REG-Starwood European Real Estate Finance Ltd SWEF: Half Yearly Report 30 June 2023
07/09/2023 07:15
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Starwood European Real Estate Finance Ltd (SWEF)
SWEF: Half Yearly Report 30 June 2023
07-Sep-2023 / 07:00 GMT/BST
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Starwood European Real Estate Finance Limited
Half Year Results for the Period Ended 30 June 2023
Orderly Realisation Progressing Well
First Capital Distribution Executed with a Second Distribution Announced
Post Period End
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 Half Year Results for the
six months ended 30 June 2023.
Following the approval of the Company’s new investment objective and
policy as recommended to shareholders by the Board at the Company’s EGM on
27 January 2023, the Company is pursuing a strategy of orderly realisation
and the return of capital to shareholders over time and in an orderly
fashion.
Highlights for the period, six months ended 30 June 2023
• Positive realisation progress – during the half year:
◦ A total of £43.6 million, 10.2 per cent of the Group’s 31
December 2022 total funded loan portfolio, has been repaid across
9 investments
◦ This included the full repayment of three loans (totalling £31.2
million or 7.3 per cent of the Group’s 31 December 2022 total
fund loan portfolio)
◦ Proceeds were used to fund the repayment of the £19 million of
debt outstanding as at 31 December 2022, the additional dividend
of £7.9 million paid in April 2023 (which equated to 2.0 pence
per share) and the first return of capital to shareholders of
£10.0 million paid in June 2023
◦ Post period end, following the full repayment of two loans
totalling £60.8 million and further partial repayments, a second
capital distribution of £30.0 million was announced alongside the
creation of a reserve to fund unfunded loan commitments and the
reduction of the Company’s credit facilities to £25.0 million
• All assets are carefully monitored for changes in their risk profile –
during the half year the following changes were made:
◦ Four assets moved from Stage 1 to Stage 2 indicating a change in
their credit risk since origination but no impairments
anticipated; and
◦ One asset moved from Stage 2 to Stage 3 and a small credit loss
of £1.7 million was recognised – this represents 0.5% of the
funded portfolio and is the result of the Group prudently
applying sensitivities to net proceeds from an agreed asset sale
currently progressing through exclusivity
• The average remaining loan term of the portfolio is 1.4 years
• Strong cash generation – the portfolio continues to support annual
dividend payments of 5.5 pence per Ordinary Share, paid quarterly, and
generates an annual dividend yield of 6.2 per cent on the share price
as at 30 June 2023
• Regular and consistent dividend – since inception the Company has paid
a regular and consistent dividend
• Inflation protection – 76.1 per cent of the portfolio is contracted at
floating interest rates (with floors)
• Robust portfolio – the loan book is performing broadly in line with
expectations with its defensive qualities reflecting in the Group’s
continued NAV stability
• Significant equity cushion – the weighted average Loan to Value for
the portfolio as at 30 June 2023 is 56.0 per cent
Portfolio Statistics
As at 30 June 2023, the portfolio was invested in line with the Group’s
investment policy. The key portfolio statistics are summarised below:
30 June 2023 30 June 2022
Number of investments 17 19
Percentage of currently invested portfolio in 76.1% 78.8%
floating rate loans
Invested Loan Portfolio unlevered annualised 8.1% 7.1%
total return*
Invested Loan Portfolio levered annualised total 8.1% 7.2%
return*
Weighted average portfolio LTV - to Group first 11.6% 14.9%
£*
Weighted average portfolio LTV - to Group last 56.0% 60.5%
£*
Average loan term 5.3 years 5.0 years
Average remaining loan term 1.4 years 1.9 years
Net Asset Value £400.4m £422.9m
Amount drawn under Revolving Credit Facility (£0.0m) (£18.5m)
(excluding accrued interest)
Loans advanced at amortised cost (including £384.1m £433.6m
accrued income)
Cash and cash equivalents £13.1m £3.1m
Other net assets (including financial assets £3.2m £4.7m
held at fair value through the profit or loss)
*Alternative performance measure
John Whittle, Chairman of the Company commented:
“We are pleased to report a robust performance and we note once again that
all interest due has been paid in full.
Following approval of the Company’s new investment objective and policy at
the outset of the period, SEREF is pursuing a strategy of orderly
realisation. During the period, 10.2% of the Group’s total loan portfolio
was repaid which included the full repayment of three investments. These
cash resources were allocated to provide the first distribution of £10.0
million to shareholders in June, an additional dividend of £7.9 million to
shareholders in April and the repayment of £19 million of outstanding
debt.
Post period end, following further repayment activity, the Board has
created a reserve to fund unfunded loan commitments, reduced the revolving
credit facilities to £25 million and announced a further capital
distribution of £30.0 million.
The focus of the Group going forward remains the continued robust asset
management of the existing loan portfolio, the orderly realisation of the
portfolio and the timely return of capital to shareholders. We look
forward to providing further updates towards meeting these objectives and
would like to thank shareholders for their continued commitment and
support.”
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
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's assets are managed by Starwood European Finance Partners
Limited, an indirect wholly owned subsidiary of the Starwood Capital
Group.
Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements
for the six-month period from 1 January 2023 to 30 June 2023
Overview
Corporate Summary
PRINCIPAL ACTIVITIES AND INVESTMENT OBJECTIVE
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 made 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)
(collectively the “Group”).
Following the Company’s Extraordinary General Meeting (“EGM”) on 27
January 2023, the Company’s objective changed and is now to conduct an
orderly realisation of the assets of the Group and the return of capital
to Shareholders. In line with this objective the Board will endeavour to
realise all of the Group’s investments in a manner that achieves a balance
between maximising the net value received from those investments and
making timely returns to Shareholders. It is anticipated that it will take
four to five years to complete this objective.
The Group will not make any new investments going forward save that
investments may be made to honour commitments under existing contractual
arrangements or to preserve the value of any underlying security.
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. It is
anticipated that where this is undertaken it would generate a positive net
interest rate spread and enhance returns for the Company.
Full details of the investment objectives and policy post the EGM on 27
January 2023 are set out in the 2022 Annual Report which can be found on
the company’s website https://starwoodeuropeanfinance.com.
The Investment Objective and Policy which applied prior to the EGM on 27
January 2023 and for the whole of 2022, are set out in the 2021 Annual
Report which can also be found on the company’s website
https://starwoodeuropeanfinance.com. The Investment Objective applied for
the whole of 2022 and prior to the EGM on 27 January 2023 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 and prior to the EGM on 27
January 2023 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.
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 registered with the Guernsey Financial
Services Commission (“GFSC”) as a closed-ended collective investment
scheme. The Company’s ordinary shares were first admitted to the premium
segment of the UK’s Financial Conduct Authority’s Official List and to
trading on the Main Market of the London Stock Exchange as part of its IPO
which completed on 17 December 2012. Further issues took place in March
2013, April 2013, July 2015, September 2015, August 2016 and May 2019. The
issued capital during the period comprises the Company’s Ordinary Shares
denominated in Sterling.
The Company received authority at the 2020 Annual General Meeting (“AGM”),
to purchase up to 14.99 percent of the Ordinary Shares in issue. This
authority was renewed at the 2021, 2022 and 2023 AGMs. Between 2020 and
2022 the Company bought back 17,626,702 Ordinary Shares. Shares bought
back (which had been held in treasury) were cancelled in June 2023.
In June 2023 the Company compulsorily redeemed 9,652,350 Ordinary Shares
from Shareholders at 103.63 pence per share.
In August 2023 the Company compulsorily redeemed a further 29,092,218
Ordinary Shares from Shareholders at 103.12 pence per share.
The Investment Manager is Starwood European Finance Partners Limited (the
“Investment Manager”), a company incorporated in Guernsey with registered
number 55819 and regulated by the GFSC. The Investment Manager has
appointed Starwood Capital Europe Advisers, LLP (the “Investment
Adviser”), an English limited liability partnership authorised and
regulated by the Financial Conduct Authority, to provide investment
advice, pursuant to an Investment Advisory Agreement.
Chairman’s Statement
Dear Shareholder,
On behalf of the Board I present the Interim Financial Report and
Unaudited Condensed Consolidated Financial Statements of Starwood European
Real Estate Finance Limited (the “Group”) for the period from 1 January
2023 to 30 June 2023.
Six months ago, when I presented the Annual Report and Audited
Consolidated Financial Statements of the Group for the year ended 31
December 2022 to you, I spoke about the growing concerns over energy
prices, the rising cost of living, higher interest rates and the Russian
invasion of Ukraine. Since then the global economic and political themes
have remained the same albeit energy prices and inflation have started to
fall while interest rates have continued to rise. The Group’s performance
has also remained consistent demonstrating its unique portfolio resilience
through the strength and consistency of its results. Once again all loan
interest and scheduled amortisation payments have been received and
underlying collateral valuations continue to provide reassuring headroom.
Notwithstanding this continued robust performance, the Group decided to
move one of the Spanish retail assets from Stage 2 to Stage 3 and
recognise a modest impairment provision against it. This minor impairment
represents 0.5% of the funded portfolio and is the result of the Group
prudently applying sensitivities to net proceeds from an agreed asset sale
which is subject to contract and is currently progressing through
exclusivity. We have also moved four assets from Stage 1 to Stage 2
indicating a change in their credit risk since origination but with no
impairments anticipated. The Group will continue to exercise an abundance
of caution in these challenging times.
Despite this the Group’s NAV has remained stable. This stability
demonstrates the positive fundamentals of the Group’s portfolio as an
exceptionally attractive risk-adjusted source of alternative income
tested, once again, in the harshest of market environments. Against market
volatility, the Group has maintained a relatively stable market valuation,
met its dividend targets (delivering an annualised 5.5 pence per share to
shareholders) and started the orderly realisation of the Group’s assets
and the return of capital to Shareholders.
As you are aware and as already detailed in the Annual Report for the
period to 31 December 2022, on 31 October 2022, the Board announced the
Company’s Proposed Orderly Realisation and Return of Capital to
Shareholders. A Circular relating to the Proposed Orderly Realisation,
containing a Notice of Extraordinary General Meeting (EGM) was published
on 28 December 2022. The proposals were approved by Shareholders at the
EGM in January 2023 and the Company is now seeking to return cash to
Shareholders in an orderly manner as soon as reasonably practicable
following the repayment of loans, while retaining sufficient working
capital for ongoing operations and the funding of committed but currently
unfunded loan commitments.
In June 2023, the Company announced its first capital distribution,
returning circa £10 million to shareholders through the compulsory
redemption of 9,652,350 shares at a price of £1.0363 per share.
The second capital distribution was announced in August 2023 which
returned circa £30 million to shareholders through the compulsory
redemption of 29,092,218 shares at a price of £1.0312 per share.
