimates of the timing of
cash flows and uses significant unobservable inputs that will directly
impact the valuation of financial assets at fair value through profit or
loss (see note 11).
* The measurement of both the initial and ongoing expected credit loss
allowance for financial assets measured at amortised cost is an area that
requires the use of significant assumptions about credit behaviour such as
likelihood of borrowers defaulting and the resulting losses (see note 2(h)).
(ii) Critical judgements
* The functional currency of each of the Group's entities, which is
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considered by the Directors to be Euro for Luxco 3; Sterling for all other
Group's entities (see notes 2(e) and 2(k)).
* The operating segments, of which the Directors are currently of the
opinion that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio of real
estate backed loans (see note 2(f)).
* The valuation of the credit linked notes is derived from a model prepared
by the Investment Adviser. The main inputs into the valuation model for the
CLNs are discount rates, market risk factors, probabilities of default,
expected credit loss levels and cash flow forecasts. The key areas of
judgement are the methodology and approach to model the fair value of credit
linked notes.
* A number of significant judgements are also required in applying the
accounting requirements for measuring ECL, such as determining the criteria
for significant increase in credit risk, choosing the appropriate model and
assumptions for the measurement of ECL, determining the probabilities of
default and loss given default.
d) Basis of consolidation
The consolidated financial statements incorporate the financial statements
of the Company and entities controlled by the Company (its subsidiary
undertakings) made up to the end of the reporting period. Control is
achieved where the Company has the power to govern the financial and
operating policies of an investee entity so as to obtain benefits directly
from its activities. The existence and effect of potential voting rights
that are currently exercisable or convertible are considered when assessing
whether the Company controls another entity. The Company also assesses
existence of control where it does not have more than 50 per cent of the
voting power but is able to govern the financial and operating policies by
virtue of de-facto control.
Principal
Subsidiary Date of Ownership Country of place of
undertakings Control % Establishment business
Starfin Lux S.à.r.l 30/11/12 100 Luxembourg Luxembourg
Starfin Public 11/09/17 100 Guernsey Guernsey
Holdco 1 Limited
Starfin Public 11/09/17 100 Guernsey Guernsey
Holdco 2 Limited
Starfin Lux 3 19/09/17 100 Luxembourg Luxembourg
S.à.r.l
Starfin Lux 4 11/12/17 100 Luxembourg Luxembourg
S.à.r.l
Subsidiary undertakings are fully consolidated from the date on which
control is transferred to the Group. They are de-consolidated from the date
that control ceases.
The Group applies the acquisition method to account for business
combinations.
Acquisition-related costs are expensed as incurred unless directly
attributable to the acquisition. No consideration, other than for the par
value of any share capital or capital contributions, has been paid in
respect of the acquisition of subsidiary undertakings. The Company acquired
the subsidiaries at the time of their initial establishment and hence they
had no net assets at the date of the acquisition.
Intercompany transactions, balances, income and expenses on transactions
between Group companies are eliminated on consolidation. Profits and losses
resulting from intercompany transactions that are recognised in assets are
also eliminated.
e) Functional and presentation currency
Items included in the financial statements of each of the Group's entities
are measured using the currency of the primary economic environment in which
the entity operates (the "functional currency"). Therefore, the Directors
have considered in assessing the functional currency of each of the Group's
entities:
* the share capital of all members of the Group is denominated in Sterling
except for Lux 3 share capital which is denominated in Euro;
* the dividends are paid in Sterling;
* Euro non-investment transactions represent only a small proportion of
transactions in the Luxembourg entities; and
* proportion of non Sterling investments in each portfolio of Luxembourg
entities.
The functional and presentation currency of each Group entity is Sterling,
apart from Starfin Lux 3 S.à.r.l for which the functional currency is Euro.
Starfin Lux 3 S.à.r.l holds loans and investments in Euro currencies. The
Directors have also adopted Sterling as the Group's presentation currency
and, therefore, the consolidated financial statements for the Company are
presented in Sterling.
f) Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief
operating decision-maker, who is responsible for allocating resources and
assessing performance of the operating segments, has been identified as the
Board, as the Board makes strategic decisions. The Directors, after having
considered the way in which internal reporting is provided to them, are of
the opinion that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio of real
estate backed loans. Equally, based on the internal reporting provided, the
Directors do not analyse the portfolio based on geographical segments.
g) Financial assets and liabilities
Classification and subsequent measurement
From 1 January 2018, the Group classifies its financial assets into the
following measurement categories: at amortised cost, at fair value through
profit or loss and at fair value through other comprehensive income. The
classification depends on the purpose for which the financial assets were
acquired. Management determines the classification of its financial assets
at initial recognition.
Financial assets measured at amortised cost
A financial asset is measured at amortised cost if both of the following
conditions are met: (a) the financial asset is held within a business model
whose objective is to hold financial assets in order to collect contractual
cash flows and (b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding. The carrying amount of these
assets is adjusted by any expected credit loss allowance recognised and
measured as described in note 2(h). Interest income from these financial
assets is included in "Income from loans advanced" using the effective
interest rate method.
Financial assets at fair value through other comprehensive income
A financial asset is measured at fair value through other comprehensive
income if both of the following conditions are met: (a) the financial asset
is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets and (b) the
contractual terms of the financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the
principal amount outstanding. Movements in the carrying amount are taken
through other comprehensive income, except for the recognition of impairment
gains and losses, interest revenue and foreign exchange gains and losses on
the instrument's amortised cost which are recognised in profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are non-derivatives
that are (a) either designated in this category upon initial recognition or
subsequently or (b) not classified in any of the other categories. Gains or
losses on a financial assets subsequently measured at fair value through
profit or loss are recognised in profit or loss net of interest income
received from these financial assets and presented in the profit or loss
statement within "Net changes in fair value of financial assets at fair
value through profit or loss" in the period in which in arises.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are carried in
the statement of financial position at fair value with net changes in fair
value recognised in profit or loss. These comprise currency forward
contracts which represent contractual obligations to purchase domestic
currency and sell foreign currency on a future date.
Financial liabilities measured at amortised cost
Financial liabilities that are not classified through profit or loss,
including bank loans, are measured at amortised cost.
Recognition and measurement
Regular purchases and sales of financial assets are recognised on the trade
date, the date on which the Group commits to purchase or sell the asset.
Financial assets not carried at fair value through profit or loss are
initially recognised at fair value plus transaction costs. Financial assets
carried at fair value through profit or loss are initially recognised at
fair value, and transaction costs are expensed in the Consolidated Statement
of Comprehensive Income. Financial assets at fair value through profit or
loss and financial assets at fair value through other comprehensive income
are subsequently carried at fair value. Financial assets at amortised cost
are subsequently measured using the effective interest method and are
subject to impairment using the expected credit loss model. Gains and losses
are recognised in profit or loss when the asset is derecognised, modified or
impaired.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from
the investments have expired or have been transferred and the Group has
transferred substantially all risks and rewards of ownership. Financial
liabilities are derecognised when they are extinguished, that is, when the
obligation specified in the contract is discharged or cancelled or expires.
Amortised cost and effective interest rate
The amortised cost is the amount at which the financial asset or or
financial liability is measured at initial recognition minus the principal
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repayments, plus or minus the cumulative amortisation using the effective
interest method of any difference between that initial amount and the
maturity amount and, for financial assets, adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of financial
assets or financial liability to the gross carrying amount of a financial
asset (i.e., its amortised cost before any loss allowance) or to the
amortised cost of a financial liability. The calculation does not consider
expected credit losses and includes transaction costs and all fees paid or
received that are integral to the effective interest rate.
Fair value estimation
The fair value of financial assets and liabilities, which comprise financial
instruments such as debt securities, not traded in an active market, is
determined using valuation techniques. The fair value of the CLNs will be
determined by the Investment Adviser using a valuation model. The main
inputs into the valuation model for the CLNs are discount rates, market risk
premium adjustments to the discount rate, probabilities of default and cash
flow forecasts. The Investment Adviser also performs a full analysis of the
performance of each underlying loan and with reference to other inputs such
as third party valuations of the underlying collateral.
The fair value of financial assets and liabilities, which comprise
derivatives not designated as hedges, are valued based on the difference
between the agreed price of selling or buying the financial instruments on a
future date and the price quoted on the year end date for selling or buying
the same or similar financial instruments.
h) Expected credit loss measurement
The Group follows a three-stage model for impairment based on changes in
credit quality since initial recognition as summarised below:
* A financial instrument that is not credit-impaired on initial recognition
is classified as Stage 1 and has its credit risk continuously monitored by
the Group. The expected credit loss ("ECL") is measured over a 12 month
period of time.
