DJ SWEF: Half Yearly Report 30 June 2020
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Half Yearly Report 30 June 2020
09-Sep-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 Limited
Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements
for the six-month period from 1 January 2020 to 30 June 2020
CONTENTS
Overview
Corporate Summary 2
Chairman's Statement 3
Investment Manager's Report 6
Principal Risks 18
Governance
Board of Directors 20
Statement of Directors' Responsibilities 21
Financial Statements
Independent Review Report 23
Unaudited Condensed Consolidated Statement of Comprehensive 24
Income
Unaudited Condensed Consolidated Statement of Financial 25
Position
Unaudited Condensed Consolidated Statement of Changes in 26
Equity
Unaudited Condensed Consolidated Statement of Cash Flows 27
Notes to the Unaudited Condensed Consolidated Financial 28
Statements
Further Information
Corporate Information 44
Overview
Corporate Summary
PRINCIPAL ACTIVITIES AND 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, focusing on Northern and Southern Europe.
Whilst investment opportunities in the secondary market are considered, the
Group's main focus is to originate direct primary real estate debt
investments.
The Group seeks to limit downside risk by focusing on secured debt with both
quality collateral and contractual protection. The typical loan term is
between three and seven years.
The Group aims to be appropriately diversified by geography, real estate
sector, loan type and counterparty. The Group pursues 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.
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 ("GFSC") as a registered closed-ended investment
company. The Company's ordinary shares were first 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 initial public
offering 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 issued capital during the period 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).
The Investment Manager is Starwood European Finance Partners Limited (the
"Investment Manager"), a company incorporated in Guernsey with registered
number 55819 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.
Chairman's Statement
Dear Shareholder,
I am delighted to present the Interim Financial Report and Unaudited
Condensed Consolidated Financial Statements of Starwood European Real Estate
Finance Limited (the "Group") for the period from 1 January 2020 to 30 June
2020.
INVESTMENT MOMENTUM
The table below summarises the new commitments made and repayments received
in the first six months of each year from 2016 to 2020.
New Repayments & Net Increase in
Commitments Amortisation Commitments
H1 2016 GBP98.9m (GBP92.1m) GBP6.8m
H1 2017 GBP115.5m (GBP85.2m) GBP30.3m
H1 2018 GBP147.5m (GBP74.1m) GBP73.4m
H1 2019 GBP49.9m (GBP45.9m) GBP4.0m
H1 2020 GBP72.7m (GBP65.3m) GBP7.4m
The net increase in commitments during the first half of 2020, whilst still
positive, has been modest. This is not surprising as market activity reduced
significantly due to the Covid-19 pandemic. Repayments were similar to
previous years and the majority occurred in the first quarter, pre lockdown
though the credit linked notes repaid at the end of the second quarter.
Importantly, the Group remains fully invested supporting the Company's
income generation.
We normally anticipate that around 30-40 per cent of loans will repay in an
average year. As things stand we would expect this figure to be lower during
2020 as it may take borrowers longer to sell or execute business plans and
opportunities to refinance following completion of plans may be more
limited. The Company expects all scheduled payments to be made on time and
in accordance with their respective initial or amended terms, as applicable.
STEPHEN SMITH | Chairman
8 September 2020
NAV AND SHARE PRICE PERFORMANCE
The NAV of the Group remained relatively stable over the first half of the
year. Notably, the Company has not experienced any defaults or increase in
expected credit losses during the period of market dislocation and
importantly all scheduled interest payments have been received on time. The
Company has delivered a NAV total return during the period of 4 per cent.
We would not expect to see significant movements in NAV as the Group's loans
are held at amortised cost and Euro exposures are hedged. The NAV would only
be materially impacted if there was an increase in credit risk which
resulted in an expected credit loss or actual default. Please refer to the
Investment Manager's report on page 10 for further useful information on the
accounting for our loans and an assessment of expected credit losses for the
period ended 30 June 2020. The Investment Manager also presents an analysis
of the potential fair values of the loans against the amortised cost that is
reflected in these financial statements.
At 30 June 2020, the share price traded at a significant discount to NAV of
17 per cent which has improved from the historic low (of 63.4 pence per
share) experienced during the Covid-19 crisis. However, the Board and the
Investment Adviser believe the shares represent very attractive value at
this level and members of the Investment Adviser team and the Board have
made personal purchases during the quarter, as disclosed by the Group.
The Company received authority at the recent AGM to purchase up to 14.99 per
cent of the Ordinary Shares in issue on 8 June 2020. The Directors continue
to closely and regularly monitor the discount to NAV and on 10th August we
announced the appointment of Jefferies International Limited as buy-back
agent to effect share buy backs on behalf of the Company. This engagement
lasts until 31 December 2020 and any share buyback will be subject to
sufficient cash being available to cover commitments to borrowers, working
capital or the payment of dividends. As at 8 September 2020 the Company had
repurchased 872,000 Ordinary Shares at an average price of 85.35 pence per
share. These shares are being held in Treasury.
DIVIDENDS
The Directors declared a dividend in respect of the first two quarters of
2020 of 1.625 pence per Ordinary Share, equating to an annualised 6.5 pence
per annum. This was approximately 0.9x covered by earnings excluding
unrealised FX gains. With the current portfolio, we expect the dividend
cover to reduce to approximately 0.87x during the second half of the year.
The Board and Investment Adviser recognise the importance of stable and
predictable dividends for our shareholders. Accordingly, we held a dividend
reserve (within retained earnings) built up over several years which we have
been using to maintain the annual dividend at 6.5 pence per share over the
last eighteen months even though the dividend has not been covered by
earnings more recently. As a result, dividends have not, to date, been paid
out of capital reserves. The Company intends to continue to use the
remaining dividend reserve to maintain the annual dividend at 6.5 pence per
share for the rest of 2020 which will leave a small dividend reserve
remaining.
In the period since the Group's inception, the Bank of England base rate has
reduced from 0.50 per cent to 0.10 per cent. The average 5 year GBP swap
rate from inception to year end 2019 was 1.16 per cent, compared to 0.13 per
cent at 30 June 2020 representing a fall of over 1 per cent on average. At
inception LIBOR / EURIBOR might have contributed up to 10 per cent of the
company's underlying return profile, today it makes up less than 1 per cent.
In light of this declining interest rate environment, from 1 January 2021
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the Group intends to reduce the dividend target to 5.5 pence per annum
(payable quarterly) which, in the Board and the Investment Adviser's view,
is a sustainable level and which should be fully covered by earnings whilst
ensuring we maintain our strong credit discipline and risk management. The
share price at 30 June 2020, assuming a dividend of 5.5 pence per annum
would deliver an attractive 6.4 per cent yield (this equates to a 5.3 per
cent yield on NAV at 30 June 2020).
BOARD COMPOSITION AND DIVERSITY
The Board previously mentioned that it is mindful of the need to plan for
succession and to implement this in a timely and constructive fashion that
supports and builds on a cohesive Board. On 3 August 2020 the Company
announced the appointment of Shelagh Mason with effect from 1 September 2020
and Charlotte Denton with effect from 1 January 2021 as Non-Executive
Directors of the Company.
The new appointments are in accordance with the Board's Succession Planning
Memorandum which states that a new Director will be appointed to the Board
during the second half of 2020 allowing time for induction prior to Mr.
Jonathan Bridel standing down from the Board in December 2020. In addition,
the Company has decided that it is appropriate to make a second new
appointment to add to the Company's skills, experience and diversity as well
as to assist in the succession process when I retire from the Board in
December 2021 and when Mr. John Whittle stands down in December 2022. The
Board believes in the value and importance of diversity in the boardroom and
it continues to consider the recommendations of the Davies Report which will
be a key factor in its succession planning.
We are pleased that Shelagh and Charlotte have accepted these appointments
to the Board and the Company believes that as the succession plan unfolds
the Board will be fully equipped with the necessary skills, experience,
knowledge and diversity to continue to grow a successful business in the
coming years. The Board believes that it has addressed concerns expressed by
shareholders at this year's AGM.
GOING CONCERN
Under the UK Corporate Governance Code and applicable regulations, the
Directors are required to satisfy themselves that it is reasonable to assume
that the Group is a going concern.
The Directors have undertaken a rigorous review of the Group's ability to
continue as a going concern including assessing the possible impact of the
Covid-19 pandemic on the Group's portfolio, a review of the ongoing cash
flows and the level of cash balances as of the reporting date as well as
forecasts of future cash flows. After making enquiries of the Investment
Manager and the Administrator and having reassessed the principal risks, 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 unaudited consolidated financial statements were signed. A
range of scenarios have been evaluated as part of this analysis. The worst
case scenario evaluated was an interest payment default on all hotel and
retail loans. In this scenario the company is still able to meet its
liabilities as they fall due although the dividend would need to be reduced
to reflect the reduced cash received. Accordingly, the Directors continue to
adopt a going concern basis in preparing the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements.