JOHN WHITTLE
Chairman
6 September 2023
HIGHLIGHTS OVER THE SIX MONTHS TO 30 JUNE 2023
Positive realisation progress - during the half year:
A total of £43.6 million, 10.2 per cent of the Group’s 31 December 2022
total funded loan portfolio, has been repaid across 9 investments
This included the full repayment of three loans (totalling £31.2 million
or 7.3 per cent of the Group’s 31 December 2022 total funded loan
portfolio)
Proceeds were used to fund the repayment of the £19 million of debt
outstanding as at 31 December 2022, the additional dividend of £7.9
million paid in April 2023 (which equated to 2.0 pence per share) and the
first return of capital to shareholders of £10.0 million paid in June 2023
All assets are carefully monitored for changes in their risk profile –
during the half year, the following changes to risk classification were
made:
Four assets moved from Stage 1 to Stage 2 indicating a change in their
credit risk since origination but no impairments anticipated; and
One asset moved from Stage 2 to Stage 3 and a small credit loss of £1.7
million was recognised – this minor impairment represents 0.5% of the
funded portfolio and is the result of the Group prudently applying
sensitivities to net proceeds from an agreed asset sale which is subject
to contract and is currently progressing through exclusivity
The average remaining loan term of the portfolio is 1.4 years
Strong cash generation - the portfolio continues to support annual
dividend payments of 5.5 pence per Ordinary Share, paid quarterly, and
generates an annual dividend yield of 6.2 per cent on the share price as
at 30 June 2023
Regular and consistent dividend - since inception the Company has paid a
regular and consistent dividend
Inflation protection – 76.1 per cent of the portfolio is contracted at
floating interest rates (with floors)
Robust portfolio - the loan book is performing broadly in line with
expectations with its defensive qualities reflected in the Group’s
continued NAV stability
Significant equity cushion - the weighted average Loan to Value for the
portfolio as at 30 June 2023 is 56.0 per cent
INVESTMENT MOMENTUM
In line with the new strategic direction of the Group (i.e. the orderly
realisation and return of capital to shareholders) there has been no new
commitments made in the six months to 30 June 2023. Repayments received in
the six months to 30 June 2023 are summarised in the highlights section
above.
As at 30 June 2019 to 2023 the Group had commitments as shown in the table
below.
June 2019 June 2020 June 2021 June 2022 June 2023
Funded loans £447.0m £447.5m £418.5m £429.1m £379.2m
Unfunded cash £31.9m £67.2m £36.8m £36.8m £47.3m
Commitments
Total Portfolio £478.9m £514.7m £455.3m £465.9m £426.5m
Since 30 June 2023 £69.7 million has been repaid, including the full
repayment of two loans - Hotels & Residential, UK - £49.9 million and
Mixed Use, Dublin - £10.9 / €12.7 million.
NAV PERFORMANCE
The table below shows the NAV per share movements over the 6 months to 30
June 2023.
Jan - 23 Feb - 23 Mar - 23 Apr - 23 May - Jun -
23 23
NAV per share at 105.20 104.58 105.28 103.82 103.09 103.63
beginning of month
Monthly Movements
Operating Income
available to distribute 0.65 0.69 0.59 0.63 0.62 0.64
before impairment
provision(1)
Impairment provision on
asset classified as 0.00 0.00 0.00 0.00 0.00 (0.45)
Stage 3(2)
Realised FX
gains/(losses) not 0.00 0.56 0.00 0.00 0.00 0.00
distributable(3)
Unrealised FX 0.11 (0.55) (0.05) 0.01 (0.08) (0.07)
gains/(losses)(4)
Dividends declared (1.38) 0.00 (2.00) (1.37) 0.00 0.00
NAV per share as end of 104.58 105.28 103.82 103.09 103.63 103.75
month
(1) Operating Income available to distribute before impairment provision
comprises loan income recognised in the period less the cost of debt
facilities utilised by the Group and operating costs incurred. Operating
Income available to distribute before impairment provision also includes
any realised foreign exchange gains or losses upon settlement of hedges,
except those described in note 3. Included in loan income recognised in
February 2023 is circa £0.5m (equivalent to 0.14p per share) of loan
income related to Office and Industrial Portfolio, UK which was fully
repaid in February 2023 and which benefited from early repayment income
protection.
(2) In June 2023 a loan which had been classified as Stage 2 was
reclassified to Stage 3 and an impairment provision recognised.
(3) On occasion, the Group may realise a gain or loss on the roll forward
of a hedge if it becomes necessary to extend a capital hedge beyond the
initial anticipated loan term. If this situation arises the Group will
separate the realised FX gain or loss from other realised FX gains or
losses and not consider it available to distribute or as a reduction in
distributable profits. The FX gain or loss will only be considered part of
distributable reserves or as a reduction in distributable profits when the
rolled hedge matures or is settled and the final net gain or loss on the
capital hedges can be determined.
(4) Unrealised foreign exchange gain/losses relate to the net impact of
changes in the valuation of foreign exchange hedges and the sterling
equivalent value of Euro loan investments (using the applicable month end
rate). Mismatches between the hedge valuations and the loan investments
may occur depending on the shape of the forward FX curve and this causes
some movement in the NAV. These unrealised FX gains / losses are not
considered part of distributable reserves.
As anticipated, as shown above and as in the past, we are pleased to
report that the Group’s NAV has once again remained stable over the first
half of 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, Euro exposures are hedged
and credit risk is proactively managed.
The NAV would be materially impacted if a significant impairment in the
value of a loan was required but, despite the disruption to markets over
the recent years, no material impairment has been needed and the Group’s
underlying collateral valuations remain stable and current (the average
age of current valuations is just over one year). 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.
The Group continues to closely monitor its loan exposures, underlying
collateral performance and repayments.
SHARE PRICE PERFORMANCE
During the first half of 2023, the Company’s shares have been, relative to
a volatile market, stable. In the six month period to 30 June 2023, the
share price has been trading at between 86.2 pence and 92.6 pence and
ended the half year at 88.6 pence.
As at 30 June 2023, the discount to NAV stood at 14.6 per cent, with an
average discount to NAV of 15.0 per cent over the half year. The Board,
the Investment Manager and Adviser continue to believe that the shares
represent attractive value at this level.
DIVIDENDS
The Directors declared dividends in respect of the first two quarters of
2023 of 1.375 pence per Ordinary Share, equating to an annualised 5.5
pence per annum. This was covered by earnings (excluding unrealised FX
gains and realised FX gains expected to reverse). The Board also declared
an additional dividend in March 2023 of 2 pence per share related to 2022.
With the current portfolio, and based on current forecasts (including
forecasts of capital redemptions), we expect the target dividend of 5.5
pence per share to continue to be covered by earnings over the 12 months
to 31 December 2023.
Based on the share price at 30 June 2023, a dividend of 5.5 pence per
annum represents a 6.2 per cent dividend yield.
BOARD COMPOSITION AND DIVERSITY
The Board believes in the value and importance of diversity in the
boardroom and it continues 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.
I am very pleased with the composition of the Board and I believe we have
a very relevant diversity of skills and expertise which places us well for
executing the strategy the shareholders have tasked us with.
GOING CONCERN
Under the UK Corporate Governance Code and applicable regulations, the
Directors are required to satisfy themselves that it is reasonable to
assume that the Group is a going concern.
The Directors have undertaken a comprehensive review of the Group’s
ability to continue as a going concern including a review of the ongoing
cash flows and the level of cash balances as of the reporting date as well
as forecasts of future cash flows. After making enquiries of the
Investment Manager, Investment Adviser and the Administrator and having
reassessed the principal risks in light of the recent change of investment
objective and strategy, the Directors considered it appropriate to adopt
the going concern basis of accounting in preparing the Interim Financial
Report and Unaudited Condensed Consolidated Financial Statements.
OUTLOOK
The Board is pleased that the diligent underwriting, loan structuring and
active asset management of the Investment Manager and Adviser has led to
very robust performance of the loans during the period.
At 30 June 2023, the Group had no debt drawn and undrawn revolving credit
facilities of £101.0 million to fund existing commitments of £47.3 million
if needed. Since 30 June 2023 and following the full repayment of two
loans totaling £60.8 million in addition to other partial repayments the
Board has created a reserve to fund the unfunded cash loan commitments and
has reduced the revolving credit facilities to £25 million, available to
May 2024.
The focus of the Group for the rest of 2023 is:
(i) the continued robust asset management of the existing loan portfolio;
(ii) the orderly realisation of the portfolio; and
(iii) the timely return of capital to shareholders
I would like to close by thanking you for your continued commitment and
support.
John Whittle
Chairman
6 September 2023
Investment Manager’s Report
MARKET COMMENTARY
At the beginning of the year we saw inflation from energy costs beginning
to moderate as we passed the anniversary of the start of the war in
Ukraine. Some of these trends have continued over the half year under
review particularly in the United States where June CPI was well received
by the markets down to 3 per cent which is the lowest rate since 2021 but
there are concerns of a longer period of high inflation especially in the
UK.
Eurozone preliminary data for June shows the consumer price inflation rate
decreased to 5.5 per cent in June 2023, down from 6.1 per cent in the
previous month and slightly below market expectations of 5.6 per cent. The
core rate, which excludes volatile items such as food and energy, was
slightly up from the previous month at 5.4 per cent but below the March
rate of 5.7 per cent and also slightly below market forecasts of 5.5 per
cent. Energy prices were down 5.6 per cent (versus down 1.8 per cent in
May). More concerningly, services inflation picked up to 5.4 per cent from
5.0 per cent. However, more encouraging aspects to note are that the
Eurozone consumer price inflation is now at its lowest level since January
2022 having peaked at 10 per cent in October 2022 and recent data shows
factory gate prices in the region fell 1.5 per cent in the year to May,
the first outright decline since December 2020.
UK inflation has been higher persistently with concerns focused around the
core inflation rate. Interest rate markets moved markedly higher on the
recent numbers. While the April data showed a reasonable decrease in
overall consumer price inflation which declined from 10.1 per cent in
March to 8.7 per cent, it was less of a decline than markets expected and
core consumer price inflation continued to increase to 6.8 per cent which
was the highest rate since March 1992. May numbers continued to miss
expectations with the overall consumer price inflation rate unchanged at
8.7 per cent versus an expectation of a fall to 8.5 per cent. However June
data swung the other way with a decline to 7.9 per cent versus analyst
expectations of 8.2 per cent and markets reacted quickly to the surprise
with asset prices rising across the board. The FTSE 100 rallied by almost
2 per cent and the 10 year gilt yield fell from 4.34 per cent to 4.16 per
cent on the day.
As expected, central banks continue to be hawkish on the persistence of
inflation. During the half year under review, the Bank of England raised
the UK base rate four times including a larger than expected 50 basis
points move in June in reaction to the high inflation data. With the
subsequent August increase the Bank of England has now raised rates from
0.1 per cent to 5.25 per cent in this tightening cycle over a twenty month
period. The markets see more to come with the expected peak in UK interest
rates having risen from an expected peak of 5 per cent as at May, to as
high as 6.5 per cent at one point.
In Europe there have also been rate rises taking the key Euro interest
rate to 3.75 per cent and markets expecting this to rise to a peak of
around 4 per cent. Christine Lagarde has signaled that the ECB will remain
vigilant commenting on “a more persistent inflation process” meaning that
rate-setters “cannot declare victory yet”.
Higher interest rates expectations have fed directly into UK mortgage
rates with fast changing rate expectations leading to a flurry of press
reports on rising rates for residential mortgages. Headlines have
highlighted the large numbers of mortgage deals being pulled from the
market and in some cases leading UK banks repriced their headline mortgage
rates twice in one week. During August a number of lenders have begun to
cut rates however the 2 year fixed rate residential mortgages are still
near their peak level at 6.8 per cent and the average rate for a five-year
fixed mortgage stands at 6.3 per cent. These increases have begun to feed
into house prices where average UK home prices according to the Halifax
declined 2.6 per cent in the year to June which is the largest year on
year decline since 2011.
Commercial real estate markets are looking for increased levels of
certainty in inflation and interest rate expectations and until the
outlook settles there is likely to be a decreased level of transaction
volumes. This can be seen in the reduced activity in the first quarter of
2023 where investment volumes were down 62 per cent as a whole in Europe.