* If a significant increase in credit risk since initial recognition is
identified, the financial instrument is moved to Stage 2 but is not yet
deemed to be credit-impaired. The ECL is measured on a lifetime basis.
* If the financial instrument is credit-impaired it is then moved to Stage
3. The ECL is measured on a lifetime basis.
The Group's financial assets at amortised cost are classified within Stage 1
for the following reasons:
* All loans are the subject of very detailed underwriting, including the
testing of resilience to aggressive downside scenarios with respect to the
loan specifics, the market and general macro economic changes, and therefore
the Group considers that value of losses given default ("LGD") currently
have a nil value for all loans;
* Loans have very robust covenants in place which trigger as an early
warning (long before there would be any indicators of significant increase
in credit risk) and this enables the Investment Adviser to become highly
involved in the execution of business plans to avoid ECL;
* Loans have strong security packages and many are amortising with
relatively short terms which further reduces the risk; and
* All loans have significant loan-to-value headroom which further mitigates
the risk of ECL.
No loans in the portfolio to date have had an increase in credit risk that
would have required them to be classified within Stage 2. The paragraph
below describes how the Group determines when a significant increase in
credit risk has occurred. However, even if this were to occur, the Group
would not anticipate the recognition of material credit losses for the
reasons outlined above - the value of ECL would still be expected to be nil.
The Group considers that for prepayments and capitalised costs, the ECL is
by default nil as these are non- monetary items with no credit risks. For
trade and other receivables the Group applies the simplified approach which
requires expected lifetime losses to be recognised from initial recognition
of the receivables.
Significant increase in credit risk
The Group uses both quantitative and qualitative criteria which is monitored
no less than quarterly in order to assess whether an increase in credit risk
has occurred. Increased credit risk would be considered if, for example, all
or a combination of the following has occurred:
* underlying income performance is at a greater than 10 per cent variance to
the underwritten loan metrics;
* Loan to Value is greater than 75-80 per cent;
* Loan to Value or income covenant test results are at a variance of greater
than 5-10 per cent of loan default covenant level (note that loan default
covenant levels are set tightly to ensure that an early cure is required by
the borrower should they breach which usually involves decreasing the loan
amount until covenant tests are passed);
* late payments have occurred and not been cured within 3 days;
* loan maturity date is within six months and the borrower has not presented
an achievable refinance or repayment plan;
* covenant and performance milestones criteria under the loan have required
more than two waivers;
* increased credit risk has been identified on tenants representing greater
than 25 per cent of underlying asset income;
* income rollover / tenant break options exist such that a lease up of more
than 30 per cent of underlying property will be required within 12 months in
order to meet loan covenants and interest payments; and
* borrower management team quality has adversely changed.
Under-performing assets - Stage 3
Non-performing financial assets would be classified with Stage 3, which is
fully aligned with the definition of credit- impaired, when one or more of
the following has occurred:
* the borrower is in breach of all financial covenants;
* the borrower is in significant financial difficulty; and
* it is becoming probable that the borrower will enter bankruptcy.
An instrument is considered to have been cured, that is no longer in
default, when it no longer meets any of the default criteria for a
sufficient period of time.
Write-off policy
The Group writes off financial assets, in whole or in part, when it has
exhausted all practically recovery efforts and has concluded there is no
reasonable expectation of recovery. Indicators that there is no reasonable
expectation of recovery include:
* ceasing enforcement activity; and
* where the Group's recovery method is foreclosing on collateral and the
value of the collateral is such that there is no reasonable expectation of
recovering in full.
Sensitivity analysis
The most significant period-end assumptions used for the expected credit
loss estimates are the LGD and probability of default ("PD") as described
above.
The default probabilities are based on initial loan-to-value ("LTV")
headroom which the Investment Adviser believes to be a good predictor of the
PD, in accordance with recent market studies of European commercial real
estate loans.
In measuring the LGD for this sensitivity analysis, the loans advanced have
been assessed on a collective basis as they possess similar covenants and
security package characteristics. The selected LGD of 0.30% is based on the
aggregate losses of all AAA rated notes issued in Europe from 1995 to 2017
(totalling EUR177 billions), accordingly to recent market studies of
European commercial real estate loans. The Investment Adviser considers this
to be a reasonable estimate for loss given default parameter.
As explained on Note 2 (b)(i), the year-end ECL are nil. Set out below is
the sensitivity to the ECL as at 31 December 2018 and 31 December 2017 that
could result from reasonable possible changes in the LTV and LGD actual
assumptions used for calculation of ECL as at the respective year-end. On an
individual loan basis, the LTV was increased by 5%, and a new PD determined,
which was multiplied by a constant LGD of 0.30% for all loans and the loan
exposure as at each year-end. All other variables are held constant.
Reasonable 31 December 31 December
possible shift 2018 2017
(absolute value) GBP GBP
LTV +5% 278,861 230,919
LGD +0.3%
Change in ECL allowance (+)
i) Cash and cash equivalents
In the Consolidated Statement of Cash Flows, cash and cash equivalents
includes cash in hand, deposits held at call with banks and other short-term
highly liquid investments with original maturities of three months or less.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of new Ordinary Shares are shown in equity as a
deduction, net of tax, from the proceeds.
k) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency
using the exchange rates prevailing at the dates of the transactions or
valuation where items are re-measured. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the translation
at year-end exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognised in the Consolidated Statement of
Comprehensive Income. Foreign exchange gains and losses that relate to
borrowings and cash and cash equivalents and all other foreign exchange
gains and losses are presented in the Consolidated Statement of
Comprehensive Income within "net foreign exchange losses/(gains)".
Group companies
The results and financial position of all the Group entities that have a
functional currency different from the presentation currency of the Group
are translated into the presentation currency of the Group as follows:
i. assets and liabilities for each Statement of Financial Position presented
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are translated at the closing rate at the end of the reporting period;
ii. income and expenses for each Statement of Comprehensive Income are
translated at average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates prevailing on
the transaction dates, in which case income and expenses are translated at
the rate on the dates of the transactions);
iii. share capital is translated at historical cost (translated using the
exchange rates at the transaction date); and
iv. all resulting exchange differences are recognised in other comprehensive
income.
The cumulative amount of translation exchange differences is presented in a
separate component of equity until disposal of the entity.
Starfin Lux 3 S.à.r.l has Euro as its functional currency.
l) Interest income
Interest income on financial assets within Stage 1 and 2 is recognised by
applying the effective interest rate to the gross carrying amount of
financial assets. For financial assets that are classified within Stage 3,
interest revenue is calculated by applying the effective interest rate to
their amortised cost (that is net of expected credit loss provision).
Interest income on non-performing financial assets at amortised cost is
recognised to the extent the Group expects to recover the interest
receivable.
Interest on cash and cash equivalents is recognised on an accruals basis.
m) Origination, exit and loan arrangement fees
Origination fees paid to the Investment Manager and exit and direct loan
arrangement fees received will be recognised using the effective interest
rate method under loans advanced and amortised over the lifetime of the
related financial asset through income from loans advanced in the
Consolidated Statement of Comprehensive Income. Syndication costs are
recognised in the Consolidated Statement of Comprehensive Income when
incurred.
n) Expenses
All other expenses are included in the Consolidated Statement of
Comprehensive Income on an accruals basis.
o) Taxation
The Company is a tax-exempt Guernsey limited liability company as it is
domiciled and registered for taxation purposes in Guernsey where it pays an
annual exempt status fee under The Income Tax (Exempt Bodies) (Guernsey)
Ordinances 1989 (as amended). Accordingly, no provision for Guernsey tax is
made.
The Holdcos are exempted for Guernsey tax purposes, and therefore no
provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations in
Luxembourg and taxation is provided based on the results for the year (see
note 20).
p) Other receivables
Trade and other receivables are amounts due in the ordinary course of
business. They are classified as assets. Trade and other receivables are
recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method, less allowance for ECL.
q) Other payables
Trade and other payables are obligations to pay for services that have been
acquired in the ordinary course of business. They are classified as
liabilities. Trade and other payables are recognised initially at fair value
and subsequently measured at amortised cost using the effective interest
rate method.
r) Dividend distributions
Dividend distributions to the Company's shareholders are recognised as a
liability in the Company's financial statements in the period in which the
dividends are declared by the Board of Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported on
the Consolidated Statement of Financial Position when there is a legally
enforceable right to offset the recognised amounts and there is an intention
to settle on a net basis or realise the asset and settle the liability
simultaneously.
t) Financial liabilities at amortised cost
Financial liabilities at amortised cost, including bank loans are initially
recognised at fair value and subsequently measured at amortised cost using
the effective interest method. Financial liabilities are derecognised when
the contractual obligation is discharged, cancelled or expires.
u) Capitalised expenses on credit facilities
Expenses in connection with the process of originating, prolongation, or
restructuring of a credit facility, such as application and underwriting
fees, are capitalised and subsequently amortised over the period of the
relevant credit facility in the Consolidated Statement of Comprehensive
Income within "credit facility amortisation of fees".