COVID-19 AND OUTLOOK
The Board is pleased that the robust underwriting, initial loan structuring
and active asset management of the Investment Manager and Adviser during
this turbulent time has contributed significantly to a very robust
performance during the period. The Investment Manager and Adviser have
actively engaged with our borrowers during this time when amendments and
waivers under loan documentation have been required due to the disruption to
business plans. Just under a quarter of the portfolio has required some sort
of amendment or waiver as a result of Covid-19 with most waivers required in
respect of income based covenants. However, despite this, all interest has
been paid in full and on time and although in many cases credit risk may
have changed and some loans have moved from Stage 1 to Stage 2, no
impairments have been required. Importantly, we expect interest payments to
continue to be paid, in full, based on the forecast and for conditions to
gradually improve if lockdown continues to be relaxed across the UK and
Europe. For further information on the performance of the various components
of the portfolio during Covid-19 please refer to the Investment Managers
report on page 7.
The Investment Adviser expects to see a strong pipeline of opportunities as
the markets begin to stabilise and will continue to apply its rigorous
approach to the selection of appropriate opportunities as it re-invests
capital into new opportunities. At 30 June 2020, the Group was very modestly
levered with net debt of GBP15.1 million (3.5 per cent of NAV) and undrawn
revolving credit facilities of GBP101.9 million to fund the Group's existing
commitments of GBP67.2 million. If the Group does not receive any further
repayments this year, it means the Group has approximately GBP44 million of
capacity for new loans.
The Board believes that the Company is well placed and that its portfolio
and investment pipeline should, over the long term, continue to deliver an
attractive risk-adjusted return. I would like to close by thanking you for
your commitment and support.
Stephen Smith
Chairman
8 September 2020
Investment Manager's Report
CONTINUED INVESTMENT DEPLOYMENT
As at 30 June 2020, the Group had 18 investments and commitments of GBP514.7
million as follows:
Sterling Sterling equivalent
equivalent unfunded commitment (1)
balance (1)
Hospitals, UK GBP25.0m -
Hotel & Residential, UK GBP49.9m -
Office, Scotland GBP4.6m GBP0.4m
Office, London GBP13.0m GBP7.6m
Residential, London GBP37.0m GBP2.7m
Hotel, Oxford GBP16.7m GBP6.3m
Hotel, Scotland GBP25.9m GBP15.5m
Hotel, North Berwick GBP10.5m GBP4.5m
Logistics Portfolio, UK (2) GBP12.0m -
Total Sterling Loans GBP194.6m GBP37.0m
Three Shopping Centres, GBP34.1m GBP5.9m
Spain
Shopping Centre, Spain GBP15.6m -
Hotel, Dublin, Ireland GBP55.0m -
Hotel, Spain GBP40.1m GBP9.5m
Office & Hotel, Madrid GBP17.0m GBP0.9m
Mixed Portfolio, Europe GBP31.3m -
Mixed Use, Dublin GBP2.0m GBP11.5m
Office Portfolio, Spain GBP19.6m GBP2.4m
Office Portfolio, Dublin GBP32.2m -
Logistics Portfolio, GBP6.0m -
Germany (2)
Total Euro Loans GBP252.9m GBP30.2m
Total Portfolio GBP447.5m GBP67.2m
(1) Euro balances translated to sterling at period-end exchange rate.
(2) Logistics Portfolio, UK and Logistics Portfolio, Germany is one single
loan agreement with sterling and Euro tranches.
Between 1 January 2020 to 30 June 2020, the following significant investment
activity occurred (included in the table above):
NEW LOAN: OFFICE PORTFOLIO, 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 commitment of &euro35.15 million. The portfolio consists of 12
high occupancy properties in Central Dublin with primarily office and some
small amounts of retail and residential space totalling over 600,000 sqf in
total.
NEW LOAN: HOTEL, NORTH BERWICK, SCOTLAND:
On 12th February 2020, the Group committed to fund a hotel acquisition
financing for a commitment of GBP15.0 million. The sponsor is a repeat
borrower for the Group. The financing, which was 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.
LOAN UPSIZE: 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 Group with a commitment of GBP10.0 million.
NEW LOAN: LOGISTICS, UK AND GERMANY:
On 17 June 2020, the Group closed an investment in the funding of a
&euro71.9 million, 36 month floating rate senior loan secured by a portfolio
of industrial/logistics assets in the UK and Germany. The investment was
made alongside Starwood Property Trust, Inc (through a wholly owned
subsidiary) with the Group participating in &euro20 million (27.8 per cent)
of the senior loan amount. The Group expects the transaction to generate
attractive risk-adjusted returns, in line with its stated investment
strategy.
Loan Repayments & Amortisation: the following material loan repayments and
material amortisation were received during the first half:
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? a full and final repayment of the &euro16 million loan on an office in
Paris;
? &euro16.4 million of unscheduled amortisation on the loan on the mixed
portfolio;
? Full and final repayment of the mixed use development, South East UK loan
(approximately GBP700k) as the borrower completed their business plan;
? Credit Linked notes: a full and final repayment of the GBP21.8 million
balance. This repayment was earlier than the contractual settlement date but
was anticipated given the relatively high yield that was being earned on the
credit linked notes compared to the current market conditions; and
? Residential, London: GBP15.0 million of amortisation following the sale of
residential units
The Group also advanced GBP16.5 million to borrowers to which it has
outstanding commitments.
PORTFOLIO OVERVIEW IN LIGHT OF COVID-19
We have always had a detailed, hands on approach to asset management, almost
all our loans are direct origination with the borrowers. We therefore know
our borrowers well and we monitor the credit closely through the life of the
investments.
Typically, loans are structured in line with underwritten borrower business
plans. Financial and other milestone covenants are set and ratchet up over
time to track those business plans, which means that should underlying
performance start to deteriorate, early triggers are in place which
effectively allow us to review the position with the borrower and recommend
loan amendments or restructurings as appropriately tailored to each deal.
These loan structures, close relationships and monitoring have proved
particularly useful during Covid-19 where disruption to business plans has
resulted in requirements for amendments and waivers under loan
documentation.
Just under a quarter of the portfolio has required some form of amendment or
waiver as a result of Covid-19. As at the date of approval of the Unaudited
Condensed Consolidated Financial Statements, most waivers required were in
respect of income based covenants.
An example of this has been debt yield test or income covenant waivers to
allow for the disruption of hospitality assets performance. However it is
important to note that these deals are well capitalised with cash reserves
in place to fund forecast shortfalls of income and, no deal or project has
identified a funding shortfall in the medium term.
Amendments to-date have also included refurbishment or ground up
construction loans where loans are structured with required project
completion dates. Where construction progress has been hampered by either
mandatory government shutdowns or the introduction of Covid-compliant social
distancing measures, some milestones have been pushed out to account for the
time lost. Again, these deals are all adequately capitalised where any cost
increase identified as a result of on-site delays, has identified funding in
place.
All loan interest up to the date of publication has been paid in full and on
time and future interest payments are expected to be paid in full based on
the forecast gradual continued easing of lockdowns across the UK and Europe.
The performance of the portfolio has been robust during the Covid-19 crisis
and performance by sector is summarised below.
Hospitality (34.7 per cent of Investment Portfolio)
? Of the Group's investments, the hospitality industry has been most
affected by the Covid-19 pandemic.
? Four hotels, which equates to 40 per cent of hotels in the portfolio had
to close during the pandemic.
? All hotels are now open and operational, aside from the Hotel, Spain which
remains under construction and is due to achieve completion in Q3 2020. The
Hotel, Dublin has remained open and has benefited from a contract with the
Irish Health Authority during the pandemic.
? Every hospitality loan within the Group's loan book continued to pay
interest on time.
? All hospitality loans have adequate resources to meet their cash needs for
the medium term.
Retail (12.7 per cent of Investment Portfolio)
? The retail sector has also been hard hit by the Covid-19 pandemic. This is
on the back of a number of difficult trading years for the retail "bricks
and mortar" sector as a whole.
? Across Europe almost all non-essential retail assets were shut for a
number of months. These retail assets are now beginning to open once again
and starting to become operational.
? In some parts of the retail market we have witnessed footfall return to as
much as 70 per cent of its pre-Covid level. However, we do expect to see
more insolvencies across the sector as 2020 continues.
? The Group's retail investments are either a small part of a large
portfolio of mixed assets or benefit from robust loan structures including
interest / cash reserves which will enable the borrower to weather the storm
over the medium term.
Office, Industrial & Residential (47 per cent of Investment Portfolio)
? These three sectors have been the most resilient sectors during the
Covid-19 pandemic.
? Underlying office rent collections for loans with greater than 75 per cent
exposure to office remain strong at 96 per cent year to date.
? Residential sales have continued to progress well during the Covid-19
related disruption with a number of units being sold since 1 March 2020 at
premiums to underwritten values. The loan-to-value for this segment is 59.6
per cent.
? Underlying industrial loan rent collections remain strong at 100 per cent
year to date.