Focusing on the office market where we commented last time on the
differences between the US and European markets, observers might be
surprised that volume decreases here are largely in line with the market
as a whole with a 64 per cent decrease in office transaction volume.
Looking at Central London office in particular the number of transactions
is similar to the same period last year but the average lot size is down
by 59 per cent which is in line with the reduction in overall transaction
volumes. As is typical in slower markets the activity has been focused on
high quality assets and as such London office transactions in the first
quarter of 2023 have set the highest ever recorded average capital value
per square foot.
Operating asset classes showed lower declines in investment volumes with
hotel investment activity in the quarter ended 30 June 2023 versus the
previous year being the strongest of the sectors. Hotels recorded a flat
level of transactions reflecting strong underlying operating performance
in the sector. All of the top 25 European hotel markets have recorded
higher average room rates in the 12 months to end of May 2023 than they
did in 2019.
One of the underperformers in transaction volumes for the quarter ended 30
June 2023 was logistics where volumes were down 76 per cent, however this
may be a sector that picks up volume following a rapid repricing.
Valuation adjustment in the UK during 2022 has been very swift with the
move having been compounded by a high starting point due to strong
performance in recent years. As a result of the rapid correction we had
seen some evidence that yields were nudging off the recent highs. The
fundamentals of high demand combined with supply being unable to keep up
are still leading to a positive outlook for growing rental levels in this
area which will attract investor interest to the positive income dynamics.
The wait for stability in the inflation and interest rate markets has been
longer than many expected. This will continue to be a key driver for real
estate markets and until the outlook settles further market volumes are
likely to remain lower.
PORTFOLIO STATISTICS
As at 30 June 2023, the portfolio was invested in line with the Group’s
investment policy.
The key portfolio statistics are as summarized below.
30 June 30 June
2023 2022
Number of investments 17 19
Percentage of currently invested portfolio in floating 76.1% 78.8%
rate loans
Invested Loan Portfolio unlevered annualised total 8.1% 7.1%
return(1)
Invested Loan Portfolio levered annualised total 8.1% 7.2%
return(1)
Weighted average portfolio LTV – to Group first £(1) 11.6% 14.9%
Weighted average portfolio LTV – to Group last £(1) 56.0% 60.5%
Average loan term 5.3 years 5.0 years
Average remaining loan term 1.4 years 1.9 years
Net Asset Value £400.4m £422.9m
Amount drawn under Revolving Credit Facilities £0.0m (£18.5m)
(excluding accrued interest)
Loans advanced at amortised cost (including accrued £384.1m £433.6m
income)
Cash and cash equivalents £13.1m £3.1m
Other net assets (including financial assets held at £3.2m £4.7m
fair value through the profit or loss)
(1) Alternative performance measure - refer to definitions and calculation
methodology.
The maturity profile of investments as at 30 June 2023 is shown below.
Remaining years to Principal value of % of invested
contractual maturity* loans £m portfolio
0 to 1 years £186.4 49.2%
1 to 2 years £87.6 23.1%
2 to 3 years £46.0 12.1%
3 to 5 years £59.2 15.6%
* Excludes any permitted extensions. Note that borrowers may elect to
repay loans before contractual maturity.
The Board considers that the Group is engaged in a single segment of
business, being the provision of a diversified portfolio of real estate
backed loans. The analysis presented in this report is presented to
demonstrate the level of diversification achieved within that single
segment. The Board does not believe that the Group’s investments
constitute separate operating segments.
SHARE PRICE PERFORMANCE
As at 30 June 2023 the NAV was 103.75 pence per Ordinary Share (31
December 2022: 105.20 pence; 30 June 2022: 103.42 pence) and the share
price was 88.6 pence (31 December 2022: 89.0 pence; 30 June 2022: 91.6
pence).
Source: Morningstar
The Company’s share price volatility has been driven by market conditions
and trading cash flows rather than a change in the Company’s NAV.
INVESTMENT DEPLOYMENT
As at 30 June 2023, the Group had 17 investments and commitments of £426.5
million as follows:
Sterling Sterling
equivalent Sterling equivalent unfunded Total
balance(1), (2) cash commitment(1) (3) (Drawn and
Unfunded)
Hospitals, UK £25.0 m £25.0 m
Hotel & £49.9 m £49.9 m
Residential, UK
Office, London £20.5 m £20.5 m
Hotel, Scotland £42.6 m £42.6 m
Hotel, North £15.0 m £15.0 m
Berwick
Life Science, UK £19.5 m £7.1 m £26.6 m
Hotel and Office, £10.5 m £10.5 m
Northern Ireland
Hotels, United £32.0 m £18.6 m £50.6 m
Kingdom
Industrial Estate, £27.2 m £19.0 m £46.2 m
UK
Total Sterling £242.2 m £44.7 m £286.9 m
Loans
Three Shopping £28.7 m £28.7 m
Centres, Spain
Shopping Centre, £14.6 m £14.6 m
Spain
Hotel, Dublin £32.6 m £32.6 m
Office, Madrid, £15.9 m £0.9 m £16.8 m
Spain
Mixed Portfolio, £5.7 m £5.7 m
Europe
Mixed Use, Dublin £10.9 m £1.7 m £12.6 m
Office Portfolio, £7.6 m £7.6 m
Spain
Office Portfolio, £21.0 m £21.0 m
Ireland
Total Euro Loans £137.0 m £2.6 m £139.6 m
Total Portfolio £379.2 m £47.3 m £426.5 m
(1) Euro balances translated to sterling at period end exchange rate.
(2) Balances shown are funded balances before impairment.
(3) Excludes Interest of circa £4.4 million to be capitalised in respect
of Office Portfolio, Ireland which is repayable on maturity.
Between 1 January 2023 and 30 June 2023, the following significant
investment activity occurred (reflected in the table overleaf):
REPAYMENTS:
During the half year, despite lower transaction volumes across the markets
because of the cautionary approach being adopted by investors, borrowers
repaid the following loan obligations:
- £23.0 million, Hotel, Oxford (repayment of loan in full)
- €9.4 million, Hotel, Dublin (partial repayment of loan)
- £5.5 million, Office and Industrial Portfolio, UK (repayment of loan in
full)
- €3.0 million, Logistics Portfolio, Germany (repayment of loan in full)
- €2.1 million, Mixed Portfolio, Europe (partial repayment of loan)
- £1.0 million, Hotel and Office, Northern Ireland (partial repayment of
loan)
- €0.8 million, Office Portfolio, Spain (partial repayment of loan)
- €0.7 million, Three Shopping Centres, Spain (scheduled amortisation)
- €0.08 million, Mixed Use, Dublin (partial repayment of loan)
These repayments were used in the six months to 30 June 2023 to:
- Fund the repayment of the £19 million of debt outstanding in the Group
as at 31 December 2022;
- Pay the additional dividend of £7.9 million paid in March 2023 (which
equated to 2.0 pence per share); and
- Make the first return of capital to shareholders of £10.0 million paid
in June 2023
ADDITIONAL FUNDING:
During the half year, the Group funded £1.6 million in relation to loan
commitments made in prior years which were unfunded. No new loans were
funded during the half year in line with new objective and investment
policy of the group as outlined in the Chairman's Statement.
Subsequent to 30 June 2023, the following significant loan repayments
occurred:
- £49.9 million, Hotel & Residential, UK (repayment of loan in full)
- €12.7 million, Mixed Use, Dublin (repayment of loan in full)
- €5.5 million, Hotel, Dublin (partial repayment of loan)
- €2.4 million, Mixed Portfolio, Europe (partial repayment of loan)
- £1.2 million, Hotel & Office, Northern Ireland (partial repayment of
loan)
- €0.8 million, Shopping Centre, Spain (partial repayment of loan)
These repayments were used to build up sufficient cash reserves for the
Group to be able to self-fund the unfunded cash loan commitments (which
were £47.3 million as at 30 June 2023) and to make the second return of
capital to shareholders of circa £30 million paid in August 2023.
Subsequent to 30 June 2023, the Group funded £0.7 million in relation to
loan commitments made in prior years which were unfunded.
PORTFOLIO OVERVIEW
The Group continues to closely monitor its loan exposures, underlying
collateral performance and repayments. The Group has prudently assessed
key risk indicators impacting all investments and has increased the number
of loans classified as Stage 2 and moved one loan from a Stage 2
classification to a Stage 3 classification. This is outlined in detail
under the Credit Risk Analysis. Despite increased risk around higher
interest rates and lower transaction volumes, the portfolio has continued
to perform well.
During H1 2023, a total of £43.6 million, equivalent to 10.2 per cent of
the 31 December 2022 total funded loan portfolio, has been repaid across
nine investments. Repayments are originating from strategic underlying
property sales, regular loan amortisation or borrowers electing to
voluntarily pay down loan balances with surplus cash. Since 30 June 2023 a
further £69.7 million has been repaid, including the full repayment of two
loans - Hotels & Residential, UK - £49.9 million and Mixed
Use, Dublin - £10.9/€12.7 million. These repayments were used to provide a
reserve of cash to fund committed to but as yet unfunded loan commitments
(which amounted to £47.3 million as at 30 June 2023) and to fund the
second return of capital to Shareholders (which amounted to circa £30.0
million) and was paid in August 2023.
Post 30 June 2023 the Group’s exposure to development and heavy
refurbishment projects has reduced to zero following the final repayment
of the Hotel & Residential, UK loan. The sponsor successfully completed on
a combination of pre-sold residential units and a refinance of the hotel
and repaid the Group's loan in full.
At 30 June 2023 four asset classes represented 80 per cent of the total
funded loan portfolio these are Hospitality (38 per cent), Office (21 per
cent), Retail (12 per cent) and Residential (9 per cent).
The Hospitality exposure is diversified across six different loan
investments. Two (25 per cent of hospitality exposure) benefit from State/
Government licences in place at accretive rents with structural
amortisation continuing to decrease loan exposures on these assets. The
other trading hotel exposures either have been recently refurbished or
will be on a rolling basis from mid-2023. All trading assets continue to
have strong revenue performance driven by higher rates being achieved.
Sponsors are keenly focused on costs to ensure that dilution of strong top
line perform due to higher costs is minimised. The weighted average Loan
to Value of the Hospitality exposure is 49 per cent.
The Office exposure (21 per cent) is spread across seven 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. The Group’s office exposure is predominantly weighted (over 65
per cent) toward strong city centre locations which is widely documented
as being the most defensive, alongside buildings which have high quality,
ESG credentials. 66 per cent of the Group’s current office exposure is
against underlying office collateral that is either newly constructed or
has undergone recent refurbishment projects. The weighted average Loan to
Value of loans with office exposure is 62 per cent. The average age of
these independently instructed valuation reports is under one year and
hence there continues to be significant headroom to the Group's basis on
these loans. As a precaution however, two of the office loans have as at
30 June 2023 been classified in the higher risk Stage 2 category due to
slower lease up of newly refurbished space than expected or a materially
lower valuation level upon receipt of a revised appraisal.
The Retail exposure (12 per cent) has continued to perform strongly from
an operational perspective, with occupancies across the shopping centre
exposures fully recovered to pre-pandemic levels and in the high eighties
or nineties per cent. The sponsor of the shopping centre loans has
launched a comprehensive sale process and bids have been received on the
assets. The Group has prudently reclassified one of the retail loan
exposures to a Stage 3 loan given a tight bid level versus the Groups loan
level. This is further detailed in the Credit Risk Analysis section below.
The weighted average Loan to Value of the Retail exposure is 75 per cent.
