REG-Starwood European Real Estate Finance Ltd SWEF: Full Year Results for the Year Ended 31 December 2022
24/03/2023 07:15
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Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Full Year Results for the Year Ended 31 December 2022
24-March-2023 / 07:14 GMT/BST
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Starwood European Real Estate Finance Limited
Full Year Results for the Year Ended 31 December 2022
Unlevered Annualised Portfolio Return Rises to 7.8%; 79% Floating Rate
Exposure
Orderly Realisation Strategy Approval Post Period End; Additional 2.0
Pence Per Share Additional Dividend Declared
Starwood European Real Estate Finance Limited (the “Company”) and its
subsidiaries (“SEREF” or the “Group”), a leading investor originating,
executing and managing a diverse portfolio of high-quality real estate
debt investments in the UK and Europe, announces strong Full Year Results
for the year ended 31 December 2022.
Following the approval of the Company’s new investment objective and
policy as recommended to shareholders by the Board post period end at the
Company’s EGM on 27 January 2023, the Company will pursue a strategy of
orderly realisation and the return of capital over time to shareholders.
Highlights since IPO, 17 December 2012
• 82.3 per cent NAV total return from a robust investment strategy,
including annualised NAV total returns of 6.2 per cent (excludes
additional dividend of 2.0 pence for 2022 announced on 23 March 2023)
• £1.6 billion capital invested in secured loans to high quality real
estate counterparties
• 0 per cent loss track record reflecting a resilient approach
• £206 million in dividends paid to shareholders in a regular source of
income, paid quarterly
Highlights for the period, 12 months ended 31 December 2022
• Strong cash generation - the portfolio as a whole continues to support
targeted annual dividend payments of 5.5 pence per Ordinary Share,
paid quarterly. A dividend of 5.5 per pence per Ordinary Share
represents a 6.2 per cent dividend yield on the share price as at
31 December 2022
• Additional dividend – an additional dividend of 2.0 pence per Ordinary
Share has been declared post period end in respect of the 2022
earnings period, leading to a total declared distribution of 7.5 pence
per Ordinary Share for the year
• Income stability - all loan interest and scheduled amortisation
payments paid in full and on time
• 79 per cent of the portfolio is contracted at floating interest rates
(with floors) which benefits the Group in the current rising interest
rate environment
• Portfolio remains robust - despite the economic disruption and
uncertainty experienced in 2022, the portfolio continues to perform
fully in line with expectations
• Borrowers remain adequately capitalised and are expected to continue
to pay loan interest and capital repayments in line with contractual
obligations
• Further strategic progress - in 2022, the Group committed a total of
£66 million to two new loans, located in the United Kingdom and
Europe, in the office, industrial and industrial estates sectors
• 51 per cent – share price total return since IPO in December 2012
(excludes additional dividend of 2.0 pence for 2022 announced on 23
March 2023)
• Portfolio remains fully invested
Portfolio Statistics
As at 31 December 2022, the portfolio was invested in line with the
Group’s investment policy. The key portfolio statistics are summarised
below:
31 December 2022 31 December 2021
Number of investments 20 19
Percentage of currently invested 78.9% 78.0%
portfolio in floating rate loans
Invested Loan Portfolio unlevered 7.8% 6.9%
annualised total return*
Invested Loan Portfolio levered 7.9% 7.0%
annualised total return*
Weighted average portfolio LTV - to 13.2% 16.4%
Group first £*
Weighted average portfolio LTV - to 58.6% 61.9%
Group last £*
Average loan term (stated maturity at 5.0 years 4.9 years
inception)
Average remaining loan term 1.7 years 2.3 years
Net Asset Value £416.1m £421.6m
Amount drawn under Revolving Credit (£19.2m) (£8.5m)
Facility (including accrued interest)
Loans advanced at amortised cost £432.5m £414.6m
(including accrued income)
Cash £3.6m £3.0m
Other net assets / liabilities (£0.8m) £12.5m
(including the value of FX hedges)
*Alternative performance measure
John Whittle, Chairman of the Company commented:
“The twelve months ended 31 December 2022 represented another highly
successful year for the Group in an extraordinary year that severely
tested many investment strategies. Despite extremely challenging, volatile
and uncertain economic conditions, once again the Group demonstrated
resilient and consistent performance. Crucially, once again all loan
interest and scheduled amortisation payments continue to be paid in full
and on time. This is due to the rigorous underwriting and diligent
portfolio management that have defined the Group’s existence since 2012.
Meanwhile, underlying collateral valuations continue to provide reassuring
headroom. It is equally notable that while resilience is an attractive
feature, the portfolio has also been able to grow its earnings in current
market conditions, delivering a 7.8 per cent annualised and unlevered
portfolio return from the Group’s 78.9 per cent floating rate loans
positions, covering the target dividend 1.24 times.
Despite this performance and strong shareholder support, under the Group’s
discount control mechanism in Q1 2023, the Group would have been required
to offer shareholders an opportunity to redeem up to 75 per cent of their
holding in the Group as a result of the Group’s discount to its NAV per
share being greater than 5 per cent or more during the six-month period
ending 31 December 2022. In October 2022 the Board determined that
following discussions with larger shareholders, the likely take-up of this
option would result in the Company no longer being of viable size to
provide shareholders with significant liquidity and scale. Accordingly, a
resolution was passed at the Group’s EGM on 27 January 2023 to amend the
Group’s investment objective and policy to pursue a strategy of orderly
realisation and the return of capital over time to shareholders.
While the Group’s secure income investment style has fallen out of favour
it cannot be doubted that the Group has clearly met its objectives at IPO
and has established an enviable track record of delivering stable and
consistent income and risk adjusted returns. This was especially marked in
the Group’s navigation of the huge disruption of the Covid-19 epidemic
without a single missed payment, a remarkable achievement of which the
Investment Adviser, Investment Manager and the Board may be proud. To them
all I acknowledge my thanks as we look ahead to continuing to manage the
portfolio to preserve and maximise returns for shareholders as we
implement the Group’s new orderly realisation strategy.”
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
Stuart Klein
Harry Randall
Buchanan +44 (0) 20 7466 5000
Helen Tarbet +44 (0) 07788 528143
Henry Wilson
Hannah Ratcliff
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.
1 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 2022
Overview
Financial Highlights
Key Highlights Year ended Year ended
31 December 2022 31 December 2021
NAV per Ordinary Share 105.20 p 103.09 p
Share Price 89.0 p 94.0 p
NAV total return (1) (2) 7.7% 4.6%
Share Price total return (1) (2) 0.45% 11.1%
Total Net Assets £416.1 m £421.6 m
Loans advanced at amortised cost £432.5 m £414.6 m
(including accrued income)
Financial assets held at fair value £0.7 m £13.3 m
through profit or loss
Cash and Cash Equivalents £3.6 m £3.0 m
Amount drawn under Revolving Credit £19.0 m £8.5 m
Facility (excluding accrued interest)
Dividends per Ordinary Share (2) 5.5 p 5.5 p
Invested Loan Portfolio unlevered 7.8% 6.9%
annualised total return (1)
Invested Loan Portfolio levered 7.9% 7.0%
annualised total return (1)
Ongoing charges percentage (1) 1.1% 1.0%
Weighted average portfolio LTV to Group 13.2% 16.4%
first £ (1)
Weighted average portfolio LTV to Group 58.6% 61.9%
last £ (1)
(1) Further explanation and definitions of the calculation is contained in
the section “Alternative Performance Measures” at the end of this
financial report.
(2) Excludes additional dividend for 2022 announced on 23 March 2023.
SHARE PRICE PERFORMANCE
As at 31 December 2022, the NAV was 105.20 pence per Ordinary Share (2021:
103.09 pence) and the share price was 89.0 pence (2021: 94.0 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, and for the whole of 2022, are set out in the prior year
Annual Report which can be found on the company’s website
https://starwoodeuropeanfinance.com. The Investment Objective applied for
the whole of 2022 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 for the whole of
2022 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 the value of any underlying
security; and
• cash held by the Group pending distribution will be held in either
cash or cash equivalents for the purposes 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.
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 in the context of its group as a
whole;
• the Company will avoid cross-financing between businesses forming part
of its investment portfolio;
• the Company will avoid the operation of common treasury functions as
between the Company and investee companies;
• not more than 10 per cent, in aggregate, of the Company’s NAV will be
invested in other listed closed-ended investment funds; and
• the Company will, at all times, invest and manage its assets in a way
which is consistent with its object of spreading investment risk and
in accordance with the published investment policy. As required by the
Listing Rules, any material change to the investment policy of the
Company will be made only with the approval of shareholders.
Chairman’s Statement
JOHN WHITTLE | Chairman
23 March 2023
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 for the year ended 31 December 2022.
The feeling of optimism across UK and global economies felt in early 2022
- post the worst restrictions of the Covid-19 pandemic - was soon replaced
by concerns over energy prices, the rising cost of living, higher interest
rates and the Russian invasion of Ukraine.
Domestically, the UK government and economy faced a number of other
setbacks in the second half of the year with three prime ministers in as
many months, government U-turns on economic policy and a number of wide
spread and widely impacting strikes across key infrastructure sectors - by
railway workers, nurses and UK Border control, among others, at the end of
the year.
Despite these challenging, volatile and uncertain economic and political
times, once again, the Group demonstrated its unique portfolio resilience
through the strength and consistency of its results. It is significant,
and very gratifying to note, that, once again, all loan interest and
scheduled amortisation payments have continued to be paid in full and on
time. This excellent result is due both to the evident rigorous
underwriting of borrowers and sponsors and the diligent ongoing portfolio
management by our Investment Adviser and Manager. Meanwhile, underlying
collateral valuations continue to provide reassuring headroom in the event
of any asset under performance.
The last three 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. Against significant
market challenges, the Group not only maintained a stable Net Asset Value
(‘NAV’) but also met its dividend targets, delivering it’s targetted
annualised 5.5 pence per share to shareholders as well as an additional
dividend of 2p per share announced on 23 March 2023.
Nevertheless, despite the resilience of the loan portfolio, a share
buyback programme (which was active from July 2022 to October 2022) and a
stable NAV, the Company’s share price has been unable to meaningfully
narrow its discount to the prevailing NAV which initially occurred as a
result of the wider market re-rating following the onset of Covid-19 (in
the first half of 2020).
Under the Company’s discount control mechanisms (contained within its
Articles of Association), in Q1 2023 the Company would have been required
to offer shareholders an opportunity to redeem up to 75 per cent of their
holding in the Company as a result of the Company’s discount to its NAV
per share being greater than five per cent or more during the six-month
period ending 31 December 2022 (the “Tender Offer”).
However, in October 2022, the Board determined that, following discussions
with our larger shareholders, the likely take-up of a potential future
Tender Offer would be significant and as a result the Company would no
longer be of a viable size to provide shareholders with sufficient
liquidity and scale. Accordingly, the Board resolved to recommend that the
Company be placed into a managed wind-down with the aim of enabling
shareholders to realise their entire holdings in the Company ‘over time’
in line with the repayment of the relevant loan positions.
In reaching this decision, the Board considered a range of options and
several factors including the prevailing and persistent discount to NAV of
the shares, feedback from shareholders, and the market capitalisation and
liquidity of the shares.
In light of this, the Board recommended to shareholders that the
investment objective and policy of the Company were amended such that the
Board could pursue a strategy of orderly realisation and the return of
capital ‘over time’ to shareholders.
The 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 timeframe. The new strategy, approved by 99% of
Shareholders voting at the Company’s Extraordinary General Meeting (‘EGM’)
on 27 January 2023, will be implemented in a manner that will seek 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 with periodic share redemptions
being made as loans are repaid and commitments are satisfied.
Whilst market sentiment may have changed and the secure income generation
offered has recently 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. To have endured the huge disruption of the last couple of years
without a single missed payment is a remarkable achievement. My thanks to
all involved - the Investment Adviser, the Investment Manager and the
Board.
HIGHLIGHTS FOR 2022
• Strong cash generation - the portfolio as a whole continues to support
annual dividend payments of 5.5 pence per Ordinary Share, paid
quarterly. A dividend of 5.5 pence per Ordinary Share represents a 6.2
per cent dividend yield on the share price as at 31 December 2022.
• Additional dividend – an additional dividend of 2.0 pence per share
has been declared post period end in respect of the 2022 earnings
period, leading to a total declared distribution of 7.5 pence per
share for the year.
• Income stability - all loan interest and scheduled amortisation
payments paid in full and on time.
• 79 per cent of the portfolio is contracted at floating interest rates
(with floors) which benefits the Group in the current rising interest
rate environment.
• Portfolio remains robust - despite the economic disruption and
uncertainty experienced in 2022, the portfolio continues to perform
fully in line with expectations.
• Borrowers remain adequately capitalised and are expected to continue
to pay loan interest and capital repayments in line with contractual
obligations.
• Further strategic progress - in 2022, the Group committed a total of
£66 million to two new loans, located in the United Kingdom and
Europe, in the office and industrial sectors.
• 51 per cent – share price total return since IPO in December 2012
(excludes additional dividend for 2022 announced on 23 March 2023).
• Portfolio remains fully invested
INVESTMENT PERFORMANCE
Interest & Amortisation Payments
All loan interest and scheduled amortisation payments to date have been
paid in full and on time. This includes loans in sectors that have been
most impacted by the lasting impact of the Covid-19 pandemic, namely,
hospitality and retail assets, where borrowers continue to remain
adequately capitalised as previously reported.
Strong cash generation
The portfolio performance continues to support the targeted annual
dividend payments of 5.5 pence, paid quarterly.
Dividend support
79 per cent of the portfolio is contracted at floating interest rates
(with floors) which has started to provide an increase in revenue as
higher inflation has resulted in higher interest rates.
The Invested Loan Portfolio unlevered annualised total return has been
increasing steadily as interest rates curves have moved upwards. The year
on year increase at 31 December 2022 was 90 basis points (i.e. at 7.8 per
cent, up from 6.9 per cent in December 2021). As interest rates continue
to rise there is additional support for the dividend cover.