Construction (34 per cent of Investment Portfolio including some hospitality
and residential assets included above)
? Construction sites have continued to make progress during the Covid-19
pandemic.
? In the UK construction sites were able to remain open at all times. In
Spain and Ireland, construction sites were closed for 14 and 52 days
respectively.
? We expect to see more moderate delays to final completion in our
construction deals as a result of Covid-19.
? However, every deal remains fully funded by debt and equity with ample
contingencies and cost overrun protections to enable borrowers to mitigate
any Covid-19 impacts.
COMPANY PERFORMANCE
Share price, NAV and discount/premium
Source: Thomson Reuters
PORTFOLIO STATISTICS
As at 30 June 2020, the portfolio was invested in line with the Group's
investment policy. The key portfolio statistics are as summarised below.
Number of investments 18
Percentage of currently invested portfolio in floating 79.5%
rate loans
Invested Loan Portfolio unlevered annualised total 6.7%
return (1)
Portfolio levered annualised total return (2) 7.0%
Weighted average portfolio LTV - to Group first GBP (3) 18.4%
Weighted average portfolio LTV - to Group last GBP (3) 62.9%
Average loan term (stated maturity at inception) 4.4 years
Average remaining loan term 2.8 years
Net Asset Value GBP430.1m
Amount drawn under Revolving Credit Facilities (GBP24.1m)
(excluding accrued interest)
Loans advanced GBP448.9m
Cash GBP9.0m
Other net assets / (liabilities) (including hedges) (GBP3.8m)
Origination Fees - current quarter GBP0.1m
Origination Fees - last 12 months GBP1.9m
Management Fees - current quarter GBP0.8m
Management Fees - last 12 months GBP3.2m
1) The unlevered annualised total return is calculated on amounts
outstanding at the reporting date, excluding undrawn commitments, and
assuming all drawn loans are outstanding for the full contractual term. 14
of the loans are floating rate (partially or in whole and some with
floors) and returns are based on an assumed profile for future interbank
rates but the actual rate received may be higher or lower. Calculated only
on amounts funded at the reporting date and excluding committed amounts
(but including commitment fees) and excluding cash un-invested. The
calculation also excludes the origination fee payable to the Investment
Manager.
2) The levered annualised total return is calculated as per the unlevered
return but takes into account the amount of net leverage in the Group and
the cost of that leverage at current LIBOR/EURIBOR.
3) LTV to Group last GBP means the percentage which the total loan drawn
less any amortisation received to date (when aggregated with any other
indebtedness ranking alongside and/or senior to it) bears to the market
value determined by the last formal lender valuation received by the
reporting date. LTV to Group first GBP means the starting point of the loan
to value range of the loans drawn (when aggregated with any other
indebtedness ranking senior to it). For development projects the
calculation includes the total facility available and is calculated
against the assumed market value on completion of the relevant project.
The maturity profile of investments as at 30 June 2020 is shown below.
Principal value %
of loans of invested
Remaining years to contractual GBPm portfolio
maturity (1)
0 to 1 years 20.2 4.5%
1 to 2 years 133.2 29.8%
2 to 3 years 147.2 32.9%
3 to 5 years 89.7 20.0%
5 to 10 years 57.2 12.8%
Total 447.5 100.0%
1) Excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity.
The Group continues to achieve good portfolio diversification as shown in
the graphs below:
% of invested assets
* the currency split refers to the underlying loan currency, however the
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capital on all non-sterling exposure is hedged back to sterling.
The Board 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.
LIQUIDITY AND HEDGING
The Group is very modestly levered with net debt of GBP15.1 million (3.5 per
cent of NAV) at 30 June 2020, has no repo facilities outstanding and
significant liquidity available with undrawn revolving credit facilities of
GBP101.9 million to fund existing commitments as summarised below.
As at 30 June 2020 GBP million
Drawn on Group debt facilities (24.1)
Cash at hand 9.0
Net Debt (15.1)
Undrawn Debt Facilities available to Group 101.9
Undrawn Commitments to Borrowers (67.2)
Available Capacity 43.7
The way in which the Group's borrowing facilities are structured means that
it does not need to fund mark to market margin calls. The Group does have
the obligation to post cash collateral under its hedging facilities.
However, cash would not need to be posted until the hedges were more than
GBP20 million out of the money. The mark to market of the hedges at 30 June
2020 was GBP4.5 million (out of the money) and with the robust hedging
structure employed by the Group, cash collateral has never been required to
be posted since inception.
The Group has the majority of its investments currently denominated in Euros
(although this can change over time), although the Group is sterling
denominated. The Group is therefore subject to the risk that 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 functional and presentation currency of
the Group is sterling as capital is raised in sterling, it is listed on the
London Stock Exchange and the majority of expenses are sterling. The Group
focuses on the UK and Europe but at 30 June 2020 the investment portfolio is
slightly Euro dominant. The portfolio split between sterling and Euro will
fluctuate over time depending on where the best opportunities arise.
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 (unless it was funded using the revolving
credit facilities in which case it will have a natural hedge). Interest
payments are generally 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.
EXPECTED CREDIT LOSSES (IMPAIRMENT)
All loans within the portfolio are classified and measured at amortised cost
less impairment.
Under IFRS 9 a three stage approach for recognition of impairment is
applicable, based on whether there has been a significant deterioration in
the credit risk of a financial asset since initial recognition. These three
stages then determine the amount of impairment provision recognised.
At Initial Recognition Recognise a loss allowance equal
(if asset is not credit to 12 months expected credit
impaired) losses resulting from default
events that are possible within
12 months.
After initial recognition:
Stage 1 Credit risk has not increased
significantly since initial
recognition. Recognise 12 months
expected credit losses.
Interest income is recognised by
applying the effective interest
rate to the gross carrying
amount of financial assets.
Stage 2 Credit risk has increased
significantly since initial
recognition. Recognise lifetime
expected losses.
Interest income is recognised by
applying the effective interest
rate to the gross carrying
amount of financial assets.
Stage 3 Credit impaired financial asset.
Recognise lifetime expected
losses.
Interest income is calculated by
applying the effective interest
rate to their amortised cost
(that is net of expected loss
provision).
The Group has not recognised expected credit losses at initial recognition
on any of its loans due to the detailed and conservative underwriting
undertaken, robust loan structures in place and a strong equity cushion with
an average LTV of 62.9 per cent (based on the latest available valuation for
each asset).
Stage 2: Significant increase in credit risk
The Group uses both quantitative and qualitative criteria which is monitored
no less than quarterly in order to assess whether an increase in credit risk
has occurred. Increased credit risk would be considered if, for example, all
or a combination of the following has occurred:
? underlying income performance is at a greater than 10 per cent variance to
the underwritten loan metrics;
? loan to value is greater than 75-80 per cent;
? loan to value or income covenant test results are at a variance of greater
than 5-10% 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.
Stage 3: Non-performing assets
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.
At the end of 2019 all loans were classified as Stage 1. As at 30 June 2020
six loans with a value of 33 per cent of NAV have moved to Stage 2 but no
loan has moved to Stage 3. The loans classified to stage 2 are predominantly
in the retail and hospitailty sectors. Out of the list of considerations
outlined above the main reason for moving the loans to stage 2 was expected
income covenant breaches due to the disruption from Covid-19. It is
important to note that classification to Stages 2 does not automatically
mean that an expected credit loss will be recognised. This is because the
formula for calculating the expected credit loss is:
"Present Value of loan" x "probability of default" x "value of expected
loss"
The Group does not instruct independent third party valuations on a strict
annual basis, only when it is considered necessary to obtain one. We
generally consider this to be a conservative approach to the LTV stated as
many of our borrowers have business plans which are in execution and the
plans would have be gradually de-risked as the business plan progresses. The
Investment Adviser does closely analyse all available market and internal
information on a regular basis and as at 30 June 2020 considers that it is
still very likely that the third part of the formula "value of expected
loss" will remain as nil for all loans, even if they have moved from Stage 1
to Stage 2, due to the significant headroom the Group has with an average
loan to value (based on the latest third party valuations performed) of 62.9
per cent.
The table below shows the sensitivity of the loan to value calculation for
movements in the underlying property valuation.
Change in Hospitality Retail Residential Other Portfolio
Valuation Average
-15% 73.0% 82.1% 70.1% 74.3% 74.0%
-10% 68.9% 77.5% 66.2% 70.2% 69.9%
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-5% 65.3% 73.4% 62.7% 66.5% 66.2%
0% 62.0% 69.8% 59.6% 63.2% 62.9%
5% 59.1% 66.5% 56.7% 60.2% 59.9%
10% 56.4% 63.4% 54.2% 57.4% 57.2%
15% 53.9% 60.7% 51.8% 54.9% 54.7%
The Group is unable to record the loans at fair value as the loans do not
qualify for this accounting treatment as per IFRS. However, we do have to
present and have calculated the fair value of the loans based on a
discounted cash flow basis using different discount rates (as applicable)
with the assumption all loans run to full maturity, and the results are
shown below.
