DJ SWEF: Annual Audited Accounts 2019
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Annual Audited Accounts 2019
07-Apr-2020 / 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.
Starwood European Real Estate Finance
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2019
The Company has today published its annual financial report for the year
ended 31 December 2019 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.
Financial Highlights
Key Highlights Year ended Year ended
31 December 2019 31 December 2018
NAV per Ordinary Share 103.23 p 102.66 p
Share Price 104.50 p 102.00 p
NAV total return(1) 7.1% 7.1%
Share Price total return(1) 9.1% (1.0)%
Total Net Assets GBP426.6 m GBP385.0 m
Loans advanced at amortised GBP390.6 m GBP413.4 m
cost (including accrued
income)
Financial assets held at fair GBP30.5 m GBP21.9 m
value through profit or loss
(including associated accrued
income)
Cash and Cash Equivalents GBP36.8 m GBP28.2 m
Amount drawn under Revolving GBP29.7 m GBP68.8 m
Credit Facility (excluding
accrued interest)
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio 7.1% 7.4%
unlevered annualised total
return(1)
Invested Loan Portfolio 7.0% 8.0%
levered annualised total
return(1)
Ongoing charges percentage(1) 1.0% 1.1%
Weighted average portfolio LTV 18.4% 16.7%
to Group first GBP(1)
Weighted average portfolio LTV 63.0% 64.1%
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.
Full text of annual financial report for the year ended 31 December 2019
Overview
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 UK and the wider 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.
In the event that a 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
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
(MORE TO FOLLOW) Dow Jones Newswires
April 07, 2020 02:01 ET (06:01 GMT)
DJ SWEF: Annual Audited Accounts 2019 -2-
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 2018 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, shareholders' 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 2019 31 December 2018
NAV per Ordinary Share 103.23 p 102.66 p
Share Price 104.50 p 102.00 p
NAV total return(1) 7.1% 7.1%
Share Price total return(1) 9.1% (1.0)%
Total Net Assets GBP426.6 m GBP385.0 m
Loans advanced at amortised GBP390.6 m GBP413.4 m
cost (including accrued
income)
Financial assets held at fair GBP30.5 m GBP21.9 m
value through profit or loss
(including associated accrued
income)
Cash and Cash Equivalents GBP36.8 m GBP28.2 m
Amount drawn under Revolving GBP29.7 m GBP68.8 m
Credit Facility (excluding
accrued interest)
Dividends per Ordinary Share 6.5 p 6.5 p
Invested Loan Portfolio 7.1% 7.4%
unlevered annualised total
return(1)
Invested Loan Portfolio 7.0% 8.0%
levered annualised total
return(1)
Ongoing charges percentage(1) 1.0% 1.1%
Weighted average portfolio LTV 18.4% 16.7%
to Group first GBP(1)
Weighted average portfolio LTV 63.0% 64.1%
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 2019 the NAV was 103.23 pence per Ordinary Share (2018:
102.66 pence) and the share price was 104.50 pence (2018: 102.00 pence).
Source: Thomson Reuters Datastream
Since 31 December 2019, in common with the overall equity market, the
Company's share price has fallen sharply and continues to be volatile. These
moves have been driven by market conditions and flow rather than a change in
the Company's NAV.
Chairman's Statement
STEPHEN SMITH | Chairman
6 April 2020
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 2019.
OVERVIEW
The Group had another successful origination year in 2019 with GBP224.7
million of new commitments, equivalent to 52.1 per cent of the loan book at
the beginning of the year. Repayments totalled GBP198.3 million equal to 45.9
per cent of the loan book at the start of the year, marginally higher than
the average of 41.9 per cent over the previous four years. Net commitments
were therefore GBP26.4 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 7.1 per cent. The Company's share price
total return across the financial year was 9.1 per cent, reflecting an
increase in the share price from the end of 2018 and 6.5 pence of dividend
payments during the year.
As at 31 December 2019, the Group had investments and commitments of GBP489
million (of which GBP78 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 has cash of GBP36.8 million and unused liquidity facilities of GBP96
million (a total capacity of GBP133 million) which is available to fund
undrawn commitments of GBP78 million and new lending. The gross annualised
levered total return at the year end was 7.0 per cent. The Net Asset Value
("NAV") was GBP426.6 million, being 103.23 pence per Ordinary Share.
The table below shows the loan commitment and repayment profile over the
last five years.