INVESTMENT MOMENTUM
The Group closed two loans in 2022 – Office and Industrial Portfolio in
the UK and the Netherlands (total commitment which was fully funded on
signing - £5.5 million and €16.4 million respectively, of which €16.4
million had been repaid by the year end and of which £5.5 million was
repaid in February 2023) and Industrial Estate in the UK (total commitment
- £46.2 million of which £27.2 million was fully funded on signing).
The Group also funded a further £14.7 million in relation to loan
commitments made in prior years which were unfunded.
One loan, Office, Scotland (£5.0 million) was repaid in full during the
year but a further £51.9 million (including the €16.4 million referred to
above) was received in partial repayments on loans which still have
outstanding balances as at 31 December 2022.
As at 31 December 2019 to 2022 the Group had commitments as shown in the
table below.
2019 2020 2021 2022
Funded loans £411.1m £440.9m £412.0m £425.9m
Unfunded Commitments £78.2m £49.2m £44.5m £49.0m
Total £489.3m £490.1m £456.5m £474.9m
The contractual maturity of the Group’s portfolio shows that as at 31
December 2022, 40.5 per cent of invested loan balances held were expected
to mature in the next twelve months.
Q1 Q2 Q3 Q4 2022
NAV at beginning of the period 103.09 103.13 103.42 103.58 103.09
Quarterly Movements
Operating Income available to 1.36 1.47 1.77 2.20 6.80
distribute(1)
Realised FX gains/(losses) not 0.78 0.29 0.00 0.00 1.07
distributable(2)
Unrealised FX gains/(losses)(3) -0.73 -0.09 -0.46 0.67 -0.61
Dividend declared -1.37 -1.38 -1.37 -1.38 -5.50
Impact on NAV of shares bought back 0.00 0.00 0.22 0.13 0.35
NAV as end of period 103.13 103.42 103.58 105.20 105.20
(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. Included in loan income recognised in
Q4 2022 is circa £1.3m (equivalent to 0.34p per share) of loan income
related to Office and Industrial Portfolio, Netherlands which was fully
repaid in December 2022 and which benefited from early repayment income
protection. The Operating Income available to distribute also includes any
realised foreign exchange gains or losses upon settlement of hedges,
except those described in note 2.
(2) 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.
(3) 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). Mis-matches 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.
NAV PERFORMANCE
As anticipated, and as in the past, we are pleased to report that the
Group’s NAV has once again remained stable during the year demonstrating
the highly resilient credentials of the asset class that contributes to
its success as a reliable source of alternative income. We do not expect
to see significant movements in NAV as the Group’s loans are held at
amortised cost and Euro exposures are hedged.
The NAV would be materially impacted if an impairment in the value of a
loan was required but, despite the recent disruption to markets in general
no such impairment has been needed and the Group’s valuations remain
stable and current (the average age of valuations is 1.43 years). Please
refer to the Investment Manager’s report for detailed sector performance
reporting, information on the accounting for our loans and the current
loan to value position for the portfolio as a whole and for each sector.
SHARE BUYBACKS AND SHARE PRICE PERFORMANCE
During the year, the Company’s share price has been relatively volatile,
primarily as a result of dislocation across financial markets. During the
year the Company’s share price has traded in a range between 87.0 pence
and 97.6 pence. The year-end share price was 89.0 pence reflecting a 15.4
per cent discount to NAV.
The share price was supported in the latter half of 2022 by the share
buyback programme which ran from July 2022 until October 2022. During this
period the Company bought back an aggregate amount of 13.3 million shares
at an average cost per share of 92.8 pence per share. These shares are
held in Treasury.
FUTURE SHARE ISSUANCE
At the last Annual General Meeting (“AGM”), the Company sought and
received authority to disapply Pre-Emption Rights on the allotment of
equity securities for up to 10 per cent of the Ordinary Shares in issue.
As at the date of this report, this authority has not been utilised and
given the recent change in policy it is not intended that this authority
will be utilised or renewed.
DIVIDENDS
Total dividends of 5.5 pence per Ordinary Share have been paid to date in
relation to the year ended 31 December 2022. In addition, 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 to be paid on
21 April 2023 to shareholders on the register as at 31 March 2023.
The 2022 dividends paid to date (5.5 pence per Ordinary Share) were
covered 1.24 times by earnings (excluding unrealised FX gains and FX gains
realised on the roll forward of hedges). The Company maintains a dividend
reserve which is utilised, when needed, to ensure dividends are not paid
out of capital.
The Company intends to continue to target to pay a 5.5 pence per Ordinary
Share per annum (payable quarterly) going forward for as long as feasible
during the orderly realisation, and as noted above due to increases in
interest rates the dividend coverage and headroom has improved. This will
provide a level of dividend which should be fully covered by earnings
whilst ensuring the Company maintains strong credit discipline.
On the share price at 31 December 2022, a dividend of 5.5 pence represents
a 6.2 per cent dividend yield.
BOARD COMPOSITION AND DIVERSITY
The Board believes strongly in the value and importance of diversity in
the boardroom and we continue to consider 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.
Based on the recent change to the FCA’s Listing Rules regarding the
disclosure of diversity on listed company boards and executive committees,
effective for accounting periods starting from April 2022, the Board are
considering the impact, if any, on disclosure requirements.
I am very pleased with the current composition of the Board (which is 50
per cent female) both in terms of experience, skills and diversity which
places us well for the upcoming challenges.
It had been anticipated that I would retire from the Board at the end of
2023. However, the Board have suggested that I remain in post to guide the
Company through the orderly realisation of assets and I am happy to accept
their suggestion subject to the usual shareholder agreement to my
continuation in office.
Further details are provided on the succession planning in the Corporate
Governance Statement.
GOING CONCERN
Under the AIC 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.
Furthermore, the Directors have also considered, as disclosed in these
financial statements, the strategy of orderly realization and return of
capital to shareholders.
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.
OUTLOOK
The focus of the Group for 2023 is the commencement of the orderly
realisation strategy and the return of capital to shareholders over time.
The Board believes it is important to communicate clearly with you, our
shareholders, and we will continue to inform you of the Group’s progress
by way of the quarterly fact sheets and stock market announcements. We
welcome any comments you have on the way in which we communicate and
provide information to you.
My thanks to all of our services 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
23 March 2023
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.
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, both levered and unlevered;
• Ongoing charges as a percentage of undiluted NAV; and
• Weighted average loan to value for the portfolio.
Details of the KPIs achieved are shown in the Financial Highlights
section.
During 2023 the Board will consider what new and/or additional performance
measures (if any) should be used to measure its new strategy of orderly
realisation and return of capital to shareholders.
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.
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.
Long-Term Strategic Risk (risk that the business model is no longer
attractive)
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 four to five 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 and the European Union’s internal market and it is therefore
exposed to economic movements and changes in these markets. Any
deterioration in the global, UK or European economy could have a
significant adverse effect on the activities of the Group and may result
in 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, also presents a significant risk to European and Global
economies. While the Group has no direct or known indirect involvement
with Ukraine, Russia or Belarus it may be impacted by the consequences of
the instability caused by the ongoing Ukrainian/ Russian conflict.
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 conflict in
Ukraine, towards recession.
In addition there is the impact of the ongoing high inflationary
environment to consider (driven by increasing 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. Because of the cash and loan facilities available to 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 58.6 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 realization
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.
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.
Two loans within the portfolio are currently classified as Stage 2
(increased risk of default). These loans account for 10.8 per cent of the
loans advanced by the Group as at 31 December 2022. No expected credit
losses have been recognised against any of the loans, because of the
strong LTVs across the loan portfolio and strong contractual agreements
with Borrowers, including against these Stage 2 loans. 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 2022 have been structured so that 79 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 21 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 (63.1 per
cent as at 31 December 2022) 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 new non-Sterling
investments.
The Company had approximately £163.5 million (€184.1 million) of hedged
notional exposure with Lloyds Bank plc at 31 December 2022 (converted at
31 December 2022 FX rates).
As at 31 December 2022, the hedges were in the money. If the hedges move
out of the money and at any time this mark to market exceeds £15 million,
the Company is required to post collateral, subject to a minimum transfer
amount of £1 million. This situation is monitored closely, however, and as
at 31 December 2022, the Company had sufficient liquidity and credit
available on the revolving credit facility to meet any cash collateral
requirements.
Risk of Default under the Revolving Credit Facilities
The Group is subject to the risk that a borrower could be unable or
unwilling to meet a commitment that it has entered into with the Group as
outlined above under market deterioration risk. As a consequence of this,
the Group could breach the covenants of its revolving credit facilities
and fall into default itself.
A number of the measures the Group takes to mitigate market deterioration
risk as outlined above, such as portfolio diversification and rigorous due
diligence on investments and monitoring of borrowers, will also help to
protect the Group from the risk of default under the revolving credit
facility as this is only likely to occur as a consequence of borrower
defaults or loan impairments.
The Board regularly reviews the balances drawn under the credit facility
against commitments and 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.
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
(£49.0 million as at 31 December 2022) 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 all the Stage 2
loans held default, resulting in a loss of interest income and delay
in the repayment of capital; and
• Risk of default under the revolving credit facilities.
These scenarios represent ‘severe but plausible’ circumstances that the
Group could experience. The scenarios tested included:
• A high level of loan default meaning that the Group stopped receiving
interest on the Stage 2 loans in the portfolio and that the
outstanding capital on these loans was not received until 6 or 12
months after the loan maturity date plus Sonia and Euribor rates
falling to 0% from 2024 onwards;
• An analysis of the robustness of the covenants under the revolving
credit facility to withstand default of the underlying investments;
and
• A deterioration in the valuation of the foreign exchange hedges such
that the Company is required to post collateral up to £5m.
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
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 2025, 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 realization 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, healthcare and
residential.
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 4,500 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 as part of its succession
planning.
The Company has no employees and therefore has no disclosures to make in
this regard.
John Whittle | Chairman
23 March 2023
Investment Manager’s Report
MARKET SUMMARY AND INVESTMENT OUTLOOK
After decades of declining interest rates and a long period of benign
inflation, 2022 saw a sea change in inflation and a knock on effect into
interest rates across the globe. Rising inflation was driven by two key
factors. First as a consequence of the Covid-19 pandemic global supply
chains and shipments slowed in 2020 and 2021 causing worldwide shortages
and affecting consumer patterns.
The causes of the economic slowdown included workers becoming sick with
Covid-19 as well as mandates and restrictions affecting the availability
of staff resulting in production and logistics disruption with goods also
remaining at port due to staffing shortages. The related global chip
shortage contributed to the supply chain crisis, particularly in the
automobile and electronics sectors. During the Christmas and holiday
season of 2021, an increase in spending in North America, combined with
the spread of the Omicron variant of Covid-19, further exacerbated already
tight supplies.
To start with, the market largely expected these issues to be transitory
and inflation would settle back as an equilibrium in supply chains was
restored. As a result central banks were initially cautious about raising
rates which could stall a fragile economic recovery.
Market concerns began to rise about more persistent inflation in the later
part of 2021, but the second driver that compounded the issues was the war
in Ukraine which further disrupted supply of energy, commodities and food.
The result was an unprecedented rise in inflation in almost every country
in the world and a huge policy response.
Subsequently US, UK and Eurozone inflation has peaked at 9.1 per cent,11.1
per cent and 10.6 per cent respectively. In response the central banks
have acted rapidly, with the US Fed Funds rate, UK Bank of England Base
Rate and the ECB deposit policy rate leaping from 0-0.25 per cent, 0.25
per cent and -0.5 per cent to 4.25-4.5 per cent, 3.5 per cent and 2.0 per
cent respectively between the end of 2021 and the end of 2022. The knock
on effect for longer rates is that benchmarks such as the five year swap
which are typically the benchmark for commercial real estate loans have
also risen significantly. The US, UK and Euro 5 year swaps grew from 1.11
per cent, 1.05 per cent and -0.02 per cent to 3.70 per cent, 4.10 per cent
and 3.18 per cent respectively during the year.
At the beginning of the year most economists had seen inflation having
peaked and the expectations of future interest rises having peaked too.
Goldman Sachs expected UK rates peaking at 4.5 per cent in May 2023 versus
expectations by some economists that they might rise as far as 5 per cent
or even 6 per cent previously, however fears that inflation and higher
rates will be more sticky have been growing in recent weeks due to
economic data particularly the employment statistics.
Inflation and interest rates impact hard assets in a number of ways. For
example higher inflation in labour and construction materials and higher
interest rates for the financing of development all lead to a higher
overall construction cost which can lead to reduced supply which benefits
existing stock. Higher rates generally can also put pressure on real
estate yields that may look less desirable versus other forms of long
income such as long dated bonds and higher financing costs will leave
levered real estate buyers with less free cash after debt. On the other
side of the coin, the income of real assets is often strongly linked to
inflation either through direct linking in the terms of a lease or through
correlation of revenue with inflation.
In markets such as logistics and residential to rent, low levels of
vacancy combined with high demand have seen increasing rents and this
trend is likely to continue in a number of areas where there is
insufficient new supply delivered although a bad recession could reset
demand and / or the tenants ability to pay. Rising rents will be
supportive of values in these asset classes even while yields are
softening.
Real estate and leveraged finance volumes fell significantly in 2022.
Conditions have improved in the first weeks of 2023 but volumes are still
lower and pricing elevated. A large share of the increase in financing
costs has been the base interest rate component mentioned earlier with
spreads having widened as well. Larger loans that require distributions
through syndication CMBS or CLOs are still rare in the US and there have
been none in Europe. However, we do continue to see steady underlying
activity in bilateral and small club deals with spreads in Europe having
changed much less than in the bond markets since 2021 albeit with more
conservative risk metrics and structures. As is common in lower volume
markets there has been an increased gap in appetite between prime and
secondary assets and stock selection through asset class, sponsor and
business plan combination is absolutely key. Where rates settle is still
uncertain and it is likely that until the equilibrium is met we will still
see smaller volumes both in transaction and financing volumes.