Discount Rate Value Calculated % of book value
4.7% GBP473.3 m 105.4%
5.2% GBP467.0 m 104.0%
5.4% GBP462.3 m (= fair value) 103.0%
5.7% GBP460.8 m 102.7%
6.2% GBP454.8 m 101.3%
6.7% GBP448.9 m (= book value) 100.0%
7.2% GBP443.1 m 98.7%
7.7% GBP437.4 m 97.5%
8.2% GBP431.9 m 96.2%
8.7% GBP426.5 m 95.0%
The effective interest rate ("EIR") - i.e. the discount rate at which future
cash flows equal the amortised cost, is 6.7 per cent. We have sensitised the
cash flows at EIR intervals of 0.5 per cent up to +/- 2.0 per cent. The
table reflects how a changes in market interest rates or credit risk
premiums may impact the fair value of the portfolio versus the amortised
cost. Further, the Group considers the EIR of 6.7 per cent to be
conservative as many of these loans were part of a business plan which
involved transformation and many of these business plans are advanced in the
execution and therefore significantly de-risked from the original
underwriting and pricing.
MARKET SUMMARY AND INVESTMENT OUTLOOK
Markets remain reasonably volatile but have stabilised in the last few
months. The VIX is down from 38.2 at 17 April to 27.2 at 17 July having
peaked at 82.7 in March 2020. The iShares UK Property ETF is almost
completely unchanged at 495.15p on 17 July versus 495.85p three months
earlier. This more stable picture is the result of an effective campaign of
unprecedented monetary and fiscal stimulus. Overall one of the largest
drivers of the market will be the balance of these stimulus measures versus
the long-term economic effects of the disruption caused by Covid-19.
We have also seen more clarity in real estate valuation. In April real
estate valuers had been caveating their work with material uncertainty
clauses however the RICS Material Valuation Uncertainty Leaders Forum have
now recommended that central London offices, as well as all industrial and
logistics assets, no longer need a material uncertainty clause in
valuations.
The stimulus has had a material effect on the outlook for interest rates. At
the end of June the FT reported that the UK 30 year gilt was trading below
the Japanese 30 year bond. Since the Company launched in December 2012 the
30-year rate has decreased by 2.5 per cent in total. Short-term rates have
plummeted since Covid-19 with GBP Libor declining by 0.69 per cent to 0.08
per cent over the last six months. The curve is also extremely flat with the
UK 5-year swap rate also at only 0.08 per cent. Overall the lower interest
rate environment is likely to be propping up property values with an
increasing lack of yield in the fixed income world.
Investment grade credit spreads have tightened since last quarter.
Specifically, in the real estate space, Vonovia, which is one of the largest
real estate bond issuers in Europe now has lower yields than it did at the
start of the year on some of its medium and longer dated maturities. The
evolution of pricing can be seen with the new Vonovia 10 year bond issued in
July 2020 with a 1 per cent coupon versus 2.25 per cent in April this year.
Covid-19 has accelerated some of the long-term trends from physical to
online retail. The UK has been particularly hard hit by this and we have
seen more bricks-and-mortar retailers go into administration during the
first half of this year than in the whole of 2019, which was described by
some observers as 'the worst year for 25 years' for the industry. According
to the Centre for Retail Research, 40 companies have failed affecting 2,630
stores in the first half of the year versus 43 companies and 2,051 stores
for 2019 as a whole.
Large logistics and last mile logistics continue to benefit from the
long-term trend to online retail and the continued growth in requirements
for the logistics infrastructure to service the model. This continued trend
in favour of logistics is evident in both increased take-up which was up 36
per cent year on year in the UK and also in the transaction market. Last
quarter we reported that expectations for transaction volumes were, in
general, heavily down given market uncertainties and practicalities of doing
business in lockdown. However in the second quarter the volume of logistics
transactions has held up much better than other asset classes. While still
down on 2019, investment volumes reached GBP1.12 billion for H1 2020, (a fall
of 26 per cent when compared with H1 2019). Volumes for logistics investment
fell by just 24 per cent from Q1 to Q2, compared with the commercial market
as a whole where volume fell by 82 per cent during the same time period.
Values have also held up well while initially Savills moved prime yields out
25bps to 4.50 per cent for prime single let logistics units and 4.25 per
cent for multi-let industrial estates they now see positive sentiment and
competitive tension putting downward pressure on these yields.
In residential there are many themes driving the market, the stamp duty
holiday and very low interest rates are helping buyers. The imbalance of
pent up demand from buyers having put moves on hold as the market was shut
who are now looking to a limited supply of available property are so far
outweighing the uncertainties of full implications of the macro-economic
impacts of Covid-19. There is limited downward pressure and in some parts of
the market there is a significant upwards pressure. We are also seeing the
continuing theme of successful creation of larger institutional private
rented sector product in many countries around Europe and expect to see this
continue to grow.
There is much debate about the future of office space. In particular there
are short to medium term practicalities about reopening the office space
which will still take some months to bed down. Some workers have thrived
working from home in lockdown but it is also clear that people miss and need
other essential aspects of office life around close teamwork and spontaneous
communication, training, culture building, ideas generation and the social
aspects of the office environment. There has been limited activity so far to
see the impacts on the long-term outlook. Savills City Office research shows
City office rents holding up but with some pressure on incentives and their
investment market prime yields for office are flat. As volumes have been
significantly lower during the second quarter for commercial real estate
transactions some market participants are expecting a similar pent up demand
as we have seen in the residential market from both buyers and sellers to
transact and expect many processes to be launched after the summer for Q4
closing.
The real estate debt market reflects the underlying real estate market and
there has been relatively low volumes of financing concluded. We expect that
as with the underlying real estate market the early transactions will be
seen in the logistics, residential and office sectors. There is still
dislocation in the market, however we are seeing an easing and even in some
markets such as the German core office space financing terms are back to
pre-Covid-19 levels. Pricing tends to be quite opaque in the market, however
we currently estimate that in general most types of income producing real
estate are between 25bps and 50bps wider than pre-Covid-19. Pricing for more
complex credits can be significantly wider. We have observed that this
premium has been changing quickly and normalising over recent weeks. Larger
deals requiring syndication have been particularly difficult to evaluate
given a lack of clarity in the CMBS and syndication market but we are
hearing that banks with pre-Covid-19 loan inventory for sale are now making
good progress with some syndications which will help create new underwriting
capacity in the market. We still see a fair way to go to get back to
pre-Covid-19 conditions with less market participants and capacity but we
are also beginning to hear market participants worrying about missing
targets and opportunities and so we are expecting the market to continue to
"stabilise" into a new equilibrium in Q4.
RELATED PARTY TRANSACTIONS
Related party disclosures are given in note 14 to the Unaudited Condensed
Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Certain statements in this interim report are forward-looking. Although the
Group believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that these expectations
will prove to have been correct. Because these statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by these forward-looking statements.
The Group undertakes no obligation to update any forward-looking statements
whether as a result of new information, future events or otherwise.