3. MATERIAL AGREEMENTS
a) Investment management agreement
The Company and the Investment Manager have entered into an investment
management agreement, dated 28 November 2012 (the "Investment Management
Agreement"), (which was amended on 7 March 2014, 14 May 2014, 7 September
2015 and
6 October 2017) pursuant to which the Investment Manager has been given
overall responsibility for the discretionary management of the Company's
assets in accordance with the Company's investment objectives and policy.
The Investment Manager is entitled to a management fee which is calculated
and accrued monthly at a rate equivalent to 0.75 per cent per annum of NAV.
In calculating such fee, there shall be excluded from the Net Asset Value
attributable to the Ordinary Shares the uninvested portion of the cash
proceeds of any new issue of Shares (or C Shares) until at least 90 per cent
of such proceeds are invested in accordance with the Company's investment
policy (or deployed to repay borrowings under any credit facility of the
Group or other liabilities of the Group) for the first time. The management
fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset origination fee
of 0.75 per cent of the value of all new loan investments made or acquired
by the Group (see note 22). The asset origination fee to be paid by the
Group is expected to be paid upon receipt by the Group of loan arrangement
fees received on the deployment of the Group's funds.
The Investment Management Agreement is terminable by either the Investment
Manager or the Company giving to the other not less than 12 months' written
notice. The Company is also able to terminate the appointment of the
Investment Manager in the event of a change of control of the Investment
Manager. A change of control shall be deemed to occur where a person
acquires a direct or indirect interest in the Investment Manager, which is
calculated by reference to 15 per cent or more of the voting rights. In
addition the Investment Management Agreement can be terminated by the
Company for any failure to act in good faith with the due skill, care and
diligence which would reasonably be expected from an experienced manager in
the sector and to exercise appropriate prudence in the management of the
Group's portfolio.
Pursuant to the Investment Management Agreement's provisions, a performance
fee would apply from 1 January 2018. The amount of such Performance Fee is
20 per cent of the excess (if any) of the returns generated by the Group
over the Hurdle Total Return (described below). The measurement period over
which the Performance Fee is calculated is two years, with the payment of
any performance fee earned being made at the end of each such two year
period.
The Hurdle Total Return will be achieved when the NAV of the Company at the
end of the two year period, plus the total of all dividends declared and
paid to Ordinary Shareholders in that two year period, is equal to the NAV
of the Company at the start of each two year measurement period, as
increased by 8 per cent per annum, on a simple interest basis (but excluding
performance fees accrued and deemed as a creditor on the balance sheet at
the start of the two year measurement period). No performance fee will be
payable in relation to performance that recoups previous losses (if any).
To the extent that the Company makes further issues of Ordinary Shares
and/or repurchases or redeems Ordinary Shares, the Hurdle Total Return will
be adjusted accordingly, by reference to the issue proceeds of such further
issues and dividends declared subsequent to such issues. Other corporate
actions will also be refllected as appropriate in the calculation of the
Hurdle Total Return.
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.
b) Administration agreement
The Company has engaged the services of Ipes (Guernsey) Limited (the
"Administrator") to act as Administrator and Company Secretary. Under the
terms of the service agreement dated 25 September 2018, the Administrator is
entitled to a fee of no less than GBP225,000 per annum for Guernsey registered
companies of the Group, EUR96,000 for Luxembourg registered subsidiaries and
further amounts as may be agreed in relation to any additional services
provided by the Administrator. The Administrator is, in addition, entitled
to recover third party expenses and disbursements.
c) Registrar's agreement
The Company and Computershare Investor Services (Guernsey) Limited (the
"Registrar") entered into a Registrar agreement dated 28 November 2012,
pursuant to which the Company appointed the Registrar to act as Registrar of
the Company for a minimum annual fee payable by the Company of GBP7,500 in
respect of basic registration.
d) Brokerage agreement
On 21 March 2018, the Company appointed Stifel Nicolaus Europe Limited
("Stifel") to act as Broker to the Group. Stifel is entitled to receive a
fee of GBP50,000 per annum plus expenses. The previous brokerage agreement
with Fidante Partners Europe Limited was terminated on 19 March 2018.
e) Licence agreement
The Company and Starwood Capital Group Management, LLC (the "Licensor") have
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entered into a trade mark licence agreement dated 28 November 2012 (the
"Licence Agreement"), pursuant to which the Licensor has agreed to grant to
the Company a royalty-free, non-exclusive worldwide licence for the use of
the "Starwood" name for the purposes of the Company's business.
Under the terms of the Licence Agreement, it may be terminated by the
Licensor; (i) if the Investment Management Agreement or any other similar
agreement between the Company and the Investment Manager (or either of their
respective affiliates) is terminated for any reason whatsoever or expires;
(ii) if the Company suffers an insolvency event or breaches any court order
relating to the Licence Agreement; or (iii) upon two months' written notice
without cause.
f) Hedging agreements
The Company and Lloyds Bank plc entered into an international forward
exchange master agreement dated 5 April 2013 and on 7 February 2014 the
Company entered into a Professional Client Agreement with Goldman Sachs,
pursuant to which the parties can enter into foreign exchange transactions
with the intention of hedging against fluctuations in the exchange rate
between Sterling and other currencies. Both agreements are governed by the
laws of England and Wales.
g) Revolving credit facilities
Under its investment policy, the Company is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Company's borrowings for this purpose, any liabilities
incurred under the Company's foreign exchange hedging arrangements shall be
disregarded.
On 4 December 2014, the Company entered into a GBP50 million revolving credit
facility with Lloyds Bank plc (the "Lloyds Facility") which is intended for
short-term liquidity. This facility was amended and extended on 8 October
2018. The current maturity date is 8 May 2020. The facility is secured by a
pledge over the bank accounts of the Company, its interests in Starfin
Public Holdco 1 Limited and the intercompany funding provided by the Company
to Starfin Public Holdco 1 Limited. Starfin Public Holdco 1 Limited also
acts as guarantor of the facility and has pledged its bank accounts as
collateral. The undertakings and events of default are customary for a
transaction of this nature.
On 18 December 2017, the Group entered into a separate GBP64 million secured
borrowing facility with Morgan Stanley (the "MS Facility"). The debt can be
drawn in respect of underlying loans which are eligible under the facility.
Certain loans will not be eligible, for example mezzanine loans and loans
above 75 per cent loan to value. It is secured by a customary security
package of bank account pledges, intercompany receivables security, share
security over the two borrower entities (Starfin Lux 3 S.à.r.l and Starfin
Lux 4 S.à.r.l) and their shares. The MS Facility does not have recourse to
the Company. The undertakings and events of default are customary for a
facility of this nature.
4. DIRECTORS' FEES
31 December 31 December
2018 2017
GBP GBP
Directors' emoluments 137,500 122,500
Other expenses 4,321 2,916
141,821 125,416
5. AUDIT AND NON-AUDIT FEES
31 December 2018 31 December 2017
GBP GBP
Audit and non-audit fees
expensed in the Consolidated
Statement of Comprehensive
Income
Audit of company 139,500 87,600
Audit of subsidiaries 53,084 62,788
Total audit 192,584 150,388
Interim Review 21,500 20,500
Other assurance services - 18,000
Total non-audit assurance 21,500 38,500
services
Non-audit services not covered 35,416 15,721
above
Total non-audit services 56,916 54,221
Total fees expensed 249,500 204,609
Audit and non-audit fees not
expensed in the Consolidated
Statement of Comprehensive
income Tax compliance services
(i.e. related to assistance
with corporate restructuring)
Tax advisory services - 150,000
Total non-audit services - 150,000
There were GBPnil other assurance expenses incurred during the year (2017:
GBP18,000 which related to Auditor's work on Investment Circular). There were
GBPnil non-audit fees not expensed in the consolidated statement of
comprehensive income (2017: GBP150,000 which related to the Group's
restructuring and refinancing and these were capitalised to credit facility
costs). Other non-audit services totalling GBP35,416 were expensed in the
consolidated statement of comprehensive income relate to tax advisory,
valuations and other disbursements (2017: GBP15,721).