We are also continuing to see the existing themes in the bank lending
market. There is a focus on stress tests, capital treatment and managing
risk weighted assets. As a result, the trend towards banks working
together with non-banks in co-origination or financing of loans as opposed
to providing direct loans is persisting. This is evident in the latest
Bayes lending survey which tracks the UK commercial real estate lending
market. The most recent report shows that alternative lenders now provide
24 per cent of new origination from almost none a decade ago and we see
that trend towards an increased portion of the market with non-bank
lenders continuing.
PORTFOLIO STATISTICS
As at 31 December 2022, the portfolio was invested in line with the
Group’s investment policy and is summarised below.
31 December 31 December
2022 2021
Number of investments 20 19
Percentage of invested portfolio in floating rate 78.9% 78.0%
loans (1)
Invested Loan Portfolio unlevered annualised total 7.8% 6.9%
return (1)
Invested Loan Portfolio levered annualised total 7.9% 7.0%
return (1)
Weighted average portfolio LTV – to Group first £ 13.2% 16.4%
(1)
Weighted average portfolio LTV – to Group last £ 58.6% 61.9%
(1)
Average loan term (stated maturity at inception) 5.0 years 4.9 years
Average remaining loan term 1.7 years 2.3 years
Net Asset Value £416.1 m £421.6 m
Amount drawn under Revolving Credit Facility (£19.2 m) (£8.5 m)
(including accrued interest)
Loans advanced at amortised cost (including £432.5 m £414.6 m
accrued income)
Cash £3.6 m £3.0 m
Other net assets / (liabilities) (including the (£0.8 m) £12.5 m
value of FX hedges)
(1) Alternative Performance Measure – refer to the definitions and
methodology.
The maturity profile of investments as at 31 December 2022 is shown below.
Value of loans % of invested
Remaining years to contractual maturity* (£m) portfolio
0 to 1 years £172.6 40.5
1 to 2 years £107.4 25.2
2 to 3 years £86.7 20.4
3 to 5 years £59.2 13.9
* 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 63.1
Republic of Ireland 17.6
Spain 16.5
Netherlands 2.2
Germany 0.6
Sector % of invested
assets
Hospitality 38.7
Office 20.8
Retail 11.4
Residential 10.6
Light industrial 6.5
Healthcare 5.9
Life Sciences 4.6
Logistics 1.1
Other 0.4
Loan type % of invested
assets
Whole loans 70.0
Mezzanine 30.0
Loan currency % of invested
assets*
Sterling 63.1
Euro 36.9
* 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 2022, the Group had 20 investments and commitments of
£474.9 million as follows:
Sterling Sterling Sterling Total
Transaction equivalent equivalent unfunded (Drawn
balance (1) commitment (1) and Unfunded)
Hospitals, UK £25.0 m £25.0 m
Hotel & Residential, UK £49.9 m £49.9 m
Office, London £19.0 m £1.5 m £20.5 m
Hotel, Oxford £23.0 m £23.0 m
Hotel, Scotland £42.6 m £42.6 m
Hotel, North Berwick £15.0 m £15.0 m
Life Science, UK £19.5 m £7.1 m £26.6 m
Hotel and Office, Northern £11.5 m £11.5 m
Ireland
Hotels, United Kingdom £32.0 m £18.6 m £50.6 m
Office and Industrial £5.5 m £5.5 m
Portfolio, UK
Industrial Estate, UK £27.2 m £19.0 m £46.2 m
Total Sterling Loans £270.2 m £46.2 m £316.4 m
Three Shopping Centres, £30.3 m £30.3 m
Spain
Shopping Centre, Spain £15.1 m £15.1 m
Hotel, Dublin £42.0 m £42.0 m
Office, Madrid, Spain £16.4 m £0.9 m £17.3 m
Mixed Portfolio, Europe £7.8 m £7.8 m
Mixed Use, Dublin £11.2 m £1.8 m £13.0 m
Office Portfolio, Spain £8.5 m £0.1 m £8.6 m
Office Portfolio, Ireland £21.7 m £21.7 m
Logistics Portfolio, £2.7 m £2.7 m
Germany
Total Euro Loans £155.7 m £2.8 m £158.5 m
Total Portfolio £425.9 m £49.0 m £474.9 m
(1) Euro balances translated to sterling at period end exchange rates.
Between 1 January and 31 December 2022, the following significant
investments activity occurred (included above):
Additional funding by the Group (new loans and existing commitments)
NEW LOAN: Office and Industrial Portfolio, UK and The Netherlands
On 26 May 2022, the Group announced its €16.4 million and £5.5 million
investment in a three-year multi-currency loan secured on a portfolio of
five offices and one industrial property located in the Netherlands and
the UK. The €16.4 million tranche of the loan was repaid in December 2022
and the £5.5 million tranche of the loan was repaid in February 2023.
NEW LOAN: Industrial Estate, UK
In September 2022 the Group funded the initial advance of a £46.2 million
floating rate whole loan secured by an industrial estate in Loughborough,
UK.
In addition to the new loans detailed above the Group also funded a
further £14.7 million in relation to loan commitments made in prior years
which were unfunded.
Loan Repayment
The following final loan repayment was received during the year:
REPAYMENT OF LOAN: Office, Scotland
The £5 million loan repaid in full upon the sale of the underlying
property in line with the sponsors business plan during the second quarter
of 2022.
Amortisation and early partial repayments
The following material loan amortisation and early partial repayment
amounts were received during the year:
• €16.8 million of unscheduled amortisation on the loan on the Mixed
Portfolio, Europe, following asset sales in line with the borrower’s
business plan;
• €16.4 million repayment of the euro tranche of the Office and
Industrial Portfolio, UK and The Netherlands which was a new loan in
2022, following asset sales in line with the borrower’s business plan;
• €12.6 million of early partial repayment on Hotel, Dublin from surplus
cash;
• €7.2 million of unscheduled amortisation on the loan on the Office
Portfolio, Dublin, following an asset sale in line with the borrower’s
business plan;
• €3.1 million of unscheduled amortisation on Logistics Portfolio,
Germany, following an asset sale in line with business plan; and
• €1.5 million of scheduled amortisation on loan relating to Three
Shopping Centres, Spain loan.
PORTFOLIO OVERVIEW
The portfolio continues to perform in line with expectations. All interest
and scheduled amortisation has been paid in line with contractual
obligations. Borrowers are also continuing to make progress on
underwritten business plans including executing strategic asset sales and
paying down the loans.
During 2022, a total of £56.9 million was repaid. The majority of these
repayments were related to strategic underlying property sales executed by
borrowers in line with business plan and typically following the
completion of underwritten asset management initiatives, with the
remainder representing regular scheduled loan amortisation or borrowers
electing to voluntarily pay down loan balances with surplus cash.
The Group’s exposure to development and heavy refurbishment projects
continues to decrease as current developments reach completion. As at 31
December 2022, £63 million or 13 per cent of total loan commitments
represented loans funding two construction projects. Both of these
projects are expected to have reached substantial completion during the
first quarter of 2023. The larger of these projects (with a total Group
loan commitment of £49 million) has pre-sold the majority of its
residential for-sale product and we are forecasting the loan to be fully
repaid during 2023 from the proceeds of pre-sold unit completions.
The Group continues to closely monitor all of its loan exposures. Asset
classes representing more than 10 per cent of total investments include
Hospitality (39 per cent), Office (21 per cent), Retail (11 per cent) and
Residential (11 per cent). The Hospitality exposure is diversified across
seven different loan investments. Hotel performance on the trading hotel
assets has continued to improve and recover from the pandemic very well
during 2022. Despite the potential that trading may be impacted from lower
discretionary consumer spending related to inflationary pressures, the
Group’s borrowers on trading assets such as hotels have generally
indicated a positive end to 2022 and the outlook for 2023 is cautiously
optimistic based on forward sales activity as at year end. Office exposure
(21 per cent) is spread across eight loan investments. Occupancy across
the leased office portfolio has held up well, with the vast majority of
the underlying tenants renewing leases and staying in occupation. We also
continue to see prospective new tenants being attracted particularly to
newly refurbished, high quality buildings. The Retail exposure (11 per
cent) has continued to perform in line with expectations; occupancy
continues to remain robust and footfall continues its post pandemic
recovery. Our retail loan borrowers continue their active asset management
and are signing new leases where tenants wish to expand and renew existing
leases. Residential exposure (11 per cent) is predominantly related to the
successfully pre-sold residential for sale development project that is due
to complete during the first half of 2023, with the loan projected to be
fully repaid in 2023. In general, market outlook for residential product
remains high as rents have trended upwards with inflation over the prior
year and many markets remain supply challenged.
Across all loans we continue to benefit from material headroom in
underlying collateral value against the loan basis, with a current
weighted average LTV of 58.6 per cent across the portfolio. These metrics
are based on independent third-party appraisals which are typically
updated annually for income producing assets and following completion on
newly constructed or refurbished assets. While the average age of
valuations is just over one year for income producing assets and we
recognise that interest rate increases within the last twelve months are
expected to place downward pressure on valuation inputs, we are confident
in the very significant buffer to absorb any negative valuation impact of
the current market. On loans where new valuations were instructed in the
second half of 2022, average values did not change materially as in many
cases increased rents and asset management initiatives being achieved by
sponsors outweighed or offset any increase in discount or capitalisation
rates.
LIQUIDITY AND HEDGING
The Group is very modestly levered with net debt of £15.4 million (3.7 per
cent of NAV) at 31 December 2022 and has significant liquidity available
with undrawn revolving credit facilities (see note 17(c) and note 23 for
further information) to fund existing commitments.
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
£20 million out of the money. The mark to market of the hedges at 31
December 2022 was £0.7 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.
Recognise a loss allowance equal to 12 months
At Initial Recognition expected credit losses resulting from default
events that are possible within 12 months.
After initial recognition:
Credit risk has not increased significantly
Stage 1 since initial recognition. 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.
Recognise lifetime expected losses.
Stage 3
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 loan default 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 or repayment plan;
• Covenant and performance milestones criteria under the loan have
required more than two waivers;
• Increased credit risk has been identified on tenants representing
greater than 25 per cent of underlying asset income;
• Income rollover / tenant break options exist such that a lease up of
more than 30 per cent of underlying property will be required within
12 months in order to meet loan covenants and interest payments; and
• Borrower management team quality has adversely changed.
At 31 December 2022 two loans which account for 10.8 per cent of loans
advanced by the Group are classified as Stage 2 and the remaining loans
are still classified as Stage 1. The loans classified to Stage 2 are in
the Spanish retail sector.
It is important to note that although these loans have been classified as
Stage 2 no ECLs have been recognized. This is because the formula for
calculating the expected credit loss is:
“Present Value of loan” x “probability of default” x “value of expected
loss”.
Although credit risk has increased for these loans compared with the
credit risk at origination we have considered a number of scenarios and as
a result of these do not currently expect to realise a loss in the event
of a default (i.e. the last part of the formula above is considered to be
zero for all loans).
This assessment has been made, despite the continued global economic
pressure on the retail markets, on the basis of 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. The position on any potential ECLs on the Stage 2 assets in
particular continues to be closely monitored and analysed, and we have
sought input, analysis and commentary from Spanish market advisers and
have updated external valuations during 2022 to supplement our own
information. Although we continue to update the information available at
this point in time we have no reason to believe that any ECLs should be
recognised against any of the loans determined to be Stage 2. The reasons,
estimates and judgements supporting our current assessment are as follows:
• Significant headroom on the two loans with LTVs of between 70 per cent
and 73 per cent based on the latest valuations dated June 2022;
• Performance of the centres when local restrictions were lifted
following the different waves of Covid-19 has been very encouraging
for future recovery; as a result we consider that income in the
centres is well positioned to recover post pandemic;
• We have determined that although there is pressure in this market, it
is unlike the UK retail market as we are currently seeing no evidence
of significant liquidations in the Spanish retail market.
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 8.9 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 8.9 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
6.0% (fair value) £453,301,433 104.8
6.9% £446,378,688 103.2
7.4% £442,812,482 102.4
7.9% £439,304,831 101.6
8.4% £435,854,418 100.8
8.9% £432,459,966 100.0
9.4% £429,120,227 99.2
9.9% £425,833,994 98.5
10.4% £422,600,089 97.7
10.9% £419,417,368 97.0
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 £ 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 occupied office), the independent
open market value determined by an independent valuer under RICS
guidelines will be used. When considering the relevance of these
valuations in the current market, it is important to consider how
quickly a portfolio churns. Our average loan term from origination to
repayment is approximately 2.4 years and therefore our valuations have
been relatively fresh.
• After loan origination the Group has the right under loan documents to
obtain valuations on an annual basis at the expense of the borrower
(based on loan anniversary, not Group financial year end). Where a
follow on valuation has been done we use the latest valuation number
in our calculations. However, the Group does not instruct independent
third party valuations on a strict annual basis, only when it is
considered necessary and useful to obtain one. 65 per cent of the
total income producing loan book have had their valuation updated in
the twelve months to 31 December 2022.
• For development projects there are a number of potential valuation
methodologies. Our selected approach is based on giving the clearest
and most consistent presentation of the risk. For development projects
our calculation includes the total facility available and is
calculated against the appraised market value on completion of the
relevant project. There are other potential approaches such as using
current drawn loan balance and current value or using total cost as a
proxy for value. However each of these approaches has limitations. For
example, using the approach of drawn loan balance divided by current
project value will typically understate the LTV in the earlier days of
a development when less debt is drawn before converging to a higher
LTV that matches our methodology at the end once all the debt is
drawn. We generally retain the same rights to valuation on development
loans as for investment assets. It is also worth noting that the
weighting of the loan within the portfolio calculation is based off
the latest drawn balance and not the total loan commitment.
Change in Valuation Hospitality Retail Residential Other Total
-15% 67.5% 81.5% 67.6% 67.2% 69.0%
-10% 63.7% 77.0% 63.8% 63.5% 65.1%
-5% 60.4% 72.9% 60.5% 60.1% 61.7%
0% 57.3% 69.3% 57.4% 57.1% 58.6%
5% 54.6% 66.0% 54.7% 54.4% 55.8%
10% 52.1% 63.0% 52.2% 51.9% 53.3%
15% 49.9% 60.2% 49.9% 49.7% 51.0%
On the basis of the methodology previously outlined, at 31 December 2022
the Group has an average last LTV of 58.6 per cent (2021: 61.9 per cent).