Starwood European Finance Partners Limited
Investment Manager
8 September 2020
Principal Risks
PRINCIPAL RISKS FOR THE REMAINING SIX MONTHS OF THE YEAR TO 31 DECEMBER 2020
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The principal risks assessed by the Board relating to the Group were disclosed in the Annual Report and Audited Consolidated Financial Statements for the year to 31 December 2019 on pages 12 to 14. The Board and Investment Manager have reassessed the principal risks and do not consider these risks to have changed, except for the ongoing impact of Covid-19. Therefore, the following are the principal risks assessed by the Board and the Investment Manager as relating to the Group for the remaining six months of the year to 31 December 2020: ? The Covid-19 pandemic presents a new and major risk to growth, however, as yet, the full impact of the consequences for the world economy is unclear. The Board have considered the impact of Covid-19 on the current and future operations of the Group and its portfolio of loans advanced. Because of the cash and loan facilities available to the Group and the underlying quality of the portfolio of loans advanced, both management and the Board still believe the fundamentals of the portfolio remain optimistic and that the Group can adequately support the portfolio of loans advanced despite current market conditions. ? The Group's targeted returns are based on estimates and assumptions that are inherently subject to significant business and economic uncertainties and contingencies, and 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 principal may be repaid earlier than anticipated, causing the return on affected investments to be less than expected. In addition, 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. As a consequence, the shares may trade at a discount to NAV per share and Shareholders may be unable to realise their investments through the secondary market at NAV per share; ? The 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. In the period since the Group's inception, the Bank of England base rate has reduced from 0.50 per cent to 0.10 per cent and in the light of the declining interest rate environment the Group intends to reduce the dividend target to a more sustainable level of dividend which should be fully covered by earnings ensuring strong credit discipline whilst managing risk. ? The Group has the majority of its investments currently denominated in Euros and 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. All non-Sterling loan principal is hedged back to Sterling to the maturity date of the loan (except where drawn in Euros on the revolving credit facilities). 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 Group's investments are comprised principally of debt investments in the UK, and the wider European Union's internal market and it is therefore exposed to economic movements and changes in these markets. Any deterioration in the global, UK or European economy could have a significant adverse effect on the activities of the Group and may result in significant loan defaults or impairments. In the event of a default the Group is generally entitled to enforce security, but the process may be expensive and lengthy, and the outcome is dependent on sufficient capital being available to meet the borrower's obligations. Some of the investments made 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 could be subject to the available 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; ? The United Kingdom's departure from the European Union represents a potential threat to the UK economy as well as wider Europe. On a cyclical view, national economies across Europe appear to be heading at best towards lower growth and alongside the economic impact of Covid-19 to towards recession. The potential impact of Brexit could have a further destabilising effect as a result of Covid-19. To some extent the potential impact of an unsatisfactory UK exit from the EU has already been priced into markets and forecasts, but significant headwinds could arise should there be an unstructured settlement; and ? 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. As a consequence of this, the Group could breach the covenants of its revolving credit facility and fall into default. Governance Board of Directors STEPHEN SMITH | Non-executive Chairman - Chairman of the Board Stephen is Chairman of The PRS REIT which currently trades on the SFS of the London Stock Exchange. He is also Chairman of AEW UK Long Lease REIT plc which trades on the Main Market of the London Stock Exchange. Previously, he was the Chief Investment Officer of British Land Company PLC, the FTSE 100 real estate investment trust from January 2010 to March 2013 with responsibility for the group's property and investment strategy. He was formerly Global Head of Asset Management and Transactions at AXA Real Estate Investment Managers, where he was responsible for the asset management of a portfolio of more than &euro40 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 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 India Capital Growth Fund which is listed on the main market of London Stock Exchange, Globalworth Real Estate Investments Limited, GLI Finance Ltd (all listed on AIM), Toro Limited (listed on the SFS segment of the Main Market segment of the London Stock Exchange), 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. SHELAGH MASON | Non-executive Director Shelagh Mason (appointed 1 September 2020) is a solicitor specialising in English commercial property as a consultant with Collas Crill LLP,. She is also non-executive Chairman of the Channel Islands Property Fund Limited and
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sits on the Board of Riverside Capital PCC, Skipton International Limited a
Guernsey Licensed bank and is a non executive director of the Renewables
Infrastructure Fund a FTSE 250 company and she is also on the Board of
Ruffer Investment Company Limited. Previously Shelagh was a member of the
board of directors of Standard Life Investments Property Income Trust, a
property fund listed on the London Stock Exchange for 10 years until
December 2014. She retired from the board of Medicx Fund Limited, a main
market listed investment company investing in primary healthcare facilities
in 2017 after 10 years on the board. She is a past Chairman of the Guernsey
Branch of the Institute of Directors and a member of the Chamber of
Commerce, the Guernsey International Legal Association and she also holds
the IOD Company Direction Certificate and Diploma with distinction. Shelagh
is a resident of Guernsey.
Statement of Directors' Responsibilities
To the best of their knowledge, the Directors of Starwood European Real
Estate Finance Limited confirm that:
1) The Unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with IAS 34, "Interim Financial Reporting" as
adopted by the European Union as required by DTR 4.2.4 R; and
2) The Interim Financial Report, comprising of the Chairman's Statement,
the Investment Manager's Report and the Principal Risks, meets the
requirements of an interim management report and includes a fair review of
information required by:
i) DTR 4.2.7R of the UK Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six
months and their impact on the Unaudited Condensed Consolidated
Financial Statements, and a description of the principal risks and
uncertainties for the remaining six months of the year; and
ii) DTR 4.2.8R of the UK Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six months
and that have materially affected the financial position or performance
of the Company during that period, and any material changes in the
related party transactions disclosed in the last Annual Report.
By order of the Board
For Starwood European Real Estate Finance Limited
Stephen Smith John Whittle
Chairman Director
8 September 2020 8 September 2020
Financial Statements
Independent Review Report to Starwood European Real Estate Finance Limited
Report on the unaudited condensed consolidated financial statements
OUR CONCLUSION
We have reviewed Starwood European Real Estate Finance Limited's unaudited
condensed consolidated financial statements (the "interim financial
statements") in the Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements (the "Interim Report") of Starwood
European Real Estate Finance Limited for the 6-month period ended 30 June
2020. Based on our review, nothing has come to our attention that causes us
to believe that the interim financial statements are not prepared, in all
material respects, in accordance with International Accounting Standard 34,
'Interim Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
WHAT WE HAVE REVIEWED
The interim financial statements comprise:
? the unaudited condensed consolidated statement of financial position as at
30 June 2020;
? the unaudited condensed consolidated statement of comprehensive income for
the period then ended;
? the unaudited condensed consolidated statement of cash flows for the
period then ended;
? the unaudited condensed consolidated statement of changes in equity for
the period then ended; and
? the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Report have been
prepared in accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 2 to the interim financial statements, the financial
reporting framework that has been applied in the preparation of the full
annual financial statements of the Group is The Companies (Guernsey) Law,
2008 and International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
RESPONSIBILITIES FOR THE INTERIM FINANCIAL STATEMENTS AND THE REVIEW
OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS
The Interim Report, including the interim financial statements, is the
responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the Interim Report in accordance with
International Accounting Standard 34, 'Interim Financial Reporting', as
adopted by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial
statements in the Interim Report based on our review. This report, including
the conclusion, has been prepared for and only for the Company for the
purpose of complying with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and for no
other purpose. We do not, in giving this conclusion, 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.
WHAT A REVIEW OF INTERIM FINANCIAL STATEMENTS INVOLVES
We conducted our review in accordance with International Standard on Review
Engagements 2410, 'Review of Interim Financial Information Performed by the
Independent Auditor of the Entity' issued by the International Auditing and
Assurance Standards Board. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing and, consequently, does
not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
We have read the other information contained in the Interim Report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
8 September 2020
a) The maintenance and integrity of the Starwood European Real Estate
Finance Limited website is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
b) Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Unaudited Condensed Consolidated Statement of Comprehensive Income
