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
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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
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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
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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
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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
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Capital Group, which is an authorised signatory to the UN Principles for
Responsible Investments (UNPRI). While a borrower's company policy towards
the environment and social responsibility is considered as part of the
overall assessment of risk and suitability of an investment, the Board
recognises that it has no direct control over this and does not make
investment decisions based on environment and social grounds. It should be
noted that a number of the loans which the Group makes involve refurbishment
projects and these will often mitigate the environmental impact of the real
estate concerned. Additionaly, whilst it is not an investment criteria
currently, the Group's loan portfolio is significantly funded in sectors
with positive social impact such as hospitality, education, healthcare and
residential apartments.
The Group has no Greenhouse Gas Emissions to report from its operations for
the current or prior year, nor does it have responsibility for any other
emissions producing sources (including those within the underlying
investment portfolio).
The Company's service providers are Guernsey office-based companies, and the
majority of the directors are based in Guernsey, thus having a relatively
low impact on the environment and negating the need for long commutes or
flights to and from Board meetings.
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. Therefore, the Group is not within scope of the Modern Slavery
Act 2015 and is therefore not obliged to make a human trafficking statement.
BOARD DIVERSITY
The Board considers 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 as part of its succession planning.
The Company has no employees and therefore has no disclosures to make in
this regard.
Stephen Smith | Chairman
6 April 2020
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 2019, the portfolio was invested in line with the Group's
investment policy and is summarised below.
31 December 31 December
2019 2018
Number of investments 18 18
Percentage of invested portfolio in 79.1% 80.1%
floating rate loans(1)
Invested Loan Portfolio unlevered 7.1% 7.4%
annualised total return(1)
Invested Loan Portfolio levered 7.0% 8.0%
annualised total return(1)
Weighted average portfolio LTV - to 18.4% 16.7%
Group first GBP(1)
Weighted average portfolio LTV - to 63.0% 64.1%
Group last GBP(1)
Average loan term (stated maturity at 4.1 years 4.0 years
inception)
Average remaining loan term 2.8 years 2.8 years
Net Asset Value GBP426.6 m GBP385.0 m
Amount drawn under Revolving Credit (GBP29.7 m) (GBP68.8 m)
Facility (excluding accrued interest)
Loans advanced at amortised cost GBP390.6 m GBP413.4 m
(including accrued income)
Financial assets held at fair value GBP21.9 m GBP21.9 m
through profit or loss (including
associated accrued income and excluding
the value of FX hedges)
Cash GBP36.8 m GBP28.2 m
Other net assets / (liabilities) GBP7.0 m (GBP9.6 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
Country % of invested
assets
UK - Central London 28.1
Spain 25.9
Republic of Ireland 12.6
UK - Regional England 12.2
UK - Scotland 7.4
Netherlands 6.6
France 3.3
Germany 2.7
Finland 1.2
Sector % of invested
assets
Hospitality 31.4
Residential for sale 21.2
Office 20.7
Retail 13.9
Healthcare 6.1
Light Industrial 3.6
Other 1.4
Logistics 1.1
Residential for rent 0.6
Loan type % of invested
assets
Whole loans 60.5
Mezzanine 34.2
Other debt instruments 5.3
Loan currency % of invested
assets*
Sterling 47.7
Euro 52.3
· 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 7.0 per cent per annum at the end of 31
December 2019 (31 December 2018: 8%). 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/ downsides 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
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 impact of any foreign exchange
gains/losses on Euro loans. We do not forecast this as the loans are often
repaid early and the gains/losses may be different than this once hedge
positions are settled.
The above possible upsides to quoted return targets are not incorporated in
the gross levered return of 7.0 per cent as they are not guaranteed to
occur, are difficult to forecast accurately and to incorporate them could
misstate 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 in 2019 we recognised GBP0.9
million of realised foreign exchange gains on the GBP198.3 million of
repayments received which is equal to 0.45 percentage points. The amount of
realised foreign exchange may vary from year to year depending on the
proportion of Euro loans in the portfolio, the period for which they are
outstanding as well as movements in the forward curve.
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
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
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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 31 December 2019 (2018: 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
The market is moving quickly with the emergence of the general market
disruption from the COVID-19. The following market update was originally
prepared prior to the escalation of the COVID-19 within Europe, and has been
updated as at 18 March 2020.
The real estate market and real estate financing markets had been generally
positive over 2019, and the beginning of 2020, in Europe. The fourth quarter
is typically the busiest quarter for transaction activity levels in the
commercial real estate market with a drive to get deals wrapped up before
the holiday season, often compounded by year end considerations. This trend
continued into 2020 with market participants reporting a high level of deals
in execution including acquisitions, loan financing, securitisation,
corporate acquisitions and refinancings.
For the UK specifically, the underlying real estate market has been
predominantly robust in terms of operational and leasing performance. The
election and Brexit deadlines had impacted the financing market with
liquidity ebbing and flowing as events unfolded. The Cass UK Commercial
mortgage lending survey reported overall UK commercial mortgage lending up 4
per cent for the first half of 2019 versus H1 2018, and when numbers for the
second half are reported we expect that theme to have continued.
The outcome of the general election with a decisive majority result had
created a more stable environment for the UK markets and we saw the impact
of this immediately for both the residential and commercial real estate
markets. On the day after the election the iShares UK Property UCITS ETF,
which tracks the UK REIT sector, increased by 4 per cent, and at the
beginning of 2020 started 25 per cent higher than its 2019 low in August. On
the high-end residential side, Savills reported that transactions over GBP5
million were up a third in December compared to 2018.
However more recently, we can see the immediate impact of the COVID-19 in
publically traded real estate shares with the iShares UK Property UCITS ETF
trading 37 per cent lower than the year end level (as at 18 March 2020).
Market conditions for publicly traded companies are expected to remain
volatile.
