DJ SWEF: Full Year Results for the Year Ended 31 December 2023
Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Full Year Results for the Year Ended 31 December 2023
19-March-2024 / 07:00 GMT/BST
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Starwood European Real Estate Finance Limited
Full Year Results for the Year Ended 31 December 2023
Starwood European Real Estate Finance Limited (the "Company") and its subsidiaries ("SEREF" or the "Group"), a leading
investor managing a diverse portfolio of high-quality real estate debt investments in the UK and Europe and now
pursuing an orderly realisation and return of capital to shareholders, is pleased to announce Full Year Results for the
year ended 31 December 2023.
Highlights for the period, 12 months ended 31 December 2023
- Strong cash generation - the portfolio is expected to continue to support annual dividend payments of 5.5
pence per Ordinary Share, paid quarterly.
- GBP166.9m (39.2%) of the Group's 31 December 2022 total funded loan portfolio has been repaid, including
the full repayment of eight loans.
- Dividends paid of 6.0 pence per Ordinary Share in relation to 2023, compared to a target dividend rate of
5.5 pence per share.
- Income stability - all contractual loan interest and scheduled amortisation payments have once again been
paid in full.
- 90.5% of the portfolio is contracted at floating interest rates (with floors), which continues to benefit
the Group in the current interest rate environment.
- All assets are constantly monitored for changes in their risk profile - the investment risk
classification of the investments as at 31 December 2023 is as follows:
- Seven loan investments equivalent to 64% of the funded portfolio were classified as the lowest risk
profile, Stage 1.
- Four loan investments equivalent to 31% of the funded portfolio were classified as Stage 2. Since
year end, one Stage 2 asset has had a significant repayment of loan principal made.
- One loan equivalent to 5% of the funded portfolio was classified at Stage 3. During the year, the
Group accounted for an impairment provision on this loan of EUR4 million/GBP3.5 million, equivalent to 1.3% of the
funded portfolio as at 31 December 2023. Since year end this loan has been repaid and EUR0.2 million of the
impairment provision has been released.
- Portfolio remains robust - the loan book is performing broadly in line with expectations, with its
defensive qualities reflected in the Group's continued NAV per share stability in a challenging macro environment.
- Significant equity cushion - the weighted average Loan to Value portfolio is 61.8%.
Post period-end Highlights
-- Substantial further progress in receiving repayments from investments has considerably de-risked the
remaining portfolio including,
- Full repayment of Shopping Centre, Spain, of c. EUR12.4 million. This loan was classified as Stage 3
as at 31 December 2023. EUR0.2 million of the EUR4 million impairment provision made in relation to this asset in
2023 has been released.
- Significant partial repayment of Three Shopping Centres, Spain, of c. EUR19.2 million. This loan was
classified as Stage 2 at the year end.
- Repayment from Hotel, Dublin, of c. EUR8.5 million.
Portfolio Statistics
As at 31 December 2023, the portfolio was invested in line with the Group's investment policy. The key portfolio
statistics are summarised below:
31 December 31 December
2023 2022
Number of investments 12 20
Percentage of currently invested portfolio in floating rate loans 90.5% 78.9%
Invested Loan Portfolio unlevered annualised total return* 8.2% 7.8%
Weighted average portfolio LTV - to Group first GBP* 14.7% 13.2%
Weighted average portfolio LTV - to Group last GBP* 61.8% 58.6%
Average remaining loan term 1.4 years 1.7 years
Net Asset Value GBP327.3m GBP416.1m
Loans advanced at amortised cost (including accrued income and, in 2023, net of EUR4 million GBP264.1m GBP432.5m
impairment provision)
Cash GBP63.8m GBP3.6m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP0.0m) (GBP19.2m)
Other net liabilities (including financial assets held at fair value through profit or (GBP0.6m) (GBP0.8m)
loss)
*Alternative performance measure
John Whittle, Chairman of the Company commented:
"During a highly successful year for our strategy of realising the portfolio, 39.2 per cent of the of the Group's 31 December 2022 portfolio was repaid during the year, including eight investments in full. Further post-period end, this positive momentum has been maintained with over GBP34 million repaid.
These most recent repayments have significantly de-risked the remaining portfolio substantially reducing our Spanish retail exposure. Whilst the EUR4 million impairment recognised against one of the Spanish retail assets in 2023 is naturally disappointing, we consider the successful execution of the sale of this asset and subsequent repayment of our related loan in a difficult market a positive result. Accordingly, we are therefore pleased to announce the Company's fifth capital distribution of GBP25.0 million today. This follows the Company's fourth capital distribution of GBP20.0 million in February 2024. "
"Looking ahead, we are pleased to note the weighted average remaining loan term of the portfolio is 1.4 years and as such anticipate further sustained momentum in capital redemptions, whilst continuing to proactively manage our high-quality portfolio and deliver a stable source of income to shareholders."
For further information, please contact:
Apex Fund and Corporate Services (Guernsey) Limited as Company Secretary +44 203 5303 630
Duke Le Prevost
Starwood Capital +44 (0) 20 7016 3655
Duncan MacPherson
Jefferies International Limited +44 (0) 20 7029 8000
Gaudi Le Roux
Harry Randall
Ollie Nott
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Sam Adams
Notes:
Starwood European Real Estate Finance Limited is an investment company listed on the main market of the London Stock Exchange with an investment objective to conduct an orderly realisation of the assets of the Group. www.starwoodeuropeanfinance.com.
The Group is the largest London-listed vehicle to provide investors with pure play exposure to real estate lending.
The Group's assets are managed by Starwood European Finance Partners Limited, an indirect wholly owned subsidiary of the Starwood Capital Group.
Starwood European Real Estate Finance
Annual Report and Audited Consolidated Financial Statements
for the year ended 31 December 2023
Overview
Financial Highlights
Key Highlights Year ended Year ended
31 December 2023 31 December 2022
NAV per Ordinary Share 104.35 p 105.20 p
Share Price 90.4 p 89.0 p
NAV total return (1) 6.6% (2) 7.7% (3)
Share Price total return (1) 10.5% (2) 0.45% (2)
Total Net Assets GBP327.3 m GBP416.1 m
Loans advanced at amortised cost (including accrued income) GBP264.1 m GBP432.5 m
Financial assets held at fair value through profit or loss GBP1.0 m GBP0.7 m
Cash and Cash Equivalents GBP63.8 m GBP3.6 m
Amount drawn under Revolving Credit Facility (excluding accrued interest) (GBP0.0 m) (GBP19.0 m)
Other net liabilities (GBP1.6 m) (GBP1.7 m)
Dividends per Ordinary Share 6.0 p (3) 7.5 p (4)
Invested Loan Portfolio unlevered annualised total return (1) 8.2% 7.8%
Ongoing charges percentage (1) 1.1% 1.1%
Weighted average portfolio LTV to Group first GBP (1) 14.7% 13.2%
Weighted average portfolio LTV to Group last GBP (1) 61.8% 58.6%
(1) Further explanation and definitions of the calculation is contained in the section "Alternative Performance Measures" at the end of this financial report.
(2) Source: Morningstar. The Morningstar calculations include dividends in the year in which the payments are made to shareholders. This differs to the approach taken by the Company in this table which is to show dividends in the year in relation to which they are declared (see footnotes (3) and (4) below).
The differences between dividends paid and declared are shown below:
2023 2022 Dividends declared as disclosed by the Company (by the year to which they relate) 6.0 7.5 Dividends paid during the year and included in the Morningstar calculation 7.5 5.5
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(3) During 2023 the Company declared a dividend of 1.375 pence per Ordinary Share in relation to each of the first three quarters. The Company also declared a dividend of 1.875 pence per Ordinary Share in January 2024. These four dividends declared all related to income earned in 2023 and are therefore included within the 6.0 pence per Ordinary Share dividend shown in the table above for the year ended 31 December 2023.
(4) During 2022 the Company declared a dividend of 1.375 pence per Ordinary Share in relation to each of the first three quarters of 2022 with the fourth quarter dividend declaration being made in January 2023. The Company then declared a final dividend in March 2023 of 2.0 pence per Ordinary Share which related to income earned in the year ended 31 December 2022. These five dividends declared all related to income earned in 2022 and are therefore included within the 7.5 pence per Ordinary Share dividend shown in the table above for the year ended 31 December 2022.
SHARE PRICE PERFORMANCE
As at 31 December 2023, the NAV was 104.35 pence per Ordinary Share (2022: 105.20 pence) and the share price was 90.4 pence (2022: 89.0 pence).
The Company's share price has been volatile since the market turbulence caused by Covid-19 in March 2020. The volatility has been driven by market conditions and trading flows rather than a change in the Company's performance.
Objective and Investment Policy
INTRODUCTION
Starwood European Real Estate Finance Limited (the "Company") was established in November 2012 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 in the UK and the European Union's internal market.
The Company, together with its 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"), has provided a regular dividend to shareholders whilst preserving capital by limiting downside risk.
On 31 October 2022, the Company announced, that following a review of the Company's strategy and advice sought from its advisers, the Board intended to recommend to shareholders that the investment objective and policy of the Company were amended such that the Board can pursue a strategy of orderly realisation and the return of capital over time to shareholders (the "Proposed Orderly Realisation"). If approved by the shareholders, the Company would seek to return cash to shareholders in an orderly manner as soon as reasonably practicable following the repayment of loans, while retaining sufficient working capital for ongoing operations and the funding of committed but currently unfunded loan commitments.
On 28 December 2022, a Circular relating to the Proposed Orderly Realisation and containing a Notice of Extraordinary General Meeting (EGM) was published. The Circular set out details of, and sought shareholder approval for, certain proposals (the "Proposals"). The Proposals were:
(a) a change to the Company's Investment Policy to reflect the fact that the Company will cease making any new investments and will pursue a realisation strategy of the remaining assets in the Company's portfolio; and
(b) adoption of new articles which provide for the periodic Compulsory Redemption of the Company's Shares at the discretion of the Directors to allow cash to be returned to shareholders following the full or partial realisation of assets.
On 27 January 2023, these Proposals were approved at the EGM.
The Investment Objective and Policy which applied prior to the approval of the Proposals are set out in the 2021 Annual Report which can be found on the Company's website https://starwoodeuropeanfinance.com. The Investment Objective applied up to the date of the approval of the Proposals was 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 in the UK and the European Union's internal market. The Investment Policy applied up to the date of the approval of the Proposals was to invest in a diversified portfolio of real estate debt investments in the UK and the European Union's internal market as the Group had done since its initial public offering (IPO) in December 2012.
Set out below is the current Investment Objective and Policy of the Company following the approval of the Proposals.
INVESTMENT OBJECTIVE
Following the Company's EGM on 27 January 2023, the Company's investment objective is to conduct an orderly realisation of the assets of the Group.
INVESTMENT POLICY
The assets of the Group will be realised in an orderly manner, returning cash to shareholders at such times and in such manner as the Board may, in its absolute discretion, determine. The Board will endeavour to realise all of the Group's investments in a manner that achieves a balance between maximising the net value received from those investments and making timely returns to shareholders.
The Group may not make any new investments save that:
-- investments may be made to honour commitments under existing contractual arrangements or to preserve thevalue of any underlying security; and
-- cash held by the Group pending distribution will be held in either cash or cash equivalents for thepurposes of cash management.
Subject to the above restrictions, the Company retains the ability to seek to enhance the returns of selected loan investments through the economic transfer of the most senior portion of such loan investments which would be by way of syndication, sale, assignment, sub-participation or other financing (including but not limited to true sale securitisation, repurchase transactions and loan-on-loan financing) to the same maturity as the original loan (i.e. "matched funding") while retaining a significant proportion as a subordinate investment. It is anticipated that where this is undertaken it would generate a positive net interest rate spread and enhance returns for the Company.
Transactions with Starwood Capital Group or Other Accounts
Subject to the above restrictions, the Company retains the ability to transact with companies within the Starwood Capital Group or any fund, company, limited partnership or other account managed or advised by any member of the Starwood Capital Group (Other Accounts) in furtherance of the Company's investment objective to conduct an orderly realisation of the Group's assets (for example, sales of the Group's assets to companies within the Starwood Capital Group or certain Other Accounts or amendments to pre-existing arrangements). In order to manage the potential conflicts of interest that may arise as a result of any such transactions, any such proposed transaction may only be entered into if the independent Directors of the Company have reviewed and approved the terms of the transaction, complied with the conflict of interest provisions in the Registered Collective Investment Scheme Rules and Guidance, 2021 issued by the Guernsey Financial Services Commission ("Commission") under The Protection of Investors (Bailiwick of Guernsey) Law, 2020, as amended, and, where required by the Listing Rules, Shareholder approval would be obtained in accordance with the listing rules issued by the Financial Conduct Authority.
Typically, such transactions will only be approved if: (i) an independent valuation has been obtained in relation to the asset in question: and (ii) the terms are at least as favourable to the Company as would be any comparable arrangement effected on normal commercial terms negotiated at arms' length between the relevant person and an independent party, taking into account, amongst other things, the timing of the transaction.
While Starwood Capital Group and certain Other Accounts are party to certain pre-existing co-investment commitments, no new co-investment arrangements are expected to be entered into by, or in relation to, the Company in the future during the orderly realisation of the Company's assets.
The change in investment objective does not impact the below classifications.
Borrowings
The Company may utilise borrowings from time to time for working capital and general corporate purposes provided such borrowings will not exceed an amount equal to 30 per cent of the Net Asset Value immediately following the drawdown of the borrowings.
In calculating the Company's borrowings for this purpose, any liabilities incurred under its foreign exchange hedging arrangements (described below) shall be disregarded.
Hedging
The Company will not enter into derivative transactions for purely speculative purposes. However, the Company's investments have been typically made in the currency of the country where the underlying real estate assets are located. The Company may continue to implement measures designed to protect the investments against material movements in the exchange rate between Sterling, being the Company's reporting currency, and the currency in which certain investments have been made. The analysis as to whether such measures should be implemented will take into account periodic interest, principal distributions or dividends, as well as the expected date of realisation of the investment. The Company may bear a level of currency risk that could otherwise be hedged where it considers that bearing such risk is advisable. The Company will only enter into hedging contracts, such as currency swap agreements, futures contracts, options and forward currency exchange and other derivative contracts when they are available in a timely manner and on terms acceptable to it. The Company reserves the right to terminate any hedging arrangement in its absolute discretion.
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The Company may, but shall not be obliged to, engage in a variety of interest rate management techniques, particularly to the extent the underlying investments are floating rate loans which are not fully hedged at the borrower level (by way of floating to fixed rate swap, cap or other instrument). Any instruments chosen may seek on the one hand to mitigate the economic effect of interest rate changes on the values of, and returns on, some of the Company's assets, and on the other hand help the Company achieve its risk management objectives. The Company may seek to hedge its entitlement under any loan investment to receive floating rate interest.
FCA Listing Rule restrictions
The Company will continue to comply with the restrictions imposed by the Listing Rules in force and as amended from time to time.
Any material change to the Company's published investment policy will be made only with the prior approval of the Financial Conduct Authority and of shareholders by ordinary resolution at a general meeting of the Company.
UK Listing Authority Investment Restrictions
The Company currently complies with the investment restrictions set out below and will continue to do so for so long as they remain requirements of the UK Listing Authority and the Company remains listed:
-- neither the Company nor any of its subsidiaries will conduct any trading activity which is significant inthe context of its group as a whole;
-- the Company will avoid cross-financing between businesses forming part of its investment portfolio;
-- the Company will avoid the operation of common treasury functions as between the Company and investeecompanies;
-- not more than 10 per cent, in aggregate, of the Company's NAV will be invested in other listedclosed-ended investment funds; and
-- the Company will, at all times, invest and manage its assets in a way which is consistent with its objectof spreading investment risk and in accordance with the published investment policy. As required by the ListingRules, any material change to the investment policy of the Company will be made only with the approval ofshareholders.
Chairman's Statement
JOHN WHITTLE | Chairman
18 March 2024
Dear Shareholder,
On behalf of the Board, it is my pleasure to present the Annual Report and Audited Consolidated Financial Statements of Starwood European Real Estate Finance Limited and its subsidiaries (the "Group") for the year ended 31 December 2023.
By most measures 2023 was a volatile year for UK and global economies. The first part of the year was marked by concerns over energy prices, the rising cost of living, higher interest rates and the Russian invasion of Ukraine. By the middle of 2023 energy prices and inflation had started to fall while interest rates continued to rise. The end of 2023 and the beginning of 2024 have seen inflation stabilise and the expectation is that interest rates may soon fall albeit this economically positive news is in a backdrop of increasing concerns around continuing political stability.
Despite these challenging and uncertain economic and political times the Group demonstrated its unique portfolio resilience through the strength and consistency of its results. It is significant to note that, once again, all loan contractual interest and scheduled amortisation payments have continued to be paid in full and underlying collateral valuations continue to provide reassuring headroom.
Against significant market challenges, during the year the Group returned GBP85.0 million to shareholders, created a cash reserve to ensure that unfunded loan cash commitments could be met by the Group and delivered a 6.0 pence per share dividend to shareholders (against the target of 5.5 pence per share).
Shareholders will be aware that following an Extraordinary General Meeting ('EGM') held on 27 January 2023 the objective of the Group is now to pursue a strategy of orderly realisation and the return of capital over time to shareholders.
Importantly, orderly realisation strategy will not result in the liquidation of the Company in the immediate future or require the Company to dispose of assets within a defined time frame. The new strategy, approved by 99 per cent of shareholders voting at an Extraordinary General Meeting ('EGM') held on 27 January 2023, is being implemented in a manner that seeks to maximise value to shareholders. It is intended that the Company's listing and target annualised dividend of 5.5 pence per share will be maintained as long as feasible during the orderly realisation. The Board anticipates that the orderly realisation of the assets will happen over a four to five year period (having started at the beginning of 2023) with periodic share redemptions continuing to be made as loans are repaid and commitments are satisfied.
The last four years have demonstrated the positive fundamentals of the Group's portfolio as an attractive risk-adjusted source of alternative income tested in the harshest of market environments. Whilst market sentiment seems to have changed and the secure income generation offered by the Group's operations has fallen out of favour, I feel it is worth reflecting that over its life the Group has successfully met the original objectives set out at IPO, delivering stable and consistent income and risk adjusted returns.
HIGHLIGHTS FOR 2023
-- Asset realisation progress - during the year:
° A total of GBP166.9 million, 39.2 per cent of the Group's 31 December 2022 total funded loan portfolio, has been repaid, including the full repayment of eight loans
° Proceeds were used during the year to:
(i) repay GBP19 million of debt which was outstanding as at 31 December 2022,
(ii) to create a cash reserve to fund unfunded loan cash commitments (which accounted for GBP36.2 million of the GBP63.8 million of cash held by the Group as at 31 December 2023), and
(iii) to return GBP85.0 million of capital to shareholders
-- Dividend - on 25 January 2024, the Directors declared a dividend, to be paid in February, in respect ofthe fourth quarter of 2023 of 1.875 pence per Ordinary Share - resulting in a dividend of 6.0 pence per OrdinaryShare for the full year - an increase of 0.5 pence per share compared to the 2023 target of 5.5 pence per OrdinaryShare. The 2024 dividend target remains at 5.5 pence per Ordinary Share
-- Strong cash generation - going forward the portfolio is expected to continue to support annual dividendpayments of 5.5 pence per Ordinary Share, paid quarterly
-- All assets are constantly monitored for changes in their risk profile - the current investment riskclassification of the investments as at 31 December 2023 is listed below:
° Seven loan investments equivalent to 64 per cent of the funded portfolio were classified in the lowest risk profile, Stage 1
° Four loan investments equivalent to 31 per cent of the funded portfolio were classified as Stage 2. Since year end one Stage 2 loan has had a significant repayment of loan principal made.
° One loan equivalent to 5 per cent of the funded portfolio was classified as Stage 3. During the year, the Group accounted for an impairment provision on this loan of EUR4 million/GBP3.5 million, equivalent to 1.3 per cent of the funded portfolio as at 31 December 2023. Since year end this loan has been repaid and EUR167,722 of the provision was released.
-- Income stability - all contractual loan interest and scheduled amortisation payments paid in full.
-- 90.5 per cent of the portfolio is contracted at floating interest rates (with floors) which benefits theGroup in the current interest rate environment.
-- Portfolio remains robust - the loan book is performing broadly in line with expectations with itsdefensive qualities reflected in the Group's continued NAV stability in a challenging macro environment.
-- Borrowers remain adequately capitalised and are expected to continue to pay loan interest and capitalrepayments in line with contractual obligations.
-- The average remaining loan term of the portfolio is 1.4 years
-- Significant equity cushion - the weighted average Loan to Value for the portfolio is 61.8 per cent.
INVESTMENT MOMENTUM
As the Group is now pursuing a strategy of orderly realisation no new loans were closed in 2023.
During the year, the Group funded GBP7.3 million in relation to loan commitments made in prior years which were unfunded.
During the year borrowers, repaid a total of GBP166.9 million. As detailed below a total of eight loans were repaid in full and a further 6 loans made partial repayments against their outstanding loan obligations.
Details of loans repaid in full in 2023:
-- GBP49.9 million, Hotel & Residential, UK
-- GBP22.9 million, Hotel, Oxford
-- GBP20.5 million, Office, London
-- EUR18.8 million, Office, Madrid, Spain
-- EUR12.7 million, Mixed Use, Dublin
-- EUR8.8 million, Mixed Portfolio, Europe
-- GBP5.5 million, Office and Industrial Portfolio, UK
-- EUR3.0 million, Logistics Portfolio, Germany
Details of loans where partial repayments were made in 2023:
-- EUR24.5 million, Hotel, Dublin (scheduled amortisation and partial repayment of loan) -- GBP4.0 million, Life Science, UK (partial repayment of loan)
-- GBP2.7 million, Hotel and Office, Northern Ireland (scheduled amortisation)
-- EUR1.3 million, Three Shopping Centres, Spain (scheduled amortisation)
-- EUR0.8 million, Shopping Centre, Spain (partial repayment of loan)
-- EUR0.8 million, Office Portfolio, Spain (partial repayment of loan)
As at 31 December 2020 to 2023 the Group had unfunded cash commitments as shown in the table below.
2020 2021 2022 2023 Funded loans GBP440.9m GBP412.0m GBP425.9m GBP262.7m Unfunded Cash Commitments GBP49.2m GBP44.5m GBP49.0m GBP36.2m Total GBP490.13m GBP456.5m GBP474.9m GBP298.9m
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The contractual maturity of the Group's portfolio is set out in the Investment Manager's report and shows that as at 31 December 2023 46.2 per cent of invested loan balances held were contracted to mature in the next twelve months.
IMPAIRMENT
In June 2023, the Group took the step of reclassifying one of the Spanish retail loan assets from Stage 2 to Stage 3 and recognise an impairment provision of EUR2 million against it. A further additional EUR2 million impairment was recognised on the same loan in December 2023 as an underlying asset sale progressed through final due diligence. This process resulted in the successful sale of the underlying asset in March 2024 and EUR167,722 of the EUR4 million impairment provision recognised in 2023 was released.
In addition, during early / mid 2023 four loans were moved from Stage 1 to Stage 2 indicating a change in their credit risk since origination but with no impairments in value anticipated. Subsequently, in the fourth quarter of 2023, one of these Stage 2 loans was repaid in full and one had a significant repayment of loan principal made. Despite the significant repayment decreasing the risk for this loan the Group continues to prudently maintain a cautious approach and the loan remains classified as Stage 2. As at 31 December 2023, there were four loans classified as Stage 2. In March 2024 another Stage 2 loan had a significant repayment of loan principal made.
More information on this is provided in the Investment Manager's report.
NAV PERFORMANCE
The table below shows the NAV per share movements over the 12 months to 31 December 2023 by quarter and for the year.
Q1 Q2 Q3 Q4 2023 NAV at beginning of the period 105.20 103.82 103.75 104.46 105.20 Movements Operating Income available to distribute before impairment provision (1) 1.93 1.89 1.83 2.04 7.69 Impairment provision on asset classified as Stage 3 (2) 0.00 (0.45) 0.00 (0.55) (1.00) Realised FX gains/(losses) not distributable (3) 0.56 0.00 0.07 0.05 0.68 Unrealised FX gains/(losses) (4) (0.49) (0.14) 0.19 (0.28) (0.72) Dividends (3.38) (1.37) (1.38) (1.37) (7.50) NAV as end of period 103.82 103.75 104.46 104.35 104.35
(1) Operating Income available to distribute comprises loan income recognised in the period less the cost of debt facilities utilised by the Group and operating costs incurred. The Operating Income available to distribute also includes any realised foreign exchange gains or losses upon settlement of hedges, except those described in note 3.
(2) In June 2023 and December 2023 a loan classified as Stage 3 had an impairment provision recognised against it.
(3) On occasion, the Group may realise a gain or loss on the roll forward of a hedge if it becomes necessary to extend a capital hedge beyond the initial anticipated loan term. If this situation arises the Group will separate the realised FX gain or loss from other realised FX gains or losses and not consider it available to distribute or as a reduction in distributable profits. The FX gain or loss will only be considered part of distributable reserves or as a reduction in distributable profits when the rolled hedge matures or is settled and the final net gain or loss on the capital hedges can be determined. The reconciliation of NAV above includes the reversing of such FX gains (of circa GBP1.2 million) in 2023 following the repayment of two such loans. The gains previously separated are now included in the Operating Income available to distribute.
(4) Unrealised foreign exchange gain/losses relate to the net impact of changes in the valuation of foreign exchange hedges and the Sterling equivalent value of Euro loan investments (using the applicable month end rate). Mismatches between the hedge valuations and the loan investments may occur depending on the shape of the forward FX curve and this causes some movement in the NAV. These unrealised FX gains / losses are not considered part of distributable reserves.
CAPITAL REDEMPTIONS, SHARE PRICE AND SHARES HELD IN TREASURY
During the year, the Company redeemed a total of 81,901,754 shares for a total of GBP85.0 million as follows:
Number of shares NAV at which shares Total capital returned
redeemed redeemed to Shareholders
Jun-23 9,652,350 GBP1.0363 GBP10,002,730
Aug-23 29,092,218 GBP1.0312 GBP29,999,895
Dec-23 43,157,186 GBP1.0427 GBP44,999,998
81,901,754 GBP85,002,623
Following the redemption in December 2023, the Company had 313,690,942 shares in issue and the total number of voting rights was 313,690,942. Of the shares in issue (excluding the shares held in treasury - see below) as at 31 December 2022, 21 per cent were redeemed during the year.
Subsequent to year end, in February 2024, the Company redeemed a further 19,402,403 shares at a price of GBP1.0308 per share, resulting in an additional GBP20.0 million being returned to shareholders. Following this redemption, the Company has 294,288,539 shares in issue and the total number of voting rights is 294,288,539.
On 18 March 2024, the Company approved a further compulsory redemption of shares amounting to GBP25.0 million.
During the year, the Company's share price has traded in a range of between 85.4 and 92.6 pence. The year end share price was 90.4 pence reflecting a 13.4 per cent discount to NAV.
Between August 2020 and October 2022 the Company had bought back an aggregate amount of 17,626,702 million shares at an average cost per share of 91.5 pence per share. These shares were held in treasury as at 31 December 2022 and were cancelled in June 2023 before the return of capital to shareholders commenced.
DIVIDENDS
Total dividends of 6.0 pence per Ordinary Share were declared in relation to the year ended 31 December 2023 compared to a target of 5.5 pence per Ordinary Share.
The 2023 dividends were covered 1.17 times by 2023 earnings (excluding unrealised FX gains and losses and FX gains realised on the roll forward of hedges as a result of loan extensions).