for the period ended 30 June 2020
Notes 1 January 1 January 1 January
2020 to 2019 to 2019 to
30 June 2020 30 June 2019 31 December
GBP GBP 2019
(unaudited) (unaudited) GBP
(audited)
Income
Income from loans 6 14,433,090 13,687,862 26,890,182
advanced
Net foreign 4,281,241 1,003,676 4,921,541
exchange gains
Net changes in 12 1,097,722 1,164,657 2,339,222
fair value of
financial assets
at fair value
through profit or
loss
Income from cash - 1 535
and cash
equivalents
Total income from 19,812,053 15,856,196 34,151,480
investments
Expenses
Investment 14 1,584,891 1,476,340 3,077,665
management fees
Credit facility 376,430 229,821 520,218
commitment fees
Credit facility 301,993 544,084 1,003,580
interest
Credit facility 206,201 196,689 390,350
amortisation of
fees
Legal and 155,133 127,005 263,725
professional fees
Administration 154,606 169,147 338,604
fees
Audit and 127,885 125,156 241,048
non-audit fees
Other expenses 94,259 77,393 195,244
Directors' fees 14 69,991 70,167 140,328
and expenses
Agency fees 10,781 10,936 22,023
Broker's fees and - 167 167
expenses
Total operating 3,082,170 3,026,905 6,192,952
expenses
Operating profit 16,729,883 12,829,291 27,958,528
for the period /
year before tax
Taxation 13 59,808 23,939 60,898
Operating profit 16,670,075 12,805,352 27,897,630
for the period /
year
Other
comprehensive
income
Items that may be 292,900 (3,142) 6,451
reclassified to
profit or loss
Exchange
differences on
translation of
foreign
operations
Other 292,900 (3,142) 6,451
comprehensive
income for the
period / year
Total 16,962,975 12,802,210 27,904,081
comprehensive
income for the
period / year
Weighted average 3 413,219,398 384,938,735 399,195,288
number of shares
in issue
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Basic and diluted 3 4.03 3.33 6.99
earnings per
Ordinary Share
(pence)
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Financial Position
as at 30 June 2020
Notes As at As at As at
30 June 30 June 2019 31 December
2020 GBP 2019
GBP (unaudited) GBP
(unaudited) (audited)
Assets
Cash and cash 4 9,024,042 27,959,950 36,793,674
equivalents
Other receivables 5 1,107,701 12,198 28,935
and prepayments
Financial assets 7 - 21,879,086 30,480,689
at fair value
through profit or
loss
Loans advanced 6 448,891,684 428,636,053 390,647,516
Total assets 459,023,427 478,487,287 457,950,814
Liabilities
Financial 7 4,536,384 7,216,743 -
liabilities at
fair value
through profit or
loss
Credit facilities 9 22,931,943 44,996,644 28,359,047
Trade and other 8 1,466,674 1,391,059 3,036,686
payables
Total liabilities 28,935,001 53,604,446 31,395,733
Net assets 430,088,426 424,882,841 426,555,081
Capital and
reserves
Share capital 411,205,161 411,205,161 411,205,161
Retained earnings 18,526,690 13,623,598 15,286,245
Translation 356,575 54,082 63,675
reserve
Total equity 430,088,426 424,882,841 426,555,081
Number of 413,219,398 413,219,398 413,219,398
Ordinary Shares
in issue
Net asset value 104.08 102.82 103.23
per Ordinary
Share (pence)
These Unaudited Condensed Consolidated Financial Statements were approved
and authorised for issue by the Board of Directors on 8 September 2020, and
signed on its behalf by:
Stephen Smith John Whittle
Chairman Director
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Changes in Equity
for the period ended 30 June 2020
Period ended Share Retained Translation Total
30 June 2020 capital earnings reserve equity
GBP GBP GBP GBP
(unaudited) (unaudited) (unaudited) (unaudited)
Balance at 1 411,205,161 15,286,245 63,675 426,555,081
January 2020
Dividends paid - (13,429,630) - (13,429,630)
Operating - 16,670,075 - 16,670,075
profit for the
period
Other
comprehensive
income:
Other - - 292,900 292,900
comprehensive
income for the
period
Balance at 30 411,205,161 18,526,690 356,575 430,088,426
June 2020
Period ended Share Retained Translation Total
30 June 2019 capital earnings reserve equity
GBP GBP GBP GBP
(unaudited) (unaudited) (unaudited) (unaudited)
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 - (12,188,130) - (12,188,130)
Operating - 12,805,352 - 12,805,352
profit and
total
comprehensive
income
Other
comprehensive
income:
Other - - (3,142) (3,142
comprehensive
income for the
period
Balance at 30 411,205,161 13,623,598 54,082 424,882,841
June 2019
Year ended 31 Share Retained Translation Total
December 2019 capital earnings reserve equity
GBP GBP GBP GBP
(audited) (audited) (audited) (audited)
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
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Cash Flows
for the period ended 30 June 2020
1 January 2020 1 January 2019 1 January
to to 2019 to
30 June 2020 30 June 2019 31 December
GBP GBP 2019
(unaudited) (unaudited) GBP
(audited)
Operating
activities:
Operating profit 16,670,075 12,805,352 27,897,630
for the period /
year
Adjustments
Income from (14,433,090) (13,687,862) (26,890,182)
loans advanced
Net changes in (1,097,722) (1,164,657) (2,339,222)
fair value of
financial assets
at fair value
through profit
or loss
Income on cash - (1) (535)
and cash
equivalents
(Increase) / (1,078,766) 16,737 -
decrease in
prepayments,
receivables and
capitalised
costs
Increase / 188,944 58,459 (4,279)
(decrease) in
trade and other
payables
Net unrealised 13,131,462) (1,564,689) (17,376,510)
losses / (gains)
on foreign
exchange
derivatives
Net foreign (17,346,174) 1,229,975 10,824,860
exchange (gains)
/ losses
Currency (404,293) (81,044) 471,376
translation
difference
Credit facility 301,993 544,084 1,003,580
interest
Credit facility 206,201 196,689 390,350
amortisation of
fees
Credit facility 376,430 229,821 520,218
commitment fees
Corporate taxes (82,766) (45,624) (45,909)
paid
(3,567,706) (1,462,760) (5,548,623)
Loans advanced1 (85,689,578) (62,553,702) (185,959,804)
Loan repayments 43,513,026 45,895,750 198,311,623
and amortisation
Credit linked 21,773,000
notes repayments
Origination fees (576,287) (683,328) (1,962,601)
paid
Interest, 14,020,648 13,998,212 28,411,123
commitment and
exit fee income
from loans
advanced
Interest 1,210,333 1,171,906 2,339,946
received on
Credit Linked
Notes
Net cash outflow (9,316,564) (3,633,922) 35,591,664
from operating
activities
Cash flows from
investing
activities
Interest income - 1 535
from cash and
cash equivalents
Net cash inflow - 1 535
from investing
activities
Cash flows from
financing
activities
Share issue - 40,014,500 40,014,500
proceeds
received
Cost of share - (739,321) (739,321)
issues
Credit facility - - (572,358)
arrangement fees
and expenses
paid
Proceeds under 44,952,688 37,075,890 148,035,219
credit facility
Repayments under (50,472,045) (60,213,500) (185,401,045)
credit facility
Credit facility (293,798) (566,047) (1,137,413)
interest paid
Credit facility (339,296) (216,232) (499,063)
commitment fees
paid
Dividends paid (13,429,630) (12,188,130) (25,617,761)
Net cash inflow (19,582,081) 3,167,160 (25,917,242)
from financing
activities
Net (decrease) (28,898,645) (466,761) 9,674,957
in cash and cash
equivalents
Cash and cash 36,793,674 28,248,515 28,248,515
equivalents at
the start of the
period / year
Net foreign 1,129,013 178,196 (1,129,798)
exchange gains /
(losses) on cash
and cash
equivalents
Cash and cash 9,024,042 27,959,950 36,793,674
equivalents at
the end of the
period / year
1 Net of arrangement fees of GBP778,691 (30 June 2019: GBP335,994; 31 December
2019: GBP2,389,453) withheld.
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the period ended 30 June 2020
1. GENERAL INFORMATION
The Company is a close-ended investment company incorporated in Guernsey.
The Unaudited Condensed 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 30 June 2020.
2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES
The Company has prepared these Unaudited Condensed Consolidated Financial
Statements on a going concern basis in accordance with International
Accounting Standard 34, "Interim Financial Reporting", as adopted by the
European Union and the Disclosure Guidance and Transparency Rules sourcebook
of the United Kingdom's Financial Conduct Authority. This Interim Financial
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Report does not comprise statutory Financial Statements within the meaning
of the Companies (Guernsey) Law, 2008, and should be read in conjunction
with the Consolidated Financial Statements of the Group as at and for the
year ended 31 December 2019, which have been prepared in accordance with
International Financial Reporting Standards as adopted by the European Union
and the Companies (Guernsey) Law, 2008. The statutory Financial Statements
for the year ended 31 December 2019 were approved by the Board of Directors
on 6 April 2020. The opinion of the Auditor on those Financial Statements
was unqualified and did not contain an emphasis of matter. This Interim
Financial Report and Unaudited Condensed Consolidated Financial Statements
for the period ended 30 June 2020 has been reviewed by the Auditor but not
audited.
There are a number of new and amended accounting standards and
interpretations that became applicable for annual reporting periods
commencing on or after 1 January 2020.
These amendments have not had a significant impact on these Unaudited
Condensed Consolidated Financial Statements and therefore the additional
disclosures associated with first time adoption have not been made.
The preparation of the Unaudited Condensed Consolidated Financial Statements
requires management to make judgements, estimates and assumptions that
affect the application of accounting policies and the reported amounts of
assets and liabilities, income and expenses. Actual results may differ from
these estimates.
In preparing these Unaudited Condensed Consolidated Financial Statements,
the significant judgements made by management in applying the Group's
accounting policies and the key sources of estimation uncertainty were the
same as those that applied to the Annual Consolidated Financial Statements
for the year ended 31 December 2019.
3. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on the
operating profit of GBP16,670,075 (30 June 2019: GBP12,805,352 and 31 December
2019: GBP27,897,630) and on the weighted average number of Ordinary Shares in
issue at 30 June 2020 of 413,219,398 (30 June 2019: 384,938,735 and 31
December 2019: 399,195,288).
The calculation of NAV per Ordinary Share is based on a NAV of GBP430,088,426
(30 June 2019: GBP424,882,841 and 31 December 2019: GBP426,555,081) and the
actual number of Ordinary Shares in issue at 30 June 2020 of 413,219,398 (30
June 2019: 413,219,398 and 31 December 2019: 413,219,398).
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
30 June 2020 30 June 2019 31 December 2019
GBP GBP GBP
Cash at bank 9,024,042 27,959,950 36,793,674
9,024,042 27,959,950 36,793,674
Cash and cash equivalents comprises cash and short-term deposits held with
various banking institutions with original maturities of three months or
less. The carrying amount of these assets approximates their fair value.
5. OTHER RECEIVABLES AND REPAYMENTS
30 June 2020 30 June 2019 31 December
GBP GBP 2019
GBP
Prepayments 12,198 12,198 28,935
Investment proceeds 1,095,503 - -
receivable
1,107,701 12,198 28,935
Investment proceeds receivable relates to Hotel & Residential, UK and was
received on 1 July 2020.