Since early March, despite unprecedented central bank and fiscal policy
reaction, liquidity in global credit markets has deteriorated across the
board as a result of the disruption caused by the COVID-19. We anticipate
significantly lower liquidity for a period of at least several weeks and
transactional activity for new deals to be much reduced until the effects
and duration of disruption from the COVID-19 are more certain. This
environment is, however, likely to present substantial opportunities for
lenders with a long term approach, liquidity and a flexible risk adjusted
return to help borrowers with mutually attractive terms, and so provides an
opportunity for the Company to make attractive new investments, following
thorough due diligence.
EUR and GBP short interest rates had been largely unchanged over the past
year, however with some flattening versus 5 years. In the last several
weeks, and particularly since the emergency rate cut on March 11th, we have
seen the UK interest rate curve come down sharply. GBP 3 month LIBOR is now
46 bps versus 78 bps one month ago and the Company expects rates to decrease
further.
In this continued lower interest rate environment, we believe that the risk
/ reward profile of the Company's investments and potential new investments
versus other credit, continues to present a compelling risk adjusted return.
The Group's pipeline started the year strongly and well diversified by
sector, geography and investment type. The UK, Ireland and Spain remain key
geographies for new origination, but the pipeline also includes a number of
Scandinavian and other western European countries. The Company has always
been disciplined on credit risk and will continue to be very selective in
the current environment.
Investment Manager's Report - Portfolio Review
INVESTMENT DEPLOYMENT
As at 31 December 2019, the Group had investments and commitments of GBP489.3
million (Sterling equivalent at year-end exchange rates) as follows:
Transaction Sterling Sterling
equivalent equivalent unfunded
balance(1) commitment(1)
Hospitals, UK GBP25.0m -
Mixed Use Development, South East GBP0.7m GBP1.1m
UK
Credit Linked Notes, UK Real GBP21.8m -
Estate
Hotel & Residential, UK GBP39.9m -
Office, Scotland GBP4.4m GBP0.6m
Office, London GBP12.6m GBP7.9m
Residential, London GBP49.0m GBP5.7m
Hotel, Oxford GBP16.7m GBP6.3m
Hotel, Scotland GBP25.9m GBP15.5m
Total Sterling Loans GBP196.0m GBP37.1m
Three Shopping Centres, Spain GBP32.0m GBP5.5m
Shopping Centre, Spain GBP14.5m -
Hotel, Dublin, Ireland GBP51.2m -
Office, Paris, France GBP13.7m -
Hotel, Spain GBP25.8m GBP20.5m
Office & Hotel, Madrid GBP15.8m GBP0.9m
Mixed Portfolio, Europe GBP43.2m -
Mixed Use, Dublin GBP0.7m GBP11.9m
Office Portfolio, Spain GBP18.2m GBP2.3m
Total Euro Loans GBP215.1m GBP41.1m
Total Portfolio GBP411.1m GBP78.2m
(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 below):
New Loans
The table below shows new commitments made in 2019 together with amounts
funded under both the new commitments and under the existing commitments.
Month of New Funded in
Commitment Commitments(1) 2019(2)
Office, Scotland April GBP5.0 m GBP4.4 m
Mixed Portfolio, Europe May GBP44.9 m GBP44.9 m
Office, London July GBP20.5 m GBP12.6 m
Residential, London September GBP56.8 m GBP51.1 m
Mixed Use, Dublin September GBP12.7 m GBP0.7 m
Hotel, Oxford November GBP23.0 m GBP16.7 m
Hotel, Scotland November GBP41.3 m GBP25.9 m
Office Portfolio, Spain November GBP20.5 m GBP18.1 m
Mixed Use Development, Prior Years GBP0.5 m
South East UK
Three Shopping Centres, Prior Years GBP2.6 m
Spain
Residential, Dublin Prior Years GBP1.9 m
Hotel, Spain Prior Years GBP3.5 m
Hotel & Residential, UK Prior Years GBP6.7 m
Total GBP224.7 m GBP189.6 m
(1) Euro amounts converted at rate on date of first loan drawdown.
(2) Euro amounts converted at rate of each drawdown.
Office, Scotland: The Group committed to provide a GBP5 million whole loan on
an office in Scotland of which GBP4.4 million has been funded to date.
Mixed Portfolio, Europe: The Group committed to participate in the funding
of a EUR 104 million mezzanine loan secured by a diversified portfolio of
assets located in the Netherlands, Germany and Finland. Starwood Property
Trust, Inc (through a wholly owned subsidiary) participated in 50 per cent
of the mezzanine loan amount, with the Group funding the balance amounting
to a net commitment of EUR 52 million. The portfolio is comprised of 165
assets and provides strong diversification in terms of tenant base, location
and asset class. The loan has a term of 3 years with two, 1-year extension
options.
Office, London: The Group committed to fund a GBP20.5 million floating rate
whole loan to support an office redevelopment in London. GBP12.6 million was
drawn in July and the balance will be drawn over the life of the
development. The term of the loan is approximately 3 years.
Residential, London: The Group committed to fund a GBP56.8 million floating
rate whole loan to support a residential scheme in London. The financing was
primarily provided in the form of an initial advance along with a smaller
capex facility to support the sponsor's completion of the scheme. The loan
term is 2 years.
Mixed Use Dublin: The Group committed to fund a EUR 14.7 million fixed rate
whole loan to support a mixed use development in Dublin. The loan is
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expected to draw down gradually over the first 2.5 years of the loan term.
Hotel, Scotland and Hotel, Oxford: The Group committed to fund two new hotel
acquisition financings for a total commitment of GBP64.3 million. Both
investments are with the same sponsor and a repeat borrower for the Starwood
Capital Group (but not this Group). Whilst the sponsor is the same on each
investment, the two loans are not cross-collateralised as the investments
sit in different fund vehicles. Each financing has been provided in the form
of a significant initial advance to finance an asset acquisition along with
a smaller capex facility to support the sponsor's capital expenditure for
improvements and rebranding of the hotels. The day one advance amounts were
GBP25.9 million and GBP16.7 million whilst the total commitments are GBP41.3
million and GBP23 million respectively and expected to be drawn over the first
1-2 years. Each loan is for a term of 5 years.