Residential exposure (9 per cent) is predominantly related to the
successfully pre-sold residential for sale development project (Hotel &
Residential, UK) that was fully repaid during Q3 2023. The weighted
average Loan to Value of the Residential exposure was 38 per cent.
LOAN TO VALUE
All assets securing the loans undergo third party valuations before each
investment closes and periodically thereafter at a time considered
appropriate by the lenders. The LTVs shown below are based on independent
third party appraisals with the exception of two loans that have been
marked against a lower sale process bid level. The current weighted
average age of the dates of these third party valuations for the whole
portfolio is just over one year while the current weighted average age of
the valuations for the income producing portfolio (i.e. excluding loans
for development or heavy refurbishment) is just over six months.
On the basis of the methodology and valuation processes previously
disclosed (the exception as noted above) at 30 June 2023 the Group has an
average last £ LTV of 56.0 per cent.
The table below shows the sensitivity of the loan to value calculation for
movements in the underlying property valuation and demonstrates that the
Group has considerable headroom within the currently reported last LTVs.
Change in Valuation Hospitality Office Retail Residential Other Total
-15% 58.1% 73.4% 88.4% 44.3% 68.8% 65.9%
-10% 54.9% 69.3% 83.5% 41.8% 65.0% 62.2%
-5% 52.0% 65.7% 79.1% 39.6% 61.6% 59.0%
0% 49.4% 62.4% 75.1% 37.7% 58.5% 56.0%
5% 47.0% 59.4% 71.5% 35.9% 55.7% 53.3%
10% 44.9% 56.7% 68.3% 34.2% 53.2% 50.9%
15% 42.9% 54.3% 65.3% 32.8% 50.9% 48.7%
LIQUIDITY AND HEDGING
The Group had no funds drawn on its available credit facilities as at 30
June 2023 and thus had significant liquidity available with undrawn
revolving credit facilities (see note 3.g of the 2022 Annual Report for
further information) of £101.0 million to fund outstanding commitments as
at that date.
Since 30 June 2023 and following the full repayment of two loans totaling
£60.8 million in addition to other partial repayments the Board has
created a reserve to fund the unfunded cash loan commitments and has
reduced the debt facilities available to the Group to £25.0 million.
In August 2023, the Company redeemed circa £30 million of shares from
Shareholders. The table below summarises the available liquidity as at 30
June 2023 and 31 August 2023.
30 June 2023 31 August 2023
£ million £ million
Drawn on Group debt facilities – –
Cash and cash equivalents 13.1 54.2
Net Cash and cash equivalents held 13.1 54.2
Undrawn Debt Facilities available to Group 101.0 25.0
Undrawn Commitments to Borrowers (47.3) (44.9)
Available Capacity 66.8 34.3
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, while the net assets of the Group exceed £400.0 million cash
would not need to be posted until the hedges were more than £20.0 million
out of the money. As the net assets of the Group decreases so will these
thresholds. This situation is closely monitored as a result. The mark to
market of the hedges at 30 June 2023 was £2.9 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 a large proportion (36%) of its investments denominated in
Euros (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.
CREDIT RISK ANALYSIS
All loans within the portfolio are classified and measured at amortised
cost less impairment.
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 closely monitors all loans in the portfolio for any
deterioration in credit risk. As at the 31 December 2022, all but two of
the Group’s loan investments were categorised as Stage 1, with two loans
(£44.6 million / 11 per cent of total funded loan portfolio) categorised
as Stage 2 loans. As at 30 June 2023, the Group has prudently reassessed
assigned classifications and has made the following reclassifications:
Stage 2 loans – four loans investments have moved from a Stage 1
classification to Stage 2. In total five loans amounting to £100.1 million
/ 26 per cent of total funded loan portfolio are now classified as Stage
2. The average Loan to Value of these exposures is 69 per cent. The
average age of valuation report dates used in the Loan to Value
calculation for these assets is just under six months old. While these
loans are considered to be higher risk since initial recognition, no loss
has been recognised on a 12-month and lifetime expected credit losses
basis. Therefore, no impairment in the value of these loans has been
recognised. The reclassification of these loans has been driven by various
key risk assessment factors including the following;
Lower underlying property values following receipt of updated formal
appraisals by independent valuers or agreed and in exclusivity sale
values,
Sponsor business plans progressing slower than originally underwritten
meaning that trading performance has lagged expectation and operating
financial covenants under the facility agreements have breached, and
Additional equity support is required to cover interest or operating
shortfalls as a result of slower lease up or operations taking longer to
ramp up.
The Stage 2 loans continue to benefit from headroom to the Group’s
investment basis. In all cases sponsors have defined business plans to
achieve stabilisation or optimise disposal processes. In most cases
sponsors are supporting the continued execution of business plans and
contractual loan payments by injecting additional equity. Additionally,
the Group has in some cases negotiated for borrowers to inject equity to
partially repay loans in exchange for selected temporary financial
covenant waivers to allow headroom for strong sponsors to progress
business plans. This will provide de-risking against the loan basis once
documented and cash injected.
Stage 3 loan – one loan has been reclassified from Stage 2 to Stage 3.
This investment totals £14.6 million / 4 per cent of total funded loan
portfolio and its Loan to Value has been increased to 92 per cent. This
value is based on the projected net proceeds which are expected to be
available for loan repayment upon sale of the underlying loan collateral.
The sponsor has run a comprehensive competitive sale process through a
global advisory firm with oversight by the lenders and the bidder has
proven execution track record in the same asset class and deal size and
intends to close with all equity with no reliance on debt. Given continued
capital markets volatility, materially lower transaction volumes and
uncertainty regarding interest rates, the Group has approved the sale and
the buyer is in exclusivity while undertaking standard purchaser due
diligence.
While the current projected net sale proceeds on the stage 3 loan would
fully pay down the Group’s loan balance, the Group has applied
sensitivities to the expected net proceeds and, on that basis, has
accounted for a credit impairment of £1.7m / 0.5 per cent of total funded
loan portfolio. We note that despite the impairment, this loan investment
is projected to achieve local currency returns of over 1.4 times the
Group’s capital invested.
This assessment has been made based on information in our possession at
the date of reporting, our assessment of the risks of each loan and
certain estimates and judgements around future performance of the assets.
A detailed description of how the Group determines on what basis loans are
classified as Stage 1, Stage 2 and Stage 3 post initial recognition is
provided in the full year accounts.
FAIR VALUE OF THE PORTFOLIO COMPARED TO AMORTISED COST
The table below represents the fair value of the loans based on a
discounted cash flow basis using a range of potential discount rates.
Discount Rate Value Calculated % of book value
6.3% £ 398.4 m 103.7%
7.0% £ 394.6 m 102.7%
7.5% £ 391.9 m 102.0%
8.0% £ 389.3 m 101.3%
8.5% £ 386.7 m 100.7%
9.0% £ 384.1 m = BOOK VALUE 100.0%
9.5% £ 381.6 m 99.3%
10.0% £ 379.2 m 98.7%
10.5% £ 376.7 m 98.1%
11.0% £ 374.3 m 97.4%
The effective interest rate (“EIR”) – i.e. the discount rate at which
future cash flows equal the amortised cost is 9.0 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. Further, the Group considers the EIR of 9.0 per cent to be
conservative as many of these loans were part of a business plan which
involved transformation and many of these business plans are advanced in
the execution and therefore significantly de-risked from the original
underwriting and pricing. The volatility of the fair value to movements in
discount rates is low due to the low remaining duration of most loans.
RELATED PARTY TRANSACTIONS
Related party disclosures are given in note 16 to the Unaudited Condensed
Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Certain statements in this interim report are forward-looking. Although
the Group believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that
these expectations will prove to have been correct. Because these
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by these forward-looking
statements.
The Group undertakes no obligation to update any forward-looking
statements whether as a result of new information, future events or
otherwise.
Starwood European Finance Partners Limited
Investment Manager
6 September 2023
Principal Risks
PRINCIPAL RISKS FOR THE REMAINING SIX MONTHS OF THE YEAR TO 31 DECEMBER
2023
The principal risks assessed by the Board relating to the Group were
disclosed in the Annual Report and Audited consolidated Financial
Statements for the year to 31 December 2022. The Board and Investment
Manager have reassessed the principal risks and do not consider these
risks to have changed. Therefore, the following are the principal risks
assessed by the Board and the Investment Manager as relating to the Group
for the remaining six months of the year to 31 December 2023:
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 cash 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 deployed a share buyback programme during 2020, 2021 and 2022 in
order to support the share price. No shares were bought back in the first
six months of 2023 but 9,652,350 shares were redeemed in June 2023 at
103.63 pence per share (the NAV per share at the end of May 2023). The
current strategy of the orderly realization of assets and the return of
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 STAGNATE OR GO INTO RECESSION)
The Group’s investments are comprised principally of debt investments in
the United Kingdom (‘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 conflict.
The impact of the UK’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 has mitigated against this
with an average weighted loan to value of the portfolio of 56.0 per cent.
Therefore, the portfolio should be able to withstand a significant level
of deterioration before credit losses are incurred.
The Investment Adviser and Manager has also mitigated the risk of credit
losses by undertaking detailed due diligence prior to the signing of each
loan. Whilst the precise scope of due diligence will have depended on the
proposed investment, such diligence will typically have included
independent valuations, building, measurement and environmental surveys,
legal reviews of property title, assessment of the strength of the
borrower’s management team and key leases and, where necessary, mechanical
and engineering surveys, accounting and tax reviews and know your customer
checks.
The Investment Adviser, Investment Manager and Board have also managed
these risks in the past by ensuring a diversification of investments in
terms of geography, market and type of loan. Such diversification will be
harder to achieve as the company pursues a strategy of orderly realisation
and does not enter into any new investments. The Investment Manager and
Investment Adviser operate in accordance with the guidelines, investment
limits and restrictions as determined by the Board. The Directors review
the portfolio against these guidelines on a regular basis.
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.
The Group has prudently assessed key risk indicators impacting all
investments and has increased the number of loans classified as Stage 2
and moved one loan from a Stage 2 classification to a Stage 3
classification. This is outlined in detail under the Credit Risk Analysis
section of the Investment Manager report. Despite increased risk around
higher interest rates and lower transaction volumes, the portfolio has
continued to perform well. 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 30 June 2023 are structured so that 76.1 per cent
are floating rate and all 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 23.9 per cent by value of the loans are fixed rate, which
provides protection from downward interest rate movements to the overall
portfolio (but also prevents the Group from benefiting from any interbank
rate rises on these positions).
FOREIGN EXCHANGE RISK
The majority of the Group’s investments are Sterling denominated (63.9 per
cent as at 30 June 2023) with the remainder being Euro denominated. The
Group is subject to the risk that the exchange rates move unfavourably and
that a) foreign exchange losses on the Euro loan principals are incurred
and b) that Euro interest payments received are lower than anticipated
when converted back to Sterling and therefore returns are lower than the
underwritten returns.
The Group manages this risk by entering into forward contracts to hedge
the currency risk. All non-Sterling loan principal is hedged back to
Sterling to the maturity date of the loan. Interest payments are normally
hedged for the period for which prepayment protection is in place.
However, the risk remains that loans are repaid earlier than anticipated
and forward contracts need to be broken early.
In these circumstances, the forward curve may have moved since the forward
contracts were placed which can impact the rate received. In addition, if
the loan repays after the prepayment protection, interest after the
prepayment-protected period may be received at a lower rate than
anticipated leading to lower returns for that period. Conversely, the rate
could have improved, and returns may increase.