6. NET FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2018 31 December 2017
GBP GBP
Loans advanced gains - 1,289,722 12,830,447
realised
Loans advanced losses - (310,845) (670,240)
realised
Forward contracts gains - 397,648 191,365
realised
Forward contracts losses - (2,858,157) (8,459,530)
realised
Other gains - realised - 210,388
Other losses - realised (833,196) (46,526)
Loans advanced gains - 4,604,445 3,033,221
unrealised
Loans advanced losses - - (10,253,871)
unrealised
Forward contracts gains - 3,280,025 7,473,888
unrealised
Forward contracts losses - (5,335,189) (5,044,068)
unrealised
234,453 (734,926)
7. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on the
operating profit of GBP26,175,567 (2017: GBP26,562,287) and on the weighted
average number of Ordinary Shares in issue during the year of 375,019,398
(2017: 375,019,398) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of GBP384,993,582
(2017: GBP383,139,536) and the actual number of Ordinary Shares in issue at 31
December 2018 of 375,019,398 (2017: 375,019,398).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2018 31 December 2017
GBP GBP
Cash at bank 28,248,515 11,750,356
28,248,515 11,750,356
Cash and cash equivalents comprises cash held by the Group and short term
deposits held with various banking institutions with original maturities of
three months or less. The carrying amount of these assets approximates their
fair value. For further information and the associated risks refer to note
17.
9. OTHER RECEIVABLES AND PREPAYMENTS
31 December 2018 31 December 2017
GBP GBP
Arrangement fees receivable - 346,593
Prepayments 28,935 31,510
28,935 378,103
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial assets is
discussed in note 2(g).
31 December 2018 31 December 2017
GBP GBP
UK
Regional Hotel Portfolio 46,752,485 46,329,933
Hotel and Residential, UK 34,532,132 -
Hospitals, UK 25,346,479 25,356,064
Industrial Portfolio - 26,039,509
Mixed Use Development, South 14,927,500 10,886,017
East UK
Varde Partners Mixed Portfolio 981,502 9,235,610
Hotel, Channel Islands - 27,262,859
Centre Point, London - 26,379,420
Ireland
Hotel, Dublin 54,458,838 -
School, Dublin 17,319,861 17,111,265
Logistics, Dublin 13,168,789 13,077,887
Student Accommodation, Dublin 9,667,282 -
Residential Portfolio, Dublin - 6,947,895
Residential, Dublin 6,931,790 -
Residential Portfolio, Cork - 5,437,250
Spain
Hotel, Barcelona 41,697,630 41,042,007
Three Shopping Centres 31,527,080 30,860,627
Hotel, Spain 23,394,315 -
Shopping Centre 15,357,522 -
Office and Hotel, Madrid 16,712,680 -
France
Office Building, Paris 14,653,866 22,969,095
Central and Eastern Europe
Industrial Portfolio, Europe 46,014,659 61,020,545
413,444,410 369,955,983
No element of loans advanced are past due or impaired. For further
information and the associated risks see the Investment Manager's Report.
The table below reconciles the movement of the carrying value of loans
advanced in the year:
31 December 2018 31 December 2017
GBP GBP
Loans advanced at the start of 369,955,983 359,876,862
the year
Loans advanced 175,161,798 217,854,795
Loan repayments and (137,158,115) (213,114,663)
amortisation
Arrangement fees earned (2,396,173) (3,026,358)
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Commitment fees earned (575,559) (297,117)
Exit fees earned (2,730,382) (1,662,413)
Origination fees for the year 1,543,468 1,656,491
Origination expenses paid - 23,273
Effective interest income 30,137,174 31,917,555
earned
Interest payments received / (26,092,214) (28,212,000)
accrued
Foreign exchange gains / 5,598,430 4,939,558
(losses)
Loans advanced at the end of 413,444,410 369,955,983
the year
Loans advanced at fair value 426,379,370 382,689,045
For further information on the fair value of loans advanced, refer to note
18.
11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise currency
forward contracts which represent contractual obligations to purchase
domestic currency and sell foreign currency on a future date at a specified
price and financial instruments designated at fair value through profit or
loss which are debt securities that are managed by the Group and their
performance is evaluated on a fair value basis.
The underlying instruments of currency forwards become favourable (assets)
or unfavourable (liabilities) as a result of fluctuations of foreign
exchange rates relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which
instruments are favourable or unfavourable, and thus the aggregate fair
values of derivative financial assets and liabilities, can fluctuate
significantly from time to time. The foreign exchange derivatives are
subject to offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Notional Fair values
contract
31 December 2018 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through profit
or loss
Credit Linked N/A 21,886,33 - 21,886,33
Notes, UK Real 5 5
Estate
Total - 21,886,33 - 21,886,33
5 5
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 263,815,899 50,055 (8,803,266) (8,753,21
1)
Goldman Sachs 959,174 - (28,221) (28,221)
Total 264,775,073 50,055 (8,831,487) (8,781,43
2)
Notional Fair values
contract
31 December 2017 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through profit
or loss
Credit Linked N/A 22,112,82 - 22,112,82
Notes, UK Real 0 0
Estate
Total - 22,112,82 - 22,112,82
0 0
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 198,329,630 17,858 (6,726,062) (6,708,20
4)
Goldman Sachs 945,136 - (18,064) (18,064)
Total 199,274,766 17,858 (6,744,126) (6,726,26
8)
1 Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Company's borrowings for this purpose, any liabilities
incurred under the Company's foreign exchange hedging arrangements shall be
disregarded. The Group has two credit facilities as described in note 3(g)
of these financial statements.
As at 31 December 2018 an amount of GBP68,818,554 (2017: GBP13,330,500) was
drawn and interest of GBP158,660 (2017: GBP7,829) was payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities.
The changes in liabilities arising from financing activities are shown in
the table below.
31 December 2018 31 December 2017
GBP GBP
Borrowings at the start of the (13,338,329) -
year
Proceeds during the year (129,979,408) (34,784,000)
Repayments during the year 75,603,281 21,500,000
Arrangement fees payable (432,738) -
Arrangement fees retained 432,738 -
Interest expenses recognised (1,074,308) (72,834)
for the year
Interest paid during the year 924,480 65,005
Foreign exchange and (1,112,930) (46,500)
translation difference
Borrowings at the end of the (68,977,214) (13,338,329)
year
13. TRADE AND OTHER PAYABLES
31 December 2018 31 December 2017
GBP GBP
Investment management fees 723,652 713,498
payable
Loan amounts payable 405,855 -
Origination fees payable 309,375 275,830
Refinancing and restructuring 239,081 1,148,310
fees payable
Audit fees payable 95,943 72,620
Commitment fees payable 82,900 106,979
Administration fees payable 74,360 109,354
Tax provision 64,401 -
Accrued expenses 60,196 -
Legal and professional fees 12,475 -
payable
2,068,238 2,426,591
14. COMMITMENTS
As at 31 December 2018 the Group had outstanding commitments in respect of
loans not fully drawn of GBP45,572,999 (2017: GBP11,305,160).
As at 31 December 2018 the Group has entered into forward contracts under
the Hedging Master Agreement with Lloyds Bank plc to sell EUR292,511,253
(2017: EUR223,168,257) to receive Sterling. At the end of the reporting
period, these forward contracts have a fair value of GBP8,753,211 liability
(2017: GBP6,708,204 liability).
As at 31 December 2018 the Group has entered into forward contracts under
the Professional Client Agreement with Goldman Sachs to sell EUR1,063,504
(2017: EUR1,063,504) and receive Sterling. At the end of the reporting
period, these forward contracts have a fair value of GBP28,221 liability
(2017: GBP18,064 liability).
15. SHARE CAPITAL
The share capital of the Company consists of an unlimited number of
redeemable Ordinary Shares of no par value which upon issue the Directors
may classify into such classes as they may determine. The Ordinary Shares
are redeemable at the discretion of the Board.
At the year end the Company had issued and fully paid up share capital as
follows:
31 December 2018 31 December 2017
GBP GBP
Ordinary Shares of no par 375,019,398 375,019,398
value Issued and fully paid
Rights attached to shares
The Company's share capital is denominated in Sterling. At any general
meeting of the Company each ordinary share carries one vote. The Ordinary
Shares also carry the right to receive all income of the Company
attributable to the Ordinary Shares, and to participate in any distribution
of such income made by the Company, such income shall be divided pari passu
among the holders of Ordinary Shares in proportion to the number of Ordinary
Shares held by them.