2015 2016 2017 2018 2019
(MORE TO FOLLOW) Dow Jones Newswires
April 07, 2020 02:01 ET (06:01 GMT)
DJ SWEF: Annual Audited Accounts 2019 -3-
New loans to GBP118.7m GBP175.9m GBP245.8m GBP208.0m GBP224.7m
borrowers
(commitment)
Loan repayments and -GBP49.0m -GBP129.3m -GBP213.1m -GBP137.2m -GBP198.3m
amortisation
Net Investment GBP69.7m GBP46.6m GBP32.7m GBP70.8m GBP26.4m
Despite recent events, such as the spread of COVID-19 and an oil price drop,
the Group still 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.
SHARE ISSUANCE AND SHARE PRICE PERFORMANCE
On 15 May 2019, the Company issued 38,200,000 New Ordinary Shares pursuant
to the Placing Programme, to raise GBP40 million before expenses. The Issue
Price was 104.75 pence per Ordinary Share, representing a premium of 2.7 per
cent to the Net Asset Value per Ordinary Share as at 30 April 2019 of 102.02
pence (ex- dividend). The placing was oversubscribed and investors' demand
for the placing exceeded the target placing size, therefore, a scaling back
exercise was undertaken with respect to the applications received.
The year-end share price was 104.50 pence reflecting a 1.2 per cent premium
to NAV. The Company has traded at a discount to NAV for periods during the
year which we believe was a reflection of general market sentiment. As
reported previously, the Company's share price in the early part of 2020 has
been severely impacted by the general market volatility. In common with the
overall equity market, the Company's share price has fallen sharply and
continues to be volatile. These moves have been driven by market conditions
and flow rather than a change in the Company's NAV. The Board continues to
closely monitor the share price performance and believe the shares represent
good value to investors at the current price.
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. As at the
date of this report, this authority has not been utilised as the share
issuance on 15 May 2019 was made utilising the authorities granted at the
2018 AGM. The Company intends to seek approval to renew these authorities at
the upcoming AGM.
The Directors believe that having access to capital within a short time
frame is important when seeking to secure attractive investment
opportunities and ensuring that the Company does not unnecessarily incur
cash drag by raising equity in advance of deployment (negatively impacting
the Company's dividend target). The Directors believe that immediate access
to capital has the following additional benefits for the Company and
shareholders:
· to enable the Company to pursue larger investment opportunities and
hence broaden its lending range and capacity;
· to enable the Company to further increase the diversification and depth
of its portfolio;
· increased scale is attractive to a wider investor base;
· a greater volume of Shares creates increased secondary market liquidity;
and
· fixed running costs spread across a larger equity capital base reduce
the Company's ongoing expenses per Share.
To take advantage of opportunities as and when they present themselves, the
Directors believe it is appropriate for the Company to renew the existing
authorities at the forthcoming AGM, in respect of issuance of up to 10 per
cent of the Ordinary Shares in issue.
Any new Ordinary Shares issued under this authority 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 at least to cover the
costs and expenses of the relevant placing of issue of new Shares. Whilst
this precludes the Company from issuing shares in the current uncertain
environment, the Board believes that access to this capital once the market
begins to recover could enable us to secure attractive and accretive
investment opportunities in line with the Company's investment policy.
DIVIDENDS
Total dividends of 6.5 pence per Ordinary Share were declared in relation to
the year ended 31 December 2019.
Period Dividend Payment Amount
declared date per share
1 January 2019 to 31 March 24 April 2019 24 May 2019 1.625p
2019
1 April 2019 to 30 June 2019 24 July 2019 30 Aug 2019 1.625p
1 July 2019 to 30 September 22 Oct 2019 22 Nov 2019 1.625p
2019
1 October 2019 to 31 23 Jan 2020 21 Feb 2020 1.625p
December 2019
Total 6.5p
Total comprehensive income for 2019 was GBP27.9 million (including GBP2.9m of
unrealised foreign exchange gains on income) and dividends of GBP25.6 million
were declared during the year. The dividend was covered 0.98x when excluding
unrealised foreign exchange gains on income or 1.09x when including
unrealised foreign exchange gains.
Since 2016, the Group has consistently paid a dividend of 6.5 pence per
share per annum in line with its target. This has been achieved despite a
macroeconomic environment with significant and sustained reductions in
interest rates and a decreasing trend in spreads across credit markets
generally since the Group launched in 2012. As an example, since January
2016 the British 10 year Gilt yield has reduced from 1.88 per cent and has
traded recently as low as 0.23 per cent. Despite these market conditions,
the Group has managed to maintain a covered dividend at a very attractive
level. Your Board continually monitors both the appropriateness of the level
of leverage in the Group and the dividend level against its earnings.