The Board is also mindful of shareholder appetite for a regular source of income and as such continues to target 5.5 pence per Ordinary Share per annum (payable quarterly) going forward for as long as feasible during the orderly realisation.
BOARD COMPOSITION AND DIVERSITY
The Board believes strongly in the value and importance of diversity in the boardroom and we continue to bear in mind the recommendations of the Davies, Hampton Alexander and Parker Reports and these recommendations will be taken into account should the appointment of a new director be required.
I remain very pleased with the current composition of the Board both in terms of experience, skills and diversity which places us well for the upcoming challenges.
As at 31 December 2023, the Company met the targets specified in the Listing Rules 9.8.6R(9)(a)(i) and (ii) with the Board comprising 50 per cent women, one of whom is the Senior Independent Director. However, the Company has not met the target under Listing Rule 9.8.6R(9)(a)(iii) of having one Director from a minority ethnic background. Please refer to the Corporate Governance Statement for the Board's diversity statement.
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 comprehensive review of the Group's ability to continue as a going concern including 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, Investment Adviser and the Administrator and having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing these Consolidated Financial Statements.
Notwithstanding the above, and as disclosed in these financial statements, the strategy of orderly realisation and return of capital to shareholders over time does in the long term result does in the long term create uncertainty as to the longer term future of the Company and the Group and its longer term ability to continue as a going concern. The financial statements have not been modified in respect of this matter.
OUTLOOK
The focus of the Group for 2024 will be the continued robust asset management of the existing loan portfolio, the orderly realisation of the Group's assets and the efficient return of capital to shareholders over time.
The Board believes it is important to maintain clear and transparent communications with you, our shareholders, and we will continue to inform you of the Group's progress by way of the quarterly factsheets. We welcome any comments you have on our communication and supply of information to you.
My thanks to all of our service providers for their perseverance in these challenging times.
On behalf of the Board, I would like to close by thanking shareholders for your commitment and support. I look forward to briefing you again on the Group's progress later this year.
John Whittle | Chairman
18 March 2024
Strategic and Business Review
Strategic Report
The Strategic Report describes the business of the Group and details the uncertainties, principal and emerging risks associated with its activities.
CORPORATE PURPOSE
Following the EGM held on 27 January 2023, the general corporate purpose of the Company and the Group is to pursue a strategy of orderly realisation and the return of capital over time to shareholders.
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OBJECTIVE, INVESTMENT POLICY AND BUSINESS MODEL
The Objective and Investment Policy describes the Group's strategy and business model and is set out in the Overview section of these Annual Accounts.
The Investment Manager is Starwood European Finance Partners Limited, a Company incorporated in Guernsey with registered number 55819 and regulated by the Commission. The Investment Manager has appointed Starwood Capital Europe Advisers, LLP (the "Investment Adviser"), an English limited liability partnership authorised and regulated by the Financial Conduct Authority, to provide investment advice, pursuant to an Investment Advisory Agreement.
CURRENT AND FUTURE DEVELOPMENT
A review of the year and outlook is contained in the Investment Highlights and Portfolio Review sections of the Investment Manager's Report and within the Chairman's Statement.
PERFORMANCE
A review of performance is contained in the Investment Highlights and Portfolio Review sections of the Investment Manager's Report.
A number of performance measures are considered by the Board, the Investment Manager and Investment Adviser in assessing the Company's success in achieving its objectives. The Key Performance Indicators ("KPIs") used are established industry measures to show the progress and performance of the Group and are as follows:
-- The movement in NAV per Ordinary Share;
-- The movement in share price and the discount / premium to NAV;
-- The payment of targeted dividends;
-- The portfolio yield;
-- Ongoing charges as a percentage of undiluted NAV; and
-- Weighted average loan to value for the portfolio.
Details of the KPIs achieved are shown in the Financial Highlights section.
RISK MANAGEMENT
It is the role of the Board to review and manage all risks associated with the Group, both those impacting the performance and the prospects of the Group and those which threaten the ongoing viability. It is the role of the Board to mitigate these either directly or through the delegation of certain responsibilities to the Audit Committee and Investment Manager.
The Board performs a review of a risk matrix at each Board meeting.
The Board considers the following principal risks could impact the performance and prospects of the Group but do not threaten the ability of the Company or the Group to continue in operation and meet its liabilities. In deciding which risks are principal risks the Board considers the potential impact and probability of the related events or circumstances, and the timescale over which they may occur. Consequently, it has put in place mitigation plans to manage those identified risks. Details of the principal and emerging risks considered as part of the review of the risk matrix are highlighted below.
Principal Risks
Financial Market Volatility (risk that dividends do not meet the targeted levels and that the share price discount persists and widens)
Subsequent to the EGM held on 27 January 2023 the Group's strategy is for an orderly realisation of its assets and the return of capital to shareholders. During the realisation period the Company intends to target a similar per share level of dividends as previously for as long as this is feasible and to return capital to shareholders subject to maintaining sufficient cash to fund as yet unfunded commitments on loans and ongoing operating costs.
The Group's targeted returns are based on estimates and assumptions that are inherently subject to significant business and economic uncertainties and contingencies and, consequently, the actual rate of return may be materially lower than the targeted returns.
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. Since March 2020 the shares have traded at a discount to NAV per share and shareholders may be unable to realise their investments through the secondary market at NAV per share.
The Board, along with the Investment Manager and the Investment Adviser, monitor, review and consider the estimates and assumptions that underpin the targeted returns of the business and, where necessary, communicate any changes in those estimates and assumptions to the market.
The Board monitors the level of premium or discount of the share price to NAV per share and deployed a share buyback programme during 2020, 2021 and 2022 in order to support the share price. The new strategy of returning capital to shareholders over time should mean that, subject to no unforeseen negative impacts on the value of investments, shareholders will receive a return of capital invested over time. In 2023, the Company returned GBP85.0 million to shareholders.
Strategic Risk (risk that the strategy is not achievable)
Subsequent to the EGM held on 27 January 2023 the Group's strategy is for an orderly realisation and return of capital to shareholders. It is anticipated that the return of capital to shareholders will be completed in the next three to four years.
The Group's targeted returns are based on estimates and assumptions that are inherently subject to significant business and economic uncertainties and contingencies and, consequently, the actual rate of return may be materially lower than the targeted returns.
The Directors regularly receive information on the performance of the existing loans, including the performance of underlying assets versus underwritten business plan and the likelihood of any early repayments, or the need for any loan amendments.
The Board continues to monitor the revised investment strategy and performance on an ongoing basis.
Market Deterioration Risk (risk of the economies in which the Group operates either stagnating or going into recession)
The Group's investments are comprised principally of debt investments in the UK, Spain and the Republic of Ireland 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 loan defaults or impairments.
The Covid-19 pandemic has had a material long term impact on global economies and on the operations of the Group's borrowers since 2020.
The situation in Ukraine, following the February 2022 incursion into Ukraine by Russia, and in the Middle East, following the October 2023 Hamas attacks in Israel also presents a significant risk to European and Global economies. While the Group has no direct or known indirect involvement with Ukraine, Russia or the Middle East it may be impacted by the consequences of the instability caused by the ongoing conflicts and political instability.
The impact of the United Kingdom's departure from the European Union in 2020 still represents a potential threat to the UK economy as well as wider Europe. On a cyclical view, the national economies across Europe appear to be heading towards lower growth, and alongside the economic impact of Covid-19 and the destabilising impact of the conflicts in Ukraine and the Middle East, towards recession.
In addition there is the impact of the ongoing volatile inflationary environment to consider (driven by interest rates, energy costs and costs of living). This environment could make it harder for Borrowers to meet their interest obligations to the Group and to ultimately repay the loans advanced to them.
The Board have considered the impact of market deterioration on the current and future operations of the Group and its portfolio of loans advanced. As a result of the cash held in reserve by the Group and the underlying quality of the portfolio of loans advanced, both the Investment Manager 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.
In the event of a loan default in the portfolio, the Group is generally entitled to accelerate the loan and enforce security, but the process may be expensive and lengthy, and the outcome is dependent on sufficient recoveries being made to repay the borrower's obligations and associated costs. Some of the investments held would rank behind senior debt tranches for repayment in the event that a borrower defaults, with the consequence of greater risk of partial or total loss. In addition, repayment of loans by the borrower at maturity could be subject to the availability of refinancing options, including the availability of senior and subordinated debt and is also subject to the underlying value of the real estate collateral at the date of maturity. The Group is mitigated against this with an average weighted loan to value of the portfolio of 61.8 per cent. Therefore, the portfolio should be able to withstand a significant level of deterioration before credit losses are incurred.
The Investment Adviser has also mitigated the risk of credit losses by undertaking detailed due diligence prior to the signing of each loan. Whilst the precise scope of due diligence will have depended on the proposed investment, such diligence will typically have included independent valuations, building, measurement and environmental surveys, legal reviews of property title, assessment of the strength of the borrower's management team and key leases and, where necessary, mechanical and engineering surveys, accounting and tax reviews and know your customer checks.
The Investment Adviser, Investment Manager and Board have also managed these risks in the past by ensuring a diversification of investments in terms of geography, market and type of loan. Such diversification will be harder to achieve as the company pursues a strategy of orderly realisation and does not enter into any new investments. The Investment Manager and Investment Adviser operate in accordance with the guidelines, investment limits and restrictions as determined by the Board. The Directors review the portfolio against these guidelines on a regular basis.
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The Investment Adviser obtains regular performance reporting from all borrowers and meets with all borrowers on a regular basis to monitor developments in respect of each loan and reports to the Investment Manager and the Board periodically and on an ad hoc basis where considered necessary.
The Group's loans are held at amortised cost. The performance of each loan is reviewed quarterly by the Investment Adviser for any indicators of significant increase in credit risk, impaired or defaulted loans. The Investment Adviser also provides their assessment of any expected credit loss for each loan advanced. The results of the performance review and allowance for expected credit losses are discussed with the Investment Manager and the Board.
Four loans within the portfolio are classified as Stage 2 as at 31 December 2023 (increased risk of default). These loans account for 30.5 per cent of the portfolio funded by the Group as at 31 December 2023. No expected credit losses have been recognised against any of these loans, because of the strong LTVs across the loan portfolio and strong contractual agreements with borrowers, including against these Stage 2 loans. One of these stage 2 loans made a significant repayment post year end.
One loan (accounting for 5.4 per cent of the funded portfolio as at 31 December 2023) is currently classed as Stage 3 (ie the loan is considered to be credit impaired). A impairment provision of GBP3.5 million has been provided in these accounts for this loan as at 31 December 2023. Subsequent to year end the loan was fully repaid utilising 96 per cent of the provision.
The reasons, estimates and judgements supporting this assessment are described in the Investment Manager's report.
Interest Rate Risk
The Group is subject to the risk that the loan income and income from the cash and cash equivalents will fluctuate due to movements in interbank rates.
The loans in place at 31 December 2023 have been structured so that 90.5 per cent are floating rate and 100 per cent of these floating rate loans are subject to interbank rate floors such that the interest cannot drop below a certain level, which offers some protection against downward interest rate risk.
The remaining 9.5 per cent by value of the loans are fixed rate, which provides protection from downward interest rate movements to the overall portfolio (but also prevents the Group from benefiting from any interbank rate rises on these positions).
Foreign Exchange Risk
The majority of the Group's investments are Sterling denominated (65.3 per cent as at 31 December 2023) with the remainder being Euro denominated. The Group is subject to the risk that the exchange rates move unfavourably and that a) foreign exchange losses on the Euro loan principals are incurred and b) that Euro interest payments received are lower than anticipated when converted back to Sterling and therefore returns are lower than the underwritten returns.
The Group manages this risk by entering into forward contracts to hedge the currency risk. All non-Sterling loan principal is hedged back to Sterling to the maturity date of the loan.
Interest payments are normally 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 changes in non-Sterling investments (e.g. extensions of non-Sterling loans).
The Company had approximately GBP110.9 million (EUR125.11 million) of hedged notional exposure with Lloyds Bank plc at 31 December 2023 (converted at 31 December 2023 FX rates).
As at 31 December 2023, the hedges were in the money. If the hedges move out of the money and at any time this mark to market exceeds GBP15 million, the Company is required to post collateral, subject to a minimum transfer amount of GBP1 million. This situation is monitored closely, however, and as at 31 December 2023, the Company had sufficient liquidity and credit available on the revolving credit facility to meet any cash collateral requirements.
Cybercrime
The Group is subject to the risk of unauthorised access into systems, identification of passwords or deleting data, which could result in loss of sensitive data, breach of data physical and electronic, amongst other potential consequences. This risk is managed and mitigated by regular reviews of the Group's operational and financial control environment. The matter is also contained within service providers surveys which are completed by the Group's service providers and are regularly reviewed by the Board. No adverse findings in connection with the service provider surveys have been found. The Company and its service providers have policies and procedures in place to mitigate this risk, the cybercrime risk continues to be closely monitored.
Regulatory risk
The Group is also subject to regulatory risk as a result of any changes in regulations or legislation. Constant monitoring by the Investment Adviser, Investment Manager and the Board is in place to ensure the Group keeps up to date with any regulatory changes and compliance with them.
Operational risk
The Group has no employees and is reliant on the performance of third-party service providers. Failure by the Investment Manager, Investment Adviser, Administrator or any other third-party service provider to perform in accordance with the terms of its appointment could have a material detrimental impact on the operation of the Group.
The Board maintains close contact with all service providers to ensure that the operational risks are minimised.
Emerging Risks
Emerging risks to the Group are considered by the Board to be trends, innovations and potential rule changes relevant to the real estate mortgage and financial sector. The challenge to the Group is that emerging risks are known to some extent but are not likely to materialise or have an impact in the near term. The Board regularly reviews and discusses the risk matrix and has identified climate change as an emerging risk.
Climate change
The consequences that climate change could have are potentially severe but highly uncertain. The potential high impact of possible losses has done a lot to raise the awareness of this risk in investment circles. The Board, in conjunction with the Investment Manager and Investment Adviser, considers the possible physical and transitional impact of climate change on properties secured on loans provided by the Group and includes the consideration of such factors in valuation instructions of the collateral properties and in considering any potential expected credit losses on loans. The Investment Adviser considers the possible physical and transitional impact of climate change as part of the origination process. In addition, the Board, in conjunction with the Investment Adviser, is monitoring closely the regulation and any developments in this area (see 'Environmental, Social and Corporate' section for further information).
ASSESSMENT OF PROSPECTS
The Group's strategy of an orderly realisation and return of capital to shareholders (approved by the shareholders in January 2023) is central to an understanding of its prospects. The Group's focus is twofold:
i) to proactively manage the investments already made to ensure that the loans continue to perform and provide positive returns to the Group, and
ii) return capital to shareholders on a timely basis subject to ensuring the Group can continue to fund as yet unfunded loan commitments (GBP36.2 million as at 31 December 2023) and meet its operating costs.
The Group updates its plan and financial forecasts on a quarterly basis and detailed financial forecasts are maintained and reviewed by the Board regularly.
ASSESSMENT OF VIABILITY
The Directors have tested the potential impact on the Group of a number of scenarios by quantifying their financial impact. These scenarios are based on aspects of the following selected principal risks, which are detailed in this Strategic Report, and as described below:
-- Foreign exchange risk;
-- Market deterioration risk; specifically the risk that the Stage 2 loans held default, resulting in a lossof interest income and delay in the repayment of capital.
These scenarios represent 'severe but plausible' circumstances that the Group could experience. The scenarios tested included:
-- A high level of loan default meaning that the Group stopped receiving interest on the remaining Stage 2loans in the portfolio (the loan classified as Stage 3 at year end having been repaid in Q1 2024) and that theoutstanding capital on these loans was not received until 6 or 12 months after the loan maturity date plus Soniaand Euribor rates falling to 0 per cent from 2025 onwards; and
-- A deterioration in the valuation of the foreign exchange hedges such that the Company is required to postcollateral up to GBP5m.
The results of this stress testing showed that the Group would be able to withstand a high level of underlying loan default or impairment resulting from any of the risks identified over the period of the financial forecasts albeit the dividend may need to be reduced to reflect the reduced cash available.
VIABILITY STATEMENT
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In addition to the assessment of prospects and viability above, the Directors also have a reasonable expectation, based on the scenario testing, that the Group will continue to meet its liabilities as they fall due over the three-year period ending 31 December 2026, and therefore the Group is expected to remain viable from both a business model and financial perspective.
Furthermore, the Directors have also considered, as disclosed in these financial statements, the strategy of orderly realisation and return of capital to shareholders.
In connection with the viability statement, the Board confirm that they have carried out a robust assessment of the principal and emerging risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE ("ESG")
As an investment company, the Board and the Investment Manager and Investment Adviser consider the Group's direct activities to have a minimal direct impact on the environment. Nevertheless, the Board regularly monitors and discusses ESG matters both at the Board meetings and with the Investment Manager and Investment Adviser.
The Investment Manager and Investment Adviser are part of the Starwood Capital Group (SCG), which is a signatory to the UN Principles for Responsible Investments (UNPRI). In assessing new loans SCG evaluates environmental risks associated with any investments as part of the underwriting process. A formal scope of work is followed by the Investment Adviser, which requires an environmental site assessment to be performed which identifies environmental conditions that may have a material adverse impact on the property being assessed or its immediate surrounding area and an assessment of a property's sustainability and marketability through the review of its environmentally friendly and unfriendly characteristics.
The Board recognises that it has no direct control over a borrower's company policy towards environment and social responsibility and whilst it is an important part of the due diligence process in understanding the impact of such issues, decisions are not weighted towards those investments with stronger environmental and social characteristics. It should be noted that a number of the loans made by the Group involve refurbishment projects and these will often improve the environmental impact of the real estate concerned. Additionally, whilst it is not an investment criteria, the Group's loan portfolio is significantly funded in sectors with positive social impact such as hospitality and healthcare.
In carrying out its activities and in its relationship with the community, the Group aims to conduct itself responsibly, ethically and fairly; including in relation to social and human rights issues. This approach is built into the Investment Adviser's origination and underwriting process. Our risk management framework is intended to facilitate an enterprise wide view of risk that supports a strong and collaborative risk management culture within the Board and with its relationship with SCG.
The Board (through its relationships with SCG, its brokers and other advisers) is focused on maintaining a productive dialogue with shareholders and gathering feedback to inform the decision making at Board level.
SCG, with in excess of 5,000 employees worldwide, takes its social responsibilities to its employees very seriously offering a challenging, fast-paced and collegial environment to its employees. SCG strives to create diverse and inclusive workplaces where all employees can perform to their full potential and to be a good corporate citizen for their communities by supporting charitable organisations that promote education and social wellbeing.
As an investment fund, the Group outsources many of its activities to external service providers and, therefore, the Group has no direct Greenhouse Gas Emissions to report from its own operations and is currently not required to report on any other emission producing sources.
While there is some travel involved for the Directors and representatives from the Investment Adviser, the Company's service providers are Guernsey office-based companies, and the majority of the Directors are based in Guernsey, thus having a relatively low impact on the environment and negating the need for long commutes or flights to and from Board meetings. As a result of Covid-19 there has been an acceleration in the use of interactive and virtual technology for meetings, further reducing the need for travel.
The Group has no employees and the Board is composed entirely of non-executive Directors. Therefore, the Group is not within scope of the Modern Slavery Act 2015 and is therefore not obliged to make a human trafficking statement. However, the business of the Company is conducted ethically and with integrity and has a zero tolerance policy towards modern slavery.
BOARD DIVERSITY
The Board considers that its members have a balance of skills, qualifications and experience which are relevant to the Company. The Board supports the recommendations of the Davies Report, the Hampton Alexander Review and the Parker Review and believes in the value and importance of diversity in the boardroom and it continues to consider the recommendations of these reports and reviews. Please refer to the Corporate Governance Statement for the Board's diversity statement.
The Company has no employees and therefore has no disclosures to make in this regard.
John Whittle | Chairman
18 March 2024
Investment Manager's Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
The volatility in inflation and interest rates expectations has been the most important macro factor affecting real estate markets over the past two years. Fast movements in inflation and the resulting speed of central banks' responses created uncertainty in real estate valuation and led to significantly lower transaction volumes. According to CBRE research, 2023 had the lowest level of investment volume since the GFC with volumes half of the levels of recent years.
Improving inflation data has led to significant momentum in the expectations for continued moderation of inflation and a knock-on effect of decreasing interest rates. US Inflation has declined from a high of 9.1 per cent in June 2022 to 3.1 per cent in January 2024, UK inflation from 11.1 per cent in November 2022 to 4.0 per cent in January 2024 and Eurozone inflation from 10.6 per cent in October 2022 to 2.6 per cent in February 2024. While the general trajectory is towards more normal target inflation levels, movement has not all been one way. February 2024 inflation in the US ticked up 0.1 per cent versus January 2024 and in the United Kingdom the January 2024 inflation number came in lower than expected at 4.0 per cent versus expectations of 4.2 per cent and unchanged since December 2023. The 4.0 per cent number remains below the Bank of England forecast of 4.1 per cent. As a result of the data, traders in the swaps market are now pricing a quarter-point cut to the Bank of England benchmark rate in June as a 65 per cent probability, up from 40 per cent.
As a result of the general trend downward in inflation, US 10 Year Treasury yields are now at 4.1 per cent having reached 5.0 per cent in October 2023, UK 10 Year Gilt rates are 4.0 per cent down from 4.7 per cent in October of 2023 and German 10 Year yields are 2.3 per cent vs. 3.0 per cent in October of 2023. Investors continue to compare fixed-income returns with real estate yields, so as bond yields decrease, real estate yields are likely to follow. Real estate is a capital-intensive investment and the lower interest rate environment reduces the cost and improves the availability of debt, boosting levered returns. European commercial real estate is typically financed using 3 to 5-year floating rate debt and the key benchmark for financing cost is the 5-year swap. The GBP and EUR 5-year swaps currently stand at 3.8 per cent and 2.6 per cent respectively, having peaked at 5.2 per cent and 3.4 per cent.
The price of these longer-term interest rate instruments is determined by market expectations of future interest rate moves. Currently, pricing reflects expectations of significant interest rate cuts over the coming quarters. For example, in the US, while rates have not yet been lowered, the guidance from dot plots provided by the Federal Reserve, show an expectation of three 25 basis point cuts in 2024. The market had previously expected a faster pace of interest rate reductions with as many as six cuts in 2024, but now is in line with the Fed pricing in just three rate cuts. The pattern is similar in the UK and the Eurozone as while central banks are determined to defeat inflation and have flagged that they are likely to continue with the approach being more cautious on the hawkish side, markets are projecting the data will allow them to cut earlier.
Generally the stabilised interest rate environment should lead to a more normalised volume of real estate transactions, however there is still risk around the path to stabilisation of interest rates which could continue to subdue transaction volumes. In particular, geo-political events such as the disruption of Red Sea shipping routes could increase the cost of moving goods and commodities and have a significant corresponding impact on the inflation trajectory.
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Nevertheless there is a significant quantity of capital available focused on investment in the commercial real estate sector. Currently the majority of capital is concentrated on value-add and opportunistic strategies and less on cheaper, core equity. The Investment Advisor attended the Commercial Real Estate Finance Council conference in Miami at the beginning of the year. At the conference it was clear that bank sentiment was meaningfully better than this time last year with a high degree of confidence in US CMBS bond issuance from the large US banks. At that time spread tightening in secondary trading had already showed a stronger market appetite and the banks were expecting healthy volumes of new issuance being cleared efficiently by the market with further tightening also on the cards which would further support sentiment for commercial real estate.
While problem areas (such as low quality office and distress for thinly capitalised developers) are still an issue, the sentiment from the conference has played out as expected with a very strong start of the year in capital markets. We have seen this across the board in bond markets both in and outside of the real estate space. The Investment Grade and High Yield markets are off to strong starts and real estate, specifically the US CMBS market, has seen USD 12.1 billion of Single Asset Single Borrower ("SASB") CMBS issuance in the first two months of the year versus only USD 5.3 billion at the same time last year. We have also seen the predicted spread tightening with the SASB AAA rated tranches having been issued as tight as 135 basis points over the benchmark interest rate versus low 200s at the end of last year.
While CMBS plays a smaller part of the European market, the health of the US CMBS market is a bellwether for real estate finance sentiment and we are seeing a similar positive dynamic in the European loan markets. There are a larger number of active loan requests in the market and with larger average loan sizes than we have seen over the last two years. The market is competitive with prices tightening and loan to value ratios creeping higher relative to last year. Many of the more substantial transactions are in the logistics and student refinancing sectors but we are also seeing strong appetite for asset classes across the board including for the right types of office with the GBP280 million refinancing of the Blue Fin building in London that closed last month being a good example.
As the year progresses it is likely that healthy credit market conditions and improving investor sentiment around interest rates will help start to lift real estate transaction volumes from the subdued level we saw in 2023.
PORTFOLIO STATISTICS
As at 31 December 2023, the portfolio was invested in line with the Group's investment policy and is summarised below.
31 December 31 December
2023 2022
Number of investments 12 20
Percentage of invested portfolio in floating rate loans (1) 90.5% 78.9%
Invested Loan Portfolio unlevered annualised total return (1) 8.2% 7.8%
Weighted average portfolio LTV - to Group first GBP (1) 14.7% 13.2%
Weighted average portfolio LTV - to Group last GBP (1) 61.8% 58.6%
Average remaining loan term 1.4 years 1.7 years
Net Asset Value GBP327.3 m GBP416.1 m
Amount drawn under Revolving Credit Facility (including accrued interest) (GBP0.0 m) (GBP19.2 m)
Loans advanced at amortised cost (including accrued income) GBP264.1 m GBP432.5 m
Cash GBP63.8 m GBP3.6 m
Other (liabilities) (including financial assets held at fair value through profit or loss) (GBP0.6 m) (GBP0.8 m)
(1) Alternative Performance Measure.
The maturity profile of investments as at 31 December 2023 is shown below.
Value of loans % of invested Remaining years to contractual maturity* (GBPm) portfolio 0 to 1 years GBP121.4 46.2 1 to 2 years GBP76.7 29.2 2 to 3 years GBP64.6 24.6
* excludes any permitted extensions. Note that borrowers may elect to repay loans before contractual maturity.
PORTFOLIO DIVERSIFICATION
The Group continues to achieve good portfolio diversification as shown in the tables below:
Country % of invested
assets
UK 65.3
Spain 19.1
Republic of Ireland 15.6
Sector % of invested
assets
Hospitality 45.0
Retail 16.2
Office 12.0
Light industrial & Logistics 10.3
Healthcare 9.5
Life Sciences 5.9
Other 1.1
Loan type % of invested
assets
Whole loans 74.2
Mezzanine 25.8
Loan currency % of invested
assets*
Sterling 65.3
Euro 34.7
* The currency split refers to the underlying loan currency; however, the capital and interest during protected periods on all non-Sterling exposure is hedged back to Sterling.