6. LOANS ADVANCED
30 June 30 June 2018 31 December
2019 GBP 2018
GBP GBP
UK
Regional Hotel - 46,690,942 -
Portfolio
Hotel & Residential 49,918,078 39,863,705 39,861,178
Hospitals 25,355,368 25,341,644 25,354,300
Residential, London 37,450,724 - 49,522,631
Hotel, Scotland 10,522,972 - -
Hotel, North Berwick 25,841,675 - 25,861,391
Hotel, Oxford 16,727,400 - 16,724,638
Mixed Use Development, - 12,282,913 766,877
South East UK
Office, London 12,964,026 - 12,697,122
Office, Scotland 4,688,936 4,305,664 4,470,792
Logistics Portfolio 11,905,419 - -
Ireland
Hotel, Dublin 55,484,069 54,173,151 51,576,017
Office Portfolio, 32,217,021 - -
Dublin
Logistics, Dublin - 13,035,099 -
Mixed use, Dublin 1,870,185 - 592,335
Residential, Dublin - 2,147,252 -
Spain
Hotel, Barcelona - 41,483,446 -
Three Shopping Centres 34,097,509 32,602,374 31,709,624
Hotel 39,590,856 25,604,236 25,225,534
Office & Hotel, Madrid 17,015,583 16,624,145 15,832,398
Shopping Centre 15,792,369 15,374,244 14,672,253
Office Portfolio 19,669,822 - 18,050,874
France
Office, Paris - 14,512,426 13,854,691
Germany
Logistics Portfolio 5,957,035 - -
Europe
Mixed Portfolio 31,822,637 47,194,411 43,874,861
Industrial Portfolio - 37,400,401 -
448,891,684 428,636,053 390,647,516
No element of loans advanced are past due or impaired. For further
information and the associated risks see the Investment Manager's Report.
The table below reconciles the movement of the carrying value of loans
advanced in the period / year:
30 June 2020 30 June 2019 31 December
GBP GBP 2019
GBP
Loans advanced at the 390,647,516 413,444,410 413,444,410
start of the period /
year
Loans advanced 84,751,266 62,495,181 189,678,726
Loan repayments and (43,513,026) (45,895,750) (198,311,623)
amortisation
Arrangement fees (778,691) (335,994) (2,389,453)
earned
Commitment fees earned (683,762) (327,239) (688,884)
Exit fees earned (243,680) (602,557) (1,983,925)
Origination fees paid 545,248 373,953 1,684,798
Effective interest 14,433,090 13,687,862 26,890,182
earned
Interest payments (13,093,206) (13,055,677) (25,738,458)
received / accrued
Foreign exchange 16,826,929 (1,148,136) (11,938,257)
(losses) / gains
Loans advanced at the 448,891,684 428,636,053 390,647,516
end of the period /
year
Loans advanced at fair 462,295,383 439,874,981 402,825,998
value
For further information on the fair value of loans advanced, refer to note
12.
7. FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT
OR LOSS
Financial assets at fair value through profit or loss comprise currency
forward contracts which represent contractual obligations to purchase
domestic currency and sell foreign currency on a future date at a specified
price and financial instruments designated at fair value through profit or
loss which are debt securities that are managed by the Group and their
performance is evaluated on a fair value basis.
The underlying instruments of currency forwards become favourable (assets)
or unfavourable (liabilities) as a result of fluctuations of foreign
exchange rates relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which
instruments are favourable or unfavourable, and thus the aggregate fair
values of derivative financial assets and liabilities, can fluctuate
significantly from time to time. The foreign exchange derivatives are
subject to offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Notional Fair values
contract
30 June 2020 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 303,343,342 1,142,927 (5,679,311) (4,536,38
4)
Total 303,343,342 1,142,927 (5,679,311) (4,536,38
4)
Notional Fair values
contract
30 June 2019 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through
profit or loss
Credit Linked N/A 21,879,08 - 21,879,08
Notes, UK Real 6 6
Estate
Total - 21,879,08 - 21,879,08
6 6
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 296,802,700 351,983 (7,552,757) (7,200,77
4)
Goldman Sachs 953,750 - (15,969) (15,969)
Total 297,756,450 351,983 (7,568,726) (7,216,74
3)
Notional Fair values
contract
31 December 2019 amount1 Assets Liabilities Total
GBP GBP GBP GBP
Investments at
fair value
through
profit or loss
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Credit Linked N/A 21,885,61 - 21,885,61
Notes, UK Real 1 1
Estate
Total - 21,885,61 - 21,885,61
1 1
Foreign exchange
derivatives
Currency
forwards:
Lloyds Bank plc 231,251,616 8,819,545 (224,467) 8,595,078
Total 231,251,616 8,819,545 (224,467) 8,595,078
1 Euro amounts are translated at the period / year end exchange rate
8. TRADE AND OTHER PAYABLES
30 June 2020 30 June 2019 31 December
GBP GBP 2019
GBP
Investment management 795,148 767,529 801,074
fees payable
Refinancing and 208,558 231,605 207,098
restructuring fees
Audit fees payable 182,996 156,779 86,131
Commitment fees payable 144,124 95,162 104,055
Administration fees 79,167 85,816 12,980
payable
Tax provision 56,681 41,429 76,773
Prepaid interest - 12,739 -
received
Loan amounts payable - - 1,717,003
Origination fees payable - - 31,572
1,466,674 1,391,059 3,036,686
9. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Group's borrowings for this purpose, any liabilities
incurred under the Group's foreign exchange hedging arrangements shall be
disregarded.
As at 30 June 2020 an amount of GBP24,062,500 (30 June 2019: GBP45,878,046 and
31 December 2019: GBP29,704,000) was drawn and interest of GBP23,144 (30 June
2019: GBP134,180 and 31 December 2019: GBP14,949) was payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities and an amount of GBP1,153,701 (30 June 2019: GBP1,015,582 and 31
December 2019: GBP1,359,902) was netted off against the loan facilities
outstanding.
The changes in liabilities arising from financing activities are shown in
the table below.
30 June 2020 30 June 2019 31 December 2019
GBP GBP GBP
Borrowings at the 28,359,047 67,764,943 67,764,943
start of the period /
year
Proceeds during the 44,952,688 37,075,890 148,035,219
period / year
Repayments during the (50,472,045) (60,213,500) (185,401,045)
period / year
Interest expense 301,993 544,084 1,003,580
recognised for the
period / year
Interest paid during (293,798) (566,047) (1,137,413)
the period / year
Credit facility fees - - (537,981)
incurred
Credit facility 206,201 196,689 390,350
amortisation of fees
Foreign exchange and (122,143) 194,585 (1,758,606)
translation
difference
Borrowings at the end 22,931,943 44,996,644 28,359,047
of the period/year
10. DIVIDENDS
Dividends will be declared by the Directors and paid in compliance with the
solvency test prescribed by Guernsey law. Under Guernsey law, companies can
pay dividends in excess of accounting profit provided they satisfy the
solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency
test considers whether a company is able to pay its debts when they fall
due, and whether the value of a company's assets is greater than its
liabilities. The Company passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the Company and the
investment outlook, it is the Directors' intention to continue to pay
quarterly dividends to Shareholders (for more information see Chairman's
Statement).
The Company paid the following dividends in respect of the period to 30 June
2020:
Dividend rate per Net dividend Payment
Share (pence) paid (GBP) date
Period to:
31 March 2020 1.625 6,714,815 15 May 2020
After the end of the period, the Directors declared a dividend in respect of
the financial period ended 30 June 2020 of 1.625 pence per share which was
paid on 28 August 2020 to Shareholders on the register on 31 July 2020.
The Company paid the following dividends in respect of the year to 31
December 2019:
Dividend rate per Net dividend Payment date
Share (pence) paid (GBP)
Period to:
31 March 2019 1.625 6,094,065 24 May 2019
30 June 2019 1.625 6,714,815 30 August 2019
30 September 1.625 6,714,815 22 November 2019
2019
31 December 2019 1.625 6,714,815 21 February 2020
11. RISK MANAGEMENT POLICIES AND PROCEDURES
The COVID-19 outbreak is an ongoing situation that is evolving and changing
on a weekly basis. There has been a negative impact on global economies and
the future impact and outcome is still largely unknown. While the outbreak
has had a significant negative impact on a lot of businesses worldwide, it
has also created opportunities in other sectors. The Directors continue to
monitor the impact on the Group and its investments.
The Group through its investment in whole loans, subordinated loans,
mezzanine loans, bridge loans, loan-on-loan financings and other debt
instruments is exposed to a variety of financial risks, including market
risk (including currency risk and interest rate risk), credit risk and
liquidity risk. The Group's overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential
adverse effects on the Group's financial performance.
The Directors monitor and measure the overall risk bearing capacity in
relation to the aggregate risk exposure across all risk types and
activities. Even though the risks detailed in the Annual Report and
Financial Statements for the year ended 31 December 2019 still remain
appropriate, further information regarding these risk policies are outlined
below:
(i) Market risk
If a borrower defaults on a loan and the real estate market enters a
downturn it could materially and adversely affect the value of the
collateral over which loans are secured. However, this risk is considered by
the Board to constitute credit risk as it relates to the borrower defaulting
on the loan and not directly to any movements in the real estate market. The
Group's exposure to market price risk arose from Credit Linked Notes held by
the Group and classified as assets at fair value through profit or loss. The
Investment Manager regularly monitored the fair value of Credit Linked Notes
and no specific hedging activities were undertaken in relation to this
investment.