Office Portfolio, Spain: The Group closed an investment in a 4-year floating
rate loan secured by a portfolio of office assets Spain, with Starwood
Property Trust, Inc (through a wholly owned subsidiary) participating in 50
per cent of the mezzanine loan amount, providing the Group with a net
commitment of EUR 24 million. The financing has been provided in the form
of an initial advance along with a capex facility to support the sponsors'
business plan to make further investment in the properties. The properties
are well-located within the decentralised submarkets of Madrid and
Barcelona. The assets are positioned to benefit from the sponsors' active
asset management strategy.
Repayments
The following loans were repaid in full during the year:
Month Amount(1) Reason
Varde Partners Mixed January GBP1.0 m Completion of
Portfolio portfolio sale
Refinancing
following
Student Accomodation, March GBP9.1 m completion of
Ireland borrower's business
plan Refinancing
following
Irish School May GBP16.3 m completion of
borrower's business
plan
Hotel, Barcelona July GBP41.3 m Sale of hotel
Industrial Portfolio, July & Sept GBP45.0 m Completion of
Europe portfolio sale
Logistics, Dublin, December GBP12.3 m Sale of portfolio
Ireland
Regional Hotel December GBP45.9 m Sale of portfolio
Portfolio, UK
Residential, Dublin, December GBP8.5 m Sale in accordance
Ireland with bor-rower's
business plan
Total GBP179.4 m
(1) Sterling equivalent for Euro loans using the spot rate on date of
repayment.
In addition to the above full repayments, the Group continued to receive
scheduled (i.e. contractual) and unscheduled amortisation on other loans as
borrowers continue to execute their business plans in the amounts shown in
the table below.
Amount(1) Reason
Mixed Use Development, GBP13.6 m Unscheduled amortisation
South East UK but in line with business
plan
Three Shopping Centres, GBP0.6 m Scheduled amortisation
Spain
Hotel & Residential, UK GBP1.3 m Unscheduled
Mixed Portfolio, Europe GBP1.3 m Unscheduled due to small
asset sales
Residential, London GBP2.1 m Unscheduled amortisation
but in line with business
plan execution
Total GBP18.9 m
(1) Sterling equivalent for Euro loans using the spot rate on date of
repayment.
The average remaining term of the loans is 2.8 years, which is split as
shown in the table below.
Remaining years to Value of loans (GBPm) % of invested
contractual maturity(1) portfolio
0 to 1 years 28.9 7.0%
1 to 2 years 93.3 22.7%
2 to 3 years 161.5 39.3%
3 to 5 years 102.4 24.9%
5 to 10 years 25.0 6.1%
Total 411.1 100.0%
(1) excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity
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 in relation to 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.
EVENTS AFTER THE REPORTING PERIOD
The following new commitments have been made since the year-end, up to 6
April 2020:
Office, Retail & Residential, Dublin: On 2 January 2020, the Group committed
to an investment in a c. 6-year floating rate loan secured by a portfolio of
assets in Ireland, together with Starwood Property Trust, Inc (through a
wholly owned subsidiary) participating in 50 per cent of the mezzanine loan
amount, providing the Group with a net commitment of EUR 35.15 million. The
portfolio consists of 12 properties in Central Dublin with primarily office
and some small amounts of retail and residential space totalling over
600,000 sqf in total.
Hotel, North Berwick, Scotland: On 12th February 2020, the Group committed
to fund a hotel acquisition financing for a total commitment of GBP15.0
million. The sponsor is a repeat borrower for the Group. The financing,
which has been provided in the form of a significant initial advance to
finance an asset acquisition together with a smaller capex facility, will
support the sponsor's capital expenditure for improvement and rebranding of
the hotel. The day one advance amount is GBP10.5 million whilst the total
commitment is GBP15.0 million. The loan is for a term of 5 years.
Hotel & Residential, UK: On 27th February 2020 the Group also committed to
fund a GBP20.0 million upsize to an existing fixed rate mezzanine loan to
support the development of a mixed-use scheme in London. Starwood Property
Trust, Inc (through a wholly owned subsidiary) is participating in 50 per
cent of the loan amount, providing the Company with a net commitment of
GBP10.0 million. The remaining loan term is 1.75 years with a 1 year extension
option. The Group expects to earn an attractive risk-adjusted return in line
with its stated investment strategy for each of these commitments.
Hotel, Dublin, Ireland: The Borrower of the Hotel, Dublin, Ireland, on which
the Company has a EUR 60 million loan, has granted a licence to the Health
Service Executive ("HSE"), Ireland's public healthcare provider, which
allows the HSE to use the Hotel and Convention Centre for accommodation and
the provision of healthcare and other important services to the Irish
public. This licence will assist the HSE with delivering significant
additional accommodation capacity and in its efforts to manage the expected
increased demand for accommodation related to the COVID-19 outbreak. The
contract is effective immediately.
The following amounts have been drawn under existing commitments, up to 6
April 2020:
Local
Currency
Hotel, Spain EUR 8,073,256
Residential, London GBP1,547,853
Mixed Use, Dublin EUR 1,091,853
Office, London GBP174,510
Office, Scotland GBP77,711
The Company has drawn additional funds on its credit facilities in order to
fund the new investments shown above. At 6 April 2020 the amounts drawn
under each facility are:
· Morgan Stanley - EUR nil million
· Lloyds - GBP24.06 million
The following loan amortisation (both scheduled and unscheduled) has been
received since the year-end up to 6 April 2020:
Local
Currency
Residential, London GBP11,534,596
Mixed Portfolio, Europe EUR 12,096,659
Three Shopping Centres, Spain EUR 167,344
The following loans have been repaid in full since the year-end up to 6
April 2020:
Local
Currency
Office Building, Paris EUR 16,000,000
Mixed Use Development, South East UK GBP698,442
On 23 January 2020 the Directors declared a dividend in respect of the
fourth quarter of 1.625 pence per Ordinary Share payable on 21 February 2020
to shareholders on the register at 31 January 2020.