INVESTMENT DEPLOYMENT
As at 31 December 2023, the Group had 12 investments and commitments of GBP298.9 million as follows:
Sterling Sterling
Sterling Total (Drawn
Transaction equivalent equivalent unfunded
and Unfunded)
balance (1) (2) commitment (3)
Hospitals, UK GBP25.0 m GBP25.0 m
Hotel, Scotland GBP42.5 m GBP42.5 m
Hotel, North Berwick GBP15.0 m GBP15.0 m
Life Science, UK GBP15.5 m GBP4.0 m GBP19.5 m
Hotel and Office, Northern Ireland GBP8.8 m GBP8.8 m
Hotels, United Kingdom GBP37.5 m GBP13.2 m GBP50.7 m
Industrial Estate, UK GBP27.2 m GBP19.0 m GBP46.2 m
Total Sterling Loans GBP171.5 m GBP36.2 m GBP207.7 m
Three Shopping Centres, Spain GBP28.4 m GBP28.4 m
Shopping Centre, Spain GBP14.1 m GBP14.1 m
Hotel, Dublin GBP19.9 m GBP19.9 m
Office Portfolio, Spain GBP7.6 m GBP7.6 m
Office Portfolio, Ireland GBP21.2 m GBP21.2 m
Total Euro Loans GBP91.2 m GBP91.2 m
Total Portfolio GBP262.7 m GBP36.2 m GBP298.9 m
(1) Euro balances translated to Sterling at period end exchange rates.
(2) Balances shown are funded balances before any impairments.
(3) Excludes interest of up to circa GBP3.3 million which may be capitalised in respect of Office Portfolio, Ireland which, if capitalised, would be repayable on maturity.
Between 1 January and 31 December 2023, the following significant investments activity occurred (included in the table above):
Additional funding by the Group
As the Group is now pursuing a strategy of orderly realisation no new loans were closed in 2023.
During the year the Group funded GBP7.3 million in relation to loan commitments made in prior years which were unfunded.
Loan Repayment (in full and in part)
During the year borrowers repaid at total of GBP166.9 million. As detailed below a total of eight loans were repaid in full and a further six loans made partial repayments against their outstanding loan obligations.
Details of loans repaid in full in 2023:
-- GBP49.9 million, Hotel & Residential, UK
-- GBP22.9 million, Hotel, Oxford
-- GBP20.5 million, Office, London
-- EUR18.8 million, Office, Madrid, Spain
-- EUR12.7 million, Mixed Use, Dublin
-- EUR8.8 million, Mixed Portfolio, Europe
-- GBP5.5 million, Office and Industrial Portfolio, UK
-- EUR3.0 million, Logistics Portfolio, Germany
Details of loans where partial repayments were made in 2023:
-- EUR24.5 million, Hotel, Dublin (scheduled amortisation and partial repayment of loan)
-- GBP4.0 million, Life Science, UK (partial repayment of loan)
-- GBP2.7 million, Hotel and Office, Northern Ireland (scheduled amortisation)
-- EUR1.3 million, Three Shopping Centres, Spain (scheduled amortisation)
-- EUR0.8 million, Shopping Centre, Spain (partial repayment of loan)
-- EUR0.8 million, Office Portfolio, Spain (partial repayment of loan)
PORTFOLIO OVERVIEW
The Group continues to closely monitor and manage the credit quality of its loan exposures and repayments. Despite continued risk around high interest rates, volatile economic conditions and lower transaction volumes, the portfolio has continued to perform well.
Significant loan repayments totaling GBP166.9 million, equivalent to just over 39 per cent of the 31 December 2022 total funded portfolio balance, were received during the year to 31 December 2023. This included the full repayment of eight loan investments and the partial repayment of six loan investments.
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The Group's remaining exposure, as at 31 December 2023, was spread across twelve investments with 99 per cent of the total funded loan portfolio spread across six sectors; hospitality (45 per cent), retail (16 per cent), office (12 per cent), light industrial & logistics (10 per cent), healthcare (10 per cent) and life sciences (6 per cent).
Hospitality exposure (45 per cent) is diversified across five loan investments. Two loans (19 per cent of hospitality exposure) benefit from State/Government licences in place at the properties and benefit from significant amortisation that continues to decrease these loan exposures. One loan (32 per cent of hospitality exposure) has two underlying key UK gateway city hotel assets, both of which are undergoing comprehensive refurbishment programmes. The remaining two loans (49 per cent of hospitality exposure) have both been recently refurbished. The Group expects its exposure to hospitality to significantly reduce during 2024 from a combination of planned asset sales and refinancings of stabilised, strong performing assets. The weighted average loan to value of the hospitality exposure was 52 per cent.
The retail exposure (16 per cent) is spread across two remaining investments, with four underlying shopping centre assets providing collateral against the two loans. While investor sentiment and transactional activity in this sector has been very low for a prolonged period, operational performance has recovered strongly post pandemic and the assets are performing well. The weighted average loan to value of the retail exposure was 91 per cent as at 31 December 2023.
As at 31 December 2023, the sponsor of these loans was in the advanced stages of selling three of the four assets to a cash buyer with a proven transaction track record at year end and these sales were completed during Q1 2024. The subsequent loan repayments have reduced the Group's exposure to retail significantly with a remaining loan balance of under GBP12 million with strong interest coverage based on current trading performance. We consider the successful execution of the sale of these assets in a difficult market a very positive result. However as outlined in the credit risk section, in 2023, an impairment provision was made against the Shopping Centre, Spain loan of EUR4 million based on expected net sales proceeds. EUR167,722 of this provision was released following the sale of the asset and the subsequent repayment of the related loan.
The office exposure (12 per cent) was spread across three loan investments. The weighted average loan to value of loans with office exposure was 77 per cent. The average age of these independently instructed valuation reports was less than one year at year end and hence there continues to be sufficient headroom to the Group's loan basis on these loans.
Light industrial & logistics and healthcare exposure comprise 10 per cent each, totalling 20 per cent of the total funded portfolio (across two investments) and provide good diversification into sectors that continue to have very strong occupational and investor demand. The weighted average loan to value of these exposures was 57 per cent.
On a portfolio level we continue to benefit from material headroom in underlying collateral value against the loan basis, with a current weighted average loan to value of 62 per cent as at 31 December 2023. These metrics are based on independent third party appraisals (with the exception of two loans that were marked against a sale process bid level). These appraisals are typically updated annually for income producing assets. The weighted average age of valuations was seven months as at 31 December 2023.
LIQUIDITY AND HEDGING
The Group had no debt outstanding at year end (31 December 2022 - net debt of GBP15.3 million) and has significant liquidity available with cash held of GBP63.8 million as at 31 December 2023 and undrawn revolving credit facilities of GBP25 million (see note 17(c) and note 23 for further information) to fund existing unfunded loan cash commitments (totaling GBP36.2 million as at 31 December 2023), working capital and collateral calls on its hedging arrangements.
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 GBP15 million out of the money. The mark to market of the hedges at 31 December 2023 was GBP1.0 million (in 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 Sterling (although this can change over time) and is a Sterling denominated group. 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 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 was introduced, 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 Recognise a loss allowance equal to 12 months expected credit losses resulting from default events
Recognition that are possible within 12 months.
After initial
recognition:
Credit risk has not increased significantly since initial recognition.
Stage 1
Recognise 12 months expected credit losses.
Credit risk has increased significantly since initial recognition.
Stage 2 Recognise lifetime expected losses.
Interest revenue recognised on a gross basis.
Credit impaired financial asset.
Stage 3 Recognise lifetime expected losses.
Interest revenue recognised on a net basis (i.e., losses are "above the line" and impact P&L and
NAV).
For the purposes of classifying between stages 1 to 3 after initial recognition, the Group considers a change in credit risk based on a combination of the following factors:
-- Underlying income performance is at a greater than 10 per cent variance to the underwritten loan metrics;
-- Loan to Value is greater than 75-80 per cent;
-- Loan to Value or income covenant test results are at a variance of greater than 5-10 per cent of loandefault covenant level;
-- Late payments have occurred and not been cured;
-- Loan maturity date is within six months and the borrower has not presented an achievable refinance orrepayment 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 underlyingasset income;
-- Income rollover / tenant break options exist such that a lease up of more than 30 per cent of underlyingproperty will be required within 12 months in order to meet loan covenants and interest payments; and
-- Borrower management team quality has adversely changed.
The Group closely monitors all loans in the portfolio for any deterioration in credit risk. As at 31 December 2023, assigned classifications are:
-- Stage 1 loans - seven loan investments equivalent to 64 per cent of the funded portfolio are classifiedin the lowest risk profile, Stage 1.
-- Stage 2 loans - four loan investments equivalent to 31 per cent of the funded portfolio are classified asStage 2. The average loan to value of these exposures was 73 per cent. The average age of valuation report datesused in the loan to value calculation was eight months old. While these loans are considered to be higher risk thanat initial recognition, no loss has been recognised on a twelve-month and lifetime expected credit losses basis.Therefore, no impairment in the value of these loans has been recognised. The drivers for classifying these dealsas Stage 2 are typically either one or a combination of the below factors:
° lower underlying property values following receipt of updated formal appraisals by independent valuers or agreed and in exclusivity sale values;
° sponsor business plans progressing more slowly than originally underwritten meaning that trading performance has lagged expectation and operating financial covenants under the facility agreements have breached; and
° additional equity support is required to cover interest or operating shortfalls as a result of slower lease up or operations taking longer to ramp up.
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The Stage 2 loans continue to benefit from headroom to the Group's investment basis. The Group has a strategy for each of these deals which targets full loan repayment over a defined period of time. Timing of repayment will vary depending on the level of equity support from sponsors. Typically, where sponsors are willing to inject additional equity to partially pay down the loans and support their business plan execution, then the Group will grant some temporary financial covenant headroom. Otherwise, sponsors are running sale processes to sell assets and repay their loans.
-- Stage 3 loan - one loan equivalent to 5 per cent of the funded portfolio is classified as Stage 3. Thisinvestment had a loan to value of 110 per cent at year end. This value was based on the projected net proceedswhich were expected to be available for loan repayment upon sale of the underlying loan collateral.
During 2023, based on an ongoing sale process and agreed sale price level, the Group recognised an impairment of GBP3.5 million against this loan, equivalent to 1.3 per cent of the funded portfolio as at 31 December 2023. In Q1 2024 the asset was sold and the loan repaid. 96 per cent of the GBP3.5 million impairment provision made against this loan was utilised. Despite the impairment, this loan investment has achieved local currency returns of 1.3 times the Group's capital invested.
The assessments regarding these loan classifications were made based on information in our possession at the date of reporting, our assessment of the risks of each loan and certain estimates and judgements around future performance of the assets.
FAIR VALUE OF PORTFOLIO VS AMORTISED COST
The table below represents the value of the loans based on a discounted cash flow basis using different discount rates.
The effective interest rate ("EIR") - i.e. the discount rate at which future cash flows equal the amortised cost, is 9.1 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 change in market interest rates or credit risk premiums may impact the fair value of the portfolio versus the amortised cost. The Group considers the EIR of 9.1 per cent to be relatively conservative as many of these loans were part of a business plan which involved transformation and many of these business plans are either completed or well advanced in execution and therefore significantly de-risked from the original underwriting and pricing. The volatility of the fair value to movements in discount rates is low due to the low remaining duration of most loans.
Discount Rate Fair Value % of Book Value 7.1% GBP271,608,883 102.8 7.6% GBP269,688,100 102.1 8.1% GBP267,796,133 101.4 8.6% GBP265,932,387 100.7 9.1% GBP264,096,238 100.0 9.6% GBP262,287,256 99.3 10.1% GBP260,504,756 98.6 10.6% GBP258,748,246 98.0 11.1% GBP257,017,205 97.3
LOAN TO VALUE
Given the need for the Group and most of its peers to record loans at amortised cost, the loan to value of companies in our sector has understandably been an area of focus for many of our shareholders and stakeholders seeking to understand underlying risk further.
In order to try to assist in understanding the underlying credit risk, we have always quoted the last GBP loan to value ("last LTV") of our portfolio and have outlined further detail below on our approach to this calculation.
Methodology
Our methodology to calculate the last LTV for each individual loan is:
Total loan drawn less any deductible lender controlled cash reserves and less any amortization received to date (including any debt provided by other lenders which rank alongside or senior to the Group's position)
Market value determined by the last formal lender valuation received by the reporting date
Each individual loan LTV is then weighted by the amount of the loan currently drawn (in the Group only, ignoring the position of other third party lenders) to give a weighted average last LTV across the Group's portfolio.
Valuations Process
The following describes the valuation basis that is used in our calculation. As the vast majority of our portfolio is originated directly by the Investment Adviser, the Group has discretion over when and how to instruct valuations. We consider this to be a strength of our valuation process as we have control over timing and complete access to the detail of the valuation process and the output. Where loans are not directly originated the lender could have a lack of control over the timing and no input to the process which we prefer to avoid where possible.
-- On the origination of a loan, for a straight forward standing investment asset (for example, an occupiedoffice), the independent open market value determined by an independent valuer under RICS guidelines will be used.
-- After loan origination the Group has the right under loan documents to obtain valuations on an annualbasis at the expense of the borrower (based on loan anniversary, not Group financial year end). Where a follow onvaluation has been done we use the latest valuation number in our calculations. However, the Group does notinstruct independent third party valuations on a strict annual basis, only when it is considered necessary anduseful to obtain one.
On the basis of the methodology outlined, at 31 December 2023 the Group had an average last LTV of 61.8 per cent (2022: 58.6 per cent).
The table below shows the sensitivity of the loan to value calculation for movements in the underlying property valuation and demonstrates that the Group has considerable headroom within the currently reported last LTVs
Dividend Policy
The Company has paid dividends of 6.0 pence per Ordinary Share in respect of the year ended 31 December 2023 (2022: 7.5 pence per Ordinary Share) compared to a target dividend rate of 5.5 pence per share. Dividends are recognised in the Consolidated Statement of Changes in Equity when declared. Dividends are usually paid within one month of the declaration date. The target annual dividend for 2024 is 5.5 pence per Ordinary Share paid quarterly.
Light
Change in Valuation Hospitality Retail Office Industrial & Other Total
Logistics
-15% 60.5% 107.1% 90.3% 75.5% 57.4% 72.7%
-10% 57.2% 101.1% 85.3% 71.3% 54.2% 68.6%
-5% 54.2% 95.8% 80.8% 67.6% 51.3% 65.0%
0% 51.5% 91.0% 76.8% 64.2% 48.8% 61.8%
5% 49.0% 86.7% 73.1% 61.1% 46.5% 58.8%
10% 46.8% 82.8% 69.8% 58.3% 44.3% 56.2%
15% 44.8% 79.2% 66.8% 55.8% 42.4% 53.7%
The Company may pay dividends out of reserves provided that the Board of Directors is satisfied on reasonable grounds that the Company will, immediately after payment, satisfy the solvency test (as defined in the Companies (Guernsey) Law, 2008, as amended), and satisfy any other requirement in its memorandum and articles.
For the year ended December 2023 6.0 pence per share has been paid out in dividends which to date was covered 1.17x by earnings (excluding unrealised FX gains and losses and realised FX gains on hedges relating to loans that have been extended).
EVENTS AFTER THE REPORTING PERIOD
The following amounts have been drawn under existing commitments, up to 18 March 2024:
-- Hotels, United Kingdom GBP3,314,576
The following loan amortisation (both scheduled and unscheduled) has been received since the year-end up to 18 March 2024:
-- Hotel, Dublin EUR8,455,000
-- Hotel and Office, Northern Ireland GBP600,000
-- Three Shopping Centres, Spain EUR19,165,883
The following loans have been repaid since year end up to 18 March 2024:
-- Shopping Centre, Spain EUR12,392,071
On 25 January 2024 the Directors declared a dividend in respect of the fourth quarter of 2023 of 1.875 pence per Ordinary Share payable on 23 February 2024 to shareholders on the register at 2 February 2024.
Starwood European Finance
Partners Limited | Investment Manager
18 March 2024
Governance
Board of Directors
JOHN WHITTLE | Non-executive Director - Chairman of the Board
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 and Audit Committee Chairman of The Renewable Infrastructure Group Ltd (FTSE 250), Sancus Lending Group Ltd (listed on AIM), and Chenavari Toro Limited Income Fund Limited (listed on the SFS segment of the Main Market of the London Stock Exchange). 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 a resident of Guernsey.
GARY YARDLEY | Non-executive Director
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Gary is a Fellow of the Royal Institution of Chartered Surveyors and holds a degree in estate management from Southbank University and an MBA. He has been a senior deal maker in the UK and European real estate market for over 25 years. Gary was formally Managing Director & Chief Investment Officer of Capital & Counties Property PLC ("Capco") and led Capco's real estate investment and development activities. Leading Capco's team on the redevelopment of Earls Court, Gary was responsible for acquiring and subsequently securing planning consent for over 11m sq. ft. at this strategic opportunity area capable of providing over 7,500 new homes for London. Gary was also heavily involved in the curation and growth of the Covent Garden estate for Capco, now an established premier London landmark. Gary is a Chartered Surveyor with over 30 years' experience in UK & European real estate. He is a former CIO of Liberty International and former equity partner of King Sturge and led PwC's real estate team in Prague and Central Europe in the early 1990s. Gary has recently returned to Prague and became Managing Director of West Bohemia Developments a.s, in August 2023, leading a major development opportunity on the D5 Highway adjacent to the German border. Gary currently remains a resident of the United Kingdom.
SHELAGH MASON | Non-executive Director - Management Engagement Committee Chairman and Senior Independent Director
Shelagh Mason is a solicitor specialising in English commercial property who retired as a consultant with Collas Crill LLP in 2020. She is the Non-Executive Chairman of the Channel Islands Property Fund Limited listed on the International Stock Exchange and is also Non-Executive Chairman of Riverside Capital PCC, sits on the board of Skipton International Limited, a Guernsey Licensed bank, and until 28 February 2022, she was a Non-Executive Director of the Renewables Infrastructure Fund a FTSE 250 company, standing down after nine years on the board. In addition to the Company, she has a non-executive position with Ruffer Investment Company Limited, also a FTSE 250 company. 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 she also holds the IOD Company Direction Certificate and Diploma with distinction. Shelagh is a resident of Guernsey.
CHARLOTTE DENTON | Non-executive Director - Audit Committee Chairman
Charlotte is a Fellow of the Institute of Chartered Accountants in England and Wales and holds a degree in politics from Durham University. She is also a member of the Society of Trust and Estate Practitioners, a Chartered Director and a fellow of the Institute of Directors. During Charlotte's executive career she worked in various locations through roles in diverse organisations, including KPMG, Rothschild, Northern Trust, a property development startup and a privately held financial services group. She has served on boards for nearly twenty years and is currently a Non-Executive Director of various entities including the GP boards of Private Equity groups Cinven and Hitec, the voting company for Pershing Square Holdings and the Investment Manager for NextEnergy. She is also the Audit Chair for the listed Investment Company River and Mercantile UK Micro Cap. Charlotte is a resident of Guernsey.
Report of the Directors
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
The Principal Activities and Investment Objective are fully detailed in the Objective and Investment Policy section.
STRUCTURE
The Company was incorporated with limited liability in Guernsey under the Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with registered number 55836 and has been authorised by the Guernsey Financial Services Commission as a registered closed-ended investment company. The Company's Ordinary Shares were admitted to the premium segment of the Financial Conduct Authority's ("FCA") Official List and to trading on the Main Market of the London Stock Exchange as part of its IPO which completed on 17 December 2012. Further issues have taken place since IPO and are listed under "Capital" below. The issued capital during the year comprises the Company's Ordinary Shares denominated in Sterling.
The Company makes its investments through Starfin Lux S.à.r.l (indirectly wholly owned via a 100 per cent 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 per cent shareholding in Starfin Public Holdco 2 Limited). References to the Group refer to the Company and its subsidiaries.
DIVIDEND POLICY
The Company has a target dividend of 5.5 pence per Ordinary Share per annum, based on quarterly dividend payments.
DIVIDENDS PAID AND PAYABLE
The Company paid dividends of 1.375 pence per Ordinary Share for the first three calendar quarters of 2023 and 1.875 pence per Ordinary Share for the fourth quarter of 2023. To date, the Company has paid a total of GBP21,534,446 in respect of 2023 (6.0 pence per Ordinary Share) (2022: GBP30,019,454.92: 7.5 pence per Ordinary share including special dividend paid in respect of 2022)..
CAPITAL ISSUED
As part of the Company's IPO completed on 17 December 2012, 228,500,000 Ordinary Shares of the Company, with an issue price of 100 pence per share, were admitted to the premium segment of the UK Listing Authority's Official List and to trading on the Main Market of the London Stock Exchange.
The following issues have been made since the IPO:
Number of Price (pence per
Admission Date
Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
15 May 2019 38,200,000 104.75
CAPITAL REDEEMED
During the year, the Company's redeemed a total of 81,901,754 shares for a total of GBP85.0 million as follows:
Number of shares Price at which shares Total Capital returned
redeemed redeemed to Shareholders
Jun-23 9,652,350 GBP1.0363 GBP10,002,730
Aug-23 29,092,218 GBP1.0312 GBP29,999,895
Dec-23 43,157,186 GBP1.0427 GBP44,999,998
81,901,754 GBP85,002,623
Following these redemptions 2023, the Company has 313,690,942 shares in issue and the total number of voting rights is 313,690,942. Of the shares in issue (excluding the shares held in treasury - see below) as at 31 December 2022, 21 per cent were redeemed during the year.
During the year the Company's share price has traded in a range of between 85.4 and 92.6 pence. The year end share price was 90.4 pence reflecting a 13.4 per cent discount to NAV.
Between August 2020 and October 2022 the Company had bought back an aggregate amount of 17,626,702 million shares at an average cost per share of 91.5 pence per share. These shares were held in treasury as at 31 December 2022 and were cancelled in June 2023 before the return of capital to shareholders commenced.
SUBSTANTIAL INTERESTS
Information provided to the Company by major shareholders pursuant to the FCA's Disclosure and Transparency Rules ("DTR") is published via a Regulatory Information Service and is available on the Company's website. The Company has been notified under Rule 5 of the DTR of the following holdings of voting rights in its shares as at 31 December 2023 and as at the date of this report.
% holding of % holding of
Name Ordinary Shares at Ordinary Shares at
31 December 2023 4 March 2024
(the latest available)
BlackRock 18.16 18.16
Waverton Investment Management 7.75 7.71
Close Brothers Asset Management 7.59 7.62
Schroder Investment Management 7.11 6.89
City of London 4.97 5.32
Investment Management Almitas Capital 4.17 4.37
Premier Miton Investors 3.99 3.99
Staude Capital 3.66 3.66
SG Private Banking 2.86 2.67
UBS Wealth Management 2.53 2.54
DIRECTORS' INTERESTS IN SHARES
The Directors' interests in shares are shown on the table below. Changes in directors shareholding between 2022 and 2023 are as a result of the compulsory share redemptions which took place during the year.
Ordinary Shares at Ordinary Shares at
Name
31 December 2023 31 December 2022
John Whittle 26,857 33,866
Shelagh Mason 89,461 112,819
Charlotte Denton 35,244 44,444
Gary Yardley - -
The Directors have adopted a code of Directors' dealings in Ordinary Shares, which is based on EU Market Abuse Regulation ("MAR"). MAR came into effect across the EU (including the UK) on 3 July 2016. The Board is responsible for taking all proper and reasonable steps to ensure compliance with MAR by the Directors and reviews such compliance on a regular basis.
BUSINESS REVIEW
The Group's performance during the year to 31 December 2023, its position at that date and the Group's future developments are detailed in the Chairman's Statement, the Strategic Report and the Investment Manager's Report.
EVENTS AFTER THE REPORTING PERIOD
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Details of events after the reporting period are contained in note 23 to the consolidated financial statements.
INDEPENDENT AUDITOR
The Directors, at the recommendation of the Audit Committee, conducted a tender in the Summer of 2022 for the position of Independent Auditor to the Company for the audit of the year- ending 31 December 2023 as a form of best practice given PricewaterhouseCoopers CI LLP has served as the Company's Independent Auditor for two consecutive terms of five years. Following a competitive tender process, the Audit Committee recommended that the Board continue to engage PricewaterhouseCoopers CI LLP, who have been engaged since the Company's inaugural meeting on 22 November 2012 and have been re-appointed at each AGM held since. PricewaterhouseCoopers CI LLP have indicated their willingness to continue as Auditor. The Directors, at the recommendation of the Audit Committee, will place a resolution before the AGM to re-appoint them as independent auditor for the ensuing year, and to authorise the Directors to determine their remuneration.
INVESTMENT MANAGER AND SERVICE PROVIDERS
The Investment Manager during the year was Starwood European Finance Partners Limited (the "Investment Manager"), incorporated in Guernsey with registered number 55819 and regulated by the GFSC and Alternative Investment Fund Management Directive. The Investment Manager has appointed Starwood Capital Europe Advisers, LLP (the "Investment Adviser"), an English limited liability partnership authorised and regulated by the FCA, to provide investment advice pursuant to an Investment Advisory Agreement.
The administration of both the Company and Investment Manager was delegated to Apex Fund and Corporate Services (Guernsey) Limited (the "Administrator") during the year.
ORDERLY REALISATION AND RETURN OF CAPITAL TO SHAREHOLDERS
Under the Company's discount control mechanisms (contained within its previous Articles of Association), the Company would have been required to offer to redeem up to 75 per cent of the shares in issue as the Company's discount to its Net Asset Value per share was greater than 5 per cent or more during the six-month period ending 31 December 2022 (the "Tender Offer").
However, on 31 October 2022, the Company announced, that following a review of the Company's strategy and advice sought from its advisers, the Board intended to recommend to shareholders that the investment objective and policy of the Company were amended such that the Board can pursue a strategy of orderly realisation and the return of capital over time to shareholders (the "Proposed Orderly Realisation"). If approved by the shareholders, the Company would seek to return cash to shareholders in an orderly manner as soon as reasonably practicable following the repayment of loans, while retaining sufficient working capital for ongoing operations and the funding of committed but currently unfunded loan cash commitments.
On 28 December 2022, a Circular relating to the Proposed Orderly Realisation and containing a Notice of Extraordinary General Meeting to be held on 27 January 2023 (the "EGM") was published. The Circular set out details of, and sought shareholder approval for, certain Proposals.
The Proposals were:
a) a change to the Company's Investment Policy to reflect the fact that the Company will cease making any new investments and will pursue a realisation strategy of the remaining assets in the Company's portfolio; and
b) adoption of the New Articles which provide for the periodic Compulsory Redemption of the Company's Shares at the discretion of the Directors to allow cash to be returned to Shareholders following the full or partial realisation of assets.
On 27 January 2023, these Proposals were approved at the EGM.
The Investment Objective and Policy which applied prior to the approval of the Proposals, and for the whole of 2022, are set out in the 2021 Annual Report. The Company maintains share repurchase powers, as approved at the 10 June 2022 Annual General Meeting, that allow the Company to repurchase Ordinary Shares in the Market up to 14.99 per cent of the share capital, subject to annual renewal of the Shareholder authority. It is not the intention of the Company to raise fresh capital including through a placing programme (subject to the publication of a prospectus of the Company) and through opportunistic tap issues following the approval of the Proposals at the EGM.
During the year the Company redeemed 81,901,754 shares for an aggregate of GBP85.0 million. As at 31 December 2023 the Company had 313,690,942 shares in issue and the total number of voting rights is 313,690,942.
SHARE BUYBACKS
The Company renewed its authority at the recent AGM to purchase in the market up to 14.99 per cent of the Ordinary Shares in issue on 10 June 2022 at a price not exceeding: (i) five per cent above the average of the mid-market values of the Ordinary Shares for the five Business Days before the purchase is made; or (ii) the higher of the last independent trade or the highest current independent bid for the Ordinary Shares.
The Directors will give consideration to repurchasing Shares under this authority, but are not bound to do so, where the market price of an Ordinary Share trades at more than 7.5 per cent below the Net Asset Value per Share for more than 3 months, subject to available cash not otherwise required for working capital purposes or the payment of dividends in accordance with the Company's dividend policy.