As a consequence of the hedging strategy employed as outlined above, the
Group is subject to the risk that it will need to post cash collateral
against the mark to market on foreign exchange hedges which could lead to
liquidity issues or leave the Group unable to hedge new non-Sterling
investments.
The Company had approximately £237.0 million (€276.1 million) of hedged
notional exposure with Lloyds Bank plc at 30 June 2023 (converted at 30
June 2023 FX rates).
As at 30 June 2023, the hedges were in the money. If the hedges move out
of the money and this mark to market exceeds £20.0 million and the total
net assets of the Groups are above £400.0 million, the Company is required
to post collateral, subject to a minimum transfer amount of £1 million. As
the Company returns capital to shareholders and the net assets value of
the Group decreases these thresholds also decrease. This situation is
monitored closely, however, and as at 30 June 2023, 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).
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 has recently returned
to Prague and became Managing Director of West Bohemia Developments a.s,
in August 2023, leading a major development opportunity on the D5 Highway
adjacent to the German border. Gary currently remains a resident of the
United Kingdom.
SHELAGH MASON | Non-executive Director - Management Engagement Committee
Chairman and Senior Independent Director
Shelagh Mason is a solicitor specialising in English commercial property
who retired as a consultant with Collas Crill LLP in 2020. She is the
Non-Executive Chairman of the Channel Islands Property Fund Limited listed
on the International Stock Exchange and is also Non-Executive Chairman of
Riverside Capital PCC, sits on the board of Skipton International Limited,
a Guernsey Licensed bank, and until 28 February 2022, she was a
Non-Executive Director of the Renewables Infrastructure Fund a FTSE 250
company, standing down after nine years on the board. In addition to the
Company, she has a non-executive position with Ruffer Investment Company
Limited, also a FTSE 250 company. Previously Shelagh was a member of the
board of directors of Standard Life Investments Property Income Trust, a
property fund listed on the London Stock Exchange for 10 years until
December 2014. She retired from the board of Medicx Fund Limited, a main
market listed investment company investing in primary healthcare
facilities in 2017 after 10 years on the board. She is a past Chairman of
the Guernsey Branch of the Institute of Directors and she also holds the
IOD Company Direction Certificate and Diploma with distinction. Shelagh is
a resident of Guernsey.
CHARLOTTE DENTON | Non-executive Director - Audit Committee Chairman
Charlotte is a Fellow of the Institute of Chartered Accountants in England
and Wales and holds a degree in politics from Durham University. She is
also a member of the Society of Trust and Estate Practitioners, a
Chartered Director and a fellow of the Institute of Directors. During
Charlotte’s executive career she worked in various locations through roles
in diverse organisations, including KPMG, Rothschild, Northern Trust, a
property development startup and a privately held financial services
group. She has served on boards for over fifteen years and is currently a
Non-Executive Director of various entities including the GP boards of
Private Equity groups Cinven and Hitec, the voting company for Pershing
Square Holdings and the Investment Manager for NextEnergy. She is also the
Audit Chair for the listed Investment Company River and Mercantile UK
Micro Cap. Charlotte is a resident of Guernsey.
Statement of Directors’ Responsibilities
To the best of their knowledge, the Directors of Starwood European Real
Estate Finance Limited confirm that:
1. The Unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with IAS 34, “Interim Financial Reporting” as
adopted by the European Union as required by DTR 4.2.4 R; and
2. The Interim Financial Report, comprising of the Chairman’s Statement,
the Investment Manager’s Report and the Principal Risks, meets the
requirements of an interim management report and includes a fair review of
information required by:
(i) DTR 4.2.7R of the UK Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six
months and their impact on the Unaudited Condensed Consolidated Financial
Statements, and a description of the principal risks and uncertainties for
the remaining six months of the year; and
(ii) DTR 4.2.8R of the UK Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six months
and that have materially affected the financial position or performance of
the Company during that period, and any material changes in the related
party transactions disclosed in the last Annual Report.
By order of the Board
For Starwood European Real Estate Finance Limited
John Whittle Charlotte Denton
Chairman Director
6 September 2023 6 September 2023
Interim Financial Statements
Independent Review Report to Starwood European Real Estate Finance Limited
Report on the unaudited condensed consolidated financial statements
OUR CONCLUSION
We have reviewed Starwood European Real Estate Finance Limited’s unaudited
condensed consolidated financial statements (the “interim financial
statements”) in the Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements of Starwood European Real Estate Finance
Limited for the 6-month period ended 30 June 2023 (the “period”).
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with International Accounting Standard
34, ‘Interim Financial Reporting’, as adopted by the European Union and
the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom’s Financial Conduct Authority.
The interim financial statements comprise:
the unaudited condensed consolidated statement of financial position as
at 30 June 2023;
the unaudited condensed consolidated statement of comprehensive income
for the period then ended;
the unaudited condensed consolidated statement of cash flows for the
period then ended;
the unaudited condensed consolidated statement of changes in equity for
the period then ended; and
the explanatory notes to the interim financial statements.
The interim financial statements included in the Interim Financial Report
and Unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with International Accounting Standard 34, ‘Interim
Financial Reporting’, as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom’s
Financial Conduct Authority.
BASIS FOR CONCLUSION
We conducted our review in accordance with International Standard on
Review Engagements 2410, ‘Review of Interim Financial Information
Performed by the Independent Auditor of the Entity’ issued by the
International Auditing and Assurance Standards Board. A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical
and other review procedures.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing and, consequently,
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we
do not express an audit opinion.
We have read the other information contained in the Interim Financial
Report and Unaudited Condensed Consolidated Financial Statements and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
RESPONSIBILITIES FOR THE INTERIM FINANCIAL STATEMENTS AND THE REVIEW
OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS
The Interim Financial Report and Unaudited Condensed Consolidated
Financial Statements, including the interim financial statements, is the
responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the Interim Financial Report and Unaudited
Condensed Consolidated Financial Statements in accordance with
International Accounting Standard 34, ‘Interim Financial Reporting’, as
adopted by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom’s Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial
statements in the Interim Financial Report and Unaudited Condensed
Consolidated Financial Statements based on our review. This report,
including the conclusion, has been prepared for and only for the company
for the purpose of complying with the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom’s Financial Conduct Authority and
for no other purpose. We do not, in giving this conclusion, accept or
assume responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
PricewaterhouseCoopers CI LLP
Chartered Accountants,
Guernsey, Channel Islands
6 September 2023
(a) The maintenance and integrity of the Starwood European Real Estate
Finance Limited website is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the financial statements since they were
initially presented on the website.
(b) Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Unaudited Condensed Consolidated Statement of Comprehensive Income
for the period ended 30 June 2023
1 January 2023 1 January 2022 1 January 2022
to to to
30 June 2023 30 June 2022 31 December
2022
Notes £ (unaudited) £ (unaudited) £ (audited)
Income
Income from loans 7 18,204,923 14,795,630 33,356,702
advanced
Short term deposits 11,435 – –
interest income
Net foreign exchange 3 (33,802) 1,045,763 3,046,164
(losses) / gains
Total income 18,182,556 15,841,393 36,402,866
Expenses
Impairment loss on 7 1,726,000 – –
loans advanced
Investment management 16 1,520,900 1,559,609 3,122,755
fees
Credit facility 424,219 434,591 828,876
commitment fees
Credit facility
interest and 255,505 376,966 1,080,499
amortisation of fees
Other expenses 214,759 268,139 432,649
Audit and non-audit 182,957 118,463 233,773
fees
Administration fees 158,769 176,070 354,426
Legal and professional 144,932 242,080 437,622
fees
Directors’ fees and 16 103,112 103,105 203,373
expenses
Broker’s fees and 25,000 25,000 50,000
expenses
Professional fees for
the orderly realisation – – 210,000
proposals
Total operating 4,756,153 3,304,023 6,953,973
expenses
Operating profit for
the period / year 13,426,403 12,537,370 29,448,893
before tax
Taxation 15 367,217 44,710 90,287
Operating profit for 13,059,186 12,492,660 29,358,606
the period / year
Other comprehensive
income
Items that may be
reclassified to profit
or loss
Exchange differences on
translation of foreign 18,174 82,284 (112,256)
operations
Other comprehensive
income /(loss) for the 18,174 82,284 (112,256)
period / year
Total comprehensive
income for the period / 13,077,360 12,574,944 29,246,350
year
Weighted average number 4 395,326,056 408,911,273 404,881,933
of shares in issue
Basic and diluted
earnings per Ordinary 4 3.30 3.06 7.25
Share (pence)
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Financial Position
as at 30 June 2023
As at As at As at
30 June 2023 30 June 2022 31 December 2022
Notes £ (unaudited) £ (unaudited) £ (audited)
Assets
Cash and cash 5 13,137,269 3,078,669 3,576,155
equivalents
Other receivables and 6 1,537,753 969,360 26,792
prepayments
Revolving credit
facility capitalised 262,287 – –
cost
Financial assets at
fair value through 8 2,891,365 4,624,887 706,661
profit or loss
Loans advanced 7 384,146,488 433,639,486 432,459,966
Total assets 401,975,162 442,312,402 436,769,574
Liabilities
Credit facilities 10 – 18,021,799 18,863,204
Trade and other 9 1,543,420 1,404,119 1,758,606
payables
Total liabilities 1,543,420 19,425,918 20,621,810
Net assets 400,431,742 422,886,484 416,147,764
Capital and reserves
Share capital 11 385,435,824 407,440,011 395,075,556
Retained earnings 15,123,803 15,397,992 21,218,267
Translation reserve (127,885) 48,481 (146,059)
Total equity 400,431,742 422,886,484 416,147,764
Number of Ordinary 385,940,346 408,911,273 395,592,696
Shares in issue
Net asset value per 103.75 103.42 105.20
Ordinary Share (pence)
These Unaudited Condensed Consolidated Financial Statements were approved
and authorised for issue by the Board of Directors on 6 September 2023,
and signed on its behalf by:
John Whittle Charlotte Denton
Chairman Director
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Changes in Equity
for the period ended 30 June 2023
Share Retained Translation Total
Period ended 30 June capital earnings reserve equity
2023 £ £ £ £
(unaudited) (unaudited) (unaudited) (unaudited)
Balance at 1 January 395,075,556 21,218,267 (146,059) 416,147,764
2023
Shares redeemed (9,639,732) (362,997) – (10,002,729)
Dividends paid – (18,790,653) – (18,790,653)
Operating profit for the – 13,059,186 – 13,059,186
period
Other comprehensive
income:
Other comprehensive – – 18,174 18,174
income for the period
Balance at 30 June 2023 385,435,824 15,123,803 (127,885) 400,431,742
Share Retained Translation Total
Period ended 30 June capital earnings reserve equity
2022 £ £ £ £
(unaudited) (unaudited) (unaudited) (unaudited)
Balance at 1 January 407,440,011 14,150,392 (33,803) 421,556,600
2022
Dividends paid – (11,245,060) – (11,245,060)
Operating profit for the – 12,492,660 – 12,492,660
period
Other comprehensive
income:
Other comprehensive – – 82,284 82,284
income for the period
Balance at 30 June 2022 407,440,011 15,397,992 48,481 422,886,484
Share Retained Translation Total
Year ended 31 December capital earnings reserve equity
2022 £ £ £ £
(audited) (audited) (audited) (audited)
Balance at 1 January 407,440,011 14,150,392 (33,803) 421,556,600
2022
Share buy backs (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
income:
Other comprehensive – – (112,256) (112,256)
income for the year
Balance at 31 December 395,075,556 21,218,267 (146,059) 416,147,764
2022
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Unaudited Condensed Consolidated Statement of Cash Flows
for the period ended 30 June 2023
1 January 2023 1 January 2022 1 January 2022
to to to
30 June 2023 30 June 2022 31 December
2022
£ £ £
(unaudited) (unaudited) (audited)
Operating activities:
Operating profit for the 13,426,403 12,537,370 29,448,893
period / year before tax
Adjustments before tax
Net interest income (18,204,923) (14,795,630) (33,356,702)
(Increase) / decrease in
prepayments, receivables and (5,875) 16,164 10,860
capitalised costs
(Decrease) / increase in (259,704) 165,901 458,661
trade and other payables
Net unrealised (gains) /
losses on foreign exchange (2,184,704) 8,669,146 12,584,938
derivatives
Net foreign exchange losses / 5,036,923 (4,774,059) (15,292,556)
(gains)
Net foreign exchange gains on (2,553,840) – 5,618,298
hedges
Impairment loss on loans 1,726,000 – –
advanced
Credit facility interest 148,118 170,528 707,171
Credit facility amortisation 107,386 206,438 373,328
of fees
Credit facility commitment 424,219 434,591 828,876
fees
Currency translation 2,199,941 (3,374,358) (5,663,501)
difference
Corporate taxes paid (290,396) (84,274) (84,274)
(430,452) (828,183) (4,366,008)
Loans advanced1 (1,661,978) (27,365,276) (60,788,846)
Loan repayments and 43,551,178 14,934,266 56,894,392
amortisation
Origination fees paid – (525,888) (872,020)
Interest, commitment and exit
fee income from loans 16,604,438 12,402,875 29,585,823
advanced
Net cash (outflow)/inflow 58,063,186 (1,382,206) 20,453,341
from operating activities
Cash flows from investing
activities
Share buy backs – – (12,364,455)
Share redemptions (10,002,729) – –
Dividends paid (18,790,653) (11,245,060) (22,290,731)
Proceeds under credit – 30,623,470 94,223,490
facility
Repayments under credit (19,000,000) (20,985,311) (84,158,141)
facility
Credit facility interest paid (535,358) (235,601) (533,577)
Credit facility commitment (443,877) (434,931) (834,495)
fees paid
Net cash outflow from (48,772,617) (2,277,433) (25,957,909)
financing activities
Net decrease in cash and cash 9,290,569 (3,659,639) (5,504,568)
equivalents
Cash and cash equivalents at
the start of the period / 3,576,155 2,994,357 2,994,357
year
Net foreign exchange gains /
(losses) on cash and cash 270,545 3,743,951 6,086,366
equivalents
Cash and cash equivalents at 13,137,269 3,078,669 3,576,155
the end of the period / year
1 Net of arrangement fees of £nil (period ended 30 June 2022: £243,148,
year ended 31 December 2022: £820,118) withheld.