Significant share movements
1 January 2018 to 31 December 2018:
Ordinary Shares Number GBP
Balance at start of the year 375,019,398 379,480,650
Shares issued in 2018 - -
Balance at the end of the year 375,019,398 379,480,650
Issue costs since inception (7,550,668)
Net proceeds 371,929,982
1 January 2017 to 31 December 2017:
Ordinary Shares Number GBP
Balance at start of the year 375,019,398 379,480,650
Shares issued in 2017 - -
Balance at the end of the year 375,019,398 379,480,650
Issue costs since inception (7,550,668)
Net proceeds 371,929,982
16. DIVIDENDS
Dividends will be declared by the Directors and paid in compliance with the
solvency test prescribed by Guernsey law. Under Guernsey law, companies can
pay dividends in excess of accounting profit provided they satisfy the
solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency
test considers whether a company is able to pay its debts when they fall
due, and whether the value of a company's assets is greater than its
liabilities. The Group passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the Group and the
investment outlook, it is the Directors' intention to pay quarterly
dividends to shareholders (for more information see Chairman's Statement).
The Group paid the following dividends in respect of the year to 31 December
2018:
Dividend rate Net dividend Payment date
per
Period to: Share (pence) paid (GBP)
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31 March 2018 1.625 6,094,065 17 May 2018
30 June 2018 1.625 6,094,065 31 August 2018
30 September 2018 1.625 6,094,065 16 November
2018
After the end of the year, the Directors declared a dividend in respect of
the financial year ended 31 December 2018 of 1.625 pence per share,
GBP6,094,065 to be paid on 22 February 2019 to shareholders on the register as
at 1 February 2019.
The Group paid the following dividends in respect of the year to 31 December
2017:
Dividend rate Net dividend Payment date
per
Period to: Share (pence) paid (GBP)
31 March 2017 1.625 6,094,065 16 May 2017
30 June 2017 1.625 6,094,065 25 August 2017
30 September 2017 1.625 6,094,065 17 November
2017
31 December 2017 1.625 6,094,065 23 February
2018
17. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated loans,
mezzanine loans, bridge loans, loan-on-loan financings and other debt
instruments is exposed to a variety of financial risks, including market
risk (including currency risk and interest rate risk), credit risk and
liquidity risk. The Group's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential
adverse effects on the Group's financial performance.
It is the role of the Board to review and manage all risks associated with
the Group, mitigating these either directly or through the delegation of
certain responsibilities to the Audit Committee, Investment Manager and
Investment Adviser.
The Board of Directors has established procedures for monitoring and
controlling risk. The Group has investment guidelines that set out its
overall business strategies, its tolerance for risk and its general risk
management philosophy.
In addition, the Investment Manager monitors and measures the overall risk
bearing capacity in relation to the aggregate risk exposure across all risk
types and activities. Further details regarding these policies are set out
below:
i) Market risk
Market risk includes market price risk, currency risk and interest rate
risk. If a borrower defaults on a loan and the real estate market enters a
downturn it could materially and adversely affect the value of the
collateral over which loans are secured. However, this risk is considered by
the Board to constitute credit risk as it relates to the borrower defaulting
on the loan and not directly to any movements in the real estate market. The
Group's exposure to market price risk arises from Credit Linked Notes held
by the Group and classified as assets at fair value through profit or loss.
The Investment Manager regularly monitors the fair value of Credit Linked
Notes and no specific hedging activities are undertaken in relation to this
investment. The Investment Manager moderates market risk through a careful
selection of loans within specified limits. The Group's overall market
position is monitored by the Investment Manager and is reviewed by the Board
of Directors on an ongoing basis.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in loans
that are denominated in currencies other than the functional currency of the
Company. Consequently the Group is exposed to risks arising from foreign
exchange rate fluctuations in respect of these loans and other assets and
liabilities which relate to currency flows from revenues and expenses.
Exposure to foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board accordingly.
The Group and Lloyds Bank plc entered into an international forward exchange
master agreement dated 5 April 2013 and on
7 February 2014 the Group entered into a Professional Client Agreement with
Goldman Sachs, pursuant to which the parties can enter into foreign exchange
transactions with the intention of hedging against fluctuations in the
exchange rate between Sterling and other currencies. The Group does not
trade in derivatives but holds them to hedge specific exposures and have
maturities designed to match the exposures they are hedging. The derivatives
are held at fair value which represents the replacement cost of the
instruments at the reporting date and movements in the fair value are
included in the Consolidated Statement of Comprehensive Income under net
foreign exchange losses/(gains). The Group does not adopt hedge accounting
in the financial statements. At the end of the reporting period the Group
had 165 (2017: 114) open forward contracts.
As at 31 December 2018 the Group had the following currency exposure:
Danish Sterling Euro Total
Krone
31 December 2018 GBP GBP GBP GBP
Assets
Loans advanced - 122,540,098 290,904,3 413,444,410
12
Financial assets - 21,886,335 - 21,886,335
at fair value
through profit or
loss
Other receivables - 28,935 - 28,935
and prepayments
Cash and cash (249) 13,953,085 14,295,67 28,248,515
equivalents 9
Liabilities
Financial - (8,781,432) - (8,781,432)
liabilities at
fair value
through profit or
loss
Revolving credit - (11,010,233) (57,966,9 (68,977,214
facility 81) )
Trade and other - (297,883) (1,770,35 (2,068,238)
payables 5)
Net currency (249) 138,318,905 245,462,6 383,781,311
exposure 55
Danish Krone Sterling Euro Total
31 December 2017 GBP GBP GBP GBP
Assets
Loans advanced - 171,489,41 198,466,57 369,955,98
2 1 3
Financial assets - 22,112,820 - 22,112,820
at fair value
through profit or
loss
Other receivables - 31,510 346,593 378,103
and prepayments
Cash and cash (2,618) 11,297,839 455,135 11,750,356
equivalents
Liabilities
Financial - (6,726,268 - (6,726,268
liabilities at ) )
fair value
through profit or
loss
Revolving credit - - (13,338,32 (13,338,32
facility 9) 9)
Trade and other - (297,883) (2,128,708 (2,426,591
payables ) )
Net currency (2,618) 197,907,43 183,801,26 381,706,07
exposure 0 2 4
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase or decrease
by 10 per cent with all other variables held constant, the net assets of the
Group at 31 December 2018 would increase or decrease by GBP24,546,266 (2017:
GBP18,380,126). Should the exchange rate of the Danish Krone against Sterling
increase or decrease by 10 per cent with all other variables held constant,
the net assets of the Group at 31 December 2018 would increase or decrease
by GBP25 (2017: GBP262). These percentages have been determined based on
potential volatility and deemed reasonable by the Directors. This does not
include the impact of hedges in place which would be expected to reduce the
impact.
In accordance with the Group's policy, the Investment Manager monitors the
Group's currency position, and the Board of Directors reviews this risk on a
regular basis.
b) Interest rate risk
Interest rate risk is the risk that the value of financial instruments and
related income from loans advanced and cash and cash equivalents will
fluctuate due to changes in market interest rates.
The majority of the Group's financial assets are loans advanced at amortised
cost, credit linked notes, receivables and cash and cash equivalents. The
Group's investments have some exposure to interest rate risk but this is
limited to interest earned on cash deposits and floating interbank rate
exposure for investments designated as loans advanced. Loans advanced have
been structured to include a combination of fixed and floating interest and
80.1% of investments designed as loans advanced at 31 December 2018 have a
floating interbank interest rate. The interest rate risk is mitigated by the
inclusion of interbank rate floors on floating rate loans, preventing
interest rates from falling below certain levels.
The following table shows the portfolio profile of the financial assets at
31 December 2018:
31 December 2018 31 December 2017
GBP GBP
Floating rate
Loans advanced1 327,185,839 292,103,935
Financial assets at fair value 21,886,335 22,112,820
through profit or loss
Cash and cash equivalents 28,248,515 11,750,356
Fixed rate
Loans advanced 86,258,571 77,852,048
Total financial assets subject 463,579,260 403,819,159
to interest rate risk
1 Loans advanced at floating rates include loans with interbank rate floors.
At 31 December 2018, if interest rates had changed by 25 basis points, with
all other variables remaining constant, the effect on the net profit and
equity would have been as shown in the table below:
31 December 2018 31 December 2017
GBP GBP
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Floating rate
Increase of 25 basis points1 943,302 814,918
Decrease of 25 basis points (943,302) (814,918)
1 The calculation assumes no interbank rate floors.
These percentages have been determined based on potential volatility and
deemed reasonable by the Directors.
ii) Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in
full when due. The Group's main credit risk exposure is in the investment
portfolio, shown as loans advanced at amortised cost and credit linked notes
designated at fair value through profit or loss, where the Group invests in
whole loans and also subordinated and mezzanine debt which rank behind
senior debt for repayment in the event that a borrower defaults. There is a
spread concentration of risk as at 31 December 2018 due to several loans
being advanced since inception. There is also credit risk in respect of
other financial assets as a portion of the Group's assets are cash and cash
equivalents or accrued interest. The banks used to hold cash and cash
equivalents have been diversified to spread the credit risk to which the
Group is exposed. The Group also has credit risk exposure in its financial
assets through profit or loss which is diversified between hedge providers
in order to spread credit risk to which the Group is exposed.