If not previously used, this authority shall expire at the conclusion of the Company's AGM in 2024. While the Directors do not currently intend to buyback any shares as redemptions are more equitable to shareholders, the Directors intend to seek annual renewal of this buyback authority from Shareholders each year at the Company's AGM.
John Whittle | Chairman
18 March 2024
Directors' Remuneration Report
REMUNERATION POLICY & COMPONENTS
The Board endeavours to ensure the remuneration policy reflects and supports the Company's strategic aims and objectives throughout the year under review. It has been agreed that, due to the small size and structure of the Company, a separate Remuneration Committee would be inefficient; therefore, the Board as a whole is responsible for discussions regarding remuneration.
As per the Company's Articles of Incorporation, all Directors are entitled to such remuneration as is stated in the Company's Prospectus or as the Company may determine by ordinary resolution; to not exceed the aggregate overall limit of GBP300,000 per annum. Subject to this limit, it is the Company's policy to determine the level of Directors' fees, having regard for the level of fees payable to non-executive Directors in the industry generally, the role that individual Directors fulfil in respect of responsibilities related to the Board, Management Engagement Committee and Audit Committee and the time dedicated by each Director to the Company's affairs. Base fees are set out in the table below.
Fees and Fees and
Expenses Expenses
Director Role
2023 2022
GBP GBP
John Whittle Chairman with effect from 1 January 2022 60,000 60,000
Management Engagement
Shelagh Mason Committee Chairman and Senior 45,000 45,000
Independent Director
Charlotte Denton Audit Committee Chairman with effect from 1 January 2022 50,000 50,000
Gary Yardley Non-Executive Director with effect from 6 September 2021 42,000 42,000
Aggregate fees 197,000 197,000
Aggregate expenses 7,739 6,373
Total fees and expenses 204,739 203,373
As outlined in the Articles of Incorporation, the Directors may also be paid for all reasonable travelling, accommodation and other out- of-pocket expenses properly incurred in the attendance of Board or Committee meetings, general meetings, or meetings with shareholders or debentures of the Company or otherwise in discharge of their duties; and all reasonable expenses properly incurred by them seeking independent professional advice on any matter that concerns them in the furtherance of their duties as Directors of the Company.
No Director has any entitlement to pensions, paid bonuses or performance fees, has been granted share options or been invited to participate in long-term incentive plans. No loans have been originated by the Company for the benefit of any Director.
None of the Directors have a service contract with the Company. Each of the Directors have entered into a letter of appointment with the Company. The letters of appointment were reviewed and amended in 2019 by an external party to ensure that they were in line with market standards prevailing at the time. Each Director is subject to annual re-election.
The Directors do not have any interests in contractual arrangements with the Company or its investments during the year under review, or subsequently. Each appointment can be terminated in accordance with the Company's Articles and without compensation. As outlined in the letters of appointment, each appointment can be terminated at the will of both parties with one month's notice either by (i) written resignation; (ii) unauthorised absences from Board meetings for 12 months or more; (iii) written request of the other Directors; or (iv) a resolution of the shareholders.
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Directors' and Officers' liability insurance cover is maintained by the Company but is not considered a benefit in kind nor constitutes a part of the Directors' remuneration. The Company's Articles indemnify each Director, Secretary, agent and officer of the Company, former or present, out of assets of the Company in relation to charges, losses, liabilities, damages and expenses incurred during the course of their duties, in so far as the law allows and provided that such indemnity is not available in circumstances of fraud, wilful misconduct or negligence.
By order of the Board
John Whittle | Chairman
18 March 2024
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium Listing on the Official List and admission to trading on the Main Market for Listed Securities of the London Stock Exchange, the Company is required to comply with the principles of the revised UK Corporate Governance Code dated 22 January 2024 ("UK Code"), and will comply with the principles of the Revised UK Code dated 22 January 2024, which comes into effect from financial years beginning 1 January 2025.
As an AIC member, the Board has also considered the principles and provisions of the AIC Code of Corporate Governance dated February 2019 ("AIC Code"). The AIC Code addresses all the principles set out in the UK Code, as well as setting out additional principles and provisions on issues of specific relevance to the Company. The AIC Code has been endorsed by the Financial Reporting Council as ensuring investment company boards fully meet their obligations to the UK Code and LR 9.8.6 of the Listing Rules.
Except as disclosed within the report, the Board is of the view that throughout the year ended 31 December 2023, the Company complied with the principles and provisions of the AIC Code. Key issues affecting the Company's corporate governance responsibilities, how they are addressed by the Board and application of the AIC Code are presented below. There is no information that is required to be disclosed under Listing Rule 9.8.4.
The UK Code includes provisions relating to: the role of the chief executive; executive Directors' remuneration; and the need for an internal audit function which are not considered by the Board to be relevant to the Company, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions.
The Guernsey Financial Services Commission Finance Sector Code of Corporate Governance ("GFSC Code") came into force in Guernsey on 1 January 2012 and was amended in February 2016, June 2021 and July 2023. The Company is deemed to satisfy the GFSC Code provided that it continues to conduct its governance in accordance with the requirements of the AIC Code.
CHAIRMAN
Appointed to the position of Chairman of the Board on 1 January 2022, John Whittle is responsible for leading the Board in all areas, including determination of strategy, organising the Board's business and ensuring the effectiveness of the Board and individual Directors. He also endeavours to produce an open culture of debate within the Board.
The Chairman's appointment was in line with the previously released Succession Plan. Prior to the Chairman's appointment, a job specification was prepared which included an assessment of the time commitment anticipated for the role. Discussions were undertaken to ensure that the Chairman was sufficiently aware of the time needed for his role and agreed to this upon signature of his letter of appointment.
Other significant business commitments of the Chairman were disclosed to the Company prior to his appointment to the Board and a current list of commitments is set out in his biography.
The effectiveness and independence of the Chairman is evaluated on an annual basis as part of the Board's performance evaluation; the Management Engagement Committee Chairman is tasked with collating feedback and discussing with the Chairman on behalf of the rest of the Board.
As per the Company's Articles, all Directors, including the Chairman, must disclose any interest in a transaction that the Board and Committees will consider. To ensure that all Board decisions are independent, the said conflicted Director is not entitled to vote in respect of any arrangement connected to the interested party but may be counted in the quorum.
JOHN WHITTLE | Chairman
BOARD
Independence and Disclosure
The Chairman confirms that the initial Board, consisting of Messrs. Jonathan Bridel (resigned 31 December 2020), Stephen Smith (resigned 31 December 2021) and himself were selected prior to the Company's launch and were able to assume all responsibilities at an early stage, independent of the Investment Manager and Investment Adviser. Shelagh Mason was appointed as a non-executive Director during 2020 and Charlotte Denton and Gary Yardley were appointed as non-executive Directors on 1 January 2021 and 6 September 2021, respectively, in accordance with the Board's Succession Planning Memorandum. The Board is composed entirely of independent non-executive Directors, who meet as required without the presence of the Investment Manager or service providers to scrutinise the achievement of agreed goals, objectives and monitor performance. Through the Audit Committee and the Management Engagement Committee they are able to ascertain the integrity of financial information and confirm that all financial controls and risk management systems are robust and analyse the performance of the Investment Manager and other service providers on a regular basis.
Following the annual performance evaluation, it was deemed that the Directors had been proven to challenge the Investment Manager throughout the year under review, as minuted and recorded, therefore for the purposes of assessing compliance with the AIC Code, the Board as a whole considers that each Director is independent of the Investment Manager and free from any business or other relationship that could materially interfere with the exercise of their independent judgment. If required, the Board is able to access independent professional advice. The Investment Manager is also requested to declare any potential conflicts surrounding votes, share dealing and soft commissions on an annual basis to the Board to help with the assessment of investments.
Open communication between the Investment Manager and the Board is facilitated by regular Board meetings, to which the Investment Manager is invited to attend and update the Board on the current status of the Company's investments, along with ad hoc meetings as required.
Coming to mutual agreement on all decisions, it was agreed that the Board had acted in the best interests of the Company to the extent that, if deemed appropriate, a Director would abstain or have his objection noted, which would be reflected within the minutes.
Similar to the process outlined above for the appointment of the Chairman, a job specification was prepared for each initial directorship which included an assessment of the time commitment anticipated for the role to ensure each Director was aware of the time commitment needed for the role. The Directors' other significant business commitments were disclosed to the Company prior to their appointment to the Board and were publicly disclosed in the Company's Prospectus dated 28 November 2012. A similar process was followed as part of the succession planning outlined below. Any subsequent changes have been declared. Certain of these commitments can be identified in each Director's biography. Details of the skills and experience provided by each Director can also be found in their biographies, alongside identification of the role each Director currently holds in the Company.
The terms and conditions of appointment for non-executive Directors are outlined in their letters of appointment and are available for inspection by any person at the Company's registered office during normal business hours and at the AGM for fifteen minutes prior to and during the meeting. The letters of appointment were previously reviewed by an external party and amended to ensure that they are in line with current market standards.
There is no executive Director function in the Company; all day-to-day functions are outsourced to external service providers.
Development
The Board believes that the Company's Directors should develop their skills and knowledge through participation at relevant courses. The Chairman is responsible for reviewing and discussing the training and development of each Director according to specific needs. Upon appointment, all Directors participate in discussions with the Chairman and other Directors to understand the responsibilities of the Directors, in addition to the Company's business and procedures.
The Company also provides regular opportunities for the Directors to obtain a thorough understanding of the Company's business by regularly meeting members of the senior management team from the Investment Manager, Investment Adviser and other service providers, both in person, by phone and through virtual meetings.
Balance of the Board and Diversity Policy
It is perceived that the Board is well-balanced, with a wide array of skills, experience and knowledge that ensures it functions correctly and that no single Director may dominate the Board's decisions.
The Board's position on diversity can be seen in the Strategic Report. All Directors currently sit on all the Committees, with the exception of the Chairman, who is not a member of the Audit Committee; additionally, no single Director fills more than one Committee chairmanship post.
Statement in accordance with Listing Rule 9.8.6R on Board Diversity
As at 31 December 2023, the Company met the targets specified in the Listing Rules 9.8.6R(9)(a)(i) and ii) with the Board comprising 50 per cent women, one of whom is the Senior Independent Director.
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The Board has not met the target under Listing Rule 9.8.6R(9)(a)(iii) of having one Director from a minority ethnic background. All Board appointments are based on merit and objective criteria, taking into account the benefits of diversity. It is the Board's intention to meet the target specified in Listing Rule 9.8.6R(9)(a)(iii) as the board is refreshed over time. However, given that the Company is pursuing a strategy of orderly realisation and return of capital to shareholders, it maybe that the Company is dissolved before this intention is realised.
We set out below the diversity data required by the new Listing Rules disclosure requirements.
Gender: as at 31 December 2023
Number of Number of Senior
Percentage of
Board Positions on Board
the Board
members (Chair, SID) (1)
Men 2 50% 1
Women 2 50% 1
Not specified/prefer not to say - 0% -
(1) As the Company does not have a CEO, CFO, executives or employees the above tables do not include this information.
Ethnic Background: as at 31 December 2023
Number of Number of Senior
Percentage of
Board Positions on Board
the Board
members (Chair, SID) (1)
White British or other
white (including 4 100% 2
minority-white groups)
Mixed/multiple ethnic groups - 0% -
Asian/Asian British - 0% -
Black/African/Caribbean/Black British - 0% -
Other ethnic group, including Arab - 0% -
Not specified/prefer not to say - 0% -
(1) As the Company does not have a CEO, CFO, executives or employees the above tables do not include this information.
Approach to data collection
Each Board member is requested to provide the information above on a strictly confidential and voluntary basis through which the individual self-reports their ethnicity and gender identity.
Annual Performance Evaluation
The Board's balance is reviewed on a regular basis as part of a performance evaluation review. Using a pre-determined template based on the AIC Code's provisions as a basis for review, the Board undertook an evaluation of its performance, and in addition, an evaluation focusing on individual commitment, performance and contribution of each Director was conducted. The Chairman then met with each Director to fully understand their views of the Company's strengths and to identify potential weaknesses. If appropriate, new members are proposed to resolve any perceived issues, or a resignation is sought. Following discussions and review of the Chairman's evaluation by the other Directors, the Management Engagement.
Committee Chairman reviewed the Chairman's performance. Training and development needs are identified as part of this process, thereby ensuring that all Directors are able to discharge their duties effectively.
Given the Company's size and the structure of the Board, no external facilitator or independent third party was used in the performance evaluation. The need to appoint an external facilitator is reviewed by the Board on an annual basis.
Re-election and Board Tenure
There is currently no Nominations Committee for the Company as it is deemed that the size, composition and structure of the Company would mean the process would be inefficient and counterproductive. The Board therefore undertakes a thorough process of reviewing the skill set of the individual Directors, and proposes new, or renewal of current appointments to the Board.
Each Director is required to be elected by shareholders at the AGM following his appointment by the Board. As part of the recommendations of the AIC Code, the Directors put themselves forward for annual re-election. In light of this, all Directors, are therefore submitting themselves for re-election.
The Audit Committee Members and the Board confirm that all Directors have proven their ability to fulfil all legal responsibilities and to provide effective independent judgment on issues of strategy, performance, resources and conduct. The Board therefore has no hesitation in recommending to Shareholders that all Directors are re-elected.
Appointment Process
The Directors appointment process involves identifying gaps and needs in the Board's composition and then reviewing the skill set of potential candidates with a view to making an appointment that fills the identified gaps and needs. Currently there is no gap that currently needs to be filled. Should a gap be identified, the Board would engage an independent search consultancy with no connection to the Company or its Directors, to assist in appointments to satisfy such gaps.
Succession Planning
The Company enters its twelfth year in 2024 and the Board is mindful of the current strategy of orderly realisation and return of capital to the shareholders. During 2019, the Directors devised a Succession Planning Memorandum which has been implemented.
Upon Stephen Smith's retirement from the Board during December 2021, John Whittle was subsequently appointed as Chairman of the Board as of 1 January 2022. Charlotte Denton became Chairman of the Audit Committee as of 1 January 2022. Shelagh Mason became the Senior Independent Director as of 20 January 2022.
As disclosed in previous reports, it was the Board's intention that John Whittle would remain on the Board until December 2023 in light of (i) John Whittle's extensive familiarity with the Company; (ii) the previously challenging market circumstances facing the Company; and (iii) the extensive rotation of the Board in recent years. Given the shareholder approval to progress the Orderly Realisation and Return of Capital, as passed by shareholder resolution at the Extraordinary General Meeting on 27 January 2023, the Board are of the view that it is in shareholders' best interests that John Whittle remains on the Board until the completion of the Orderly Realisation and Return of Capital to Shareholders. This will ensure that the Board and shareholders will benefit from the significant experience and knowledge of the Company and its portfolio that John Whittle has developed since the Company's IPO.
In terms of new appointments, with the approval of the Orderly Realisation and Return of Capital and the previously announced succession plan being implemented, the Directors believe that the current composition of three Guernsey Directors and one Director from the United Kingdom works well in terms of satisfying the Company's requirements. To the extent applicable or required, the Board will continue to consider diversity when making the new appointments to the Board.
At present, the Directors wish to leave the succession and the tenure policy of the Chairman open indefinitely, with no changes currently planned.
BOARD AND COMMITTEES
Board
Matters reserved for the Board include review of the Company's overall strategy and business plans; approval of the Company's half-yearly and annual reports; review and approval of any alteration to the Group's accounting policies or practices and valuation of investments; approval of any alteration to the Company's capital structure; approval of the dividend policy; appointments to the Board and constitution of Board Committees; observation of relevant legislation and regulatory requirements; and performance review of key service providers. The Board also retains ultimate responsibility for Committee decisions; every Committee is required to refer to the Board, who will make the final decision.
Terms of reference that contain a formal schedule of matters reserved for the Board of Directors and its duly authorised Committee for decision has been approved and can be reviewed at the Company's registered office.
The meeting attendance record is displayed in the Corporate Governance statement. The Company Secretary acts as the Secretary to the Board.
Audit Committee
The Board has established an Audit Committee which was composed of all the independent members of the Board other than Chairman of the Board. The Chairman of the Board, although not a member of the Committee, may still attend the meetings upon invitation by the Audit Committee Chairman. The Audit Committee, its membership and its terms of reference are kept under regular review by the Board, and it is confident that all members have sufficient financial skills and experience, and competence relevant to the Company's sector. John Whittle was the Audit Committee Chairman until 31 December 2021. Charlotte Denton was appointed on 24 March 2021 to the Audit Committee and has become chairman of the Audit Committee with effect from 1 January 2022.
The Audit Committee met four times during 2023 (2022: four times). The Company Secretary acts as the Secretary to the Audit Committee.
Owing to the size and structure of the Company, there is no internal audit function. The Audit Committee has reviewed the need for an internal audit function and perceived that the internal financial and operating control systems in place within the Group and its service providers, for example as evidenced by the Report on Controls at a Service Organisation ("SOC 1 Type 2 Report") on the internal procedures of the Administrator, give sufficient assurance that a sound system of internal control is maintained that safeguards shareholders' investment and Group's assets.
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The Audit Committee is intended to assist the Board in discharging its responsibilities for the integrity of the Group's consolidated financial statements, as well as aiding the assessment of the Group's internal control effectiveness and objectivity of the external Auditors. Further information on the Audit Committee's responsibilities is given in the Report of the Audit Committee.
Formal terms of reference for the Audit Committee are available at the registered office and on the Company's website and are reviewed on a regular basis.
Management Engagement Committee
The Company has established a Management Engagement Committee which comprises all the Directors, with Shelagh Mason as the Chairman of the Committee. The Management Engagement Committee's main function is to review and make recommendations on any proposed amendment to the Investment Management Agreement and keep under review the performance of the Investment Manager; and undertake an assessment of the Investment Manager's scope and responsibilities as outlined in the service agreement and prospectus on a formal basis every year. Discussions on the Investment Manager's performance are also conducted regularly throughout the year by the Board. Reviews of engagements with other service providers, such as the Administrator, to ensure all parties are operating satisfactorily are also undertaken by the Management Engagement Committee so as to ensure the safe and accurate management and administration of the Company's affairs and business and that they are competitive and reasonable for Shareholders.
The Management Engagement Committee met twice during 2023 (2022: twice) and undertook a review of the key service providers to the Group and the Company, utilising a service provider questionnaire. No material weaknesses were identified and the recommendation to the Board was that the current arrangements were appropriate and provided good quality services and advice to the Company and the Group.
Formal terms of reference for the Management Engagement Committee are available at the registered office and the Company's website and are reviewed on a regular basis.
Management
Scheduled Ad hoc Audit
Engagement
Board Board(1) Committee
Committee
John Whittle 4 9 4 2
Shelagh Mason 4 10 4 2
Charlotte Denton 4 7 4 2
Gary Yardley 4 7 4 2
Total Meetings for year 4 4 4 2
(1) The ad hoc Board meetings are convened at short notice to deal with administrative matters. It is not therefore always logistically feasible, or a necessity, for the Chairman of the Board to attend such meetings.
The Company Secretary acts as the secretary to the Management Engagement Committee.
Board and Committee Meeting Attendance
Individual attendance at Board and committee meetings is set out above.
In addition to the scheduled quarterly and additional ad hoc meetings, the Directors and the Investment Manager have been provided with a number of videoconference or telephone investment briefings by the Investment Adviser in order to keep the Directors and the Investment Manager fully apprised and up to date with the current investment status and progress. During 2018, a committee of one Director was appointed to approve dividends should a quorum of two Directors not be available.
BOARD REMUNERATION
As outlined in the Prospectus, Directors are paid in accordance with agreed principles aimed at focusing on long-term performance of the Company. Further information can be found in the Directors' Remuneration Report.
COMPANY SECRETARY
Reports and papers, containing relevant, concise and clear information, are provided to the Board and Committees in a timely manner to enable review and consideration prior to both scheduled and ad-hoc specific meetings. This ensures that Directors are capable of contributing to, and validating, the development of Company strategy and management. The regular reports also provide information that enables scrutiny of the Company's Investment Manager and other service providers' performance. When required, the Board has sought further clarification of matters with the Investment Manager and other service providers, both by means of further reports and in-depth discussions, in order to make more informed decisions for the Company.
Under the direction of the Chairman, the Company Secretary facilitates the flow of information between the Board, Committees, the Investment Manager and other service providers through the development of comprehensive, detailed meeting packs, agendas and other media. These are circulated to the Board and other attendees in sufficient time to review the data.
Full access to the advice and services of the Company Secretary is available to the Board; in turn, the Company Secretary is responsible for advising on all governance matters through the Chairman. The Articles and schedule of matters reserved for the Board indicate the appointment and resignation of the Company Secretary is an item reserved for the full Board. A review of the performance of the Company Secretary is undertaken by the Board on a regular basis.
FINANCIAL AND BUSINESS INFORMATION
An explanation of the Directors' roles and responsibilities in preparing the Annual Report and Audited Consolidated Financial Statements for the year ended 31 December 2023 is provided in the Statement of Directors' Responsibilities.
Further information enabling shareholders to assess the Company's performance, business model and strategy can be sourced in the Chairman's Statement, the Strategic Report and the Report of the Directors.
GOING CONCERN
The Directors also considered it appropriate to prepare the financial statements on the going concern basis, as explained in the 'Basis of preparation' paragraph in note 2(a) of the financial statements which includes consideration of the EGM.
RISK CONTROL
In addition to the earlier assessment of principal risks and uncertainties contained within the Strategic Report, the Board is required annually to review the effectiveness of the Group's key internal controls such as financial, operational and compliance controls and risk management. The controls are designed to ensure that the risk of failure to achieve business objectives is minimised and are intended to provide reasonable assurance against material misstatement or loss. This is not absolute assurance that all risks are eliminated.
Through regular meetings of the Audit Committee, the Board seeks to maintain full and effective control over all strategic, financial, regulatory and operational issues. The Board maintains an organisational and committee structure with clearly defined lines of responsibility and delegation of authorities.
RISK MANAGEMENT
As part of the compilation of the risk register for the Company, appropriate consideration has been given to the relevant control processes and that risk is considered, assessed and managed as an integral part of the business. The Company's system of internal control includes inter alia the overall control exercise, procedures for the identification and evaluation of business risk, the control procedures themselves and the review of these internal controls by the Audit Committee on behalf of the Board. Each of these elements that make up the Company's system of internal financial and operating control is explained in further detail as below.
(i) Control Environment
The Company is ultimately dependent upon the quality and integrity of the staff and management of the Investment Manager, the Investment Adviser and its Fund Administration & Company Secretarial service provider. In each case, qualified and able individuals have been selected at all levels. The staff of both the Investment Manager and Administrator are aware of the internal controls relevant to their activities and are also collectively accountable for the operation of those controls. Appropriate segregation and delegation of duties is in place.
The Audit Committee undertakes a review of the Company's internal financial and operating controls on a regular basis. The Auditors of the Company consider internal controls relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design their audit procedures, but not for the purpose of expressing an audit opinion on the effectiveness of the Company's internal controls.
In its role as a third-party fund administration services provider, Apex Fund and Corporate Services (Guernsey) Limited produces an annual SOC 1 Type 2 Report on the internal control procedures in place within Apex Fund and Corporate Services (Guernsey) Limited and this is subject to review by the Audit Committee and the Board.
(ii) Identification and Evaluation of Business Risks
Another key business risk is the performance of the Company's investments. This is managed by the Investment Manager, which undertakes regular analysis and reporting of business risks in relation to the loan portfolio, and then proposes appropriate courses of action to the Board for their review.
(iii) Key Procedures
In addition to the above, the Audit Committee's key procedures include a comprehensive system for reporting financial results to the Board regularly, as well as quarterly impairment reviews of loans conducted by the Board as a whole (including reports on the underlying investment performance).
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Although no system of internal control can provide absolute assurance against material misstatement or loss, the Company's system is designed to assist the Directors in obtaining reasonable assurance that problems are identified on a timely basis and dealt with appropriately. The Company, given its size, does not have an internal audit function. It is the view of the Board that the controls in relation to the Company's operating, accounting, compliance and IT risks performed robustly throughout the year. In addition, all have been in full compliance with the Company's policies and external regulations, including:
-- Investment policy, as outlined in the IPO documentation, and subsequently amended by EGMs held on 2 May2014, 9 March 2015, 6 May 2016 and 27 January 2023;
-- Personal Account Dealing, as outlined in the Model Code;
-- Whistleblowing Policy;
-- Anti-Bribery Policy;
-- Applicable Financial Conduct Authority Regulations;
-- Listing Rules, and Disclosure and Transparency Rules;
-- Treatment and handling of confidential information;
-- Conflicts of interest;
-- Compliance policies; and
-- Anti-Money Laundering Regulations.
There were no protected disclosures made pursuant to the Company's whistleblowing policy, or that of service providers in relation to the Company, during the year to 31 December 2023.
In summary, the Board considers that the Company's existing internal financial and operating controls, coupled with the analysis of risks inherent in the business models of the Company and its subsidiaries, continue to provide appropriate tools for the Company to monitor, evaluate and mitigate its risks.
ALTERNATIVE INVESTMENT FUND MANAGEMENT DIRECTIVE ("AIFMD")
The AIFMD, which was implemented across the EU on 22 July 2013 with the transition period ending 22 July 2014, aims to harmonise the regulation of Alternative Investment Fund Managers ("AIFMs") and imposes obligations on managers who manage or distribute Alternative Investment Funds ("AIFs") in the EU or who market shares in such funds to EU investors. Following the UK's cessation of EU membership on 31 January 2020, the FCA has implemented an equivalent regulation ("UK AIFMD") for the marketing of AIFs in the UK and to UK investors.
After seeking professional regulatory and legal advice, the Company was established in Guernsey such that, upon implementation of AIFMD it would be a Non-EU/UK AIF, with Starwood European Finance Partners Limited appointed to act as the Non-EU/UK AIFM.
In accordance with AIFMD disclosure obligations, note 6 provides a summary of realised and unrealised gains and losses.
The Investment Manager does not receive an additional fee, to that stated in notes 3 and 22, as a result of acting as the AIFM. The Board of the Investment Manager received an aggregate fee of GBP63,600 for the year ended 31 December 2023.
The marketing of shares in AIFs that are established outside the EU/UK (such as the Company) to investors in an EU member state/ UK is prohibited unless certain conditions are met. Certain of these conditions are outside the Company's control as they are dependent on the regulators of the relevant third country (in this case Guernsey) and the relevant EU member state/UK entering into regulatory co-operation agreements with one another.
The AIFM has given written notification to the United Kingdom Financial Conduct Authority ("FCA"), pursuant to Regulation 59 of the Alternative Investment Fund Managers Regulations 2013 (SI 1773/2013) (the "AIFM Regulations") of its intention to market the shares to investors in the United Kingdom in accordance with the AIFM Regulations and the rules and guidance of the FCA.
The AIFM has given written notification to the Netherlands Authority for the Financial Markets ("AFM") pursuant to Article 1:13b section 1 and 2 of the Act on the Financial Supervision (Wet op het financieel toezicht) (the "AFS") of its intention to market the shares to investors in the Netherlands in accordance with the AFS, any rules and regulations promulgated pursuant thereto and the rules and guidance of the AFM.
On 12 February 2016, the AIFM obtained a marketing licence in Sweden in accordance with Chapter 5, Section 10 of the Swedish Alternative Investment Fund Managers Act (Sw. lag (2013:561) om förvaltare av alternativa investeringsfonder). This enables shares in the Company to be marketed to professional investors in Sweden.