The accompanying notes form an integral part of these Unaudited Condensed
Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial Statements
for the period ended 30 June 2023
1. GENERAL INFORMATION
Starwood European Real Estate Finance Limited (the “Company”) was
incorporated with limited liability in Guernsey under the Companies
(Guernsey) Law, 2008, as amended, on 9 November 2012 with registered
number 55836, and has been authorised by the Guernsey Financial Services
Commission (the “GFSC”) as a registered closed-ended investment scheme.
The registered office and principal place of business of the Company is 1,
Royal Plaza, Royal Avenue, St Peter Port, Guernsey, Channel Islands,
GY1 2HL.
On 12 December 2012, the Company announced the results of its IPO, which
raised net proceeds of £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 buy-back agent to effect share buybacks on behalf
of the Company. During year end 31 December 2022, the Company had
repurchased 13,318,577 Ordinary Shares at an average cost of 92.84 pence
per share. These Ordinary Shares are held in treasury. However, in June
2023 the total number of Ordinary Shares held in treasury were cancelled.
On 26 June 2023, 9,652,350 Ordinary Shares were redeemed. On 25 August
2023, a further 29,092,218 Ordinary Shares were redeemed.
The Unaudited Condensed Consolidated Financial Statements comprise the
financial statements of the Company, Starfin Public Holdco 1 Limited
(“Holdco 1”), Starfin Public Holdco 2 Limited (“Holdco 2”), Starfin Lux
S.à.r.l (“Luxco”), Starfin Lux 3 S.à.r.l (“Luxco 3”) and Starfin Lux 4
S.à.r.l (“Luxco 4”) (together, the “Group”) as at 30 June 2023.
Following the Company’s Extraordinary General Meeting (“EGM”) on 27
January 2023, the Company’s objective changed and is now to conduct an
orderly realisation of the assets of the Group and the return of capital
to Shareholders. In line with this objective the Board will endeavour to
realise all of the Group’s investments in a manner that achieves a balance
between maximising the net value received from those investments and
making timely returns to Shareholders. This has resulted in having the
first partial redemption in the period of 9,652,350 Ordinary Shares from
Shareholder at 103.63 pence per share. Further details and background is
covered in the Corporate Summary section of this report.
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 Company has prepared these Unaudited Condensed Consolidated Financial
Statements on a going concern basis in accordance with International
Accounting Standard 34, “Interim Financial Reporting”, as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom’s Financial Conduct Authority. This
Interim Financial Report does not comprise statutory Financial Statements
within the meaning of the Companies (Guernsey) Law, 2008, and should be
read in conjunction with the Consolidated Financial Statements of the
Group as at and for the year ended 31 December 2022, which have been
prepared in accordance with International Financial Reporting Standards as
adopted by the European Union and the Companies (Guernsey) Law, 2008. The
statutory Financial Statements for the year ended 31 December 2022 were
approved by the Board of Directors on 23 March 2023. The opinion of the
Auditor on those Financial Statements was unqualified. This Interim
Financial Report and Unaudited Condensed Consolidated Financial Statements
for the period ended 30 June 2023 has been reviewed by the Auditor but not
audited.
In line with the considerations noted in Note 1 above, the Directors have
undertaken a comprehensive review and considered it appropriate to adopt
the going concern basis of accounting in preparing the Interim Financial
Report and Unaudited Condensed Consolidated Financial Statements.
There are a number of new and amended accounting standards and
interpretations that became applicable for annual reporting periods
commencing on or after 1 January 2023.
These amendments have not had a significant impact on these Unaudited
Condensed Consolidated Financial Statements and therefore the additional
disclosures associated with first time adoption have not been made.
The preparation of the Unaudited Condensed Consolidated Financial
Statements requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and the
reported amounts of assets and liabilities, income and expenses. Actual
results may differ from these estimates.
In preparing these Unaudited Condensed Consolidated Financial Statements,
the significant judgements made by management in applying the Group’s
accounting policies and the key sources of estimation uncertainty were the
same as those that applied to the Annual Consolidated Financial Statements
for the year ended 31 December 2022.
3. NET FOREIGN EXCHANGE GAINS / (LOSSES)
30 June 2023 30 June 2022 31 December 2022
£ £ £
Loans advanced - realised 113,162 5,699 511,596
Loans advanced - realised (166,935) (517,378) (996,010)
Forward contracts gains - 2,755,096 7,424,908 6,507,544
realised
Forward contracts losses - (209,237) (2,352,429) (428,644)
realised
Other gains - realised 4,904 (82,130) 110,951
Other losses - realised – (89,876) (38,684)
Total realised gains 2,496,990 4,388,794 5,666,753
Loans advanced gains - 32,929 5,323,680 9,987,926
unrealised
Loans advanced losses - (4,748,425) – (23,578)
unrealised
Forward contracts gains - 7,716,816 959,471 2,337,351
unrealised
Forward contracts losses - (5,532,112) (9,626,182) (14,922,288)
unrealised
Total unrealised losses (2,530,792) (3,343,031) (2,620,589)
Net gains/(losses) (33,802) 1,045,763 3,046,164
On occasion, the Group may realise a gain or loss on the roll forward of a
hedge if it becomes necessary to extend a capital hedge beyond the initial
anticipated loan term. If this situation arises the Group will separate
the realised FX gain or loss from other realised FX gains or losses and
not consider it available to distribute (or as a reduction in
distributable profits). The FX gain or loss will only be considered part
of distributable reserves when the rolled hedge matures or is settled and
the final net gain or loss on the capital hedges can be determined.
4. EARNINGS PER SHARE AND NET ASSET VALUE PER SHARE
The calculation of basic earnings per Ordinary Share is based on the
operating profit of £13,059,186 (30 June 2022: £12,492,660 and 31 December
2022: £29,358,606) and on the weighted average number of Ordinary Shares
in issue at 30 June 2023 of 395,326,056 (30 June 2022: 408,911,273 and 31
December 2022: 404,881,933).
The calculation of NAV per Ordinary Share is based on a NAV of
£400,431,742 (30 June 2022: £422,886,484 and 31 December 2022:
£416,147,764) and the actual number of Ordinary Shares in issue at 30 June
2023 of 385,940,346 (30 June 2022: 408,911,273 and 31 December 2022:
395,592,696).
5. CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprises bank balances and short term bank
deposits held by the Company. The carrying amount of these represents
their fair value.
30 June 2023 30 June 2022 31 December 2022
£ £ £
Cash at bank 3,125,834 3,078,669 3,576,155
Short term deposit 10,011,435 – –
13,137,269 3,078,669 3,576,155
Cash and cash equivalents comprises cash and short-term deposits held with
various banking institutions with original maturities of three months or
less.
6. OTHER RECEIVABLES AND REPAYMENTS
30 June 2023 30 June 2022 31 December 2022
£ £ £
Prepayments 32,667 21,275 26,792
Investment interest receivable1 1,505,086 948,085 –
1,537,753 969,360 26,792
1 Investment interest receivable as at 30 June 2023 and 30 June 2022
relate to loan related payments which were received after period end.
7. LOANS ADVANCED
30 June 2023 30 June 2022 31 December 2022
£ £ £
UK
Hotel & Residential, UK 50,110,830 49,942,753 49,876,920
Hotel, Scotland 43,249,198 42,729,177 43,109,284
Hotels, United Kingdom 32,061,420 30,381,133 32,134,282
Industrial Estate, UK 27,414,987 – 27,435,196
Hospitals, UK 25,363,038 25,360,264 25,367,475
Office, London 20,975,997 17,404,582 19,336,450
Life Science, UK 20,055,999 19,764,594 19,955,081
Hotel, North Berwick 15,253,555 15,095,014 15,211,739
Hotel and Office, Northern 10,919,618 12,852,101 11,947,821
Ireland
Hotel, Oxford – 23,042,786 23,181,461
Office and Industrial – 5,499,677 5,594,291
Portfolio, UK
Spain
Three Shopping Centres 29,590,487 30,410,440 31,023,568
Office, Madrid, Spain 15,988,322 16,032,248 16,510,039
Shopping Centre, Spain 13,466,064 15,240,528 15,886,055
Office Portfolio, Spain 8,138,179 8,653,598 9,027,980
Ireland
Hotel, Dublin 33,267,881 52,266,251 42,752,233
Office Portfolio, Ireland 21,264,090 27,382,693 21,950,119
Mixed use, Dublin 11,127,912 7,944,861 11,469,547
Rest of Europe
Mixed Portfolio, Europe 5,898,911 16,181,824 7,946,143
Logistics Portfolio, Germany – 3,305,528 2,744,282
Office and Industrial – 14,149,434 –
Portfolio, The Netherlands
384,146,488 433,639,486 432,459,966
The amortised carrying cost of the Shopping Centre, Spain includes an
impairment provision of £1.7 million for 2023 and none for 2022. For
further information and the associated risks see the Investment Manager’s
Report and also covered in Note 13.