BREXIT AND MACRO-ECONOMIC OUTLOOK
The outcome of the December 2019 general election with a decisive majority
result creates a more stable environment for markets. The UK left the EU on
31 January 2020, although there is some limited comfort for the concerned in
the form of the eleven-month transition period under the European Union
(Withdrawal Agreement) Act 2020 during which little will in practice change
(although the UK will no longer participate in the EU institutions). The
Withdrawal Agreement postpones any "hard" departure until the end of the
transition period, during which the EU and the UK have the opportunity to
negotiate and agree a UK-EU Free Trade Agreement to govern the terms of
their future trading relationship. While there are uncertainties about the
implementation of Brexit, there is certainty about the direction of travel.
And by contrast with the stalemate of much of the last decade, the
Government's majority will permit business to be conducted efficiently for
the five year life of the current Parliament. A reduction in political
tensions may provide a more stable environment and though the positive
impact is already evident in both residential and commercial real estate
markets, caution is necessary in a turbulent global environment.
The COVID-19 epidemic presents a new and major risk to growth, however, as
yet, it is impossible to fully predict the consequences for the world
economy. Economic data published in the coming weeks will of course be
followed keenly but the situation is likely to remain uncertain for several
months.
As stated previously, the Company's share price in the early part of 2020
has been severely impacted by the general market volatility. In common with
the overall equity market, the Company's share price has fallen sharply and
continues to be volatile. The Company is modestly levered with net debt of
just GBP29.7 million at 31 December 2019 (equal to 6.97 per cent of NAV), has
no repo facilities outstanding and significant available but undrawn
revolving credit facilities of GBP96.3 million. As such, the Company considers
that the recent share price movements have been driven by market conditions
and flows as opposed to a significant change in the Company's fundamental
value or outlook.
In these circumstances, the Board continues to keep a particularly watchful
eye on the macro position.
PORTFOLIO OUTLOOK
The short term outlook will be dominated by the disruption to markets from
the COVID-19. The Company expects significant short term disruption to the
income of operational real estate asset classes.
In common with similar crises of the past such as the 9/11 terror attacks
and during the SARS virus scare, the market will see a particularly
difficult hospitality trading period. The Company's hospitality exposure has
been structured defensively by the Investment Manager by conducting thorough
due diligence, working with strong sponsors and implementing robust loan
structures combined with significant diversification by jurisdiction and
asset type. The Company's loans have modest senior LTVs which provide
substantial headroom and strong loan structures in line with the Company's
investment policy. As at 31 December 2019 the Company's Weighted average
portfolio LTV to Group first GBP was 18.4 per cent and the Weighted average
portfolio LTV to Group last GBP was 63.0 per cent. The corresponding metrics
for the hotel portfolio on its own were a weighted average first GBP LTV of
4.4 per cent and a weighted average last GBP LTV of 60.7 per cent.
The Company's portfolio is comprised of well-structured loans, secured by
real estate, with significant equity cushions to high quality borrowers. The
Company sees no current impairments with loan balances well covered by the
real estate value of the underlying collateral. The Company will continue to
closely monitor and work with borrowers to protect its investments.
Over the short to medium term the dislocation in the market may also present
attractive new investment opportunities. The Company has low leverage, no
uncovered liquidity requirements and significant undrawn revolving credit
facilities available to fund existing commitments and new lending, and is
(MORE TO FOLLOW) Dow Jones Newswires
April 07, 2020 02:01 ET (06:01 GMT)
DJ SWEF: Annual Audited Accounts 2019 -4-
well positioned to benefit from selective new lending opportunities in this
environment.
Overall, in the medium to long term the strategy remains to incrementally
grow the size of the Group, to minimise cash drag and to use the revolving
credit facility where appropriate, which will continue to be a focus during
2020. Despite the expected short and medium term disruption expected to
markets, the Directors remain optimistic about the prospects and
opportunities for the Group in the year ahead.
BOARD COMPOSITION AND DIVERSITY
The Board mentioned in the 2019 interim report that it is mindful of the
need to plan for succession and to implement changes designed to promote new
talent and diversity while sustaining the overall cohesion of the Board.
With the 9th year anniversary of the Company's IPO in 2021 fast approaching,
the Director retirement process will commence in 2020 as further detailed in
the Corporate Governance Report. The Board will ensure that new Directors
are equipped with the necessary skills, experience and knowledge and fully
recognise the value of diversity in the boardroom.