Currently, the National Private Placement Regime ("NPPR") provides a mechanism to market Non-EU AIFs that are not allowed to be marketed under the AIFMD domestic marketing regimes. The Board is utilising NPPR in order to market the Company, specifically in the UK, Sweden and the Netherlands. The Board works with the Company's advisers to ensure the necessary conditions are met, and all required notices and disclosures are made under NPPR.
Any regulatory changes arising from implementation of the AIFMD (or otherwise) that limit the Company's ability to market future issues of its shares may adversely affect the Company's ability to carry out its investment policy successfully and to achieve its investment objective, which in turn may adversely affect the Company's business, financial condition, results of operations, NAV and/or the market price of the Ordinary Shares.
The Board, in conjunction with the Company's advisers, will continue to monitor the development of the AIFMD and its impact on the Company. The Company will continue to use NPPR pending further consultation from the European Securities and Marketing Authority ("ESMA").
The Board has considered the disclosure obligations under Articles 22 and 23 and can confirm that the Company complies with the various organisational, operational and transparency obligations.
The Board has considered requirements of Articles 6 and 7 of Regulation 2019/2088 on sustainability-related disclosures in the financial services sector dated 27 November 2019 and have made the necessary disclosures on the Company's website.
FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA") AND THE OECD COMMON REPORTING STANDARDS ("CRS")
FATCA became effective on 1 January 2013 and is being gradually implemented internationally. The legislation is aimed at determining the ownership of US assets in foreign accounts and improving US Tax compliance with respect to those assets.
More than 100 jurisdictions, including all 38 member countries of the Organisation for Economic Co-operation and Development ("OECD") and the G20 members, have committed to implement the Common Reporting Standard for automatic exchange of tax information ("CRS"). Building on the model created by FATCA, the CRS creates a global standard for the annual automatic exchange of financial account information between the relevant tax authorities.
The Board in conjunction with the Company's service providers and advisers have ensured that the Company complies with FATCA and CRS's requirements to the extent relevant to the Company.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the intention of the AIC Code is that the below matters set out in section 172 of the UK Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business objectives, the Company actively identifies, evaluates, manages and mitigates risk as well as continually evolving the approach to risk management. For further details in connection with Risk Management of the Company, please refer to the Strategic Report and the Corporate Governance Statement.
Our People
The Company has no employees, however, to succeed we need to manage the Company's performance by bringing through talent to the Board while ensuring we operate as efficiently as possible, as demonstrated with the succession plan. For further details in connection with the succession plan, please refer to the Corporate Governance Statement.
Business Relationships
In order for the Company to succeed, it requires to develop and maintain long-term relationships with service providers and borrowers. The Company values all of its service providers and borrowers.
Community and Environment
As an investment company, the Group's activities have minimal direct impact on the environment. Please refer to the Strategic Report for more details in connection with the impact of the Group's operations on the community and environment.
Business Conduct
The Company is committed to act responsibly and ensure that the business operates in a responsible and effective manner and with high standards in order to meet its objectives.
Shareholders
The Board place a great deal of importance on communication with all shareholders and envisage to continuing effective dialogue with all shareholders. Please refer to section below for more details on how the Company engages with the shareholders.
Throughout 2024, the Board of the Company, both individually and together, will continue to review and challenge how the Company can continue to act in good faith to promote the success of the Company for the benefit of its stakeholders in the decisions taken.
DIALOGUE WITH SHAREHOLDERS
The Directors place a great deal of importance on communication with shareholders. The Company's Chairman, Investment Manager and the Broker, offer to meet with large shareholders at least annually, together with the Investment Adviser, and calls are undertaken on a regular basis with shareholders. The Board also receives regular reports from the Broker on shareholder issues. Publications such as the Annual Report and Consolidated Financial Statements and quarterly factsheets are reviewed and approved by the Board prior to circulation and are widely distributed to other parties who have an interest in the Company's performance and are available on the Company's website.
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Following meetings with multiple large shareholders in October 2022, the Company's Proposed Orderly Realisation was progressed and approved at the EGM on 27 January 2023, following which the Company is seeking to return cash to Shareholders in an orderly manner as soon as reasonably practicable following the repayment of loans, while retaining sufficient working capital for ongoing operations.
All Directors are available for discussions with the shareholders, in particular the Chairman (John Whittle), Senior Independent Director (Shelagh Mason) and the Audit Committee Chairman (Charlotte Denton), as and when required.
Should a situation arise where shareholders cast a vote of 20 per cent or more against a board recommendation the Directors will consult with shareholders to understand their reasons behind this vote. The Board will publish the views received from the shareholders within six months of the shareholder meeting.
CONSTRUCTIVE USE OF AGM
The Notice of AGM is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions to the Board or Investment Manager, either formally at the Company's AGM, informally following the meeting, or in writing at any time during the year via the Company Secretary. The Company Secretary is also available to answer general shareholder queries at any time throughout the year.
By order of the Board
John Whittle | Chairman
18 March 2024
Report of the Audit Committee
The Board is supported by the Audit Committee, which during the year comprised of Charlotte Denton, as Chairman, Shelagh Mason, and Gary Yardley. John Whittle, as Chairman of the Board, does not sit on the Audit Committee. The Board has considered the composition of the Audit Committee and is satisfied that it has sufficient recent and relevant skills and experience. In particular the Board has considered the requirements of the AIC Code that the Audit Committee should have at least one Member who has recent and relevant financial experience and that the Audit Committee as a whole has competence relevant to the sector in which the Company invests. The Board considers all of the relevant requirements to have been met.
ROLE AND RESPONSIBILITIES
The primary role and responsibilities of the Audit Committee are outlined in the Audit Committee's terms of reference, available at the registered office, including:
-- Reviewing the Group's internal financial controls, and the Group's internal control and risk managementsystems;
-- Monitoring the need for an internal audit function annually;
-- Monitoring and reviewing the scope, independence, objectivity and effectiveness of the external Auditor,taking into consideration relevant regulatory and professional requirements;
-- Making recommendations to the Board in relation to the appointment, re-appointment and removal of theexternal Auditor and approving their remuneration and terms of engagement, which in turn can be placed before theshareholders for their approval at the AGM;
-- Development and implementation of the Group's policy on the provision of non-audit services by theexternal Auditor, as appropriate;
-- Reviewing the arrangements in place to enable Directors and staff of service providers to, in confidence,raise concerns about possible improprieties in matters of financial reporting or other matters insofar as they mayaffect the Group;
-- Providing advice to the Board on whether the consolidated financial statements, taken as a whole, arefair, balanced and understandable and provide the information necessary for shareholders to assess the Group'sperformance, business model and strategy; and
-- Reporting to the Board on how the Committee discharged all relevant responsibilities at each Boardmeeting.
Financial Reporting
The primary role of the Audit Committee in relation to the financial reporting is to review with the Administrator, Investment Manager and the Auditor the appropriateness of the Annual Report and Audited Consolidated Financial Statements and Interim Condensed Consolidated Financial Statements, concentrating on, amongst other matters:
-- The quality and acceptability of accounting policies and practices;
-- The clarity of the disclosures and compliance with financial reporting standards and relevant financialand governance reporting requirements;
-- Material areas in which significant judgements have been applied or there has been discussion with theAuditor;
-- Whether the Annual Report and Audited Consolidated Financial Statements, taken as a whole, is fair,balanced and understandable and provides the information necessary for the shareholders to assess the Group'sperformance, business model and strategy; and
-- Any correspondence from regulators in relation to the Group's financial reporting.
To aid its review, the Audit Committee considers reports from the Administrator and Investment Manager and also reports from the Auditor on the outcomes of their half-year review and annual audit. The Audit Committee supports PricewaterhouseCoopers CI LLP ("PwC") in displaying the necessary professional scepticism their role requires.
The Audit Committee met four times during the year under review; individual attendance of Directors is outlined in the Corporate Governance Statement. The main matters discussed at those meetings were:
-- Review and approval of the external Auditor and when tabled, consideration of the final audit findingsreport;
-- Discussion and approval of the fee for the external audit;
-- Detailed review of the Annual Report and Audited Consolidated Financial Statements and recommendation forapproval by the Board;
-- Review and approval of the interim review findings report of the external Auditor;
-- Detailed review of the Interim Condensed Consolidated Financial Statements and recommendation forapproval by the Board;
-- Discussion of reports from the external Auditor following their interim review and annual audit;
-- Assessment of the effectiveness of the external Auditor as described below;
-- Assessment of the independence of the external Auditor;
-- Review of the Group's key risks and internal controls;
-- Consideration of the AIC Code, FRC Guidance on Audit Committees and other regulatory guidelines; and
-- Consideration of the proposals received as part of the competitive tender process conducted for the roleof the Company's independent auditor for the audit of the year-ended 31 December 2023.
The Committee has also reviewed and considered the whistleblowing policy in place for the Administrator and other service providers and is satisfied the relevant staff can raise concerns in confidence about possible improprieties in matters of financial reporting or other matters insofar as they may affect the Company.
Annual General Meeting
The Audit Committee Chairman, or other members of the Audit Committee appointed for the purpose, shall attend each AGM of the Company, prepared to respond to any shareholder questions on the Audit Committee's activities.
Internal Audit
The Audit Committee considers at least once a year whether or not there is a need for an internal audit function. Currently, the Audit Committee does not consider there to be a need for an internal audit function, given that there are no employees in the Group and all outsourced functions are with parties / administrators who have their own internal controls and procedures. This is evidenced by the annual SOC 1 Type 2 Report provided by the Administrator, which gives sufficient assurance that a sound system of internal control is maintained at the Administrator.
SIGNIFICANT ISSUES IN RELATION TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year, the Audit Committee considered a number of significant risks in respect of the Annual Report and Audited Consolidated Financial Statements. The Audit Committee reviewed the external audit plan at an early stage and concluded that the appropriate areas of audit risk relevant to the Group had been identified and that suitable audit procedures had been put in place to obtain reasonable assurance that the consolidated financial statements as a whole would be free of material misstatements.
The table below sets out the Audit Committee's view of the key areas of risk and how they have addressed the issues.
Significant Issues Actions to Address Issue
The Audit Committee reviews the investment process of the Investment Manager and Investment
Adviser including the controls in place around deal sourcing, investment analysis, due diligence
and the role of the Investment Adviser's investment committee and the Investment Manager's Board.
The Audit Committee also reviews the controls in place around the effective interest loan models
and is notified regularly by the Investment Manager of any changes to underlying assumptions made
in the loan models.
The Audit Committee receives regular updates and reports on the performance of each loan and
discusses with the Investment Manager and Investment Adviser whether there are any indicators of
significant increase in credit risk or impaired or defaulted loans. The Audit Committee also
assesses the ECL methodology focusing on the estimation of probability of default, exposure at
default and loss given default.
Carrying amount and
impairment/ expected Formal loan performance reviews and credit risk assessments are also prepared by the Investment
credit losses of Adviser and Investment Manager which are reviewed at each Audit Committee meeting and the Audit
loans advanced Committee considers whether there are any indicators that would warrant a change to the expected
credit loss assessed for each loan advanced. Prior to the change in strategy and the adoption of
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the strategy of orderly realisation and, as a result, no new loans being advanced to borrowers,
for all new loans advanced, the Investment Manager presented, as part of the investment
recommendation process, their assessment of any expected credit loss required at inception of the
loan arrangement.
All existing loans advanced as at 31 December 2023 were assessed so as to ensure compliance with
IFRS 9. As disclosed in note 2 and in the Investment Manager's report, at 31 December 2023, one
loan (accounting for 5.4 per cent of the funded portfolio as at 31 December 2023), was classified
as Stage 3, four loans were classified as Stage 2 and the remaining loans were classified as Stage
1. An impairment provision of EUR4 million has been provided in these accounts for the loan
classified as Stage 3 as at 31 December 2023. Subsequent to year end the loan was fully repaid
utilising 96 per cent of the provision and EUR167,722 of the impairment provision was released. No
further expected credit loss provision have been made in respect of the loans classified as Stage
2 and Stage 1.
Income from loans advanced is measured in accordance with the effective interest rate method. The
requirement to estimate the expected cash flows when forming an effective interest rate model is
subject to significant management judgements and estimates.
The Audit Committee discusses with the Investment Manager and Investment Adviser the reasons for
Risk of fraud and the changes in key assumptions made in the loan models such as changes to expected drawdown or
error in income from repayment dates or other amendments to expected cash flows such as changes in interbank rates on
loans advanced floating loans. The Audit Committee ensures that any changes made to the models are justifiable
based on the latest available information.
A separate income rationalisation which is prepared outside of the detailed loan models is
provided to the Board on a quarterly basis as a secondary check on the revenue being recognised in
the loan models. This is also reviewed by the Audit Committee and questions raised where
appropriate.
REVIEW OF EXTERNAL AUDIT PROCESS EFFECTIVENESS
The Audit Committee communicated regularly with the Investment Manager, Investment Adviser and Administrator to obtain a good understanding of the progress and efficiency of the audit process. Similarly, feedback in relation to the efficiency of the Investment Manager, Investment Adviser and other service providers in performing their relevant roles was sought from relevant involved parties, including the audit partner and team. The external Auditor is invited to attend the Audit Committee meetings at which the interim and annual consolidated financial statements are considered, also enabling the Auditor to meet and discuss any matters with the Audit Committee without the presence of the Investment Manager or the Administrator.
During the year, the Audit Committee reviewed the external Auditor's performance, considering a wide variety of factors including:
-- The quality of service, the Auditor's specialist expertise, the level of audit fee, identification andresolution of any areas of accounting judgement, and quality and timeliness of papers analysing these judgements;
-- Review of the audit plan presented by the Auditor, and when tabled, the final audit findings report;
-- Meeting with the Auditor regularly to discuss the various papers and reports in detail;
-- Furthermore, interviews of appropriate staff in the Investment Manager, Investment Adviser andAdministrator to receive feedback on the effectiveness of the audit process from their perspective; and
-- Compilation of a checklist with which to provide a means to objectively assess the Auditor's performance.
AUDITOR'S TENURE AND OBJECTIVITY
The Group's current Auditor, PwC, have acted in this capacity since the Company's inaugural meeting on 22 November 2012. The Committee reviews the Auditor's performance on a regular basis to ensure the Group receives an optimal service and make regular enquiries to confirm the quality findings of audit work undertaken by both the firm and lead engagement partner on the audit. Subject to annual appointment by shareholder approval at the AGM, the appointment of the Auditor is formally reviewed by the Audit Committee on an annual basis. PwC follows the FRC Ethical Standards and their rotation rules require the lead audit partner to rotate every 5 years, key partners involved in an audit every 7 years
and PwC's own internal policy would generally expect senior staff to have consideration given to the threats to their independence after 7 years and to be rotated after 10 years. Rotation ensures a fresh look without sacrificing institutional knowledge.
Rotation of audit engagement partners, key partners involved in the audit and other staff in senior positions is reviewed on a regular basis by the lead audit engagement partner. Roland Mills served his fifth year of five as engagement partner and a new audit partner, Adrian Peacegood, is in place for the 31 December 2023 audit.
PwC regularly updates the Audit Committee on the rotation of audit partners, staff, level of fees, details of any relationships between the Auditor and the Group, and also provides overall confirmation of its independence and objectivity. There are no contractual obligations that restrict the Group's choice of Auditor. Any non-audit work would be reviewed by the Audit Committee to confirm it appropriate under the FRC Ethical Standard and approved by the Audit Committee Chairman prior to the Auditor undertaking any work.
Following a review of PwC's tenure, the Audit Committee recommended that the Board of Directors conduct a competitive tender process for the role of the Company's independent auditor for the audit of the year-ended 31 December 2023. Following the completion of the competitive tender process, the Audit Committee were satisfied that PwC were still best placed to service the Company as its independent auditors and as such will be recommending their continued appointment by the Board.
CONCLUSIONS IN RESPECT OF THE CONSOLIDATED FINANCIAL STATEMENTS
The production and the audit of the Annual Report and Audited Consolidated Financial Statements is a comprehensive process requiring input from a number of different contributors. In order to reach a conclusion on whether the Group's consolidated financial statements are fair, balanced and understandable, as required under the AIC Code, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Consolidated Financial Statements fulfils these requirements. In outlining its advice, the Audit Committee has considered the following:
-- The comprehensive documentation that is in place outlining the controls in place for the production ofthe Annual Report and Audited Consolidated Financial Statements, including the verification processes in place toconfirm the factual content;
-- The detailed reviews undertaken at various stages of the production process by the Investment Manager,Investment Adviser, Administrator, Auditor and the Audit Committee that are intended to ensure consistency andoverall balance;
-- Controls enforced by the Investment Manager, Investment Adviser, Administrator and other third-partyservice providers to ensure complete and accurate financial records and security of the Group's assets; and
-- The existence and content of a satisfactory controls report that has been reviewed and reported upon bythe Administrator's service Auditor to verify the effectiveness of the internal controls of the Administrator, suchas the SOC 1 Type 2 Report.
As a result of the work performed, the Audit Committee has concluded that it has acted in accordance with its' terms of reference and has ensured the independence and objectivity of the external Auditor. It has reported to the Board that the Annual Report for the year ended 31 December 2023, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy. The Board's conclusions in this respect are set out in the Statement of Directors' Responsibilities.
The Audit Committee has recommended to the Board that the external auditor be re-appointed for the 2024 year end annual report.
Charlotte Denton | Audit Committee
Chairman
18 March 2024
Statement of Directors' Responsibilities
The Directors are responsible for preparing consolidated financial statements for each financial year which give a true and fair view, in accordance with applicable laws and regulations, of the state of affairs of the Company and of the profit or loss of the Company for that year.
Company law requires the Directors to prepare financial statements for each financial year. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). In preparing the consolidated financial statements, the Directors are required to:
-- Select suitable accounting policies and apply them consistently;
-- Make judgments and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been followed, subject to any material departuresdisclosed and explained in the consolidated financial statements; and
-- Prepare the consolidated financial statements on the going concern basis unless it is inappropriate topresume that the Company will continue in business.
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The maintenance and integrity of the Company's website is the responsibility of the Directors; the work conducted by the Auditor does not involve consideration of the maintenance and integrity of the website and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the consolidated financial statements since they are initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the consolidated financial statements may differ from legislation in other jurisdictions.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the consolidated financial statements comply with the Companies (Guernsey) Law, 2008, as amended. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors confirms that, to the best of their knowledge:
-- They have complied with the above requirements in preparing the consolidated financial statements;
-- There is no relevant audit information of which the Company's Auditor is unaware;
-- All Directors have taken the necessary steps that they ought to have taken to make themselves aware ofany relevant audit information and to establish that the Auditor is aware of said information;
-- The consolidated financial statements, prepared in accordance with the applicable set of accountingstandards, give a true and fair view of the assets, liabilities, financial position and profit or loss of theCompany and Group; and
-- The Chairman's Statement, Strategic Report, Investment Manager's Report, Report of the Directors,Corporate Governance Report and Report of the Audit Committee include a fair review of the development and theposition of the Company and the Group, together with a description of the principal risks and uncertainties thatthey face and take into account the results of the EGM.
The UK Code, as adopted through the AIC Code by the Company, also requires Directors to ensure that the Annual Report and Consolidated Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Consolidated Financial Statements fulfil these requirements The process by which the Committee has reached these conclusions is set out in the Report of the Audit Committee. Furthermore, the Board believes that the disclosures set out in the Annual Report provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
Having taken into account all the matters considered by the Board and brought to the attention of the Board during the year ended 31 December 2023, as outlined in the Chairman Statement, Investment Manager's Report, Corporate Governance Statement, Strategic Report and the Report of the Audit Committee, the Board has concluded that the Annual Report and Audited Consolidated Financial Statements for the year ended 31 December 2023, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
For Starwood European Real Estate Finance Limited
John Whittle | Chairman
18 March 2024
Financial Statements
Independent Auditor's Report to the Members of Starwood European Real Estate Finance Limited
Report on the audit of the consolidated financial statements
OUR OPINION
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Starwood European Real Estate Finance Limited (the "company") and its subsidiaries (together "the group") as at 31 December 2023, and of their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and have been properly prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
WHAT WE HAVE AUDITED
The group's consolidated financial statements comprise:
-- the consolidated statement of financial position as at 31 December 2023;
-- the consolidated statement of comprehensive income for the year then ended;
-- the consolidated statement of changes in equity for the year then ended;
-- the consolidated statement of cash flows for the year then ended; and
-- the notes to the consolidated financial statements, comprising material accounting policy information andother explanatory information.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
INDEPENDENCE
We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements of the group, as required by the Crown Dependencies' Audit Rules and Guidance. We have fulfilled our other ethical responsibilities in accordance with these requirements.
OUR AUDIT APPROACH
OVERVIEW
Audit scope
-- The company is based in Guernsey, has subsidiaries located in Guernsey and Luxembourg and engagesStarwood European Finance Partners Limited (the "Investment Manager") to manage its assets. The consolidatedfinancial statements are a consolidation of the financial statements of the company and all the subsidiaries.
-- We conducted our audit of the consolidated financial statements from information provided by Apex Fundand Corporate Services (Guernsey) Limited (the "Administrator") and its related group entities to whom the board ofdirectors has delegated the provision of certain functions. Along with the Investment Manager, we also interactedwith Starwood Capital Europe Advisers, LLP (the "Investment Adviser") in completing aspects of our overall auditwork.
-- We conducted our audit work in Guernsey and we tailored the scope of our audit taking into account thetypes of investments within the group, the involvement of the third parties referred to above, and the industry inwhich the group operates.
We performed an audit of the consolidated financial information of the company and its Guernsey and Luxembourg subsidiaries and we consider them all as one component.
-- Scoping was performed at the group level, irrespective of whether the underlying transactions took placewithin the company or within any of the subsidiaries. Our testing was performed on a consolidated basis usingthresholds which are determined with reference to the overall group performance materiality and the risks ofmaterial misstatement identified.
KEY AUDIT MATTERS
-- Carrying amount, expected credit losses (ECL) and impairment of loans advanced
-- Risk of fraud in income from loans advanced
MATERIALITY
-- Overall group materiality: GBP6.5 million (2022: GBP8.3 million) based on 2 per cent of consolidated netassets.
-- Performance materiality: GBP4.9 million (2022: GBP6.2 million).
THE SCOPE OF OUR AUDIT
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
KEY AUDIT MATTERS
Key audit matters are those matters that, in the auditor's professional judgement, were of most significance in the audit of the consolidated financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditor, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Key audit matter How our audit addressed the key audit matter
We understood and evaluated the internal control environment
in place at the Administrator, the Investment Manager, and
the Investment Adviser over the carrying amount of the loans
advanced, in particular management's processes and
assumptions used to measure the loans at amortised cost and
used to determine the level of impairment (if any) required
on the loans advanced, either at inception, or on an ongoing
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basis, using the amortised cost model and ECL calculation.
We assessed the accounting policy for loans advanced for
compliance with International Financial Reporting Standards
as adopted by the European Union and planned and executed
our audit procedures to ensure that the loans advanced were
accounted for in accordance with the stated accounting
Carrying amount, expected credit losses (ECL) and policy.
impairment of loans advanced
Loans advanced at the year-end of GBP264.1 million (note 10)
are measured at amortised cost and comprise of both fixed Our procedures included:
and floating rate loans.
-- Substantive testing over the amortised cost
Loans advanced make up a significant part of the models used by management to value the loans at
consolidated statement of financial position and due to amortised cost using the effective interest rate method;
the nature of this balance, their amortised cost carrying
amount, expected credit losses ("ECL"), ongoing -- Testing a sample of the assumptions and inputs
recoverability, and impairment is subject to judgement and into the amortised cost models by inspecting the
estimation. associated agreements and other legal documentation;
-- Back-testing procedures were performed to
assist in our conclusions as to the cash flow
The judgements exercised in determining the potential for forecasting reliability applied by the Investment
ECL could significantly impact the net asset value of the Adviser;
group and this is considered to be a key source of -- Understanding of and evaluating the
estimation uncertainty as described in note 2c of the assumptions and judgements made by the Investment
consolidated financial statements. Adviser in respect of the ECL for each loan advanced
included;
- obtaining the Investment Adviser's impairment
The specific areas of judgement include: papers and assessing the ECL methodology, focussing on
the estimation of probability of default, exposure at
default and loss given default, and how forward-looking
information was considered in this regard;
-- The impact of changes in the expected cash - evaluating the consistency and appropriateness
flows for each loan on the carrying amount of the of the Investment Adviser's assumptions applied in
loans measured at amortised cost; and determining whether any loan advanced was performing,
-- How management determine the underlying underperforming or non-performing, including
assumptions when preparing impairment/ECL review consideration as to whether a significant increase in
analyses such as significant changes in the credit credit risk of each borrower had occurred during the
risk of a borrower, changes in the probability of year;
default of a borrower, changes in valuation of - obtaining evidence to support a sample of key
underlying collateral and the Loan-To-Value ratios assumptions presented in the assessment of the ECL,
headroom, the ability of the borrowers to deliver in including consideration of the financial information on
accordance with their business plans and their the borrower and the collateral in place to assess their
projected financial performance figures. ability to meet future payment commitments, and progress
against business plans including management's assessment
of the Loan-To-Value ratio headroom for each of the
loans;
Given the level of judgement and estimate used by - inspecting the Investment Adviser's
management in determining the carrying amount and application of its impairment/ ECL criteria to evaluate
impairment//ECL of loans advanced, combined with the the appropriateness and completeness of the loans moved
significance of the balance of the loans advanced in the between ECL stages;
consolidated statement of financial position, meant that - recalculating a targeted sample of the
this was considered a key audit matter. Investment Adviser's sensitivity analysis of the
Loan-To-Values ratios headroom;
- engaging our Real Estate valuation experts to
work with our audit team through the inspection of a
sample of third-party real estate valuation reports on
the underlying properties against which collateral is
held by the group for the loans advanced, and which
underpin the Loan-To-Value considerations applied in the
ECL modelling; and
- inspecting a sample of compliance certificates
signed by each respective underlying borrower in respect
of compliance with covenants as at the year-end.
Based on the audit work described above we have nothing to
report to those charged with corporate governance.
We assessed the accounting policy for the recognition of
interest income for compliance with International Financial
Reporting Standards as adopted by the European Union; and we
planned and executed our audit procedures to ensure that
interest income from loans had been accounted for in
accordance with the stated accounting policy.
Risk of fraud in income from loans advanced We held discussions with the Investment Manager, the
Investment Adviser and the Administrator to understand and
Income from loans advanced for the year was GBP31.9 million evaluate the processes in place for recognising interest
(Note 10) and was measured in accordance with the income and to understand the estimates made.
accounting policies as described in note 2l of the
consolidated financial statements. The group has a key
investment objective to provide shareholders with regular
dividends through investment in debt instruments and Our procedures included:
therefore it is considered to be an area of focus for the
members of the company.
-- Detailed testing over the amortised cost
models used by manage- ment to measure the loans at
The requirement to estimate the expected cash flows when amortised cost and calculate the effective interest
calculating an effective interest rate model is subject to income in the consolidated financial statements,
significant management judgements and estimates, and as including how the arrangement, origination and
such could be open to manipulation by management of commitment fees, which are integral to the loan
factors including: arrangements, have been considered in the models;
-- Assessing the judgements made in respect of
the estimated cash flows timing (versus the contractual
-- Expected timing of repayments; repayment date) and amount including arrangement,
-- Expectations of partial or full prepayments; origination and commitment fees, through testing of the
and amortised cost models for each loan;
-- Associated exit fees and make-whole -- Recalculating interest income using the
payments. original effective interest rate, paying due
consideration to any early, partial or full prepayments
or management's re-estimate thereof;
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-- Inspecting supporting documents, such as
As a result of the significance of interest income and the correspondence with the underlying borrower and timing
level of estimation that can be applied, the risk of fraud of cash receipts, as part of our assessment of
in income from loans advanced was considered a key audit management's estimates and assumptions; and
matter. -- For those loans advanced that were also held
at 31 December 2022, comparing the estimated future cash
flows in the amortised cost models as at 31 December
2023 and evaluating the rationale behind any significant
changes from the estimated cash flows in the 31 December
2022 models.