Subsequent to the year end, equity markets experienced substantial falls
associated with uncertainties linked to the COVID-19 virus epidemic. See
comments in the Chairman's statement for more details. 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. These moves have been driven by market conditions and flow rather
than a change in the Company's NAV.
Starwood European Finance
Partners Limited | Investment Manager
6 April 2020
Governance
Board of Directors
STEPHEN SMITH | Non-executive Chairman - Chairman of the Board
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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 EUR 40 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),
Sequoia Economic Infrastructure Income Fund Limited (FTSE 250) and SME
Credit Realisation Fund Limited (in run off) 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 and Senior
Independent Director
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 the SFS segment of the Main Market),
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 section.
STRUCTURE
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 2019. The Company paid a total of GBP25,617,761 in respect of 2019
(6.5 pence per Ordinary share) (2018: GBP24,376,261: 6.5 pence per Ordinary
Share).
BUSINESS REVIEW
The Group's performance during the year to 31 December 2019, 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:
Admission Date Number of Price (pence per
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
15 May 2019 38,200,000 104.75
Following these issues, the Company now has issued share capital consisting
of 413,219,398 Ordinary Shares.
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 2019 and as at the
date of this report.
Name % holding of % holding of
Ordinary Shares Ordinary Shares
at 31 December at 20 March 2020
(the latest
available)
2019
BlackRock 7.56 12.37
Close Brothers Asset 7.41 8.60
Management
SG Private Banking 7.10 7.08
Quilter Cheviot 6.66 6.34
Investment Management
Schroder Investment 6.38 6.94
Management
Fidelity International 5.34 5.80
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown below:
Name Ordinary Shares at Ordinary Shares at
31 December 2019 31 December 2018
Stephen Smith 78,929 78,929
John Whittle 11,866 11,866
Jonathan Bridel and 11,866 11,866
Spouse
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.
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 Apex Fund and Corporate Services (Guernsey)
Limited (the "Administrator") during the whole period.
DISCOUNT CONTROL
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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
If the Ordinary Shares trade at an average discount to Net Asset Value per
Share of five per cent or more during the six-month period, the Directors at
their absolute discretion may put a realisation offer to Shareholders,
subject to applicable law including the requirements of the Companies
(Guernsey) Law, 2008 (a "Realisation Offer").
The provisions relating to the Realisation Offer will first apply by
reference to the last six months of the financial year ending 31 December
2022 and 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 2019, the Company renewed the authority received
at the AGM held on 15 May 2018 to purchase in the market up to 14.99 per
cent of the Ordinary Shares in issue on 15 May 2019 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 2020. The Directors intend to seek annual renewal of this
buyback authority from Shareholders each year at the Company's AGM.
John Whittle | Director
6 April 2020
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 Incorporation, all Directors are entitled
to such remuneration as is stated in the Company's Prospectus or as the
Company 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
in the table below.
As outlined in the Articles of Incorporation, 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. The letters of appointment have been reviewed and amended in
the year by an external party to ensure that they are in line with current
market standards. Each Director is subject to annual re-election.
Director Total Fee 2019 Total Fee 2018
GBP GBP
Stephen Smith 50,000 50,000
John Whittle 45,000 45,000
Jonathan Bridel 42,500 42,500
Aggregate fees 137,500 137,500
Aggregate expenses 2,828 4,321
Total 140,328 141,821
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
6 April 2020
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 July 2018 ("UK
Code").
As an AIC member, the Board has also considered the principles and
provisions of the AIC Code of Corporate Governance dated February 2019 ("AIC
Code"). The AIC Code addresses all the principles set out in the UK Code, as
well as setting out additional principles and provisions 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.
Except as disclosed within the report, the Board is of the view that
throughout the year ended 31 December 2019, the Company complied with the
principles and provisions of the AIC 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 UK 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 AIC 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.
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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 in Board of Directors section. 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, 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 that 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 their 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 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. The letters of appointment have recently been reviewed and amended by an external party to ensure that they are in line with current market standards. 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 specific 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 in 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. The need to appoint an external facilitator is reviewed by the Board on an annual basis. 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 counterproductive. 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. Each Director is required to be elected by shareholders at the AGM following his appointment by the Board. As part of the recommendations of the AIC Code, the Directors put themselves forward for annual re-election as of May 2019. In light of this, Mr John Whittle, Mr Stephen Smith and Mr Jonathan Bridel are therefore submitting themselves for re-election at the AGM on 8 June 2020. 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. However, the Board intends to appoint a formal search contractor to help with the appointments of the new directors. It is anticipated that this 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 Company enters its ninth year in 2021 and the Board has been mindful that a succession plan needs to be implemented. During Q4 2019, the Directors devised a Succession Planning Memo. The Memo states that a new Director will be appointed to the Board during the second half of 2020 giving them time to get up to speed prior to Mr Jonathan Bridel standing down from the Board in December 2020. A further Director will be appointed in June 2021 with Mr Stephen Smith retiring in December 2021. The same process will be repeated in 2022 with Mr John Whittle retiring from the Board in December 2022. Upon the resignation of Mr Stephen Smith from the Board, Mr John Whittle will be appointed as Chairman until his resignation in December 2022. In terms of the new appointments, the Directors believe that the current
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composition of two Guernsey Directors and one Director from the United
Kingdom works well in terms of satisfying the Company's requirements. The
Board also intend to consider diversity when making the new appointments to
the Board. The Directors wish to recruit at least two individuals with a
strong financial background and some real estate knowledge with the third
having a vast wealth of experience in UK and European real estate and a good
understanding of property funding.