The table below reconciles the movement of the carrying value of loans
advanced in the period / year:
30 June 2023 30 June 2022 31 December 2022
£ £ £
Loans advanced at the start of 432,459,966 414,632,512 414,632,512
the period / year
Loans advanced 1,637,570 27,401,675 61,420,419
Income from loans advanced 18,204,923 14,795,630 33,356,702
Impairment loss on loans (1,726,000) – –
advanced
Foreign exchange gains / (4,769,269) 4,811,942 9,478,646
(losses)
Origination fees received for – 525,888 872,020
the year
Exit fees paid (238,207) (86,896) (501,062)
Arrangement fees paid – (243,148) (820,118)
Commitment fees paid (433,719) (368,823) (710,782)
Interest payments receivable (17,437,598) (12,895,028) (28,373,979)
Loan repayments (43,551,178) (14,934,266) (56,894,392)
Loans advanced at the end of 384,146,488 433,639,486 432,459,966
the period / year
Loans advanced at fair value 398,443,765 451,583,669 453,301,433
8. FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT
OR LOSS
Financial assets at fair value through profit or loss comprise currency
forward contracts which represent contractual obligations to purchase
domestic currency and sell foreign currency on a future date at a
specified price.
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 gains and losses relating to the currency forwards are included within
“Net foreign exchange gains / (losses)” in the Unaudited Condensed
Consolidated Statement of Comprehensive Income”.
The fair value of financial assets and liabilities at fair value through
profit or loss are set out below:
Notional contract Fair values
30 June 2023 amount1 Assets Liabilities Total
£ £ £ £
Foreign exchange
derivatives
Currency forwards:
Lloyds Bank plc 238,265,359 4,865,135 (1,973,770) 2,891,365
Total 238,265,359 4,865,135 (1,973,770) 2,891,365
Notional contract Fair values
30 June 2022 amount1 Assets Liabilities Total
£ £ £ £
Foreign exchange
derivatives
Currency forwards:
Lloyds Bank plc 286,121,467 7,749,022 (3,124,135) 4,624,887
Total 286,121,467 7,749,022 (3,124,135) 4,624,887
Notional contract Fair values
31 December 2022 amount1 Assets Liabilities Total
£ £ £ £
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 period / year end exchange rate
9. TRADE AND OTHER PAYABLES
30 June 2023 30 June 2022 31 December 2022
£ £ £
Investment management fees 757,750 785,084 777,556
payable
Audit fees payable 223,094 195,268 289,457
Accrued expenses 172,764 121,571 273,183
Administration fees payable 132,971 142,667 203,420
Commitment fees payable 154,195 154,045 164,855
Tax provision 102,646 (2,721) 25,727
Loan amounts payable – 6,204 24,408
Directors’ fees payable – 2,001 –
1,543,420 1,404,119 1,758,606
10. CREDIT FACILITIES
Under its investment policy, the Group is limited to borrowing an amount
equivalent to a maximum of 30 per cent of its NAV at the time of drawdown,
of which a maximum of 20 per cent can be longer term borrowings. In
calculating the Group’s borrowings for this purpose, any liabilities
incurred under the Group’s foreign exchange hedging arrangements shall be
disregarded.
As at 30 June 2023, an amount of £nil (30 June 2022: £18,470,386 and 31
December 2022: £19,000,000) was drawn and interest of £nil (30 June 2022:
£38,213 and 31 December 2022: £181,907) was payable.
As at 30 June 2023, commitment fees of £154,195 (30 June 2022: £154,045
and 31 December 2022: £164,855) were payable.
The revolving credit facility capitalised costs are directly attributable
costs incurred in relation to the establishment of the credit loan
facilities as at June 2023 and an amount at 30 June 2022: £486,566 and 31
December 2022: £319,675 was netted off against the loan facilities
outstanding. In June 2023, an amount of £262,289 was separately shown in
revolving credit facility capitalised cost in assets.
The Group has maintained sufficient headroom against the measures under,
and is full compliance with, all loan covenants.
The changes in liabilities arising from financing activities are shown in
the table below.
30 June 2023 30 June 2022 31 December 2022
£ £ £
Borrowings at the start of the 18,863,204 7,914,993 7,914,993
period / year
Proceeds during the period / – 30,623,470 94,223,490
year
Repayments during the period / (19,000,000) (20,985,311) (84,158,141)
year
Interest expense recognised for 148,118 170,528 707,171
the period / year
Interest paid during the period (330,455) (235,601) (533,577)
/ year
Credit facility fees incurred (50,000) – –
Credit facility amortisation of 107,386 206,438 373,328
fees
Foreign exchange and 261,747 327,282 335,940
translation difference
Borrowings at the end of the – 18,021,799 18,863,204
period/year
11. SHARE CAPITAL
The 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 period end, the Company had issued and fully paid up share capital
as follows:
30 June 2023 30 June 2022 31 December 2022
£ £ £
Period to:
Ordinary Shares of no par value – – –
Issued and fully paid 395,592,696 413,219,398 413,219,398
Shares redeemed (9,652,350) – –
Shares held in treasury – (4,308,125) (17,626,702)
Total Ordinary Shares, 385,940,346 408,911,273 395,592,696
excluding those in treasury
On 13 June 2023, the Board of the Company announced the cancellation of
17,626,702 shares that were held in treasury.
The Company’s share capital is denominated in Sterling. At any general
meeting of the Company each ordinary share carries one vote. The Ordinary
Shares also carry the right to receive all income of the Company
attributable to the Ordinary Shares, and to participate in any
distribution of such income made by the Company, such income shall be
divided pari passu among the holders of Ordinary Shares in proportion to
the number of Ordinary Shares held by them.
Significant share movements
1 January 2023 to 30 June 2023:
Number £
Balance at the start of the period 395,592,696 403,365,545
Shares redeemed in June 2023 (9,652,350) (9,639,732)
Balance at the end of the period 385,940,346 393,725,813
Issue costs since inception (8,289,989)
Net proceeds 385,435,824
1 January 2022 to 30 June 2022:
Number £
Balance at the start of the period 408,911,273 415,730,000
Shares bought back in the period – –
Balance at the end of the period 408,911,273 415,730,000
Issue costs since inception (8,289,989)
Net proceeds 407,440,011
1 January 2022 to 31 December 2022:
Number £
Balance at the start of the period 408,911,273 415,730,000
Shares bought back in 2022 (13,318,577) (12,364,455)
Balance at the end of the period 395,592,696 403,365,545
Issue costs since inception (8,289,989)
Net proceeds 395,075,556
12. DIVIDENDS
Dividends will be declared by the Directors and paid in compliance with
the solvency test prescribed by Guernsey law. Under Guernsey law,
companies can pay dividends in excess of accounting profit provided they
satisfy the solvency test prescribed by the Companies (Guernsey) Law,
2008. The solvency test considers whether a company is able to pay its
debts when they fall due, and whether the value of a company’s assets is
greater than its liabilities. The Company passed the solvency test for
each dividend paid.
Subject to market conditions, the financial position of the Company and
the investment outlook, it is the Directors’ intention to continue to pay
quarterly dividends to shareholders (for more information see Chairman’s
Statement).
The Company paid the following dividends in respect of the period to 30
June 2023:
Dividend rate per Share (pence) Net dividend Payment date
paid (£)
Period to:
31 March 2023 1.375 5,439,400 23 May 2023
After the end of the period, the Directors declared a dividend in respect
of the financial period ended 30 June 2023 of 1.375 pence per share which
was paid in August 2023 to shareholders on the register on 31 July 2023.
The Company paid the following dividends in respect of the year to 31
December 2022:
Dividend rate per Net dividend Payment date
Share (pence) paid (£)
Period to:
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 1.375 5,439,400 24 February 2023
31 December 2022 - 2.000 7,911,854 18 April 2023
Additional 2022 dividend 1
1 Additional dividend relating to 2022 declared after year end due to
excess funds available.
13. 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:
(i) Market risk
If a borrower defaults on a loan and the real estate market enters a
downturn it could materially and adversely affect the value of the
collateral over which loans are secured. However, this risk is considered
by the Board to constitute credit risk as it relates to the borrower
defaulting on the loan and not directly to any movements in the real
estate market.
The Investment Manager moderates market risk through a careful selection
of loans within specified limits. The Group’s overall market position is
monitored by the Investment Manager and is reviewed by the Board of
Directors on an ongoing basis.
a) Currency risk
The Group, via the subsidiaries, operates across Europe and invests in
loans that are denominated in currencies other than the functional
currency of the Company. Consequently, the Group is exposed to risks
arising from foreign exchange rate fluctuations in respect of these loans
and other assets and liabilities which relate to currency flows from
revenues and expenses. Exposure to foreign currency risk is hedged and
monitored by the Investment Manager on an ongoing basis and is reported to
the Board accordingly.
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 113
(June 2022: 105 and December 2022: 109) open forward contracts.
b) 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 majority of the Group’s financial assets are loans advanced at
amortised cost, receivables and cash and cash equivalents. The Group’s
investments have some exposure to interest rate risk which 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 rates
to reduce the overall impact of interest rate movements. Further
protection is provided by including interbank rate floors and preventing
interest rates from falling below certain levels.
The loans in place at 30 June 2023 are structured so that 76.1 per cent
(December 2022: 78.6 per cent) are floating rate and all 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 23.9 per cent by value of the
loans are fixed rate, which provides protection from downward interest
rate movements to the overall portfolio (but also prevents the Group from
benefiting from any interbank rate rises on these positions).
(ii) Credit risk
Credit risk is the risk that a counterparty will be unable to pay amounts
in full when due. The Group’s main credit risk exposure is in the
investment portfolio, shown as loans advanced at amortised cost, where the
Group invests in whole loans and also subordinated and mezzanine debt
which rank behind senior debt for repayment in the event that a borrower
defaults. There is a spread concentration of risk as at 30 June 2023 due
to several loans being advanced since inception. There is also credit risk
in respect of other financial assets as a portion of the Group’s assets
are cash and cash equivalents or accrued interest. The banks used to hold
cash and cash equivalents have been diversified to spread the credit risk
to which the Group is exposed. The Group also has credit risk exposure in
its financial assets classified as financial assets through profit or loss
which can be diversified between hedge providers in order to spread credit
risk to which the Group is exposed. At period end our 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 end of the reporting period. As at 30 June
2023, the maximum credit risk exposure was £401,942,495 (30 June 2022:
£442,291,127 and 31 December 2022: £436,742,782).
The Investment Manager has adopted procedures to reduce credit risk
exposure by conducting credit analysis of the counterparties, their
business and reputation which is monitored on an ongoing basis. After the
advancing of a loan, a dedicated debt asset manager employed by the
Investment Adviser monitors ongoing credit risk and reports to the
Investment Manager, with quarterly updates also provided to the Board. The
debt asset manager routinely stresses and analyses the profile of the
Group’s underlying risk in terms of exposure to significant tenants,
performance of asset management teams and property managers against
specific milestones that are typically agreed at the time of the original
loan underwriting, forecasting headroom against covenants, reviewing
market data and forecast economic trends to benchmark borrower performance
and to assist in identifying potential future stress points. Periodic
physical inspections of assets that form part of the Group’s security are
also completed in addition to monitoring the identified capital
expenditure requirements against actual borrower investment.