Based on the audit work described above we have nothing to
report to those charged with corporate governance.
HOW WE TAILORED THE AUDIT SCOPE
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the consolidated financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, the industry in which the group operates, and we considered the risk of climate change and the potential impact thereof on our audit approach.
The company is based in Guernsey with two subsidiaries located in Guernsey and three underlying subsidiaries located in Luxembourg. The consolidated financial statements are a consolidation of the company and all the subsidiaries. We have considered whether the consolidated subsidiaries included within the group comprise separate components for the purpose of our audit scope. However, we have taken into account the group's financial reporting system and the related controls in place at the Administrator, the Investment Manager, and at the Investment Adviser, and based on our professional judgement have tailored our audit scope to account for the group's consolidated financial statements as a single component.
Scoping was performed at the group level, irrespective of whether the underlying transactions took place within the company or within the subsidiaries. The group audit was led, directed, controlled and reviewed by PricewaterhouseCoopers CI LLP and all audit work for material items within the consolidated financial statements was performed in Guernsey by PricewaterhouseCoopers CI LLP.
The transactions relating to the company and the subsidiaries are maintained by the Administrator and its related group entities and therefore we were not required to engage with component auditors. Our testing was therefore performed on a consolidated basis using thresholds which are determined with reference to the overall group materiality and the risks of material misstatement identified.
MATERIALITY
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality for the consolidated financial statements as a whole as follows:
Overall group GBP6.5 million (2022: GBP8.3 million) materiality How we 2% of consolidated net assets determined it Rationale for We believe consolidated net assets to be the appropriate basis for determining materiality since this benchmark is a key consideration for members of the company when assessing financial performance. It is also a applied generally accepted measure used for companies in this industry.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75 per cent (2022:75 per cent) of overall materiality, amounting to GBP4.9 million (2022: GBP6.2 million) for the group financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above GBP0.3 million (2022: GBP0.4 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
REPORTING ON OTHER INFORMATION
The other information comprises all the information included in the Annual Report and Audited Consolidated Financial Statements (the "Annual Report") but does not include the consolidated financial statements and our auditor's report thereon. The directors are responsible for the other information.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND THE AUDIT
Responsibilities of the directors for the consolidated financial statements
As explained more fully in the statement of Director's responsibilities, the directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, the requirements of Guernsey law and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the consolidated financial statements, whetherdue to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidencethat is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a materialmisstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,forgery, intentional omissions, misrepresentations, or the override of internal control.
-- Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe group's internal control.
-- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimatesand related disclosures made by the directors.
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-- Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, basedon the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may castsignificant doubt on the group's ability to continue as a going concern over a period of at least twelve monthsfrom the date of approval of the consolidated financial statements.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group to cease to continue as a going concern.
-- Evaluate the overall presentation, structure and content of the consolidated financial statements,including the disclosures, and whether the consolidated financial statements represent the underlying transactionsand events in a manner that achieves fair presentation.
-- Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the group to express an opinion on the consolidated financial statements. We areresponsible for the direction, supervision and performance of the group audit. We remain solely responsible for ouraudit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and only for the members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Company Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
-- we have not received all the information and explanations we require for our audit;
-- proper accounting records have not been kept; or
-- the consolidated financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this responsibility.
CORPORATE GOVERNANCE STATEMENT
The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.
The company has reported compliance against the 2019 AIC Code of Corporate Governance (the "Code") which has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance Code for the purposes of meeting the company's obligations, as an investment company, under the Listing Rules of the FCA.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Strategic Report is materially consistent with the consolidated financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:
-- The directors' confirmation that they have carried out a robust assessment of the emerging and principalrisks;
-- The disclosures in the Annual Report that describe those principal risks, what procedures are in place toidentify emerging risks and an explanation of how these are being managed or mitigated;
-- The directors' statement in the consolidated financial statements about whether they considered itappropriate to adopt the going concern basis of accounting in preparing them, and their identification of anymaterial uncertainties to the group's ability to continue to do so over a period of at least twelve months from thedate of approval of the consolidated financial statements;
-- The directors' explanation as to their assessment of the group's prospects, the period this assessmentcovers and why the period is appropriate; and
-- The directors' statement as to whether they have a reasonable expectation that the company will be ableto continue in operation and meet its liabilities as they fall due over the period of its assessment, including anyrelated disclosures drawing attention to any necessary qualifications or assumptions.
Our review of the directors' statement regarding the longer-term viability of the was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statement is consistent with the consolidated financial statements and our knowledge and understanding of the group and its environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the consolidated financial statements and our knowledge obtained during the audit:
-- The directors' statement that they consider the Annual Report, taken as a whole, is fair, balanced andunderstandable, and provides the information necessary for the members to assess the group's position, performance,business model and strategy;
-- The section of the Annual Report that describes the review of effectiveness of risk management andinternal control systems; and
-- The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.
OTHER MATTER
In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these consolidated financial statements will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard ("ESEF RTS"). This auditor's report provides no assurance over whether the annual financial report will be prepared using the single electronic format specified in the ESEF RTS.
As explained in note 21 to the consolidated financial statements, in addition to our responsibility to audit and express an opinion on the consolidated financial statements in accordance with ISAs and Guernsey law, we have been requested by the directors to express an opinion on the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America as issued by the AICPA, in order to meet the requirements of Rule 206(4)-2 under the Investment Advisers Act (the "Custody Rule"). We have reported separately in this respect within the Annual Report.
Adrian Peacegood
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
18 March 2024
Independent Auditor's Report to the Directors of Starwood European Real Estate Finance Limited (US GAAS)
To the Directors of Starwood European Real Estate Finance Limited
OPINION
We have audited the accompanying consolidated financial statements of Starwood European Real Estate Finance Limited ("the company") and its subsidiaries (together "the group"), which comprise the consolidated statements of financial position as of 31 December 2023 and 31 December 2022 and the related consolidated statements of comprehensive income, consolidated changes in equity and consolidated cash flows for the years then ended including the related notes for the years then ended (collectively referred to as the "consolidated financial statements").
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the group as of 31 December 2023 and 31 December 2022, and the results of its operations, changes in its equity and its cash flows for the years then ended in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union.
BASIS FOR OPINION
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We conducted our audit in accordance with auditing standards generally accepted in the United States of America (US GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of the group and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
RESPONSIBILITIES OF MANAGEMENT FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Guernsey law and IFRSs as adopted by the European Union, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the group's and ability to continue as going concerns, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the group or to cease operations, or has no realistic alternative but to do so.
AUDITORS' RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with US GAAS, we:
-- Exercise professional judgement and maintain professional scepticism throughout the audit.
-- Identify and assess the risks of material misstatement of the consolidated financial statements, whetherdue to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures includeexamining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements.
-- Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe group's internal control. Accordingly, no such opinion is expressed.
-- Evaluate the appropriateness of accounting policies used and the reasonableness of significant accountingestimates made by management, as well as evaluate the overall presentation of the consolidated financialstatements.
-- Conclude whether, in our judgement, there are conditions or events, considered in the aggregate, thatraise substantial doubt about the group's ability to continue as a going concern for a reasonable period of time.
-- Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the group to express an opinion on the consolidated financial statements. We areresponsible for the direction, supervision and performance of the group audit. We remain solely responsible for ouraudit opinion.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
OTHER INFORMATION
Management is responsible for the other information included in the Annual Report and Audited Consolidated Financial Statements (the "annual report"). The other information comprises the information included in the annual report, but does not include the consolidated financial statements and our auditor's reports thereon. Our opinion on the consolidated financial statements does not cover the other information, and we do not express an opinion or any form of assurance thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and consider whether a material inconsistency exists between the other information and the consolidated financial statements or the other information otherwise appears to be materially misstated. If, based on the work performed, we conclude that an uncorrected material misstatement of the other information exists, we are required to describe it in our report.
RESTRICTION OF USE
This report, including the opinion, has been prepared for and only for the directors in relation to the requirements of Rule 206(4)-2 of the Investment Advisers Act of 1940 (the "Custody Rule") as it applies to the company and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
18 March 2024
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2023
1 January 2023 to 1 January 2022 to
Notes 31 December 2023 31 December 2022
GBP GBP
Income
Income from loans advanced 10 31,923,037 33,356,702
Short term deposits interest income 1,222,122 -
Net foreign exchange gains 6 1,809,952 3,046,164
Total income 34,955,111 36,402,866
Expenses
Impairment loss on loans advanced 10 3,476,360 -
Investment management fees 3(a), 22 2,910,524 3,122,755
Credit facility commitment fees 604,878 828,876
Credit facility interest and amortisation of fees 514,651 1,080,499
Other expenses 442,863 432,649
Administration fees 3(b) 353,610 354,426
Audit and non-audit fees 5 290,376 233,773
Legal and professional fees 248,936 437,622
Directors' fees and expenses 4, 22 204,739 203,373
Broker's fees 3(d) 50,000 50,000
Professional fees for the Orderly Realisation proposals - 210,000
Total operating expenses 9,096,937 6,953,973
Operating profit for the year before tax 25,858,174 29,448,893
Taxation 20 607,193 90,287
Operating profit for the year 25,250,981 29,358,606
Other comprehensive loss
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations 2(k) (60,422) (112,256)
Other comprehensive loss for the year (60,422) (112,256)
Total comprehensive income for the year 25,190,559 29,246,350
Weighted average number of shares in issue 7 378,184,423 404,881,933
Basic and diluted earnings per Ordinary Share (pence) 7 6.66 7.25
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statement of Financial Position
as at 31 December 2023
As at As at
Notes 31 December 2023 31 December 2022
GBP GBP
Assets
Cash and cash equivalents 8 63,837,644 3,576,155
Other receivables and prepayments 9 24,225 26,792
Revolving credit facility capitalised cost 12 8,333 -
Financial assets at fair value through profit or loss 11 993,204 706,661
Loans advanced 10 264,096,284 432,459,966
Total assets 328,959,690 436,769,574
Liabilities
Credit facility 12 - 18,863,204
Trade and other payables 13 1,627,985 1,758,606
Total liabilities 1,627,985 20,621,810
Net assets 327,331,705 416,147,764
Capital and reserves
Share capital 15 313,280,868 395,075,556
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Retained earnings 14,257,318 21,218,267 Translation reserve (206,481) (146,059) Total equity 327,331,705 416,147,764 Number of Ordinary Shares in issue 15 313,690,942 395,592,696 Net asset value per Ordinary Share (pence) 104.35 105.20
These consolidated financial statements were approved and authorised for issue by the Board of Directors on 18 March 2024, and signed on its behalf by:
Chairman Director
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2023
Year ended 31 December 2023
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2023 395,075,556 21,218,267 (146,059) 416,147,764
Shares redeemed (81,794,688) (3,207,935) - (85,002,623)
Dividends paid - (29,003,995) - (29,003,995)
Operating profit for the year - 25,250,981 - 25,250,981
Other comprehensive loss for the year - - (60,422) (60,422)
Balance at 31 December 2023 313,280,868 14,257,318 (206,481) 327,331,705
Year ended 31 December 2022
Retained Translation
Share capital Total Equity
earnings reserves
GBP GBP
GBP GBP
Balance at 1 January 2022 407,440,011 14,150,392 (33,803) 421,556,600
Share buybacks (12,364,455) - - (12,364,455)
Dividends paid - (22,290,731) - (22,290,731)
Operating profit for the year - 29,358,606 - 29,358,606
Other comprehensive loss for the year - - (112,256) (112,256)
Balance at 31 December 2022 395,075,556 21,218,267 (146,059) 416,147,764
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2023
1 January 2023 to 1 January 2022 to
31 December 2023 31 December 2022
GBP GBP
Operating activities:
Operating profit for the year before tax 25,858,174 29,448,893
Adjustments:
Impairment loss on loans 3,476,360 -
Income from loans advanced (31,923,037) (33,356,702)
Short term deposits interest income (1,222,122) -
Decrease in receivables and prepayments 2,567 10,860
Decrease/(increase) in trade and other payables (312,832) 458,661
Net unrealised losses / (gains) on foreign exchange derivatives (286,543) 12,584,938
Net foreign exchange losses / (gains) (1,523,409) (15,292,556)
Net foreign exchange gains on foreign exchange derivatives 4,988,870 5,618,298
Credit facility commitment fees 604,878 828,876
Credit facility interest and amortisation of fees 514,651 1,080,499
Currency translation difference 1,969,811 (5,663,501)
Corporate taxes paid (290,396) (84,274)
1,856,972 (4,366,008)
Loan repayments and amortisation 166,897,162 56,894,392
Interest income received 32,199,782 28,373,979
Commitment and exit fee income from loans advanced 1,345,427 1,211,844
Loans advanced(1) (7,338,190) (60,788,846)
Origination fees paid - (872,020)
Net cash inflow from operating activities 194,961,153 20,453,341
Cash flows from investing activities
Short term deposits interest income 1,222,122 -
Net cash inflow from investing activities 1,222,122 -
Cash flows from financing activities
Shares redemptions (85,002,623) -
Dividends paid (29,003,995) (22,290,731)
Repayments under credit facility (19,000,000) (84,158,141)
Credit facility commitment fees paid (715,131) (834,495)
Credit facility interest and amortisation paid (377,796) (533,577)
Shares buy backs - (12,364,455)
Proceeds under credit facility - 94,223,490
Net cash outflow from financing activities (134,099,545) (25,957,909)
Net increase / (decrease) in cash and cash equivalents 62,083,730 (5,504,568)
Cash and cash equivalents at the start of the year 3,576,155 2,994,357
Net foreign exchange gains/(losses) on cash and cash equivalents (1,822,241) 6,086,366
Cash and cash equivalents at the end of the year 63,837,644 3,576,155
(1) Net of arrangement fees of GBPNil (2022: GBP820,118) withheld.
The accompanying notes form an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
for the year ended 31 December 2023
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (the "Company") was incorporated with limited liability in Guernsey under the Companies (Guernsey) Law, 2008, as amended, on 9 November 2012 with registered number 55836, and has been authorised by the Guernsey Financial Services Commission (the "GFSC") as a registered closed-ended investment scheme. The registered office and principal place of business of the Company is 1, Royal Plaza, Royal Avenue, St Peter Port, Guernsey, Channel Islands, GY1 2HL.
On 12 December 2012, the Company announced the results of its IPO, which raised net proceeds of GBP223.9 million. The Company's Ordinary Shares were admitted to the premium segment of the UK FCA's Official List and to trading on the Main Market of the London Stock Exchange as part of its IPO which completed on 17 December 2012. Further issues took place in March 2013, April 2013, July 2015, September 2015, August 2016 and May 2019. On 10 August 2020 the Company announced the appointment of Jefferies International Limited as buy-back agent to effect share buy backs on behalf of the Company. As at 31 December 2023, the Company had repurchased 17,626,702 ordinary shares (the same number they subsequently canceled) at an average price of 91.5 pence per share. As at 31 December 2023, the Company had redeemed a total of 81,901,754 shares for a total of GBP85,002,623.
The consolidated financial statements comprise the financial statements of the Company, Starfin Public Holdco 1 Limited (the "Holdco 1"), Starfin Public Holdco 2 Limited (the "Holdco 2"), Starfin Lux S.à.r.l ("Luxco"), Starfin Lux 3 S.à.r.l ("Luxco 3") and Starfin Lux 4 S.à.r.l ("Luxco 4") (together the "Group") as at 31 December 2023.
Following the Company's Extraordinary General Meeting ("EGM") on 27 January 2023, the Company's objective is to conduct an orderly realisation of the assets of the Group and the return of capital to Shareholders. In line with this objective the Board will endeavour to realise all of the Group's investments in a manner that achieves a balance between maximising the net value received from those investments and making timely returns to Shareholders. This has resulted in a total redemption of 81,901,754 shares for an aggregate of GBP85,002,623 in 2023. As at 31 December 2023 the Company had 313,690,942 shares in issue. Further details and background is covered in the Corporate Summary section of this report.
Current investments are all debt obligations of corporate entities domiciled or with significant operations in the UK and the European's internal market. As the Group is now pursuing a strategy of orderly realisation no new investments were made in 2023.
The Company has appointed Starwood European Finance Partners Limited as the Investment Manager (the "Investment Manager"), a company incorporated in Guernsey and regulated by the GFSC. The Investment Manager has appointed Starwood Capital Europe Advisers, LLP (the "Investment Adviser"), an English limited liability partnership authorised and regulated by the FCA, to provide investment advice pursuant to an Investment Advisory Agreement. The administration of the Company is delegated to Apex Fund and Corporate Services (Guernsey) Limited (the "Administrator").
2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES
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The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated.
a) Going Concern
Note 17 includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of financial instruments and exposure to credit risk and liquidity risk. The Directors, at the time of approving these Annual Accounts, are required to satisfy themselves that they have reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. At the EGM of the Company held on 27 January 2023, following a recommendation from the Board as published in the Circular and EGM Notice dated 28 December 2022, the resolutions for the Proposed Orderly Realisation received shareholder votes in favour amounting to 99.97 per cent of the shareholder votes cast, voting for a change to the Company's Objective and Investments Policy which would lead to the orderly realisation of the Company's assets and a return of capital to shareholders. The Directors have undertaken a rigorous review of the Group's ability to continue as a going concern, reviewing the ongoing cash flows and the level of cash balances and available liquidity facilities.
After making enquiries of the Investment Manager and the Administrator and reviewing the viability model prepared by the Investment Adviser, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least one year from the date the consolidated financial statements were signed. Accordingly, the Directors continue to adopt a going concern basis in preparing these consolidated financial statements.
In addition to a going concern statement, the Directors have undertaken a longer term viability assessment of the Group, the results of which can be found in the Strategic Report. A range of scenarios have been evaluated as part of this analysis. The worst case scenario evaluated was an interest payment default on all Stage 2 loans, and simultaneously the repayment of the loan principal is not received until 6 months after their maturity dates and that Sonia and Euribor rates fall to 0 per cent from 2025. In this scenario the Group is still able to meet its liabilities as they fall due although the dividend might need to be reduced to reflect the reduced cash received.
b) Statement of compliance
The Company has prepared its consolidated financial statements in accordance with the Companies (Guernsey) Law, 2008 (as amended) and International Financial Reporting Standards ("IFRS") as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Boards ("IASB") together with the interpretations of the IFRS Interpretations Committee ("IFRIC") as approved by the International Accounting Standards Committee ("IASC") which remain in effect and were adopted by the European Union. The Directors of the Company have taken the exemption in Section 244 of the Companies (Guernsey) Law, 2008 (as amended) and have therefore elected to only prepare consolidated and not separate financial statements for the year.
(i) Standards and amendments to existing standards effective 1 January 2023
Certain new accounting standards and interpretations have been published that are effective 1 January 2023 and have not been applied in preparing these consolidated financial statements. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.
(ii) New standards, amendments and interpretations effective after 1 January 2023 and have not been early adopted
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2023, and have not been early adopted in preparing the Group's consolidated financial statements. None of these are expected to have a material effect on the consolidated financial statements of the Group.
c) Basis of preparation
These consolidated financial statements have been prepared on a going concern basis and under the historical cost convention as modified by the revaluation of certain assets and liabilities to fair value.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements relate to:
(i) Critical accounting estimates and assumptions
-- Models used for loans accounted at amortised cost use assumptions and estimates regarding the receipt andtiming of scheduled and unscheduled payments of loans advanced. Changes in these assumptions and estimates couldimpact liquidity risk and the interest income (see note 17).
-- The measurement of both the initial and ongoing expected credit loss allowance ("ECL") for financialassets measured at amortised cost is an area that requires the use of significant assumptions about creditbehaviour such as likelihood of borrowers defaulting and the resulting losses (see note 2(h)). The determination ofECL using the Loan to value headroom analysis is a key estimate/judgement.
(ii) Critical accounting judgements
-- The functional currency of subsidiary undertakings of the Company, which is considered by the Directorsto be Euro for Luxco 3; Sterling for all other subsidiaries (see notes 2(e) and 2(k)).
-- The operating segments, of which the Directors are currently of the opinion that the Company and itssubsidiaries are engaged in a single segment of business, being the provision of a diversified portfolio of realestate backed loans (see note 2(f)).
-- A number of significant judgements are also required in applying the accounting requirements formeasuring ECL, such as determining the criteria for significant increase in credit risk, choosing the appropriatemodel and assumptions for the measurement of ECL, determining the probabilities of default and loss given default(see note 2(h)).
d) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiary undertakings) made up to the end of the reporting period. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits directly from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. The Company also assesses existence of control where it does not have more than 50 per cent of the voting power but is able to govern the financial and operating policies by virtue of de-facto control.
Subsidiary Date of Ownership Country of Principal place of undertakings Control % Establishment business Starfin Lux S.à.r.l 11/30/2012 100 Luxembourg Luxembourg Starfin Public Holdco 1 Limited 9/11/2017 100 Guernsey Guernsey Starfin Public Holdco 2 Limited 9/11/2017 100 Guernsey Guernsey Starfin Lux 3 S.à.r.l 9/19/2017 100 Luxembourg Luxembourg Starfin Lux 4 S.à.r.l 12/11/2017 100 Luxembourg Luxembourg
Subsidiary undertakings are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations.
Acquisition-related costs are expensed as incurred. No consideration, other than for the par value of any share capital or capital contributions, has been paid in respect of the acquisition of subsidiary undertakings. The Company acquired the subsidiaries at the time of their initial establishment and hence they had no net assets at the date of the acquisition.
Intercompany transactions, balances, income and expenses on transactions between Group companies are eliminated on consolidation. Profits and losses resulting from intercompany transactions that are recognised in assets are also eliminated.
e) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). Therefore, the Directors have considered in assessing the functional currency of each of the Group's entities:
-- the share capital of all members of the Group is denominated in Sterling except for Luxco 3 share capitalwhich is denominated in Euro;
-- the dividends are paid in Sterling;
-- Euro non-investment transactions represent only a small proportion of transactions in the Luxembourgentities; and
-- proportion of non Sterling investments in each portfolio of Luxembourg entities.
The functional and presentation currency of each Group entity is Sterling, apart from Luxco 3 for which the functional currency is Euro. Luxco 3 holds loans and investments in Euro currencies. The Directors have also adopted Sterling as the Group's presentation currency (as the Group holds a significant proportion of its assets in the UK, although this may vary from time to time, capital was raised in Sterling, Group expenses are primarily incurred in Sterling and performance is measured in Sterling) and, therefore, the consolidated financial statements for the Group are presented in Sterling.
f) Segment reporting
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Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board, as the Board makes strategic decisions. The Directors, after having considered the way in which internal reporting is provided to them, are of the opinion that the Company and its subsidiaries are engaged in a single segment of business, being the provision of a diversified portfolio of real estate backed loans. Equally, based on the internal reporting provided, the Directors do not analyse the portfolio based on geographical segments.
g) Financial assets and liabilities
Classification and subsequent measurement
The Group classifies its financial assets into the following measurement categories: at amortised cost, at fair value through profit or loss and at fair value through other comprehensive income. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Financial assets measured at amortised cost
A financial asset is measured at amortised cost if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as described in note 2(h). Interest income from these financial assets is included in "Income from loans advanced" using the effective interest rate method.
Financial assets at fair value through other comprehensive income
A financial asset is measured at fair value through other comprehensive income if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment gains and losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial instruments that (a) either designated in this category upon initial recognition or subsequently or (b) not classified in any of the other categories. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the Consolidated Statement of Comprehensive Income. This category includes currency forward contracts. Gains or losses on currency forward contracts are recognised within "Net foreign exchange gains or losses".
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in profit or loss. These comprise currency forward contracts which represent contractual obligations to purchase domestic currency and sell foreign currency on a future date.
Financial liabilities measured at amortised cost
Financial liabilities that are not classified through profit or loss, including bank loans, are measured at amortised cost.
Recognition and measurement
Regular purchases and sales of financial assets are recognised on the trade date, the date on which the Group commits to purchase or sell the asset. Financial assets not carried at fair value through profit or loss are initially recognised at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the Consolidated Statement of Comprehensive Income. Financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income are subsequently carried at fair value. Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment using the expected credit loss model. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Financial liabilities are derecognised when they are extinguished, that is, when the obligation specified in the contract is discharged or cancelled or expires.
Amortised cost and effective interest rate
The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of financial assets or financial liability to the gross carrying amount of a financial asset (i.e., its amortised cost before any loss allowance) or to the amortised cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs and all fees paid or received that are integral to the effective interest rate.
Fair value estimation
The fair value of financial assets, which comprise derivatives not designated as hedges, are valued based on the difference between the agreed price of selling or buying the financial instruments on a future date and the price quoted on the year end date for selling or buying the same or similar financial instruments.
h) Expected credit loss measurement
The following describes the valuation basis that is used in our calculation. As the vast majority of our portfolio is originated directly by the Investment Adviser, the Group has discretion over when and how to instruct valuations. We consider this to be a strength of our valuation process as we have control over timing and complete access to the detail of the valuation process and the output. Where loans are not directly originated the lender could have a lack of control over the timing and no input to the process which we prefer to avoid where possible. Further details on the valuation process are covered in the Investment Manager's Report.
The Group follows a three-stage model for impairment based on changes in credit quality since initial recognition as summarised below:
-- A financial instrument that is not credit-impaired on initial recognition is classified as Stage 1 andhas its credit risk continuously monitored by the Group. The expected credit loss ("ECL") is measured over a 12month period of time.
-- If a significant increase in credit risk since initial recognition is identified, the financialinstrument is moved to Stage 2 but is not yet deemed to be credit-impaired. The ECL is measured on a lifetimebasis.
-- If the financial instrument is credit-impaired it is then moved to Stage 3. The ECL is measured on alifetime basis.
The Group's financial assets at amortised cost were all classified within Stage 1 at inception for the following reasons:
-- All loans are the subject of very detailed underwriting, including the testing of resilience toaggressive downside scenarios with respect to the loan specifics, the market and general macro economic changes,and therefore the Group considers that value of losses given default ("LGD") currently have a nil value for allloans;
-- Loans have very robust covenants in place which trigger as an early warning (long before there would beany indicators of significant increase in credit risk) and this enables the Investment Adviser to become highlyinvolved in the execution of business plans to avoid ECL;
-- Loans have strong security packages and many are amortising with relatively short terms which furtherreduces the risk; and
-- All loans have significant loan-to-value headroom which further mitigates the risk of ECL.
As at 31 December 2023, one loan, with a value of GBP11,189,028 (net of impairment provision of GBP3,476,360), was classified as Stage 3 (31 December 2022: none); four loans, with a value of GBP81,869,634, were classified as Stage 2 (31 December 2022: two loans with a value of GBP46,909,623) and the remaining loans are classified as Stage 1. An impairment provision of GBP3,476,360 million has been recognised against the loan classified as Stage 3 but no expected credit loss has been recognised at 31 December 2023 (2022: GBPnil) against the loans classified as Stage 2 as although the credit risk has increased for these loans, the Group does not anticipate realising a loss in the event of a default. For further information, see the Investment Manager's report. The paragraph below describes how the Group determines when a significant change in credit risk has occurred, such that a loan would be reclassified to Stage 1, Stage 2 or Stage 3.