With respect to the credit linked notes designated at fair value through
profit or loss, the Group holds junior notes linked to the performance of a
portfolio of high quality UK real estate loans owned by a major commercial
bank. The transaction is structured as a synthetic securitisation with risk
transfer from the bank to the Group achieved via the purchase of credit
protection by the bank on the most junior tranches. The credit risk to the
Group is the risk that one of the underlying borrowers defaults on their
loan and the Group is required to make a payment under the credit protection
agreement. Despite the different way in which the transaction has been
structured the Group considers the risks to be fundamentally the same as any
other junior loan in the portfolio and monitors and manages this risk in the
same way as the other loans advanced by the Group.
The total exposure to credit risk arises from default of the counterparty
and the carrying amounts of financial assets best represent the maximum
credit risk exposure at the year-end date. As at 31 December 2018, the
maximum credit risk exposure was GBP463,579,260 (2017: GBP404,165,752).
The Investment Manager has adopted procedures to reduce credit risk exposure
by conducting credit analysis of the counterparties, their business and
reputation which is monitored on an ongoing basis. After the advancing of a
loan a dedicated debt asset manager employed by the Investment Adviser
monitors ongoing credit risk and reports to the Investment Manager, with
quarterly updates also provided to the Board. The debt asset manager
routinely stresses and analyses the profile of the Group's underlying risk
in terms of exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are typically
agreed at the time of the original loan underwriting, forecasting headroom
against covenants, reviewing market data and forecast economic trends to
benchmark borrower performance and to assist in identifying potential future
stress points. Periodic physical inspections of assets that form part of the
Group's security are also completed in addition to monitoring the identified
capital expenditure requirements against actual borrower investment.
The Group measures credit risk and expected credit losses using probability
of default, exposure at default and loss given default. The Directors
consider both historical analysis and forward looking information in
determining any expected credit loss. The Directors consider the loss given
default to be close to zero as all loans are the subject of very detailed
underwriting, including the testing of resilience to aggressive downside
scenarios with respect to the loan specifics, the market and general macro
changes. In addition to this, all loans have very robust covenants in place,
strong security packages and significant loan-to-value headroom. As a
result, no loss allowance has been recognised based on 12-month expected
credit losses as any such impairment would be wholly insignificant to the
Group.
The Group uses both quantitative and qualitative criteria for monitoring the
loan portfolio as described in note 2(h). The gross carrying amount of loan
portfolio is presented in the table below and also represents the Group's
maximum exposure to credit risks on these assets.
Total as Total as at
at
Stage 1 Stage 2 Stage 3 31 31 December
December 2017
2018
GBP GBP GBP GBP GBP
Loans advanced 413,444,41 - - 413,444,41 369,955,983
0 0
Gross carrying 413,444,41 - - 413,444,41 369,955,983
amount 0 0
Less ECL - - - - -
allowance
Carrying 413,444,41 - - 413,444,41 369,955,983
amount 0 0
A reconciliation of changes in the ECL allowance was not presented as the
allowance recognised at the end of the reporting period was GBPnil (2017:
GBPnil).
The Group maintains its cash and cash equivalents across various different
banks to diversify credit risk which have been all rated A1 or higher by
Moody's and this is subject to the Group's credit risk monitoring policies
as mentioned above.
Total as at Total as at
31 December 2018 31 December 2017
GBP GBP
Barclays Bank plc 27,634,114 11,596,030
Lloyds Bank plc 816 854
HSBC Bank plc 424 76
Royal Bank of Scotland 88 123
International
ING Luxembourg, SA 613,073 153,273
Total cash and cash 28,248,515 11,750,356
equivalents
The carrying amount of cash and cash equivalents approximates their fair
value.
iii) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient resources
available to meet its liabilities as they fall due. The Group's loans
advanced are illiquid and may be difficult or impossible to realise for cash
at short notice.
The Group manages its liquidity risk through short term and long term cash
flow forecasts to ensure it is able to meet its obligations. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has entered
into revolving credit facilities of total of GBP114,000,000 (2017:
GBP114,000,000) of which GBP68,818,554 (2017: GBP13,330,500) was drawn at the end
of the reporting period.
The table below shows the maturity of the Group's non-derivative financial
assets and liabilities arising from the advancement of loans by remaining
contractual maturities at the end of the reporting date. The amounts
disclosed under assets are contractual, undiscounted cash flows and may
differ from the actual cash flows received in the future as a result of
early repayments:
Between 3 and
Up to 3 12 months Over 1 Total
months year
31 December 2018 GBP GBP GBP GBP
Assets
Loans advanced - 22,840,793 390,603,61 413,444,410
7
Financial assets - - 21,886,335 21,886,335
at fair value
through profit or
loss
Liabilities and
commitments
Loan commitments1 (13,300,3 (14,166,013) (15,091,63 (42,557,994
50) 1) )
Credit facilities (13,663,1 - (55,314,05 (68,977,214
61) 3) )
Trade and other (2,068,23 - - (2,068,238)
payables 8)
(29,031,7 8,674,780 342,084,26 321,727,299
49) 8
1 Loan commitments are estimated forecasted drawdowns at year end.
Between 3
and
Up to 3 12 months Over 1 Total
months year
31 December 2017 GBP GBP GBP GBP
Assets
Loans advanced - 26,379,420 343,576,56 369,955,98
3 3
Financial assets - - 22,112,820 22,112,820
at fair value
through profit or
loss
Liabilities and
commitments
Loan commitments (613,241) (7,237,382) (3,454,537 (11,305,16
) 0)
Credit facilities - (13,338,329) - (13,338,32
9)
Trade and other (2,426,591 - - (2,426,591
payables ) )
(3,039,832 5,803,709 362,234,84 364,998,72
) 6 3
The table below analyses the Group's derivative financial instruments that
will be settled on a gross basis into relevant maturity groupings based on
the remaining period at the end of the reporting date. The amounts disclosed
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are the contractual undiscounted cash flows:
31 December 2018
Between 3 and More than Total as at
Up to 3 12 months 1 year 31 December
months 2018
Derivatives GBP GBP GBP GBP
Goldman Sachs:
Foreign exchange
derivatives
Outflow1 - - 959,174 959,174
Inflow - - 991,632 991,632
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow1 3,515,09 12,752,592 247,548,215 263,815,899
2
Inflow 3,505,93 12,824,551 257,003,592 273,334,080
7
31 December 2017
Between 3 and More than Total as at
Up to 3 12 months 1 year 31 December
months 2017
Derivatives GBP GBP GBP GBP
Goldman Sachs:
Foreign exchange
derivatives
Outflow1 - - 945,136 945,136
Inflow - - 981,260 981,260
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow1 2,464,05 29,834,871 166,030,710 198,329,631
0
Inflow 2,466,40 29,962,789 171,725,189 204,154,383
5
1 Euro amounts translated at year end exchange rate.
Capital management policies and procedures
The Group's capital management objectives are:
* To ensure that the Group will be able to continue as a going concern; and
* To maximise the income and capital return to equity shareholders through
an appropriate balance of equity capital and long-term debt.
The capital of the Company is represented by the net assets attribute to the
holders of the Company's shares.
In accordance with the Group's investment policy, the Group's principal use
of cash (including the proceeds of the IPO and subsequent tap issues and
placings) has been to fund investments in the form of loans sourced by the
Investment Adviser and the Investment Manager, as well as initial expenses
related to the issue, ongoing operational expenses and payment of dividends
and other distributions to shareholders in accordance with the Company's
dividend policy.
The Board, with the assistance of the Investment Manager, monitors and
reviews the broad structure of the Company's capital on an ongoing basis.
The Company has no imposed capital requirements.
The Company's capital at the end of the reporting period comprises:
31 December 2018 31 December 2017
GBP GBP
Equity
Equity share capital 371,929,982 371,929,982
Retained earnings and 13,063,600 11,209,554
translation reserve
Total capital 384,993,582 383,139,536
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements using a fair
value hierarchy that reflects the significance of the inputs used in making
the measurements. The fair value hierarchy has the following levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices including interest rates, yield
curves, volatilities, prepayment rates, credit risks and default rates) or
other market corroborated inputs (level 2).