The table above 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
To date, the Company has paid dividends of 5.5 pence per Ordinary Share in
respect of the year ended 31 December 2022 (2021: 5.5 pence per Ordinary
Share). In addition, 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 to be paid on 21 April 2023 to shareholders on the register
as at 31 March 2023. 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 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 2022 5.5 pence per share has been paid out in
dividends which to date was covered 1.24x by earnings (excluding
unrealised FX gains and losses and realised FX gains on hedges relating to
loans that have been extended). In addition, on 23 March 2023, the Company
has declared a special dividend of 2 pence per Ordinary Share in respect
of the year ending 31 December 2022 to be paid on 21 April 2023 to
shareholders on the register as at 31 March 2023. The Company maintains a
dividend reserve which is utilised, when needed, to ensure dividends are
not paid out of capital.
EVENTS AFTER THE REPORTING PERIOD
The following amounts have been drawn under existing commitments, up to 23
March 2023:
• Mixed Use, Dublin - €109,357
The following loan amortisation (both scheduled and unscheduled) has been
received since the year-end up to 23 March 2023:
• Hotel, Dublin - €2,449,200
• Hotel and Office, Northern Ireland - £1,000,000
• Mixed Portfolio, Europe - €1,516,035
• Three Shopping Centres, Spain - €359,732
The following loans have been repaid in full since year end up to 23 March
2023:
• Hotel, Oxford - £22,950,000
• Office and Industrial Portfolio, UK - £5,500,000
During January and February 2023, a total amount of £19,000,000 was paid
to Morgan Stanley as repayment of amounts owed as at 31 December 2022
under the credit facility held with them.
On 21 January 2023 the Directors declared a dividend in respect of the
fourth quarter of 2022 of 1.375 pence per Ordinary Share payable on 24
February 2023 to shareholders on the register at 3 February 2023.
In addition, 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
to be paid on 21 April 2023 to shareholders on the register as at 31 March
2023.
Subsequent to year end the Lloyds credit facility agreement was extended
to May 2024 with a reduced facility amount of £25.0 million.
Starwood European Finance
Partners Limited | Investment Manager
23 March 2023
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
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 is 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 over fifteen years and is currently a
Non-Executive Director of various entities including Butterfield Bank
(Guernsey) Limited, the GP boards of Private Equity groups Cinven and
Hitec 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% shareholding in Starfin Public Holdco 1 Limited),
Starfin Lux 3 S.à.r.l and Starfin Lux 4 S.à.r.l. (both indirectly wholly
owned via a 100% shareholding in Starfin Public Holdco 2 Limited).
References to the Group refer to the Company and its subsidiaries.
DIVIDEND POLICY
The Company has a target dividend of 5.5 pence per Ordinary Share per
annum, based on quarterly dividend payments.
DIVIDENDS PAID AND PAYABLE
The Company has paid dividends of 1.375 pence per Ordinary Share for each
of the calendar quarters of 2022. To date, the Company has paid a total of
£22,107,601 in respect of 2022 (5.5 pence per Ordinary Share) (2021:
£22,490,120: 5.5 pence per Ordinary Share). In addition, 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 to be paid on 21 April 2023 to
shareholders on the register as at 31 March 2023.
BUSINESS REVIEW
The Group’s performance during the year to 31 December 2022, its position
at that date and the Group’s future developments are detailed in the
Chairman’s Statement, the Strategic Report and the Investment Manager’s
Report.
CAPITAL
As part of the Company’s IPO completed on 17 December 2012, 228,500,000
Ordinary Shares of the Company, with an issue price of 100 pence per
share, were admitted to the premium segment of the UK Listing Authority’s
Official List and to trading on the Main Market of the London Stock
Exchange.
The following issues have been made since the IPO:
Admission Date Number of Price (pence per
Ordinary Shares Ordinary Share)
21 March 2013 8,000,000 104.25
9 April 2013 1,000,000 104.50
12 April 2013 600,000 104.00
23 July 2015 23,780,000 103.00
29 September 2015 42,300,000 102.75
12 August 2016 70,839,398 103.05
15 May 2019 38,200,000 104.75
The Company holds 17,626,702 (2021: 4,308,125) shares in treasury. The
total number of voting rights in the Company is 395,592,696, which may be
used by shareholders as the denominator for the calculations by which they
can determine if they are required to notify their interest in, or a
change to their interest in, the Company under the Financial Conduct
Authority’s Disclosure and Transparency Rules. As disclosed in the
Chairman’s Statement, during the year ended 31 December 2022, the Company
bought back 13,318,577 Ordinary Shares at an average cost of 92.84 pence
per share (2021: 660,000 Ordinary Shares at an average cost of 89.63 pence
per share).
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 2022 and as at
the date of this report.
% holding of % holding of
Name Ordinary Shares at Ordinary Shares at
31 December 2022 7 March 2023
(the latest available)
BlackRock 19.37 19.27
Close Brothers Asset Management 7.72 7.84
Waverton Investment Management 7.71 7.99
Schroder Investment Management 5.85 6.39
Fidelity International 5.05 5.05
SG Private Banking 4.09 3.76
Premier Miton Investors 3.99 3.99
Quilter Cheviot Investment 3.88 3.85
Manager
James Hambro & Partners 3.50 2.73
City of London 3.18 3.35
DIRECTORS’ INTERESTS IN SHARES
The Directors’ interests in shares are shown opposite:
Ordinary Shares at Ordinary Shares at
Name
31 December 2022 31 December 2021
John Whittle 33,866 23,866
Shelagh Mason 112,819 112,819
Charlotte Denton 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.
EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting period are contained in note 23 to
the consolidated financial statements.
INDEPENDENT AUDITOR
The Directors, at the recommendation of the Audit Committee, conducted a
tender 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
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 prior year
Annual Report. The current Investment Objective and Policy of the Company
following the approval of the Proposals are set out above. 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.
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 2023. The Directors intend to seek annual renewal of
this buyback authority from Shareholders each year at the Company’s AGM.
As disclosed in the Chairman’s statement, the Company has bought back
13,318,577 shares during the year ended 31 December 2022 at an average
cost per share of 92.84 pence. These shares are held in treasury.
John Whittle | Chairman
23 March 2023
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 £300,000 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.
Total Fee Total Fee
Director Role 2022 2021
£ £
John Whittle Chairman with effect from 1 January 60,000 45,000
2022
Management Engagement
Shelagh Mason Committee Chairman and Senior 45,000 42,500
Independent Director
Charlotte Denton Audit Committee Chairman with 50,000 40,000
effect from 1 January 2022
Gary Yardley Non-Executive Director with effect 42,000 12,712
from 6 September 2021
Stephen Smith Chairman with effect to 31 December - 50,000
2021
Aggregate fees 197,000 190,212
Aggregate expenses 6,373 5,198
Total 203,373 195,410
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.
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
23 March 2023
Corporate Governance Statement
As a regulated Guernsey incorporated company with a Premium Listing on the
Official List and admission to trading on the Main Market for Listed
Securities of the London Stock Exchange, the Company is required to comply
with the principles of the UK Corporate Governance Code dated July 2018
(“UK Code”).
As an AIC member, the Board has also considered the principles and
provisions of the AIC Code of Corporate Governance dated February 2019
(“AIC Code”). The AIC Code addresses all the principles set out in the UK
Code, as well as setting out additional principles and provisions on
issues of specific relevance to the Company. The AIC Code has been
endorsed by the Financial Reporting Council as ensuring investment company
boards fully meet their obligations to the UK Code and LR 9.8.6 of the
Listing Rules.
Except as disclosed within the report, the Board is of the view that
throughout the year ended 31 December 2022, 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 and June 2021. 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 is 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 previous 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 above.
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.
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 eleventh year in 2023 and the Board has been
mindful in the implementation of the previously announced succession plan.
During Q4 2019, the Directors devised a Succession Planning Memorandum.
The Memorandum stated that a new Director was to be appointed to the Board
during the second half of 2021 giving them time to get up to speed prior
to Stephen Smith standing down from the Board in December 2021. Charlotte
Denton and Gary Yardley were duly appointed on 1 January 2021 and 6
September 2021, respectively.
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 the new appointments, with the approval of the Orderly
Realisation and Return of Capital and the previously announced succession
plan being largely completed, 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 2022 (2021: three 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.
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 2022 (2021: once) and
undertook a review of the key service providers to the Group and the
Company, utilising a service provider questionnaire. No material
weaknesses were identified and the recommendation to the Board was that
the current arrangements were appropriate and provided good quality
services and advice to the Company and the Group.
Formal terms of reference for the Management Engagement Committee are
available at the registered office and the Company’s website and are
reviewed on a regular basis.
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 9 4 2
Gary Yardley 4 9 4 2
Total Meetings for year 4 10 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 2022 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).
Although no system of internal control can provide absolute assurance
against material misstatement or loss, the Company’s system is designed to
assist the Directors in obtaining reasonable assurance that problems are
identified on a timely basis and dealt with appropriately. The Company,
given its size, does not have an internal audit function. It is the view
of the Board that the controls in relation to the Company’s operating,
accounting, compliance and IT risks performed robustly throughout the
year. In addition, all have been in full compliance with the Company’s
policies and external regulations, including:
• Investment policy, as outlined in the IPO documentation, and
subsequently amended by EGMs held on 2 May 2014, 9 March 2015, 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 2022.
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 £63,600 for the year ended
31 December 2022.
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 90 jurisdictions, including all 34 member countries of the
Organisation for Economic Co-operation and Development (“OECD”) and the
G20 members, have committed to implement the Common Reporting Standard for
automatic exchange of tax information (“CRS”). Building on the model
created by FATCA, the CRS creates a global standard for the annual
automatic exchange of financial account information between the relevant
tax authorities.
The Board in conjunction with the Company’s service providers and advisers
have ensured that the Company complies with FATCA and CRS’s requirements
to the extent relevant to the Company.
SECTION 172 STATEMENT
Whilst directly applicable to UK domiciled companies, the intention of the
AIC Code is that the below matters set out in section 172 of the UK
Companies Act, 2006 are reported.
Risk Management
In order to minimise the risk of failure to achieve business objectives,
the 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 2023, 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,
aim to meet with large shareholders at least annually, together with the
Investment Adviser, and calls are undertaken on a regular basis with
shareholders. The Board also receives regular reports from the Broker on
shareholder issues. Publications such as the Annual Report and
Consolidated Financial Statements and quarterly factsheets - which in
light of the considerable disruption from Covid-19 the Board has sought to
provide more detailed updates and disclosures - 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.
The Chairman met with multiple large shareholders in October 2022, where
it was concluded that the likely take-up of a potential future Tender
Offer would be significant and that the Company would no longer be of a
viable size to provide shareholders with sufficient liquidity and scale.
Following these consultations and the subsequent announcement on 31
October 2022, the Company’s Proposed Orderly Realisation was progressed
and approved at the EGM.
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
23 March 2023
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 management systems;
• Monitoring the need for an internal audit function annually;
• Monitoring and reviewing the scope, independence, objectivity and
effectiveness of the external Auditor, taking into consideration
relevant regulatory and professional requirements;
• Making recommendations to the Board in relation to the appointment,
re-appointment and removal of the external Auditor and approving their
remuneration and terms of engagement, which in turn can be placed
before the shareholders for their approval at the AGM;
• Development and implementation of the Group’s policy on the provision
of non-audit services by the external Auditor, as appropriate;
• Reviewing the arrangements in place to enable Directors and staff of
service providers to, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters
insofar as they may affect the Group;
• Providing advice to the Board on whether the consolidated financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess the
Group’s performance, business model and strategy; and
• Reporting to the Board on how the Committee discharged all relevant
responsibilities at each Board meeting.
Financial Reporting
The primary role of the Audit Committee in relation to the financial
reporting is to review with the Administrator, Investment Manager and the
Auditor the appropriateness of the Annual Report and Audited Consolidated
Financial Statements and Interim Condensed Consolidated Financial
Statements, concentrating on, amongst other matters:
• The quality and acceptability of accounting policies and practices;
• The clarity of the disclosures and compliance with financial reporting
standards and relevant financial and governance reporting
requirements;
• Material areas in which significant judgements have been applied or
there has been discussion with the Auditor;
• Whether the Annual Report and Audited Consolidated Financial
Statements, taken as a whole, is fair, balanced and understandable and
provides the information necessary for the shareholders to assess the
Group’s performance, business model and strategy; and
• Any correspondence from regulators in relation to the Group’s
financial reporting.
To aid its review, the Audit Committee considers reports from the
Administrator and Investment Manager and also reports from the Auditor on
the outcomes of their half-year review and annual audit. The Audit
Committee supports PricewaterhouseCoopers CI LLP (“PwC”) in displaying the
necessary professional scepticism their role requires.
The Audit Committee met 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 findings report;
• Discussion and approval of the fee for the external audit;
• Detailed review of the Annual Report and Audited Consolidated
Financial Statements and recommendation for approval by the Board;
• Review and approval of the interim review findings report of the
external Auditor;
• Detailed review of the Interim Condensed Consolidated Financial
Statements and recommendation for approval by the Board;
• Discussion of reports from the external Auditor following their
interim review and annual audit;
• Assessment of the effectiveness of the 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 role of 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.
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
Carrying amount and default, exposure at default and loss given
impairment/ default.
expected credit
losses of loans Formal loan performance reviews and credit risk
assessments are also prepared by the Investment
advanced Adviser and Investment Manager which are reviewed
at each Audit Committee meeting and the Audit
Committee considers whether there are any
indicators that would warrant a change to the
expected credit loss assessed for each loan
advanced. For all new loans advanced, the
Investment Manager presents, as part of the
investment recommendation process, their
assessment of any expected credit loss required at
inception of the loan arrangement.
All existing loans advanced as at 31 December 2022
were assessed so as to ensure compliance with IFRS
9. As disclosed in note 2 and in the Investment
Manager’s report, while two loans amounting to
£46,909,623 (2021: three loans amounting to
£59,031,888 (one loan was moved to Stage 1 during
2022)) remain classified as Stage 2, during the
year ended 31 December 2022, no expected credit
losses were considered necessary based on the loan
to value ratios headroom as at 31 December 2022
and strong security packages in place.