The Group considers that for prepayments the ECL is by default nil as these are non-monetary items with no credit risks. For trade and other receivables the Group applies the simplified approach which requires expected lifetime losses to be recognised from initial recognition of the receivables.
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Significant increase in credit risk - Stage 2
The Group uses both quantitative and qualitative criteria which is monitored no less than quarterly in order to assess whether an increase in credit risk has occurred. Increased credit risk would be considered if, for example, all or a combination of the following has occurred:
-- Underlying income performance is at a greater than 10 per cent variance to the underwritten loan metrics;
-- Loan to Value is greater than 75-80 per cent;
-- Loan to Value or income covenant test results are at a variance of greater than 5-10 per cent of loandefault covenant level (note that loan default covenant levels are set tightly to ensure that an early cure isrequired by the borrower should they breach which usually involves decreasing the loan amount until covenant testsare 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 orrepayment 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 underlyingasset income;
-- Income rollover / tenant break options exist such that a lease up of more than 30 per cent of underlyingproperty will be required within 12 months in order to meet loan covenants and interest payments; and
-- Borrower management team quality has adversely changed.
Default and credit-impaired assets - Stage 3
Non-performing financial assets would be classified with Stage 3, which is fully aligned with the definition of credit- impaired, when one or more of the following has occurred:
-- The borrower is in breach of all financial covenants;
-- The borrower is in significant financial difficulty; and
-- It is becoming probable that the borrower will enter bankruptcy.
An instrument is considered to have been cured, that is no longer in default, when it no longer meets any of the default criteria for a sufficient period of time.
Write-off policy
The Group writes off financial assets, in whole or in part, when it has exhausted all practically recovery efforts and has concluded there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include:
-- Ceasing enforcement activity; and
-- Where the Group's recovery method is foreclosing on collateral and the value of the collateral is suchthat there is no reasonable expectation of recovering in full.
Sensitivity analysis
The most significant period-end assumptions used for the expected credit loss estimates are the LGD and probability of default ("PD") as described above.
The default probabilities are based on initial loan-to-value ("LTV") headroom which the Investment Adviser believes to be a good predictor of the PD, in accordance with recent market studies of European commercial real estate loans.
In measuring the LGD for this sensitivity analysis, the loans advanced have been assessed on a collective basis as they possess similar covenants and security package characteristics. The selected LGD of 0.30 per cent is based on the aggregate losses of all AAA rated notes issued in Europe from 1995 to 2020 (totalling EUR177 billion), according to recent market studies of European commercial real estate loans. AAA rated notes are considered the most representative of the Group's loan portfolio. The Investment Adviser considers this to be a reasonable estimate for loss given default parameter.
As explained above, an impairment provision of GBP3,476,360 was provided against an asset classified as Stage 3 as at 31 December 2023. This was an asset specific impairment which arose due to a unique set of market and geographical sector circumstances. Each other loan asset has been individually reviewed and based on the level of the collateral over the current and reasonably expected property values over the remaining life of the loans, and after taking account of any relevant adjustments such as forced sale discounts no further losses are expected hence no allowance has been made for an ECL. Set out below is the sensitivity to the ECL as at 31 December 2023 and 31 December 2022 that could result from reasonable possible changes in the LTV and LGD actual assumptions used for calculation of ECL as at the respective year-end. On an individual loan basis, the LTV was increased by 25 per cent, and a new PD determined, which was multiplied by a constant LGD of 0.30 per cent for all loans and the loan exposure as at each year-end. All other variables are held constant.
31 December 2023 31 December 2022
Reasonable possible shift (absolute value)
ECL ECL
GBP GBP
LTV +25% (2022: +25%)
LGD +0.3% (2022: +0.3%) 172,755 322,561
Change in ECL allowance (+)
i) Cash and cash equivalents
In the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of new Ordinary Shares are shown in equity as a deduction, net of tax, from the proceeds.
k) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses that relate to loans advanced, borrowings and cash and cash equivalents and all other foreign exchange gains and losses are presented in the Consolidated Statement of Comprehensive Income within "net foreign exchange losses/(gains)".
Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency of the Group are translated into the presentation currency of the Group as follows:
i. assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the end of the reporting period;
ii. income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions);
iii. share capital is translated at historical cost (translated using the exchange rates at the transaction date); and
iv. all resulting exchange differences are recognised in other comprehensive income.
The cumulative amount of translation exchange differences is presented in a separate component of equity until disposal of the entity.
Luxco 3 has Euro as its functional currency.
l) Interest income
Interest income on financial assets within Stage 1 and 2 is recognised by applying the effective interest rate to the gross carrying amount of financial assets. For financial assets that are classified within Stage 3, interest revenue is calculated by applying the effective interest rate to their amortised cost (that is net of expected credit loss provision). Interest income on non-performing financial assets at amortised cost is recognised to the extent the Group expects to recover the interest receivable.
Interest on cash and cash equivalents is recognised at amortised cost basis.
m) Origination, exit and loan arrangement fees
Origination fees paid to the Investment Manager and exit and direct loan arrangement fees received will be recognised using the effective interest rate method under loans advanced and amortised over the lifetime of the related financial asset through income from loans advanced in the Consolidated Statement of Comprehensive Income. Syndication costs are recognised in the Consolidated Statement of Comprehensive Income when incurred.
n) Expenses
All other expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis.
o) Taxation
The Company is a tax-exempt Guernsey limited liability company as it is domiciled and registered for taxation purposes in Guernsey where it pays an annual exempt status fee under The Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 (as amended). Accordingly, no provision for Guernsey tax is made.
The Holdcos are exempted for Guernsey tax purposes, and therefore no provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations in Luxembourg and taxation is provided based on the results for the year (see note 20).
p) Other receivables
Trade and other receivables are amounts due in the ordinary course of business. They are classified as assets. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for ECL.
q) Other payables
Trade and other payables are obligations to pay for services that have been acquired in the ordinary course of business. They are classified as liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method.
r) Dividend distributions
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Dividend distributions to the Company's shareholders are recognised as a liability in the Company's financial statements in the period in which the dividends are declared by the Board of Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported on the Consolidated Statement of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.
t) Financial liabilities at amortised cost
Financial liabilities at amortised cost, including bank loans are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. Financial liabilities are derecognised when the contractual obligation is discharged, cancelled or expires.
u) Capitalised expenses on credit facilities
Expenses in connection with the process of originating, prolongation, or restructuring of a credit facility, such as application and underwriting fees, are capitalised and subsequently amortised over the period of the relevant credit facility in the Consolidated Statement of Comprehensive Income within "credit facility interest".
3. MATERIAL AGREEMENTS
a) Investment management agreement
The Company and the Investment Manager have entered into an investment management agreement, dated 28 November 2012 (the "Investment Management Agreement"), (which was amended on 7 March 2014, 14 May 2014, 7 September 2015 and 6 October 2017) pursuant to which the Investment Manager has been given overall responsibility for the discretionary management of the Company's assets in accordance with the Company's investment objectives and policy.
The Investment Manager is entitled to a management fee which is calculated and accrued monthly at a rate equivalent to 0.75 per cent per annum of NAV. In calculating such fee, there shall be excluded from the NAV attributable to the Ordinary Shares the uninvested portion of the cash proceeds of any new issue of Shares (or C Shares) until at least 90 per cent of such proceeds are invested in accordance with the Company's investment policy (or deployed to repay borrowings under any credit facility of the Group or other liabilities of the Group) for the first time. The management fee is payable quarterly in arrears.
In addition, the Investment Manager is entitled to an asset origination fee of 0.75 per cent of the value of all new loan investments made or acquired by the Group (see note 22). The asset origination fee to be paid by the Group is expected to be paid upon receipt by the Group of loan arrangement fees received on the deployment of the Group's funds.
The Investment Management Agreement is terminable by either the Investment Manager or the Company giving to the other not less than 12 months' written notice. The Company is also able to terminate the appointment of the Investment Manager in the event of a change of control of the Investment Manager. A change of control shall be deemed to occur where a person acquires a direct or indirect interest in the Investment Manager, which is calculated by reference to 15 per cent or more of the voting rights. In addition the Investment Management Agreement can be terminated by the Company for any failure to act in good faith with the due skill, care and diligence which would reasonably be expected from an experienced manager in the sector and to exercise appropriate prudence in the management of the Group's portfolio.
Pursuant to the Investment Management Agreement's provisions, a performance fee would apply from 1 January 2018. The amount of such Performance Fee is 20 per cent of the excess (if any) of the returns generated by the Group over the Hurdle Total Return (described below). The measurement period over which the Performance Fee is calculated is two years, with the payment of any performance fee earned being made at the end of each such two year period.
The Hurdle Total Return will be achieved when the NAV of the Company at the end of the two year period, plus the total of all dividends declared and paid to Ordinary Shareholders in that two year period, is equal to the NAV of the Company at the start of each two year measurement period, as increased by 8 per cent per annum, on a simple interest basis (but excluding performance fees accrued and deemed as a creditor on the balance sheet at the start of the two year measurement period). No performance fee will be payable in relation to performance that recoups previous losses (if any).
To the extent that the Company makes further issues of Ordinary Shares and/or repurchases or redeems Ordinary Shares, the Hurdle Total Return will be adjusted accordingly, by reference to the issue proceeds of such further issues and dividends declared subsequent to such issues. Other corporate actions will also be re?ected as appropriate in the calculation of the Hurdle Total Return.
The Investment Manager has appointed Starwood Capital Europe Advisers, LLP (the "Investment Adviser"), an English limited liability partnership authorised and regulated by the FCA, to provide investment advice pursuant to an Investment Advisory Agreement.
b) Administration agreement
The Company has engaged the services of Apex Fund and Corporate Services (Guernsey) Limited (the "Administrator") to act as Administrator and Company Secretary. Under the terms of the service agreement dated 25 September 2018, the Administrator is entitled to a fee of no less than GBP225,000 per annum for Guernsey registered companies of the Group, EUR96,000 for Luxembourg registered subsidiaries and further amounts as may be agreed in relation to any additional services provided by the Administrator. The Administrator is, in addition, entitled to recover third party expenses and disbursements.
c) Registrar's agreement
The Company and Computershare Investor Services (Guernsey) Limited (the "Registrar") entered into a Registrar agreement dated 28 November 2012, pursuant to which the Company appointed the Registrar to act as Registrar of the Company for a minimum annual fee payable by the Company of GBP9,996 in respect of basic registration.
d) Brokerage agreement
On 19 June 2020 Jefferies Group LLC ("Jefferies") was appointed to act as Broker. Jefferies is entitled to receive a fee of GBP50,000 per annum plus expenses.
e) Licence agreement
The Company and Starwood Capital Group Management, LLC (the "Licensor") have entered into a trade mark licence agreement dated 28 November 2012 (the "Licence Agreement"), pursuant to which the Licensor has agreed to grant to the Company a royalty-free, non-exclusive worldwide licence for the use of the "Starwood" name for the purposes of the Company's business.
Under the terms of the Licence Agreement, it may be terminated by the Licensor; (i) if the Investment Management Agreement or any other similar agreement between the Company and the Investment Manager (or either of their respective affiliates) is terminated for any reason whatsoever or expires; (ii) if the Company suffers an insolvency event or breaches any court order relating to the Licence Agreement; or (iii) upon two months' written notice without cause.
f) Hedging agreements
The Company and Lloyds Bank plc entered into an international forward exchange master agreement dated 5 April 2013 and on 7 February 2014 the Company entered into a Professional Client Agreement with Goldman Sachs, pursuant to which the parties can enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate between Sterling and other currencies. Both agreements are governed by the laws of England and Wales.
g) Revolving credit facility
Under its investment policy, the Company is limited to borrowing an amount equivalent to a maximum of 30 per cent of its NAV at the time of drawdown, of which a maximum of 20 per cent can be longer term borrowings. In calculating the Company's borrowings for this purpose, any liabilities incurred under the Company's foreign exchange hedging arrangements shall be disregarded.
On 4 December 2014, the Company entered into a GBP50 million revolving credit facility with Lloyds Bank plc (the "Lloyds Facility") which is intended for short-term liquidity. The facility available was amended to GBP25 million and the term extended in January 2023. The current maturity date is 5 May 2024. The facility is secured by a pledge over the bank accounts of the Company, its interests in Holdco 1 and the intercompany funding provided by the Company to Holdco 1. Holdco 1 also acts as guarantor of the facility and has pledged its bank accounts as collateral. The undertakings and events of default are customary for a transaction of this nature.
On 18 December 2017, the Group entered into a separate GBP64 million secured borrowing facility with Morgan Stanley (the "MS Facility"). This facility was amended and extended on 14 November 2019 and canceled in August 2023.
4. DIRECTORS' FEES
31 December 2023 31 December 2022
GBP GBP
Directors' emoluments 197,000 197,000
Other expenses 7,739 6,373
204,739 203,373
5. AUDIT AND NON-AUDIT FEES
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The following table discloses the audit and non audit fees paid to the auditors for audit and non-audit services and their associated network firms for non-audit services, where and as applicable.
31 December 2023 31 December 2022
GBP GBP
Audit and non-audit fees expensed in the Consolidated Statement of Comprehensive
Income
Audit of company 135,000 140,563
Audit of subsidiaries 128,376 68,215
Total audit 263,376 208,778
Audit related assurance services (Interim review) 27,000 24,995
Total assurance services 27,000 24,995
Total fees expensed 290,376 233,773
6. NET FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2023 31 December 2022
GBP GBP
Loans advanced gains - realised 221,192 511,596
Loans advanced losses - realised (724,358) (996,010)
Forward contracts gains - realised 5,218,375 6,507,544
Forward contracts losses - realised (334,112) (428,644)
Other gains - realised 320,918 110,951
Other losses - realised - (38,684)
4,702,015 5,666,753
Loans advanced gains - unrealised 57,994 9,987,926
Loans advanced losses - unrealised (3,236,599) (23,578)
Forward contracts gains - unrealised 7,319,116 2,337,351
Forward contracts losses - unrealised (7,032,573) (14,922,288)
(2,892,062) (2,620,589)
1,809,952 3,046,164
On occasion, the Group may realise a gain or loss on the roll forward of a hedge if it becomes necessary to extend a capital hedge beyond the initial anticipated loan term. If this situation arises the Group will separate the realised FX gain or loss from other realised FX gains or losses and not consider it available to distribute (or as a reduction in distributable profits). The FX gain or loss will only be considered part of distributable reserves when the rolled hedge matures or is settled and the final net gain or loss on the capital hedges can be determined.
7. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on the operating profit of GBP25,250,981 (2022: GBP29,358,606) and on the weighted average number of Ordinary Shares in issue during the year of 378,184,423 (2022: 404,881,933) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of GBP327,331,705 as at 31 December 2023 (2022: GBP416,147,764) and the actual number of Ordinary Shares in issue at 31 December 2023 of 313,690,942 (2022: 395,592,696).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2023 31 December 2022
GBP GBP
Cash at bank 20,673,973 3,576,155
Short term deposit 43,163,671 -
63,837,644 3,576,155
Cash and cash equivalents comprises cash held by the Group and short term deposits held with various banking institutions with original maturities of three months or less. The carrying amount of these assets approximates their fair value. For further information and the associated risks refer to note 17.
9. OTHER RECEIVABLES AND PREPAYMENTS
31 December 2023 31 December 2022
GBP GBP
Prepayments 24,225 26,792
24,225 26,792
10. LOANS ADVANCED
The Group's accounting policy on the measurement of financial assets is discussed in note 2(g).
31 December 2023 31 December 2022
GBP GBP
UK
Hotel, Scotland 43,232,893 43,109,284
Hotels, United Kingdom 37,355,613 32,134,282
Industrial Estate, UK 27,410,670 27,435,196
Hospitals, UK 25,370,368 25,367,475
Life Science, UK 15,923,105 19,955,081
Hotel, North Berwick 15,241,403 15,211,739
Hotel and Office, Northern Ireland 9,099,325 11,947,821
Hotel & Residential, UK - 49,876,920
Office, London - 19,336,450
Hotel, Oxford - 23,181,461
Office and Industrial Portfolio, UK - 5,594,291
Ireland
Office Portfolio, Ireland 21,428,669 21,950,119
Hotel, Dublin 20,332,167 42,752,233
Mixed Use, Dublin - 11,469,547
Spain
Three Shopping Centres, Spain 29,276,457 31,023,568
Shopping Centre, Spain 11,189,028 15,886,055
Office Portfolio, Spain 8,236,586 9,027,980
Office, Madrid, Spain - 16,510,039
Germany
Logistics Portfolio , Germany - 2,744,282
Europe
Mixed Portfolio, Europe - 7,946,143
264,096,284 432,459,966
The Group accounted for an impairment provision on loans to Shopping Centre, Spain of GBP3,476,360 as at 31 December 2023. The amount above is shown net of this provision.
The table below reconciles the movement of the carrying value of loans advanced in the year:
31 December 2023 31 December 2022
GBP GBP
Loans advanced at the start of the year 432,459,966 414,632,512
Income from loans advanced 31,923,037 33,356,702
Loans advanced 7,338,190 61,420,419
Exit fees received (499,300) (501,062)
Commitment fees received (846,127) (710,782)
Impairment loss on loans advanced (3,476,360) -
Foreign exchange (losses)/gains (3,681,770) 9,478,582
Interest payments received (32,199,782) (28,373,979)
Loan repayments (166,921,570) (56,894,392)
Origination fees paid for the year - 872,020
Arrangement fees received - (820,118)
Loans advanced at the end of the year 264,096,284 432,459,966
Loans advanced at fair value 275,556,353 453,301,433
IFRS 7 requires the disclosure of the fair value of financial instruments not measured at fair value for comparison to their carrying amounts. The fair value of loans advanced has been determined by discounting the expected cash flows at a market rate of interest using the discounted cash flow model. For the avoidance of doubt, the Group carries its loans advanced at amortised cost in the consolidated financial statements, consistent with the requirement of IFRS 9 as the Group's intention and business model is to collect both interest and the capital repayments thereof.
The following table sets out the sensitivity to the above reported fair value to a change in the discount rate used in the discounted cash flow model:
31 December
Discount Rate
2023
Value increase /
Value calculated
(decrease)
GBP
GBP
6.1% (fair value) 275,556,353 11,460,070
7.1% 271,608,883 7,512,600
7.6% 269,688,100 5,591,817
8.1% 267,796,133 3,699,850
8.6% 265,932,387 1,836,104
9.1% (Carrying value) 264,096,283 -
9.6% 262,287,256 (1,809,027)
10.1% 260,504,756 (3,591,527)
10.6% 258,748,246 (5,348,037)
11.1% 257,017,205 (7,079,078)
The following table sets out the sensitivity to the above reported fair value to a change in the discount rate used in the discounted cash flow model:
31 December
Discount Rate
2022
Value calculated Value increase / (decrease)
GBP GBP
6.0% (fair value) 453,301,433 20,841,467
6.9% 446,378,688 13,918,722
7.4% 442,812,482 10,352,516
7.9% 439,304,831 6,844,865
8.4% 435,854,418 3,394,452
8.9% (Carrying value) 432,459,966 -
9.4% 429,120,227 (3,339,739)
9.9% 425,833,994 (6,625,972)
10.4% 422,600,089 (9,859,877)
10.9% 419,417,368 (13,042,598)
11. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise currency forward contracts which represent contractual obligations to purchase domestic currency and sell foreign currency on a future date at a specified price.
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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 on the tables below and more information is provided in Note 17.
Fair values
Notional contract
Assets Liabilities Total
31 December 2023 amount(1)
GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 329,276,074 3,826,628 (2,833,424) 993,204
Total 329,276,074 3,826,628 (2,833,424) 993,204
(1) Euro amounts are translated at the year end exchange rate
Fair values
Notional contract
Assets Liabilities Total
31 December 2022 amount(1)
GBP GBP GBP
GBP
Foreign exchange derivatives
Currency forwards:
Lloyds Bank plc 309,280,796 4,697,637 (3,990,976) 706,661
Total 309,280,796 4,697,637 (3,990,976) 706,661
(1) Euro amounts are translated at the year end exchange rate
12. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing an amount equivalent to a maximum of 30 per cent of its NAV at the time of drawdown, of which a maximum of 20 per cent can be longer term borrowings. In calculating the Group's borrowings for this purpose, any liabilities incurred under the Group's foreign exchange hedging arrangements shall be disregarded. As at 31 December 2023,the Group has one GBP25 million credit facility (which is due to expire in May 2024) as described in note 3(g) of these financial statements.
As at 31 December 2023 an amount of GBPnil (2022: GBP19,000,000) was drawn and interest of GBPnil (2022: GBP181,907) was payable.
The revolving credit facility capitalised costs are directly attributable costs incurred in relation to the establishment of the credit loan facilities which are amortised over the term of the facility. As at 31 December 2023 an amount of GBP8,333 relating such costs is shown on the face of the balance sheet (2022: GBP319,675 was netted off against the loan facilities outstanding).
The Group has maintained sufficient headroom against the measures under, and is full compliance with, all loan covenants
The changes in liabilities arising from financing activities are shown in the table below.
31 December 2023 31 December 2022
GBP GBP
Borrowings at the start of the year 18,863,204 7,914,993
Repayments during the year (19,000,000) (84,158,141)
Interest paid during the year (327,796) (533,577)
Credit facility amortisation of fees 311,342 373,328
Interest expenses recognised for the year 153,250 707,171
Foreign exchange and translation difference - 335,940
Drawdowns during the year - 94,223,490
Borrowings at the end of the year - 18,863,204
13. TRADE AND OTHER PAYABLES
31 December 2023 31 December 2022
GBP GBP
Investment management fees payable 672,075 777,556
Tax provision 342,547 25,727
Accrued expenses 256,530 273,183
Audit fees payable 206,866 289,457
Administration fees payable 82,556 203,420
Commitment fees payable 54,654 164,855
Directors' fees and expenses payable 12,757 -
Loan amounts payable - 24,408
1,627,985 1,758,606
14. COMMITMENTS
As at 31 December 2023, the Group had outstanding unfunded loan cash commitments in respect of loans not fully drawn of GBP36,252,255 (2022: GBP49,063,014). As at 31 December 2023 the Group has cash reserves sufficient to fund these commitments.
As at 31 December 2023, the Group has entered into forward contracts under the Hedging Master Agreement with Lloyds Bank plc to sell EUR329,276,074 (2022: EUR309,280,796) to receive Sterling. At the end of the reporting period, these forward contracts were in the money with a fair value of GBP993,204 (2022: GBP706,661).
15. SHARE CAPITAL
The authorised share capital of the Company consists of an unlimited number of redeemable Ordinary Shares of no par value which upon issue the Directors may classify into such classes as they may determine. The Ordinary Shares are redeemable at the discretion of the Board.
At the year end, the Company had issued and fully paid up share capital as follows:
31 December 2023 31 December 2022
Number of shares Number of shares
Ordinary Shares of no par value
313,690,942 413,219,398
Issued and fully paid
Shares held in treasury - (17,626,702)
Total Ordinary Shares, excluding
313,690,942 395,592,696
those in treasury
On 13 June 2023, the Board of the Company announced the cancellation of 17,626,702 shares that were held in treasury.
Rights attached to shares
The Company's share capital is denominated in Sterling. At any general meeting of the Company each ordinary share carries one vote. The Ordinary Shares also carry the right to receive all income of the Company attributable to the Ordinary Shares, and to participate in any distribution of such income made by the Company, such income shall be divided pari passu among the holders of Ordinary Shares in proportion to the number of Ordinary Shares held by them.
Significant share movements
1 January 2023 to 31 December 2023:
Ordinary Shares Number GBP Balance at the start of the year 395,592,696 403,365,545 Shares redeemed to date 2023 (81,901,754) (81,794,688) Balance at the end of the year 313,690,942 321,570,857 Issue costs since inception - (8,289,989) Net proceeds 313,280,868
1 January 2022 to 31 December 2022:
Ordinary Shares Number GBP Balance at the start of the year 408,911,273 415,730,000 Shares bought back in 2022 (13,318,577) (12,364,455) Balance at the end of the year 395,592,696 403,365,545 Issue costs since inception (8,289,989) Net proceeds 395,592,696 395,075,556
16. DIVIDENDS
Dividends will be declared by the Directors and paid in compliance with the solvency test prescribed by Companies (Guernsey) law, 2008. Under Guernsey law, companies can pay dividends in excess of accounting profit provided they satisfy the solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency test considers whether a company is able to pay its debts when they fall due, and whether the value of a company's assets is greater than its liabilities. The Group passed the solvency test for each dividend paid.
Subject to market conditions, the financial position of the Group and the investment outlook, it is the Directors' intention to pay quarterly dividends to shareholders (for more information see Chairman's Statement).
The Group paid the following dividends in respect of the year to 31 December 2023:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2023 1.375 5,439,400 23 May 2023
30 June 2023 1.375 5,306,680 28 August 2023
30 September 2023 1.375 4,906,662 25 November 2023
31 December 2023(1) 1.875 5,881,705 23 February 2024
(1) Declared on 25 January 2024 and to be paid on 23 February 2024 to shareholders on the register as at 2 February 2024. As this was declared after year end it was not accrued at year end.
On 23 March 2023, the Company declared a special dividend of 2 pence per Ordinary Share in respect of the year ending 31 December 2022 and paid on 18 May 2023 to shareholders on the register as at 31 March 2023.
The Group paid the following dividends in respect of the year to 31 December 2022:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (GBP)
31 March 2022 1.375 5,622,530 27 May 2022
30 June 2022 1.375 5,606,271 26 August 2022
30 September 2022 1.375 5,439,400 25 November 2022
31 December 2022(1) 1.375 5,439,400 24 February 2023
31 December 2022 Additional distribution 2.000 7,911,854 18 May 2023
(1) Declared after year end and to be paid on 24 February 2023 to shareholders on the register as at 3 February 2023. This was declared after year end hence was not accrued at year end.
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17. RISK MANAGEMENT POLICIES AND PROCEDURES
The Group through its investment in whole loans, subordinated loans, mezzanine loans, bridge loans, loan-on-loan financings and other debt instruments is exposed to a variety of financial risks, including market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.
It is the role of the Board to review and manage all risks associated with the Group, mitigating these either directly or through the delegation of certain responsibilities to the Audit Committee, Investment Manager and Investment Adviser.
The Board of Directors has established procedures for monitoring and controlling risk. The Group has investment guidelines that set out its overall business strategies, its tolerance for risk and its general risk management philosophy.
In addition, the Investment Manager monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. Further details regarding these policies are set out below:
a) Market risk
Market risk includes market price risk, currency risk and interest rate risk.
i) Market price 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 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.
ii) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in loans that are denominated in currencies other than the functional currency of the Company. Consequently the Group is exposed to risks arising from foreign exchange rate fluctuations in respect of these loans and other assets and liabilities which relate to currency flows from revenues and expenses. Exposure to foreign currency risk is hedged and monitored by the Investment Manager on an ongoing basis and is reported to the Board accordingly.
The Group and Lloyds Bank plc entered into an international forward exchange master agreement dated 5 April 2013 and on 7 February 2014 the Group entered into a Professional Client Agreement with Goldman Sachs, pursuant to which the parties can enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate between Sterling and other currencies. The Group does not trade in derivatives but holds them to hedge specific exposures and have maturities designed to match the exposures they are hedging. The derivatives are held at fair value which represents the replacement cost of the instruments at the reporting date and movements in the fair value are included in the Consolidated Statement of Comprehensive Income under net foreign exchange gains. The Group does not adopt hedge accounting in the financial statements. At the end of the reporting period the Group had 84 (2022: 109) open forward contracts.