(iii) Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Group's
financial assets and liabilities (by class) measured at fair value:
31 December 2018
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - 21,886,335 21,886,335
value through profit
or loss
Total - - 21,886,335 21,886,335
Liabilities
Derivative - (8,781,432) - (8,781,432)
liabilities
Total - (8,781,432) - (8,781,432)
31 December 2017
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - 22,112,820 22,112,820
value through profit
or loss
Total - - 22,112,820 22,112,820
Liabilities
Derivative - (6,726,268) - (6,726,268)
liabilities
Total - (6,726,268) - (6,726,268)
There have been no transfers between levels for the year ended 31 December
2018 (2017: nil).
Investments classified within Level 3 consist of Credit Linked Notes
("CLNs"). The fair value of the CLNs is determined by the Investment Adviser
using a discounted cash flow valuation model. The main inputs into the
valuation model for the CLNs are discount rates, market risk factors,
probabilities of default, expected credit loss levels and cash flow
forecasts. The Investment Adviser also considers the original transaction
price and recent transactions of comparable instruments (where available),
the credit quality on the underlying reference portfolios and adjusts the
valuation model as deemed necessary.
The Directors are responsible for considering the methodology and
assumptions used by the Investment Adviser and for approving the fair values
reported at the financial period end.
The most significant input to the valuation model is the discount rate
applied to the cash flows. As at 31 December 2018, if the discount rate was
to increase/decrease by 1%, the fair value of the CLNs would reduce/increase
by GBP474,000 / GBP494,000 (2017: GBP637,000 / GBP665,000).
The table below presents the movement in level 3 investments.
31 December 2018 31 December 2017
GBP GBP
Balance at the start of the 22,112,820 -
year
Acquisitions - 22,061,150
Disposals - -
Cash interest received (2,245,256) -
Net gains / (losses) 2,018,771 51,670
recognised in profit or
loss(1)
Balance at the end of the year 21,886,335 22,112,820
Changes in unrealised gains or - -
losses for Level 3 assets held
at year end and included in
net changes in fair value of
financial assets at fair value
through profit or loss
(1) The net gains comprise of GBP2,306,921 interest income recognised on CLNs
and GBP288,150 initially capitalised origination fees which were subsequently
expensed.
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 31 December
2018 but for which fair value is disclosed:
31 December 2018
Total fair Total
carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 28,248,515 - 28,248,515 28,248,51
equivalents 5
Other - 28,935 - 28,935 28,935
receivables
and
prepayments
Loans advanced - - 426,379, 426,379,370 413,444,4
370 10
Total - 28,277,450 426,379, 454,656,820 441,721,8
370 60
Liabilities
Trade and - 2,068,238 - 2,068,238 2,068,238
other payables
Credit - 68,977,214 - 68,977,214 68,977,21
facility 4
Total - 71,045,452 - 71,045,452 71,045,45
2
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 31 December
2017 but for which fair value is disclosed:
31 December 2017
Total fair Total
carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Cash and cash - 11,750,356 - 11,750,356 11,750,35
equivalents 6
Other - 378,103 - 378,103 378,103
receivables
and
prepayments
Loans advanced - - 382,689, 382,689,045 369,955,9
045 83
Total - 12,128,459 382,689, 394,817,504 382,084,4
045 42
Liabilities
Trade and - 2,426,591 - 2,426,591 2,426,591
other payables
Credit - 13,338,329 - 13,338,329 13,338,32
facility 9
Total - 15,764,920 - 15,764,920 15,764,92
0
The carrying values of the assets and liabilities included in the above
table are considered to approximate their fair values, except for loans
advanced. The fair value of loans advanced has been determined by
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discounting the expected cash flows using a discounted cash flow model. For
the avoidance of doubt, the Group carries its loans advanced at amortised
cost in the consolidated financial statements, consistent with the
requirement of IFRS 9 as the Group's intention and business model is to
collect both interest and the capital repayments thereof.
Cash and cash equivalents include cash at hand and fixed deposits held with
banks. Other receivables and prepayments include the contractual amounts and
obligations due to the Group and consideration for advance payments made by
the Group. Credit facilities and trade and other payables represent the
contractual amounts and obligations due by the Group for contractual
payments.
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of shareholdings advised to
them, the Company has no immediate or ultimate controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of GBP1,200.
The Luxembourg indirect subsidiaries of the Company are subject to the
applicable tax regulations in Luxembourg. The table below analyses the tax
charges incurred at Luxembourg level:
31 December 2018 31 December 2017
GBP GBP
Current tax
Tax expenses on profit of the 50,384 3,310
reporting period
Tax expenses on profit of 17,684 -
previous periods
Tax refund for previous - (1,190)
periods
Total current tax 68,068 2,120
The Luxco had no operating gains on ordinary activities before taxation and
were therefore for the year ended 31 December 2018 subject to the Luxembourg
minimum corporate income taxation at EUR3,810 (2017: EUR3,210). The Luxco 3
and Luxco 4 are subject to Corporate Income Tax and Municipal Business Tax
based on a margin calculated on an arm's-length principle. The effective tax
rate in Luxembourg during the reporting period was 26.01% (2017: 27.08%).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment Advisors Act
1940 (the "Custody Rule") the consolidated financial statements of the Group
have also been audited in accordance with Generally Accepted Auditing
Standards applicable in the United States ("US GAAS"). As such two
independent Auditor's reports are included in the Annual Report and Audited
Consolidated Financial Statements, one under International Standards on
Auditing as required by the Crown Dependencies Audit Rules and the other
under US GAAS. Compliance with the Custody Rule also requires a
reconciliation of the operating profit and net assets under IFRS to US GAAP.
The principal differences between IFRS and US GAAP relate to accounting for
financial assets that are carried at amortised cost. Under US GAAP the
calculation of the effective interest rate is based on contractual cash
flows over the asset's contractual life. International Financial Reporting
Standards, however, base the effective interest rate calculation on the
estimated cash flows over the expected life of the asset.
The Directors have assessed the operating profit and NAV of the Company and
Group under both IFRS and US GAAP and have concluded that no material
differences were identified and therefore no reconciliation has been
presented in these consolidated financial statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control
the other party or exercise significant influence over the other party in
making financial or operational decisions. Details on the Investment Manager
and other related party transactions are included in note 3 to the
consolidated financial statements.
The following tables summarise the transactions occurred with related
parties during the reporting period and outstanding at 31 December 2018 and
31 December 2017:
2018
Outstanding at For the year
ended
31 December 31 December 2018
2018
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 50,000
John Whittle - 45,000
Jonathan Bridel - 42,500
Expenses paid - 4,321
Investment Manager
Investment management fees 723,652 2,858,556
Origination fees 309,375 1,543,468
Expenses - 175,531
2017
Outstanding at For the year
ended
31 December 31 December 2017
2017
Fees, expenses and other GBP GBP
payments
Directors' fees and expenses
paid
Stephen Smith - 47,500
John Whittle - 40,000
Jonathan Bridel - 35,000
Expenses paid - 2,916
Investment Manager
Investment management fees 713,498 2,844,140
Origination fees 275,830 1,944,641
Expenses - 47,636
The following tables summarise the dividends paid to related parties during
the reporting period and number of Company's shares held by related parties
at 31 December 2018 and 31 December 2017:
2018
Dividends paid As at
for
the year ended 31 December
2018
31 December 2018 Number of
shares
Shareholdings and dividends GBP
paid
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel 771 11,866
2017
Dividends paid As at
for
the year ended 31 December
2017
31 December 2017 Number of
shares
Shareholdings and dividends GBP
paid
Starwood Property Trust Inc. 594,100 9,140,000
SCG Starfin Investor LP 148,525 2,285,000
Stephen Smith 5,130 78,929
John Whittle 771 11,866
Jonathan Bridel 771 11,866
Other
The Group continues to participate in a number of loans in which Starwood
Property Trust, Inc. ("STWD") acted as a co-lender. The details of these
loans are shown in the table below.
Loan Related party co-lenders
Mixed Residential and Hotel, UK STWD
Mixed Use Development, South East UK STWD
Hotel, Spain STWD
Credit Linked Notes, UK Real Estate STWD
23. EVENTS AFTER THE REPORTING PERIOD
The following cash amounts have been funded since the year end up to the
date of publication of this report:
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
The following loan amortisation (both scheduled and unscheduled) has been
received since the year end up to the date of publication of this report:
Local Currency
Industrial Portfolio, Central and Eastern Europe EUR938,496
Three Shopping Centres, Spain EUR167,344
Logistics, Dublin, Ireland EUR38,967
Student Accommodation, Dublin, Ireland totalling EUR10,569,039 and Varde
Partners Mixed Portfolio, UK totalling GBP968,003 have been repaid in full
since 31 December 2018.