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 the
changes in key assumptions made in the loan models
Risk of fraud and error such as changes to expected drawdown or repayment
in income from loans dates or other amendments to expected cash flows
advanced such as changes in interbank rates on floating
loans. The Audit Committee ensures that any
changes made to the models are justifiable based
on the latest available information.
A separate income rationalisation which is
prepared outside of the detailed loan models is
provided to the Board on a quarterly basis as a
secondary check on the revenue being recognised in
the loan models. This is also reviewed by the
Audit Committee and questions raised where
appropriate.
REVIEW OF EXTERNAL AUDIT PROCESS EFFECTIVENESS
The Audit Committee communicated regularly with the Investment Manager,
Investment Adviser and Administrator to obtain a good understanding of the
progress and efficiency of the audit process. Similarly, feedback in
relation to the efficiency of the Investment Manager, Investment Adviser
and other service providers in performing their relevant roles was sought
from relevant involved parties, including the audit partner and team. The
external Auditor is invited to attend the Audit Committee meetings at
which the 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 and resolution of any areas of accounting
judgement, and quality and timeliness of papers analysing these
judgements;
• Review of the audit plan presented by the Auditor, and when tabled,
the final audit findings report;
• Meeting with the Auditor regularly to discuss the various papers and
reports in detail;
• Furthermore, interviews of appropriate staff in the Investment
Manager, Investment Adviser and Administrator to receive feedback on
the effectiveness of the audit process from their perspective; and
• Compilation of a checklist with which to provide a means to
objectively assess the Auditor’s performance.
In addition to the regular and ad hoc meetings held with the auditors, the
Audit Committee Chairman and Chairman of the Company received a
presentation on PwC’s use of technology in their audit process on 7
February 2022.
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 is currently serving his fifth
year of five as engagement partner and a new audit partner will be in
place for the 31 December 2023 audit, with a full handover taking place at
the conclusion of the 2022 year end 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 of the Annual Report and Audited
Consolidated Financial Statements, including the verification
processes in place to confirm the factual content;
• The detailed reviews undertaken at various stages of the production
process by the Investment Manager, Investment Adviser, Administrator,
Auditor and the Audit Committee that are intended to ensure
consistency and overall balance;
• Controls enforced by the Investment Manager, Investment Adviser,
Administrator and other third-party service providers to ensure
complete and accurate financial records and security of the Group’s
assets; and
• The existence and content of a satisfactory controls report that has
been reviewed and reported upon by the Administrator’s service Auditor
to verify the effectiveness of the internal controls of the
Administrator, such as the SOC 1 Type 2 Report.
As a result of the work performed, the Audit Committee has concluded that
it has acted in accordance with its’ terms of reference and has ensured
the independence and objectivity of the external Auditor. It has reported
to the Board that the Annual Report for the year ended 31 December 2022,
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, following a
competitive tender process, the external auditor be re-appointed for the
2023 year end annual report.
Charlotte Denton | Audit Committee
Chairman
23 March 2023
Statement of Directors’ Responsibilities
The Directors are responsible for preparing consolidated financial
statements for each financial year which give a true and fair view, in
accordance with applicable laws and regulations, of the state of affairs
of the Company and of the profit or loss of the Company for that year.
Company law requires the Directors to prepare financial statements for
each financial year. The consolidated financial statements have been
prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (“IFRS”). In preparing the consolidated
financial statements, the Directors are required to:
• Select suitable accounting policies and apply them consistently;
• Make judgments and estimates that are reasonable and prudent;
• State whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
consolidated financial statements; and
• Prepare the consolidated financial statements on the going concern
basis unless it is inappropriate to presume that the Company will
continue in business.
The maintenance and integrity of the Company’s website is the
responsibility of the Directors; the work conducted by the Auditor does
not involve consideration of the maintenance and integrity of the website
and, accordingly, the Auditor accepts no responsibility for any changes
that may have occurred to the consolidated financial statements since they
are initially presented on the website. Legislation in Guernsey governing
the preparation and dissemination of the consolidated financial statements
may differ from legislation in other jurisdictions.
The Directors are responsible for keeping proper accounting records that
are sufficient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the financial position of the Company
and the Group and enable them to ensure that the consolidated financial
statements comply with the Companies (Guernsey) Law, 2008, as amended.
They are also responsible for safeguarding the assets of the Company and
the Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Each of the Directors confirms that, to the best of their knowledge:
• They have complied with the above requirements in preparing the
consolidated financial statements;
• There is no relevant audit information of which the Company’s Auditor
is unaware;
• All Directors have taken the necessary steps that they ought to have
taken to make themselves aware of any relevant audit information and
to establish that the Auditor is aware of said information;
• The consolidated financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view of
the assets, liabilities, financial position and profit or loss of the
Company and Group; and
• The Chairman’s Statement, Strategic Report, Investment Manager’s
Report, Report of the Directors and Corporate Governance Statement
include a fair review of the development and the position of the
Company and the Group, together with a description of the principal
risks and uncertainties that they face 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
2022, 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
2022, 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
23 March 2023
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 2022, 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
2022;
• the consolidated statement of comprehensive income for the year then
ended;
• the consolidated statement of changes in equity for the year then
ended;
• the consolidated statement of cash flows for the year then ended; and
• the notes to the consolidated financial statements, which include
significant accounting policies and other 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 engages Starwood European Finance Partners Limited
(the “Investment Manager”) to manage its assets. The consolidated
financial statements are a consolidation of the company and all the
subsidiaries.
• We conducted our audit of the consolidated financial statements from
information provided by Apex Fund and Corporate Services (Guernsey)
Limited (the “Administrator”) and its related group entities to whom
the board of directors has delegated the provision of certain
functions. We also had significant interaction with Starwood Capital
Europe Advisers, LLP (the “Investment Adviser”) in completing aspects
of our overall audit work.
• We conducted our audit work in Guernsey and we tailored the scope of
our audit taking into account the types of investments within the
group, the involvement of the third parties referred to above, and the
industry in which the group operates.
• We performed an audit of the 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 place within the company or within any of
the subsidiaries. Our testing was performed on a consolidated basis
using thresholds which are determined with reference to the overall
group performance materiality and the risks of material misstatement
identified.
MATERIALITY
• Overall group materiality: £8.3 million (2021: £8.4 million) based on
2% of consolidated net assets.
• Performance materiality: £6.2 million (2021: £6.3 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.
KEY AUDIT MATTERS
• Carrying amount, expected credit losses and impairment of loans
advanced
• Risk of fraud in income from loans advanced
• Amendment to group investment objective and policy to pursue a
strategy of orderly realisation
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 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 ECL and the level of
impairment (if any) required on the
loans advanced, either at inception,
or on an ongoing basis.
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 policy.
Our procedures included:
Carrying amount, expected credit
losses and impairment of loans
advanced
• Detailed testing over the
As detailed within notes 2(g) and 10 amortised cost models used by
to the consolidated financial management to value the loans at
statements, loans advanced at the amortised cost using the
year-end of £432.5 million are effective interest rate method;
measured at amortised cost and • Testing and challenging the
comprise of both fixed and floating assumptions and inputs into the
rate loans. amortised cost models and
inspecting the associated
agreements and other legal
documentation;
Loans advanced make up a significant • Back-testing procedures were
part of the consolidated statement of performed to assist in our
financial position and due to the conclusions as to the cash flow
nature of this balance, their forecasting reliability applied
carrying amount, expected credit by the Investment Adviser;
losses (“ECL”) and impairment is • Understanding, assessing and
subject to judgement and estimation. challenging the assumptions and
judgements made by the
Investment Adviser in respect of
the ECL for each loan advanced
The judgements exercised in including;
determining the carrying amount, ECL
and impairment of loans advanced ◦ obtaining the Investment
could significantly impact the net Adviser’s impairment papers and
asset value of the group and this is assessing the ECL methodology,
considered to be a key source of focussing on and challenging the
estimation uncertainty as described estimation of probability of
in note 2(c) and 2(h) of the default, exposure at default and
consolidated financial statements. loss given default, and how
forward-looking information was
considered in this regard;
◦ assessing the consistency and
The specific areas of judgement appropriateness of the
include: Investment Adviser’s assumptions
applied in determining whether
any loan advanced was
performing, underperforming or
• The impact of changes in the non-performing, including
expected cash flows for each loan consideration as to whether a
on the carrying amount of the significant increase in credit
loans measured at amortised cost; risk of each borrower had
and occurred during the year;
◦ obtaining evidence to support
• How management determine the any significant assumptions
underlying assumptions when presented in the assessment of
determining the carrying amount the ECL, including consideration
and preparing the ECL and of the financial information on
impairment review analyses, such the borrower and the collateral
as significant changes in the in place to assess their ability
credit risk of a borrower, to meet future payment
changes in the probability of commitments, and progress
default of a borrower, changes in against business plans,
valuation of underlying including any ongoing impact
collateral and the Loan-To-Value caused by COVID-19 or other
ratios headroom, the ability of global crises, including
the borrowers to deliver in management’s assessment of the
accordance with their business Loan‑To-Value ratio headroom for
plans and their projected each of the loans;
financial performance figures. ◦ assessing the Investment
Adviser’s application of its
impairment and ECL criteria to
evaluate the appropriateness and
Given the level of judgement and completeness of the loans moved
estimate used by management in between ECL stages;
determining the carrying amount, ECL, ◦ recalculating a targeted sample
and impairment of loans advanced, of the Investment Adviser’s
combined with the significance of the sensitivity analysis of the
balance of the loans advanced in the Loan-To-Values ratios headroom;
consolidated statement of financial ◦ engaging our Real Estate
position, meant that this was valuation experts to work with
considered a key audit matter. 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.
• Obtained and reviewed
management’s calculation with
respect to any impairment on
loans advanced (if any).
Based on the audit procedures
performed 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
income from loans had been accounted
for in accordance with the stated
accounting policy.
We held discussions with the
Investment Adviser and the
Risk of fraud in income from loans Administrator to understand and
advanced evaluate the processes in place for
recognising income from loans and to
Income from loans advanced for the understand the estimates made.
year was £33.4 million (Note 10) and
was measured in accordance with the
accounting policies as described in
note 2(l) of the consolidated Our procedures included:
financial statements. The group has a
key investment objective to provide
shareholders with regular dividends
through investment in debt • Detailed testing over the
instruments and therefore we focussed amortised cost models used by
on this risk. management to measure the loans
at amortised cost and calculate
the effective interest income in
the consolidated financial
The requirement to estimate the statements, including how the
expected cash flows when calculating arrangement, origination and
an effective interest rate model is commitment fees, which are
subject to significant management integral to the loan
judgements and estimates, and as such arrangements, have been
could be open to manipulation by considered in the models;
management of factors including: • Assessing the judgements made in
respect of the estimated cash
flows timing (versus the
contractual repayment date) and
• Expected timing of repayments; amount including arrangement,
• Expectations of partial or full origination and commitment fees,
prepayments; and through testing of the amortised
• Associated exit fees and cost models for each loan;
make-whole payments. • Recalculating interest income
using the original effective
interest rate, paying due
consideration to any early,
Changes to the estimated timings of partial or full prepayments or
cash flows can have a significant management’s re-estimate
impact on the recognition of income thereof;
from loans advanced and is considered • Inspecting supporting documents,
to be a key source of estimation such as correspondence with the
uncertainty as described in note 2(c) underlying borrower and timing
of the consolidated financial of cash receipts, as part of our
statements. assessment of management’s
estimates and assumptions; and
• For those loans advanced that
were also held at 31 December
As a result of the significance of 2021, comparing the estimated
interest income and the level of future cash flows in the
estimation that can be applied, the amortised cost models as at 31
risk of fraud in income from loans December 2022 and evaluating the
advanced was considered a key audit rationale behind any significant
matter. changes from the estimated cash
flows in the 31 December 2021
models.
Amendment to group investment
objective and policy to pursue a
strategy of orderly realisation Based on the audit procedures
performed, we have nothing to report
As referred to in note 2(a), on 28 to those charged with corporate
December 2022, a Circular relating to governance.
the Proposed Orderly Realisation and
containing a Notice of Extraordinary
General Meeting (EGM) was published
which set out details of, and sought We obtained a detailed understanding
shareholder approval for, proposals of the Board’s proposals with
with respect to the Board’s respect to the Proposed Orderly
recommendation to pursue a strategy Realisation through discussions with
of orderly realisation of the group’s the Board and the Investment Adviser
loans advanced and the return of and from reviewing the Circular.
capital over time to shareholders
(the “Proposed Orderly Realisation”).
We considered these proposals in
light of the requirements of
On 27 January 2023, these Proposals International Financial Reporting
were approved at the EGM. Based on Standards as adopted by the European
the current terms of the group’s Union, the current accounting
loans advanced, the orderly policies of the group and in
realisation could take up to 5 years considering the ongoing basis of
to complete and given the significant preparation of the financial
shift in the investment strategy, we statements.
have considered this a key audit
matter.
We also considered the adequacy of
the disclosures made by the
Directors with respect to the
Proposed Orderly Realisation in the
Annual Report and Financial
Statements.
Based on our enquiries and the
matters considered above with
respect to the Proposed Orderly
Realisation, 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
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 from
another PwC global network firm operating under our instruction. Our
testing was therefore performed on a consolidated basis using thresholds
which are determined with reference to the overall group materiality and
the risks of material misstatement identified.
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 materiality £8.3 million (2021: £8.4 million)
How we determined it 2% of consolidated net assets
We believe consolidated net assets to be the
appropriate basis for determining materiality
Rationale for benchmark since this is a key consideration for members of
applied the company when assessing financial
performance. It is also a 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%
(2021: 75%) of overall materiality, amounting to £6.2 million (2021: £6.3
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 of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £0.4 million (2021:
£0.4 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 Directors’ 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, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the group’s internal control.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
the directors.