At present the Directors wish to leave the succession and the tenure policy
of the Chairman open until Mr Whittle's departure from the Board in 2022.
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 Corporate Governance
statement. The Company Secretary acts as the Secretary to the Board.
Audit Committee
The Board has established an Audit Committee which was composed of all the
independent members of the Board until 12 November 2018, when the Chairman
of the Board resigned from the Committee. The Chairman of the Board,
although not a member of the Committee, may still 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 the Audit Committee Chairman.
The Audit Committee met three times during 2019 (2018: three times); the
meeting attendance record is displayed in the table below. 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 Report on Controls at a Service Organisation ("SOC 1
Type 2 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
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 2019 (2018: 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
Individual attendance at Board and committee meetings is set out below:
Scheduled Ad hoc Audit Management
Board Board(1) Committee Engagement
Committee
Stephen Smith1 4 1 3 1
John Whittle 4 5 3 1
Jonathan Bridel 4 6 3 1
Total Meetings for year 4 7 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.
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 2018, a
committee of one Director was appointed to approve dividends should a quorum
of two Directors not be available.
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.
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 2019 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.
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
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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, Apex
Fund and Corporate Services (Guernsey) Limited produces an annual SOC 1 Type
2 Report on the internal control procedures in place within Apex Fund and
Corporate Services (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
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 EGMs 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 2019.
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.
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 GBP60,000 for the year ended 31 December
2019.
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.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the intention of the
AIC Code is that the below matters set out in section 172 of the UK
Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business objectives, the
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Company actively identifies, evaluates, manages and mitigates risk as well
as continually evolving the approach to risk management. For further details
in connection with Risk Management of the Company, please refer to the
Strategic Report and the Corporate Governance Statement.
Our People
The Company has no employees, however, to succeed we need to manage
Company's performance by bringing through talent to the Board while ensuring
we operate as efficiently as possible, as demonstrated with the succession
plan. For further details in connection with the succession plan, please
refer to the Corporate Governance Statement.
Business Relationships
In order for the Company to succeed, it requires to develop and maintain
long term relationships with service providers and borrowers. The Company
values all of its service providers and borrowers.
Community and Environment
As an investment company, the Group's activities have minimal direct impact
on the environment. Please refer to the Annual Report for more details in
connection with the impact of the Company's operations on the community and
environment.
Business Conduct
The Company is committed to act responsibly and ensure that the business
operates in a responsible and effective manner and with high standards in
order to meet its objectives.
Shareholders
The Board place a great deal of importance on communication with all
shareholders and envisage to continuing effective dialogue with all
shareholders. Please refer to section below for more details on how the
Company engages with the shareholders.
Throughout 2020, the Board of the Company consider, both individually and
together, will continue to review and challenge how the Company can continue
to act in good faith to promote the success of the Company for the benefit
of its members in the decisions taken.
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.
Should a situation arise where shareholders cast a vote of 20 per cent or
more against a board recommendation the directors will consult with
shareholders to understand their reasons behind this vote. The Board will
publish the views received from the shareholders within six months of the
shareholder meeting.
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.
By order of the Board
John Whittle | Director
6 April 2020
Report of the Audit Committee
The Board is supported by the Audit Committee, which comprises of Mr John
Whittle, as chairman and Mr Jonathan Bridel. The Chairman of the Board
stepped down from the Committee during the year of 2018 following the
release of the 2018 UK Corporate Governance Code. 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 AIC 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 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 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;
· 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;
· Adoption of the 2019 AIC Code, FRC Guidance on Audit Committees and
other regulatory guidelines.
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 SOC 1 Type 2 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
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During the year, the Audit Committee considered a number of significant
risks 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 losses the investment process of the
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 and reports
on the performance of each
loan and discusses with the
Investment Manager and
Investment Adviser whether
there are any indicators of
significant increase in
credit risk or 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
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.
All existing loans advanced
as at 31 December 2019 were
assessed so as to ensure
compliance with IFRS 9,
however 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 2019 the Group
considers the fair value of
the CLNs at the year-end
approximates GBP21,885,611. 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. The Chairman of the Audit Committee also ensures that an open
dialogue is maintained with the audit team throughout the year.
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
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final audit findings report;
· Meeting with the Auditor regularly to discuss the various papers and
reports in detail, market and governance developments and the status of
the ongoing audit and related services;
· 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 Auditor's effectiveness, 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 and make regular enquiries to confirm the quality findings
of audit work undertaken by both the firm and lead engagement partner on the
audit. 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
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 have consideration given to the threats to
their independence after 7 years and to be rotated 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. Roland Mills is currently serving his second
year of five as engagement partner.
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.
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 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 controls report 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 SOC 1 Type 2 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 2019, 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
6 April 2020
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 accept 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 Financial Highlights, Chairman's Statement, Strategic Report and
Investment Manager's Report in 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
2019, 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 2019, taken
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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
6 April 2020
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 2019, 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 2019;
· 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
description of the 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 we have fulfilled our other ethical responsibilities in accordance with
these requirements. We are also independent in accordance with SEC
Independence Rules.
OUR AUDIT APPROACH
Overview
MATERIALITY
· Overall group materiality was GBP8.5 million which represents 2% of
consolidated net assets.
AUDIT SCOPE
· The company is based in Guernsey, has 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
subsidiaries.
· We conducted our audit of the consolidated financial statements from
information provided by Apex Fund and Corporate Services (Guernsey)
Limited (the "Administrator") and its related group entities to whom the
board of directors (the "Board") has delegated the provision of certain
functions. We also had significant interaction with Starwood Capital
Europe 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 consolidated net assets and operating
profit for the year.