The Investment Manager moderates market risk through a careful selection of
loans within specified limits. The Group's overall market position is
monitored by the Investment Manager and is reviewed by the Board of
Directors on an ongoing basis.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in loans
that are denominated in currencies other than the functional currency of the
Company. Consequently, the Group is exposed to risks arising from foreign
exchange rate fluctuations in respect of these loans and other assets and
liabilities which relate to currency flows from revenues and expenses.
Exposure to foreign currency risk is hedged and monitored by the Investment
Manager on an ongoing basis and is reported to the Board accordingly.
b) Interest rate risk
Interest rate risk is the risk that the value of financial instruments and
related income from loans advanced and cash and cash equivalents will
fluctuate due to changes in market interest rates.
The majority of the Group's financial assets are loans advanced at amortised
cost, credit linked notes, receivables and cash and cash equivalents. The
Group's investments have some exposure to interest rate risk which is
limited to interest earned on cash deposits, credit linked notes and
floating interbank rate exposure for investments designated as loans
advanced. Loans advanced have been structured to include a combination of
fixed and floating interest rates to reduce the overall impact of interest
rate movements. Further protection is provided by including interbank rate
floors and preventing interest rates from falling below certain levels.
(ii) Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts in
full when due. The Group's main credit risk exposure is in the investment
portfolio, shown as loans advanced at amortised cost and credit linked notes
designated at fair value through profit or loss, where the Group invests in
whole loans and also subordinated and mezzanine debt which rank behind
senior debt for repayment in the event that a borrower defaults. There is a
spread concentration of risk as at 30 June 2020 due to several loans being
advanced since inception. There is also credit risk in respect of other
financial assets as a portion of the Group's assets are cash and cash
equivalents or accrued interest. The banks used to hold cash and cash
equivalents have been diversified to spread the credit risk to which the
Group is exposed. The Group also has credit risk exposure in its derivative
financial instruments which is diversified between hedge providers in order
to spread credit risk to which the Group is exposed.
With respect to the credit linked notes designated at fair value through
profit or loss, the Group held junior notes linked to the performance of a
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portfolio of high-quality UK real estate loans owned by a major commercial
bank. The credit linked notes were repaid in June 2020. The transaction was
structured as a synthetic securitisation with risk transfer from the bank to
the Group achieved via the purchase of credit protection by the bank on the
most junior tranches. The credit risk to the Group was the risk that one of
the underlying borrowers defaulted on their loan and the Group being
required to make a payment under the credit protection agreement. Despite
the different way in which the transaction was structured the Group
considered the risks to be fundamentally the same as any other junior loan
in the portfolio and monitored and managed this risk in the same way as the
other loans advanced by the Group.
The total exposure to credit risk arises from default of the counterparty
and the carrying amounts of financial assets best represent the maximum
credit risk exposure at the end of the reporting period. As at 30 June 2020,
the maximum credit risk exposure was GBP459,011,229 (30 June 2019:
GBP478,475,089 and 31 December 2019: GBP457,921,879).
The Investment Manager has adopted procedures to reduce credit risk exposure
by conducting credit analysis of the counterparties, their business and
reputation which is monitored on an ongoing basis. After the advancing of a
loan a dedicated debt asset manager employed by the Investment Adviser
monitors ongoing credit risk and reports to the Investment Manager, with
quarterly updates also provided to the Board. The debt asset manager
routinely stresses and analyses the profile of the Group's underlying risk
in terms of exposure to significant tenants, performance of asset management
teams and property managers against specific milestones that are typically
agreed at the time of the original loan underwriting, forecasting headroom
against covenants, reviewing market data and forecast economic trends to
benchmark borrower performance and to assist in identifying potential future
stress points. Periodic physical inspections of assets that form part of the
Group's security are also completed in addition to monitoring the identified
capital expenditure requirements against actual borrower investment.
The Group measures credit risk and expected credit losses using probability
of default, exposure at default and loss given default. The Directors
consider both historical analysis and forward looking information in
determining any expected credit loss. The Directors consider the loss given
default to be close to zero as all loans are the subject of very detailed
underwriting, including the testing of resilience to aggressive downside
scenarios with respect to the loan specifics, the market and general macro
changes. In addition to this, all loans have very robust covenants in place,
strong security packages and significant loan-to-value headroom. Despite the
fact that six loans with a carrying value of GBP142,572,781 have been moved
from Stage 1 to Stage 2 from 31 December 2019 to 30 June 2020 (refer to the
Investment Manager's Report), no loss allowance has been recognised based on
12-month expected credit losses as any such impairment would be wholly
insignificant to the Group.
(iii) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient resources
available to meet its liabilities as they fall due. The Group's loans
advanced are illiquid and may be difficult or impossible to realise for cash
at short notice.
The Group manages its liquidity risk through short term and long-term cash
flow forecasts to ensure it is able to meet its obligations. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has entered
into revolving credit facilities totalling GBP126,000,000 (30 June 2019:
GBP114,000,000 and 31 December 2019: GBP126,000,000) of which GBP24,085,644
(including accrued interest) was drawn on 30 June 2020 (30 June 2019:
GBP46,012,226 and 31 December 2019: GBP29,718,949).
As at 30 June 2020, the Group had GBP9,024,042 (30 June 2019: GBP27,959,950 and
31 December 2019: GBP36,793,674) available in cash and GBP1,466,674 (30 June
2019: GBP1,391,059 and 31 December 2019: GBP3,036,686) trade payables. The
Directors considered this to be sufficient cash available, together with the
undrawn facilities on the credit facilities, to meet the Group's
liabilities.
12. FAIR VALUE MEASUREMENT
IFRS 13 requires the Company to classify fair value measurements using a
fair value hierarchy that reflects the significance of the inputs used in
making the measurements. The fair value hierarchy has the following levels:
i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1);
ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices including interest
rates, yield curves, volatilities, prepayment rates, credit risks and
default rates) or other market corroborated inputs (level 2); and
iii) Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Group's
financial assets and liabilities (by class) measured at fair value:
30 June 2020 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - - -
value through profit or
loss
Total - - - -
Liabilities
Derivative liabilities - (4,536,384) - (4,536,384)
Total - (4,536,384) - (4,536,384)
30 June 2019 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Investments at fair - - 21,879,086 21,879,086
value through profit
or loss
Total - - 21,879,086 21,879,086
Liabilities
Derivative - (7,216,743) - (7,216,743)
liabilities
Total - (7,216,743) - (7,216,743)
31 December 2019 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 8,595,078 - 8,595,078
Investments at fair - - 21,885,611 21,885,611
value through profit or
loss
Total - 8,595,078 21,885,611 30,480,689
Liabilities
Derivative liabilities - - - -
Total - - - -
There have been no transfers between levels for the period ended 30 June
2020 (30 June 2019: GBPnil and 31 December 2019: GBPnil).
Investments classified within Level 3 consist of Credit Linked Notes
("CLNs"). The fair value of the CLNs is determined by the Investment Adviser
using a discounted cash flow valuation model. The main inputs into the
valuation model for the CLNs are discount rates, market risk factors,
probabilities of default, expected credit loss levels and cash flow
forecasts. The Investment Adviser also considered the original transaction
price and recent transactions of comparable instruments (where available),
the credit quality on the underlying reference portfolios and adjusts the
valuation model as deemed necessary. All CLNs have been repaid during the
period ended to 30 June 2020.
The Directors are responsible for considering the methodology and
assumptions used by the Investment Adviser and for approving the fair values
reported at the financial period end.
The movement in level 3 instruments are presented in the table below.
30 June 2020 30 June 2019 31 December 2019
GBP GBP GBP
Balance at the start 21,885,611 21,886,335 21,886,335
of the period / year
Cash interest (1,210,333) (1,171,906) (2,339,946)
received
Net gains / (losses) 1,097,722 1,164,657 2,339,222
recognised in profit
or loss (1)
Loan repayments (21,773,000) - -
Balance at the end of - 21,879,086 21,885,611
the period / year
Changes in unrealised - - -
gains or losses for
Level 3 assets held
at period/ year end
and included in net
changes in fair value
of financial assets
at fair value through
profit or loss
1 The net gains for the period ended 30 June 2020 comprise of GBP1,097,722
interest income on CLNs (30 June 2019: GBP1,164,657 31 December 2019:
GBP2,339,222).
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 30 June 2020
but for which fair value is disclosed:
Level 1 Level 2 Level 3 Total Total
fair carrying
values amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 462,295,3 462,295,3 448,891,6
83 83 84
Total - - 462,295,3 462,295,3 448,891,6
83 83 84
Liabilities
Credit - 22,931,943 - 22,931,94 22,931,94
facilities 3 3
Total - 22,931,943 - 22,931,94 22,931,94
3 3
The following table summarises within the fair value hierarchy the Group's
assets and liabilities (by class) not measured at fair value at 30 June 2019
but for which fair value is disclosed:
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