• Conclude on the appropriateness of the directors’ use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions
that may cast significant doubt on the group’s ability to continue as
a going concern over a period of at least twelve months from the date
of approval of the 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
transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the group to
express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that
we identify during our audit.
We also provide those charged with governance with a statement that we
have complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable,
related safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
consolidated financial statements of the current period and are therefore
the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should
not be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest
benefits of such communication.
Use of this report
This 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 principal risks;
• The disclosures in the Annual Report that describe those principal
risks, what procedures are in place to identify 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 it appropriate to adopt the going
concern basis of accounting in preparing them, and their
identification of any material uncertainties to the group’s ability to
continue to do so over a period of at least twelve months from the
date of approval of the consolidated financial statements;
• The directors’ explanation as to their assessment of the group’s
prospects, the period this assessment covers and why the period is
appropriate; and
• The directors’ statement as to whether they have a reasonable
expectation that the company will be able to continue in operation and
meet its liabilities as they fall due over the period of its
assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability
of the group 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 and understandable, 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 and internal 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 MATTERS
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.
Roland Mills
For and on behalf of
PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
23 March 2023
Independent Auditor’s Report to the Directors of Starwood European Real
Estate Finance Limited (US GAAS)
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 2022 and 31 December
2021 and the related consolidated statements of comprehensive income,
changes in equity and cash flows 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 2022 and 31 December 2021, and the results of their
operations and their cash flows for the years then ended in accordance
with International Financial Reporting Standards (“IFRSs”) as adopted by
the European Union.
BASIS FOR OPINION
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 Auditors’
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 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 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, whether due to fraud or error, and
design and perform audit procedures responsive to those risks. Such
procedures include examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements.
• Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the group’s internal control. Accordingly, no such
opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management,
as well as evaluate the overall presentation of the consolidated
financial statements.
• Conclude whether, in our judgement, there are conditions or events,
considered in the aggregate, that raise substantial doubt about the
group’s ability to continue as a going concern for a reasonable period
of time.
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
23 March 2023
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2022
1 January 2022 to 1 January 2021 to
Notes 31 December 2022 31 December 2021
£ £
Income
Income from loans advanced 10 33,356,702 28,382,742
Net foreign exchange 6 3,046,164 (3,043,374)
gains/(losses)
Total income 36,402,866 25,339,368
Expenses
Investment management fees 3(a), 22 3,122,755 3,147,075
Credit facility interest and 1,080,499 685,815
amortisation of fees
Credit facility commitment 828,876 844,694
fees
Legal and professional fees 437,622 266,154
Other expenses 432,649 179,262
Administration fees 3(b) 354,426 344,950
Audit and non-audit fees 5 233,773 229,387
Professional fees for the 210,000 -
orderly realisation proposals
Directors' fees and expenses 4, 22 203,373 195,410
Broker's fees 3(d) 50,000 53,250
Total operating expenses 6,953,973 5,945,997
Operating profit for the year 29,448,893 19,393,371
before tax
Taxation 20 90,287 100,452
Operating profit for the year 29,358,606 19,292,919
Other comprehensive loss
Items that may be
reclassified to profit or
loss
Exchange differences on
translation of foreign 2(k) (112,256) (329,895)
operations
Other comprehensive loss for (112,256) (329,895)
the year
Total comprehensive income 29,246,350 18,963,024
for the year
Weighted average number of 7 404,881,933 408,939,505
shares in issue
Basic and diluted earnings 7 7.25 4.72
per Ordinary Share (pence)
The accompanying notes form an integral part of these consolidated
financial statements.
Consolidated Statement of Financial Position
as at 31 December 2022
As at As at
Notes 31 December 2022 31 December 2021
£ £
Assets
Cash and cash equivalents 8 3,576,155 2,994,357
Other receivables and prepayments 9 26,792 37,652
Financial assets at fair value 11 706,661 13,291,598
through profit or loss
Loans advanced 10 432,459,966 414,632,512
Total assets 436,769,574 430,956,119
Liabilities
Credit facility 12 18,863,204 7,914,993
Trade and other payables 13 1,758,606 1,484,526
Total liabilities 20,621,810 9,399,519
Net assets 416,147,764 421,556,600
Capital and reserves
Share capital 15 395,075,556 407,440,011
Retained earnings 21,218,267 14,150,392
Translation reserve (146,059) (33,803)
Total equity 416,147,764 421,556,600
Number of Ordinary Shares in issue 15 395,592,696 408,911,273
Net asset value per Ordinary Share 105.20 103.09
(pence)
These consolidated financial statements were approved and authorised for
issue by the Board of Directors on 23 March 2023, 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 2022
Year ended 31 December 2022
Retained Translation
Share capital Total Equity
earnings reserves
£ £
£ £
Balance at 1 January 407,440,011 14,150,392 (33,803) 421,556,600
2022
Share buybacks (12,364,455) - - (12,364,455)
Dividends paid - (22,290,731) - (22,290,731)
Operating profit for - 29,358,606 - 29,358,606
the year
Other comprehensive
loss:
Other comprehensive - - (112,256) (112,256)
loss for the year
Balance at 31 December 395,075,556 21,218,267 (146,059) 416,147,764
2022
Year ended 31 December 2021
Retained Translation
Share capital Total Equity
earnings reserves
£ £
£ £
Balance at 1 January 408,031,544 18,369,871 296,092 426,697,507
2021
Share buybacks (591,533) - - (591,533)
Dividends paid - (23,512,398) - (23,512,398)
Operating profit for - 19,292,919 - 19,292,919
the year
Other comprehensive
loss:
Other comprehensive - - (329,895) (329,895)
loss for the year
Balance at 31 December 407,440,011 14,150,392 (33,803) 421,556,600
2021
The accompanying notes form an integral part of these consolidated
financial statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2022
1 January 2022 to 1 January 2021 to
31 December 2022 31 December 2021
£ £
Operating activities:
Operating profit for the year before 29,448,893 19,393,371
tax
Adjustments:
Net interest income (33,356,702) (28,382,742)
Decrease/(increase) in prepayments and 10,860 (20,558)
receivables
Increase in trade and other payables 458,661 132,570
Net unrealised losses / (gains) on 12,584,938 (12,373,339)
foreign exchange derivatives
Net foreign exchange (gains) / losses (15,292,556) 15,488,570
Net foreign exchange gains on hedges 5,618,298 895,944
Credit facility interest 707,171 236,071
Credit facility amortisation of fees 373,328 449,744
Credit facility commitment fees 828,876 844,694
Currency translation difference (5,663,501) 2,722,148
Corporate taxes paid (84,274) (87,724)
(4,366,008) (701,251)
Loans advanced(1) (60,788,846) (90,597,307)
Loan repayments and amortisation 56,894,392 103,474,780
Origination fees paid (872,020) (300,456)
Interest income from loans advanced 28,373,979 25,567,309
Commitment and exit fee income from 1,211,844 1,115,354
loans advanced
Net cash inflow from operating 20,453,341 38,558,429
activities
Cash flows from financing activities
Interest income from cash and cash - -
equivalents
Net cash inflow from investing - -
activities
Cash flows from financing activities
Share buybacks (12,364,455) (677,120)
Dividends paid (22,290,731) (23,512,398)
Proceeds under credit facility 94,223,490 63,800,000
Repayments under credit facility (84,158,141) (75,128,132)
Credit facility interest paid (533,577) (262,221)
Credit facility commitment fees paid (834,495) (647,799)
Net cash outflow from financing (25,957,909) (36,427,670)
activities
Net increase / (decrease) in cash and (5,504,568) 2,130,759
cash equivalents
Cash and cash equivalents at the start 2,994,357 2,939,408
of the year
Net foreign exchange gains/(losses) on 6,086,366 (2,075,810)
cash and cash equivalents
Cash and cash equivalents at the end 3,576,155 2,994,357
of the year
(1) Net of arrangement fees of £820,118 (2021: £1,125,342) 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 2022
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 £223.9 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 buyback agent to effect share buybacks on behalf
of the Company. During the year ended 31 December 2022, the Company had
repurchased 13,318,577 (year ended 31 December 2021: 660,000) Ordinary
Shares at an average cost of 92.84 (year ended 31 December 2021: 89.63
pence) per share. These Ordinary Shares are held in treasury.
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 2022.
The Company’s investment objective is to conduct an orderly realisation of
the assets of the Group. The assets of the Group will be realized 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. Further details
have been covered under the Objective and Investment Policy section.
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
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% 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 to 12 months after their
maturity dates and that Sonia and Euribor rates fall to 0% from 2024. 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
2022
Certain new accounting standards and interpretations have been published
that are effective 1 January 2022 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 2022 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 2022, 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 and timing of scheduled and unscheduled
payments of loans advanced. Changes in these assumptions and estimates
could impact liquidity risk and the interest income (see note 17).
The measurement of both the initial and ongoing expected credit loss
allowance (“ECL”) for financial assets measured at amortised cost is an
area that requires the use of significant assumptions about credit
behaviour such as likelihood of borrowers defaulting and the resulting
losses (see note 2(h)). The determination of ECL using the LTV 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 Directors to be Euro for Luxco 3; Sterling for all
other subsidiaries (see notes 2(e) and 2(k)).
The operating segments, of which the Directors are currently of the
opinion that the Company and its subsidiaries are engaged in a single
segment of business, being the provision of a diversified portfolio of
real estate backed loans (see note 2(f)).
A number of significant judgements are also required in applying the
accounting requirements for measuring ECL, such as determining the
criteria for significant increase in credit risk, choosing the appropriate
model and assumptions for the measurement of ECL, determining the
probabilities of default and loss given default (see note 2(h)).
Subsidiary Date of Ownership Country of Principal place
Control of business
undertakings % Establishment
Starfin Lux S.à.r.l 11/30/2012 100 Luxembourg Luxembourg
Starfin Public Holdco 1 9/11/2017 100 Guernsey Guernsey
Limited
Starfin Public Holdco 2 9/11/2017 100 Guernsey Guernsey
Limited
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
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 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 capital which is denominated in Euro;
the dividends are paid in Sterling;
Euro non-investment transactions represent only a small proportion of
transactions in the Luxembourg entities; and
proportion of non Sterling investments in each portfolio of Luxembourg
entities.
The functional and presentation currency of each Group entity is Sterling,
apart from 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
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 and has its credit risk continuously
monitored by the Group. The expected credit loss (“ECL”) is measured over
a 12 month period of time.
If a significant increase in credit risk since initial recognition is
identified, the financial instrument is moved to Stage 2 but is not yet
deemed to be credit-impaired. The ECL is measured on a lifetime basis.
If the financial instrument is credit-impaired it is then moved to Stage
3. The ECL is measured on a lifetime basis.
The Group’s financial assets at amortised cost 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 to aggressive downside scenarios with respect to the
loan specifics, the market and general macro economic changes, and
therefore the Group considers that value of losses given default (“LGD”)
currently have a nil value for all loans;
Loans have very robust covenants in place which trigger as an early
warning (long before there would be any indicators of significant increase
in credit risk) and this enables the Investment Adviser to become highly
involved in the execution of business plans to avoid ECL;
Loans have strong security packages and many are amortising with
relatively short terms which further reduces the risk; and
All loans have significant loan-to-value headroom which further
mitigates the risk of ECL.
During the year ended 31 December 2022 two loans with a carrying value of
£46,909,623 (31 December 2021: three loans amounting to £59,031,888) have
been classified as Stage 2, no loss allowance has been recognised on
12-month and lifetime expected credit losses for Stage 1 and Stage 2 loans
advanced respectively, as based on the information available there is no
reason to believe that there has been any impairment in the value of the
loans held by the Group. For further information, see the Investment
Manager’s report. The paragraph below describes how the Group determines
when a significant increase in credit risk has occurred, such that a loan
would move from Stage 1 to Stage 2. No loans have been moved to Stage 2 or
to Stage 3 during 2022.
The Group considers that for prepayments and capitalised cost, the ECL is
by default nil as these are non-monetary items with no credit risks. For
trade and other receivables the Group applies the simplified approach
which requires expected lifetime losses to be recognised from initial
recognition of the receivables.
Significant increase in credit risk - Stage 2
The Group uses both quantitative and qualitative criteria which is
monitored no less than quarterly in order to assess whether an increase in
credit risk has occurred. Increased credit risk would be considered if,
for example, all or a combination of the following has occurred:
underlying income performance is at a greater than 10 per cent variance
to the underwritten loan metrics;
Loan to Value is greater than 75-80 per cent;
Loan to Value or income covenant test results are at a variance of
greater than 5-10% of loan default covenant level (note that loan default
covenant levels are set tightly to ensure that an early cure is required
by the borrower should they breach which usually involves decreasing the
loan amount until covenant tests are passed);
late payments have occurred and not been cured within 3 days;
loan maturity date is within six months and the borrower has not
presented an achievable refinance or repayment plan;
covenant and performance milestones criteria under the loan have
required more than two waivers;
increased credit risk has been identified on tenants representing
greater than 25 per cent of underlying asset
income rollover / tenant break options exist such that a lease up of
more than 30 per cent of underlying property will be required within 12
months in order to meet loan covenants and interest payments; and
borrower management team quality has adversely changed.
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 such that there is no reasonable expectation of
recovering in full.
Sensitivity analysis
The most significant period-end assumptions used for the expected credit
loss estimates are the LGD and probability of default (“PD”) as described
above.
The default probabilities are based on initial loan-to-value (“LTV”)
headroom which the Investment Adviser believes to be a good predictor of
the PD, in accordance with recent market studies of European commercial
real estate loans.
In measuring the LGD for this sensitivity analysis, the loans advanced
have been assessed on a collective basis as they possess similar covenants
and security package characteristics. The selected LGD of 0.30% is based
on the aggregate losses of all AAA rated notes issued in Europe from 1995
to 2020 (totalling €177 billions), 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 on Note 2 (b)(i), the year-end ECL are nil. Set out below is
the sensitivity to the ECL as at 31 December 2022 and 31 December 2021
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%, and a
new PD determined, which was multiplied by a constant LGD of 0.30% for all
loans and the loan exposure as at each year-end. All other variables are
held constant.