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
6 April 2020
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and details the
uncertainties, principal and emerging risks associated with its activities.
CORPORATE PURPOSE
As an investment company, the general corporate purpose is to provide
long-term prosperity to our shareholders through providing regular dividends
and preserving capital by limiting downside risk. In addition to this, the
Board and Investment Manager also recognise that by furthering their
understanding of the needs of other relevant stakeholders, the Company can
provide better returns to its shareholders.
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 movement in NAV per Ordinary Share;
· The movement in share price and the discount / premium to NAV;
· The payment of targeted dividends;
· The portfolio yield, both levered and unlevered;
· Ongoing charges as a percentage of undiluted NAV; and
· Weighted average loan to value for the portfolio.
Details of the KPIs are shown in the 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 and emerging risks could impact
the performance and prospects of the Group but do not threaten its ability
to continue in operation and meet its liabilities. In deciding which risks
are principal risks the Board consider the potential impact and probability
of the related events or circumstances, and the timescale over which they
may occur. 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
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, and have in the past, traded 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 2019 have been structured so that 20.9 per
cent by value 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 79.1 per cent is classified as
floating, 93.4 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 Investment Adviser is monitoring the transition from LIBOR to a new
alternative and will manage any transition required on behalf of the Group.
The Group has ensured that loan agreements for the current portfolio are in
a form which accommodates the flexibilities required to manage the
transition.
The Board considers that the following principal and emerging 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 GBP231.3 million of hedged notional exposure
with Lloyds Bank plc at 31 December 2019 (converted at 31 December 2019 FX
rates).
As at 31 December 2019 the hedges were in the money. If the hedges move out
(MORE TO FOLLOW) Dow Jones Newswires
April 07, 2020 02:01 ET (06:01 GMT)
of the money and 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 2019, the Company had sufficient liquidity and credit available on
the revolving credit facility to meet any cash collateral requirements.
Market Deterioration Risk
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. The Group's exposure to market deterioration
risk also arises from Credit Linked Notes held by the Group. The Investment
Manager regularly monitors the fair value of Credit Linked Notes and
currently there are no specific hedging activities in place in relation to
this investment.
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 63.0
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 previously 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.
Emerging Risks
Emerging risks to the Group are considered by Board trends, innovations and
potential rule changes relevant to real estate mortgage and the financial
sector. The challenge to the Group is that they are known to some extent but
are not likely to materialise or have an impact for several years. The Board
regularly reviews the risk matrix and identified cybercrime and climate
change as emerging risks.
The rapid adoption of new technologies and increasingly sophisticated number
of cyber-attacks worldwide ranks the cybercrime risk as an emerging one. The
cybercrime risk is managed by regular reviews of the Group operational and
financial control environment. The matter is also contained within service
providers survey which is completed by Group's service providers and is
regularly reviewed by the Board.
Climate change, extreme weather events and natural catastrophes and the
consequences these could have both on infrastructures and on nature are
potentially severe but highly uncertain. The potential high impact of
potential losses has done a lot to raise the awareness of this risk in
investment circles. The Group currently has no Environmental policy as such
but is monitoring closely the regulation and any developments in this area.
Since the year end, a further emerging risk has presented itself in the form
of COVID-19. Whilst it has spread rapidly and had a sharp impact on global
financial markets, the severity of the impact on both the Group's operations
and portfolio of investments is unclear. The Board and Investment Adviser
will continue to assess the impact of COVID-19 as its impact on the global
economy evolves and will communicate to you any details of the risks posed
to the Group's operations and/or investment portfolio as and when these are
more clear. Refer to the Portfolio Outlook section of Chairman's statement
for further details.
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
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 as follows:
· Foreign exchange risk;
· Market deterioration risk (including impact of Brexit); and
· Risk of default under the revolving credit facilities.
An adverse effect of foreign exchange would have a direct impact on NAV per
ordinary share, NAV total return and total Net Assets. Market deterioration
and default under the credit facility would impact the above mentioned key
performance indicators and would affect additionally the share price and
share price total return.
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 2022, 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 and emerging risks facing
the company, including those that would threaten its business model, future
performance, solvency or liquidity.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ("ESG") ISSUES
As an investment company, the Group's activities have minimal direct impact
on the environment.
The Investment Manager and Investment Adviser are part of the Starwood
(MORE TO FOLLOW) Dow Jones Newswires
April 07, 2020 02:01 ET (06:01 GMT)
© 2020 Dow Jones News