The Group measures credit risk and expected credit losses using
probability of default, exposure at default and loss given default. The
Directors consider both historical analysis and forward looking
information in determining any expected credit loss. The Directors
consider the loss given default to be close to zero as all loans are the
subject of very detailed underwriting, including the testing of resilience
to aggressive downside scenarios with respect to the loan specifics, the
market and general macro changes. In addition to this, all loans have very
robust covenants in place, strong security packages and significant
loan-to-value headroom. During the period, four assets moved from Stage 1
to Stage 2 indicating a change in their credit risk since origination but
no impairments in value anticipated. One asset moved from Stage 2 to Stage
3 and a small credit loss of £1.7 million was recognised. This minor
impairment represents 0.5% of the funded portfolio and is the result of
the Group prudently applying sensitivities to net proceeds from an agreed
asset sale which is subject to contract and is currently progressing
through exclusivity (Please refer note 7).
(iii) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient
resources available to meet its liabilities as they fall due. The Group’s
loans advanced are illiquid and may be difficult or impossible to realise
for cash at short notice.
The Group manages its liquidity risk through short-term and long-term cash
flow forecasts to ensure it is able to meet its obligations. In addition,
the Company is permitted to borrow up to 30 per cent of NAV and has
entered into revolving credit facilities totalling £101,000,000 (30 June
2022: £126,000,000 and 31 December 2022: £126,000,000) of which £nil was
drawn on 30 June 2023 (30 June 2022: £18,470,386 and 31 December 2022:
£19,000,000).
Subsequent to 30 June 2023 £76.0 million of the 30 June 2023 revolving
credit facilities were cancelled, leaving £25.0 million still available.
This was due to repayments received after 30 June 2023 (see note 17) which
allowed the Company to build a cash reserve to cover the outstanding
unfunded cash loan commitments (which were £47.3 million as at 30 June
2023 and are detailed in the Investment Managers Report).
As at 30 June 2023, the Group had £13,137,269 (30 June 2022: £3,078,669
and 31 December 2022: £3,576,155) available in cash and £1,792,663 (30
June 2022: £1,404,119 and 31 December 2022: £1,758,606) trade payables.
The Directors considered this to be sufficient cash available, together
with the undrawn facilities on the credit facilities, to meet the Group's
liabilities and undrawn loan commitments. These are set out in the
Investment Managers report.
(iv) Risk of default under the revolving credit facilities
The Group is subject to the risk that a borrower could be unable or
unwilling to meet a commitment that it has entered into with the Group as
outlined above under market deterioration risk. As a consequence of this,
the Group could breach the covenants of its revolving credit facilities
and fall into default itself.
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.
14. FAIR VALUE MEASUREMENT
IFRS 13 requires the Company to classify fair value measurements using a
fair value hierarchy that reflects the significance of the inputs used in
making the measurements. The fair value hierarchy has the following
levels:
(i) Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1);
(ii) Inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices including interest
rates, yield curves, volatilities, prepayment rates, credit risks and
default rates) or other market corroborated inputs (level 2); and
(iii) Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3).
The following table analyses within the fair value hierarchy the Group’s
financial assets and liabilities (by class) measured at fair value:
30 June 2023
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Investments at fair value – 4,865,135 – 4,865,135
through profit or loss
Short term deposit 1 10,011,435 – – 10,011,435
Total 10,011,435 4,865,135 – 14,876,570
Liabilities
Investments at fair value – (1,973,770) – (1,973,770)
through profit or loss
Total – (1,973,770) – (1,973,770)
1 Presented under cash and cash equivalents in Statement of Financial
Position.
30 June 2022
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Investments at fair value through – 7,749,022 – 7,749,022
profit or loss
Total – 7,749,022 – 7,749,022
Liabilities
Investments at fair value through – (3,124,135) – (3,124,135)
profit or loss
Total – (3,124,135) – (3,124,135)
31 December 2022
Level 1 Level 2 Level 3 Total
£ £ £ £
Assets
Investments at fair value through – 4,697,637 – 4,697,637
profit or loss
Total – 4,697,637 – 4,697,637
Liabilities
Investments at fair value through – (3,990,976) – (3,990,976)
profit or loss
Total – (3,990,976) – (3,990,976)
The Directors are responsible for considering the methodology and
assumptions used by the Investment Adviser and for approving the fair
values reported at the financial period end.
The following table summarises within the fair value hierarchy the Group’s
assets and liabilities (by class) not measured at fair value but for which
fair value is disclosed:
30 June 2023
Level 1 Level 2 Level 3 Total fair Total carrying
values amount
£ £ £ £ £
Assets
Loans – – 384,146,488 398,443,765 384,146,488
advanced
Total – – 384,146,488 398,443,765 384,146,488
30 June 2022
Level 1 Level 2 Level 3 Total fair Total carrying
values amount
£ £ £ £ £
Assets
Loans advanced – – 451,583,669 451,583,669 433,639,486
Total – – 451,583,669 451,583,669 433,639,486
Liabilities
Credit – 18,021,799 – 18,021,799 18,021,799
facilities
Total – 18,021,799 – 18,021,799 18,021,799
30 December 2022
Level 1 Level 2 Level 3 Total fair Total carrying
values amount
£ £ £ £ £
Assets
Loans advanced – – 453,301,433 453,301,433 432,459,966
Total – – 453,301,433 453,301,433 432,459,966
Liabilities
Credit – 18,863,204 – 18,863,204 18,863,204
facilities
Total – 18,863,204 – 18,863,204 18,863,204
For cash and cash equivalents, other receivables and trade and other
payables the carrying amount is a reasonable approximation of the fair
value.
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. For avoidance of doubt, the
Group carries its loans advanced at amortised cost.
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.
15. 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 Luxco had no operating gains on ordinary activities before taxation
and was therefore subject to the Luxembourg minimum corporate income
taxation at €4,815 (year ended 31 December 2022: €4,815). The Luxco 3 and
Luxco 4 are subject to Corporate Income Tax and Municipal Business Tax
based on a margin calculated on an arm's -length principle. The effective
tax rate in Luxembourg during the reporting period was 24.94% (year ended
31 Dec 2022 :24.94%).
16. 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.
Outstanding at Outstanding at Outstanding at
30 June 2023 30 June 2022 31 December 2022
£ £ £
Investment Manager
Investment management fees 757,750 785,084 777,556
payable
For the period For the period For the year
ended ended ended
30 June 2023 30 June 2022 31 December 2022
£ £ £
Directors’ fees and
expenses paid
John Whittle 30,000 30,000 60,000
Shelagh Mason 22,500 22,500 45,000
Charlotte Denton 25,000 25,000 50,000
Gary Yardley 21,000 21,000 42,000
Expenses paid 4,612 4,605 6,373
Investment Manager
Investment management fees 1,520,900 1,559,609 3,122,755
earned
Origination fees – 525,888 501,936
Expenses 42,781 97,618 120,099
The tables below summarise the dividends paid to and number of Company’s
shares held by related parties.
Dividends paid Dividends paid Dividends paid
during during during
the period ended the period ended the year ended
30 30 31
June 2023 June 2022 December 2022
£ £ £
Starwood Property Trust 434,150 251,350 502,700
Inc.
SCG Starfin Investor LP 108,538 62,838 125,675
John Whittle 1,609 656 1,725
Charlotte Denton 2,111 – 1,833
Shelagh Mason 5,359 3,103 6,205
Duncan MacPherson* 11,875 6,875 8,333
Lorcain Egan* 3,975 2,301 3,818
As at As at As at
30 June 2023 30 June 2022 31 December 2022
Number of shares Number of shares Number of shares
Starwood Property Trust 8,916,984 9,140,000 9,140,000
Inc.
SCG Starfin Investor LP 2,229,246 2,285,000 2,285,000
John Whittle 33,040 23,866 33,866
Charlotte Denton 43,360 – 44,444
Shelagh Mason 110,066 112,819 112,819
Duncan MacPherson* 243,891 250,000 250,000
Lorcain Egan* 81,638 83,678 83,678
* Employees at the Investment Adviser
Other
The Group continues to participate in a number of loans in which Starwood
Property Trust, Inc. (“STWD”) acted as a co‐lender. The Group also acted
as co-lender with Starwood European Real Estate Debt Finance I LP (“SEREDF
I”) an affiliate entity. The details of these loans are shown in the table
below.
Loan Related party co-lenders
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
17. EVENTS AFTER THE REPORTING PERIOD
Subsequent to 30 June 2023, the following loan amortisation (both
scheduled and unscheduled) has been received up to the date of publication
of this report:
Local Currency
Three Shopping Centres €317,344
Shopping Centre, Spain €775,652
Hotel, Dublin €5,500,000
Mixed Portfolio, Europe €2,371,718
Hotel and Office, Northern Ireland £1,200,000
Subsequent to 30 June 2023, the following loans have been repaid in full
up to the date of publication of this report:
Local Currency
Hotel & Residential, UK £49,930,000
Mixed Use, Dublin €12,715,112
Subsequent to 30 June 2023, the Group funded £0.7 million in relation to
loan commitments made in prior years which were unfunded.
In August 2023 the Group's £76.0 million debt facility with Morgan Stanley
was canceled.
In August 2023 a second capital distribution was announced which returned
circa £30 million to shareholders through the compulsory redemption of
29,092,218 shares at a price of £1.0312 per share.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures
(“APMs”) the Board has considered what APMs are included in the Interim
Financial Report and Unaudited Condensed 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 un- invested. 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 Unaudited Condensed 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 have 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 / DEBT
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.
Further Information
Corporate Information
Directors
John Whittle (non-executive
Chairman)
Shelagh Mason (non-executive
Director)
Charlotte Denton Registered Office
(non-executive Director)
Gary Yardley (non-executive 1 Royal Plaza
Director)
Royal Avenue
(all care of the registered
office) St Peter Port
Investment Manager Guernsey
Starwood European Finance GY1 2HL
Partners Limited Investment Adviser
1 Royal Plaza Starwood Capital Europe Advisers, LLP
2nd Floor
Royal Avenue
1 Berkeley
St Peter Port Street London
Guernsey W1J 8DJ
United Kingdom
GY1 2HL
Advocates to the Company
Solicitors to the Company (as to Guernsey law)
(as to English law and U.S.
securities law) Carey Olsen
Norton Rose Fullbright LLP PO Box 98
3 More London Riverside
London Carey House, Les Banques
St Peter Port
SE1 2AQ
United Kingdom Guernsey
Registrar GY1 4HP
Computershare Investor Independent Auditor
Services
(Guernsey) Limited PricewaterhouseCoopers CI LLP
3rd Floor Royal Bank Place
Natwest House
Le Truchot 1 Glategny Esplanade
St Peter Port St Peter Port
Guernsey
GY1 1WD Guernsey
Sole Broker GY1 4ND
Jefferies Group LLC Principal Bankers
100 Bishopsgate Barclays Private Clients International
Limited
London, EC2N 4JL
PO Box 41
United Kingdom
Le Marchant House
Administrator, Designated
Manager St Peter Port
and Company Secretary Guernsey
Apex Fund and Corporate GY1 3BE
Services
Website:
(Guernsey) Limited
www.starwoodeuropeanfinance.com
1 Royal Plaza
Royal Avenue
St Peter Port
Guernsey
GY1 2HL
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══════════════════════════════════════════════════════════════════════════
ISIN: GG00BPGJYV48
Category Code: IR
TIDM: SWEF
LEI Code: 5493004YMVUQ9Z7JGZ50
OAM Categories: 1.2. Half yearly financial reports and audit
reports/limited reviews
3.1. Additional regulated information required to be
disclosed under the laws of a Member State
Sequence No.: 269736
EQS News ID: 1720585
End of Announcement EQS News Service
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