Reasonable possible shift (absolute 31 December 2022 31 December 2021
value) ECL ECL
£ £
LTV +25% (2021: +25%)
LGD +0.3% (2021: +0.3%) 322,561 264,231
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) Ordinances1989 (as amended). Accordingly, no provision for
Guernsey tax is made.
The Holdcos are exempted for Guernsey tax purposes, and therefore no
provision for taxes has been made.
The Luxcos are subject to the applicable general tax regulations in
Luxembourg and taxation is provided based on the results for the year (see
note 20).
p) Other receivables
Trade and other receivables are amounts due in the ordinary course of
business. They are classified as assets. Trade and other receivables are
recognised initially at fair value and subsequently measured at amortised
cost using the effective interest method, less allowance for ECL.
q) Other payables
Trade and other payables are obligations to pay for services that have
been acquired in the ordinary course of business. They are classified as
liabilities. Trade and other payables are recognised initially at fair
value and subsequently measured at amortised cost using the effective
interest rate method.
r) Dividend distributions
Dividend distributions to the Company’s shareholders are recognised as a
liability in the Company’s financial statements in the period in which the
dividends are declared by the Board of Directors.
s) Offsetting financial assets and liabilities
Financial assets and liabilities are offset and the net amount reported on
the Consolidated Statement of Financial Position when there is a legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis or realise the asset and settle the
liability simultaneously.
t) Financial liabilities at amortised cost
Financial liabilities at amortised cost, including bank loans are
initially recognised at fair value and subsequently measured at amortised
cost using the effective interest method. Financial liabilities are
derecognised when the contractual obligation is discharged, cancelled or
expires.
u) Capitalised expenses on credit facilities
Expenses in connection with the process of originating, prolongation, or
restructuring of a credit facility, such as application and underwriting
fees, are capitalised and subsequently amortised over the period of the
relevant credit facility in the Consolidated Statement of Comprehensive
Income within “credit facility 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 reflected 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
£225,000 per annum for Guernsey registered companies of the Group, €96,000
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 £7,500
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 £50,000 per annum plus
expenses. The previous brokerage agreement with Stifel Nicolaus Europe
Limited was terminated on the same date.
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 £50 million revolving
credit facility with Lloyds Bank plc (the “Lloyds Facility”) which is
intended for short-term liquidity. This facility was amended and extended
on 7 January 2022. The current maturity date is 5 May 2023. Subsequent to
year end the facility was extended for a further year from May 2023 to May
2024, albeit at a lower facility amount to £25.0 million. 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 £64 million secured
borrowing facility with Morgan Stanley (the “MS Facility”). This facility
was amended and extended on 14 November 2019. The current maturity date is
14 November 2024 and the borrowing facility was increased to £76 million.
The debt can be drawn in respect of underlying loans which are eligible
under the facility. Certain loans will not be eligible, for example
mezzanine loans and loans above 75 per cent loan to value. It is secured
by a customary security package of bank account pledges, intercompany
receivables security, share security over the two borrower entities (Luxco
3 and Luxco 4) and their shares. The MS Facility does not have recourse to
the Company. The undertakings and events of default are customary for a
facility of this nature.
4. DIRECTORS’ FEES
31 December 2022 31 December 2021
£ £
Directors’ emoluments 197,000 190,212
Other expenses 6,373 5,198
203,373 195,410
5. AUDIT AND NON-AUDIT FEES
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 2022 31 December 2021
£ £
Audit and non-audit fees expensed in the
Consolidated Statement
of Comprehensive Income
Audit of company 140,563 120,800
Audit of subsidiaries 68,215 84,756
Total audit 208,778 205,556
Audit related assurance services 24,995 23,831
(Interim review)
Total assurance services 24,995 23,831
Non-audit services not covered above - -
Total non-audit services 24,995 23,831
Total fees expensed 233,773 229,387
6. NET FOREIGN EXCHANGE GAINS / (LOSSES)
31 December 2022 31 December 2021
£ £
Loans advanced gains - realised 511,596 153,504
Loans advanced losses - realised (996,010) (1,929,067)
Forward contracts gains - realised 6,507,544 1,998,286
Forward contracts losses - realised (428,644) (330,105)
Other gains - realised 110,951 328,245
Other losses - realised (38,684) (49,430)
5,666,753 171,433
Loans advanced gains - unrealised 9,987,926 -
Loans advanced losses - unrealised (23,578) (15,588,146)
Forward contracts gains - unrealised 2,337,351 13,707,768
Forward contracts losses - unrealised (14,922,288) (1,334,429)
(2,620,589) (3,214,807)
3,046,164 (3,043,374)
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 £29,358,606 (2021: £19,292,919) and on the weighted
average number of Ordinary Shares in issue during the year of 404,881,933
(2021: 408,939,505) Ordinary Shares.
The calculation of NAV per Ordinary Share is based on a NAV of
£416,147,764 (2021: £421,556,600) and the actual number of Ordinary Shares
in issue at 31 December 2022 of 395,592,696 (2021: 408,911,273).
8. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise the following:
31 December 2022 31 December 2021
£ £
Cash at bank 3,576,155 2,994,357
3,576,155 2,994,357
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 2022 31 December 2021
£ £
Prepayments 26,792 37,439
Investment proceeds receivable - 213
26,792 37,652
10. LOANS ADVANCED
The Group’s accounting policy on the measurement of financial assets is
discussed in note 2(g).
31 December 2022 31 December 2021
£ £
UK
Hotel & Residential, UK 49,876,920 49,922,112
Hotel, Scotland 43,109,284 42,390,350
Hotels, United Kingdom 32,134,282 30,016,910
Industrial Estate, UK 27,435,196 -
Hospitals, UK 25,367,475 25,364,814
Hotel, Oxford 23,181,461 21,579,756
Life Science, UK 19,955,081 19,620,908
Office, London 19,336,450 14,156,850
Hotel, North Berwick 15,211,739 14,123,338
Hotel and Office, Northern Ireland 11,947,821 12,719,727
Office and Industrial Portfolio, UK 5,594,291 -
Office, Scotland - 5,121,199
Ireland
Hotel, Dublin 42,752,233 50,842,327
Office Portfolio, Ireland 21,950,119 26,570,048
Mixed Use, Dublin 11,469,547 5,108,054
Spain
Three Shopping Centres, Spain 31,023,568 30,171,573
Office, Madrid, Spain 16,510,039 15,595,042
Shopping Centre, Spain 15,886,055 14,736,977
Office Portfolio, Spain 9,027,980 9,845,168
Germany -
Logistics Portfolio 2,744,282 4,958,050
Europe
Mixed Portfolio 7,946,143 21,789,309
432,459,966 414,632,512
No element of loans advanced are past due or impaired. For further
information and the associated risks see the Investment Manager’s Report.
The table below reconciles the movement of the carrying value of loans
advanced in the year:
31 December 2022 31 December 2021
£ £
Loans advanced at the start of the year 414,632,512 442,659,649
Loans advanced 61,420,419 91,935,602
Income from loans advanced 33,356,702 28,382,742
Foreign exchange gains/(losses) 9,478,582 (17,363,712)
Origination fees received for the year 872,020 300,456
Exit fees paid (501,062) (527,953)
Commitment fees paid (710,782) (586,841)
Arrangement fees paid (820,118) (1,125,342)
Interest payments received (28,373,979) (25,567,309)
Loan repayments (56,894,392) (103,474,780)
Loans advanced at the end of the year 432,459,966 414,632,512
Loans advanced at fair value 453,301,433 431,658,356
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 (see the Investment Manager’s report for more information):
Discount Rate 31 December 2022 31 December 2022
Value Value increase /
calculated (decrease)
£ £
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)
Discount Rate 31 December 2021 31 December 2021
Value Value increase /
calculated (decrease)
£ £
4.9% 432,710,809 18,078,297
5.1% (fair value) 431,658,356 17,025,843
5.4% 428,059,002 13,426,490
5.9% 423,496,872 8,864,360
6.4% 419,002,118 4,389,606
6.9% (Carrying value) 414,632,512 -
7.4% 410,325,896 (4,306,616)
7.9% 406,100,176 (8,532,336)
8.4% 401,953,326 (12,679,186)
8.9% 397,883,380 (16,749,132)
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.
The underlying instruments of currency forwards become favourable (assets)
or unfavourable (liabilities) as a result of fluctuations of foreign
exchange rates relative to their terms. The aggregate contractual or
notional amount of derivative financial instruments, the extent to which
instruments are favourable or unfavourable, and thus the aggregate fair
values of derivative financial assets and liabilities, can fluctuate
significantly from time to time. The foreign exchange derivatives are
subject to offsetting, enforceable master netting agreements for each
counterparty.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Fair values
Notional contract
Assets Liabilities Total
31 December 2022 amount(1)
£ £ £
£
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
Fair values
Notional contract
Assets Liabilities Total
31 December 2021 amount(1)
£ £ £
£
Foreign exchange
derivatives
Currency forwards:
Lloyds Bank plc 305,663,797 14,394,963 (1,103,365) 13,291,598
Total 305,663,797 14,394,963 (1,103,365) 13,291,598
(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. The Group has two credit facilities as described in note 3(g)
of these financial statements.
As at 31 December 2022 an amount of £19,000,000 (2021: £8,500,000) was
drawn and interest of £181,907 (2021: £7,997) was payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities and an amount of £319,675 (2021: £593,004) was netted off
against the loan facilities outstanding.
The changes in liabilities arising from financing activities are shown in
the table below.
31 December 2022 31 December 2021
£ £
Borrowings at the start of the year 7,914,993 18,626,837
Proceeds during the year 94,223,490 63,800,000
Repayments during the year (84,158,141) (75,128,132)
Interest expenses recognised for the 707,171 236,071
year
Interest paid during the year (533,577) (262,221)
Credit facility amortisation of fees 373,328 563,496
Foreign exchange and translation 335,940 78,942
difference
Borrowings at the end of the year 18,863,204 7,914,993
13. TRADE AND OTHER PAYABLES
31 December 2022 31 December 2021
£ £
Investment management fees payable 777,556 791,344
Audit fees payable 289,457 98,896
Accrued expenses 273,183 103,470
Administration fees payable 203,420 87,815
Commitment fees payable 164,855 169,746
Tax provision 25,727 19,742
Loan amounts payable 24,408 212,953
Directors' expense payable - 560
1,758,606 1,484,526
14. COMMITMENTS
As at 31 December 2022, the Group had outstanding commitments in respect
of loans not fully drawn of £49,063,014 (2021: £44,543,155).
As at 31 December 2022, the Group has entered into forward contracts under
the Hedging Master Agreement with Lloyds Bank plc to sell €309,280,796
(2021: €219,050,014) to receive Sterling. At the end of the reporting
period, these forward contracts have a fair value of £706,661 asset (2021:
£13,291,598 asset).
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 2022 31 December 2021
Number of shares Number of shares
Ordinary Shares of no par value
413,219,398 413,219,398
Issued and fully paid
Shares held in treasury (17,626,702) (4,308,125)
Total Ordinary Shares, excluding
395,592,696 408,911,273
those 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 2022 to 31 December 2022:
Ordinary Shares Number £
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 395,075,556
1 January 2021 to 31 December 2021:
Ordinary Shares Number £
Balance at the start of the year 409,571,273 416,321,533
Shares bought back in 2021 (660,000) (591,533)
Balance at the end of the year 408,911,273 415,730,000
Issue costs since inception (8,289,989)
Net proceeds 407,440,011
16. DIVIDENDS
Dividends will be declared by the Directors and paid in compliance with
the solvency test prescribed by Guernsey law. Under Guernsey law,
companies can pay dividends in excess of accounting profit provided they
satisfy the solvency test prescribed by the Companies (Guernsey) Law,
2008. The solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company’s assets is
greater than its liabilities. The Group passed the solvency test for each
dividend paid.
Subject to market conditions, the financial position of the Group and the
investment outlook, it is the Directors’ intention to pay quarterly
dividends to shareholders (for more information see Chairman’s Statement).
The Group paid the following dividends in respect of the year to 31
December 2022:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (£)
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
(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.
In addition, 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
to be paid on 21 April 2023 to shareholders on the register as at 31 March
2023. As this special dividend was declared after year end it was not
accrued for at year end.
The Group paid the following dividends in respect of the year to 31
December 2021:
Dividend rate per Net dividend
Period to: Payment date
Share (pence) paid (£)
31 March 2021 1.375 5,622,530 4 June 2021
30 June 2021 1.375 5,622,530 3 September 2021
30 September 2021 1.375 5,622,530 3 December 2021
31 December 2021(1) 1.375 5,622,530 24 February 2022
(1) Declared after year end and were paid on 25 February 2022 to
shareholders on the register as at 4 February 2022.
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
losses/ (gains). The Group does not adopt hedge accounting in the
financial statements. At the end of the reporting period the Group had 109
(2021: 134) open forward contracts.
As at 31 December 2022 the Group had the following currency exposure:
Danish Krone Sterling Euro Total
31 December 2022
£ £ £ £
Assets
Loans advanced - 273,150,000 159,309,966 432,459,966
Financial assets at - 706,661 - 706,661
fair value through
Other receivables and - 16,792 10,000 26,792
prepayments
Cash and cash 49 3,496,721 79,385 3,576,155
equivalents
Liabilities
Revolving credit - (18,863,204) - (18,863,204)
facility
Trade and other - (1,462,729) (295,877) (1,758,606)
payables
Net currency exposure 49 257,044,241 159,103,474 416,147,764
Danish Krone Sterling Euro Total
31 December 2021
£ £ £ £
Assets
Loans advanced - 192,279,327 222,353,185 414,632,512
Financial assets at fair - 13,291,598 - 13,291,598
value through
Other receivables and - 17,094 20,558 37,652
prepayments
Cash and cash equivalents 101 2,858,545 135,711 2,994,357
Liabilities
Revolving credit facility - (7,914,993) - (7,914,993)
Trade and other payables - (1,375,329) (109,197) (1,484,526)
Net currency exposure 101 199,156,242 222,400,257 421,556,600
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 2022 would increase or decrease by £15,910,347
(2021: £22,240,026). 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 2022 would increase
or decrease by £5 (2021: £10). 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, credit linked notes, receivables and cash and cash
equivalents. The Group’s investments have some exposure to interest rate
risk but this is limited to interest earned on cash deposits and floating
interbank rate exposure for investments designated as loans advanced.