As at 31 December 2023 the Group had the following currency exposure:
Danish Krone Sterling Euro Total
31 December 2023
GBP GBP GBP GBP
Assets
Loans advanced - 173,633,377 90,462,907 264,096,284
Financial assets at fair value through - 993,204 - 993,204
Other receivables and prepayments - 24,225 - 24,225
Cash and cash equivalents (45) 47,350,920 16,486,769 63,837,644
Liabilities
Revolving credit facility - - - -
Trade and other payables - (1,233,776) (394,209) (1,627,985)
Net currency exposure (45) 220,767,950 106,555,467 327,323,372
Danish Krone Sterling Euro Total
31 December 2022
GBP GBP GBP GBP
Assets
Loans advanced - 273,150,000 159,309,966 432,459,966
Financial assets at fair value through - 706,661 - 706,661
Other receivables and prepayments - 16,792 10,000 26,792
Cash and cash equivalents 49 3,496,721 79,385 3,576,155
Liabilities
Revolving credit facility - (18,863,204) - (18,863,204)
Trade and other payables - (1,462,729) (295,877) (1,758,606)
Net currency exposure 49 257,044,241 159,103,474 416,147,764
Currency sensitivity analysis
Should the exchange rate of the Euro against Sterling increase or decrease by 10 per cent with all other variables held constant, the net assets of the Group at 31 December 2023 would increase or decrease by GBP10,655,547 (2022: GBP15,910,347). Should the exchange rate of the Danish Krone against Sterling increase or decrease by 10 per cent with all other variables held constant, the net assets of the Group at 31 December 2023 would increase or decrease by GBP5 (2022: GBP5). These percentages have been determined based on potential volatility and deemed reasonable by the Directors. This does not include the impact of hedges in place which would be expected to reduce the impact.
In accordance with the Group's policy, the Investment Manager monitors the Group's currency position, and the Board of Directors reviews this risk on a regular basis.
iii) 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, receivables and cash and cash equivalents. The Group's investments have some exposure to interest rate risk but this is limited to interest earned on cash deposits and floating interbank rate exposure for investments designated as loans advanced.
Loans advanced have been structured to include a combination of fixed and floating interest and 90.5 per cent (2022: 78.6 per cent) of investments designed as loans advanced at 31 December 2023 have a floating interbank interest rate. The interest rate risk is mitigated by the inclusion of interbank rate floors on floating rate loans, preventing interest rates from falling below certain levels.
The following table shows the portfolio of the financial assets at 31 December. As at 31 December 2023, there were no interest bearing financial liabilities (2022: GBP18,863,204 fixed/floating rate).
31 December 2023 31 December 2022
GBP GBP
Floating rate
Loans advanced(1) 238,725,916 340,705,532
Cash and cash equivalents 63,837,644 3,576,155
Fixed rate
Loans advanced 25,370,368 91,754,434
Total financial assets subject to interest rate risk 327,933,928 436,036,121
(1) Loans advanced at floating rates include loans with interbank rate floors.
At 31 December 2023, if interest rates had changed by 100 basis points, with all other variables remaining constant, the effect on the net profit and equity would have been as shown in the table below:
31 December 2023 31 December 2022
GBP GBP
Floating rate
Increase of 100 basis points (1) 3,025,636 3,442,817
Decrease of 100 basis points (3,025,636) (3,442,817)
(1) Loans advanced at floating rates include loans interbank rate floors.
These percentages have been determined based on potential volatility and deemed reasonable by the Directors.
b) 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, where the Group invests in whole loans and also subordinated and mezzanine debt which rank behind senior debt for repayment in the event that a borrower defaults. There is a spread concentration of risk as at 31 December 2023 due to several loans being advanced since origination. 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. Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. The Group also has credit risk exposure in its financial assets classified as financial assets through profit or loss which is diversified between hedge providers in order to spread credit risk to which the Group is exposed. At year-end the derivative exposures were with one counterparty.
The total exposure to credit risk arises from default of the counterparty and the carrying amounts of financial assets best represent the maximum credit risk exposure at the year-end date. As at 31 December 2023, the maximum credit risk exposure was GBP328,927,132 (2022: GBP436,742,782).
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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 ECL using probability of default, exposure at default and loss given default. The Directors consider both historical analysis and forward looking information in determining any ECL. The Directors consider the loss given default to be close to zero for all loans, with the exception of Shopping Centre, Spain, a Stage 3 loan, referred to below, as all loans are the subject of very detailed underwriting, including the testing of resilience to aggressive downside scenarios with respect to the loan speci?cs, the market and general macro changes. In addition to this, all loans have very robust covenants in place, strong security packages and signi?cant loan-to-value headroom. During the year ended 31 December 2023, one loan moved from Stage 2 to Stage 3 with a value (net of impairment provision) of GBP11,189,028; four loans are classified as Stage 2 with a value of GBP81,869,634 (31 December 2022: the two loans with a value of GBP46,909,623) and the remaining loans are classified as Stage 1. The Group accounted for an impairment provision on its loan to Shopping Centre, Spain of GBP3,476,360 as at 31 December 2023.
The Group uses both quantitative and qualitative criteria for monitoring the loan portfolio as described in note 2 (h). The gross carrying amount of loan portfolio is presented in the table below and also represents the Group's maximum exposure to credit risks on these assets.
Total as at Total as at
Stage 1 Stage 2 Stage 3
31 December 2023 31 December 2022
GBP GBP GBP
GBP GBP
Loans advanced 171,037,622 81,869,634 11,189,028 264,096,284 432,459,966
Gross carrying amount 171,037,622 81,869,634 11,189,028 264,096,284 432,459,966
Carrying amount 171,037,622 81,869,634 11,189,028 264,096,284 432,459,966
The Group accounted for an impairment provision on loans to Shopping Centre, Spain of GBP3,476,360 as at 31 December 2023. This impairment provision was arrived at as at 31 December 2023 based on an ongoing sale process and agreed sale price level. In Q1 2024 the asset was sold and the loan repaid. 96 per cent of the impairment provision made was utilised.
The Group maintains its cash and cash equivalents across various different banks to diversify credit risk which have been all rated A1 or higher by Standard & Poor's and this is subject to the Group's credit risk monitoring policies as mentioned above.
Total as at Total as at
31 December 2023 31 December 2022
GBP GBP
Barclays Bank plc (rated: A1) 20,654,384 2,276,081
ING Luxembourg, SA (rated: A1) 18,321 1,299,092
Lloyds Bank plc (rated: A1) 698 698
HSBC Bank plc (rated: A1) 374 154
Royal Bank of Scotland International (rated: A1) 196 130
BlackRock Inc - Money Market Fund (rated A1+) 31,109,262 -
Deutsche Bank - Money Market Fund (rated A1) 12,054,409 -
Total cash and cash equivalents 63,837,644 3,576,155
The carrying amount of cash and cash equivalents approximates their fair value.
c) 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. The Group holds cash reserves sufficient to cover all unfunded cash loan commitments. Ongoing costs are covered by interest receipts. Dividends are paid from available cash. In addition, the Company is permitted to borrow up to 30 per cent of NAV and has revolving credit facilities available to it of GBP25,000,000 (2022: GBP126,000,000) of which GBPnil (2022: GBP19,000,000) was drawn at the end of the reporting period.
In January 2023, one facility of GBP50 million was reduced to GBP25 million and in August 2023, the revolving credit facilities of GBP76.0 million were canceled, leaving GBP25.0 million still available. The term of the GBP25 million facility expires in May 2024 and the Company does not intend to renew it.
The table below shows the maturity of the Group's non-derivative financial assets and liabilities arising from the advancement of loans by remaining contractual maturities at the end of the reporting date. The amounts disclosed under assets are contractual, undiscounted cash flows and may differ from the actual cash flows received in the future as a result of early repayments and interest rate changes:
Between 3 and
Up to 3 months Over 12 months Total
31 December 2023 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 11,189,028 80,136,618 172,770,638 264,096,284
Cash and cash equivalents 63,837,644 - - 63,837,644
Liabilities and commitments
Loan commitments(1) (1,809,314) (18,429,070) (16,013,871) (36,252,255)
Credit facilities - - - -
Trade and other payables (1,627,985) - - (1,627,985)
71,589,373 61,707,548 156,756,767 290,053,688
(1) Loan commitments are estimated forecasted cash drawdowns at year end.
Between 3 and
Up to 3 months Over 12 months Total
31 December 2022 12 months
GBP GBP GBP
GBP
Assets
Loans advanced 42,752,233 145,719,555 243,988,178 432,459,966
Cash and cash equivalents 3,576,155 - - 3,576,155
Liabilities and commitments
Loan commitments(1) (3,258,958) (20,660,608) (25,143,447) (49,063,014)
Credit facilities (182,879) (19,000,000) - (19,182,879)
Trade and other payables (1,758,606) - - (1,758,606)
41,127,945 106,058,947 218,844,731 366,031,622
(1) Loan commitments are estimated forecasted cash drawdowns at year end.
The table below analyses the Group's derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the end of the reporting date. The amounts disclosed are the contractual undiscounted cash flows:
31 December 2023
Between 3 and Total as at
Up to 3 months Over 12 months
Derivatives 12 months 31 December 2023
GBP GBP
GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives (16,783,019) (66,362,828) (25,555,814) (108,701,661)
Outflow(1)
Inflow 16,747,137 66,588,688 26,198,164 109,533,989
(1) Euro amounts translated at year end exchange rate.
31 December 2022
Between 3 and Total as at
Up to 3 months Over 12 months
Derivatives 12 months 31 December 2022
GBP GBP
GBP GBP
Lloyds Bank plc:
Foreign exchange derivatives
Outflow(1) (45,083,803) (44,996,439) (72,650,196) (162,730,438)
Inflow 45,342,288 45,603,942 74,248,795 165,195,025
(1) Euro amounts translated at year end exchange rate.
(iv) Risk of default under the revolving credit facilities
The Group is subject to the risk that a borrower could be unable or unwilling to meet a commitment that it has entered into with the Group as outlined above under market deterioration risk. As a consequence of this, the Group could breach the covenants of its revolving credit facilities and fall into default itself.
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The Board regularly reviews the balances drawn under the credit facility against commitments and reviews the performance under the agreed covenants. The loan covenants are also stress tested to test how robust they are to withstand default of the Group's investments. It should be noted however that as at 31 December 2023 there were no amounts drawn on the Group's credit facilities, the remaining GBP25 million facility available to the Group is due to expire in May 2024 and the Group has no intention of drawing on the facility in 2024 or extending the facility beyond May 2024.
Capital management policies and procedures
The Group's capital management objectives are:
-- To ensure that the Group will be able to continue as a going concern; and
-- To maximise the income and capital return to equity shareholders through an appropriate balance of equitycapital and cash reserves.
The capital of the Company is represented by the net assets attributable to the holders of the Company's shares.
In accordance with the Group's current investment policy, the Group's principal use of cash is to fund unfunded loan cash commitments, ongoing operational expenses and payment of dividends in accordance with the Company's dividend policy and the return of capital to shareholders.
The Board, with the assistance of the Investment Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. The Company has no imposed capital requirements.
The Company's capital at the end of the reporting period comprises:
31 December 2023 31 December 2022
GBP GBP
Equity
Equity share capital 313,280,868 395,075,556
Retained earnings and translation reserve 14,050,837 21,072,208
Total capital 327,331,705 416,147,764
18. FAIR VALUE MEASUREMENT
IFRS 13 requires the Group to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
b) 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).
c) Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Group's financial assets and liabilities (by class) measured at fair value:
31 December 2023
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 993,204 - 993,204
Total - 993,204 - 993,204
31 December 2022
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Derivative assets - 706,661 - 706,661
Total - 706,661 - 706,661
There have been no transfers between levels for the year ended 31 December 2023 (2022: nil).
The Directors were 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 following table summarises within the fair value hierarchy the Group's assets and liabilities (by class) not measured at fair value at 31 December 2023 but for which fair value is disclosed:
31 December 2023
Total fair Total carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 275,556,353 275,556,353 264,096,284
Total - - 275,556,353 275,556,353 264,096,284
31 December 2022
Total fair Total carrying
Level 1 Level 2 Level 3 values amount
GBP GBP GBP GBP GBP
Assets
Loans advanced - - 453,301,433 453,301,433 432,459,966
Total - - 453,301,433 453,301,433 432,459,966
Liabilities
Credit facility - 18,863,204 - 18,863,204 18,863,204
Total - 18,863,204 - 18,863,204 18,863,204
For cash and cash equivalents, other receivables, trade and other payables and credit facilities the carrying amount is a reasonable approximation of the fair value. The Group carries its loans advanced at amortised cost in the consolidated financial statements. Refer to note 10 for further information.
The carrying amounts of the revolving credit facilities included in the above tables are considered to approximate its fair values. The fair value of loans advanced have been determined by discounting the expected cash flows using a discounted cash flow model based on the variable interest rates. For avoidance of doubt the Group carries its loans advanced at amortised cost in the financial statements. Refer to note 10 for further information.
Cash and cash equivalents include cash at hand and fixed deposits held with banks. Other receivables include the contractual amounts and obligations due to the Group and consideration for advance payments made by the Group. Credit facilities and trade and other payables represent the contractual amounts and obligations due by the Group for contractual payments.
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of shareholdings advised to them, the Company has no immediate or ultimate controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of GBP1,600.
The Luxembourg indirect subsidiaries of the Company are subject to the applicable tax regulations in Luxembourg. The table below analyses the tax charges incurred at Luxembourg level:
31 December 2023 31 December 2022
GBP GBP
Operating profit before tax (Luxco, Luxco 3 and Luxco 4 only) 643,358 612,648
Corporate Income Tax and Municipal Business Tax 158,403 150,775
Net Wealth Tax 40,282 35,004
Withholding Tax 130,814 58,029
Under provisions related to prior years 277,693 (153,520)
Taxation per Consolidated Statement of Comprehensive Income 607,193 90,287
The Luxco had no operating gains on ordinary activities before taxation and were therefore for the year ended 31 December 2023 subject to the Luxembourg minimum corporate income taxation at EUR4,815 (2022: EUR4,815). The Luxco 3 and Luxco 4 are subject to Corporate Income Tax and Municipal Business Tax based on a margin calculated on an arm's-length principle. The effective tax rate for Corporate Income Tax and Municipal Business Tax in Luxembourg during the reporting period was 24.94 per cent (2022: 24.94 per cent).
21. RECONCILIATION OF IFRS TO US GAAP
To meet the requirements of Rule 206(4)-2 under the Investment Advisors Act 1940 (the "Custody Rule") the consolidated financial statements of the Group have also been audited in accordance with Generally Accepted Auditing Standards applicable in the United States ("US GAAS"). As such two independent Auditor's reports are included under International Standards on Auditing as required by the Crown Dependencies Audit Rules and the other under US GAAS. Compliance with the Custody Rule also requires a reconciliation of the operating profit and net assets under IFRS to US GAAP.
The principal differences between IFRS and US GAAP relate to accounting for financial assets that are carried at amortised cost. Under US GAAP the calculation of the effective interest rate is based on contractual cash flows over the asset's contractual life, however, under the IFRS basis, the effective interest rate calculation is based on the estimated cash flows over the expected life of the asset.
The Directors have assessed the operating profit and NAV of the Company and Group under both IFRS and US GAAP and have concluded that no material differences were identified and therefore no reconciliation has been presented in these consolidated financial statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Details on the agreements with the Investment Manager and other parties are included in note 3 to these consolidated financial statements.
The following tables summarise the transactions that occurred with related parties during the reporting period and outstanding at 31 December 2023 and 31 December 2022:
2023
Outstanding at For the year ended
31 December 2023 31 December 2023
Fees, expenses and other payments GBP GBP
Directors' fees and expenses
John Whittle - 60,000
Shelagh Mason 11,250 45,000
Charlotte Denton - 50,000
Gary Yardley - 42,000
Expenses 1,500 7,739
Investment Manager
Investment management fees 672,075 2,910,524
Expenses - 90,813
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2022
Outstanding at For the year ended
31 December 2022 31 December 2022
Fees, expenses and other payments GBP GBP
Directors' fees and expenses
John Whittle - 60,000
Shelagh Mason - 45,000
Charlotte Denton - 50,000
Gary Yardley - 42,000
Expenses - 6,373
Investment Manager
Investment management fees 777,556 3,122,755
Origination fees - 501,936
Expenses - 120,099
The following tables summarise the dividends paid to related parties during the reporting period and number of Company's shares held by related parties at 31 December 2023 and 31 December 2022:
2023
Dividends paid during
As at
the year ended
Shareholdings and dividends paid 31 December 2023
31 December 2023
Number of shares
GBP
Starwood Property Trust Inc. 670,125 7,247,687
SCG Starfin Investor LP 167,531 1,811,923
John Whittle 2,483 26,857
Charlotte Denton 3,259 35,244
Shelagh Mason 8,272 89,461
Duncan MacPherson* 18,329 198,239
Lorcain Egan* 6,135 66,353
* Employees at the Investment Adviser
2022
Dividends paid during
As at
the year ended
Shareholdings and dividends paid 31 December 2022
31 December 2022
Number of shares
GBP
Starwood Property Trust Inc. 502,700 9,140,000
SCG Starfin Investor LP 125,675 2,285,000
John Whittle 1,725 33,866
Charlotte Denton 1,833 44,444
Shelagh Mason 6,205 112,819
Duncan MacPherson* 13,750 250,000
Lorcain Egan* 4,602 83,678
* Employees at the Investment Adviser
Other
The Group continues to participate in a number of loans in which Starwood Property Trust, Inc. ("STWD") acted as a co-lender. The Group also acted as co-lender with Starwood European Real Estate Debt Finance I LP ("SEREDF I") an affiliate entity. The details of these loans are shown in the table below.
Loan Related party co-lenders Hotels, United Kingdom SEREDFI Office Portfolio, Spain STWD Office Portfolio, Ireland STWD
23. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 31 December 2023, the following amounts have been drawn under existing commitments, up to 18 March 2024:
Local currency Hotels, United Kingdom GBP3,314,576
Subsequent to 31 December 2023, the following partial repayments have been received up to 18 March 2024:
Local currency Hotel, Dublin EUR8,455,000 Hotel and Office, Northern Ireland GBP600,000 Three Shopping Centres, Spain EUR19,165,883
Subsequent to 31 December 2023, the following loans have been repaid in full up to 18 March 2024:
Local currency Shopping Centre, Spain EUR12,392,071
On 20 February 2024, the Company announced a compulsory redemption of 19,402,403 Ordinary shares at a price of GBP1.0308 per share.
On 25 January 2024, the Directors declared a dividend in respect of the fourth quarter of 2023 of 1.875 pence per Ordinary share payable on 23 February 2024 to shareholders on the register at 2 February 2024.
On 18 March 2024, the Company approved a further compulsory redemption of shares amounting to GBP25.0 million.
Further Information
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs") the Board has considered what APMs are included in the Annual Financial Report and Audited Consolidated Financial Statements which require further clarification. An APM is defined as a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. APMs included in the financial statements, which are unaudited and outside the scope of IFRS, are deemed to be as follows:
NAV PER ORDINARY SHARE
The NAV per Ordinary Share represents the net assets attributable to equity shareholders divided by the number of Ordinary Shares in issue, excluding any shares held in treasury. The NAV per Ordinary Share is published monthly. This APM relates to past performance and is used as a comparison to the share price per Ordinary Share to assess performance. There are no reconciling items between this calculation and the Net Asset Value shown on the balance sheet (other than to calculate by Ordinary Share).
NAV TOTAL RETURN
The NAV total return measures the combined effect of any dividends paid, together with the rise or fall in the NAV per Ordinary Share. This APM relates to past performance and takes into account both capital returns and dividends paid to shareholders. Any dividends received by a shareholder are assumed to have been reinvested in the assets of the Company at its NAV per Ordinary Share.
SHARE PRICE TOTAL RETURN
The share price total return measures the combined effects of any dividends paid, together with the rise or fall in the share price. This APM relates to past performance and assesses the impact of movements in the share price on total returns to investors. Any dividends received by a shareholder are assumed to have been reinvested in additional shares of the Company at the time the shares were quoted ex-dividend.
NAV TO MARKET PRICE DISCOUNT / PREMIUM
The discount / premium is the amount by which the share price of the Company is lower (discount) or higher (premium) than the NAV per Ordinary Share at the date of reporting and relates to past performance. The discount or premium is normally expressed as a percentage of the NAV per Ordinary Share.
INVESTED LOAN PORTFOLIO UNLEVERED ANNUALISED TOTAL RETURN
The unlevered annualised return is a calculation at the quarterly reporting date of the estimated annual return on the portfolio at that point in time. It is calculated individually for each loan by summing the one-off fees earned (such as up-front arrangement or exit fees charged on repayment) and dividing these over the full contractual term of the loan, and adding this to the annual returns. Where a loan is floating rate (partially or in whole or with floors), the returns are based on an assumed profile for future interbank rates, but the actual rate received may be higher or lower. The return is calculated only on amounts funded at the quarterly reporting date and excludes committed but undrawn loans and excludes cash uninvested. The calculation also excludes origination fees paid to the Investment Manager, which are accounted for within the interest line in the financial statements.
An average, weighted by loan amount, is then calculated for the portfolio.
This APM gives an indication of the future performance of the portfolio (as constituted at the reporting date). The calculation, if the portfolio remained unchanged, could be used to estimate "income from loans advanced" in the Consolidated Statement of Comprehensive Income if adjusted for the origination fee of 0.75 basis points amortised over the average life of the loan. As discussed earlier in this report the figure actually realised may be different due to the following reasons:
-- In the quoted return, we amortise all one-off fees (such as arrangement and exit fees) over thecontractual life of the loan, which is currently four years for the portfolio . However, it has been our experiencethat loans tend to repay after approximately 2.5 years and as such, these fees are actually amortised over ashorter period.
-- Many loans benefit from prepayment provisions, which means that if they are repaid before the end of theprotected period, additional interest or fees become due. As we quote the return based on the contractual life ofthe loan these returns cannot be forecast in the return.
-- The quoted return excludes the benefit of any foreign exchange gains on Euro loans. We do not forecastthis as the loans are often repaid early and the gain may be lower than this once hedge positions are settled.
Generally speaking, the actual annualised total return is likely to be higher than the reported return for these reasons, but this is not incorporated in the reported figure, as the benefit of these items cannot be assumed.
PORTFOLIO LEVERED ANNUALISED TOTAL RETURN
The levered annualised total return is calculated on the same basis as the unlevered annual return but takes into account the amount of leverage in the Group and the cost of that leverage at current SONIA rates.
ONGOING CHARGES PERCENTAGE
Ongoing charges represents the management fee and all other operating expenses excluding finance costs and transactions costs, expressed as a percentage of the average monthly net asset values during the year and allows users to assess the running costs of the Group. This is calculated in accordance with AIC guidance and relates to past performance. The charges include the following lines items within the Consolidated Statement of Comprehensive Income:
-- Investment management fees
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-- Administration fees
-- Audit and non-audit fees
-- Other expenses
-- Legal and professional fees
-- Directors' fees and expenses
-- Broker's fees and expenses
-- Agency fees
The calculation adds back any expenses unlikely to occur absent any loan originations or repayments and as such, the costs associated with hedging Euro loans back to Sterling have been added back. The calculation does not include origination fees paid to the Investment Manager; these are recognised through "Income from loans advanced".
WEIGHTED AVERAGE PORTFOLIO LTV TO GROUP FIRST AND LAST GBP
These are calculations made as at the quarterly reporting date of the loan to value ("LTV") on each loan at the lowest and highest point in the capital stack in which the Group participates. LTV to "Group last GBP" means the percentage which the total loan commitment less any amortisation received to date (when aggregated with any other indebtedness ranking alongside and/or senior to it) bears to the market value determined by the last formal lender valuation received by the quarterly reporting date. LTV to "first Group GBP" means the starting point of the loan to value range of the loan commitments (when aggregated with any other indebtedness ranking senior to it). For development projects, the calculation includes the total facility available and is calculated against the assumed market value on completion of the project.
An average, weighted by the loan amount, is then calculated for the portfolio.
This APM provides an assessment of future credit risk within the portfolio and does not directly relate to any financial statement line items.
PERCENTAGE OF INVESTED PORTFOLIO IN FLOATING RATE LOANS
This is a calculation made as at the quarterly reporting date, which calculates the value of loans, which has an element of floating rate in part, in whole and including loans with floors, as a percentage of the total value of loans. This APM provides an assessment of potential future volatility of the income on loans, as a large percentage of floating rate loans would mean that income would move up or down with changes in SONIA.
AVERAGE LOAN TERM AND AVERAGE REMAINING LOAN TERM
The average loan term is calculated at the quarterly reporting date by calculating the average length of each loan from initial advance to the contractual termination date. An average, weighted by the loan amount, is then calculated for the portfolio.
The average remaining loan term is calculated at the quarterly reporting date by calculating the average length of each loan from the quarterly reporting date to the contractual termination date. An average, weighted by the loan amount, is then calculated for the portfolio.
This APM provides an assessment of the likely level of repayments occurring in future years (absent any early repayments) which will need to be reinvested. In the past, the actual term of loans has been shorter than the average contractual loan term due to early repayments and so the level of repayments is likely to be higher than this APM would suggest. However, this shorter actual loan term cannot be assumed as it may not occur and therefore it is not reported as part of this APM.
NET CASH
Net cash is the result of the Group's total cash and cash equivalents minus total credit facility utilised as reported on its consolidated financial statements.
UNUSED LIQUID FACILITIES
Unused liquid facilities is the result of the Group's total cash and cash equivalents plus the available balance to withdraw under existing credit facilities at the reporting date.
PORTFOLIO DIVERSIFICATION
The portfolio diversification statistics are calculated by allocating each loan to the relevant sectors and countries based on the value of the underlying assets. This is then summed for the entire portfolio and a percentage calculated for each sector / country.
This APM provides an assessment of future risk within the portfolio due to exposure to specific sectors or countries and does not directly relate to any financial statement line items.
Corporate Information
Directors
John Whittle (Non-executive Director)
Shelagh Mason (Non-executive Director)
Charlotte Denton (Non-executive Director)
Gary Yardley (Non-executive Director)
(all care of the registered office)
Investment Manager
Starwood European Finance
Partners Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Solicitors to the Company (as to English law and U.S. securities law)
Norton Rose Fullbright LLP
3 More London Riverside London
SE1 2AQ
United Kingdom
Registrar
Computershare Investor Services (Guernsey) Limited
1st Floor
Tudor House
Le Bordage
St Peter Port
Guernsey
GY1 1DB
Broker
Jefferies Group LLC
100 Bishopsgate
London, EC2N 4JL
United Kingdom
Administrator, Designated Manager and Company Secretary
Apex Fund and Corporate Services
(Guernsey) Limited
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Registered Office
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
Investment Adviser
Starwood Capital Europe Advisers, LLP
1 Berkeley Street
London
W1J 8DJ
United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques
St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
St Julian's Court
St Julian's Avenue
St Peter Port
Guernsey
GY1 1WA
Website:
www.starwoodeuropeanfinance.com
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ISIN: GG00BP6VJD72 Category Code: ACS TIDM: SWEF LEI Code: 5493004YMVUQ9Z7JGZ50 OAM Categories: 1.1. Annual financial and audit reports Sequence No.: 310408 EQS News ID: 1861413 End of Announcement EQS News Service =------------------------------------------------------------------------------------
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