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
· Management's consideration of the potential impact of COVID-19
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 judgements;
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
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 its related group entities and therefore we were
not required to engage with component auditors from another PwC global
network firm operating under our instruction. 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 consolidated net assets
and operating profit for the year.
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 judgement, 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 GBP8.5 million (2018: 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,
GBP390.6 million (note 10) are either at inception, or on
measured at amortised cost and an ongoing basis, using the
comprise of both fixed and floating expected credit loss model.
rate loans. Loans advanced make up Our procedures included:
a significant part of the
consolidated statement of financial
position and due to the nature of
these transactions, their ongoing
recoverability and impairment is
subject to judgement and
estimation, including the
calculation of expected credit · Detailed testing over
losses ("ECL"). the effective interest
models used by management
to value the loans at
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amortised cost using the
effective interest rate
method.
· Validating the
The judgements exercised in assumptions and inputs
determining the potential for ECL into the amortised cost
could significantly impact the net models and reading the
asset value of the group and this associated agreements and
is considered to be a key source of other legal documentation.
estimation uncertainty as described
in note 2c of the consolidated · Detailed back-testing
financial statements. procedures were also
performed to assist in our
conclusions as to the cash
flow forecasting
reliability applied by the
Investment Adviser;
· Understanding of and
The specific areas of judgement evaluating the assumptions
include: and judgements made by the
Investment Adviser in
respect of the ECL for
each loan advanced
including;
· assessing the ECL
methodology focussing on
· How management determine the the estimation of
underlying assumptions when probability of default,
preparing impairment/ECL review exposure at default and
analyses such as significant loss given default, and
changes in the credit risk of a how forward looking
borrower, changes in the information was considered
probability of default of a in this regard;
borrower, changes in valuation of
underlying collateral, the · evaluating the
ability of the borrowers to consistency and
deliver in their business plans appropriateness of the
and projected financial Investment Adviser's
performance figures; and assumptions applied in
determining whether any
· The impact of changes in the loan advanced was
expected cash flows for each loan performing,
on the carrying amount of the underperforming or
loans measured at amortised cost. non-performing, including
consideration as to
whether a significant
increase in credit risk of
each borrower had
occurred;
· 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
underlying borrower which
confirmed compliance with
any covenants as at the
year-end.
We did not identify any
material issues from our
procedures.
Valuation 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) to assist with the
million (Note 11) held as at the following audit procedures:
year-end are measured at fair value
through profit or loss.
· Discussions with the
Investment Adviser on the
The fair valuation of the CLNs due diligence performed,
represents a significant risk that continuous monitoring
we have focused on as the fair processes and the model
value is determined by the functionality;
Investment Adviser using an
internal model with inputs and · Determined whether the
assumptions that are subjective and model was fit for purpose
therefore judgmental. In and whether the use of a
determining the fair value, the discounted cash flow
Investment Adviser considers methodology was
relevant general market movements appropriate;
and recent market transactions for
comparable instruments (where · Assessment of the
available) and adjusts the reasonableness of
valuation model where deemed assumptions used which
necessary. 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;
· 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; and
· Assessed the appropriate
classification of cash
received between interest
income versus capital
repayments.
We did not identify any
material issues as a result
of our procedures.
Risk of fraud in income from loans Our procedures included:
advanced
Income from loans advanced for the
year was GBP26.9 million (Note 10 -
see "effective interest income
earned" line) and was measured in · Assessing the judgements
accordance with the effective made in respect of the
interest rate method. The group has estimated cash flows
a key investment objective to including arrangement,
provide shareholders with regular origination and commitment
dividends through investment in fees, through testing of
debt instruments and therefore we the amortised cost models
focussed on this risk. for each loan;
· Recalculating interest
income using the original
effective interest rate,
paying due consideration
to any early, partial or
full prepayments;
The requirement to estimate the
expected cash flows when forming an · Inspecting supporting
effective interest rate model is documents, such as
subject to significant management correspondence with the
judgements and estimates, and as underlying borrower and
such could be open to manipulation timing of cash receipts,
by management of factors including: as part of our assessment
of management's estimates
and assumptions; and
· For those debt
investments also held at
31 December 2018,
comparing the estimated
· Timing of repayments; cash flows in the
amortised cost models as
· Expectations of partial or full at 31 December 2019 and
prepayments; and evaluating the rationale
behind any significant
· Associated exit fees and changes to those cash
make-whole payments. flows from the 31 December
2018 models.
Changes to the estimated timings of
cash flows can have a significant We did not identify any
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impact on the recognition of income material issues from our
from loans advanced and is procedures.
considered to be a key source of
estimation uncertainty as described
in note 2c of the consolidated
financial statements.
Management's consideration of the In assessing management's
potential impact of COVID-19 consideration of the
potential impact of
COVID-19, we have undertaken
the following audit
Management and the Board have procedures:
considered the potential impact of
the non-adjusting post balance
sheet events that have been caused
by the pandemic, COVID-19 (Note * We obtained from
23), on the current and future management their latest
operations of the group. In doing financial models that
so, management have made estimates support the Board's
and judgements that are critical to assessment and conclusions
the outcomes of these with respect to the
considerations. statements of going concern
and viability respectively.
* We discussed with
management the critical
estimates and judgements
As a result of the impact of applied in their latest
COVID-19 on the wider financial financial models so we could
markets and the company's share understand and challenge the
price, we have determined rationale for the factors
management's consideration of the incorporated into these
potential impact of COVID-19 financial models and the
(including their associated sensitivities applied as a
estimates and judgements) to be a result of COVID-19.
key audit matter.
* We inspected the financial
models provided to assess
their consistency with our
understanding of the
operations of the group, the
portfolio of loans advanced
and with any market
commentary already made by
the group. We also agreed
any key amendments,
estimates and judgements to
underlying supporting
information and fact
patterns where and as
appropriate.