Loans advanced have been structured to include a combination of fixed and
floating interest and 78.6% (2021: 76.8%) of investments designed as loans
advanced at 31 December 2022 have a floating interbank interest rate. The
interest rate risk is mitigated by the inclusion of interbank rate floors
on floating rate loans, preventing interest rates from falling below
certain levels.
The following table shows the portfolio profile of the financial assets at
31 December 2022:
31 December 2022 31 December 2021
£ £
Floating rate
Loans advanced(1) 340,705,532 318,642,491
Cash and cash equivalents 3,576,155 2,994,357
Fixed rate
Loans advanced 91,754,434 95,990,021
Total financial assets subject to 436,036,121 417,626,869
interest rate risk
(1) Loans advanced at floating rates include loans with interbank rate
floors.
At 31 December 2022, if interest rates had changed by 50 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 2022 31 December 2021
£ £
Floating rate
Increase of 50 basis points(1) 1,721,408 1,608,184
Decrease of 50 basis points (1,721,408) (1,608,184)
(1) Loans advanced at floating rates include loans with 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 2022
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. 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 2022, the
maximum credit risk exposure was £436,742,782 (2021: £430,918,680).
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 as
all loans are the subject of very detailed underwriting, including the
testing of resilience to aggressive downside scenarios with respect to the
loan specifics, the market and general macro changes. In addition to this,
all loans have very robust covenants in place, strong security packages
and significant loan- to-value headroom. During the year ended 31 December
2022, two loans with a value of £46,909,623 (31 December 2021: the three
loans with a value of £59,031,888) remain classified as Stage 2 and the
remaining loans are classified as Stage 1. The main reason for moving the
loans to Stage 2 in the second quarter of 2020 was expected income
covenant breaches due to the disruption from Covid-19. Following loan
amendments agreed with borrowers, no income breaches have occurred. Since
origination these loans have been classified as Stage 2 loans, no expected
credit loss has been recognised at 31 December 2022 (2021: £nil) as
although the credit risk has increased for these loans, the Group does not
anticipate realising a loss in the event of a default.
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 31 December
£ £ £ 2022 2021
£ £
Loans advanced 385,550,343 46,909,623 - 432,459,966 414,632,512
Gross carrying 385,550,343 46,909,623 - 432,459,966 414,632,512
amount
Carrying amount 385,550,343 46,909,623 - 432,459,966 414,632,512
A reconciliation of changes in the loss allowance was not presented as the
allowance recognised at the end of the reporting period was £nil (2021:
£nil).
The Group maintains its cash and cash equivalents across various different
banks to diversify credit risk which have been all rated A1 or higher by
Moody’s and this is subject to the Group’s credit risk monitoring policies
as mentioned above.
Total as at Total as at
31 December 2022 31 December 2021
£ £
Barclays Bank plc 2,276,081 2,980,544
ING Luxembourg, SA 1,299,092 12,743
Lloyds Bank plc 698 778
HSBC Bank plc 154 227
Royal Bank of Scotland International 130 65
Total cash and cash equivalents 3,576,155 2,994,357
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. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has
entered into revolving credit facilities of total of £126,000,000 (2021:
£126,000,000) of which £19,000,000 (2021: £85,00,000) was drawn at the end
of the reporting period.
The table below shows the maturity of the Group’s non-derivative financial
assets and liabilities arising from the advancement of loans by remaining
contractual maturities at the end of the reporting date. The amounts
disclosed under assets are contractual, undiscounted cash flows and may
differ from the actual cash flows received in the forecast future as a
result of early repayments and interest rate changes:
Up to 3 Between 3 and
months Over 12 months Total
31 December 2022 12 months
£ £ £
£
Assets
Loans advanced 42,752,233 145,719,555 243,988,178 432,459,966
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 (1,758,606) - - (1,758,606)
payables
37,551,790 106,058,947 218,844,731 362,455,467
(1) Loan commitments are estimated forecasted drawdowns at year end.
Up to 3 Between 3 and
months Over 12 months Total
31 December 2021 12 months
£ £ £
£
Assets
Loans advanced 14,736,977 90,989,466 308,906,069 414,632,512
Liabilities and
commitments
Loan commitments(1) (8,324,454) (15,850,277) (19,186,697) (43,361,428)
Credit facilities (7,997) (8,500,000) - (8,507,997)
Trade and other (1,484,526) - - (1,484,526)
payables
4,920,000 66,639,189 289,719,372 361,278,561
(1) Loan commitments are estimated forecasted 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 2022
Between 3 and Total as at
Up to 3 months Over 12 months
Derivatives 12 months 31 December
£ £ 2022
£
£
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.
31 December 2021
Between 3 and Total as at
Up to 3 Over 12 months
Derivatives months 12 months 31 December
£ 2021
£ £
£
Lloyds Bank plc:
Foreign exchange
derivatives
Outflow(1) (3,104,840) (51,449,438) (129,195,826) (183,750,104)
Inflow 3,115,540 52,103,985 132,586,030 187,805,555
(1) Euro amounts translated at year end exchange rate.
Capital management policies and procedures
The Group’s capital management objectives are:
• To ensure that the Group will be able to continue as a going
concern; and
• To maximise the income and capital return to equity shareholders
through an appropriate balance of equity capital and long-term debt.
The capital of the Company is represented by the net assets attributable
to the holders of the Company’s shares.
In accordance with the Group’s investment policy, the Group’s principal
use of cash (including the proceeds of the IPO and subsequent tap issues
and placings) has been to fund investments in the form of loans sourced by
the Investment Adviser and the Investment Manager, as well as initial
expenses related to the issue, ongoing operational expenses and payment
of dividends and other distributions to shareholders in accordance with
the Company’s dividend policy.
The Board, with the assistance of the Investment Manager, monitors and
reviews the broad structure of the Company’s capital on an ongoing basis.
The Company has no imposed capital requirements.
The Company’s capital at the end of the reporting period comprises:
31 December 2022 31 December 2021
£ £
Equity
Equity share capital 395,075,556 407,440,011
Retained earnings and translation 21,072,208 14,116,589
reserve
Total capital 416,147,764 421,556,600
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 2022
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Derivative assets - 706,661 - 706,661
Total - 706,661 - 706,661
31 December 2021
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Derivative assets - 13,291,598 - 13,291,598
Total - 13,291,598 - 13,291,598
There have been no transfers between levels for the year ended 31 December
2022 (2021: 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 2022 but for which fair value is disclosed:
31 December 2022
Total fair Total carrying
Level 1 Level 2 Level 3 amount
values
£ £ £ £
£
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
31 December 2021
Total fair Total carrying
Level 1 Level 2 Level 3 amount
values
£ £ £ £
£
Assets
Loans advanced - - 431,658,356 431,658,356 414,632,512
Total - - 431,658,356 431,658,356 414,632,512
Liabilities
Credit facility - 7,914,993 - 7,914,993 7,914,993
Total - 7,914,993 - 7,914,993 7,914,993
For cash and cash equivalents, other receivables and prepayments, 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 and prepayments include the contractual
amounts and obligations due to the Group and consideration for advance
payments made by the Group. Credit facilities and trade and other payables
represent the contractual amounts and obligations due by the Group for
contractual payments
19. CONTROLLING PARTY
In the opinion of the Directors, on the basis of shareholdings advised to
them, the Company has no immediate or ultimate controlling party.
20. TAXATION
The Company is exempt from Guernsey taxation under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of
£1,200.
The Luxembourg indirect subsidiaries of the Company are subject to the
applicable tax regulations in Luxembourg. The table below analyses the tax
charges incurred at Luxembourg level:
31 December 2022 31 December 2021
£ £
Current tax
Tax expenses on profit of the reporting 90,287 100,452
period
Total current tax 90,287 100,452
Luxco had no operating gains on ordinary activities before taxation and
was therefore for the year ended 31 December 2022 subject to the
Luxembourg minimum corporate income taxation at €4,815 (2021: €4,815).
Luxco 3 and Luxco 4 are subject to Corporate Income Tax and Municipal
Business Tax based on a margin calculated on an arm’s-length principle.
The effective tax rate in Luxembourg during the reporting period was
24.94% (2021: 24.94%).
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, one under International
Standards on Auditing as required by the Crown Dependencies Audit Rules
and the other under US GAAS. Compliance with the Custody Rule also
requires a reconciliation of the operating profit and net assets under
IFRS to US GAAP.
The principal differences between IFRS and US GAAP relate to accounting
for financial assets that are carried at amortised cost. Under US GAAP the
calculation of the effective interest rate is based on contractual cash
flows over the asset’s contractual life, 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 Group
under both IFRS and US GAAP and have concluded that no material
differences were identified and therefore no reconciliation has been
presented in these consolidated financial statements.
22. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the other
party in making financial or operational decisions. Details on the
Investment Manager and other related party transactions are included in
note 3 to the consolidated financial statements.
The following tables summarise the transactions occurred with related
parties during the reporting period and outstanding at 31 December 2022
and 31 December 2021:
2022
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2022 31 December 2022
£ £
Directors’ fees and expenses paid
John Whittle - 60,000
Shelagh Mason - 45,000
Charlotte Denton - 50,000
Gary Yardley - 42,000
Expenses paid - 6,373
Investment Manager
Investment management fees 777,556 3,122,755
Origination fees - 501,936
Expenses - 120,099
2021
Outstanding at For the year ended
Fees, expenses and other payments 31 December 2021 31 December 2021
£ £
Directors’ fees and expenses paid
Stephen Smith (resigned 31 December - 50,000
2021)
John Whittle - 45,000
Shelagh Mason - 42,500
Charlotte Denton (appointed 1 January - 40,000
2021)
Gary Yardley (appointed 6 September - 12,712
2021)
Expenses paid 560 5,198
Investment Manager
Investment management fees 791,344 3,147,075
Origination fees 380,000 300,456
Expenses - 68,107
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 2022 and 31 December 2021:
2022
Dividends paid during
As at
Shareholdings and the year ended
31 December 2022
dividends paid 31 December 2022
Number of shares
£
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* 8,333 133,333
Lorcain Egan* 3,818 61,093
* Employees at the Investment Adviser
2021
Dividends paid during
As at
Shareholdings and the year ended
31 December 2021
dividends paid 31 December 2021
Number of shares
£
Starwood Property Trust Inc. 525,550 9,140,000
SCG Starfin Investor LP 131,388 2,285,000
Stephen Smith (resigned 31 December 4,538 78,929
2021)
John Whittle 1,372 23,866
Shelagh Mason 6,487 112,819
Duncan MacPherson* 7,667 133,333
Lorcain Egan* 3,513 61,093
* 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 details of these
loans are shown in the table below. The Group also acted as co-lender with
Starwood European Real Estate Debt Finance I LP (“SEREDF I”) an affiliate
entity.
Loan Related party co-lenders
Hotel and Residential, UK STWD
Hotels, United Kingdom STWD
Mixed Portfolio, Europe STWD
Office Portfolio, Spain STWD
Office Portfolio, Ireland STWD
2 Hotels, UK SEREDF I
23. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 31 December 2022, the following amounts have been drawn
under existing commitments, up to 23 March 2023:
Local currency
Mixed Use, Dublin €109,357
Subsequent to 31 December 2022, the following loan amortisation (both
scheduled and unscheduled) has been received up to 23 March 2023:
Local currency
Hotel, Dublin €2,449,200
Hotel and Office, Northern Ireland £1,000,000
Mixed Portfolio, Europe €1,516,035
Three Shopping Centres, Spain €359,732
Subsequent to 31 December 2022, the following loans have been repaid in
full up to 23 March 2023:
Local currency
Hotel, Oxford £22,950,000
Office and Industrial Portfolio, UK £5,500,000
During January and February 2023, a total amount of £19,000,000 was paid
to Morgan Stanley as repayment of amounts owed as at 31 December 2022
under the credit facility held with them.
On 21 January 2023, the Directors declared a dividend in respect of the
fourth quarter of 1.375 pence per Ordinary Share payable on 24 February
2023 to shareholders on the register at 3 February 2023.
In addition, 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
to be paid on 21 April 2023 to shareholders on the register as at 31 March
2023.
Subsequent to year end the Lloyds credit facility agreement was extended
to May 2024 with a reduced facility amount of £25.0 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 the contractual life of the loan,
which is currently four years for the portfolio. However, it has been
our experience that loans tend to repay after approximately 2.5 years
and as such, these fees are actually amortised over a shorter period.
• Many loans benefit from prepayment provisions, which means that if
they are repaid before the end of the protected period, additional
interest or fees become due. As we quote the return based on the
contractual life of the loan these returns cannot be forecast in the
return.
• The quoted return excludes the benefit of any foreign exchange gains
on Euro loans. We do not forecast this as the loans are often repaid
early and the gain may be lower than this once hedge positions are
settled.
Generally speaking, the actual annualised total return is likely to be
higher than the reported return for these reasons, but this is not
incorporated in the reported figure, as the benefit of these items cannot
be assumed.
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
• 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 £
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 £” 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 £” 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
2nd Floor
One Eagle Place
St. James`s
London
SW1Y 6AF
United Kingdom
Advocates to the Company (as to Guernsey law)
Carey Olsen
PO Box 98
Carey House, Les Banques
St Peter Port
Guernsey
GY1 4HP
Independent Auditor
PricewaterhouseCoopers CI LLP
Royal Bank Place
1 Glategny Esplanade
St Peter Port
Guernsey
GY1 4ND
Principal Bankers
Barclays Private Clients International Limited
PO Box 41
Le Marchant House
St Peter Port
Guernsey
GY1 3BE
Website:
www.starwoodeuropeanfinance.com
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
══════════════════════════════════════════════════════════════════════════
ISIN: GG00B79WC100
Category Code: ACS
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 232221
EQS News ID: 1591043
End of Announcement EQS News Service
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