Subsequently to reporting date, the Group 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 the date of publication of this report the amount drawn under each
facility are:
* Lloyds Facility: EUR17 million
* Morgan Stanley Facility: EUR34 million
On 23 January 2019 the Company declared a dividend of 1.625 pence per
Ordinary Share payable to shareholders on the register on 1 February 2019.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures
("APMs") the Board has considered what APMs are included in the Annual
Financial Report and Audited Consolidated Financial Statements which require
further clarification. An APM is defined as a financial measure of
historical or future financial performance, financial position, or cash
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flows, other than a financial measure defined or specified in the applicable
financial reporting framework. APMs included in the financial statements,
which are unaudited and outside the scope of IFRS, are deemed to be as
follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets attributable to equity
shareholders divided by the number of Ordinary Shares in issue, excluding
any shares held in treasury. The NAV per Ordinary Share is published
monthly. This APM relates to past performance and is used as a comparison to
the share price per Ordinary Share to assess performance. There are no
reconciling items between this calculation and the Net Asset Value shown on
the balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any dividends paid,
together with the rise or fall in the NAV per Ordinary Share. This APM
relates to past performance and takes into account both capital returns and
dividends paid to shareholders. Any dividends received by a shareholder are
assumed to have been reinvested in the assets of the Company at its NAV per
Ordinary Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of any dividends
paid, together with the rise or fall in the share price. This APM relates to
past performance and assesses the impact of movements in the share price on
total returns to investors. Any dividends received by a shareholder are
assumed to have been reinvested in additional shares of the Company at the
time the shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of the Company
is lower (discount) or higher (premium) than the NAV per Ordinary Share at
the date of reporting and relates to past performance. The discount or
premium is normally expressed as a percentage of the NAV per Ordinary Share.
INVESTMENT LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the quarterly reporting
date of the estimated annual return on the portfolio at that point in time.
It is calculated individually for each loan by summing the one-off fees
earned (such as up-front arrangement or exit fees charged on repayment) and
dividing these over the full contractual term of the loan, and adding this
to the annual returns. Where a loan is floating rate (partially or in whole
or with floors), the returns are based on an assumed profile for future
interbank rates but the actual rate received may be higher or lower. The
return is calculated only on amounts funded at the quarterly reporting date
and excludes committed but undrawn loans and excludes cash un-invested. The
calculation also excludes origination fees paid to the Investment Manager,
which are accounted for within the interest line in the financial
statements.
An average, weighted by loan amount, is then calculated for the portfolio.
This APM gives an indication of the future performance of the portfolio (as
constituted at the reporting date). The calculation, if the portfolio
remained unchanged, could be used to estimate "income from loans advanced"
in the Consolidated Statement of Comprehensive Income if adjusted for the
origination fee of 0.75 basis points amortised over the average life of the
loan. As discussed earlier in this report the figure actually realised may
be different due to the following reasons:
* 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
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.
* 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.
Generally speaking, the actual annualised total return is likely to be
higher than the reported return for these reasons but this is not
incorporated in the reported figure, as the benefit of these items cannot be
assumed.
INVESTED LOAN PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same basis as the
unlevered annual return but takes into account the amount of leverage in the
Group and the cost of that leverage at current LIBOR/EURIBOR rates.
ONGOING CHARGES PERCENTAGE
Ongoing charges represents the management fee and all other operating
expenses excluding finance costs and transactions costs, expressed as a
percentage of the average monthly net asset values during the year and
allows users to assess the running costs of the Group. This is calculated in
accordance with AIC guidance and relates to past performance The charges
include the following lines items within the Consolidated Statement of
Comprehensive Income:
* Investment management fees
* Administration fees
* Audit and non-audit fees
* Other expenses
* Legal and professional fees
* Directors' fees and expenses
* Broker's fees and expenses
* Agency fees
The calculation adds back any expenses unlikely to occur absent any loan
originations or repayments and as such, the costs associated with hedging
Euro loans back to sterling have been added back. The calculation does not
include origination fees paid to the Investment Manager, these are
recognised through "Income from loans advanced".
WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST GBP
These are calculations made as at the quarterly reporting date of the loan
to value ("LTV") on each loan at the lowest and highest point in the capital
stack in which the Group participates. LTV to "Group last GBP" means the
percentage which the total loan commitment less any amortisation received to
date (when aggregated with any other indebtedness ranking alongside and/or
senior to it) bears to the market value determined by the last formal lender
valuation received by the quarterly reporting date. LTV to "first Group GBP"
means the starting point of the loan to value range of the loan commitments
(when aggregated with any other indebtedness ranking senior to it). For
development projects, the calculation includes the total facility available
and is calculated against the assumed market value on completion of the
project.
An average, weighted by the loan amount, is then calculated for the
portfolio.
This APM provides an assessment of future credit risk within the portfolio
and does not directly relate to any financial statement line items.
PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS
This is a calculation made as at the quarterly reporting date, which
calculates the value of loans, which have an element of floating rate in
part, in whole and including loans with floors, as a percentage of the total
value of loans. This APM provides an assessment of potential future
volatility of the income on loans, as a large percentage of floating rate
loans would mean that income would move up or down with changes in EURIBOR
or LIBOR.
AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM
The average loan term is calculated at the quarterly reporting date by
calculating the average length of each loan from initial advance to the
contractual termination date. An average, weighted by the loan amount, is
then calculated for the portfolio.
The average remaining loan term is calculated at the quarterly reporting
date by calculating the average length of each loan from the quarterly
reporting date to the contractual termination date. An average, weighted by
the loan amount, is then calculated for the portfolio.
This APM provides an assessment of the likely level of repayments occurring
in future years (absent any early repayments) which will need to be
reinvested. In the past, the actual term of loans has been shorter than the
average contractual loan term due to early repayments and so the level of
repayments is likely to be higher than this APM would suggest. However, this
shorter actual loan term cannot be assumed as it may not occur and therefore
it is not reported as part of this APM.
PORTFOLIO DIVERSIFICATION
The portfolio diversification statistics are calculated by allocating each
loan to the relevant sectors and countries based on the value of the
underlying assets. This is then summed for the entire portfolio and a
percentage calculated for each sector / country.
This APM provides an assessment of future risk within the portfolio due to
exposure to specific sectors or countries and does not directly relate to
any financial statement line items.
Corporate Information
Directors
Stephen Smith (Non-executive Chairman)
Jonathan Bridel (Non-executive Director)
John Whittle (Non-executive Director)
(all care of the registered office)
Investment Manager
Starwood European Finance
Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities law)
Norton Rose LLP
3 More London Riverside
London
SE1 2AQ
United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
3rd Floor
Natwest House
Le Truchot
St Peter Port
Guernsey
GY1 1WD
Broker
Stifel Nicolaus Europe Limited
trading as Stifel
150 Cheapside
London
EC2V 6ET
United Kingdom
Administrator, Designated Manager and Company Secretary
Ipes (Guernsey) Limited
(Now part of the Apex Group)
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
(MORE TO FOLLOW) Dow Jones Newswires
March 26, 2019 03:05 ET (07:05 GMT)
1 Royal Plaza Royal Avenue St Peter Port Guernsey GY1 2HL Investment Adviser Starwood Capital Europe Advisers, LLP 2nd Floor One Eagle Place St. James's London SW1Y 6AF United Kingdom Advocates to the Company (as to Guernsey law) Carey Olsen PO Box 98 Carey House, Les Banques St Peter Port Guernsey GY1 4HP Independent Auditor PricewaterhouseCoopers CI LLP Royal Bank Place 1 Glategny Esplanade St Peter Port Guernsey GY1 4ND Principal Bankers Barclays Private Clients International Limited PO Box 41 Le Marchant House St Peter Port Guernsey GY1 3BE Website: www.starwoodeuropeanfinance.com ISIN: GG00B79WC100 Category Code: ACS TIDM: SWEF LEI Code: 5493004YMVUQ9Z7JGZ50 Sequence No.: 7942 EQS News ID: 791461 End of Announcement EQS News Service 1: https://link.cockpit.eqs.com/cgi-bin/fncls.ssp?fn=redirect&url=6af4d5186fecdbe5ed29055acea46692&application_id=791461&site_id=vwd_london&application_name=news
(END) Dow Jones Newswires
March 26, 2019 03:05 ET (07:05 GMT)