* We subjected the financial
models to additional stress
testing to confirm that both
management and the Board
have considered a balanced
range of outcomes in their
assessment of the potential
impact of COVID-19 on the
group.
* We considered the
appropriateness of the
disclosures made by
management and the Board in
respect to the potential
impact of COVID-19 on the
current and future
operations of the group as a
non-adjusting post balance
sheet event.
* In discussing, challenging
and evaluating the estimates
and judgments made by
management in their
financial models, we noted
the following factors that
were considered to be
fundamental by management
and the Board in their
consideration of the
potential impact of COVID-19
on the current and future
operations of the group and
which support the statements
of going concern and
viability respectively:
* The group currently has no
impairments or notice of
default within its portfolio
of loans advanced;
* The group has low levels
of leverage with net debt of
GBP16.5m as of the end of
February 2020;
* The group has undrawn and
available credit facilities
of GBP98.5m as of the end of
February 2020 and management
have confirmed these
facilities with the lenders
since the spread of
COVID-19;
* The portfolio of loans
advanced are considered by
management to have modest
levels of headroom with
respect to the portfolio's
ratio of loan-to-values
(LTVs); and
* Management has identified
that the loans advanced to
the hospitality sector are
the most exposed to negative
market sentiment and that
although the view in this
sector in the short-term is
negative, we noted that
management and the Board
remain confident in the
fundamentals of the markets
in which the group's assets
are located and the
borrower's business plans
for these assets in the
hospitality sector over the
medium to long term.
Based on our procedures, we
have not identified any
matters to report with
respect to both management's
and the Board's
considerations of the impact
of COVID-19 on the current
and future operations of the
group.
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 (the "Annual Report") but does not
include the consolidated financial statements and our auditor's report
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 related 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
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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 judgement 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. · 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 over a period of at least twelve months from the date of approval of the financial statements. 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. · 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. USE OF THIS REPORT This independent auditor's report, including the opinions, 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 these opinions, 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. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Company Law exception reporting 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. Listing Rules of the Financial Conduct Authority (FCA) The company has reported compliance against the 2019 AIC Code of Corporate Governance (the "Code") which has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance Code for the purposes of meeting the company's obligations, as an investment company, under the Listing Rules of the FCA. We have nothing material to add or draw attention to in respect of the following matters which we have reviewed based on the requirements of the Listing Rules of the FCA: · The directors' confirmation that they have carried out a robust assessment of the principal and emerging risks facing the group, including a description of the principal risks, what procedures are in place to identify emerging risks, and an explanation of how those risks are being managed or mitigated. · The directors' explanation as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report having performed a review of the directors' statement that they have carried out a robust assessment of the principal and emerging risks facing the group and 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 Code; and considering whether the statements are consistent with the knowledge and understanding of the group and its environment obtained in the course of the audit. Additionally, we have nothing to report in respect of our responsibility to report when: · The directors' statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. · The statement given by the directors that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the group's position and performance, business model and strategy is materially inconsistent with our knowledge of the group obtained in the course of performing our audit. · The section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. · The directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. 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 consolidated 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 6 April 2020 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 (together the "group"), which comprise the consolidated statements of financial position as of 31 December 2019 and 31 December 2018, and the related consolidated statements of comprehensive income, consolidated statements of changes in equity and 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
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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 audits 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 at 31 December
2019 and 31 December 2018, and the results of their operations and their
cash flows for the years then ended in accordance with International
Financial Reporting Standards as adopted by the European Union.
OTHER MATTER
This report, including the opinion, has been prepared for and only for the
members of Starwood European Real Estate Finance Limited 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
6 April 2020
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2019
Notes 1 January 2019 1 January 2018
to 31 December to 31 December
2019 2018
GBP GBP
Income
Income from loans 10 26,890,182 30,137,174
advanced
Net foreign exchange 6 4,921,541 234,453
gains
Net changes in fair value 18 2,339,222 2,018,771
of financial assets at
fair value through profit
or loss
Income from cash and cash 535 21,205
equivalents
Total income 34,151,480 32,411,603
Expenses
Investment management 22 3,077,665 2,858,556
fees
Credit facility interest 1,003,580 1,074,308
Credit facility 520,218 470,700
commitment fees
Credit facility 390,350 439,950
amortisation of fees
Administration fees 3(b) 338,604 356,409
Legal and professional 263,725 196,806
fees
Audit and non-audit fees 5 241,048 249,500
Other expenses 195,244 287,663
Directors' fees and 4, 22 140,328 141,821
expenses
Facility agent fees 22,023 16,506
Broker's fees and 3(d) 167 75,749
expenses
Total operating expenses 6,192,952 6,167,968
Operating profit for the 27,958,528 26,243,635
year before tax
Taxation 20 60,898 68,068
Operating profit for the 27,897,630 26,175,567
year
Other comprehensive
income
Items that may be
reclassified to profit or
loss
Exchange differences on 6,451 54,740
translation of foreign
operations
Other comprehensive 6,451 54,740
income for the year
Total comprehensive 27,904,081 26,230,307
income for the year
Weighted average number 7 399,195,288 375,019,398
of shares in issue
Basic and diluted 7 6.99 6.98
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 2019
As at As at
Notes 31 December 2019 31 December 2018
GBP GBP
Assets
Cash and cash 8 36,793,674 28,248,515
equivalents
Other receivables and 9 28,935 28,935
prepayments
Credit facility 12 1,359,902 1,212,271
capitalised costs
Financial assets at fair 11 30,480,689 21,886,335
value through profit or
loss
Loans advanced 10 390,647,516 413,444,410
Total assets 459,310,716 464,820,466
Liabilities
Financial liabilities at 11 - 8,781,432
fair value through
profit or loss
Credit facility 12 29,718,949 68,977,214
Trade and other payables 13 3,036,686 2,068,238
Total liabilities 32,755,635 79,826,884
Net assets 426,555,081 384,993,582
Capital and reserves
Share capital 15 411,205,161 371,929,982
Retained earnings 15,286,245 13,006,376
Translation reserve 63,675 57,224
Total equity 426,555,081 384,993,582
Number of Ordinary 15 413,219,398 375,019,398
Shares in issue
Net asset value per 103.23 102.66
Ordinary Share (pence)
These consolidated financial statements were approved and authorised for
issue by the Board of Directors on 6 April 2020, 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 2019
Year ended 31 December 2019
Share Retained Translation Total
capital Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 371,929,982 13,006,376 57,224 384,993,582
January 2019
Issue of share 40,014,500 - - 40,014,500
capital
Cost of issues (739,321) - - (739,321)
Dividends paid - (25,617,761) - (25,617,761
)
Operating - 27,897,630 - 27,897,630
profit for the
year
Other
comprehensive
income:
Other - - 6,451 6,451
comprehensive
income for the
year
Balance at 31 411,205,161 15,286,245 63,675 426,555,081
December 2019
Year ended 31 December 2018
Share Retained Translation Total
capital Equity
earnings reserves
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
The accompanying notes form an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2019
1 January 2019 to 1 January 2018 to
31 December 2019 31 December 2018
GBP GBP
Operating activities:
Operating profit for the 27,897,630 26,175,567
year
Adjustments:
Net interest income (26,890,182) (30,137,174)
Interest income on cash and (535) (21,205)
cash equivalents
Net changes in fair value of (2,339,222) (2,018,771)
financial assets at fair
value through profit or loss
Decrease in prepayments and - (152,366)
receivables
(Decrease) / Increase in (4,279) 50,302
trade and other payables
Net unrealised (gains) / (17,376,510) 2,055,164
losses on foreign exchange
derivatives
Net foreign exchange losses 10,824,860 (4,750,126)
/ (gains)
Credit facility interest 1,003,580 1,074,308
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Credit facility amortisation 390,350 439,950
of fees
Credit facility commitment 520,218 470,700
fees
Currency translation 471,376 -
difference
Corporate taxes paid (45,909) (4,217)
(5,548,623) (6,817,868)
Loans advanced(1) (185,959,804) (172,359,770)
Loan repayments and 198,311,623 137,158,115
amortisation
Arrangement fees received - 347,490
(not withheld from proceeds)
Origination fees paid (1,962,601) (1,509,923)
Interest, commitment and 28,411,123 29,398,155
exit fee income from loans
advanced
Interest received on Credit 2,339,946 2,245,256
Linked Notes
Net cash inflow / (outflow) 35,591,664 (11,538,545)
from operating activities
Cash flows from investing
activities
Interest income from cash 535 21,205
and cash equivalents
Net cash inflow from 535 21,205
investing activities
Cash flows from financing
activities
Share issue proceeds 40,014,500 -
received
Cost of share issue (739,321) -
Dividends paid (25,617,761) (24,376,261)
Proceeds under credit 148,035,219 129,546,670
facility
Repayments under credit (185,401,045) (75,603,281)
facility
Credit facility interest (1,137,413) (924,480)
paid
Credit facility commitment (499,063) (494,779)
fees paid
Credit facility arrangement (572,358) (420,567)
fees and expenses paid
Net cash (outflow) / inflow (25,917,242) 27,727,302
from financing activities
Net increase in cash and 9,674,957 16,209,962
cash equivalents
Cash and cash equivalents at 28,248,515 11,750,356
the start of the year
Net foreign exchange gains (1,129,798) 288,197
on cash and cash equivalents
Cash and cash equivalents at 36,793,674 28,248,515
the end of the year
(1) Net of arrangement fees of GBP2,389,453 (2018: GBP2,396,173) withheld.
The accompanying notes form an integral part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2019
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 registered closed-ended investment scheme. 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. Further issues took place in
March 2013, April 2013, July 2015, September 2015, August 2016 and May 2019.
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 2019.
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 UK 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 Apex
Fund and Corporate Services (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 assessing possible impact of the COVID-19 pandemic
on the Group's portfolio, 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 2019
Certain new accounting standards and interpretations have been published
that are effective 1 January 2019 and have not been adopted by the Group.
These standards are not expected to have a material impact on the Group in
the current or future reporting periods and on foreseeable future
transactions.
ii) New standards, amendments and interpretations effective after 1
January 2019 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 2019, and have not
been early adopted in preparing the 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 assumptions and
estimate the receipt of and estimated timing of scheduled and unscheduled
pre-payments of loans advanced. Changes in these assumptions and estimates
could impact 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 accounting judgements
· The functional currency of subsidiary undertakings of the Company, which
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is considered by the Directors to be Euro for Luxco 3; Sterling for all
other subsidiaries (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 ("ECL") levels and cash flow forecasts.
The key area 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
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 financial
instruments that (a) either designated in this category upon initial
recognition or subsequently or (b) not classified in any of the other
categories. Financial assets 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 the statement of profit or loss. This
category includes currency forward contracts and credit linked notes. Gains
or losses on credit linked notes 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 statements within
"Net changes in fair value of financial assets at fair value through profit
or loss" in the period in which it arises. Gains or losses on currency
forward contracts are recognised within "Net foreign exchange gains or
losses".
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
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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 financial
liability is measured at initial recognition minus the principal 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 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, 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 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 cost, 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 - Stage 2
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% 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.
Non-performing assets - Stage 3
Non-performing financial assets would be classified in 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 EUR 177 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 previously, the year-end ECL are nil. Set out below is the
sensitivity to the ECL as at 31 December 2019 and 31 December 2018 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 2019 2018
(absolute value) GBP GBP
LTV +5% 351,780 278,861
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
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